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SWPD v FC of T

Members:
AG Melick AO SC DP
L Rieper M

Tribunal:
Administrative Appeals Tribunal, Hobart

MEDIA NEUTRAL CITATION: [2020] AATA 555

Decision date: 18 March 2020

AG Melick AO SC (Deputy President) and L Rieper (Member)

1. The facts are not in dispute in this case. The sole issue is whether the facts establish that the Applicant was carrying on a business for the purposes of subdivision 152-A of the Income Tax Assessment Act 1997 (the Act) in the 2016-17 tax year. If he was, then he is entitled to reduce, likely to nil, the capital gain on the sale of his property.

2. In 1992, the Applicant bought the property, in partnership with his then wife, from a forestry operation (the Operation). The purchase price was $180,000. The size of the property was 343.95 hectares and it was predominantly covered by native forest. Seventy percent of the purchase price was borrowed from the National Australia Bank.

3. It is common ground that prior to the purchase the native forest on the land had been selectively logged and a plantation of approximately five (5) hectares of native trees planted.

4. On 5 January 1996, the Applicant became the sole owner of the property.

5. On 15 April 2016 the Applicant sold the property for $2.75M.

6. During the period the Applicant owned the property no harvesting activities took place on it.

7. The activities that were carried out at the property, either by the Applicant or at his direction, included maintaining the roads and fences on the property, clearing fallen logs, eradicating gorse weed and establishing a new access road as the previous road (across a neighbour's property) was in the wrong place.

BACKGROUND AND LEGISLATION

8. When the Applicant lodged his tax return for the 2016-17 tax year, he did not assert that he was entitled to the Capital Gains Tax (CGT) small business concessions under Division 152 in respect of the gain on the sale of the property. After he was issued with a notice of assessment, he lodged an objection on the basis that the CGT small business concessions should apply to the sale of the property. On 8 June 2018 the Commissioner disallowed the objection in full.

9. Section 14ZZK(b)(i) of the Taxation Administration Act 1953 places the burden on the Applicant of establishing that the assessment is excessive or otherwise incorrect.

10. The starting point for determining whether the Applicant is entitled to the CGT small business concessions is contained in section 152-10(1) of the Act, which sets out a series of conditions which must be satisfied:

ATC 8596

Basic conditions for relief
  • (1) A * capital gain (except a capital gain from * CGT event K7) you make may be reduced or disregarded under this Division if the following basic conditions are satisfied for the gain:
    • (a) a * CGT event happens in relation to a * CGT asset of yours in an income year;

      Note: This condition does not apply in the case of CGT event D1: see section 152- 12.

    • (b) the event would (apart from this Division) have resulted in the gain;
    • (c) at least one of the following applies:
      • (i) you are a * CGT small business entity for the income year;
      • (ii) you satisfy the maximum net asset value test (see section 152-15);
      • (iii) you are a partner in a partnership that is a CGT small business entity for the income year and the CGT asset is an interest in an asset of the partnership;
      • (iv) the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year;
    • (d) the CGT asset satisfies the active asset test (see section 152- 35).

      Note: This condition does not apply in the case of CGT event D1: see section 152- 12.

11. It is agreed by the parties that paragraphs (a) and (b) are satisfied.

12. The Applicant says that he satisfies paragraphs (c)(i) and (d) and therefore satisfies the basic conditions for relief. The Commissioner does not agree.

13. Section 152-10(1AA) provides:

CGT small business entity

  • (1AA) You are a CGT small business entity for an income year if:
    • (a) you are a * small business entity for the income year; and
    • (b) you would be a small business entity for the income year if each reference in section 328-110 to $10 million were a reference to $2 million.

14. Section 328-10(1) sets out the meaning of small business entity:

Meaning of small business entity

General rule: based on aggregated turnover worked out as at the beginning of the current income year

  • (1) You are a small business entity for an income year (the current year) if:
    • (a) you carry on a * business in the current year; and
    • (b) one or both of the following applies:
      • (i) you carried on a business in the income year (the previous year ) before the current year and your * aggregated turnover for the previous year was less than $10 million;
      • (ii) your aggregated turnover for the current year is likely to be less than $10 million.

15. For completeness, the Tribunal notes that business is defined in section 995-1 of the Act as including "any profession, trade, employment, vocation or calling, but does not include occupation as an employee."

16. As already noted above, the issue in dispute is whether the Applicant was carrying on a business at the relevant time.

WAS THE APPLICANT CARRYING ON A BUSINESS?

17. Both parties rely on
Spriggs v Federal Commissioner of Taxation (2009) 239 CLR 1 and in particular the majority's statement (at 59):

The existence of a business is a matter of fact and degree. It will depend on a number of indicia, which must be considered in combination and as a whole. No one factor is necessarily determinative. Relevant factors include, but are not limited to, the existence of a profit-making purpose, the scale of activities, the commercial character of the transactions, and whether the activities are systematic and organised, often described as whether the activities are carried out in a business-like manner.

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Existence of a profit-making purpose

18. The Applicant is a self-described entrepreneur. At the time he purchased the property he had interests in a number of other businesses.

19. The Applicant's evidence was that he first heard about the property though an employee at a hotel he owned. He said one of the barmen was a trainee real estate agent and showed him a brochure. The property was subject to an expression of interest process and the Applicant thought he was likely to be the only interested party. He said he knew the vendor, (the Operation), and that it was in the business of growing and cutting down trees. The Applicant acknowledged that he had little knowledge of the forestry industry at the time but he spoke to a number of people including two forestry people who were patrons of his bar. They told him to buy it. He was also told that in 10-15 years the forest would come in at 3-4 times the cost of the land. He was told he would not have to do anything with the land and it would just "grow money".

20. In the Applicant's view the property was great value given its size, it had a well-developed road system which was useful for future logging and it was close to a mill, which would minimise transport costs. He said his plan was to sit on the property and wait as it was too big to weed or water and did not need daily or weekly attention, although it did need maintenance works to the boundary and roads.

21. The Applicant also gave evidence that he did calculations before the purchase but no longer has them. He said that he would do those sorts of calculations twenty times per year in relation to various potential ventures. He saw the property as a good business opportunity. He had moved to Tasmania and said that he saw opportunity everywhere. His recollection was that he thought he would reclaim approximately $1,000 per acre on the acres that were forested.

22. Under cross-examination the Applicant said that nothing else could be done with the land. It has no access to water, sewerage or power and so could not be used for a resort or a home. He said that in all the time he owned it no use other than timber materialised. Whilst much of the land around his property had been cleared for farmland it had subsequently been abandoned. He did allow a neighbour to graze some cattle on the property for a period. His recollection was that it was a continuation of an activity permitted by the Operation but it stopped when drought hit the area. He thought he earned around $500 per quarter from the cattle grazing.

23. The drought commenced in approximately 1996 and continued until approximately 2004. There was also a drop in the water table in the area. The trees did not grow as initially anticipated by the Applicant and no harvesting took place prior to him selling the property in 2016. The Applicant was asked whether he adjusted his profit calculations in light of these events. The Applicant said that as he was not going to harvest it really did not matter. His recollection was that after the drought he took a saw miller to the property and was told he should wait. He said there was no point doing calculations until he decided to harvest.

24. The Applicant said he did not sell the property by choice. He was going through a divorce and was forced to sell the property. He said that it had otherwise been his intention to keep the property for his children.

25. The Commissioner submitted that the Applicant's evidence should be given little weight but did not submit that the Applicant was not a witness of credit and should not be believed.

26. The Applicant acknowledged that he had some issues with his memory as a result of some health problems several years ago but the Tribunal found him to have a good recollection of the relevant matters and found him to be a witness of truth. As Gibbs J said in
McCormack v Federal Commissioner of Taxation (1979) 143 CLR 284 at 301 "…the taxpayer is usually the person best able to give evidence as to the purpose for which the property in question was bought."

27. The Tribunal notes that there is some corroboration for the Applicant's evidence. Whilst the Applicant's present accountant has only been working for him since 2009, his evidence was that during that time the Applicant always referred to the property as one with trees on it intended for harvest. The Commissioner says this is not

ATC 8598

the same as having a profit-making purpose. Whilst that is true, it makes no sense to the Tribunal that the Applicant would describe the property in that way if he was not intending to harvest the trees at some point for a profit.

28. It is apparent that the property had been run as a commercial venture by the Operation prior to the Applicant's purchase. It had been selectively logged once, a plantation had been established on five (5) hectares of the land and several kilometres of roads had been established, no doubt at considerable cost. The land was zoned "non-vacant primary production". The Commissioner conceded that if the Applicant had been the one to carry out the selective logging and the planting of the plantation he would be in a stronger position to assert that he was carrying on a business.

29. The Commissioner did not put forward any counter-scenario to explain the Applicant's reasons for purchasing the property other than the possibility it was a passive investment. The Commissioner conceded that it was not a hobby. The forestry experts engaged by each party considered the property to be of a commercial size and to be carrying a crop of trees which would become commercial with time.

30. The Tribunal finds it entirely plausible that an entrepreneur such as the Applicant would have purchased the property intending to make a profit without knowing a great deal about the industry and after only a few conversations with people in the industry. His evidence was that before moving to Tasmania he was national retail manager for Westfield Shopping Centres, but at the time of the purchase he had very diverse business interests including in hospitality and tuna fishing. The Tribunal accepts the Applicant's evidence that he was influenced by a number of factors including the closeness of the mill, his conversations with people from the industry and his own perception that the property was great value for money.

31. The Commissioner placed emphasis on the Applicant's lack of record-keeping. In addition to not keeping his initial profit calculations, the Applicant was unable to produce any records related to his loan from the National Australia Bank, the work that was carried out on the property over the years or a vehicle he said he purchased and used on the property. The Commissioner points to the record-keeping requirements for CGT purposes in Division 121 of the Act and the fact that the Applicant did not approach the bank to see if it still held documents related to the loan.

32. Both the Applicant and his accountant of the last 10 years acknowledged that the Applicant is a poor record-keeper. Whilst not keeping the records may amount to an offence under the Act, it does not of itself prove that the Applicant was not carrying on a business. There are any number of businesses that have poor record-keeping practices and the evidence of the Applicant's accountant was that, in his experience, not recording even large expenses is not unusual.

33. The Tribunal notes that after the year 2000 it was not possible for the Applicant to use any of his expenses as deductions against other income earned in that same year and there was no income being earned from the property. Therefore was there no immediate need for the records, although it would have been a good business practice to have stored them for later use. The Applicant has also had a number of accountants over that period, so it is possible that he handed the records to his accountant for safe-keeping but they were not handed on. The Applicant did produce a letter from a contractor who carried out some of the work, including building the access road, although the contractor was not sure which entity had been billed for the work. In respect of the loan, the Applicant's evidence was that it was paid out by 1996. The Tribunal does not think that it is unreasonable that The Applicant has assumed that the bank no longer holds any records related to the loan, given it was repaid over 20 years ago.

34. Whilst the Applicant may have initially anticipated that a profit would materialise within 20 years, there is no evidence that he abandoned his profit-making intentions when it became apparent the trees would take much longer to grow to the size required for commercial harvesting. The Tribunal notes that in
Ferguson v Federal Commissioner of Taxation [1979] 37 FLR 310, the majority stated that whilst a purpose of profit-making

ATC 8599

may be important "…an immediate purpose of profit-making in a particular income year does not appear to be essential." The Court went on to state that a person may be carrying on a business even when his profit is small or even when making a loss. Likewise
Thomas v Federal Commissioner of Taxation (1972) 3 ATR 165 is authority for the proposition that it is not necessary to obtain income from a primary production activity for a business to exist:

It is common ground that the appellant did not obtain any income from primary production before on in the tax year. No harvest has yet been obtained from any of the trees. But, in my opinion, that fact does not necessarily preclude a finding that the appellant was carrying on a business of primary production. This was not a case in which land was being improved in order to bring it to a condition in which it might be used for primary production for which it was not yet suitable. I am of opinion, therefore, that the decision in southern Estate Pty. Ltd. V. Federal Commissioner of Taxation (1967), 117 CLR 481; 10AITR 525, does not stand in the way of the appellant's claim. Trees had been planted and were growing, although they had not yet grown to an age which they would yield marketable produce.

The same could be said for the Applicant's trees, the only difference being that Mr Thomas had apparently planted, or caused to be planted, the various trees on his property.

35. Counsel for the Applicant also took the Tribunal to a number of passages in Case L1
(1979) 79 ATC 1. These included the following observations in respect of a submission by counsel for the Commissioner (at 3):

(ii) The taxpayer was "cavalier" in the manner in which he went about acquiring Lot 155, as evidence by his failure to enquire about rainfall, quality of soil, etc. This led counsel for the Commissioner to ask rhetorically-

"Well, is that the act of a business man? - View it objectively?"

The short answer to Mr Shepherdson's rhetorical question may well be "No". However, the Act makes no distinction between good businessmen and bad ones. The real question is: Did this bad businessman engage in the business of afforestation?

36. The decision to purchase the property may not have been the Applicant's best business decision, however his evidence was that it was his intention to make a profit. The Tribunal also notes that whilst there was no evidence before the Tribunal as to the value of the timber on the property at the time of its sale, the evidence of Mr Livingstone, a forestry expert called by the Applicant, was that people do hold blocks of land containing forest and sell them for more because the timber is closer to being harvested at the time of sale. The Commissioner's expert, Mr Ringk, heard the oral evidence of Mr Livingstone and did not disagree with it.

37. The Tribunal therefore finds that the Applicant's intention was always to make a profit from the forestry business.

The scale of activities

38. The Commissioner concedes that the property was not of a small scale and was not a hobby farm, but points to the limited activities that were carried out on the property in the period it was owned by the Applicant.

39. Counsel for the Applicant put to Mr Livingstone that there were three stages in a forestry business:

  • 1. Planting and thinning;
  • 2. The growth period; and
  • 3. Harvesting.

Mr Livingstone (and Mr Ringk) agreed and said that the Applicant's property was very much in the "sit back and watch it grow" stage. Mr Livingstone stated that it was "there" and it was adequately stocked so all that was required was to sit back, monitor it and, somewhere down the track, harvest it.

40. The experts agreed that there was no need for watering, pruning or fertilising the trees on the property during this period. It should not be held against the Applicant that no such activities were in fact carried out. If he had carried them out then he would be open to criticism for not understanding the industry and not operating the business in a commercial

ATC 8600

manner. As Hill J noted in
Evans v Federal Commissioner of Taxation (1989) 20 ATR 922 (at 939) one of the factors which is relevant to whether a business was being carried on is "whether ordinary commercial principles are applied characteristic of the line off business in which the venture is carried on." In the Tribunal's view the Applicant was doing just that.

41. It follows that "repetition and regularity" which were said in Ferguson (at 314) to be important, are of considerably less importance in a forestry operation such as this.

42. The Commissioner took issue with the lack of records related to the activities which the Applicant said took place on the property, but did not put to the Applicant that they did not occur. The Tribunal is therefore satisfied that the Applicant, either by his own hand or through contractors, carried out activities which were ancillary to the forestry business such as maintaining the roads and fences, removing noxious weeds and building an access road. The expert evidence was that these activities were consistent with a forestry business although the extent, particularly in respect of road maintenance during the growth stage, varies within the industry.

43. The Tribunal also does not accept that there were no other activities taking place on the property. Throughout the period of the Applicant's ownership the forest was growing, albeit slowly, and edging closer to becoming a commercial crop. This is an activity which is fundamental to a forestry business. It just happens that in the case of a forest such as the one purchased by the Applicant, it occurs with little or no human intervention after it is planted and thinned (to the extent that it is planted and thinned at all as opposed to being native). The Tribunal does not accept the inference in the Commissioner's submissions that only activities being carried out by the taxpayer are relevant considerations.

44. The Tribunal is therefore satisfied that the scale and nature of the activities being carried on in respect of the property were very much characteristic of a forestry business in its growth stage.

The commercial character of the transactions

45. The Tribunal accepts the Commissioner's submission that there were few transactions related to the property but, for similar reasons to those expressed above, the Tribunal does not accept that the absence of transactions is indicative of the lack of a business. It is apparent from the expert evidence that few transactions are to be expected during the growth phase of a forestry business. After all, there was nothing to sell and little to buy apart from materials necessary for repairs and maintenance. In that regard, the Applicant's evidence was that he already possessed the tools he needed and whilst he did use a ute on the property, he said it was not used solely on the property and in its early years resided at his home and not on the property.

46. The Tribunal accepts that the purchase of the property was a commercial transaction carried out by an entrepreneur after some limited research into the industry. The purchase price, whilst needing to be financed, was not large relative to all of the Applicant's other business interests at the time.

47. The Tribunal also notes that whilst there are no records before it in respect of the loan, The Applicant's evidence was that he arranged the loan through a business banker as opposed to a personal banker. This suggests to the Tribunal that the loan was a business loan and therefore commercial in nature.

48. The Commissioner submitted that the purchase could just as easily have been a passive investment, but that was not put to the Applicant and is contrary to the evidence. Indeed there is no evidence before the Tribunal that the Applicant ever made enquiries as to the value of the land itself or the prospects of capital growth. It also seems unlikely, given the evidence as to the unsuitability of the land for other activities such as farming or a resort.

Whether the activities were carried out in a business-like manner

49. There is no doubt the Applicant's record-keeping was sorely lacking, but in all other respects the Tribunal is satisfied that the Applicant carried out the activities related to the property in a business-like manner. It was the evidence of the experts retained by both parties that there were no activities that the

ATC 8601

Applicant should have been carrying out but did not. Likewise, the activities he did carry out were consistent with the activities carried out by others who run forestry businesses.

50. Whilst the Applicant did not have a budget or a business plan, the evidence of his accountant was that this was to be expected and it would have been quite unusual if he had them. The Tribunal accepts this evidence, particularly in light of the lack of expenditure required on the property over the years the Applicant owned it.

51. The Tribunal also does not consider that it counts against the Applicant that he did not regularly (or at all after purchase) calculate the costs associated with harvesting the timber or the potential revenue. As the Applicant said in evidence, this would only have become relevant once the trees were ready to harvest. The evidence is that, despite early predictions to the contrary, at the time the Applicant was forced to sell the property, the trees were still many years away from being a commercial crop.

52. There were some questions asked during the hearing as to how the Applicant could possibly have known whether the trees were ready for harvesting or not given his lack of industry experience. The Applicant's evidence was that he had been told that trees would be viable to harvest when it became hard for him to put his arms around them. The experts agreed that it was a reasonable, although far from precise, measure. In any event, the Tribunal accepts the Applicant's evidence that at some stage he had the trees inspected by a saw miller. It is also not true that the Applicant remained entirely ignorant of the industry after his purchase. His evidence was that he attended various industry seminars. In any event, the evidence clearly backs up the Applicant's assessment that the trees were not ready to be harvested prior to his sale of the property in 2016.

53. The Applicant and the experts were also questioned regarding the initial advice the Applicant received that the trees would be ready to harvest within about 20 years of his purchase of the property. Mr Livingstone's evidence was that at the time he probably would have made the same prediction, but with the benefit of experience and hindsight he now knows that was overly optimistic, particularly for trees in low quality soil such as exists at the property and throughout that region. Mr Ringk was not in the industry at that time and deferred to Mr Livingstone. In light of Mr Livingstone's evidence the Tribunal does not believe the Applicant can be criticised for accepting that initial advice.

54. Overall, it would appear that the only significant criticism that can be levelled at the Applicant is that he no longer has records related to a minimal number of transactions, which whilst they should have been kept, were not of immediate use because no expenses could be claimed until revenue was earned. The Applicant's accountant conceded that if the Applicant had kept the records then they could have been claimed against future income, but as already noted he also said that the Applicant was not a good record-keeper.

55. Both parties took the Tribunal to the case of
Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63. The case concerned a taxpayer who had not kept proper books and records but was objecting to an assessment. The Court noted (at 87):

In the absence of some record in the mind or in the books of the taxpayer, it would often be quite impossible to make a correct assessment. The assessment would necessarily be a guess to some extent, and most certainly inaccurate in fact. There is every reason to assume that the legislature did not indent to confer upon a potential taxpayer the valuable privilege of disqualifying himself in that capacity by the simple and relatively unskilled method of losing either his memory or his books.

56. The Applicant's counsel also took the Tribunal to the following passage in
Imperial Bottleshops Pty Limited v Federal Commissioner of Taxation (1991) 91 ATR 148 at 155:

A taxpayer who does not keep records of his deductible outgoings faces a very difficult task. If he goes into the witness box and swears that he has incurred the outgoings he is making a self-serving statement. That does not necessarily mean that he is not to be believed. Such a statement, like statements of purpose, or object or state of

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mind must, however, be "tested most closely, and received with the greatest caution":
Pascoe v Federal Commissioner of Taxation (1956) 11 ATD 108 at 111. It would, of necessity, be a rare case indeed where a taxpayer, claiming to have expended a very large sum of money on trading stock and other business expenses, would succeed in satisfying the burden of proving that the assessment is excessive. Some other corroborative evidence would normally be required which makes it more probable than not that his sworn testimony is to be believed. It must, however, be borne in mind that the evidence of a taxpayer is not to be regarded as "prima facie unacceptable", cf
McCormack v Federal Commissioner of Taxation [1979] HCA 18; (1978-9) 143 CLR 284 at 302 per Gibbs J.

57. The Tribunal notes that the Commissioner also relies on Imperial Bottleshops as authority for the proposition that self-serving statements must be tested closely and need corroborative evidence.

58. Whilst the Applicant may have lost his records, he has not lost his memory and the Tribunal accepts his evidence of what took place, particularly as some of it is corroborated by his accountant and a contractor.

CONCLUSION

59. The Tribunal is satisfied that the Applicant has met the burden of proof with regards to his operating a business. Having weighed up the various factors referred to in the case law as they relate to his property and the activities carried out during his ownership, the Tribunal is satisfied that he was operating a business throughout that period of his ownership including in the 2016-17 tax year when the property was sold. It also follows that the property satisfied the active asset test. Accordingly the Applicant satisfies the basic conditions for relief in section 152-10(1) of the Act. The objection decision under review must be set aside and the matter remitted to the Commissioner for reconsideration in accordance with these reasons.


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