Federal Commissioner of Taxation v. Whitfords Beach Pty. Ltd.
82 ATC 4031
Full High Court
Judgment date: Judgment handed down 17 March 1982.
Gibbs C.J.: The facts of this appeal are not in dispute. For the purposes of this judgment it is sufficient to summarize them as follows. The respondent, Whitfords Beach Pty. Ltd. (``the taxpayer''), in 1954 acquired 1,584 acres of land north of Perth. The land was acquired to secure for the original shareholders of the company access to shacks which they occupied on the beachfront and not for the purpose of profit-making by sale or for any business purpose. On 20th December 1967 all the shares in the taxpayer were bought by three companies which had not previously been shareholders. The three companies bought the shares only to obtain control of the land, and with the intention that the taxpayer would cause the land to be developed, subdivided and sold at a profit. The total purchase price for the shares was $1,600,000. It was expected that the rezoning and development of the land would take from three to five years and that thereafter the subdivided lands would be sold at a profit estimated at about $7,000,000. In addition a part of the land was to be used as sites for commercial purposes. On the same day, 20th December 1967, a new set of articles was adopted by the taxpayer, and two of the purchaser companies were appointed to be general managers for a period of about fifteen years to do all within their power to develop and subdivide the land and to sell it in subdivisional allotments. Thereafter the managers began to search for a source of water supply and to investigate means of providing roads, electricity, sewerage and other essential services. Progress accelerated in 1969 when the Government of Western Australia, for reasons of policy, began to encourage and support the subdivision of land in the district. In October 1969 the necessary rezoning of portion of the land was effected. In 1970 subdivision of that portion of the land commenced. The first sales of allotments were made (by selling agents of the taxpayer) early in 1971 and in subsequent years substantial sums were received by the taxpayer as the proceeds of the sales of the allotments. The Commissioner assessed the taxpayer to income tax on profits from the sale of the lands that emerged during the years 1972, 1973, 1974 and 1975. The question that now falls for decision is whether such profits were assessable income of the taxpayer. If that question is answered in favour of the Commissioner, further questions arise, namely, whether the land was committed to a profit-making under-taking or scheme in 1967 or at a later date, and whether the land was wholly committed, or committed piece by piece as the development or the subdivision occurred. However, the parties before us were in agreement that if the first question were to be answered in favour of the Commissioner it would be preferable to remit the matter to the Federal Court to enable the subsidiary questions to be decided.
A profit made on the sale of an asset may be treated as assessable income within the Income Tax Assessment Act 1936 (Cth.) as amended (``the Act'') for one of a number of reasons. In the first place, if the profit should be regarded as income in accordance with the ordinary usages and concepts of mankind, it will be assessable income within sec. 25(1) of
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the Act. When the owner of an investment chooses to realize it, and obtains a greater price for it than he paid to acquire it, the enhanced price will not be income within ordinary usages and concepts, unless, to use the words of the Lord Justice Clerk in
Californian Copper Syndicate v. Harris (1904) 5 Tax Cas. 159, at p. 166, that have so frequently been quoted, ``what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business''. The Lord Justice Clerk went on to say, at p. 166:
``What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being - Is the sum of gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operation of business in carrying out a scheme for profit-making?''
Jones v. Leeming (1930) A.C. 415 it was held by the House of Lords that, assuming that there was no adventure or concern in the nature of trade within sec. 237 of the Income Tax Act 1918 (U.K.), the profit made on an isolated transaction of purchase and resale did not become income merely because the property was bought with the intention of reselling it at a profit. This decision did not involve any new question of law, as Viscount Dunedin pointed out, at p. 421. It depended on the finding of fact that there was no adventure or concern in the nature of trade. Prima facie, an accretion to the capital value of a security between the date of purchase and that of realization is a capital gain (
Colonial Mutual Life Assurance Society Ltd. v. F.C. of T. (1946) 73 C.L.R. 604, at p. 614), and the ground of the decision in Jones v. Leeming was simply that ``the profit on an isolated sale which is not a trading transaction'' is a capital accretion and therefore not income: see per Lord Macmillan, at p. 430. The case did not decide that the fact that the purchase and resale was an isolated transaction necessarily meant that it was not a trading adventure - many cases, before and since, including Californian Copper Syndicate v. Harris and
Edwards (Inspector of Taxes) v. Bairstow (1956) A.C. 14, are opposed to that proposition; what was held was that if, as a matter of fact, the transaction was not a trading transaction, the profit did not become income merely because the asset had been bought with the intention of making a profit on its resale. Jones v. Leeming was decided under English legislation the scheme of which is different from that provided by the Act. However, the conclusion that a profit made on the realization of a capital asset does not become income by reason only of the fact that the asset was acquired for the purpose of profitmaking by sale accords with ordinary concepts. Such a profit is ordinarily regarded as a capital gain, even though the asset was bought for the purpose of making the gain.
Soon after Jones v. Leeming was decided, the Income Tax Assessment Act 1922 (Cth.), which was then in force, was amended by the Income Tax Assessment Act 1930 (Cth.) by inserting in the definition of ``income'' words which were repeated in sec. 26(a) of the Act. Section 26(a) reads as follows:
``The assessable income of a taxpayer shall include -
- (a) profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme.''
The profit on the sale of an asset may be assessable income within this provision, even though it would not ordinarily be regarded as income and would not fall within sec. 25(1) of the Act. It is sometimes said that the purpose of enacting sec. 26(a) appears to have been to overcome the decision in Jones v. Leeming: see
H.R. Lancey Shipping Co. Pty. Ltd. v. F.C. of T. (1951) 9 A.T.D. 267, at p. 271;
White v. F.C. of T. (1968) 120 C.L.R. 191, at p. 208; and
McClelland v. F.C. of T. 70 ATC 4115 at p. 4122; (1970) 120 C.L.R. 487, at p. 499. That statement seems correct so far as the first limb of sec. 26(a) is concerned. Having regard to the existing state of the law to which I have referred, the first limb can in my opinion only have been intended to treat as income profits arising from the acquisition and sale of property which was acquired by the taxpayer for the purpose of profit-making by sale, notwithstanding that the profits did not arise in the carrying on or carrying out of a business - notwithstanding, in other words,
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that the profits would ordinarily be regarded as a capital gain. The words of the first limb, when given their ordinary and natural meaning, support this conclusion, for they contain nothing to suggest that capital gains are to be excluded, and if they did apply only to profits that constituted income in accordance with ordinary concepts they would effect no alteration to the law as already established. The purpose of the second limb of sec. 26(a) is however less clear. The enactment of the second limb was not necessary to undo the effect of Jones v. Leeming; the first limb would have been sufficient for that purpose. The second limb is expressed in words taken from the judgment of Knox C.J., and Gavan Duffy, Powers and Starke JJ. in
Ruhamah Property Co. Ltd. v. F.C. of T. (1928) 41 C.L.R. 148, at p. 151, where their Honours said:
``The principle of law is that profits derived directly or indirectly from sources within Australia in carrying on or carrying out any scheme of profit-making are assessable to income tax, whilst proceeds of a mere realization or change of investment or from an enhancement of capital are not income nor assessable to income tax...''
The judgment goes on (at p. 152) to refer to ``the question whether the sale was an operation of business in carrying out a scheme of profit-making'' - words of course taken from the judgment in Californian Copper Syndicate v. Harris - and it is apparent that their Honours did not intend to depart from the law as declared in that and other authorities, under which profits from carrying on or carrying out a scheme of profit-making were treated as income only if the scheme could be described as a business, a trading adventure, or a commercial venture. However the words used in the second limb of sec. 26(a) do not refer to an operation of business. It may be perhaps that the draftsman of sec. 26(a) thought that he should, out of an abundance of caution, enact into legislation the principles already established by the Courts, since, if sec. 26(a) had contained only the words of the first limb, it might have been thought that the Parliament intended to lay down an exclusive test, with the result that profits arising from the sale of property not acquired for the purpose of profit-making by sale could never be treated as income. I do not consider it admissible to attempt to discover the intention of the Parliament in enacting sec. 26(a) by having regard to statements made by the Minister when the Bill was introduced, but I must add that such material of that kind as I have seen does not reveal any clear reason for the enactment of the second limb of sec. 26(a).
Premier Automatic Ticket Issuers Ltd. v. F.C. of T. (1933) 50 C.L.R. 268, at pp. 297-298, Dixon J. said that the adoption of the provision which later became sec. 26(a) ``probably has no more effect than to give legislative authority to the tests propounded and applied in decisions of this Court'', but added: ``No doubt, as the language of the statute it must receive a more literal application''. In
Official Receiver v. F.C. of T. (Fox's case) (1956) 96 C.L.R. 370 the Court expressed the matter rather more strongly, saying, at p. 387:
``Moreover, although s. 26(a) is founded on language which was used in judicial decisions... yet it provides a statutory criterion which must be applied directly and cannot be treated as going no further and producing no different result than would a criterion expressed as `exercising trade' or `carrying on a business'.''
This passage was cited with apparent approval by Taylor and Owen JJ. in White v. F.C. of T., at p. 219, and I myself have already accepted its correctness:
F.C. of T. v. N.F. Williams 72 ATC 4188 at p. 4195; (1972) 127 C.L.R. 226, at p. 250. If the words of the second limb are literally construed they are wide enough to include profits which are income according to ordinary concepts as well as profits of a capital nature. In so far as they include profits which are income in character they appear to overlap to some extent the provisions of sec. 25(1): see White v. F.C. of T., at p. 219, and
F.C. of T. v. Bidencope 78 ATC 4222 at p. 4223; (1978) 140 C.L.R. 533 at p. 552. In practice in some (if not most) cases it has been found unnecessary to determine whether the profits in question were assessable under sec. 25(1) or sec. 26(a); it was enough to decide whether or not they were taxable. In
A.C. Williams v. F.C. of T. 72 ATC 4157; (1972) 128 C.L.R. 645 Stephen J., at ATC p. 4166; C.L.R. pp. 652-653, has
82 ATC 4036
given examples of cases in which it was regarded as immaterial under which provision (sec. 25(1) or sec. 26(a)) the receipts in question became assessable income, the question in issue being whether they were assessable at all. Scottish
Australian Mining Co. Ltd. v. F.C. of T. (1950) 81 C.L.R. 188, a case much relied on in argument in the present case, provides another example: see at p. 195. Although in many cases the assessment will be the same whether the case is regarded as falling within sec. 25(1) or sec. 26(a), there may be cases in which a different result will be arrived at depending on which provision is held to be applicable. A.C. Williams v. F.C. of T. was held to be such a case. I am not persuaded that a difference will result from the fact that sec. 25(1) refers to ``gross income'' and sec. 26(a) to ``profit'', for I agree with Mason J. in
Commercial and General Acceptance Ltd. v. F.C. of T. 77 ATC 4375 at pp. 4380-4381; (1977) 137 C.L.R. 373, at pp. 382-383, that ``gross income'' includes ``a net amount which is income according to the ordinary concepts and usages of mankind, when the net amount alone has that character, not being derived from gross receipts that are revenue receipts''. However, the question before us in the present case asks not merely whether any part of the proceeds constitutes assessable income but if so on what ground. In case it should become material it is therefore necessary to consider whether, if both sec. 25(1) and sec. 26(a) appear to justify the inclusion of an amount in the assessable income, and if different consequences might flow from regarding the income as included by one provision rather than by the other, the case should be held to be governed by sec. 25(1) or by sec. 26(a). There can I think be no doubt that when particular transactions (for example the buying and selling of stock in trade) which might otherwise fall within the words of sec. 26(a) form part of the conduct of a wider business, it is not permissible to treat each such transaction as separately taxable under sec. 26(a). In
Investment and Merchant Finance Corporation Ltd. v. F.C. of T. 71 ATC 4140; (1971) 125 C.L.R. 249 Barwick C.J. said, at ATC p. 4142; C.L.R. p. 255:
``In the first place it is an error in my opinion to think that the transactions of a business can be taken item by item and each treated as falling within sec. 26(a). The business must be regarded as a whole, its receipts being assessable income from which the permitted deductions are to be deducted. Section 26(a) is intended in my opinion to deal with transactions which are entire in themselves and do not form part of a more extensive business. In that event they are regarded as yielding a profit which will be calculated according to the circumstances of the transaction, the profit only being assessable income.''
In the same case Menzies J. said, at ATC pp. 4146-4147; C.L.R. p. 264:
``I do not think that every business that involves the buying and selling of stock in trade is to be fragmented into a large number of separate transactions and the dealer taxed on the aggregate of the profits derived from each transaction considered separately... It is significant that sec. 26(a) defines but one item to be included in assessable income, and, in my opinion, the whole of the carrying on of a business of buying and selling is not to be comprehended within sec. 26(a), nor does that provision aptly apply to the particular dealings constituting, in total, the carrying on of a business.''
These passages have been referred to with apparent approval by Stephen J. in A.C. Williams v. F.C. of T., at ATC p. 4166; C.L.R. pp. 653-654, and by Mason J. in
F.C. of T. v. St. Hubert's Island Pty. Ltd. (in liq.) 78 ATC 4104 at pp. 4113-4114; (1978) 138 C.L.R. 210, at pp. 229-230. I respectfully agree that it is not possible to isolate the profits of a transaction which forms part of a wider business and to tax them separately as the profits of a transaction which forms part of a wider business and to tax them separately as the profits of a profit-making undertaking or scheme. Such a result would be manifestly unjust, and it is not required by the words of sec. 26(a), since it would not be a natural use of words to describe a dealing which forms an integral part of a wider operation as being itself a profit-making undertaking or scheme.
The present case is not one in which the alleged profit-making undertaking or scheme forms part of a larger operation. The alleged scheme forms the whole of the taxpayer's operations. The question that arises is whether profits arising from the carrying on or carrying out of a profit-making scheme
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that itself constitutes the whole of the taxpayer's business are taxable under sec. 26(a), notwithstanding that in the absence of the provisions of that paragraph the profits would fall within sec. 25(1). In Investment and Merchant Finance Corporation Ltd. v. F.C. of T. Menzies J., at the conclusion of the passage that I have already quoted, went on to say, at ATC p. 4147; C.L.R. p. 264:
``Section 26(a) deals with particular transactions which might otherwise escape from the tax net and it brings into assessable income profits, after outgoings attributable to the particular transaction have been taken into account.''
Ordinarily the specific provisions of sec. 26 will be given effect in preference to the general provisions of sec. 25(1): see
Reseck v. F.C. of T. 75 ATC 4213, at pp. 4217 and 4220; (1975) 133 C.L.R. 45, at pp. 49 and 57. However, the fact that the profits yielded by some transactions which fall within the literal meaning of the words of sec. 26(a) will not be brought to tax under that provision, since the transactions form part of a more extensive business, supports the view that sec. 26(a) does not apply where sec. 25(1) is applicable. Moreover, any business conducted for profit can be described as a profit-making undertaking or scheme, but it is impossible to suppose that the Parliament intended (contrary to settled practice) that the profits of every business should be dealt with under sec. 26(a) rather than under the general provisions of sec. 25. Not without some doubt I have therefore reached the conclusion that although the provisions of sec. 26(a), if given full effect, would overlap those of sec. 25, the second limb of sec. 26(a) applies only to ``profits not attributable to gross income that has already been captured by sec. 25'', to use the words of Mason J. in F.C. of T. v. Bidencope, at ATC p. 4228; C.L.R. p. 555.
It is implicit in what I have said that I consider that the second limb of sec. 26(a) includes profits which would not otherwise have fallen within sec. 25, because they could not be described as income in the ordinary sense. I have discussed that question in F.C. of T. v. Bidencope, at ATC p. 4226; C.L.R. pp. 551-552, and adhere to what I there said in relation to this aspect of the matter. However, I should make it clear that I regard it as established that profit yielded by the mere realization of a capital asset not acquired for the purpose of profit-making by sale would not be either assessable income within sec. 25(1) or the profit arising from the carrying on or carrying out of a profit-making undertaking or scheme within sec. 26(a): see
Hobart Bridge Co. Ltd. v. F.C. of T. (1951) 82 C.L.R. 372, at pp. 383-384; White v. F.C. of T., at p. 219, and F.C. of T. v. N.F. Williams, at ATC p. 4194; C.L.R. p. 249. If the second limb of sec. 26(a) had the effect of including such profits in assessable income, the first limb would be entirely nugatory.
It is clear that the first limb of sec. 26(a) has no application to the present case. As I said in
Steinberg v. F.C. of T. 75 ATC 4221 at p. 4232; (1975) 134 C.L.R. 640, at p. 695, to satisfy the first limb of sec. 26(a), it is necessary that the property, whose sale yielded a profit, should be the same property as that which was acquired for the purpose of profit-making by sale. In the present case the property sold, the land, was not acquired by the taxpayer for the purpose of profit-making by sale, although the shares in the taxpayer were acquired by the present shareholders for the purpose of making a profit by the sale of the land.
The question whether the profits were income within ordinary concepts depends on the application of the tests laid down in Californian Copper Syndicate v. Harris and in the cases that have followed that decision. Was what was done merely a realization of the taxpayer's asset, or was it something done in what was truly the carrying on or carrying out of a business? In other words the question is ``whether the facts reveal a mere realization of capital, albeit in an enterprising way, or whether they justify a finding that the [taxpayer] went beyond this and engaged in a [business of profit-making] in land albeit on one occasion only'': see McClelland v. F.C. of T. at ATC p. 4120; C.L.R. p. 496, where however the words used are ``a trade of dealing in land''; the words which I have ventured to substitute seem more consonant with the Australian authorities. The words ``merely'' and ``mere'' in these statements seem to me to be an important part of the definition of the line between profits that are taxable and those
82 ATC 4038
that are not. If the taxpayer does no more than realize an asset, the profits are not taxable. It does not matter that the taxpayer goes about the realization in an enterprising way, so to secure the best price. As I have said in F.C. of T. v. N.F. Williams, at ATC p. 4194; C.L.R. p. 249:
``The situation is not altered by the fact that the landowner seeks and acts upon the advice of an expert as to the best method of subdivision and sale or by the fact that he carries out work such as grading, levelling, road building and the provision of reticulation for water and power to enable the land to be sold to its best advantage.''
Further, the mere magnitude of the realization does not convert it into a business:
Commr. of Taxes v. British Australian Wool Realization Association (1931) A.C. 224, at p. 252. But if the taxpayer does engage in an operation of business, the proceeds are income and taxable.
Counsel for the taxpayer naturally relied on a line of cases which exemplify the principle that a realization does not cease to be such merely because extensive work is done on the land in order that it will fetch the best price. Since the question to be decided is one of fact, it will be unprofitable to examine the particular circumstances of the various cases in which the question has been discussed. Perhaps the strongest from the taxpayer's point of view was the decision of Williams J. in Scottish Australian Mining Co. Ltd. v. F.C. of T. In that case a company, formed primarily to carry on the business of coal mining, in 1863 purchased land for the purpose of its coal mining operations. After those operations ceased, in 1924, the company subdivided the land, built roads and a railway station, made sites available for schools, churches and parks, and sold the subdivided parcels at a considerable profit. It was held that the profits should not be included in the company's assessable income. It is important to observe that the company had carried on coal mining on the land until it was no longer business-like to do so, and that it was not a company formed for the purpose of dealing in land, and that it had not in fact engaged in such a business: see at pp. 195 and 197.
On the other hand, the Commissioner relied on Fox's case. That case, as has often been pointed out, was an exceptional one. Lands in process of reclamation were vested in the official receiver of the bankrupt estate of one Rankin, deceased. The official receiver continued the process of development that had been begun by Rankin, and sold the subdivided and developed blocks. Although the Court found that the purpose of the trustee of an estate in bankruptcy is to realize the estate (see at pp. 384-385), and that the official receiver was not selling blocks as a person habitually trading in land, but was simply realizing assets in the way which appeared most advantageous (see at p. 386), it was nevertheless held that the profit if any fell within sec. 26(a). The reasons given by the Court for this conclusion were expressed as follows, at p. 387:
``But there can be little doubt that in embarking, in pursuance of the resolution of creditors, upon the course of strengthening the title to the land, persuading the Southport Town Council to continue the agreement and allow him to fulfil it, causing the work to be completed under contract and causing the sub-divisional sales to be made through commission agents, the official receiver was adopting a set plan with a view of securing from the ultimate sale of the land a much greater net return than otherwise could be expected. These activities were planned, organised and coherent. True it is that they formed only the final stages of a plan conceived by Rankin and carried partly into execution by him. But given the basal facts that land of a definite value was thus made to yield net proceeds considerably in excess of what otherwise could be obtained, it seems too difficult to deny that the official receiver adopted and pursued an undertaking or scheme that from his point of view satisfied the description `profit-making' and that he carried it out.''
This decision is a somewhat difficult one to understand. True it is that if applied to the present case it assists the case of the Commissioner. However, the reasons for judgment suggest that the facts that the activities were planned, organized and coherent, and that they produced profits considerably larger than could otherwise
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have been obtained, meant that an advantageous realization was converted into a profit-making scheme. If that is the ratio of the decision the case cannot stand with numerous other authorities. The decision may perhaps be supported on the footing that on the facts of the case the official receiver went beyond merely realizing the land.
In the present case I gravely doubt whether the profits resulting from the development, subdivision and sale of the land would have been taxable if it had not been for the events that occurred on 20th December 1967. Had those events not occurred, the situation of the taxpayer would have been analogous to that of the company in Scottish Australian Mining Co. Ltd. v. F.C. of T. However, on 20th December 1967, the taxpayer was transformed from a company which held land for the domestic purposes of its shareholders to a company whose purpose was to engage in a commercial venture with a view to profit. Counsel for the taxpayer submitted that it was not permissible to blur the distinction between the company and its shareholders. That of course is true, but in deciding whether what was done was an operation of business, it is relevant to consider the purpose with which the taxpayer acted, and, since the taxpayer is a company, the purposes of those who control it are its purposes. In Ruhamah Property Co. Ltd. v. F.C. of T. the majority of the Court regarded as important, if not decisive, the purposes with which the shareholders and directors of the company acted, although Isaacs J., who dissented, thought it erroneous to consider a company merely as machinery for carrying out individual purposes: see at pp. 160, 162 and 166. However, in my opinion Isaacs J. took too rigid a view of the effect of
Salomon v. Salomon & Co. (1897) A.C. 22 if he thought that in determining the purpose with which a company acted it was not permissible to have regard to the intentions of the directors who controlled it. In the present case, the three companies which became the shareholders, or the two which became the managers (it matters not which), represented the directing mind and will of the taxpayer and controlled what it did, and their state of mind was the state of mind of the taxpayer:
H.L. Bolton (Engineering) Co. Ltd. v. T.J. Graham & Sons Ltd. (1957) 1 Q.B. 159, 172; cited in
Tesco Supermarkets Ltd. v. Nattrass (1972) A.C. 153, at pp. 171 and 187; and see B.
Elsey Pty. Ltd. v. F.C. of T. 69 ATC 4115 at p. 4117; (1969) 121 C.L.R. 119, at p. 121. The purpose of those controlling the taxpayer was to engage in a business venture with a view to profit. Moreover, although the taxpayer was not formed for the purpose of selling land, after December 1967 it became a company which existed solely for the purpose of carrying out the business operation on which the new shareholders had decided to embark when they acquired their shares. It is in the light of these circumstances that the extensive work of development and subdivision is seen to be more than the mere realization of an existing asset and to be work done in the course of what was truly a business venture. For these reasons, although the case is not without its difficulties, I have concluded that the profits were income within ordinary concepts and taxable accordingly.
Wickham J., at first instance, answered the first question raised for the determination of the Court as follows:
- Q. - Does any part of the proceeds of sale of the subject land constitute assessable income of the taxpayer, and if so on what ground?
- A. - Yes, all of the proceeds were assessable under the provisions of sec. 25.
For the reasons I have given I consider that this answer was correct, assuming as I do that ``proceeds'' was intended to mean ``profit''. I would accordingly allow the appeal, and restore that part of the order of Wickham J. As to the other questions raised, I would remit the matter to the Federal Court to determine the remaining questions.