McKellar v Federal Commissioner of Taxation

The case of *McKellar v. Federal Commissioner of Taxation* concerned an appeal by Grace Violet McKellar, as executrix of the will of John Cumming deceased, against an assessment for war-time profits tax. The dispute centred on how to value the capital of a pastoral business for the purpose of calculating the pre-war standard of profits. The business, conducted on Mount Violet Station, had been owned and operated by successive individuals, with the appellant continuing it as executrix after the death of John Cumming. The High Court of Australia was asked to determine the correct valuation date for the land comprising the business's capital.

The primary legal issue before the Court was to ascertain the correct date at which the value of the lands, as part of the business's capital, should be determined for the calculation of the pre-war percentage standard of profits under the *War-time Profits Tax Assessment Act 1917-1918*. Specifically, the Court had to decide whether the Commissioner's approach of valuing the land at the date of the testator's death was correct, or if the executrix's contention of valuing it at the end of the last pre-war trade year was appropriate, or if another date was mandated by the Act.

A majority of the Court, comprising Knox C.J., Isaacs, Gavan Duffy, and Starke JJ., held that neither the Commissioner's nor the appellant's proposed valuation dates were correct. They reasoned that the Act treated a business as a continuous entity despite changes in ownership. Section 17(1) of the Act stipulated that the capital of a business was to be taken as the amount paid up by the owner in money or in kind. The Court concluded that for assets acquired by purchase, such as the land in question, the capital should be valued at the amount actually paid by the original owner who brought the asset into the business. Therefore, the value of the lands should be taken as at the date they were purchased by George Cumming, the initial owner. Higgins J. dissented, finding that the land was acquired by John Cumming without purchase and should be valued at the time of his acquisition, but disagreed with the majority's conclusion on the date.

The Court ordered that the Commissioner was not right in valuing the lands at the date of the testator's death. The correct date for valuing the lands for the purpose of calculating the pre-war standard of profits was the date they were purchased by George Cumming.