Case L16

Judges:
AM Donovan Ch
LC Voumard M

Court:
No. 2 Board of Review

Judgment date: 21 March 1979.

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A.M. Donovan (Chairman) and L.C. Voumard (Member): Deductions claimed by the taxpayer in his return for the year ended 30th June, 1975, in relation to what was described therein as primary production, were disallowed by the Commissioner. The Commissioner's attitude was maintained in the face of objection, and the allowability of the items is now the matter for the Board's decision.

2. The relevant facts fall within a fairly small compass. The taxpayer holds university degrees in both science and agricultural science, and for many years was employed in a scientific field. During this period he made a valuable contribution to the clucidation of a grave problem affecting the pastoral industry. In 1961, when he was employed on the teaching staff of a tertiary educational institution, he purchased an area of land some 5½ acres in extent about 15 miles from a capital city located in a district which ``generally speaking could be called marginal farming land or something of that sort''. When purchased the land was virtually unimproved, only some of it had been cleared and what fences existed were very poor. There were no buildings on it.

3. The taxpayer himself erected fences and had built a home which was later extended for the accommodation of himself, his wife and six children. A dam was sunk, trees were cleared from the land (except for a steep area at the back of the property of some one acre in extent), sheds were built, pasture was sown and the property was eventually subdivided into a number of small paddocks.

4. That the land was intended as the site of the taxpayer's home is beyond doubt, but he said it was purchased because of his interest in agriculture and to try breeding livestock. He said that he ``had the idea of running it as a commercial proposition right from the word `jump'''. It is not clear when in fact he first started to run cattle on it for details were provided only in respect of the years 1972 to 1978. During that period he had on hand at the end of each year an average of about four beasts, with the highest being eight in 1976 and the lowest one in 1978. Sales of cattle in 1973 produced $108, three were sold in 1975 for $57, four in 1977 for $76 and in the following year six for $335. During the entire period only two head were purchased for a total of $109, and over the same time span there were only nine natural increase. Milk produced by the animals kept was used for household purposes.

5. Little was said by the taxpayer of the fowls which were kept on the property. In 1974, $50 was received from the sale of eggs and in 1978, $33 came from the sale of the birds themselves.

6. At no time did the activities produce any net profit. The total outgoings, which related predominantly to the cattle, varied between $410 in 1972 to a maximum of $2,568 in 1977, and those for the year with which we are concerned were $1,667. The taxpayer put these poor results down to two causes. The first was that initially he contemplated running dairy cattle, for which he believed there was a good demand from dairymen when they were on the point of, or were in full milk. Depressed conditions in that industry caused abandonment of this plan. He decided then to change to a dual-purpose breed of stock which could produce milk and which were also favoured as beef cattle. Although it is not altogether clear, it seems that he was in the process of achieving this end by cross-breeding from his earlier dairy stock.

7. It was emphasised that the cattle operation was what was described as a ``feed-lot''. By this we understood that the animals were not dependent upon pasture or crops which the property produced, but principally upon fodder which was purchased from outside sources. It is implicit in this system of husbandry that the area of approximately three acres which was given over to the cattle was capable of carrying considerable numbers since

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the limiting factor was not the fodder the area produced but merely the number of cattle that the paddocks could accommodate.

8. In so far as the deductions claimed represent outgoings, success for the taxpayer depends upon their satisfying one or other of the two limbs of sec. 51, which in general terms permit deduction of outgoings incurred in gaining or producing assessable income or necessarily incurred in carrying on a business.

9. It is convenient to consider firstly whether the taxpayer was carrying on a business in relation to the running of cattle. The question whether or not particular activities have amounted to the conduct of a business is one which has engaged the attention of Courts on numerous occasions and, not suprisingly, ordinarily has arisen in circumstances where the operator has not depended upon the income produced for his livelihood. In some of the authorities attempts have been made to define ``business'', and in
Rolls v. Miller (1884) 27 Ch. D. 71 at p. 88, the word was said to mean ``almost anything which is an occupation as distinguished from a pleasure - anything which is an occupation or duty which requires attention is a business''. Observations of this nature are, however, of little assistance.

10. Even in the absence of judicial definition, it is normally not difficult to decide whether given activities amount to a business as that word is ordinarily understood. Factors which have to be taken into account include not only the nature of the activities involved but the manner in which and the extent to which they are conducted. That this is so is abundantly clear from the authorities. Thus, in
Tweddle v. Commissioner of Taxation (1942) 7 A.T.D. 186, the question was whether businesses were being conducted on two rural properties. On one the appellant had a stud, and Williams J., after referring to the number of animals kept, observed that to breed and sell stud stock was to carry on business and said, inter alia, that the stud was being conducted ``according to the usual manner in which similar stock would be used for such purposes on any other stud farm'', and then went on to hold that a business was being carried on. In relation to the other property on which an average of about 200 sheep and a few cattle were run and on which some crops were grown for sale, the learned Judge decided at p. 189 that ``... the facts are just sufficient to establish that... he was carrying on a business of a farmer there'' (emphasis added).

11. In
Thomas v. F.C. of T. 72 ATC 4094, Walsh J. rejected a contention that the appellant was conducting a business of growing pine trees. 1,800 such trees had been planted but had been neglected, so that only about 1,200 remained, not all of which were in good condition. The total value of the trees was ``fairly trivial'', and the appellant was said to have failed to achieve a standard of competency of a man setting out to grow trees as a business venture. The operation was dismissed by his Honour as lacking ``a significant commercial purpose or character''. In concluding otherwise in relation to trees for the production of avocado pears and macadamia nuts, the learned Judge observed at p. 4100: ``... (the appellant) proceeded then... to use (the land) for the growing of trees to such an extent that this might be regarded as a business operation''.

12. Considerable emphasis was put on the extent of operations in
McInnes v. F.C. of T. 77 ATC 4167. During the period with which the case was concerned, the appellant depastured stock on a town common. He had between four and five animals on hand at the end of each year, sold two or three animals and had natural increase of two or three also in each year. The operation resulted in an annual gross profit. In rejecting the contention that the appellant was a primary producer as defined in the Act, and hence was a person carrying on the business of primary production, Waddell J. said at p. 4169:

``It is to be inferred from the evidence that the taxpayer's stock activities were not carried on as a hobby but for the purpose of making some additional income. It is clear enough that activities may be said to be a business even though carried on only in a small way but nonetheless before such activities can be said to be a business it must be possible to attribute some significant commercial purpose or character to the activities. An example of both these statements is to be found in the decision of Walsh J. in Thomas v. F.C. of T. 72 ATC 4094 at 4099. It is also, I think, relevant to compare the operations involved in the taxpayer's activities with those ordinarily involved in activities which would readily be conceded, as a matter of ordinary use of language, to amount to carrying on a business of grazing cattle: cf. the decision of Williams J. in Tweddle v. F.C. of T. (1942) 7 A.T.D. 186 at pp. 188-190.

In my opinion no significant commercial purpose or character can be attributed to the activities here in question in view of the small number of stock and sales involved and the

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small profit derived. The activities involved have little in common with those associated with what would ordinarily be described as a business of grazing. In my opinion the evidence does not establish that during the 1972 tax year the taxpayer carried on a business of grazing and hence of primary production.''

13. So far as the taxpayer in this reference is concerned, it can be said that the running of cattle for the purpose of selling them or their progeny is capable of being regarded as a business activity. This character is not lost solely because milk from some of the cows is used for domestic purposes. Nevertheless, the taxpayer did not carry on the activity in the manner of a commercial breeder. He was engaged in producing calves on a feed-lot and we were not told, and are otherwise not aware, of any commercial operation where cattle are bred for sale under feed-lot conditions. The operation at an agricultural college to which the taxpayer referred in evidence involved not the breeding of cattle but the purchase of cattle in store condition which were grown and fattened on a feed-lot and then sold.

14. So far as the taxpayer was concerned, the keeping of cattle was at best a part-time activity, for throughout the year with which we are concerned he was in full-time employment. The activity was conducted on a very limited basis and the numbers of stock were far fewer than are associated with a commercial venture. We appreciate that he said in evidence that his original intention of breeding and selling dairy stock was frustrated by a downturn in the dairy industry and that when he turned his attention to dual-purpose cattle there was a collapse in the beef market. These factors may perhaps explain why he did not proceed to increase the number of stock carried. That, however, is not the point. What we have to decide is whether the activities actually conducted amounted to a business, and in our view they did not for they were not conducted either in the manner or on the scale which could be encompassed in that description as it is ordinarily understood.

15. Without repeating the little that was said in evidence about the poultry, we merely express our conclusion that they were over-whelmingly kept for domestic purposes and that this operation lacked any commercial significance. Neither the poultry activity alone nor in conjunction with the cattle activity amounted to the carrying on of a business for the purposes of sec. 51 of the Act, and hence the outgoings with which we are concerned are not deductible under the second limb of that section.

16. The first limb of that section provides for deductions in relation to outgoings incurred in gaining or producing assessable income. If, as we have found, the taxpayer was not carrying on a business, it is difficult to see how the proceeds of the cattle which were sold or the receipts from the sale of eggs and poultry could constitute assessable income. If this view be correct, as we believe it to be, then clearly the outgoings with which we are concerned do not fall for deduction under the first limb.

17. For the sake of completeness, we should mention that deductions were claimed in respect of depreciation. This matter can be dealt with quite shortly. Section 54 requires that depreciable items be ``used... for the purpose of producing assessable income''. For the reasons already stated, the items in respect of which the claims were made were not so used. We should perhaps observe that even if they had been, the taxpayer's claims would have encountered difficulty for he was unable to establish either the cost price of the items in question or their date of purchase.

18. Included amongst the deductions claimed in respect of the 1975 year were losses in respect of the activities described incurred during the two immediately preceding years. The outgoings were not incurred in the 1975 year and there is no provision in the Act under which they could possibly fall for deduction in that year.

19. For the reasons stated, none of the deductions to which we have referred is allowable in the 1975 year and, in consequence, the Commissioner's decision on the objection must be upheld and the relevant assessment confirmed.

Claim disallowed