CMI Services Pty Ltd v The Commissioner of Taxation of the Commonwealth of Austraila

Re: C.M.I. SERVICES PTY. LIMITED
And: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
No. VG272 of 1989
FED No. 259
Income Tax

COURT

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
Lockhart(1), Jenkinson(2) and Gummow(3) JJ.

CATCHWORDS

Income Tax - Ascertainment of assessable income - Distinction between income and capital - Profits of a business or realization of capital assets - Sales of land - Sales by commercial property investment company.

Income Tax Assessment Act 1936 - s.25(1)

Californian Copper Syndicate (Limited and Reduced) v. Harris (1904) 5 TC 159

Colonial Mutual Assurance Society Limited v. Federal Commissioner of Taxation (1946) 73 CLR 604

Federal Commissioner of Taxation v. Myer Emporium Limited (1987) 163 CLR 199

London Australia Investment Company Limited v. The Commissioner of Taxation (1977) 138 CLR 106

HEARING

MELBOURNE

#DATE 14:6:1990

Counsel for the Appellant: Mr H.J. Myers QC and Mr J.W. de Wijn

Counsel for the Respondent: Mr D. Graham QC and Mr C.M. Maxwell

Solicitors for the Appellant: Mallesons Stephen Jaques

Solicitor for the Respondent: Australian Government Solicitor

ORDER

1. The appeal be dismissed.

2. The appellant pay the respondent's costs of the appeal.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

The question for decision in this appeal from the judgment of a single Judge of this Court (Woodward J.) is whether the Commissioner was correct in including in the taxpayer's assessable income for the year of income ended 30 June 1984 the sum of $382,903 either as income according to ordinary concepts within sub-s. 25(1) of the Income Tax Assessment Act 1936 ("the Act") or as profits to which the first limb of s. 26(a) attaches.

Before the learned primary Judge and on appeal to this Full Court the parties confined their submissions to sub-s. 25(1) on the basis that, if the Commissioner did not succeed under that provision, he would not succeed under s. 26(a).
The sum of $382,903 represented the profit which arose from the sale by the taxpayer during the 1984 year of income of two properties in High Street, Belmont, a suburb of Geelong ("the Belmont properties").
The facts have been fully stated in the judgment of the primary Judge so it will be sufficient if I state them shortly.
The taxpayer is a wholly owned subsidiary of the Chamber of Manufactures Insurance Limited ("C.M.I."). C.M.I. is wholly owned by the Australian Chamber of Manufactures, an organisation of employers registered at the relevant time under the Conciliation and Arbitration Act 1904 and which was a tax exempt organisation pursuant to s. 23 of the Act. C.M.I. has carried on business in the general insurance field since 1914.
The taxpayer was incorporated on 7 October 1971 in order to serve as a property investment company through which surplus funds of C.M.I. could be invested. Property investment was decided upon because of its perceived security, steady returns and protection from the effects of inflation. The reason for establishing a separate company was that it was neater and more convenient to keep property investment separate from the insurance and insurance related activities of C.M.I.
It was believed by C.M.I. that funds which it did not require for insurance purposes would be better invested and controlled by the taxpayer with the same experienced board members than returned to the Chamber of Manufactures which has a regular turnover of leadership and no continuing access to skills in the property investment area. Until 1988 the board membership of C.M.I. and of the taxpayer was identical. The taxpayer had no staff of its own and all of its services were performed by the staff of C.M.I. When the taxpayer was incorporated its purpose was to purchase commercial or industrial properties, mainly in Victoria, but not in the Central Business District of Melbourne which was seen as too expensive for purposes of investing funds of the parent company believed to be surplus to its requirements. The purchase moneys were lent by the parent company to the taxpayer which during its early years paid a nominal rate of interest; but after it had become established the rate was raised by stages to the normal market rate. It was intended that each property purchased would be held indefinitely in the sense of as long as it continued to provide and to promise for the future a satisfactory return by way of rent, after allowing for outgoings, and did not present any major problems in its management.
Decisions about the purchase of properties seem always to have been made by the board of C.M.I. and recorded in the minutes of that board under the heading "C.M.I. Services Pty. Limited". The primary Judge found that doubtless this was because the funds being committed were those of C.M.I. which would be lent to the taxpayer. Each decision to negotiate a purchase was based on a written recommendation from C.M.I.'s management. The resolutions of the C.M.I. board were reflected in subsequent resolutions of the board of the taxpayer.
The taxpayer was never called upon to repay any loan from C.M.I. for the purpose of paying out any actual or anticipated insurance claim. When a property was sold the amount borrowed from the parent company was refunded, but any surplus from the resale which exceeded the amount of the loan was retained by the taxpayer. All moneys borrowed by the taxpayer from C.M.I. have been repaid in recent years, presumably out of retained profits from rents and resales. The loan moneys were not required by C.M.I. for its insurance purposes. Because of the time required to sell real estate it is not a practicable form of investment for moneys which may be required to meet insurance claims. Readily realisable assets are always retained for that purpose.
The primary Judge found that the purchase and resale of real estate by the taxpayer did not form part of the investment activities of an insurance business and was not "a mere adjunct to the business of C.M.I. as an insurer". His Honour held that, on the contrary, those purchases constituted an independent or free standing investment operation even though the buying of real estate was governed by the willingness of C.M.I. to make the particular loan of surplus funds, and the decision, in principle, to sell the Belmont properties was made when the directors were meeting as the board of C.M.I.
The board of the taxpayer received six monthly reviews of properties held by it. These reviews were provided for information rather than action. No sale of any property was determined upon by the board as a result of a six monthly review. If a sale was ever decided upon following such a review, as occurred in relation to the Belmont properties, it was because an express recommendation to sell was submitted by management to the board at the same meeting.
The taxpayer acquired its first property at a date which is now uncertain but was probably early in 1974. It purchased three further properties that year, one in 1976, five in 1977, three in 1978, seven in 1979, three in 1980 and three more between 1981 and 1984. Only one property has been acquired by the taxpayer since 1984. In total twenty-seven properties were purchased by the taxpayer of which sixteen were sold, one was in the process of being sold at the time of the trial and ten were then still held by the taxpayer.
It is not necessary to recite the history of the buying and selling of properties by the taxpayer except the Belmont properties, which are the subject of this appeal, since the primary Judge analysed the history fully and his analysis was not challenged before us.
The Belmont properties were bought separately but sold together. The primary Judge found that the funds with which the Belmont properties were purchased were surplus to any requirements of the insurance business of C.M.I. and that they would have been returned as dividends to the only shareholder of that business, the Australian Chamber of Manufactures, had that body not preferred to have the moneys re-invested under expert guidance. Number 118-122 High Street, Belmont was bought in November 1977 for $408,171 and number 107-121 High Street, on the opposite side of the highway, was bought on 5 April 1979 for $1,029,259. The properties were sold together in September 1983 for $1,820,333, leaving a profit of $382,903 which is the amount in contest. The proceeds of sale of the Belmont properties were returned in large part to C.M.I. which put them into its pool of funds for investment.
The primary Judge found that there were two main reasons for the sale of the Belmont properties. One reason was that the returns from rental had not achieved the expected levels and were likely to decrease rather than increase. The other reason was that the foundations of both buildings were insecure and could result in future problems with both the tenants and neighbours. The structural problems also cast doubt over the security of the moneys invested. These doubts as to the suitability of the properties for investment purposes tended to be confirmed when it took some twelve months to find a buyer for them. The decision to sell the Belmont properties was first made by the board of C.M.I. on 30 July 1982, not by the board of the taxpayer. His Honour found that board members were seriously concerned by these structural problems and that they probably played the major role in the decision to sell the properties. The board was advised that it would get a better result if the two properties were sold together.
His Honour found that, at the time the Belmont properties were purchased and sold, the board of the taxpayer saw itself as engaged in a business of purchasing properties for long term investment purposes and not in the business of buying and selling real estate for the purpose of profit-making by sale. The Belmont properties were tenth and fifteenth in the chronological list of properties purchased. When the second of the two Belmont properties was purchased on 5 April 1979 none of the other properties previously purchased had been sold, although one was sold two months later. Only a property at Mitcham had been sold before the two Belmont properties were sold in September 1983.
His Honour found:

"Obviously it was within contemplation that any property purchased would ultimately be sold. Common sense dictated that if a property was not producing reasonable returns, or appeared to be moving in that direction, or was presenting serious management problems, its sale would have to be seriously considered. But in the case of each purchase I am satisfied that property speculation was not in the minds of the board members and the hope and expectation was that the property would be retained for a considerable number of years in (the taxpayer's) portfolio ... it is clear that there was never any fixed lower limit for yield, below which a property would not be purchased or an existing property would be sold; but (the taxpayer) existed to make profits from property investments, whilst at the same time protecting its capital base."

Later in his reasons for judgment the primary Judge said:

"... I am satisfied that profit-making by sale formed no part of the reasons for acquisition of the subject properties; but I am left in some doubt as to the state of mind of the relevant officers of the (taxpayer) and C.M.I., on the general question of resales, both when the original purchases were made and when they decided to sell the Belmont properties. The question also remains, if they did then foresee further sales for reasons other than profit-making, whether the expectation of those sales, probably resulting in profit-making, makes such a sale 'a normal operation in the course of carrying on the business of investing for profit'".

His Honour found that the purchases and sales of the Belmore properties were part of a pattern which involved

"... the expectation and intention at the time of purchase that the properties in question would be resold, in the ordinary course of (the taxpayer's) business, if their prospective yields, in relation to current market values, made it prudent to do so. That was a significant reason for the sale of the Belmont properties, in the sense that I am not confident that the structural problems would have led to their sale if the properties had been performing well. It follows that the profits derived from resale constituted income, within ordinary concepts."

His Honour found that the board of C.M.I. was at all times concerned to behave prudently concerning its investments through the taxpayer and this meant that,

"... while not attempting to wring the last dollar from its portfolio by constantly disposing of properties with below average performance, it recognised the desirability of selling, on reasonable terms, any properties which were performing distinctly below expectations and were not likely to improve."

His Honour reached the conclusion: "... that the management and board of both C.M.I. and (the taxpayer) genuinely hoped that, when properties were purchased, they would each provide a satisfactory investment over a number of years. However they recognised that, as their portfolio grew, there would be cases where their expectations were disappointed and it would be sensible to sell. The circumstances leading to such disappointments could include low returns because of difficulties with tenants or tenants' business failures. They might also include problems arising from physical circumstances such as structural failures of the buildings themselves or unhelpful nearby developments. A third circumstance which would cause a prudent investment manager to consider selling would be an upsurge in the property market, or an increase in value of the particular property, which was not properly reflected in higher rents, or which was not expected to be permanent."

His Honour referred to London Australia Investment Company Limited v The Commissioner of Taxation (1977) 138 CLR 106 and said that, although the present case was not as clear as in that case, he preferred to describe the taxpayer's history

"as involving the quite frequent sale of properties, mostly at a substantial profit, for the purpose of protecting the rental yield of its portfolio."

However his Honour "adapted" the language of Gibbs J. in London Australia:

"... in finding that the sale of the properties was a normal operation in the course of carrying on the business of investing for profit."

His Honour held that the tax was correctly assessed, that the taxpayer's notice of objection was correctly disallowed. He dismissed the appeal with costs.
Submissions
None of the findings of fact made by the primary Judge were challenged by either party, though inferences which his Honour drew from them were challenged in varying respects by counsel for the taxpayer. The principal attack made upon the findings of the primary Judge centred on the application by his Honour of the decision of the High Court in London Australia. Counsel for the taxpayer submitted that the principle established in that case is that the profit on the realisation of investments is assessable as income under ordinary concepts only if the investments have been acquired with a purpose (not necessarily a dominant purpose) of profit-making by sale. This principle was said to be derived from the judgment of Jacobs J. in London Australia, especially at 128-129, and the reasons for judgment of Mason A.C.J., Wilson, Brennan, Deane and Dawson JJ. in Federal Commissioner of Taxation v Myer Emporium Limited (1987) 163 CLR 199 at 213 where, in a passage to which I shall refer later, their Honours referred to the discussion by Gibbs J. in London Australia at 116-118 in terms which, according to the submission of counsel for the taxpayer, really amounted to adoption of what Jacobs J. said about the matter at the pages mentioned earlier.
Counsel for the taxpayer submitted that Woodward J. erred in applying London Australia and in holding that that decision made it clear that

"... if one of a series of investments is sold by an investment company because it is not performing as well as others - particularly if the reason for that failure is that an increase in value has lowered the rate of return - then such a sale is in the course of the business of profit-making."

It was argued that this is not the principle established by London Australia. Counsel submitted that, in the light of the finding by Woodward J. that "profit-making by sale formed no part of the reasons for acquisition" there is no scope for the application to this case of London Australia.
Woodward J. admitted evidence and took into account sales of real estate made by the taxpayer after the end of the 1984 year of income. Ground 7 in the taxpayer's notice of appeal asserted that his Honour erred in law in taking that evidence into account, but the point was not argued before us in light of the decision of a Full Court of this Court in Federal Commissioner of Taxation v Harris (1980) 43 FLR 36.
Counsel for the Commissioner submitted that the profit which the taxpayer derived as a result of the sale of the Belmont properties was correctly characterised by his Honour as income because those realisations were acts done in what was truly the carrying on of its business of investing in property for profit.
An alternative argument was put on behalf of the Commissioner that it is an integral and essential part of the business of an insurer to invest surplus funds in various forms of income-earning investments, to realise them and use or re-invest the proceeds from time to time. It was argued that the taxpayer simply performed part of the investment activities of C.M.I.'s insurance business, namely, the property investment activities, that the business of the taxpayer was a mere adjunct to the business of C.M.I. as an insurer and that the property investment activities of the taxpayer in buying, holding, managing and selling real estate could not be viewed in isolation, divorced from the activities of its parent. It was not undertaking an independent or "free-standing" investment operation; its actions in buying and selling property were wholly dictated by the requirements, wishes and capacity of C.M.I.; and the assets acquired by the taxpayer cannot be simply disregarded on the basis that they were surplus to the requirements of C.M.I.'s business. They were part of a reserve fund available to meet claims and were at relevant times essential to C.M.I.'s ability to satisfy statutory solvency requirements. Counsel for the Commissioner relied upon the judgment of Gibbs J. in London Australia and submitted that any differences in approach between Gibbs J. and Jacobs J. were not resolved in favour of the views of Jacobs J. by Myer Emporium which, in any case, was concerned with an exceptional or isolated disposition, not (as in the present case) with transactions carried on in the ordinary course of a taxpayer's business.
Findings
Whether profit realized on the sale by a taxpayer of one of its investments is capital or income is answered by applying the test enunciated by the Lord Justice-Clerk (The Right Honourable J.H.A. MacDonald) in Californian Copper Syndicate (Limited and Reduced) v Harris (1904) 5 TC 159 in a passage which has been often cited with approval, though described by Barwick C.J. in London Australia at 112 as a "truism" which has given it "a delphic significance". The principle was stated in Colonial Mutual Assurance Society Limited v Federal Commissioner of Taxation (1946) 73 CLR 604 in the joint judgment of Latham C.J., Dixon and Williams JJ. at 614 in these terms:

"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: Lomax v Peter Dixon and Sons Limited (1943) KB 671. But in the words of the Lord Justice-Clerk in Californian Copper Syndicate v Harris (1904) 5 Tax Cas 159 at p 166 which had 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'."

Gibbs J. cited this passage from the High Court's judgment in Colonial Mutual in London Australia and went on to say at 116:

"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' (73 CLR at 615). However it is in my opinion established by this and 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 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 Goldmines N.L. v Commissioner of Taxation (W.A.) (1938) 59 CLR 729 at p 740."

Whether the Belmont properties were acquired on the capital account of the taxpayer for the purpose of adding to its profit-making structure as the means of producing rental income rather than as part of the profit earning activity within that structure must be answered by applying the test expounded in Californian Copper. As Gibbs J. said in London Australia at 118:

"the test suggested in Californian Copper Syndicate v Harris ... is applicable to any business."

London Australia is a case which offers guidance to the resolution of the present case. London Australia Investment Company Limited, the taxpayer, was an investment company. Its shareholders were mostly residents of the United Kingdom. Its principal object was to invest mainly or wholly in Australian securities for the purpose of producing dividend income which it could distribute to its shareholders. The taxpayer held a large portfolio of Australian shares. During the relevant years of income (the years 1967, 1968 and 1969) the directors of the taxpayer met each month to decide whether shares should be bought or sold and during that period the taxpayer engaged in a continuous large scale activity in buying and selling shares. In deciding what shares should be bought, sold or retained the taxpayer was guided by a number of principles, but one important consideration in buying shares was that the shareholding should immediately or within a reasonable time produce a dividend yield (the return on the shares calculated as a percentage of their market value) of 4% or better. In buying shares the taxpayer was influenced by their "growth potential", that is the expectation that they would produce a greater dividend yield. The taxpayer never bought shares for the purpose of profit making by sale or with the intention of selling them or simply because their market value was likely to increase. It bought shares to hold as an investment to yield dividends but it foresaw that it was likely that the shares would increase in market value and hoped that this would occur. If the shares did increase in value, but the dividend rate did not correspondingly increase, the dividend yield would fall and the taxpayer would then be likely to sell the shares.
In the years in question there was a steady rise in share prices and in consequence the dividend yield of many shares held by the taxpayer fell and many shares were sold. The shares sold in each of the years in question exceeded a million dollars in value and amounted to at least one-tenth of the total value of the shares held in that year. The moneys realised on the sale of the shares were not, under the articles of association of the taxpayer, available for dividend and could be used to buy further shares or to make up a future capital loss.
The learned trial Judge in London Australia found that the main or dominant purpose actuating the acquisition of the shares was not profit making by sale and held that the surpluses did not fall within s. 26(a) of the Act; but held that they were properly treated as income within s. 25 of the Act. The High Court by majority (Gibbs and Jacobs JJ., Barwick C.J. dissenting) held that the profits were part of the taxpayer's assessable income.
Gibbs J. applied the test suggested in Californian Copper to which reference has been made earlier. His Honour said at 116 that the taxpayer

"... naturally placed considerable reliance on the finding that the shares were not bought for the purpose of selling them at a profit. That is indeed an important circumstance." Gibbs J. approved at 117 the finding of the trial Judge: "... that during the three years in question it was an integral part of the taxpayer's business to deal in shares, in the sense that switching of investments was desirable to produce the best dividend returns and was indeed necessary if the taxpayer's policy of investing in shares with growth potential was to be adhered to."

Gibbs J. found that the trial Judge was correct in holding that the profits made on the sale of the shares were assessable income and said at 117:

"Although the company's business was to invest in shares with the primary purpose of obtaining income by way of dividends, the conduct of the investment business required that the share portfolio should be given regular consideration, and that shares should frequently when the dividend yield dropped, which for practical purposes usually meant when the shares went up in value. The taxpayer systematically sold its shares at a profit for the purpose of increasing the dividend yield of its investment. The sale of the shares was a normal operation in the course of carrying on the business of investing for profit. It was not a mere realisation or change of investment."

Jacobs J. considered the questions in the case as being whether the profit which arose from the acquisition and disposal of the shares was income in the sense of profit arising from the carrying on of a profit making undertaking within the second limb of s. 26(a) or as a result of the application of s. 25. His Honour said at 127 and 128:

"... in the circumstances of the present case it is unnecessary to distinguish between these two questions. In each case the profit will only be income if it arose from the carrying on of a business undertaking. The identification and characterisation of the business carried on by the taxpayer is the essential task ... If the acquisition and disposal of property is part of a business of so doing, the position is significantly different. There must still be a purpose of resale because resale is part of the description of the relevant business, and, since business has in it the notion of profit-making rather than loss-making there must no doubt be a purpose of resale at a profit. But the significant difference is that the purpose of resale need not be the sole purpose or the primary or dominant purpose, as in the case under the first limb of s. 26(a). It need only be one of the purposes. And in this context the word 'purpose' is hardly if at all distinguishable from intention or expectation. The dominant or primary purpose may be to obtain income from the items of property acquired but if there is a purpose or intention or expectation of selling at a profit if and when a suitable occasion arises then one condition of carrying on a business of buying and selling at a profit is satisfied. If a man makes a business of acquiring property with a dual purpose of enjoying it or its profits and of reselling it eventually at a higher price than he paid for it, then not only the income from the property but also the profit on resale will be income in the ordinary sense of the term, and within the second limb of s. 26(a). Therefore, once profits on sale are found not to fall within the first limb of s. 26(a), the determinate is the carrying on of a business, not any associated business in the general sense, but the specific business of acquisition with a purpose or intention or expectation of resale and subsequent resale with consequent profits."

His Honour concluded at 130-1 that the evidence taken as a whole strongly supported the conclusion:

"That a purpose or intention or expectation implicit in the carrying into effect of its investment policy was that shares acquired would be resold if and when an occasion arose which would make it desirable so to do and an element of desirability was that there would be greater financial benefit in disposing of the shares at an enhanced value than in retaining them. The fact that enlargement of dividend income was the dominant purpose does not gain say the existence of a concurrent purpose of resale if and when that resale would throw up a profit which could be used to enlarge the dividend income. The massive scale of the activities in the years in question practically compels the inference that the investment policy was one which in its inception and throughout the course of carrying it into effect would in the expected state of the rising market require frequent and regular realisations of shares whenever they rose in market price before dividends from them were increased."

As mentioned earlier counsel for the taxpayer relied on the judgment of Jacobs J. to found a submission that the principle established in London Australia is that the profit on the realisation of the investments is assessable as income under ordinary concepts only if the investments were acquired for the purpose (not necessarily a dominant purpose) of profit making by sale. It is important to remember that Jacobs J. found it unnecessary on the facts of the case to distinguish between the two questions whether the profit which arose from the acquisition and disposal of the shares was a profit arising from the carrying on of a profit making undertaking within the second limb of s. 26(a) and whether it was income according to ordinary concepts under s. 25. Much of what his Honour said was directed to circumstances where it was part of the business of the taxpayer to acquire and dispose of property. In that context his Honour said there must be a purpose of resale at a profit because business has in it the notion of profit making and that that purpose must be one of the purposes. But his Honour observed that even in that context the word "purpose" was "hardly if at all distinguishable from intention or expectation". His Honour went on to find at 131 that on the facts of the case the inference was practically compelled

"that the investment policy was one which in its inception and throughout the course of carrying it into effect would in the expected state of the rising market require frequent and regular realisations of shares whenever they rose in market price before dividends from them were increased."

I do not read Jacobs J.'s reasons for judgment as departing from the well established principles which determine whether a taxpayer has derived income according to ordinary concepts pursuant to sub-s. 25(1) and which do not require that a taxpayer who carries on a business must necessarily have a purpose of resale at a profit when assets are acquired in the course of carrying on the business.
The approach adopted by Jacobs J. was not fundamentally different from the approach taken by Gibbs J., though there are discernible differences in emphasis on some matters.
In Myer Emporium the High Court (Mason A.C.J., Wilson, Brennan, Deane and Dawson JJ.) referred, apparently with approval, to the analysis by Gibbs J. in London Australia at 116-118 of the question when profits made on the realization or change of investments may constitute income and made no reference to any perceived difference in principle between the judgments of Gibbs J. and Jacobs J.
Nor can I discern any support for the argument of counsel for the taxpayer that the High Court in Myer Emporium, by referring to the discussion by Gibbs J. in London Australia at 116-118, did so in terms which essentially adopted what Jacobs J. said at 128-129. First, the High Court made no reference in Myer Emporium to the judgment of Jacobs J.; and the High Court could not be regarded as having impliedly adopted an approach of one Judge of the High Court in London Australia when making specific reference only to the judgment of another Judge in the same case. Plainly their Honours intended to do exactly what they said, namely, to refer to the discussion by Gibbs J. in London Australia. However, it is important to note the context in which the High Court referred to that discussion by Gibbs J.. The reference was made by the High Court at 213 in the context of a close analysis of the question whether a receipt may constitute income if it arises from an isolated business operation or commercial transaction entered into otherwise than in the ordinary course of the carrying on of the taxpayer's business. The facts in Myer Emporium were special and unusual.
The Myer Emporium Limited ("Myer") lent $80m to an associated company for a period exceeding seven years at an interest rate of 12.5 percentum per annum. Three days after the loan was made Myer assigned to an unassociated financier, in accordance with an arrangement entered into before the loan was made, "the moneys due or to become due as the interest payment (pursuant to the loan agreement) and interest thereon." The consideration for the assignment was $45.47m which was paid immediately. The consideration was calculated as the value at the date of assignment of the right to interest over the period of the loan. Myer was the holding company of a group which carried on business principally of retail trading and property development. The borrower was brought into the group as a wholly owned subsidiary of Myer shortly before the transaction with the intention of its becoming the finance company within the group. The sum lent by Myer to the finance subsidiary represented for the most part the proceeds of the sale by Myer to another subsidiary, recently formed for the purpose of holding shares in other subsidiary companies which owned shops and shopping centres.
The High Court held that the consideration for the assignment constituted part of Myers assessable income in the year of its receipt as income under s. 25 of the Act and also as profit arising from the carrying on or carrying out of a profit-making undertaking or scheme under s. 26(a).
The High Court expressly applied the principles laid down in Californian Copper and analysed closely the distinction made in Californian Copper between a mere realization or change of investment and "an act done in what is truly the carrying on or carrying out of a business". It was in the context of discussing the proposition that a mere realization or change of investment is not income that the High Court made reference to the judgment of Gibbs J. in London Australia. Myer Emporium was concerned with an isolated transaction which required a close examination of the facts relating to the acquisition of the relevant asset, namely, the consideration for the assignment. Nowhere in the judgment of the High Court can I discern any disagreement with the approach of the majority in London Australia. Nor did their Honours seek to distinguish London Australia. London Australia was a case where the process of disposal of the relevant assets was part of the business activities of the taxpayer.
London Australia is plainly relevant to the present case but is not directly comparable to it. The sale of shares was a normal operation in the course of carrying on the business of London Australia of investing for profit. There was a large volume of share transactions, described by Jacobs J. as a "massive" scale of activities, in the relevant years of income and continual monitoring of the share portfolio to assess whether it was necessary to retain or sell them. The monitoring process was engaged in pursuant to a specific policy adopted by London Australia as to when shares ought to be sold. That policy was framed in terms directed to preserving the dividend yield of the shares, but the application of it had the effect of maximising the total gains to London Australia from both dividends and price increments on sale.
In the present case there was a considerably lower volume of transactions, though this is not unexpected since the transactions involved real estate not shares. Most properties were bought and held by the taxpayer for reasonably substantial periods of time. The reasons which led to the sale of properties included difficulties with tenants, structural faults in the buildings which threatened their safety, upsurge in the price of real estate which was unlikely to be sustained and perceptions of prospective falls in rental yield.
The critical question in this case is whether the primary Judge correctly held that the taxpayer, in carrying on the business of investing in real estate for the purpose of producing income, bought and sold the real estate, in particular the Belmont properties, as part of that business. The central finding of his Honour was that the purchases and sales of the Belmont properties were part of "a pattern" which involved

"the expectation and intention at the time of purchase that the properties in question would be resold, in the ordinary course of (the taxpayer's) business, if their prospective yields, in relation to current market values, made it prudent to do so."

In one sense most investors in property, real or personal, who primarily seek a satisfactory return of income on their investment, make their investment decisions with an eye to the possibility of resale if the income does not come up to expectation. Speaking generally, they do not carry on the business of buying and selling those assets. But if their activities are in real estate, in substantial sums and not inconsiderable in volume and are undertaken with the intention of reselling the properties if the income yield is not satisfactory the question becomes more complex. The answer depends on the facts of the particular case.
In applying the criterion stated in Californian Copper where the taxpayer is a company it is necessary to have regard to the nature of the company, the character of the assets realised, the nature of the business carried on by the company and the particular realisation which produced the profit: Ruhamah Property Co. Ltd. v Federal Commissioner of Taxation (1928) 41 CLR 148 at 154, Hobart Bridge Co. Ltd. v Federal Commissioner of Taxation (1951) 82 CLR 372 at 383, cited in London Australia by Gibbs J. at 116. Also in London Australia Jacobs J. said at 129:

"It would seem that a course of activity on the part of a company otherwise engaged in commercial activity may more readily be termed a business than one on the part of an individual but no great emphasis should be given to this feature. C.f. Western Goldmines N.L. v Commissioner of Taxation

(W.A.) (1938) 59 CLR 729 per Latham C.J. at 733."

The fact that the taxpayer did not buy real estate for the purpose of selling it at a profit is an important consideration. But, as the primary Judge found, there was a pattern discernible in the policy of the taxpayer in investing in real estate which involved it being resold if its prospective returns from rental fell below acceptable levels. Although the taxpayer's business was to invest in real estate for the primary purpose of obtaining income by way of rental, the conduct of that investment business required that the real estate portfolio should be considered and monitored on a fairly regular basis and that real estate should be sold when its rental yield, measured in relation to market value, dropped to an unacceptable level. The purchase of the Belmont properties is the directly relevant example of the application of that policy.
The taxpayer was carrying on the business of investing for the purpose of producing income; but the facts disclose that the buying and selling of real estate was done as part of that business of the taxpayer of investing for the purpose of producing income. The profits which were realised on the sale of the Belmont properties were profits of the business and income within ordinary usages and concepts and so fell within s. 25.

Although property speculation was not present in the minds of the board of the taxpayer or the board of C.M.I., the taxpayer was plainly aware of the desirability of selling properties which were performing distinctly below expectations and were not likely to improve. The taxpayer recognised that as its portfolio grew there would be cases where the expectations were not recognised and it would be necessary to sell the properties. The taxpayer's activities involved the quite frequent sale of properties, mostly at a substantial profit, for the purpose of protecting the rental yield of its portfolio of real estate investment. The sale of the properties was a normal operation in the course of carrying on the business of investing for profit. I respectfully agree with the primary Judge's conclusion that the purchases and sales of the Belmont properties were part of a pattern which involved "the expectation and intention at the time of purchase that the properties in question would be resold, in the ordinary course of (the taxpayer's) business, if their prospective yields, in relation to current market values, made it prudent to do so."
In view of these findings I do not find it necessary to consider the alternative submission of counsel for the Commissioner that the business of the taxpayer was so inextricably linked with the activities of C.M.I., its parent, that the taxpayer's business should be viewed as simply being part of the investment activities of C.M.I.'s insurance business and that the taxpayer's business was a mere adjunct to the business of C.M.I. as an insurer. The activities of the taxpayer cannot, of course, be divorced from those of C.M.I., but I do not find it necessary to approach the facts of this case as if the taxpayer was but an investment arm of its parent and fell broadly within the description of the business of insurance. As Jacobs J. pointed out in London Australia at 129 there may be a significant difference between a banking or insurance business which involves investment activity and the course of investment activity in the London Australia case itself (129-130).
Nor is it necessary in this case to examine the relationship between sub-s. 25(1) and s. 26(a), a relationship which has been the subject of considerable discussion in the decided cases and which is comprehensively reviewed in the judgment of Mason J. (as his Honour then was) in Federal Commissioner of Taxation v Whitfords Beach Pty. Limited (1982) 150 CLR 355 at 376-384. Also, as mentioned earlier, the parties confined their submissions to sub-s. 25(1).
I would dismiss the appeal with costs.

JUDGE2

I have had the advantage of reading the Reasons for Judgment of Lockhart J. and I agree with them. I also agree with the orders his Honour proposes.

JUDGE3

I agree that the appeal should be dismissed with costs, and I agree in the reasons for judgment of Lockhart J.

[1990] FCA 259

14 JUNE 1990