Puzey v Commissioner of Taxation [2004] FCAFC 23 (13 February 2004)

Last Updated: 16 February 2004

FEDERAL COURT OF AUSTRALIA

Puzey v Commissioner of Taxation [2004] FCAFC 23

INCOME TAX – supplementary orders – whether taxpayer entitled to deductions claimed for participation in an Indian Sandalwood plantation – plantation management fee – whether on capital account







Income Tax Assessment Act 1997 (Cth) s 8-1


Puzey v Commissioner of Taxation [2002] FCA 1171; (2002) 194 ALR 615 cited
Puzey v Federal Commissioner of Taxation [2003] FCAFC 197; (2003) 201 ALR 302 cited














NOEL PUZEY V COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
W 30 of 2003
W 31 of 2003


FRENCH, HILL & CARR JJ
13 FEBRUARY 2004
PERTH

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY	W30 OF 2003

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	NOEL PUZEY APPELLANT
AND:	COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA RESPONDENT
JUDGES:	FRENCH, HILL & CARR JJ
DATE OF ORDER:	13 FEBRUARY 2004
WHERE MADE:	PERTH

THE COURT ORDERS THAT:

The Orders made on 26 August 2003 are confirmed.



Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY	W30 OF 2003 W31 OF 2003

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	NOEL PUZEY APPELLANT
AND:	COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA RESPONDENT

JUDGES:	FRENCH, HILL AND CARR JJ
DATE:	13 FEBRUARY 2004
PLACE:	PERTH

REASONS FOR JUDGMENT
ON SUPPLEMENTARY SUBMISSIONS

THE COURT:

1 The present appeal was brought against a judgment of Lee J dismissing an appeal by Mr Noel Puzey against the disallowance of objections to assessments of his income tax for the years ended 30 June 1997 and 30 June 1998 – Puzey v Commissioner of Taxation [2002] FCA 1171; (2002) 194 ALR 615. The case concerned deductions claimed by Mr Puzey in respect of his investment in a project for the planting and development of an Indian Sandalwood plantation.

2 Relevantly for present purposes Lee J made the following orders at first instance on 24 December 2002:

‘1. Save for Item 2 hereof, the appeal be dismissed.

2. The "appealable objection decision" in respect of the 1998 year of income be set aside and the matter be remitted to the Commissioner with the direction that the applicant’s objection to the amended assessment of income tax be allowed to the extent that deductions from taxable income are allowed for plantation establishment fees ($2,000), and for plantation management fees ($800).

3. The applicant pay one-half of the Commissioner’s costs of the appeal.’

3 On 26 August 2003, in Appeal W30 of 2003, the Full Court, on appeal from Lee J, made the following orders:

1. Paragraph 2 of the orders made on 24 December 2002 be varied by deleting the words ‘...the deductions from taxable income are allowed for plantation establishment fees ($2,000), and for plantation management fees ($800)’ and inserting in lieu thereof the words ‘the deduction from taxable income is allowed for plantation management fees ($800)’.

2. Paragraph 3 of the orders made on 24 December 2002 be set aside and in lieu thereof there be an order that the appellant pay the respondent’s costs of the proceedings at first instance.

3. The appeal be otherwise dismissed.

4. Paragraph 1 of the above orders be suspended for ten days. If either party wishes to make submissions concerning the plantation management fees or the plantation establishment fees they may file and serve written submissions within seven days of the publication of these reasons. If any such submissions are received, the suspension of paragraph 1 will continue until further order.

(Puzey v Federal Commissioner of Taxation [2003] FCAFC 197; (2003) 201 ALR 302 at 325)

In the related appeal, W31 of 2003, the Court ordered that the appeal be dismissed with costs and allowed a cross-appeal in relation to costs of the proceedings at first instance.

4 In the joint reasons for judgment of Hill and Carr JJ (with which French J agreed) the Court upheld the following conclusions of the primary judge:

1. That in the year of income ending 30 June 1997, Mr Puzey’s involvement in the project constituted the carrying on of a business [54].
2. By reason of the foregoing conclusion, amounts paid in the 1997 income year for seedlings to be used in the project were allowable deductions in that year and not on capital account [45].
3. By reason of a restructure of the project arrangements, Mr Puzey was not carrying on a business in the year of income ended 30 June 1998 and became a passive investor in a managed investment scheme [57].
4. Amounts outlaid by Mr Puzey for seedlings in the year of income ended 30 June 1998 were not deductible under s 8-1 of the Income Tax Assessment Act 1977 (Cth) (‘ITAA’).
5. The balance of the outgoings in both years of income would have been deductible under s 8-1 [62].
6. By reason of the application of Pt IVA of the ITAA and determinations made by the Commissioner thereunder tax benefits gained by Mr Puzey were properly cancelled. These comprised outgoings for rental and management fees together with the outgoings for seedlings in the 1997 year of income [66].

5 An outstanding question relating to the deductibility of plantation establishment fees of $2,000 and plantation management fees of $800 in the year of income 1998, arises out of his Honour’s judgment. Mr Puzey had claimed before his Honour that his amended assessment for the 1998 year of income was excessive in that he had not been allowed the following deductions:

(i) $40,000 for purchase of seedlings;
(ii) $2,000 for plantation establishment fees;
(iii) $800 for plantation management fees; and
(iv) $1,200 for lease fees

In the end, the last item claimed was not the subject of submissions and his Honour made no definitive finding on it. Nor did he disturb the Commissioner’s decision in respect of it. As to the two payments of $2,000 and $800 he said (at [66]):

‘Upon execution of the management agreement the applicant incurred a liability in respect of that year of income to pay to Lincfel a plantation preparation and establishment fee of $2000 and an annual management fee of $800. As with the payments made to purchase seedlings, those amounts may be characterised as payments on revenue account being payments made to further the purpose of gaining or producing assessable income and the sums claimed were deductible under ss 51(1) and 8-1.’

6 On appeal Mr Puzey was successful in arguing the deductibility of the amounts he claimed in the 1997 year of income before the effect of the determination under Pt IVA was considered. He was unsuccessful in relation to the deductibility of the amounts claimed in 1998 for the purchase of seedlings. That is because those amounts were held to be capital outgoings. No separate argument was addressed to the Full Court concerning the two amounts of $2,000 and $800 in the 1998 year. In their joint reasons, Hill and Carr JJ expressed the view that there seemed to be no reason why the latter, at least, would not be deductible but for the determination. The Court was of the view that the former would be capital. In the final paragraph of their reasons, Hill and Carr JJ said:

‘In case either party should wish to make submissions concerning the plantation management fees and the plantation establishment fees, they should do so in writing within seven days of the publication of these reasons. To enable this to be done the orders made by the Court should be suspended for 10 days or such further time as the court may order to enable any further submissions as the parties may wish to file to be considered.’

In the event no further order was made after the expiry of the seven days although written submissions were lodged within the time limited by par 4 of the orders.

The Appellant’s Contentions

7 It was submitted on behalf of Mr Puzey that the Commissioner had not raised or argued in his cross-appeal that the primary judge had erred in finding the plantation establishment fee or the plantation management fee to be a deductible outgoing under s 8-1. It was said that on this basis no order should be made overturning the primary judge’s findings. Both the plantation establishment fee of $2,000 and the plantation management fee of $800 were incurred pursuant to Part 3 of the Schedule to the Management Agreement entered into between Mr Puzey and Lincfel. Even after the restructuring arrangements in 1998, the Management Agreement continued in operation and continued to be enforceable by Mr Puzey. It was pointed out that this had been confirmed at [55] of the joint judgment of Hill and Carr JJ where their Honours referred to the question whether the restructuring of the project arrangements at the request of the ASC had the consequence that Mr Puzey ceased to carry on the business which he had commenced in June 1997 as his Honour held. Their Honours said:

‘It is important to note that the contracts of lease and management entered into by Mr Puzey continued in operation and continued to be enforceable by him.’

At [58] of the joint judgment they said:

‘The question which then arises is whether the change affects the deductibility of the amounts outlaid by Mr Puzey. There can be no doubt that a contractual payment to a manager to manage such a scheme would be deductible. So too would rent paid by Mr Puzey. Outgoings such as rent and fees for services, if for the purpose of gaining and producing assessable income are deductible and not on capital account. The only question of any difficulty is whether a different result follows in respect of the purchase of seedlings.’

And at [62] in the joint judgment it was said that although the purchase price of the seedlings in the 1998 year of income was not deductible, the balance of the outgoings in both years of income would be.

8 It was submitted for the appellant that having regard to those findings, a finding could not properly be made that either the plantation establishment fee or the plantation management fee were not deductible under s 8-1 of the ITAA in the 1998 year of income. It was therefore submitted that the orders of this Court should be amended accordingly and Order 2 made by Lee J on 24 December 2002 not be disturbed.

9 It was submitted on behalf of the Commissioner that the orders in the form proposed by the Court are in accordance with the reasoning in the joint judgment in that the plantation management fees were outgoings bearing a revenue character and properly deductible. The plantation establishment fees, it was said, bore a capital character. Reference to the Management Agreement showed those fees to be a one-off payment for land preparation and planting. Accordingly, they constituted expenditure directed to securing an advantage of a lasting character.

10 In our opinion, the orders which were made on 26 August 2003 should be confirmed. In any event the suspension of Order 1 ceased to operate at the expiry of ten days after it was made. The Management Agreement referred, in Part 3, to a ‘preparation and establishment fee in the sum of $2,000.00 which shall be paid by the Grower to the Plantation Manager on the 1^st September 1997 or alternatively in four (4) quarterly instalments in advance commencing on the 1^st September 1997’. That fee relating to the costs incurred under the Plantation Establishment Programme in Part 4 (Recital D), which set out the process of plantation establishment:

‘(i) Plantation Establishment Programme

Planting to commence on 1^st June 1998 or as soon thereafter as ground conditions permit.
Plantable area in two plantings -Two acres in total.
Species - Indian Sandalwood 400 plus pot hosts
- East African Ebony 160
- Rosewood 160
- Mahogany 160
- Acacia 640

Stocking rate/spacing
Fertiliser NPK
Weed and Grass Control Rate of application as recommended by strip spray CALM
Other preparation In accordance with good horticultural
practice as recommended by CALM.’

11 The plantation establishment fees are properly characterised as on capital account. Although the Management Agreement is a contract concerned with the payment for plantation managerial services, it draws an explicit distinction between payments of amounts for plantation establishment costs and payments for plantation management fees in Part 3 of the Agreement. The costs break-down suggests ongoing management of the plantation as a revenue item captured by the later fee under the contract. The management fee is an ongoing fee payable annually in four quarterly instalments and CPI indexed. The plantation preparation and establishment fee is a lump sum, one-off fee of $2,000 payable on 1 September 1997. Its character does not alter by virtue of the option to pay it in four quarterly instalments in advance. In our opinion the characterisation essayed in the joint judgment of Hill and Carr JJ at [99] was correct and the suspension under Order 4 should be lifted enabling Order 1 to have effect. No issue of costs adjustment arises.

I certify that the preceding eleven
(11) numbered paragraphs are a
true copy of the Reasons for
Judgment of the Court.

Associate:
Date: 13 February 2004

Counsel for the Applicant:	Mr J W De Wijn QC and Mr SHP Steward
Solicitor for the Applicant:	Wilson & Atkinson
Counsel for the Respondent:	Mr G Davies QC, Ms H Symon SC and Ms L Price
Solicitor for the Respondent:	Australian Government Solicitor
Date of Submissions:	1 and 5 September 2003
Date of Supplementary Reasons for Judgment:	13 February 2004