Southern Estates Pty Ltd v. Federal Commissioner of Taxation

(1967) 117 CLR 481
41 ALJR 270

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(Judgment by: Barwick C.J.)

SOUTHERN ESTATES PTY. LTD.
v. FEDERAL COMMISSIONER OF TAXATION

Court:

Judges: McTiernan J.

Barwick C.J.Taylor, Owen JJ.
Windeyer

Judgment date: 2 June 1967

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Judgment by:
Barwick C.J.

1967, December 13.

The following written judgments were delivered:-

BARWICK C.J. The taxpayer was a member of a partnership which owned an area of virgin land in South Australia. Neither the partnership nor the taxpayer was actually engaged in primary production at the time the land came into the possession of the partnership. Indeed, it would seem that the taxpayer included amongst the objects of its incorporation the purchase and sale of land and that it had in fact been dealing in land during periods relevant to the consideration of the present appeal. (at p486)

However, the purpose of the partnership in acquiring the land was to clear it of the scrub upon it, fence, water and grass it for the carriage of stock and thereafter to graze it until such time as it could profitably be sold as grazing land. The conduct of primary production upon the land to this extent was merely to establish its value as grazing land. It could therefore be held upon the material in the case and I am of opinion that it should be held that at least the dominant if not perhaps the sole purpose of the improvement of the land was its preparation for sale at a profit. It is conceded by the taxpayer that resale at a profit was at least an object of the acquisition of the land, for it gave in respect of the acquisition the requisite notice under s. 52 of the Income Tax and Social Services Contribution Assessment Act 1936-1961 (the Act). (at p486)

Due to the supervening illness of the partner of the taxpayer, it had become necessary to sell the land before it had been brought into a productive condition though a great deal of expenditure had been made upon its improvement by way of clearing, fencing and grassing. Though the price obtained on its sale was greater than the price paid on acquisition of the land, due to these expenditures in improving the land a loss on resale was incurred. The Commissioner allowed the taxpayer that loss as a deduction in the year of the disposal of the land. (at p486)

However, the taxpayer claimed also to deduct the amount of the expenditure on improving the land from its income in each of the years in which such expenditure was made. It founded this claim on s. 75 (1) of the Act. It will be convenient to set out the relevant portion of that sub-section:

"Expenditure incurred in the year of income by a taxpayer engaged in primary production on any land . . . in . . . . . . .

(b)

the destruction and removal of timber, scrub or undergrowth indigenous to the land;

. . . .

(e)

ploughing and grassing the land for grazing purposes;

. . . .

shall be an allowable deduction." (at p487)

The respondent Commissioner disallowed the taxpayer's claim to make these deductions, whereupon the taxpayer appealed to this Court. My brother McTiernan, who heard the appeals, dismissed them upon the ground that at the time the expenditures were made the taxpayer was not engaged in primary production within the meaning of s. 75 of the Act. The taxpayer has now appealed from that decision and submits that upon its true construction s. 75 (1) extends to allow a deduction of the amount of the described expenditures by a person who makes them in order to engage in primary production. It says in effect that, unless the statute is so construed, it is in its presently relevant provisions practically meaningless. The appellant submits, and, in my opinion, rightly, that "the land" referred to in the various paragraphs of the sub-section is the whole or part of the land referred to in the opening sentence of the sub-section upon which the taxpayer to qualify for the deduction must be engaged in primary production. The appellant submits that evidently the intention of the legislature included an intention to allow a deduction for bringing the land to which it first refers in the sub-section into a productive state by clearing etc. Therefore, it is said, the expression "engaged in primary production" in relation to that land, which by hypothesis may not be in a state to permit of primary production thereon or therefrom, must be satisfied by the very acts involved in bringing that land into a productive state with the intention of conducting operations of primary production thereon. The appellant says that unless this construction be adopted, the operation of the sub-section must be at best confined to the case of the primary producer who is making expenditures upon part of his land on the balance of which he is at the time of making the expenditures conducting his business as a primary producer. (at p487)

I confess to having felt the force of this submission and can see little reason in point of national policy to confine to a taxpayer already in primary production on the land the encouragement of the improvement of land which the section evidently intends by the deduction it grants and to deny it to a taxpayer by whose expenditure additional land is brought to primary productivity even though until it is ready for production he is not and will not be actually engaged in primary production upon it. But, after a good deal of consideration, I am unable to deny the limiting quality of the opening sentence. I am unable to read "a taxpayer engaged in" as satisfied by one of whom no more can be said than that he intends to engage in. To prepare land for primary production, even for primary production thereon by the person making the improvement is not of itself, in my opinion, to engage in primary production. (at p488)

It seems to me that there is scope for the operation of the subsection without giving it the construction for which the appellant contends. In my opinion, the improvement by one of the methods described in the sub-section of part of land owned by a taxpayer who is actually carrying on primary production on the balance of his land, can be regarded for the purposes of the sub-section as itself an activity of primary production : but that is because the improvement or tilling of the unimproved or untilled land is part of the business activity of a taxpayer already in primary production on the other part of the land. Further, just as a taxpayer already engaged in primary production on part of his land is also so engaged when he sets about the improvement or the tilling of other parts of his land, so, in my opinion, a taxpayer, who is already engaged in primary production elsewhere and who acquires virgin land to bring it into primary production as part of his existing business, is at least from the moment of his first expenditure in its improvement engaged in primary production upon the acquired land. That is to say, that although the activity of bringing land to a state where primary production may begin is not itself primary production, it will be regarded as such for the purposes of s. 75 when it is carried out by a taxpayer already a primary producer. It seems to me that, though a somewhat artificial and not very satisfactory result, the sub-section upon its proper construction extends so far but no further. It cannot be construed, in my opinion, to include as a person engaged in primary production, a person who no more than intends to so engage whilst he is doing no more than make preparations to enable him to do so. Accordingly, for this reason I respectfully agree with the conclusion at which my brother Justice arrived. (at p488)

There is a further reason for my agreement with that conclusion. The taxpayer was not only not in business as a primary producer but it was not intending to enter into primary production as an end in itself. The grazing activities it proposed were but a part of its immediate programme of realization of the land as itself the profit making venture on which the taxpayer was engaged. That being so, even if the appellant's construction of the sub-section could be accepted, the taxpayer could not, in my opinion, properly claim to be covered by it, for the reason that the expenditures which it claims to deduct were not expenditures made by a person intending to engage in primary production in a relevant sense. (at p489)

But in so deciding in the circumstances of this case, I would wish to make it clear that it does therefore not follow that a taxpayer engaged in primary production should not be accorded the deduction of amounts expended upon an activity described in s. 75 (1) merely because he entertained the purpose of selling his property at some time. Nor should he be refused the deduction merely because at the time of his acquisition of the land he had the purpose of reselling it at some time in order to make a profit by the purchase and sale. In those instances the taxpayer will have pursued primary production as an end in itself. (at p489)

Accordingly, for both these reasons I would dismiss these appeals. (at p489)