Bowden Investments Pty Ltd v The Commissioner of Taxation of the Commonwealth of Australia
[1987] FCA 390
•15 JULY 1987
Re: BOWDEN INVESTMENTS PTY. LTD. IN RE: HIGHFIELD FARMS PTY. LTD.
And: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
No. Q G172-191 of 1986
Income Tax
COURT
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
Fox (1), Northrop(1) and Burchett(1) JJ.
CATCHWORDS
Income Tax - acquisition of land with intention that a portion of it be retained as an investment - whether profit on the sale of such land is capital or income pursuant to s.25 Income Tax Assessment Act - whether the sale of land is a mere realization of an investment or an act done in the carrying on of a business.
Income Tax Assessment Act 1936 (Cth) ss.25, 26, 36.
HEARING
SYDNEY
#DATE 15:7:1987
Counsel for Appellants: Mr G. Davies Q.C. with Mr Muir
Solicitors for Appellants: Messrs. Thompson, King & Partners
Counsel for Respondent: Mr Fryberg Q.C. with Mr C. Newton
Solicitors for Respondent: Australian Government Solicitors
ORDER
The court orders that the appeal be dismissed with costs.
(Settlement and entry of orders is dealt with in O.36 of the Rules of Court.)
JUDGE1
These 20 appeals from 20 judgments of the Supreme Court of Queensland were heard together. Each appellant is a proprietary company and is a member of a partnership known as Pine Rivers Consolidated ("the Partnership"). The effect of the 20 judgments appealed from is that income in the sum of $962,500 derived in the income year ended 30 June 1979 from the sale of a parcel of land was assessable income under paragraph 25(1)(a) of the Income Tax Assessment Act 1936 ("the Act"). That paragraph provides:-
"25. (1) The assessable income of a taxpayer shall include -
(a) where the taxpayer is a resident -
the gross income derived directly or indirectly from all sources whether in or out of Australia; ...
which is not exempt income."
Having found in favour of the Commissioner under s.25(1)(a) of the Act, the Supreme Court, in its reasons, said there was no need to consider the other bases for sustaining the assessments appealed from, namely, those based upon s.26(a) of the Act as then in operation and s.36 of the Act. On the hearing of the appeals, submissions were made with respect to the assessments made in relation to each of sections 25, 26 and 36 of the Act, but consideration is given first to the application of paragraph 25(1)(a).
The facts giving rise to the assessments have been stated fully in the judgment of the Supreme Court and for the purpose of the appeal can be stated shortly. The sole beneficial interest and control of the Partnership resides in Mr Bowden, the permanent governing director of each of the appellants. Therefore, in establishing the intention of each of the appellants with respect to the parcel of land the subject of the appeals, it is sufficient to have regard to the intention of Mr Bowden.
The Partnership is and at all material times was engaged in the business of the development and sale of land. In 1967, but at different times, the Partnership purchased land in aggregation to form what was later to be called the Kensington Hills Development. The Kensington Hills Development was to be a self-contained suburb complete with shopping centre, churches, parks and a large residential area. Evidence was given at the trial that the residential portion of the estate was to be subdivided and sold, whereas the land upon which the shopping centre was to be built, once it was ascertained, would be developed and retained for investment as an income-earning asset and not sold in the ordinary course of business. It is an area which ultimately came to be designated as the shopping centre land which is the subject of this appeal.
Although the land was purchased in 1967, the shopping centre was never constructed, and in May 1978 the shopping centre land was sold at a profit of $962,500. Mr Bowden gave evidence that the land was sold at a time when he was experiencing liquidity problems and that the sale was necessary in order to raise funds to service his liabilities.
At the trial before the Supreme Court, many of the arguments of both parties were directed to establishing the intention of Mr Bowden as regards the use of the shopping centre land.
After dealing in some detail with the evidence given at the trial and setting out a summary of the "salient features" of the case, the trial Judge, Moynihan J. said:-
"I am far from persuaded that the sale in contention was other than a sale carried out in the course of the taxpayers' business as land developers and hence that the proceeds are other than income according to ordinary concepts and properly brought to account as such. What was done was 'not merely a realisation or change of investment but an act done in what is termed the carrying on or carrying out of a business' as the Lord Justice Clerk said in Californian Copper Syndicate (Limited and Reduced) v. Harris (1904) 5 Tax Cas 159 at 165-166. Put another way the taxpayers engaged in the trade or business of real estate developers. This involved them acquiring land and developing it in the most advantageous way available. That advantage was not necessarily constant in respect of a particular piece of land. Sometimes (indeed no doubt most often) this involved the land being subdivided and sold off. That was because most of the taxpayers' funds were committed to land in respect of which this was the most advantageous use. At other times this involved retaining and developing land for the income generated when this was seen to be most advantageous. Even where there was an intention formed to develop and retain land that was not immutable. The advantage might change, as it did in respect of the shopping centre site, and the land would be sold off. Although circumstances were such as to render this a relatively rare occurrence it was to my mind as much an aspect of the taxpayers' business as subdivision into allotments for sale.
On the view I take of the matter the profit in contention is income according to ordinary concepts."
His Honour's conclusion, though reached by applying to the facts the well-known principles of law laid down in the Californian Copper case, was fundamentally one of fact. It qualified quite significantly his acceptance of the proposition that, in a general sense, Mr Bowden did have an intention of developing and retaining as an investment the shopping centre to be designed as an integral part of the total project. Counsel for the taxpayers cited the following evidence in support of Mr Bowden's averred intention to develop and retain the shopping centre land as an income-earning asset:-
(a) Mr Bowden's extensive travel in the United States of America to view American shopping centres and glean ideas for the style of his own shopping centre.
(b) The rezoning of the subject land from residential to shopping centre.
(c) The plans drawn up by the architects, which went beyond what was necessary to gain zoning approval for the proposed shopping centre land to be used for a shopping centre.
(d) Mr Bowden's lengthy discussions with several prospective tenants, including Myer, Coles and Woolworths.
(e) Mr Bowden's expressed intention to use the rental from the shopping centre land as a retirement fund; and
(f) the fact that the shopping centre land was taken out of the trading stock account (in which it was originally brought into account) and put into an account denoted "land and buildings for investment" as soon as the shopping centre land was identified.
Counsel for the Commissioner sought to demonstrate that at the relevant time, being the time of acquisition of the land, the intent that the shopping centre land be retained as an investment was far from fully implemented and was the mere germ of an idea. In support of this contention, reliance was placed on the following factors:-
(a) It was not until 1971 that the subject land received precise definition - before that time it was impossible to identify the property and therefore it was not of the requisite "calibre" at the date of acquisition.
(b) The land was zoned to residential one year after its purchase as a consequence of an application by Mr Bowden, and was not rezoned as a shopping centre until 1973. If Mr Bowden intended to retain the land, he should have applied for commercial zoning from the outset.
(c) No provision was made for the financing of the centre because it was intended that it be financed out of the proceeds of the sale of land. It was not until 1977 that Mr Bowden approached his bankers to discuss the prospects of obtaining finance.
(d) The transfer of the land from trading stock to fixed assets was not necessarily indicative that it was thereafter to be treated as capital, because there was a regular pattern of taking land from trading stock into fixed assets and back again.
(e) The shopping centre was used during the course of the taxpayers' business to promote the sale of the surrounding land. It was therefore part of the taxpayers' business and was used as an asset of the business to be employed as it seemed appropriate.
(f) Mr Bowden's ability to give effect to an increased reliance on retained income-earning developments and a decreased reliance on subdividing and selling the land was constrained by the need to generate funds to service the desired activity and by the fact that the ability to generate funds was ultimately dependent on subdivisional development and sale.
(g) In the financial records of the company the proceeds of the sale of the land was treated as income, not capital.
The basis of the appeal brought by each of the 20 taxpayers is that the learned trial Judge erred in finding that the proceeds of the sale of the land were income according to ordinary concepts. It was alleged that the learned trial Judge should have found that the sale was the realization of a capital asset and that therefore, the proceeds were capital and not income by virtue of sections 25, 26(a) or s.36 of the Act. Several findings of fact were also challenged but it is not necessary to refer to them as they have no bearing on the s.25 issue.
The classical statement of principle to be applied when considering s.25 of the Act is contained in Californian Copper Syndicate (Limited and Reduced) v. Harris (1904) 5 Tax Cas 159 per The Lord Justice Clerk at pp 165-166:-
"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."
An illustration of the application of that principle in relation to s.25 of the Act is contained in London Australia Investment Co. Ltd. v. Commissioner of Taxation of the Commonwealth of Australia (1977) 138 CLR 106. That case concerned an investment company incorporated in New South Wales whose principal object was to invest in Australian securities for the purpose of producing dividend income. There was no intention at the time of their acquisition to sell the securities or to make profits on their resale. However the company did endeavour to maintain a consistent yield and securities were sold if it was necessary to maintain such a yield or to improve liquidity. When this did occur, any profits made on the resale were required by the company's Articles of Association to be transferred to an investment equalisation account or a capital reserve. Large profits were made on the sale of securities which the Federal Commissioner sought to assess under sections 25 and 26(a) of the Act. The Court held that the profits were not taxable under sub-section 26(a) as the securities were not acquired for the purpose of profit making by sale, nor was there a profit making undertaking or scheme. However, the Court, Gibbs and Jacobs JJ., Barwick J. dissenting, held that the profits were taxable under s.25 of the Act. At pp 115-6 Gibbs J. said:-
"When a taxpayer sells one of its investments, the question whether the profit on the sale should be treated as capital or income is to be answered by applying the tests stated in Californian Copper Syndicate (Limited and Reduced) v. Harris (1904) 5 Tax Cas 159, at pp 165-166, in a passage which has constantly been cited, or repeated, with approval; see, e.g., Commissioner of Taxes (Vict.) v. Melbourne Trust Ltd. (1914) 18 CLR 413, at pp 420-421; Ruhamah Property Co. Ltd. v. Federal Commissioner of Taxation (1928) 41 CLR 148, at pp 152, 165; Australasian Catholic Assurance Co. Ltd. v. Federal Commissioner of Taxation (1959) 100 CLR 502, at p 506 and White v. Federal Commissioner of Taxation (1968) 120 CLR 191, at p 222. The principle was stated as follows in Colonial Mutual Life Assurance Society Ltd. v. Federal Commissioner of Taxation (1946) 73 CLR 604, at p 614:
'Prima facie the depreciation in or accretion to the capital value of a security between the date of purchase and that of realization is a loss of or accretion to capital and is therefore a capital loss or gain and does not form part of the assessable income ... But in the words of the Lord Justice Clerk in Californian Copper Syndicate v. Harris
(1904) 5 Tax Cas, at p 166 which have been so often quoted, 'it is equally well established that enhanced values obtained from realization or conversion of securities may be so assessable, where what is done is not merely a realization or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business' .'
Their Honours went on to point out that not all of the proceeds of a business carried on by a taxpayer are income for the purposes of the Act; they will be so only if they are income 'in accordance with the ordinary usages and concepts of mankind, except in so far as the Act states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income'
(1946) 73 CLR, at p 615. However it is in my opinion established by this and the many other cases in which Californian Copper Syndicate v. Harris has been applied that if the sale in question is a business operation, carried out in the course of the business of profit-making, the profit arising on the sale will be of an income character. To apply this criterion it is necessary 'to make both a wide survey and an exact scrutiny of the taxpayer's activities': Western Gold Mines N.L v. Commissioner of Taxation (W.A.) (1938) 59 CLR 729, at p 740. Different considerations may apply depending on whether the taxpayer is an individual or a company. In the latter case it is necessary to have regard to the nature of the company, the character of the assets realized, the nature of the business carried on by the company and the particular realization which produced the profit: Hobart Bridge Co. Ltd. v. Federal Commissioner of Taxation (1951) 82 CLR 372, at p 383 citing Ruhamah Property Co. Ltd. v. Federal Commissioner of Taxation (1928) 41 CLR, at p 154."
His Honour then applied those principles to the facts of that case. The facts established that it was an integral part of the company's business to deal in shares and that the switching of investments was necessary to produce the best dividend yields. Thus, the sale of shares was not a mere realization or change of investment but an act in the true carrying on of a business. He held therefore, that the profits arising on the sale were taxable.
The facts of the present cases, as found by the trial Judge, established that the sale of the shopping centre land was a business operation carried out in the course of the businesses being carried on by the taxpayers and that the profit arising on the sale is income according to ordinary concepts. We agree with the reasoning of Moynihan J. set out earlier in these reasons. The sale of the shopping centre land was not a mere realization or change of investment but an act in the true carrying on of the business of the Partnership.
In the Partnership accounts the shopping centre land was dealt with variously, but in a way which did not distinguish it from other land which was for sale as part of the Partnership's ordinary business. When it was finally decided by Mr Bowden that the planned shopping centre should be where it came to be, he did, it appears, have an intention that if possible the shopping centre be retained as an investment. But the trial Judge, having regard to the onus, was not satisfied that that intention was ever sufficiently definite to enable it to be said that the land involved in the appeal had been segregated from the trading land of the business so as to be a capital asset. The fact was that Mr Bowden's proposal was dependent upon a number of imponderables including his finding the funds necessary to develop the site and construct the shopping centre. He found that up to the time of sale he was unable to give effect to his plan and when in May 1978 he was offered what seemed to him to be a very good price for it, the Partnership sold it. If the site had not been sold there is no indication as to when the shopping centre might have been developed or whether the development could have been financed by the Partnership or indeed whether it might not have been necessary to alter the plan in some other way.
In these circumstances, there is no reason to differ from the conclusion of the trial Judge.
Since the hearing of these appeals, the High Court, on 14 May 1987, gave judgment in Commissioner of Taxation v. The Myer Emporium Ltd. 71 ALR 28. That judgment contained opinions on the application of paragraph 25(1)(a) of the Act. The reasons set out above are consistent with the opinions expressed by the High Court in the Myer Emporium case.
In the result, it is not necessary to consider the submissions based upon sub-section 26(a) and s.36 of the Act.
Each appeal will be dismissed with costs.
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