Southern Estates Pty Ltd v Federal Commissioner of Taxation

[1967] HCA 16

HIGH COURT OF AUSTRALIA

McTiernan J. Barwick C.J., Taylor, Windeyer and Owen JJ.

SOUTHERN ESTATES PTY. LTD. v. FEDERAL COMMISSIONER OF TAXATION

(1967) 117 CLR 481

2 June 1967

Income Tax (Cth)

Income Tax (Cth)—Deductions—Expenditure by taxpayer "engaged in primary production"—Expenditure on improving for primary production land purchased by taxpayer intending to resell at a profit—Taxpayer not otherwise engaged in primary production—Income Tax and Social Services Contribution Assessment Act 1936-1962 (Cth), ss. 6, 75 (1).

Decisions

1967, June 2.
McTIERNAN J. delivered the following written judgment:-
These matters are income tax appeals. The appeals were heard together. The appellant Southern Estates Pty. Limited was incorporated in South Australia. The founder of the company was Ashby Francis Smith, and it was under his sole control and management. The company was incorporated in 1959 and entered on the business of buying and selling land round Adelaide. In 1958 Smith, the founder of the company, purchased a large tract of land about fifteen miles from Naracoorte. The land was then substantially in its primitive condition. Smith almost immediately set about reclaiming and improving the land with a view to depasturing sheep on it. In 1960, Smith sold a half interest in the land to Southern Estates and by a written agreement made about the same time Smith and Southern Estates became partners in the venture, the former having sole voice in the partnership's affairs. The partnership expended large sums of money in the years of income ended 30th June 1960, 1961 and 1962 in reclaiming and improving the land for the purpose Smith had in view. The work progressed on the southern portion of the land to the stage of sowing it for growth of pasture and on the northern portion nearly to that stage, but the final work done there was ploughing and rolling the soil - seed was not planted. Because of serious illness Smith abandoned the venture, and the partnership necessarily did not go on further with it. It was not practical to bring sheep on to the land until there was adequate pasture : in the ordinary course this would involve waiting about twelve months after seeding. Smith negotiated to sell the property. He effected a sale but at a substantial loss. (at p483)

2. The tax returns which the partnership furnished showed the expenditure incurred in each year of income on the development of the land as a loss. The return for the year of income ended 30th June 1962 also showed the partnership loss on the sale. The account included the total expenditure incurred on development as well as the price paid for the land. This account contained a notification pursuant to s. 52 of the Income Tax and Social Services Contribution Assessment Act (Cth). The returns of Southern Estates claimed as deductions half of the partnership losses, a half was the measure of its individual interest in the partnership. The company had no taxable income on the figures shown in its returns for either the year of income ended 30th June 1960 or 30th June 1962. It purported to carry forward the company's shares of the partnership losses of those years respectively to each next year of income. As a consequence of no taxable income being returned for years of income ended 30th June 1960 or 30th June 1962 only the assessments, under appeal, were issued in respect of the period in which the reclamation and improvement of the Naracoorte land by the partnership took place. Apparently there was an investigation by the Department of Taxation into the company's affairs - these were by no means limited to the partnership venture. The notices of the assessments are all dated 15th July 1964. The Commissioner disallowed all the losses shown in the company's returns representing half the partnership expenditure on developing the land at Naracoorte. But the Commissioner treated the partnership loss on the sale of the land as a loss coming within s. 52 of the Income Tax and Social Services Contribution Assessment Act and allowed the company half such loss as a deduction. (at p483)

3. The company claims in these appeals that it is entitled to deductions of its share, as partner, of expenditure in relation to the property at Naracoorte. The company relies on s. 75 of the Income Tax and Social Services Contribution Assessment Act, also s. 76. As the expenditure is portion of the loss allowed under s. 52 the company prays in aid s. 82 (3) of the Income Tax and Social Services Contribution Assessment Act. (at p484)

4. As regards s. 75 the Commissioner does not dispute that pars. (b) and (e) may cover the operations which the partnership carried out. The question at issue is whether the company in its capacity as partner of Smith was "engaged in primary production". The definition of "primary production" in s. 6 (1) of the Income Tax and Social Services Contribution Assessment Act raises a difficulty for the company, because no "production" within the scope of the definition resulted from anything which the partnership or either partner did on the land, while in possession. It is contended for the company that the evidence supports a strong probability that the purpose of the partnership was the "maintenance of animals" - sheep - on the land when the pasture had grown adequately ; and after a few years to dispose of the land in parcels sufficient as living areas to persons going into the pastoral industry, including Mr. Smith's son if he desired to be a grazier. I am of opinion that upon the widest construction of which the word "engaged" admits, a person who merely has an intention to carry on the business of primary production is not engaged in it. No work which the partnership did on the land per se amounted to the maintenance of animals, nor was proximate to such business. The purpose for which the work was done did not result in the partnership going into the business of primary production. It had not an immediate connexion with bringing sheep on to the land at Naracoorte, by either partner, in order to begin production on this land. I am unable to hold that the company as partner was "engaged in primary production". As regards s. 76, the deduction claimed under this section is made in respect of some expenditure on fencing. In order to qualify for this deduction the taxpayer has to prove to the satisfaction of the Commissioner that he is ". . . carrying on agricultural or pastoral pursuits or forest operations . . .". For the reasons which I have stated I think that the company as partner was not carrying on pastoral pursuits in any relevant year : no question arises as to agricultural pursuits or forest operations. I am of opinion that the appeals should fail. (at p484)

5. The Court therefore orders that the appeals be dismissed with costs. (at p484)

6. From this decision the appellant appealed to the Full Court. (at p484)

7. A. K. Sangster Q.C. (with him W. M. Rogers), for the appellant. Section 75 (1) is only available to a taxpayer engaged in primary production on the land on which the expenditure was incurred and on which the development took place. The section allows a deduction for expenditure of a kind which in some instances must precede primary production. In this context the meaning of primary production must extend over the whole gamut from clearing scrub to, say, the final wool clip. The object of the section is not only to allow deductions to those actually operating as primary producers but also to those prepared to develop land for the purposes of primary production by taking all the steps up to and including production. The expenditure must be directed towards primary production by the taxpayer himself and not by some other person. It is a question of fact and degree whether the taxpayer was intending to carry on primary production. So long as there exists a primary purpose of expenditure preparatory to primary production, the existence of a secondary purpose does not destroy or weaken the effect of the primary purpose. The trial judge found that the intention of the taxpayer was to develop the land for the purpose of depasturing sheep and, although the taxpayer conceded that his ultimate purpose was to resell, he is entitled to the deduction. (He referred to Ronpibon Tin N.L. v. Federal Commission of Taxation (1949) 78 CLR 47 ; London &India Docks Co. v. Thames Steam Tug &Lighterage Co. Ltd. (1909) AC 15 ; London &India Docks Co. v. McDougall &Bonthron Ltd. (1909) AC 25 .) As assessments are related to the activities of the taxpayer in each year, the assessment can only be made in the light of the facts then known and should not be made according to what may happen later. (at p485)

8. S. J. Jacobs Q.C. (with him R. F. Mohr), for the respondent. The statutory definition of primary production requires the taxpayer to be engaged in production and s. 75 (1) cannot apply to a taxpayer engaged in operations preliminary to primary production. Alternatively, it may extend to the steps preliminary to production if there is a sufficient link between those steps and the production or if there is sufficient evidence in the preparatory operations of intent to engage in primary production. If a person is doing no more than improving or developing the land he is not engaged in primary production. Unless the land is brought into production, the taxpayer is not entitled to the deduction. It is a question of fact in each case. In this case the taxpayer's business was the acquisition of land for resale and this land was acquired by the taxpayer for the purpose of resale. The preliminary acts in this case are more consistent with the acquisition for resale than with development for primary production.

Cur. adv. vult. (at

p486)

1967, December 13.
The following written judgments were delivered:-
BARWICK C.J. The taxpayer was a member of a partnership which owned an area of virgin land in South Australia. Neither the partnership nor the taxpayer was actually engaged in primary production at the time the land came into the possession of the partnership. Indeed, it would seem that the taxpayer included amongst the objects of its incorporation the purchase and sale of land and that it had in fact been dealing in land during periods relevant to the consideration of the present appeal. (at p486)

2. However, the purpose of the partnership in acquiring the land was to clear it of the scrub upon it, fence, water and grass it for the carriage of stock and thereafter to graze it until such time as it could profitably be sold as grazing land. The conduct of primary production upon the land to this extent was merely to establish its value as grazing land. It could therefore be held upon the material in the case and I am of opinion that it should be held that at least the dominant if not perhaps the sole purpose of the improvement of the land was its preparation for sale at a profit. It is conceded by the taxpayer that resale at a profit was at least an object of the acquisition of the land, for it gave in respect of the acquisition the requisite notice under s. 52 of the Income Tax and Social Services Contribution Assessment Act 1936-1961 (the Act). (at p486)

3. Due to the supervening illness of the partner of the taxpayer, it had become necessary to sell the land before it had been brought into a productive condition though a great deal of expenditure had been made upon its improvement by way of clearing, fencing and grassing. Though the price obtained on its sale was greater than the price paid on acquisition of the land, due to these expenditures in improving the land a loss on resale was incurred. The Commissioner allowed the taxpayer that loss as a deduction in the year of the disposal of the land. (at p486)

4. However, the taxpayer claimed also to deduct the amount of the expenditure on improving the land from its income in each of the years in which such expenditure was made. It founded this claim on s. 75 (1) of the Act. It will be convenient to set out the relevant portion of that sub-section:

"Expenditure incurred in the year of income by a taxpayer engaged in primary production on any land . . . in . . . . . . .

(b) the destruction and removal of timber, scrub or undergrowth indigenous to the land; . . . .

(e) ploughing and grassing the land for grazing purposes; . . . .

shall be an allowable deduction." (at p487)

5. The respondent Commissioner disallowed the taxpayer's claim to make these deductions, whereupon the taxpayer appealed to this Court. My brother McTiernan, who heard the appeals, dismissed them upon the ground that at the time the expenditures were made the taxpayer was not engaged in primary production within the meaning of s. 75 of the Act. The taxpayer has now appealed from that decision and submits that upon its true construction s. 75 (1) extends to allow a deduction of the amount of the described expenditures by a person who makes them in order to engage in primary production. It says in effect that, unless the statute is so construed, it is in its presently relevant provisions practically meaningless. The appellant submits, and, in my opinion, rightly, that "the land" referred to in the various paragraphs of the sub-section is the whole or part of the land referred to in the opening sentence of the sub-section upon which the taxpayer to qualify for the deduction must be engaged in primary production. The appellant submits that evidently the intention of the legislature included an intention to allow a deduction for bringing the land to which it first refers in the sub-section into a productive state by clearing etc. Therefore, it is said, the expression "engaged in primary production" in relation to that land, which by hypothesis may not be in a state to permit of primary production thereon or therefrom, must be satisfied by the very acts involved in bringing that land into a productive state with the intention of conducting operations of primary production thereon. The appellant says that unless this construction be adopted, the operation of the sub-section must be at best confined to the case of the primary producer who is making expenditures upon part of his land on the balance of which he is at the time of making the expenditures conducting his business as a primary producer. (at p487)

6. I confess to having felt the force of this submission and can see little reason in point of national policy to confine to a taxpayer already in primary production on the land the encouragement of the improvement of land which the section evidently intends by the deduction it grants and to deny it to a taxpayer by whose expenditure additional land is brought to primary productivity even though until it is ready for production he is not and will not be actually engaged in primary production upon it. But, after a good deal of consideration, I am unable to deny the limiting quality of the opening sentence. I am unable to read "a taxpayer engaged in" as satisfied by one of whom no more can be said than that he intends to engage in. To prepare land for primary production, even for primary production thereon by the person making the improvement is not of itself, in my opinion, to engage in primary production. (at p488)

7. It seems to me that there is scope for the operation of the subsection without giving it the construction for which the appellant contends. In my opinion, the improvement by one of the methods described in the sub-section of part of land owned by a taxpayer who is actually carrying on primary production on the balance of his land, can be regarded for the purposes of the sub-section as itself an activity of primary production : but that is because the improvement or tilling of the unimproved or untilled land is part of the business activity of a taxpayer already in primary production on the other part of the land. Further, just as a taxpayer already engaged in primary production on part of his land is also so engaged when he sets about the improvement or the tilling of other parts of his land, so, in my opinion, a taxpayer, who is already engaged in primary production elsewhere and who acquires virgin land to bring it into primary production as part of his existing business, is at least from the moment of his first expenditure in its improvement engaged in primary production upon the acquired land. That is to say, that although the activity of bringing land to a state where primary production may begin is not itself primary production, it will be regarded as such for the purposes of s. 75 when it is carried out by a taxpayer already a primary producer. It seems to me that, though a somewhat artificial and not very satisfactory result, the sub-section upon its proper construction extends so far but no further. It cannot be construed, in my opinion, to include as a person engaged in primary production, a person who no more than intends to so engage whilst he is doing no more than make preparations to enable him to do so. Accordingly, for this reason I respectfully agree with the conclusion at which my brother Justice arrived. (at p488)

8. There is a further reason for my agreement with that conclusion. The taxpayer was not only not in business as a primary producer but it was not intending to enter into primary production as an end in itself. The grazing activities it proposed were but a part of its immediate programme of realization of the land as itself the profit making venture on which the taxpayer was engaged. That being so, even if the appellant's construction of the sub-section could be accepted, the taxpayer could not, in my opinion, properly claim to be covered by it, for the reason that the expenditures which it claims to deduct were not expenditures made by a person intending to engage in primary production in a relevant sense. (at p489)

9. But in so deciding in the circumstances of this case, I would wish to make it clear that it does therefore not follow that a taxpayer engaged in primary production should not be accorded the deduction of amounts expended upon an activity described in s. 75 (1) merely because he entertained the purpose of selling his property at some time. Nor should he be refused the deduction merely because at the time of his acquisition of the land he had the purpose of reselling it at some time in order to make a profit by the purchase and sale. In those instances the taxpayer will have pursued primary production as an end in itself. (at p489)

10. Accordingly, for both these reasons I would dismiss these appeals. (at p489)

TAYLOR AND OWEN JJ. These appeals are brought against orders made by MCTiernan J. dismissing appeals by the taxpayer (hereinafter called the company) against assessments for the years ending 30th June 1961 and 30th June 1963. (at p489)

2. In November 1958 one Ashby Francis Smith, who over a number of years had been a buyer and seller of land and had also been employed as a land salesman, purchased about 7,600 acres of virgin scrub country near Naracoorte in the south east of South Australia. In October 1959 he formed the company, he and members of his family being its shareholders. The memorandum and articles of association of the company are not reproduced in the appeal book but it is apparent that one of the company's objects was to carry on the business of buying and selling land and in fact during the relevant period it had a number of dealings of this description. In March 1960 Smith transferred the title to the Naracoorte land to himself and the company and they entered into a partnership agreement under which they agreed to carry on the business of pastoralists and graziers on it, Smith being the controlling partner. In its virgin state the land was covered with indigenous scrub, there was no water on it and little fencing. In its then state it was useless for primary production and would remain so until such time as a substantial area of it had been cleared, ploughed, sown to pasture and the pasture had grown sufficiently to graze sheep and cattle on it. Soon after Smith completed the purchase he began to clear the scrub and after the partnership was formed the work of improving the land to fit it for the grazing of stock was continued. In the years in question in these appeals substantial expenditure was incurred by the partnership in destroying and removing scrub and ploughing and sowing the land to pasture grasses. Although no express finding to this effect was made by McTiernan J., it seems to be clear from Smith's evidence that his purpose in buying the land was to improve it to the stage when it would be capable of being used for grazing purposes and then to use it for that purpose until it could be sold at a profit. That resale at a profit was the ultimate purpose of buying and improving the land is made clear by a statement of expenditure attached to the partnership income tax return for the year ending 30th June 1962 headed "Property Development Expenses - Property bought for profit making by sale". While work on the land was in progress, however, and before it was sufficiently advanced to allow the land to be stocked, Smith became seriously ill and this made it necessary to sell the land. The price obtained was in excess of that paid for the land by Smith but, when the expenditure on improvements was taken into account, a substantial loss was shown and the company's share of this loss was claimed by it and allowed as a deduction under s. 52 of the Act. (at p490)

3. The company claimed in addition that its share of the partnership expenditure during the years in question in destroying the scrub and ploughing and seeding the land was an allowable deduction under s. 75 (1)(b) and (e) of the Act. Those paragraphs provide that :

"Expenditure incurred in the year of income by a taxpayer engaged in primary production on any land . . . in . . . . . . .

(b) the destruction and removal of timber, scrub or undergrowth indigenous to the land ; . . . .

(e) ploughing and grassing the land for grazing purposes ; . . . .

shall be an allowable deduction."

The definition of the words "primary production" in s. 6 is :

"production resulting directly from - (a) the cultivation of land ; (b) the maintenance of animals or poultry for the purpose of selling them or their bodily produce, including natural increase ;

(c) fishing operations ; . . . ."

But this definition, which is really directed to defining what constitute primary products, seems to throw little light upon the question which arises in the present appeals. (at p491)

4. The Commissioner refused to allow the deductions claimed and McTiernan J. held that he was right in doing so. We think his Honour's conclusion was correct. Section 75 (1) proceeds upon the basis that at the time when the expenditure is incurred the taxpayer is actually engaged in carrying on the business of a primary producer on the land upon which the improvements are effected. But where, as here, the land is, at the time when the expenditure is incurred, incapable of being used for primary production and the expenditure in incurred in order to bring it into a condition in which it will be possible to use it for primary production we are of opinion that it cannot be said that the taxpayer is engaged in primary production on that land. If, as was the case here, the real or substantial purpose of incurring the expenditure was to make the land capable of being used for primary production in order to resell it at a profit, s. 75 (1) has, in our opinion, no application. The sub-section is not designed to benefit a taxpayer who buys land which, as it stands, cannot be used for primary production and expends money upon improvements to it so that he may resell it to the best advantage when it is in, or approaching, a state in which it can be used for that purpose. Its purpose is to benefit a taxpayer who, at the time he incurs the expenditure, is himself engaged in primary production on the land. (at p491)

5. We would therefore dismiss the appeals. (at p491) (at p491)

2. WINDEYER J. I agree that these appeals should be dismissed. But I do not read s. 75 of the Income Tax and Social Services Contribution Assessment Act 1936-1962 as the other members of the Court do. I differ in what seems to me an important aspect. I say important because to say that the section does not extend to expenditure to bring virgin land into a state in whcih it can be used for primary production gives the section a narrow operation and a meaning which differs from that which has, I believe, been hitherto acted upon by the Commissioner, and which has been implicit in decisions of boards of review. The construction of the Act which the Taxation Department has acted on has been made widely known to the public by the booklet, prepared by the Taxation Department and issued under the authority of the Commonwealth Treasurer, called Income Tax for Farmers and Graziers, which is now in its seventh edition. The deductions which under s. 75 a primary producer may claim are there said to be for "expenditure which will bring land into production or improve the productive qualities of land already in use" ; and references are made to buying virgin land and expenditure in clearing and grassing it : see pp. 17-20 of the booklet. Of course these departmental views cannot determine the meaning of the Act or be used as an aid to its interpretation. They show, however, that my view of the meaning and effect of s. 75 is not a mere idiosyncrasy. But first I shall give my reasons for agreeing in the conclusion that these appeals should be dismissed. (at p492)

2. In my opinion a taxpayer who acquires land for the purpose of profit making by sale, that being his main or dominant purpose, and who expends money upon it with a view to improving it and selling it in an improved state, cannot have the deductions which by s. 75 (1) are allowed to a taxpayer engaged in primary production. Expenditure on land by a taxpayer who has acquired the land in order to sell it is an allowable deduction in ascertaining the amount of any profit realized by him which is brought to tax under s. 26 (a) - and see also s.52. But, as I read the Act, he is not to be permitted to deduct the same amount twice - under s. 75 and also for the computation of a s. 26 (a) profit. Whether a man is "engaged in primary production on any land" within the meaning of s.75 does not depend simply on the activities carried on by him on that land. It depends rather on the purpose for which he engages in those activities, the end to which they are directed. What is his business on or with the land ? Is it that of a primary producer or of a dealer or speculator in land ? The need to determine the character of a taxpayer's undertaking in this way may be said to raise a difficult and sometimes an elusive question. Yet the distinction is one which this Court has constantly recognized. It is the distinction between, on the one hand, the man who holds property as an investment (in the case of land, in order to derive rents and profits from it by letting it or working it) and, on the other hand, the man who acquires and holds similar property for the purpose of selling it at a profit when a suitable opportunity to do so comes. It is the distinction between an investor and a dealer ; between a landowner or landlord and a land-jobber, as in the earlier cases he was called : see e.g. Perrott v. Deputy Federal Commissioner of Taxation (N.S.W.) (1925) 40 CLR 450 . A man does not cease to be a landjobber because as part of his profit-making undertaking and with the object of realizing his land at the best price he improves it. On the other hand, a man does not cease to be engaged in primary production because he has in mind that some day he may sell out. (at p493)

3. Judged by the test of real, substantial, primary or dominant purpose, the taxpayer in this case was never engaged in primary production within the meaning of s. 75 so as to be entitled to the deductions claimed. That, I think, is enough to dispose of this case ; and I would go no further if it were not that propositions which I cannot accept have found favour and I therefore feel bound to state my dissent and my own understanding of s. 75. (at p493)

4. Section 75 is one of a number of provisions in the Act whereby in determining the taxable income of taxpayers engaged in primary production expenditure of a capital nature or otherwise of a special character is deductible. The words in s. 75, "a taxpayer engaged in primary production", may be usefully looked at alongside certain expressions in other parts of the Act, with the reference in s. 54 to "a business of primary production" and to "land which is used for the purpose of agricultural or pastoral pursuits" ; and with the use of the same phrase in ss. 57AA and 57AB : with the reference in s. 76 to a taxpayer who is "carrying on agricultural or pastoral pursuits" : with the words "land used for primary production" in s. 88A. I may add to these a reference to s. 62AB (although it was enacted after the present case arose) which allows as a deduction the cost of new plant "for use by the taxpayer . . . for the purpose of carrying on . . . a business of primary production". The general purpose and policy of these provisions, it may be assumed, is not simply to relieve primary producers from taxation. It is to do so in order to encourage expenditures which increase the efficiency of primary industry. Section 75 (1) clearly reflects a policy of encouraging capital expenditure which will improve the productive capacity of rural land in Australia. A policy and purpose behind s. 75 may thus be seen. But the wording of the section, from which its application must be determined, is unfortunately loose and imprecise. The draftsman seems to have taken no trouble to make it harmonious with other provisions I have mentioned that reflect the same general policy and purpose. I set out s. 75 (1) items (a) to (f) inclusive. The later paragraphs or items, some of them added by amendments since 1960, do not assist in the matter now under discussion. Those I have taken, the first six, sufficiently indicate the kinds of expenditure the section deals with.

"75 (1) Expenditure incurred in the year of income by a taxpayer engaged in primary production on any land in Australia or in the Territory of Papua and New Guinea in - (a) the eradication or extermination of animal or vegetable pests from the land ;

(b) the destruction and removal of timber, scrub or undergrowth indigenous to the land ;

(c) the destruction of weed or plant growth detrimental to the land ;

(d) the preparation of the land for agriculture ; (e) ploughing and grassing the land for grazing purposes ; (f) the draining of swamp or low-lying lands where that operation improves the agricultural or grazing value of the land ; . . . .

shall be an allowable deduction." (at p494)

5. It will be seen that three conditions, which are presently relevant, must be fulfilled if a deduction of expenditure is to be allowed under this section : first the taxpayer must be a person "engaged in primary production on any land in Australia or in the Territory of Papua and New Guinea" ; secondly the expenditure must be in an activity of one or more of the kinds described ; thirdly that activity must have been performed on "the land", which grammatically must mean the land on which it is predicated that the taxpayer is engaged in primary production. (at p494)

6. The first question that arises is, when is a man "engaged in primary production" ? As I have already said, I take this expression to refer to the business purpose of the taxpayer as the possessor of the land. Whether a person in engaged in primary production on land does not, I think, depend on whether any produce has actually been gathered from that land, or on how soon produce can be gathered from it. It depends, I think, on whether the activities in which the taxpayer is there engaged are for the purpose of obtaining produce from it. It is the character of the taxpayer's undertaking on the land which in my view brings s. 75 into operation, not the stage which his undertaking has reached. It is not suggested that the land must have been brought into actual production in the sense that crops had been harvested or were ready for harvesting, that wool had been shorn or sheep were ready for shearing or for market, or that cattle had been sent to market or were ready for the market. A man could surely be engaged in primary production if he had sown or planted his land, whether with wheat, grapes, bananas, fruit-trees or pine-trees - however distant the time of harvest might be. And the day before sowing or planting he would be no less engaged in primary production than the day after. And if the land had not previously been ploughed or planted he would in my view still be engaged in primary production there if he were ploughing it to plant a crop for the first time. So too, if he were ploughing it and sowing grass in order to graze stock there. He would not first become engaged in primary production on that land when the grass had grown and he had brought stock upon his improved pasture and they had begun to fatten. The various kinds of expenditure itemized and described in s. 75 shew that expenses preliminary to planting or stocking are contemplated deductions. They include clearing the land, by, for example, ring-barking, felling, suckering and burning-off or removal of logs. That at all events is for me what is meant by item (b) of s. 75 (1) - "destruction and removal of timber, scrub or undergrowth indigenous to the land". These words seem to comprehend clearing virgin forest or scrub from land so that it can be used for primary production by grazing or agriculture. It would be surprising if they were meant to refer only to expenditure in clearing timber, scrub and undergrowth from land already capable of carrying stock in useful numbers. Section 75, it is to be remembered, is not concerned with the ordinary annual outgoings and expenses of the conduct of a farming or grazing business, which would be taken into account in arriving at the taxable income of a taxpayer. It is concerned with expenditures of a capital character by which the taxpayer's capital asset, his land, is improved. (at p495)

7. I cannot accept the proposition that a taxpayer cannot be said to be "engaged in primary production on any land" if the land is not then in a state in which it can be used for primary production. This seems to me to postulate a demarcation which is quite imprecise, indeed illusory. Once it be conceded, as obviously it must be, that actual produce need not have been had from the land, I cannot see any criterion to be applied to the words of s. 75 except that the taxpayer's operations on or in relation to the land were undertaken by him with the purpose or aim of gaining produce from that land by his carrying on there the business of a primary producer. The difficulties of any other view become apparent as soon as one seeks, as in the course of argument counsel and the Court with the aid of hypothetical examples sought, to give a precise meaning to the words "on any land". These words do not relate to the word "expenditure". They relate to the words "engaged in primary production". That is to say, the operation of the section is confined to cases where the expenditure is on or in relation to "the land". And "the land" is "any land" on which the taxpayer was, when the expenditure was incurred, engaged in primary production. The words "land" and "any land" are notoriously indefinite and have given rise to problems under many statutes. They are often used to denote "an area of land owned and used as one area or as an integral whole", as Starke J. expressed it in Federal Commissioner of Taxation v. Royal Sydney Golf Club (1943) 67 CLR 599, at p 615 . But the difficulty of identifying "land" as an area of land, a unity, an integral whole, or as a separate parcel remains : see the discussion in the second Golf Club Case, Royal Sydney Golf Club v. Federal Commissioner of Taxation (1955) 91 CLR 610, at pp 625, 626 . Hypothetical cases are usually a poor aid to construction ; but I may take two or three illustrations from events constantly occurring in the country. Let it be supposed that a taxpayer, a farmer, is possessed of Blackacre - part of it cleared, fenced, and in production ; another contiguous part heavily overgrown with timber and scrub and weeds poisonous to stock, useless for cultivation or grazing until cleared. Can he not have the benefit of s. 75 for expenditure in clearing the uncleared part of his land? Now suppose the uncleared paddock is not contiguous with but some distance away, and separated say by a road, from the cleared land, Blackacre, where the homestead stands ; that it is held under a different form of Crown land tenure ; but that it has been acquired by the taxpayer so that he may clear it and then use it in conjunction with Blackacre in his established business as a primary producer. Is he not to be entitled to the benefit of s. 75 for the cost of clearing it? And finally, suppose the taxpayer to be a farmer who sold out in one district to take up Forestacre, a block of new country in another district. He obtains this new holding for the purpose of clearing it and bringing it into production and there carrying on the business of a primary producer. Is he not entitled to the benefit of s. 75 for expenditure he incurred in doing so - or must he first bring part of it, and if so how much, into production before he can claim a deduction for the expenditure of clearing the rest? In my view in each of the cases I have supposed - and they are not fanciful or far-fetched illustrations - a deduction under s. 75 would be allowable. (at p496)

8. Finally, I should say, with respect, that I am unable to accept the construction of s. 75 which the Chief Justice has adopted, namely that whether a taxpayer is entitled to a deduction for expenditure in clearing virgin land is to be determined by seeing whether he is already carrying on business as a primary producer on developed land elsewhere. I recognize the value of this consideration as evidencing the purpose for which the new land was taken up. But to my mind it is only for that that it would be relevant. I do not think that whether or not a man who acquires Scrubacre, virgin land, in one part of Australia is there engaged in primary production can depend in law upon whether or not he is engaged in primary production elsewhere in Australia or New Guinea. To say that seems to me, with respect, to involve reading the words "engaged in primary production on any land" in a sense which, having regard to the context, they cannot bear. (at p497)

9. I need say no more in explanation of my agreeing that the appeals should be dismissed ; but not accepting all the reasons which have been put forward in other judgments for that conclusion. (at p497)

Orders

Appeals dismissed with costs.