Jeffrey Nelson and Commissioner of Taxation

[2012] AATA 579

[2012] AATA 579  

Division	TAXATION APPEALS DIVISION
File Number(s)	2011/3312
Re	Jeffrey Nelson
APPLICANT
And	Commissioner of Taxation
RESPONDENT

DECISION

Tribunal	Senior Member Bernard J McCabe
Date	30 August 2012
Place	Brisbane

The decision under review is affirmed.

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Senior Member Bernard J McCabe

CATCHWORDS

TAXATION – deductions – carrying on a primary production business – criteria for the existence of a business – systematic approach to business development – insufficient link between business activities and the production of income – decision affirmed.

LEGISLATION

Income Tax Assessment Act 1997 (Cth) ss 8-1, 995-1, Div 35.

REASONS FOR DECISION

Senior Member Bernard J McCabe

30 August 2012

1. This case turns on a single question: was the taxpayer carrying on a business of primary production during the 2004-2009 years of income? He did not make any income out of the farming operation during this period, but he wants to claim a number of deductions in respect of improvements he made to the property and other expenses he incurred, including the depreciation of assets. The Commissioner of Taxation acknowledges the taxpayer was running a farm alongside his other business activities during the years in question and concedes he did carry out a number of improvements – but the Commissioner insists the operation had not reached the point where it could be characterised as a primary production business. In those circumstances, the Commissioner says the taxpayer’s claims should be disallowed in full.

2. I had the advantage of visiting the taxpayer’s farming operation. He kindly drove me and the Commissioner’s representatives all over his farm, which is located in south-east Queensland, just west of Brisbane. He was able to point out the many improvements he had made to the property (although it is important to keep in mind that not all of the improvements had been completed during the years of income in question). He also explained his plans for the future development of the property. He is an enterprising man, and he has put a good deal of thought into how he might make money out of his small property. But, for reasons I will explain, I am not persuaded the operation had reached the point where it could be said to be a business. He was still in the preparatory stages of the business throughout the years of income in question. That means the objection decision must be affirmed.

   THE OPERATION

3. The taxpayer is the trustee of a family trust. The trust acquired a 500 acre property (approximately 195 ha) in 2002. At that stage, the taxpayer was working as a building inspector for a local council. He said in his evidence that it was always his dream to own his own property. He says he entered into a tenancy arrangement with the trust: he claims he is renting the property. I understand he has claimed deductions in respect of the rent in a number of the years of income. Interesting questions have arisen about whether the taxpayer is entitled to the income generated from aspects of the property, like trees, which would ordinarily flow to the property owner. Happily, I do not need to resolve that issue at this point. I need only focus on whether the taxpayer was involved in the conduct of a business.

4. Before I address the facts, I should say something about the relevant law. It will be helpful to keep that in mind as I attempt to characterise the different activities he undertook, or proposed undertaking.

5. The starting point of the analysis is the general deduction provision in s 8-1 of the Income Tax Assessment Act 1997 (the Act). Relevantly, that provision enables a taxpayer to deduct losses or outgoings “necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income”. Section 995-1 of the Act defines the word business to include “any profession, trade, employment, vocation or calling, but does not include occupation as an employee”. Section 995-1 goes on to confirm one carries on a primary production business if one carries on a business of:

   (a)  cultivating or propagating plants, fungi or their products or parts (including seeds, spores, bulbs and similar things), in any physical environment; or

   (b)  maintaining animals for the purpose of selling them or their bodily produce (including natural increase); or

   (c)  manufacturing dairy produce from raw material that you produced; or

   (d)  conducting operations relating directly to taking or catching fish, turtles, dugong, bêche-de-mer, crustaceans or aquatic molluscs; or

   (e)  conducting operations relating directly to taking or culturing pearls or pearl shell; or

   (f)  planting or tending trees in a plantation or forest that are intended to be felled; or

   (g)  felling trees in a plantation or forest; or

   (h)  transporting trees, or parts of trees, that you felled in a plantation or forest to the place:

   (i)  where they are first to be milled or processed; or

   (ii)  from which they are to be transported to the place where they are first to be milled or processed.

6. For present purposes, the taxpayer cannot succeed in his claim in respect of the losses he sustained unless he is carrying on a business. If he were carrying on a primary production business, a question would arise over whether the losses should be deferred pursuant to Div 35 of the Act. 

7. There is no fixed definition of what constitutes a business. Whether an operation is a business is a question of fact to be assessed in each case. The Commissioner’s ruling (TR97/11) provides some useful guidance on the sort of indicia one would expect to see in a primary production business. The ruling reviews a number of the relevant authorities and explains (at [26]):

   26. From the judgments it is clear that the relevant indicators of whether a business of primary production is being carried on by a taxpayer are:

   *  does the activity have a significant commercial purpose or character?

   *  does the taxpayer have more than a mere intention to engage in business?

   *  is there an intention to make a profit or a genuine belief that a profit will be made? Will the activity be profitable?

   *  is there repetition and regularity in the activity? i.e., how often is the activity engaged in? How much time does the taxpayer spend on the activity?

   *  is the activity of the same kind and carried on in a similar way to that of the ordinary trade?

   *  is the activity organised in a businesslike manner?

   *  what is the size or scale of the activity?

   *  is the activity better described as a hobby, a form of recreation or a sporting activity?

8. That explanation of the approach to characterisation is fair enough, although one must avoid using the list of indicia as some sort of rigid check-list.

9. The taxpayer says he has planned, conducted or commenced up to 14 different business activities on the property during the years of income in question. None of those activities produced any income for the taxpayer in those years.  The list of activities which was distilled by the respondent includes:

   (a)Aquaculture: the taxpayer wants to build a dam to stock fish for sale to restaurants. He has been researching fish species, talking to local restaurants, consulting experts and visiting other fisheries. He has drawn up some plans and identified a site for the dam and done some preparation work – but the dam has not been built yet.

   (b)Cropping: the taxpayer has prepared the pastures for cropping and improved fences and other structures. He tested a number of crops during the years of income, but none were a success. He still has not identified an appropriate crop, although he remains positive – and he knows more about the potential as a result of his experimentation.

   (c)Free-range pigs: the taxpayer has investigated the establishment of a free-range piggery. He has done extensive research and spoken with a number of people in the industry. He has prepared plans and done calculations, but he still has not obtained the finance necessary to execute the proposal even several years after the years of income in question.

   (d)Growing timber for fencing: the taxpayer has harvested some timber for fencing purposes. He also planted seedlings to grow more timber during the years of income but most of those seedlings were eaten by wildlife. He has been planning to plant more seedlings and commence a timber growing operation, and cleared an area of the property to that end during the years of income in question.

   (e)Growing timber for milling: the same can be said of the taxpayer’s efforts to establish a timber milling operation. He has taken some limited steps towards establishing a forest. He had not acquired a mill. He did some research and talked to some people about the potential and he concluded from his experience in the building industry that there might be a market for the type of timber he could produce in years to come.

   (f)Storing and breeding cattle: a number of cattle have been agisted on the property for some time. Fences have been built and some other improvements have been made to this end. The taxpayer has been looking into establishing his own herd. He has been talking to experts, drawing up plans, and identifying appropriate sites for dams and other improvements. He has not yet obtained finance to commence the operation.

   (g)Conducting a nursery and producing seedlings and plants for cultivation: the taxpayer established a shade house and nursery (two, in fact: the first was destroyed in a flood in 2004). He has cultivated a number of seedlings and plants for use on the farm: he has a small area near the accommodation block where he has tested different species. Most of the seedlings in the relevant years perished. The taxpayer has been researching and consulting experts about the way forward.

   (h)Producing seedlings and plants for sale: the same can be said of the efforts to produce plants and seedlings for sale. None have yet been sold.

   (i)Growing an orchard: the taxpayer has identified an area on the property that will be used for an orchard. He has commenced clearing and preparing the area, and he has worked on the dam that will supply water. He has done extensive calculations and planning for the irrigation system, investigated machinery and consulted experts and potential customers. He has not yet identified suitable fruit trees, but he has been experimenting.

   (j)Poultry: the taxpayer has a relatively small number of chickens in a small hen house. He acquired an incubator. He proposes establishing a commercial operation but so far the hens only produce enough eggs for private consumption. He anticipates he will be able to produce more eggs and has been researching the business. He does not yet have enough chickens to justify obtaining a permit from the local council to conduct a poultry operation.

   (k)Building cabins for accommodation on the property: the taxpayer showed me the sites on which he proposed establishing some cabins which would be built from timber harvested on the property. The sites are very pleasant and it is easy to see how such an accommodation business might flourish. He has conducted some research into the opportunity and drawn up plans. He does not have any finance to undertake the construction of the cabins.

   (l)Manufacturing relocatable cabins out of local timber: the same can be said of the plan to produce cabins for sale. The proposal is still at the investigation stage.

   (m)Meat processing: the taxpayer has been researching the establishment of a meat processing operation. He has drawn up some plans and sought advice but he has not yet obtained the necessary approvals or finance.

   (n)Producing stock feed: the taxpayer is considering producing stock feed for sale. His research so far suggests corn and lucerne might be the best crops but his experience to date has not been good: the test crops he sowed all failed.

10. I will say at once I am satisfied the taxpayer’s operation meets a number of the criteria referred to in TR97/11. He has carefully researched the various business activities. He has identified a great many opportunities and he has assessed those opportunities in a careful and informed way. He has prepared extensive business plans. He keeps meticulous books and records. He has a well-stocked library of resource material. There is evidence of a systematic approach: he has conducted a number of experiments in relation to crops, for example, which have been unsuccessful – but which he says have yielded valuable lessons about what crops are worth cultivating. He has acquired a good deal of machinery, although he is constrained by his financial resources. The operation is small, but not necessarily unsustainable. I also think he is genuinely committed to making a profit out of the farming operation in due course. I accept he does not see the property as a mere hobby or lifestyle. He has obviously worked hard on the property and he and his family have made many sacrifices to get the property to its current state.

11. I accept the taxpayer has made a number of improvements to the property. He has cleared parts of the property and laid down or improved vehicular access routes. He has built fences out of harvested timber. He has planted trees in test orchards and established farm outbuildings, including a hen house and nursery. He has installed irrigation pipes. He has a large machinery shed adjoining the residential accommodation he shares with his family. All of these things are consistent with the operation being characterised as a business.

12. And yet I am not satisfied the taxpayer was engaged in a business during the years of income in question. None of the activities identified by the taxpayer had advanced much beyond the planning stage. Some of the activities had not even gone that far: they remained glimmers in the taxpayer’s eye during the period in question. He has certainly put a lot of thought into the various activities he would like to undertake, and he has taken some steps towards achieving those plans. He may yet manage to make a success of some of the proposals, but the link between the activities he has already undertaken and the production of income at some future point is too tenuous during the years of income in question.

    CONCLUSION

13. The taxpayer is an honest, enterprising and hard-working man. He has lots of good ideas about how to make his farm turn a profit. One wishes him every success in that quest. But his operation had not reached the point during the years of income where it could properly be described as a business in the relevant sense. In those circumstances, the objection decision under review must be affirmed.

I certify that the preceding 13 (thirteen) paragraphs are a true copy of the reasons for the decision herein of Senior Member Bernard J McCabe.

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Associate

Dated 30 August 2012

Date(s) of hearing	26 June 2012
Applicant	Self-represented
Counsel for the Respondent	Mr Ballans