Southern Estates Pty Ltd v. Federal Commissioner of Taxation
(1967) 117 CLR 48141 ALJR 270
(Judgment by: McTiernan J.)
SOUTHERN ESTATES PTY. LTD.
v. FEDERAL COMMISSIONER OF TAXATION
Judges:
McTiernan J.Barwick C.J.
Taylor, Owen JJ.
Windeyer
Judgment date: 2 June 1967
Judgment by:
McTiernan J.
1967, June 2.
McTIERNAN J. delivered the following written judgment:-
These matters are income tax appeals. The appeals were heard together. The appellant Southern Estates Pty. Limited was incorporated in South Australia. The founder of the company was Ashby Francis Smith, and it was under his sole control and management. The company was incorporated in 1959 and entered on the business of buying and selling land round Adelaide. In 1958 Smith, the founder of the company, purchased a large tract of land about fifteen miles from Naracoorte. The land was then substantially in its primitive condition. Smith almost immediately set about reclaiming and improving the land with a view to depasturing sheep on it. In 1960, Smith sold a half interest in the land to Southern Estates and by a written agreement made about the same time Smith and Southern Estates became partners in the venture, the former having sole voice in the partnership's affairs. The partnership expended large sums of money in the years of income ended 30th June 1960, 1961 and 1962 in reclaiming and improving the land for the purpose Smith had in view. The work progressed on the southern portion of the land to the stage of sowing it for growth of pasture and on the northern portion nearly to that stage, but the final work done there was ploughing and rolling the soil - seed was not planted. Because of serious illness Smith abandoned the venture, and the partnership necessarily did not go on further with it. It was not practical to bring sheep on to the land until there was adequate pasture : in the ordinary course this would involve waiting about twelve months after seeding. Smith negotiated to sell the property. He effected a sale but at a substantial loss. (at p483)
The tax returns which the partnership furnished showed the expenditure incurred in each year of income on the development of the land as a loss. The return for the year of income ended 30th June 1962 also showed the partnership loss on the sale. The account included the total expenditure incurred on development as well as the price paid for the land. This account contained a notification pursuant to s. 52 of the Income Tax and Social Services Contribution Assessment Act (Cth). The returns of Southern Estates claimed as deductions half of the partnership losses, a half was the measure of its individual interest in the partnership. The company had no taxable income on the figures shown in its returns for either the year of income ended 30th June 1960 or 30th June 1962. It purported to carry forward the company's shares of the partnership losses of those years respectively to each next year of income. As a consequence of no taxable income being returned for years of income ended 30th June 1960 or 30th June 1962 only the assessments, under appeal, were issued in respect of the period in which the reclamation and improvement of the Naracoorte land by the partnership took place. Apparently there was an investigation by the Department of Taxation into the company's affairs - these were by no means limited to the partnership venture. The notices of the assessments are all dated 15th July 1964. The Commissioner disallowed all the losses shown in the company's returns representing half the partnership expenditure on developing the land at Naracoorte. But the Commissioner treated the partnership loss on the sale of the land as a loss coming within s. 52 of the Income Tax and Social Services Contribution Assessment Act and allowed the company half such loss as a deduction. (at p483)
The company claims in these appeals that it is entitled to deductions of its share, as partner, of expenditure in relation to the property at Naracoorte. The company relies on s. 75 of the Income Tax and Social Services Contribution Assessment Act, also s. 76. As the expenditure is portion of the loss allowed under s. 52 the company prays in aid s. 82 (3) of the Income Tax and Social Services Contribution Assessment Act. (at p484)
As regards s. 75 the Commissioner does not dispute that pars. (b) and (e) may cover the operations which the partnership carried out. The question at issue is whether the company in its capacity as partner of Smith was "engaged in primary production". The definition of "primary production" in s. 6 (1) of the Income Tax and Social Services Contribution Assessment Act raises a difficulty for the company, because no "production" within the scope of the definition resulted from anything which the partnership or either partner did on the land, while in possession. It is contended for the company that the evidence supports a strong probability that the purpose of the partnership was the "maintenance of animals" - sheep - on the land when the pasture had grown adequately ; and after a few years to dispose of the land in parcels sufficient as living areas to persons going into the pastoral industry, including Mr. Smith's son if he desired to be a grazier. I am of opinion that upon the widest construction of which the word "engaged" admits, a person who merely has an intention to carry on the business of primary production is not engaged in it. No work which the partnership did on the land per se amounted to the maintenance of animals, nor was proximate to such business. The purpose for which the work was done did not result in the partnership going into the business of primary production. It had not an immediate connexion with bringing sheep on to the land at Naracoorte, by either partner, in order to begin production on this land. I am unable to hold that the company as partner was "engaged in primary production". As regards s. 76, the deduction claimed under this section is made in respect of some expenditure on fencing. In order to qualify for this deduction the taxpayer has to prove to the satisfaction of the Commissioner that he is ". . . carrying on agricultural or pastoral pursuits or forest operations . . .".
For the reasons which I have stated I think that the company as partner was not carrying on pastoral purs uits in any relevant year : no question arises as to agricultural pursuits or forest operations. I am of opinion that the appeals should fail. (at p484)
The Court therefore orders that the appeals be dismissed with costs. (at p484)
From this decision the appellant appealed to the Full Court. (at p484)
A. K. Sangster Q.C. (with him W. M. Rogers), for the appellant. Section 75 (1) is only available to a taxpayer engaged in primary production on the land on which the expenditure was incurred and on which the development took place. The section allows a deduction for expenditure of a kind which in some instances must precede primary production. In this context the meaning of primary production must extend over the whole gamut from clearing scrub to, say, the final wool clip. The object of the section is not only to allow deductions to those actually operating as primary producers but also to those prepared to develop land for the purposes of primary production by taking all the steps up to and including production. The expenditure must be directed towards primary production by the taxpayer himself and not by some other person. It is a question of fact and degree whether the taxpayer was intending to carry on primary production. So long as there exists a primary purpose of expenditure preparatory to primary production, the existence of a secondary purpose does not destroy or weaken the effect of the primary purpose. The trial judge found that the intention of the taxpayer was to develop the land for the purpose of depasturing sheep and, although the taxpayer conceded that his ultimate purpose was to resell, he is entitled to the deduction. (He referred to Ronpibon Tin N.L. v. Federal Commission of Taxation (1949) 78 CLR 47 ; London & India Docks Co. v. Thames Steam Tug & Lighterage Co. Ltd. [1909] AC 15 ; London & India Docks Co. v. McDougall & Bonthron Ltd. [1909] AC 25 .) As assessments are related to the activities of the taxpayer in each year, the assessment can only be made in the light of the facts then known and should not be made according to what may happen later. (at p485)
S. J. Jacobs Q.C. (with him R. F. Mohr), for the respondent. The statutory definition of primary production requires the taxpayer to be engaged in production and s. 75 (1) cannot apply to a taxpayer engaged in operations preliminary to primary production. Alternatively, it may extend to the steps preliminary to production if there is a sufficient link between those steps and the production or if there is sufficient evidence in the preparatory operations of intent to engage in primary production. If a person is doing no more than improving or developing the land he is not engaged in primary production. Unless the land is brought into production, the taxpayer is not entitled to the deduction. It is a question of fact in each case. In this case the taxpayer's business was the acquisition of land for resale and this land was acquired by the taxpayer for the purpose of resale. The preliminary acts in this case are more consistent with the acquisition for resale than with development for primary production.
Cur. adv. vult. (at p486)