Case Analysis
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Summary of the Case
The case Ferguson v FCT (1979) 9 ATR 873 is an appeal case. Ferguson (tax payer) was a member of the Royal Australian Navy and before he was about to retire, he had formed is retirement plans of establishing a business of primary production. In order to start his business he entered into an arrangement with Cattle Leasing Ltd who specialized in the leasing of cattle, made available to Ferguson five Charolais half-cross cows for a period of four years. He also entered in another separate arrangement with Gunn Rural Management Pty Ltd for them to manage the cattle- looking after the heifers, their progeny and the descendants for a period of ten years. The cattle were to be artificially inseminated to produce pure-bred Charolais and selling the male progeny. Ferguson also expressed intention into entering the agreements to buy the stock at cheap prices, starting with approximately 200 breeders on his own property. In doing this he had incurred expenses totaling $2370 and $1258 in the income year ending 30 June 1973 and 1974 respectively and so he sought for deduction for these expenses.
During the following years there was natural increase to his stock and he sold some, however the consideration received on the sales was less then what he anticipated due the demand of the market, giving him a net loss on the transactions.
His first appearance in court rejected his claim for deduction and held that Ferguson was not engaged in a business of primary production and the expenditure was not incurred in carrying on the business for the purpose of deriving assessable income.
Ferguson did not give up, he appealed to the Supreme Court of NSW which was heard in 1978. Sheppard J dismissed the appeal on the same grounds and further added that the expenses was incurred on the establishment of his business, he has no business yet so there can not be expense relating to the business.
Unsurprisingly he appealed again, this time to the Federal Court. This time the court standing on FergusonÐЎЦs side held that all the activities was of commercial flavour, conducted systematically and no activities was in an disorganized way, professional assistance was available in the system and organization of the breeding scheme itself; the activities constituted the carrying on of a business thus the expenses are not capital and were deductible in terms of s 51(1).
Issues Raised
In the appeal case there are four issues that was raise.
(i) whether at the time the outgoings were incurred the appellant was carrying on a
business;
(ii) whether the outgoings were deductible under the second limb of s 51(1) of the
Income Tax Assessment Act;
(iii) alternatively, whether the outgoings were deductible under the first limb of s 51(1)
of the Income Tax Assessment Act;
(iv) whether the outgoings were of capital or of a capital nature.
The main issue and the only relevant one that was considered is the first issue of whether Ferguson was in the business of primary production, but the judge did talk briefly on the other issues.
Business of primary production
This was the main issue that was discussed because it leads to the other issue of being true or not. Ferguson was in the Navy at the time but it does not stop him from starting up his own business (in general, in the business of primary production) for the purpose of having an ideal retirement.
In looking at where Ferguson was in the business of primary production we refer to s 6 of the Income Tax Assessment Act 1936 (ITAA 1936). This section defines business, stating, ÐЎЧincludes any profession, trade, employment, vocation or calling, but does not include occupation as an employeeÐÐŽÐÐ. However this definition is too brief and in Hope v Bathurst City Council, Mason J says ÐЎЧthe question of whether a person is carrying on a business is a mixed question of law and factÐÐŽÐÐ. So in order to determine if a person is in ÐÐŽÐÒbusinessÐЎЦ we need to refer to cases.
The legal principle/ratio that the court applied to this case was ÐЎЧThe 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.ÐÐŽÐÐ
The courts have identified a number of factors that must be considered. It seems that none of these factors, with the possible exception of the profit motive, are determinative of the issue. Several of the factors may be present and still no business will be found. On the other hand, only one factor may be present and a business will exist. Relevant factors in this case are: if there is some kind of system & organization, there is a profit motive, size & scale of activity, repetition & regularity of activity and time spent or volume of operations, and if the activities are of a hobby nature.
System & Organization
Turning to the facts of the case, there is evidence of considerable system and organization. Ferguson makes an agreement with Gunn Rural Management Pty Ltd who manages the cattle, acting like an agent, Ferguson pays the agent a fee in return for service of the agent agreeing to agist the five cows and their progeny for a term of ten years from 21 June 1973.
For the agent to perform his agreement, they provide Ferguson with monthly reports covering the breeding programme, a timely livestock report and calving report and general reports as to market conditions. A rational person like Ferguson would spend some time reading these reports as it is in his own interest, he wants to know how his cattle are going and of course is his business going well. Furthermore he tries to learn more about primary production by subscribing to periodicals/magazines relating to them. And in no doubt like a business organization would do, he maintains a card index system in which he records important data such as date of