Case S89

Judges:
KP Brady Ch
JE Stewart M
DJ Trowse M

Court:
No. 2 Board of Review

Judgment date: 7 November 1985.

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K.P. Brady (Chairman), J.E. Stewart and D.J. Trowse (Members)

The question involved in these references, which concern the years of income ended 30 June 1977 and 1978, is whether amounts paid by the taxpayer in respect of investments in radiata pine plantations are deductible for tax under the terms of sec. 51(1) of the Income Tax Assessment Act 1936.

2. By consent of the parties, the references for both years were heard concurrently.

3. The taxpayer is a medical practitioner. His return of income for the first of the years of income in issue, viz. 1977, included the following components of income:

                                             $
      Consultancy fees from
      various hospitals                   29,944

      Net income from medical
      practice                           100,361

      Net loss on pine forestry
      venture at S                      (108,515)
      

The latter loss was induced by a major expense item called ``forestry management contract fees'' amounting to $107,000. The other expense item was concerned with site preparation amounting to $3,078. Income from sales of timber, $1,563, reduced the expenditures' total to the above-mentioned loss of $108,515. In processing the taxpayer's return, the Commissioner disallowed the expense item of $107,000 on the basis that it was not deductible under sec. 51 or any other section of the Act.

4. By the end of the second year in issue, viz. 30 June 1978, the taxpayer had expanded his interest in radiata pine plantations into another area at T. There, it seems, a station property had recently been subdivided into a number of 100 acre lots for the establishment of pine plantations. The taxpayer's return of income for the 1978 year, to the extent considered relevant, included the following components of income:

        
                                                   $
      Consultancy fees from
      various hospitals                         22,113

      Net income from
      medical practice                          70,179

      Net losses on pine
      industry ventures at S,
      and at T                                 (96,048)
      

The latter loss figure comprised the following components:

      S venture
           Income                                    $

             Sales of timber                        344
                                                -------
           Less expenses

             Accounting and administration          350
             Interest paid to DL Securities
               Pty. Ltd.                          9,607
             Site preparation                     1,085
                                                -------
                                                $11,042
                                                -------
           Net loss for year                    $10,698
                                                -------

      T venture                                       $

           Income                                   Nil

           Less expenses
             Forestry management fees paid
               to CD Plantations Pty. Ltd.       85,000
             Accounting and
               administration                       350
                                                -------

           Net loss for year                    $85,350
                                                -------
           Total losses                         $96,048
                                                -------
      

5. In raising the assessment for the 1978 year, the Commissioner disallowed the above total losses figure of $96,048 on the same basis as for 1977, i.e. he considered that no part was an allowable deduction under sec. 51(1) or any other section of the Act. It will be noted, however, that, whereas in 1977 he was prepared to allow deductibility of the amount expended on site preparation, he was not so minded in 1978.

6. We were told that the taxpayer's interest in pine plantations stemmed from a perceived need for financial security upon his planned retirement some 20 to 25 years in the future. At the time he made his initial enquiries into the economics of afforestation programs, he was in his early forties. He understood that, for an initial outlay of between $50,000 to $100,000, he could look forward to receipt of approximately $500,000 at the end of 25 years, which would coincide with his plan to retire. Accordingly, after discussions with his accountant, whom we shall call A, and after examining various brochures and similar materials on projects in operation interstate as well as on the local scene, the taxpayer, on 13 May 1977, contracted to buy from a company, CD Plantations Pty. Ltd., for a consideration of $19,100, a parcel of land of approximately 43.7 hectares, or 108 acres, situated at S. It seems that land in the S area enjoyed a high rainfall and a good run-off, and was considered ideal for pine plantations. It is appropriate to pause here and state that CD Plantations Pty. Ltd. was in the business of operating pine plantations. Its principal was a Mr P, who was said to possess a vast experience in establishing and managing such ventures, and it seems he was well known to the taxpayer. It emerged from the evidence that P had spent a considerable number of years of his working life on the land and had been involved with managing, planting and maintaining pine plantations since 1972.

7. Despite the expertise possessed by P, the taxpayer was not disposed to entrust him with the total management of his investment and, accordingly, on the same day that he bought the land, he entered into an agreement with a family company of his, S Timbers Pty. Ltd., whereby the company undertook to manage and maintain the pine trees that it was proposed would be planted on the land. Under the agreement, two alternative forms of paying management fees were specified. The first method required the taxpayer to pay the company an annual fee of $10,600 for each year for the first four years, and thereafter it was reviewable for each period of three years. The alternative was for the taxpayer to make a lump sum payment of $96,500 on or before a stipulated date, which payment would free the taxpayer for a period of 10 years from making the annual payments of $10,600 and from the further payments due under the reviewing clauses of the contract. In the result, the taxpayer paid over the lump sum amount of $96,500.

8. Yet another agreement was completed between the taxpayer and S Timbers on 13 May 1977, and that related to the purchase and planting of seedlings. Amounts paid by the

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taxpayer under the agreement were $1,800 and $8,700, and when they are added to the lump sum payment of $96,500 they total the contract fees' figure of $107,000 which was disallowed by the Commissioner. Evidence was adduced to show that the various amounts making up the total of $107,000 were paid by the taxpayer in May 1977 and paid into the company's bank account shortly before 30 June 1977.

9. The chain of agreements is completed as regards the 1977 year by making mention of an agreement, also dated 13 May 1977, which was made between S Timbers and CD Plantations Pty. Ltd. Under that arrangement, S Timbers subcontracted to CD Plantations the work of purchasing, planting, managing and maintaining the pine plantation. The latter company, called ``the Contractor'', received fees of the same amount as were paid by the taxpayer to S Timbers, called ``the Manager'', for selling the seedlings and planting them, viz. the amounts of $1,800 and $8,700. However, the annual consultant's fee paid by S Timbers was lower at $6,400 than the amount received by it from the taxpayer as a management fee; also, there was no provision for a lump sum payment as there was in the agreement between S Timbers and the taxpayer. The services to be performed by the operator under the two agreements were substantially the same.

10. It seems that the taxpayer did not possess ready funds to make the payments totalling $107,000, more particularly the lump sum payment of $96,500, and so he borrowed an amount of $90,500 from a company by the name of DL Securities Pty. Ltd. The security given for the loan was a first mortgage on the land at S and on another property in which he had a half-interest.

11. In the year ended 30 June 1977, it seems that the land at S was cleared and prepared for the growing of seedlings, which were duly planted. Some sales of timber were made in that year from trees that were felled.

12. We complete the fact situation so far as is relevant for the 1977 year by stating that S Timbers was originally called M Pty. Ltd., and was the trustee of the taxpayer's family trust. That trust was established on 13 April 1977. On 22 April of the same year, its objects were varied so as to permit it to carry on, inter alia, ``the business of plantation managers, contractors and sub-contractors for the growing planting tending harvesting and marketing of seedlings and trees''. Some few days later, on 28 April 1977, its name was changed to S Timbers Pty. Ltd. The taxpayer's accountant, A, was a director and was also its secretary. P, the principal of CD Plantations Pty. Ltd., was originally a director but resigned on 16 June 1978. The taxpayer's wife, B, was also a director. The taxpayer was neither a director nor a shareholder, but it was conceded that he controlled its activities.

13. For purposes of the narrative that follows, it is necessary to allude to another company controlled by the taxpayer. That company we shall call Agency Pty. Ltd. As with S Timbers Pty. Ltd., both A and B were directors, with the shares being owned by the taxpayer's children.

14. Turning now to the 1978 year, the taxpayer was encouraged by P to purchase further land for growing radiata pine trees at a location which we shall call T. On 29 June of that year, he entered into a contract with a Mr L to purchase 100 acres of land for a price of $20,000. Then, similarly to what happened with the S venture, an agreement was made to buy seedlings and have them planted, and a second agreement was made for their subsequent care and management. Both agreements were made with CD Plantations Pty. Ltd., the same company which acted as contractor for the plantation at S. However, unlike the situation which appertained with the S area, the taxpayer himself dealt directly with the operator, CD Plantations, as regards caring for all the trees planted and grown at T.

15. The management agreement which was made with CD Plantations contained the annual fees that were to be paid to the manager over the duration of the agreement, and these totalled $89,900. As was the case with the agreement between the taxpayer and S Timbers for the management of the operation at S, the taxpayer could choose to make a lump sum payment at the beginning of the agreement and thus free himself from paying annual fees over the life of the agreement. As the lump sum was determined at a figure of $70,000, there was a considerable inducement to adopt that particular mode of payment. This was in fact what the taxpayer did, and that payment, plus the amounts totalling $15,000 paid under the Seedlings Agreement, gave rise to the forestry management fees claim of $85,000.

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ATC 650

16. Just as the taxpayer borrowed funds to meet the lump sum payment of the management fees relating to the S pine plantation, so did he also in regard to the further lump sum paid for managing the T property. On the same day that he contracted to buy the land, he entered into a loan agreement with another company controlled by P, viz. P Nurseries Pty. Ltd., whereby that company agreed to loan to the taxpayer the sum of $70,000 on an interest-free basis in exchange for obtaining a right to participate in profits upon the eventual sale of the timber harvestings. It seems that P Nurseries obtained the loan funds by borrowing them from a further P controlled company called M Securities Pty. Ltd., which in its turn borrowed them from CD Plantations Pty. Ltd. That latter company we have already seen was also controlled by P. Repayments of the principal sum were to be made over a 20-year term in accordance with the schedule forming part of the agreement. Bank statements of the taxpayer were tendered showing that he received the loan funds on 30 June; they also showed that he paid on that same date the forestry management fees totalling $85,000.

17. In making his submissions, the Commissioner's representative pointed to the ``round-robin'' path taken by the moneys which were paid under the various agreements. Referring first to the 1977 year, he pointed out that, of the $107,000 paid over on 28 June to S Timbers, $90,500 was borrowed from DL Securities. Only $5,000 of the total remained with the former company to form its working capital because on that same day, 28 June, it advanced an amount of $102,000 to Agency Pty. Ltd. Still on that same day, the latter company advanced to DL Securities an amount of $91,500 in order that that company might be in funds to loan the amount of $90,500 to the taxpayer. Accordingly, the Commissioner's representative alleged that the amount of $90,500 did nothing more than move around in a circle, returning to the point where it started. He went on to state that, of the total of $107,000 received by S Timbers, only an amount of $10,000 was ever paid over to the pine growing contractor, CD Plantations, and that amount formed part of the funds advanced to the taxpayer so that he could make the prepayment to S Timbers. Thus, the Commissioner's representative alleged that no part of the amount of $107,000 was used to meet the subcontracting fees payable by S Timbers to CD Plantations.

18. The Commissioner's representative submitted that the ``round-robin'' procedure with loan funds cheques was perpetuated in the 1978 income year. He pointed out that the sum of $70,000 which the taxpayer borrowed from P Nurseries was advanced to CD Plantations, which in turn advanced it to M Securities, which completed the circular flow by advancing it to P Nurseries. As was the case with the 1977 year, the recipient of the prepaid management fees, CD Plantations, did not retain the funds but merely acted as a conduit for them. Accordingly, it was alleged that the prepayments made in both years lacked a commercial purpose. We were consequentially asked to draw the conclusion that the real purpose of the payment was not to secure management services but was to do no more than obtain a substantial tax deduction in both years.

19. The taxpayer has claimed the amounts in issue for the 1977 and 1978 years under the alternative limbs of sec. 51(1), i.e. they were incurred by the taxpayer in gaining his assessable income; alternatively, they were necessarily incurred by him in carrying on a business for the purpose of gaining assessable income.

20. In making his various submissions, the taxpayer's representative placed considerable reliance on the Supreme Court of Queensland's decision in favour of the taxpayer in
Lau v. F.C. of T. 84 ATC 4618, and as upheld by the Full Federal Court, 84 ATC 4929. As with the case now before us, Dr Lau was a medical practitioner engaged in full-time practice who, acting on the advice of his accountant, joined a scheme along with some 80 other participants for establishing and maintaining a pine forest plantation near Bundaberg, Queensland. On 23 April 1981, he executed a lease for 10 hectares of land for growing pine trees. The lease was for three years with options to renew for further periods of three years up to a maximum of 21 years. On the next day, in the capacity of ``the Forest Owner'', he entered into a management agreement with a company called ``N.Q.''. Under the terms of that agreement, which also was to run for 21 years, the doctor was required to pay a management fee calculated at $3,920 per hectare. The total cost was $39,200 payable on the execution of the agreement. Dr Lau,

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ATC 651

however, did not have that sum, and it was considered unwise to borrow it at a commercial rate of interest as to do so would have mitigated against securing an economic rate of return. Accordingly, an arrangement was devised to allow the doctor to borrow an amount of $35,300 at a low rate of interest from a company called ``Liberton''. That company agreed to accept in full satisfaction of both principal and interest the proceeds of certain harvestings of timber. However, as was the case with Dr Lau, ``Liberton'' had no available cash and so it was put in funds by a cheque from ``N.Q.'' by way of an interest-bearing advance, and it immediately paid back to that company a cheque of the same amount being the aggregate of the sums owing by the participants on account of management fees, rent and stamp duty. There are obvious similarities between Lau and the case now before us.

21. In his return for the year of income ended 30 June 1981, Dr Lau claimed a deduction for an amount of $40,020 made up of the management fee, $39,200, rent and legal expenses. The Commissioner disallowed the deduction and, upon the taxpayer appealing to the Supreme Court of Queensland, that Court ruled in his favour finding that the partnership of which the taxpayer was a member was carrying on the business of afforestation, and therefore the amounts claimed were properly deductible under sec. 51. In arriving at his decision, Connolly J. saw the prepayment of the fee charged by ``N.Q.'' for recurring services over the period of 21 years as providing considerable advantages to the participants, not the least of which was precluding exposure in future years to uncertain and constantly increasing demands for remuneration. So far as ``N.Q.'' was concerned, it needed a substantial amount of cash to establish the afforestation project, and prepayment of the fees enabled such cash to be promptly obtained. The company, ``Liberton'', was inserted in the scheme to better keep ``N.Q.'' at arm's length from the scheme participants. The learned Judge went on to state that the fact that one of the attractions of the scheme was the tax advantage to those who participated in it, did not negate the deductibility of the prepayment under the terms of sec. 51(1).

22. Upon the Commissioner appealing to the Full Federal Court, it found that the taxpayer had no relationship with either the lessee of the land (a company called ``Paragon''), ``N.Q.'' or ``Liberton'', and that the taxpayer and the above-named parties were always at arm's length. It was not therefore a case similar to
Ure v. F.C. of T. 80 ATC 4264 (and on appeal 81 ATC 4100) (so the Court ruled) where the taxpayer was able to mould the transaction so as to maximise its tax advantages. The Full Federal Court also found that Dr Lau ``incurred'' the outgoing as required by sec. 51(1) because he bound himself by enforceable obligations to pay to ``N.Q.'' and ``Paragon'' respectively the amounts of management fees and rental. That being the situation, no proof of payment or actual disbursement needed to be established.

23. Also, it was a necessary part of the Court's decision in favour of the taxpayer in Lau that it found that there was a substantial commercial flavour in all that was done. In particular, the Court pointed to the need for the management company to receive prepayment of the fees because of the major development outlays anticipated in the early stages of the project. At p. 4942, Beaumont J. stated:

``The question is whether the prepayment of the fee is so significant as to work a transformation of the transaction from something which had a commercial objective into an arrangement which lacks any such purpose. In my opinion, the question should be answered in the negative. Although the transaction was structured so as to offer tax advantages to participants, it would be wrong to say it was not a real business transaction. The arrangements were underpinned by genuine commercial considerations and, in my view, these considerations are decisive for the purposes of the application of sec. 51...''

24. So the question that invites our response is whether the decision in favour of the taxpayer in Lau is determinative of the issues in the present case. If not, what are the essential differences in the two fact situations which would cause us to rule otherwise?

25. It will be recalled that the taxpayer has put his case under the alternative limbs of sec. 51(1) (see para. 19), and whilst it has been stated by the High Court on a number of

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ATC 652

occasions that the second limb adds little to the operation of the first limb (see
Ronpibon Tin N.L. v. F.C. of T. (1949) 78 C.L.R. 47 at p. 56;
John Fairfax & Sons Pty. Ltd. v. F.C. of T. (1958-1959) 101 C.L.R. 30 at p. 40, and
A.G.C. (Advances) Ltd. v. F.C. of T. 75 ATC 4057 at p. 4071), we would agree with the observation made by Ormiston J. in
F.C. of T. v. Klan 85 ATC 4060 at p. 4063, that ``there does remain some distinction both in expression and operation between the two limbs''. We therefore consider it appropriate to make a finding on the preliminary point as to whether the taxpayer was carrying on a business in both relevant years, before putting our minds to the central issue raised above. From an examination of all the evidence, both oral and documentary, we believe that the taxpayer was carrying on a business in both 1977 and 1978. It would seem to us that the activities undertaken at S were necessarily of a preliminary nature, but in
Ferguson v. F.C. of T. 79 ATC 4261, it was stated at p. 4264 that:

``... every business has to begin and even isolated activities may in the circumstances be held to be the commencement of carrying on business.''

26. The evidence was that some 30 hectares at S were planted with seedlings prior to 30 June 1978, following upon the land being cleared, tilled and fertilised. Also, it seems that, as a necessary part of afforestation, a number of seedlings had to be replanted when the original ones did not strike. The fact that trading losses were incurred in both years by the taxpayer does not disturb our finding that the taxpayer was carrying on a business as from May of 1977. Also, the fact that the taxpayer was at all times carrying on a medical practice concurrently with his afforestation activities does not preclude a finding that those activities amounted to a business (see Ferguson, supra, at p. 4264; also
Walker v. F.C. of T. 83 ATC 4168 at p. 4188). Nor is our finding put in jeopardy, we consider, by the fact that an entity other than the taxpayer, be it S Timbers or CD Plantations, was carrying on the bulk of the radiata pine growing activity (see Ferguson, supra, at p. 4270, also Walker, supra, at p. 4188). However, the fact that a taxpayer may be said to be carrying on a business is not conclusive that all outlays made in regard to that business are deductible. Section 51(1) states that to be deductible the outlays must be ``necessarily incurred... for the purpose of gaining or producing such income''. It is to that matter that we now turn and, because the fact situation is less complicated in 1978 than in 1977, we will deal first with the later year.

27. It will be recalled that in his 1978 taxation return, the taxpayer claimed:

                                                  $
      Prepayment of management fee             70,000
      Purchase of seedlings                     2,500
      Planting fee                             12,500
      Interest                                  9,607
      Site preparation                          1,085
      Accounting and administration               700
                                              -------
                                              $96,392
                                              -------
      

It will be recalled that the first three items made up the ``forestry management contract fees'' paid to CD Plantations (refer para. 15). As in Lau, those outlays were made to a party which was at arm's length, and, if we may put the prepayment aspect of the management fee to one side for the moment, they seemed to us to have a genuinely commercial flavour (again, as was the case in Lau). We were informed as to the basis of the management fee and of the planting fee and both were based on estimates of CD Plantations' operating costs which included such items as spraying, replanting and pest control, to which was added a predetermined margin of profit. In the calculation of that margin, the charges of rival operators were taken into account. Paraphrasing what was said in Case Q101,
83 ATC 495, real money changed hands, real seedlings were purchased and real seedlings were planted and cultivated. We therefore have no reason to see the outlays other than as necessarily incurred by the taxpayer in carrying on a business for the purpose of producing his assessable income.

28. In our view, too, genuine commercial reasons induced the lump sum prepayment of the management fee. From the point of view of its recipient, the management company, its principal P outlined the advantages in the following terms:

``Overall, we were looking at two methods of doing the plantations at this stage because we have had difficulty prior to this with things like grasshoppers descending upon us and wiping out our plantations and it was necessary to be able to go ahead and do

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things if it came up; if these sorts of things came up without even having to ask, it was critical to be able to do so in a day or two, so we wanted forward commitments from our clients. And to do this, we endeavoured to give them a forward costing for the 20 year period, so that they knew where they were going and we also knew where we were going.''

A little later in the proceedings, the following exchange took place between the taxpayer's representative and P in regard to the same matter:

``Q. And in regard to the outlays, in 1978, was an option given to [the taxpayer] that he would pay either by instalments or by a prepayment plan? - A. Yes.

Q. And did you discuss with him or [A] as to what the benefits were? - A. Yes, I discussed it, both with [the taxpayer] and [A], the benefits of a lump sum payment. Once again, as far as we were concerned, I wanted to endeavour to lock people into our program because we wanted to develop a total area up there, and in our costings we always allowed for situations where, if things went wrong, and tried to take a pessimistic view totally if people were just going to pay us from year to year and we suggested a lump sum because it would be far cheaper for our clients and [the taxpayer] and we would give a discount on that sort of thing, and we also looked at our own future with our industry where we could lock in programs so that we got totally involved in the plantation, and in the long term, as we have now started to do with milling and preservation, be able to get substantial returns in the long term.''

Also, the lump sum payment arrangement seemed to offer considerable advantages not only to the recipient but also to the taxpayer. He effected a saving of almost $20,000 on the total of the annual amounts that he would otherwise have been required to pay, and loan funds were readily available from P to avail himself of the opportunity to make the prepayment. We were told that, because the arrangement offered advantages to both landowner and plantation manager, it had become commonplace in the industry.

29. It was asserted by the Commissioner's representative that the prepayment amount of $70,000 was computed solely to give the taxpayer a tax deduction so as to almost eliminate the taxation income ($77,908) derived in the 1978 year from his medical practice. That assertion was vehemently denied by the taxpayer and by his two witnesses, A and P. It was conceded on the taxpayer's side that the tax advantages attaching to the prepayment transaction were recognised, but that it remained a transaction explainable on proper commercial grounds.

30. Our finding on that aspect is the same as that expressed by Beaumont J. in para. 23, supra. There were tax advantages of considerable magnitude in the taxpayer making the lump sum payment in lieu of annual payments, which advantages were well known to him, but none the less there were sound commercial reasons for him doing what he did (see also
F.C. of T. v. The Myer Emporium Limited 85 ATC 4601). Accordingly, in our view, it can be said that he incurred the payment of $70,000 for the purpose of gaining his assessable income.

31. One point of difference of possible materiality between Lau and the taxpayer in the instant case, is that Dr Lau had no choice in regard to making the prepayment, whereas the taxpayer before us did have such a choice. The taxpayer could comply with the request of CD Plantations and make the lump sum payment, which in fact he did, or he could equally have not made it; it was up to him. Of what significance is that point of difference? In our view, its significance amounts to very little. In
Commercial Union Assurance Company of Australia Limited v. F.C. of T. 77 ATC 4186, it was stated by the Supreme Court of Victoria at p. 4194 that:

``... it is well established that payments made for reasons of business expediency, although otherwise voluntary, are not excluded from the category of allowable deductions under sec. 51, because not made in pursuance of any legal obligation.''

In other words, those sorts of payments may be deductible or they may not, depending upon the surrounding circumstances. In
F.C. of T. v. Ilbery 81 ATC 4661, it was stated by Toohey J. at p. 4668, as one of the Full Federal Court, that the amount in issue being a prepayment of interest was not deductible because the prepayment was unquestionably made for the

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ATC 654

purpose of securing a tax advantage, and for no other purpose. There, no relevant income-producing activity had begun. That situation may be contrasted with the instant case where a future income-producing business was very much under way, and the prepayment had a sound commercial purpose, i.e. the taxpayer was to be ``locked-in'' to a financial venture, necessarily being of a long-term nature through the inherent nature of the enterprise. We therefore consider that the Federal Court's pronouncements in Ilbery are not relevant to the issues before us. Rather, we believe, the issues are not too far different from those examined by the Supreme Court of New South Wales in
F.C. of T. v. Solling and F.C. of T. v. Pepper 85 ATC 4518. There, the taxpayers, both doctors, entered into a sheep leasing arrangement, and agreed to pay the agistment, leasing and management fees for four years in advance. The taxpayers claimed deductions for the fees so prepaid and those claims were upheld by Lee J. on the basis that the arrangement amounted to the carrying on of a business and that was so even though the taxpayers were motivated to enter into the arrangement by their wish to obtain a tax deduction. At p. 4528, Lee J. stated as follows:

``There cannot, as I have earlier said, be any doubt that the tax advantage was seen by both Dr Solling and Dr Pepper to be considerable but that fact cannot of itself, in the present case, deprive the agreement of commercial reality nor prevent a finding that both respondents were telling the truth from the witness box as to their intentions in entering into the scheme.''

Likewise in the present case, we believe that the tax advantage aspect cannot negate deductibility under sec. 51 for the ``forestry management contract fees'' amounting to $85,000, detailed in para. 27.

32. We take a different view, however, of the deduction claimed for interest. Whilst the quarterly payments were made in the 1978 year of income, the actual borrowing was made on 28 June of the previous year in order to help finance the ``forestry management contract fees'' of $107,000 paid on that day to S Timbers. The test of deductibility for interest outlays is no different to any other claim made under sec. 51(1), viz. the interest must be incidental and relevant to the gaining of assessable income. That relevance is attained where the sum borrowed is laid out for the purpose of gaining assessable income (see Ure v. F.C. of T. 81 ATC 4100 at p. 4104, confirming the basic proposition stated in
F.C. of T. v. Munro (1926) 38 C.L.R. 153 at pp. 170, 171 and 197, and
Texas Co. (Australasia) Ltd. v. F.C. of T. (1939-1940) 63 C.L.R. 382 at p. 468). On the facts supplied in the taxpayer's evidence (see para. 17), it seems to us that no part of the principal sum of $90,500 was used to produce assessable income. The funds were not used in any afforestation activity but simply flowed through S Timbers to another company, Agency Pty. Ltd. (which the taxpayer controlled), and then returned per medium of DL Securities to the taxpayer. Because the borrowing was made for a purpose wholly unconnected with the production of assessable income, we consider that the claim for deduction of the interest must be disallowed.

33. Turning now to the site preparation expenses of $1,085, we consider that a proportionate part only, one-tenth, is deductible under sec. 75A. It is well to recall that those expenses relate to the property at S. That property was situated in very hilly country and, whilst it had been partially used over past years for grazing, there was presumably a lot of timber on it at the time when the taxpayer purchased it. As a result, the land had to be cleared, and moneys were expended to have that done. It seems that similar outlays were not involved on the property at T as that land had been worked as a grazing property for some time. The amount claimed by the taxpayer in his 1978 return follows upon a larger amount of $3,078 claimed in 1977 when, it would seem, the greater part of the clearing work was done. We consider that the clearing costs are capital expenditures and so are precluded from deduction under the terms of sec. 51(1). However, sec. 75A provides a deduction for certain capital expenditures on land used for primary production, and amongst their number is expenditure on the destruction and removal of timber, scrub or undergrowth indigenous to the land (see sec. 75A(1)(b)); in the alternative, the expenditure would seem to be deductible under sec. 75A(1)(d) as outlays incurred in ``the preparation of the land for agriculture''. The special deduction allowable under sec. 75A is one-tenth of the qualifying expenditure in the income year in which it was incurred, and in each of the next nine income years (see sec.

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75A(3)). Accordingly, as regards the 1978 year, we consider that the taxpayer is entitled to no greater deduction than the amount of $109.

34. Whilst we have determined that the ``forestry management contract fees'' are deductible for the 1978 income year, we believe that the amounts so claimed in the 1977 income year are not deductible. It will be recalled that those outlays were made by the taxpayer to his family company, which was the trustee of a discretionary trust, and were made pursuant to agreements whereby the family company contracted to buy seedlings and plant them, and manage the operation for the taxpayer. It will also be recalled that, on the same day as those agreements were made, the family company entered into a further agreement with a professional plantation managing company whereby it subcontracted out the work of purchasing and planting the seedlings, and managing the operation. Mention was made earlier that the services to be performed by the family company under its agreement with the taxpayer were substantially the same as the professional plantation manager was to perform under its agreement with the family company. In Lau it was stated at p. 4934 that:

``In the application of sec. 51, as with the application of sec. 25, what is to be looked at is the nature of an outgoing, on the one hand, or the nature of a receipt, on the other... It is necessary to see what was done, and to what end, and to relate that to the concepts being dealt with.''

35. Perhaps the most valid way of ascertaining what S Timbers did in consideration for the various moneys paid to it is to look at the company itself. The company was incorporated on 23 March 1977, some few months before the end of the year of income in issue. Its intended role was to act as the trustee of the taxpayer's discretionary trust established in the following month. We have seen that in April of 1977 its memorandum of association was varied to permit it to carry on the business of a plantation manager. However, with the exception of P who resigned as a director in June of the following year, it had no office holders who knew anything about plantation management. It would seem that the company had no staff, and through its action in on-lending the funds received from the taxpayer, it had little money; also, it would seem it had no other assets. It was in no position to provide the many specialist services it committed itself to in the agreement which it made with the taxpayer. It did nothing and could do nothing in return for the considerable sums of money paid to it. It was stated in evidence that it had a role more extensive than that of the plantation managing company, but no evidence was adduced as to those additional activities, and so the statement remains an assertion only. Accordingly, in our view, there was no commercial purpose for the fees paid over to it by the taxpayer. That being the case, the overwhelming conclusion is that the purpose of making the payments was to do no more than obtain a tax deduction. It was conceded that the taxpayer had the effective control over the activities of the family company, and so in our belief it was very much a situation where ``the taxpayer was in a position to mould the transaction so as to maximize its advantages from his standpoint'' (see Lau at p. 4941).

36. In our view, the amounts making up the total of $107,000 were not incurred by the taxpayer in gaining or producing his assessable income, nor were they necessarily incurred in carrying on a business for the purpose of gaining or producing such income. Accordingly, we must deny deduction for those outlays. Whilst we believe that the expenditure on site preparation in the 1977 year, amounting to $3,078, was incorrectly allowed by the Commissioner (see para. 33), we are not disposed to vary the assessment in that matter. We see our function as reviewing the decisions of the Commissioner upon objections, and since the taxpayer's claim was allowed by the Commissioner in processing his return there was no reason for the taxpayer to include it in his notice of objection; accordingly, the matter was not before us. We find support for our view in a very early Board of Review case, Case 5,
9 C.T.B.R. (O.S.), where it was stated at p. 12:

``The Board has power in any case to increase the assessment, but where the objection is in respect of some particular item or items of income or deductions the power to increase is, in our opinion, limited to an increase in respect of the particular item or items to which the objection applies.''

That view, we believe, accords with common sense; also, the contrary view, viz. that a Board

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of Review could increase an assessment in the sort of situation now before us, seems to run counter to the proposition that a Board ``is an administrative tribunal reviewing at the instance of taxpayers the work of the Commissioner in dealing with objections'' (emphasis added), see
Ada Sutton v. F.C. of T. (1958) 11 A.T.D. 499 at p. 502; also it seems not inappropriate to mention within this context that a Board must operate with a sense of fairness, see
Mobil Oil Australia Pty. Ltd. v. F.C. of T. (1963) 13 A.T.D. 135 at p. 147.

37. In the taxpayer's notice of objection to the assessment for the 1978 year of income, he made passing reference to sec. 82KJ dealing with certain prepaid outgoings forming part of a tax avoidance scheme, and incurred after 19 April 1978, the date on which the Federal Treasurer announced the proposed new legislation. For completeness, and for reasons which are implicit in what we have expressed above, we would state that that provision has no relevance to the instant case.

38. For the reasons detailed above, we uphold the Commissioner's decision in disallowing the amount of $107,000 claimed by the taxpayer in his return for the year of income ended 30 June 1977, and we confirm the assessment for that year. Also for the reasons given above which lead to a different finding for the following year ended 30 June 1978, so far as the ``forestry management contract fees'' are concerned, we uphold the taxpayer's objection to his assessment (which is an amended assessment) in regard to that aspect, and we allow as a deduction the fees totalling $85,000. Also we uphold his objection to the extent that we allow the accountancy and administration expenditures of $700. However, we determine that the deduction for site preparation expenditures should be reduced to a figure of $109, and we confirm the assessment subject to the making of that adjustment and to the extent of disallowing the interest deduction of $9,607.

Claims allowed in part