Rowsthorn and Commissioner of Taxation (Taxation) [2017] AATA 602 (5 May 2017)

Transcription

1 Rowsthorn and Commissioner of Taxation (Taxation) [2017] AATA 602 (5 May 2017) Division: TAXATION & COMMERCIAL DIVISION File Numbers: 2015/4637 and 2015/4638 Re: Peter Rowsthorn APPLICANT And Commissioner of Taxation RESPONDENT DECISION Tribunal: Deputy President S A Forgie Date: 5 May 2017 Place: Melbourne The Tribunal affirms the decision under review....[sgd]... Deputy President S A Forgie Commonwealth of Australia 2017

2 Catchwords TAXATION deductibility of capital expenditure applicant holder of a depreciating asset in form of a stallion - applicant established corporate structure stallion used within that structure whether applicant used stallion for a taxable purpose whether for the purpose of gaining or producing his assessable income - applicant kept no records as to income and expenses of stallion - distinct legal entities income of applicant as an individual is distinct from the income of a company decision affirmed Legislation Income Tax Assessment Act 1936 ss 170(7), Income Tax Assessment Act 1997 ss 8-1, 40-15, 40-25, 40-30, 40-95, , , , , A New Tax System (Australian Business Number) Act 1999 s 8 A New Tax System (Goods and Services Tax) Act 1999 s 9-20 Taxation Administration Act 1953 s 14ZZK, and Schedule 1: ss , Cases Dennis Willcox v Federal Commissioner of Taxation [1998] FCA 123; (1988) 79 ALR 267 Federal Commissioner of Taxation v Dalco [1990] HCA 3; (1990) 168 CLR 614; 90 ALR 341; 20 ATR 1370; 64 ALJR 166; 90 ATC 4088 Federal Commissioner of Taxation v R & D Holdings Pty Ltd [2007] FCAFC 107; (2007) 160 FCR 248 Federal Commissioner of Taxation v Reef Networks Pty Ltd [2004] FCAFC 275; 57 ATR 375 Federal Commissioner of Taxation v Swansea Services Pty Ltd [2009] FCA 402; [2009] ATC ATR 120 Ferguson v Federal Commissioner of Taxation (1979) 37 FLR 310 Gauci v Federal Commissioner of Taxation [1975] HCA 54; (1975) 135 CLR 81 Hobart Bridge Co Ltd v Federal Commissioner of Taxation [1951] HCA 33; (1951) 82 CLR 372 Kenneth A Summons Pty Ltd v Federal Commissioner of Taxation (1986) 86 FLR 408 Kennon v Spry [2008] HCA 56; (2008) 238 CLR 366 Magna Alloys & Research Pty Ltd v Federal Commissioner of Taxation (1980) 33 ALR 213; 11 ATR 276; 80 ATC 4542 Martin v Federal Commissioner of Taxation (1953) 90 CLR 470 Pettigrew v Commissioner of Taxation (1990) 92 ALR 261 Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47 Quarries Ltd v Federal Commissioner of Taxation (1961) 106 CLR 310 Ryde Municipal Council v Macquarie University (1978) 139 CLR 633 Spriggs v Federal Commissioner of Taxation [2009] HCA 22; (2009) 239 CLR 1 Trautwein v Federal Commissioner of Taxation [1936] HCA 77; (1936) 56 CLR 63 Tweddle v Commissioner of Taxation (1942) 180 CLR 1 Secondary Materials PAGE 2 OF 45

3 REASONS FOR DECISION Deputy President S A Forgie 1. A taxpayer must pay income tax for each financial year. Income tax is worked out by reference to a taxpayer s taxable income for the income year. In this case, the income year equates with the financial year. Although particular provisions may introduce variations, in general terms, the amount of income tax that is payable is worked out by multiplying a taxpayer s taxable income by the applicable rate of tax and deducting any tax offsets from the figure that results from that multiplication. A taxpayer s taxable income is arrived at by first working out that taxpayer s assessable income and deducting a figure for deductions. 2. At issue in this case is the amount that Mr Rowsthorn may claim a deduction equal in value to the decline in value of in respect of a depreciating asset. The depreciating asset was a stallion called Grey Swallow. More particularly, the issue is whether Mr Rowsthorn used Grey Swallow for a taxable purpose within the meaning of s 40-25(7) of the Income Tax Assessment Act 1997 (ITAA97) in the 2008 and 2009 years of income. It is common ground that, in the context of this case, Mr Rowsthorn has used Grey Swallow for a taxable purpose if he has used it for the purpose of gaining or producing his assessable income or in carrying on a business for the purpose of gaining or producing his assessable income. 3. I have decided to affirm the Commissioner s objection decision dated 7 July BACKGROUND 4. In this section of my reasons, I set out the facts that are not in dispute between the parties and that I am satisfied are established on the evidence. Mr Rowsthorn s registration for an Australian Business Number 5. Mr Rowsthorn had an Australian Business Number (ABN) in the 2008 and 2009 financial years. He held that ABN under the A New Tax System (Australian Business Number) Act 1999 (ABN Act). He was entitled to it under s 8 of the ABN Act if he was carrying on an enterprise in Australia or if, in the course or furtherance of carrying on an enterprise, he made supplies that are connected with Australia. 1 1 ABN Act; s 8(1) PAGE 3 OF 45

4 6. The expression enterprise is defined in s 41 to have enterprise has the meaning given by section 9 20 of the A New Tax System (Goods and Services Tax) Act In so far as it applies to an individual, s 9-20(1) provides that: An enterprise is an activity, or series of activities, done: (a) (b) (c) (d)-(h) in the form of a *business; or in the form of an adventure or concern in the nature of trade; or on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or Certain activities are excluded from the meaning of enterprise by s 9-20(2) and I refer particularly to the exclusion of an activity, or series of activities, done: as a private recreational pursuit or hobby In Federal Commissioner of Taxation v Swansea Services Pty Ltd, 3 McKerracher J considered what it is to do an activity or series of activities in the form of a business. His Honour said: [T]he words in the form of cannot be ignored. The Commissioner has also expressed the view (in Good and Services Tax Determination GST 2000/8 at para 7) that: The words in the form of have the effect of extending the meaning of enterprise beyond entities carrying on a business. An enterprise will include entities that carry out activities that have... the appearance or characteristics of business activities. (Emphasis added.) Rather than these words supporting a suggestion that form alone may prevail over substance, they have the effect of extending the reach of enterprise to those activities which are in the form of a business but would not, in the ordinary meaning of business be considered such. But the activity must still be reasonably intended to be profit making in the case of an individual and cannot for any entity simply be a private recreational pursuit or hobby. That this is so is clear from the exclusions to s 9-20 of the GST Act which, relevantly, rules out private recreational pursuits or hobbies or, in the case of individuals, (other than a charitable trustee) an activity or activities done without a reasonable expectation of profit or gain. 4 The purchase of Grey Swallow 8. I accept Mr Rowsthorn s evidence that he purchased Grey Shadow for US$4 million in Grey Swallow was a colt by Daylami out of Style of Life. Daylami had won seven 2 A New Tax System (Goods and Services Tax) Act 1999; s 9-20(2)(b) 3 [2009] FCA 402; [2009] ATC ; 72 ATR 120; McKerracher J 4 [2009] FCA 402; [2009] ATC ; 72 ATR 120 at [98]-[99]; 9,589; Exhibit A at [5] See also the following documents which are part of Exhibit B: Tax Invoice dated 4 July 2006 regarding transport and veterinary costs; Preliminary Tax Invoice from International Racehorse Transport (IRT) dated 6 July 2006 re transport preliminary Tax Invoice re GST and entry PAGE 4 OF 45

5 Group 1 races between 1996 and He was European Horse of the Year and the US Champion Male Turf Horse in He and another horse were together rated the best horses in the world in that year. Grey Swallow was regarded as the best of his progeny at the time. 9. Before Mr Rowsthorn purchased him, Grey Swallow had won two Group 1 races in Ireland: the Irish Derby in 2004 and the Tattersalls Gold Cup in During his racing career in Ireland, the United Kingdom and the United States of America, Grey Swallow had run in 14 races with the following results: won two Group 1 being those I have already mentioned and four other races; been placed in the first three in three Group 1 races and fourth in two others; and been unplaced in three Group 1 races. At the time that he won the Irish Derby, Grey Swallow was ranked equal ninth in the inaugural World Thoroughbred Racehorse Rankings for His win in the Tattersalls Gold Cup led to his being ranked equal 21 st in the 2005 rankings. 10. On his arrival in Australia in mid 2006, Grey Swallow raced in only one race: the Group 1 Tattersall s WS Cox Plate at Moonee Valley in October He was injured before the start of the race but passed fit to run by the course veterinarian. Grey Swallow was placed last. Grey Swallow recovered from his injury in the first half of An outbreak of equine influenza in August 2007 restricted the movement of horses throughout Australia. Studs in Queensland and New South Wales closed down for the 2007 breeding season. Grey Swallow was retired to stud at that time. The claims for deductions, assessments and objection decision 11. In respect of the income year ending 30 June 2008 (2008 year), Mr Rowsthorn claimed that he had a net non-primary production loss of $931,977 of which $512,146 was attributable to a deduction in respect of Grey Swallow. In the 2009 year, he claimed that he had a net non-primary production loss of $619,647 of which $435,324 was attributable to a deduction under s in respect of Grey Swallow. The Commissioner issued notices of assessment to Mr Rowsthorne on the basis of the income tax returns that he had lodged. He did so on 12 June 2009 in respect of the 2008 year and on 15 June 2010 in respect of the 2009 year. and processing fees; and letter from International Racehorse Transport dated 28 August 2006 attaching original documentation including Australian Customs Entry for Home Consumption. Each of the documents was addressed to Mr Rowsthorn at his residential address. I note that a Tax Invoice dated 20 July 2006 and relating to the costs of insuring Grey Shadow is addressed to Mr Rowsthorn C/O Wadham Park at a postal address in Queensland. In light of the other evidence, I have not given the address any weight at all in deciding that Mr Rowsthorn bought Grey Shadow in his own name. PAGE 5 OF 45

6 12. On 18 February 2015 the Commissioner issued two notices of amended assessment after Mr Rowsthorn consented under s 170(7) of the Income Tax Assessment Act 1936 (ITAA36) to his doing so. The Commissioner s notice of amended assessment disallowed Mr Rowsthorn s claimed non-primary production loss of $931,977 for the 2008 year. He also disallowed Mr Rowsthorn s claimed non-primary production loss of $619,647 in respect of the 2009 year in a further amended assessment. 13. The notices of amended assessment also notified Mr Rowsthorn that he was liable to pay shortfall interest charge (SIC) of $130, in respect of the 2008 year and $73, in respect of the 2009 year. Those amounts were calculated after taking into account prior remissions including, and in particular, the shortfall interest charges. The remissions amounted to $59, in respect of the 2008 year and $26, in respect of the 2009 year. 14. The Commissioner issued the amended notices of assessment because he was not satisfied that Mr Rowsthorn held Grey Shadow for the purpose of producing assessable income, and so for a taxable purpose. If he did not, he was not entitled to a deduction in respect of Grey Shadow s cost as a depreciating asset in each of those years. 15. When Mr Rowsthorn objected to the amended assessments and to remission decisions in respect of the SIC, the Commissioner disallowed those objections in an objection decision dated 7 July Mr Rowsthorn applied for review of that objection decision, which is a reviewable objection decision. The Wadham Group 16. Following his retirement in 2002 after a career in senior management and then as a director and Chairman of a publicly listed company, Mr Rowsthorn set up a corporate structure comprising a number of privately owned companies which were incorporated between 2003 and Those companies were part of a group of private companies known as the Wadham Park Group together with another company that Mr Rowsthorn had incorporated many years before in I accept Mr Rowsthorn s evidence about the following six companies that were part of the group and find: (1) Wadham Nominees Pty Ltd (Wadham Nominees) (a) Registered: 19 April 1973; (b) (c) (d) Mr Rowsthorn is a director; Mr Rowsthorn is a shareholder; and Wadham Nominees is the trustee of the Peter Rowsthorn Settlement of which Mr Rowsthorn is the primary beneficiary. PAGE 6 OF 45

7 (2) Wadham Park (Vic) Pty Ltd (Wadham Park) (a) Registered: 23 July 2004; (b) Mr Rowsthorn is the sole director and secretary; (c) Wadham Nominees is the sole shareholder of Wadham Park; and (d) Wadham Park carried on horse training and agistment operations. (3) Wadham Park Thoroughbreds Pty Ltd (WP Thoroughbreds) (a) Registered: 2 April 2003; (b) (c) (d) (e) (f) Mr Rowsthorn is the sole director and secretary; Wadham Park Pty Ltd is the sole shareholder; WP Thoroughbreds is trustee of the Wadham Park Thoroughbreds Property Unit Trust; WP Thoroughbreds owned a property in Seymour Victoria (Seymour property), which it held as trustee for the Wadham Park Thoroughbreds Property Unit Trust; and WP Thoroughbreds leased the Seymour property to Wadham Park. (4) Wadham Park (Vic) Property Pty Ltd (WPV Property) (a) Registered: 5 August 2004; (b) (c) (d) (e) (f) Mr Rowsthorn is the sole director and secretary; Wadham Park is the sole shareholder; WPV Property is the trustee of the Wadham Park (Vic) Property Unit Trust; WPV Property owned a property in Trentham Road, Tylden (Trentham Road property) as trustee of the Wadham Park (Vic) Property Unit Trust; and WPV Property leased the Trentham Road property to Wadham Park. (5) Woodside Park Stud Pty Ltd (WPS) (a) Registered: 19 April 2006; (b) Mr Rowsthorn is currently the sole director and secretary; (c) Wadham Nominees is the sole shareholder; and (d) WPS carried on horse breeding operations. (6) Wadham Park Stud Pty Ltd (Wadham Park Stud) (a) Registered: 14 February 2016; (b) (c) (d) Mr Rowsthorn is the sole director and secretary; Wadham Nominees is the sole shareholder; Wadham Park Stud is the trustee of the Wadham Park Stud Property Unit Trust; PAGE 7 OF 45

8 (e) (f) Wadham Park Stud owned a property in Central Road, Tylden (Central Road property) as trustee of the Wadham Park Stud Property Unit Trust; and Wadham Park Stud leased the Central road property to WPS. 17. I also accept Mr Rowsthorn s evidence and find that, in the 2008 and 2009 income years, Wadham Park carried on its horse training and agistment operations as well as other horserelated activities at the Trentham Road property. Mr Rowsthorn had funded the acquisition of the land and the building of the training facility. WPS carried on its breeding operations at the Central Road property, which was known as the Woodside Park Stud. In earlier years, the Wadham Park Group had carried out its training and racing operations in Queensland but was no longer doing so in the 2008 and 2009 income years. Peter Rowsthorn Trust 18. On 27 April 1973, a Deed was made between Mr Jon McCready, as Settlor, and Wadham Nominees, as Trustee (Peter Rowsthorn Settlement). Wadham Nominees agreed to hold a sum of money given to it by Mr McCready on the trusts and subject to the powers and provisions set out in the Deed. The sixth paragraph of the Preamble to the Deed stated: The Settlor desires that the trustee shall have the greatest possible discretion in relation to the administration of the trust property and in the distribution of the income and capital thereof and desires further that the trustee may from time to time and at any time vary the trusts and provisions hereof in the manner herein provided but not further. 19. Clause 2 of the Deed is concerned with Wadham Nominee s power to apply income. I will set out only 2(a)(i) as it gives a flavour of 2(a)(ii) to (iv). Clause 2(b) sets out Wadham Nominee s obligations on the date of distribution i.e. a date that is the 80 th anniversary of 27 April Clause 2 provides: SUBJECT to Clause 5 hereof the trustee shall during the income period hold the trust property UPON TRUST as follows: (a) To apply such part of the income arising during the income period as the trustee thinks fit between the beneficiaries and spouses in such proportions and in all respects as the trustee thinks fit as follows: (i) (ii)-(iv) by paying so much of the income as the trustee thinks fit to any beneficiary or spouse or to a bank account in the name of any beneficiary or spouse (whether solely or jointly with that of any other person including the trustee) and such payment shall with or without execution of a receipt by such beneficiary or spouse or any person on his behalf constitute a full and final discharge therefor to the trustee in relation to the trusts of this Deed; 6 Deed; cl 1(b): ST documents; ST1 at 866 PAGE 8 OF 45

9 (b) Subject to the provisions of Clause 5 hereof the trustee shall at the date of distribution pay and apply as well the capital as the income of the trust property to such one or more of the children of the said Peter Rowsthorn as the trustee thinks fit or if there are no such children still alive to such one or more of the beneficiaries as the trustee thinks fit and such payment or application may be made in the manner as provided for payment in subparagraph (i) of paragraph (a) of this Clause 2 or in any other manner and no receipt need be given by any beneficiary in order to discharge the trustee. 20. Clause 2(b) gives the trustee power to vary any of the provisions of cl 6, relating to its investment powers, and cl 7, relating to its powers more generally. Clause 2(a) provides: NOTWITHSTANDING anything contained herein the trustee may at any time or times and from time to time as it thinks fit: (a) by Deed appoint that in lieu of the trusts declared in Clause 2 hereof of the trust property and income therefrom shall be held on such trusts in favour of the beneficiaries or any one or more of them as the trustee thinks fit and/or that the income from the trust property shall be held on such trusts in favour of the beneficiaries and spouses or any one or more of them as the trustee thinks fit PROVIDED ALWAYS that no exercise of this power of appointment shall: (i) (ii) (iii) affect any interest in corpus already vested; affect the right of any beneficiary or spouse to income once applied for his benefit pursuant to Clause 2 hereof; or postpone the distribution of the trust property beyond the day of distribution. 21. Clause 1(e) of the Trust Deed provides that the expression as the trustee thinks fit : shall give the trustee the widest and most absolute discretion including a power to prefer one or more of the beneficiaries to the exclusion of any one other or others. LEGISLATIVE BACKGROUND 22. Part 2.10 of the Income Tax Assessment Act 1997 (ITAA97) sets out rules about the deductibility of capital expenditure. I am concerned particularly with Division 40. Its objects are: (a) (b) (c) to allow you to deduct the *cost of a *depreciating asset; and to spread the deduction over a period that reflects the time for which an asset can be used to obtain benefits; and to provide deductions for certain other capital expenditure that is not otherwise deductible. Note 1: This Division does not apply to some depreciating assets: see section PAGE 9 OF 45

10 Note 2: The application of this Division to a life insurance company is affected by sections and The meaning of the expression depreciating asset is found in s Section 40-30(1) provides that: A depreciating asset is an asset that has a limited *effective life and can reasonably be expected to decline in value over the time it is used, except: (a) (b) land; or an item of *trading stock; or (c) an intangible asset, unless it is mentioned in subsection (2). 24. There is no suggestion that Grey Swallow is excluded from the definition. The effective life of a depreciating asset is worked out under ss 40-95, , , and of ITAA97. 9 A taxpayer may choose to use an effective life determined by the Commissioner under s or work out an effective life for himself or herself under s Grey Shadow s effective life is not in issue between the parties. 25. Section 40-25(1) provides that: You can deduct an amount equal to the decline in value for an income year (as worked out under this Division) of a *depreciating asset that you *held for any time during the year. Note 1: Sections 40-70, and show you how to work out the decline for most depreciating assets. There is a limit on the decline: see subsections 40-70(3), 40-72(3) and 40-75(7). Note 2: Note 3 The owner of Grey Shadow is its holder Having calculated the decline in value of the depreciating asset in order to work out the amount of any deduction to which the holder is entitled, s 40-25(2) directs the taxpayer to: reduce your deduction by the part of the asset s decline in value that is attributable to your use of the asset, or your having it *installed ready for use, for a purpose other than a *taxable purpose. Example: Ben holds a depreciating asset that he uses for private purposes for 30% of his total use in the income year. If the asset declines by $1,000 for the year, Ben would have to reduce his deduction by $300 (30% of $1,000). 7 ITAA97; s ITAA97; s 995-1(1) 9 ITAA97; s 995-1(1) 10 ITAA97; s 40-95(1) 11 ITAA97; ss 995-1(1)and 40-40, Item 10 PAGE 10 OF 45

11 27. A taxable purpose is, as defined in s 40-25(7): (a) (b) (c) (d) the *purpose of producing assessable income; or the purpose of *exploration or prospecting; or the purpose of *mining site rehabilitation; or *environmental protection activities. Note: 28. The expression purpose of producing assessable income is defined in s 995-1(1) of ITAA97 when it provides: something is done for the purpose of producing assessable income if it is done: (a) (b) for the purpose of gaining or producing assessable income; or in carrying on a *business for the purpose of gaining or producing assessable income. Note: Section (about using property in providing entertainment) treats use of property as not being for the purpose of producing assessable income. The word business includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee. 12 PRINCIPLES RELATING TO INTERPRETATION AND APPLICATION OF PROVISIONS Purpose of producing assessable income A. for the purpose of gaining or producing assessable income 29. The expression use for the purpose of gaining or producing assessable income was considered by the Full Court of the Federal Court in Pettigrew v Commissioner of Taxation 13 (Pettigrew) when it appeared in s 54 of the Income Tax Assessment Act 1936 (ITAA36). Section 54 was the predecessor of s of ITAA97. Also relevant in the Court s consideration was s 51, which finds its modern expression in s 8-1 of ITAA97. Both permit a taxpayer to deduct from his or her assessable income any loss or outgoing to the extent that it is incurred in gaining or producing the assessable income or is necessarily incurred in carrying on a business for the purpose of gaining assessable income. The expression incurred in gaining or producing the assessable income (emphasis added) means incurred in the course of gaining or producing that assessable income. 14 In order to meet that criterion: 12 ITAA97; s 995-1(1) 13 (1990) 92 ALR 261; Lockhart, Neave and Hill JJ 14 Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47 at 57 per Latham CJ, Rich, Dixon, McTiernan and Webb JJ PAGE 11 OF 45

12 it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income In his judgment, Hill J first adopted a passage from the judgment of Brennan J in Magna Alloys & Research Pty Ltd v Federal Commissioner of Taxation 16 explaining that: Motive means the reason a taxpayer decides to incur the expenditure. Purpose may be either a subjective purpose the taxpayer s purpose where it means the object which the taxpayer intends to achieve by incurring the expenditure; or it may be an objective purpose, meaning the object which the incurring of the expenditure is apt to achieve. Both motive and subject purpose are states of mind and they are to be distinguished from the objective purpose, which is an attribute of a transaction. An objective purpose is attributed to a transaction by reference to all the known circumstances; whereas subjective purpose and motive, being states of mind, are susceptible of proof not by inference alone but also by direct evidence, for a state of mind may be proved by the testimony of him whose state of mind is relevant to a fact in issue. In contrast to s 51(1), however, the purpose of which s 54 speaks is the purpose of the use to which the plant or other article is put in the year of income. In so providing, s 54 produces a quite different regime to that applicable in s 51(1). It is clear that in the latter section purpose is not a criterion of deductibility, although as the High Court pointed out John v FCT (1989) 83 ALR 606; 63 ALJR 166 at 169 it will not necessarily be irrelevant. Section 54 is not concerned with motive. If an item of plant be used by a partnership for the purpose of producing assessable income it will matter for the purpose of s 54 that the partners who so used it joined together, motivated to obtain a tax deduction. As such, subjective purpose will not be relevant to the issue under s 54. In the ordinary case, the purpose which s 54 requires will be determined by reference to the use to which the item of plant is put. If the item is, for example, a tractor employed in a farming business, the requisite purpose will be ascertained from the purpose of the business itself. Where the item is put out for hire, the circumstances of the hire and the terms of hire will determine whether the purpose of the hire being the only use of the goods will be for the production of assessable income. But an item may properly be said to be used for the purpose of producing assessable income if it is held by a taxpayer carrying on a business of hiring such articles waiting to be taken on hire by a prospective customer. There the nature of the activity of the taxpayer taken with the subjective purpose of the taxpayer that that that business activity will continue provides evidence of the purpose of which the section speaks A differently constituted Full Court of the Federal Court referred to the Pettigrew case in Federal Commissioner of Taxation v Reef Networks Pty Ltd 18 (Reef Networks): We agree with the primary judge when he said that the depreciation provisions are concerned with the amortisation of capital rather than with working outlays, and allow amortisation deductions if the outlays were for the purpose of gaining assessable income or carrying on a business to produce assessable income. As 15 (1949) 78 CLR 47 at (1980) 33 ALR 213; 11 ATR 276; 80 ATC (1990) 92 ALR 261 at (citations omitted) 18 [2004] FCAFC 275; 57 ATR 375; Hill, Sundberg and Kenny JJ PAGE 12 OF 45

13 Hill J said in Pettigrew (at ATR 1850; ATC 4138; ALR 279), the depreciation provisions (then s 54 of the ITAA 1936) produce a quite different regime from that in s 51(1) Further principles established by the authorities include: (1) It is of course clear that a taxpayer uses an item which is put out to hire notwithstanding that some other person may also have use and possession of that item. 20 (2) A person who owns land may be said to use it for his own purposes notwithstanding that he permits someone else to occupy it, even under a lease. That is almost beyond argument when the owner s purpose is to acquire income. In the ordinarily accepted meaning of the word a building is used for the purpose of acquiring income if rents are derived from it, and an owner of the premises who leases them is making use of those premises by employing or applying them for the purpose of letting But that is not the only way in which an owner of land may use it by letting it to someone else. An employer who provides premises in which he requires an employee to live so that the employee may perform more efficiently the duties of his position is in my opinion himself using those premises. That this is so is clear when the employee occupies them under a licence rather than under a lease. 21 (3) The critical question is concerned with the purpose for which they were used by the taxpayer.. 22 That requires an understanding of the way in which the asset is used. Would, for example, it have been possible for the taxpayer to carry on its business without the relevant asset? (4) Plant may be used by a taxpayer for the requisite purpose even though it does not generate assessable income.. 23 Again, the use to which the plant is put must be seen in its context. In Federal Commissioner of Taxation v Reef Networks Pty Ltd, the taxpayer had installed a 12 fibre optic cable beside the railway line between Brisbane and Cairns under an agreement it had with Queensland Rail. In order to do so, the taxpayer paid certain fees to Queensland Rail and allowed Queensland Rail to use four of the fibres for no further fee. Under licence, the taxpayer permitted Optus to use the remaining eight fibres for a fee. The taxpayer claimed that all 12 fibres were used for the purpose of producing assessable income. At first instance, the Federal Court found that, had the four fibres not been made available to Queensland Rail, it would have been impossible for the taxpayer to license the other eight fibres for reward. Therefore, all eight were used for the purpose of carrying on a business and the whole of the cable could be depreciated; not simply three quarters [2004] FCAFC 275; 57 ATR 375 at [21]; (1990) 92 ALR 261 at 279 (citation omitted) per Hill J 21 Ryde Municipal Council v Macquarie University (1978) 139 CLR 633 at 638 per Gibbs ACJ 22 Quarries Ltd v Federal Commissioner of Taxation (1961) 106 CLR 310 at Federal Commissioner of Taxation v Reef Networks Pty Ltd [2004] FACFC 275; (2004) 57 ATR 375; Hill, Sundberg and Kenny JJ 24 Although decided in the context of s 8-1, the same point is made by the High Court in Spriggs v Federal Commissioner of Taxation [2009] HCA 22; (2009) 239 CLR 1; French CJ, Gummow, Heydon, Crennan, Kiefel and Bell JJ. The issue was whether management fees paid by two football players to a manager to negotiate contracts with a new football club could be deducted from their assessable income on the basis either that it was incurred in gaining or producing the assessable income or was necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. The High Court held that the players were engaged in the business of PAGE 13 OF 45

14 B. in carrying on a *business for the purpose of gaining or producing assessable income B.1 Business : general principles 33. The word business has been considered both in the context of s 8-1 and of s and of their predecessors. Principles established by various authorities include: (1) 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 the 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... Where it is determined that a taxpayer is conducting a business, the next question will be the scope of that business It may be that the taxpayer pursues two separate fields of endeavour, which are properly described as two separate businesses or a business and some other nonbusiness activity. On the other hand, a taxpayer may pursue separate income-producing activities as part of a single business The question is one of fact, turning upon the degree of connection and interdependence between the activities. One must consider the whole of the operations of the business concerned in determining questions of deductibility To determine whether a taxpayer is conducting a business and the scope of that business, as said in a different context, it is necessary to make both a wide survey and an exact scrutiny of the taxpayer s activities 25 (2) 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 or 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 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 commercially exploiting their sporting prowess and associated celebrity for a limited period. Neither was exclusively an employee of his club but had well established businesses before the management fees were incurred. Even if the management fees had been paid solely for acquiring the service of negotiating the playing contracts, the service and the management fees were productive of both playing income and non-playing income which flowed to the business of each player. There existed a sufficient connection between the outgoing, the management fees and the gaining or producing of assessable income from the business of exploiting sporting prowess and associated celebrity for the management fees to be regarded as having been incurred in the course or gaining or producing income from each player s business. They were deductible under s 8-1(1)(a). 25 Spriggs v Federal Commissioner of Taxation [2009] HCA 22; (2009) 239 CLR 1 at [59]-[60]; (citations omitted) PAGE 14 OF 45

15 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. 26 (3) [T]here is no single factor or group of factors that points to a betting or racing business in any case in which it appears. Many factors might be common to the activities of two individuals, and yet, because of the presence of other factors, a different conclusion might properly be reached in respect of those persons by the same court. 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 engaging in them, and, as counsel for the taxpayer put it, the determination is eventually based on the large or general impression gained. 27 (4) 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 number of stud horses is being steadily increased. 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 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 Land, 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 It is notorious in 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 stock is to carry on a business 28 (5) It is to be borne in mind, however, when weighing the relevant factors, that there is usually a distinction between the pursuit of a pastime, even if the pursuit is vigorous, and the carrying on of a business: Martin v Federal Commissioner of Taxation (1953) 90 CLR 470, at 479, per curiam. 29 (6) Carrying on a business was not a matter of owning an asset, but of engaging in a course of conduct. In July 1997, and indeed from 1990, Chapel Road was the legal owner of the mortgaged land, but was not in possession of it and carried on no business. It could make no decisions about such matters as engaging tenants or carrying out repairs and maintenance Ferguson v Federal Commissioner of Taxation (1979) 37 FLR 310 at 314 per Bowen CJ and Franki J (citations omitted) and see also Tweddle v Commissioner of Taxation (1942) 180 CLR 1 27 Martin v Federal Commissioner of Taxation (1953) 90 CLR 470 at 474 per Webb J 28 Tweddle v Federal Commissioner of Taxation (1942) 180 CLR 1 at 5-6 per Williams J 29 Woods v Deputy Commissioner of Taxation [1999] FCA 1589 at [34] per Sackville J 30 Federal Commissioner of Taxation v R & D Holdings Pty Ltd [2007] FCAFC 107; (2007) 160 FCR 248 at [63]; 259 per Heery and Edmonds JJ Chapel Road was a wholly owned subsidiary of R & D Holdings Pty Ltd and, in 1989, had acquired land. It obtained finance and built an office block on the land in 1990 but, when it could no longer meet the repayments on the loan, the mortgagee entered into possession in The mortgagee sold the building in PAGE 15 OF 45

16 (7) 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 would certainly be better in the interests of the Commissioner if he did so 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. 31 B.2 Business : relevance of other entities 34. Regard must be had to the activities of all of the entities that have a part to play in the activities undertaken by the taxpayer. Spriggs provides an example. Mr Spriggs was an Australian Rules footballer playing in the competition conducted by the Australian Football League (AFL). He was contracted to play for two clubs in succession. In each case, he was contracted to play AFL football on a full-time basis under an AFL Standard Playing Contract between him, the relevant club and the AFL. The High Court found this to be a contract of employment but a contract which permitted Mr Spriggs to engage in other paid activities provided he complied with certain conditions. In considering whether he could claim as a deduction the management fees that he incurred in negotiating a new contract, the High Court observed: [The] question of whether the management fees were incurred in gaining or producing the assessable income of Spriggs turns upon the characterisation of the tripartite arrangement between Spriggs, his club and the AFL. The answer to the question is not to be found by isolating in those arrangements a contract of employment of the player A taxpayer may be found to be carrying on a business even though he or she is not necessarily personally undertaking the physical tasks essential for the conduct of the business. In a case such as Tweddle v Federal Commissioner of Taxation, it is clear that the taxpayer, Mr Tweddle, had engaged an experienced farmer to manage the property at Winlaton and to develop it as a stud farm. Mr Tweddle owned the property, bore the expenses, reaped what few rewards there were and directed the farmer if only to make the place pay. There was a clear separation of roles between Mr Tweddle and the farmer and 31 Tweddle v Federal Commissioner of Taxation (1942) 180 CLR 1 at 7 per Williams J 32 [2009] HCA 22; (2009) 239 CLR 1 at [44]; 15 PAGE 16 OF 45

17 Williams J was satisfied that he, Mr Tweddle, was engaged in the business of farming at Winlaton as well as in a separate business of farming at another location. The Court examined the roles of each of the participants in the activities said to constitute the business just as it did in Federal Commissioner of Taxation v R & D Holdings Pty Ltd in determining whether the mortgagor, Chapel Road, or the mortgagee, which had taken possession, was carrying on the business that was centred on the leasing of the building. 36. In Ferguson v Federal Commissioner of Taxation, Mr Ferguson was even less physically present in the activities of the business than Mr Tweddle. The facts are summarised in the headnote: The taxpayer was a member of the Royal Australian Navy. In anticipation of his retirement in three years, he leased five Charolais cows and entered into an agreement whereby a management company agreed to agist, breed from, and otherwise care for and manage the cows. The taxpayer intended, on his retirement, to acquire a grazing property and to raise beef cattle thereon, and the present arrangements were made with a view to building up a herd of cattle. The cows in fact gave birth to heifers and bulls, some of which he sold. The taxpayer took a keen interest in the development of the herd, received monthly reports as to their progress and maintained a card index system for his leased cows and their progeny. The taxpayer claimed to be entitled to a deduction pursuant to s. 51 of the Income Tax Assessment Act 1936 in respect of expenditure on leasing and agistment of the cows and other similar outgoings. The commissioner disallowed the claim on the basis that, at the time the outgoings were incurred, the taxpayer was not carrying on a business In their joint judgment, Bowen CJ and Franki J noted that: there is evidence of considerable system and organization in relation to the breeding scheme itself. It is true that most of this was done by the manager. On the other hand, the appellant paid for the manager s services. In return for the fees he paid these things were done for him. The application and results of the system and organization maintained by the manager were communicated to the appellant in the form of a monthly report covering the breeding programme, a timely livestock report and calving report and general reports as to market conditions. The appellant read these reports and also subscribed to and read periodicals relating to primary production. Since July or August 1973 he had maintained a card index system in which he recorded particulars as to date of birth, type, sire and dam, date of artificial insemination in relation to each behest or natural mating, and calving. He also maintained a ledger as a record of his receipts and payments. The appellant spent a fair amount of his spare time on maintaining familiarity with the progress of the cattle through received reports and through reading periodicals. He was overseas for a period of two years and two months from January 1974 to March 1976 and continued his activities while abroad, although there is some evidence on the taxpayer having remained ignorant for sixteen 33 (1979) 37 FLR 310 PAGE 17 OF 45

18 months as to whether one of the heifers had fallen pregnant or not. A significant proportion of the appellant s income was applied by him under the two agreements. Receipts were obtained from the sale of bull calves, although due to a number of factors these receipts were insufficient in the relevant years to cover his outgoings. On the face of it, he was conducting his activities on a commercial basis and was, it would seem, carrying on a business. In our opinion, the proper conclusion is that his activities in advance of carrying out his ultimate intention were such as to constitute a business In a separate judgment reaching the same conclusion, Fisher J said: Admittedly the majority of the activities were carried on by the management company. But this company was acting on behalf of the taxpayer and performing these functions as his agent. It had no interest other than in the provision of services, and certainly no interest in the stock whether leased stock or the progeny of that stock. The activities themselves appear to me to have been performed in a systematic and commercial manner and would not be likely to be significantly different if the taxpayer has leased fifty rather than five heifers. 35 ONUS OF PROOF 39. On his application for review, Mr Sinclair has the burden of proving that the Commissioner s assessment is excessive and, in the case of SIC, should not have been imposed or imposed at a different rate. 36 include: The principles that the courts have developed over the years (1) The Act does not place any onus on the Commissioner to show that the assessments were correctly made. Nor is there any statutory requirement that the assessments should be sustained or supported by evidence. The implication of such a requirement would be inconsistent with s. 190 (b) for it is a consequence of that provision that unless the appellant shows by evidence that the assessment is incorrect, it will prevail. There is nothing inherently unfair in a provision which places the onus on a taxpayer to prove his case when the purpose for which an asset was acquired depends so much on his intentions and circumstances of which he, rather than the Commissioner, has comprehensive knowledge. 37 (2)... the facts in relation to his income are facts peculiarly within the knowledge of the taxpayer. In the absence of some record in the mind or in the books of the taxpayer, it would often be quite impossible to make a correct assessment. The assessment would necessarily be a guess to some extent, and almost certainly inaccurate in fact. There is every reason to assume that the legislature did not intend to confer upon a potential taxpayer the valuable 34 (1979) 37 FLR 310 at (1979) 37 FLR 310 at Taxation Administration Act 1953, s 14ZZK(b)(i) and (iii) 37 Gauci v Federal Commissioner of Taxation [1975] HCA 54; (1975) 135 CLR 81 at 89 per Mason J PAGE 18 OF 45

19 privilege of disqualifying himself in that capacity by the simple and relatively unskilled method of losing either his memory or his books. 38 (3)... It would be inappropriate for a court determining an appeal to make an order altering the tax liability assessed... unless the court were satisfied that the amount to which it proposed to alter the assessment represented the true tax liability of the taxpayer. Although the grounds of objection limit the grounds of appeal, the ultimate question for the court hearing the appeal is not whether the grounds have been made out but whether the amount assessed as taxable income is wrong. The burden which rests on a taxpayer is to prove that the assessment is excessive and that burden is not necessarily discharged by showing an error by the Commissioner in forming a judgment as to the amount of the assessment. 39 (4)... The burden may be discharged by drawing inferences from the evidence. In some cases in which all the relevant facts are known, and there is no material upon which it might properly be concluded that the property was acquired for the relevant purpose, the inference may properly be drawn that the property was not acquired for the relevant purpose. But it is not enough, even when all the facts are known, that there is no material upon which it may be concluded that the property was acquired for the purpose mentioned in s. 26(a). If a taxpayer can succeed, simply because there is no evidence from which it can be concluded that the relevant purpose existed, that must mean that the burden of proving the existence of that purpose lies on the Commissioner. That in my respectful opinion would be to invert the onus of proof. The taxpayer will succeed if the proper inference from the evidence is that the property was not acquired for the relevant purpose, but if there is no evidence as to the purpose for which the taxpayer acquired the property the appeal must fail. 40 (5)... mere error in the formation of that judgment by the Commissioner does not warrant the setting aside of the amount assessed. Given the validity of the exercise of the power to make an assessment..., the ultimate question is whether the amount of the assessment is excessive. The amount of the assessment might not be excessive in fact, though the reasons which led to the assessment were erroneous THE EVIDENCE Mr Rowsthorn s Strategic Plan 40. A document entitled Peter Rowsthorn Strategic Plan is dated January The document began with a statement that Mr Rowsthorn: 38 Trautwein v Federal Commissioner of Taxation [1936] HCA 77; (1936) 56 CLR 63; Latham CJ, Starke, Dixon and Evatt JJ at 87 per Latham CJ 39 Federal Commissioner of Taxation v Dalco [1990] HCA 3; (1990) 168 CLR 614; 90 ALR 341; 20 ATR 1370; 64 ALJR 166; 90 ATC 4088 at [8]; 621; 344; 1373; 168; 4091 per Brennan J 40 McCormack v Federal Commissioner of Taxation [1979] HCA 18; (1979) 143 CLR 284; 23 ALR 583; 9 ATR 610; 53 ALJR 436; 79 ATC 4111 at [11]; 303; 597; 443; 622; 4,121 per Gibbs J. In assessing Mr McCormack he Commissioner had treated the net profit from the sale of a property as assessable income on the basis that it arose from the sale of a property she had acquired for the purpose of profit-making by sale within the meaning of s 26(a) of ITAA36 as it was then in force. 41 Federal Commissioner of Taxation v Dalco [1990] HCA 3; (1990) 168 CLR 614; 90 ALR 341; 20 ATR 1370; 64 ALJR 166; 90 ATC 4088 at [11]; 623; 345; 1374; 169; 4092 per Brennan J PAGE 19 OF 45