Case V120

Members:
BJ McMahon SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 27 July 1988.

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B.J. McMahon (Senior Member)

The applicant was born into a farming family 28 years ago. Until his recent marriage, he lived on the 1,000 acre family farm with his father, mother and younger brother. From an early age, he was brought up to do work around the property. This revealed an interest in things mechanical. In order to improve his skills in this area, he sought to become qualified as a motor mechanic. It was a skill he intended to use in maintaining the farm machinery.

2. As he put it, he was lucky enough to obtain an apprenticeship with his local Water Resources Commission in this trade at the age of 19. After a four-year course, he completed his apprenticeship and obtained his tradesman's certificate. He left the employment of the Commission on 11 April 1983. His group certificate for the period commencing 1 July 1982 to the date of termination of his employment showed that he earned $12,268.52 in that period.

3. The property is owned by the applicant's father. It is used principally for growing rice and wheat, although other crops are also grown and stock is run. The farm was operated, not as a partnership, but on a share farming basis by the four members of the family. The various marketing boards were advised of the shares of sales receipts to be forwarded to each of the four people concerned, and appropriate amounts were credited to their separate respective bank accounts from time to time. The father would assess the amount of expenses to be paid by his two sons and collect appropriate amounts from them separately.

4. While he was working with the Water Resources Commission for 38 to 40 hours per week, the applicant also worked on the farm on weekends and during available daylight hours in the week. At that time, he was entitled to one-eighth of the gross profits of the farm and contributed a corresponding amount of its expenses. His income was averaged under provisions of Div. 16 of the Income Tax Assessment Act (``the Act'') for taxation purposes.

5. When he left the employment of the Commission, he received a lump sum payment of $411.33. He immediately returned to work full time on the farm. He said that he had always intended that his period of salaried employment would be limited. His only purpose in taking on the job was to further his education in mechanical engineering.

6. Because his salary was no longer paid, his taxable income dropped dramatically. In the year ended 30 June 1984 it was $3,364, in 1985 $4,464, in 1986 $5,054, and in 1987 it was a loss of $341. These amounts represent exclusively moneys earned from his activities on the family farm.

7. In October 1984 he married. As ``a sort of wedding present'' his father lifted his share in the gross profits from one-eighth to one-quarter. At no time has there been any written agreement between the share farmers. The shares to be allotted to the two sons are decided upon arbitrarily by the father and this situation appears to be accepted, certainly by the applicant.

8. The applicant's wife works at a bank in the local township and earns approximately $19,000 per year. Since they married, the applicant and his wife have bought a house. The repayments on the loan have been principally financed through her salary. They have discussed what would happen if and when they have children. They have agreed that his wife would take maternity leave for a period, but then would return to her employment.

9. While he worked for the Commission, the applicant's brother helped out on the farm. Like the applicant, the brother could not subsist on his farm income alone and his wife is not in employment. Consequently his brother earns additional money by going away shearing from time to time. The applicant said that he could never contemplate any such course for himself. He also could never contemplate any other work where he was not his own boss, as he put it. Furthermore, he would not want to work indoors or to work for anyone else.

10. Although the applicant's father ``keeps talking about retirement'', the applicant and his brother can see no prospect of it. The father's farm would preclude him from social security benefits. If the sons were to buy the farm from him, they would have to borrow money. The figures indicate that income derived from the farm would hardly be sufficient to service the loan, let alone to reduce it.

11. The applicant insists that although his farm income is low, he and his wife would prefer things the way they are. He said that no

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ATC 755

money is owed on the farm and it provides a subsistence for them. He feels that his continued presence on the farm is important as his brother goes away shearing, and his father is less able to manage now that he is getting older. In 1986, an additional block of 1,300 acres was leased. However, it has been an expensive investment and does not look promising. It had previously been leased and, according to the applicant, was farmed out. In addition, the Commission has established a salt-pan next to it which leaves no scope for enlargement.

12. Evidence was given by a local accountant, that such a low level of farm income is common in the area in which the applicant lives and works. The accountant, who has been in the area for about 17 years, said that some 60% to 70% of his clients had taxable incomes between $1,530 and $3,950 (according to examples he gave) or in fact suffer losses. In his opinion, these clients are happy to accept that standard. Income of this nature is often accompanied by a salary earned either by the husband or the wife.

13. In his return of income for the years ended 30 June 1985 and 1986, the applicant claimed to be entitled to the benefit of sec. 155 of the Act. This is in the following terms:

``155(1) Where a taxpayer establishes that, owing to his retirement from his occupation, or from any other cause (but not including a change in the investment of assets from which assessable income was derived into assets from which the taxpayer derives income which is not liable to be assessed under this Act), his taxable income has been permanently reduced to an amount which is less than two-thirds of his average taxable income, he shall be assessed, and the provisions of this Division shall apply to the income thereafter derived by him, as if he had never been a taxpayer before that year.

(2) For the purposes of the application of sub-section (1) in relation to a taxpayer in relation to a year of income, a reference in that sub-section to the average taxable income of the taxpayer shall be construed as a reference to the amount that would be the average income of the taxpayer in relation to that year of income ascertained in accordance with section 149 if there were excluded from the assessable income of the taxpayer of the average years any income received by him from sources from which he does not usually receive income.''

14. The respondent denied that the applicant had established that he was entitled to the benefits of that section, and disallowed appropriate objections. This application is brought to review those two objection decisions.

15. The section has been in the Act and in its predecessors in its present terms for many years. Where a taxpayer to whom the averaging provisions have been previously applied retires from business, so that his taxable income has been greatly reduced, the averaging provisions would impose a disproportionately large amount of tax in respect of the early years of his retirement. It is possible that the application of those principles could even impose hardship. Section 155 is intended to provide relief in cases of this kind.

16. In order to establish his entitlement, an applicant must show, firstly, that his taxable income has been permanently reduced to an amount which is less than two-thirds of his average taxable income and, secondly, that this reduction is a result of the taxpayer's retirement from his occupation or from some other cause. The specific exception dealt with by the words between brackets in subsec. (1) have no application in this case. The section requires a comparison between the taxable income in the subject year and two-thirds of the average taxable income of the five-year period terminating at the end of the year of assessment. This formula flows from the combined application of sec. 149, 150, and 155(2). In 1985, for example, the applicant's taxable income was $4,464. The relevant average figure was $10,465. Two-thirds of this was $6,976 leaving a gap of $2,512. The applicant's income in that year (and indeed in the other year under review) was clearly less than the relevant two-thirds amount. Yet the respondent considered that the applicant was not entitled to the benefit of the provisions of this section.

17. The standard of proof to be met and the objective nature of the considerations to be taken into account were dealt with by the majority in Case P42,
82 ATC 196 at para. 2 in the following words:

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``In the first place, the subsection sets out what is expressed as an objective factual test. For the section to be activated, the taxpayer needs to `establish' that, owing to retirement from his occupation or from any other cause (other than that specifically excepted in the clause in brackets) his taxable income has been `permanently reduced to an amount which is less than two-thirds of his average taxable income'; he is then to be assessed, and the provisions of the section are to apply to the income thereafter derived by him, as if he had never been a taxpayer before that year. Nothing is said in the section or in the regulations of the manner in which the taxpayer is to `establish' that he has complied with the conditions precedent - a notation in the income tax return drawing attention to a claim that the income has been appropriately reduced for an acceptable reason would appear to be sufficient. Whatever may be the appropriate approach, it is clear that the section does not provide for any particular formal application or election nor does it confer formally on the Commissioner a discretionary power. The test to be satisfied appears to be an objective factual test.

By this standard, the Commissioner was plainly in error when he made his assessment. In our view, the taxpayer, on the ordinary civil standard of probabilities, had established that, by reason of his retirement from his lucrative position as an airline pilot, his taxable income had been reduced for an indefinitely continuing period to an amount less than two-thirds of his average taxable income for the year ended 30 June 1977.''

18. The respondent's first argument was that there had not been a retirement. The applicant was aged 23 when he left the employment of the Commission. The respondent argued that the ordinary meaning of retirement could not apply to circumstances of this kind. The respondent's advocate used the phrase ``permanent retirement'' as if the word, as used in the section, should apply only to those who had, in the normal course of events, completed their life's labours and intended to give up any further prospect of gainful employment. All that had happened, it was said, was that the applicant had merely ceased his activity as a mechanic. I do not accept this argument.

19. The section talks of retirement from ``his'' occupation not from ``any occupation''. It is true that one of the meanings attributed to retirement in the Shorter Oxford English Dictionary is ``withdrawal from occupation or business activity''. A corresponding meaning in Macquarie Dictionary is ``removal or retiring from service, office, or business''. Yet the context in which the word appears suggests to me that ``retirement'' was not intended to mean a total retirement from all gainful employment to continue indefinitely. The very fact that the section contemplates income being derived after retirement adds weight to this interpretation. When looked at in this light, the age on retirement is irrelevant. It matters not, furthermore, whether one retires to a life of indolence or to pursue another occupation.

20. In any event, however, it seems to me unnecessary to determine whether the termination of the applicant's employment amounted to a retirement. The section is wide enough to operate if the permanent reduction is brought about ``from any other cause''. There can be no doubt that the loss of his salary certainly reduced the applicant's income. Whether one calls the cause of that loss a termination of employment or a retirement seems to me, in the light of the terms of the subsection, to be of little importance. What matters, and what the applicant must primarily establish, is that his taxable income has been permanently reduced to the appropriate level. The respondent advanced many arguments in support of his contention that any reduction of taxable income suffered by the applicant, could not be viewed as permanent for the purposes of this section.

21. The first two arguments can be referred to as option arguments. The respondent submitted firstly that the applicant, now that he was a qualified mechanic, had an option to go back into the workforce. While that option was reasonably open to him, his income reduction could not be regarded as permanent. The applicant of course gave evidence that he had no desire to work in a position other than his present position. Having regard to his background, I believe that it is unlikely that he ever would be otherwise employed. The second option argument was that the applicant and his family could develop the new leased area and increase their general income in that way. I will deal with the general validity arguments of this

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ATC 757

nature later on. It is sufficient to point out at this stage that the evidence was that geographical expansion was precluded by the installation of a salt-pan adjacent to the property and that productivity development was inhibited by the overuse of the property in the past.

22. The next two arguments of the respondent seemed to have been inspired by decisions of Boards of Review. It was argued firstly, that the income of the applicant would fluctuate with the world prices of commodities. In Case C79,
71 ATC 349, the Board noted that no expert evidence in that case had been adduced as to the likelihood of continuance of the depressed prices from which the taxpayer was then suffering.

23. In that case, however, the taxpayer had substantial liquid resources exceeding the amount required for working capital. The prospect of future income from those resources made it impossible to hold that there had been a permanent reduction as required by sec. 155. Needless to say the evidence established no such situation in the present case. The average amount of interest included in the applicant's taxable income for the past four years has been approximately $50, derived from a small deposit with a building society.

24. The next argument of the respondent turned on the arbitrary nature of the financial relationship between the applicant and his father. It was suggested that as there was no agreement between them, the father could increase the applicant's income at any time. Some reliance was placed on the observations made by the Board in Case J13,
(1958) 9 T.B.R.D. 69. However, in the present situation, any variation is certainly not within the power of the applicant. He would be completely dependent upon the goodwill of his father for any increase in his share and there was no evidence that any such increase was likely.

25. Then there were four further arguments which were little more than speculations. The respondent submitted firstly that the applicant's personal circumstances would ensure that he would have to increase his income in the future. A young married man is likely to have children and to have heavy demands on his finances that would drive him to further personal exertion. The second speculation was that the applicant and his family could, if they found the farm so unprofitable, lease it to somebody else and go to town to obtain paid employment. The third speculation was that as the gap between the applicant's taxable income and the relevant two-thirds figure was relatively small, it was reasonable to assume that he would be able to overcome it. Fourthly, the respondent suggested that the applicant, acting in conjunction with his brother, could buy out his father's interest and run the farm more profitably. In my view, there was no evidence upon which one could convert such speculations into possible outcomes, much less into probabilities.

26. It seems clear from the reasoning in Case P42 to which I have referred, that the appropriate point of reference in considering the application of the section is the year of reduction. The applicant must be able to establish that as at that time, more likely than not, his reduction in income would be permanent. He does not have to go further than that. If (contrary to the facts in this case) his income unexpectedly increases in later years, this would be no answer to the application of the section at the relevant time, if when viewed at the relevant time, such an increase would have appeared unlikely. We must ask ourselves therefore whether on an objective view of the facts in the year of reduction it was more likely than not that the reduction would be permanent.

27. The word permanent appears as a concept in many Acts of Parliament. As was observed in
Henriksen v. Grafton Hotel (1942) 2 K.B. 184 at p. 196, it is a relative term and is not synonymous with ``everlasting''. It is simply the opposite of temporary. The continuation of a state of affairs forever - an everlasting state - is perhaps appropriate in religious or spiritual thinking. Such a condition does not exist in the worldly affairs of mankind. The use of the word permanent is not intended to indicate the contrary. The primary meaning attributed to the word in the Shorter Oxford English Dictionary is ``lasting or designed to last indefinitely without change; enduring; persistent: opposite to temporary''.

28. In
F.C. of T. v. Austin (1932) 48 C.L.R. 590 at pp. 601-602 the High Court, dealing with the predecessor of sec. 155, observed:

``The word `permanent' is employed in an inexact but a very usual sense of indefinitely continuing.''

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29. Dealing with the concept of permanent incapacity for work for the purposes of qualifying for an invalid pension, Woodward J. in a Full Bench decision of the Federal Court in
McDonald v. Director-General of Social Security (1983-1984) 6 A.L.D. 6 at p. 13 said:

``In my view the true test of a permanent, as distinct from temporary, incapacity is whether in the light of the available evidence, it is more likely than not that the incapacity will persist in the foreseeable future.''

30. The word has been interpreted in a similar manner in a variety of contexts. Notions such as permanent employment, a permanent position with a local authority and a permanent place of abode, have all been judicially considered with the same general approach. In
F.C. of T. v. Applegate 79 ATC 4307 the phrase ``permanent place of abode outside Australia'' was construed to mean, in effect, ``permanent for the time being''.

31. Having regard to these observations one may now ask what was the likelihood of the applicant's reduction in income below the statutory level extending into the indefinite future. It seems to me that the evidence points overwhelmingly to a conclusion that it would have been reasonable to expect such a permanent reduction at the relevant time. The applicant is now a subsistence farmer, was one in the year of reduction, and is likely to be one for the foreseeable future. It is not sufficient to displace what the applicant has established by suggesting that he has other options. If, as I find, it is unlikely that he would have taken up any of these options to increase his income, then their mere existence becomes irrelevant. Similarly, speculations as to possible increases in income in the future, if not based on likelihoods or probabilities, do not assist in the task of evaluating whether the reduction of income is permanent. In my view, the applicant knew that his income would be substantially reduced when he went back to the farm and he accepted that. His fiancee accepted it. Neither of them expected it to improve materially in the future. Quite apart from their own subjective assessment of events, more importantly an objective look at the relevant evidence would confirm this prediction. Indeed, as events have turned out (and except in so far as they help us to understand reasonable likelihood at the relevant time, this is only by the way) his taxable income has indeed remained below the critical level.

32. Having established his entitlement, the application of the section becomes mandatory. There is no discretion conferred on the respondent. In my view, the applicant has demonstrated or established his entitlement and the respondent is in no position to deprive him of the benefit which he seeks.

33. Accordingly the objection decisions under review are set aside and the matters are remitted to the respondent with the direction that the applicant's assessments be amended on the basis that the applicant was entitled to the benefit of sec. 155 of the Income Tax Assessment Act at the relevant times.