Reiger and Commissioner of Taxation [2002] AATA 88; (2002) 49 ATR 1022; 2002 ATC 2020 (15 February 2002)

Last Updated: 5 October 2009

DECISION AND REASONS FOR DECISION [2002] AATA 88

ADMINISTRATIVE APPEALS TRIBUNAL )

) No QT2000/98
TAXATION APPEALS DIVISION )
Re GERALD REIGER
Applicant
And COMMISSIONER OF TAXATION
Respondent

DECISION

Tribunal Mr K L Beddoe, Senior Member

Date 15 February 2002

Place Brisbane
Decision The objection decisions for the years of income ended 30 June 1994 and 30 June 1995 are affirmed.

. (Sgd) K L Beddoe
Senior Member
CATCHWORDS
TAXATION – deductions disallowed – whether applicant carrying on a business – whether interest allowable deduction – whether penalty provisions apply

REASONS FOR DECISION

15 February 2002 Mr K L Beddoe, Senior Member

1. The applicant objected to amended assessments of Income Tax for the years of income ended 30 June 1994 and 30 June 1995 (T5). Those objections were disallowed (T3 and T4) and the applicant sought review of those decisions (T1).
2. The questions at issue are

(a) whether the applicant was carrying on a business of cultivation of palm trees for sale;

(b) whether amounts claimed for interest are allowable deductions; and

(c) whether the penalty tax provisions apply and if so whether penalties imposed should be remitted in full.
3. At the hearing of the application for review Mr Powrie appeared for the applicant and Ms Ford appeared for the respondent. The documents lodged in the Tribunal pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 were before the Tribunal as the T documents and further documents were tendered and marked as exhibits . Certain documents tendered on behalf of the respondent were objected to for the applicant and tenders rejected by the Tribunal. Oral evidence was given by the applicant and a witness called for the respondent.
4. I make the following findings of fact.
5. The respondent disallowed as deductions amounts totalling $40,904 in respect of the year of income ended 30 June 1994 and $45,107 in respect of the year of income ended 30 June 1995.
6. In the relevant years of income the applicant was a full-time employee of the Queensland Government and resided in the Brisbane suburb of Brookfield.
7. In or about July 1993 the applicant purchased a 50 acres property at Tewantin. Purchase price was $380,000 (Exhibit A). The land was undeveloped land in the vicinity of Lake Cooroibah with access to the lake. It is zoned "Rural Pursuits" by the Noosa Shire Council. Agriculture is a permitted use within the Rural Pursuits Zone so that no development application is necessary (T11). The Noosa Council expressed its opinion that if "palms were grown on the site for retail sale or development usage elsewhere, the use would be classified as agriculture". The Council distinguished retail "nurseries" from this ruling.
8. When purchased by the applicant the subject land was in a virgin state. The applicant made various enquiries and conducted research into the growing of palm trees. He also obtained advice about potential cash flows.
9. Development of the property commenced in late 1994 with construction of dams and clearing about 50% of the property. Over the next two years the applicant planted palm trees on an irregular basis with the result that 1645 palms (half being Dwarf Date palms) had been planted by March 1996. During that period the applicant had also done further clearing work (another 30%) and fencing work.
10. Exhibit 1 includes copies of photographs taken several years after the relevant years of income. Those photographs show spasmodic planting rather than plantation planting of palms. The applicant described the plantings as landscape planting.
11. In his oral evidence the applicant said, in effect, that he intended to grow palm trees from seed for the purpose of sale of palm trees in a semi mature state into what the applicant called the "upper end of the landscaping market". In that regard he identified the market to include resorts, golf courses, unit complexes and high value housing market.
12. Exhibit A is a requisition for information issued by the respondent together with the applicant's responses to questions asked.
13. The applicant's responses indicate that purchase of the property was financed, in full, by money borrowed from two persons as to $198,000 each. One loan is said to be at 11% and for an indefinite period and the other at 8% also for an indefinite period. The more expensive loan was said to be from the applicant's brother who lives overseas and the less expensive loan from the applicant's wife, who, I understand to live in Australia. Total annual interest on those loans is $37,620. Interest payments to the applicant's wife are deposited to their joint account. The source of those funds has not been disclosed to the Tribunal.
14. In February 1997 the applicant approached Noosa Council for rezoning of the land with a view to a proposed development application because the applicant became aware of a proposed development on adjoining land in December 1996.
15. Noosa Council eventually rejected the application for rezoning. During the period of consideration by the Noosa Council the applicant wrote to the Council on 8 August 1997. The general effect of the letter was that his rezoning application should be considered under the existing Strategic Plan of Noosa Council and not under a proposed Strategic Plan. The letter includes the following:

" I have decided to write these lines to provide you with an appreciation in regards to my feelings and thoughts following the apparent shock turnaround of Councils' Town Planning staff treatment of my rezoning application.

I have bought the property with the intend (sic) to subdivide the land in accordance with the strategic plan in force at the time, thus creating the opportunity of having housing lots for my own family, my parents, my brother, other family members and other nature loving families. The property has been prepared for this vision to come true over a two year period with significant financial backing from my brother and parents.

Being not a developer in the traditional sense, I have from December 1996 looked to Council Town Planning staff and then to Michael Ball from Noosa Town Planning Pty Ltd for guidance. Before lodging an application I attended three meetings with Nadine Gorton to discuss the proposal and the process ahead. Work proceeded accordingly including the conduct of an EIS. In my fourth meeting with Nadine (2 June 1997) some remaining concerns were discussed which were all addressed through the submission of a revised plan on the 6 June 1997. At that time, the application was still discussed to fall under the strategic plan current at the time of lodging it."

16. The applicant does not deny the fact of the letter, and its contents. He says however that the assertions as to the vision for the property is not correct. He also said that the statement as to intent was not correct. He said the statement needed to be seen in its context but did not explain how the context changed the meaning of his statement to the Council.
17. In response to a requisition for information the applicant advised the Taxation Office on 6 September 1995 that the nature of his primary production activities was:

"To grow palms to a mature size (10 to 15 years of growth/age) to cater for the upper end of the landscaping market" (Exhibit A).

18. In his oral evidence the applicant admitted he had no commercial experience in growing cycads/palms. In his letter to the Taxation Office dated 31 March 1996 (Exhibit D) the applicant sets out in some detail informal research undertaken by him. That research seems to have been based on kerbside observation of various nurseries and consideration of literature and discussions with representatives of the Department of Primary Industry.
19. The lack of experience may explain why he failed to conduct any soil tests in circumstances where it is apparent from the applicant's photographs (T36) that the land is low lying water logged land likely to be affected by acid sulphate soils.
20. That, on the evidence, the land is not so affected, is not a reason for failing to test for soil suitability. That there may be a problem is evidenced by the loss of a significant number of palms. The reason for such losses is not apparent but a possible explanation is to be found in the evidence of Mr Walkley who was called to give evidence by the respondent.
21. Mr Walkley is the proprietor of a palm nursery. In an affidavit dated 2 August 2000 (Exhibit 1) he stated, inter alia, that some palms will grow in swamp land, but most require good drainage. He further stated that in swampy areas success can only be achieved by providing adequate drainage using "V" drains, or mounds to avoid the palm roots from sitting in water. Mr Walkley described in some detail his operations in connection with his nursery. He also said that palms are not soil specific but the Ph factor and drainage must be right to get fast growing palms which are commercially viable. A lead time of seven years can be expected for palms to be established and commercially viable. Depending on size and variety, prices obtained would range from $100 to $1,000. There have been sales at much higher figures.
22. The subject property was sold by the applicant in 1998 for $390,000. The purchaser was Garella Pty Ltd as trustee for the Noosa Lakes Trust. Given that the company and the applicant use the same Post Office box, I am satisfied that they are associated persons. The applicant and his wife are the only unit-holders in the Noosa Lakes Trust and therefore are, in effect, the beneficial owners of the subject land.
Consideration
23. Mr Powrie submitted that the applicant was carrying on a business in the subject years of income. He asserted that the applicant started to pursue a new venture in late 1996 but that was being pursued concurrently with the palm growing business ie he had two mind sets.
24. Ms Ford submitted that the applicant had a flexible approach to the truth and the Tribunal should prefer the contemporaneous documents. On the applicant's own evidence he had planted 445 palms at September 1995 when the Taxation Office issued its requisition for information.
25. Whether a person is carrying on business is to be determined on the facts. In Martin v FCT [1953] HCA 100; (1952) 90 CLR 470 Webb J, at first instance said at CLR 474:

"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 in engaging in them and, as counsel for the taxpayer put it, the determination is eventually based on the large or general impression gained".

26. In his decision Webb J held that Martin was carrying on a business. That decision was reversed in the Full Court but as I read their Honours judgment they did not disagree with the above dicta of Webb J ((1953) [1953] HCA 100; 10 ATD 226). Nor did Hill J in Babka v FCT [1989] FCA 383; (1989) 89 ALR 373 Evans v FCT 89 ATC 4540 (and the Full Court in Ferguson v FCT [1979] FCA 29; 79 ATC 4261 at 4269) where his Honour gave consideration to the reasoning in Martin but did not expressly refer to the above dicta of Webb J.
27. In Tweddle v FCT [1942] HCA 40; (1942) 7 ATD 186 the High Court (Williams J) adopted with apparent approval dicta of the Lord President in Commissioner of Inland Revenue v Livingston, 11TC 538 at 542, as follows:

"the operations involved in it are of the same kind, and carried on in the same way as those which are characteristic of ordinary trade in the line of business in which the venture was made." This statement was adopted by Rowlatt J and the Court of Appeal in Leeming v Jones [1930] 1KB 279 (affirmed on appeal by the House of Lords) [1930] AC 415.

28. In Ferguson v FCT 79 ATC at 4270 Fisher J also adopted this statement.
29. The essence of Tweddle is that the taxpayer undertook stud farm operations in addition to being the Manager of a company in Melbourne which was his full time occupation. The Court held that the taxpayer was engaged in the business of farming.
30. In his judgment in favour of the taxpayer whereby his Honour found that the stud farm was a business Williams J said at page 190:

"It is not suggested that it is the function of income tax Acts or of those who administer them to dictate to taxpayers in what business they shall engage or how to run their business profitably or economically. The Act must operate upon the result of a taxpayer's activities as it finds them. If a taxpayer is in fact engaged in two businesses, one profitable and the other showing a loss, the Commissioner is not entitled to say he must close down the unprofitable business and cut his losses even if it might be better in his own interests and although it certainly would be better in the interests of the Commissioner if he did so: Toohey's Ltd v Commissioner of Taxation (NSW) 22 SR (NSW) 432. If the appellant succeeds and makes a profit it will plainly be taxable, and it is difficult to see how his activities could at that moment of time be transmogrified from an indulgence in a somewhat unusual form of recreation into the carrying on of a business. I am satisfied that the appellant is seeking to establish himself at Winlaton as a recognised breeder of high class stud stock, and that while he is prepared to make losses to achieve this ambition he has a genuine belief that he will be able eventually to make the business pay. Indeed, unless he can do so, his experience will hardly be an encouragement to others to emulate his example."

31. Scale of operations and the nature of the operations are however factors that must be taken into account although they were not in issue in Tweddle.
32. In Ferguson v FCT [1979] FCA 29; 79 ATC 4261, the Federal Court decided that a serving naval officer was carrying on business when he was breeding up cattle preparatory to carrying on a business of primary production following anticipated retirement from the Navy. At page 4264 Bowen CJ and Franki J commented that it may be held a person is carrying on business notwithstanding the profit is small or non-existent. Their Honours said repetition and regularity of activities is also important but every business has a beginning so that isolated activities may in the circumstances be held to be the commencement of a business activity. Included in their Honours' summation of the authorities is the following at 4265:

"The volume of his operations and the amount of capital employed by him may be significant."

33. In Thomas v FCT 72 ATC 4094, a practising Barrister established relatively small plantations of macadamia trees (75), avocado trees (30) and pine trees (1800). He did not expect any return for the first seven years from the plantings and because of adverse conditions was never likely to achieve his expected returns. Walsh J found that the macadamia and avocado plantations were part of a business of primary production but the pine plantation was found not to have a significant commercial purpose or character.
34. The decision of Walsh J in Thomas was subsequently explained by the Full Court in Hope v Council of the City of Bathurst, [1980] HCA 16; 80 ATC 4386. In particular Mason J (Murphy and Aickin JJ concurring) said at page 4391:

"The issue in Thomas was whether the taxpayer was carrying on the business of growing avocado, macadamia nut and pine trees. Walsh J in the passage quoted did no more than say that he left the pine trees out of account because the growing of them did not have a commercial purpose or character which was significant for the purpose of characterizing the taxpayer's other activities as a business. His Honour's remarks did not go to the magnitude or size of the activities necessary to constitute a business, nor indeed to the genuineness or bona fide character of those activities. His Honour had expressly conceded that a man may carry on a business though in a small way."

35. So instructed I have come to the conclusion that an objective assessment of the applicant's palm planting on a landscape basis as distinct from a plantation basis and the cost of the land contrasted with a small number of palms planted leads to a conclusion that the objective purpose was not to carry on business as a palm plantation. As has been explained by the cases it is not the relatively small number of palms planted that is determinative.
36. It is the failure to carry on the activity in a business like manner by planting for landscape, planting with little regard to industry practice, the number of palms, and the potential return on the palms being insignificant when compared with the cost of the land and the interest charges incurred on purchase of the land. The planting of palms for landscape is consistent with the expressed intent of developing the land including the development a family enclave.
37. I am not satisfied that the applicant was carrying on a business growing palms trees.
38. I turn now to the question of the additional tax assessed. For the year ended 30 June 1994 the respondent assessed an amount of $2675.24 for "understatement Penalty and Interest". For the 1995 year the amount assessed was $762.92. The amounts assessed consist of interest only according to the notices of assessment. The notice of objection (T5) does not raise the issue of penalty tax assessed and I can see no reason to interfere with the assessment.
39. The decisions under review will be affirmed.

I certify that the 39 preceding paragraphs are a true copy of the reasons for the decision herein of Mr K L Beddoe, Senior Member

Signed: .....................................................................................

Associate

Date/s of Hearing 13 December 2000

Date of Decision 15 February 2002

For the Applicant Mr Powrie

For the Respondent Ms Ford