Primary production: conditions for election to spread or defer profit on disposal or death of livestock

For the purposes of satisfying the condition in subparagraph 385-100(1)(a)(iii) of the Income Tax Assessment Act 1997 (ITAA 1997), was the taxpayer's disposal of livestock 'because' pasture was destroyed by drought?

No. For the purposes of satisfying the condition in subparagraph 385-100(1)(a)(iii) of the ITAA 1997, the taxpayer's disposal of livestock was not 'because' pasture was destroyed by drought.

During the income year the taxpayer sold part of his grazing property together with some livestock. He did so in order to obtain funds so that he could give financial help to his son who was planning to set up his own business but was unable to secure bank finance for the venture. Other factors relevant at the time of disposal were that: • the livestock disposed of exceeded the carrying capacity of the part of the property the taxpayer retained • the property had been subjected to a period of drought conditions and the pasture was degraded as a result • the taxpayer intended to acquire a replacement property less susceptible to drought on which to run livestock when circumstances permit.

The taxpayer sought to make an election to defer the tax profit on the disposal of the livestock under section 385-110 of the ITAA 1997.

Under section 385-110 of the ITAA 1997, a primary producer can elect to defer, for concessional tax treatment, the tax profit arising from certain disposals of livestock. The qualifying conditions that must be met in order to make an election are set out in section 385-100 of the ITAA 1997. The threshold condition is that the disposal occurs because of an event listed in paragraph 385-100(1)(a) of the ITAA 1997. In this case, the taxpayer may be eligible to make an election in terms of subparagraph 385-100(1)(a)(iii) of the ITAA 1997 if the disposal of livestock is 'because pasture or fodder is destroyed by fire, drought or flood'.

The Macquarie Dictionary [Multimedia], version 5.0.0, 01/10/01 defines 'because' to mean 'for the reason that; due to the fact that'. It follows that 'because' denotes a causal relationship between the destruction of pasture or fodder by drought and the disposal of livestock.

A similar expression, 'by reason of', was considered in Human Rights and Equal Opportunity Commission v. Mount Isa Mines Limited [1993] FCA 535. In construing that expression in the context of the Sex Discrimination Act 1984 , Lockhart J said at paragraph 55: In my opinion the phrase "by reason of" ... should be interpreted as meaning "because of", "due to", "based on" or words of similar import which bring something about or cause it to occur. The phrase implies a relationship of cause and effect ....

Whether it can be said that the destruction of pasture by drought brings about or is the cause of the disposal of livestock, for the purposes of subparagraph 385-100(1)(a)(iii) of the ITAA 1997, turns on whether there is a sufficiently close relationship to establish cause and effect. In weighing the meaning of the language used and the closeness or sufficiency of the relationship that needs to exist it is critical to examine the legislative context of the expression.

The importance of context as an aid to establishing what Parliament intended is illustrated in Vickers v. Minister for Business and Consumer Affairs and Others (1982) 43 ALR 389. That case considered the meaning of a provision in the Customs Act 1901 that required the possession of money in a bank account to arise 'by reason of' dealing in narcotics. Morling J at page 497 observed that 'the phrase ... implies a relationship of cause and effect between the sale or dealing in narcotics and the possession of the bank account'. In finding that there was a sufficient causal relationship, his honour rejected the argument that the intervening transaction to deposit the proceeds from the narcotics dealing into a bank account broke the causal relationship. His honour noted at page 408 that this construction, having regard to the manifest intention of the legislation to deprive a person of a financial advantage from dealing in narcotics, 'promotes the purpose or object underlying the Act and is thus to be preferred to one that does not.'

The legislative context in which subparagraph 385-100(1)(a)(iii) of the ITAA 1997 appears is therefore an important indicator of its intended scope. The immediate context of Division 385 of the ITAA 1997 is about providing tax relief for primary producers in specified circumstances. Broadly, this concession is in the form of a choice to either spread or defer a liability to tax in respect of profits from the forced disposal of livestock.

The legislative history of the concession from its inception in 1945 reveals a consistent policy to confine the scope of the tax relief to those primary producers who are forced to dispose of livestock because of a specified event. Originally, the enactment was limited to the case of pastoralists forced to dispose of livestock because of land resumption for soldier resettlement. The Explanatory Memorandum to the Income Tax Assessment Bill 1945 emphasised that tax relief in these situations was 'equitable' given that the profit arises from a sale that a pastoralist is obliged to make. In this sense the special circumstances of a forced sale with the resulting abnormal amount of income provided the rationale for the concession in its original form.

In 1952 the concession was expanded to include the circumstances of natural disaster now covered by subparagraph 385-100(1)(a)(iii) of the ITAA 1997. The Explanatory Memorandum to the Income Tax and Social Services Contributions Assessment Bill (no.3) 1952 also underscores the involuntary nature of a disposal caused by a natural disaster that the provision targets. It states: The amendment to section 36 ... is designed to afford taxation relief to pastoralists who are forced to sell live-stock because of the destruction of pastures or fodder through the ravages of fire, drought or flood .... Pastoralists seeking to take advantage of this concession will be required to establish that the sale was genuinely occasioned by the loss or destruction of pastures or fodder and that the loss was the result of fire, drought or flood.

The concession was further enlarged in 1955 to cover compulsory disposals because of tick eradication and, in 1961, to include additional classes of compulsory disposals caused by disease and land contamination.

Division 385 of the ITAA 1997 rewrote and consolidated these rules. Consistently with the old law, the Explanatory Memorandum to the Tax Law Improvement Bill 1997 describes the Division as conferring 'special treatment ... for a forced disposal ... caused by a specified event'. These specified events listed in subsection 385-100(1) of the ITAA 1997 cover disposals where the operation of a law compels that outcome. This can be seen in the case of a disposal because of the operation of the law governing land resumption, tick eradication, disease control and property contamination. The other forced event dealt with in subparagraph 385-100(1)(a)(iii) of the ITAA 1997 is a natural disaster being fire, flood or drought that destroys pasture and fodder thereby compelling the disposal of livestock.

The legislative context strongly indicates that to come within the terms of the subparagraph, the natural disaster and consequent destruction of pasture must be the compelling and decisive reason for the livestock disposal. Only where it can be concluded that the disposal of the livestock was effectively forced because of the destruction of pasture or fodder will there be a sufficient causal relationship for the purposes of the provision. In these circumstances, the relationship of cause and effect is established. Conversely, if the destruction of pasture is just a background factor or an incidental or remote reason for the disposal, the necessary nexus is not established. No special tax treatment will be available under the provision because the element of compulsion is lacking.

In the present case, the taxpayer disposed of the livestock together with the property carrying the livestock. The decisive reason for the sale was to enable him to give his son financial assistance. Although the pasture was affected by drought, this was only a background factor or an incidental reason for the disposal of the cattle. The destruction of pasture by drought was not the compelling or decisive reason for the disposal of the livestock.

There is an insufficient causal nexus between the destruction of pasture and the disposal of the livestock to establish that the disposal occurred 'because' pasture was destroyed by drought. Accordingly, the taxpayer's disposal of livestock was not 'because' pasture was destroyed by drought for the purposes of satisfying the condition in subparagraph 385-100(1)(a)(iii) of the ITAA 1997.