Ferguson v Federal Commissioner of Taxation [1979] FCA 29; (1979) 37 FLR 310 (12 June 1979)

FEDERAL COURT OF AUSTRALIA

FERGUSON v. FEDERAL COMMISSIONER OF TAXATION [1979] FCA 29; (1979) 37 FLR 310
Income Tax

COURT

FEDERAL COURT OF AUSTRALIA
GENERAL DIVISION
Bowen C.J.(1), Franki(1), Fisher(2) JJ.

CATCHWORDS

Income Tax - Deductions - Whether taxpayer carrying on business - Whether outgoings necessarily incurred in carrying on business - Whether outgoings of capital or of capital nature - Income Tax Assessment Act 1936 (Cth.), s. 51. The taxpayer was a member of the Royal Australian Navy. In anticipation of his retirement in three years, he leased five Charolais cows and entered into an agreement whereby a management company agreed to agist, breed from, and otherwise care for and manage the cows. The taxpayer intended, on his retirement, to acquire a grazing property and to raise beef cattle thereon, and the present arrangements were made with a view to building up a herd of cattle. The cows in fact gave birth to heifers and bulls, some of which he sold. The taxpayer took a keen interest in the development of the herd, received monthly reports as to their progress and maintained a card index system for his leased cows and their progeny.

The taxpayer claimed to be entitled to a deduction pursuant to s. 51 of the Income Tax Assessment Act 1936 in respect of expenditure on leasing and agistment of the cows and other similar outgoings. The commissioner disallowed the claim on the basis that, at the time the outgoings were incurred, the taxpayer was not carrying on a business.

Held, that the taxpayer was carrying on a business and that the outgoings were not of a capital nature and were deductible under the second limb of s. 51 (1) of the Income Tax Assessment Act 1936.

Decision of the Supreme Court of New South Wales (Sheppard J.), reversed.

HEARING

Sydney, 1979, February 20; June 12. 12:6:1979
APPEAL.

The facts appear from the judgments.

R. Bainton Q.C. and B. M. James, for the appellant.

T. Simos Q.C. and P. R. Graham, for the respondent.
Cur. adv. vult.

Solicitors for the appellant: Purves, Moodie & Storey.

Solicitor for the respondent: Alan R. Neaves (Commonwealth Crown

Solicitor).

J. H. KARKAR

DECISION

June 12.

The following written judgments were delivered.
BOWEN C.J. and FRANKI J. These are two appeals from a judgment of the

Supreme Court of New South Wales dismissing two appeals against assessments of Mr. Peter Ian Murdoch Ferguson, the appellant, to tax in respect of the income years ending 30th June, 1973, and 30th June, 1974. (at p301)

2. The appellant claims that payments made by him totalling $2,370 in the year ending 30th June, 1973, for leasing fees and insurance premiums and $1,258 in the year ending 30th June, 1974, for leasing fees, insurance premiums, artificial insemination fees, agistment fees, Charolais Society fees and cost of periodicals were deductible under the provisions of s. 51 (1) of the Income Tax Assessment Act 1936. The claim for deduction was in each case rejected by the Commissioner of Taxation. The appellant objected but his objections were disallowed. He requested reference to the board of review but the board by majority upheld the commissioner's decisions on the objections and confirmed the assessments. The Supreme Court of New South Wales, sitting in its Administrative Law Division, dismissed appeals from the board of review and ordered the appellant to pay the commissioner's costs. (at p311)

3. On 21st June, 1973, whilst serving as a Lieutenant Commander in the Royal Australian Navy and anticipating retirement in two or three years, the appellant entered into two agreements pursuant to which most of the expenditure was incurred. One agreement (hereafter called the "lease agreement") was made with Cattle Leasing Ltd. (therein called the "head lessee") for the sub-lease from that company of five identified half-cross Charolais heifers for a term of four years. The other agreement (hereafter called the "management agreement") was with an associate company Gunn Rural Management Pty. Ltd. (therein called the "manager") providing for the management of the heifers, their progeny and descendants for a period of ten years. (at p311)

4. Under the lease agreement each heifer was warranted a half-cross Charolais duly registered with the Charolais Society of Australasia. Each heifer was to deliver a calf within the twelve months from the date of the agreement from pure bred Charolais semen or as the result of being joined to a pure bred Charolais bull. Provision was made for the substitution of another heifer if a calf was not produced in accordance with the terms of the lease agreement. The appellant was deemed to have the beneficial ownership of cattle born during the term of the lease either to the five heifers or to their progeny. He agreed to pay by way of rent $33 per calendar month for each of the five heifers, payable calendar monthly in advance, and to insure such heifers and pay all premiums payable. (at p311)

5. Under the management agreement the manager was to agist the five heifers, their progeny and descendants and to use its best endeavours to practise a high standard of animal husbandry, and properly and efficiently to tend and care for the cattle. The manager was to use its best endeavours to artificially inseminate heifers with pure bred Charolais semen and upon their twice failing to conceive to expose them to pure bred Charolais bulls for natural service. Further failure to conceive would result in recommendations by the manager as to the disposal of the cattle. The appellant was entitled under the management agreement to enter the agistment land to inspect the heifers at reasonable times and to require the manager to identify his cattle, provided the reasonable costs incurred in such identification were paid by him. Details and records relating to the cattle were to be supplied to the appellant. Where the heifers produced male calves, the manager was to give advice as to how many should be castrated as being unfit for sale as commercial bulls. Entire male calves were to be agisted by the manager and sold as commercial or stud bulls according to the instructions of the appellant. Sales of cattle by the manager on behalf of the appellant were to be effected through any recognized commercial market or by treaty at the sole discretion of the manager. An agistment fee of $60 per year was payable by equal half-yearly instalments in advance for all cattle (except maiden heifers during the first year of the agreement). An agistment fee of $60 per year was also payable in relation to each calf born. (at p312)

6. Service charges of $40 were payable upon the birth of each calf and upon each maiden female attaining fourteen months with provision for rebate in the case of death of a calf before the expiration of one such period. All charges were subject to increase in accordance with the consumer price index for Brisbane. (at p312)

7. The natural increase of bulls during the years ending 30th June, were two in 1974, four in 1975 and one in 1976. Two bulls were sold in the year ending 30th June, 1976, and four in the eight months to 28th February, 1977. The two bulls sold in the year ending 30th June, 1976, apparently realized a net figure of $364. The natural increase of heifers during the years ending 30th June were three in 1974, none in 1975 or 1976 and two in the eight months to 28th February, 1977. (at p312)

8. Although it would have been expected that five calves in each of the four years would be dropped, it was found that insemination could not be achieved until heifers were somewhat older than had been anticipated, and that a longer period had to be allowed to elapse between a heifer's pregnancies. It appears that at the time when the appellant entered into the two agreements cattle prices were higher than they were for some time thereafter. A brochure which the appellant received when he was considering entering into the agreements estimated the sale price of bull calves sold two years after birth at an average of $400 each. (at p312)

9. The appellant intended to go on the land eventually and regarded the two agreements as a sensible and practical way to start in a small way and expand as time went by. In the meantime, bull calves would be sold at one or two years of age and the female calves would be retained for use in the breeding programme aimed at building up a pure bred herd. It would take two to four years to achieve the programme, depending on what calves were dropped. Under the four-year lease agreement, there was a guarantee of five calves in the first twelve months and under the ten-year management agreement the breeding programme covered not only the five leased heifers but also their female progeny and descendants. (at p313)

10. 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". The appellant denied that at the time of the agreement he had viewed the programme as a useful pilot scheme from which he could learn whether or not the real thing would be worthwhile. He had made up his mind to go on the land from 1970 or 1971. It was his plan to have a commercial herd to sell to a fat cattle market and upon retirement from the Navy in two or three years' time to purchase an area of land on which he could run about 200 breeders. The retirement benefits due to him allowed ample funds for the land purchase and he had his wife's agreement. He had had previous discussions with friends involved in the cattle-breeding business. He saw the programme as a start and did not harbour an option of backing out later on and relinquishing the plan to buy land. (at p313)

11. The principal questions raised by the appeal are: (i) whether at the time the outgoings were incurred the appellant was carrying on a business; (ii) whether the outgoings were deductible under the second limb of s. 51 (1) of the Income Tax Assessment Act; (iii) alternatively, whether the outgoings were deductible under the first limb of s. 51 (1) of the Income Tax Assessment Act; (iv) whether the outgoings were of capital or of a capital nature. (at p313)

12. This Court has jurisdiction under s. 24 (1) (c) of the Federal Court of Australia Act 1976 to hear and determine appeals from judgments of State Supreme Courts exercising federal jurisdiction in income tax matters. In the appeal the court is to have regard to the evidence given in the proceeding out of which the appeal arose and has power to draw inferences of fact and, in its discretion, to receive further evidence (s. 27). (at p313)

13. In Whim Creek Consolidated N.L. v. Federal Commissioner of Taxation [1977] FCA 19; (1977) 31 FLR 146 this Court held that the court would reverse such a finding of fact when it was convinced that the trial judge came to a wrong conclusion (Paterson v. Paterson [1953] HCA 74; (1953) 89 CLR 212 ; Da Costa v. Cockburn Salvage & Trading Pty. Ltd. [1970] HCA 43; (1970) 124 CLR 192 ). A majority of the High Court has since described, in Warren v. Coombes [1979] HCA 9; (1979) 53 ALJR 293 , the task of an appellate court in wider terms: "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" (1979) 53 ALJR, at pp 300-301 . (at p314)

14. In the present case no oral evidence was called before the trial judge. The parties relied on the evidence put before the board of review. No question of credit arises. We deal in turn with the questions raised.

(i) Whether at the time the outgoings were incurred the
appellant was carrying on a business (at p314)

15. Section 6 of the Income Tax Assessment Act defines "business" stating that it includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee. This does not afford much assistance in the present case. It is necessary to turn to the cases. There are many elements to be considered. The nature of the activities, particularly whether they have the purpose of profit-making, may be important. However, an immediate purpose of profit-making in a particular income year does not appear to be essential. Certainly it may be held a person is carrying on business notwithstanding his profit is small or even where he is making a loss. Repetition and regularity of the activities is also important. However, every business has to begin and even isolated activities may in the circumstances be held to be the commencement of carrying on business. Again, organization of activities in a business-like manner, the keeping of books, records and the use of system may all serve to indicate that a business is being carried on. The fact that, concurrently with the activities in question, the taxpayer carries on the practice of a profession or another business, does not preclude a finding that his additional activities constitute the carrying on of a business. The volume of his operations and the amount of capital employed by him may be significant. However, if what he is doing is more properly described as the pursuit of a hobby or recreation or an addiction to a sport, he will not be held to be carrying on a business even though his operations are fairly substantial. See generally, Trautwein v. Federal Commissioner of Taxation (No. 2) [1936] HCA 46; (1936) 56 CLR 196 ; Tweddle v. Federal Commissioner of Taxation [1942] HCA 40; (1942) 7 ATD 186 ; Fairway Estates Pty. Ltd. v. Federal Commissioner of Taxation [1970] HCA 29; (1970) 123 CLR 153 ; Thomas v. Federal Commissioner of Taxation (1972) 46 ALJR 397 , in all of which cases it was held the taxpayer was carrying on business; and Martin v. Federal Commissioner of Taxation [1953] HCA 100; (1953) 90 CLR 470 in which it was held the taxpayer was not carrying on business. (at p314)

16. Turning to the facts of the present case, there is evidence of considerable system and organization in relation to the breeding scheme itself. It is true that most of this was done by the manager. On the other hand, the appellant paid for the manager's services. In return for the fees he paid these things were done for him. (at p315)

17. The application and results of the system and organization maintained by the manager were communicated to the appellant in the form of a monthly report covering the breeding programme, a timely livestock report and calving report and general reports as to market conditions. The appellant read these reports and also subscribed to and read periodicals relating to primary production. Since July or August 1973 he had maintained a card index system in which he recorded particulars as to date of birth, type, sire and dam, date of artificial insemination in relation to each beast or natural mating, and calving. He also maintained a "ledger" as a record of his receipts and payments. (at p315)

18. The appellant spent a fair amount of his spare time on maintaining familiarity with the progress of the cattle through received reports and through reading periodicals. He was overseas for a period of two years and two months from January 1974 to March 1976 and continued his activities while abroad, although there is some evidence of the taxpayer having remained ignorant for sixteen months as to whether one of the heifers had fallen pregnant or not. A significant proportion of the appellant's income was applied by him under the two agreements. (at p315)

19. Receipts were obtained from the sale of bull calves, although due to a number of factors these receipts were insufficient in the relevant years to cover his outgoings. (at p315)

20. On the face of it, he was conducting his activities on a commercial basis and was, it would seem, carrying on a business. (at p315)

21. However, it was argued on behalf of the commissioner, that the object of the appellant was to start a business of commercial cattle production with a herd of 200 breeding cows on his own land; that he could have done this by simply buying a herd of 200 cows and a property; and, that if he had done that the herd would have been trading stock because it would have constituted livestock used in the business. Up to this point we do not think we would necessarily disagree with the argument. Counsel for the commissioner then proceeded to argue that instead of purchasing the herd the appellant adopted this alternative mode of acquisition by means of the lease agreement and the management agreement; that in doing this he was not carrying on his intended business; that what he was doing was not part of that intended business because he had not yet commenced that business; that until he commenced that intended business he was simply acquiring cattle for it in a particular way and his expenditure until the herd was used in that intended business was of a capital nature, being concerned with circulating capital and, therefore, did not fall within s. 51 (2); and that when he did commence the intended business, and the herd that accumulated was used in that business, it would properly be brought in as trading stock and he would then be entitled to a full deduction for expenses incurred in the acquisition. It was not made clear whether he would have to give credit for the amounts received upon the sale of bull calves so that it would be his net expenditure only which would represent his cost. Nor was the possibility canvassed that, if circumstances improved, his receipts from the sale of bull calves might exceed his outgoings. It was argued that the sale of bull calves was not sufficient to alter the nature of the activity, which was the acquisition of a herd for the projected business. (at p316)

22. It is true to say that the appellant's long-term object was as counsel for the commissioner stated. However, it does not follow that because one tax result would follow if he carried out his object by purchasing 200 cows, the same result must follow if he adopts a different method. It may do so. It depends upon the method adopted. Clearly, one method would be to carry on a preliminary business in such a way that he would in due time have his herd of breeding cows so as to enable him to engage in the final business that he intended ultimately to undertake. (at p316)

23. 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.

(ii) Whether the outgoings were deductible under the second
limb of s. 51 (1) of the Income Tax Assessment Act (at p316)

24. What has to be established to bring outgoings within the second limb of s. 51 (1) is that they were necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. It has been said that the word "necessarily" no doubt limits the operation of the alternative, but probably it is intended to mean no more than "clearly appropriate or adapted for" (Ronpibon Tin N.L. v. Federal Commissioner of Taxation (1949 [1949] HCA 15; (1949) 78 CLR 47, at p 56 , and see John Fairfax & Sons Pty. Ltd. v. Federal Commissioner of Taxation [1959] HCA 4; (1959) 101 CLR 30 ). We consider the outgoings were "necessarily" incurred by the appellant in the sense in which the word is used in s. 51 (1). Furthermore, it has been held that s. 51 (1) does not require a rigid restriction of the amount claimed as a deduction in a year of income to the gaining or producing of assessable income in that year of income (Federal Commissioner of Taxation v. Finn [1961] HCA 61; (1961) 106 CLR 60 cf. Federal Commissioner of Taxation v. Hatchett [1971] HCA 47; (1971) 125 CLR 494 ). We consider that the outgoings in the present appeals were necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income within the meaning of s. 51 (1).

(iii) Alternatively whether the outgoings were deductible under
the first limb of s. 51 (1) of the Income Tax Assessment Act (at p317)

25. In view of our answer to question (ii), it is unnecessary to make any pronouncement upon this question.

(iv) Whether the outgoings were of capital or of a capital
nature (at p317)

26. It was argued for the commissioner that the applicant was engaged in acquiring stock which when he commenced the projected business of producing breeding cattle from a herd of 200, would be brought in as stock. That until that projected business commenced, he was making expenditure of a capital nature and could not claim a deduction under s. 51 (2) because the stock were not yet used in the business. (at p317)

27. This argument cannot stand, if, as we have held, the appellant in the preliminary stages was carrying on an initial business. That initial business involved him in outgoings and was so arranged as to bring him in some receipts. It seems expenses may be incurred within the meaning of the first two limbs of s.51 (1) and yet be expenditure of capital or of a capital nature (John Fairfax & Sons Pty. Ltd. v. Federal Commissioner of Taxation [1959] HCA 4; (1959) 101 CLR 30 ). Nevertheless, looking at the nature of the outgoings and at the nature of the initial business carried on by the appellant, it is our opinion that his outgoings were of a revenue character. They were directed not to the profit-yielding subject of that initial business but to the process of operating it (Sun Newspapers Ltd. v. Federal Commissioner of Taxation [1938] HCA 73; (1938) 61 CLR 337 ). The outgoings were not, in our opinion, of capital or of a capital nature. (at p317)

28. We would order that the appeals be allowed and the orders of the Supreme Court be set aside. In lieu thereof, we would order that the assessments be remitted to the commissioner to be amended in accordance with these reasons for judgment. We would further order that the commissioner pay to the appellant his costs of the appeal and of the proceedings before the Supreme Court. (at p317)

FISHER J. These are two appeals brought by Peter Ian Murdoch Ferguson ("the taxpayer") against a decision of the Supreme Court of New South Wales in its Administrative Law Division. That court confirmed the decision of Board of Review No. 1 which by a majority upheld income tax assessments issued against the taxpayer by the Commissioner of Taxation ("the commissioner") in respect of years of income ended 30th June, 1973, and 1974. (at p318)

2. In his return for each of the said years the taxpayer contended that he was entitled pursuant to s. 51 of the Income Tax Assessment Act 1936 ("the Act") to certain deductions arising out of the leasing by him of five Charolais cows. The commissioner in his assessments for these years of income disallowed the taxpayer's claim, stating in the adjustment sheet for the first year that the deduction was "disallowed as the expenses are not incurred in carrying on a business" and in that sheet for the second year that the "net loss on primary production activities now excluded as it is not considered that such activities constituted the carrying on of a business of primary production". The taxpayer objected to each of the assessments, which objections were disallowed by the commissioner. Each of the objections was referred by the taxpayer to Board of Review No. 1, which board by a majority upheld the assessments. The taxpayer then appealed to the Supreme Court of New South Wales and that court (Sheppard J.) dismissed the appeals. (at p318)

3. No question turned on the amount of the deductions which are allowable in the years of income if the taxpayer was entitled to claim them, as by a statement of agreed facts tendered to the board the outgoings for the first year of income are stated as $2,370 and for the second year as $1,258. The principal question in issue is whether the taxpayer is entitled to a deduction of these amounts pursuant to the second limb of s. 51 (1) on the basis that they represent outgoings "necessarily incurred in carrying on a business for the purpose of gaining or producing" the assessable income of the taxpayer. Alternatively the taxpayer contended that the outgoings are deductible under the first limb of that section. (at p318)

4. As the trial judge has found, the facts are exhaustively set out in the reasons for decision of Mr. O'Neill, the dissenting member of the board, and there is thus no necessity for me to set them out in detail. (at p318)

5. The taxpayer is a serving member of the Royal Australian Navy, holding at the time of hearing the rank of Commander. However, in the middle of 1973 he was a Lieutenant Commander contemplating retirement in two to three years. At that time, and for a period prior thereto, he had formed the intention on his retirement of acquiring a grazing property and raising beef cattle thereon. He foresaw that the combined resources of himself and his wife would be sufficient to finance the purchase of a property. (at p318)

6. Prior to 21st June, 1973, the taxpayer had discussions with a company, Cattle Leasing Ltd., concerning the leasing of Charolais half-cross cows. On that date the taxpayer entered into two agreements, one with Cattle Leasing Ltd. ("Cattle Leasing") and one with Gunn Rural Management Pty. Ltd., ("the management company"). The first agreement provided for the taxpayer to sub-lease from Cattle Leasing five identified half-cross Charolais cows for a period of four years at a monthly rent of $33 per cow. Pursuant to the second agreement the management company agreed to agist on behalf of the taxpayer the five cows and their progeny for a term of ten years from 21st June, 1973. (at p319)

7. Pursuant to the sub-leasing agreement Cattle Leasing warranted that each of the cows would deliver a calf within twelve months of the date thereof from pure bred Charolais semen or as a result of being joined to a pure bred Charolais bull. The agreement additionally made detailed and business-like provisions concerning the ownership by the taxpayer of cattle born during the term of the lease to the cows or their progeny, for the failure of the leased cows to calve during the period of twelve months, the death of any of those cows at the time of calving, for insurance of the cows and for sale of male calves and, in certain circumstances, of female calves. There was no challenge before us to the commercial efficacy of this sub-lease or of the management agreement now to be considered. (at p319)

8. The latter agreement was equally detailed and elaborate providing as it did for the depasturing, caring and managing on behalf of the taxpayer of the leased cows and their progeny, the identifying of the same, maintenance of records thereof, for breeding from them whether by way of artificial insemination or natural service, and arranging for sales primarily of the male calves and for tattooing the cattle and registering the calves pursuant in each instance to the requirements of the Charolais Society of Australasia. On the part of the taxpayer there were provisions for payment by him of agistment fees, service fees and further fees on the birth of each calf. (at p319)

9. At the time of entering into the agreements the taxpayer had had a number of discussions with friends concerning Charolais cattle. He had earlier made up his mind he would go into cattle production on his retirement. As already stated he did not propose to acquire a property of his own until that time, but was desirous, if he could, of making a start upon cattle production. There is no doubt that he saw the concept inherent in the two agreements (and in a brochure which he read prior to entering into the agreements) as a feasible way of establishing the nucleus of a herd which he could eventually on his retirement transfer to his own property where he could engage in full scale cattle production. (at p319)

10. After he entered into the agreements the taxpayer ascertained that he had been selected for promotion to Commander and that after his promotion he would be posted to England for two years. His promotion took effect at the end of December 1973 and he left for England with his family at the end of the succeeding month. However, throughout the relevant time he regularly received from the management company monthly reports concerning such matters as rainfall, pastures and the condition of his cattle and also from time to time specific livestock and calving reports. He maintained for himself a card index system for his leased cows and their progeny, with a separate card for each cow and each calf. (at p320)

11. The taxpayer entered into the agreements on 21st June, 1973, and paid in advance leasing and insurance fees for the ensuing twelve months. In the next year being the year of income ending 30th June, 1974, five calves were dropped by the leased cows. Three of the calves were female and two males, both of the latter being sold in the year of income ended 30th June, 1976. In the year ended 30th June, 1975, four male calves were born, and one male calf was born in July 1975. Four of these calves had been sold at the time of the hearing before the board in March 1977 and one was awaiting sale. A further two female calves were dropped by the leased cows prior to the hearing. The taxpayer had at that date the five leased cows, five heifers the progeny of those cows and one bull which was awaiting sale. He had sold a total of six bulls. (at p320)

12. There was evidence to the effect that at the time when the taxpayer entered into the agreements two-year old bulls were bringing an average of $600 per head and steers $200 per head. Unfortunately for him the price for all cattle had fallen and the market was extremely depressed at the time when he was selling off his bulls. If prices had remained firm, the proceeds of sale of the bulls would have gone in the early years some considerable way towards recouping the taxpayer's expenditure. Ultimately the venture could have realized a cash profit without bringing into account the retained heifers. (at p320)

13. The facts in this matter have as above mentioned at no stage been in dispute. The members of the board of review accepted the evidence of the taxpayer and his supporting witnesses and no witnesses appeared before Sheppard J. The evidence before the board was tendered by consent and the commissioner conceded that it was given honestly and truthfully and should be accepted. However, counsel for the commissioner disputed before us that his client had agreed when before the trial judge that each of the outgoings claimed was of a revenue nature. Nothing as I see it turns on this alleged concession and I can assume for the purpose of my decision it has not been made. (at p320)

14. The primary question argued before the trial judge was whether the taxpayer was carrying on a business, in which case the outgoings were deductible under the second limb of s. 51. The facts upon which this question is to be determined, are, as above mentioned not in dispute, but whether the activities of the taxpayer can be characterized as a business venture is a matter to be concluded (or otherwise) from those facts. It is the question whether this positive conclusion is justified which constitutes the issue before us. Counsel on both sides appeared to concede that we were as well placed as the trial judge in determining whether or not it was the right conclusion. Such a concession accords with the approach of the High Court on appeal in Martin v. Federal Commissioner of Taxation: "It is simply a question of the right conclusion to draw from the whole of the evidence. Although the issue is one of fact there is no conflict of evidence and the case is one of those cases where the court of appeal is in as good a position to reach a conclusion as the judge below" (1953) 90 CLR, at p 479 . It is pertinent to note that the Full High Court in allowing an appeal did not specifically reject the trial judge's test: "The test is both subjective and objective: it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and as counsel for the taxpayer put it, the determination is eventually based on the large or general impression gained" (1953) 90 CLR, at p 474 . The Full Court allowed the appeal expressly on the ground that the evidence did not justify the trial judge's conclusion, not that he applied the wrong test. (at p321)

15. The trial judge in this matter was not prepared to find that the taxpayer was carrying on a business during the relevant years. He accepted the contentions of the commissioner that there were "two steps in the taxpayer's proposals". The first step was the entry of the taxpayer into the two agreements pursuant to which the taxpayer acquired stock. The second step was the commencement of a cattle-raising business upon a property to be purchased by the taxpayer. It followed, the trial judge found, that the taxpayer was in reality acquiring stock at a cheap price against the day when he would commence business with that stock on his own property. (at p321)

16. Stated in this way I am quite prepared to accept these findings as far as they go. But it seems to me necessary to give more detailed consideration to the activities of the taxpayer at the first stage. The fact that he ultimately intended to carry on the business of cattle raising or primary production on his own property with the stock acquired during the first stage does not necessarily preclude the finding that the taxpayer was also carrying on business during the first stage. A person may conduct a business, albeit of a limited nature, the activities of which business are preparatory to or in preparation for the conduct of another business on a larger scale. The question is whether the more limited activities at the earlier stage, standing alone, constitute a business. (at p322)

17. Before dealing with that question I refer generally to some matters of principle arising under the second limb of s. 51 (1). Menzies J. in John Fairfax & Sons Pty. Ltd. v. Federal Commissioner of Taxation [1959] HCA 4; (1959) 101 CLR 30 dealt with the meaning to be attached to that limb in its application to outgoings when he said: ". . . there must, if an outgoing is to fall within its terms, be found, (i) that it was necessarily incurred in carrying on a business; and (ii) that the carrying on of the business was for the purpose of gaining assessable income. The element that I think it necessary to emphasize here is that the outlay must have been incurred in the carrying on of a business, that is, it must be part of the cost of trading operations" (1959) 101 CLR, at p 49 . (at p322)

18. In the same case the point is made by Menzies J. (1959) 101 CLR, at pp 45-46 that the outgoing may be an allowable deduction although incurred in a year in which no assessable income is produced by the activities to which the outgoing is related. The criterion it would appear is the purpose of production of assessable income not the actual production thereof and this is plainly the position if there are continuing operations and not an isolated transaction. (at p322)

19. Finally, the conclusion is open to be drawn that a taxpayer is engaged in business activities notwithstanding the fact that he is operating in a very small way i.e. on a few acres, with very few trees or with a very small number of stock. I would be of opinion that the size of the operation could be of significance for the purpose of testing whether a taxpayer is conducting a hobby rather than a business, but that size is certainly not the determining factor. Walsh J. gave consideration to this aspect in Thomas v. Federal Commissioner of Taxation (1972) 46 ALJR 397 where he said: "There is no doubt that the appellant's chief occupation was the practising of his profession and that the tree farming, if it had a business character, was relatively of minor importance both as to the time devoted to it and as to the returns to be expected from it. But a man may carry on a business although he does so in a small way. In my opinion the appellant's activities in growing the trees ought not to be found to have been carried on merely for recreation or as a hobby. I leave out of account the pine trees, the growing of which did not have, I think, a significant commercial purpose or character. But the appellant in planting the avocado pear trees and the macadamia nut trees set out to grow them on a scale that was much greater than was required to satisfy his own domestic needs and he expected upon reasonable grounds that their produce would have a ready market and would yield, if the trees became established, a financial return which would be of a significant amount, with a relatively small outlay of time and money, and that this return would continue for a very long time. In these circumstances I think it is proper to find, and I do find, that he set out to engage in producing the pears and the nuts as a business and that he was in the tax year carrying on that business, which was a business of primary production" (1972) 46 ALJR, at pp 400-401 . (at p323)

20. The courts have from time to time grappled with the question whether the taxpayer is engaged in carrying on a business, and a number of tests have been suggested. Walsh J. in Thomas' case, in the passage above quoted, found that a certain activity of the taxpayer, namely the growing of pine trees, did not have "a significant commercial purpose or character" and thus was not a business activity. For the purpose of characterizing an outgoing as part of the cost of "trading" operations (see per Menzies J. in Fairfax's case (1959) 101 CLR, at pp 45-46 it is certainly relevant to ascertain if the operations of the taxpayer have a commercial purpose i.e. pursuit of profit or gain rather than pleasure or recreation. The activity is also reviewed for the purpose of determining whether, in the words of Lord Clyde in Commissioner of Inland Revenue v. Livingstone, "the operations involved in it are of the same kind and carried on in the same way as those which are characteristic or ordinary trade in the line of business in which the venture was made" (1926) 11 TC 538, at p 542 . By the application of this test if may be possible to determine whether the activities have a commercial character. (at p323)

21. Moreover if the transactions which go to make up the activity or operations of the taxpayer have an element of regularity or repetitiveness this factor assists in concluding that the taxpayer is carrying on a business rather than indulging in a recreational or hobby activity. (at p323)

22. Returning to the facts of the present matter, the trial judge did not find against the taxpayer on the ground that he was engaged in a recreational activity. Nor in fact did either of the two members who formed the majority of the board of review decide against him on this ground. They all appear to have accepted the taxpayer's evidence on this score. As mentioned above the trial judge was influenced by the fact that the taxpayer proposed ultimately to conduct a business of primary production on his own land, and that what he was currently doing was building up a herd of stock for use in that business. This was the use to which he proposed to put the stock acquired in the first stage of his operations, and at the second stage he would without doubt be carrying on the business of primary production with this stock in accordance with the definition of that term in s. 6 of the Act. But it is still, and notwithstanding, open to find that the activities in the first stage had such a commercial character as to amount to trading operations, and in my view it is proper so to find and I do so find. (at p324)

23. Admittedly the majority of the activites were carried on by the management company. But this company was acting on behalf of the taxpayer and performing these functions as his agent. It had no interest other than in the provision of services, and certainly no interest in the stock whether leased stock or the progeny of that stock. The activities themselves appear to me to have been performed in a systematic and commercial manner and would not be likely to be significantly different if the taxpayer has leased fifty rather than five heifers. (at p324)

24. The commissioner's contention before us was that the taxpayer's operations formed no part of his ultimately intended business of commercial cattle production on his own land, the projected time of commencement of which was too far away. With this I would be prepared to agree. Until such time as the ultimate business commenced the taxpayer was, he submitted, engaged in the activity of building up a herd which activity is not a business. He contended that the activity of building up a herd was not a business because there was nothing in the nature of trade contemplated. There was nothing in the nature of trade contemplated because there was insufficient buying and selling, even taking into account the disposal of the male calves. Finally, the commissioner did not contend that the taxpayer was engaged in a hobby, but stated that the question was whether he was engaged in an activity preparatory to commencing a business or had actually embarked on a business. (at p324)

25. As I have said the activity of building up a herd may, contrary to the commissioner's submission, amount to the carrying on of a business. Neither the fact that the herd would ultimately be used as the basis of another business on the taxpayer's own land nor the small number currently employed necessarily denies the activity the label of a business activity. It is necessary to give consideration to the essential nature of the activity, and the question whether it has the characteristics of a business is primarily a matter of general impression and degree. (at p324)

26. It is my opinion that in the present case the taxpayer had embarked upon a commercial activity which activity was primarily designed to build up a herd of cattle as cheaply as possible. He proposed ultimately to use this herd for the purpose of producing assessable income by selling the members thereof and their natural increase. Until, however, he had acquired the desired numbers he proposed to sell off only the unwanted male calves. These sales were sales of the by-products of the venture and an inevitable feature of his activities. The evidence is that he sold more of the calves than he retained. Moreover the venture as a whole had a commercial flavour, was conducted systematically and, as counsel for the commissioner conceded, in a businesslike manner. It could not be said that there was anything haphazard or disorganized in the way in which he carried out the activity. In my opinion it amounted to the carrying on of a business and thus the outgoings claimed are allowable as a deduction under the second limb of s. 51 (1). There is no need to consider whether the deductions are allowable under the first limb of the section. (at p325)

27. It follows that I would allow the appeal and remit the assessments to the commissioner, who must pay the taxpayer's costs both here and in the court below. (at p325)

ORDER

Appeal allowed with costs.