Will each applicant be carrying on a business?
72 The indicia of conducting a business have frequently been identified in the cases. In Ferguson v Federal Commissioner of Taxation (1979) 37 FLR 310 at 314, Bowen CJ and Franki J said, concerning that question:
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 and 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.
73 More recently, in Puzey v Commissioner of Taxation (2003) 131 FCR 244 at [46]-[48], Hill and Carr JJ observed:
46. The question whether a person is carrying on a business is a conclusion to be drawn from all relevant facts and circumstances. There are some relevant propositions which can, however, be stated. First … every business must have a first transaction. And there may be a business, even if that business is small in scope … . A person may carry on a business, notwithstanding that the person had some other activity, such as full-time employment. It is not necessary in concluding that a business is carried on that the acts to be undertaken are acts of the person seeking to establish he or she is carrying on a business. So a person may appoint another to take the steps which constitute the business activity … .
47. It will be relevant in deciding whether a business is carried on that there is some repetition of acts and that the activities in question have "something of a permanent character" … . What is required is that activities be engaged upon "on a continuous and repetitive basis" … . However, perhaps not too much attention should be given to the concept of repetition where the activity is one, such as plantation operation, where the activity will continue over a relatively long period of time but where there will be significant periods of what may be referred to as inactivity. Business does not mean being busy.
48. In deciding whether or not a business is carried on, courts have pointed to what have been called in the United Kingdom the "badges of trade", indicia which, while no one of them will be determinative of whether a business is carried on, collectively will demonstrate a business. These include the profit motive (although a non-profit company may still carry on a business), acting in a business-like way (although many businesses may be found which operate in a non business-like way), the keeping of books of account and records (although the fact that there are none will not necessitate the conclusion that a business is not carried on) and repetition (although a fixed term project may still be a business).
74 In approaching the question it is also important to keep in mind the observations of Dixon J in Sun Newspapers at 359-60 where his Honour said:
The business structure or entity or organization may assume any of an almost infinite variety of shapes and it may be difficult to comprehend under one description all the forms in which it may be manifested. In a trade or pursuit where little or no plant is required, it may be represented by no more than the intangible elements constituting what is commonly called good will, that is, widespread or general reputation, habitual patronage by clients or customers and an organized method of serving their needs. At the other extreme it may consist in a great aggregate of buildings, machinery and plant all assembled and systematized as the material means by which an organized body of men produce and distribute commodities or perform services.
75 There can be no doubt that each applicant will participate in the Scheme for the purpose of deriving financial gain. Such a gain will only be derived if proceeds from the sale of almonds exceed the expenses (including rent) incurred in producing, processing and selling them. Each applicant will bring his leased Almondlots to the Scheme. They will be used for the purpose of growing almonds for sale. Each applicant will also have an ongoing commitment to pay management fees and other outgoings so as to ensure that the trees eventually become, and then remain, commercially productive. This activity will extend over many years and be performed by AIMA or its agent, but at the expense of each applicant, such expenses being met from year to year. There will be seasonal financial returns, but they will not commence for some years.
76 The Commissioner submits that neither applicant will be conducting a business because:
· each applicant will have delegated to AIMA his responsibility for management of his Almondlots;
· AIMA intends that the Scheme be registered under Ch 5C of the Corporations Act;
· there is a "disparity" between the cost to AIMA of obtaining management services from Select Harvests and the management fees charged to each applicant for the period from 2 June 2009 to 30 June 2009 and in later periods; and
· the almond crops will be pooled for sale.
77 As to the question of delegation, we consider that the Commissioner focuses too much upon what the applicants will not be doing and pays too little attention to what they will be doing. His approach involves the identification of functions which are, perhaps usually, incidental to the conduct of a business and are, perhaps normally, performed by the person who is ultimately carrying on the business. Such an approach fails to give sufficient weight to the observations by Dixon J in Sun Newspapers concerning the variety of forms which a business may take. It also places an artificial limit upon the proposition (which the Commissioner accepts) that a person who conducts a business may delegate functions to another. The notion of a "silent partner" assumes the possibility of more or less total delegation.
78 In any event, each applicant will have obligations under his sub-lease, his management agreement and the constitution. Each may look to AIMA to perform many of those obligations, but each will pay for such performance and, ultimately, each will bear the consequences of any failure by AIMA to do so. In those circumstances we cannot accept the Commissioner's description of each applicant's involvement in the Scheme as being to lay out money and await the results. Further, the Commissioner seems to have ignored the possibility that a prudent Grower might choose to ensure, as far as is practicable, that AIMA performs its obligations in an appropriate and economical way. Such a function is as much a part of carrying on business as any of those identified in the Commissioner's list of functions which the applicants will not perform.
79 The Commissioner's reliance upon AIMA's intention to register the Scheme under the Corporations Act is really little more than a restatement of the submissions concerning delegation. It is submitted that Ch 5 of the Corporations Act assumes that a scheme member will have no day-to-day control over its operations. AIMA's opinion as to the proper construction of the Corporations Act, or that of its legal and/or accounting advisers, is hardly relevant for present purposes. In any event we see nothing in the registration requirements (s 601ED) which would be inconsistent with a finding that an individual Grower will be carrying on his or her own business. No doubt AIMA will be carrying on a business. That business may be the promotion and management of managed investment schemes. That it will be doing so will not exclude the possibility that it may also be managing the Scheme on behalf of Growers, or that each Grower may be conducting the business of producing almonds for sale.
80 We have already said something about the so-called disparity between fees payable to AIMA and fees payable by AIMA to Select Harvests. Given the assumption that the management fees will be within the range of fees charged in the industry for similar services provided in relation to schemes of this nature, we find the Commissioner's position difficult to understand. More significantly we note the different duties to be undertaken in the period from 2 June 2009 to 30 June 2009, to which we have previously referred, and the possibility that the supply of services may commence before 2 June 2009. The Commissioner's references to alleged disparities in later periods are imprecise and seem not to have been given significant weight. In any event, these matters have little relevance to the question of whether each applicant will be conducting a business. They may, of course, be relevant to the question of characterization of the outgoings. As we have observed, in his submissions on appeal, the Commissioner did not rely upon the so-called discrepancies between Select Harvests' charges to Almond Land and AIMA's charges to Growers.
81 We turn to the question of pooling. The Commissioner asserts that AIMA will have the "right" to pool. Clause 7.4 of the management agreement may suggest as much. However, when read with cll 6 and 8 of that agreement and cl 13 of the constitution, it is clear that each crop will be the property of the Grower until it is sold. Until that time, the Grower may withdraw it from the pooling arrangement. No doubt the Commissioner is correct in assuming that generally, Growers will utilize the mechanism of marketing the pooled crop but nonetheless, a crop will be produced on each Grower's Almondlots, which crop he or she will own. That a Grower may choose to participate in pooled marketing and sales may well be an entirely appropriate way of carrying on business.
82 The Commissioner relies heavily upon the reasons of Dixon CJ and Kitto J in Clowes (supra). However that case differed substantially from the present case. Dixon CJ characterized the relevant arrangement "from the taxpayer's point of view" as follows (at 216-217):
… he laid out a sum of money entitling him at the end of a protracted period of time to an uncertain return in a lump sum which he hoped might prove larger than his outlay though it might well prove smaller. In the event, when a period of fifteen to eighteen years had elapsed, he received back a sum equal to his outlay and an additional forty per cent. But the taxpayer did nothing but lay out his money on the faith of the contract to await the result. The company was in no sense his agent. The money which he paid in pursuance of the contracts became part of the general funds of the company. Its obligations to him were simply contractual. It made the contract for its own advantage and in performing it acted independently of the direction or control of any lot-holders, whose relationship to the company was simply that of persons providing it with money on special term. Further, every lot-holder made a separate contract. They were not bound together by any contract inter socios. It would be impossible to regard them collectively as an unincorporate body or association of persons that would fall within the definition of "company" contained in s 6 of the Income Tax Assessment Act 1936-1945.
83 In Clowes the amount payable by the taxpayer in order to acquire the relevant rights was a fixed sum, payable at the commencement of the arrangement, although there was provision for payment by instalments. After such payment, no further action was required of the taxpayer. It could properly be said that he or she would "await the result". In that case, too, there was no question of the taxpayer acquiring any title to relevant land or to the timber. At 218 Dixon CJ observed:
If the case is considered apart from s 26(a), then I think the taxpayer's gain should be held to be a mere enlargement of capital. In the case of each of the two contracts, a single sum was paid in the expectation or hope of the return of a single sum, an increased sum. From the taxpayer's point of view it was nothing but a casual investment of capital in hope of enlargement at the end of many years.
84 In the present case, each applicant will have a continuing financial commitment to the Scheme and seasonal income over many years. The repetitive nature of both obligations and benefits strongly suggests the conduct of a business.
85 It is true that in Milne v Federal Commissioner of Taxation (1976) 133 CLR 526 the High Court seemed to place less emphasis on the single receipt of income than did Dixon CJ and Kitto J in Clowes. In that case the Commissioner sought to distinguish Clowes upon the basis that the return to investors was to be paid in almost annual sums as opposed to the lump sum payment in Clowes. The Court rejected that approach, finding the receipts to be of capital and adopting the reasoning of Dixon CJ and Kitto J. However Milne seems otherwise to have been factually similar to Clowes and therefore different from the present case.
86 The Commissioner also relies on the decision of French J at first instance in Vincent (reported at (2002) 50 ATR 20 where his Honour considered a scheme which involved the leasing of cattle for the purpose of breeding. French J observed at [108]:
Nevertheless having regard to [the taxpayer's] non-involvement in the operation of the project and the way in which [the manager] managed the herd as undifferentiated group of cattle without regard to the rights of particular investors, I could not accept that [the taxpayer's] outgoings were necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.
87 It is submitted that by parity of reasoning a similar result should follow in the present case. However the observations were not part of the ratio of the case. The introductory words at [108] demonstrate that his Honour disposed of the matter on another basis. On appeal (supra) the Full Court did not consider whether the taxpayer was conducting a business, observing at [60]:
For the purposes of the present argument we are content to restrict consideration of this issue to the one issue only, namely whether the management fees claimed were capital or of a capital nature. If they were, then the amount in question would not be deductible, even if incurred in gaining or producing the assessable income as held by the learned primary Judge.
88 The Court considered that the taxpayer was entitled to receive six calves of a particular description, regardless of whether the leased cows had produced those calves or any other progeny. At [62] their Honours observed:
It may be accepted that moneys outlaid for management services to be rendered on a recurrent basis would ordinarily be on revenue account, particularly, although not necessarily limited to the case, where the services are rendered for a business carried on by a taxpayer. The same may be said of recurrent chattel leasing expenditure. And this result will ordinarily not be affected (absent legislative provision) merely because some part of the consideration may be payable in advance … . However, it cannot be extrapolated from cases such as those just cited that every time there is an agreement which nominates a consideration for services to be performed the payment will be on revenue account. Whether it is will depend upon all the circumstances and particularly an analysis of the agreement under which the payments are made.
89 The Court then went on to characterize the contemplated benefit from the outgoings as being the supply of six calves as described, and not necessarily the progeny of cows leased by the taxpayer for the purposes of the scheme. Had the taxpayer been carrying on the business of breeding cattle and selling progeny, the calves would have been trading stock. However, as she was not doing so they were, in effect, capital. It followed that the taxpayer's outgoings in connection with the scheme were of a capital nature. It is likely that the views expressed by French J at first instance were, at least to some extent, influenced by that aspect of the case. In any event, there is a clear distinction between the "one off" receipt of six calves and repeated seasonal returns from the Scheme.
90 In the present case the continuation of the operation over an extended period of time, the repetitive nature of the work involved in farming each Almondlot (to be paid for on a regular basis) and the return in the form of almond crops (to be received from year to year) all suggest an ongoing business. The applicants may not have control over the way in which their Almondlots are farmed, but that is an incident of their grouping for the purposes of management. Each applicant may terminate the management agreement for breach or, in company with other Growers, resolve to dismiss AIMA as manager. Each applicant has an ongoing commitment to paying AIMA to do what is necessary in order to facilitate commercial production of almonds over a lengthy period of time. In light of AIMA's authorization to pool almonds for sale under cl 7.4 of the management agreement, each applicant is likely to obtain a return for his product in a proportion differing in some degree from the actual contribution to the pool of almonds made by him. This scheme, allowing both for pooling and for the easy ascertainment of a grower's entitlement on sale, seems to us to reflect no more than a commercially sensible mechanism which, it is probably envisaged, will be fair and economical to all growers in the circumstances. In our view each applicant will be carrying on an individual business on his or her Almondlots with the purpose of producing almonds for sale at a profit.