Commissioner of Taxation of the Commonwealth of Australia v Walker, Michael John

[1984] FCA 203

Re: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
And: MICHAEL JOHN WALKER
Nos. G105 and G106 of 1983
Income Tax - Appeals
84 ATC 4553 / 2 FCR 283

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Fisher(1),Davies(2) and Neaves(3) JJ.

CATCHWORDS

INCOME TAX - Allowable deductions - Partnerships allegedly set up to develop herds of exotic cattle - whether businesses carried on - Deductibility of payments made by partnerships as leasing or management fees - Whether principle in Ramsay v I.R.C. applicable - Reception of further evidence on appeal.

Income Tax Assessment Act 1936 ss.36A, 51, 92, 260.

Income Tax - Allowable deductions - Partnership set up to develop herds of exotic cattle - Whether business carried on - Whether deduction allowable for leasing and management fees - Whether a pre-ordained series of transactions involving steps having no commercial purpose - Income Tax Assessment Act 1936 (Cth), ss 51(1), 92(1).

Appeals - Reception of further evidence on appeal from Supreme Court to Federal Court - Discretion of appellate court - Federal Court of Australia Act 1976 (Cth), s. 27.

HEADNOTE

The taxpayer was a member of two partnerships which, for a short time, were engaged in cattle breeding activities.

Held (Per Fisher and Davies JJ. - Neaves J. dissenting): (1) There was nothing sufficiently unusual or exceptional in the way the partnerships were constituted or dissolved, or in the way their activities were carried on, to justify a departure from the trial judge's conclusion that each of the partnerships was carrying on a business.

(2) The purpose for which the outgoings of the partnerships were incurred is a matter for objective determination.

In this respect, the purpose which the taxpayer had in mind in entering into the partnerships is not the relevant consideration.

Magna Alloys and Research Pty Ltd v. Federal Commissioner of Taxation (1980) 49 F.L.R. 183, applied.

(3) Even if all the steps taken by the taxpayer prior and subsequent to the entry into the partnerships were pre-determined or "pre-ordained", each of the steps had a commercial purpose apart from the avoidance of tax. Therefore none of the steps can be disregarded.

Inland Revenue Commissioners v. Burmah Oil Co. (1982) S.T.C. 30 and Furness (Inspector of Taxes) v. Dawson (1984) 1 All E.R. 530, distinguished.

(4) In the exercise of the court's discretion, under s. 27 of the Federal Court of Australia Act 1976 (Cth) to receive further evidence on appeal, the fact that a document was available at the trial but not tendered is a relevant factor.

HEARING

Sydney, 1984, February 20-24; July 19. #DATE 19:7:1984

APPEALS.

Appeals from decisions of the Supreme Court of New South Wales allowing the taxpayer's appeals from the Commissioner's disallowance of the taxpayer's objections to income tax assessments for the year ended 30 June 1976 and 30 June 1977.

D. F. Rofe Q.C. and D. B. McGovern, for the appellant.

D. G. Hill, for the respondent.

Cur. adv. vult.

Solicitor for the appellant: Australian Government Solicitor.

Solicitors for the respondent: Moore & Bevins.

F.P.C.

ORDER

The appeals be dismissed.

The Commissioner of Taxation to pay the respondent's costs.

Appeals dismissed with costs.

JUDGE1

These are two appeals brought by the Commissioner of Taxation ("the Commissioner") against decisions of the Supreme Court of New South Wales in its Administrative Law Division. That Court upheld appeals by Michael John Walker ("the taxpayer") against income tax assessments issued against him by the Commissioner in respect of years of income ending 30 June 1976 and 30 June 1977 and an amended assessment in respect of the latter year.

In his return of income for each of the said years the taxpayer claimed certain deductions against his assessable income which were disallowed by the Commissioner. In the income year ending 30 June 1976 the total of deductions claimed and disallowed which were the subject of objection was $64,024. This amount was comprised of $62,224 claimed under s.92 of the Income Tax Assessment Act 1936 ("the Act") as the taxpayer's individual interest in a partnership loss and $1,800 being interest paid on borrowed monies claimed as deductible under sub.s.51(1) of the Act. The Commissioner in his assessment for that year disallowed the taxpayer's claims, stating in the adjustment sheet that the "share of loss from Wintara Lodge Cattle Breeders" was disallowed as was the "Deduction for interest paid to Cattle Genetics Finance Pty. Ltd. disallowed as private expenditure".

In the year ending 30 June 1977 the taxpayer claimed certain deductions which were disallowed totalling $60,618. This amount comprised $78 being his individual interest in a further loss incurred by the Wintara Lodge Cattle Breeders partnership ("Wintara") and $60,540 being his interest pursuant to s.92 of the Act in the loss incurred by a partnership called Columba Park Charolais Cattle Breeders ("Columba"). These claims were disallowed without explanation by the Commissioner in the adjustment sheet forming part of the assessment to tax of the taxpayer for that year. Subsequently the Commissioner issued an amended assessment for that year which disallowed three further deductions claimed by that taxpayer namely, $3,806 for interest paid to Cord Investments Pty. Ltd. and two amounts totalling $343 being guarantee fees and general expenses.

The taxpayer objected to each of the assessments and the amended assessment to the extent of $4,108, which objections were disallowed by the Commissioner, and the taxpayer elected to request the Commissioner to treat the objections as appeals and to forward them to the Supreme Court of New South Wales. That Court upheld each of the appeals, allowed the objections and remitted the matters to the Commissioner. The trial judge made no reference in his reasons or order to the deductions disallowed by the amended assessment. No question turned during the hearing before the trial judge or on the appeal on the amount of the deductions claimed in each year. The essential question was whether the partnerships were entitled to a deduction of the amount of the partnership losses under the second limb of sub.s.51(1) of the Act as outgoings "necessarily incurred in carrying on a business for the purpose of gaining or producing" assessable income, an issue which the trial Judge determined in favour of the taxpayer. A subsidiary question, which was barely mentioned on the appeal, was the taxpayer's claim to deduct in the year of income ending 30 June 1976 the sum of $1,800 interest paid on borrowed money. The Commissioner did not make seperate submissions either on this aspect of the trial judge's decision to allow the relevant appeals or on the amounts disallowed by the amended assessment, though the amount of $3,806 was referred to in his notice of appeal.

Although the circumstances in which the partnerships, and through them the taxpayer, claim to deduct the outgoings are complex, there was little if any dispute concerning the primary facts as found by the trial judge. The Commissioner essentially challenged the conclusions and the inferences which the trial judge had drawn from those facts. Section 27 of the Federal Court of Australia Act 1976 directs the court on appeal "to have regard to the evidence given in the proceedings out of which the appeal arose" and provides that it has power to draw inferences of fact and to receive further evidence. The authority of Warren v. Coombs and Another (1978-1979) 23 A.L.R. 405 establishes the nature of our task in an appeal of this kind. The majority of the Court (Gibbs, Jacobs and Murphy J.J.) on page 423 said:

"Shortly expressed, the established principles are, we think, that in general an appellate court is in as good a position as the trial judge to decide on the proper inference to be drawn from facts which are undisputed or which having been disputed, are established by the findings of the trial judge. In deciding what is the proper inference to be drawn, the appellate court will give respect and weight to the conclusion of the trial judge, but, once having reached its own conclusion, will not shrink from giving effect to it."

The taxpayer is a medical practitioner who in the years in question was in receipt of substantial income from his professional practice. During this period he became a member of two partnerships, namely Wintara and Columba hereinbefore mentioned. One of the main points for determination in these appeals is whether Wintara was carrying on business during the years of income ending 30 June 1976 and 30 June 1977, and Columba during the year of income ending 30 June 1977. It is necessary to set out, although not in great detail as this has been done by the trial judge, the nature of the alleged business activities conducted by the alleged partnerships and the nature and extent of the taxpayer's involvement in such partnerships. There is little if any dispute on these matters which are essentially established by the primary facts. When I deal with the various grounds of challenge by the Commissioner it will be necessary to consider further facts insofar as they relate to the areas of dispute.

The taxpayers case was that these partnerships were established to exploit in this country the technique of ovum transplant as applied to cattle. This exploitation enabled animals of valuable and exotic European breed, which could not themselves be brought into Australia, to be produced here. The technique accelerated the natural breeding process normally available from a female animal. To this end the progeny born in New Zealand of European cattle were brought from New Zealand to Australia. The technique as applied to the female progeny ("the donors") was to stimulate her ovaries so that she produced more eggs than normal and then to inseminate these eggs artificially or naturally. The fertilised eggs were then removed by operation and transplanted into local cows ("the recipients") which then calved in the ordinary manner. Because as many as 17 fertilised eggs could be obtained from one operation, it is obvious that a better herd could thereby be produced in Australia more quickly and in greater numbers than by conventional breeding. This in brief was the technique which it was contended the partnerships proposed to exploit commercially. The necessary means to this end was to acquire the services, whether by lease or purchase, of donors. The progeny produced in this way were of considerable value and this certainly was the case at the time the partnerships were established.

The exploitation of this technique was initiated independently by a Mr. Brian Maher ("Mr. Maher"), described as a breeder of stud cattle and a property developer, a Mr. Busquet who was a cattle expert and Mr. Lonergan, a veterinary surgeon. It was contended at trial by the Commissioner that Mr. Maher was a "marketer" of tax avoidance schemes, but the trial judge found that the evidence did not support such a contention. He also found that Mr. Egan, an accountant who promoted the partnerships to the taxpayer and was himself a member of Wintara, did not know at any relevant time that Mr. Maher was alleged to be involved in this tax avoidance activity. Mr. Busquet and Mr. Maher visited New Zealand together in 1974 to inspect a herd of cattle. Mr. Lonergan in 1975 visited the United States of America to assess the ovum transplant technique being established there. During 1975 there were many meetings, discussions and seminars in New South Wales on the topic of European cattle and the transplant technique. In 1976 Mr. Busquet visited New Zealand in company this time with a Mr. McIntyre, a partner of Mr. Egan, to watch transplant operations and to inspect the herd of cattle.

The taxpayer was invited to join the Wintara partnership in 1976. He was approached at a social gathering by Mr. Egan who put the proposition to him on the basis that it was a viable commercial enterprise with no reason to doubt its ultimate success. It was proposed that the partnership would lease 6 donors with an entitlement to two operations on each donor which should result in 48 calves to the value of $288,000. The taxpayer was also told that the intention of the enterprise with regard to the calves was that the bulls would be sold and the heifers kept for further breeding. Mr. Egan dealt with the taxpayer's accountant, a Mr. Reid, in respect of financial and taxation aspects of the proposal, though he did tell the taxpayer that a 25% interest in the partnership would cost him about $65,000, which amount would probably be a "tax deduction". He said that an opinion was being obtained to verify that this deduction would be available. In his discussions with Mr. Reid, Mr. Egan placed much emphasis on the tax saving aspects of the proposal, preparing and presenting documents to emphasize these matters. As one of the Commissioner's contentions was that the taxpayer's real interest and prime purpose in entering the partnerships was the promise of tax savings, it will be necessary to consider this aspect later and in greater detail. At about this time Mr. Egan's firm sought and obtained advice, including advice from a Queen's Counsel, that the taxation advantages would be available. The Commissioner attached great significance to these letters of advice.

The taxpayer agreed to become a member of the Wintara partnership and the nature of his involvement can be initially related by reference to the formal documents, all dated 26 April 1976. In the first instance he executed an agreement, described as a partnership agreement, comprising 10 individuals ("the major partners") who contributed 99% of partnership capital and a minor partner, International Genetics Pty. Ltd. which contributed 1% and was a company associated with Mr. Maher. The taxpayer contributed 24.75% of the initial capital of $1,000. The partnership's business was that of cattle breeders and pasturalists, its term was 5 years unless earlier determined and it commenced on its stated date. There was a provision for any partner to give a notice of variation, the consequence of the giving of which was that the minor partner's interest was increased to 50% in return for payment to the major partners of a specified sum of money. As will ultimately become apparent, this sum represented the amount then owing by the major partners on loans made to them to finance further contributions to partnership capital. The agreement further provided that within a specified time following the giving of the notice of variation, a notice of this change of interest should pursuant to s.36A of the Act be lodged with the Commissioner.

The donor heifers, 6 in all, and the necessary number of recipients were to be leased by Wintara from Cattle Genetics Leaseco Pty. Ltd., another company associated with Mr. Maher and to this end the taxpayer as a partner executed a deed of lease. The term of the lease expired 2 months after the last ovum transplant operation, the partnership being entitled to 2 operations on each animal. The trial judge found that there was a guarantee by the lessor that the operations would produce 48 progeny, i.e. a minimum of four fertile eggs per operation. However it is probably more correct to construe the guarantee as being 48 pregnancies rather than 48 live calves. The consideration payable under this lease, which included the rent for the donors and the recipients, was $246,800, due for payment on execution of the lease.

It follows that Wintara was obliged to pay, and did in fact pay, this rental in the year of income ending 30 June 1976. Each major partner contributed further capital to fund this obligation and obtained the money by way of loan from Cattle Genetics Finance Pty. Ltd., another company associated with Mr. Maher. The taxpayer borrowed $64,800 and the terms of the borrowings by him and each of the other major partners were recorded in a deed of loan. Under this document the major partners borowed a total of $259,200 but each was liable only for his separate borrowing. Repayments were to be made by 12 monthly instalments of $10,800 of which the taxpayer's share was $2,700. The balance of $129,600 was repayable either on 31 December 1978 or, if a variation notice under the partnership agreement was given, on the date of that notice or the relevant date as defined in that agreement, whichever be the earlier. The coincidence between the amount of loan repayable at this time and the amount payable by the minor partner on the giving of a notice of variation is readily apparent.

The taxpayer was directly or indirectly involved in 4 further documents which evidence other aspects of the arrangements but which are of lesser overall significance. Each of the major partners was a party to a deed which charged on his interest under the leases and in the partnership assets repayment of his loans. By a deed of guarantee Cattle Genetics Finance Pty. Ltd. guaranteed Cattle Genetics Leasco Pty. Ltd's obligations under the deed of lease. Pursuant to a management agreement Westralian Pastoral Corporation Pty. Ltd. agreed to manage for the partnership 15 Poll Shorthorn Cows hereinafter referred to. Finally Cattle Genetics Leasco Pty. Ltd., the lessor under the abovementioned deed of lease, granted to Wintara an option to purchase the recipient cows for $200 each.

Pursuant to and in accordance with his obligations under the abovementioned documents the taxpayer made the following payments. Having borrowed $64,800 from Cattle Genetics Finance Pty. Ltd. he paid $68,319 to Mr. Egan's firm's trust account. This amount being primarily borrowed monies together with his own funds was applied as follows;

Initial contribution to partnership capital $247.50 Further contributions to partnership capital $62,221.50 Proportion of fees paid under deed of guarantee $1,350.00 Interest on loan from Cattle Genetics Finance $1,800.00 First monthly instalment of loan repayments $2,700.00 $68,319.00

Wintara for its part paid to Cattle Genetics Leaseco Pty. Ltd. $246,800 on 25 May 1976 being the rental under the lease of the donors and recipients and also the fee under the deed of guarantee. In its return of income for the year ending 30 June 1976 Wintara disclosed a partnership loss of $251,412 and it is the taxpayer's individual interest in this loss which in accordance with s.92 of the Act he claimed as an allowable deduction.

That concludes the essential contemporaneous circumstances in which Wintara allegedly made a partnership loss and the taxpayer claimed a deduction of his share of the loss. However it is necessary to relate subsequent happenings of relevance both to Wintara and ultimately Columba.

Prior to 30 June 1976 Wintara acquired some commercial poll shorthorn cattle in Western Australia which appear never to have been put to any business use. The Commissioner used this fact to support his contention that the transactions had no commercial reality. The donor heifers arrived in New South Wales in May and September 1976 but transplant operations did not commence until November or December of that year. The first two heifers operated upon produced an average of 8 fertile eggs each of which 14 were transplanted to recipients. The major partners, including the taxpayer, flew at their own expense to Mudgee in December 1976 to witness the performance of the transplant operations. On 4 April 1977 a second series of operations were performed. By letter dated 29 March 1978 Wintara was advised that 47 recipients had been certified as pregnant and 17 calves had been born alive.

In December 1976 the taxpayer was approached by Mr. Egan to join another partnership. On 4 January 1977 he paid his cheque for $8,754.62 as a contribution to the Columba partnership and thereafter signed a partnership agreement dated 16 March 1977. It bore much similarity to Wintara but had different partners. The minor partner was Cord Securities Pty. Ltd., another company associated with Mr. Maher and the donor heifers were purchased rather than leased. In this instance the taxpayer's involvement was also evidenced by a number of documents all dated 16 March 1977.

The partnership agreement was in terms very similar to Wintara, and upon the giving of a notice of variation thereunder an amount not exceeding $96,000 was payable by Cord Securities Pty. Ltd. as minor partner to increase its interest in the partnership to 50%. Under a deed of management the manager Corlease Pty. Ltd., another Maher company, agreed to super-ovulate and artificially inseminate on two separate occasions the donor heifers and make available recipient cows. The management charges totalled $200,400 and the manager in effect guaranteed 48 pregnancies. In this instance also the major partners each borrowed from an associated company amounts totalling in all $192,800 of which the taxpayer's share was $58,000. These borrowings are evidenced by a deed of loan, the terms of which were in pari materia with the Wintara loan agreement. By a further deed of loan the major partners each borrowed from the same company amounts totalling $27,000 being the purchase price of the 6 donor heifers.

Subsidiary documentation included a charge given by the lenders securing repayments of loan monies. 3 deeds of guarantee, guaranteeing inter alia the performance by the manager of its obligations under the deed of management, and a deed evidencing an agreement of sale and purchase of the donor heifers.

In implementation of these arrangements the taxpayer gave to Mr. Egan's firm a cheque for $8,754.37 which sum together with the sums of $58,000 and $8,156.25 borrowed by the taxpayer under the two deeds of loan were applied as follows:

Share of partnership capital (29.906%) $145.00 Further contribution to partnership capital $68,686.50 Guarantee fee $302.09 Interest on loan of purchase money $1,178.13 Interest on loan a/c management charges $2,628.12 Loan to partnership $145.00 Accounting fees $1,359.37 Share of stamp duty $466.41 $74,910.62

For its part Columba paid $200,400 in management charges, $2,000.00 guarantee fees and $27,000 the price of the 6 donor heifers. In its return of income for the year ending 30 June 1977 Columba claimed a loss of $202,433 and the taxpayer claimed to deduct his individual interest in that loss.

In May 1977 the first series of operations commenced on the Columba donors and two pregnancies were reported. Other operations commenced in February 1978 and continued through until June of that year.

On 1 October 1978 one of the major partners in Wintara gave notice of variation. In consequence the total interest therein of the major parties was reduced to 50%, their individual interests being proportionately reduced, and the interest of the minor partner was increased to 50%. At the same time the minor partner paid the major partners $129,600 which was applied by them in discharging the balance of their loans from Cattle Genetics Finance Pty. Ltd. On 30 November 1978 the Wintara partnership was dissolved in that the minor partner retired therefrom. The major partners remained in partnership. The trial judge found that this dissolution was because of dissatisfaction on the part of the major partners, a matter to be discussed later in these reasons. The relevant notice under s.36A of the Act was given to the Commissioner. At the time of dissolution Wintara had 37 living calves. By agreement between the parties, Wintara retained 24 of such calves, its full entitlement under the deed of lease consequent upon the variation and the minor partner received only 13 calves. The reconstituted Wintara partnership continued its operations thereafter and at the date of hearing had 23 cattle, a further number having been bred and some sold from time to time.

In Columba a notice of variation was given on 14 May 1979 by one of the major partners. The consequences of such notice were similar to these in Wintara including the giving of a s.36A notice. On 5 June 1979 Columba was dissolved when the minor partner retired and the major partners continued in a reconstituted partnership. By agreement the reconstituted partnership retained 24 calves (its entitlement under the partnership agreement) with the minor partner receiving 7, which was less than its entitlement. The donor heifers were sold to the minor partner.

The trial judge generally accepted the evidence of the taxpayer's witnesses whom he found to be truthful and to have acted bona fide. He made no adverse finding on the credit of any of these persons. Generally, he said, they had enthusiasm for and interest in the cattle activities and although they had the tax advantages very much in mind, the attainment of these advantages was not the predominant purpose or motivation for their entering into partnership. They saw commercial advantages in the use of the technology and tax benefits were not the primary reason for undertaking the activities. All of these findings depend very much upon his assessment of the credibility of these persons and we should hesitate to decide otherwise. In my opinion it is idle for this Court, which has not had the advantage of seeing and assessing the witnesses, to speculate whether we would have made such unequivocal findings. The trial judge also made crucial findings on the nature of the partnerships and the purposes for which they were constituted. He found that the partners intended to carry on the activities necessarily involved in the breeding up of a substantial herd of valuable pure bred cattle and to continue breeding therefrom. He held that they intended to sell some of the progeny of the donors and to breed from the balance. This was, he found, contemplated as a long term activity. It is my view that these findings are essentially findings of fact and not inferences or conclusions drawn from such facts. It follows that in the circumstances this Court must accept these findings, particularly as they are so dependent upon the trial judge's favourable view of the credit of the witnesses. Moreover there was no submission by the Commissioner that the partnership arrangements constituted a sham.

It was on these facts that the trial judge was prepared to conclude or infer that the partnerships were conducting commercial activities and thus carrying on business as required by the second limb of sub.s.51(1) of the Act. This is one of the crucial inferences which counsel for the Commissioner challenge before us.

It is necessary to appreciate that the essential question before us is not the same as that in Ferguson's case (Ferguson v Federal Commissioner of Taxation (1979) 26 A.L.R. 307). In that matter the Court had to determine whether the taxpayer was entitled to claim a deduction under sub.s. 51 of the Act. The Full Court of this Court decided, contrary to the decision of the Supreme Court, that he was carrying on business for the purpose of gaining assessable income. In this matter the taxpayer did not and could not claim for the amounts he paid the benefit of a deduction under that sub-section. He claimed to deduct under sub.s.92(1) of the Act his "individual interest in a partnership loss" allegedly incurred in two specified years by Wintara and Columba respectively. It was common ground that he was a member of each of these partnerships, and the question therefore is whether either or both incurred a loss in accordance with s.90. Such a loss arises under the definition of "partnership loss" when the allowable deductions of a partnership exceed its assessable income in the year in question calculated as if the partnership were a taxpayer. Each partnership was entitled to claim deduction of an outgoing if it was under sub.s. 51(1) "necessarily incurred in carrying on a business for the purposes of gaining or producing assessable income". In this regard counsel on both sides primarily directed their attention to the second limb of sub.s.51(1) of the Act. It follows that the finding of the trial judge that each of the partnerships was carrying on a business is of prime importance, and if accepted, in my opinion virtually concludes these appeals.

Counsel for the Commissioner placed considerable emphasis upon his submission that the sole or predominant purpose of each of the partnerships was to achieve tax advantages for its members, and he argued that this was the only inference which could be drawn from the proven facts. For a number of reasons and on a number of grounds he contended that this was an irresistible conclusion which this Court was bound to reach. The essence of his argument was that the trial judge failed to attach sufficient significance to a number of unusual or exceptional features. He said in particular that the whole series of transactions which I have earlier related had been pre-planned in such a way that it was obvious that they were directed to the end of tax advantage, and were contrivances to achieve avoidance of tax. It was always intended, he said, that as soon as the tax advantage had been achieved the partnerships would be dissolved. It followed that no genuine business activity was ever intended.

To my mind the crucial question is whether I am prepared to draw the same inference or arrive at the same conclusion as the trial judge did on the issue whether each of the partnerships was pursuing business activities. To this end it is necessary that I consider the alleged unusual or exceptional features upon which the Commissioner relied.

Notwithstanding the trial judge's finding, which I see as a finding of primary fact, that the gaining of tax advantages was not the predominant purpose or motivation of the partnerships, the Commissioner submitted to the contrary. His argument was that we should be satisfied by a number of matters most of which occurred prior to formal entry into partnership that these advantages were the only matters intended to be pursued. This was made, he said, abundantly clear by the documents presented by Mr. Egan to Mr. Reid, the taxpayer's accountant. These documents, which he called "the blue print" of the proposed transactions, indicated in some detail the monies to be laid out by the taxpayer and the tax advantages which could be gained. In the same way, he attached much significance to a letter written by Mr. Egan's firm to tax consultants in Sydney seeking advice on the tax implications of the scheme and to the consultants' very detailed reply. A consideration of these documents however does not dispose me to disagree with the trial judge's conclusions. Each of them must be considered in context and not in isolation. The essential purpose of the discussions between Mr. Egan and Mr. Reid was to assess the financial and tax implications consequent upon the taxpayer's entry into the scheme and not its commercial efficacy and viability. Likewise the Sydney tax consultants were required to consider only the income tax implications of the arrangements and not their commercial aspects. In giving their advice they adhered to their instructions and were not concerned with the technique of ovum transplant and its commercial viability. The fact that the consultants were only involved in these matters does not mean that they were the only matters of interest to the partners. It is pertinent, on another matter raised by the Commissioner, to note that none of these documents contemplated an early dissolution of either of the partnerships. The blue print in fact lends support to the taxpayer's contention that a continuing operation was proposed.

In identifying alleged unusual or exceptional features the Commissioner pointed to the option in the partnership agreements to vary the interests of the partners and the resultant receipt by the major partners of funds sufficient to repay the balance of their individual borrowings. To my mind this provision, although unusual, is commercially explicable, in that it enabled the minor partner to acquire a greater interest in the partnership assets and the major partners to fund the balance of their borrowings. The fact that it was commercially most highly probable that notice would be given does not mean that such a step was inevitable (See per Stephen J. in Mullens v Federal Commissioner of Taxation (1975-1976) 135 C.L.R. 290 at page 317) and counsel for the respondent suggested circumstances in which it would be in the interests of neither party to give the notice. The fact that subsequent to the exercise of an option a notice was given under s.36A of the Act was in accordance with procedure made available by the Act. It would be unusual or exceptional if such a notice was not given or if the right to give it was expressly denied by the partnership agreement.

Some significance was attached to the fact that the partners (other than the minor partner) each borrowed funds to make additional contributions to partnership capital, thereby enabling the partnership to pay lease or management fees. This was unusual, it was said, because normally a partnership would borrow such funds, and by so doing would obligate the partners jointly and severally for the full amount borrowed. However to my mind it is perfectly understandable that each partner would prefer separately to borrow the funds necessary to make his contribution to partnership capital and thereby incur no liability beyond the amount of his own borrowings.

The trial judge acknowledged that the contracted operations had not all been performed on the donor heifers prior to retirement of the minor partner. He also found however that the major partners terminated arrangements with the promoters in consequence of a disagreement. The Commissioner did not criticise this finding of fact. The major partners acquired the number of progeny to which they were entitled if all operations had been successfully performed. This was more than their proper share of the progeny then produced which confirmed that there was a compromise of claims arising out of the disagreement.

The Commissioner also drew attention to the fact that in Wintara the partners could not have contemplated that the operations would be performed in the first year of income. It was also contended that the taxpayer did not take any real interest in when the operations would be performed. The latter contention does not accord with the evidence and I do not see the former as unusual or of any special significance.

Our attention was also drawn to the purchase of 15 poll shorthorn cattle in Western Australia by Wintara, the fact that the name of a particular associated company was incorrectly inserted in the Wintara lease agreement as the owner of the donors and the confusion in breeding certificates given by the breeders societies. In some circumstances these matters might be seen as significant but they are in my opinion relatively unimportant here. Certainly they do not point irresistibly to any particular conclusion. Likewise the fact that the taxpayer entered into the Columba partnership prior to the birth, but not the transplant, of any progeny in Wintara, the ultimate re-purchase in the Columba partnership of the donor heifers, the replacement of 2 injured animals at the time of retirement of the minor partner in Columba, the discrepancies of the registration of progeny and a refund of funds provided in the Wintara matter by the taxpayer, all these appear to me to be, whether considered together or individually, as relatively unimportant. I see nothing of great significance and certainly nothing which in the context of income tax necessarily carries a sinister implication. They certainly do not persuade me to disagree with the conclusions and inferences of the trial judge.

Counsel for the Commissioner attached much significance to what he called the "pre-ordained dissolution" of the partnerships, which he said supported his contention that once the tax advantages had been achieved, the partnerships had served their purpose. This was put as strongly denying the conclusion that the partnerships were engaged in business activities. I have already drawn attention to the fact that the pre-partnership documents and in particular Mr. Egan's "blue print" do not support a contention that dissolution was pre-ordained. The oral evidence was to the like effect. It was never put to the taxpayer and his witnesses that early dissolution and cessation of activities were proposed either after a notice of variation was given or alternatively when all calves were born. Moreover the fact is that there was at no time prior to trial a complete dissolution of the partnership between the major partners, and certainly no dissolution in the sense that they ceased carrying on activities in common. What in truth happened was that the minor partner acquired a 50% interest in each partnership and then, after a disagreement, retired with the consent of the major partners from Wintara and Columba taking an agreed share of the assets of each partnership. There was as between the major partners a variation in the constitution of the partnership, each remaining partner increasing his share. The major partners, now the sole proprietors, continued partnership activities with their portion of the progeny. It follows that I do not see this "dissolution" as pre-ordained nor do I attach the significance to it that I might if the major partners had wholly terminated the partnership inter se and ceased altogether carrying on the activities previously conducted by Wintara and Columba.

I do not see any of the matters relied upon by the Commissioner as sufficiently unusual or exceptional to persuade me not to accept the trial judge's conclusion that each of the partnerships was carrying on business activities, being activities conducted for the purpose of gaining assessable income. The challenged payments of lease and management fees were clearly directed to this end and there was no suggestion that the trial judge had misconceived the law on this aspect of the matter. He correctly applied the approach of the Full Court in Ferguson's case supra to his findings of fact and his conclusions.

The fact that I am not prepared to differ from the trial judge's finding that the partnerships incurred the relevant outgoings in the course of carrying on business operations does not necessarily require the dismissal of the appeals. There were a number of additional submissions by the Commissioner which require consideration.

The first of these submissions is, in my opinion, substantially concluded by the finding that the partnerships were carrying on businesses. The Commissioner contended that the purpose of each of the relevant outgoings was not the gaining of assessable income but the obtaining of allowable deductions. This matter in my opinion must be considered in the context of the business operations of the partnerships and the purpose for which the partnerships incurred the outgoings. The purpose which the partners had in mind in entering into the partnerships is not the relevant consideration. The purpose for which the outgoings were incurred is a matter for objective determination and on the primary facts found by the trial judge there is little doubt that the tests propounded in Magna Alloys and Research Pty. Ltd. v Federal Commissioner of Taxation (1980-81) 33 A.L.R. 213 at page 235 are satisfied. The outgoings were, viewed objectively, capable of being seen as appropriate to be incurred for the relevant business purpose and were in fact so seen by the partnerships. The Commissioner's contentions under this head must be rejected.

It was also submitted that the outgoings were outgoings of capital or of a capital nature. This contention is answered by the conclusion that the partnerships were carrying on business operations. Pursuant to and in the course of these activities they were taking steps to acquire and build up trading stock. It can not be said that they were acuiring capital assets or enlarging the permanent structures of the partnerships. (See Ferguson's case supra per Bowen C.J. and Franki J. at page 314).

The contention which was more strongly relied upon by the Commissioner was that the reasoning of the House of Lords in W.T. Ramsay v Inland Revenue Commissioners (1982) A.C. 300 was directly applicable to the facts of these matters. If I was inclined to accept this contention, the result would be that the appeals would be allowed and the deductions disallowed on the ground that they were part of a tax avoidance or, more correctly, a tax deferment scheme. On the assumption that the reasoning of their Lordships, based as it is on the different provisions of English revenue legislation, is applicable to the facts of this matter, it is necessary briefly to consider the essential features of that reasoning. Counsel for the Commissioner placed considerable emphasis on the fact that all steps taken by the taxpayer and the other partners prior and subsequent to entry into partnership were pre-determined and "pre-ordained". This may well be the case, and I accept it for the purpose of considering this aspect of the appeals. However such acknowledgement does not conclude the matter. Equally the fact that the partnerships were engaging in business or commercial activities is not of itself an answer. In Inland Revenue Commissioners v Burmah Oil (1982) S.T.C. 30 Lord Diplock described the predetermined steps at page 32 as follows:

"a pre-ordained series of transactions (whether or not they include the achievement of a legitimate commercial end) into which there are essential steps that have no commercial purpose apart from the avoidance of a liability to tax which in the absence of these particular steps would have been payable."

In the subsequent decision of the House of Lords in Furness (Inspector of Taxes) v Dawson (1984) 1 All E.R. 530 Lord Brightman in delivering the principal speech relied upon this formulation by Lord Diplock of the extent and the limits of the decision in Ramsay's case supra. He said at page 543:

"The formulation by Lord Diplock in Burmah expresses the limitations of the Ramsay principle. First, there must be a pre-ordained series of transactions; or, if one likes, one single composite transaction. This composite transaction may or may not include the achievement of a legitimate commercial (i.e. business) end. The composite transaction does, in the instant case; it achieved a sale of the shares in the Operating Companies by the Dawsons to Wood Bastow. It did not in Ramsay. Secondly, there must be steps inserted which have no commercial (business) purpose apart from the avoidance of a liability to tax - not 'no business effect'. If those two ingredients exist, the inserted steps are to be disregarded for fiscal purposes. The court must then look at the end result. Precisely how the end result will be taxed will depend on the terms of the taxing statute sought to be applied.

In the instant case the inserted step was the introduction of Greenjacket as a buyer from the Dawsons and as a seller to Wood Bastow. That inserted step had no business purpose apart from the deferment of tax, although it had a business effect. If the sale had taken place in 1964 before capital gains tax was introduced, there would have been no Greenjacket.

The formulation, therefore, involves two findings of fact, first whether there was a pre-ordained series of transactions, i.e. a single composite transaction. Secondly, whether that transaction contained steps which were inserted without any commercial or business purpose apart from a tax advantage. Those are facts to be found by the Commissioners. They may be primary facts to be found by the Commissioners. They may be primary facts or, more probably, inferences to be drawn from the primary facts. If they are inference, they are nevertheless facts to be found by the Commissioners. Such inferences of fact cannot be disturbed by the court save on Edwards v Bairstow principles."

It is not suggested that the last two sentences represent the present state of the law in this country (Cf Warren v. Coombs and Anor) supra.

In the matters before this Court, counsel for the Commissioner was unable to point, or at least to point clearly, to the steps or steps which on his contention were the steps which had no commercial (business) purpose apart from the avoidance of tax. If he relied upon the notice of variation provided for in each partnership agreement, it can not be said that it had no commercial purpose. It was a step which enabled the minor partner to acquire an equal interest in the particular partnership with the major partners, who for their part would obtain funds necessary to repay their borrowings. The step had a considerable business or commercial purpose, whether perceived from the point of view of the major partners or the minor partner. Moreover it can not be contended that the insertion or the exercise of this right had the purpose of avoiding a liability to tax. Apart from the impact of s.36 of the Act it had no income tax implications whatsoever.

It is my opinion that the trial judge was correct in rejecting the contentions of the Commissioner based upon Ramsay's case.

Counsel for the Commissioner relied, but faintly, on a contention that s.260 had application. This submission was dismissed and in my opinion rightly dismissed by the trial judge. I agree with the course he adopted and his reasoning.

That concludes my consideration of the questions raised on the appeals. During the hearing counsel for the Commissioner sought to introduce additional evidence pursuant to s.27 of the Federal Court of Australia Act 1976. One additional document was received by consent. However the tender of a counsel's opinion in respect to a partnership other than Wintara and Columba which was in existence at the date of the trial was rejected. It was said that reasons for this rejection would be ultimately given. Under s.27 of the Federal Court Act receipt at this stage of further evidence is essentially a matter of discretion and Counsel conceded that he carried the burden of satisfying the Court that it should be exercised in his favour. He referred us to a paragraph in the reasons for judgment of Hutley J.A. in Warr v Santos (1973) 1 N.S.W. L.R. 432 at page 440 as to the way in which the discretion should be exercised. However that judge was there discussing a requirement that such evidence should only be admitted "on special grounds". There is no such restriction in s.27. In this matter the fact that the document was available at trial is a relevant factor, and not only as indicating that so little significance was attached to it that its tender was said to have been overlooked. Moreover there was no suggestion that the document was such that its receipt could have a decisive or even an important bearing on the course of the trial. These factors coincide with the general undesirability of admitting fresh evidence on appeal because as Lord Pearson said in Murphy v Stone Wallwork (Charlton) Ltd (1969) 2 All E.R. 949 at page 959 "there ought to be finality in litigation". For these reasons the tender of counsel's opinion was rejected.

It is my view that the appeals should be dismissed with costs.

JUDGE2

I have had the opportunity of reading the reasons for judgment prepared by Mr Justice Fisher. I am in general agreement with them and with the orders which his Honour proposes. However, I would add a few words of my own.

The crux of the appeals is whether or not, during the subject years, the taxpayer, Michael John Walker, and the persons with whom he was associated in the subject arrangements, carried on business. If they did carry on business, the contentions put by the Commissioner of Taxation against the fiscal effects of the arrangements and of the acts done were unsound, as Mr Justice Fisher has explained. If, however, the taxpayer and the persons with whom he associated in each of the arrangements, described as partnerships, did not carry on business, then the basis for the deductions sought fails.

A business, as distinct from a scheme or undertaking, has continuity, an ongoing character, though it may have quiescent periods. As Bowen CJ and Franki J said in Ferguson v Federal Commissioner of Taxation (1979) 37 FLR 310 at p. 314 "Repetition and regularity of the activities is . . . important." An isolated transaction does not constitute the carrying on of a business (Jones v Leeming (1930) AC 415). But if there is a transaction which, if repeated, would be a transaction in a business and if it is shown to be undertaken with the intent that it should be the first of several transactions in the carrying on of a business, then that first transaction will be a transaction of a business (Re Griffin (1890) 60 LJQB 235).

Therefore, in determining whether or not activities, such as those carried on by the taxpayer and his associates, should be categorised as a business, it has often been necessary to give attention to the plans or intentions of the persons involved.

In Ferguson's case, cited above, the Court had to consider activities of cattle breeding involving the leasing of five heifers for a term of five years and a management agreement providing for the management of the heifers, their joinder to a pure-bred Charolais bull, or their artificial insemination with pure-bred Charolais semen and the production of progeny thereby. Bowen CJ and Franki J took into account the following fact, inter alia, at p. 313,

"The appellant denied that his only interest in the five beasts was in the progeny they could produce during the currency of the lease. They were also 'a stepping stone to my current plans and my plans then to go on the land. I saw them as a very useful stepping stone, a start towards this aim'."

Their Honours concluded, at p. 316,

"The question is what is the proper conclusion, having regard to what he did. In our opinion, the proper conclusion is that his activities in advance of carrying out his ultimate intention were such as to constitute a business. We believe the learned trial judge was wrong in his conclusion. We would answer question (i) in the affirmative."

Fisher J, who was of the same opinion, also referred, at p. 324, to the fact that the taxpayer " . . . proposed ultimately to use this herd for the purpose of producing assessable income by selling the members thereof and their natural increase."

On the other hand, Taxation Board of Review No.1 has held that a taxpayer was not carrying on a business though he had entered into an agreement for the production of pure-bred Charolais cattle. The Board was of the view that it was not the intention of the taxpayer to build up a herd and that the transaction was an isolated transaction not part of a business (see Case R.7, 84 ATC 151).

Thus, a taxpayer's intentions may give an added quality to activities sufficient to constitute those activities a business, though they would not otherwise be so.

It is not to be overlooked, nevertheless, that the plans of the taxpayer for the future are only factors to be taken into account. As Lord Buckmaster said in J. & R. O'Kane & Co. v The Commissioners of Inland Revenue (1922) 12 TC 303 at 347, " . . . the intention of a man cannot be considered as determining what it is that his acts amount to; . . . ". Whatever the taxpayer's plans for the future, he will be held not to be carrying on a business if his business activities are minuscule. See Thomas v Federal Commissioner of Taxation (1972) 46 ALJR 397, in which the growing of pine trees was considered not to have "a significant commercial purpose or character" (p.401) and Case R.1, 84 ATC 101, in which it was held that the taxpayer merely performed acts preparatory to the carrying on of a business. See also Deane & Croker v Federal Commissioner of Taxation (1982) 60 FLR 197, wherein, at p.209, Rogers J said :

"In so far as the second limb of s.51 is concerned, for the self-same reasons I do not consider that the loss was incurred in the course of carrying on the business of share trading. In my view the syndicate and the members thereof were not carrying on that business. They were but a pale imitation of a share trader. The flurry of activity which took place in the last week of June is best characterized by the Bougainville Copper transaction which I have already described. Certainly it is true to say that, through their advisers, members of the syndicate sought to create the appearance of being share traders. I can only say that the application of warpaint to a person will not make one into a warrior."

On the other hand, a business may be carried on though the business is limited because the trading stock is finite in quantity. In Federal Commissioner of Taxation v St. Hubert's Island Pty Limited, (1978) 138 CLR 210, the taxpayer had acquired 110 acres on St Hubert's Island and 100 acres on Riley's Island and had commenced elaborate developmental and sub-divisional works. Mason J, who formed one of the majority, said, at p.231,

"The features to which I have referred stamp the enterprise with the characteristics of a business which had as its object the making of a profit from the ultimate disposition of the land in subdivided form. The land was acquired in 1960 in a series of transactions as the first step in a substantial business undertaking which was to endure for some years. Indeed, it was a long way from completion in 1972 though it is fair to say that the respondent encountered some difficulties which may not have been foreseen. The land was not acquired as an investment and its development for subdivision and sale was not simply the realization of a capital asset. In these circumstances it is impossible to treat the proposed enterprise as one which lacked the characteristics of a business and to say that it constituted no more than an isolated transaction capable of yielding assessable income under s.26(a) rather than s.25(1)."

Likewise, in Federal Commissioner of Taxation v Whitfords Beach Pty Ltd, (1982) 39 ALR 521, the High Court held a company to be carrying on a business when, following a change in the shareholding of the company, it actively engaged in the development and subdivision of its then landholding.

In the present appeals, the taxpayer and his associates carried on, through agents, activities which were adequate to constitute the carrying on of a business, provided that the activities were not self-contained or limited so as properly to be regarded as activities of a scheme or undertaking rather than as activities of a business. The activities were not minuscule. Each association paid more than $200,000 for the leasing or purchase of pure-bred heifers and for management procedures intended to result in each case in the production of 48 pure-bred progeny. Expensive heifers were inseminated and valuable progeny were produced. Those activities plainly could constitute the carrying on of a business provided that they formed part of ongoing activities. On the other hand, the activities were not, in my opinion, of such extent that they should be categorised as the carrying on of a business whatever was the ultimate intention of each association. Had the intent of each association been simply to acquire 48 progeny and to sell those progeny, the activities would, I think, properly be categorised as activities of a scheme or undertaking rather than as a business. The mere entering into of arrangements for the production of 48 valuable progeny does not amount to the carrying on of a business notwithstanding that the arranged procedures of superovulation, artificial insemination and ova transplant are complex and expensive procedures.

In my opinion, therefore, the crucial question for the allowance of the deductions sought was whether or not the associations, which described themselves as partnerships, in fact intended to carry out the object stated in each partnership agreement, namely, "to carry on the business of cattle breeders and pastoralists in Australia . . . ".

Mr D. Rofe, QC, senior counsel for the appellant, put forward cogent reasons why it should be held that the taxpayer and his associates did not intend to continue the associations beyond the production in the case of each partnership of 48 calves. Mr Rofe submitted that it was pre-ordained that each partnership would be dissolved and that the Maher company would cease its association with the other partners.

There is much to be said for Mr Rofe's contentions. Paragraph 14 of each partnership agreement read :

"14. The Partners shall by resolution in writing signed by such number of Partners who are entitled to at least seventy five percentum of profits of the partnership or their deputies appointed as hereinafter provided or by resolution passed by such number of Partners who are entitled to at least seventy five percentum of the profits of the partnership at a meeting of Partners or their deputies as so appointed manage the business of the partnership and no contract shall be entered into, payment made or liability incurred on behalf of the partnership except with the sanction of a resolution of the Partners previously passed or signed as aforesaid."

Thus, apart from the arrangements which were put into force by the documents signed at the same time as the partnership agreements, and which were limited to the production in each case of the 48 calves, no step could be taken in relation to the partnership save with the approval of partners entitled to at least 75% of the profits. Therefore, no further step could be taken without the concurrence of the Maher partner, which, after the anticipated change in partnership interest, had an entitlement to 50% of the profits. No convincing reason has been put forward as to why the Maher companies would have wanted to continue indefinitely the many partnerships which were formed at that time and into two of which the taxpayer entered. Moreover, it does not appear that there ever was a meeting of partners for any planning in conjunction with the Maher partner as to what might be done by the partnership after the calves had been produced.

Mr Rofe further relied upon the fact that the arrangements had a tax avoidance element which required that a Maher company be a member of each partnership during the operation of the planned arrangements but not thereafter.

The tax avoidance element in each arrangement was founded upon the pre-payment of a lease fee by the partnership at a time when the Maher partner had only a 1% interest in the capital and profits of the partnership with the result that the partnership loss resulting from the pre-payment would be distributed under s.92 of the Income Tax Assessment Act 1936 (Cth) as to 99% of the other partners and as to 1% to the Maher company. The partners, other than the Maher company, were thus to obtain the taxation benefit of a 99% interest in a substantial partnership loss, while having the power to recoup half that loss the following year by requiring a capital payment from the Maher partner on a change in partnership interests, on which they were entitled to insist.

Mr Rofe submitted that the partnerships had served their purpose once the taxation deductions had been claimed and the calves had been produced.

However, the learned trial Judge was the judge of the facts. He saw and heard the witnesses and he rejected the view that " . . . when the payments were made there was a sure knowledge that the two partnerships would be wound up and the guaranteed progeny distributed to the major partners" (83 ATC 4,168 at p.4,200) and the view that " . . . as dissolution and distribution in specie was anticipated there was no intention that the progeny would be traded in by the partnerships." (at p.4,200). His Honour concluded that a business was carried on by each partnership and found, at pp.4,186-4,187, inter alia,

" . . . I accept that it was contemplated and expected that the matter would not stop with the production of the minimum forty-eight pure bred animals or whatever the number may have been in excess thereof, following upon the transplants. I accept that there would be subsequent breeding, culling, sales and the like with all the necessary elements that that would involve, and with the intention of profits being distributed amongst the partners. This was not challenged in cross-examination. It is consistent with the above that notwithstanding the circumstance that the minor partner is no longer a member of the partnership, the major partners have continued the partnership, breeding, developing, showing and selling cattle and generally performing the activities of cattle breeders up to the present."

In my opinion, an appeal court could not interfere with those findings. As his Honour said, it was not put in the cross-examination of any witness that it was intended that the partnerships would be dissolved and that the Maher partners would cease to be associated with the other partners. The accountants involved in the formation of the partnerships gave evidence. The taxpayer and some other members of the partnerships gave evidence. The witnesses mentioned their interest in pure-bred cattle and their expectation that ongoing activities would be carried on. Their evidence was accepted.

On the crucial question of fact, the learned trial Judge found for the respondent. The contrary view has now been put most forcibly by senior counsel for the appellant. But it was never put to any witness at the trial.

In my opinion, no ground has been shown upon which an appellate court should interfere with the findings of fact made by the learned trial Judge.

I would dismiss the appeals with costs.

JUDGE3

I have the misfortune to differ from the other members of the Court on the question whether Wintara Lodge Cattle Breeders Partnership ("Wintara") and Columba Park Charolais Cattle Breeders Partnership ("Columba") were during the relevant years of income carrying on business within the meaning of that expression in section 51 of the Income Tax Assessment Act 1936 ("the Act"). In the case of Wintara the relevant years of income are those which ended on 30 June 1976 and 30 June 1977. Only the latter year is relevant in the case of Columba.

In my opinion the respondent has failed to establish that that question should in either case attract an affirmative answer, the onus being upon him to do so by virtue of section 190(b) of the Act. My reasons for reaching this conclusion may be stated shortly. It will be sufficient if I do so in relation to Wintara for, although the circumstances concerning the two partnerships are not identical, the differences are not such as, in my view, to warrant a different conclusion being reached in relation to Columba.

Wintara came into existence on 25 May 1976 pursuant to a deed of partnership bearing that date. As originally constituted it comprised ten natural persons, one of whom was the respondent, and a company called International Genetics Pty. Limited. That company was one of a group of companies that may conveniently be referred to as the Maher group of companies. Another in the group was Cattle Genetics Pty. Limited which owned the herd of donor heifers from which the animals made available to Wintara were selected. Another, Cattle Genetics Leaseco Pty. Limited, provided the necessary services to superovulate and artificially inseminate the donor heifers and to carry out the embryo transplant operations. That company also provided the necessary number of recipient cows and agistment for the donor heifers, the recipient cows and the progeny. A fourth company in the group, Cattle Genetics Finance Pty. Limited, made available by way of loan to each of the natural persons who were partners the moneys necessary to enable those partners to make their respective contributions to the partnership capital so that the enterprise might be carried into effect by the partnership making an advance payment of $246,800 to Cattle Genetics Leaseco Pty. Limited.

The dominant role played in the enterprise by the Maher group of companies is thus readily apparent. Notwithstanding this, however, the natural persons who were partners were in the documentation, somewhat euphemistically, described collectively as "the major partners", International Genetics Pty. Limited being there described as "the minor partner". To describe the individuals who were partners collectively as "the major partners" was correct only in the sense that at the inception of the partnership their respective shares collectively represented a 99 per cent interest therein, the remaining 1 per cent interest being held by International Genetics Pty. Limited. The sole purpose of this arrangement was to enable each of the "major partners" to have the benefit in reduction of his assessable income for income tax purposes of his respective share in virtually the whole of the substantial partnership loss which the arrangements between the parties secured would be disclosed in the partnership accounts as at 30 June 1976.

It was always contemplated and intended, however, that at the latest by 31 December 1978 a variation notice would be given under clause 11 of the partnership deed varying the interests of the partners being natural persons so that their respective shares in the partnership then collectively amounted only to a 50 per cent interest while the share of International Genetics Pty. Limited was increased to a similar percentage. Under the partnership deed one half of the moneys loaned by Cattle Genetics Finance Pty. Limited to the partners other than International Genetics Pty. Limited were repayable on 31 December 1978 or, if the variation notice were given on an earlier date, on that earlier date. The intention of the parties clearly was that upon the variation notice being given each of the partners would be relieved of his obligation to repay one half of the moneys loaned to him and International Genetics Pty. Limited would assume the 50 per cent interest in the partnership that was envisaged as its proper share. The variation notice was in fact given so as to take effect on 1 October 1978 with the consequences to which I have referred.

The dominant role that was envisaged for the Maher group is also reflected in clause 14 of the partnership deed which provided -

"The Partners shall by resolution in writing signed by such number of Partners who are entitled to at least seventy five percentum of profits of the partnership or their deputies appointed as hereinafter provided or by resolution passed by such number of Partners who are entitled to at least seventy five percentum of the profits of the partnership at a meeting of Partners or their deputies as so appointed manage the business of the partnership and no contract shall be entered into, payment made or liability incurred on behalf of the partnership except with the sanction of a resolution of the Partners previously passed or signed as aforesaid."

The result was that, apart from the carrying out of the initial arrangements which had been made with the Maher group for the superovulation and artificial insemination of the donor heifers and the embryo transplant operations, once the notice of variation was given the partnership could embark on no other activities and could take no business decisions without the concurrence of International Genetics Pty. Limited.

Even prior to the giving of the variation notice the involvement of the partners other than International Genetics Pty. Limited in the carrying on of what was said to be a business venture seems to have been minimal. The decisions relating to all aspects of the carrying out of the embryo transplant operations appear to have been made within the Maher group. Wintara was not consulted as to the donor heifers which were to be substituted for those of the original group found to be infertile and the partnership had no say in identifying the sires whose semen was to be used for the artifical insemination of the donor heifers. At best the partnership was informed of the decisions after they had been taken but at least in some instances Wintara was not advised of such decisions until long after the events had occurred. Between 25 May 1976 and 30 June 1978 only two meetings of the partners appear to have been held. Certainly the minutes of only one such meeting are in evidence. The first, in October 1976, of which no minutes were taken was for the purpose of hearing an address by Mr. B. Maher on the progress made in carrying out the embryo transplant operations and on proposals for the formation of other partnerships. The second was held on 28 June 1978 when the giving of the variation notice was discussed.

The activity of Wintara during the relevant years of income did not extend beyond the implementation of the arrangements made with the Maher group on 25 May 1976. The carrying out of that transaction, considered alone, would not in my view warrant the conclusion that Wintara was carrying on a business of cattle breeders and pastoralists as the partnership deed recites the partners had agreed to do. Nor can one look to continuing activity on the part of the partnership as originally constituted for the partnership was dissolved and reconstituted on 30 November 1978. The question is whether the carrying out of the arrangements made on 25 May 1976 was intended as a first step in an ongoing activity having those elements of repetition and regularity which would transmogrify what would otherwise be properly categorised as a scheme or undertaking into the carrying on of a business.

Evidence was given by some of the partners as to their own intentions. Relevant as this evidence is, the critical element is what was the intention of International Genetics Pty. Limited for, as I have indicated, that company was cast in a key role. No evidence was adduced before the Supreme Court as to the plans or intentions of that company and there was no evidence from which it can be inferred that that company intended to continue indefinitely in association with the ten natural persons in a cattle breeding and pastoralist business. In my opinion the learned primary judge was in error in concluding, in the absence of any such evidence, that the respondent had established that during the relevant years of income Wintara was carrying on business within the meaning of section 51 of the Act.

As previously mentioned I am of opinion that there are no features in the case of Columba to warrant a different conclusion being reached in relation to that partnership.

I would, therefore, allow the appeals and restore the assessments.