Grieve v Commissioner of Inland Revenue
Summary
Taxpayer suffered losses while conducing farming operations. Commissioner denied deduction on the notion of NO business was being carried. Definition of business was discussed in this case, and it was held taxpayers were carrying a business, thus losses were permitted to be offset against taxable income.
Facts of the case
The taxpayers Mr Grieve and his wife purchased a rundown farming property of 216 acres for $33,000 in 1969. They formed a partnership with the intention of carrying on a farming business. When they acquired the land, it was not in a suitable condition for farming as the land was heavily infested with gorse, the pastures had deteriorated and the fencing was not in place. They had problems to improve the land because it was surrounded by a forestry area and a wine yard. Mr Grieve put lots of efforts to improve the land slowly and established a Hereford stud herd (of a modest size in 1980 with the intention to bring some profit to them. He worked full-time in the farm and his son joined him as full-time worker from 1975 to 1977. The partnership had made losses from 1972 to 1977. However, only losses from 1972 to 1975 were allowed to be offset against their other income. The Commissioner disallowed the losses in 1976 and 1977 as they said the taxpayers were not carrying on a business in those years.
Issue
The issue in this case is whether the partnership was carrying on a business activity in those years (1976 and 1977).
Tax law
YA1 of the Income Tax Act 2007: Definition of a “business”
CB1 of the Income Tax Act 2007: Income of a person
Taxpayer’s argument
Taxpayers claimed that they had put in time and efforts to slowly improve the land with the intention to make profit from it. Thus, he was carrying on a farming business and losses should be allowed.
Commissioner’s argument
The Commissioner’s argument was that the taxpayers’ partnership in 1976 and 1977 did not carry on any business, thus losses were not allowed.
Court’s view
The important point in this case is to determine whether the taxpayers were carrying on a business in those years. Because there is no real “definition” of business, this concept is very vague and needs to be considered carefully. The Judge introduced two important points: the nature of the activities carried on and the intention of the taxpayer in engaging in those activities. In this case, the nature of the activities is to buy a land and carry on farming business activity. The Judge identified the nature of business activity as “revenue earning activities that are imposed a charge for tax, business must be a pursuit or occupation demanding time and attention, commercial or mercantile activity”
Then, the Judge went on and looked at the intention of the taxpayers. They also provided with factors to take into consideration when determine the taxpayers’ intention, such as “nature of the activity, period over which it is engaged in, scale of operations and volume of transactions, time, money and effort, pattern of activity and financial results”. In this case, the initial land was not suitable for farming activity, thus the taxpayers had to spend lots of time and efforts to improve the land for their farming business. Because of other factors (surrounding area is forest area and wine yard), it took a bit longer for them to work on their land. Mr Grieve and his son worked full time on the farm during those tax years and he was an experienced farmer working on the farm before. He also established a Herford stud herd in the farm. Thus, the Judge ruled that there was a clear intention the taxpayer were carrying a farming activity in those tax years and therefore, losses should be allowed.
Lesson learned
This is the LADNMARK case to determine a business activity. Before the case, due to the absence of legislative guidelines, the definition for business was often very vague and it was hard for both the taxpayer and Commissioner to work out. From this case, the Judge gave out excellent test when dealing with the problem.
First, there are two tests that we need to consider “the nature of the activities and the intention of the taxpayer”. Then, we need to look at the facts of the case and consider these factors:
- Statements of the taxpayer about their intentions
- Nature of the activity
- The period over which the person engages in that activity
- The scale of operations and the volume of transactions
- Commitment of time, money and effort
- The pattern of activity
- The financial results
After going through these steps, we can work out whether the taxpayer is carrying on a business or not.
Reference
Grieve v Commissioner of Inland Revenue (1984) 6 NZTC 61682