Burnside v Federal Commissioner of Taxation

[1977] HCA 66

HIGH COURT OF AUSTRALIA

BARWICK C.J. Stephen, Mason, Jacobs and Aickin JJ.

BURNSIDE v. FEDERAL COMMISSIONER OF TAXATION

(1977) 138 CLR 23

22 December 1977

Income Tax (Cth)

Income Tax (Cth)—Profit-making undertaking or scheme—Profit on sale of mining company shares—No purpose of profit-making by sale at time of acquisition—Whether transaction capable of being profit-making undertaking or scheme—Income Tax Assessment Act 1936 (Cth), ss. 25, 26 (a)*. * Section 26 (a) of the Income Tax Assessment Act 1936 (Cth), as amended, provides: "26. 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."

Decisions

1977, December 22.
The following written judgments were delivered:-
BARWICK C.J. In an appeal by the appellant against the disallowance by the respondent of his objections to his assessment to tax upon the proceeds of sales of shares in a public company, the Supreme Court of South Australia (Hogarth J.) held that the shares had not been acquired by the appellant for profit-making by resale (1976) 10 ALR 109; 6 ATR 406; 76 ATC 4214 . The circumstances of the acquisition and disposal of the shares are set out in the reasons for judgment prepared in this matter by my brother Mason. Having considered those circumstances, I am of opinion that the learned primary judge was not in error so to find. I agree with the reasons which my brother Mason gives for his opinion in the same sense. (at p26)

2. However, the primary judge found that, notwithstanding his finding as to the absence of the purpose of profit-making by sale of the shares, the gain arising from their disposal was a profit arising from the carrying on or carrying out of a profit-making undertaking or scheme. In my opinion, his Honour was in error in so finding. I agree generally with the reasons given by my brother Mason for so concluding. (at p27)

3. Where nothing more appears than that an asset acquired, but not for the purposes of profit-making by sale, has been sold at a price in excess of the price at which it was acquired, there can in my opinion be no basis for holding that that gain is a profit arising from a profit-making undertaking or scheme. The circumstances lack not only the elements of an undertaking or scheme but the profit-making purpose of any undertaking or scheme which is essential to satisfy what is generally referred to as the second limb of s. 26 (a). (at p27)

4. In this case there were no further relevant circumstances. All that could be said, and indeed in the reasons of the Supreme Court is said, is that at some time subsequent to taking the decision to acquire the shares, the appellant realized that his circumstances might require him to realize the shares: and he decided that, if necessary, he would do so. The details of those circumstances which justify this statement are to be found in my brother Mason's reasons. In Steinberg v. Federal Commissioner of Taxation (1975) 134 CLR 640 I indicated my view as to a way in which a profit satisfying the second limb of s. 26 (a) might be made by the use of acquired property in a profit-making scheme. The need for the use of the acquired property in the profit-making scheme is there emphasized. In this case, nothing of the kind was shown to exist: indeed, it is illustrative of the consequences of not being specific in considering whether or not the essential elements of a relevant undertaking or scheme exist. As I have said, no more appeared than a readiness to dispose of the shares to satisfy demands upon the appellant by his other financial transactions in contemplation when that willingness to realize the shares was formed. (at p27)

5. I agree with my brother Mason's conclusion that the Supreme Court was in error in holding that the gain made by the appellant by the sale of the shares was a profit arising from a profit-making undertaking or scheme. (at p27)

6. In my opinion, the appeal should be allowed. (at p27)

STEPHEN J. This appeal concerns the much litigated s. 26 (a) of the Income Tax Assessment Act 1936. In other reasons for judgment appear accounts of the circumstances in which the appellant taxpayer acquired his large parcel of shares in Samin Ltd. and thereafter sold some of them, subsequently being assessed to tax on the resultant substantial profits. (at p28)

2. The learned primary judge concluded that those profits did not attract the first limb of s. 26 (a) but were assessable to tax under the second limb of that sub-section. I agree with the reasons given by Mason J. and Aickin J. for the conclusions that in the particular circumstances of this case the first limb does not apply and that the second limb is also inapplicable. I would therefore allow this appeal, only adding to what has been said by others an observation concerning the first limb of s. 26 (a). (at p28)

3. It is important to note the nature of the findings of fact by the primary judge which in this case have rendered inapplicable the first limb of s. 26 (a). In summary, they begin with the finding that initially, when it became clear to the taxpayer that shares in Samin Ltd. would be allotted to him, his purpose was that he should acquire them as an investment for long term holding; his purpose at that time was not that of profiting by their resale. Then, as the taxpayer's circumstances altered and as the date of acquisition of the Samin shares approached, his intentions underwent some change but his initial purpose was at no time converted into a dominant purpose of profit-making by resale. The taxpayer thus lacked, at the critical date of acquisition, that dominant purpose upon which the first limb of s. 26 (a) depends for its operation. (at p28)

4. It was here no question of mere uncertainty of mind of the taxpayer as to which particular Samin shares he would sell which was effective to exclude the operation of the first limb of s. 26 (a). If a taxpayer acquires a parcel of shares with the purpose of selling some of them at a profit he will not succeed in an appeal against assessment to tax on profits in fact made on resale simply because his purpose of resale at a profit, otherwise well defined, did not involve any clear identification of the precise shares to be sold. In the case of a parcel of shares all in one company, each of which is identical and which, under modern company legislation, need not even bear distinguishing numbers, there can scarcely be any question of the buyer, who intends to resell some only of that parcel, turning his mind to the precise identity of those to be sold; they will, in any event, be indistinguishable one from another. Yet neither a consciously created and studiously maintained state of indecision, nor even a quite unstudied and natural state of uncertainty, as to the particular shares which, from the total comprised in the parcel, are to be sold, will suffice of itself to avoid the first limb of s. 26 (a). (at p29)

5. Nor will the position be any different whatever may be the nature of the items of property in question, whether shares, subdivisional land and so on and whether or not acquired all at the same time, so long as, at the various dates of acquisition, the taxpayer had in relation to some of them, albeit unidentified, the dominant purpose of reselling them at a profit. In such a case a taxpayer's failure initially to earmark the particular items to be disposed of in satisfaction of his settled intention to resell at a profit will not of itself avoid liability to tax under s. 26 (a). He bears the onus of showing an assessment to be erroneous and will fail to establish that at date of acquisition he had no dominant purpose of reselling at a profit merely by proof that he did not initially identify the particular items which were to be sold to answer his then purpose of reselling some of such items at a profit. (at p29)

6. The reported cases appear to be concerned with the more difficult case of the intended resale of part of the one whole entity. In Chapman v. Federal Commissioner of Taxation (1968) 117 CLR 167, at p 171 , Menzies J. contrasted such cases with what he regarded as the more straightforward situation which prevails in the present case. It was, he said, "comparatively easy to treat the purchase of, say, 1,000 shares or 1,000 cattle, as the case may be, as the purchase of 1,000 separate units". Nevertheless his Honour was able in Chapman's Case to assign a dominant purpose of resale at a profit to a taxpayer in relation to part only of the forty-four acre lot which he had purchased. His Honour was not there confronted with the difficulty that the taxpayer had not initially decided what he would retain and what resell. However in the earlier case of Wall v. Federal Commissioner of Taxation (1966) ALR 949; (1965) 13 ATD 530 his Honour, in relation to what he described as "subdivisions 49 and 50, Pacific Highway", concluded that the taxpayer's purpose had always been to resell a part of the land (1966) ALR, at p 952; (1965) 13 ATD, at p 533 . In upholding the assessment to tax on profits of resale his Honour did not appear to concern himself with identifying the part in fact resold with some identifiable part intended to be resold at the date of original acquisition. In Smith v. Federal Commissioner of Taxation (1972) 46 ALJR 518; 3 ATR 204; 72 ATC 4111 , Walsh J. had to deal with the case of portions of land, unidentified at date of purchase, to which a purpose of resale was held to attach. His Honour said of this situation (1972) 46 ALJR, at p 523; 3 ATR, at pp 213-214; 72 ATC, at p 4120 :

"In Chapman's Case (1968) 117 CLR 1679 the respective areas acquired for different purposes were clearly defined. In the present case no such definite line can be drawn. But it is clear that both in the Dunbar land and in the Oldfield land the portions with frontages to Walker's Road would be preferred to any other portions for the purpose of subdivision into residential lots for sale. The only sales with which these appeals are concerned are sales of lots with frontages to Walker's Road. If it be accepted that it is probable that the taxpayer had a purpose of retaining for himself part of the Dunbar land and perhaps part of the Oldfield land also, it is not necessary in my opinion, in order to decide these appeals, to fix precisely the boundaries of the land to which that purpose applied. It is enough to say that the land which has been subdivided and sold was not within those boundaries."

Reference may also be made to Case C21 (1971) ATC 95 . Lack of precise identification, at time of purchase, of those particular items which are to be resold at a profit will not, I think, of itself avail a taxpayer who is assessed to tax on the profits of resale. (at p30)

7. I would allow this appeal for the reasons stated by my brothers Mason and Aickin. (at p30)

MASON J. This is an appeal by the appellant against orders of the Supreme Court of South Australia (Hogarth J.) dismissing his appeals against assessments to income tax for the years ended 30th June 1970 and 1971 by which the Commissioner included in his assessable income profits made by the appellant on the sale between February and August 1970 of 6,400 shares in Samin Ltd. ("Samin"). The appellant acquired by way of allotment 14,800 shares in Samin early in January 1970 in circumstances to which I shall refer. Of these shares 3,900 were sold between 26th February and 30th April 1970 yielding a profit of $23,143. By an amended assessment the Commissioner included this amount in the appellant's assessable income for the first of the two years in question. The appellant sold a further 2,500 shares in Samin between 30th July and 3rd August 1970 at a profit of $24,312 which the Commissioner included in his assessable income for the second year. In each instance the Commissioner relied on the provisions of ss. 25 and 26 (a) of the Income Tax Assessment Act 1936, as amended, to support the assessments. The primary judge, after a comprehensive review of the circumstances in which the shares were acquired, held that they had been acquired in the course of a profit-making undertaking or scheme and that the profits fell within s. 26 (a). Whether the profits fell within the first or second limbs of s. 26 (a) are the only issues for determination. (at p31)

2. In 1948 the appellant, who was a Canadian, entered the employment of McPhar Geophysics Ltd., a Canadian company, as a field technician. By 1954 when he had become a geophysicist he entered the employment of an associated exploration company. In 1961 he returned to McPhar Geophysics Ltd. and became a shareholder in that company. At present his shareholding represents about 8 per cent of the paid-up capital of the company. (at p31)

3. In 1961 the company joined a consortium with three Australian companies. It was arranged that McPhar Geophysics Proprietary Ltd. ("McPhar") would provide technical assistance for the consortium. This company opened an office in Melbourne and conducted its activities from there. McPhar provided its services at cost but on the understanding that in the event of mining activity being undertaken it would be entitled to participate in that activity on a 10 per cent basis. The appellant came to Australia in 1961 as the Vice-President and General Manager of McPhar, taking up residence in Melbourne. Although he returned to Canada in 1964 he came back to Australia in 1965 when a renewal of the consortium agreement for a further three years was agreed upon. At first he continued to live in Melbourne but later in that year he and his family moved to Adelaide. He was promoted to President and Managing Director of McPhar. (at p31)

4. In 1969, after the Australian members of the consortium decided that they would not participate in the development of certain copper deposits at Burra in the State of South Australia which the consortium had investigated, Basil Lewis, a geologist, who had formerly been employed at Broken Hill South Ltd., a member of the consortium, took steps to incorporate Samin with a view to mining the deposits at Burra. It was arranged that McPhar would take a 10 per cent interest in the capital of Samin. Subsequently the arrangement was varied to enable employees of McPhar to take up a proportion of the capital in Samin to which McPhar would otherwise be entitled. It was initially thought that Samin would require a paid-up capital of between half a million and one million dollars to engage in mining operations. (at p31)

5. Samin was incorporated on 6th October 1969. On 29th September, immediately before Samin's incorporation, a company known as Poseidon N.L. announced that it had discovered a valuable nickel deposit in Western Australia. On the evening of that day Mr. Lewis had a conference with Mr. Shierlaw of Poseidon, in which it was agreed that Samin would apply for and be allotted 200,000 fully paid 20 cents shares in Poseidon at the closing market price of the shares on 30th September less $2 per share. The consideration for the discount was that Samin would provide mining and exploration services for Poseidon. The closing price of Poseidon shares on the following day was $6.90 and this led to Mr. Lewis agreeing on behalf of Samin (which was yet to be incorporated) to pay $5 per share for the 200,000 shares. In consequence of this arrangement the proposed capital of Samin was increased, with the result that shortly after its incorporation it had a paid-up capital of $1,750,000 of which $1,000,000 was applied in paying off a loan raised to pay for the Poseidon shares. By the date of Samin's incorporation the market price for Poseidon fully paid shares had risen to $20. (at p32)

6. As a result of discussions between the President of the Canadian company, the appellant and Mr. Lewis, agreement was reached as to the number of shares to be allotted to McPhar employees and to Samin employees. The appellant was allocated 20,000 shares of which he applied for 14,800 in his own name, the balance being applied for by his wife and children except as to 400 shares which were made available to his bank manager, Mr. Byrnes. (at p32)

7. The closing price for Poseidon fully paid shares on 18th December was $115, on 19th December (which was a Friday) $128 and on 22nd December $170. Applications for Samin shares closed on the following day when the closing price for Poseidon fully paid shares was $175. As the primary judge observed, it must have been obvious that the allotment of a 50 cents share in Samin would give an interest in a company with an asset backing far in excess of its paid-up capital. (at p32)

8. In August 1969 the appellant and his wife who were then living in a house in Panorama, a suburb of Adelaide, of which they were the owners subject to a mortgage, were looking for a home in a different area. They were attracted to a house in the suburb of Hawthorn which was for sale by auction. They attended the auction with their bank manager. The house was sold but they were not the successful bidders. Fortuitously the house came on the market again in December 1969 and the bank manager informed them that it was available for purchase. On 19th December 1969, the day on which they signed their applications for shares in Samin, they entered into a contract to purchase the Hawthorn house for $46,700, the bank manager having agreed to provide short term finance. Arrangements were made on 22nd December between the appellant and the bank manager for more specific financial assistance by the bank. The then financial position of the appellant and his wife and the arrangements made for the provision of finance by the bank were summarized by the primary judge in this way (1976)10 ALR, at p 115; 6 ATR, at p 411; 76 ATC, at pp 4218-4219 :

"At that time the general account of the appellant and his wife was in overdraft to the extent of $5,461. The No. 2 account was $1,515 in debit. On the 18th of December 1969, therefore, the appellant and his wife needed funds to finance, first, the purchase of the Hawthorn house; and secondly, the shares in Samin. They therefore applied for an increase in the approved overdraft limit of the general account to $56,000. This meant that the total accommodation sought by the appellant and his wife was $57,515. The purpose stated by the appellant, as recorded by Mr. Byrnes, was: 'Assist purchase of house property $46,700

less 1st mtge. E.S. &A.

Savings 10,000 _________ $36,700

Purchase 20,000 shares Samin N/L for self and family 10,000

Present debt, say 6,000 Personal needs, car etc. 3,300 ________ $56,000'

Under the heading 'Repayment' appears: 'Sale of present house property expected to

provide equity of $10,000

Sale of sufficient Poseidon and/or Samin shares $50,000' The expiry date for the proposed overdraft was given as the
8th of March 1970. In February 1970 the bank approved an overdraft limit of $57,000 to be reduced to $25,000 by the 8th of March 1970; and to be discharged in full by the 31st of July 1970. The No. 2 account was to continue to be repaid by monthly payments until the sale of the Panorama house, when it was to be paid off; and the whole indebtedness was to be paid off in any event by the 31st of July 1970. In fact the Panorama house, although put up for sale, was not sold until after 1970. In the result, therefore, the whole of the debt to the bank had to be paid from other sources."

The appellant and his wife were at this time confronted with the necessity of selling part of their assets, in addition to the Panorama house, in order to discharge the debt to the bank or, alternatively, of obtaining long term finance by way of mortgage. Apart from the shares in Samin the appellant and his wife held 1,000 shares in Poseidon which had been acquired on 30th September 1969 for $6,695. He and his wife had previously on 15th September 1969 bought 1,000 contributing shares in that company for $896 and sold them on 29th September for $3,240. They also held shares in other Australian companies which were sold in February and March for $10,288.18. In addition the appellant had the shares in McPhar Geophysics Ltd. to which I have already referred. The proceeds of sale of the shares in Australian companies were credited to the joint account with the bank and almost all the proceeds of sale of the Samin shares sold between February and April 1970 were also credited to the joint account, reducing the overdraft to $8,223.55 on 30th April 1970. The proceeds of sale of the 2,500 shares in Samin sold between 30th July and 3rd August 1970, amounting to $25,562.03, were also paid into the joint account, thereby creating a credit balance of $5,165.60. (at p34)

9. The appellant claimed in his returns that the purchase of the Samin shares was an investment rather than a speculation and in evidence he stated that he wished to purchase and hold as an investment the Samin shares as they were attributable to him as an employee of that company. His evidence in this respect was accepted by the primary judge who drew a distinction between the acquisition of the Samin shares and other share transactions into which the appellant and his wife entered some of which the appellant conceded to have been speculative transactions in the shares of mining and oil exploration companies. (at p34)

10. His Honour found that when the appellant applied for the Samin shares he knew that he would have to raise a substantial part of the necessary funds by selling some of his shares in Poseidon or in Samin, or in both of those companies, and that this sale would be at a profit, but that, subject to this sale, it was the appellant's intention to retain the shares in both companies as a long term investment - an intention which the appellant carried out, and to his cost, because the shares ultimately became of little value. His Honour also found that at the time of acquisition of the Samin shares the appellant had no definite intention of selling the exact number, or indeed any, of the shares in that company which were in fact sold in 1970. (at p34)

11. The gist of his Honour's conclusion in relation to the first limb of s. 26 (a) was that it was not satisfied because the appellant at the relevant time did not have a definite purpose or intention of selling the Samin shares, it being possible that he would sell the Poseidon shares. (at p35)

12. However, the primary judge went on to find that the arrangements made by the appellant in December 1969 with the bank manager for a temporary loan to finance the purchase of the house and the applications for the Samin shares, to use the Poseidon and Samin shares as security for the loan and to raise funds to pay off the loan within the times mentioned, in part by the sale of the Poseidon or Samin shares, or shares in both companies, amounted to a profit-making undertaking or scheme within the second limb of s. 26 (a) with the consequence that the profits formed part of his assessable income. (at p35)

13. I am in agreement with his Honour's conclusion that the profit made by the appellant on the sale of the 6,400 Samin shares did not fall within the first limb of s. 26 (a). It speaks of profits arising from the sale of property "acquired...for the purpose of profit-making by sale", not profits arising from the sale of property acquired for the purpose of sale. The remarks made in connexion with s. 16 (b) (i) (1) of the Income Tax Assessment Act 1922-1932 by Rich, Dixon and Evatt JJ. in Evans v. Deputy Federal Commissioner of Taxation (S.A.) (1936) 55 CLR 80, at p 99 , apply with equal force to the first limb of s. 26 (a). Their Honours said:

"No doubt to transfer the assets to another company for shares is a sale. To that extent the purpose of sale was not absent. But the proviso defines the purpose which it excludes, not as one of resale simply, but as resale at a profit. It is concerned with the well known difference between enlargement of capital by sale of capital assets and obtaining detachable profit by buying and selling assets. 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." (at p35)

14. Under the first limb of s. 26 (a) the issue in this case may be expressed thus: Has the appellant established that the dominant purpose actuating the acquisition of the shares was not that of profit-making by sale? On the findings of fact made by his Honour it is my opinion that this question must be answered in favour of the appellant. It was in August 1969 that it was arranged that the appellant and his family would be allocated 20,000 shares (approximately) in Samin and it was at this time that the appellant formed the intention that he would take up shares in that company as a long term investment. There was then no question of selling any part of the shares in order to meet the cost of acquiring the Hawthorn house because the negotiations for the purchase of that house did not take place until December when it came on the market for a second time. Had it not been for the purchase of the house in December the appellant may well have been able to finance the purchase of the shares without resorting to selling them in 1970. The moneys borrowed to take up the Samin shares could have been repaid out of the proceeds of sale of the shares held in other Australian companies. These shares were in fact sold in February and March 1970 for over $10,000 which exceeded the amount of $10,000 payable on the 20,000 50 cents shares in Samin. (at p36)

15. It is to be inferred that the notion that either some Samin or Poseidon shares, or both, should be sold to repay the indebtedness of the bank was first entertained by the appellant when the bank manager announced in December 1969 the terms on which the bank was prepared to provide temporary finance for the purchase of the Hawthorn house and insisted on repayment by 8th March 1970, the terms being subsequently modified so as to require a repayment of $25,000 on that date. It may then be said that from the beginning the purpose of acquiring the Samin shares was that of long term investment, as the judge found, and that subsequently, by the time the application for the shares was made and they were later allotted, that purpose was qualified by the appellant's recognition that there was a possibility that he would need to sell portion of the Samin shares to reduce or extinguish his debt to the bank. There is not enough in this circumstance to justify the conclusion that the acquisition of the shares in Samin which were sold in 1970 was actuated by the dominant purpose of profit-making by sale. The other possibility considered by the appellant at the time of acquisition of the Samin shares was that the debt to the bank would be repaid out of the proceeds of Poseidon shares the sale of which, as we shall see, would not have produced, and did not produce, assessable income in the hands of the appellant. The Samin shares were acquired in circumstances in which the appellant had no dominant purpose of making a profit by selling them. In these circumstances the profit does not fall within the first limb of s. 26 (a). (at p36)

16. This conclusion does not necessarily dispose of the case because, like Gibbs J. in Federal Commissioner of Taxation v. Williams (1972) 127 CLR 226, at p 250 , I do not understand their Lordships in McClelland v. Federal Commissioner of Taxation (1970) 120 CLR 487, at p 496 , to be saying that the second limb of s. 26 (a) is otiose - see also Steinberg v. Federal Commissioner of Taxation (1975) 134 CLR 640 ). But once attention is given to the findings of fact made by the primary judge and to the conclusion that the first limb of s. 26 (a) has no application, it is impossible to avoid the further conclusion in the circumstances of this case that the profit did not arise from a profit-making undertaking or scheme. (at p37)

17. In the first place, where the profit in question arises from the purchase and subsequent sale of an asset and it is found that the asset was not acquired for the purpose of profit-making by sale it is very difficult to see how the profit can be said to arise from a profit-making undertaking or scheme (see McGuiness v. Federal Commissioner of Taxation (1972) 46 ALJR 279; 3 ATR 22; 72 ATC 4023 ). In this case the difficulty becomes insurmountable because the finding in connexion with the first limb of s. 26 (a) denies the existence of the relevant profit-making undertaking or scheme which is alleged to bring the profit within the second limb. For the Commissioner's claim is that the essence of the profit-making scheme lies in the purpose of acquiring the Samin shares and selling them at a profit. According to the Commissioner it is that purpose and that purpose alone which stamps the scheme with a profit-making character. (at p37)

18. The Poseidon shares, the other possible source of funds from which the bank's debt might be repaid, were acquired by the appellant and his wife in September 1969 some months before the formation of the alleged profit-making undertaking or scheme in December of that year. It is conceded by Mr. Rice for the Commissioner that the Poseidon shares were not acquired for the purpose of profit-making by sale and that any profit made by the appellant on their sale was not assessable income in the hands of the appellant and his wife. On the assumption that the appellant's application for shares in Samin, his arrangement to repay the bank and his intention to sell either enough Poseidon or Samin shares, or both, to repay the bank deserved to be labelled as an undertaking or scheme, that undertaking or scheme was not in my opinion a profit-making undertaking or scheme within the meaning of s. 26 (a) because the acquisition of the Samin shares which represented a critical element in the alleged plan, like the earlier acquisition of the Poseidon shares, was not actuated by the dominant purpose of profit-making by sale. (at p37)

19. I would therefore allow the appeal against the orders made by the Supreme Court dismissing the appellant's appeals against assessments to income tax for the years ended 30th June 1970 and 1971. (at p38)

JACOBS J. I agree that the appeal should be allowed. There is little that I wish to add to the reasons for this conclusion which have been expressed by Mason J. and with which I agree. (at p38)

2. In the circumstances of the present case I think that a conclusion that the shares in Samin Ltd. were not acquired by the taxpayer for the purpose of profit-making by sale leads to a conclusion that the profit made by the taxpayer on the sale of the shares was not a profit from the carrying on or carrying out of a profit-making undertaking or scheme. I lay emphasis upon the particular circumstances of the case because a purchase of shares in a number of companies with an intention of selling some of them at a profit when a favourable opportunity arose could in many circumstances be the carrying on or carrying out of a profit-making scheme. (at p38)

3. In my opinion the conclusion of the primary judge was correct that the shares were not acquired for the purpose of profit-making by sale. At the time when application for the shares was made, the taxpayer envisaged that he might need to sell all or some of them but when he formed the intention to acquire the shares, which was in August 1969 some four or five months earlier, he had no purpose of profit-making by sale nor did he definitely form such a purpose in the intervening months before he made formal application for the allotment of the shares to him. Likewise, any scheme of the taxpayer under the second limb of s. 26 (a) must in the circumstances of the present case be found to be a scheme which had been formulated at the time when the taxpayer formed an intention to take up the shares in Samin Ltd. which he had been told would be allocated to him. It is true that he could have resiled from his intention to take up the Samin shares at any time up until the time when he made formal application for the shares. But to regard this as the decisive factor in determining whether or not there was a profit-making scheme would be to construct or to impute a scheme not out of what actually happened but by having regard to what might have happened. The taxpayer decided in August 1969 to take up his allocation of Samin shares. At that time he had no intention of doing other than retaining the shares as a long term investment. By the time the taxpayer made formal application for the Samin shares he envisaged that he might need to sell those shares in order to pay liabilities which had arisen after August 1969. But his intention to take up the Samin shares had never varied between August 1969 and his application for the shares in December 1969. In these circumstances a profit-making scheme would require that the intention to take up the shares be accompanied by a purpose of profit-making. There cannot be found a profit-making scheme simply because, by the time for action pursuant to that continuing intention, a need should have arisen to envisage the necessity of selling the shares even though by the time of the action of taking up the shares there be a likelihood of sale at a higher price. (at p39)

AICKIN J. This is an appeal from a decision of Hogarth J. of the Supreme Court of South Australia in two appeals by the taxpayer against the disallowance of objections to the Commissioner's assessment of income tax in respect of the years ended 30th June 1970 and 1971. The Commissioner disallowed the objections and the taxpayer appealed to the High Court of Australia pursuant to the provisions of the Income Tax Assessment Act 1936, as amended, but the appeals were remitted to the Supreme Court of South Australia for hearing in that Court. (at p39)

2. The judgment of Hogarth J. (1976) 10 ALR 109; 6 ATR 406; 76 ATC 4214 contains a careful review of the history of the matter and of all relevant facts and it is not necessary to repeat the whole of that account here. The Commissioner included in the assessable income of the taxpayer in each of the two years an amount representing the profit made by the taxpayer on the sale of shares in a mining company, Samin Ltd. The taxpayer had acquired 14,800 shares in that company for which he had applied on 18th December 1969 on the occasion of a public floatation. (at p39)

3. The shares were allotted to him in early January 1970. He sold 6,400 of those shares between February and August 1970. The origin of the transaction and the association out of which it arose as accepted by the learned trial judge went back prior to 1969. The appellant is a geophysicist of Canadian origin and in 1948 he entered the employment of a Canadian company, McPhar Geophysics Ltd. ("McPhar Canada") and remained in its employment or that of associated companies at all relevant times. At some stage he became a shareholder in McPhar Canada and in 1969 held about 8 per cent of its paid-up capital. In 1961 McPhar Canada entered into a consortium with three Australian companies interested in exploration for minerals and the development of mines. Broken Hill South Ltd. was the major participant and it arranged for McPhar Canada to provide technical assistance for a period of three years. This was effected by a subsidiary, McPhar Geophysics Pty. Ltd. ("McPhar Australia") incorporated in Australia. McPhar Australia entered into the consortium on the basis that its services would be supplied at cost, but that in the event of any mining activity being undertaken it would have the right to enter the venture on a 10 per cent basis. The appellant came to Australia in 1961 as the Vice-President and General Manager of McPhar Canada for a three year term. He returned to Canada in 1964 but made two further trips to Australia in that year and in the following year. During this time negotiations were under way for a further three year contract with the other members of the consortium. In the result the agreement was renewed and the appellant returned to Australia to live in 1965 and settled in Adelaide. The appellant was during the second three year term promoted to being President and Managing Director of McPhar Australia. During the second term the consortium explored a number of copper prospects in South Australia and the appellant was connected with those activities. During that period he was closely associated with Mr. Lewis, a geologist employed by Broken Hill South Ltd. (at p40)

4. During the latter part of the second three year term Lewis learned that the Australian members of the consortium were not likely to be interested in one of the two copper deposits which had been investigated, namely, that at a place called Burra. He left the employment of Broken Hill South Ltd. on 30th June 1969 after discussions with the chairman of directors of that company. With other employees of that company he formed a syndicate with the object of forming a company to take over the interest of the consortium at Burra and to mine the deposits there. The appellant was not a member of that syndicate. However the prospect of forming such a syndicate had been discussed by Lewis with the appellant and Dr. Hallof, the President of McPhar Canada, over a period prior to 30th June 1969. Lewis' evidence was that about two or three months prior to 30th June Dr. Hallof and the appellant had indicated that McPhar Australia would participate and would like to increase its interest above the 10 per cent to which it was entitled in the original consortium and a figure of 25 per cent was mentioned. It was not at any time contemplated that it would take less than 10 per cent. Lewis also said that at the same time it was informally agreed that a proportion of McPhar Australia's entitlement would go to its staff on a percentage basis to be determined later. In September 1969 Lewis received formal confirmation that the other two Australian members of the original consortium were not interested in pursuing the Burra project and he then approached the Director of Mines in South Australia. On 30th September he was informed that the Minister would approve the transfer of the mining tenements to the proposed company. On 6th October 1969 Samin Ltd. ("Samin") was incorporated on Lewis' instructions. The appellant and McPhar Australia were kept informed of these developments. Prior to that, further discussions took place in August between the appellant, Lewis and Dr. Hallof who was in Australia at that time. It was then agreed that McPhar Australia's proportion should be a 10 per cent interest in the new company and that a stated proportion of that would be made available to be taken up by the appellant and other employees of McPhar Australia and by Dr. Hallof himself. These discussions took place on the basis of the percentage of the capital of the new company to be attributed to McPhar Australia, because at that stage the amount of capital required was not definitely known. At that time it was contemplated by Lewis that it would require between half a million and a million dollars to set up the mining operations. (at p41)

5. On 29th September 1969 another mining company, Poseidon N.L. ("Poseidon"), reported the discovery of a rich deposit of nickel on a mining tenement in Western Australia and its shares rose rapidly on the stock exchanges. There was prior to that no connexion between Samin and Poseidon, but later on that day Lewis made an arrangement with those concerned with Poseidon that Samin would apply for and be allotted 200,000 fully paid 20 cents shares in Poseidon at the closing market price on 30th September, less $2 per share. This discount was to represent services in the mining and exploration field to be performed by Samin's experts for the benefit of Poseidon. At the same time it was agreed that Poseidon would take up 200,000 shares in Samin at par, which it did shortly after that company was incorporated. The actual price for Samin's shares in Poseidon was subsequently fixed at $5 per share for the 200,000 shares, thus requiring the payment of $1,000,000. This arrangement required changes in the proposed capital structure of Samin. The necessary funds to enable it to take up the Poseidon shares were borrowed on a short term basis, but ultimately an issue of approximately 2,000,000 shares of 50 cents each was made over and above what would otherwise have been required for the Burra operation alone. (at p41)

6. Samin was incorporated with an authorized capital of $5,000,000 divided into 10,000,000 shares of 50 cents each. By then the market price of Poseidon shares had risen to $20 so that Samin's shares in Poseidon would on that basis be valued at $4,000,000 compared with Samin's then issued capital of approximately $100,250. Shortly after Samin was incorporated it was decided to issue 3,000,000 shares so as to bring the total paid-up capital to $1,600,250. Of this $1,000,000 was required to pay off the loan which had been raised to take up the Poseidon shares. A list was prepared setting out the persons and companies who were to be invited to apply for these shares and the number which would be reserved for allotment to them. Firm arrangements were made between Dr. Hallof, the appellant and Lewis as to the allocation of shares from the McPhar Australia interest to its employees. It was then agreed that Dr. Hallof himself might apply for and be allotted 20,000 shares and that the appellant would be entitled to the same number. Other employees of McPhar Australia were to be entitled to allotments of other numbers of shares which were also agreed upon at the time. The issue of shares by Samin was delayed by the formalities required for the issue of a prospectus. The prospectus was issued on 10th December 1969. On 18th December the appellant applied for 14,600 shares in his own name and his wife and children applied for the balance of the 20,000 shares except for 400 shares which were applied for by his bank manager, who acted generally for him in all his financial arrangements and as his financial adviser. The subscription moneys were payable on application. By the time applications for Samin shares closed on 23rd December, the price of Poseidon shares on the Stock Exchange was $175. The Samin shares were allotted in early January 1970 and the 20,000 shares available to the appellant were in fact allotted in accordance with the applications. (at p42)

7. Hogarth J. sets out in detail the financial arrangements made by the appellant from the time that he came to live in South Australia in 1965 and thereafter. For present purposes it is sufficient to say that he bought a house in which he and his family resided until 1969. It was in the joint names of his wife and himself and its purchase was substantially financed by mortgage arranged by the bank. He and his wife also bought and sold certain parcels of shares, which transactions were managed for them by the bank's nominee company. In August 1969 the appellant and his wife were looking for a house in a different area and located one in Hawthorn which they wished to purchase. They spoke to the bank manager who agreed to make finance available for the purchase if the taxpayer and his wife were successful in purchasing the property at the contemplated auction. The appellant was not in Adelaide on the day of the auction but the bank manager attended the auction on his behalf. He was not successful at the auction but in December 1969 he heard that the same house was again on the market and notified the appellant. In the result on 18th December the appellant and his wife entered into a contract to purchase that house for some $46,000, having previously arranged with the bank manager in general terms that short term finance would be provided to enable the purchase to be made at that price. (at p43)

8. The appellant's evidence was that he had previously informed the bank manager of the Samin proposal as it developed, and that he was in communication with him regularly, and depended on him for advice. (at p43)

9. In the result on 18th December the appellant and his wife needed funds to finance both the purchase of the house and the taking up of the shares in Samin. They applied for an increase in the approved overdraft limit to a figure of some $56,000. The bank manager recorded the details of this as follows:

"Assist purchase of house
property $46,700 less 1st mtge. E.S. &A.

Savings 10,000 __________ $36,700

Purchase 20,000 shares Samin

N/L for self and family 10,000 Present debt, say 6,000 Personal needs, car etc. 3,300 ________ $56,000."

Under the heading "Repayment" in the bank manager's memorandum there appeared the following notations:

"Sale of present house property expected to provide equity of $10,000 Sale of sufficient Poseidon and/or Samin shares $50,000."

The date stated for the expiration of the new overdraft arrangements was 8th March 1970 but this date was later extended to 31st July 1970. In fact the other house was not sold until after 1970 and the proceeds were therefore not available to contribute to the discharge of the overdraft in accordance with the arrangements. (at p43)

10. There were several possible sources from which the appellant could raise funds to discharge the debt to the bank, namely: (1) sale of shares in Poseidon; (2) sale of shares in Samin; (3) sale of shares in other Australian companies; (4) sale of portion of his holding in McPhar Canada, or borrowing in Canada on the security of that holding; (5) obtaining long-term finance by way of mortgage. The shares in other Australian companies were sold in February/March 1970 for a total of some $10,000 and this was used to reduce the overdraft. The appellant repaid the balance due to the bank out of the proceeds of sale of Samin shares in accordance with advice given by the bank manager as follows:

"(1) On 26th February 1970 he sold 390 shares for $11,451.10. This amount was paid into the joint account at the bank, and had the effect of reducing the overdraft to $45,163.78. (2) On the 14th and 15th April 1970 he sold 1,510 shares for $15,131.72. Of this amount $15,107.47 nett was paid into the joint bank account and reduced the overdraft to $26,068.89. (3) On the 30th of April 1970 he sold 2,000 shares for $19,527.84. Of this amount $19,427.84 nett was paid into the joint bank account, and reduced the overdraft to $8,223.55. (4) Between the 30th July and the 3rd August 1970 he sold a further 2,500 shares for $25,562.03. This amount was paid into the joint bank account and had the effect of discharging the overdraft in full, and creating a credit balance of $5,165.60." (at p44)

11. It is the surplus arising upon those sales of Samin shares over the amount paid on application for them that the Commissioner included in the assessable income of the taxpayer. (at p44)

12. The learned trial judge made a number of findings of fact which are of critical importance to the determination of this appeal. They are as follows:

(1) That, from the inception of the idea of incorporating a
company to mine the deposits at Burra, McPhar Australia had been interested in maintaining its share in the project. (2) That the appellant wished to take up and hold as an investment such shares as might be attributable to him as an employee of that company out of its entitlement. (3) That the appellant had had a close association with the exploration work on that project and the connexion which he had with the company to be formed for the purpose of working those deposits was of a very different order from his connexion with other mining and oil exploration companies in whose shares he had been dealing. The trial judge noted that the taxpayer conceded that some of his other share purchases had been of a speculative nature. The learned judge correctly said (1976) 10 ALR, at p 117; 6 ATR, at p 413; 76 ATC, at p 4220 : "But the mere fact that he hopes that his investment will increase in value may make the transaction speculative, but does not necessarily bring the profits made on the investment to tax when he disposes of it, unless it can be shown that at the time he made the investment he had the purpose of selling the shares at a profit or that the project was otherwise part of a profitmaking undertaking or scheme."

(4) The trial judge said that he had no doubt that the profits made by the taxpayer on the sale of the shares in Samin in 1970 were not income within the ordinary meaning of that term. (5) "When the appellant applied for the allotment to him of the shares in Samin he had knowledge that the nett assets of that company, by virtue of its ownership of 200,000 Poseidon shares bought for $5 each, would far exceed the application moneys payable for the shares. He had every reason to believe that as soon as the Samin shares came on the market he would be able to dispose of them at a handsome profit. When they did come on the market on 19th January 1970, the closing sales on that day were at $21 per share. But his knowledge that he could make a profit on the Samin shares in this way does not necessarily lead to the conclusion that when he acquired them he did so with the purpose of reselling them, or any of them. His own evidence, which I accept, is that he wished to retain them as a long-term investment. But, in the light of his available assets and the liabilities that he had to meet, what he wished was one thing; what he recognized that he must do, against his will, was another." (1976) 10 ALR, at pp 118-119; 6 ATR, at p 414; 76 ATC, at p 4221.
He was directing his attention for the purposes of s. 26 (a) to the appellant's state of mind at the time of the application for the shares.
(6) That he was not satisfied that, in some of the other cases of the purchase and sale of shares made by the appellant and his wife, they were not purchased for the purpose of profit-making by sale, but said that (1976) 10 ALR, at pp 119-120; 6 ATR, at p 415; 76 ATC, at pp 4221-4222. :

"...it seems to me that the purchases and sales of

shares through E.S. &A. Nominees and through the

bank itself, in the joint names of the appellant and his wife, stand on a completely different footing from his acquisition of the Samin shares. As I have pointed out, he had a close professional interest in the development of the Burra mine, for which purpose Samin was incorporated. Similar considerations did not apply to any of the other shares. He took up the shareholding in Samin as the result of negotiations between his employer, McPhar, the president of the parent corporation in Canada, Dr. Hallof, and Mr. Lewis as the spokesman for the syndicate which incorporated Samin. No other shares were acquired in this manner, but were merely shares bought on the market. Although, therefore, as I have said, I think that many, if not all, of the shares

purchased through E.S. &A. Nominees and subsequently

resold (and I am thereby excluding the parcel of 1,000 Poseidon shares bought on 30th September 1969), would be brought to tax under the first limb of s. 26 (a), I do not think that the considerations which lead to that result apply in respect of the profit made on the sale of the Samin shares."

The trial judge then reviewed the appellant's resources, the circumstances of his dealings with the bank, and the origin of his interest in Samin and said (1976) 10 ALR, at p 121; 6 ATR, at pp 415-416; 76 ATC, at p 4222. :

"For practical purposes, this means that when the appellant applied for the Samin shares he must have intended to raise a substantial part of the necessary funds by selling some of his shares in Poseidon or in Samin, or in both those companies; and the memorandum made by Mr. Byrnes of the interview of 22nd December 1969 with the appellant confirms this. I am satisfied that when the appellant acquired the Samin shares he did not have a definite intention of selling the exact number, or indeed any, of the shares in that company which in fact were sold in 1970 and whose sale gives rise to these proceedings." (at p46)

13. After considering other factors including a parcel of Poseidon shares which the appellant and his wife had acquired on 30th September 1969 and the circumstances surrounding that purchase he then said (1976) 10 ALR, at p 122; 6 ATR, at p 416; 76 ATC, at p 4223 :

"It follows, in my opinion, that it is impossible to attribute to the appellant an intention or purpose of selling any of the Poseidon shares, on the date of his acquisition of them, in order to finance his subsequent purchase of the Hawthorn house or his application for the allotment of shares in Samin some two and a half months later out of the profits he would make by the sale. And so if he had chosen to pay off his indebtedness to the bank by the sale of Poseidon shares, I do not see how his profit on such sale could be brought to tax. The case is, therefore, not of an election to sell shares in one of two companies where profits on the sale of either would be taxable. The appellant said that when eventually he raised the necessary funds by selling shares in Samin as opposed to Poseidon shares, he did so on the recommendation of his bank manager, Mr. Byrnes. Whatever Mr. Byrnes may have said to influence the appellant, the decision in the end was his own; and I have no doubt that when the shares were sold he made his decision in the light of his consideration of which shares it would be better for him to retain in the long run." (at p47)

14. The learned trial judge summarized his conclusions as follows (1976) 10 ALR, at pp 122-123; 6 ATR, at pp 416-417; 76 ATC, at pp 4223-4224. :

"I am satisfied, and find, that when the appellant applied for and was allotted his holding of 14,800 shares in Samin he confidently expected that he would be able to sell them at a profit as soon as they came on the market; that he knew that he would have to sell some shares either in Samin or in Poseidon, or both, in order to discharge his short-term indebtedness to the bank; that he wished to keep both the Poseidon and the Samin shares as long-term investments; but that he realised that he would be unable to keep all of them and that he would have to sell some. Is this attitude of mind sufficient justification for concluding that he acquired the Samin shares under review with the purpose of profit-making by their sale? I do not think that it is. I have found no authority on the topic, nor were counsel able to refer me to any. But bearing in mind the possibility that the appellant could use his alternative means of raising finance by selling shares in Poseidon, and that when he acquired the Samin shares he had an open mind as to whether or not he would do so, in my opinion he has satisfied the onus of establishing that at that time he did not have the purpose of selling them at a profit. He acquired them in the realisation that he might do so, and I would go so far as to say that he had the purpose of putting himself in a position where he would be able to do so; but at that time he had not formed the intention, or the definite purpose, of selling them or any of them." (at p47)

15. He therefore concluded that the appellant had not had the requisite intention for the transactions to fall within the first limb of s. 26 (a) and went on to deal with the second limb. As to that he said (1976) 10 ALR, at p 123; 6 ATR, at p 417; 76 ATC, at p 4224 :

"I do not suggest for one moment that the mere application by the appellant for shares in Samin, in the knowledge that those allotted to him would have an immediate value far in excess of the amount paid by him for the allotment, would constitute the carrying on or carrying out of a profit-making undertaking or scheme. But there was more to it than that. I refer to the arrangements made with the bank for the provision of finance for the acquisition of the shares, as well as for the purchase of the Hawthorn house, on the security inter alia of those very shares; and the express intention of the appellant to pay off the debt in part by 8th March 1970, and in full by 31st July 1970, by the sale to the extent necessary of shares either in Poseidon or in Samin or in both those companies."

After referring to a number of authorities he described the situation as follows (1976) 10 ALR, at pp 124-125; 6 ATR, at p 418; 76 ATC, at p 4225. :

"The arrangements made by the appellant in December 1969 were to raise a temporary loan from the bank in order to finance the purchase of the Hawthorn house and the applications for Samin shares by himself and his wife and for his children; to use the Poseidon shares and the Samin shares as security for the loan; and to raise funds to pay off the loan within the times I have mentioned, in part by the sale of Poseidon or Samin shares, or shares in both companies. In my opinion the combined effect of these arrangements amounted to an undertaking or scheme within the meaning of the section. By carrying out the scheme he did indeed make a profit of which the amounts included by the Commissioner in the appellant's taxable income formed a part. I think that when he embarked upon the undertaking or scheme he did so with the intention of raising whatever funds were still to be found, after he had obtained what he could from other sources, by the sale of either Poseidon or Samin shares, or shares in both companies, to his best advantage. When he embarked upon the undertaking or scheme he believed that he would be able to sell shares in either of those companies at a very substantial profit. Even though he had not decided finally either how much money he would need to raise from those sources, nor exactly what shares he would sell, he nevertheless embarked upon the undertaking or scheme with that general intention; he carried out that intention; and he thereby made a profit of the sort which he had had in general contemplation at the outset." (at p48)

16. Accordingly, the learned trial judge dismissed the appellant's appeal on the ground that the amount which the Commissioner had included as part of his assessable income was in fact assessable income by reason of the second limb of s. 26 (a). The appellant appealed to this Court from that decision. (at p48)

17. In my opinion no basis has been made out for departing from the trial judge's conclusion as to the first limb of s. 26 (a). It is not merely that he had the advantage of seeing the witnesses and assessing their reliability. Although he looked at the intention as at 18th December 1969 he rightly took into account the earlier events as relevant to ascertaining that intention. The undisputed history of the arrangement leads in my opinion clearly to the conclusion that neither in August 1969, when the arrangement fixing his proportion of McPhar Australia's entitlement was made, nor in December when he signed the application form and paid the application moneys did the appellant have as his purpose or dominant purpose profit-making by their sale. (at p49)

18. As to the second limb of s. 26 (a) the principal difficulty lies in formulating the scheme as found by the trial judge and as submitted by counsel for the Commissioner in a manner which does not contradict the primary finding that the shares which were sold were not acquired for the purpose of profit-making by sale, and which reveals what source of profit was involved in the scheme itself. No formulation advanced succeeded in showing any profit, or any profit-making capacity, other than that arising from the difference between the amount paid on the application for the shares and the amount obtained on their sale. (at p49)

19. The situation was one in which on 18th and 22nd December the appellant found himself overcommitted on capital account. By coincidence two unrelated projects had come to fruition at the same time. One was the purchase of the house at Hawthorn which he had been seeking to purchase for some months and for which his bank had throughout been prepared to provide finance. The other was the taking up of his entitlement in respect of shares in Samin. That had been under way since prior to 30th June 1969 and had been in substance finalized in August, subject only to the company being incorporated and its promoters fixing the amount of capital to be raised on its floatation. His proportion was agreed and he intended to take it up, even though the amount of money required was not known. He retained that intention throughout. (at p49)

20. When December came his liquid assets in Australia were not adequate to finance these two projects without substantial bank support. He had however two other capital assets which would provide both security and a source of funds for repayment of the bank advance in whole or in part. They were his existing house which throughout he had intended to sell if and when he obtained the new house, and the Poseidon shares which by that time had greatly increased in value. The trial judge found that those shares had not been acquired for the purpose of resale at a profit, and in this Court counsel for the Commissioner conceded that if the appellant had sold the Poseidon shares any profit derived would not have been assessable. The details recorded by the bank manager on 22nd December required the bank's advance to be repaid by 8th March 1970. It was assumed that the proceeds of sale of the first house would contribute to the reduction of the overdraft but in fact it took longer to sell than was expected. The remaining source listed under "Repayment" was "Sale of sufficient Poseidon and/or Samin shares." Thus the major source of repayment was to be the sale of shares of one or other or both kinds, each of which were found not to have been acquired for the purposes of profit-making by sale. This may no doubt properly be regarded as an "arrangement" but one may properly ask, where is the profit-making undertaking or scheme. In argument it was conceded by counsel for the Commissioner that the only profit which arose from carrying out the arrangement was the profit on the sale of the Samin shares, but that was not a profit of an income character, and a capital profit is outside the scope of the second limb of s. 26 (a). The realization of a capital asset is not a profit-making undertaking or scheme, however enterprising or simple the mode of realization may be - see Scottish Australian Mining Co. Ltd. v. Federal Commissioner of Taxation (1950) 81 CLR 188 ; White v. Federal Commissioner of Taxation (1968) 120 CLR 191 ; Federal Commissioner of Taxation v. Williams (1972) 127 CLR 226 . There was here no scheme of profit-making to which this asset, or these assets, were committed in any relevant sense, nor was there any business activity. (at p50)

21. The trial judge took the view that the combined effect of the arrangements made in December 1969 was an undertaking or scheme which he described in the passage which I have quoted above. That reasoning however overlooks the significance of his Honour's own findings that neither the Poseidon nor the Samin shares had been acquired for the purpose of profit-making by sale, though the profit to which he referred arose solely out of the sale and not out of the arrangement. (at p50)

22. In my opinion there was here no profit-making undertaking or scheme at all, and no "profit" within the meaning of s. 26 (a) because, as is established by the decision of the Privy Council in McClelland v. Federal Commissioner of Taxation (1970) 120 CLR 487 , the second limb of s. 26 (a) is concerned only with profits on income account, and not with capital gains. (at p50)

23. Accordingly I would allow the appeals and order that in lieu of the trial judge's orders it be ordered that the appellant's appeals against the amended assessments issued by the Commissioner in respect of each of the years ended 30th June 1970 and 30th June 1971 be allowed with costs and the amended assessments set aside. (at p51)

Orders

Appeal allowed with costs.

Orders of the Supreme Court of South Australia set aside and in lieu thereof order that the appeals to that Court be allowed with costs.

Remit matters to the Commissioner to reassess in accordance with the reasons for judgment of the Court.