Radnor Pty Ltd v Commissioner of Taxation

Re: RADNOR PTY LIMITED
And: COMMISSIONER OF TAXATION
Nos. G1130 to G1137 of 1988 and G25 of 1989
FED No. 363
Taxation

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Davies J.(1)

CATCHWORDS

Taxation - Income tax - profits on sales of shares - shares held by company which is an instrument of a trustee - predominant end of the trust estates is the care of a mentally and physically disabled person - whether such profits in the nature of income - whether business of dealing in shares - possible application of principle in the London Australia case.

Income Tax Assessment Act 1936 (Cth)

HEARING

SYDNEY

#DATE 20:7:1990

Counsel for the applicant: Mr J.W. Durack

Solicitors for the applicant: Minter Ellison

Counsel for the respondent: Mr N.R. Burns

Solicitor for the respondent: Australian Government Solicitor

ORDER

The Commissioner's decision on the objections be set aside and the matters remitted to the Commissioner for reconsideration according to law with the direction that the subject profits derived from the sale of investments were not assessable. The Respondent should pay the costs of the proceedings.

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

JUDGE1

These are appeals against decisions of the Commissioner of Taxation on objections lodged by the applicant, Radnor Pty Limited ("Radnor"), with respect to assessments of income tax for the years ended 30 June 1980 to 30 June 1986. Radnor is not a trustee but is an instrument of the trustee of two trust estates: the David Minter Settlement Fund and the David Minter Trust.

Clifford Minter was, until his death in 1977, a well-known Sydney solicitor. He and his wife, Ethel Minter, had four children, John, who was born on 30 July 1919 and died on 3 January 1984, Robert, who was born on 9 September 1921 and is still living, Diana, who was born on 10 December 1923 and died in 1945, and David, who was born on 6 October 1928 and is still living.
David Minter, who is now 61 years of age, was born with serious intellectual and physical handicaps which would not affect his life expectancy but would disable him throughout his life and would make it impossible for him to care adequately for himself. Clifford Minter therefore arranged for David's grandmother, Tempe Florence Minter, to establish the David Minter Settlement Fund by deed dated 4 January 1944. The income from the Trust goes to or for the benefit of David Minter throughout his lifetime with the capital on his death going to other members of the Minter family. To the same effect, Clifford Minter established the David Minter Trust on 12 January 1949. A third trust, the Pacific Trust, had been established by Tempe Florence Minter on 9 December 1929. The trust deed empowered the trustees to apply the income from the Pacific Trust to the benefit of John, Robert, Diana and David. After 30 November 1949 the income of the Pacific Trust was paid to Clifford Minter and was used by him solely for the maintenance and care of David. Following the death of Clifford Minter in 1977, the Pacific Trust vested in the surviving beneficiaries, John, Robert and David. David's share was added to his account in the books of Radnor and the assets were dealt with as part of the trust estates with which we are now concerned.
The subject trust estates were thus established and have been maintained primarily with a view to ensuring that David Minter would have adequate care and attention for the rest of his life. The subject trust estates are trust estates which have in mind as a predominant end the care of a mentally and physically disabled person. Of course, that is not their sole end, and on David Minter's death, the estates will benefit other members of the Minter family, the present senior members of which I assume to be comfortably off.
David lived with his parents until his mother's death and thereafter with his father until May 1966 when Radnor acquired a house at 23 Clairvaux Road, Vaucluse, as a home for him. He has since lived there, except for visits to the family's farming property at Moss Vale and other short trips. He is assisted by and is accompanied on his trips by a live-in housekeeper who attends to his needs and manages purchases of food, household supplies, cooking and cleaning. As David does not read books or newspapers and now tires easily from physical exertion, he spends much of his time watching television.
The structure of the Minter assets has been reorganised from time to time. I shall mention some of the changes but I have not perceived and my attention was not drawn to any aspect of these events which impinges significantly upon the issue to be resolved.
The early trustees of the trust estates were Clifford Minter, Ethel Minter until her death, Robert Minter and later also John. On 4 September 1953, Mahana Pty Limited ("Mahana") was incorporated and, in 1956, it purchased the investments of the then three trust estates. Thereafter, as the purchase price had not been paid or paid in full, Mahana paid to the trust estates in lieu of interest the dividends which it received from those shareholdings. Robert Minter has deposed that "I believe there was reason for this arrangement but I cannot now recall what it was."
Earlier, two family companies, Kahlua Properties Pty Limited ("Kahlua Properties") and Kahlua Aberdeen Angus Stud ("Kahlua Stud"), purchased two rural properties near Moss Vale which were thereafter run in conjunction. Included in investments acquired by the three trust estates and later by Mahana were shares in these two companies. Subsequently, for reasons which again Robert Minter could not recall, Radnor was formed and acquired from Mahana all the investments held by it. Shortly thereafter, Mahana was appointed as trustee of each of the three trust estates in lieu of the individual trustees.
Thereafter, Radnor was the central investment vehicle for holding all the assets from which income flowed to the trust estates. Radnor declared dividends to Mahana as trustee of the trust estates in each year of income and also interim dividends from time to time to meet David's requirements as they arose. Mahana in turn distributed so much of the income as was needed for David's requirements and reinvested the surplus not required with Radnor.
The structure therefore was that Mahana, as trustee for each of the three trusts, held all the share capital of Radnor. Radnor in turn held all the investments in public and private companies formerly held by the three trusts including, directly or indirectly, the shares in Kahlua Stud and Kahlua Properties. These two companies held, between them, the Moss Vale farming properties.
From time to time, family members, particularly Clifford Minter, lent sums to Radnor for investment purposes. From time to time, Radnor itself made loans to family members, usually at interest, to meet the specific requirements of those family members. Whenever the loans were not made at interest, they were made on the basis that the recipient would in some way contribute to the maintenance, welfare or general enjoyment of life of David.
The Moss Vale properties provided little or no income to Radnor but they were retained partly because of the entertainment and enjoyment which they provided to David and partly because their retention was believed to be likely to constitute a hedge against inflation. Three hundred acres of the properties were sold in the early 1980's and the balance was sold in 1985 when David no longer had much enjoyment of the properties, after the death of his parents and of Mrs Gilpin, the manager's wife, with whom David had liked to stay on the properties.
When individual family members were trustees of the trusts, the trustees held the following investment intentions, according to the evidence of Robert Minter:-

"We bought shares primarily to obtain an income for David but also with a view to securing the growth of capital as a means of providing against inflation. It was obvious to me then and I believe also to the other trustees, as it remains obvious to me now, that moneys placed on deposit to earn interest income only will eventually lose their value as a consequence of inflation. We therefore bought shares in public and private companies with a view, from time to time expressed by all of us, to combating the influence of inflation by obtaining either bonus issues in the securities acquired or issues at less than the market price then prevailing with the object of continually raising the level of capital upon which dividends were calculated. Occasionally we would invest in securities with such a high yield or anticipated yield that the absence of capital growth did not concern us although this was unusual, and from time to time we made interest bearing deposits of funds not immediately required for David or investment elsewhere. We sold shares representing such investments only in the following circumstances which were from time to time discussed between us:-

(i) If there was a need for funds for some specific purpose associated with David's or the family's welfare;

(ii) If the relevant shares had become the subject of a takeover offer - either because we did not wish to be the subject of a compulsory acquisition or we did not wish to be left in the position of one of a group of shareholders who did not have control of the company; or

(iii) If the shares were performing poorly - this could occur either because the dividend yield was too low and there were no bonus issues or signs of growth or if the management was apparently performing poorly. I was also interested, although not unduly so, in the market value of shares in our portfolios from time to time. The other trustees expressed similar interest. Had the value of the portfolios entrusted to us been declining we would have been concerned about the consequences of inflation and each of us had in mind, and expressed as much to each other, that if we ever had to commit David to an institution or to substantially increase the level of care for him then it might be necessary to have resort to capital of the trusts and, failing the availability of sufficient capital, to our own resources in order to support David. We therefore regarded substantially declining market values as an indication of poor performance which did not meet our criteria for investment."

That investment philosophy was also applied after the formation of Radnor and the centralisation in that company of the investments of the trusts.

By 1976, Clifford Minter, Robert Minter and John Minter concluded that, as the assets held were substantial and, as they had made some investment mistakes, they should take professional advice. John D.G. Robinson and Associates Pty Limited was appointed on 23 September 1976 as manager of Radnor's portfolio of investments. From the date of its appointment, Radnor acted substantially in accordance with Robinson's advice as to suitable investments, purchases and sales. On 1 July 1980, Robinson's merged with Wardley Australia Ltd and became Wardley Investment Management Limited ("Wardleys"). Subsequently, Radnor executed a portfolio management agreement with Wardleys dated 1 June 1984.
Mr A.D. McKinnon, who was a member of Robinson's and subsequently of Wardleys, has deposed:-

"4. I recall that when I assumed management of the Radnor portfolio I understood that it was maintained for the benefit of David Minter, the spastic brother of John and Robert Minter and that the income from the portfolio was used for David Minter's maintenance and upkeep. In accordance with instructions which I received from John I managed the Radnor portfolio on the basis that the purchase of stocks was to be made with a view to obtaining a good yield with growth prospects and also with a view to investing in stocks the value of which would at least keep pace with inflation.

5. While I do not recall specifically the stocks that were bought and sold in the Radnor portfolio during the period in which I managed it, to the best of my recollection, the portfolio was managed according to established practice for the management of such portfolios. Accordingly stocks were generally sold for the following reasons:

(i) When specific requests for funds were received from either of the Minters;

(ii) When sales occurred for the purpose of disposing of very small holdings of stocks or rights;

(iii) When stocks became the subject of takeovers;

(iv) When the stocks were performing poorly, i.e. their yield was poor or their growth prospects were poor;

(v) To adjust weightings as Wardleys endeavoured to ensure that portfolios did not hold percentages of stocks in particular areas of the market which were substantially different from the proportion of those holdings in the Stock Exchange All Ordinaries Index, or as determined by overall investment policy.

(vi) Occasionally stocks were sold because their prices were not justified by their likely future performance.

(vii) Occasionally we also sold rights to which Radnor had become entitled rather than exercise the rights and take up the shares. We took this course on occasion because of an absence of available funds to take up the issue or because the weightings were already disproportionate to the All Ordinaries Index, or as determined by overall investment policy.

6. I spoke to either Mr John Minter or Mr Robert Minter at least once a year to discuss the portfolio and receive their instructions. Apart from the occasions when the Minters requested that specific funds be provided and that shares be sold for that purpose, the Minters acted, to my observations, in accordance with Wardleys advice as to the purchase of investments and the sale of investments from time to time.

7. I managed the Radnor portfolio until I ceased employment with Wardleys in March 1987."

Mr T.L. Williams, who took over management of the portfolio when Mr Williams ceased employment with Wardleys has given like evidence, which I also accept.

As can be seen from Mr McKinnon's affidavit and as was made clear in the cross-examination of Mr McKinnon and of Mr Willliams, one matter that Robinson's, and subsequently Wardleys, took into account in the management of the portfolio was the proportion of stocks in particular areas of the market as disclosed in the Stock Exchange All Ordinaries Index. If the percentage of the portfolio's stocks in a particular area was substantially different from the proportion of such holdings in the All Ordinaries Index, consideration was given to either buying or selling. This guide was not used as a strict or inflexible rule but was a factor which was taken into account. As disclosed in cross-examination, the basis of such an investment policy is that the performance of the All Ordinaries Index is often a more reliable guide to the performance of shares than are individual assessments of the merits or demerits of particular stocks.
It is worth commenting that the implementation of such a policy does not necessarily carry with it an implication of buying or selling for profit but it does necessarily add to the regularity or frequency of dealing and therefore introduces an aspect of business into the investment activity.
Mr Robinson has described of all transactions in shares which occurred from the year ended 30 June 1960 to the year ended 30 June 1988 and he has set out his recollection of the reasons for each purchase or sale. It would unduly burden these reasons to set out details of all the shares bought and sold; but it may be helpful to set out the following details given of the shares sold during the years ended 30 June 1980 to 30 June 1986:-

SHARES SOLD

"YEAR ENDING 30 JUNE 1980

COMPANY SOLD PROCEEDS REASON FOR OF SALE SALE A.G. Campbell Holdings 2,640 $20,634.60 Takeover C.S.R. Ltd 5,055.55 Manager's Decision E.Z. Industries Ltd 700 2,444.20 ) ) Ampol Petroleum 12,000 10,498.60 ) E.Z. Industries rights 2,100 6,136.92 Manager's Decision Thiess 7,200 47,549.00 ) Tooheys Limited rights 1,428 1,214.96 Takeover ) Herald and Weekly Times 2,500 13,452.60 ) Tooheys Ltd 10,000 20,000.00 Takeover Wattyl Ltd 2,250 5,360.45 Manager's Decision YEAR ENDING 30 JUNE 1981

COMPANY SOLD PROCEEDS REASON FOR OF SALE SALE Brambles Industries Ltd 3,437 $ 9,649 ) To raise ) funds for ) loan to RH and SJ Minter Stramit Ltd 2,625 4,467 ) ) C.R.A. Ltd 2,000 12,671 ) ) C.S.R. Ltd 2,090 14,961 ) Elder Smith 6,000 26,704 Takeover Goldsbrough Mort

David Jones Ltd 5,000 7,297 Takeover Tooth and Co Ltd 6,500 16,810 Takeover Acmil Ltd 8,623 Takeover Acmil Ltd Notes 1,437 Takeover B.H.P. Ltd. Rights 1,500 7,126 ) C.S.R. Rights 1,250 500 ) Manager's E.Z. Industries Ltd rights 2,000 4,224 Decision E.Z. Industries Ltd 2,000 14,821 ) Seltrust Holdings 4,000 10,057 ) Scruttons Holdings Ltd 1,065 1,598 Takeover U.E.B. Industries 74 26 Takeover National Bank 8,000 22,531 Takeover YEAR ENDING 30 JUNE 1982

COMPANY SOLD PROCEEDS REASON FOR OF SALE SALE National Bank of A'asia 8,000 see 1981 Takeover Vickers Australia Ltd 2,750 $ 7,087 ) Sold to raise ) funds for the Publishing and Broadcasting 5,000 7,835 ) purchase by Ltd ) Radnor of ) shares in Pioneer Concrete Services 6,000 12,749 ) Kahlua Ltd ) Properties ) Pty Ltd Wormald International Ltd 900 ) and Kahlua ) Aberdeen- T.V.W. Enterprises Ltd ) Angus Stud - Rights 1,100 9 ) Pty Ltd ) as part of a ) family

re-organisation

C.S.R. Ltd 1,500 8,753 ) C.R.A. Ltd 3,500 14,654 ) Broken Hill Proprietary 1,000 14,532 ) Co. Ltd Manager's Decision Bougainville Copper Ltd 3,000 7,941 ) Brambles Inds Ltd 3,000 8,704 ) Commercial Bank of Aust 3,400 24,752 Takeover Brambles Inds Ltd - 477 146 ) Rights

Ashton Mining Ltd - Rights 732 323 ) C.S.R. Ltd - Rights 617 675 ) Mayne Nickless Ltd 6,600 13,982 ) Manager's Western Mining Corporation 2,000 6,907 Decision Chamberlain Holdings Ltd 10,000 17,080 ) M.I.M. Holdings Ltd - Rights 390 71 ) Grace Bros 8,088 24,739 Takeover Renison Goldfields Manager's Consolidated Ltd 4,600 18,400 Decision E.Z. Industries (rights) 550 652 ) Seltrust Holdings Ltd )

(rights) 450 45 ) National Consolidated )

(rights) 1,176 279 ) YEAR ENDING 30 JUNE 1983

COMPANY SOLD PROCEEDS REASON FOR OF SALE SALE Elders IXL Ltd 1,800 5,734 ) E.Z. Industries Ltd 2,000 10,052 ) ) Manager's The Myer Emporium Ltd 3,000 4,077 ) decision N.Z. Forest Products Ltd 24 44 ) National Consolidated Ltd 5,880 5,929 Takeover Ashton Mining Ltd 3,660 5,885 ) Publishing and Broadcasting Ltd 10,000 17,000 ) ) Manager's ) decision Comalco Ltd 2,000 6,585 ) TVW Enterprises Ltd 5,808 12,981 ) Stocks and Holdings

Property Trust Rights 3,750 150 ) TVW Enterprises Ltd

rights 1,452 698 ) Growth Investments Ltd 2,520 6,067 Liquidation (in Vol Liquidation)

YEAR ENDING 30 JUNE 1984

COMPANY SOLD PROCEEDS REASON FOR OF SALE SALE Aztec Exploration Ltd 4,000 $ 947 ) ASC Property Trust Units 6,700 6,530 ) Manager's ) Decision Caltex Limited 3,000 3,494 ) Castlemaine Tooheys Ltd 7,593 29,676 Sold to meet part of tax on amended assessments Carlton and United 7,200 26,567 Takeover Breweries Ltd

Energy Resources of 6,200 8,620 ) Australia Ltd ) Philip Morris (Aust) Ltd 4,273 13,329 ) Manager's ) Decision P and O Australia Ltd 6,000 11,370 ) Renison Goldfields 1,000 3,504 ) Consolidated Ltd ) Stocks and Holdings 15,000 19,500 Trust wound up Property Trust Units

Umal Consolidated Ltd 7,700 27,104 Takeover ICI Limited Rights 2,222 642 Manager's Decision YEAR ENDING 30 JUNE 1985

COMPANY SOLD PROCEEDS REASON FOR OF SALE SALE Carr Boyd Minerals Ltd 1,000 $1,846 Poor performanc EZ Industries Ltd 750 4,644 Takeover N and K Properties Ltd 1,000 314 Poor performanc Westpac Banking 5,780 5,661 ) Manager's Corporation Ltd Rights ) Decision YEAR ENDING 30 JUNE 1986

COMPANY SOLD PROCEEDS REASON FOR OF SALE SALE Allied Mills 18,220 $59,215 Manager's Decision BHP Co Ltd 12,020 110,584 ) Castlemaine Tooheys Ltd 1,293 10,667 ) ) Takeover Myer Emporium Ltd 15,120 38,133 ) Repco Corporation Ltd 19,320 30,139 ) Convertible Notes 2,760 3,943 )

The profits derived from those sales were as follows:-

Year ending 30 June 1980 $93,706 Year ending 30 June 1981 84,981 Year ending 30 June 1982 79,367 Year ending 30 June 1983 25,282 Year ending 30 June 1984 5,891 Year ending 30 June 1985 10,048 Year ending 30 June 1986 171,387

An officer of the Taxation Office has given this analysis of purchases and sales of listed shares.

"ANALYSIS OF PURCHASES AND SALES OF SHARES OMITTED"

The significance of the takeovers should be noted. Dealings resulting from takeovers amounted to 46% in value of all dispositions. Omitting the takeovers, dispositions in each year ranged from 1.03% to 16% of the value of the shares held at the beginning of the year.
As the present issue concerns the assessability of the profits made by Radnor on the sale of its shares, counsel for Radnor understandly relied upon the decision in Charles v. Federal Commissioner of Taxation (1954) 90 CLR 598 while counsel for the Commissioner relied upon London Australia Investment Company Limited v. Federal Commissioner of Taxation (1977) 138 CLR 106 ("London Australia").
The question to be resolved, in the circumstances of the present case, is whether or not the subject profits were derived from a business of dealing or trading in shares. In Commissioner of Taxation for the Commonwealth of Australia v. Equitable Life and General Insurance Co. Ltd (Davies, Pincus and Gummow JJ., unreported, 13 June 1990), I discussed the relevant principles in these terms:-

"The starting point is the principle stated by the Lord Justice Clerk, the Right Honourable J.H.A. McDonald, in Californian Copper Syndicate v. Harris (1904) 5 TC 159 at pp 165-6, where his Lordship said:- '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.

...

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?' The importance of His Lordship's remarks for present purposes lie in his Lordship's reference to 'a business' and 'an operation of business'. If what occurred in the present case was an activity of business, then the profits would be assessable. The relevant business, if there was one, would for present purposes be a business of dealing or trading in shares for, as I have said, the share transactions were not an incident of an insurance or any other business. In Federal Commissioner of Taxation v. Whitfords Beach Pty Ltd, (1980) 150 CLR 355, cited above, Gibbs CJ at p 362, after referring to Jones v. Leeming (1930) AC 415, said:-

'... 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 p 363, after referring the to remarks in Ruhamah Property Co Ltd v. Federal Commissioner of Taxation (1928) 41 CLR 148, his Honour said:-

'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."

At p 372, Mason J. said:- '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.' This was also the way in which the matter was regarded in Federal Commissioner of Taxation v. Myer Emporium Ltd (1987) 163 CLR 199, in which at pp 209-10, Mason ACJ., Wilson, Brennan, Deane and Dawson JJ. commented:- 'Although it is well settled that a profit or gain made in the ordinary course of carrying on a business constitutes income, it does not follow that a profit or gain made in a transaction entered into otherwise than in the ordinary course of carrying on the taxpayer's business is not income. Because a business is carried on with a view to profit, a gain made in the ordinary course of carrying on the business is invested with the profit-making purpose, thereby stamping the profit with the character of income. But a gain made otherwise than in the ordinary course of carrying on the business which nevertheless arises from a transaction entered into by the taxpayer with the intention or purpose of making a profit or gain may well constitute income. Whether it does depends very much on the circumstances of the case. ... The authorities establish that a profit or gain so made will constitute income if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit.'

At p 213, their Honours said:- '... over the years this Court, as well as the Privy Council, has accepted that profits derived in a business operation or commercial transaction carrying out any profit-making scheme are income, whereas the proceeds of a mere realization or change of investment or from an enhancement of capital are not income: Ruhamah Property Co. Ltd. v. Federal Commissioner of Taxation (1928) 41 CLR 148, at pp 151-2, 154; McClelland v. Federal Commissioner of Taxation (1970) 120 CLR 487, at pp 495-496; London Australia Investment Co. Ltd. v. Federal Commissioner of Taxation (1977) 138 CLR 106, at pp 115-116 and see Whitfords Beach. The proposition that a mere realization or change of investment is not income requires some elaboration. First, the emphasis is on the adjective 'mere': Whitfords Beach (1982) 150 CLR, at p 383. Secondly, profits made on a realization or change of investments may constitute income if the investments were initially acquired as part of a business with the intention or purpose that they be realized subsequently in order to capture the profits arising from their expected increase in value: see the discussion by Gibbs J. in London Australia (1977) 138 CLR, at pp 116-118. It is one thing if the decision to sell an asset is taken after its acquisition, there having been no intention or purpose at the time of acquisition of acquiring for the purpose of profit-making by sale. Then, if the asset be not a revenue asset on other grounds, the profit made is capital because it proceeds from a mere realization. But it is quite another thing if the decision to sell is taken by way of implementation of an intention or purpose, existing at the time of acquisition, of profit-making by sale, at least in the context of carrying on a business or carrying out a business operation or commercial transaction." The same principle applies to such investment companies as carry on a business of dealing or trading in investments. See, eg., Scottish Investment Trust Co v. Forbes (1893) 3 TC 231 in which at p 234, the Lord President said:-

'But from the structure of the Memorandum it appears that the varying the investments and turning them to account are not contemplated merely as proceedings incidentally necessary, for they take their place among what are the essential features of the business. In my view such speculations are among the appointed means of this Company's gains.' In London Australia Investment Co Ltd v. Federal Commissioner of Taxation (1977) 138 CLR 106, an investment company, listed on the London Stock Exchange, was held to be assessable on its profits from its share trading activities. Barwick C.J., dissenting, accepted that the company carried on investment in Australian shares as a business or business activity but felt that it was no part of that business that the company traffic in shares. Gibbs J. and Jacobs J., however, came to the contrary conclusion. Their Honours each made reference to the extensive dealings which took place and to the derivation of both dividend income and substantial gains through share dealings. Reference was made to the fact that the activities of the company, which carried on an extensive investment business for the purpose of creating returns for its shareholders, necessarily involved it in switching or dealing with its investments. Gibbs J. held that the investment company was carrying on a business of dealing in shares. At p 116, his Honour referred to the remarks of the Lord Justice Clerk, cited above, and at p 118, rejected the contention that the principles I have discussed above related only to banking or insurance companies. His Honour said, having referred again to the remarks of the Lord Justice Clerk in Californian Copper Syndicate v. Harris:-

'That test is applicable to any business, and if the sale of the shares is an act done in what is truly the carrying on of an investment business the profits will be taxable just as they would have been if the business had been that of banking or insurance.

At p 128, Jacobs J. said:- 'Therefore, once profits on sale are found not to fall within the first limb of s.26(a), the determinant is the carrying on of a business, not any associated business in a general sense, but the specific business of acquisition with a purpose or intention or expectation of resale and subsequent resale with consequent profit. Though frequent activity of acquisition and resale does not necessarily signify a business, it is evidence from which it may be inferred that there is a business.'"

These principles were also enunciated and applied by Lockhart, Jenkinson and Gummow JJ. in CMI Services Pty Ltd v. Federal Commissioner of Taxation (unreported, delivered 14 June 1990) and by Lockhart, Gummow and Hill JJ. in Federal Commissioner of Taxation v. Cooling (unreported, delivered 28 June 1990).

Thus, putting s.26(a) and s.25(A) of the Act on one side, and they were not relied upon by counsel for the Commissioner, the question is whether or not Radnor's activities constituted a business of dealing or trading in shares.
Such a question, which is one of fact or of fact and degree, can be difficult. I have mentioned the aspects of regularity and frequency. It is sufficient in this respect to refer to the remarks of Jacobs J. in London Australia at p 128, cited above. It is also relevant that the activity was carried on in a businesslike way. See e.g., Ferguson v. Federal Commissioner of Taxation (1979) 37 FLR 310 per Bowen C.J. and Franki J. at p 314. And the fact that the taxpayer is an incorporated company has weight, but probably less so in this country than in the United Kingdom. See London Australia per Gibbs J. at p 116 and Jacobs J. at p 129.
Another factor to be given weight, when relevant, is that the taxpayer is a trustee. A trustee has a duty to invest the trust funds, to derive income thereon and to preserve the capital of the fund. See Jacob's Law of Trusts in Australia, 5th Ed., p 431.
However, a trustee may not speculate. See e.g., Sidey v. Huntly (1900) 21 LR (NSW) Eq 104. As Lindley L.J. said in In re Whiteley. Whiteley v. Learoyd (1886) 33 Ch D 347 at p 355:-

"The duty of a trustee is not to take such care only as a prudent man would take if he had only himself to consider; the duty rather is to take such care as an ordinary prudent man would take if he were minded to make an investment for the benefit of other people for whom he felt morally bound to provide."

Thus, when a taxpayer is a trustee, it is less likely that a finding will be made that the sale of shares was an operation in the course of carrying on a business of investing for profit and more likely that the finding will be made that the sale was a mere realisation or change of investment. As Gibbs J. said in London Australia at p 118:-

"The position of an investment company is materially different from that of an individual managing his own portfolio of shares. It is different also from that of a trustee managing a portfolio of shares in a trust fund."

His Honour went on to explain that it was this factor which distinguished London Australia from Charles v. Federal Commissioner of Taxation.

In Charles case, which was decided before trusts were used commonly for trading purposes, Dixon C.J., Kitto and Taylor JJ. noted the following facts, at p 606:-

"The deed contained no power to traffic in securities. Indeed it provided that except for purposes of the deed the trustees should not sell any of the investments until the determination of the trust (cl.5). But in addition to conferring on the trustees a power to sell investments in order to give effect to certain provisions directed to ensuring that the uncalled liability in respect of any of the investments could be met (cl.4 (C)), the deed gave a wide power to vary investments."

At pp 609-610, their Honours said:-

"The evidence established that these dealings were considerable; they occurred frequently and produced substantial profits. Indeed, most sales of securities were made at prices in excess of cost. Moreover, all the profits thus made, less such losses as were sustained, were paid out to the certificate holders in the half-yearly distributions, the managers exercising the discretion given them by cl.13

(B) to include all these profits (less losses) in the 'cash produce'. This was a course of action which obviously had been contemplated from the beginning; and if the proper conclusion from the evidence were that the managers and the trustees co-operated in pursuing a systematic course of buying and selling securities for the purpose of producing profits and thereby swelling the half-yearly amounts of 'cash produce' available for distribution to certificate holders, the commissioner's opinion that such profits should be treated as assessable income of the certificate holders when paid over to them would be clearly correct. But the evidence of the only witness in the case, Mr T.R. Groom the managing director of Unit Trusts Ltd. was that at no time were securities acquired for the express purpose of re-sale at a profit, and that sales were normally made when the managers anticipated a fall in the value of shares. The purpose (he explained in effect) was to preserve for the fund any increase in value which had occurred and which it seemed likely would otherwise be lost. He said (p 115) that the general policy of the managers was to hold the securities as investments, and that their 'standard idea' in buying was to buy the best available securities and to hold them unless there appeared to be some good reason for selling."

Their Honours concluded at pp 611-612:-

"It remains to consider one argument upon which counsel for the commissioner relied. They contended, in effect, that even if the position be accepted that the course pursued in the administration of the Trust cannot properly be described as the carrying on of a business of stock-jobbing, still it amounted to a business of making profits of various kinds for the certificate holders, and that the selling of rights, and the buying of securities and re-selling them at prices in excess of cost, were part and parcel of the sum of activities by which those profits were made. In such a situation, counsel submitted, cases such as Punjab Co-operative Bank Ltd., Amritsar v. Commissioner of Income Tax, Lahore

(1940) AC 1055 and Colonial Mutual Life Assurance Society Ltd. v. Federal Commissioner of Taxation (1946) 73 CLR 604 show that the whole of the profits realized, even though some part of them would otherwise be of a capital nature, are to be regarded as income. To accept this argument, however, would be to ignore the evidence already mentioned, which is inconsistent with the notion that the activities of the managers, or of the managers and the trustees together, were different in kind from those in which trustees normally engage who hold a portfolio of shares with power to vary investments from time to time as they consider the interests of the beneficiaries require. According to that evidence, the moneys in question arose, not (as in the cases cited) from transactions forming incidents in the conduct of a business or a profit-making scheme, but from transactions effected in the course of performing a fiduciary duty to preserve for beneficiaries as far as practicable the assets comprising the trust fund and any increments in the value of those assets which might appear from time to time to be in jeopardy. The case therefore differs fundamentally from the cases relied upon by counsel for the commissioner."

In London Australia, Gibbs J. cited from this conclusion at p 118 and Jacobs J. cited it at p 132. Jacobs J. went on to say:-

"Thus it could be concluded that there was no business but merely an activity of investment which was explicable by reference to the specific duties of trustees and therefore did not lead to an inference adverse to the taxpayer. In my opinion the same cannot be said of the course of activity and the reasons given therefor which are present in the instant cases."

Like considerations apply in the present case for Radnor, though it is not the trustee of the trusts, is the instrument of the trustee for the purpose of investment of the trusts' funds. Being the investment arm of the trustee, Radnor must manage its investments having regard solely to the interests of the beneficiaries. Radnor was aware of and involved with the trusts and, if Radnor or its directors had acted in a manner inconsistent with the trust obligations or otherwise than in the interests of the beneficiaries, they would have been liable for the consequences. See Bacon V.C. in Lee v. Sankey (1873) LR 15 Eq 204 at p 211.
In this circumstance, I am of the view that it would be wrong to characterize Radnor's activities as a business of dealing or trading in shares. Radnor's function was not to trade but to invest. Radnor had the ongoing duty to see to both the derivation of income and the protection of the capital.
I incline to think that, absent this factor, I would conclude that the frequency of acquisition and sale, the engagement of professional managers and the resort to a system, if I might call it that, whereby shares were bought and sold by reference to the proportions of various classes of shares in the All Ordinaries Index, tended to characterize Radnor's activities as a business of dealing in shares.
But Radnor was not an investment company carrying on a business for the profit of shareholders. Radnor was the investment arm of a trustee and was under a duty to invest funds to the benefit of beneficiaries. As such, Radnor had a duty regularly to review its investments so as to maintain an adequate level of current income and to maintain the value of the fund. If it did so in a businesslike way, it did not cease to be carrying out its function to care for the funds in the interests of beneficiaries.
My conclusion in the present case therefore is that Radnor was not carrying on a business of dealing in shares and that the assessements were incorrect.
I shall therefore allow the appeals with costs, set aside the Commissioner's decision on the objections and remit the matters to the Commissioner of Taxation for reconsideration according to law with the direction that the subject profits derived from the sale of investments were not assessable income.

[1990] FCA 363

20 JULY 1990