Case R59

Judges:
HP Stevens Ch
TJ McCarthy M
PM Roach M

Court:
No. 1 Board of Review

Judgment date: 12 July 1984.

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H.P. Stevens (Chairman)

The question for decision in this reference is whether the taxpayer should be regarded as carrying on a business of primary production during the year ended 30 June 1981.

2. In his return of income for the year concerned the taxpayer claimed a deduction in respect of primary production loss of $15,663. A profit and loss account attached indicated this was arrived at by deducting from gross income $931.80 expenditure totalling $16,594.78. Upon assessment the claimed deduction was disallowed ``as not considered to be engaged in carrying on a business'' and, in due course, a request for reference to a Board followed.

3. When ``called over for mention'' it was suggested that the taxpayer and the Commissioner endeavour to reach agreement if possible on the ``quantum'' of the items involved, and at the hearing it was indicated that certain expenditure items should be reduced thereby making the claimed deduction now $14,409.31.

4. Born in 1933 the taxpayer came ``from a family of farming background'' and in his youth ``had a fair bit to do with rural properties''. He became a public servant in 1967 and later became friends with a person (a wholesale butcher and abattoir owner) who acquired a rundown property and to whom he gave assistance in restoring and building up the property. This person, no doubt because of his occupation, had a large turnover of cattle - buy poor quality, handfeed and trade off - although there was also some breeding. Subsequently the taxpayer's department was one of those ``compulsorily'' transferred to the A.C.T. and the taxpayer said he saw this as an opportunity to acquire a farm to retire on. He looked around for some time prior to coming to the A.C.T. where he initially rented a house. Although he had in mind a larger property he and his wife contracted in June 1979 to purchase a property of 16.93 hectares (43 acres) 32 kilometres north of Canberra for $85,000 (of which $25,000 was borrowed from a bank).

5. In the taxpayer's 1980 return the purchase price of $85,000 was dissected as being for residence $39,000, land $32,000 and improvements $14,000 (comprising earth dams $10,000, external fencing $1,000, cattle yards $1,000 and machinery sheds $2,350). This reflected the fact that upon completion there was a substantial brick veneer residence with an incorporated double garage on the property along with two sheds (one partly constructed), three dams - one by medium of a pump feeding a small holding tank half way up a hill - cattle handling facilities including ``a very makeshift yard which was used for holding cattle'' and fencing. The perimeter fencing was largely in good repair except for one section of approximately 300 m which was in bad repair. The ``internal fencing was largely makeshift and of very poor quality'' whilst there were virtually

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no gates to lock off paddocks - no doubt reason for no allocation thereto. There was no stock on the property when acquired.

6. The 1980 return disclosed, inter alia, a gross income of $147.60 - basically from poultry - and a net loss of $7,353.06. It indicated, inter alia, one head of cattle, 37 sheep, two deer and two horses had been purchased during the year, internal subdivisional fencing ($2,350) installed in December 1979, water regulation and irrigation costs ($276) incurred in May 1980 whilst a plough, fertilizer spreader and gates had been acquired in December 1979. An attachment to the return (also attached to the 1981 objection lodged in October 1981) indicated, inter alia, that:

• (a) it was intended to breed cattle, sheep, venison and poultry - intended numbers being 10, 150, 10-20 and 100-150 respectively;
• (b) two acres of orchards would be cultivated;
• (c) five acres would be set aside for lucerne cultivation;
• (d) the taxpayer ``is establishing a Perindale sheep stud'';
• (e) the anticipated time for development is five years;
• (f) installation of paddock watering systems, top fertilising, pasture improvement and small cropping was also intended;
• (g) fallow deer breeding was intended, but after construction of a high yard the taxpayer was forced to hold the project in abeyance;
• (h) in lieu the taxpayer decided to increase and expand his activities in sheep breeding and poultry farming; and
• (i) since July 1980 he had endeavoured to make the property viable by the construction of a semi-intensive piggery.

The 1980 claim was allowed and one of the contentions made in the present reference was that having allowed it for one year the 1981 claim should also be allowed. However, a Board can only give a decision on the facts of the year before it without regard to the action the Commissioner has taken in respect of an earlier or later year of income.

7. Turning now to what occurred after the property was purchased and taking into account the information described in the 1980 return it would seem that before deciding to acquire a property enquiries were made of the Department of Agriculture as to the type of activities that could be conducted in the area. By letter of 15 November 1978 an officer responded and enclosed some publications. The alternatives apparently included fallow deer, sheep, stud, fruit trees and poultry and on 22 June 1979 the taxpayer and his wife became members of the Deer Breeders Association. With deer farming in mind special deer wire was acquired and a one acre paddock (part of a larger intended area) was fenced in 1979. Although promised deer stock ($250 per head) and having placed an order in August 1979 for 10 does and two bucks, prices escalated rapidly whilst they were informed ``the order could not be met anyway''. As a result two bucks only at $600 per head were acquired during the 1980 year of income. It was anticipated does would later be forthcoming - they are available ``if you are prepared to pay the price'' - but the taxpayer was ``not convinced that there is the economic sense in... buying the stock at this stage'' and ``we then moved on and left the deer project stand''. The two bucks are still on the property in their one acre paddock.

8. With respect to sheep sometime during the 1980 year of income 37 head of sheep were purchased - they were Merino ewes in lamb - but it was subsequently decided to move into Perindales. Enquiries were made of the Perindale Sheep Society but the drought or lack of further information ``stopped me pushing on with the Perindale at this stage. I would still like to go in for a breed - a sheep stud - but that is something else, too''. Some of the Merinos were sold, some died, some killed for rations and as at 30 June 1982 there were, after natural increase in the 1980 and 1981 years, 13 on hand. Accordingly it is incorrect to say (as per para. 6) that there was any increase and expansion in his sheep breeding activities or that a Perindale sheep stud was being established.

9. In relation to cattle although there was purchased during the 1980 year a cow (either due to calf or with calf at foot) it was conceded that it was primarily intended for providing milk for domestic purposes. Additionally two horses (one in foal or with foal at foot) were acquired but in cross-examination it was admitted one

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was for a school-age daughter's use for pony club work: the three horses which are not thoroughbreds are still on hand and have not been bred (two mares and one gelding) although if in later years demand increased this could be considered.

10. When the property was first occupied some poultry were acquired for the family's own use but the numbers were later increased - precise details not given. In November 1981 after consultations with the Department of Agriculture it was decided to specialize in that area and ``we purchased incubators, raising and breeding equipment, particularly intending to breed quail''. Prior to that the taxpayer was selling eggs at work whilst some ducks, etc. were supplied to the restaurant trade - it was when the restaurants indicated they would be interested in quail that the Department of Agriculture was consulted. Subsequently quail were acquired and an average of 40 dressed birds (done by wife) are now sold at $1.20 each to restaurants. It was proposed to expand and mechanise this activity (new structure to be erected) but the relevant legislation was changed - previously quail were regarded as a game bird with no licence required - and the taxpayer is faced with closing down completely or supplying the birds to a licensed person to process for him (such additional cost might make the project uneconomic in any event).

11. Insofar as a piggery is concerned the attachment is also misleading in that it was brought to the taxpayer's attention by the Department of Agriculture that ``in a poultry processing operation it is against the law to have pigs on the property'' with the result that ``only very minor earthworks had been completed before putting that aside''.

12. Turning to fruit trees, some have been planted - details imprecise - and have been now connected to an agricultural dripper watering system. There is a range of trees - plums, apricots, mulberries (2), grapevines (2), pears (2), apples (4) and cherries (3) and it is hoped to sell fruit to the restaurants. No details of quantities expected or revenues expected were given.

13. A valuer called on behalf of the Commissioner deposed that with large animals the property, due to its small size, could not be viable and the taxpayer did not disagree with this. In fact he indicated he had been so informed and strongly advised in the year in question ``to look for something that we could house and farm intensively: hence the quail venture followed straight on''.

14. The question of whether a business is being carried on is one of fact and degree and is one which has been before this Board on a number of occasions, e.g. Case Q105,
83 ATC 530 ; Case R14,
84 ATC 171 and Case R37,
84 ATC 341 . Having regard to the facts of the present case it is my view that a business had not been commenced during the year ended 30 June 1981. No doubt the taxpayer was searching for suitable activities and desired to commence business operations but what was done to 30 June 1981 does not constitute the carrying on of a business.

15. In the circumstances it is unnecessary to consider other arguments put forward on behalf of the Commissioner in relation to, for example, the joint liability of the taxpayer and his wife in respect of the claims for interest and the like.

16. For the above reasons I would uphold the Commissioner's decision upon the taxpayer's objection and confirm his assessment for the year ended 30 June 1981.