Southern Estates Pty Ltd v Commissioner of Taxation - [1967] HCA 16 - HCA 1967 case summary — Zoe

CTHHCA

Southern Estates Pty Ltd v Commissioner of Taxation

[1967] HCA 16

High Court of Australia|1967-06-02|Before: McTiernan J, Owen JJ

View original source

At a glance

Source facts

Court

High Court of Australia

Decision date

1967-06-02

Before

McTiernan J, Owen JJ

Source

Original judgment source is linked above.

Judgment (46 paragraphs)

[1]

High Court of Australia McTiernan J. Barwick C.J. Taylor, Windeyer and Owen JJ. Southern Estates Pty Ltd v Commissioner of Taxation (Cth) [1967] HCA 16

[2]

1967, June 2 McTiernan J . delivered the following written judgment: -

[3]

These matters are income tax appeals. The appeals were heard together. The appellant Southern Estates Pty. Limited was incorporated in South Australia. The founder of the company was Ashby Francis Smith, and it was under his sole control and management. The company was incorporated in 1959 and entered on the business of buying and selling land round Adelaide. In 1958 Smith, the founder of the company, purchased a large tract of land about fifteen miles from Naracoorte. The land was then substantially in its primitive condition. Smith almost immediately set about reclaiming and improving the land with a view to depasturing sheep on it. In 1960, Smith sold a half interest in the land to Southern Estates and by a written agreement made about the same time Smith and Southern Estates became partners in the venture, the former having sole voice in the partnership's affairs. The partnership expended large sums of money in the years of income ended 30th June 1960, 1961 and 1962 in reclaiming and improving the land for the purpose Smith had in view. The work progressed on the southern portion of the land to the stage of sowing it for growth of pasture and on the northern portion nearly to that stage, but the final work done there was ploughing and rolling the soil - seed was not planted. Because of serious illness Smith abandoned the venture, and the partnership necessarily did not go on further with it. It was not practical to bring sheep on to the land until there was adequate pasture: in the ordinary course this would involve waiting about twelve months after seeding. Smith negotiated to sell the property. He effected a sale but at a substantial loss.

[6]

As regards s. 75 the Commissioner does not dispute that pars. (b) and (e) may cover the operations which the partnership carried out. The question at issue is whether the company in its capacity as partner of Smith was "engaged in primary production". The definition of primary production in s. 6 (1) of the Income Tax and Social Services Contribution Assessment Act raises a difficulty for the company, because no "production" within the scope of the definition resulted from anything which the partnership or either partner did on the land, while in possession. It is contended for the company that the evidence supports a strong probability that the purpose of the partnership was the "maintenance of animals" - sheep - on the land when the pasture had grown adequately; and after a few years to dispose of the land in parcels sufficient as living areas to persons going into the pastoral industry, including Mr. Smith's son if he desired to be a grazier. I am of opinion that upon the widest construction of which the word "engaged" admits, a person who merely has an intention to carry on the business of primary production is not engaged in it. No work which the partnership did on the land per se amounted to the maintenance of animals, nor was proximate to such business. The purpose for which the work was done did not result in the partnership going into the business of primary production. It had not an immediate connexion with bringing sheep on to the land at Naracoorte, by either partner, in order to begin production on this land. I am unable to hold that the company as partner was "engaged in primary production". As regards s. 76, the deduction claimed under this section is made in respect of some expenditure on fencing. In order to qualify for this deduction the taxpayer has to prove to the satisfaction of the Commissioner that he is " carrying on agricultural or pastoral pursuits or forest operations ". For the reasons which I have stated I think that the company as partner was not carrying on pastoral pursuits in any relevant year: no question arises as to agricultural pursuits or forest operations. I am of opinion that the appeals should fail.

[22]

In November 1958 one Ashby Francis Smith, who over a number of years had been a buyer and seller of land and had also been employed as a land salesman, purchased about 7,600 acres of virgin scrub country near Naracoorte in the south east of South Australia. In October 1959 he formed the company, he and members of his family being its shareholders. The memorandum and articles of association of the company are not reproduced in the appeal book but it is apparent that one of the company's objects was to carry on the business of buying and selling land and in fact during the relevant period it had a number of dealings of this description. In March 1960 Smith transferred the title to the Naracoorte land to himself and the company and they entered into a partnership agreement under which they agreed to carry on the business of pastoralists and graziers on it, Smith being the controlling partner. In its virgin state the land was covered with indigenous scrub, there was no water on it and little fencing. In its then state it was useless for primary production and would remain so until such time as a substantial area of it had been cleared, ploughed, sown to pasture and the pasture had grown sufficiently to graze sheep and cattle on it. Soon after Smith completed the purchase he began to clear the scrub and after the partnership was formed the work of improving the land to fit it for the grazing of stock was continued. In the years in question in these appeals substantial expenditure was incurred by the partnership in destroying and removing scrub and ploughing and sowing the land to pasture grasses. Although no express finding to this effect was made by McTiernan J., it seems to be clear from Smith's evidence that his purpose in buying the land was to improve it to the stage when it would be capable of being used for grazing purposes and then to use it for that purpose until it could be sold at a profit. That resale at a profit was the ultimate purpose of buying and improving the land is made clear by a statement of expenditure attached to the partnership income tax return for the year ending 30th June 1962 headed "Property Development Expenses - Property bought for profit making by sale". While work on the land was in progress, however, and before it was sufficiently advanced to allow the land to be stocked, Smith became seriously ill and this made it necessary to sell the land. The price obtained was in excess of that paid for the land by Smith but, when the expenditure on improvements was taken into account, a substantial loss was shown and the company's share of this loss was claimed by it and allowed as a deduction under s. 52 of the Act.

[32]

In my opinion a taxpayer who acquires land for the purpose of profit making by sale, that being his main or dominant purpose, and who expends money upon it with a view to improving it and selling it in an improved state, cannot have the deductions which by s. 75 (1) are allowed to a taxpayer engaged in primary production. Expenditure on land by a taxpayer who has acquired the land in order to sell it is an allowable deduction in ascertaining the amount of any profit realized by him which is brought to tax under s. 26 (a) - and see also s. 52. But, as I read the Act, he is not to be permitted to deduct the same amount twice - under s. 75 and also for the computation of a s. 26 (a) profit. Whether a man is "engaged in primary production on any land" within the meaning of s. 75 does not depend simply on the activities carried on by him on that land. It depends rather on the purpose for which he engages in those activities, the end to which they are directed. What is his business on or with the land? Is it that of a primary producer or of a dealer or speculator in land? The need to determine the character of a taxpayer's undertaking in this way may be said to raise a difficult and sometimes an elusive question. Yet the distinction is one which this Court has constantly recognized. It is the distinction between, on the one hand, the man who holds property as an investment (in the case of land, in order to derive rents and profits from it by letting it or working it) and, on the other hand, the man who acquires and holds similar property for the purpose of selling it at a profit when a suitable opportunity to do so comes. It is the distinction between an investor and a dealer; between a landowner or landlord and a land-jobber, as in the earlier cases he was called: see e.g. Perrott v. Deputy Federal Commissioner of Taxation (N.S.W.) [1] . A man does not cease to be a land-jobber because as part of his profit-making undertaking and with the object of realizing his land at the best price he improves it. On the other hand, a man does not cease to be engaged in primary production because he has in mind that some day he may sell out.

[42]

The first question that arises is, when is a man "engaged in primary production"? As I have already said, I take this expression to refer to the business purpose of the taxpayer as the possessor of the land. Whether a person is engaged in primary production on land does not, I think, depend on whether any produce has actually been gathered from that land, or on how soon produce can be gathered from it. It depends, I think, on whether the activities in which the taxpayer is there engaged are for the purpose of obtaining produce from it. It is the character of the taxpayer's undertaking on the land which in my view brings s. 75 into operation, not the stage which his undertaking has reached. It is not suggested that the land must have been brought into actual production in the sense that crops had been harvested or were ready for harvesting, that wool had been shorn or sheep were ready for shearing or for market, or that cattle had been sent to market or were ready for the market. A man could surely be engaged in primary production if he had sown or planted his land, whether with wheat, grapes, bananas, fruit-trees or pine-trees - however distant the time of harvest might be. And the day before sowing or planting he would be no less engaged in primary production than the day after. And if the land had not previously been ploughed or planted he would in my view still be engaged in primary production there if he were ploughing it to plant a crop for the first time. So too, if he were ploughing it and sowing grass in order to graze stock there. He would not first become engaged in primary production on that land when the grass had grown and he had brought stock upon his improved pasture and they had begun to fatten. The various kinds of expenditure itemized and described in s. 75 shew that expenses preliminary to planting or stocking are contemplated deductions. They include clearing the land, by, for example, ring-barking, felling, suckering and burning-off or removal of logs. That at all events is for me what is meant by item (b) of s. 75 (1) - "destruction and removal of timber, scrub or undergrowth indigenous to the land". These words seem to comprehend clearing virgin forest or scrub from land so that it can be used for primary production by grazing or agriculture. It would be surprising if they were meant to refer only to expenditure in clearing timber, scrub and undergrowth from land already capable of carrying stock in useful numbers. Section 75, it is to be remembered, is not concerned with the ordinary annual outgoings and expenses of the conduct of a farming or grazing business, which would be taken into account in arriving at the taxable income of a taxpayer. It is concerned with expenditures of a capital character by which the taxpayer's capital asset, his land, is improved.

[43]

I cannot accept the proposition that a taxpayer cannot be said to be "engaged in primary production on any land" if the land is not then in a state in which it can be used for primary production. This seems to me to postulate a demarcation which is quite imprecise, indeed illusory. Once it be conceded, as obviously it must be, that actual produce need not have been had from the land, I cannot see any criterion to be applied to the words of s. 75 except that the taxpayer's operations on or in relation to the land were undertaken by him with the purpose or aim of gaining produce from that land by his carrying on there the business of a primary producer. The difficulties of any other view become apparent as soon as one seeks, as in the course of argument counsel and the Court with the aid of hypothetical examples sought, to give a precise meaning to the words "on any land". These words do not relate to the word "expenditure". They relate to the words "engaged in primary production". That is to say, the operation of the section is confined to cases where the expenditure is on or in relation to "the land". And "the land" is "any land" on which the taxpayer was, when the expenditure was incurred, engaged in primary production. The words "land" and "any land" are notoriously indefinite and have given rise to problems under many statutes. They are often used to denote "an area of land owned and used as one area or as an integral whole", as Starke J. expressed it in Federal Commissioner of Taxation v. Royal Sydney Golf Club [1] . But the difficulty of identifying "land" as an area of land, a unity, an integral whole, or as a separate parcel remains: see the discussion in the second Golf Club Case, Royal Sydney Golf Club v. Federal Commissioner of Taxation [2] . Hypothetical cases are usually a poor aid to construction; but I may take two or three illustrations from events constantly occurring in the country. Let it be supposed that a taxpayer, a farmer, is possessed of Blackacre - part of it cleared, fenced, and in production; another contiguous part heavily overgrown with timber and scrub and weeds poisonous to stock, useless for cultivation or grazing until cleared. Can he not have the benefit of s. 75 for expenditure in clearing the uncleared part of his land? Now suppose the uncleared paddock is not contiguous with but some distance away, and separated say by a road, from the cleared land, Blackacre, where the homestead stands; that it is held under a different form of Crown land tenure; but that it has been acquired by the taxpayer so that he may clear it and then use it in conjunction with Blackacre in his established business as a primary producer. Is he not to be entitled to the benefit of s. 75 for the cost of clearing it? And finally, suppose the taxpayer to be a farmer who sold out in one district to take up Forestacre, a block of new country in another district. He obtains this new holding for the purpose of clearing it and bringing it into production and there carrying on the business of a primary producer. Is he not entitled to the benefit of s. 75 for expenditure he incurred in doing so - or must he first bring part of it, and if so how much, into production before he can claim a deduction for the expenditure of clearing the rest? In my view in each of the cases I have supposed - and they are not fanciful or far-fetched illustrations - a deduction under s. 75 would be allowable.