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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.

Wilson J.: In this case the Commissioner appeals by special leave from a decision of the Federal Court of Australia (Brennan and Fisher JJ., Deane J. dissenting) setting aside assessments of income tax payable by the

82 ATC 4049

respondent (``the taxpayer'') in respect of its substituted tax years ended 30 September 1972, 1973, 1974 and 1975 respectively. The decision reversed a decision of the Supreme Court of Western Australia (Wickham J.) in favour of the Commissioner.

The primary question in the appeal is whether any part of the proceeds of sale by the taxpayer of lots in a real estate subdivision at Whitfords Beach in Western Australia is ``assessable income'' for the purposes of the Income Tax Assessment Act 1936 (``the Act''). If that question be answered in the affirmative, then a further question remains to be dealt with, namely, on what date or dates was the land or part thereof committed to the business or profit-making undertaking or scheme? However, the parties join in requesting the Court, if it becomes necessary to consider that second question, to remit it to the Federal Court for determination.

The answer to the first question depends on the conclusions which should be drawn from facts which are not in dispute, and which I now relate.

On 26 April 1954 the taxpayer was incorporated. Its shareholders were the occupiers of fishing shacks located on a reserve on the beach front at Whitfords Beach, which is some twenty-four kilometres north of Perth. The reserve is vested in the Council of the Shire of Wanneroo. Adjoining the reserve was an area of 1,584 acres of undeveloped bush land (``the subject land'') which was owned by a Mr. Simpson in two separate titles of 1,544 acres and 40 acres respectively. The subject land provided the only means of access by land to the beach front. The taxpayer was formed in order that it could acquire the subject land and thereby secure to each shareholder continued access to his shack. Planning restrictions which applied to the area at that time precluded any subdivision of either portion of the subject land, with the consequence that it was necessary to acquire the whole of the land. It was intended, if and when it became legally practicable to do so, to subdivide the subject land so that each shareholder could hold the freehold title to one or more residential sites of a value comparable to the holding of each other shareholder. Article 3(A) of the Articles of Association of the taxpayer purported to express this intention, and provided also that any surplus land after such an allocation had been made was to be dealt with as the company in general meeting should, from time to time, decide.

Immediately on its incorporation, the taxpayer acquired the subject land. The parties are agreed that the taxpayer did not acquire the subject land for the purpose of profit-making by sale.

The situation remained largely unchanged until 1967. By that time the market value of the subject land had increased greatly. Rates and taxes likewise increased. The land remained incapable of subdivision. Its zoning under the Metropolitan Region Scheme was as follows: 630 acres was zoned deferred urban, 80 acres was zoned parks and recreation, and the remainder was zoned rural. Notwithstanding the then existing zoning restrictions, the potential value of the land in residential subdivision was already attracting the attention of land developers.

On 20 December 1967 the then shareholders of the taxpayer (most of whom were still shack holders) sold the entirety of their shares to three purchasers. These were the National Mutual Life Association of Australasia Limited (``National Mutual'') as to 50%, Martindale Pty. Ltd. (``Martindale'') as to 25%, and F.D. O'Sullivan Pty. Ltd. as to 25%. Martindale was a company controlled by Mr. J.A. McCusker. F.D. O'Sullivan Pty. Ltd. was a company now, called General Development Corporation Pty. Ltd. (``G.D.C.'') controlled by Mr. F.D. O'Sullivan. Mr. O'Sullivan also controlled a company which traded under the business name of the General Agency Co.

It is the Commissioner's contention that the events which occurred on 20 December 1967 marked a decisive change in the character and purpose of the taxpayer. The original purpose touching the subject land was superseded. Henceforth, the sole object of the taxpayer was to engage in the business of development, subdivision and sale of the subject land.

In order to evaluate this submission it is necessary to examine the facts in some detail, including the course of events leading up to the sale of the shares. Messrs. O'Sullivan and McCusker through their respective

82 ATC 4050

companies had considerable experience in working together on land development projects. The profit potential of the subject land as a prime prospect for residential development came first to the attention of Mr. O'Sullivan. On 19 October 1967 he wrote, on behalf of an ``Investment Finance Group'', to the Secretary of the taxpayer offering to purchase either the whole of the subject land (which represented the total assets of the company) or the whole of the issued shares in the company. The taxpayer rejected the offer to purchase its assets, but following negotiation granted Mr. O'Sullivan an option to buy all the issue shares in the company for the sum of $1,600,000. Then followed a period of intensive planning and negotiation led by Mr. O'Sullivan. He enlisted Mr. McCusker's interest and support, and together they sought the participation of National Mutual in the project as financier both of the purchase of the shares and the subsequent programme of development and sale of the subject land in subdivision. Their written proposal dated 15 November 1967 to National Mutual includes the following passages:

``Further to our recent negotiations which we hope will culminate in our joint ownership of a Company known as Whitfords Beach Pty. Ltd., I would like to set out in some detail our assessment of the development potential of the land owned by this Company.

The major asset of this Company comprises 1,584 acres of attractive undulating land 1½ miles north of the suburb of Sorrento and fronting on to 1½ mile of beautiful surf beaches. The land is obviously suitable for development into a major housing project.

The salient features of the land are as follows:

(a) ROADS...
(d) WATER...

Potential Returns

After extensive discussions with the local Shire Council and the Metropolitan Regional Town Planning Authority, and a survey of the land in question, it could be confidently anticipated that the land presently zoned as deferred urban could be rezoned to urban within five years and that at this time, this area of land could be subdivided and sold as ¼ acre residential lots.

Generally speaking, the Metropolitan Regional Town Planning Authority will consider an application to rezone from deferred urban to urban if the following conditions are met:

(a) A comprehensive plan of development is prepared and accepted by them for the development of the whole of the subject land.
(b) That public services, such as water and light are sufficient to service subject land.
(c) The developer is prepared to meet the total cost of extending such services and meeting the cost of development.
(d) The developer to plan an orderly development and build houses on a reasonable proportion of the developed land as it is released.

After our investigations, we are hopeful that we can meet these requirements within three years, but are completely confident that we will be able to commence development within five.

As we are considering the purchase of the shares in the Company only to gain control of the land in question, for all purposes we can assume the land cost at 1,584 to be $1,600,000. However I would like to point out that there is possibly a contingent tax liability to be considered in that the land was originally purchased by the Company for $48,218. However, this is a matter in which we should call for advice from our solicitors.

I have briefly set out in the following Schedule, an estimated profit return which in the light of our experience I believe to be reasonably conservative.

82 ATC 4051

SCHEDULE $ Land Cost 1,584 acres 1,600,000 Less rural land value 874 acres @ $600 per acre 524,400 ---------- Value of 630 acres of deferred urban land $1,075,600 ---------- Note: 80 acres Public open space. Assuming development will commence in 5 years and that the whole of the deferred urban land will be developed and sell at an even rate over the next five years (i.e. 440 lots per annum). Gross Return 630 acres will be subdivided into 2,200 residential lots (3.5 lots per acre) $ 2,200 x $5,000 11,000,000 $ Interest (net) for 5 years 600,000 Rates and Taxes 60,000 Selling and promotional costs and management @ $500 per lot 1,100,000 Development costs (roads, etc.) @ $500 per lot 1,100,000 ---------- 2,860,000 ---------- 8,140,000 Less Land Cost 1,075,000 ---------- Net Return before Tax $7,065,000 ----------


1. We have assessed the value of subdivided lots in five years at $5,000 which is today's market value of comparative lots 1½ miles south at Sorrento. We have not tried to predict land values five years hence which as indicated in the attached report would be in excess of these estimates.

2. We have made no allowance for interest after five years on capital employed as we have also not allowed for any increment in land values after five years and the increment that we would expect would more than offset an interest allowance.

3. Selling costs normally account for 5% of selling prices and a further 5% should cover all promotional and management costs.

4. Development costs are estimated in the light of our experience of similar land. Drainage costs are at a minimum and sewerage costs have not been allowed. It is practical to assess development costs on today's costs as our returns are based on today's land values.

5. We can confidently expect a recovery of 3.5 lots per acre in the light of our experience at Westfield Park. A copy of the report is attached.

6. A selling rate of 440 lots per annum from the 5th to the 10th year is reasonable as our organisation is today building at the rate of 500 new homes per year.

We furthermore have the selling resources of The General Agency Co. which in the last twelve months has sold real estate to the value of $15,000,000. This Company employs more than 40 Salesmen and is by

82 ATC 4052

far the largest selling real estate Company in Western Australia.

7. No allowance has been made for the great value which would be attributable to:

(a) The neighbourhood Shopping Centre
(b) Hotel Site
(c) Service Station Sites
(d) Flat and Duplex Sites

8. At the end of the 10 years the Company would still own 874 acres of rural land at today's values. We would be confident that once the 630 acres of deferred urban has been fully developed, the Metropolitan Regional Town Planning Authority would consider the rezoning of the rural land for further housing development.

The photographs attached will also indicate to you the location of the land in relation to existing development, the City of Perth in the background and the highly desirable nature of the land in relation to the beautiful surf beaches.

In conclusion I would like to point out that it is rarely such a desirable piece of land becomes available for purchase in such a large acreage which has the potential for development that this land has. We are highly confident of the success of this venture if our negotiations to purchase the shares of Whitfords Beach Pty. Ltd. are fruitful.''

As will earlier have appeared from what I have said, this advocacy was successful in enlisting National Mutual's participation in the proposal to take over the taxpayer. Mr. Bunning, the Chairman of the Western Australian Branch of National Mutual testified in the hearing before Wickham J. to the effect that at all times the project was seen as the purchase of land with development potential with a view to developing, selling and producing a profit and that the purchase of the shares in the taxpayer was seen as a method of acquiring the land. It was seen, he said, as ``a sound development proposition over a long term''.

A number of significant things happened on 20 December 1967. At a series of meetings of directors and shareholders of the taxpayer, transfers of the shares in favour of National Mutual, Martindale and G.D.C. were registered, and new directors, appointed by those transferees replaced the previous directors. An entirely new set of Articles of Association was adopted. The old Art. 3(A) disappeared, and the former provision for the election and rotation of directors gave way to provisions which secured the permanency in office of directors appointed by the new shareholders. On the same day these companies had executed a loan agreement defining their respective rights and obligations inter se. Also on the same day the taxpayer by deed appointed Martindale and G.D.C. to be joint managers of the project for a term expiring 31 December 1982 subject to earlier termination in prescribed circumstances. Their task was

``... to do all within their power to develop and subdivide into urban allotments such part or parts of the land as the Company may from time to time direct and to sell the land or such part or parts thereof as the Company may from time to time direct in urban subdivisional allotments and generally to ensure that the land is developed subdivided and sold to the best advantage.''

What, then, was the effect of all these events on the taxpayer? In the Federal Court, Deane J. described that effect in terms which I would respectfully adopt as my own:

``It is plain that the effect of the transactions and events of 20 December, 1967 was completely to transform the substratum of the taxpayer. At the commencement of that day, the taxpayer was a company whose only significant asset was land which had been acquired for the purpose of safeguarding the interests of its shareholders as owners of the Whitfords Beach shacks and which, under the Articles of Association, was, when subdivision became possible, to be allocated among the shareholders with any surplus to be dealt with as the company might, in general meeting, decide. At the end of that day, the taxpayer had set out upon a projected course of activity in relation to that land which involved procuring changes of zoning, the development of the subject land as a residential subdivision and the

82 ATC 4053

eventual sale, over a period of many years, of the subdivided lots. These projected activities were on a scale which was expected to yield a net return before tax in excess of $7 million during the first ten years while leaving the bulk (in area) of the subject land available for subsequent subdivision, development and sale. The taxpayer's Articles no longer contained any provision for allocating the land among its shareholders and the identity of the taxpayer's shareholders had changed to three companies which had acquired the shares in the taxpayer's capital for the benefits which they saw as likely to flow to themselves, as shareholders, from the profits of the projected activities. The taxpayer was the creature of its three shareholders and the common motive for their purchase of the shares in the taxpayer became the object which the taxpayer was thenceforth to pursue.''

It appears from the evidence that following 20 December 1967 the joint managers proceeded promptly with their task. A project co-ordinator was appointed, and his reports show that a search for a water supply was undertaken, negotiations were started with a local authority for the construction of a road, and preliminary consideration was given to engineering, surveying and planning requirements. However, in June 1969 a new direction and impetus was provided to the execution of the taxpayer's plans when the Government of Western Australia intervened to encourage the speedy development and sale in housing lots of land in the northern corridor from Perth, a corridor which included the subject land. Thereafter planning proceeded with expedition, and with the active encouragement of government agencies. The taxpayer's urban deferred land was rezoned urban. Subdivision was approved, and the first survey plan providing for 272 lots was lodged at the Titles Office in December 1970. Within weeks two hundred lots had been sold. National Mutual financed the development in the form of loans to the taxpayer. The evidence showed that it provided $436,000 in 1970 and $926,000 in 1971, with repayments being made by the taxpayer of $300,000 in 1973 and of $700,000 in 1974. The amounts actually spent on development on the one hand, and sales proceeds on the other were shown to be:

         Year       Outgoings       Sales Proceeds
                        $                  $
         1970        345,000
         1971      1,265,000            490,000
         1972        887,000          1,420,000
         1973        855,000          2,688,000
         1974      1,523,000          1,572,000
         1975        843,000          1,710,000

All sales of the subject land have been made as subdivided vacant lots. The taxpayer has relied throughout on the services of its joint managers. It has not maintained any premises or place of business, nor has it employed any staff. The General Agency Co. was appointed the sole selling agent.

It is by reference to these facts, then, that the primary question for determination in this appeal must be answered. On the one hand, the Commissioner claims that the profits enjoyed by the taxpayer in the years in question constitute assessable income because as from 20 December 1967 it was engaged in the business of subdividing, developing and selling land for residential purposes and the proceeds of that business are taxable according to ordinary concepts under sec. 25 of the Act, or alternatively under the second limb of sec. 26(a). On the other hand, the taxpayer argues that it acquired the subject land otherwise than for the purpose of profit-making and has done no more than dispose of its interest in the land, even though it has gone to some effort to sell it to the best advantage. The resulting surplus is not assessable income either under sec. 25 or sec. 26(a).

82 ATC 4054

The battle lines drawn by the parties have a familiar ring, similar problems having frequently required resolution by the Courts in the course of the present century. In
Californian Copper Syndicate (Limited and Reduced) v. Harris (Surveyor of Taxes) (1904) 5 T.C. 159, the Lord Justice Clerk (at pp. 165-166) stated the problem in terms which subsequent acknowledgement has given wide currency and common acceptance:

``It is quite a well settled principle in dealing with questions of assessment of Income Tax, that 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 in the sense of Schedule D of the Income Tax Act of 1842 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 for profit-making?''

There is authority for the proposition that an owner of land who holds it until the price of the land has risen and then subdivides and sells it it not thereby engaging in an adventure in the nature of trade, or carrying out a profit-making scheme. In the words of Gibbs J. (as he then was) in
F.C. of T. v. N.F. Williams 72 ATC 4188 at p. 4195; (1972) 127 C.L.R. 226 at p. 249:

``The proceeds resulting from the mere realization of a capital asset are not income either in accordance with ordinary concepts or within the second limb of sec. 26(a), even though the realization is carried out in an enterprising way so as to secure the best price:
McClelland v. F.C. of T. 70 ATC 4115 at pp. 4119, 4120; (1970) 120 C.L.R. 487, at pp. 494, 496, and cases there cited;
Eisner v. Commr. of Taxation of the Commonwealth 71 ATC 4022 at p. 4034; (1971) 45 A.L.J.R. 110, at p. 114.''

His Honour went on to recognise, as had the Lord Justice Clerk in the Californian Copper case, the difficulty in many cases of drawing the line between realisation, on the one hand, and the carrying on or carrying out of a business or profit-making scheme, on the other. The decision in each case must depend on its own facts, and very often will be a matter of degree.

Wickham J., in the Supreme Court, concluded that the taxpayer was, as from 20 December 1967, carrying on the business of subdividing, developing and selling land as lots for residential or ancillary purposes and was doing so with a view to profit. If that conclusion is correct then the Commissioner is entitled to succeed, the profit being assessable income within sec. 25, and it would be unnecessary to consider the second limb of sec. 26(a). I propose first to consider its correctness.

In the Federal Court, Brennan J. adopted a format in his consideration of the problem which I find helpful, and which I propose to follow. He recognised, first, that although the activities in which the taxpayer through its managers engaged after 20 December 1967 were indistinguishable from some of the familiar activities of land trading companies which buy, develop, subdivide and sell land at a profit it was nevertheless not carrying on the business of land trading. The reason for that conclusion is that when it bought the land in 1954 it did not buy it for the purpose of engaging in such a trade. Nor, of course, did it buy any other land to furnish the stock in trade of a business of land dealing. With respect, I agree with that conclusion, and the reasoning which supports it.

Brennan J. then proceeds to discuss the possibility that the subject land may have become ``embedded in a trade'', the trade of developing, subdividing and selling land. On this hypothesis it would not matter that in the first place the land was not acquired for trading purposes. The kind of possibility here under consideration is expounded by Barwick C.J. in
F.C. of T. v. McClelland 69 ATC 4001; at p. 4003; (1969) 118 C.L.R. 353, at p. 371:

82 ATC 4055

``The realization of an inheritance even though carried out systematically and in a businesslike way to obtain the greatest sum of money it will produce does not, in my opinion, make the proceeds either profit or income for the purposes of the Act. But, if the inheritor adventures the inheritance as the capital of a business, for example, of land jobbing or developing, the income of that business will be taxable, not, in my opinion, under sec. 26(a) but according to ordinary concepts of income. No part of the value of the inheritance will be deductible in determining that income. The inheritance is then but the capital of the business. The point at which what was inherited or acquired not for resale so becomes the capital of a business may be at times difficult of identification.''

The distinction is also drawn by the former Chief Justice in
White v. F.C. of T. (1968) 120 C.L.R. 191, at p. 216;

``It seems to me that it is not the circumstance that the taxpayer has endeavoured to improve the realizable value of his capital asset which provides the criterion but the circumstance that he has in reality put his capital asset to work as the whole or part of the capital of a business upon which he has ventured. Merely to realize a capital asset may involve money making as distinct from profit making but a business in the relevant sense of necessity involves the earning of or the intention to earn profits.''

White's case provides an example of the venturing of land not acquired for the purpose of profit-making as the capital of a business, in that case, the business of timber production and sale. That is a clear case. In N.F. Williams, at ATC pp. 4192-4193; C.L.R. p. 245, Menzies J. suggests another plain case:

``There may, no doubt, be cases where a person ventures what has been received by gift in the carrying on or carrying out of a profit-making undertaking or scheme. In the judgment of the majority of this Court - but not in the opinion of the majority of the Privy Council -
McClelland v. F.C. of T. (1970) 120 C.L.R. 487 was such a case. A plain case can, however, be taken as an instance. There could be no doubt that land which has been given and is later used by the donee in the development of a housing scheme in which lots, with houses built upon them, are sold, could be regarded as committed to a profit-making undertaking.''

Plain cases, of course, are not likely to occasion a great deal of difficulty. The real difficulty lies in discerning in a case where the answer depends on questions of degree when an alleged ``mere realisation'' is in reality the venturing of an asset not acquired for the purpose of profit-making as the capital of a business.

The taxpayer relies on the decision of Williams J. in
Scottish Australian Mining Co. Ltd. v. F.C. of T. (1950) 81 C.L.R. 188. In that case, certain land was purchased by the company in 1863 for the purpose of carrying on coal-mining operations. When those operations ceased in 1924, the land was sold, from time to time in parcels, at a considerable profit, for residential and other purposes. For the purpose of sale the land had been subdivided, roads and a railway station constructed, sites made available for schools and churches and areas set aside for parks. Williams J. held that the company was not engaged in the business of selling land as from 1924 but was engaged in realising a capital asset the profits from which should not be included in its assessable income. In the course of his reasons, his Honour observed (at p. 192) that after 1924 the principal and substantial object still remained, as it had been before, the carrying on of mining operations, and that on the face of the memorandum of association it was not in any sense a company formed for the purpose of dealing in land. At p. 195, his Honour continued:

``The profits on the sales must therefore be taxable either because the taxpayer was carrying on the business of selling land, in which case the profits would be income on ordinary principles, or because in selling the land the appellant was carrying on or carrying out a profit-making undertaking or scheme in which case the profits would be assessable income under the second limb of s. 26(a).... The crucial question is

82 ATC 4056

therefore whether the facts justify the conclusion that the appellant embarked on such a business or undertaking or scheme in 1924. The facts would, in my opinion, have to very strong indeed before a court could be induced to hold that a company which had not purchased or otherwise acquired land for the purpose of profit-making by sale was engaged in the business of selling land and not merely realizing it when all that the company had done was to take the necessary steps to realize the land to the best advantage, especially land which had been acquired and used for a different purpose which it was no longer businesslike to carry out. The plain facts of the present case are that the appellant purchased the Lambton lands for the purpose of carrying on the business of coal mining and carried on that business on the land until it was no longer businesslike to do so. It then had the land on its hands and it was land which because of its locality and size could only be sold to advantage in sub-division. A sale in sub-division inevitably requires the building of roads. If it is advantageous to the sale of the land as a whole to set aside part of the land for parks and other amenities, this does not convert the transaction from one of mere realization into a business. It is simply part of the process of realizing a capital asset.''

Mr. Forsyth Q.C., Counsel for the taxpayer, argues that there is no relevant ground of distinction between the Scottish Australian case and the present case. In each, it was a case of land being acquired for a non-profit-making purpose which was now spent, to be followed by the expenditure of energy and enterprise in enhancing the price at which it might be realised. And yet I remain unpersuaded as to the strength of the analogy. Williams J. was clearly impressed by the fact that the cessation of mining on the Lambton lands had not changed the essential character of the company. It was still a mining company, not one formed for the purpose of dealing in land. It found itself possessed of land for which it had no further use, and in his Honour's view set about selling it in an enterprising way. In any event, in this area of discourse, where the line between realisation on the one hand and the carrying on of a business on the other is difficult to draw and the decision in each case must depend on its own facts, one cannot do more than receive the way in which other courts have resolved different fact situations as illustrations, but no more than illustrations, of the operation of the basic principles.

It seems to me, with respect, that the distinctive circumstances that attend this case have received insufficient attention in the majority judgments in the Federal Court. The events of 20 December 1967 were of great significance. The taxpayer did not remain unaffected by those events. The change in its articles gave it a new purpose, a new orientation. True enough, it remained throughout the owner in fee simple of the subject land: cf.
Moruben Gardens Pty. Ltd. v. F.C. of T. 72 ATC 4147; (1972) 46 A.L.J.R. 559. But I am drawn to the conclusion that after that date its purpose was the business of developing, subdividing and selling land, a business in which the subject land was ventured as the capital of the business. It is not without significance that the written proposal to National Mutual of 15 November 1967 envisaged that a condition of rezoning would be that the proposed development of the subject land would include the building of houses ``on a reasonable proportion of the developed land as it is released'', and carried the assurance that such a requirement could be met. In the result some houses were built, but not by the taxpayer. They were built by Inchcape (W.A.) Pty. Ltd., a company which in 1972 was appointed by the taxpayer to manage the project together with Martindale and G.D.C. Nevertheless, it is the taxpayer's expectation when it was restructured in December 1967 which is relevant.

Ruhamah Property Company Limited v. F.C. of T. (1928) 41 C.L.R. 148, four members of the Court in a joint judgment said, 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

82 ATC 4057

consideration of all the matters advanced by the Company was relevant to a determination of that question...''

and later, at p. 154, their Honours emphasised the point that:

``The nature of the company, the character of its assets, the nature of the business carried on by it and the particular sale or realization are all relevant to the issue.''

When one has regard to those matters in the context of the present case, I think with respect that Wickham J. in the Supreme Court and Deane J. in the Federal Court were correct. I do not overlook the observation contained in the opinion of the Privy Council in
Commr. of Taxes v. British Australian Wool Realization Association Ltd. (1931) A.C. 224, at p. 252 to the effect that the mere extensiveness of the organisation set up to realise an asset does not of itself cause the realisation to become a business. The decision in that case with its rather special factual context illustrates the operation of the principle which is there stated. But that is not to say that the magnitude of the operation is wholly irrelevant to the determination of its nature, in answering the question whether more than mere realisation is involved in the treatment of a capital asset.

I appreciate the valuable review of the earlier cases which Fisher J. undertook in discussing the distinction between realisation of land and the venturing of it in a business. As I have emphasised, the distinction in many cases will be difficult to draw, and opinions based on the same facts may readily differ. Although I differ from the conclusion reached by Fisher J., I agree with respect with his statement that the true question is whether the taxpayer in proposing to maximise the amount of money which it received on sale of the land committed the land to a business venture or to a profit-making undertaking or scheme or merely sold the land to the best advantage. In answering this question, I begin by focusing on the true significance of the events of 20 December 1967. I do not find it necessary to consider whether or in what circumstances the profit-making purpose of the new shareholders may be attributed to the taxpayer, but see
Bernard Elsey Pty. Ltd. v. F.C. of T. 69 ATC 4115, at p. 4117; (1969) 121 C.L.R. 119, at p. 121. There is enough in the changes in its constitution and the contracts into which it entered to signify the launching of a business of developing, subdividing and selling the land. It remains a question of degree whether the proceeds of that business constitute income according to ordinary concepts, and the answer depends, in my opinion, whether what happens to the subject land in the course of conducting that business is such as to take the process beyond what may properly be described as mere realisation.

In the present case, a great deal had to be done in order that the land could be sold in residential subdivision. Its character had to undergo significant change. That which at 20 December 1967 was no more than a distant potentiality had to be brought within the range of practical achievement. I am inclined to question whether some of the earlier cases have not assumed too readily that the conversion of broadacres into residential allotments with all the services and facilities that are requisite to an urban environment is no more than the realisation of a capital asset in an enterprising way. But that question need not be pursued here, because this case exhibits the additional feature that at the material time the subject land as a matter of law could not be sold otherwise than in its unsubdivided state. The business upon which the taxpayer embarked in 1967 required active measures to be undertaken in order to remove the legal impediment to development of the subject land. That change in its character was essential to the successful achievement of the taxpayer's purpose. Taken together with all the attendant circumstances, it satisfies me that the taxpayer ventured the subject land as the capital of the business in such a way as to make the proceeds of that business assessable income within the meaning of sec. 25 of the Act.

This conclusion is enough to dispose of the appeal. It was the Commissioner's contention that the profits enjoyed by the taxpayer were assessable income by reference to either sec. 25 or the second limb of sec. 26(a). It is unnecessary to consider the relevance of sec. 26(a). Having regard to the

82 ATC 4058

diversity of judicial opinion touching the proper application of this paragraph, revealed in the majority and dissenting opinions of their Lordships in the Privy Council in McClelland's case, and in subsequent cases in this Court, I think that any attempt at further elucidation should await a case which depends on the provision for its determination. I may add that I do not regard its construction as settled by existing authority.

I would allow the appeal, and remit the matter to the Federal Court for determination of the second question.


Appeal allowed with costs. Judgment of the Federal Court of Australia set aside and in lieu thereof order:

(1) That the appeal to that court be dismissed with costs;
(2) That the order of Wickham J. be varied by deleting para. 2, 3, 4 and 5 thereof.

Further order that the matter be remitted to the Federal Court of Australia to determine the outstanding questions in the matter.


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