Case: Ell v Commissioner of Taxation 2006 ATC 4098
Outcome: cited
recently, but no less helpfully, Emmett J had this to say on the subject in Ell v Commissioner of Taxation (2006) ATC 4098 at [111]-[114]: [111] Although not determinative, intention is relevant where, for example, a particular activity produces no income (see John v FCT [1989] HCA 5 ; (1989) 166 CLR 417) or where the first step in a business is undertaken (see Fairwell States Pty Ltd v FCT [1970] HCA 29 ; (1970) 123 CLR 153). It is necessary to examine the activities engaged in, including their nature and extent (see Martin v FCT [1953] HCA 100 ; (1953) 90 CLR 470 at 474). Activities may constitute the carrying on of a business even though the activities are carried on in a small way and it is not for the Commissioner to dictate to a taxpayer in which business the taxpayer engages or how to run a business profitably or economically (see Tweedle v FCT [1942] HCA 40 ; (1952) 180 CLR 1). Provided that an activity said to constitute carrying on business is engaged in for the purpose of profit on a continuous and repetitive basis, that activity may constitute the carrying on of business (see Hope v Bathurst City Council [1980] HCA 16 ; (1980) 144 CLR 1). [112] If there were no real expectation of a profit from engaging in a particular activity, there will be real doubt as to whether engaging in that activity can be said to be the carrying on of a business. Where the expenses and outgoings of an activity are disproportionate to any income that might reasonably have been expected from engaging in the activity that involved incurring those expenses and outgoings, it may be legitimate to draw an inference that the expenses and outgoings were not incurred in gaining or producing the relevant assessable income but were incurred for some other purpose. [113] Where expenses and outgoings claimed as deductions are disproportionate to the assessable income produced, subjective factors, including the direct and indirect objects of a taxpayer, may become determinative (see Fletcher v FCT [1991] HCA 42 ; (1991) 173 CLR 1 at 17 19). Where an expense or outgoing claimed as an expense or outgoing of a business is disproportionate to any assessable income that may be gained, it will not be as easy to conclude that the expense or outgoing was incurred in gaining or producing that income (see Spassked Pty Ltd v Commissioner of Taxation [2003] FCAFC 282 ; (2003) 136 FCR 441 at [64]). [114] The state of mind or intention of a taxpayer may be relevant to the question of whether or not that taxpayer is carrying on a business. Even where a transaction produces no income, if the intention of the relevant taxpayer is that the transaction is the first step in a business, that subjective state of mind may be relevant. The acquisition of Athena was, the Taxpayers say, the first step in the carrying on of a business (see Fairway Estate Pty Ltd v FCT [1970] HCA 29 ; (1970) 123 CLR 153 at 166.8). Further, it is not for the Commissioner to dictate to a taxpayer in what way a business should be run. A business may be carried on even though it is not profitable or economical (see Tweedle v FCT [1942] HCA 40 ; (1952) 180 CLR 1) , provided it is carried on with the purpose of making a profit (see FCT v Stone (2005) ATC 4234 at 4243). The Taxpayers say that they had a profit making purpose or intention in relation to the use of Athena. As is clear from the definition of "enterprise", an activity which would not under these general conceptions be regarded as a business, eg an isolated venture in the nature of trade, can nonetheless fall within the definition. One must therefore be careful not wholly to assimilate the concept of a business for income tax law purposes with the concept of an "enterprise" for GST law purposes. In the present case though the extensions beyond "business" evident in the definition of "enterprise" are not raised on the facts. Was an "enterprise" in the form of an accounting practice carried on by the partnership in the period from 1 July 2000 to the date of its dissolution on 23 February 2004? Mr Russell's evidence was that, under the name AW Russell and Co, an accountancy practice was carried on. His oral evidence was that there was "nothing much" by way of clients for such a practice in this period apart from Ancath. There was likewise "nothing much" in any other evidence would suggest that the partnership had any wider clientele during the period prior to 23 February 2004. Mr Russell introduced in evidence what purported to be a written agreement made between the partnership and Ancath in August 2000 for the provision of services to Ancath by the partnership. Mr Russell instanced his being made available to Tradecorp to fulfil Ancath's obligation to Tradecorp under the Tradecorp Agreement as the provision of services to Ancath by the partnership.