Commissioner of Taxation v Westfield Limited

[1991] HCATrans 184

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IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Sydney No S34 of 1991

B e t w e e n -

COMMISSIONER OF TAXATION

Applicant

and

WESTFIELD LIMITED

Respondent

Application for special leave

to appeal

MASON CJ
DEANE J

McHUGH J

Westfield 1 5/8/91

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON MONDAY, 5 AUGUST 1991, AT 10.12 AM

Copyright in the High Court of Australia

MR D.H. BLOOM, QC:  May it please the Court, in that matter

I appear with my learned friend, MR S.M.P. REEVES,

for the applicant. (instructed by the k1stralian

Government Solicitor)

MR R.J. ELLICOTT:  Your Honours, I appear with my learned

friend, MR R.F. EDMONDS, for the respondent in this

case. (instructed by Freehill Hollingdale and

Page)

MASON CJ: Yes, Mr Bloom.

MR BLOOM:  Your Honours, this case raises the question

whether it is appropriate to place a limitation on

what was said by this Court in Myer Emporium and,

if so, what limitations should be applied to the

observations in that case.

Your Honours, the Full Federal Court,

reversing Mr Justice Sheppard at first instance,

was concerned not to give the observations in Myer

too wide an interpretation lest the distinction,

they said, between capital and revenue profits be

eliminated. However, in our respectful submission,

the Full Court went too far the other way and

interpreted Myer in a more narrow manner than is

appropriate.

The Full Court seems to have held that profit

from the sale of land will not be included in the

assessable income unless it can be shown either

that the taxpayer's business ordinarily involves

the activity of buying and selling land or the land in question was purchased for the purpose of profit

making by its sale,.the sale being the very means -

they added that word."very" to what Your Honour

said in Myer - of profit making envisaged at the

time of acquisition.

Your Honours, the Full Court did not, in

terms, pose for itself the question whether the

sale of this land was the mere realization of an

ordinary investment. If it had put the question in

that way it would, in our respectful submission,

have been bound to answer the question in the

negative and so to have included the amount in

question in the assessable income. The result, in

our respectful submission, is that on the proper

application of Myer the profit here in question was

assessable income.

It is necessary to take Your Honours very

briefly to the facts. The business of the

respondent is referred to in the application book,

firstly, at page 3, line 10:

Westfield 2 5/8/91

The principal evidence given in support of the applicant's case was given by

Mr Saunders who is its Deputy Chairman.	At
the time of the transaction, and until
November 1987, he was one of two joint
managing directors of the applicant;	Mr Lowy
was the other.	Mr Saunders said that the main

activity of the applicant was the design,

construction, letting and management of

shopping centres. Additionally the applicant

designed and sometimes built hotels and office

buildings. The shopping centres were usually

held for long term investment but sometimes

the applicant was one of a number of joint

venturers, sometimes lease back arrangements

were involved and sometimes the applicant did

not own any part of the shopping centres which

it designed and built.

So it did it on the land of others. And then, if

Your Honours go to page 30, Your Honours will see

at the bottom of that page, about line 23, there is

a reference to a 1978 reconstruction in which the

shopping centres that were held by the respondent
were sold:

After that date, save for the land the subject of the appeal, the appellant had never

directly owned any land.

So it is clear that at all material times the

business of the respondent included the management, construction and development of shopping centres on land which it did not itself own.

Your Honours, the subject land was a strategic

parcel - it was so described by the witnesses -

without which it was clear that at all material

times development and construction of a shopping

centre could not have taken place. And in the

words of a director of the respondent, the land was

bought in order to secure a strategic site to

ensure Westfield's involvement in the proposed

developing in the area. And, of course, it was

sold for that same purpose.

Your Honours, there was no suggestion made

that the land was bought as what might be called an

ordlnary investment. If Your Honours go to page 36

in the application book, line 17, there is a

reference in the judgment of Mr Justice Hill, with

whom the others agreed in the Full Federal Court,

to the learned trial judge's judgment:

His Honour found that the appellant had

never given up its intention of having a hand

in the designing and construction of the

Westfield 3 5/8/91

centre, if that course were at all possible.

His Honour said:

"He (ie Mr Saunders) acquired the Seganfreddo

land -

that is the land in question -

with the short term object of keeping a
competitor out; but his ultimate goal was to

play a significant part in the eventual

development which he was sure would take

place. The whole of his negotiations with the

AMP were on that basis.

Then, at page 41, still in the judgment of

Mr Justice Hill, about line 8:

Mr Saunders, in his evidence, agreed that as

at the time of exercise of the option -

that was the option to acquire the subject land -

he did not know exactly how the development

would take place, he knew only that it would.

It was frankly acknowledged by Mr Saunders

that the Seganfreddo's land was critical to

any overall development of the whole site.	It
was a strategic land holding.

And at page 34, if Your Honours will go back to

that, at line 24:

Negotiations between the appellant and

AMP continued over a long period of time.

Early, the appellant made it plain that it

would be prepared to sell the land it had

acquired to AMP, but that the sale might

depend upon arrangements being entered into

between AMP and the appellant for the design

and building of the centre.

Your Honour, it is our submission that in those

circumstances it does not matter that buying and

selling land was not a usual business activity of

the respondent. Participation in shopping centre

development was the usual business activity and the
land was bought and sold in pursuance or
furtherance of that usual business activity. In
those circumstances, in our respectful submission,
it is hard to find anything in Myer that would

suggest that the profit on the sale of the land

should be excluded from the assessable income.

McHUGH J: That is not the sort of point we would grant

special leave on in a tax case, is it? I mean, if

you are to get special leave in this case you have

Westfield 4 5/8/91

got to demonstrate in some way the Full Court has

misinterpreted and misapplied Myer.

MR BLOOM:  Yes, your Honour.

McHUGH J: Well, now, what is your point there?

MR BLOOM:  We say that it has limited profits on or

assessability of profits on sale of land to two

situations only: one, where the usual business

activity is buying and selling land - and that, we

say, is too much of a limitation to start off with

because the usual business here, to use these facts

as an example, involve construction of shopping

centres on other people's land and a block of land

was bought and sold to secure participation in

someone else's development. So it may not have

been the case that it was clear that the land would

be sold at the time of its purchase. And it may

also be the case that purchase and sale of land was

not a usual activity. But that, we say with

respect, is not the only circumstance in which a

profit on the sale of land can be assessable

income, yet that is what the Federal Court seems to

have held - in the ordinary business sense.

MASON CJ:  You have got to fasten, have you not, on the

passage at the bottom of 52 and the top of 53?

MR BLOOM:	Yes, your Honour.
MASON CJ:	And submit that that is a misinterpretation of the Myer principle?
MR BLOOM:	Yes, that is a misinterpretation of the second

part of the Myer principle, with respect,

Your Honour. The first part is - if I could take

Your Honours to page 31, firstly, in the judgment

of the Full Court, line 3, and then come to 51, 52.

At page 31 Mr Justice Hill says this:

There was no suggestion that, in the

years immediately preceding 1981, the

appellant carried on a business of buying and

selling land -

that is the business with which he is concerned.

And then, at page 51, at about line 9:

It cannot be said, in the present case, that

resale of land was part of the ordinary

business activity at all, or, for that matter,

a necessary incident of that business

activity. That business activity was

relevantly the construction of shopping

centres, their leasing or management, either

Westfield 5/8/91

on the appellant's own land, on the land of

others, or on joint venture land.

So it is quite clear that the sale was in

furtherance or pursuance of the ordinary business

activity, even though the ordinary business

activity was not buying and selling land. And to

say that one has to find an ordinary business

activity of buying and selling land before the sale

is an ordinary business activity itself is, with

respect, to narrow Myer too much.

Mr Justice Sheppard, in his judgment,

described what His Honour referred to as the whole

of the transaction - by which His Honour probably

meant the transaction of purchase and sale - as

being one carried out in the ordinary course of the

applicant's business and part of an overall profit

making venture. His Honour the trial judge, of

course, also applied Myer to get to that result;

we say, with respect, correctly.

If by this his Honour attempted to

suggest that the transaction was one done in

the ordinary course of business, his Honour

fell into error -

with respect, it was not His Honour but the Full

Court who fell into error by limiting the ordinary

business activity aspect of Myer.

It can hardly be assumed that his Honour was

suggesting that the business of the appellant

was concerned -

and here we have it again -

with resale of land at a profit, because that
would have been contrary to his Honour's own

findings of fact.

Once it is clear that the activity of buying	and selling, which generated the profit, was
not an activity in the ordinary course of business -

that is buying and selling -

or, for that matter, an ordinary incident of

some other business activity, the profit in

question will only form part of the assessable

income ..... if -

there was the -

purpose of profit-making at the time of

acquisition.

Westfield 6 5/8/91

And then they go to the second aspect of Myer, that is the extraordinary business transaction and say, at the bottom of page 52 -

Second, where a transaction falls outside the

ordinary scope of the business, so as not to

be a part of that business, there must exist,

in my opinion, a purpose of profit-making by

the very means by which the profit was in fact

made. So much is implicit in the decision of

the High Court in Myer.

The passage from Myer is at page 47 of the appeal book and it is a passage which is expressed by way

of inclusion of things in the assessable income,

not what is excluded from the assessable income,

not by way of limitation in any respect.

"Although it is well settled that a profit or

gain made in the ordinary course of carrying
on a business constitutes income, it does not

follow that a profit or gain made in a

transaction entered into otherwise than in the

ordinary course of carrying on the taxpayer's

business in not income. Because a business is

carried on with a view to profit, a gain made

in the ordinary course of carrying on the

business is invested with a profit-making

purpose, thereby stamping the profit with the

character of income. But a gain made

otherwise than in the ordinary course of

carrying on the business which nevertheless

arises from a transaction entered into by the

taxpayer with the intention or purpose of

making a profit or gain may well constitute

income. Whether it does depends very much on

the circumstances of the case. Generally

speaking -

and Your Honours were generally speaking -

however, it may be said that if the

circumstances are such as to give rise to the
inference that the taxpayer's intention or

purpose in entering into the transaction was to make a profit or gain, the profit or gain

will be income, notwithstanding that the

transaction was extraordinary judged by

reference to the ordinary course of the

taxpayer's business. Nor does the fact that a

profit of gain is made as the result of an

isolated venture or a 'one off' transaction

preclude it from being properly characterized

as income: Federal Commissioner of Taxation v
Whitfords Beach Pty Ltd. The authorities

establish that a profit or gain so made will constitute income if the property generating

Westfield 7 5/8/91

the profit or gain was acquired in a business
operation or commercial transaction for the

purpose of profit-making by the means giving

rise to the profit".

We would have thought, with respect, that those

words aptly covered the situation and the facts of

this case unless those words are to be somehow

limited.	And those words were not words of
limitation.	The Court, in Myer, was not setting

out the only circumstances in which a gain will be

assessable income. Yet not only have those words

been treated as setting out the only circumstances,

they have been treated as being further limited by

addition of the word "very" to the word "means" -

appearing at the bottom of page 47 - and by

treating those as the exclusive circumstances in

which such a profit would be assessable.

We can only say again here, Your Honours, that this was an acquisition of land to secure

participation in the development - that was the
ordinary business activity of the respondent - and

the land was sold for the very purpose for which it

was acquired. Your Honours, Myer would hold such

an amount assessable if properly construed by the

Federal Court. With respect, it is only an

incorrect construction of the decision in Myer that

could lead to this other result.

MASON CJ:  Has this view been acted upon in other cases in

the Federal Court?

MR BLOOM:  No, Your Honour, not yet, but it is regarded as

very important; important enough, I can tell Your

Honours, to have halted a general ruling that the

Commissioner was in the process of drafting on Myer

for release to the public, until this matter is

clarified.

McHUGH J: What about in Spedley? Was this approach used by

the Federal Court in Spedley?

MR BLOOM: It was a different approach, the approach in

Spedley, Your Honour, to the best of my

recollection. A different approach, a mere

realization approach. But the Federal Court here

did.not ask that question, did not say, "Is this

the mere realization of an ordinary investment?",

and that is the way, with respect, they could and

should have approached it, on Myer, and yet they

did not.

In Myer, Your Honour recalls that the Court

held that by no stretch of the imagination could

the transaction in that case be viewed as the mere

realization of a capital asset.

Westfield 8 5/8/91

DEANE J:  Do you give any meaning at all to the last words

in that extract, "by the means giving rise"? As I

follow your argument, that extract should be read

as if those words were not there?

MR BLOOM:  No, Your Honour. The means here were the means

envisaged at the time of acquisition of the land; that is that the land was acquired to be used for the purpose of securing participation. In other

words it is a broader concept than just acquired

for sale.

DEANE J: Well, can you look at the sentence?

MR BLOOM:	Yes, Your Honour.
DEANE J:	"The authorities establish" - - -
MR BLOOM:	Yes:

that a profit or gain so made will - -

DEANE J: Is not your argument that that would be an

accurate statement of the law if it ended with the

word "profit-making"?

MR BLOOM:  Yes.

DEANE J: Well, that was what I asked you.

MR BLOOM:  Yes, but those words are apposite to apply to our

case, we say, Your Honour, because the means was

envisaged at the time of acquisition.

DEANE J:  I was directing my question to your argument of

principle and, as I follow it, your argument is

that no significance is to be attached to the

addition of those words at the end of that

paragraph.

MR BLOOM:

Yes, Your Honour, I would put it that way but,

there, in that passage, the Court was talking about

extraordinary profits; that is, as we understand

it, profits made outside the ordinary course of the

business. We say that the first error of the

Federal Court is not to treat this as an ordinary

business transaction, as a sale in pursuance or

furtherance of that which was the usual business of

this particular taxpayer, and that they narrow it

too much there as well as when we get to the

extraordinary business transaction.

McHUGH J:	I thought it was not only in this case but in other cases that the Full Court of the Federal
Court had used those words at the end of that
passage as confining Myer; or am I wrong in that?

Westfield 9 5/8/91

MR BLOOM:  Your Honour, I have not reread Spedley before

corning here this morning. It was a casa,

certainly, where the Court said that not every

profit temporarily arising in the course of a

business is income. You must look to see whether

the asset is an investment or capital asset, in

which case if there is a mere realization of it you

will still have income, and Myer has not taken that

away. But that is a very different case, with

respect, to this, Your Honour.

MCHUGH J: Yes, I follow.

MR BLOOM: There is no case since Westfield yet, but there

are bound to be many of them and this is the

Commissioner's concern, that the courts and the

tribunals following Westfield will apply a

principle different and narrower to that expressed

by this Court in Myer.	Your Honours, those are our
submissions.

MASON CJ: Yes, Mr Ellicott.

MR ELLICOTT:  Your Honours, this is another attempt by the

Commissioner to have this Court do something which

it has been doing since, in effect, time immemorial

and that is to construe section 25 or its

equivalent in relation to sales of property. And

although there has been some debate in earlier days

Myer's case did, one would have thought,

encapsulate within it all the principles that were apply section 25 or, if need be, if they are
needed in order for the Commissioner and the

relevant, to section 26(a) so far as it may still

be relevant.

This case is really a decision on its own

facts. The facts are clear, the business is not

confined in the way in which my friend indicated.

line 3: If Your Honours go to page 30 of the appeal book,	Where the appellant itself designed and
constructed shopping centres on land owned by
it, those shopping centres had usually been
held by it as long term investments.
Sometimes, however, the appellant, after
building the shopping centre, would sell and
lease back the centres as part of a financing
arrangement. Sornetirnes·the appellant was one
of a number of joint venturers which would own
and operate the shopping centres, and
sometimes the appellant did not own any part of the shopping centres which it designed and
built.

Westfield 10 5/8/91

Now, its profit yielding subject was either a

shopping centre that it owned or a shopping centre

that it constructed and managed and the contracts
in relation to that - in other words, it was the
contractual arrangement which was the profit
yielding subject, or sometimes the appellant merely

designed and built it. Those were all ways in which they acquired a profit yielding subject;

that is to say, the contractual arrangement or the

land with a shopping centre on it.

Now, sometimes it would be in a joint venture

arrangement. Never, was the acquisition and sale

of land part of its business. That is absolutely

clear. And in relation to this particular land it

was absolutely clear on the facts that when it was

acquired sale of it was a mere possibility. So not

only was sale not contemplated, as a purpose that

is, but it was not contemplated at a profit. And

when the sale took place there was no bargaining to

get the best price - because it was a strategic

area of land so far as the whole shopping

development was concerned, but when that happened

there was no bargaining to get the best price.

Indeed, the sale price was far below some

valuations that were made at the time. That was a

merely incidental matter. So the conduct of the

taxpayer was completely consistent with the notion

that its interest, its business, was actually

either owning shopping centres or having some

arrangement or contractual arrangement in relation

to their building and management or in relation to

their building alone or design and building.

Because Myer's.case had some other passages in

it and they do happen to be referred to - in the

judgment of Mr Justice Sheppard, if Your Honours go

to pages 15 and 16 - and they stress how important
these words are that Mr Justice Deane referred to

in the earlier passage. At line 28:

"The important proposition to be derived from

Californian Copper and Ducker is that 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, so long as the

taxpayer entered into the transaction with the

intention or purpose of making a relevant
profit or gain from the transaction."

Now, the transaction alleged here is the purchase of the land and its sale, and that just cannot be

satisfied. And it was an isolated transaction.

Over the page, about line 12:

Westfield 11 5/8/91

"It is one thing if the decision to sell an

asset is taken after its acquisition, there

having been no intention or purpose at the

time of acquisition or acquiring for the

purpose of profit-making by sale. Then, if

the asset be not a revenue asset on other

grounds, the profit made is capital because it

proceeds from a mere realization."

Now, that is obviously an adoption of all the old

authorities on the subject. Nothing new, if I may

say so, about that sentence or about the next.

"But it is quite another thing if the decision

to sell is taken by way of implementation of

an intention or purpose, existing at the time

of acquisition, of profit-making by sale, at

least in the context of carrying on a business

or carrying out a business operation or

commercial transaction."

Your Honours, those passages have to be read with

the passage that my friend referred to Your Honours

at pages 47 and 48. And those words at the foot of

page 47, "by the means giving rise to the profit",

are critical words. My friend wants to read them

out but Your Honours did not lightly put them in

there and they are repeated in those other two

passages. And what the Commissioner is really

seeking to do is to say this: that simply because

a company which is carrying on some business which

involves land or property, then if it sells it and

sells it at a profit, merely because it is a

possibility that it might sell it, not at a profit

but it might sell it, because it is carrying on a
business - and without identifying the business -

then any profit is assessable.	Now, that just
cannot be right.

The head office of an insurance company,

obviously, may be acquired with the possibility of

selling it some day - and it has happened.

Australian Catholic Assurance, the Commissioner

tried to do it, he did not succeed.	And in other
earlier cases in this Court.

If David Jones acquired that property years

and_ years ago, and they now sell it. No doubt when

it was acquired the mere possibility of sale would

have been in the minds of the directors but is it

going to be said that properties like that are

going to be - that the profit on those properties

is going to be assessable merely because it is done

in the course of some business activity; that is

carrying on a retail shop. And what the

Commissioner is really trying to do here - if I may

suggest it - in essence, is to get behind the

Westfield 12 5/8/91

capital gains provisions because, as he points out
in his affidavit, section 25 can stand before the

capital gains provisions.

What does capital gains give that section 25

does not give? What it gives is indexation. And

the result is that one might think that the capital gains provisions are fairer. And the Commissioner,

in this and probably in other cases - he will not give up, he will keep on putting this point until

the Court rejects it, and I hope it will do it

today - what the Commissioner is seeking to do is

to establish a proposition that if a company -

particularly a company because if it is set up to

conduct a business it is a business - if a company

sells a property then, if it makes a profit, it

must be a profit of the business.

That proposition was laid to rest decades ago.

If it were accepted or if what my friend wants this

Court to look at now is accepted, it would mean
overturning principles which I suggest are now old

enough to be called established since time

immemorial. And, Your Honours, we would submit

that this is a case in which the Court should

refuse special leave.

MASON CJ: Thank you, Mr Ellicott. Yes, Mr Bloom.

MR BLOOM:  Your Honours, the Commissioner does not contend

that the mere realization of a capital asset gives

rise to assessable income; David Jones Market

Street property, for instance, or the head office

of an insurance building. All the Commissioner

says is this: that in this case the property was

bought not be held as an investment or capital

asset in the true sense but bought to be used to

secure participation in the shopping centre

development and it was sold for that purpose. And

nothing that this Court said in Myer should exclude the profit thus arising from the assessable income.

If Your Honours please.

MASON CJ: The Court will take a short adjournment to

consider the course it will take in this matter.

AT 10.40 AM SHORT ADJOURNMENT

UPON RESUMING AT 10.51 AM:

Westfield 13 5/8/91

MASON CJ:	The Full Court of the Federal Court is the ultimate court of appeal in taxation matters
subject only to the exceptional cases in which this
Court grants special leave to appeal. It follows
that a question of fundamental principle must arise
for decision in such a matter before this Court
will grant special leave.
Although the Commissioner contends that the decision of the Full Court of the Federal Court
rests on a misinterpretation of the principle
enunciated by this Court in the Myer Emporium case,
we consider that this case turns on its own facts
and does not call for the grant of special leave to
appeal.  The application is therefore refused.
MR ELLICOTT:	Would the Court make an order for costs?
MASON CJ:	You do not oppose that, Mr Bloom?
MR BLOOM:	No, Your Honour.
MASON CJ:	The application is refused with costs.

AT 10.51 AM THE MATTER WAS ADJOURNED SINE DIE

Westfield 14 5/8/91