Federal Commissioner of Taxation v Whitfords Beach Pty Ltd

[1982] HCA 8

HIGH COURT OF AUSTRALIA

Gibbs C.J., Mason, Murphy and Wilson JJ.

FEDERAL COMMISSIONER OF TAXATION v. WHITFORDS BEACH PTY. LTD.

(1982) 150 CLR 355

17 March 1982

Income Tax (Cth)

Income Tax (Cth)—Income—Assessable income—Profit-making undertaking or scheme—Acquisition by company of land for purpose other than sale—Shares in company acquired by property developers—Purpose of new shareholders to sell land for profit—Articles of association changed—Land rezoned, subdivided and sold—Whether proceeds assessable income—Income Tax Assessment Act 1936 (Cth), ss. 25(1), 26(a).

Decisions

1982, March 17.
The following written judgments were delivered: - GIBBS C.J. The facts of this appeal are not in dispute. (at p359)

2. For the purposes of this judgment it is sufficient to summarize them as follows. The respondent, Whitfords Beach Pty. Ltd. ("the Taxpayer"), in 1954 acquired 1,584 acres of land north of Perth. The land was acquired to secure for the original shareholders of the company access to shacks which they occupied on the beachfront and not for the purpose of profit-making by sale or for any business purpose. On 20 December 1967 all the shares in the taxpayer were bought by three companies which had not previously been shareholders. The three companies bought the shares only to obtain control of the land, and with the intention that the taxpayer would cause the land to be developed, subdivided and sold at a profit. The total purchase price for the shares was $1,600,000. It was expected that the re-zoning and development of the land would take from three to five years and that thereafter the subdivided lands would be sold at a profit estimated at about $7,000,000. In addition a part of the land was to be used as sites for commercial purposes. On the same day, 20 December 1967, a new set of articles was adopted by the taxpayer, and two of the purchaser companies were appointed to be general managers for a period of about fifteen years to do all within their power to develop and subdivide the land and to sell it in subdivisional allotments. Thereafter the managers began to search for a source of water supply and to investigate means of providing roads, electricity, sewerage and other essential services. Progress accelerated in 1969 when the Government of Western Australia, for reasons of policy, began to encourage and support the subdivision of land in the district. In October 1969 the necessary re-zoning of portion of the land was effected. In 1970 subdivision of that portion of the land commenced. The first sales of allotments were made (by selling agents of the taxpayer) early in 1971 and in subsequent years substantial sums were received by the taxpayer as the proceeds of the sales of the allotments. The Commissioner assessed the taxpayer to income tax on profits from the sale of the lands that emerged during the years 1972, 1973, 1974 and 1975. The question that now falls for decision is whether such profits were assessable income of the taxpayer. If that question is answered in favour of the Commissioner, further questions arise, namely, whether the land was committed to a profit-making undertaking or scheme in 1967 or at a later date, and whether the land was wholly committed, or committed piece by piece as the development or the subdivision occurred. However, the parties before us were in agreement that if the first question were to be answered in favour of the Commissioner it would be preferable to remit the matter to the Federal Court to enable the subsidiary question to be decided. (at p360)

3. A profit made on the sale of an asset may be treated as assessable income within the Income Tax Assessment Act 1936 (Cth), as amended, ("the Act") for one of a number of reasons. In the first place, if the profit should be regarded as income in accordance with the ordinary usages and concepts of mankind, it will be assessable income within s. 25(1) of the Act. When the owner of an investment chooses to realize it, and obtains a greater price for it than he paid to acquire it, the enhanced price will not be income within ordinary usages and concepts, unless, to use the words of the Lord Justice Clerk in Californian Copper Syndicate v. Harris (1904) 5 Tax Cas 159, at p 166 , that have so frequently been quoted, "what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business". The Lord Justice Clerk went on to say (1904) 5 Tax Cas, at p 166 :
"What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being - Is the sum of gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operation of business in carrying out a scheme for profit-making?"
In Jones v. Leeming (1930) AC 415 it was held by the House of Lords that, assuming that there was no adventure or concern in the nature of trade within s. 237 of the Income Tax Act 1918 (U.K.), the profit made on an isolated transaction of purchase and resale did not become income merely because the property was bought with the intention of reselling it at a profit. This decision did not involve any new question of law, as Viscount Dunedin pointed out (1930) AC, at p 421 . It depended on the finding of fact that there was no adventure or concern in the nature of trade. Prima facie, an accretion to the capital value of a security between the date of purchase and that of realization is a capital gain (Colonial Mutual Life Assurance Society Ltd. v. Federal Commissioner of Taxation (1946) 73 CLR 604, at p 614 ), and the ground of the decision in Jones v. Leeming was simply that "the profit on an isolated sale which is not a trading transaction" is a capital accretion and therefore not income: see per Lord Macmillan (1930) AC, at p 430 . The case did not decide that the fact that the purchase and resale was an isolated transaction necessarily meant that it was not a trading adventure - many cases, before and since, including Californian Copper Syndicate v. Harris (1904) 5 Tax Cas 159 and Edwards (Inspector of Taxes) v. Bairstow (1956) AC 14 , are opposed to that proposition; what was held was that if, as a matter of fact, the transaction was not a trading transaction, the profit did not become income merely because the asset had been bought with the intention of making a profit on its resale. Jones v. Leeming was decided under English legislation the scheme of which is different from that provided by the Act. However, the conclusion that a profit made on the realization of a capital asset does not become income by reason only of the fact that the asset was acquired for the purpose of profit-making by sale accords with ordinary concepts. Such a profit is ordinarily regarded as a capital gain, even though the asset was bought for the purpose of making the gain. (at p362)

4. Soon after Jones v. Leeming was decided, the Income Tax Assessment Act 1922 (Cth), which was then in force, was amended by the Income Tax Assessment Act 1930 (Cth) by inserting in the definition of "income" words which were repeated in s. 26(a) of the Act. Section 26(a) reads as follows:
"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". The profit on the sale of an asset may be assessable income within this provision, even though it would not ordinarily be regarded as income and would not fall within s. 25(1) of the Act. It is sometimes said that the purpose of enacting s. 26(a) appears to have been to overcome the decision in Jones v. Leeming: see H. R. Lancey Shipping Co. Pty. Ltd. v. Federal Commissioner of Taxation (1951) 5 AITR 135, at p 140 ; White v. Federal Commissioner of Taxation (1968) 120 CLR 191, at p 208 ; and McClelland v. Federal Commissioner of Taxation (1970) 120 CLR 487, at p 499 . That statement seems correct so far as the first limb of s. 26(a) is concerned. Having regard to the existing state of the law to which I have referred, the first limb can in my opinion only have been intended to treat as income profits arising from the acquisition and sale of property which was acquired by the taxpayer for the purpose of profit-making by sale, notwithstanding that the profits did not arise in the carrying on or carrying out of a business - notwithstanding, in other words, that the profits would ordinarily be regarded as a capital gain. The words of the first limb, when given their ordinary and natural meaning, support this conclusion, for they contain nothing to suggest that capital gains are to be excluded, and if they did apply only to profits that constituted income in accordance with ordinary concepts they would effect no alteration to the law as already established. The purpose of the second limb of s. 26(a) is however less clear. The enactment of the second limb was not necessary to undo the effect of Jones v. Leeming (1930) AC 415 ; the first limb would have been sufficient for that purpose. The second limb is expressed in words taken from the judgment of Knox C.J., and Gavan Duffy, Powers and Starke JJ. in Ruhamah Property Co. Ltd. v. Federal Commissioner of Taxation (1928) 41 CLR 148, at p 151 , where their Honours said:

"The principle of law is that profits derived directly or indirectly from sources within Australia in carrying on or carrying out any scheme of profit-making are assessable to income tax, whilst proceeds of a mere realization or change of investment or from an enhancement of capital are not income nor assessable to income tax . . . . "

The judgment goes on to refer to "the question whether the sale was an operation of business in carrying out a scheme of profit-making" (1928) 41 CLR, at p 152 - words of course taken from the judgment in Californian Copper Syndicate v. Harris (1904) 5 Tax Cas 159 - and it is apparent that their Honours did not intend to depart from the law as declared in that and other authorities, under which profits from carrying on or carrying out a scheme of profit-making were treated as income only if the scheme could be described as a business, a trading adventure, or a commercial venture. However the words used in the second limb of s. 26(a) do not refer to an operation of business. It may be perhaps that the draftsman of s. 26(a) thought that he should, out of an abundance of caution, enact into legislation the principles already established by the courts, since, if s. 26(a) had contained only the words of the first limb, it might have been thought that the Parliament intended to lay down an exclusive test, with the result that profits arising from the sale of property not acquired for the purpose of profit-making by sale could never be treated as income. I do not consider it admissible to attempt to discover the intention of the Parliament in enacting s. 26(a) by having regard to statements made by the Minister when the Bill was introduced, but I must add that such material of that kind as I have seen does not reveal any clear reason for the enactment of the second limb of s. 26(a). (at p363)

5. In Premier Automatic Ticket Issuers Ltd. v. Federal Commissioner of Taxation (1933) 50 CLR 268, at pp 297-298 , Dixon J. said that the adoption of the provision which later became s. 26(a) "probably has no more effect than to give legislative authority to the tests propounded and applied in decisions of this Court", but added: "No doubt, as the language of the statute it must receive a more literal application". In Official Receiver v. Federal Commissioner of Taxation (Fox's Case) (1956) 96 CLR 370, at p 387 the Court expressed the matter rather more strongly, saying:

"Moreover, although s. 26(a) is founded on language which was used in judicial decisions . . . yet it provides a statutory criterion which must be applied directly and cannot be treated as going no further and producing no different result than would a criterion expressed as 'exercising trade' or 'carrying on a business'."

This passage was cited with apparent approval by Taylor and Owen JJ. in White v. Federal Commissioner of Taxation (1968) 120 CLR, at p 219 , and I myself have already accepted its correctness: Federal Commissioner of Taxation v. Williams (1972) 127 CLR 226, at p 250 . If the words of the second limb are literally construed they are wide enough to include profits which are income according to ordinary concepts as well as profits of a capital nature. In so far as they include profits which are income in character they appear to overlap to some extent the provisions of s. 25(1): see White v. Federal Commissioner of Taxation (1968) 120 CLR, at p 219 and Federal Commissioner of Taxation v. Bidencope (1978) 140 CLR 533, at p 552 . In practice in some (if not most) cases it has been found unnecessary to determine whether the profits in question were assessable under s. 25(1) or s. 26(a); it was enough to decide whether or not they were taxable. In A. C. Williams v. Federal Commissioner of Taxation (1972) 128 CLR 645, at pp 652-653 Stephen J. has given examples of cases in which it was regarded as immaterial under which provision (s. 25(1) or s. 26(a)) the receipts in question became assessable income, the question in issue being whether they were assessable at all. Scottish Australian Mining Co. Ltd. v. Federal Commissioner of Taxation (1950) 81 CLR 188 , a case much relied on in argument in the present case, provides another example: see at p. 195. Although in many cases the assessment will be the same whether the case is regarded as falling within s. 25(1) or s. 26(a), there may be cases in which a different result will be arrived at depending on which provision is held to be applicable. A. C. Williams v. Federal Commissioner of Taxation was held to be such a case. I am not persuaded that a difference will result from the fact that s. 25(1) refers to "gross income" and s. 26(a) to "profit", for I agree with Mason J. in Commercial and General Acceptance Ltd. v. Federal Commissioner of Taxation (1977) 137 CLR 373, at pp 382-383 , that "gross income" includes "a net amount which is income according to the ordinary concepts and usages of mankind, when the net amount alone has that character, not being derived from gross receipts that are revenue receipts". However, the question before us in the present case asks not merely whether any part of the proceeds constitutes assessable income but if so on what ground. In case it should become material it is therefore necessary to consider whether, if both s. 25(1) and s. 26(a) appear to justify the inclusion of an amount in the assessable income, and if different consequences might flow from regarding the income as included by one provision rather than by the other, the case should be held to be governed by s. 25(1) or by s. 26(a). There can I think be no doubt that when particular transactions (for example the buying and selling of stock in trade) which might otherwise fall within the words of s. 26(a) form part of the conduct of a wider business, it is not permissible to treat each such transaction as separately taxable under s. 26(a). In Investment and Merchant Finance Corporation Ltd. v. Federal Commissioner of Taxation (1971) 125 CLR 249, at p 255 Barwick C.J. said:

"In the first place it is an error in my opinion to think that the transactions of a business can be taken item by item and each treated as falling within s. 26(a). The business must be regarded as a whole, its receipts being assessable income from which the permitted deductions are to be deducted. Section 26(a) is intended in my opinion to deal with transactions which are entire in themselves and do not form part of a more extensive business. In that event they are regarded as yielding a profit which will be calculated according to the circumstances of the transaction, the profit only being assessable income."

In the same case Menzies J. said (1971) 125 CLR, at p 264 :

"I do not think that every business that involves the buying and selling of stock in trade is to be fragmented into a large number of separate transactions and the dealer taxed on the aggregate of the profits derived from each transaction considered separately . . . It is significant that s. 26(a) defines but one item to be included in assessable income, and, in my opinion, the whole of the carrying on of a business of buying and selling is not to be comprehended within s. 26(a), nor does that provision aptly apply to the particular dealings constituting, in total, the carrying on of a business."

These passages have been referred to with apparent approval by Stephen J. in A. C. Williams v. Federal Commissioner of Taxation (1972) 128 CLR, at pp 653-654 , and by Mason J. in Federal Commissioner of Taxation v. St. Hubert's Island Pty. Ltd. (In liq.) (1978) 138 CLR 210, at pp 229-230 . I respectfully agree that it is not possible to isolate the profits of a transaction which forms part of a wider business and to tax them separately as the profits of a profit-making undertaking or scheme. Such a result would be manifestly unjust, and it is not required by the words of s. 26(a), since it would not be a natural use of words to describe a dealing which forms an integral part of a wider operation as being itself a profit-making undertaking or scheme. (at p366)

6. The present case is not one in which the alleged profit-making undertaking or scheme forms part of a larger operation. The alleged scheme forms the whole of the taxpayer's operations. The question that arises is whether profits arising from the carrying on or carrying out of a profit-making scheme that itself constitutes the whole of the taxpayer's business are taxable under s. 26(a), notwithstanding that in the absence of the provisions of that paragraph the profits would fall within s. 25(1). In Investment and Merchant Finance Corporation Ltd. v. Federal Commissioner of Taxation Menzies J., at the conclusion of the passage that I have already quoted, went on to say (1971) 125 CLR, at p 264 :

"Section 26(a) deals with particular transactions which might otherwise escape from the tax net and it brings into assessable income profits, after outgoings attributable to the particular transaction have been taken into account."

Ordinarily the specific provisions of s. 26 will be given effect in preference to the general provisions of s. 25(1): see Reseck v. Federal Commissioner of Taxation (1975) 133 CLR 45, at pp 49,57 . However, the fact that the profits yielded by some transactions which fall within the literal meaning of the words of s. 26(a) will not be brought to tax under that provision, since the transactions form part of a more extensive business, supports the view that s. 26(a) does not apply where s. 25(1) is applicable. Moreover, any business conducted for profit can be described as a profit-making undertaking or scheme, but it is impossible to suppose that the Parliament intended (contrary to settled practice) that the profits of every business should be dealt with under s. 26(a) rather than under the general provisions of s. 25. Not without some doubt I have therefore reached the conclusion that although the provisions of s. 26(a), if given full effect, would overlap those of s. 25, the second limb of s. 26(a) applies only to "profits not attributable to gross income that has already been captured by s. 25", to use the words of Mason J. in Federal Commissioner of Taxation v. Bidencope (1978) 140 CLR, at p 555 . (at p367)

7. It is implicit in what I have said that I consider that the second limb of s. 26(a) includes profits which would not otherwise have fallen within s. 25, because they could not be described as income in the ordinary sense. I have discussed that question in Federal Commissioner of Taxation v. Bidencope (1978) 140 CLR, at pp 551-552 , and adhere to what I there said in relation to this aspect of the matter. However, I should make it clear that I regard it as established that profit yielded by the mere realization of a capital asset not acquired for the purpose of profit-making by sale would not be either assessable income within s. 25(1) or the profit arising from the carrying on or carrying out of a profit-making undertaking or scheme within s. 26(a): see Hobart Bridge Co. Ltd. v. Federal Commissioner of Taxation (1951) 82 CLR 372, at pp 383-384 ; White v. Federal Commissioner of Taxation (1968) 120 CLR, at p 219 ; and Federal Commissioner of Taxation v. Williams (1972) 127 CLR, at p 249 . If the second limb of s. 26(a) had the effect of including such profits in assessable income, the first limb would be entirely nugatory. (at p367)

8. It is clear that the first limb of s. 26(a) has no application to the present case. As I said in Steinberg v. Federal Commissioner of Taxation (1975) 134 CLR 640, at p 695 , to satisfy the first limb of s. 26(a), it is necessary that the property, whose sale yielded a profit, should be the same property as that which was acquired for the purpose of profit-making by sale. In the present case the property sold, the land, was not acquired by the taxpayer for the purpose of profit-making by sale, although the shares in the taxpayer were acquired by the present shareholders for the purpose of making a profit by the sale of the land. (at p367)

9. The question whether the profits were income within ordinary concepts depends on the application of the tests laid down in Californian Copper Syndicate v. Harris (1904) 5 Tax Cas 159 and in the cases that have followed that decision. Was what was done merely a realization of the taxpayer's asset, or was it something done in what was truly the carrying on or carrying out of a business? In other words the question is "whether the facts reveal a mere realization of capital, albeit in an enterprising way, or whether they justify a finding that the" (taxpayer) "went beyond this and engaged in a" (business of profit-making) "in land albeit on one occasion where however the words used are "a trade of dealing in land"; the words which I have ventured to substitute seem more consonant with the Australian authorities. The words "merely" and "mere" in these statements seem to me to be an important part of the definition of the line between profits that are taxable and those that are not. If the taxpayer does no more than realize an asset, the profits are not taxable. It does not matter that the taxpayer goes about the realization in an enterprising way, so to secure the best price. As I have said in Federal Commissioner of Taxation v. Williams (1972) 127 CLR, at p 249 :

"The situation is not altered by the fact that the landowner seeks and acts upon the advice of an expert as to the best method of subdivision and sale or by the fact that he carries out work such as grading, levelling, road building and the provision of reticulation for water and power to enable the land to be sold to its best advantage."

Further, the mere magnitude of the realization does not convert it into a business: Commissioner of Taxes v. British Australian Wool Realization Association (1931) AC 224, at p 252 . But if the taxpayer does engage in an operation of business, the proceeds are income and taxable. (at p368)

10. Counsel for the taxpayer naturally relied on a line of cases which exemplify the principle that a realization does not cease to be such merely because extensive work is done on the land in order that it will fetch the best price. Since the question to be decided is one of fact, it will be unprofitable to examine the particular circumstances of the various cases in which the question has been discussed. Perhaps the strongest from the taxpayer's point of view was the decision of Williams J. in Scottish Australian Mining Co. Ltd. v. Federal Commissioner of Taxation (1950) 81 CLR 188 . In that case a company, formed primarily to carry on the business of coal mining, in 1863 purchased land for the purpose of its coal mining operations. After those operations ceased, in 1924, the company subdivided the land, built roads and a railway station, made sites available for schools, churches and parks, and sold the subdivided parcels at a considerable profit. It was held that the profits should not be included in the company's assessable income. It is important to observe that the company had carried on coal mining on the land until it was no longer business-like to do so, and that it was not a company formed for the purpose of dealing in land, and that it had not in fact engaged in such a business (1950) 81 CLR, at pp 195, 197 . (at p368)

11. On the other hand, the Commissioner relied on Fox's Case (1956) 96 CLR 370 . That case, as has often been pointed out, was an exceptional one. Lands in process of reclamation were vested in the official receiver of the bankrupt estate of one Rankin, deceased. The official receiver continued the process of development that had been begun by Rankin, and sold the subdivided and developed blocks. Although the Court found that the purpose of the trustee of an estate in bankruptcy is to realize the estate (1956) 96 CLR, at pp 384-385 , and that the official receiver was not selling blocks as a person habitually trading in land, but was simply realizing assets in the way which appeared most advantageous (1956) 96 CLR, at p 386 , it was nevertheless held that the profit if any fell within s. 26(a). The reasons given by the Court for this conclusion were expressed as follows (1956) 96 CLR, at p 387 :

"But there can be little doubt that in embarking, in pursuance of the resolution of creditors, upon the course of strengthening the title to the land, persuading the Southport Town Council to continue the agreement and allow him to fulfil it, causing the work to be completed under contract and causing the sub-divisional sales to be made through commission agents, the official receiver was adopting a set plan with a view of securing from the ultimate sale of the land a much greater net return than otherwise could be expected. These activities were planned, organised and coherent. True it is that they formed only the final stages of a plan conceived by Rankin and carried partly into execution by him. But given the basal facts that land of a definite value was thus made to yield net proceeds considerably in excess of what otherwise could be obtained, it seems too difficult to deny that the official receiver adopted and pursued an undertaking or scheme that from his point of view satisfied the description 'profit-making' and that he carried it out."

This decision is a somewhat difficult one to understand. True it is that if applied to the present case it assists the case of the Commissioner. However, the reasons for judgment suggest that the facts that the activities were planned, organized and coherent, and that they produced profits considerably larger than could otherwise have been obtained, meant that an advantageous realization was converted into a profit-making scheme. If that is the ratio of the decision the case cannot stand with numerous other authorities. The decision may perhaps be supported on the footing that on the facts of the case the official receiver went beyond merely realizing the land. (at p369)

12. In the present case I gravely doubt whether the profits resulting from the development, subdivision and sale of the land would have been taxable if it had not been for the events that occurred on 20th December 1967. Had those events not occurred, the situation of the taxpayer would have been analogous to that of the company in Scottish Australian Mining Co. Ltd. v. Federal Commissioner of Taxation (1980) 81 CLR 188 . However, on 20th December 1967, the taxpayer was transformed from a company which held land for the domestic purposes of its shareholders to a company whose purpose was to engage in a commercial venture with a view to profit. Counsel for the taxpayer submitted that it was not permissible to blur the distinction between the company and its shareholders. That of course is true, but in deciding whether what was done was an operation of business, it is relevant to consider the purpose with which the taxpayer acted, and, since the taxpayer is a company, the purposes of those who control it are its purposes. In Ruhamah Property Co. Ltd. v. Federal Commissioner of Taxation (1928) 41 CLR 148 the majority of the Court regarded as important, if not decisive, the purposes with which the shareholders and directors of the company acted, although Isaacs J., who dissented, thought it erroneous to consider a company merely as machinery for carrying out individual purposes (1928) 41 CLR, at pp 160, 162, 166 . However, in my opinion Isaacs J. took too rigid a view of the effect of Salomon v. Salomon &Co. (1897) AC 22 if he thought that in determining the purpose with which a company acted it was not permissible to have regard to the intentions of the directors who controlled it. In the present case, the three companies which became the shareholders, or the two which became the managers (it matters not which), represented the directing mind and will of the taxpayer and controlled what it did, and their state of mind was the state of mind of the taxpayer: H. L. Bolton (Engineering) Co. Ltd. v. T. J. Graham &Sons Ltd. (1957) 1 QB 159, at p 172 , cited in Tesco Supermarkets Ltd. v. Nattrass (1972) AC 153, at pp 171, 187 ; and see Bernard Elsey Pty. Ltd. v. Federal Commissioner of Taxation (1969) 121 CLR 119, at p 121 . The purpose of those controlling the taxpayer was to engage in a business venture with a view to profit. Moreover, although the taxpayer was not formed for the purpose of selling land, after December 1967 it became a company which existed solely for the purpose of carrying out the business operation on which the new shareholders had decided to embark when they acquired their shares. It is in the light of these circumstances that the extensive work of development and subdivision is seen to be more than the mere realization of an existing asset and to be work done in the course of what was truly a business venture. For these reasons, although the case is not without its difficulties, I have concluded that the profits were income within ordinary concepts and taxable accordingly. (at p371)

13. Wickham J., at first instance, answered the first question raised for the determination of the Court as follows:

Question

Does any part of the proceeds of sale of the subject land constitute assessable income of the taxpayer, and if so on what ground?

Answer

14. Yes, all of the proceeds were assessable under the provisions of s. 25. (at p371)

15. For the reasons I have given I consider that this answer was correct, assuming as I do that "proceeds" was intended to mean "profit". I would accordingly allow the appeal, and restore that part of the order of Wickham J. As to the other questions raised, I would remit the matter to the Federal Court to determine the remaining questions. (at p371)

MASON J. The issue here, according to the judgments in the Federal Court, is whether the proceeds of sale are the mere realization of a capital asset or whether they are the end result of a business undertaking or scheme. The majority in the Federal Court (1979) 44 FLR 312; 28 ALR 637; 10 ATR 549; 79 ATC 4,648 thought that the proceeds were not income under s. 25(1) or s. 26(a) of the Income Tax Assessment Act 1936 as amended. Deane J., dissenting, considered that they were income under s. 25(1). (at p371)

2. The authorities, and there are many of them, need to be read with a close eye to the difference between the Australian and the United Kingdom legislation. In the United Kingdom the legislation taxes the net profits or gains of a business. Our Act proceeds by an entirely different method - taking the taxpayer's gross income (s. 25(1)), adding to it other receipts of which s. 26(a) is an atypical example (because it catches net profit), thereby arriving at his assessable income from which are subtracted allowable deductions where appropriate (s. 48), resulting in the ascertainment of his taxable income (see Commercial and General Acceptance Ltd. v. Federal Commissioner of Taxation (1977) 137 CLR 373, at p 381 ). Despite the existence of this statutory scheme it is accepted that s. 25(1) includes a net amount which is income according to the ordinary concepts and usages of mankind when the net income alone has that character, not being derived from gross receipts that are revenue receipts: Commercial and General Acceptance (1977) 137 CLR, at pp 381-383 . (at p372)

3. It has been a long-settled principle of revenue law that, unless a sale of property is made in an operation of business, the resulting profit will not be income according to the ordinary concepts and usages of mankind. The principle was expressed by the Lord Justice Clerk in Californian Copper Syndicate v. Harris (1904) 5 Tax Cas, at pp 165-166 , in these terms:
" . . . where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit . . . assessable to Income Tax. But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable, where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business . . . What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being - Is the sum of gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operation of business in carrying out a scheme of profit making?" (at p372)

4. This statement expresses the question which has to be decided when it is sought to apply s. 25(1) to a taxpayer who sells property at an enhanced value. Does s. 26(a) have a different application less favourable to the taxpayer? This is the next question to be considered. (at p372)

5. A provision corresponding to s. 26(a) was inserted in the Income Tax Assessment Act 1922, as amended, by Act No. 50 of 1930 as par. (ba) of the definition of "income". The amendment was given retrospective effect to 1 July 1922, the day that the Income Tax Assessment Act 1922 came into operation. It is evident that the amendment was made to overcome the perceived effect of the decision of the House of Lord in Jones v. Leeming (1930) AC 415 . There it was held that the profit made on the sale of two rubber estates acquired for the purpose of profit-making by sale, when the purchase and sale was an isolated transaction not being undertaken in the course of business or trade, was not in the nature of income but an accretion to capital. The decision in the case was complicated by the actual findings of the Commissioners - that the property was acquired with the actual intention of it being turned over at a profit and that, nonetheless, the transaction was not an "adventure or concern in the nature of trade". For an analysis of the case and its difficulties see "Section 26(a) and section 26AAA of the Income Tax Assessment Act" by Mr. Justice Asprey in Taxation Review Committee - Commissioned Studies (1975) 211, at pp. 214-216. (at p373)

6. The Treasurer, in his Second Reading speech, when introducing the bill incorporating the amendment in 1930 said:

"Certain provisions in the bill relate to the taxation of isolated transactions which have been undertaken for profit-making. Several judgments of individual members of the High Court have declared that such profits are taxable; but a recent judgment of the House of Lords decided that they are not the proceeds of a trade or business, and therefore not taxable under the income tax law of the United Kingdom. Although that judgment is not binding upon our High Court, it might be followed upon appeal, with considerable disadvantage to the revenue. To obviate such a change in the interpretation of our law, we are making it clear that the profits from such isolated transactions shall continue to be taxable here. It is proposed to apply the new provision to all past assessments owing to the existence of disputes on assessments for past years back to 1922- 23."

(Parliamentary Debates, vol. 125, pp. 3724-3725). The explanatory memorandum mentioned earlier in the Treasurer's speech stated:

"This amendment is merely a statutory declaration of what has for many years been accepted as settled law in Australia, viz., that a profit derived from any transaction or scheme entered into for the purpose of profit-making is income which is assessable to income tax notwithstanding that the transaction or scheme does not amount to or is not part of, a trade or business. The amendment is necessary in consequence of the fact that within the last few weeks the House of Lords has given a decision on an appeal against an assessment under the English Income Tax Act to the effect that the profit arising from an isolated transaction of the purchase and sale of property is not income, but is an accretion of capital, even where the property was purchased for the purpose of profit-making by sale. (Jones v. Leeming) . . . "

(Explanatory Notes, Income Tax Assessment Bill 1930, p. 4.) (at p373)

7. As I said in Wacando v. Commonwealth (1981) 148 CLR 1, at pp 25-27 , generally speaking, reference cannot be made to what is said in Parliament for the purpose of interpreting a statute. But in my opinion there are grounds for making an exception for the case where a bill is introduced to remedy a mischief. Then, to have regard to the purpose for which the legislation was enacted as stated by the Minister in charge of the bill would conform to the rule that extrinsic material is admissible to show the mischief which the statute is designed to remedy. I acknowledge that the inadmissibility of parliamentary debates, as an aid to the construction of statutes is supported by powerful authority. (See generally Bitumen &Oil Refineries (Australia) Ltd. v. Commissioner for Government Transport (1955) 92 CLR 200 ; Australasian United Steam Navigation Co. Ltd. v. Hiskens (1914) 18 CLR 646, at p 672 ; South Australia v. The Commonwealth (1942) 65 CLR 373 ; South Australian Commissioner for Prices &Consumer Affairs v. Charles Moore (Aust.) Ltd. (1977) 139 CLR 449 ; Davis v. Johnson (1979) AC 264 ). But there is a case for treating the Minister's statement, particularly when it is not contested, as cogent evidence of the mischief aimed at, evidence certainly as cogent as the extrinsic materials from which the court would draw an inference in many cases. (at p374)

8. In Assam Railways and Trading Co. v. Commissioners of Inland Revenue (1935) AC 445, at p 458 Lord Wright noted: " . . . that the language of a Minister of the Crown in proposing in Parliament a measure which eventually becomes law is inadmissible and the Report of Commissioners is even more removed from value as evidence of intention, because it does not follow that their recommendations were accepted." But his Lordship went on to refer (1935) AC, at pp 458-459 to Lord Halsbury L.C.'s use of the report of a commission in Eastman Photographic Materials Co. v. Comptroller-General of Patents, Designs, and Trade Marks (1898) AC 571, at p 575 because there was "no more accurate source of information as to what was the evil or defect which the Act . . . was intended to remedy". As Elmer A. Driedger points out in The Construction of Statutes, pp. 130-131, the Minister's speech should be admissible for the same purpose. (at p374)

9. There is some support in the cases for this view. In In re Mew &Thorne (1862) 31 LJ Bk 87, at p 89 , Lord Westbury referred to the report of a commission and to the speech of the member who introduced the legislation into the House of Commons and stated that he did so in order to ascertain the object to which the relevant provision was directed, having earlier noted that the court needed to ascertain the mischief or evil which existed under the antecedent law. In T. M. Burke Pty. Ltd. v. City of Horsham (1958) VR 209, at pp 216-217 Sholl J. referred to the Victorian Hansard to show that a provision amending the Local Government Act 1949 was introduced to remove a particular doubt. See also Griffith C.J. arguendo in Sydney Municipal Council v. The Commonwealth (1904) 1 CLR 208, at pp 213-214 ; Lord Denning M.R. in Sagnata Investments Ltd. v. Norwich Corporation (1971) 2 QB 614, at p 624 ; P. Brazil, "Legislative History, Statutes and Construction", University of Queensland Law Journal, vol. 4 (1961), 1, esp. at pp. 12-14; Pearce, Statutory Interpretation in Australia (1974), pars. 67, 219. (at p375)

10. In the United States of America where admittedly the courts make a much more generous use of legislative materials including debates, the established rule is "that debates, although inadmissible as evidence of legislative meaning, may be resorted to as evidence of the situation or 'evil' which led to the adoption of the statute in question . . . " (Sutherland, Statutes and Statutory Construction, 4th ed., vol. 3, p. 562; The Tap Line Cases (1914) 234 US 1, at p 27 (58 Law Ed 1185, at p 1195) ; Standard Oil Co. v. United States (1911) 221 US 1, at p 50 (55 Law Ed 619, at p 641) ). (at p375)

11. In this case, I hasten to add, the extrinsic material allows an inference to be drawn as to the purpose of the amendment, without the need to rely on the Treasurer's statement. (at p375)

12. Despite the Treasurer's statement there is a doubt as to whether the new provision, in particular its first limb, was merely a restatement of the general law as it had been understood in Australia before Jones v. Leeming. It had not been decided, conclusively or otherwise, that the profit derived from the sale of property acquired in an isolated transaction for the purpose of profit-making by sale was income. So in Blockey v. Federal Commissioner of Taxation (1923) 31 CLR 503, at pp 508-509 Isaacs J. had said:

"A mere realization of property though producing profit does not, as I have said, produce income. It is a mere enlargement of capital. But if a man, even in a single instance, risks capital in a commercial venture - say, in the purchase of a cargo of sugar or a flock of sheep - for the purpose of profit making by resale and makes profit accordingly, I do not for a moment mean to say he has not received 'income' which is taxable. I intimated during the argument that this was possible; and I leave it open".

See also Rydge, Commonwealth Income Tax Acts, 1st ed. (1923), p. 118; 2nd ed. (1929), p. 186. Even so, there were those - perhaps Isaacs J. was one of them - who, like the Treasurer, believed that the profit derived from the sale of property acquired in an isolated transaction for the purpose of profit-making by a sale was income because it was derived in a business operation carrying out a profit-making scheme. Jones v. Leeming apparently denied this conclusion and it denied the reasons underlying this conclusion because it seemed to say that a one-off transaction could not amount to a business operation carrying out a profit-making scheme. The obvious response to Jones v. Leeming therefore lay in the introduction of a provision like s. 26(a) which, first, specifically dealt with the facts in that case and, secondly, re-affirmed the general principles so as to fortify it against the House of Lords' decision. (at p376)

13. Some twenty-five years after Jones v. Leeming the Treasurer was vindicated, substantially if not entirely, by the House of Lords' decision in Edwards (Inspector of Taxes) v. Bairstow (1956) AC 14 . There it was decided that a profit arising from a joint venture involving the purchase of a complete spinning plant and its subsequent re-sale was liable to income tax. Although it was an isolated transaction not undertaken in the course of carrying on a business, the joint venturers bought the plant for the purpose of making a profit by resale. Because it involved a dealing with the plant for the purpose of making a profit, albeit in an isolated transaction, it was held to be an adventure in the nature of trade. Jones v. Leeming (1930) AC 415 was regarded as a decision which turned on the findings of fact there made. The irony of this is that the facts of Jones v. Leeming are not readily distinguishable from Edwards v. Bairstow and the finding of fact by the Commissioners in the latter case, which seems to have reflected the decision in the former case, was set aside on the ground that as it could not reasonably be supported there was a question of law involved. Edwards v. Bairstow, rightly in my opinion, overruled the proposition ascribed to Jones v. Leeming that a profit made on the sale of property acquired for the purpose of profit-making by sale, when the purchase and sale is an isolated transaction not undertaken in the course of carrying on a business, cannot constitute income. (at p376)

14. The first limb of s. 26(a) precisely covers the facts of Jones v. Leeming. However, the problem lies not so much in the first limb as in the second limb; it is to decide whether the second limb has an operation additional to the first limb and, if so, what it is. The language of the second limb reflects the remarks made by Knox C.J., Gavan Duffy, Powers and Starke JJ. in Ruhamah Property Co. Ltd. v. Federal Commissioner of Taxation (1928) 41 CLR 148 . There the Court held that the sale of property by the taxpayer was not "a business operation carrying out a scheme of profit-making but the realization of a capital asset" (1928) 41 CLR, at p 154 . These words are virtually identical with those used in Californian Copper. Their Honours said (1928) 41 CLR, at p 151 :

"The principle of law is that profits derived directly or indirectly from sources within Australia in carrying on or carrying out any scheme of profit-making are assessable to income tax, whilst proceeds of a mere realization or change of investment or from an enhancement of capital are not income nor assessable to income tax . . . "

Later they observed (1928) 41 CLR, at pp 151-152 :

"In our opinion the authorities show that the objects and powers of the Company contained in its memorandum and articles of association are not decisive of the question whether the sale was an operation of business in carrying out a scheme of profit-making, but that a consideration of all the matters advanced by the Company was relevant to a determination of that question . . . "

Subsequently, after the enactment of s. 26(a) in Premier Automatic Ticket Issuers Ltd. v. Federal Commissioner of Taxation (1933) 50 CLR 268, at p 298 , Dixon J., after quoting the passages already cited from Ruhamah, said: "The criterion, which the Legislature has now adopted and established, was formulated by the Courts in the absence of any statutory direction upon the way in which capital profits may be distinguished from income profits. So far as it lacks precision or is uncertain in its application, the cause is to be found in the powerlessness of the Courts to do more than state a wide general proposition and to apply it as each case arose. The statement of the proposition was not a definition, but rather an explanation of principle. No doubt, as the language of the statute it must receive a more literal application. It is not easy to say whether the expression 'profit-making by sale' refers to a sole purpose, or a dominant or main purpose, or includes any one of a number of purposes. The alternative 'carrying on or carrying out' appears to cover, on the one hand, the habitual pursuit of a course of conduct, and, on the other, the carrying into execution of a plan or venture which does not involve repetition or system . . . " (at p377)

15. The absence of any reference in the second limb to the expression "a business operation" or an "operation of business" excites the question whether the second limb was intended to alter the antecedent law. Later, Dixon J. was to say of s. 26(a) in Clowes v. Federal Commissioner of Taxation (1954) 91 CLR 209, at p 217 "It was aimed at bringing what might otherwise have been thought possibly to be capital profits within the conception of income." Subsequently in Official Receiver v. Federal Commissioner of Taxation (Fox's Case) (1956) 96 CLR 370, at p 387 the Court, including Dixon C.J., in its joint judgment said:
" . . . although s. 26(a) is founded on language which was used in judicial decisions . . . yet it provides a statutory criterion which must be applied directly and cannot be treated as going no further and producing no different result than would a criterion expressed as 'exercising trade' or 'carrying on a business'." (at p378)

16. The effect of these two statements is to acknowledge that, although the aim of s. 26(a) was to set to rest a controversial question by characterizing the profits there described as income, the profits described in the second limb might possibly include profits not held to be income under the general law. The important point, that made in Fox, is that the language of the second limb should be interpreted directly, and that it should not necessarily be constrained by reference to what had been said in earlier cases. The statement made in Fox is also significant in that it merely denies the proposition that the second limb contemplates an undertaking or scheme involved in "exercising trade" or "carrying on a business". It does not deny that the second limb contemplates a "business deal" or "business operation". (at p378)

17. The majority of the Judicial Committee in McClelland v. Federal Commissioner of Taxation (1970) 120 CLR 487 held that the second limb of s. 26(a) necessarily contemplated that the profit-making undertaking or scheme of which it speaks will be an "operation of business" or a "business deal". The minority were not prepared to subscribe to such a limitation, so it seems, though they considered that the object of the provision was to overcome Jones v. Leeming (1930) AC 415 . In McClelland the majority held that the profit made by a residuary beneficiary in an estate who, holding an interest in land through the estate, got in the outstanding interest and sold the greater part of the land to obtain finance was not taxable because her dominant purpose was to retain as much land as possible. Consequently, the transaction was not a "business deal" or "operation of business". I have some difficulty with this conclusion. I should have thought that by buying in an outstanding interest with a view to selling the greater part of the land to advantage the taxpayer entered into a "business deal" or an "operation of business". It is not easy to describe what occurred as the mere realization of an asset. (at p378)

18. Unfortunately there is an element of ambiguity in the expressions "business deal" and "operation of business" as there is in the adjectives "business", "commercial" and "trading" which have about them a chameleon-like hue, readily adapting themselves to their surroundings, different though they may be. In some contexts "business deal" and "operation of business" may signify a transaction entered into by a person in the course of carrying on a business; in other contexts they denote a transaction which is business or commercial in character. Although the majority in McClelland thought that s. 26(a) was mainly, if not wholly declaratory, of the existing concept of income, they did not by the references to "business deal" and "operation of business", necessarily mean a transaction entered into in the course of carrying on a business. (at p379)

19. It is of importance to note their Lordship's statement (1970) 120 CLR, at pp 494-495 that not only are wagers and lottery tickets excluded from profit-making undertakings or schemes, but "also . . . the purchase of investments bought by a private investor as a hedge against inflation and sold - perhaps long afterwards - at more than the purchase price", and the further statement (1970) 120 CLR, at p 495 that "The undertaking or scheme, if it is to fall within s. 26(a), must be a scheme producing assessable income, not a capital gain." There are two separate strands of thought embedded in these observations: (1) that the transaction must have about it some business or commercial flavour - the purchase of an investment by a private investor is not enough; and (2) the profit in view must be an income, not a capital, gain, according to ordinary concepts. (at p379)

20. Not all that was said in McClelland can now be accepted. The majority judgment fails to differentiate between the United Kingdom and the Australian systems of arriving at taxable incomes and employs expressions derived from the United Kingdom income tax legislation which have no place in our legislation. And there is the possibility that it insufficiently acknowledges that the operation of the second limb of s. 26(a) may extend to some gains of a capital nature according to general revenue law. (at p379)

21. I do not doubt that the majority was right to exclude from the second limb of s. 26(a) successful wagers and lottery windfalls. Perhaps the exclusion of private investments originally made as a hedge against inflation was more open to question but there is now a strong body of authority to support its exclusion. (at p379)

22. There have been those who have read the majority judgment as a declaration that the second limb merely catches gains on income account according to the ordinary usages and concepts of mankind, not capital gains - Eisner v. Federal Commissioner of Taxation (1971) 45 ALJR 110, at p 114 , per Walsh J.; Federal Commissioner of Taxation v. Williams (1972) 127 CLR 226, at pp 234-235 , per Stephen J.; Burnside v. Federal Commissioner of Taxation (1977) 138 CLR 23, at p 50 , per Aickin J. Others have said that the second limb extends to capital profits (Investment and Merchant Finance Corporation Ltd. v. Federal Commissioner of Taxation (1971) 125 CLR 249, at p 264 , per Menzies J.) or that McClelland may not leave the second limb with an operation that is otiose (Williams (1972) 127 CLR, at p 250 , per Gibbs J.; Federal Commissioner of Taxation v. Bidencope (1978) 140 CLR 533, at p 552 , per Gibbs J. (with whom I concurred)). (at p380)

23. It has been said that Barwick C.J., having initially favoured the first view, later concluded that s. 26(a) catches capital profits. I do not think that this statement does justice to his Honour's views which were elaborated and developed in A. L. Hamblin Equipment Pty. Ltd. v. Federal Commissioner of Taxation (1974) 131 CLR 570, esp at p 576 ; Steinberg v. Federal Commissioner of Taxation (1975) 134 CLR 640, at pp 687-688 ; and Bidencope (1978) 140 CLR, at p 540 . There is nothing to be gained from repeating what his Honour said in these cases. It is sufficient to say that his Honour assumed that s. 26(a) was designed only to catch profits which do not fall within s. 25(1) i.e. capital gains, and asserted that the circumstances giving rise to an application of the second limb when the first does not apply will be rare - Bidencope (1978) 140 CLR, at p 540 . (at p380)

24. In Steinberg (1975) 134 CLR, at p 687 his Honour made an important comment with which I agree. It was that "the acquisition of property by the taxpayer with the purpose of its resale at a profit . . . is in truth a commercial dealing". He referred to the second limb as being founded upon the same notion. (at p380)

25. The different and conflicting answers which have been given to the question whether s. 26(a) is aimed at income gains or capital gains or both reflect in some degree differing views as to what is income according to ordinary usages and concepts of mankind and as to the correctness of Jones v. Leeming (1930) AC 415 . As doubts as to the scope of the concept of income according to general revenue law were responsible for the introduction of the provision, it is scarcely a profitable exercise to determine the extent of its operation by reference to the antecedent law. But the need to decide in a particular case whether s. 25(1) or s. 26(a) applies may make it necessary to decide their respective areas of operation. (at p381)

26. The settled interpretation that the first limb requires the purpose of profit-making by sale to be the dominant purpose provokes other questions associated with the relationship between the two limbs and their relationship with s. 25(1). Section 26(a) does not narrow the circumstances in which entire or isolated transactions generate income. In deciding that the first limb speaks of a dominant purpose the Court has reflected the condition according to which a profit made on the sale of property would ordinarily yield income - it is the existence of the purpose of profit-making by sale, the dominant purpose, which is critical to the character of the profit as income under the general law and under s. 26(a). The second limb does not speak of purpose. No doubt the expression "profit-making" as applied to "undertaking or scheme" looks to the intention or purpose of profit-making. If the second limb looks to dominant purpose, it is to the dominant purpose of "profit-making", rather than the dominant purpose of "profit-making by sale". Jacobs J. in London Australia Investment Co. Ltd. v. Federal Commissioner of Taxation (1977) 138 CLR 106, at pp 127-128 though that the second limb would apply where profitable re-sale was a purpose, though not the dominant purpose, but it seems that his Honour then had in mind re-sale in the course of the carrying on of a business by a taxpayer who acquires property with a dual purpose of enjoying it or its profits or of re-selling it eventually at a higher price. (at p381)

27. There will be cases in which property will be acquired for the purpose of profit-making otherwise than by sale. Then so long as the acquisition is an element in a profit-making undertaking or scheme the resultant profit will be caught by the second limb, even though the undertaking or scheme lacks the repetitive or recurrent characteristics that are regarded as the hallmark of business activity. There is a fruitful field for the operation of the second limb in cases where there is a lack of identity between the property acquired and the property sold. Take for example the acquisition of property by a company with the expectation on the part of the company and its shareholders that the property will sharply rise in value and with the intention on their part that the increase in value will be realized either by selling the property at an increased price or by selling the shares in the company at a price which will reflect the increased value of the property acquired. The profit derived from a sale of the shares will escape the first limb, but why should it escape the second limb? (at p382)

28. Moruben Gardens Pty. Ltd. v. Federal Commissioner of Taxation (1972) 46 ALJR 559; 3 ATR 225; 72 ATC 4,147 is an example. There the taxpayer, a home unit company, purchased land on which there was a house with the intention of demolishing it and erecting a home unit building and selling the units in the form of strata title at a profit. I held that the profit made by the taxpayer on executing its scheme was caught by both limbs of s. 26(a). I concluded that (a) there was no lack of essential indentity between what was acquired and what was sold because the legal estate in fee simple was acquired and ultimately disposed of; and (b) a profit on sale was made notwithstanding that the land had been improved by the erection of a more valuable building. If, as has been suggested, contrary to my conclusion, the profit in such a case was not caught by the first limb, either because there is a lack of essential identity between what is acquired and what is sold or because the first limb looks to a profit made on the sale of property which is in the same condition at the time of purchase and at the time of sale, then the second limb would apply on its own in such a case. (at p382)

29. Because s. 26(a) looks to net profit and s. 25(1) deals with gross income, different consequences may follow, according to which provision is found to apply to a taxpayer. In ascertaining net profit for the purpose of s. 26(a) general accounting principles, rather than the statutory provisions relating to allowable deductions may need to be applied. In the result in a given case there may not necessarily be a correspondence in the operation of s. 25(1) and s. 26(a). (at p382)

30. One view is that s. 26(a) should be applied to the cases which fall within its terms, to the exclusion of s. 25(1) - see Reseck v. Federal Commissioner of Taxation (1975) 133 CLR 45, at pp 49, 57 . After all, s. 26(a) is a specific provision introduced for the purpose of catching profits yielded by the transactions which it describes. Moreover, it has generally been applied to cases falling within its terms without the Court examining in detail whether s. 25(1) might also have had an application (Steinberg (1975) 134 CLR, at p 710 ; Bidencope (1978) 140 CLR, at p 552 ; Federal Commissioner of Taxation v. St Hubert's Island Pty. Ltd. (In liq.) (1978) 138 CLR 210, at pp 229-230 ; Pascoe v. Federal Commissioner of Taxation (1956) 30 ALJ 402; 11 ATD 108; 6 AITR 315 ). (at p382)

31. The second view is that s. 26(a) will only operate when s. 25(1) does not do so (Investment and Merchant Finance (1971) 125 CLR, at pp 255, 264 ; Steinberg (1975) 134 CLR, at p 688 ). This is the view which I have been disposed to favour in the past (see St Hubert's Island (1978) 138 CLR, at pp 229-230 ; Bidencope (1978) 140 CLR, at p 555 ). Its rationale is that s. 26(a) should be considered as supplementary to s. 25(1) which continues to operate as the principal statutory provision on the revenue side. As I have already indicated, it was no part of the purpose of s. 26(a) to limit the operation of s. 25(1). Indeed, in large measure its object was to ensure that the revenue did not suffer in the event that s. 25(1) received a more restricted application that it was then thought to have. I am still inclined to think that this is the preferable view and that, accordingly, the second limb of s. 26(a) applies only to "profits not attributable to gross income that has already been captured by s. 25" (Bidencope (1978) 140 CLR, at p 555 ). (at p383)

32. All that I have said indicates that the second limb does not affect the principle enunciated in Californian Copper except to emphasize that an undertaking or scheme may be a profit-making one even if it lacks the characteristics of repetition or recurrence supposedly essential to the carrying on of a business. It is possible that the second limb applies when the taxpayer's activities amount to more than the mere realization of an asset but do not constitute the carrying on of a business because they lack the characteristics of repetition or recurrence. The distinction made in Californian Copper (1904) 5 Tax Cas 159 between a mere enhancement in value by realization of a security and a gain made in an operation of business in carrying out a scheme of profit-making remains a valid distinction for the second limb of s. 26(a). (at p383)

33. If the taxpayer's activities do amount to the carrying on of a business then s. 25(1) will certainly apply. It was not intended that the second limb should apply to cases in which the taxpayer is carrying on a business because this would give the second limb a very extensive operation at the expense of s. 25(1). (at p383)

34. The principal, if not the essential, question under the second limb of s. 26(a), as under s. 25(1), is whether more is involved than the mere realization of an asset. As Deane J. noted in his dissenting judgment in the Federal Court, we must not overlook the importance and the scope of the word "mere". To bring this case within the second limb the Commissioner does not need to show that the respondent was carrying on a business. As we have seen, it is enough to answer the statutory description that there was a profit-making undertaking or scheme which exhibited the characteristics of a business deal, even though it did not amount to the carrying on of a business. If what has happened amounted to no more than the mere realization of an asset then it was not a profit-making undertaking or scheme. (at p384)

35. The judges of the Federal Court and Wilson J. of this Court have reviewed in detail the activities in which the respondent commenced to engage. I need not repeat them. They showed that on 20 December 1967 the respondent committed the land in question to a profit-making undertaking or scheme of considerable magnitude involving the development and subdivision of the land into residential allotments. It was on that day that the ownership and control of the company changed hands, that new articles of association were adopted, eliminating the old art. 3(A) and General Development Corporation Pty. Ltd. ("General Development") and Martindale Pty. Ltd. ("Martindale") were appointed General Managers for a period of more than fifteen years. (at p384)

36. The old shareholders sold their interests in the respondent to National Mutual Life Association of Australasia Ltd., Martindale and General Development for $1,600,000. It was frankly conceded that, had the purchasers bought the land, not the shares, the resulting profits would have been taxable. This is because the land would then have been acquired for the purpose of profit-making by sale or for the purpose of a profit-making undertaking or scheme. The intention of the respondent as a company is in my opinion, to be ascertained by reference to the intention of those who owned and controlled it at the relevant time - see Bernard Elsey Pty. Ltd. v. Federal Commissioner of Taxation (1969) 121 CLR 119, at p 121 . To my mind in deciding whether what the respondent did was the mere realization of an asset or the carrying out of a profit-making undertaking or scheme, it is relevant to take into account that the company came under the ownership and control of new shareholders whose purpose was to use the company for the execution of what, judged from their point of view, was a profit-making undertaking or scheme. In deciding whether the company was carrying on the business of land development it is material that the new shareholders would have been carrying on such a business had they purchased the land from the company and carried out the development and sale on their own account. (at p384)

37. However, apart altogether from this factor, the facts previously mentioned show that there was involved more than mere realization of an asset. Deane J. was right in pointing to the circumstance that the asset was divided and improved in the course of a business of dividing and improving the asset. In this respect I do not agree with the proposition which appears to be founded on remarks in some of the judgments that sale of land which has been subdivided is necessarily no more than the realization of an asset merely because it is an enterprising way of realizing the asset to the best advantage. That may be so in the case where an area of land is merely divided into several allotments. But it is not so in a case such as the present where the planned subdivision takes place on a massive scale, involving the laying out and construction of roads, the provision of parklands, services and other improvements. All this amounts to development and improvement of the land to such a marked degree that it is impossible to say that it is mere realization of an asset. We need to bear in mind that the subdivision of broad acres into marketable residential allotments involves much more in the way of planning, development and improvement than was formerly the case. (at p385)

38. Like Wilson J., I have difficulty with the decision of Williams J. in Scottish Australian Mining Co. Ltd. v. Federal Commissioner of Taxation (1950) 81 CLR 188 . The taxpayer there, after giving up its mining business in 1924, devoted itself to the subdivision of its land. This entailed the construction of roads, the building of a railway station, the granting of land to public institutions such as schools and churches and the setting aside of land for parks. I should have been inclined to the view that the taxpayer had ceased to carry out its mining business and that it had commenced to carry on the business of land development. (at p385)

39. This conclusion would have been more consistent with the later decisions of this Court in Fox (1956) 96 CLR 370 and White v. Federal Commissioner of Taxation (1968) 120 CLR 191 . In Fox (in which no mention was made of Scottish Australian) the activities were less extensive, though they did involve land subdivision and improvement (reclamation). The only difference between Scottish Australian and Fox seems to lie in the circumstance that there was a new taxpayer in Fox. He was a new taxpayer whose function it was to get in the bankrupt's assets so that a distribution among creditors could take place. (at p385)

40. From what I have said it will be seen that it is my opinion that what the respondent did amounted to more than realization of an asset and constituted the carrying on of the business of land development. Accordingly, the gross income is assessable under s. 25(1). (at p386)

41. But for this conclusion I would have held that the activity of the respondent amounted to the carrying out of a profit-making undertaking or scheme which exhibited the characteristics of a business deal so that net profit of the respondent would have been assessable under the second limb of s. 26(a), if not under s. 25(1). (at p386)

42. In the result I would allow the appeal. (at p386)

MURPHY J. The question is whether the taxpayer's assessment is excessive. The burden is upon the taxpayer to prove that it is excessive (see Income Tax Assessment Act 1936, as amended ("the Act"), s. 190(b); McCormack v. Federal Commissioner of Taxation (1979) 143 CLR 285 ; Macmine Pty. Ltd. v. Federal Commissioner of Taxation (1979) 53 ALJR 362; 24 ALR 217; 9 ATR 638; 79 ATC 4,133 ). (at p386)

2. The Commissioner included in the assessment profit from the taxpayer's development and sale of certain land on the basis that it came within the second limb of s. 26(a) of the Act as "profit arising . . . from the . . . carrying out of any profit-making undertaking or scheme". (at p386)

3. The land development scheme falls easily within the conception of a profit-making undertaking or scheme. The development involved not only subdivision, but planning and building of roads and other services, as well as other activities involved in modern land development schemes, and it was undertaken for profit-making. This is not a borderline case. It is altogether different from, for example, simple realization of a large allotment by subdivision into several smaller blocks. The profit therefore comes within s. 26(a) as profit from a profit-making undertaking or scheme. The taxpayer relied upon the judgment of the Privy Council in McClelland v. Federal Commissioner of Taxation (1970) 120 CLR 487 to support the contention that the taxpayer's land development scheme did not fall within s. 26(a). In McClelland's Case the majority of the Privy Council misunderstood s. 26(a) and largely nullified it. Contrary to their holding and consistently with the minority in the Privy Council and the majority view of the High Court in that case, s. 26(a) has a wide application to capital gains. (at p386)

4. The taxpayer founded a further argument upon Barwick C.J.'s statement in Steinberg. v. Federal Commissioner of Taxation (1975) 134 CLR 640 that to bring the second limb of s. 26(a) into operation the scheme of realisation must have been contemplated at the time of acquisition. Ultimately the taxpayer conceded that the submission amounted to reading at the end of s. 26(a) an exception to the effect "except an undertaking or scheme which relates to any property previously owned by the taxpayer". No such exception is warranted. (at p387)

5. The assessment has not been shown to be excessive. The appeal should be allowed. I agree with the order proposed. (at p387)

WILSON J. In this case the Commissioner appeals by special leave from a decision of the Federal Court of Australia (Brennan and Fisher JJ., Deane J. dissenting) (1979) 44 FLR 312; 28 ALR 637; 10 ATR 549; 79 ATC 4,648 setting aside assessments of income tax payable by the respondent ("the taxpayer") in respect of its substituted tax years ended 30 September 1972, 1973, 1974 and 1975 respectively. The decision reversed a decision of the Supreme Court of Western Australia (Wickham J.) in favour of the Commissioner (1978) 20 ALR 239; 8 ATR 593; 78 ATC 4,211 . (at p387)

2. The primary question in the appeal is whether any part of the proceeds of sale by the taxpayer of lots in a real estate subdivision at Whitfords Beach in Western Australia is "assessable income" for the purposes of the Income Tax Assessment Act 1936 ("the Act"). If that question be answered in the affirmative, then a further question remains to be dealt with, namely, on what date or dates was the land or part thereof committed to the business or profit-making undertaking or scheme? However, the parties join in requesting the Court, if it becomes necessary to consider that second question, to remit it to the Federal Court for determination. (at p387)

3. The answer to the first question depends on the conclusions which should be drawn from facts which are not in dispute, and which I now relate. (at p387)

4. On 26 April 1954 the taxpayer was incorporated. Its shareholders were the occupiers of fishing shacks located on a reserve on the beach front at Whitfords Beach, which is some twenty-four kilometres north of Perth. The reserve is vested in the Council of the Shire of Wanneroo. Adjoining the reserve was an area of 1,584 acres of undeveloped bush land ("the subject land") which was owned by a Mr. Simpson in two separate titles of 1,544 acres and 40 acres respectively. The subject land provided the only means of access by land to the beach front. The taxpayer was formed in order that it could acquire the subject land and thereby secure to each shareholder continued access to his shack. Planning restrictions which applied to the area at that time precluded any subdivision of either portion of the subject land, with the consequence that it was necessary to acquire the whole of the land. It was intended, if and when it became legally practicable to do so, to subdivide the subject land so that each shareholder could hold the freehold title to one or more residential sites of a value comparable to the holding of each other shareholder. Article 3(A) of the articles of association of the taxpayer purported to express this intention, and provided also that any surplus land after such an allocation had been made was to be dealt with as the company in general meeting should, from time to time, decide. (at p388)

5. Immediately on its incorporation, the taxpayer acquired the subject land. The parties are agreed that the taxpayer did not acquire the subject land for the purpose of profit-making by sale. (at p388)

6. The situation remained largely unchanged until 1967. By that time the market value of the subject land had increased greatly. Rates and tax likewise increased. The land remained incapable of subdivision. Its zoning under the Metropolitan Region Scheme was as follows: 630 acres were zoned deferred urban, 80 acres were zoned parks and recreation, and the remainder was zoned rural. Notwithstanding the then existing zoning restrictions, the potential value of the land in residential subdivision was already attracting the attention of land developers. (at p388)

7. On 20 December 1967 the then shareholders of the taxpayer (most of whom were still shack holders) sold the entirety of their shares to three purchasers. These were the National Mutual Life Association of Australasia Limited ("National Mutual") as to 50 per cent, Martindale Pty. Ltd. ("Martindale") as to 25 per cent, and F. D. O'Sullivan Pty. Ltd. as to 25 per cent. Martindale was a company controlled by Mr. J. A. McCusker. F. D. O'Sullivan Pty. Ltd. was a company, now called General Development Corporation Pty. Ltd. ("G.D.C.") controlled by Mr. F. D. O'Sullivan. Mr. O'Sullivan also controlled a company which traded under the business name of the General Agency Co. (at p388)

8. It is the Commissioner's contention that the events which occurred on 20 December 1967 marked a decisive change in the character and purpose of the taxpayer. The original purpose touching the subject land was superseded. Henceforth, the sole object of the taxpayer was to engage in the business of development, subdivision and sale of the subject land. (at p388)

9. In order to evaluate this submission it is necessary to examine the facts in some detail, including the course of events leading up to the sale of the shares. Messrs. O'Sullivan and McCusker through their respective companies had considerable experience in working together on land development projects. The profit potential of the subject land as a prime prospect for residential development came first to the attention of Mr. O'Sullivan. On 19 October 1967 he wrote, on behalf of an "Investment Finance Group", to the Secretary of the taxpayer offering to purchase either the whole of the subject land (which represented the total assets of the company) or the whole of the issued shares in the company. The taxpayer rejected the offer to purchase its assets, but following negotiation granted Mr. O'Sullivan an option to buy all the issue shares in the company for the sum of $1,600,000. Then followed a period of intensive planning and negotiation led by Mr. O'Sullivan. He enlisted Mr. McCusker's interest and support, and together they sought the participation of National Mutual in the project as financier both of the purchase of the shares and the subsequent programme of development and sale of the subject land in subdivision. Their written proposal dated 15 November 1967 to National Mutual includes the following passages:
"Further to our recent negotiations which we hope will culminate in our joint ownership of a Company known as Whitfords Beach Pty. Ltd., I would like to set out in some detail our assessment of the development potential of the land owned by this Company.
The major asset of this Company comprises 1,584 acres of attractive undulating land 1 1/2 miles north of the suburb of Sorrento and fronting on to 3/4 mile of beautiful surf beaches. The land is obviously suitable for development into a major housing project. The salient features of the land are as follows: Area . . . Description . . . Development . . . (a) ROADS . . . (B) DRAINAGE . . . (C) ELECTRICITY . . . (D) WATER . . . (E) SEWERAGE . . . Potential Returns After extensive discussions with the local Shire Council and the Metropolitan Regional Town Planning Authority, and a survey of the land in question, it could be confidently anticipated that the land presently zoned as deferred urban could be rezoned to urban within five years and that at this time, this area of land could be subdivided and sold as 1/4 acres residential lots. Generally speaking, the Metropolitan Regional Town Planning Authority will consider an application to rezone from deferred urban to urban if the following conditions are met: (a) A comprehensive plan of development is prepared and accepted by them for the development of the whole of the subject land. (b) That public services, such as water and light are sufficient to service subject land. (c) The developer is prepared to meet the total cost of extending such services and meeting the cost of development. (d) The developer to plan an orderly development and build houses on a reasonable proportion of the developed land as it is released. After our investigations, we are hopeful that we can meet these requirements within three years, but are completely confident that we will be able to commence development within five. As we are considering the purchase of the shares in the Company only to gain control of the land in question, for all purposes we can assume the land cost at 1,584 to be $1,600,000. However I would like to point out that there is possibly a contingent tax liability to be considered in that the land was originally purchased by the Company for $48,218. However, this is a matter in which we should call for advice from our solicitors. I have briefly set out in the following Schedule, an estimated profit return which in the light of our experience I believe to be reasonably conservative.

SCHEDULE Land Cost 1,584 acres $1,600,000 Less rural land value 874 acres @ $600 per acre 524,400 ______________ Value of 630 acres of deferred urban land $1,075,600 ______________ Note: 80 acres Public open space. Assuming development will commence in 5 years and that the whole of the deferred urban land will be developed and sell at an even rate over the next five years (i.e. 440 lots per annum). Gross Return 630 acres will be subdivided into 2,200 residential lots (3.5 lots per acre) 2,200x$5,000 $11,000,000 Interest (nett) for 5 years $ 600,000 Rates and Taxes 60,000 Selling and promotional costs and management @ $500 per lot 1,100,000 Development costs (roads, etc.) @ $500 per lot 1,100,000 ______________

2,860,000

______________

$8,140,000

Less Land Cost 1,075,000 ______________ Nett Return before Tax $7,066,000 ______________ Notes: 1. We have assessed the value of subdivided lots in five years at $5,000 which is today's market value of comparative lots 1 1/2 miles south at Sorrento. We have not tried to predict land values five years hence which as indicated in the attached report would be in excess of these estimates. 2. We have made no allowance for interest after five years on capital employed as we have also not allowed for any increment in land values after five years and the increment that we would expect would more than offset an interest allowance. 3. Selling cost normally account for 5% of selling prices and a further 5% should cover all promotional and management costs. 4. Development costs are estimated in the light of our experience of similar land. Drainage costs are at a minimum and sewerage costs have not been allowed. It is practical to assess development costs on today's costs as our returns are based on today's land values. 5. We can confidently expect a recovery of 3.5 lots per acre in the light of our experience at Westfield Park. A copy of the report is attached. 6. A selling rate of 440 lots per annum from the 5th to the 10th year is reasonable as our organisation is today building at the rate of 500 new homes per year. We furthermore have the selling resources of the The General Agency Co. which in the last twelve months has sold real estate to the value of $15,000,000. This Company employs more than 40 Salesmen and is by far the largest selling real estate Company in Western Australia. 7. No allowance has been made for the great value which would be attributable to: (a) The neighbourhood Shopping Centre (b) Hotel Site (c) Service Station Sites (d) Flat and Duplex Sites 8. At the end of the 10 years the Company would still own 874 acres of rural land at today's values. We would be confident that once the 630 acres of deferred urban has been fully developed, the Metropolitan Regional Town Planning Authority would consider the rezoning of the rural land for further housing development. The photographs attached will also indicate to you the location of the land in relation to existing development, the City of Perth in the background and the highly desirable nature of the land in relation to the beautiful surf beaches.

In conclusion I would like to point out that it is rarely such a desirable piece of land becomes available for purchase in such a large acreage which has the potential for development that this land has. We are highly confident of the success of this venture if our negotiations to purchase the shares of Whitfords Beach Pty. Ltd. are fruitful." (at p392)

10. As will earlier have appeared from what I have said, this advocacy was successful in enlisting National Mutual's participation in the proposal to take over the taxpayer. Mr. Bunning, the chairman of the Western Australian branch of National Mutual testified in the hearing before Wickham J. to the effect that at all times the project was seen as the purchase of land with development potential with a view to developing, selling and producing a profit and that the purchase of the shares in the taxpayer was seen as a method of acquiring the land. It was seen, he said, as "a sound development proposition over a long term". (at p392)

11. A number of significant things happened on 20 December 1967. At a series of meetings of directors and shareholders of the taxpayer, transfers of the shares in favour of National Mutual, Martindale and G.D.C. were registered, and new directors, appointed by those transferees replaced the previous directors. An entirely new set of articles of association was adopted. The old art. 3(A) disappeared, and the former provision for the election and rotation of directors gave way to provisions which secured the permanency in office of directors appointed by the new shareholders. On the same day these companies had executed a loan agreement defining their respective rights and obligations inter se. Also on the same day the taxpayer by deed appointed Martindale and G.D.C. to be joint managers of the project for a term expiring 31 December 1982 subject to earlier termination in prescribed circumstances. Their task was:
" . . . to do all within their power to development and subdivide into urban allotments such part or parts of the land as the Company may from time to time direct and to sell the land or such part or parts thereof as the Company may from time to time direct in urban subdivisional allotments and generally to ensure that the land is developed subdivided and sold to the best advantage". (at p392)

12. What, then, was the effect of all these events on the taxpayer? In the Federal Court, Deane J. described that effect in terms which I would respectfully adopt as my own (1979) 44 FLR, at p 327; 28 ALR, at pp 650-651; 10 ATR, at p 560; 79 ATC, at pp 4,663-4,664. :
"It is plain that the effect of the transactions and events of 20 December 1967 was completely to transform the sub-stratum of the taxpayer. At the commencement of that day, the taxpayer was a company whose only significant asset was land which had been acquired for the purpose of safeguarding the interests of its shareholders as owners of the Whitfords Beach shacks and which, under the articles of association, was, when subdivision became possible, to be allocated among the shareholders with any surplus to be dealt with as the company might, in general meeting, decide. At the end of that day, the taxpayer had set out upon a projected course of activity in relation to that land which involved procuring changes of zoning, the development of the subject land as a residential subdivision and the eventual sale, over a period of many years, of the subdivided lots. These projected activities were on a scale which was expected to yield a net return before tax in excess of $7 million during the first ten years while leaving the bulk (in area) of the subject land available for subsequent subdivision, development and sale. The taxpayer's articles no longer contained any provision for allocating the land among its shareholders and the identity of the taxpayer's shareholders had changed to three companies which had acquired the shares in the taxpayer's capital for the benefits which they saw as likely to flow to themselves, as shareholders, from the profits of the project activities. The taxpayer was the creature of its three shareholders and the common motive for their purchase of the shares in the taxpayer became the object which the taxpayer was thenceforth to pursue." (at p393)

13. It appears from the evidence that following 20 December 1967 the joint managers proceeded promptly with their task. A project co-ordinator was appointed, and his reports show that a search for a water supply was undertaken, negotiations were started with a local authority for the construction of a road, and preliminary consideration was given to engineering, surveying and planning requirements. However, in June 1969 a new direction and impetus was provided to the execution of the taxpayer's plans when the Government of Western Australia intervened to encourage the speedy development and sale in housing lots of land in the northern corridor from Perth, a corridor which included the subject land. Thereafter planning proceeded with expedition, and with the active encouragement of government agencies. The taxpayer's urban deferred land was rezoned urban. Subdivision was approved, and the first survey plan providing for 272 lots was lodged at the Titles Office in December 1970. Within weeks two hundred lots had been sold. National Mutual financed the development in the form of loans to the taxpayer. The evidence showed that it provided $436,000 in 1970 and $926,000 in 1971, with repayments being made by the taxpayer of $300,000 in 1973 and of $700,000 in 1974. The amounts actually spent on development on the one hand, and sales proceeds on the other were shown to be -

Year Outgoings Sales Proceeds

$ $

1970 345,000 1971 1,265,000 490,000
1972 887,000 1,420,000
1973 855,000 2,688,000
1974 1,523,000 1,572,000
1975 843,000 1,710,000

All sales of the subject land have been made as subdivided vacant lots. The taxpayer has relied throughout on the services of its joint managers. It has not maintained any premises or place of business, nor has it employed any staff. The General Agency Co. was appointed the sole selling agent. (at p394)

14. It is by reference to these facts, then, that the primary question for determination in this appeal must be answered. On the one hand, the Commissioner claims that the profits enjoyed by the taxpayer in the years in question constitute assessable income because as from 20 December 1967 it was engaged in the business of subdividing, developing and selling land for residential purposes and the proceeds of that business are taxable according to ordinary concepts under s. 25 of the Act, or alternatively under the second limb of s. 26(a). On the other hand, the taxpayer argues that it acquired the subject land otherwise than for the purpose of profit-making and has done no more than dispose of its interest in the land, even though it has gone to some effort to sell it to the best advantage. The resulting surplus is not assessable income either under s. 25 or s. 26(a). (at p394)

15. The battle lines drawn by the parties have a familiar ring, similar problems having frequently required resolution by the Courts in the course of the present century. In Californian Copper Syndicate v. Harris (1904) 5 Tax Cas 159, at pp 165-166 , the Lord Justice Clerk stated the problem in terms which subsequent acknowledgement has given wide currency and common acceptance:

"It is quite a well settled principle in dealing with questions of assessment of Income Tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit in the sense of Schedule D of the Income Tax Act of 1842 assessable to Income Tax. But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable, where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business . . . . What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being - Is the sum of gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operation of business in carrying out a scheme for profit-making?"

There is authority for the proposition that an owner of land who holds it until the price of the land has risen and then subdivides and sells it is not thereby engaging in an adventure in the nature of trade, or carrying out a profit-making scheme. In the words of Gibbs J. (as he then was) in Federal Commissioner of Taxation v. Williams (1972) 127 CLR, at p 249 :

"The proceeds resulting from the mere realization of a capital asset are not income either in accordance with ordinary concepts or within the second limb of s. 26(a), even though the realization is carried out in an enterprising way so as to secure the best price: McClelland v. Federal Commissioner of Taxation (1970) 120 CLR, at pp 494, 496 , and cases there cited; Eisner v. Federal Commissioner of Taxation (1971) 45 ALJR, at p 114 ."

His Honour went on to recognize, as had the Lord Justice Clerk in the Californian Copper Case, the difficulty in many cases of drawing the line between realization, on the one hand, and the carrying on or carrying out of a business or profit-making scheme, on the other. The decision in each case must depend on its own facts, and very often will be a matter of degree. (at p395)

16. Wickham J., in the Supreme Court, concluded that the taxpayer was, as from 20 December 1967, carrying on the business of subdividing, developing and selling land as lots for residential or ancillary purposes and was doing so with a view to profit. If that conclusion is correct then the Commissioner is entitled to succeed, the profit being assessable income within s. 25, and it would be unnecessary to consider the second limb of s. 26(a). I propose first to consider its correctness. (at p395)

17. In the Federal Court, Brennan J. adopted a format in his consideration of the problem which I find helpful, and which I propose to follow. He recognized, first, that although the activities in which the taxpayer through its managers engaged after 20 December 1967 were indistinguishable from some of the familiar activities of land trading companies which buy, develop, subdivide and sell land at a profit it was nevertheless not carrying on the business of land trading. The reason for that conclusion is that when it bought the land in 1954 it did not buy it for the purpose of engaging in such a trade. Nor, of course, did it buy any other land to furnish the stock in trade of a business of land dealing. With respect, I agree with that conclusion, and the reasoning which supports it. (at p396)

18. Brennan J. then proceeds to discuss the possibility that the subject land may have become "embedded in a trade", the trade of developing, subdividing and selling land. On this hypothesis it would not matter that in the first place the land was not acquired for trading purposes. The kind of possibility here under consideration is expounded by Barwick C.J. in Federal Commissioner of Taxation v. McClelland (1969) 118 CLR, at p 371 :
"The realization of an inheritance even though carried out systematically and in a businesslike way to obtain the greatest sum of money it will produce does not, in my opinion, make the proceeds either profit or income for the purposes of the Act. But, if the inheritor adventures the inheritance as the capital of a business, for example, of land jobbing or developing, the income of that business will be taxable, not, in my opinion, under s. 26(a) but according to ordinary concepts of income. No part of the value of the inheritance will be deductible in determining that income. The inheritance is then but the capital of the business. The point at which what was inherited or acquired not for resale so becomes the capital of a business may be at times difficult of identification".
The distinction is also drawn by the former Chief Justice in White v. Federal Commissioner of Taxation (1968) 120 CLR, at p 216 :

"It seems to me that it is not the circumstance that the taxpayer has endeavoured to improve the realizable value of his capital asset which provides the criterion but the circumstance that he has in reality put his capital asset to work as the whole or part of the capital of a business upon which he has ventured. Merely to realize a capital asset may involve money making as distinct from profit making but a business in the relevant sense of necessity involves the earning of or the intention to earn profits".

White's Case provides an example of the venturing of land not acquired for the purpose of profit-making as the capital of a business, in that case, the business of timber production and sale. That is a clear case. In Williams (1972) 127 CLR, at p 245 , Menzies J. suggests another plain case:

"There may, no doubt, be cases where a person ventures what has been received by gift in the carrying on or carrying out of a profit-making undertaking or scheme. In the judgment of the majority of this Court - but not in the opinion of the majority of the Privy Council - McClelland v. Federal Commissioner of Taxation (1970) 120 CLR 487 was such a case. A plain case can, however, be taken as an instance. There could be no doubt that land which has been given and is later used by the donee in the development of a housing scheme in which lots, with houses built upon them, are sold, could be regarded as committed to a profit-making undertaking".

Plain cases, of course, are not likely to occasion a great deal of difficulty. The real difficulty lies in discerning in a case where the answer depends on questions of degree when an alleged "mere realization" is in reality the venturing of an asset not acquired for the purpose of profit-making as the capital of a business. (at p397)

19. The taxpayer relies on the decision of Williams J. in Scottish Australian Mining Co. Ltd. v. Federal Commissioner of Taxation (1950) 81 CLR 188 . In that case, certain land was purchased by the company in 1863 for the purpose of carrying on coal-mining operations. When those operations ceased in 1924, the land was sold, from time to time in parcels, at a considerable profit, for residential and other purposes. For the purpose of sale the land had been subdivided, roads and a railway station constructed, sites made available for schools and churches and areas set aside for parks. Williams J. held that the company was not engaged in the business of selling land as from 1924 but was engaged in realizing a capital asset the profits from which should not be included in its assessable income. In the course of his reasons, his Honour observed that after 1929 "the principal and substantial object still remained, as it had been before, the carrying on of mining operations", and that on the face of the memorandum of association it "was not in any sense a company formed for the purpose of dealing in land" (1950) 81 CLR, at p 192 . His Honour continued (1950) 81 CLR, at p 195 :

"The profits on the sales must therefore be taxable either because the taxpayer was carrying on the business of selling land, in which case the profits would be income on ordinary principles, or because in selling the land the appellant was carrying on or carrying out a profit-making undertaking or scheme in which case the profits would be assessable income under the second limb of s. 26(a) . . . . The crucial question is therefore whether the facts justify the conclusion that the appellant embarked on such a business or undertaking or scheme in 1924. The facts would, in my opinion, have to be very strong indeed before a court could be induced to hold that a company which had not purchased or otherwise acquired land for the purpose of profit-making by sale was engaged in the business of selling land and not merely realizing it when all that the company had done was to take the necessary steps to realize the land to the best advantage, especially land which had been acquired and used for a different purpose which it was no longer businesslike to carry out. The plain facts of the present case are that the appellant purchased the Lambton lands for the purpose of carrying on the business of coal mining and carried on that business on the land until it was no longer businesslike to do so. It then had the land on its hands and it was land which because of its locality and size could only be sold to advantage in sub-division. A sale in sub-division inevitably requires the building of roads. If it is advantageous to the sale of the land as a whole to set aside part of the land for parks and other amenities, this does not convert the transaction from one of mere realization into a business. It is simply part of the process of realizing a capital asset."

Mr. Forsyth, counsel for the taxpayer, argues that there is no relevant ground of distinction between the Scottish Australian Case and the present case. In each, it was case of land being acquired for a non-profit-making purpose which was now spent, to be followed by the expenditure of energy and enterprise in enhancing the price at which it might be realized. And yet I remain unpersuaded as to the strength of the analogy. Williams J. was clearly impressed by the fact that the cessation of mining on the Lambton lands had not changed the essential character of the company. It was still a mining company, not one formed for the purpose of dealing in land. It found itself possessed of land for which it had no further use, and in his Honour's view set about selling it is an enterprising way. In any event, in this area of discourse, where the line between realisation on the one hand and the carrying on of a business on the other is difficult to draw and the decision in each case must depend on its own facts, one cannot do more than receive the way in which other courts have resolved different fact situations as illustrations, but no more than illustrations, of the operation of the basic principles. (at p398)

20. It seems to me, with respect, that the distinctive circumstances that attend this case have received insufficient attention in the majority judgments in the Federal Court. The events of 20 December 1967 were of great significance. The taxpayer did not remain unaffected by those events. The change in its articles gave it a new purpose, a new orientation. True enough, it remained throughout the owner in fee simple of the subject land: cf. Moruben Gardens Pty. Ltd. v. Federal Commissioner of Taxation (1972) 46 ALJR 559; 3 ATR 225; 72 ATC 4147 . But I am drawn to the conclusion that after that date its purpose was the business of developing, subdividing and selling land, a business in which the subject land was ventured as the capital of the business. It is not without significance that the written proposal to National Mutual of 15 November 1967 envisaged that a condition of rezoning would be that the proposed development of the subject land would include the building of houses "on a reasonable proportion of the developed land as it is released", and carried the assurance that such a requirement could be met. In the result some houses were built, but not by the taxpayer. They were built by Inchcape (W.A.) Pty. Ltd., a company which in 1972 was appointed by the taxpayer to manage the project together with Martindale and G.D.C. Nevertheless, it is the taxpayer's expectation when it was restructured in December 1967 which is relevant. (at p399)

21. In Ruhamah Property Co. Ltd. v. Federal Commissioner of Taxation (1928) 41 CLR 148, at pp 151-152 , four members of the Court in a joint judgment said:
"In our opinion the authorities show that the objects and powers of the Company contained in its memorandum and articles of association are not decisive of the question whether the sale was an operation of business in carrying out a scheme of profit-making, but that a consideration of all the matters advanced by the Company was relevant to a determination of that question . . . "
and later, their Honours emphasized the point that, "The nature of the company, the character of its assets, the nature of the business carried on by it and the particular sale or realization are all relevant to the issue" (1928) 41 CLR, at p 154 . (at p399)

22. When one has regard to those matters in the context of the present case, I think with respect that Wickham J. in the Supreme Court and Deane J. in the Federal Court were correct. I do not overlook the observation contained in the opinion of the Privy Council in Commissioner of Taxes v. British Australian Wool Realization Association Ltd. (1931) AC, at p 252 to the effect that the mere extensiveness of the organization set up to realize an asset does not of itself cause the realization to become a business. The decision in that case with its rather special factual context illustrates the operation of the principle which is there stated. But that is not to say that the magnitude of the operation is wholly irrelevant to the determination of its nature, in answering the question whether more than mere realization is involved in the treatment of a capital asset. (at p399)

23. I appreciate the valuable review of the earlier cases which Fisher J. undertook in discussing the distinction between realization of land and the venturing of it in a business. As I have emphasized, the distinction in many cases will be difficult to draw, and opinions based on the same facts may readily differ. Although I differ from the conclusion reached by Fisher J., I agree with respect with his statement that the true question is whether the taxpayer in proposing to maximize the amount of money which it received on sale of the land committed the land to a business venture or to a profit-making undertaking or scheme or merely sold the land to the best advantage. In answering this question, I begin by focussing on the true significance of the events of 20 December 1967. I do not find it necessary to consider whether or in what circumstances the profit-making purpose of the new shareholders may be attributed to the taxpayer, but see Bernard Elsey Pty. Ltd. v. Federal Commissioner of Taxation (1969) 121 CLR 119, at p 121 . There is enough in the changes in its constitution and the contracts into which it entered to signify the launching of a business of developing, subdividing and selling the land. It remains a question of degree whether the proceeds of that business constitute income according to ordinary concepts, and the answer depends, in my opinion, whether what happens to the subject land in the course of conducting that business is such as to take the process beyond what may properly be described as mere realization. (at p400)

24. In the present case, a great deal had to be done in order that the land could be sold in residential subdivision. Its character had to undergo significant change. That which at 20 December 1967 was no more than a distant potentiality had to be brought within the range of practical achievement. I am inclined to question whether some of the earlier cases have not assumed too readily that the conversion of broadacres into residential allotments with all the services and facilities that are requisite to an urban environment is no more than the realization of a capital asset in an enterprising way. But that question need not be pursued here, because this case exhibits the additional feature that at the material time the subject land as a matter of law could not be sold otherwise than in its unsubdivided state. The business upon which the taxpayer embarked in 1967 required active measures to be undertaken in order to remove the legal impediment to development of the subject land. That change in its character was essential to the successful achievement of the taxpayer's purpose. Taken together with all the attendant circumstances, it satisfies me that the taxpayer ventured the subject land as the capital of the business in such a way as to make the proceeds of that business assessable income within the meaning of s. 25 of the Act. (at p401)

25. This conclusion is enough to dispose of the appeal. It was the Commissioner's contention that the profits enjoyed by the taxpayer were assessable income by reference to either s. 25 or the second limb of s. 26(a). It is unnecessary to consider the relevance of s. 26(a). Having regard to the diversity of judicial opinion touching the proper application of this paragraph, revealed in the majority and dissenting opinions of their Lordships in the Privy Council in McClelland's Case (1970) 120 CLR 487 , and in subsequent cases in this Court, I think that any attempt at further elucidation should await a case which depends on the provision for its determination. I may add that I do not regard its construction as settled by existing authority. (at p401)

26. I would allow the appeal, and remit the matter to the Federal Court for determination of the second question. (at p401)

Orders

Appeal allowed with costs. Judgment of the Federal Court of Australia set aside and in lieu thereof order -
(1) That the appeal to that Court be dismissed with costs;
(2) That the order of Wickham J. be varied by deleting paragraphs 2, 3, 4 and 5 thereof.

Further order that the matter be remitted to the Federal Court of Australia to determine the outstanding questions in the matter.