Thomas v. Federal Commissioner of Taxation

Judges:
Walsh J

Court:
High Court

Judgment date: Judgment handed down 20 June 1972.

---

Walsh J.: The appellant lodged objections in writing to the assessment of tax on his income for the year which ended on 30 June 1970 (herein called ``the tax year''). The respondent allowed an objection in respect of one deduction claimed by the appellant and issued an amended assessment to give effect to that decision but otherwise the objections were disallowed. The appellant appealed to this Court against the respondent's decision, in accordance with sec. 187 of the Income Tax Assessment Act 1936, as amended (the Act). Shortly before the hearing of the appeal an amended assessment was issued which gave effect to the acceptance in whole or in part of some of the grounds of objection against the original assessment. At the hearing of the appeal there were three matters still in dispute. In the order in which I think it will be convenient to deal with them, these are the following claims of the appellant -

• 1. He claims that a deduction of $624 for wages paid by him to his wife, which was at first wholly disallowed and was afterwards allowed as to $312 only, should have been allowed in full.
• 2. He claims that a deduction of $457 in respect of interest paid upon a loan from a bank, which was wholly disallowed, should have been allowed in part.
• 3. He claims that in the tax year he was a ``primary producer'' within the meaning of sec. 157 of the Act and that in consequence the assessment should be reviewed in the manner which will be mentioned later.

The appellant is a barrister who has chambers in Brisbane. Some of his professional work is done in country areas. He resides at Moggill about fifteen miles from the City of Brisbane. The income disclosed by his return for the tax year was derived, except for some relatively small amounts of which details need not be given, from his practice as a barrister.

In the years 1962 and 1963 the appellant purchased three adjoining blocks of land at Moggill having a total area of 7½ acres. By 1964 the building on that site of a house had been completed. Subsequently, some further rooms were added to the house. It became the home of the appellant and of his wife and children. One room is used by him as a study in which he does some of the work required in the carrying on of his practice. His practice has been growing and it was considerably larger in the tax year than it was in 1962 and 1963.

No oral evidence, in addition to his own, was called in the appellant's case. The respondent called two witnesses, an expert in agricultural science and a valuer and to their evidence I shall refer later. The facts are not really in dispute. It is the conclusions that

---

ATC 4096

should be drawn from the facts that are in issue.

It is convenient to proceed to deal with each of the three matters that have to be decided. In considering each of them I shall refer to such further facts as appear to be relevant to the question being examined.

1. Wages paid to the appellant's wife.

The appellant states that before and during the tax year he had available to him the services of a secretary, but this was in conjunction with two other members of the Bar who were senior to him and had more extensive practices than his. Their demands upon the services of the secretary tended to restrict the availability of such services to the appellant. For this reason and because, in addition, telephone calls relating to professional matters were made frequently to his home when the appellant was not present, he claims that it was reasonable to employ his wife to attend to those calls, to go through his fee cards and to type memoranda of fees and to do some other typing, for example, the typing of letters drafted by him in the course of his professional business. He says that she was so employed from March 1969 onwards. He estimates that his wife devoted on an average three hours a week to such clerical work, as well as being on call to answer the telephone. He claims that the wage of $12 per week, which according to his evidence she was paid regularly, was reasonable remuneration for the work which she did.

The appellant's wife was engaged in ordinary household duties and in caring for her husband and their children. No doubt she would answer the telephone in her husband's absence, whether paid to do so or not. But I am prepared to accept that she performed other work, as described by the appellant, of a kind which would ordinarily be done by a paid employee. However, I am not called upon to decide for myself whether or not the appellant acted reasonably in paying his wife, who would have been in any event maintained by him, at the rate of $12 per week for services rendered by her to him. The effect of sec. 65(1) of the Act is that the amount or a part of the amount paid by the appellant to his wife for such services is allowable as a deduction ``only to the extent to which, in the opinion of the Commissioner, it is reasonable''. What deduction, if any, should be allowed is dependent therefore not upon the view that the Court may take of the objective facts but upon the opinion of the respondent. From the fact that (as a result of an amendment of the assessment) one-half the amount claimed has been allowed, the conclusion must be drawn, I think, that that was the extent to which, in the opinion of the respondent, the deduction was reasonable. The opinion of the Commissioner on that question is examinable by the Court, in my opinion, to the same limited extent as that to which his failure to be ``satisfied'' of specified facts, as set out in other provisions of the Act, is examinable, in accordance with the principles stated by Dixon J. in
Avon Downs Pty. Ltd. v. F.C. of T. (1949) 78 C.L.R. 353 at p. 360 and considered recently by this Court in
F.C. of T. v. Brian Hatch Timber Co. (Sales) Pty. Ltd. 71 ATC 4093; 46 A.L.J.R. 111.

There has been no evidence placed before me to show what was the material, if any, in addition to the appellant's income tax return and his notice of objection, which the respondent had before him when he formed his opinion. It has not been shown, in my opinion, that the respondent did not address himself to the question which sec. 65(1) formulates or that his conclusion was affected by a mistake of law or that in some other way he must gave failed to discharge his function according to law. Attention has been drawn to the fact that the respondent allowed in full a similar deduction claimed in respect of a portion of the year, when assessing the tax payable by the appellant upon his income for the year which ended on 30 June 1969, and to the fact that in his assessment for the tax year the respondent disallowed the whole of the deduction and later allowed it to the extent of one-half. But in my opinion, those facts do not provide a sufficient basis for concluding that the later opinion of the respondent, which has become the relevant opinion, is one which must have been formed because of some mistake or misconception and that the respondent must have failed properly to discharge his function

---

ATC 4097

according to law. On this question I am of opinion that the appellant is not entitled to succeed.

2. Interest on loan.

In 1963 and 1964 the appellant obtained an overdraft from a bank with a limit of $8,000. His purpose was the building of the house in which he lives. From that time onward, payments were made and changes occurred in the limit of the overdraft, as a result of which at the end of 1966 the limit was $5,000. Part of the credit so obtained was used in 1965 to buy a motor car, afterwards used in the course of the appellant's practice. But after that purchase the limit had been reduced again to less than it had been before the car was bought. In 1967 the appellant spent about $6,000 in adding three rooms to his house. In that year his overdraft limit was increased from $5,000 to $6,500. In October 1967, the appellant arranged what he called a ``fully drawn loan''. At the same time he continued to operate upon the existing account as a separate account. The fully drawn loan created a debt for a fixed sum. The appellant was expected to reduce the principal sum owing at the rate of $1,000 per year, as well as paying the interest. In March 1969 the capital sum owing in respect of the fully drawn loan was increased to $7,514, in order to obtain money for the purchase of a boat. Later in 1969, it was reduced by the payment of money obtained by the appellant from the sale of some land at Noosa. This amount was then $5,672 and it remained at that amount throughout the tax year. Meanwhile the appellant continued to operate his general account with the same bank, drawing upon it for private and business expenditure and paying into it money received in the course of his professional practice. During the tax year he made an investment of $3,000 at about 7% interest, which was a little less than the rate he was paying to the bank. The money for that investment was drawn from his general account which was in credit. He preferred to invest the money in that way rather than to use it to reduce the bank loan because, as he said in evidence, he ``wished to keep the liquidity'' which the loan gave him. He spent $800 in the purchase of shares from which he received income by way of dividends.

The appellant claimed in his tax return a deduction of $457, being the whole of the interest payable in the tax year on the fully drawn loan. At the hearing of the appeal a more limited claim was made. It was submitted that the arrangements with the bank should be viewed as a whole without regard to the splitting of the accounts. The interest paid on the loan should be found to be an outgoing incurred partly in respect of private expenditure, partly for business purposes and partly for the making of investments which produced assessable income. It was submitted that at least one-third of the expenditure should be held to be allowable as a deduction under sec. 51 of the Act.

I am not satisfied that the respondent was in error in refusing to allow any part of this deduction. Leaving out of account the private transactions, which caused the amount of the loan to be increased for the purchase of a boat and to be decreased after the sale of the land at Noosa, the indebtedness arose from expenditure upon the additions to the house. The appellant seeks to support his claim mainly by saying that one of the three rooms then added has been and is used by him as a study for professional purposes. But, in my opinion, the house should not be regarded in the circumstances of this case as being or as including part of the business premises of the appellant and the loan should not be regarded as having been raised for the purpose of providing him with business premises. Payment of the interest, in so far as it was an outgoing connected with the cost of extensions to the house was, in my opinion, an outgoing ``of a capital, private or domestic nature'' within the meaning of sec. 51(1) of the Act. In my opinion it did not lose that character merely because the appellant, like most professional men, did some of his work at home, or because he used one of the added rooms for that purpose. The appellant did not spend money in erecting premises suitable only for use as business premises. He added rooms to his house. It is natural to suppose that the addition increased the capital value of the improvements on the land. In my opinion the appellant does not obtain any support for this claim from the

---

ATC 4098

fact that he made the investments which have been mentioned and obtained some income from them. He did not borrow money to make those investments. It is true that if he had used the money with which they were made to reduce the debt to the bank he would have paid less interest. But, in my opinion, that is irrelevant to the determination of the nature of the outgoing consisting of the payment of interest to the bank. That outgoing had no relationship, in my opinion, to the gaining or producing of the income derived from the investments. I am, therefore, of opinion that the appeal fails so far as it relates to this claim.

3. Was the appellant a primary producer?

In his income tax return the appellant included a ``Farm Statement''. This gave details of certain expenditure and depreciation, claimed to arise out of the cultivating of the appellant's land and the growing on it of avocado pear trees, macadamia nut trees and pine trees. In addition to claiming those deductions, the appellant claims that he was before and in the tax year a ``primary producer'', within the meaning of sec. 157 of the Act, that is to say, he was a person who carried on ``a business of primary production'' and that he was entitled to have applied, in the assessment of his tax, the averaging provisions contained in Div. 16 of Pt. III of the Act.

It is common ground that the appellant did not obtain any income from primary production before or in the tax year. No harvest has yet been obtained from any of the trees. But, in my opinion, that fact does not necessarily preclude a finding that the appellant was carrying on a business of primary production. This was not a case in which land was being improved in order to bring it to a condition in which it might be used for primary production for which it was not yet suitable. I am of opinion, therefore, that the decision in
Southern Estates Pty. Ltd. v. F.C. of T. (1967) 117 C.L.R. 481 does not stand in the way of the appellant's claim. Trees had been planted and were growing, although they had not yet grown to an age at which they would yield marketable produce.

There is authority justifying me in holding that losses and outgoings may be allowable deductions, in accordance with the provisions of sec. 51(1) of the Act, although incurred in a year in which no assessable income is actually gained or produced by the activities in relation to which the losses or outgoings are incurred: see
Ronpibon Tin N.L. v. F.C. of T. and Tongkah Compound N.L. v. F.C. of T. (1949) 78 C.L.R. 47 at p. 56;
John Fairfax and Sons Pty. Ltd. v. F.C. of T. (1959) 101 C.L.R. 30 at pp. 45-46; and
F.C. of T. v. Finn (1961) 106 C.L.R. 60 at p. 68. In my opinion a similar view may be taken in appropriate circumstances of the operation of sec. 54 and sec. 57AA of the Act, that is to say, depreciation in accordance with those sections may be allowed with respect to a year of income, although the carrying out of the purpose for which the depreciated property is used does not produce income received in that same year. In this appeal no argument to the contrary of what I have just stated was advanced on behalf of the respondent. Furthermore, it has not been contended for the respondent that in sec. 157(1) the concluding words ``income derived by a primary producer'' cannot apply in a case in which a person receives during a year of income no return from primary production, although then carrying on ``a business of primary production''. For the purpose of this appeal, it is conceded that if I should find that the appellant was, in the tax year a ``primary producer'' within the meaning of the definition of that term in sec. 157 he is entitled to the benefit of the deductions totalling $280.66 set out in the ``Farm Statement'' and he is entitled to have the matter remitted to the respondent for a re-assessment to give effect to the averaging provisions of the Act.

The facts upon which depends the question whether the appellant was a primary producer, were disclosed mainly by his own evidence, which I accept. They may be stated as follows. When he bought the land his basic purpose was to acquire a place to live. When he bought the first block he was not married or engaged but by the time he bought the third block he was married. Soon after he acquired the land he realised that parts of it were fertile and capable of producing something and after experimenting with different trees he decided

---

ATC 4099

to plant, in the better parts of the land, macadamia nut trees and avocado pear trees. On some other parts of the land he planted, after getting some advice, 1,800 pine trees. Some of these were allowed later to be overgrown by wattle and other forms of regrowth on the land and about 1,200 trees remained. When buying and planting the nut trees and pear trees, he sought and obtained some information and advice which I need not set out in detail. He put in seventy-five nut trees, about 1965. He encountered prolonged drought conditions. He set up an irrigation system devised by himself. The trees grew fairly well; but the appellant is of opinion that he should have watered them more than he did. He planted thirty pear trees and of these twelve were lost before the tax year, mainly because of frost, but at that time the remaining eighteen were expected to survive. In August 1970 a bush fire went through the land causing serious damage to the trees. Fifty of the nut trees were detroyed. The rest were damaged and at the time of the hearing of this appeal these were restored nearly to the condition in which they were before the fire. A dozen of the pear trees were destroyed and others damaged and only two remain in good condition. These are now ready to bear fruit. Since the fire thirty-five nut trees have been planted but as yet there has been no replacement of the pear trees. Some of the pine trees were burnt out and some remain.

It was known to the appellant when he planted the nut trees and the pear trees that they would not be in production for some seven years. He expected to get his first returns from them in 1973 and 1974. At first these returns would be small but when the trees were mature he hoped to make about $3,000 a year from them. He believed, as a result of inquiries which he made, that there would be a market for the pears and the nuts, the demand for which exceeded the supply. He did not expect any early return from the pine trees and believed that there would never be more than a net return from them of perhaps $100 a year, on an average.

The labour of planting the trees and attending to them and keeping other growth down on the land has been done mainly by the appellant himself, with some assistance from friends and with paid labour obtained from time to time.

The respondent succeeded in establishing by cross-examination and by calling as witnesses Professor Wilson, who is professor of agriculture in the University of Queensland, and Mr. Allanson, a valuer, the following additional facts. In the area in which the appellant lives no other person raises avocado pear trees and there is no commercial growing of nut trees. Some of the pine trees are in good condition but on much of the land re-growth has been unchecked and the total value of the pine trees is fairly trivial. The appellant had failed in several respects in achieving a standard of competency and good husbandry that might have been expected of a man setting out to grow trees as a business venture, for example, in failing to provide a fire break or other protection against fire. His irrigation methods and his treatment of the grasses and other growth on the land were open to criticism. The growing of avocado pears on the appellant's land was, as Professor Wilson expressed it, ``a very chancy operation''. The appellant's land was bought at a higher price per acre than that for which farming land in the area could have been obtained.

On the foregoing facts the question whether or not the appellant embarked upon a business venture has to be determined. There is no doubt that the appellant's chief occupation was the practising of his profession and that the tree farming, if it had a business character, was relatively of minor importance both as to the time devoted to it and as to the returns to be expected from it. But a man may carry on a business although he does so in a small way. In my opinion the appellant's activities in growing the trees ought not to be found to have been carried on merely for recreation or as a hobby. I leave out of account the pine trees, the growing of which did not have, I think, a significant commercial purpose or character. But the appellant in planting the avocado pear trees and the macadamia nut trees set out to grow them on a scale that was much greater than was required to satisfy his own domestic needs and he expected upon reasonable grounds that their produce would

---

ATC 4100

have a ready market and would yield, if the trees became established, a financial return which would be of a significant amount, with a relatively small outlay of time and money, and that this return would continue for a very long time. In these circumstances I think it is proper to find, and I do find, that he set out to engage in producing the pears and the nuts as a business and that he was in the tax year carrying on that business, which was a business of primary production.

I have given close consideration to the criticisms that were advanced as to the lack of business efficiency with which the appellant conducted the operations. But in the circumstances I have not found that this should lead to a conclusion that it was not a business venture. On various matters the appellant did take advice. It is not in doubt that he made mistakes. But many persons carry on a business for the competent conduct of which they have not previously acquired much knowledge or experience. I think that the fact that the appellant bought the land for more than the ruling price of farming land is of no significance. He does not claim that farming was the purpose for which he bought the land. He claims that afterwards he saw that there was a chance to turn some of it to use by growing trees on it. If he proceeded then, as I think he did, to use it for the growing of trees to such an extent that this might be regarded as a business operation, it matters not that if his original purpose had been farming he might have chosen some other cheaper land.

In my opinion the appeal should succeed upon this question.

Although the appeal has not been wholly successful, the appellant has succeeded upon the most important of the three questions argued and in relation to some other questions, including one of those argued, he has obtained advantages, by means of an amended assessment, which he did not have when the appeal was instituted. In the circumstances I am of opinion that the respondent should pay the appellant's costs of the appeal.

I order that the appeal be allowed, that the amended assessment issued in June 1972 be set aside and that the matter be remitted to the respondent Commissioner of Taxation for re-assessment in accordance with this judgment. I order the respondent to pay the appellant's costs of the appeal.

ORDER:

Appeal allowed. The amended assessment issued in June 1972 set aside and matter remitted to the Commissioner of Taxation for re-assessment in accordance with the judgment of the Court. Order the respondent to pay the appellant's costs of the appeal. Usual order as to the exhibits.