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Federal Commissioner of Taxation v. Whitfords Beach Pty. Ltd.

82 ATC 4031

Gibbs CJ

Mason J

Murphy J

Wilson J

Full High Court

Judgment date: Judgment handed down 17 March 1982.

Mason J.: The issue here, according to the judgments in the Federal Court, is whether the proceeds of sale are the mere realization of a capital asset or whether they are the end result of a business undertaking or scheme. The majority in the Federal Court thought that the proceeds were not income under sec. 25(1) or sec. 26(a) of the Income Tax Assessment Act 1936 (as amended). Deane J., dissenting, considered that they were income under sec. 25(1).

82 ATC 4040

The authorities, and there are many of them, need to be read with a close eye to the difference between the Australian and the United Kingdom legislation. In the United Kingdom the legislation taxes the net profits or gains of a business. Our Act proceeds by an entirely different method - taking the taxpayer's gross income (sec. 25(1)), adding to it other receipts of which sec. 26(a) is an atypical example (because it catches net profit), thereby arriving at his assessable income from which are subtracted allowable deductions where appropriate (sec. 48), resulting in the ascertainment of his taxable income (see
Commercial and General Acceptance Ltd. v. F.C. of T. 77 ATC 4375 at p. 4380; (1977) 137 C.L.R. 373, at p. 381). Despite the existence of this statutory scheme it is accepted that sec. 25(1) includes a net amount which is income according to the ordinary concepts and usages of mankind when the net income alone has that character, not being derived from gross receipts that are revenue receipts - see Commercial and General Acceptance, at ATC pp. 4376-4377; C.L.R. pp. 381-383.

It has been a long-settled principle of revenue law that, unless a sale of property is made in an operation of business, the resulting profit will not be income according to the ordinary concepts and usages of mankind. The principle was expressed by the Lord Justice Clerk in
Californian Copper Syndicate (Limited and Reduced) v. Harris (1904) 5 T.C. 159, at pp. 165-166, in these terms:

``... where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit... assessable to Income Tax. But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable, where 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... 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 of profit-making?''

This statement expresses the question which has to be decided when it is sought to apply sec. 25(1) to a taxpayer who sells property at an enhanced value. Does sec. 26(a) have a different application less favourable to the taxpayer? This is the next question to be considered.

A provision corresponding to sec. 26(a) was inserted in the Income Tax Assessment Act 1922 (as amended) by Act No. 50 of 1930 as para. (ba) of the definition of ``income''. The amendment was given retrospective effect to 1 July 1922, the day that the Income Tax Assessment Act 1922 came into operation. It is evident that the amendment was made to overcome the perceived effect of the decision of the House of Lords in
Jones v. Leeming (1930) A.C. 415. There it was held that the profit made on the sale of two rubber estates acquired for the purpose of profit-making by sale, when the purchase and sale was an isolated transaction not being undertaken in the course of business or trade, was not in the nature of income but an accretion to capital. The decision in the case was complicated by the actual findings of the Commissioners - that the property was acquired with the actual intention of it being turned over at a profit and that, nonetheless, the transaction was not an ``adventure or concern in the nature of trade''. For an analysis of the case and its difficulties see ``Section 26(a) and section 26AAA of the Income Tax Assessment Act'' by Asprey J. in Taxation Review Committee - Commissioned Studies (1975) p. 211, at pp. 214-216.

The Treasurer, in his Second Reading speech, when introducing the bill incorporating the amendment in 1930 said:

``Certain provisions in the bill relate to the taxation of isolated transactions which have been undertaken for profit-making. Several judgments of individual members of the High Court have declared that such profits are taxable; but a recent judgment of the House of Lords decided that they are not the proceeds of a trade or business, and therefore not taxable under the income tax law of the United Kingdom. Although that judgment is not

82 ATC 4041

binding upon our High Court, it might be followed upon appeal, with considerable disadvantage to the revenue. To obviate such a change in the interpretation of our law, we are making it clear that the profits from such isolated transactions shall continue to be taxable here. It is proposed to apply the new provision to all past assessments owing to the existence of disputes on assessments for past years back to 1922-23.''

(Hansard's Parliamentary Debates, vol. 125, at pp. 3724-3725.) The explanatory memorandum mentioned earlier in the Treasurer's speech stated:

``This amendment is merely a statutory declaration of what has for many years been accepted as settled law in Australia, viz., that a profit derived from any transaction or scheme entered into for the purpose of profit-making is income which is assessable to income tax notwithstanding that the transaction or scheme does not amount to or is not part of, a trade or business.

The amendment is necessary in consequence of the fact that within the last few weeks the House of Lords has given a decision on an appeal against an assessment under the English Income Tax Act to the effect that the profit arising from an isolated transaction of the purchase and sale of property is not income, but is an accretion of capital, even where the property was purchased for the purpose of profit-making by sale. (Jones v. Leeming)...''

(Explanatory Notes, Income Tax Assessment Bill 1930, at p. 4.)

As I said in
Wacando v. Commonwealth (1981) 37 A.L.R. 317 at pp. 335-336, generally speaking, reference cannot be made to what is said in Parliament for the purpose of interpreting a statute. But in my opinion there are grounds for making an exception for the case where a bill is introduced to remedy a mischief. Then, to have regard to the purpose for which the legislation was enacted as stated by the Minister in charge of the bill would conform to the rule that extrinsic material is admissible to show the mischief which the statute is designed to remedy. I acknowledge that the inadmissibility of Parliamentary debates, as an aid to the construction of statutes is supported by powerful authority. (See generally
Bitumen & Oil Refineries (Australia) Ltd. v. Commr. for Government Transport (1955) 92 C.L.R. 200;
Australasian United Steam Navigation Co. Ltd. v. Hiskens (1914) 18 C.L.R. 646 at p. 672;
S.A. v. The Commonwealth (1942) 65 C.L.R. 373;
S.A. Commr. for Prices & Consumer Affairs v. Charles Moore (Aust.) Ltd. (1977) 139 C.L.R. 449;
Davis v. Johnson (1979) A.C. 264.) But there is a case for treating the Minister's statement, particularly when it is not contested, as cogent evidence of the mischief aimed at, evidence certainly as cogent as the extrinsic materials from which the Court would draw an inference in many cases.

Assam Railways and Trading Co. Ltd. v. I.R. Commrs. (1935) A.C. 445 Lord Wright noted (at p. 458):

``... that the language of a Minister of the Crown in proposing in Parliament a measure which eventually becomes law is inadmissible and the Report of Commissioners is even more removed from value as evidence of intention, because it does not follow that their recommendations were accepted.''

But (at pp. 458-459) his Lordship went on to refer to Lord Halsbury L.C.'s use of the report of a commission in
Eastman Photographic Materials Company v. Comptroller-General of Patents, Designs, and Trade Marks (1898) A.C. 571, at p. 575 because there was ``no more accurate source of information as to what was the evil or defect which the Act... was intended to remedy''. As Elmer A. Driedger points out in The Construction of Statutes pp. 130-131, the Minister's speech should be admissible for the same purpose.

There is some support in the cases for this view. In In
Re Mew & Thorne (1862) 31 L.J. Bk. 87 Lord Westbury (at p. 89) referred to the report of a commission and to the speech of the member who introduced the legislation into the House of Commons and stated that he did so in order to ascertain the object to which the relevant provision was directed, having earlier noted that the court needed to ascertain the mischief or evil which existed under the antecedent law. In
T.M. Burke Pty. Ltd. v. City of Horsham (1958) V.R. 209

82 ATC 4042

Sholl J. (at pp. 216-217) referred to the Victorian Hansard to show that a provision amending the Local Government Act 1949 was introduced to remove a particular doubt. See also Griffith C.J. arguendo in
The Municipal Council of Sydney v. The Commonwealth (1904) 1 C.L.R. 208 at pp. 213-214; Lord Denning M.R. in
Sagnata Investments Ltd. v. Norwich Corporation (1971) 2 Q.B. 614 at p. 624; P. Brazil ``Legislative History, Statutes and Construction'' (1961) 4 University of Queensland Law Journal 1 esp. at pp. 12-14; Pearce Statutory Interpretation in Australia (1974) para. 67 and 219.

In the United States of America where admittedly the courts make a much more generous use of legislative materials including debates, the established rule is ``that debates, although inadmissible as evidence of legislative meaning, may be resorted to as evidence of the situation or `evil' which led to the adoption of the statute in question...'' (Sutherland Statutes and Statutory Construction 4th ed. vol. 3 p. 562;
The Tap Line Cases (1914) 234 U.S. 1, at p. 27;
Standard Oil Co. v. United States (1911) 221 U.S. 1, at p. 50).

In this case, I hasten to add, the extrinsic material allows an inference to be drawn as to the purpose of the amendment, without the need to rely on the Treasurer's statement.

Despite the Treasurer's statement there is a doubt as to whether the new provision, in particular its first limb, was merely a restatement of the general law as it had been understood in Australia before Jones v. Leeming. It had not been decided, conclusively or otherwise, that the profit derived from the sale of property acquired in an isolated transaction for the purpose of profit-making by sale was income. So in
Blockey v. F.C. of T. (1923) 31 C.L.R. 503 Isaacs J. had said (at pp. 508-509):

``A mere realization of property though producing profit does not, as I have said, produce income. It is a mere enlargement of capital. But if a man, even in a single instance, risks capital in a commercial venture - say, in the purchase of a cargo of sugar or a flock of sheep - for the purpose of profit making by resale and makes profit accordingly, I do not for a moment mean to say he has not received `income' which is taxable. I intimated during the argument that this was possible; and I leave it open.''

See also Rydge Commonwealth Income Tax Acts 1st ed. (1923) p. 118; 2nd ed. (1929) p. 186. Even so, there were those - perhaps Isaacs J. was one of them - who, like the Treasurer, believed that the profit derived from the sale of property acquired in an isolated transaction for the purpose of profit-making by a sale was income because it was derived in a business operation carrying out a profit-making scheme. Jones v. Leeming apparently denied this conclusion and it denied the reasons underlying this conclusion because it seemed to say that a one-off transaction could not amount to a business operation carrying out a profit-making scheme. The obvious response to Jones v. Leeming therefore lay in the introduction of a provision like sec. 26(a) which, first, specifically dealt with the facts in that case and, secondly, reaffirmed the general principles so as to fortify it against the House of Lords' decision.

Some twenty-five years after Jones v. Leeming the Treasurer was vindicated, substantially if not entirely, by the House of Lords' decision in
Edwards (Inspector of Taxes) v. Bairstow (1956) A.C. 14. There it was decided that a profit arising from a joint venture involving the purchase of a complete spinning plant and its subsequent resale was liable to income tax. Although it was an isolated transaction not undertaken in the course of carrying on a business, the joint venturers bought the plant for the purpose of making a profit by resale. Because it involved a dealing with the plant for the purpose of making a profit, albeit in an isolated transaction, it was held to be an adventure in the nature of trade. Jones v. Leeming was regarded as a decision which turned on the findings of fact there made. The irony of this is that the facts of Jones v. Leeming are not readily distinguishable from Edwards v. Bairstow and the finding of fact by the Commissioners in the latter case, which seems to have reflected the decision in the former case, was set aside on the ground that as it could not reasonably be supported there was a question of law involved. Edwards v. Bairstow, rightly in my opinion, overruled the proposition ascribed to Jones v. Leeming that a profit made on the sale of property

82 ATC 4043

acquired for the purpose of profit-making by sale, when the purchase and sale is an isolated transaction not undertaken in the course of carrying on a business, cannot constitute income.

The first limb of sec. 26(a) precisely covers the facts of Jones v. Leeming. However, the problem lies not so much in the first limb as in the second limb; it is to decide whether the second limb has an operation additional to the first limb and, if so, what it is. The language of the second limb reflects the remarks made by Knox C.J., Gavan Duffy, Powers and Starke JJ. in
Ruhamah Property Co. Ltd. v. F.C. of T. (1928) 41 C.L.R. 148. There the Court held that the sale of property by the taxpayer was not ``a business operation carrying out a scheme of profit-making but the realization of a capital asset'' (p. 154). These words are virtually identical with those used in Californian Copper. Their Honours said (at p. 151):

``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...''

Later they observed (at pp. 151-152):

``In our opinion the authorities show that the objects and powers of the Company contained in its memorandum and articles of association are not decisive of the question whether the sale was an operation of business in carrying out a scheme of profit-making, but that a consideration of all the matters advanced by the Company was relevant to a determination of that question...''

Subsequently, after the enactment of sec. 26(a) in
Premier Automatic Ticket Issuers Ltd. v. F.C. of T. (1933) 50 C.L.R. 268, Dixon J., after quoting the passages already cited from Ruhamah, said (at p. 298):

``The criterion, which the Legislature has now adopted and established, was formulated by the Courts in the absence of any statutory direction upon the way in which capital profits may be distinguished from income profits. So far as it lacks precision or is uncertain in its application, the cause is to be found in the powerlessness of the Courts to do more than state a wide general proposition and to apply it as each case arose. The statement of the proposition was not a definition, but rather an explanation of principle. No doubt, as the language of the statute it must receive a more literal application. It is not easy to say whether the expression `profit-making by sale' refers to a sole purpose, or a dominant or main purpose, or includes any one of a number of purposes. The alternative `carrying on or carrying out' appears to cover, on the one hand, the habitual pursuit of a course of conduct, and, on the other, the carrying into execution of a plan or venture which does not involve repetition or system...''

The absence of any reference in the second limb to the expression ``a business operation'' or an ``operation of business'' excites the question whether the second limb was intended to alter the antecedent law. Later, Dixon J. was to say of sec. 26(a) in
Clowes v. F.C. of T. (1954) 91 C.L.R. 209 at p. 217, ``It was aimed at bringing what might otherwise have been thought possibly to be capital profits within the conception of income.'' Subsequently in
Official Receiver v. F.C. of T. (Fox's case) (1956) 96 C.L.R. 370 the Court, including Dixon C.J., in its joint judgment said (at p. 387):

``... 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'.''

The effect of these two statements is to acknowledge that, although the aim of sec. 26(a) was to set to rest a controversial question by characterizing the profits there described as income, the profits described in the second limb might possibly include profits not held to be income under the general law. The important point, that made in Fox, is that the language of the second limb should be interpreted directly, and that it should not necessarily be constrained by reference to what had been said in earlier cases. The statement made in Fox is also significant in that it merely denies the

82 ATC 4044

proposition that the second limb contemplates an undertaking or scheme involved in ``exercising trade'' or ``carrying on a business''. It does not deny that the second limb contemplates a ``business deal'' or ``business operation''.

The majority of the Judicial Committee in
McClelland v. F.C. of T. 70 ATC 4115; (1970) 120 C.L.R. 487, held that the second limb of sec. 26(a) necessarily contemplated that the profit-making undertaking or scheme of which it speaks will be an ``operation of business'' or a ``business deal''. The minority were not prepared to subscribe to such a limitation, so it seems, though they considered that the object of the provision was to overcome Jones v. Leeming. In McClelland the majority held that the profit made by a residuary beneficiary in an estate who, holding an interest in land through the estate, got in the outstanding interest and sold the greater part of the land to obtain finance was not taxable because her dominant purpose was to retain as much land as possible. Consequently, the transaction was not a ``business deal'' or ``operation of business''. I have some difficulty with this conclusion. I should have thought that by buying in an outstanding interest with a view to selling the greater part of the land to advantage the taxpayer entered into a ``business deal'' or an ``operation of business''. It is not easy to describe what occurred as the mere realization of an asset.

Unfortunately there is an element of ambiguity in the expressions ``business deal'' and ``operation of business'' as there is in the adjectives ``business'', ``commercial'' and ``trading'' which have about them a chameleon-like hue, readily adapting themselves to their surroundings, different though they may be. In some contexts ``business deal'' and ``operation of business'' may signify a transaction entered into by a person in the course of carrying on a business; in other contexts they denote a transaction which is business or commercial in character. Although the majority in McClelland thought that sec. 26(a) was mainly, if not wholly declaratory, of the existing concept of income, they did not by their references to ``business deal'' and ``operation of business'', necessarily mean a transaction entered into in the course of carrying on a business.

It is of importance to note their Lordships' statement (at pp. 494-495) that not only are wagers and lottery tickets excluded from profit-making undertakings or schemes, but ``also... the purchase of investments bought by a private investor as a hedge against inflation and sold - perhaps long afterwards - at more than the purchase price'', and the further statement (at p. 495) that ``The undertaking or scheme, if it is to fall within s. 26(a), must be a scheme producing assessable income, not a capital gain.'' There are two separate strands of thought embedded in these observations: (1) that the transaction must have about it some business or commercial flavour - the purchase of an investment by a private investor is not enough; and (2) the profit in view must be an income, not a capital, gain, according to ordinary concepts.

Not all that was said in McClelland can now be accepted. The majority judgment fails to differentiate between the United Kingdom and the Australian systems of arriving at taxable incomes and employs expressions derived from the United Kingdom Income Tax legislation which have no place in our legislation. And there is the possibility that it insufficiently acknowledges that the operation of the second limb of sec. 26(a) may extend to some gains of a capital nature according to general revenue law.

I do not doubt that the majority was right to exclude from the second limb of sec. 26(a) successful wagers and lottery windfalls. Perhaps the exclusion of private investments originally made as a hedge against inflation was more open to question but there is now a strong body of authority to support its exclusion.

There have been those who have read the majority judgment as a declaration that the second limb merely catches gains on income account according to the ordinary usages and concepts of mankind, not capital gains -
Eisner v. F.C. of T. 71 ATC 4022 at p. 4026; (1971) 45 A.L.J.R. 110 at p. 114, per Walsh J.;
F.C. of T. v. N.F. Williams 72 ATC 4069 at pp. 4074-4075; (1972) 127 C.L.R. 226 at pp. 234-235, per Stephen J.;
Burnside v. F.C. of T. 77 ATC 4588 at pp. 4603-4604; (1977) 138 C.L.R. 23 at p. 50, per Aickin J. Others have said that the second limb extends to capital profits (
Investment and Merchant Finance Corp. Ltd. v. F.C. of T. 71 ATC 4140 at p. 4147; (1971) 125 C.L.R. 249 at p. 264,

82 ATC 4045

per Menzies J.) or that McClelland may not leave the second limb with an operation that is otiose (N.F. Williams at ATC p. 4193; C.L.R. p. 250, per Gibbs J.;
F.C. of T. v. Bidencope 78 ATC 4222 at p. 4228; (1978) 140 C.L.R. 533 at p. 552, per Gibbs J. (with whom I concurred)).

It has been said that Barwick C.J., having initially favoured the first view, later concluded that sec. 26(a) catches capital profits. I do not think that this statement does justice to his Honour's views which were elaborated and developed in
A.L. Hamblin Equipment Pty. Ltd. v. F.C. of T. 74 ATC 4310; (1974) 131 C.L.R. 570 esp. at ATC pp. 4314-4315; C.L.R. p. 576;
Steinberg v. F.C. of T. 75 ATC 4221 at p. 4228; (1975) 134 C.L.R. 640 at pp. 687-688; and Bidencope at ATC p. 4226; C.L.R. p. 540. There is nothing to be gained from repeating what his Honour said in these cases. It is sufficient to say that his Honour assumed that sec. 26(a) was designed only to catch profits which do not fall within sec. 25(1) i.e. capital gains, and asserted that the circumstances giving rise to an application of the second limb when the first does not apply will be rare - Bidencope at ATC p. 4226; C.L.R. p. 540.

In Steinberg his Honour made an important comment with which I agree. It was that ``the acquisition of property by the taxpayer with the purpose of its resale at a profit... is in truth a commercial dealing'' (ATC p. 4228; C.L.R. p. 687). He referred to the second limb as being founded upon the same notion.

The different and conflicting answers which have been given to the question whether sec. 26(a) is aimed at income gains or capital gains or both reflect in some degree differing views as to what is income according to ordinary usages and concepts of mankind and as to the correctness of Jones v. Leeming. As doubts as to the scope of the concept of income according to general revenue law were responsible for the introduction of the provision, it is scarcely a profitable exercise to determine the extent of its operation by reference to the antecedent law. But the need to decide in a particular case whether sec. 25(1) or sec. 26(a) applies may make it necessary to decide their respective areas of operation.

The settled interpretation that the first limb requires the purpose of profit-making by sale to be the dominant purpose provokes other questions associated with the relationship between the two limbs and their relationship with sec. 25(1). Section 26(a) does not narrow the circumstances in which entire or isolated transactions generate income. In deciding that the first limb speaks of a dominant purpose the Court has reflected the condition according to which a profit made on the sale of property would ordinarily yield income - it is the existence of the purpose of profit-making by sale, the dominant purpose, which is critical to the character of the profit as income under the general law and under sec. 26(a). The second limb does not speak of purpose. No doubt the expression ``profit-making'' as applied to ``undertaking or scheme'' looks to the intention or purpose of profit-making. If the second limb looks to dominant purpose, it is to the dominant purpose of ``profit-making'', rather than the dominant purpose of ``profit-making by sale''. Jacobs J. in
London Australia Investment Co. Ltd. v. F.C. of T. 77 ATC 4398; (1977) 138 C.L.R. 106 thought that the second limb would apply where profitable resale was a purpose, though not the dominant purpose, but it seems that his Honour then had in mind resale in the course of the carrying on of a business by a taxpayer who acquires property with a dual purpose of enjoying it or its profits or of reselling it eventually at a higher price (ATC pp. 4408-4409; C.L.R. pp. 127-128).

There will be cases in which property will be acquired for the purpose of profit-making otherwise than by sale. Then so long as the acquisition is an element in a profit-making undertaking or scheme the resultant profit will be caught by the second limb, even though the undertaking or scheme lacks the repetitive or recurrent characteristics that are regarded as the hallmark of business activity. There is a fruitful field for the operation of the second limb in cases where there is a lack of identity between the property acquired and the property sold. Take for example the acquisition of property by a company with the expectation on the part of the company and its shareholders that the property will sharply rise in value and with the intention on their part that the increase in value will be

82 ATC 4046

realized either by selling the property at an increased price or by selling the shares in the company at a price which will reflect the increased value of the property acquired. The profit derived from a sale of the shares will escape the first limb, but why should it escape the second limb?

Moruben Gardens Pty. Ltd. v. F.C. of T. 72 ATC 4147; (1972) 46 A.L.J.R. 559, is an example. There the taxpayer, a home unit company, purchased land on which there was a house with the intention of demolishing it and erecting a home unit building and selling the units in the form of strata title at a profit. I held that the profit made by the taxpayer on executing its scheme was caught by both limbs of sec. 26(a). I concluded that (a) there was no lack of essential identity between what was acquired and what was sold because the legal estate in fee simple was acquired and ultimately disposed of; and (b) a profit on sale was made notwithstanding that the land had been improved by the erection of a more valuable building. If, as has been suggested, contrary to my conclusion, the profit in such a case was not caught by the first limb, either because there is a lack of essential identity between what is acquired and what is sold or because the first limb looks to a profit made on the sale of property which is in the same condition at the time of purchase and at the time of sale, then the second limb would apply on its own in such a case.

Because sec. 26(a) looks to net profit and sec. 25(1) deals with gross income, different consequences may follow, according to which provision is found to apply to a taxpayer. In ascertaining net profit for the purpose of sec. 26(a) general accounting principles, rather than the statutory provisions relating to allowable deductions may need to be applied. In the result in a given case there may not necessarily be a correspondence in the operation of sec. 25(1) and sec. 26(a).

One view is that sec. 26(a) should be applied to the cases which fall within its terms, to the exclusion of sec. 25(1) - see
Reseck v. F.C. of T. 75 ATC 4213 at pp. 4215, 4220; (1975) 133 C.L.R. 45 at pp. 49, 57. After all, sec. 26(a) is a specific provision introduced for the purpose of catching profits yielded by the transactions which it describes. Moreover, it has generally been applied to cases falling within its terms without the Court examining in detail whether sec. 25(1) might also have had an application (Steinberg at ATC 4229; C.L.R. p. 710; Bidencope at ATC p. 4233; C.L.R. p. 552;
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;
Pascoe v. F.C. of T. (1956) 6 A.I.T.R. 315).

The second view is that sec. 26(a) will only operate when sec. 25(1) does not do so (Investment and Merchant Finance at ATC pp. 4143, 4147; C.L.R. pp. 255, 264; Steinberg at ATC p. 4229; C.L.R. p. 688). This is the view which I have been disposed to favour in the past (see St. Hubert's Island at ATC pp. 4113-4114; C.L.R. pp. 229-230; Bidencope at ATC p. 4234; C.L.R. p. 555). Its rationale is that sec. 26(a) should be considered as supplementary to sec. 25(1) which continues to operate as the principal statutory provision on the revenue side. As I have already indicated, it was no part of the purpose of sec. 26(a) to limit the operation of sec. 25(1). Indeed, in large measure its object was to ensure that the Revenue did not suffer in the event that sec. 25(1) received a more restricted application than it was then thought to have. I am still inclined to think that this is the preferable view and that, accordingly, the second limb of sec. 26(a) applies only to ``profits not attributable to gross income that has already been captured by sec. 25'' (Bidencope at ATC p. 4234; C.L.R. p. 555).

All that I have said indicates that the second limb does not affect the principle enunciated in Californian Copper except to emphasize that an undertaking or scheme may be a profit-making one even if it lacks the characteristics of repetition or recurrence supposedly essential to the carrying on of a business. It is possible that the second limb applies when the taxpayer's activities amount to more than the mere realization of an asset but do not constitute the carrying on of a business because they lack the characteristics of repetition or recurrence. The distinction made in Californian Copper between a mere enhancement in value by realization of a security and a gain made in an operation of business in carrying out a scheme of profit-making remains a valid distinction for the second limb of sec. 26(a).

82 ATC 4047

If the taxpayer's activities do amount to the carrying on of a business then sec. 25(1) will certainly apply. It was not intended that the second limb should apply to cases in which the taxpayer is carrying on a business because this would give the second limb a very extensive operation at the expense of sec. 25(1).

The principal, if not the essential, question under the second limb of sec. 26(a), as under sec. 25(1), is whether more is involved than the mere realization of an asset. As Deane J. noted in his dissenting judgment in the Federal Court, we must not overlook the importance and the scope of the word ``mere''. To bring this case within the second limb the Commissioner does not need to show that the respondent was carrying on a business. As we have seen, it is enough to answer the statutory description that there was a profit-making undertaking or scheme which exhibited the characteristics of a business deal, even though it did not amount to the carrying on of a business. If what has happened amounted to no more than the mere realization of an asset then it was not a profit-making undertaking or scheme.

The judges of the Federal Court and Wilson J. of this Court have reviewed in detail the activities in which the respondent commenced to engage. I need not repeat them. They showed that on 20 December 1967 the respondent committed the land in question to a profit-making undertaking or scheme of considerable magnitude involving the development and subdivision of the land into residential allotments. It was on that day that the ownership and control of the company changed hands, that new Articles of Association were adopted, eliminating the old Article 3(A) and General Development Corporation Pty. Ltd. (``General Development'') and Martindale Pty. Ltd. (``Martindale'') were appointed General Managers for a period of more than fifteen years.

The old shareholders sold their interests in the respondent to National Mutual Life Association of Australasia Ltd., Martindale and General Development for $1,600,000.00. It was frankly conceded that, had the purchasers bought the land, not the shares, the resulting profits would have been taxable. This is because the land would then have been acquired for the purpose of profit-making by sale or for the purpose of a profit-making undertaking or scheme. The intention of the respondent as a company is in my opinion, to be ascertained by reference to the intention of those who owned and controlled it at the relevant time - see
Bernard Elsey Pty. Ltd. v. F.C. of T. 69 ATC 4126 at p. 4127; (1969) 121 C.L.R. 119 at p. 121. To my mind in deciding whether what the respondent did was the mere realization of an asset or the carrying out of a profit-making undertaking or scheme, it is relevant to take into account that the company came under the ownership and control of new shareholders whose purpose was to use the company for the execution of what, judged from their point of view, was a profit-making undertaking or scheme. In deciding whether the company was carrying on the business of land development it is material that the new shareholders would have been carrying on such a business had they purchased the land from the company and carried out the development and sale on their own account.

However, apart altogether from this factor, the facts previously mentioned show that there was involved more than mere realization of an asset. Deane J. was right in pointing to the circumstance that the asset was divided and improved in the course of a business of dividing and improving the asset. In this respect I do not agree with the proposition which appears to be founded on remarks in some of the judgments that sale of land which has been subdivided is necessarily no more than the realization of an asset merely because it is an enterprising way of realizing the asset to the best advantage. That may be so in the case where an area of land is merely divided into several allotments. But it is not so in a case such as the present where the planned subdivision takes place on a massive scale, involving the laying-out and construction of roads, the provision of parklands, services and other improvements. All this amounts to development and improvement of the land to such a marked degree that it is impossible to say that it is mere realization of an asset. We need to bear in mind that the subdivision of broad acres into marketable residential allotments involves much more in the way of planning, development and improvement than was formerly the case.

82 ATC 4048

Like Wilson J., I have difficulty with the decision of Williams J. in
Scottish Australian Mining Co. Ltd. v. F.C. of T. (1950) 81 C.L.R. 188. The taxpayer there, after giving up its mining business in 1924, devoted itself to the subdivision of its land. This entailed the construction of roads, the building of a railway station, the granting of land to public institutions such as schools and churches and the setting aside of land for parks. I should have been inclined to the view that the taxpayer had ceased to carry out its mining business and that it had commenced to carry on the business of land development.

This conclusion would have been more consistent with the later decisions of this Court in Fox, and
White v. F.C. of T. (1968) 120 C.L.R. 191. In Fox (in which no mention was made of Scottish Australian) the activities were less extensive, though they did involve land subdivision and improvement (reclamation). The only difference between Scottish Australian and Fox seems to lie in the circumstance that there was a new taxpayer in Fox. He was a new taxpayer whose function it was to get in the bankrupt's assets so that a distribution among creditors could take place.

From what I have said it will be seen that it is my opinion that what the respondent did amounted to more than realization of an asset and constituted the carrying on of the business of land development. Accordingly, the gross income is assessable under sec. 25(1).

But for this conclusion I would have held that the activity of the respondent amounted to the carrying out of a profit-making undertaking or scheme which exhibited the characteristics of a business deal so that net profit of the respondent would have been assessable under the second limb of sec. 26(a), if not under sec. 25(1).

In the result I would allow the appeal.


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