McClelland v. Federal Commissioner of Taxation.
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Judgment date: Judgment delivered 2 November 1970.
Dissenting judgment (Lord Pearson and Lord MacDermott): I would hold that sec. 26(a) of the Income Tax and Social Services Contribution Assessment Act 1936-1963 applies to this case. Being in a minority, I will state my reasons shortly.
Section 26 provides that ``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''.
This provision was introduced in the Act in the year 1930 a few months after the decision of the House of Lords in
Jones v. Leeming (1930) A.C. 415 and, as Windeyer J. said in
White v. F.C. of T. (1968) 42 A.L.J.R. 139 at p. 146, seems to have been introduced for the purpose of overcoming the decision in Jones v. Leeming as it might have applied to Australia. In Jones v. Leeming four persons had joined in obtaining options to purchase rubber estates in Malaysia, and they ultimately sold them at a profit. The Crown's claim that this profit was assessable to income tax was rejected. There was a supplementary finding
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by the Commissioners that the transaction was not a concern in the nature of trade. In the course of his judgment in the Court of Appeal Lawrence L.J. had said ``It seems to me in the case of an isolated transaction of purchase and re-sale of property there is really no middle course open. It is either an adventure in the nature of trade, or else it is simply a case of sale and re-sale of property.'' This passage in the judgment of Lawrence L.J. was cited with approval by Lord Buckmaster at p. 421 Lord Dunedin at p. 422 and Lord Thankerton at pp. 427-8. Lord Warrington said at p. 425: ``Here we have a case of the acquisition of an item of property and a profit made by the transfer thereof to another. In this I can find nothing but a profit arising from an accretion in value of the item of property in question and the realisation of such enhanced value. There is in this nothing in the nature of revenue or income. The fact that the parties intended from the first to make a profit if they could does not in my opinion affect the question we have to determine. The case seems to me a clear one against the Crown.''
Section 26(a) enacted the opposite of the ratio decidendi in Jones v. Leeming. In sec. 26(a) there is no requirement that the acquisition and subsequent sale or the carrying out of a profit-making scheme must not be an isolated transaction or must amount to, or be in the course of, a business or trade or adventure in the nature of trade. In
Official Receiver v. F.C. of T. (Fox's case) (1956) 96 C.L.R. 370 the judgment of the Court (Dixon C.J. and Williams, Webb, Fullagar and Kitto JJ.) contained at p. 387 this passage-
``Although sec. 26(a) is founded on language which was used in judicial decisions (see
Premier Automatic Ticket Issuers Ltd. v. F.C. of T. (1933) 50 C.L.R. 268 at pp. 297, 298) 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'. English cases applying those tests cannot govern the application of sec. 26(a), although no doubt they may give some assistance.''
In the case referred to in that passage-Premier Automatic Ticket Issuers Ltd. v. F.C. of T. at pp. 297-8 Dixon J. had said ``In Ruhamah Property Co. v. F.C. of T.'' in the judgment of Knox C.J., Gavan Duffy, Parvis and Starke JJ. the rule was re-stated: ``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 realisation or change of investment or from an enhancement of capital are not income nor assessable to income tax. (C. of T. (Vic.) v. Melbourne Trust Ltd.; Duckes v. Rees Roturbo Development Syndicate; C. of T. (W.A.) v. Newman; Blockey v. F.C. of T.)''... 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.
This last sentence was cited and adopted by Taylor J. in
Clowes and Anor. v. F.C. of T. (1954) 91 C.L.R. 209 at p. 231.
Dixon J. had also said in the same judgment, in relation to sec. 26(a), ``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''. But I think it can now be taken as settled by later cases that the ``purpose'' referred to in the phrase in sec. 26(a) ``for the purpose of profit-making by sale'' is the dominant or main purpose.
Evans v. D.F.C. of T. (S.A.) (1936) 55 C.L.R. 80 at p. 99 per Rich, Dixon and Evatt JJ. (``The purpose of which it speaks is the dominant purpose actuating the acquisition of the assets-the use to which they are to be put'')
Buckland v. F.C. of T. (1960) 12 A.T.D. 166 at p. 169 per Windeyer J. (``When a person buys property, as a commercial money-making transaction and not for his personal use or enjoyment, the purpose he has in view is the use to which he intends to put the property to achieve this end. He may intend either to sell it at a profit, or to keep it as a revenue-producing asset. In relation to sec. 26(a) it is the main or dominant purpose of the acquisition that is significant. If a property, say a house or farm, were bought for the purpose of resale at a profit it would be immaterial that the purchaser also had in mind to take the rents and profits in the meantime or pending selling to use it for some purpose of his own.'')
Pascoe v. F.C. of T. (1956) 11 A.T.D. 108 at p. 112 per Fullagar J.
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Does the first part of sec. 26(a) apply to the present case? Was there in the year of assessment a profit arising from the sale by the appellant of any property acquired by her for the purpose of profit-making by sale?
In July 1962 the estate of the deceased had not been completely administered. The executors had to set aside two sums of £15,000 and £10,000 respectively and pay the income thereof to two named beneficiaries for their lives. The executors considered that they had not made sufficient provision and they wished the appellant and her brother to lodge £10,000 each for this purpose.
The appellant and her brother did not yet have any property in the land.
Commr. of Stamp Duties (Queensland) v. Livingston (1965) A.C. 694. They were entitled to have the estate duly administered with the result that either the land would be sold and the nett proceeds of sale, after making provision for setting aside the £15,000 and the £10,000, would be divided equally between them, or the lodgments would be made and the land would be transferred to them as tenants in common in equal shares. Neither of them yet had any tenancy in common or other estate in the land. Each of them had a conditional and prospective right to acquire a tenancy in common. The appellant on 10 September 1962 exercised her option to acquire her brother's right for £40,000 but the right would not pass to her until she paid the price for it.
That was the position at the beginning of 5 October 1962. On that date several things happened. The appellant contracted to sell to certain purchasers Portion 5 of the land at a price of £150,000 (which was subject to adjustment on measurement) and the purchasers paid a deposit of £50,000. This enabled the appellant to pay £40,000 to her brother for his right and to lodge £10,000 with the executors. Then the executors transferred to her the ownership in fee simple of the entirety of the land. That is what she acquired.
Did she acquire it for the purpose of profit-making by sale? In my opinion the answer is in the affirmative. The evidence and the findings of the learned Judges show that she acquired the ownership of the land for the purpose of selling it at a profit. She was going to sell Portion 5 of the land immediately to the purchasers in pursuance of the contract, which gave her a large profit, and her intention was to keep the rest of the land (Portions 4 and 6) while its market value would greatly increase and eventually she would sell it at a very large profit.
Subject to a question to be considered in a moment, it seems to me that this transaction does fall within the first part of sec. 26(a) and also within the second part which refers to ``profit arising... from the carrying out of any profit-making... scheme''.
The question remaining to be considered is whether the profits of this transaction, though prima facie within sec. 26(a), are to be excluded as being ``proceeds of a mere realisation or change of investment or from an enhancement of capital''. (Premier Automatic Ticket Issuers Ltd. v. F.C. of T. supra.)
C. of T. (Vic.) v. British Australian Wool Realisation Assn. Ltd. (1931) A.C. 224 at p. 250 Lord Blanesburgh said ``To their Lordships, therefore, there is disclosed, on their view of the facts here, a case entirely within the terms of the following words from the judgment in Californian Copper Syndicate v. Harris which have been since so often cited with approval: It is quite a well-settled principle in dealing with questions of assessments of income tax that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it that he originally acquired it at, the enhanced price is not profit... assessable to income tax.'' Equally applicable in the view of their Lordships are the words of Lord Dunedin in C. of T. (Vic) v. Melbourne Trust, where he says ``If the liquidator of one of the banks had made an estimate of the various assets held by him for realisation, and then on realisation had obtained more than that estimate, such surplus would not have been profit assessable to income tax.''
There have been English and Australian cases in which advantageous disposal of an inheritance or of property no longer required for the use for which it was acquired has been held to be ``mere realisation'', so that the profit was not assessable to income tax, but I have not found any statement of the principle wide enough to cover the present case. In the present case there was an elaborate scheme not merely to enlarge the inheritance but to acquire something different and much more valuable. The appellant put into the transaction (i) the £40,000 paid to her brother for his prospective right to receive one-half of the nett proceeds of sale of the land or a tenancy
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in common (ii) her own similar right (iii) the lodgment of £10,000. She took out of the transaction the fee simple of the entirety of the land. She also sold immediately a portion of the land for a good profit and was able to retain the rest in the expectation of eventually selling it at a very high profit. In my opinion this transaction went beyond mere realisation and so is not excluded from the operation of sec. 26(a). There may be doubts as to the proper method of assessing the taxable profit, but I agree with Kitto J. that the assessment made has not been shown to be excessive.
Lord MacDermott has asked me to add that he agrees with this judgment and would dismiss the appeal for the reasons I have given.