MR & SL BLOCK & ORS v FC of T

Members:
A Sweidan SM

Tribunal:
Administrative Appeals Tribunal, Perth

MEDIA NEUTRAL CITATION: [2007] AATA 1897

Decision date: 26 October 2007

ATC 2737

A Sweidan (Senior Member)

Background

1. The second and third applicants are husband and wife who reside on a farming property at Gidgegannup (Cheverell Park), approximately 45 kilometres north east of Perth.

2. The first applicant is a partnership of the second and third applicants which it is claimed on 1 July 1996, commenced to carry on a business at Cheverell Park, breeding thoroughbred horses and Suffolk sheep for sale at a profit (the "business").

3. The first applicant has it is claimed at all material times continued to carry on the business at Cheverell Park.

4. From 8 September 2001 to 1 October 2005 ("the relevant period"), the first applicant was registered under Division 23 of the A New Tax System (Goods and Services) Act 1999 (the "GST Act").

5. The Respondent claimed that the first applicant's activities in the relevant period did not amount to the carrying on of a business or an enterprise and:

and disallowed objections by the applicants. The applicants seek a review of those decisions.

Issues

6. Whether the first applicant was entitled to be registered for goods and services tax for the period commencing 8 September 2000 and continuing until 1 October 2005.

7. Whether the first applicant correctly returned taxable supplies in its business activity statements for the tax periods ending 31 December 2001 until 30 September 2005 inclusive.

8. Whether the first applicant correctly returned creditable acquisitions in its business activity statements for the tax periods ending 31 December 2001 until 30 September 2005 inclusive.

9. Whether the net losses claimed by the first applicant in its income tax returns for the years ended 30 June 2001 to 2004 arising from the conduct of the business were correctly calculated.

10. Whether the second and third applicants were entitled to claim a deduction for their interest in the first applicant's net loss for the years of income ended 30 June 2001 to 2004.

Respondent's contentions

11. The respondent asserts that the first applicant's horse breeding activities were not activities carried on in the form of a business for the following reasons:

12. The respondent also asserts that the first applicant's sheep breeding activities were not activities carried on in the form of a business for the following reasons:

13. The respondent further asserted that by reason of the matters referred to above, the first applicant is not a "partnership" within the meaning of section 195 of the GST Act because the first applicant is not:

14. By reason of the above, the respondent asserted that the first applicant is not an entity entitled to be registered under s 23-10 of the GST Act.

Applicant not conducting an "enterprise" within the meaning of the GST Act

15. Further, and in the alternative to the above it was asserted that by reason of:

16. Further, and in the alternative the respondent asserted that by reason of:

17. Further, and in the alternative the respondent asserted that by reason of:

18. By reason of the matters set out above, the respondent asserted that the first applicant

ATC 2739

was not entitled to be registered for GST under s 23-10, GST Act.

19. The respondent also asserted that by reason of the matters above, the first applicant was not:

Whether Mr Block and Mrs Block were entitled to deduct his or her share of the first applicant's losses.

Partners entitled to deduct partnership losses

20. Pursuant to s 92(2) of the Income Tax Assessment Act 1936 (ITAA 1936) a partner in a partnership is allowed a deduction for their interest in the losses of the partnership.

21. A partnership loss is incurred when a partnership's allowable deductions exceed its assessable income.

22. Pursuant to s 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) losses or outgoings are relevantly deductible to the extent that:

Mr Block and Mrs Block not entitled to deduct partnership losses

23. The respondent asserted that by reason of the matters above:

24. Accordingly the respondent contended that by reason of the matters in the previous paragraph, Mr Block and Mrs Block were not entitled to a deduction for their share in the losses of the first applicant under s 92(2), ITAA 1936.

Tribunal's findings

25. The Tribunal finds, for the reasons which follow, that the first applicant was carrying on a business of horse and sheep breeding at all relevant times. The Tribunal has no hesitation in rejecting the respondent's assertions to the contrary.

Evidence

26. Mrs Block gave evidence for the applicants and the Tribunal accepts her evidence which was supported by a number of documents and which is set out below in some detail.

27. Overall the Tribunal finds that at all material times, the first applicant has conducted its activities in a businesslike and commercial manner, preparing and maintaining all appropriate books and records. The Tribunal notes that the first applicant has maintained full and proper accounts in respect of the business and engaged accountants to prepare the tax returns and accounts for the business.

28. Further the Tribunal finds that the evidence which is summarised below together with the Tribunal's findings overwhelmingly supports the case of the applicants.

The property

29. The second and third applicants arrived in Australia in 1987 and have, at all material times since their arrival, lived in Gidgegannup.

30. The first applicant acquired a property at Reen Road, Gidgegannup in 1987, for $185,000. The property is a farming property of approximately 30 hectares, which included a house and improvements. The second and third applicants lived in an old house on the property while they built a new home.

31. In 1988 or thereabouts, the first applicant purchased a neighbouring farming property for $200,000. This property was also about 30 hectares. It included a house and specific improvements for a horse stud, including a stable block, some post and rail yards and shelters. The property also included a shearing shed and run down yards.

32. The first applicant purchased the second property to increase the size of the land and facilities available to enable it to conduct horse and sheep breeding activities.

33. 

ATC 2740

Together these two properties constitute Cheverell Park.

34. In 1989, the first applicant purchased a larger farming property of 250 hectares at the Lakes. This property was some 30 minutes drive from the Gidgegannup property. The first applicant carried on a farming business on this property running up to 1500 head of stud merino sheep for breeding, meat and wool. The Lakes property had poor pasture growth and the market for merino sheep declined.

35. The first applicant sold the Lakes property in 1996, to finance improvements to Cheverell Park and to purchase stock for the business.

36. The first applicant has ongoing upgrade programme for Cheverell Park and has made the following improvements:

The business activities

37. The second and third applicants have considerable relevant experience including:

38. The first applicant's business is governed by the Western Australian Department of Agriculture's stocking rates, which is based upon a consideration of the size of the property (60 hectares), the topography, useable acreage and the amount of hand feeding carried out.

39. 

ATC 2741

The stocking rate requires a balance to be retained between the number of horses and sheep on the property. The first applicant has at all material times conducted its business in accordance with these standards. The sheep and horse breeding activities are an integral part of the first applicant's business and complement each other.

40. The second and the third applicants have built up the first applicant's business by investing a significant amount of their capital, time and effort in the conduct of the business with a view to making a profit.

Thoroughbred horses

41. The purpose and intention of the applicants in engaging in the horse breeding business at the property was and is to breed thoroughbred horses and to sell the progeny for profit.

42. The second and third applicants purchased their first mare and put her to stud to produce a foal in 1991. In the period 1991 to 1996, the second and third applicants developed and expanded the number of quality brood mares which they had available to enable them to commence business in 1996 with 5 or 6 mares.

43. Upon commencement of the business, the first applicant continued the acquisition of mares (by breeding or purchase) to reach 10 in the tax years ending 30 June 2000 and 2001.

44. On 1 July 1996, the first applicant commenced to carry on the business at Cheverell Park. In the period between 1 July 1996 and 30 June 2000 the first applicant:

45. The activities of the applicants are further reflected in the 'Equine Business Programme' of the first applicants (Respondent's T documents 324-325).

46. In the period 1 July 1996 - 30 June 2000, the first applicant commenced to place certain fillies into training and racing them. The purpose of this was to prove the breeding and to improve interest in the stud. Neither of the second or third applicants have any interest in racing and only attend race meetings when their horses are racing and then usually only for that race. Wagering by the second and third applicant's is rare and usually confined to a $10 'each way' bet.

47. The first applicant has continued to race certain of its horses throughout the relevant period for the purpose of marketing the stud. This has recently or will shortly be discontinued in view of the success in breeding and selling, following the restructuring of the stud.

48. The first applicant successfully offered and/or sold its stock on commercial terms:

49. The first applicant suffered the following accidental injuries and deaths to its horses in the period 1 July 2000 to 30 June 2004 which had a serious effect upon its business:

50. Subsequent to the failure to sell horses at the 2002 sales, and a series of mishaps resulting in injuries and deaths to horses, the first applicant determined to restructure its horse breeding business.

51. The first applicant made a decision to invest in the infrastructure of the business, whilst producing its own young mares to replace mares that had died or aged.

52. The restructure of the first applicant's horse breeding business resulted initially in the business declining in size and scale, and contributed to the losses made by the business in the years ended 30 June 2003 to 2005.

53. As part of the restructure, the first applicant reviewed the quality of its stock and sold, culled or otherwise disposed of horses (including mares) which it regarded of little value.

54. In order to restock, the first applicant retained some its quality fillies to keep as mares, which meant that they were not available for the sales in 2004 and 2005.

55. The first applicant made a decision not to purchase broodmares as part of the restructure, because of concerns about quality and because the purchasing of broodmares had already been tried with limited success.

56. The first applicant decided to continue to undertake some limited horse racing for the purpose of improving the value of the horses for sale, and to produce quality brood mares. Where this was done, the first applicant sought trainer's advice so as to ensure the horses had the appropriate training programme.

57. The primary activity and purpose of the first applicant's business is horse and sheep breeding and not the racing of horses. The first applicant has always been foremost a breeder and is recognised as such in the industry.

58. The investment in infrastructure contributed to an increase in the expenditure of the first applicant, and an increase in the quantity of losses made by the business. This was done with the intention of turning the business to profit in the future.

59. The investment in infrastructure is now complete. The first applicant expects that future expenditure on the property will be minimal maintenance costs.

60. The first applicant plans to invest the proceeds from the business to further improve stock, and to acquire new breeding stock. The planned purchase of a quality mare in foal in the sales in 2006 has been put on hold in view of the action by the ATO and the need to pay the outstanding taxes.

61. The second and third applicants have put considerable capital, time and effort into the business, far more than a person undertaking a recreational pursuit or a hobby and are concerned not to risk their future time, effort and capital, if the business is to be regarded as a hobby.

62. The first applicant now has a high quality mare which has been bred to put into foal, and another two mares which are in foal this year to a top Western Australia stallion. Another three mares have been booked into top stallions for this year's stud season.

63. One of the first applicant's quality yearlings was accepted for the Premier Yearling Sale in February 2007.

64. 

ATC 2743

With the new young mares and the retained broodmares, the first applicant expected to produce quality foals ready for sale at both the Ready to Run and Yearling sales in 2007, with significant returns to the business.

65. Subsequent to 2007, the first applicant's business plan is to produce and sell high quality horses in the Magic Millions, Yearling and Ready to Run sales on a regular basis and it is reasonable to expect that the business will secure sales in well in excess of $100,000 per annum. The yearling market is now buoyant and healthy for well conformed foals.

66. The first applicant has significantly reduced its outlays to primarily maintenance and limited trainer's fees.

67. The first applicant has been systematically implementing its business plan over the past three years with the purpose of placing the horse breeding business on a path to sustainable profit.

Suffolk sheep

68. The purpose and intention of the first applicant in engaging in the sheep breeding business was and is to breed Suffolk sheep with the intention of building a thoroughbred flock and to sell the progeny to farmers for flock improvement, at a profit.

69. The activities of the first applicant in carrying on the sheep breeding business are considerable, systematic and organised, and not in the nature of a private recreational pursuit or hobby.

70. The first applicant has:

71. The sound business practices of the first applicant in respect of the sheep breeding business resulted in a business that, in isolation, was and is profitable.

72. The first applicant sold 45, 12, 0 and 8 sheep in the years of income ended 30 June 2001 to 30 June 2004. The first applicant sold 21 sheep in 2005 and 47 sheep in 2006.

73. In 2002/2003, the first applicant suffered almost a complete non-lambing due to an infertile ram, which resulted in minimal stock available for sale in 2003/2004. To avoid this in the future, the first applicant now runs the ewes in two flocks with separate rams.

74. The first applicant reduced the number of ewes from 81 at 1 July 2000 to 60 at 30 June 2005, with a view to improving the quality of the breeding stock. At 30 June 2006, the stock had been increased to 77 sheep.

75. The first applicant has improved, repaired and constructed infrastructure on the property to support the sheep breeding activities, including:

76. The first applicant has an operating plan that commences at predetermined dates every year, which includes:

77. The first applicant maintains normal commercial practices in selling its sheep by:

78. To date, the first applicant has had no problem in selling all available sheep through its existing sale practices and, as a general rule, has not had enough sheep available to fill orders.

79. The first applicant has taken, and is taking, further steps to increase the size and scale of the sheep breeding business.

80. During the period 30 June 2002 to 30 June 2005, the number of rams held by the first applicant increased from 3 to 30. The first applicant purchased two breeding rams from a stud in Tasmania for $2,200 each in September 2005, as part of a plan to provide better conformation ewes.

81. The first applicant also plans to introduce another 12 ewe hoggets to go into the flock in 2007.

82. The first applicant reasonably expects that the sheep breeding business will produce higher numbers of quality progeny every year, and plans to sell all rams produced every year, in addition to surplus ewes that are required to upgrade its flock.

83. The first applicant has realised a profit from the sale of sheep for the past two years, and expects the business will continue to make a profit.

84. The first applicant has been systematically implementing its business plan over a number of years with the aim of increasing the profitability of the sheep breeding business.

General

85. It is clear that the first applicant has incurred significant losses in respect of the business because of the capital costs of setting up the business, the subsequent restructuring of the business and, as a result of a series of unforeseeable setbacks.

86. The first applicant reasonably in the Tribunal's view anticipates that as all the infrastructure and improvements for the business is now in place, and steps have been taken to upgrade its stock, it will have saleable progeny to secure future income and profit from both the horse and sheep breeding businesses.

87. The Tribunal finds that the first applicant does not undertake either the horse or sheep breeding activities as a private recreational pursuit or hobby. The first applicant conducts the businesses in a proper business like and commercial manner with an intention of making profits.

88. The first applicant was registered as a partnership for goods and services tax (GST) from 8 September 2000 until 1 October 2005, accounted on a cash basis and lodged BAS returns quarterly.

89. As a result of the first applicant's business, the first applicant prepared and lodged its business activities statements for the tax periods ended 31 December 2000 to 30 September 2004 on the basis that it was

ATC 2745

carrying on an enterprise, and remitted GST in respect of its taxable supplies and claimed input tax credits in respect of its creditable acquisitions.

90. The first applicant's business activity statements showed the following net amounts during the period.


PERIOD ENDING REPORTED LABEL 1A REPORTED LABEL 1B REPORTED NET BAS
31/12/2001 $140 $7,601 −$7,461
31/3/2002 $10 $5,067 −$5,057
30/6/2002 $100 $6,561 −$6,461
30/9/2002 $0 $3,162 −$3,162
31/12/2002 $0 $3,592 −$3,592
31/3/2003 $201 $5,351 −$5,150
30/6/2003 $143 $3,445 −$3,302
30/9/2003 $1,156 $7,341 −$6,185
31/12/2003 $4,816 $16,402 −$11,586
31/3/2004 $572 $3,683 −$3,111
30/6/2004 $87 $8,230 −$8,143
30/9/2004 $2,411 $6,185 −$3,774
31/12/2004 $416 $4,312 −$3,896
31/3/2005 $0 $6,175 −$6,175
30/6/2005 $1,751 $5,176 −$3,425
30/9/2005 $20 $3,066 −$3,046
SUBTOTAL $11,823 $95,349 −$83,526

91. The first applicant prepared and lodged its income tax returns for the years of income ended 30 June 1996 to 2004 on the basis that it was carrying on a business.

92. The respondent has denied that the first applicant is carrying on a business and has disallowed the following net losses from the business for the years of income ended 30 June 2001 to 2004.


Income Year Net Loss From Business
2001 $143,955
2002 $199,750
2003 $208,401
2004 $169,913

93. As a result of the interest of the second and the third applicants in the first applicant, the second and the third applicants prepared and lodged their income tax returns including a deduction for their respective shares in the first applicant's losses.

Effects of Tribunal's findings

94. The first applicant was entitled to be registered for goods and services tax pursuant to s 23-10 of the GST Act for the tax periods ending 31 December 2001 until 30 September 2005, inclusive.

95. The first applicant correctly returned taxable supplies made in accordance with s 9-5 of the GST Act in its business activity statements for the tax periods ending 31 December 2001 until 30 September 2005, inclusive.

96. The first applicant correctly returned creditable acquisitions made in accordance with s 11-5 of the GST Act in its business activity statements for the tax periods ending 31 December 2001 until 30 September 2005, inclusive.

97. The expenditure incurred by the first applicant in relation to the business in relation to each of the years of income ended 30 June 2001 to 2004 was expenditure necessarily incurred in carrying on a business for the purpose of gaining or producing its assessable income.

98. The expenditure incurred by the first applicant in relation to the business, and which is claimed as a deduction, is neither capital or of a capital, private or domestic nature.

99. 

ATC 2746

The first applicant is entitled to a deduction for capital allowances, depreciation and capital works in each year of income as the plant and capital works were used or held ready for use by it in carrying on business for the purposes of gaining or producing assessable income.

100. The first applicant is entitled to a deduction under either s 8-1, section 25-10 (for repairs), s 25-25 (borrowing expenses), Division 40 (capital allowances) and Division 43 (capital works) of the Income Tax Assessment Act 1997 for the deductions claimed in its income tax returns.

101. The second and third applicants are entitled to a deduction for their respective interest in the first applicant's net loss incurred in each of the years of income ended 30 June 2001 to 2004 from the carrying on of the business, under s 92 of the Income Tax Assessment Act, 1936.

Decision

102. The decisions under review are therefore set aside and the Tribunal directs the respondent to take the steps set out in its decision above.

 

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