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 Ferguson¡¦s 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).
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, ¡§includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee¡¨. However this definition is too brief and in Hope v Bathurst City Council, Mason J says ¡§the question of whether a person is carrying on a business is a mixed question...
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