Case C18

Judges:
FE Dubout Ch
G Thompson M

Court:
No. 3 Board of Review

Judgment date: 26 March 1971.

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F.E. Dubout (Chairman) and G. Thompson (Member): In his income tax return for each of the three consecutive years of income ended 30 June 1967, 1968 and 1969, the taxpayer claimed to deduct losses incurred in, or in connection with, motor racing activities in which he had engaged. In summary, the losses were calculated as set out hereunder-

                           1967            1968        1969
     Prize Money           $99             $30         Nil
   Less

     Repairs and
     Maintenance  $646            $284
     General ex-
     penses       $150             $86
     Depreciation $321            $327
   Less - contd.
     Loss on dis-
     posal of car    -               -                435
                 -----           ------             ------

                 $1117   $1117    $697    $697       $435
                         -----           ------     ------
   Loss claimed          $1018            $667       $435
                         -----           ------     ------
    

2. Upon the rejection of these claims in each year by the Commissioner, the taxpayer duly lodged an objection against each assessment, and the disallowance of those objections has led to the present references. The grounds of objection taken to the 1967 and 1968 assessments were identical, and were set out in the following form-

• 1. Prize money received was income and should properly be included in my taxable income in accordance with sec. 25, and/or

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• 2. Under the first limb of sec. 51(1) the expenditure was necessarily incurred in producing the assessable income, and/or
• 3. Under the second limb of sec. 51(1) the expenditure was necessarily incurred in carrying on the business of motor racing, and/or
• 4. In accordance with sec. 26 motor racing was a profit making undertaking or scheme, and in consequence the loss incurred should be allowed via the provisions of sec. 52.

3. In support of each of these objections, the taxpayer provided a long statement, partly of a factual nature, but containing also inferences drawn from the facts, and arguments as to why the objections should be allowed. So far as the material in the statements was purely factual, it was not disputed by the Commissioner's representative, and it forms part of the evidence in the case. There was also tendered a much shorter document, described as a ``Statement of Agreed Facts'', and oral evidence was given by the taxpayer.

4. To finalise the matter of grounds of objection, it should be added that in respect of the 1969 year, the taxpayer objected against the disallowance of ``depreciation adjustment in respect of sale of racing car $435'' on the following grounds-

• (a) In accordance with the provisions of sec. 51, the loss is properly deductible; and/or
• (b) In accordance with sec. 26, motor racing was a profit making undertaking or scheme and in consequence the loss incurred should be allowed via the provisions of sec. 52.

5. The taxpayer, now a man of 26 years, attended a university where he obtained, at the end of 1966, the Degree of Bachelor of Commerce. Shortly afterwards, he entered into employment as an accountant with a firm of Chartered Accountants, and he has remained continuously in that employment up to the present time. He has had no other experience as an employee except as a casual shop assistant in periods of school or university vacation.

6. In September 1964, the taxpayer purchased a 1954 model Holden sedan at a cost of $110 for the purpose of converting it to a racing car. However, it proved unsuitable for that purpose as the body was badly rusted, and later the body was scrapped. Pursuing his original idea, the taxpayer purchased, in April 1965, a 1953 model Holden sedan at a cost of $50. With the body of this vehicle as the frame work, and from the engines and other parts of both vehicles, taxpayer commenced the construction of a racing car. Construction continued until July 1966, by which time the racing car was completed at a total cost of $1,555. This is the car on which depreciation was claimed in the 1967 and 1968 returns, and the loss on disposal of which was claimed in the 1969 return.

7. On 31 July 1966, the car was tested on the track at a motor racing circuit, and apparently passed muster as a racing car, for the taxpayer on 25 September 1966, took part in his first competitive race meeting, which was held at the circuit mentioned above. (All races in which the taxpayer competed were held on one or other of two circuits). He competed in three events at his first meeting, but failed to fill a place which carried prize money. During the year ended 30 June 1967, the taxpayer attended in all 6 meetings and competed in 18 events. In the following year, he attended 4 meetings and competed in 14 events. As previously stated, the total prize money won in each of these years respectively was $99 and $30.

8. From the information supplied, it can be seen that the taxpayer's record of placings which attracted prize money was as follows-

     First place      -      twice
     Second place     -      3 times
     Third place      -      twice
     Fourth place     -      twice
     Fifth place      -      once
     Sixth place      -      twice.
      

All these placings are placings recognised for the particular class of vehicle to which the taxpayer's racing car belonged. The taxpayer did not gain an outright win, for which, in some races, additional prize money was awarded. Taking into account the availability of such additional prize money, it appears that if the taxpayer could have succeeded in winning outright every event in which he competed, he could have won prize money totalling $952 in the first year and $900 in the second. The taxpayer stated that he had attended most of the meetings held in the two years, and it was only car maintenance problems which caused him to miss any meetings of consequence.

9. Since May 1968, the taxpayer has not competed at any motor racing meeting. The racing car which, during the taxpayer's ownership, had never been registered for private use on the road was sold in August, 1968 for $500. The taxpayer has since February, 1965 been a member of a

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Motor Sporting Club which conducts the activities at one of the circuits where he raced. Finally it is mentioned that the taxpayer on 8 February 1967 registered a business name, which indicated a direct connection with the motor trade, under local legislation relating to business names, and that registration has since been annually renewed.

10. The first ground of objection taken by the taxpayer is that the prize money constituted income, and therefore forms part of his assessable income by reason of sec. 25. This assertion opens up for consideration two possible questions-first, whether the motor racing activities in which the taxpayer engaged amounted to the carrying on of a business, and second, if those activities did not amount to a business, whether the prize money was in any event of an income nature. We propose to consider first the question as to whether or not there was a business.

11. Over a period of many years, there has accumulated a wealth of judicial dicta on what amounts to the carrying on of a business, or in the English cases, what constitutes a venture in the nature of trade. Such dicta usually prove to have limited usefulness when it comes to the solution of the problem in an individual case. One statement, which has a sufficient degree of generality to provide a test in a wide range of circumstances, is that made by Lord Reid in
Griffiths v. J.P. Harrison (Watford) Ltd. (1962) 1 All E.R. 909, at p. 913, where His Lordship said-

``Certainly these cases establish that operations of the same kind and carried on in the same way as those which characterise ordinary trading should be held to be trading though there may be no intention to earn profit or though the transaction may be an isolated one.''

12. If one attempts to apply a test of that kind to the situation in the present case, difficulties arise at once. Certain obvious questions present themselves - is there any ordinary recognised business of motor racing, what operations ordinarily characterise such a business, were the taxpayer's operations characteristic of the operations of a person undeniably engaged in such a business? To the first question, it may be answered (as a matter of judicial of knowledge) that there are certainly people whose business, or perhaps profession, appears to be motor racing; conversely, at the other extreme there is the driver who competes in an occasional hill climb, and who has no conceivable claim to professionalism. But there is what might be called an intermediate level of motor racing activity, where it seems that this taxpayer might fairly be placed, which, in our opinion, has no general, commonly accepted classification one way or the other, either as a business or as a non-business.

13. The activity in which the taxpayer participated is a sport, and is so described in the manual which constitutes the Official Year Book of the controlling body in Australia, the Confederation of Australian Motor Sport. The Confederation derives its powers of control by appointment from the Federation Internationale de I'Automobile. To have decided that the activity is a sport does not, however, advance the inquiry very far. It merely establishes that car racing may, for some participants at least, have some intrinsic interest, or appeal over and above the possibility of winning prize money, and different from the kind of interest that a man would take in his profession of, say, accountancy.

14. The taxpayer submitted that the domain of the amateur ended, and that of the professional began, when a driver entered into track racing. In one sense of the word ``professional'' that may be true, and one example might be that the acceptance by the taxpayer of money prizes or merely competing for them would brand him as a ``professional'' and cause him to be disbarred from amateur sport. But that in itself would not necessarily lead to the conclusion that he was carrying on a business.

15. In support of the taxpayer's claim, there are to be found some factors which indicate a business-like approach. He kept systematic records of all expenditure incurred in the construction of the racing car, and apparently also, of later operational and maintenance costs. In the course of the two years, he competed in races as frequently as the state of repair of his car permitted. He has asserted that he entered into the field of track racing for the purpose of making money. It is a neutral consideration that the occupation was only part time. All races in which he competed were held on Sundays, and the preceding Saturday in each case would be devoted to practice at the racing circuit. Doubtless maintenance of the car would call for expenditure of some time during the week.

16. What is repugnant, however, to any normal concept of business is the fact that the taxpayer's participation in motor racing was literally incapable of producing any profit, having regard to operating expenses and depreciation on the capital cost of the car unless the taxpayer was successful to an extent beyond all reasonable probability, and even then the profit would be negligible. It is conceded that the absence of a profit-making intent, or perhaps even the absence of the possibility of profit, would not necessarily be fatal to a taxpayer's claim, but it is part of this taxpayer's case that he had embarked upon a

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profit-making undertaking. When it is considered that the taxpayer is academically qualified in a field embracing a study of economics and commerce, and further, that he has day to day connection with business in his employment, it is beyond credence that he could have seriously regarded his motor racing as a business. Because of the extreme variety of factual differences, comparison with other decided cases is a process that may be open to challenge, but we feel it not inappropriate to refer to
18 T.B.R.D. Case T58. In that case, Board of Review No. 1 declined to accept as a business, certain fishing activities which a taxpayer carried on over a number of years. The taxpayer there concerned incurred considerably greater capital expenditure and devoted far more time and effort to his venture than did the present taxpayer.

17. After a careful consideration of all the evidence as to the taxpayer's motor racing activities, we are of the opinion that they do not constitute the carrying on by him of a business. There is still the question as to whether, independently of the existence of a business, the prize moneys won by the taxpayer were of an income nature. The taxpayer submitted that success in motor racing depended upon skill and judgment, and that such racing was not a game of chance. If one accords to skill its undeniable place in these activities, it seems to us that there is still plenty of room for chance to intervene. Some reliance was placed by the taxpayer upon the fact that he operated under a contract with the promoters, but he was not paid for competing in events. He was awarded prize money only if he filled certain placings in the field. It is quite unlike the case of a footballer who may receive $20 a week for playing football.

18. Cases decided by Boards of Review on the assessability of prizes won in ``quiz'' competitions are in some respects analogous to the present question. In
17 T.B.R.D. Case S17, Board of Review No. 2 held unanimously that the prizes won in the circumstances of that case were assessable income. Although they expressed the view that ``success in the contests depended, for the most part, upon the comparative skills and knowledge of the respective contestants'', an important factor in the case was also the fact the taxpayer there concerned had been offered the opportunity to compete, and there was, in effect, assured minimum prize money. It was that aspect in another case, which appears to have particularly influenced Mr. Burke, Chairman of Board of Review No. 1, where he said, in
18 T.B.R.D. Case T14-

``As I see it, the taxpayer's position was no different from that of an athlete, who, having won trophies as an amateur, agreed to compete for a professional `purse' with guaranteed appearance money. In all such cases, including that of the quiz contestant, the rewards, in my opinion, must be characterised as being of an income nature.''

19. There are no such features present in this case. The taxpayer had to compete in races with such skill as he possessed, with such automotive aid as his car could provide, and against such hazards as chance might cast in his way. In those circumstances we do not consider that the prize money is properly to be described as ``income'', and consequently, not assessable income.

20. For the reasons already stated in our consideration of the question of a business, we conclude that the taxpayer's car racing did not amount to a profit-making undertaking or scheme.

21. The Board's decision, accordingly, is that the objections be disallowed and the assessments confirmed.

Claim disallowed