Consideration
14 As the Tribunal observed, s 8-1(b) of the Act enables a taxpayer to deduct from assessable income any loss or outgoing to the extent that it is necessarily incurred in carrying on a business. Clearly, whether an entity is "carrying on a business" is a question of fact in any particular circumstances. In Spriggs v Federal Commissioner of Taxation (2009) 239 CLR 1 at [59] the High Court observed:
The existence of a business is a matter of fact and degree. It will depend on a number of indicia, which must be considered in combination and as a whole. No one factor is necessarily determinative. Relevant factors include, but are not limited to, the existence of a profit-making purpose, the scale of activities, the commercial character of the transactions, and whether the activities are systematic and organised, often described as whether the activities are carried out in a business-like manner.
(Footnotes omitted.)
15 While the question of whether a taxpayer is "carrying on a business" for taxation purposes is a question of fact, principles relevant to determination of that question in any particular case have been the subject of much academic writing and judicial attention. In determining the factual question of whether a taxpayer is carrying on a business, it is appropriate for the Court or relevant tribunal to have regard to relevant principles developed by the Courts, in addition to the general guidance provided by the Act (and in particular, in this case, the definition provided in s 995-1 concerning the carrying on the business of primary production). So, for example, in relation to whether a taxpayer is carrying on a business:
The relevant expense must have been incurred as part of the cost of trading operations (John Fairfax & Sons Pty Ltd v Federal Commissioner of Taxation (1959) 101 CLR 30 at 49).
Losses incurred in circumstances where the taxpayer has not engaged in any form of trading activity during the relevant financial year may not be incurred in carrying on a business (Case V71 (1988) 88 ATC 516). This includes the cost of establishing the business (John Fairfax at 48) or terminating the business (Peyton v Federal Commissioner of Taxation (1963) 109 CLR 315).
The cost of a step taken in the process of gaining or producing income is one incurred in carrying on a business (John v Federal Commissioner of Taxation (1989) 166 CLR 417).
Expenditure must have been incurred in the course of activities which manifest the essential characteristics of a business - that is, the conduct of a commercial enterprise in the nature of a going concern, wherein activities are engaged in on a repetitive and continuous basis for the purpose of profit.
It is not necessary that the expenditure has been incurred for the purpose of profit in the short-term provided that there is a profit-making purpose (Tweddle v Federal Commissioner of Taxation (1942) 180 CLR 1, Ferguson v Federal Commissioner of Taxation (1979) 26 ALR 307, and other cases cited in Australian Federal Income Tax Reporter (CCH, subscription service) at [31-581]). Similarly, it is irrelevant if the profit or loss is small.
It is irrelevant that the scale of the business is small. The activities engaged in by the taxpayer must, however, be more than mere domestic activities adequate for private purposes.
An isolated transaction may constitute carrying on a business, particularly if it is the transaction by which the business commences (Federal Commissioner of Taxation v St Hubert's Island Pty Ltd (in liquidation) (1978) 138 CLR 210).
Keeping detailed records kept in a systematic and business-like fashion suggests the carrying on of a business (Ferguson).
Activities which are merely preparatory to the carrying on of a business are not necessarily conducted in the carrying on of a business (Commissioner of Taxation v Osborne (1990) 26 FCR 63, Vance v Commissioner of Taxation (2005) 146 FCR 440, Esso Australia Resources Ltd v Commissioner of Taxation (1998) 84 FCR 541).
16 In its decision in this case, the Tribunal referred extensively to the Commissioner's ruling in TR97/11, entitled "Income tax: am I carrying on a business of primary production?" ("the Ruling"). As is plain from the Ruling, the Commissioner in TR97/11 has explained his view of circumstances where a taxpayer carries on a business of primary production for the purposes of the Act. In particular, at [12-16] of the Ruling the Commissioner states:
12. Whilst each case might turn on its own particular facts, the determination of the question is generally the result of a process of weighing all the relevant indicators. Therefore, although it is not possible to lay down any conclusive test of whether a business of primary production is or is not being carried on, the indicators outlined below provide general guidance. This is explained further at paragraph 25 of this Ruling.
13. The courts have held that the following indicators are relevant:
• whether the activity has a significant commercial purpose or character; this indicator comprises many aspects of the other indicators (see paragraphs 28 to 38);
• whether the taxpayer has more than just an intention to engage in business (see paragraphs 39 to 46);
• whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity (see paragraphs 47 to 54);
• whether there is repetition and regularity of the activity (see paragraphs 55 to 62);
• whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business (see paragraphs 63 to 67);
• whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit (see paragraphs 68 to 76);
• the size, scale and permanency of the activity (see paragraphs 77 to 85); and
• whether the activity is better described as a hobby, a form of recreation or a sporting activity (see paragraphs 86 to 93).
14. A taxpayer does not need to derive all his/her income from the primary production activity. The taxpayer may also be employed in some other occupation or profession. What is important is that the taxpayer's primary production activity amounts to the carrying on of a business. This activity is considered separately from any other employment or business carried on by the taxpayer. The fact that another business is carried on does not necessarily mean that the primary production activity is also a business.
15. We stress that no one indicator is decisive (Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922), and there is often a significant overlap of these indicators. For example, an intention to make a profit will often motivate a person to carry out the activity in a systematic and organised way, so that the costs are kept down and the production and the price obtained for the produce are increased.
16. The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the 'large or general impression gained' (Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551) from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour' (Ferguson v. FC of T (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). However, the weighting to be given to each indicator may vary from case to case.
17. Subject to all the circumstances of a case, where an overall profit motive appears absent and the activity does not look like it will ever produce a profit, it is unlikely that the activity will amount to a business.
17 It is clear that this excerpt from TR97/11 contains many principles which have been endorsed by the Courts to guide determination of whether a taxpayer is, in fact, "carrying on a business".
18 In my view no criticism of substance can be levelled at the reasoning of the Tribunal in making detailed reference to TR97/11. While perhaps not an exercise in learned examination and articulation of legal principles, it is apparent that in its reference to TR97/11 the Tribunal was adopting a "shorthand" approach to discussion of the relevant law concerning the meaning of "carrying on a business" for the purposes of the Act. I am unable to identify any legal error in this approach. In particular:
It is plain that the Tribunal was fully cognisant of the task before it.
The Tribunal recognised that TR97/11 reflected legal principles articulated in many relevant cases in this area of law.
The Tribunal recognised that it was not required to rigidly adopt the principles explained in TR97/11, and that the case required determination on its peculiar facts.
The Tribunal carefully considered the facts of the case, and the arguments put to it by Mr Nelson. In doing so, the Tribunal had regard to principles relevant to determination whether Mr Nelson was, in fact, carrying on the business of primary production.
It was open to the Tribunal as a conclusion of fact to form the view that the activities of Mr Nelson were preparatory to the carrying on of a business, rather than incidental to the carrying on of a business.
19 I am not persuaded that the Tribunal failed to correctly identify and apply the relevant principles of law which define the "carrying on a business" as claimed by Mr Nelson, or that the Tribunal failed to properly consider the facts before it in light of those principles. Similarly, I am not persuaded that the decision of the Tribunal was unreasonable, or not open on the material before it.
20 I note Mr Nelson's contention that the Tribunal failed to appreciate his claim that, in fact, he was carrying on only one single, core, forestry business. However I am not persuaded that the decision of the Tribunal was affected by error as Mr Nelson claimed. While I accept Mr Nelson's contention that cases advanced by litigants in person may lack some degree of clarity, in this case I am satisfied that the Tribunal understood the case put to it by Mr Nelson, and that it had thoroughly and carefully considered Mr Nelson's claims in their entirety.
21 That the Tribunal found against Mr Nelson on the facts was not a result of any confusion on the part of the Tribunal, but the view taken by the Tribunal on the facts before it of whether Mr Nelson was carrying on a business.
22 The appropriate order in this case is to dismiss the application.
I certify that the preceding twenty-two (22) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Collier.