Case W122

Members:
BJ McMahon DP

Tribunal:
Administrative Appeals Tribunal

Decision date: 2 November 1989.

---

B.J. McMahon (Deputy President)

In the year ended 30 June 1984, the applicant claimed deductions for expenses incurred in two enterprises in which he was involved. The first related to the alleged business of a television technician and electronics parts salesman and the second related to the alleged business of a primary producer. The moneys were claimed as deductions pursuant to the second limb of sec. 51(1) of the Income Tax Assessment Act on the basis that they were incurred in the running of a business. The claims were disallowed on objection. This application is brought to review that objection decision.

2. In the year in question, the applicant spent most of his working time as an employee of a large motor car manufacturing company located about 12 km from his home. He had been with that company for some 25 years, first as a machinist, then as a fitter and turner and finally, during the relevant period, as a tool making inspector. He was paid a wage of $22,238 during the year, from which tax was deducted in the normal way.

3. In 1964 he married and bought a rural property of some three acres in area. He gave evidence that he had always been interested in electronics and telephones since he had been a small boy. He said that he had been ``tinkering'' all his life. After marrying and moving into the house that he and his wife built on the property, he successfully carried out some repairs to his own radio and television sets. His wife boasted of his success, so he said, to her friends, and before long he had a number of them asking him to repair their appliances as well.

4. He originally had problems with spare parts and commenced in 1967 to buy common parts and to build up a stock of them. By 1970, he found that he was spending a good deal of his time fixing radios and television sets for friends and decided that he would start a business and make money from the venture.

5. He had started a system of record keeping for individual television sets and used this as the basis upon which to build his business. He registered a business name in July 1973. He obtained a home industry permit from his local shire council for the carrying on of the business from their home. He arranged for printing of business stationery, including letterheads and cards. He had white overalls embroidered with the business name. As part of his project, he decided to improve his own knowledge of electronics and of business organisation.

6. In 1972, he commenced a correspondence course in radio and television servicing with a college. He continued this course for three-and-a-half years until the college closed down before his final accreditation was achieved. About that time, he also joined the local Association of Radio and Television Servicemen and was a member of it between 1975 and 1978. The association provided lectures and training and support for its members in difficult repair cases. He found, however, that at each meeting there would be more time spent on gossiping that on providing benefits. He began to find the demands on his time while attending meetings every week were not worthwhile and he resigned from the association in 1978.

7. In the early stages of the business he started importing parts from the United Kingdom and the United States of America. He found that hobbyists would contact him to ``fix their messes''. He saw a potential market for himself and started manufacturing project kits on order. He still sells many of these kits and parts to hobbyists. He said that this ancillary side of the business helped his general repair business. In 1974 he started buying more expensive equipment for repair purposes. He also took a course in 1975 in colour TV

---

ATC 969

technology. This was the year in which he joined his local association. Work is carried out from a room in his house in which work benches and cupboards are installed. There is nothing else in the room except equipment and parts that are associated with this business. It does not have direct access to the street. If a person brings an appliance for repair he is met at the door and the applicant takes the appliance back to his workshop.

8. He uses a Ford Econovan in connection with the business. He found that some people were, for one reason or another, unable to bring their television sets to him and had asked him to call. Some time prior to the relevant year, he started service calls twice per week after work. The work would be done in the customer's premises wherever possible, but where not possible the sets were returned to his premises where the work was carried out. He gave evidence that from late 1974 until the late 1980s he worked until 1 or 2 a.m. However, in the relevant year, 1984, there was more than the usual amount of overtime at the factory where he principally worked and he was not able to spend as much time at this business as normal. In reply to requests for particulars from the respondent he said that he averaged some 10 hours per week on the electronics business during the relevant year.

9. The general repair business has been at a fairly static level over the years except for the low level in 1984. In 1985 he bought a computer. Prior to that time he had not kept any separate profit and loss accounts of the business. Primary records consisted of order books which he used when he placed an order with a supplier, docket books which he used when he received work from customers and a cheque book and butts. He maintained that he made a profit, in the sense that there was a cash surplus of receipts above disbursements. He knew this because he had not been called upon to supplement the separate bank account that was kept for the business by any cash deposits from his own private means.

10. The second part of his claim relates to his activities as a primary producer. After he bought the property in 1964, he improved and fenced areas of it and built the house. He made a telephone enquiry to the government authority responsible for issuing licences to keep commercial numbers of laying hens. On verbal assurances from that authority that he would have no difficulty in getting his permit he went ahead and built a poultry shed with a capacity to hold 200 birds. However, after he put in his application, he was told that because the quotas for the area had already been filled he would be unsuccessful. The largest number of hens that he could keep without a permit was 20. He has maintained a flock of around that number since that time. Appropriate cages were bought early in 1966 and the hens have continued to lay since then. The eggs are sold regularly to the public. Full records are kept of production. Each of the hens is watched and its production recorded. There was included in the papers a computer printout of the egg production for each bird in his flock.

11. The second area of primary production lies in a market garden that occupies 0493 of a hectare. In 1968 he bought a rotary hoe and started growing crops in 1970. From that time, he has continued to increase production annually through more intense cultivation and through attention to detail. He grows lettuces, tomatoes, zucchinis, cabbages, cauliflowers and so on, depending on the season. He approached the cultivation of these crops quite methodically. He has continued to keep records of wind speed and direction and the weather generally so that he may plan for watering and for planting. He keeps records of watering and he keeps records of particular jobs done in the market garden.

12. He has not increased the area under cultivation because local water pressure was not sufficient. However he gave evidence that it has recently been increased in his neighbourhood and he intends to use more of his property for market gardening.

13. There is a sign outside the house indicating that fresh vegetables are for sale. If a person wishes to buy some, he goes to the house and is then directed to the actual bed of vegetables from which he chooses what he wants. Records are kept daily of sales and a separate bank account is kept for the market garden business. The applicant said that he did not know whether he made a profit from the market gardening activities as such, but because he was not called upon to subsidise the separate bank account and because all seed and capital items, such as the tractor, came out of the account, he felt that it was a commercial enterprise and that he was still in front.

---

ATC 970

14. The third aspect of his primary production activities was in the rearing of livestock. He had a number of calves from time to time but for one reason or another they misbred. In the year in question he had only one calf. He also had three sheep in that year. He gave evidence that he has the sheep shorn regularly by a professional shearer, or by a neighbour for a fee, and that the wool is taken to a wool agent in Geelong. The applicant himself does the drenching and injection necessary in the husbanding of these sheep. There is a calf shed on the property which houses a feeding bail and which offers protection to the animals in inclement weather.

15. He insisted that throughout both ventures it was always his intention to make money, to provide for his family and for his retirement. He pointed out that his family now has no debts. He added that they have not had a holiday for many years and that their spare time was spent working on the property. The applicant's wife is paid in cash for the work that she carries out but there are no other employees. The applicant's intention at all times, he said, was to make as much money as he could from these activities. If he had failed through misadventure, such as missing out on a hen permit, then this was merely a misfortune and did not indicate, he said, that he took the business any less seriously. All the steps he had taken to formalise the TV business indicated, he said, that his activities were carried out in the expectation of a profit.

16. There have been many cases decided on the question of what constitutes the carriage of a business. The facts in each case, of course, will need to be looked at individually. However, there are four principal factors that may be used as guides in reaching an appropriate decision. They are, firstly, the scale of operations, secondly, the elements of repetition and system, thirdly, whether a significant commercial purpose exists or whether the activity represents a hobby and, fourthly, whether there is a profit purpose.

17. It is true that a large scale operation lends itself more easily to an objective inference of a commercial undertaking. None the less, Walsh J. said in
Thomas v. F.C. of T. 1972 ATC 4094 at p. 4099 ``a man may carry on a business although he does so in a small way''. In
Ferguson v. F.C. of T. 79 ATC 4261 at p. 4269 Fisher J. said:

``Finally, the conclusion is open to be drawn that a taxpayer is engaged in business activities notwithstanding the fact that he is operating in a very small way i.e. on a few acres, with very few trees or with a very small number of stock. I would be of opinion that the size of the operation could be of significance for the purpose of testing whether a taxpayer is conducting a hobby rather than a business, but that size is certainly not the determining factor.''

18. The second factor to be considered is the presence or absence of elements of repetition and system or of some form of organisation. These were found to exist, for example, in
F.C. of T. v. Mullins 81 ATC 4192. In Ferguson, Fisher J. said at p. 4270:

``Moreover 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 on a business rather than indulging in a recreational or hobby activity.''

19. The third factor to be considered is the presence or absence of a significant commercial purpose. This is a phrase that appears to owe its origin to the observations of Walsh J. in Thomas at p. 4099. It has been relied upon in many subsequent decisions.

20. The fourth factor, namely the presence or absence of a profit purpose, was referred to in Ferguson at p. 4270:

``it is certainly relevant to ascertain if the operations of the taxpayer have a commercial purpose, i.e. pursuit of profit or gain rather than pleasure or recreation.''

21. These tests can be applied to the facts in the present application. It seems to me that the same tests will determine whether the applicant was carrying on a business, whether or not it was the electronics business or the business of primary production. The first test, namely the scale of operations will now be considered. It is quite true that in the present case the applicant's scale of operations was small. In the relevant year, there seems to have been only four or five service repairs carried out although there seem to have been payments for a large number of parts that were used or otherwise sold. The business in that year could more properly be characterised as a parts sale

---

ATC 971

business. It is not clear from the evidence that was tendered whether the parts were sold to hobbyists or whether they were used in actual repair jobs. Nevertheless it is conceded by the applicant that the turnover was small. Gross sales amounted to $466. Stock on hand and concluding stock were high in relation to the small turnover. The gross profit, representing the applicant's labour cost, was a mere $62.

22. On the primary production side, there was no trading in stock in the year in question. The opening number of cattle is the same at the beginning as at the end. There was a natural increase of one in the number of sheep. The real income from primary production was derived from the sale of eggs and vegetables to passers-by who walked in off the road. From this source, an amount of $548.40 was derived from the sale of vegetables and $597.50 from the sale of eggs. In view however of the observations of Walsh J. and Fisher J. to which I have referred, the smallness of the applicant's operations, in itself, would not be fatal if other characteristics led to a conclusion that he was carrying on one or other of the relevant businesses.

23. The second test relates to the existence of an organised system and in particular to elements of repetition and regularity. In my view there is abundant evidence of their presence in this application. Individual records were kept of work on the television sets. Very detailed records were kept of the farm produce from the market garden and from the poultry shed. The fact that the businesses have been carried on for so long in itself imparts an element of system and regularity.

24. The third test relates to the presence or absence of a significant commercial purpose. In my view there is no evidence that the activities carried on by the applicant were for the purpose of a hobby or for any domestic purpose. As far as the electronics business is concerned, all the signs indicate that it was set up as a business. It could have no other raison d'etre. It may not be conducted with the same vigour and with the same volume as it was at the beginning, but its structure is there and there has been no significant departure sufficient to warrant the characterisation of the activities as a hobby or as the pursuit of pleasure. Similarly, with the growing eggs and vegetables, the way in which the enterprise is carried out and recorded indicates a desire, successfully achieved, of making money in a commercial undertaking. The eggs and vegetables were sold at market prices. The applicant gave evidence that he visited other areas so that he could estimate appropriate prices to charge. The crops were planned in accordance with the weather and with market demand. These facts, together with the prospects of expansion, now that adequate water is becoming available, all indicate a constructive businesslike approach to the enterprise.

25. The fourth test relates to the presence or absence of a profit purpose. It is true that this purpose is better established if it can be inferred from objective evidence. However, the taxpayer's evidence of his subjective purpose may establish the required profit purpose where an objective inference would not be drawn
Tweddle v. F.C. of T. (1942) 7 A.T.D. 186). In New Zealand the view has been taken that without a reasonable prospect of profit, no business exists, irrespective of the taxpayer's subjective purpose:
Hanley v. Commr of I.R. (1971) N.Z.L.R. 482;
Prosser v. Commr of I.R. (N.Z.) 73 ATC 6006. In Tweddle the High Court of Australia (Williams J.) rejected this view on the ground that it would require the Commissioner to be the judge of the viability of a commercial enterprise.

26. In my view, there is here strong evidence, both subjective and objective, of the existence of a profit purpose. There is no question that the moneys expended in either activity were for the purpose of avoiding or reducing taxation liability. For this reason this case can be distinguished from many other cases where the question of the existence of a profit purpose had been questioned (for example, in
Walker v. F.C. of T. 83 ATC 4168). In the particular year in question losses were returned. However, it is not necessary for the existence of a profit purpose that a profit be made in every year. It may not even be necessary that a profit ever be made at all, so long as a genuine and bona fide purpose of achieving a profit can be demonstrated.

27. In my view, therefore, the applicant was carrying on the two businesses as he alleged in his return. The objection decision is set aside and the matter is remitted to the respondent with the direction that the applicant be reassessed in accordance with his return.

---

ATC 972

28. It was submitted that if I came to this conclusion I should apportion one of the items of expenditure, namely travel expenses incurred in connection with the two motor vehicles. Thirty per cent of the use of a Ford Cortina by the applicant was admitted and 20 per cent private use of the Ford Econovan was also allowed by the applicant. In my view the evidence supports such an apportionment in accordance with the return and calls for no further reapportionment. Evidence on this point was given by the applicant. It was consistent with the apportionment as stated. It was not attacked by the respondent's representative and the respondent called no evidence in reply. On the evidence before me, I have no hesitation in finding that the apportionment, as returned, was correct.