Case U192

Members:
RK Todd DP

Tribunal:
Administrative Appeals Tribunal

Decision date: 19 October 1987.

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R.K. Todd (Deputy President)

This is the review of an objection decision whereunder the taxpayer's claim to deduct under sec. 51(1) of the Income Tax Assessment Act 1936 ("the ITAA") a number of items of expenditure incurred by him in relation to a macadamia-growing venture were disallowed.

2. The applicant was an officer in the Defence Force. I have no doubt that he was genuine in the desire which he, in evidence, expressed himself as having had when he embarked on the venture in March 1981. This was that he wished, on his retirement, to be able to have what he called an alternative lifestyle that would be productive of income. With this in mind the applicant made two journeys to northern New South Wales to look at macadamia-growing ventures in course of development. He received some advice on financial and agricultural aspects of the project, and in particular sought advice from the State Department of Agriculture. He formed the view that 700 trees on a 10 acre block would generate a satisfactory income. This estimate, the applicant said, foreshadowed no income for the first six years, a substantial income after the tenth year, and a levelling off at about 15 years after planting.

3. The applicant had spoken, on one of the two trips mentioned, to brothers named J. One of the brothers had an option over some 400 acres of land and acted as co-ordinator. A "shelf" company, M. Pty. Ltd., was acquired which purchased the land and then sold it to 14 individuals of whom the applicant was one, with this qualification that the applicant purchased his share equally with his wife as tenants-in-common. But this contract required subdivision of the land in question, and this became, for the time being at least, impossible because the relevant planning authority decided that an environmental impact study of the whole of the shire in question was needful, and that pending such study subdivision and rezoning could not proceed. Subdivision had not occurred by the end of the 1983 year, and indeed appears still not to have occurred. Because the land could not be transferred in accordance with the proposed plan of subdivision, M. Pty. Ltd. leased the land to the various purchasers, the applicant and his wife becoming lessees accordingly.

4. The participation of the applicant's wife in the purchase of the land and in the lease led to the first difficulty for the applicant. For the year ended 30 June 1981 the applicant's profit and loss account showed a net distributable loss for tax purposes in excess of $15,000. That for the year ended 30 June 1982 showed a loss of nearly $18,000. The precise amounts for these years do not matter, the significant point being that while the Commissioner accepted that a business of primary production was being carried on, he assessed the applicant on the footing that he was entitled to a deduction of only half the loss, his wife being, in the Commissioner's view, entitled to a deduction in respect of her half. As the applicant's wife had no other income, this was a serious blow to his plans. Objections were lodged and the matter eventually came on before a Board of Review, but after some misadventures the applicant abandoned his objections.

5. By the commencement of the 1983 year the applicant had borrowed money from three sources. He had initially borrowed $25,000 on the security of his house in Canberra, but had had to make a further borrowing from the Defence Credit Union because of the tax treatment of the 1981 and 1982 years.

6. After the initial purchase of the land, one of the brothers J commenced to germinate the trees for the applicant in J's nursery. This was successful, and subsequently the trees were put

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ATC 1100

through a grafting procedure, this operation probably taking place in the second year. The applicant said that in the first year the land, which was uncleared scrub, was cleared. This was followed, in that year itself and in the second year, by what he called a significant amount of pasture improvement, with fertilisation and the growing of a cover crop. A dam was built, bordering on the applicant's property, conjointly with some of the other owners. The applicant said that by 30 June 1982 at least two other properties had been planted out with trees. All of the others had planted their trees by the date of the hearing. The applicant said that he had had it in mind that he could plant his 700 trees "in the calendar year 1983". But various factors led to the trees never being planted, let alone in the year ended 30 June 1983: the lack of finance that was due in part to the tax problem already mentioned; the consequent inability to find $10,000 to put in an irrigation system (although at least two others planted their trees without installing irrigation); some doubts about the ability of the trees to resist salt ingestion; and the applicant's reluctance "to plant out until I saw the results of the environmental impact study because if [it]... had negative recommendations about rezoning... any further investment could have been compromised". All of these, the applicant said, led to the trees not being planted. They could have been planted, but in the absence of the subdivision going ahead the applicant would not have been able to build a house and live on the property. In the result the trees were never planted and, eventually, having become pot-bound, were lost.

7. The applicant said that overall he had expended something in excess of $50,000 on the whole project. In the 1983 year, in respect of which the Commissioner had rejected the applicant's claims for deductions in respect of the macadamia venture entirely, the amounts claimed to be deductible, as maintained at the hearing, were:

                                         $
      Accountancy                        227
      Bank charges                        24
      Depreciation                       120
      Fertiliser chemicals and
        contract maintenance labour    2,456
      Farm maintenance and
        supervision                    1,000
      Interest
           ... 154
           ... 1,758
           ... 1,466                   3,378
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      Lease of property                3,800
      Postage, stationery and
        telephone                        156
      Rates and administration
        charges                          125
      Soil analysis                       22
      Subscriptions - AMGA                10
      Travelling expenses                700
                                     -------
                                     $12,018
                                     -------
      

8. There was a challenge by the Commissioner's representative in respect of some of these amounts, on the footing that the invoice presented to the applicant in which the amounts in question were set out, totalling $2,456, was dated June 1982. Certainly the work in question referable to the invoiced amounts was done in the 1982-1983 year, but the applicant's evidence was that the applicant's liability had not been discharged by payment prior to 1 July 1983 but thereafter, and I see no reason not to accept this evidence, so that the amounts in question are deductible, if deductible at all, in the 1982-1983 year.

9. The question then is, was the applicant carrying on, in the year in question, a business, namely a business of primary production? There is much to be said for both sides of the argument. For the Commissioner, it was argued that, while the applicant may have intended to carry on a business of primary production, his actions showed that he did not. There were here no trading operations, as there was no business to be carried on without the trees being planted. The activities represented by the expenditure of $2,456 had taken place in the previous year. The situation was said to be close to that dealt with in principle in
Southern Estates Pty. Ltd. v. F.C. of T. (1966-1967) 117 C.L.R. 481, so that the taxpayer's activities should be seen as having been no more than preparatory to the commencement of a business. In a more direct

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ATC 1101

sense, the case was said to be analogous to Case N101,
81 ATC 560 where Mr H.P. Stevens (Chairman) and Mr J.R. Harrowell (Member) said, at p. 561, the following of a taxpayer who had taken preliminary steps towards a macadamia venture but had not planted any trees:

"5. We accept the taxpayer desired to commence a business of growing macadamia nuts but we do not accept that, during the relevant year, he had commenced such a business. He was preparing to commence but that does not, in our view, constitute actual commencement..."

Finally, it was submitted for the Commissioner that any purpose of gaining assessable income ceased to exist when the applicant was unable to continue with his irrigation and planting plans.

10. I was at first impressed with these arguments but have ultimately come to the conclusion that the present case has a vital distinction from Case N101. The difference is small, but it arises because in Case N101, in which the facts are admittedly very tersely stated, the taxpayer appears not to have acquired any trees, indeed no more appears than that he had been given a quotation for the propagation of the trees. Here the taxpayer had acquired the trees, they having been propagated and, later, grafted. The situation is more analogous in my opinion to that which obtained in Case T12,
86 ATC 178, wherein the taxpayer partners had purchased blueberry plants from which propagation was carried out on a nearby nursery. The words of the Board of Review (Mr K.P. Brady (Chairman) and Mr J.B. Stewart and Mr D.J. Trowse (Members)) in para. 14 (at p. 185) of the reasons are in my opinion equally apposite here:

"14. Whilst we are prepared to accept that the nature of the activities undertaken during the years in issue may be seen as preparatory to the operation as planned, we do not consider that such an acceptance is necessarily fatal to the taxpayer's claim. It seems to us that the partnership had embarked upon a commercial undertaking designed to create stock as cheaply as possible and which ultimately was to be used in the derivation of assessable income by the sale of its produce. The evidence taken as a whole leads to the conclusion that the venture had at that stage a commercial flavour and that it had been conducted in a systematic and businesslike manner. For those reasons, we consider that those activities, when taken alone, constitute the carrying on of a business."

11. There are dangers in resorting to generalisation on either side of the coin in these cases, but it is to be noted that this case does not equate to those in which a person buys a small bush block and, developing it in a desultory fashion over a long period, uses it in the meantime as a weekend and holiday relaxation, running a few animals on it. In this case the taxpayer may have been unwise even to commence the venture, he may have been under-capitalised, and he may have made some wrong decisions along the way, but I am on balance satisfied that he incurred the expenditure in question for no other purpose than of carrying on, and in carrying on, a business of primary production for the purpose of gaining or producing assessable income, such business having passed beyond the preparatory stage of setting up such a business.

12. In Case P14,
82 ATC 62 Dr P. Gerber (now a Senior Member of this Tribunal) at p. 63A emphasised again that "Whether a man is or is not carrying on a business is, ultimately, a question of fact...". He went on to set out the factors to be considered as follows:

"9. Doing the best I can with such tried old warhorses as
Thomas 72 ATC 4094,
Martin (1952-53) 90 C.L.R. 470 and
Ferguson 79 ATC 4261, the following indicia seem to emerge:

• (i) `A man may carry on business although he does so in a small way' (Thomas).
• (ii) `The test is both subjective and objective: it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them... the determination is eventually based on the large or general impression gained' (Martin).
• (iii) `If the transactions which go to make up the activity or operations of the taxpayer have an element of regularity or repetitiveness, this factor assists in concluding that the taxpayer is carrying

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  ATC 1102

  on a business rather than indulging in a recreational or hobby activity' (Ferguson)."

13. Myself doing the best I can with the warhorses mentioned, and with the facts of this case, I am of opinion that the Tribunal should set aside the objection decision under review and in substitution therefor decide that the applicant is entitled to a further deduction of $12,018 under sec. 51(1) of the ITAA.