Penglase; Secretary, Department of Agriculture, Fisheries and Forestry and

[2023] AATA 1324

Penglase; Secretary, Department of Agriculture, Fisheries and Forestry and [2023] AATA 1324 (24 May 2023)

Division:GENERAL DIVISION

File Number:          2022/8813

Re:Secretary, Department of Agriculture, Fisheries and Forestry  

APPLICANT

AndRodney Penglase

RESPONDENT

DECISION

Tribunal:Dr L Bygrave, Member

Date:24 May 2023

Place:Melbourne

The Tribunal sets aside the decision under review and, in substitution, decides that Mr Rodney Penglase is not eligible for farm household allowance because he does not satisfy paragraphs 8(b) and 8(c) of the Farm Household Support Act 2014 (Cth).

.......................[SGD]...........................

Dr L Bygrave, Member

Catchwords

SOCIAL SECURITY – farm household allowance – whether Respondent is a farmer – whether Respondent contributes a significant part of their labour and capital to a farm enterprise – whether the Respondent’s farm enterprise has a significant commercial purpose or character – decision under review set aside

Legislation

Farm Household Support Act 2014 (Cth)

Farm Household Support Secretary’s Rule 2014 (Cth)

Cases

Inglis v Federal Commissioner of Taxation [1979] FCA 106

Secondary Materials

Explanatory Memorandum, Farm Household Support Act 2014 (Cth)
Farm Household Allowance guidelines issued by the Department of Agriculture, Water and the Environment in May 2021

Taxation Ruling 97/11

REASONS FOR DECISION

Dr L Bygrave, Member

24 May 2023

INTRODUCTION

1. Farm household allowance is legislated in the Farm Household Support Act 2014 (Cth) (the FHS Act); it aligns with and notionally modifies social security legislation including in relation to qualification requirements, payability settings and the reciprocal obligations framework. The object of farm household allowance, as set out in section 3 of the FHS Act, is to improve the financial situation of farmers who need financial assistance: the allowance can be paid for up to four cumulative years within a 10-year period, and funding is provided for farmers to ‘engage in certain activities’ and ‘obtain a farm financial assessment’. The purpose of paying farm household allowance over an extended period is to provide farmers ‘sufficient time to develop strategies for self-reliance and create an incentive to make significant business decisions where the farm enterprise is unsustainable’.[1]

   [1] Farm Household Allowance guidelines, page 2.

2. This matter is about whether the Respondent, Mr Rodney Penglase, meets the qualification criteria for farm household allowance as set out in the FHS Act.

3. Mr Penglase made a claim for farm household allowance on 10 March 2022 in which he declared the ‘[p]rimary production of the farm enterprise’ is ‘beef’.[2]

   [2] Exhibit T-T6, 29.

4. This claim was refused by Services Australia, both initially and on review, and Mr Penglase subsequently applied for review to the Social Services and Child Support Division (AAT1) of the Administrative Appeals Tribunal (the Tribunal). The AAT1 decided on 14 September 2022 that Mr Penglase qualified for farm household allowance.

5. On 21 October 2022, the Secretary, Department of Agriculture, Fisheries and Forestry (the Secretary) lodged an application for review of the AAT1 decision with the General Division of the Tribunal.

6. The matter was heard in Melbourne on 26 April 2023. Mr Penglase had legal representation; he appeared at the hearing and gave oral evidence in person.

   LEGISLATION

7. The qualification criteria for farm household allowance are set out in section 8 of the FHS Act, which relevantly states:

   8 Qualification of farmers for farm household allowance

   A person is qualified for farm household allowance for a period if throughout the period:

   (a)  the person is a farmer; and

   (b)  the person contributes a significant part of his or her labour and capital to a farm enterprise; and

   (c)  the farm enterprise has a significant commercial purpose or character; and

   …

   Note 1: For paragraph (b), see section 11 if a person is exempt from the activity test under section 31 (temporary incapacity). …

8. Subsection 5(1) of the FHS Act provides the following definitions:

   “farmer” means an individual who:

   (a)  has a right or interest in land; and

   (b)  uses the land wholly or mainly for the purposes of a farm enterprise.

   “farm enterprise” means an enterprise carried on within any of the agricultural, horticultural, pastoral, apicultural or aquacultural industries.

   [emphasis in original]

9. Policy guidance relating to the qualification for and payment of farm household allowance is also set out in the Farm Household Allowance guidelines (FHA guidelines) issued by the Department of Agriculture, Water and the Environment in May 2021.

   CONSIDERATION

10. The issue for determination by the Tribunal is whether Mr Penglase qualifies for farm household allowance in accordance with section 8 of the FHS Act. The Secretary and the Respondent agree that the only issues in dispute are whether:

    (a)Mr Penglase is a farmer as defined in subsection 5(1) of the FHS Act;

    (b)Mr Penglase contributes a significant part of his labour and capital to a farm enterprise; and

    (c)the farm enterprise has a significant commercial purpose or character.

    Issue – is Mr Penglase a farmer as defined in subsection 5(1) of the FHS Act?

11. The terms, ‘farmer’ and ‘farm enterprise’, are defined in subsection 5(1) of the FHS Act as set out in paragraph 8 above. This is reiterated in the FHA guidelines, which state that the ‘definition of a “farmer” captures individuals who have a right or interest in land used for the purposes of a farm enterprise’.[3] The guidelines clarify that the farm enterprise is ‘the business associated with the farmland’, which is ‘distinct from the farmland’.[4]

    [3] Farm Household Allowance guidelines, part 2.1.

    [4] Farm Household Allowance guidelines, part 2.1.2.

12. Mr Penglase owns two properties:[5] property 1 comprises ‘200 acres of flat and undulating land surrounding [his] house’; and property 2 (near to but not adjoining property 1) is 300 acres of ‘mostly flat low-lying land’ with water available from four dams.[6] I am satisfied that Mr Penglase has a ‘right or interest in land’ through his ownership of these properties.

    [5] Exhibits T-T24 and T-T25, 68-69.

    [6] Exhibit T-T31.1, 81.

13. I now turn to considering whether Mr Penglase’s properties are ‘wholly or mainly’ used for the purpose of a farm enterprise carried on within any of the agricultural, horticultural, pastoral, apicultural or aquacultural industries. Relevant to Mr Penglase, the FHA guidelines note that a farm enterprise can involve activities carried on in the agricultural industry such as the ‘cultivation or propagation of plants’ and/or the ‘maintenance of animals for the purpose of selling them or their bodily produce’.[7]

    [7] Farm Household Allowance guidelines, part 2.1.2.

14. Mr Penglase gave evidence that his grandparents settled in the area of his properties prior to 1914. From the time of his childhood, he was taught farm skills by his father and has farmed the properties – primarily cattle farming but also growing pasture hay – since his father died in 1988. Mr Penglase said that cattle farming was his main income from 1998 to 2003, but he had to sell his cattle herd in 2003 due to drought.

15. Since 2004, Mr Penglase has used his properties for cattle agistment and to produce farm fodder (for hay and/or silage). The extent to which Mr Penglase has been able to offer cattle agistment and produce fodder on his properties from 2004 to the present has varied substantially depending on seasons and droughts. Mr Penglase has also worked ‘off farm’ on a casual basis as a driver for a fertilizer company and a concreting company since about 2009 to supplement his farm income from his properties; this was in part to ensure he had a secure stream of income to repay a bank loan that he finalised in 2021.

16. In his claim for farm household allowance, Mr Penglase set out that he intends to ‘rebuild [his] cattle herd back to 100 breeders’.[8] A Farm Business Plan dated 16 May 2022 outlined Mr Penglase’s properties and assets, and noted that he ‘intends to resume breeding, raising and selling Hereford cattle’ up to a ‘safe carrying capacity’ of 150 breeders.[9] Mr Penglase told the Tribunal that he has not yet commenced the process to rebuild his cattle herd: he has spoken to the bank about borrowing $80,000 but has not made a formal loan application (or received loan approval); and he has spoken with a livestock agent but not purchased any cattle. He said he is currently waiting for cattle prices to decline to a ‘satisfactory point’ and is building savings to approach the bank and to have money to ‘last 12 to 24 months’.

    [8] Exhibit T-T6, 32.

    [9] Exhibit T-T31.1, 81.

17. The Secretary submitted that Mr Penglase is not a farmer for the purpose of the FHS Act ‘because agistment is not an activity of a “farm enterprise”’.[10] The Secretary referred to the FHA guidelines that distinguish between a ‘farm enterprise’ and a ‘directly related business’ and refers to ‘income from agistment’ as an example of a ‘directly related business’.[11] The Secretary further noted the FHA guidelines describes ‘directly related businesses’ as:

    A business is directly related to a farm enterprise if the operation of both businesses relies to a large extent on the use of shared equipment or other shared physical assets to generate income. There must be sufficient association with the farm enterprise and the directly related business.

    Examples for directly related businesses

    Example 1: The farm enterprise operates on a property and a spare paddock is leased out to another person/farm enterprise to agist sheep. The agistment business is directly related to the farm enterprise.[12]

    [emphasis added]

    [10] Statement of Facts, Issues and Contentions of the Applicant, 23 February 2023, paragraph 18.

    [11] Farm Household Allowance guidelines, part 14.1.1.

    [12] Farm Household Allowance guidelines, part 16.2.1.

18. Mr Penglase provided detailed written and oral evidence to the Tribunal about the agistment of cattle on his properties. He said that cattle agistment on his properties involves him monitoring the cattle daily to ensure their access to feed and water, rotating the cattle regularly between paddocks, assisting with drenching and weaning calves, and mustering the cattle. Mr Penglase stated that offering his properties for cattle agistment has also meant that he remains ‘actively involved in maintaining [his] pasture and water for the intended purpose of cattle breeding’.[13] This includes the repair and maintenance of fences, managing native animals on the properties, enlarging dams during periods of drought, servicing and maintaining farm machinery, undertaking weed control and slashing firebreaks.

    [13] Exhibit HB, 208.

19. Based on this evidence, I accept that the agistment of cattle as part of Mr Penglase’s current farm enterprise involves substantially more than him simply leasing his properties to another person to agist their animals. In particular, I am satisfied that it includes the use of shared equipment and assets, and the maintenance and development of his properties through activities such as sowing pasture, ensuring water storage and maintaining fences.

20. Mr Penglase also provided extensive written and oral evidence about producing fodder on his properties. He outlined details about the clover crops he has sowed, fertilizing practices, and the processes of cutting, making and storing hay and silage. Mr Penglase filed a summary of his hay sales from 2005 to 2017: he told the Tribunal he last produced hay in 2020 and explained that he did not produce hay in 2017–2019 because of drought and was unable to make hay in 2021–2022 because he was unwell.

21. On balance, I find that Mr Penglase operates a farm enterprise in the agricultural industry. I am satisfied that Mr Penglase is a farmer for the purpose of paragraph 8(a) of the FHS Act because he owns land that he mainly uses for the purpose of an enterprise within the agricultural industry.

    Issue – does Mr Penglase contribute a significant part of his labour and capital to a farm enterprise?

22. The Explanatory Memorandum to the Farm Household Support Bill 2014 at section 8 states:

    The term significant as it relates to the labour and capital test is intentionally broad and should be interpreted as a relative measure of a person’s capacity to contribute labour and capital.

    [emphasis added]

23. I further note that the term, ‘significant’, is not defined in the FHS Act or the FHA guidelines, and so attribute the ordinary meaning to the term. The Oxford Dictionary defines ‘significant’ as ‘large or important enough to have an effect or to be noticed’.

24. The FHA guidelines state that the assessment for a person to contribute significant labour and capital should happen on ‘a case-by-case basis according to the current circumstances that the individual is subject to’.[14] The guidelines acknowledge that farmers may seek opportunities for off-farm employment to ‘diversify their operations and spread their risk’.[15]

    [14] Farm Household Allowance guidelines, part 2.2.

    [15] Farm Household Allowance guidelines, part 2.2.

25. In assessing the labour a person contributes to a farm enterprise, the FHA guidelines state that the labour should be ‘both significant to the individual and to the farm enterprise’, and an assessment should examine and compare the farmer’s time working the farm enterprise with his off-farm employment.[16] There should also be consideration about whether the off-farm work is ‘sporadic or episodic and how it works around the requirements of the farm’.[17]

    [16] Farm Household Allowance guidelines, part 2.2.2.

    [17] Farm Household Allowance guidelines, part 2.2.2.

26. Mr Penglase gave evidence about the hours of work he undertakes on his properties in relation to cattle agistment and fodder production, and the hours he works off-farm. I accept this changes each year due to seasons and droughts, and the need to retain some stability in his income through off-farm employment. I also note that Mr Penglase’s hours of work reduced significantly due to his ill health from December 2021 to about March 2023.

27. A Farm Business Plan dated 16 May 2022 stated that Mr Penglase worked 35–40 hours per week on his properties during ‘normal operations’ (this includes ‘administration, book-keeping, animal husbandry, pasture rotation, repairs, maintenance, and other necessary farming operational duties, such as weed control’) but his hours of work reduced to ‘20 hours of maintenance per week’ after his ‘health scare of December 2021’.[18]  

    [18] Exhibit T-T31.1, 82.

28. Mr Penglase provided copies of his income tax returns for the 2020–2021 and 2021–2022 financial years, which showed his primary income was from off-farm employment as a truck driver and he received business income (and had business expenses) from cattle agistment (described as ‘beef cattle farming’).[19] I note that in both financial years, Mr Penglase’s off-farm income exceeded any net income he received from cattle agistment. Mr Penglase told the Tribunal that, based on his off-farm income in his tax returns, he was employed off-farm for about 25 hours per week in 2020–2021 and about 36 hours per week in the period from July to December 2021.

    [19] Exhibit T-T2 and HB-R2.2.

29. In his written and oral evidence, Mr Penglase said that he became unwell in December 2021 and subsequently reduced his hours working on his properties and off-farm. He told the Tribunal that, due to his ill health, he was only able to manage about 12 hours a week working on his properties from December 2021 to March 2023. He said he has now resumed off-farm employment on a part-time casual basis for four to six hours a day, two to three days a week.

30. In view of Mr Penglase’s ill health from December 2021 to March 2023, the parties made submissions about whether the provisions of ‘temporary illness or injury’ apply to his circumstances. The FHA guidelines state:

    Temporary illness or injury

    Where a farmer is incapacitated by a temporary illness or injury which results in an exemption from the activity test, they will be taken to contribute a significant part of their labour to a farm enterprise if, immediately prior to the temporary illness or injury, they had been contributing a significant part of their labour to a farm enterprise.[20]

    [20] Farm Household Allowance guidelines, part 2.2.2.

31. Note 1 in section 8 of the FHS Act refers to ‘section 11 if a person is exempt from the activity test under section 31 (temporary incapacity)’. Section 11 of the FHS Act states that persons with a ‘temporary incapacity exemption may be taken to meet the labour requirement’, and section 31 sets out the requirements for exemption from the activity test due to temporary incapacity. Notably, paragraph 31(1)(e) of the FHS Act requires the provision of a certificate from a medical practitioner that sets out a diagnosis and a prognosis of the person’s medical condition, states the person ‘is incapacitated and cannot undertake any activities for the purposes of the activity test for more than 8 hours a week’, and identifies ‘the period for which the person is incapacitated’.

32. I note that Mr Penglase has provided no medical evidence to the Tribunal. At the hearing, he said that his illness appeared to be related to asthma/ a respiratory condition and medical investigations are ongoing. However, he said his health has improved since March 2023.

33. In view of the extended period of time (14 months) and the absence of any medical evidence before the Tribunal as required by section 31 of the FHS Act, I cannot find the provisions of temporary illness or injury apply to Mr Penglase’s circumstances.

34. The documentary evidence about the number of hours Mr Penglase works on his properties varied. I prefer the oral evidence of Mr Penglase, which is consistent with his tax returns for the 2020–2021 and 2021–2022 financial years.

35. Mr Penglase participated in off-farm employment for 25 hours a week in the period from July 2020 to June 2021 and for 36 hours a week from July to December 2021. I cannot accept that Mr Penglase contributes a significant part of his labour to his farm enterprise in circumstances where he was consistently working off-farm more than three days a week in the 2020–2021 financial year and approximately five days a week from July to December 2021. I also find these constant and regular hours of off-farm employment cannot be described as sporadic or episodic. Rather, it is my view that Mr Penglase’s off-farm employment is appropriately characterised as providing him with a reliable, low-risk stream of income. I accept this is an understandably attractive option in view of the financial risks associated with relying solely on income from a farm enterprise.

36. I now consider whether Mr Penglase contributes a significant part of his capital to a farm enterprise. The FHA guidelines outline the ‘purpose of the capital qualification requirement is to exclude individuals who meet the definition of a farmer but who do not have a significant financial investment in the farm enterprise’ and notes the assessment of capital examines only the person’s ‘contributions of capital to the farm enterprise’.[21]

    [21] Farm Household Allowance guidelines, part 2.2.3.

37. Mr Penglase’s financial position is set out in a Farm Business Plan dated 16 May 2022 that lists his assets of ‘farmland and buildings’ and ‘plant, machinery and vehicles’ valued at over $1.7 million and outlines a proposed bank loan of $80,000.[22]

    [22] Exhibit T-T31.1, 82-83.

38. As I set out in paragraph 16 above, Mr Penglase set out his intention to rebuild his cattle herd in a claim for farm household allowance and a Farm Business Plan. While he has not commenced this process, either in relation to obtaining a bank loan or purchasing cattle, I have had regard to Mr Penglase’s ownership of the properties and associated farm assets. Based on the value of these assets, I am satisfied he contributes a significant part of his capital to a farm enterprise.

1. Overall, I am not satisfied that Mr Penglase contributes a significant part of his labour and capital to a farm enterprise as required by paragraph 8(b) of the FHS Act because I do not find that he contributes a significant part of his labour to a farm enterprise.

   Issue – does the farm enterprise have a significant commercial purpose or character?

2. The FHA guidelines refer to the Farm Household Support Secretary’s Rule 2014 (Cth) (the Secretary’s Rule) and outline the ‘set of characteristics (also used by the ATO)’ that need to be considered to determine whether a farm enterprise meets the ‘commerciality test’.[23] Section 5 of the Secretary’s Rule lists the following matters that must be taken into account when determining whether a farm enterprise has a significant commercial purpose or character for the purpose of paragraph 8(c) of the FHS Act:

   ·whether a business plan has been drawn up for the farm enterprise;

   ·if the farmer is not an expert in respect of the farm enterprise, whether relevant expert advice has been sought or relevant technical literature has been obtained about the farm enterprise;

   ·whether it has been established that the land used for the farm enterprise is suitable, including by analysing soil and water samples;

   ·whether the person has considered if there is a commercial market for the farm enterprise, investigated the capital requirements of the farm enterprise, conducted research into the farm enterprise confirming that profits can be expected and the size and scale of the farm enterprise is sufficient for a commercial enterprise;

   ·whether legal requirements to operate the farm enterprise on a commercial basis have been complied with; and

   ·whether there is an intention to make a profit in respect of the farm enterprise and a reasonable belief that the farm enterprise is likely to generate a profit.

   [23] Farm Household Allowance guidelines, part 2.3.

3. The FHA guidelines note these factors are informed by Taxation Ruling 97/11 (TR 97//11), which considers available case law and the factors that contribute to someone carrying on a business of primary production. The guidelines further outline that ‘consideration may also be given to agricultural value indicators and the farm enterprise’s turnover’ in assessing whether a farm enterprise has a significant commercial character: these include agricultural value, turnover, estimated value of agricultural operations, goods and services tax and productivity.[24]

   [24] Farm Household Allowance guidelines, part 2.3.2.

4. TR 97/11 sets out the relevance of a business plan to establish that a person is carrying on a business of primary production and recommends the ‘basic elements of the business plan’ should include information about:

   ·a description of the business;

   ·the markets to which the person proposes to sell and realistic estimates of quantity and volume of sales;

   ·expected income from the business activity;

   ·research conducted by the person and information about the property on which the business is conducted; and

   ·information about expected expenses and capital outlays, and how the person proposes to pay for the expenses and capital outlays.[25]

   [25] Australian Taxation Office, Taxation Ruling 97/11. Income Tax: am I carrying on a business of primary production? 110-111.

5. Mr Penglase has produced a Farm Business Plan dated 16 May 2022 that outlines:

   ·his current situation (including his ill health);

   ·a physical description of his properties and current activities of cattle agistment and fodder production;

   ·the value of his current assets of ‘farmland and buildings’ and ‘plant, machinery and vehicles’, and a proposed bank loan;

   ·his financial performance history including income from cattle agistment and off-farm work;

   ·his business performance and a ‘SWOT’ analysis;

   ·his business strategy and goal to ‘return his farm to full production’, that is, ‘fully stocked with breeding Hereford cows’;

   ·general risk management strategies; and

   ·financial information including a proposed loan and security.[26]

   [26] Exhibit T-T31.1, 76-94.

6. In reviewing the Farm Business Plan dated 16 May 2022, I do not consider that it addresses in any substantial manner the matters outlined in section 5 of the Secretary’s Rule that must be taken into account when determining whether a farm enterprise has a significant commercial purpose or the basic elements of a business plan recommended in TR 97/11. In particular, I find there is no or insufficient information about the commercial market for the farm enterprise, the capital requirements of the farm enterprise, whether profits can be expected from the farm enterprise, and whether the size and scale of the farm enterprise is sufficient for a commercial enterprise and whether it is likely to make a profit.

7. There is also a substantial barrier to any assessment about the farm enterprise proposed by Mr Penglase in his claim for farm household allowance and Farm Business Plan dated 16 May 2022 and whether it has a significant commercial purpose or character. As set out in paragraph 16 above, Mr Penglase has not yet commenced his proposed farm enterprise and it is unclear when or whether he will commence this farm enterprise. I find Mr Penglase has taken no formal steps towards organising finance for the proposed farm enterprise, such as making a formal application for a bank loan, and has given varying evidence about the amount of money he may borrow from a bank. Further, he has not identified a timeframe for when he will apply for a bank loan and/or purchase cattle. On the basis of this evidence, I am satisfied that, while Mr Penglase has an intention to rebuild his cattle herd, he has not commenced the activity of doing this.

8. The TR 97//11, at paragraph 39, refers to the Federal Court decision by Brennan J (as he was then) in Inglis v Federal Commissioner of Taxation where his Honour stated:  

   The carrying on of a business is not a matter merely of intention. It is a matter of activity. … At the end of the day, the extent of activity determines whether the business is being carried on. That is a question of fact and degree.[27]

   [emphasis added]

   [27] [1979] FCA 106 [12]-[13].

9. In view of Mr Penglase not commencing the farm enterprise he has proposed, I find his Farm Business Plan dated 16 May 2022 remains a plan of his intention, not an activity. In these circumstances, I cannot be satisfied that Mr Penglase has a farm enterprise that has a significant commercial purpose or character.

10. I am not satisfied that Mr Penglase meets the requirement in paragraph 8(c) of the FHS Act.

    CONCLUSION

11. For the reasons above, I find Mr Penglase does not satisfy the criteria in paragraphs 8(b) and 8(c) of the FHS Act and therefore, he is not eligible for farm household allowance.

    DECISION

12. The Tribunal sets aside the decision under review and, in substitution, decides that Mr Rodney Penglase is not eligible for farm household allowance because he does not satisfy paragraphs 8(b) and 8(c) of the Farm Household Support Act 2014 (Cth).

I certify that the preceding 50 (fifty) paragraphs are a true copy of the reasons for the decision herein of Dr L Bygrave, Member

............................[sgd]............................................

Associate

Dated: 24 May 2023

Date(s) of hearing:	26 April 2023
Solicitors for the Applicant:	Australian Government Solicitor
Counsel for the Respondent:	Emma M Swart
Solicitors for the Respondent:	Social Security Rights Victoria