Crawford v The Valuer-General [1990] QLAC 26 (1990) 13 QLCR 138

Land Appeal Court Brisbane Re: Appeal against Land Court determination of unimproved value - V89-460 K, Crawford v. The Valuer-General REASONS FOR JUDGMENT Delivered the 27th day of August, 1990. Section 11(1)(vii) of the Valuation of Land Act 1944-1987 is probably one of the better known provisions in the Act. The section prescribes various criteria that the Valuer-General is required to observe in making a valuation of the unimproved value of land. Sub-paragraph (vii) provides: "In making, pursuant to this subsection, the valuation of the unimproved value of land exclusively used for purposes of a single dwelling-house or for purposes of the business of primary production, any enhancement in that value for that the land has been subdivided by survey or has a potential use for industrial, subdivisional or any other purposes shall be disregarded irrespective of whether or not, in case of potential use as aforesaid, that potential use is lawful when the valuation is made. In this paragraph - Athe business of primary production1 means the business of agriculture, pasturage, horticulture, viticulture, apiculture, forestry (including the planting or tending in a plantation of forest of trees intended for felling), poultry farming, dairy farming or any other business consisting of the cultivation of soils, the gathering in of crops or the rearing of livestock.11 Speaking generally, this provision protects certain owners against valuations that would otherwise take into account [1990] QLAC 26 -- 1 of 16 -- 2 potential factors that are extraneous to the actual use of the land. So long as the land continues to be used exclusively for one or other of these purposes, the owner is entitled to the protection of this provision. This particular case is concerned with land used for primary production. Commonly, as an integral part of the operation of the business, a primary producer will live on his property, either full- time or part-time, or he may have an employee living upon it. The fact that he does so will not stand in the way of a finding that the land is exclusively used for the purposes of the business of primary production. The problem most frequently met in the application of this provision is determination whether the relevant use amounts to the "business" of primary production. That is the point at issue in the present case. The appellant owns two adjacent titles, subdivisions 85 and 86 of portion 356 in the Parish of Tingalpa, containing a total area of 4.047 hectares (a little over 10 acres). The land is situated at 239 Bacton Road, Chandler. It consists of easy to moderately sloping grey sandy clay loams. The land is cut by a watercourse which severs the south-eastern part from the southwest to the north-east. It contains a single unit dwelling upon which Mr. Chandler lives with his family and the land is used for the growing of small crops, mainly strawberries and tomatoes. The appellant has resided there since 1960 and throughout that period has grown small crops. There is a large dam on the southern portion from which small crops are irrigated by spray and trickle irrigation. There are some 40 or so items i -- 2 of 16 -- 3 of agricultural plant or machinery on the property. His plant includes an irrigation system, a tractor, slasher, strawberry planter, spray outfit, pumps, tomato transplanter, disc harrow, stake rammer, two disc plough, manure spreader, carton vibrator, packing shed, 10 foot rake, rotary hoe, fumigation applicator and many other items. Mr. Crawford is employed as a full-time groundsman at the Belmont Rifle Range, but still finds the time to perform the fairly intensive work required for small cropping of his land. He produces literally tonnes of produce, namely 2 tonnes of marketable strawberries and 5 tonnes of tomatoes each year. Last year the gross return from his strawberries was approximately $10,000. There are currently 4,500 strawberry plants growing. Photographs of the property show extensive planting cultivation and irrigation, and present a picture that could only be described as one of serious farming activities. In reply to a request from the Valuer-General for particulars of income and expenditure during the years 1985 to 1988 the appellant furnished the Valuer-General the following details - Tax Year Income from sale of crops Expenditure in production Profit or Loss 1986 $ 5,184 $ 3,686 Profit $1 ,498 1987 $ 4,667 $10,963 Loss $5,296 1988 $10,247 $ 9,050 Profit $1 ,197 I -- 3 of 16 -- 4 The Valuer-General's valuer (Mr. Skinner) also inspected the land and spoke with the appellant. He freely acknowledged that the activity carried out by the appellant possessed all the ingredients of continuity, diligence and repetition of actions constituting the activity, but in his opinion, (although he had "not been greatly involved" in the strawberry industry), it did not possess the degree of "substantiality and viability" necessary to bring the activity within the class of a business of primary production as he understood the test to have been applied by the Land Appeal Court, particularly in Walker v. The Valuer-General (1978) 5 Q.L.C.R. 347-354. It is fair to say that the learned Member who heard the appeal from the Valuer- General ' s determination also took the same view of Walker's case in its application to the present circumstances, and the appeal was dismissed on that basis. For the purposes of the general revaluation of the area as at 30th June, 1986, the Valuer-General valued this property in the sum of $110,000, on the footing that it should be valued as a single residential site. It was common ground that if the property should have been valued as land used exclusively for the business of primary production then an unimproved value of $40,000 would be appropriate. The picture revealed by tax return figures is not always an accurate one as to the viability or commercial reality of a farming business. Quite apart from the less obvious benefits which help to induce many persons to remain farmers despite apparently low taxable incomes, there are accounting benefits available within the formal accounting procedures which may mean i -- 4 of 16 -- 5 that the actual farming operation is more beneficial to the farmer in real terms than the statement of income and deductions contained in the taxation return might at first glance suggest. In the present matter some account contrary to the interests of the appellant seems to have been taken of the year ended 30th June, 1989, in which the overall figures show income of $9,542 and deductions of $13,694. However, the major items of expenditure, even in this apparently unfavourable year, include depreciation - $2,603, motor vehicle expenses - $1,565, repairs $1,793 and rates - $2,032. These items alone account for approximately $8,000 of the deductions. There is some artificiality in some of these items, including the depreciation allowance when many items may be actually appreciating. The appellant's ability to bring his motor vehicle expenses into account would not exist but for this activity, and neither would he be able to deduct his rates. The point is that the real trading benefit from his primary production activities is artificially reduced by the taxation accounting procedure, and such figures should not be taken at face value in assessing the commercial viability and commercial value of the enterprise. It is its value to the owner that needs to be kept in mind. Leaving aside all other items, removal of the rates alone from the accounting procedure would show a substantially healthier trading picture over the three years in question than the figures relied on by the Valuer-General. It may therefore be somewhat unrealistic to base conclusions that an enterprise is "not sufficiently viable" upon a series of taxation returns. -- 5 of 16 -- 6 From a consideration of this case and others that were heard in the present sittings (especially Mychael v. The Valuer- General ) it would seem that an artificial and unwarranted gloss has developed in the determination of eligibility for the benefit of s. 11(1)(vii), and it is desirable that the cases be re-examined. Mychael's case is a good example of the hardening view that the benefit was unobtainable unless the "scale of activities" or the size of the business or the size of the herd or the income measured up to certain arbitrary limits. Understandably great reliance has been placed on what has come to be described as the "Walker test", derived from Walker v. The Valuer-General (1978) 5 Q.L.C.R. 347. That was a decision of the Land Appeal Court delivered by Stable S.P.J, which simply adopted in its entirety the discussion of the Land Court President sitting alone in a previous case (Groom v. The Valuer-General (1978) 5 Q.L.C.R. 116.) The passage which purports to summarise relevant tests of what can amount to a business is found at p. 354 of Walker's case - "Profit or lack of profit is not in itself the deciding criterion ... There must, in my opinion, be continuity, diligence and repetition of actions constituting the activities and, moreover, the operations must have some significant commercial purpose or character - a degree of substantiality or viability although not necessarily always profitable. Alternatively, the actions or operations in train at the relevant date of valuation must be such that given favourable seasons and conditions they are of such magnitude that they will, in the fullness of time, by maturity or further activity reasonably be expected to develop into a viable venture. In short, I cannot accept that the scale of the operations or activities are not a significant factor in determining whether or not they are to be classed as a business." \ -- 6 of 16 -- (We have underlined the passages to which attention will be directed in due course). This test has been freely applied in the Land Courts, the common result being a finding of non-compliance with the test. (See for example Matis v. The Valuer-General (1980-1981) 7 Q.L.C.R. 57; Missicr v. The Valuer-General (1980-1981 ) 7 Q.L.C.R. 61; Tobin v. The Valuer-General (1986-1987) 11 Q.L.C.R. 29; Robinson v. The Valuer-General (1986-1987) 11 Q.L.C.R. 148.) The problem that has emerged is that a tendency has developed to include the element of "scale of operations" as an end in itself in determining whether or not there is a "business" of primary production. Certainly it seems to have been given a much greater level of importance than it would appear was intended by the judgment in Walker. No doubt "scale of operations" is an element in the Walker test, but the importance that can be placed solely on it is questionable for the following reasons - (1) The element of scale and "significant commercial purpose or character" arise from an unwarranted interpretation of the statement by Walsh J. in Thomas v. F.C.T. (1972) 72 A.T.C. 4094, 4100, in which His Honour used that phrase. The proper interpretation of this statement, and its limited relevance to the application of the appropriate test was discussed in Hope v. Council of the City of Bathurst (1979-1980) 144 C.L.R. 1. (2) None of the Land Court or Land Appeal Court decisions have referred to the High Court's explanation in Hope, which 1 -- 7 of 16 -- clearly undermines the reliance upon scale of activity that has since developed. (3) The warning at the end of the judgment in Walker expressly advises against the placing of a numerical minimum upon production and expressly recognises the prospect of conducting a business although numbers might be small. In short, the correct interpretation of Walker is that while scale may be relevant in the overall exercise, it is wrong to regard it in general as a decisive factor. The term "business" is not defined in the Valuation of Land Act, and it should be given its ordinary meaning. Courts have attempted to spell out the criteria which identify what amounts to a business in many cases, in the context of both taxation and valuation. Both contexts lie in the field of revenue-gathering, though the Valuer-General is not the revenue gatherer and is called upon simply to determine whether someone qualifies for a certain type of valuation or whether he does not. In this respect the growing use of the term "concessional" in relation to such valuations is unfortunate, and it should be clearly understood that their grant is a matter of right and not of concession or of policy. Through the combination of s. 51(1) of the Income Tax Assessment Act, which allows deductions "necessarily incurred in carrying on a business for the purpose of gaining or producing such income", and the definition of "primary production" in s. 6 of that Act, the Courts have on numerous occasions turned their attention to the question whether particular activities constitute the carrying on of a business of primary production. -- 8 of 16 -- 9 The starting point for further discussion may conveniently be taken as Walsh J.'s judgment in Thomas v. F.C.T. (above): "... a man may carry on a business although he does so in a small way. In my opinion the appellant's activities in growing the trees ought not to be found to have been carried on merely for recreation or as a hobby, I leave out of account the pine trees, the growing of which did not have, I think, a significant commercial purpose or character. But the appellant in planting the avocado pear trees and the macadamia nut trees set out to grow them on a scale that was much greater than was required to satisfy his own domestic needs and he expected upon reasonable grounds that their produce would have a ready market and would yield, if the trees became established, a financial return which would be of a significant amount, with a relatively small outlay of time and money, and that this return would continue for a very long time. In these circumstances I think it is proper to find ... that he set out to engage in producing the pears and the nuts as a business and that he was ... carrying on that business, which was a business of primary production.11 In Hope v. Council of the City of Bathurst (1979-1980) 144 C.L.R. 1 the primary Judge had decided that the appellant's use of the land was "not significant enough" to bring it within the scope of the common or general meaning of the word "business". Gibbs and Stephen JJ. observed: "When Walsh J. in Thomas v. Federal Commissioner of Taxation (1972) 46 A.L.J.R. 397 said that he left ^out of account the pine trees, the growing of which did not have ... a significant commercial purpose or character', it is perfectly clear that he did not intend to suggest that a commercial activity cannot be described as a business if it is small in scale. In that case Walsh J. was considering whether the appellant was a ^primary producer' within s. 157 of the Income Tax Assessment Act 1936 (Cth), as amended, that is, whether he was a person who carried on ^a business of primary production'. It was enough for Walsh J. to hold that, in the circumstances of that case, the appellant had set out to engage in producing macadamia nut trees and avocado pear trees as a business; that having been decided, it was immaterial whether the growing of pine trees was also done in the course of carrying on a business. In succinctly disposing of the issue of fact concerning the pine trees, Walsh J. was not purporting to make an i -- 9 of 16 -- 1 0 exhaustive statement of the test to be applied in deciding what is a business." The remarks of Mason J. at pp. 9-10 are destructive of the notion that an enterprise may qualify as a business according to notions whether the activities are "significant", "real", "important", "genuine" or "weighty". "Certain it is that their Honours below were beguiled by the remarks of Walsh J. in Thomas v. Federal Commissioner of Taxation (1972) 46 A.L.J.R. 397. As par. 18 of the case shows. Rath J. concluded that the appellant's use of the land was not x significant enough' to constitute a business, although, as we have seen, his Honour expressed it very differently in his judgment. A similar idea, albeit otherwise expressed, emerged in the judgment of Glass J.A. when he spoke of the primary judge's conclusion that the activities ^did not amount to a genuine, real or significant business'. And Samuels J.A. expressed the view that x significant' as used by the primary judge, meant ^important', ^real', ^genuine' or ^weighty'. It seems that the emphasis given to the need for activities which were ^significant', xreal', Aimportant', ^genuine', or ^weighty' had its origin in what was said in Thomas by Walsh J. (1972) 46 A.L.J.R. at p. 401. xBut a man may carry on a business although he does so in a small way. In my opinion the appellant's activities in growing the trees ought not to be found to have been carried on merely for recreation or as a hobby. I leave out of account the pine trees, the growing of which did not have, I think, a significant commercial purpose or character. ' The issue in Thomas was whether the taxpayer was carrying on the business of growing avocado, macadamia nut and pine trees. Walsh J. in the passage quoted did no more than say that he left the pine trees out of account because the growing of them did not have a commercial purpose or character which was significant for the purpose of characterizing the taxpayer's other activities as a business. His Honour's remarks did not go to the magnitude or size of the activities necessary to constitute a business, nor indeed to the genuineness or bona fide character of those activities. His Honour had expressly conceded that a man may carry on a business though in a small way." i -- 10 of 16 -- 1 1 Mason J. concluded on the facts as found in that case that the appellant's activities amounted to a business and that no other conclusion was reasonably open. The fact as adverted to by His Honour were as follows: Transactions were entered into on a continuous and repetitive basis for the purpose of making a profit; The activity had a permanent character in that it had been carried on without interruption for many years; The appellant sought customers by advertising and kept appropriate financial records; The land, though small in area, was put to its best potential use, the pastures were improved and fenced; There was nothing in the findings to suggest that the activities were other than genuine and real. His Honour's remarks do not suggest any magnitude or size of the activities as being necessary to constitute a business, and indeed they underline the fact that a business may be small and that concentration upon the size or significance of the business is prone to lead to error. Ferguson v. F.C.T. (1979) 79 A.T.C. 4261 further illustrates the point. The appellant sub-leased five identified Charolais heifers for a term of four years, and made an agreement for agistment in the expectation that in due course he would establish the nucleus of a herd which he would then transfer to a more substantial grazing property (not yet acquired). Under the agreements the taxpayer was entitled to keep female calves and sell bulls. After approximately two years the taxpayer had an interest in ten cattle either as owner i -- 11 of 16 -- 1 2 or sub-lessee. On appeal the Full Federal Court held that the taxpayer's activities in building up a herd were conducted in such a systematic and business like manner as to amount to the carrying on of a business. In the joint judgment of Bowen C.J. and Franki J. at pp. 4264-4265 the following observations are made: "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 fact that, concurrently with the activities in question, the taxpayer carries on the practice of a profession or another business, does not preclude a finding that his additional activities constitute the carrying on of a business. 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 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." Reference was made in Groom's case and in Walker v. The Valuer- General to a statement by Waddell J. in Fennell v. Wyong Shire Council 31 L.G.R.A. 64, 169 where His Honour considered certain activities relevant to the question whether they constituted a business. "The activities should, I think, be carried out for the purpose of gain whether or not a profit is currently being made. The activities must be on a sufficient scale to have some element of independent viability. There should be present in the activities elements of continuity and repetition. I think that basically the enquiry is of a nature of the use being i -- 12 of 16 -- 1 3 made of the subject land. Whether the occupier has another source of income which is his main source of income, or whether he regards his participation in any activities on the subject land as a recreation from his other income earning activities and like consideration may in an extreme case have some relevance but will, I think, generally speaking be irrelevant. I do not intend the above to be an exhaustive statement. Doubtless other cases may give rise to other different considerations." This statement is unexceptionable provided that too much is not read into the sentence "the activities must be on a sufficient scale to have some element of independent viability". Perhaps the words "at least in the long term" should be added to it; and it should not be thought that "independent viability" is inconsistent with a sideline business or a small business activity. Also illustrative of the proper approach is F.C.T. v. Walker (1985) 16 A.T.R. 331, 335. Here the appellant acquired a pure-bred female Angora goat, intending to breed goats and sell the offspring. The goat was left at a stud and while no agistment or other fees were paid to the stud it had the right to remove and sell the mohair. The appellant carried on a programme until it became evident that in the market conditions he was unlikely to profit. He thereupon ceased his activity. Ryan J. observed; with respect to the period when he had pursued the activity - "There is nothing in the evidence to suggest that the taxpayer was merely pursuing a hobby. Rather it indicates that he was interested in the acquisition of an Angora goat for breeding purposes and thereby to make a profit. It is true that the volume of his operations was small, though the amount of capital he ventured, namely $3,000, was not insignificant. However, it is established both by the remarks of Walsh J. in Thomas v. F.C. of T. 72 A.T.C. 4094 at p. 4100; (1972) 46 A.L.J.R. 397 at p. 401 and by the comments thereon by members of the High Court in Hope i -- 13 of 16 -- 1 4 v. The Council of the City of Bathurst 80 A.T.C. 4386 at p. 4390-4391; (1980) 144 C.L.R. 1 at pp. 3 and 10 that a person may carry on a business though he does so in a small way. I do not consider that the scale of the operations was such as to put in question the conclusion I have reached, namely that he was conducting his activities on a commercial basis. There is nothing in the arrangements which suggested that they lacked commercial reality." In the light of the above analysis the passage in Walker v. The Valuer-General (at p. 354) which has earlier been set out should not be read as placing emphasis upon scale or size as a significant factor in the ultimate determination. I n particular, the final sentence in that passage - ("In short, I cannot accept that the scale of the operations or activities are not a significant factor in determining whether or not they are to be classed as a business"), seems to have been used as the justification by means of which small genuine activities designed to make a profit have been denied the status of a business. In truth it is impossible to pose a simple test which will give the correct answer to the great variety of personal enterprises undertaken from place to place. It is true that the volume of operations needs to be understood and that it is relevant to an understanding of the enterprise as a whole. Its smallness may in the end help in leading to a conclusion that it is not a bona fide commercial exercise, just as its largeness may help to place it clearly beyond characterisation as a hobby and assist in the conclusion that it is a business. Alternatively, its size when considered with other factors may show that it could never be reasonably capable of commercial viability, in which case it will fail the test. But there must -- 14 of 16 -- 1 5 be no preconceptions against little enterprises. Familiarity with the tests recognised in the above cases and in particular those applied in Thomas, Hope, Ferguson and F.C.T. v. Walker, and the above passage in Fennell v, Wvong Shire Council, subject to the comment we have made in relation to it, should provide the relevant guidance. Our intent in reviewing the authorities has been to remove any undue emphasis that might otherwise be given to the words we have underlined at p. 6 in the short statement of the Walker test. Where then does the present case stand? It is an example of a reasonably substantial production but of small profit and occasional loss at least according to taxation accounting. Even so it is an activity that has been ongoing for nearly 30 years and involves significant work, continuous application, diligence and repetition. It from time to time makes a profit, and it has inherent in it the less obvious but nonetheless real benefits to the appellant to which we have earlier adverted. The appellant is plainly bona fide engaged in primary production, and this much is common ground between the parties. The activity is such that it would be absurd to characterise it as a hobby. He competes in a market and his relevant activities bear a commercial character. Had the appropriate tests been applied the only reasonable conclusion was that he was using his land exclusively for the purposes of the business of primary production. It is we think a clear case of a bona fide small business. -- 15 of 16 -- 1 6 The appeal is allowed, and the detennination of the Land Court set aside. The unimproved value of the subject land is determined in the sum of $40,000. (J.B. Thomas) j # Judge of the Supreme Court (C.H. Carter) Member of the Land Court (R.E. Wenck) Member of the Land Court i -- 16 of 16 --