Case C79

Judges:
AM Donovan Ch
GR Thompson M
RK Todd M

Court:
No. 2 Board of Review

Judgment date: 18 November 1971.

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A.M. Donovan (Chairman) and G.R. Thompson and R.K. Todd (Members): For many years the taxpayer has been a primary producer and, in accordance with the relevant provisions of Div.16 of Pt.III of the Act, the tax payable in respect of income derived by him during the year ended 30 June 1969, was calculated at the rate applicable to his average taxable income. An objection was lodged against the relevant assessment, material parts being as under -

``We claim that the rate of tax calculated by application of Division XVI should be reduced to 7.67927 cents per dollar - that is the average rate of tax applicable to a taxable income of $1370.

During the year which ended on 30 June 1967, taxpayer's income was permanently reduced to less than two-thirds of `average income' and we therefore submit that the assessment is erroneous as Section 155 - providing that 1967 should be deemed the first average year - has not been applied in calculating the rate of tax.

We further claim that as 1969 is the first year since 1967 in which the taxable income exceeds the preceding year the average for 1969 should be calculated by reference to income of 1968 and 1969 only.''

2. The division above referred to is a recognition of the comparative disadvantage at which a person is placed when his income is subject to marked fluctuation from year to year and his tax is calculated according to a graduated scale. Since 1938, these provisions have applied only to primary producers and their effect is to apply to the taxable income of a particular year not the rate of tax ordinarily applicable to such an income but the rate applicable to an amount equivalent to the average annual taxable income over a maximum period of five years terminating at the end of the year in question. If the taxable income of the particular year is greater than the average, the taxpayer derives from the provision a benefit in that fiscal period. However, if the taxable income is less than the average, the converse applies.

3. To afford relief in certain circumstances where the taxable income is substantially less than the average, sec.155 was enacted. It provides -

``(1) Where a taxpayer establishes that, owing to his retirement from his occupation, or from any other cause (but not including a change in the investment of assets from which assessable income was derived into assets from which the taxpayer derived income which is not liable to be assessed under this Act), his taxable income has been permanently reduced to an amount which is less than two-thirds of his average taxable income, he shall be assessed, and the provisions of this Division shall apply to the income thereafter derived by him, as if he had never been a taxpayer before that year.''

Subject to the conditions mentioned, this provision removes a primary producer from the effects of a prejudicial average scale, but, in the altered circumstances, permits a new scale to be applied as soon as its operation would confer a benefit. Nevertheless, its significance has been greatly diminished since the enactment of sec.158A which, in effect, permits the permanent withdrawal from the averaging provisions.

4. As mentioned above, the objection is directed against the assessment in respect of the income year ended 30 June 1969, when the taxable income was $1,627 and the average income $3,604. It asserts that a permanent reduction of the required magnitude took place in the year ended 30 June 1967, when the average was $5,089, two-thirds of which is $3,392. In that year the taxable income was $3,165 only and was thus below two-thirds of the average. The question for decision is whether that reduction is ``permanent'' within the meaning of sec.155.

5. Counsel for the taxpayer submitted that ``permanent'' was a word which connoted a degree of relativity and referred to
Tyers v. Barmera Packing Co. Ltd., 30 S.A. S.R. 123, and to
Hendrickson v. Grafton Hotel Ltd. (1942) 1 A.E.R. 684. In particular, he suggested that as the averaging provisions took into account a maximum period of five years only, ``permanent'' should be interpreted with that period in mind. In
F.C. of T. v. Austin, 48 C.L.R. 590, the provision which was the forerunner of the present sec.155 was considered and, at p.601, Gavan Duffy, C.J. and Dixon, J. observed that the word ``permanent'' therein appearing was ``employed in an inexact but a very usual sense of indefinitely continuing''. In spite of counsel's arguments, that is the interpretation which should be adopted by the Board in this reference.

6. By the terms of the section the taxpayer has the task of showing that the reduction on which he relies is a permanent one. The nature of the obligation thus imposed on him was considered in
10 C.T.B.R. Case 123. There it was said: ``Before the claim can succeed it is necessary for the taxpayer to establish that the taxable income has been permanently reduced.... The mere probability of such reduction is not enough. The evidence must have sufficient weight to indicate that no other conclusion could reasonably be reached.... It is not necessary, of course, for the taxpayer to establish that the income cannot possibly exceed

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ATC 351

that amount in any circumstances. All that is required, we think, is to demonstrate that, as far as can be foreseen, for an indefinite period the taxable income for any year will not reach that amount.'' We respectfully accept this approach.

7. As far as the material placed before the Board extends, the taxpayer's taxable income was at its maximum in 1965 when it reached $6,540. In subsequent years from 1966 to 1970 it was $5,580, $3,165, $1,112, $1,627 and $1,490. There has thus been a very marked reduction due it seems to three factors. Two of them are said to have operated in 1967 and are relied upon as having permanent effect. The first cause was a diminution in the prices commanded by the products of the taxpayer's farm. In relation to this aspect of the case, evidence was led that the farm was of some 400 acres in area and was really only suitable for the use to which it was put - the production of fat lambs and wool. It was efficiently worked and managed and there was no prospect of increasing the number of livestock turned off or the quantity of wool produced. There can be no doubt that in the years 1968 to 1970 the low incomes have been caused to a considerable extent by depressed prices. Nevertheless, one has come to expect fluctuations in the return for farm products except perhaps in those areas where stabilisation schemes exist, and perhaps that provides one reason why the averaging provisions now apply only to primary producers. Because price fluctuations are more or less normal, difficulties must inevitably confront any taxpayer in attempting to show that depressed prices in a free market are likely to continue indefinitely. One supposes that the views held even by experts on future market movements might, in many instances, amount to little more than informed guesses. That is not to say, however, that circumstances cannot exist where it is possible to decide with a reasonable degree of confidence that an existing level of prices is likely to continue. In the present case, however, the only evidence came from the taxpayer himself who said he foresaw no improvement in the market conditions existing at the time of the hearing. He is undoubtedly an able and experienced farmer and no doubt keenly interested in the amount the farm returns, but he is certainly no expert in agricultural economics and his opinion provides no evidence upon which the Board could form a considered view that the depressed market for wool and fat lambs will continue. For this reason, the Board has to ignore the effect of the diminished prices in deciding whether the reduction in the taxpayer's income is permanent. We should perhaps mention that the net incomes from the farm for the years 1963 to 1970 inclusive were - $5,864, $4,452, $6,618, $5,766, $5,646 (1967), $1,549, $3,041 and $2,195. The 1967 year thus saw a comparatively minor reduction on this account.

8. The other matter relied upon as giving rise to the permanent reduction was the formation of a partnership between the taxpayer and his wife to carry on the farming operations previously conducted by the taxpayer alone. The relevant agreement, which provided for profits and losses to be shared equally, was executed on 1 July 1966, and recited that the parties had agreed to become partners ``in the business of farmers upon the property of'' the taxpayer. It was agreed that the partnership should continue ``so long as the partners shall live or until such time as it is terminated by notice as hereinafter mentioned.'' The agreement contemplated that if either party failed to carry out the obligations imposed by it or committed an act of bankruptcy, became unfit to attend to the partnership business or did or suffered any act which would be a ground for the dissolution of the partnership by the Court, the other partner might by notice in writing terminate the partnership and that partner should have the option of purchasing the share of the other upon terms stated. Clause 14 designated the taxpayer the managing partner and provided that on any matter pertaining to the partnership his decision should prevail in the event of dispute between the partners. Apart from this clause, the agreement seems to have been in a usual form.

9. The Board was not told why the partnership was formed, but it seems reasonable to infer that fiscal considerations were largely responsible. The partnership provided a simple and effective means of dividing the farm income equally between the taxpayer and his wife, thereby obtaining the benefit from the lower rates of the graduated tax scale. In this context it is not without significance that when the relevant agreement was executed the taxpayer and his wife were approaching 60 years of age and had been married for considerably more than 30 years.

10. The farm used by the partnership remained the taxpayer's property, being held by him under a 99 year lease from the Crown carrying with it the right to purchase the freehold for, it seems, $5,900. This was considerably less than the value of the property which, according to a copy of an entry in a valuation roll, was $55,000. The same entry showed the assessed annual value as $2,200, yet the annual rental payable to the Crown was $264 only. This amount and the local government rates were paid by the partnership, but the taxpayer received from it nothing for foregoing full possession of the farm. Counsel submitted that he was obliged by the terms of the partnership agreement to permit the firm to occupy it without charge. For reasons

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ATC 352

which it is not necessary to expound here, we do not so interpret the agreement. The Commissioner's representative strongly argued that since the taxpayer had it in his power to require payment from the partnership of a reasonable occupation fee whenever he so chose, it was not possible to say that there had been a permanent reduction in his income to the extent required by sec.155. In the light of our later conclusions, we do not propose to deal with this argument, but it may be pertinent to remark that if a reason for the formation of the partnership was the division of the farm income for tax purposes, that objective could best be achieved by the taxpayer continuing to forego any rental for the farm.

11. We now turn to consider the 1967 year in greater detail. During that period the taxpayer's gross income consisted of $2,823 being his share of the partnership income, $18 dividends and $527 interest on two separate loans, giving a total of $3,368. Concessional deductions amounting to $203 left the taxable income of $3,165 already mentioned. The details set out earlier show that the 1967 profits from the farm differed little from those of earlier years, so that if depressed prices applied at all in that period their effect was minimal. The reduction in the 1967 taxable income can thus for practical purposes be ascribed wholly to the sharing of the farm income because of the existence of the partnership. Reductions to the same extent and for like reason can be anticipated in all future years. If there were nothing else to be considered, the requirements of sec.155 would be fully satisfied.

12. It is necessary, however, to advert to the possibility of the partnership deriving income from a source additional to its farming operations. At 30 June 1967, its current banking account stood at $14,457, a figure which has subsequently increased. As far as can be seen, this amount is considerably greater than the sums required to provide working capital and to meet contingencies. It seems that the partnership has adopted the taxpayer's practice of holding substantial amounts in liquid form. Yet the continuance of this practice depends only on the whim of the taxpayer for there is no reason why even a substantial part of the money in the bank should not be put to the production of income. It would take the investment of little more than one-half of the abovementioned balance at the interest rates available on trustee securities to produce $460, one-half of which would lift the taxpayer's assumed taxable income beyond the critical figure of $3,392. The distinct possibility of the investment of funds to the extent mentioned makes it impossible for us to decide that there has been a permanent reduction in the taxable income of the required magnitude.

13. The third reason for the decrease in the 1969 and 1970 taxable incomes lies in the fact that one of the loans which had been producing interest for the taxpayer in earlier years was repaid, with the result that the interest received in those two years was $187 and $153 respectively. The repaid principal appears to have been banked in the partnership current account and to have been treated in its books as additional capital contributed by the taxpayer. As we have stated, the objection relies only on events in the 1967 year already described, and in consequence the Board was told little about this matter. It is here referred to merely for the sake of completeness and the only comment we intend to make is that the transaction seems properly to be regarded as a reversible one.

14. To repeat what we have said, we are of opinion that the taxpayer's case fails. To the extent that it depended on depressed prices, there was no acceptable evidence adduced to show that the low prices are likely to continue indefinitely. As far as the second submission is concerned, the formation of the partnership diminished the taxpayer's income though to little beyond the minimum required by sec.155. There is, however, a distinct possibility that that comparatively slight difference will be extinguished by the investment of some of the partnership's substantial liquid assets. The taxpayer has thus failed to show that his taxable income has been permanently reduced to the required extent.

15. We would uphold the Commissioner's decision on the objection.

Claim disallowed