Tweddle v Federal Commissioner of Taxation [1942] HCA 40; (1942) 180 CLR 1; (1942) 2 AITR 360; (1942) 7 ATD 186 (5 November 1942)

WILLIAMS J delivered the following written judgment:

This is an appeal by J T Tweddle against the assessment of tax upon his income for the year ending 30 June 1940. The appellant returned a substantial income from personal exertion as Chairman of Directors of Andrews Bros Pty Ltd, a prosperous company engaged in the soft goods trade with headquarters in Flinders Lane, Melbourne, and from property mainly derived from dividends paid

by that company. He claimed as a deduction the sum of £3,094 the debit to profit and loss account incurred in connexion with the carrying on of two country properties in Victoria, namely Wonga, comprising 1,900 acres, situated near Colac, and Winlaton, comprising 550 acres, situated near Shepparton. This is really a claim that the income derived from Wonga £192 and from Winlaton £497 was the proceeds of a business of a farmer carried on upon these two properties during the year of income within the meaning of s 6 of the Income Tax Assessment Act 1936 (Cth), so that he is entitled to a deduction from these sums of the losses and outgoings amounting to £837 in the case of Wonga (including another small property of 20 acres known as Glenduie amounting to £22) and £2,257 in the case of Winlaton on the ground that they were incurred in the course of gaining or producing this assessable income within the meaning of s 51(1) 1 .

The appellant, who was born in England, arrived in this country in 1887. His parents were farmers from whom he inherited a liking for the land. For five years after his arrival he was a farmer at Bendigo. But he then became interested in the business of Andrews Bros. He made his home in Melbourne and his business life has been chiefly occupied in the carrying on and management of the affairs of the company. But he retained a predilection for the land. In 1918, partly in order to assist a nephew who had come to Australia and partly to satisfy this liking the appellant commenced to purchase and lease small farm properties in Victoria. In the first instance he purchased a property near Bendigo and appointed his nephew as manager. In 1922 he sold this property and bought another one at Sunbury nearer to Melbourne where he again appointed his nephew as manager and commenced to breed stud Friesian dairy cattle. But a fire destroyed the buildings, and the appellant had to transfer his stud to Berwick where he entered into partnership with two friends Dr Sewell and an accountant, Mr Flack, professional city men, who, like himself, were interested in this breed of cattle. The venture was not a success and he sold the stud in 1930. He was not satisfied with his nephew as a manager and he decided to sell the property at Sunbury, which was then worth about £7,000. He had an opportunity of exchanging it for the vendor's interest in Wonga under a contract of sale by which the vendor had sold this property for £13,000; £10,000 of which still remained unpaid at the date of the exchange. He was ill at the time and unable to make a personal

inspection. On the advice of a relative he agreed to the exchange which, on paper, appeared to be a good bargain, but the purchaser defaulted under the contract and he was forced to enter into possession. He found the property to be poor country and in a neglected condition. It was well fenced and cleared of heavy timber but covered with scrub bracken and weeds and over-run with rabbits.

Between 1923 and 1927, he had purchased and leased some small areas of farm land near Berwick. In 1930 he placed an experienced and reliable manager named Tailford in charge of these properties then comprising 240 acres and bred stud Suffolk sheep and middle white Yorkshire pigs. In 1937, whilst on one of his periodical visits to England, he became interested in Percheron draught horses. He imported two stud mares in foal at a cost of £540 and bought a stallion in New South Wales, but both foals died. He commenced to breed Percheron stud horses at Berwick, but the country was not suitable for the purpose, so that, in 1939, he sold the Berwick properties and purchased a farm near Shepparton which he called Winlaton after his native village. He appointed Tailford manager and continued to breed stud horses, sheep, and pigs there.

It is clear that the appellant's land ventures have not been financial successes. Between the years 1926 and 1942 his profit and loss accounts have shown consistent losses ranging from £1,300 to £3,950. Section 6 of the Act includes in income from personal exertion the proceeds of any business carried on by the taxpayer. In Commissioner of Inland Revenue v Livingston 2 the Lord President (Clyde) in discussing whether a taxpayer was engaged in trade said that he was because "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 3 (affirmed on appeal by the House of Lords) 4 .

It is clear that the appellant never intended to enter into possession of Wonga or to carry on business there. He had acquired the vendor's rights under the contract of sale in order to convert his Sunbury property into money. When he was forced to take possession he found the property in the parlous condition already mentioned. His main desire was to sell it, but he only succeeded in

doing so in March 1942. It was therefore on his hands for over ten years. He was compelled to put men on to clear and manure the property to make it fit for sale and to comply with legal requirements relating to country infested with noxious weeds and animals. He ran a few sheep (on an average about 200) and a few grazing cattle on the property and grew some crops for sale. In the year of income he had two men regularly working there. The only proceeds of sale in that year were £149 for a crop of potatoes, £34 for wool, £6 for cattle and sundries £3, totalling £192. The outgoings were £1,029 leaving a net loss of £837. The average proceeds of other years were from £150 to £380. The clearing and improvements were beneficial not only to enhance the prospects of selling the property but also to enable the appellant to carry on business there if he was unable to sell it. He said that he did not try to stock it up, that the carrying capacity would have been little and he was exerting his best efforts to sell it. The main items of expenditure were for labour and stores. These items were probably more attributable to the work of clearing and improving the property than to the limited extent to which it was being worked as a farm, but so far as they were attributable to the former purpose they would appear to be deductible under s 75 and so far as attributable to the latter purpose to be deductible under s 51 so that it does not appear to be a case for splitting hairs. Without the improvements and the men the appellant would not have been able to work the place at all. The appellant's activities were circumscribed by his inability to obtain an efficient manager, the distance from his own home in Melbourne which made it impossible to pay regular visits and the condition of the country. In Rolls v Miller 5 , Lindley LJ, said "the word" (business) "means almost anything which is an occupation, as distinguished from a pleasure — anything which is an occupation or duty which requires attention is a business." His dominant purpose was to sell the property, but I think that the facts are just sufficient to establish that pending realization he was carrying on the business of a farmer there.

There remains the question of Winlaton. It is all farming land. The purchase price was £6,700. The appellant has spent over £5,500 of borrowed money to adapt the farm for stud purposes. The usual steps, including frequent exhibitions at shows are being taken to establish the reputation of the stud. The appellant was unable to buy Percheron mares in Australia. The foals of the mares he imported and of their offspring cannot be sold until they are three or four

years old. The number of stud horses is being steadily increased. There are now twenty-two Percherons. Altogether there are about sixty horses, two dozen Guernsey cattle, 120 Suffolk sheep and 80-100 pigs. It will soon carry another twenty-five head of cattle and another twenty horses. The animals are being used for the purpose of breeding and sale according to the usual manner in which similar stock would be used for such purposes on any other stud farm. It is being managed by an experienced farmer, whose instructions are to make the place pay. Mr Connors, an experienced expert, said that the country is suitable for a stud farm and that the improvements which the appellant has made do not exceed what is required to work the property. The facts are essentially different from those which the Court had to consider in In re Wallis; Ex parte Sully 6 . Proper accounts are kept of all transactions. Until the sale of Wonga the outgoings at Winlaton were increased by a heavy bill for interest £734, but with the proceeds of this sale the appellant has been able to discharge this item. In the first year he suffered a disastrous flood and in the following year a serious drought. The flood prevented him ploughing and the drought killed the crops so that a large amount of fodder had to be purchased. His outgoings in the future should therefore be considerably less than they have been in the past but it may be difficult to reduce them below £1,200. With the present acreage it may be optimistic to conjecture that the income will exceed this figure, although it could easily do so if the Percherons are an outstanding success. As a business entered into with a view to profit, it is no doubt in the nature of a hobby when compared with the business of Andrews Bros. The appellant will probably not be unduly disappointed if he has to carry on at a loss in the future, so long as he can, as he said, obtain a change of business from the routine and monotony of Flinders Lane, make a name for himself as a stud-master and help the country of his adoption by improving the quality of some of its stock. It is not essential that a person who engages in business should do so with the motive of making a profit for himself 7 . It is notorious that in many businesses, as for instance an insurance or newspaper business, serious losses are usually suffered during the establishment stage. To breed and sell stud stock is to carry on a business 8 .

Mr Phillips contended that the evidence shows that the venture at Winlaton can never show a profit and he invited me to hold that in intention and in fact it is being carried on without any hope of doing so regardless of expense simply and solely for the admittedly laudable but entirely unbusiness-like object of satisfying a foible of the appellant to breed high class stock. But I might with respect apply to this argument by analogy the remarks made by Lord Cairns in In re Suburban Hotel Co 9 , with respect to an application to wind up a company on the ground that it was just and equitable to do so because the business had been carried on at a loss and appeared likely to continue a losing concern. He said "This Court cannot be used and ought not to be used as a means of evoking a judicial decision as to the probable success or non-success of a company as a commercial speculation."

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 10 . 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 recognized 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.

For these reasons I find as a fact that in the relevant year the appellant was engaged in the business of farming both at Wonga and Winlaton.

In case this appeal may go further I will add that the appellant and his witnesses all impressed me as honest and reliable witnesses.

Appeal allowed.

Discharge the existing assessment.
Direct the respondent Commissioner to re-assess the appellant allowing as a deduction the sum of £3,094 claimed by the appellant in his return. Respondent to pay the appellant's costs of the appeal.

Solicitors for the appellant, Duigan & Hall.
Solicitor for the respondent, H F E Whitlam, Crown Solicitor for the Commonwealth.

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1 Amalgamated Zinc (De Bavay's) Ltd v Federal Commissioner of Taxation [1935] HCA 81; (1935), 54 CLR 295, at pp 303, 309.
2 (1927) 11 Tax Cas 538, at p 542.
3 [1930] 1 KB 279, at pp 284, 290.
4 Jones v Leeming, [1930] AC 415.
5 (1884) 27 Ch D 71, at p 88.
6 (1885) 14 QBD 950.
7 In re Incorporated Council of Law Reporting for England and Wales (1888), 22 QBD 279, at pp 293-294; Religious Tract & Book Society of Scotland v Forbes (Surveyor of Taxes) (1896), 3 Tax Cas 415; Royal Agricultural Society of England v Wilson (Inspector of Taxes) (1924), 9 Tax Cas 62.
8 Lord of Derby v Bassom (Inspector of Taxes) (1926), 10 Tax Cas 357
9 (1867) LR 2 Ch App 737, at pp 750-751.
10 Toohey's Ltd v Commissioner of Taxation (NSW) (1922), 22 SR (NSW) 432, at pp 440-441.