Steinberg v Federal Commissioner of Taxation

[1975] HCA 63

HIGH COURT OF AUSTRALIA

Mason J., Barwick C.J., Menzies, Gibbs and Stephen JJ. (THE RIGHT HONOURABLE MR. JUSTICE MENZIES died before judgment was delivered in this case.)

STEINBERG v. FEDERAL COMMISSIONER OF TAXATION ;

(1975) 134 CLR 640

4 May 1973

Income Tax

Income Tax—Profit arising from sale of property acquired for purpose of profit-making by sale—Identity of property acquired and property sold—Purchase of all shares in land-holding company as means of acquiring land—Voluntary liquidation—Distribution of company's assets in specie—Subsequent sale of land by individuals who received land as tenants in common—Calculation of profit—Evidence of taxpayer about purpose of acquiring land not accepted—Burden of proof—Income Tax Assessment Act 1936-1970, ss. 26(a), 190(b). Income Tax—Profit arising from carrying on or carrying out profit-making scheme—"Scheme"—Acquisition of property with intention of making profit—Manner in &hich profit to be made not then decided—Company incorporated to acquire property—Voluntary liquidation—Distribution of company's assets in specie—Subsequent sale by individuals who received land as tenants in common—Participation by individuals in scheme—Income Tax Assessment Act 1936-1970, s. 26(a).

Decisions

1973, May 4.
MASON J. delivered the following written judgment:-
These appeals, by Morris Steinberg, by the trustee of a trust established by his wife Judith Steinberg and by Malcolm Steinberg, his son, relate to various transactions in which parcels of land situated at Innaloo, Rockingham and Wanneroo, outlying suburbs of Perth, were acquired and subsequently resold at a considerable profit. The principle actor in these transactions was Mr. Steinberg and it is therefore necessary to state shortly his circumstances and the arrangements which he made with respect to his affairs before, and in the course of, the relevant transactions. (at p644)

2. In 1949 Mr. Steinberg commenced to carry on in partnership with his two brothers, Reuben and Matthew, the business of furniture manufacturers. In 1953 the wives of the three partners, including Judith, Mr. Steinberg's wife, became members of the partnership. It then acquired a retail firm in Murray St., Perth, and commenced to carry on a furniture retailing business under the name of Murray's Furnishing Stores. The business prospered until 1955 when its turnover was $360,000 and its profit in excess of $28,000 for the year. (at p644)

3. However, the firm then ran into difficulty. The premises in which it carried on business were acquired by Woolworths Ltd. and the partnership was compelled to move to other premises. Thereafter its business fell away. Within two years the turnover had fallen to $250,000 and the profit to $11,000 per annum. It was then decided that the partnership should look for some other income-producing venture. (at p644)

4. In 1956 Mr. Steinberg had become acquainted with Percy Markham, a real estate agent. In that year Mr. Steinberg became a member of a syndicate formed by Mr. Markham to acquire land at Gosnells, an outer suburb of Perth, with a view to its resale at a profit. Thereafter Mr. Steinberg, at Mr. Markham's invitation, became a member of a number of syndicates formed for the purpose of acquiring land and re-selling it at a profit. The syndicates, thirteen in all, were formed and carried on business in the succeeding years. The last syndicate was formed in December 1969. Each syndicate acquired a large parcel of land in outlying suburbs of Perth; the land was unsubdivided land. Without exception the syndicates were profitable, some exceedingly so. The profits thus made formed part of the assessable income of the syndicate members and were disclosed as assessable income in the partnership and individual tax returns. In some instances Mr. Steinberg held his interest in the syndicate as a nominee for Murray's Furnishing Stores, sometimes in his own right and in one case as a nominee for his wife and himself. (at p645)

5. In addition Mr. Steinberg became a member of a syndicate which acquired land at Kelmscott with his wife, his brothers and their wives in 1967. The land was sold at a profit in subdivision. In the same year with his wife and two sons Malcolm and Gordon he formed a syndicate which acquired land at Swan View. In 1969 he formed two syndicates in which his wife and a family company, as well as himself, and in one case his two sons, were members. One syndicate acquired land at Gosnells which was sold at a profit and the other acquired land at Kelmscott which is still held. (at p645)

6. In 1963 on the advice of his accountant Mr. Eli Rhine, steps were taken by Mr. Steinberg to reorganize his affairs so as to reduce his liability to income tax and for estate planning purposes. These steps, which I shall set out in detail, resulted in a change in the membership of the partnership of Murray's Furnishing Stores. Mr. Steinberg was advised that he and his wife should transfer their assets to a new partnership, M.J.S. Investments, and that a number of discretionary trusts should be created to become members of that partnership. (at p645)

7. With this end in view, eighteen deeds of trust were executed on 1st June 1963. Mr. Rhine was the trustee appointed under each deed. Judith Steinberg was the settlor under three deeds of trust, including the Judith Steinberg No. 2 Trust. In each case the sum of fifty dollars was settled on the trustee who was given power to enter into a partnership, in addition to power to invest. The trustee was required until the expiration of eighty years to hold the trust fund upon trust to divide or apply the whole of the income between all or any of the persons living and included in the class of beneficiaries mentioned in the Schedule to each deed in such proportions and in such manner as he in his absolute discretion might think fit. Subject to these provisions, the trustee was directed to hold the capital and income upon trust for the members of the class living at the end of eighty years. The trustee was given power to pay or apply the whole of the trust fund to any one or more of the beneficiaries before the expiration of the eighty years (cl. 1). Power was conferred on Mr. Steinberg or his wife to remove trustees and appoint new trustees (cl. 7). (at p646)

8. The beneficiaries of the Judith Steinberg No. 2 Trust were expressed to include the husband, children (except Gordon Steinberg) and remoter issue of Judith Steinberg. There were variations in the description of the class of beneficiaries under each of the deeds, but they included the children of Mr. Steinberg and his wife, sometimes excluding one of the children and sometimes including Mrs. Steinberg, although she was not a beneficiary under the three deeds under which she was a settlor. (at p646)

9. On the same day a deed of partnership was executed between Mr. Steinberg, Mrs. Steinberg and Mr. Rhine as trustee of the eighteen trusts. The business of the partnership was expressed to be general dealers and investors. The capital was $1,000. The deed provided that the partners should be deemed to hold units in partnership. The units were divided into two classes, A units and B units. (at p646)

10. The deed of partnership provided that Mr. Steinberg and his wife were each to hold fifty dollars in A units and that Mr. Rhine as trustee of each of the trusts was to hold fifty dollars in B units. The A units carried the right to cast fifty-one per cent of the rights exercisable at every general and committee meeting of partners, but in other respects they carried limited rights. The holders of A units were entitled to a preferential payment out of the annual profits of an amount not exceeding ten per cent of the nominal amount of the A units held, but no further right to participate in the distribution of profits. Likewise they were entitled on a winding up to a return in property of the original capital but no right to receive any distribution in excess. (at p646)

11. On 1st June 1963 Mr. Reuben Steinberg, Mr. Matthew Steinberg and their two wives agreed in writing to M.J.S. Investments, the new partnership, succeeding to the capital and interests of Mr. and Mrs. Steinberg in the partnership of Murray's Furnishing Stores. On the same day Mr. Steinberg sold to M.J.S. Investments his one-sixth share in Murray's Furnishing Stores as at that date for the sum of $10,000 or such higher figure as the Commissioner of Stamps might assess and Mrs. Steinberg likewise sold her one-sixth share for the sum of $19,600 or such higher figure as the Commissioner of Stamps might assess. (at p647)

12. By a deed dated 1st July 1963 Mr. Steinberg sold to M.J.S. Investments his 1,000 A class and 200 D class shares in Malgor Pty. Ltd., together with the shares which he held in a company known as Indoor Amusements Games Pty. Ltd., for the sum of $32,400 or such higher figure as the Commissioner of Stamps might assess as the value for the purpose of stamp duty. On the same day Mrs. Steinberg sold to M.J.S. Investments her 500 B class shares. (at p647)

13. As a result of these transactions the sole asset of the trusts was their investment in the partnership M.J.S. Investments which acquired the assets of Mr. and Mrs. Steinberg including their interests in Murray's Furnishing Stores. As Mr. Rhine explained in his evidence profits earned by the partnership Murray's Furnishing Stores would be distributed between its members, including M.J.S. Investments, and thereby to the trusts which were members of that partnership. The consequence was that Mr. and Mrs. Steinberg would receive less income from Murray's Furnishing Stores than they would have received had the arrangement not been made. (at p647)

14. By Act No. 110 of 1964 amendments were made to the Income Tax Assessment Act which adversely affected the liability to income tax of discretionary trusts. On 24th July 1965 Mr. Rhine "liquidated" the trusts by making a distribution of their assets, the B units in M.J.S. Investments to each member of the partnership as follows: To Mr. Steinberg 125 B units held by five trusts, including the Judith Steinberg No. 2 Trust; to Mrs. Steinberg 125 B units held by five trusts; to Malcolm Steinberg 100 B units held by four trusts; and to Gordon Steinberg 100 B units held by four trusts. The transfer of the units was approved by the other partners in Murray's Furnishing Stores. The result was that the membership of the M.J.S. Investments partnership consisted of Mr. Steinberg and the three members of his family. M.J.S. Investments continued to be a member of the Murray's Furnishing Stores partnership, together with Mr. Steinberg's two brothers and their wives. (at p647)

15. An understanding of these arrangements is essential to an appreciation of the various appeals which arise for decision. As will appear, the affairs of the Steinberg family were to become more complex when Malgor Pty. Ltd., a company which Mr. Steinberg caused to be incorporated, acquired land at Rockingham and was subsequently wound up, the liquidator transferring the land in specie to the shareholders, and the members of the family acquired the share capital of Golden West Land Development Co. Pty. Ltd., a company which owned land at Wanneroo. This company also was wound up and its land transferred in specie to its shareholders. There is at this stage no occasion to deal with the history of the two companies; it is recounted more conveniently when I come to consider the appeals that relate to the profits made on the sale of the land at Rockingham and Wanneroo. (at p648)

The sale of land at Innaloo - appeal by the trustee of the Judith Steinberg No. 2 Trust.

16. In February 1965 Murray's Furnishing Stores sold land at Innaloo, near Perth, to the Grove Shopping Centre Ltd. for $100,400, thereby making a profit of $60,298. At that time M.J.S. Investments held a one-third interest in Murray's Furnishing Stores, the members of M.J.S. Investments being Mr. and Mrs. Steinberg (each holding A units with limited rights) and the eighteen trusts (each holding B units), including the Judith Steinberg No. 2 Trust. (at p648)

17. The profit was disclosed in the partnership income tax return lodged by Murray's Furnishing Stores for the year ended 30th June 1965. It was claimed that the profit did not form part of the assessable income of the partnership on the ground that the land was purchased for the purpose of developing it as a site for a hotel and a shopping centre. It was said that the land was ultimately sold because the development contemplated could not be carried out and because funds were required for the purpose of investing in a land-owning company called Golden West Land Development Co. Pty. Ltd. (at p648)

18. The trust was assessed to income tax for the year ended 30th June 1965 on the footing that its share of the profit made on the sale of the land at Innaloo formed part of its assessable income for the year. Its taxable income as returned was $378, to which was added the sum of $1,124 reflecting its share of the profit on the sale of the land, and the sum of $1,658 representing the trust's share of profit on the sale of shares in Malgor Pty. Ltd., making a total of $3,160. The trustee objected to the inclusion of both amounts as assessable income. (at p648)

19. As a preliminary to the history of the acquisition and sale of the land at Innaloo I should mention Mr. Steinberg's acquisition of a hotel site in the Nollamara area. In 1958 acting on behalf of Murray's Furnishing Stores, he tendered successfully for the site which had been made available by the State Housing Commission. The amount of the tender was $24,500. The partnership did not proceed with the project of building a hotel on the land by reason of its inability to raise the necessary finance for the construction. Mr. Steinberg made efforts to raise a substantial loan in Perth and in Melbourne but he was unable to do so on satisfactory terms. In October 1958 he requested the Housing Commission to defer payment of the balance of the purchase price on the ground that he and his associates were having difficulty in securing sufficient mortgage money, but the request was refused. In the result the land was returned to the Housing Commission. (at p649)

20. In December 1959 Mr. Steinberg was informed by an estate agent that a property at Innaloo, being lot 1 at the corner of Oswald St. and Scarborough Beach Road, containing seven and three-quarter acres, owned by Mr. Frank Randall, was for sale. Mr. Steinberg inspected the property and was shown a letter dated 26th November 1959 from the Perth Road Board stating that the town planning board would not agree to rezoning of the land which permitted shops or industry, but would consider development as a public building, including a hotel. The letter did not rule out the possibility of development of the land for a supermarket or a department store limited in area. (at p649)

21. On 29th January 1960 Mr. Steinberg paid Mr. Randall $110 for an option to purchase as follows: (i) five acres for $15,000; (ii) the whole of the land (excluding a part not less than one and one-sixth acres in area) for $27,000; or (iii) the whole of the land for $32,000. It is not entirely clear whether Mr. Steinberg exercised the option to purchase the whole of the land (excluding one and one-sixth acres) shortly thereafter, but on 11th February 1960 he paid the sum of $400 on behalf of himself and his two brothers to Mr. Randall as an initial deposit on the purchase of the whole of the land less the one and one-sixth acres for the price of $25,000. (at p649)

22. On the next day, 12th February 1960 an agreement was executed by Mr. Randall as vendor and Mr. Steinberg and his two brothers as purchasers. It provided for the sale and purchase of the five-acre parcel of land for $15,000. It acknowledged that the sum of $800 had already been received as a deposit and it provided that the sum of $4,200 should be paid as a further deposit on execution and the balance of $10,000 by equal half-yearly payments. Clause 20 of the agreement gave the purchasers an option (to be exercised on or before 12th May 1960) to purchase the parcel of land being not less in area than one and one-sixth acres for $10,000. Clause 21 gave the purchasers an option to acquire the balance of the land, in the event that the vendor elected within three years to sell that land, at a valuation. (at p650)

23. Neither the evidence nor the documents demonstrate with clarity whether the land which was the subject of cl. 21 of the agreement was acquired by Mr. Steinberg and his brothers. But within six weeks of the making of the agreement of 12th February 1960 Mr. Steinberg, acting on behalf of himself and his brothers, granted the Waikiki Motel Ltd. an option to purchase part of lot 1, being four and a half acres, and including the land which was the subject of cl. 21, for the sum of $56,000, subject to the obtaining of a provisional certificate for a general publican's licence. This option was expressed to expire on 22nd December 1960. It was followed by an agreement dated 27th September 1960 by which the three brothers granted to the company an option to acquire the whole of the land in lot 1 until 22nd October 1961 for the sum of $50,000. It seems that little or nothing was done in connexion with the land until the option expired on 22nd October 1961. (at p650)

24. Mr. Steinberg says that it was then decided to develop the site as a site for a hotel, shopping centre and service station. Mr. Duirs, an accountant experienced in developments of this kind, was retained. On 22nd November 1961 he made an application to the Shire of Perth for its approval to the proposed development, but the shire indicated that it was not prepared to approve the hotel/motel development which involved direct access to Scarborough Beach Road. Despite further efforts on the part of Mr. Duirs and Miss Feilman, a town planner who had also been engaged, to secure approval on the basis of favourable road access, neither the Shire of Perth nor the town planning board was willing to approve a hotel development on the site of a kind which the owners considered satisfactory. By letter dated 15th January 1962 on the instructions of Mr. Steinberg, Mr. Duirs offered the whole site (excluding the service station only) to the Swan Brewery Co. Ltd. for purchase for the sum of $60,000, on terms that the company was to be responsible for all development work required by the local authority. The offer was immediately rejected. (at p650)

25. In evidence Mr. Steinberg said that up to 12th January 1962 he was considering the formation of a syndicate to develop the land as a site for a hotel and a shopping centre. He admitted that he had taken no steps before that date to seek finance or to invite a retailer to take an interest in the shopping centre because, as he said, he was waiting for the site to be rezoned. He claimed that shortly before the offer was made to the Swan Brewery Co. Ltd. on 15th January he came to the conclusion that "we were not going to get anywhere with the site" because there was very little hope of approval of a development with satisfactory road access. It was, he claimed, a consequence of his reaching this conclusion that the offer was made to the Swan Brewery Co. Ltd. He still had it in mind that part of the land might be developed as a shopping centre, although from that time onwards he abandoned the proposal for development of part of the site as a hotel. (at p651)

26. Thereafter nothing was done in connexion with the land until the middle of 1963 when Mr. Gordon Campbell approached Mr. Steinberg and said that his firm would be pleased to promote the land, or part of it, as a shopping centre. Mr. T. Ahern was approached with a view to his firm becoming the retailer in the shopping centre. Mr. Ahern requested the submission of layout plans and instructions were then given to Messrs. Oldham, Boas &Ednie-Brown to prepare suitable plans for such a development. The plans were prepared in or about the month of April 1964 at a fee of $210. However, Mr. Ahern indicated that his firm was not interested in the proposal. (at p651)

27. Although on the documents it appears that Mr. Steinberg initially acquired the option to purchase and later that he was acting on behalf of himself and his two brothers, the return of income was lodged by the partnership Murray's Furnishing Stores and assessments issued to the members of the partnership, including the trustee of the Judith Steinberg No. 2 Trust. It is accepted by the parties that the land was acquired by the partnership Murray's Furnishing Stores and sold by that partnership. (at p651)

28. In support of the assessment reliance was placed on both parts of s. 26(a). The onus is on the taxpayer to show that the profit made does not fall within either part of the provision. To escape the first part of the provision the taxpayer must show that the land was not acquired for the purpose of profit-making by sale, that resale at a profit was not the partnership's sole or dominant purpose in acquiring the land (see Evans v. Deputy Federal Commissioner of Taxation (S.A.) (1936) 55 CLR 80, at p 99 , per Rich, Dixon and Evatt JJ.). (at p651)

29. The taxpayer's case rests mainly on the oral evidence of Mr. Steinberg and it is necessary that I weigh his evidence carefully for it was not corroborated by his brothers or by the other members of the partnership. I have come to the conclusion that his evidence concerning his attitude and that of his associates to the purchase of the land is open to such serious doubt that I am not prepared to accept it. My reasons for that conclusion may be shortly stated. (at p652)

30. Mr. Steinberg, as his earlier association with the Markham interests showed and his later association with these and other interests was to show, was a man with a keen eye for the prospect of making a profit by the purchase and sale of land. However, throughout his evidence he was at pains to disavow any skill, experience or perception in that field. In these appeals three large parcels of unsubdivided land on the outskirts of Perth were purchased on Mr. Steinberg's decision and were subsequently resold at a very large profit. In each case Mr. Steinberg says that the land was not bought for resale, but for retention for a purpose which would yield income and that the prospect of profitable resale did not occur to his mind, firmly fixed as it was on other and distant prospects not mentioned in s. 26(a). In each case the profit made was not contemplated by Mr. Steinberg and the manner of its making was apparently not foreseen by him. In my view this account conveys a picture of Mr. Steinberg's talents which is too modest by far for in my assessment he is an astute and able businessman with a keen sense for the prospect of a profit. (at p652)

31. There are a variety of circumstances which combine to invest Mr. Steinberg's account of the purpose for which the land was bought with an air of improbability. His account of his intentions, and those of the partnership for which he is acting, is best summarized in his own words: "We were going to build a hotel motel and a shopping centre, but if we didn't get a licence it would be a motel and shopping centre." Yet all that he had at the time of purchase by way of assurance that the land could be developed for these purposes was the letter dated 26th November 1959 which raised doubts concerning the future use of the site for shops, a supermarket or a department store. (at p652)

32. The development proposed by Mr. Steinberg required substantial expenditure. Apart from his expressed belief that finance could be obtained, no evidence was offered of the Steinbergs' financial resources at the time or of the availability of finance. The failure of the Nollamara venture due to lack of finance in the previous year would have alerted Mr. Steinberg to the difficulty of procuring capital on satisfactory terms. (at p653)

33. The principal point of criticism of Mr. Steinberg's account is that his actions after the purchase of the land were inconsistent with his earlier intentions as he expressed them. Within six weeks of the purchase he granted an option to purchase the major part of the land for $56,000 to Waikiki Motel Ltd. The option was extended to 22nd October 1961. Shortly after its expiry he caused the land to be offered to the Swan Brewery Co. Ltd. for $60,000 excluding a service station site which he hoped to sell independently. These actions he sought to explain by saying that the option was granted because it was then realized that the shopping centre could be more readily developed with the proceeds of sale of the hotel site and that by early 1962 he realized that he had little hope of securing approval of his proposals for the development of the hotel. I am not convinced that these explanations are accurate; indeed, I think it more likely that Mr. Steinberg had envisaged the sale of the site from the moment when he decided to buy it. According to him the development of the land for a hotel was his primary purpose, yet on his account he was prepared to abandon that purpose within six weeks of the purchase. At the time when the land was offered to the Swan Brewery Co. Ltd. his proposals for development were under consideration by the town planning board and a decision had not been received on that proposal. (at p653)

34. At no time did Mr. Steinberg seek finance for the development of the land. Nor did he seek to interest a major retailer in participating in a shopping centre there until the middle of 1963. In the intervening three years he had displayed a masterly inactivity, except for his attempts to secure approval of a hotel development. Those attempts do not evidence an intention to develop; they are consistent with a desire to achieve the highest price on resale by selling the site on the footing that there was a firm town planning approval for the erection of a hotel. The hypothesis remains that profit-making by sale was the purpose for which the land was acquired. I do not regard Mr. Steinberg's evidence of intention, which is unsubstantially, if not wholly, uncorroborated, as dispelling that hypothesis. (at p653)

35. I am therefore not satisfied on the probabilities that the land at Innaloo was not acquired for the sole or dominant purpose of profit-making by sale (see Evans v. Deputy Federal Commissioner of Taxation (S.A.) (1936) 55 CLR, at p 99 ). It was objected that none the less that part of the proceeds of sale received by the Judith Steinberg No. 2 Trust was not assessable income because there was no evidence to show that it or the partnership of which it was a member had acquired the land for profit-making by resale. The Murray's Furnishing Stores partnership which sold the land differed in its membership from the partnership which bought the land, by reason of the formation of the trusts, the formation of the M.J.S. Investment partnership and the transfer by Mr. and Mrs. Steinberg to that partnership of their assets, including their interest in the Murray's Furnishing Stores partnership, in July 1963. (at p654)

36. Had the point been available to the appellant in this appeal, it may have proved difficult of resolution. A partnership is not an entity distinct from its members; it is not the partnership that carries on business as such, but the individual members who carry on business in partnership (Income Tax Commissioners for City of London v. Gibbs (1942) AC 402 ). Section 6 of the Income Tax Assessment Act defines "partnership" to mean an association of persons carrying on business as partners or in receipt of income jointly. But neither this definition nor the provisions of div. 5 of Pt III relating to partnerships qualifies the principle of the general law that a partnership is not a distinct legal entity (see Rose v. Federal Commissioner of Taxation (1951) 84 CLR 118 ; Federal Commissioner of Taxation v. Happ (1952) ALR 382; (1952) 9 ATD 447; 5 AITR 290 ). By virtue of ss. 90 and 92 the assessable income of a partner includes his individual interest in the "net income" of the partnership, which expression is defined to mean the assessable income of the partnership, calculated as if the partnership were a taxpayer, less certain allowable deductions. (at p654)

37. For the purpose of applying s. 26(a) to the profit made on the sale of land which constituted partnership property it would have been necessary to ascertain the purpose for which the property was acquired by the members who constituted the relevant partnership. In this case the relevant partnership, Murray's Furnishing Stores, consisted of Mr. Steinberg's brothers and their wives and the members of the M.J.S. Investments partnership which was created on 1st June 1963 but did not acquire the interests of Mr. and Mrs. Steinberg in Murray's Furnishing Stores until 1st July 1963. (at p654)

38. In the light of the finding which I have already made, the interest in the land which the four continuing partners acquired must be regarded as having been acquired for the purpose of profit-making by sale. But it does not necessarily follow that the same could be said of the incoming partners. As it happens, I should not have come to a different conclusion had the question arisen for decision, for no evidence has been led with a view to satisfying me that the trusts acquired their interests in the Murray's Furnishing Stores partnership otherwise than with a view to the sale of the Innaloo land at a profit. What I have said would not dispose of the difficulty of ascertaining how much of the profit made on the sale of the land constituted assessable income of the trusts. (at p655)

39. However, these difficulties may be put aside because, when regard is had to the relevant returns of income and the notice of objection, the point is not available to the taxpayer. The return of income lodged on behalf of Murray's Furnishing Stores disclosed the profit as a capital profit made by that partnership, constituted as it was after the transactions entered into in June and July 1963. The statement accompanying that return which related the circumstances in which the land had been acquired and sold proceeded on the footing that the partnership which sold the land in 1965 was the partnership which bought it in 1960. The notice of objection to the assessment lodged on behalf of the trustee of the Judith Steinberg No. 2 Trust took as its principal ground the contention that the land at Innaloo was not acquired by the Murray's Furnishing Stores partnership for the purpose of profit-making by sale and that the sale did not form part of the carrying on or carrying out of a profit-making undertaking or scheme. The objection did not take the point that the partnership which sold the land was a different partnership from the partnership on whose behalf the land was acquired, or that the acquisition by the trust took place in July 1963 or that the trust had acquired an interest in the land for a purpose different from the purpose for which the land had initially been acquired in 1960. Accordingly, I am of opinion that the submission made on behalf of the taxpayer in this respect is not open to it under the notice of objection. I am therefore of opinion that the appeal fails so far as it relates to the profit made on the sale of land at Innaloo. (at p655)

40. The second question, which concerns a profit made on the sale of shares in Malgor Pty. Ltd., will be more conveniently taken up when I deal with the profits made on the purchase and sale of land at Rockingham.

The sale of shares in Malgor Pty. Ltd. and the sale of land at Rockingham.

41. The acquisition of a large parcel of land at Rockingham in 1960, the incorporation of a company known as Malgor Pty. Ltd. which became the purchaser of that land, the allotment of shares in the capital of that company to members of Mr. Steinberg's family, the sale of one-half of those shares to Mr. Markham, the liquidation of the company followed by the transfer of the land in specie to its shareholders and its ultimate sale at a vast profit give rise to a number of questions of considerable difficulty. (at p656)

43. The appeals raise the following issues concerning the shares in Malgor Pty. Ltd. and profits made on the sale of the land at Rockingham: (a) whether the profit of $1,655 made by the Judith Steinberg No. 2 Trust on the sale of shares in Malgor Pty. Ltd., beneficially owned by M.J.S. Investments, to Mr. Markham in July 1964 was assessable income by virtue of ss. 25 and 26 of the Act (Appeal No. 3 of 1972 by the trustee of the Judith Steinberg No. 2 Trust); (b) whether the profit of $8,778 made by Malcolm David Steinberg on the sale of 250 C shares in Malgor Pty. Ltd. to Mr. Markham in July 1964 was assessable income by virtue of ss. 25 and 26 of the Act (Appeal No. 4 of 1972 by Malcolm David Steinberg); (c) whether the sum of $10,442, being the taxpayer's share of the profit of $48,648 made on the sale of the land at Rockingham in the year ended 30th June 1970, was assessable income of Morris Steinberg by virtue of ss. 25 and 26 of the Act (Appeal No. 2 of 1972 by Morris Steinberg); and (d) whether the sum of $19,410, being the taxpayer's share of the profit of $48,648 made on the sale of the land at Rockingham in the year ended 30th June 1970, was assessable income of Malcolm David Steinberg by virtue of ss. 25 and 26 of the Act (Appeal No. 5 of 1972 by Malcolm David Steinberg). (at p656)

44. Some issues set out above involve more precise questions, but they are more conveniently discussed when the relevant circumstances have been stated comprehensively. Once again it is necessary to keep steadily in mind the transactions which took place in June and July 1963 respecting the affairs of Mr. and Mrs. Steinberg for, as in the case of the land at Innaloo, they have an importance. (at p656)

45. In or about the month of June 1960 Mr. Steinberg was approached by Mr. Charles Heppingstone, a stock and station agent, who had available for sale a property owned by the McLarty family, which was in the vicinity of Mandurah some twenty-eight miles from Perth. The land had an area of 700 acres and was used for grazing purposes. Mr. Steinberg drew Mr. Markham's attention to the land and they inspected it together. Mr. Markham considered that the land should be bought and proposed that a company should be formed under the name of the Southern Pastoral Co. However, the company was not formed and the land was purchased in the name of Mr. Markham who formed a syndicate in accordance with his usual practice. Mr. Steinberg became a member of the syndicate. It is acknowledged by Mr. Steinberg that the land was acquired for the purpose of resale. As yet the land has not been resold. (at p657)

46. In July 1960 Mr. Heppingstone informed Mr. Steinberg that another grazing property owned by the McLarty family was available for sale. This property consisted of 1,267 acres of land south of Rockingham. It was fenced; it had a windmill with water troughs for cattle and good natural pasture. The land was situated a mile or less from the sea and was in a rural area. There was no urban development in the vicinity. At the time, the McLartys had cattle grazing on the property. (at p657)

47. Mr. Steinberg inspected the land and decided that he would buy it. In evidence he said: "I was interested in it from a grazing point of view. I thought it would be an ideal site to make up a grazing property, somewhere where later on I could retire to, when circumstances warranted it, and I had in mind to make it quite a show place. I did really have that in mind." (at p657)

48. On 1st August 1960 he secured an option to purchase the land from Mr. Edwin McLarty, the vendor. The option recited that in consideration of the payment of $100 the vendor granted an option to purchase the land at a price of $15 per acre, payable as to $5,000 by the way of deposit and as to the balance within twelve months at six per cent interest. The option was expressed to expire on 15th August. Mr. Steinberg exercised the option and paid $5,000 to the vendor on 13th August 1960. (at p657)

49. On 7th November 1960 Malgor Pty. Ltd. was incorporated at the instance of Mr. Steinberg. It became the purchaser of the Rockingham land and its principal object was expressed in its memorandum of association as the acquisition of land for pastoral pursuits and the conduct of the business of farming and grazing. Its initial shareholders were Mr. Steinberg and Mrs. Judith Steinberg. As a result of an issue of shares made in March 1961 they held 100 A class and 100 B class shares respectively in the company. (at p657)

50. The statutory general meeting of the company was held on 27th January 1961. According to the minutes of that meeting Mr. Steinberg, who was elected chairman, reported: "As yet the company had not embarked upon any definite land development but was considering a number of propositions." In evidence Mr. Steinberg said that the resolution referred to "a certain number of ideas" as to what they were going to do with the farm. He said: "It was just for the purpose of developing the farm. That was what we were considering." (at p658)

51. Early in 1962 Malgor Pty. Ltd. made application to the Commercial Bank of Australia for an advance. The bank requested Mr. Steinberg to obtain a valuation of the Rockingham land. A valuation was obtained from Mr. Gordon Campbell, a real estate agent and valuer, who inspected the land and valued it for the purpose of obtaining mortgage finance. In his report he stated that the land had potential for subdivision, an opinion which he confirmed in his oral evidence, by reason of its situation and the development of industry south of Perth in the Kwinana region. (at p658)

52. In a report made by the relieving manager, Mr. Williamson, to the inspectors of the bank, which I admitted in evidence under s. 79c of the Evidence Act, 1928-1967 (W.A.), the business of the company was given as "graziers" and it was stated that the company had been formed to purchase the property "as a grazing property and future subdivisional proposition and with a view to providing financial security for sons". An advance of $12,000 was granted. (at p658)

53. Mr. Steinberg denies that he told the bank that the land had been purchased for subdivision and that he had any such purpose in mind at the time. His evidence on the point was as follows:

"At the time you exercised the option, did you see this land as having future subdivisional prospects? - No. It was in the middle of nowhere. It was purely a rural area, and it was a farming proposition. Did you at any stage see it as having future subdivisional prospects? - Only in 1933 when they brought out the Metropolitan Region plan. In 1963? - In 1963 - my apology."

He did concede, however, that any information given to the bank must have come from him. (at p658)

54. At the time of the purchase of the Rockingham land Mr. Steinberg had no knowledge or experience of farming and grazing. Apart from such conversations as he had with the McLartys and Mr. Charles Heppingstone he did not obtain any advice with respect to using the land for farming and grazing purposes. After acquisition of the land he had some discussion with Mr. Heppingstone's brother, Hubert, with a view to Hubert selecting and running cattle on the property, but nothing came of this proposal. Hubert advised Mr. Steinberg that the property could be run successfully only in conjunction with another property because the land suffered from a copper deficiency and the cattle became "coasty" and debilitated. He said that therefore it was suitable for seasonal grazing only, the use to which it had in fact been put by the McLartys. However, Mr. Sloan, a neighbouring grazier, disagreed with this opinion and expressed the view that the difficulty could be overcome by copper dressing and putting copper elements in the water. (at p659)

55. At no time did Mr. Steinberg or the company use the land for grazing purposes. Their activity was limited to one occasion when, according to Mr. Steinberg, they dressed sixty or seventy acres with superphosphate and strawberry clover as an experiment. For some months after the purchase the McLartys were allowed to graze cattle on the land. Nothing was thereafter done until the end of 1961 when Mr. Sloan, the neighbour, was permitted to graze cattle on the land in return for a payment of $100 per annum, making a firebreak and keeping up fences. This arrangement continued until the land was ultimately sold to Rockingham Park Pty. Ltd. in 1969. (at p659)

56. Some time before 1956 a plan had been prepared for the Perth metropolitan region by Professor G. Stephenson and Mr. G.A. Hepburn. It showed part of the land at Rockingham within an area designated "primarily for residential use" and the balance as "public open space". This plan, known as the "Stephenson Plan", became the basis of Interim Development Order No. 1 of 3rd September 1956 under s. 7A of the Town Planning and Development Act (W.A.). It was the subject of a formal announcement made in May 1955 by the minister for town planning and it was given wide publicity at the time. By that order a large portion of the subject land was designated "proposed area for urban development", the balance being designated as "public purposes". (at p659)

57. In 1963 Interim Development Order No. 1 was superseded by the Metropolitan Regional Scheme which was gazetted on 30th October 1963 under the Metropolitan Region Planning Scheme Act, 1959 (W.A.). Under the scheme a portion of the subject land comprising some 550 acres was designated "urban deferred" and the balance was set aside for "parks and recreation". (at p659)

58. Mr. Steinberg asserts that he was quite unaware of the zoning of the land until September or October 1963 when, according to him, publicity was given to it in the press. He says "it was just out of curiosity that I went up to the town planning board". He then ascertained that a portion of the land was zoned for urban development. He claims that having ascertained this information, he abandoned his intention to use the property for grazing purposes and was minded to sell it thereafter to the best advantage. (at p660)

59. I have already mentioned that before 1963 Mr. Steinberg held 100 A class shares and his wife held 100 B class shares in Malgor Pty. Ltd. In 1963, before the transactions of June-July 1963, 900 A class and 200 D class shares were issued to Mr. Steinberg, 400 B class shares to Mrs. Steinberg and 500 C class shares to Malcolm Steinberg. The issue of shares to Malcolm Steinberg had come about in circumstances described by Mr. Rhine in his evidence. He said:

"In about August 1962 Mr. Morris Steinberg said to me: 'I want to give 500 shares to Malcolm'. At that time the company owed him approximately $4,000 which he paid in, but the books were not written up until about a year afterwards. It was only a very, very small company and I didn't write up the books on a day-to-day basis, but just at the end of the year when it came to the taxation, and I had forgotten his implicit instructions, and I simply apportioned the $4,000 to the credit of his loan account, his wife's loan account and his son's loan account, and then issued shares against which I debited the cost; if I had followed the instructions implicitly I would of course have issued the shares to him initially and then transferred them from him back to his son, but I took a short cut, not realizing there would be any implications such as this."

The sum of $4,000 which Mr. Rhine mentioned was the payment which Mr. Steinberg had made on behalf of the company to Mr. McLarty in respect of the land at Rockingham. (at p660)

60. In consequence of the dispositions made on 1st July 1963 by Mr. and Mrs. Steinberg of their assets to M.J.S. Investments, the shares which they held in Malgor Pty. Ltd. became partnership property of M.J.S. Investments. Malcolm Steinberg continued to hold beneficially the 500 C class shares which had been allotted to him. (at p660)

61. Early in 1964 Mr. Steinberg informed Mr. Markham that he was short of funds and was unable to get an extension of his overdraft with the Commercial Bank. Mr. Markham suggested that he approach the National Bank. Mr. Steinberg acted on this suggestion but was unsuccessful. Shortly thereafter it was agreed that Mr. Markham would purchase a half-interest in the land at Rockingham for $50,000. On 31st July 1964 an agreement between Malgor Pty. Ltd. and Mr. Markham was executed by which the company agreed to sell Mr. Markham a half undivided share in the land at Rockingham for $50,000 payable as to the sum of $2,000 by way of deposit on the execution of the agreement. The document was executed by Mr. Steinberg on behalf of the company. It does not appear that Mr. Steinberg was authorized by the company to execute the agreement on its behalf. (at p661)

62. It seems that Mr. Steinberg then discussed the transaction with Mr. Rhine who advised that the transaction should not be carried out in the form of the agreement executed by Mr. Steinberg and Mr. Markham. He advised that there should be a transfer of half the share capital in Malgor Pty. Ltd. to Mr. Markham, in lieu of the transfer of a half-interest in the land. (at p661)

63. Mr. Steinberg says that Mr. Rhine so advised because a sale of shares would enable Mr. Steinberg and his family to receive the purchase price, whereas a sale of the land would leave the purchase price in the hands of the company. A memorandum was prepared by Mr. Rhine in which he set out the steps that should be followed in order to implement his advice. The heading of the memorandum was "Suggested method of selling half interest in land in order not to attract tax liability". Mr. Rhine in evidence said that the reference to tax liability was a reference to the liability of avoiding income tax on the dividends which would be paid by the company to its shareholders out of profits to be made by the company on the sale of a half-interest in the land. The steps proposed by Mr. Rhine included the proposal that the company should, after the share transfers had taken place, go into a members' voluntary liquidation and convey the land to the shareholders in satisfaction of loans made to the family and the return of their share capital. He pointed out that the land would then be held as tenants in common as follows: M.J.S. Investments 17/44; Malcolm Steinberg 5/44; Markham Interests 22/44. (at p661)

64. The advice given by Mr. Rhine was executed. On 31st July 1964 the directors of Malgor Pty. Ltd. approved the transfer to Mr. Markham of 500 A and 100 D class shares by Mr. Steinberg, of 250 B class shares by Mrs. Steinberg and 250 C class shares by Malcolm Steinberg. Mr. Markham says that some of these shares were transferred to members of his family, not to himself, but in my opinion he is mistaken. In my opinion it was later that members of his family acquired an interest in the land. (at p661)

65. Thereupon Mr. Rhine, who had formerly kept the books of the company and lodged its taxation returns, handed the books over to Mr. Warner, Mr. Markham's accountant, and he acted for the company. On 8th April 1965 Mr. Steinberg concurred in the removal of the company's bank account to the National Bank of A/asia Ltd., Mr. Markham's bank. On the same day Mr. Steinberg notified the company that during his absence abroad he had appointed Mr. Markham his attorney under power to act for him in all matters pertaining to the company. (at p662)

66. Subsequently Mr. Markham formed the Safety Bay Land Syndicate by bringing in Leslie Gunzberg and Ellen Louisa Michelides to whom he transferred some of the shares in the company which he had acquired. After the company had been wound up the syndicate was expanded by the admission of further members, but the evidence does not reveal when this occurred. (at p662)

67. As early as 12th March 1964 before he had taken a transfer of shares in the company, Mr. Markham sought approval from the town planning board of the release of 200 lots annually in the area zoned as "deferred urban". This perhaps was no more than a preliminary inquiry by Mr. Markham designed to establish that the land could be subdivided and developed before he agreed to purchase a one-half interest. (at p662)

68. However, after a one-half interest had been transferred to him he set about securing the necessary approvals and sought to interest likely purchasers. On 4th February 1965 he wrote to the town planning board and submitted a proposal on behalf of Malgor Pty. Ltd. for the subdivision of the land zoned "deferred urban" and asked that it be altered to "urban". He made a similar request on behalf of the company to the Shire of Rockingham on 29th April 1965. The town planning board gave its approval to subdivision on 25th March 1966. (at p662)

69. On 18th August 1966 a special resolution for the voluntary winding-up of Malgor Pty. Ltd. was passed at an extraordinary general meeting of shareholders. At that meeting it was unanimously resolved that the liquidator divide among the members in accordance with their respective shareholding in the company the following undivided shares in the land in specie, namely: To Leslie Gunzberg 73/2200; Percival Wynyard Markham 991/2200; Ellen Louisa Michelides 36/2200; Morris Steinberg 600/2200; Judith Steinberg 250/2200; Malcolm David Steinberg 250/2200. By a transfer dated 3rd March 1967 the liquidator transferred the Rockingham land in specie to the persons set out above. (at p662)

70. The shares in the company held by Mr. and Mrs. Steinberg were assets of the M.J.S. Investments partnership, as were the interests in the land which they acquired in specie from the liquidator. To give effect to the entitlement of the members of the family in that partnership Mr. and Mrs. Steinberg transferred their interests in the land with the result that, apart from the 250/2200 share in the land which Malcolm David Steinberg enjoyed in his own right, the members of the family held the following interests in the land: Malcolm David Steinberg 68/792; Gordon Steinberg 68/792; Morris Steinberg 85/792; Judith Steinberg 85/792; holding between them as tenants in common in the shares set out above 306/792 undivided shares of an estate in fee simple. (at p663)

71. Mr. Markham continued in his efforts to sell the land. On 26th April 1967 he submitted a proposal for the rezoning, subdivision and sale of the land to the Minister for town planning and followed this with an application to the Shire of Rockingham for the rezoning of the "deferred urban" land as "urban". (at p663)

72. Subsequently he offered the land to Page, Johnson &Co. of the United Kingdom. He was authorized at a meeting of the syndicate to travel to the United Kingdom in connexion with the negotiations. The syndicate indemnified his expenses to the extent of $3,000. The negotiations proved unsuccessful but shortly thereafter Mr. Markham commenced negotiations with Rockingham Park Pty. Ltd., the ultimate purchaser. (at p663)

73. Mr. Steinberg asserted that the Safety Bay Land Syndicate consisted exclusively of Mr. Markham and those persons whom he brought into the venture. This was denied by Mr. Markham who said that the syndicate included the Steinbergs. Mr. Markham was an impressive witness and I accept his evidence on this question. The documentary evidence indicates that Mr. Markham acted on behalf of the company after he became a shareholder in seeking to obtain approvals from the shire and the town planning board and in seeking to find a purchaser. Apart from the ultimate negotiations with Rockingham Park Pty. Ltd., Mr. Steinberg did not participate in these activities. Indeed, when half of the shares in the company were transferred to Mr. Markham, Mr. Steinberg acquiesced in Mr. Markham having control of its activities. The books were kept by Mr. Markham's accountant and the bank account was transferred to Mr. Markham's bank. A letter dated 12th September 1967 from Mr. Markham to the National Bank states that after the company went into voluntary liquidation those interested in the land, including the Steinbergs, were members of the syndicate which had its bank account with the National Bank, Messrs. Markham, Steinberg and Gunzberg accepting responsibility for the overdraft. (at p663)

74. The ultimate sale of the land to Rockingham Park Pty. Ltd. was effected by two contracts of sale. The first, dated 15th May 1969 related to the sale of the one-half interest in the land held by Mr. Markham and the persons whom he had brought in. The purchase price was $750,000 payable as to the sum of $50,000 by way of deposit, as to the sum of $100,000 by four equal annual instalments commencing on 1st May 1970 and as to the sum of $600,000 by ten equal annual instalments commencing on 1st May 1974. So much of the purchase price unpaid at any time was to carry interest at five per cent per annum. The contract gave the purchaser a right to rescind in the event that the Steinbergs did not agree to sell their one-half interest to the purchaser on or before 1st November 1969. (at p664)

75. Mr. Markham did not have authority to sell the Steinberg interests to Rockingham Park Pty. Ltd. He transmitted at least one offer from that company to Mr. Steinberg which was rejected. Ultimately Mr. Steinberg accepted a purchase price equal to that paid to Mr. Markham and his associates. The sale was effected by a contract dated 3rd November 1969 in which Mr. and Mrs. Steinberg and their two sons were the vendors, agreeing to sell the following shares in a one-half undivided interest in the land: Morris Steinberg 2125/19,800; Judith Steinberg 2125/19,800; Malcolm Steinberg 3950/19,800; Gordon Steinberg 1700/19,800. By the contract the balance of the purchase price remaining after payment of the deposit of $50,000 was made payable by ten equal annual instalments commencing on 1st November 1974. (at p664)

76. The appellant sought to show that the land at Rockingham was bought as a grazing property with the intention that it should be retained for that purpose and that it was not acquired for the purpose of profit-making by sale. It was urged that Mr. Steinberg's evidence established the nature of his intentions and those of Malgor Pty. Ltd. There are a number of considerations which induce me not to accept Mr. Steinberg's evidence concerning his intentions and those of the company before and at the time of purchase. (at p664)

77. First, at this time Mr. Steinberg had as a member of the Markham syndicates a record of investment in land for resale at a profit. Less than two months before he took an option over the land at Rockingham he had been offered grazing land further south of Perth and the Kwinana industrial area by Mr. C. Heppingstone, the stock and station agent, who subsequently offered him the Rockingham land. Yet he did not purchase that land for grazing and made it available to Mr. Markham to form a syndicate for the purpose of profit-making by sale. Despite this he said that he regarded the Rockingham land as a grazing and not as a subdivisional proposition until October 1963. I find it difficult to accept that Mr. Steinberg, with this background, did not give serious consideration to the possibility of profitable resale. I find it difficult also to accept that he was quite unaware until October 1963 that there was a real prospect that a significant part of the land would be zoned as "urban" or "deferred urban" land. (at p665)

78. Apart from his other interests in land which would have made him aware of the importance of zoning and of the developing town plan which had been emerging for the Perth region since 1956, he knew Mr. Markham and other agents who would have been aware of zoning considerations by reason of the wide publicity given to them. (at p665)

79. Secondly, it is somewhat remarkable that Mr. Steinberg who had no previous experience or knowledge of grazing should have bought the land for that purpose, at the suggestion of Mr. C. Heppingstone. Mr. Steinberg had not been looking for a grazing property. Nor was it suggested that he had informed Mr. Heppingstone that he was looking for such a property. He made no inquiry of those expert or experienced in the field with a view to ascertaining whether the property was suitable for grazing or whether a grazing operation could be profitably undertaken there. It seems remarkable that he inspected no other property if his real intention was to own and run a grazing property. (at p665)

80. Thirdly, at no time after the option was acquired on 1st August 1960 did Mr. Steinberg or Malgor Pty. Ltd. put the land to any grazing use, apart from the experimental sowing of strawberry clover and the spreading of superphosphate over some acres. Nor did he formulate any plans for its future development for that purpose. It is significant that the land was not used by its owner for the purpose for which it is claimed to have been purchased. Yet no satisfactory explanation was given for the failure to use the land for grazing purposes. It could not be suggested that the property yielded an economic income from the use to which it was in fact put after acquisition. The only income which it produced was the princely annual sum of $100 paid by Mr. Sloan and the $300 paid by Bell Bros. for the privilege of removing marl. (at p665)

81. It is true that the Steinberg family at the time of the purchase of the Rockingham land was short of ready money, but this circumstance suggests that the Steinbergs may not have had the financial resources at the time of purchase to develop the property as a grazing property and stock it. The land at Innaloo had been acquired earlier in the year. If, as Mr. Steinberg claims, it was intended to develop that land as a site for a hotel and shopping centre, a considerable financial outlay would have been required. If Mr. Steinberg is not correct in that claim, and as I have said, I do not accept it, there was still a shortage of available money. In August 1961 Mr. Steinberg sought from Mr. McLarty and was granted a deferment of the payment of the balance of the purchase money for the Rockingham land. (at p666)

82. Finally, the statement made by Mr. Steinberg at the statutory meeting of the company on 27th January 1961 that the company "had not embarked upon any definite land developments, but was considering a number of propositions", suggests that he then had under consideration a development of the land other than grazing. Mr. Steinberg sought to explain this statement by saying that it referred to grazing activities, but he gave no indication of what the propositions referred to were. The report to the inspectors of the National Bank on 1st March 1962 also points to the possibility of development by way of subdivision and does so in the context of a statement of the reasons why the company bought the land. (at p666)

83. Attention was drawn to the first object in the memorandum of association of the company which accords, so it is said, with the notion that the primary purpose of the acquisition was for grazing and pastoral purposes. No doubt it does, but in my opinion its significance is limited when regard is had to the other material to which I have referred. (at p666)

84. Mr. Toohey for the respondent submitted that once Mr. Steinberg's evidence of intention is discarded, the case is simply one of a profit-making scheme within s. 26(a). The land was acquired with the intention that a profit should be made from its sale; there followed a succession of steps and events which culminated in the sale of the land at a profit. That is enough, according to the argument, to constitute a profit-making scheme within the meaning of s. 26(a). (at p666)

85. The absence of other evidence as to Mr. Steinberg's intentions before and when the land was acquired is disadvantageous to the appellants for they bear the onus of showing that the assessments are excessive. It is for them to satisfy me on the probabilities that the profits in question do not fall within either part of s. 26 (a), in particular that the profits were not made pursuant to a profit-making undertaking or scheme. The appellants' cause is not advanced to any significant extent by the evidence of Malcolm Steinberg and Mr. Rhine. (at p666)

86. Malcolm Steinberg did not impress me as a witness. The effect of his evidence was that his father did not discuss in detail with him the affairs of Malgor Pty. Ltd. or the transactions which took place concerning that company and the Rockingham land, and that his participation in these matters was limited to acting in accordance with requests made or directions given by his father. I do not accept that this was so. In my opinion Malcolm Steinberg was at all times aware of his father's intentions relating to the company and the land. It is of special significance that Malcolm Steinberg gave no evidence of what his father had said to him concerning the reasons why the Rockingham land had been purchased and the intentions he had with respect to it. Nor did he give evidence of why his father wanted him to have shares in the company. Indeed he had nothing to say as to what he proposed to do with the shares which he acquired in his own name, the 500 C class shares. No doubt he was prepared to deal with them in accordance with his father's wishes. His evidence does not establish that the profits made fall outside s. 26(a). (at p667)

87. As a witness Mr. Rhine stands in a different category. His oral evidence and some documentary evidence show that the transactions of June-July 1963, the sale of shares (in lieu of land) to Mr. Markham in 1965, the winding up of the company with the consequential transfer of the land in specie to the shareholders and the termination of the eighteen trusts took place on his advice. But Mr. Rhine did not tell us of discussions with Mr. Steinberg relating to the use to which the land would be put, other than a reference to an instruction that the main objects clause of the company should include husbandry and ancillary projects. Mr. Rhine acted for Mr. Steinberg in connexion with the incorporation of the company. He was therefore in a position of advantage to speak of Mr. Steinberg's plans for the future of the company and of the Rockingham land. Nor did he give evidence as to the intention with which he as the trustee of the eighteen trusts participated in the purchase of the shares in Malgor Pty. Ltd., held by Mr. and Mrs. Steinberg, apart from stating that the transactions took place on his advice for estate planning purposes. Again, having regard to these considerations, Mr. Rhine's evidence does little to assist the appellants in discharging the onus which lies upon them. (at p667)

88. On the probabilities I am satisfied that before the Rockingham land was acquired, Mr. Steinberg believed it would appreciate substantially in value and that this was the reason why he caused it to be purchased. I do not accept that he was ignorant until October 1963 of the possibility that some part of the land would be zoned "deferred urban" or "urban". Moreover, I am satisfied that he caused the company to be incorporated and to purchase the land with a view to realizing the profit which was to be made out of the anticipated appreciation in value and ensuring that he and the members of his family participated in that profit. The acquisition of the Rockingham land, viewed in the light of Mr. Steinberg's membership of the Markham land dealing syndicates, was not an isolated transaction, but a business venture in which Mr. Steinberg decided to use a company as a vehicle for participation by the members of his family, perhaps because it offered a variety of ways of realizing a profit. (at p668)

89. I consider that the land was acquired pursuant to a plan or scheme which had the making of a profit as the end in view. At this point it becomes a matter of difficulty to define the elements of Mr. Steinberg's scheme. The cause of that difficulty is the paucity of evidence upon the point: although it is possible that a contributing cause was the circumstance that the precise mechanism by which the profit was to be made had not then been determined and was left for later decision. (at p668)

90. When property is acquired in the expectation that it will increase in value with the intention that a profit is to be made out of that increased value and a company is incorporated to acquire the property, the profit may be realized in a variety of ways. First, the company may sell at a profit which is then distributed by way of dividend to the shareholders. Secondly, the increased value of the property will reflect an increased value of the shares which may be sold at a profit by the shareholders. Thirdly, the company may be placed in voluntary liquidation in the course of which the liquidator may distribute the property in specie. Other methods of realizing and distributing a profit arising from the increased value of the property, or a combination of methods, may be selected. (at p668)

91. The first method is the most common, but it may be pursued in combination with the second method, although it may appear that when a company has been incorporated with a view to acquiring property and selling it at a profit, the shareholders have taken up shares not with a view to selling them at a profit, but to participate by way of dividend in the profit to be made by the company on resale. (at p668)

92. The evidence does not point to a plan or scheme which envisaged profit-making in the form of a sale by the company to the exclusion of any method of making a profit. Mr. Steinberg was concerned to deny that profit-making by sale was a purpose of the acquisition at all. The evidence does not displace the hypothesis that the company was incorporated and the land acquired with the intention that a profit should be made out of its appreciation in value and that the details of the method by which the profit was to be realized and channelled into the hands of Mr. Steinberg and his family were left for later decision. Nor does the evidence displace the possibility that before the time of acquisition Mr. Steinberg contemplated the sale of the shares in the company, its liquidation and the distribution in specie of its assets as steps which might be taken as a means to the end which he had in view. (at p669)

93. The need for additional finance in 1964, the intended sale of an interest in the land to Mr. Markham, followed by Mr. Rhine's advice that shares should be sold and the company wound up, do perhaps suggest that neither the sale of shares nor the distribution in specie was contemplated earlier. The onus is on the appellants to establish that this was so, but their evidence does not persuade me of it. The evidence was of course directed to a different end, seeking to establish that the land was purchased as a grazing property. (at p669)

94. Although the occasion for the sale of shares was the Steinbergs' need for finance, I am not satisied that this was the only reason for allowing Mr. Markham to participate in the venture. He had been closely associated with Mr. Steinberg in other land sale ventures and he had great experience in the sale and development of land. I do not discount the possibility that from the beginning Mr. Steinberg had foreseen that Mr. Markham should have an interest in the venture. And the articles of association of Malgor Pty. Ltd. from the beginning conferred a power on the liquidator to distribute assets in specie. (at p669)

95. The word "scheme" in s. 26(a) connotes some "programme or plan of action" (Clowes v. Federal Commissioner of Taxation (1954) 91 CLR 209, at p 225 , per Kitto J.; XCO Pty. Ltd. v. Federal Commissioner of Taxation (1971) 124 CLR 343, at p 349 , per Gibbs J.). In Investment and Merchant Finance Corporation Ltd. v. Federal Commissioner of Taxation (1970) 120 CLR 177, at pp 188-189 , reversed on appeal (1971) 125 CLR 249 , speaking of the expression "undertaking or scheme" where used in s. 26(a), Windeyer J. said:

"A scheme presupposes some programme of action, a series of steps all directed to an end result. Similarly, an undertaking is an enterprise directed to an end result. Each word connotes activities that are co-ordinated by plan and purpose - that whatever is done under the scheme or pursuant to the undertaking is done as a means to an end. There may, in one sense, be several transactions, but they are related because all directed to the attainment of the one end, profit." (at p670)

96. But in my view it is not an essential element of a profit-making scheme in s. 26(a) that every step which culminates in the making of a profit should be planned or foreseen before the scheme is put into operation. In a business transaction of this kind where property is acquired with the intention that a profit should be made out of its anticipated appreciation in value by whichever means prove most suitable, it matters not that the particular means by which the profit is to be made are left for subsequent decision. (at p670)

97. Once Mr. Steinberg's evidence is rejected the acquisition of the land, the incorporation of the company and the issue of shares to members of his family are seen as a business transaction having as its objective the making of a profit by the members of the family from the anticipated increase in value of the land. The means by which it was achieved was a means to an end and was not an essential element of the scheme. (at p670)

98. To bring the profit made within the second part of s. 26(a) it is necessary that the profit-making undertaking or scheme should have been carried on or carried out by the taxpayer or on his behalf (Clowes v. Federal Commissioner of Taxation (1954) 91 CLR 209 ; XCO Pty. Ltd. v. Federal Commissioner of Taxation (1971) 124 CLR 343 ). Here there is no question that the scheme was acted upon by the taxpayers. The scheme of which Mr. Steinberg was the author was a scheme designed to benefit himself and the members of his family. Mr. Steinberg and his wife were subscribers to the memorandum of association of the company and shares were issued to them. There was evidence from Mr. Steinberg that he intended that his sons should have an interest in the company. Malcolm acquired shares in 1963 and Mr. Rhine as trustee of the eighteen trusts agreed to the purchase by M.J.S. Investments of Mr. and Mrs. Steinberg's shares in July 1963. By doing so Malcolm Steinberg and the trusts became parties to the scheme. I have already said that I infer that Malcolm Steinberg was at all times aware of his father's intentions with respect to the land and I do not doubt that Mr. Rhine was aware of those intentions. Subsequently they participated in the events which occurred culminating in the sale of the land, to the extent which was necessary. Mr. Rhine's participation was limited to agreeing to a sale of one-half half of the shares to Mr. Markham, terminating the trusts and distributing the assets of the trusts, namely the units in the M.J.S. Investments partnership. The scheme was therefore executed by Mr. Steinberg, Malcolm and Mr. Rhine as trustee of the Judith Steinberg No. 2 Trust so far as it was necessary for them to do so. (at p671)

99. I accept that the creation of the trusts, the formation of the M.J.S. Investments partnership, its acquisition of Mr. and Mrs. Steinberg's shares in Malgor Pty. Ltd. and the termination of the trusts were transactions entered into with the intention of diminishing Mr. and Mrs. Steinberg's liability to income tax and for estate planning purposes, but I do not regard this finding as affecting the conclusion which I have otherwise reached. The circumstance that the shares in Malgor Pty. Ltd. were so acquired by Mr. Rhine as trustee of the trusts was not necessarily inconsistent with an intention that the shares should be held and dealt with in accordance with the profit-making scheme formulated by Mr. Steinberg. (at p671)

100. I am therefore of the opinion that the appellants have failed to show that the sale of the shares to Mr. Markham, the winding up of the company, the transfer of the land in specie to the shareholders and the subsequent sale of the land were not steps taken pursuant to a profit-making scheme under which the land and the shares were initially acquired. Difficult questions would have arisen had I concluded that the profit-making scheme as initially formulated was confined to a sale of land by the company and that it was altered or amended in 1964 and 1965 so as to provide for the steps which were thereafter taken, but those questions do not call for decision. (at p671)

101. The appellants relied on the decision in McClelland v. Federal Commissioner of Taxation (1970) 120 CLR 487 which establishes that the second part of s. 26(a) has no application to the mere realization of a capital asset, albeit in an enterprising way. Here, however, more was involved than the mere realization of a capital asset. The company was formed and the land acquired with the purpose of making a profit from the anticipated appreciation in value of the land by means of the sale of the land or some other suitable means. The entire transaction had the characteristics of a "business deal", to use their Lordships' expression. (at p671)

102. The remarks of Windeyer J. at first instance and Barwick C.J. on appeal to the Full Court in the same case (1969) 118 CLR 353, at pp 359, 372 were relied on to support the submission that s. 26(a) has no application to part of the profits made by Malcolm Steinberg because part of the profits which he made were attributable to the ownership of 500 C class shares in the company which he acquired by way of gift from his father. The short answer to this submission is that, although Mr. Steinberg may have intended to make a gift of some of his shares to his son, the transaction took a different form. Malcolm was allotted shares by the company. As it turned out the gift was of money, not of shares. (at p672)

103. Accordingly, as no argument was addressed to me on the quantification of the profits made, I am of opinion that the appeals relating to the profits made on the sale of shares in Malgor Pty. Ltd. and the sale of the interests in the Rockingham land should be dismissed. In the light of this conclusion I need not deal with an alternative argument advanced by the respondent to the effect that there was a profit-making scheme culminating in the sale of the interests in the land, which began with the resolution to wind up the company when, by agreement of the parties, the land had a value of $400,000. (at p672)

The sale of land at Wanneroo - Appeal No. 1 of 1972 by Morris Steinberg.

104. In respect of the year ended 30th June 1966 Mr. Steinberg was assessed to income tax on the footing that there was included in his assessable income a sum of $7,752, being his share of the profit made on the sale in that year of certain land at Wanneroo. The respondent supports the assessment by reference to ss. 25 and 26(a) of the Act and the appellant has argued that the profit does not fall within these provisions. (at p672)

105. In this instance the land was acquired by Mr. and Mrs. Steinberg, Mr. Steinberg's two brothers and their wives. The land was owned by a company, Golden West Land Development Co. Pty. Ltd., in which the Steinberg family acquired shares. The company was subsequently wound up and the land distributed by the liquidator in specie to the shareholders who, having acquired the land, sold it to the Overseas Telecommunications Commission which indicated that, if the Steinbergs would not agree to sell, it would exercise its power to acquire the land compulsorily under s. 55 of the Overseas Telecommunications Commission Act 1946 (Cth), as amended. (at p672)

106. The history of the acquisition of the land commences in August 1964 when Mr. Rawle, the local secretary of the Golden West company, offered Mr. Steinberg 720 acres of land at Wanneroo, some twelve miles to the north of the city of Perth, between Kingsway and Gnangara Roads. Mr. Rawle informed Mr. Steinberg that approval had been granted for subdivision of the land into ten-acre lots. Mr. Steinberg inspected the land and ascertained that there were a few farmlets in the vicinity in Kingsway and Gnangara Roads. There was some vegetable and flower growing on the farmlets. Apart from several cottages, there was no housing in the area. The offer took the form of an offer of the shares in the company. (at p673)

107. Mr. Steinberg said that, having inspected the land, he thought it was well suited to development by way of subdivision into ten-acre lots for leasing. His evidence on the prospective use to which the land would be put is best set out in his own words:

"When I looked at it, I thought: 'There's a possibility here. There is the right of 10-acre lots and we might build two or three bedroom cottages, put a wire fence round them, put a bore down' - because water was there in abundance and the water level was very high there. Our thoughts were that we would let these out at, say, a five-year lease with the first year at $25 a week and the subsequent four years at $35 a week. In the first year we thought we would give the tenant a chance to build up whatever it was - flowers or vegetables, or whatever occupation he proposed to do - and we looked at it from this point of view. The land was costing us roughly $146,000 (I have to rely on my memory). We reckoned $2,000 it would cost for transfers etc.; we thought the roads would cost about $35,000 - which was more than they actually cost; and about $5,000 for survey. I estimated that we would get sixty-eight lots out of it, so roughly I thought it was going to cost $2,800 per lot. Therefore I took a round figure of $3,000, allowing for the incidentals. We thought the cost of building a little cottage on it would be around $6,000. We also said to ourselves that $1,000 would cover the cost of fencing. After all, they are against each other, so it's almost half the fencing of one block. All in all, we said that the whole lot would cost us approximately $10,000. We anticipated or we thought we'd raise $6,000 on them as a mortgage. I don't think we would have had any trouble to borrow that." (at p673)

108. He denied that it was bought with a view to resale at a profit, although he acknowledged that in the distant future the land had potential for subdivision. He claimed that he considered that it would not be profitable to subdivide and sell and that it was "the last thing in my mind". (at p673)

109. However, it seems that when Mr. Rawle offered the land to him it was offered as land having potential for profitable resale in subdivision. Mr. Steinberg obtained from Mr. Rawle a document setting out short details of the company and the land. According to the document the primary object of the company was: "To carry on the businesses of real property dealing and development and building promotion and for such purposes to develop, subdivide, lay out, prepare and turn to account any real property or any estate or interest therein." (at p674)

110. It made the following remarks concerning the land:

"The Southern boundary of this land is situated approximately twelve mile from Perth by Road and approximately nine mile in a direct line. The northern boundary of the State Housing Commissions land would be in the vicinity of 3/4 of a mile from the Southern boundary of the Golden West land. Recent sales in the area: Land as shown on the plan is selling on the opposite of Kingsway Road in five acre lots at an average price of 870 per block on the following terms: 10 deposit and the balance at 10 per month at six per cent interest computed and adjusted quarterly on the unpaid balance. From the 1st July, 1961, twenty of these lots have been sold, without any advertising and for taxation reasons this is the quota for the year." (at p674)

111. On 7th September 1964 for the sum of 200 Mr. Steinberg obtained an option expressed to be granted on behalf of the Golden West company in favour of Malgor Pty. Ltd. to purchase the 27,210 issued shares in the Golden West company for 2 18s. 3d. per share. On 27th November 1964 the option was extended to 15th February 1965 in consideration of the payment of an additional $400. On 15th February 1965 Malgor Pty. Ltd. offered
2 14s. 3d. per share for the issued capital of the Golden West company. Ultimately, by a deed which was undated but which was stamped on 27th July 1965 Mr. Steinberg, his two brothers, the three wives and Malcolm David Steinberg purchased the 27,210 issued shares of the Golden West company from the shareholders for 2 14s. 3d. per share, a total of $147,614. How the individuals came to purchase the shares in lieu of Malgor Pty. Ltd. is not entirely clear; the deed recites that Malgor Pty. Ltd. nominated the purchasers, and that it at no time had any beneficial interest in the shares. (at p674)

112. By the deed the individual purchasers agreed to acquire the shares in Golden West in the following: Morris Steinberg twenty-five per cent; Judith Steinberg twenty-five per cent; Reuben Steinberg eleven and a quarter per cent; Joy Steinberg eleven and a quarter per cent; Matthew Steinberg eleven and a quarter per cent; Lilian Steinberg eleven and a quarter per cent. However, it seems that Malcolm David Steinberg did not become a shareholder in the company and his five per cent was distributed equally between the six remaining purchasers. The reason for the changes in the identity of the purchasers is, as I have said, not clear, but it seems that it was connected with the termination of the eighteen trusts which took place several days before the deed was stamped on 27th July 1965. (at p675)

11. Fundamental to the question of intention was acceptance of the view that the land was acquired for the purpose of subdividing it into about sixty-eight ten-acre lots, each to have a small cottage built on it and then to be let to a working tenant farmer. According to the taxpayer this concept did not occur to him until after he had obtained an option over the land in favour of Malgor Pty. Ltd., a company in which he and his family then held only a one half interest, the remainder of its shares being held by interests associated with a Mr. Markham who was a very experienced dealer in real estate and the organizer of numerous syndicates for the purchase and resale of land in and near Perth. There is nothing in the evidence to negate, and much which supports, the view that at this stage the contemplated purpose was to resell the land either before or after its subdivision. (at p707)

12. Mr. Steinberg asserted that later, before actually buying the shares in Golden West, this novel idea of leasing to tenant farmers first occurred to him; he made no inquiries whatever concerning its feasibility, although he had not previously heard of it being attempted, nor did he take any steps to have the land's suitability for farming assessed. There was no investigation to determine whether there was any demand for tenancies of this nature or whether it would be possible to find over sixty tenant farmers prepared to undertake market gardening as tenants on ten acre lots on which they would reside. The capital cost of such a venture, according to his own generalized and somewhat tentative estimates, was considerably in excess of half a million dollars and his financial resources and those of his relatives, even with the aid of substantial loan moneys, appeared to be quite inadequate for the purpose. (at p708)

13. With these considerations in mind and having formed the view that Mr. Steinberg was an astute and able businessman already experienced in land purchase and development it is perhaps not surprising that his Honour was not satisfied that Mr. Steinberg in fact acquired the Golden West shares with a view to developing the Wanneroo land in the manner stated by him but rather concluded that the shares were purchased so as to enable the purchaser to acquire that land for the purpose of profit-making by sale. (at p708)

14. I turn now to the taxpayer's second argument, that s. 26(a) has in any event no application even if Mr. Steinberg's evidence of purpose be rejected. (at p708)

15. In my view the Commissioner cannot rely upon the first limb of s. 26(a) to support his present assessment. The profit included in the taxpayer's assessable income is, broadly speaking, the difference between the price paid for half the Golden West shares and the price later realized on the sale of half the Wanneroo land. Implicit in this is the view that the cost of the land to the taxpayer was the cost to him of the shares, yet this is not the case; the taxpayer got no land when he bought the shares but only those rights to which a shareholder is entitled. Those rights include a right, on a winding up, to an aliquot share of the surplus of assets over liabilities, which might in this instance be satisfied by a distribution of assets in specie; but only in that loose sense had he any interest in the company's land. As was pointed out by Gibbs J. in Ord Forrest Pty. Ltd. v. Federal Commissioner of Taxation (1974) 130 CLR 124, at p 148 , a shareholder obtains no rights of property in the assets of the company in which he holds shares. The fact that the taxpayer bought the shares so as to acquire the land does not, in my view, in any way affect this position; it does not entitle the Commissioner to apply to the land the price paid for the shares. (at p708)

16. What then was the price, if any, paid for the land from which a "profit" may properly be calculated? In Archibald Howie Pty. Ltd. v. Commissioner of Stamp Duties (N.S.W.) (1948) 77 CLR 143, at p 153 Dixon J. described a distribution in specie to shareholders as properly to be regarded as "the acquisition of assets for a consideration." It is that consideration which may, for the purposes of the first limb of s. 26(a), be regarded as the cost of the land so as to form the starting point in any calculation of profit; it alone represents the cost to the taxpayer of the property which he subsequently sold. Unfortunately there is no evidence of the money value of that consideration, being the value of Mr. Steinberg's entitlement as a contributory in the winding up of Golden West and which was satisfied by the distribution to him of an interest as tenant in common in the Wanneroo land. Indeed the date of the distribution in specie, which I regard as the relevant date, does not clearly appear; the liquidation occurred in November 1965, the shares having been bought for $147,614 only some four months earlier. If that price, in what was a transaction at arm's length, in any way accurately reflected the then value of the Wanneroo land it increased very much in the ensuing months since on 13th May of the following year a price of $172,957 for only half the land was agreed to between Mr. Steinberg and the Overseas Telecommunications Commission. (at p709)

17. Were it necessary for the Commissioner to rely upon the first limb of s. 26(a) the appropriate course would be to remit the matter to him for reassessment, since apart from this question of the basis of calculation of profit I would otherwise regard the first limb of s. 26(a) as applicable; there was here a relevant acquisition by the taxpayer of the interest in land which he later sold, it occurred when the distribution in specie was made. The taxpayer was no mere passive recipient of the land; the entire transaction, beginning with the Golden West shares, was, on the contrary, initiated by him so that he and others might each acquire an interest in the Wanneroo land with the purpose of its resale at a profit. (at p709)

18. The same objection to the Commissioner's basis of calculation of profit does not, I think, apply to the second limb of s. 26(a), which I regard as applicable in the circumstances of this case. There was here a profit-making scheme and it commenced with the purchase of the shares in July 1965 for a price of $147,614; the profit from the scheme may then properly be calculated using that price as the starting point. (at p709)

19. The profit-making scheme was to purchase the issued capital of Golden West, to alter its articles, to secure its voluntary liquidation followed by the distribution in specie to shareholders of its valuable asset, the Wanneroo land and, last of all, to sell that asset in subdivision. There was here no question of a mere realization of an asset in an enterprising way, as is referred to in Federal Commissioner of Taxation v. Becker (1952) 87 CLR 456, at p 460 , per Fullagar J. and subsequent cases. The scheme began with the acquisition of one asset, continued with its translation into a different asset and was to have concluded with the profitable disposal of that latter asset. There was the "carrying into execution of a plan or venture which does not involve repetition or system" (per Dixon J. in Premier Automatic Ticket Issuers Ltd. v. Federal Commissioner of Taxation (1933) 50 CLR 268, at p 298 ) and that plan or venture had all the aspects of a "business deal" (McClelland v. Federal Commissioner of Taxation (1970) 120 CLR 487 ). (at p710)

20. If this be so it is, I think, nothing to the point that the intervention of the Overseas Telecommunications Commission resulted in a premature conclusion to the scheme so far as half the land was concerned; this only meant that sooner rather than later a purchaser appeared on the scene prepared to buy at a handsome profit and without any need to incur full costs of subdivision - cf. Hobart Bridge Co. Ltd. v. Federal Commissioner of Taxation (1951) 82 CLR 372, at p 382 . (at p710)

21. It is, therefore, the second limb of s. 26(a) which I regard as justifying the Commissioner's assessment both in respect of the liability of the taxpayer's profit to assessment in his hands and in respect of the quantum of that profit. (at p710)

22. In the circumstances it is unnecessary to consider the Commissioner's stated reliance upon s. 25 of the Act. (at p710)

23. I would dismiss this appeal. (at p710)

The Rockingham Land.

24. The third transaction is relevant to the three remaining appeals, one by Mr. Morris Steinberg, and two by his son Malcolm David Steinberg and also affects the appeal by the trustee of the Judith Steinberg No. 2 Trust, whose assessment to tax in respect of profits on the sale of the Innaloo land I have already dealt with. It relates to the assessability of profits upon sales of shares in Malgor Pty. Ltd. to Mr. Markham and upon the sale of land at Rockingham, a few miles to the south of Perth, to Rockingham Park Pty. Ltd. (at p710)

25. As previously, there is first a question whether or not this Rockingham land, bought by Malgor Pty. Ltd., was bought for the purpose of resale at a profit. It was Mr. Morris Steinberg who procured Malgor's incorporation in November 1960; he and his wife were its only two original shareholders and he was its chairman of directors. Shortly before its incorporation he had obtained, and had exercised, an option to purchase the Rockingham land, consisting of 1,267 acres of rather poor grazing land, at a price of $15 per acre and after its incorporation it became the buyer of the land. In 1963 four hundred shares in its capital were issued to his son Malcolm David Steinberg, paid for by his father; later, in July 1963, Morris Steinberg and his wife sold to a partnership, M.J.S. Investments, all their shares in Malgor Pty. Ltd. as part of the tax and estate planning proposals to which I have earlier referred. The members of this partnership were Mr. and Mrs. Steinberg and the trustee of each of eighteen family deeds of trust. Then, in July 1964, shares in that company were sold to Mr. Markham so that he came to hold one half of its issued capital, the remainder being retained by M.J.S. Investments and Malcolm David Steinberg. This was the transaction which has given rise to two of the four appeals presently in issue. (at p711)

26. Then in August 1966 Malgor Pty. Ltd. went into voluntary liquidation and in a resultant distribution in specie Morris and Malcolm David Steinberg in March 1967 each acquired an interest as tenant in common in the Rockingham land, apparently the company's only substantial asset. I ignore for the present, but will later have to return briefly to a consideration of, possible consequences of Morris Steinberg's disposal of his shares in Malgor Pty. Ltd., which resulted in his former shareholding being held by him on behalf of the M.J.S. Investments partnership; suffice it to say that thereafter efforts were made by Mr. Markham to sell the Rockingham land which was ultimately sold in two separate contracts the first being a sale of the Markham group's interest in the land, the second a sale of the Steinberg group's interest, only sold in November 1969. It is with the proceeds of this sale that the two other appeals, by Morris Steinberg and his son, are concerned. (at p711)

27. Mason J. held that the profits made on the sale of the shares in Malgor Pty. Ltd. and on the subsequent sale of interests in the Rockingham land were profits arising from the carrying out of a profit-making scheme initiated in early 1960 and were assessable accordingly under the second limb of s. 26(a). (at p711)

28. Counsel for the Commissioner supported his Honour's conclusion and, by way of alternative submission, also contended that the circumstance could be viewed as involving a scheme beginning only when it was decided to sell half of the issued capital in Malgor Pty. Ltd. to the Markham interests or, as a further alternative, beginning later still when it was decided that Malgor Pty. Ltd. should be placed in liquidation. (at p712)

29. For the taxpayers it was contended that no relevant scheme existed but that the purchase of the Rockingham land was undertaken as an investment in a grazing property. Alternatively it is said that in any event the shares in Malgor Pty. Ltd. were not sold to Mr. Markham by the persons to whom they were originally issued but by the M.J.S. Investments partnership, something which no scheme ever contemplated but which was brought about by the adoption of tax and estate planning advice given to Morris Steinberg which resulted in the substitution of that partnership as shareholder in Malgor Pty. Ltd. in place of Morris Steinberg and his wife. In essence the taxpayers rely upon the fact that the profits which were derived arose in an unforeseen way and hence not pursuant to any scheme. (at p712)

30. Before considering the taxpayer's alternative submission I should say that I agree with the conclusion of Mason J. concerning Mr. Morris Steinberg's purpose in buying the Rockingham land and should state briefly my reasons for doing so. (at p712)

31. Mr. Steinberg said that he bought the land, having Malgor Pty. Ltd. incorporated so that it might become the purchaser, as a farming proposition with a view to his retirement, having in mind making it "quite a show place". This evidence Mason J. rejected, pointing to a number of considerations which led him to that view. Those considerations are indeed powerful and his Honour was not only entitled to take the view he did but could, in my view, scarcely take any other. It is enough to refer to the improbable version given by Mr. Steinberg of what was, according to him, his sudden and wholly unpremeditated entry into grazing activities on a somewhat unpromising property without any prior advice and having neither inspected nor, indeed, made any inquiries at all concerning any other grazing properties available for purchase. When this is combined with the failure, after its purchase, to use the land for grazing, with Mr. Steinberg's considerable past experience in the purchase of land for profit-making by resale, and with his statement at the statutory meeting of Malgor Pty. Ltd. that no definite land development had yet been embarked upon but that a number of propositions were being considered, the conclusion may readily be reached that Mr. Steinberg's purpose in acquiring the land was other than what he said it was. (at p712)

32. I turn now to the question of whether in these circumstances s. 26(a) is applicable to the four receipts of profits involved in this transaction and which the Commissioner has assessed to tax. (at p713)

33. The applicability of the first limb of s. 26(a) may be dealt with quite shortly; there was no evidence to suggest that the shares in Malgor Pty. Ltd. were acquired with any view to their resale, indeed the evidence is, rather, to the contrary. It was only the need for funds and the lack of success experienced in securing those funds from other sources that led to their sale. Profits on their sale by Malcolm David Steinberg and by the trustee of the Judith Steinberg No. 2 Trust cannot in my view be assessed to tax in reliance on the first limb of s. 26(a). Profits made by Morris Steinberg and his son on the sale of their interests as tenants in common in the Rockingham land are, on the other hand, in my view assessable under the first limb for reasons similar to those I have discussed in the case of the Wanneroo land; the receipt of the interests in the Rockingham land on the making of the distribution in specie was an acquisition within s. 26(a) and there has been no evidence to displace the inference that it was accompanied by an intention to make a profit by the sale of what was distributed. Mason J. inferred that this had been Mr. Morris Steinberg's intention in relation to the Rockingham land from the outset and I agree, with respect, in his conclusion regarding Malcolm's role from the time he became a party to the transaction; the son's evidence is in no way inconsistent with his being an informed and ready associate of his father in relation to all that was thereafter done and intended concerning the Rockingham land. (at p713)

34. However, in my view, as was the case in relation to the Wanneroo land, any reliance upon s. 26(a) must involve a remission to the Commissioner for re-assessment because there is no material before this Court concerning the value of the respective interests in the land as at the date of their distribution in specie and it is at that date and not earlier that, for profit calculation purposes, the cost of the land is to be ascertained. (at p713)

35. I turn therefore to the second limb of s. 26(a); the critical question here is whether there existed any scheme and, if so, whether the profits in question arose from its carrying on or carrying out. (at p713)

36. That there was initially a profit-making scheme is, I think, clear and his Honour has so found. It consisted in part of the purchase of the Rockingham land and the incorporation of Malgor Pty. Ltd. so that it might become the purchaser of that land. Whether or not the scheme included any precise plan of the manner in which the land and its subdivisional potential should ultimately be turned to profit does not emerge from the evidence. Nor was it likely to when the taxpayers' case involved a denial that the initial acquisition was with a view to resale at a profit. Once this evidence is rejected there may then remain circumstances from which valid inferences may be drawn concerning the purpose with which acts were done but it is unlikely that they will permit of inferences concerning those details of a scheme which have never been given effect to because the march of events has caused the scheme to be prematurely abandoned or substantially altered. (at p714)

37. Before considering what is the consequence of this absence of evidence about any details of the scheme I should state my understanding of certain characteristics of the concept of a scheme for the purposes of s. 26(a). (at p714)

38. Once it is determined that a scheme exists the effect of supervening events which cause a departure from the original scheme will vary depending upon the view taken of those events. If they be seen as involving an abandonment of the scheme as a whole, as in Kratzmann v. Federal Commissioner of Taxation (1970) 44 ALJR 293, at p 294; 1 ATR, at p 830; (1970) ATC, at p 4045 , without the substitution of some new scheme, Eisner v. Federal Commissioner of Taxation (1971) 45 ALJR 110; 2 ATR 3; (1971) ATC 4022 , profits made subsequent to its abandonment will not be assessable under s. 26(a). If, instead, a scheme in an amended form is thereafter carried out which can be seen to be a different scheme from the original scheme the date of inception of the new scheme will be the starting point for the calculation of profit, so that if the acquisition and resale of land is in question the value of the land at the date of inception of the new scheme will be the relevant starting figure. Again not every change in the planned details will involve the adoption of a new scheme, this will always be a question of fact and will be much affected by the degree to which the original scheme was precise in its details. An imprecise scheme, the details of which have not been worked out in advance, will more readily take in its stride unexpected events without becoming a different scheme. (at p714)

39. It is true that an undertaking or scheme must involve a "programme or plan of action" (Clowes v. Federal Commissioner of Taxation, per Kitto J. (1954) 91 CLR 209, at p 225 , and XCO Pty. Ltd. v. Federal Commissioner of Taxation, per Gibbs J. (1971) 124 CLR 343, at p 349 ); it presupposes, as Windeyer J. has said, activities which are "co-ordinated by plan and purpose" (Investment and Merchant Finance Corporation Ltd. v. Federal Commissioner of Taxation (1970) 120 CLR 177, at p 189 ). However, as emerges from the judgment of Windeyer J. in Buckland v. Federal Commissioner of Taxation (1960) 34 ALJR, at p 62; (1960) ALR, at pp 602-603; 12 ATD, at p 169 , it may involve no more than a settled purpose on the part of those concerned "to turn their purchase to profitable account as best they could when they got possession, depending on how the undertaking then developed", although it must necessarily have as its object the making of a profit (XCO Case (1971) 124 CLR, at p 350 ). It may involve alternative plans, different routes to the desired profitable end, the selection of one route rather than another being left for determination by future events (Elsey v. Federal Commissioner of Taxation (1969) 121 CLR 99, at p 114 ). It is clear from what was said by Dixon J. in the Premier Automatic Ticket Issuers Case (1933) 50 CLR, at p 300 , that a venture involving an acquisition of property with a view to "any profitable dealing with the property", it being proposed that advantage be taken of whichever of a large number of possible modes of future profitable disposal happens to prove most expedient, may constitute a scheme, despite the absence of any particular planned mode of dealing. (at p715)

40. It may be that the original scheme in this instance was quite precise in its terms; if so, the sale of half the shares in Malgor Pty. Ltd. to the Markham interests could hardly have been anticipated by it, it also probably did not contemplate any winding up and distribution in specie. However the scheme may equally well have been entirely imprecise in character, no particular steps being worked out by which profit was to be gained from an increase in the value of the Rockingham land; it may have consisted of no more than a scheme whereby a company to be formed, with the Steinbergs as shareholders, would acquire the land and retain it while it appreciated in value, that being followed by a realization of the land by whatever means and with whatever intermediate steps might then appear expedient. (at p715)

41. Even were there evidence that the scheme was fully pre-determined from the beginning this would not, I think, mean that what in fact happened involved an abandonment of the scheme so that, as in Kratzmann's Case (1970) 44 ALJR 293; 1 ATR 827; (1970) ATC 4043 , profits which subsequently arose did not arise from the carrying on or carrying out of a profit-making scheme. Only rarely, I think, can it be said of a scheme for the acquisition of assets for profit-making simply by their resale (of which Kratzmann's Case was not an instance) that a frustration of the planned mode of disposal, followed nevertheless by a profitable disposal, results in there being no scheme capable of attracting s. 26(a) but only in a realization of a capital asset. Here the original object, a profitable sale of the land, was pursued and attained, although the mode of doing so may have been changed so as to accommodate to changing circumstances. Were the scheme thus shown to have been fully predetermined from the beginning, the most that could be said is that changes made to the scheme resulted in the substitution of a new scheme for the original one, the starting point for calculation of profit therefore being the value of the land at the date of initiation of the new scheme. In fact there is no evidence that the scheme was other than of the simplest sort, devoid of any details of how, precisely, the profit would be realized. It follows that the fact that the profit was in fact realized in part from the unanticipated sale of half the issue capital of Malgor Pty. Ltd. and in part from the sale of land which came to the shareholders by way of a distribution in specie not perhaps originally contemplated does not of itself show the Commissioner's assessment to have been in error. (at p716)

42. In the case of the two appeals by Malcolm David Steinberg and of the appeal by the trustee of Judith Steinberg No. 2 Trust, the respective taxpayers clearly enough did not become participants in the scheme until 1963, long after its inception. Mason J. held that both these taxpayers were at all times aware of the intentions of Mr. Morris Steinberg, the originator of the scheme; by their entry, albeit belated, into the scheme as participants with full knowledge of it, what had previously been done by the original participants was adopted by them and they took the benefit of the scheme which they found already on foot. No doubt, as Dixon C.J. observed in Clowes' Case (1954) 91 CLR, at p 217 , s. 26(a) must be understood as speaking of a scheme carried on or carried out "by the taxpayer or on his behalf" and it will not apply to the case of a taxpayer, who, as in Clowes' Case (1954) 91 CLR 209 , derives a receipt from another who has in turn obtained it by the carrying out of such a scheme (per Gibbs J., XCO Case (1971) 124 CLR, at p 349 ). However neither Malcolm David Steinberg nor the trustee can, in my view, call this principle in aid, even for the purpose of having their profits calculated from a starting point in 1963 rather than from the earlier inception of the scheme. They stand in the same position as do the original participants in the scheme in relation to the calculation of quantum of profit. (at p717)

43. The position of the fourth appellant, Mr. Morris Steinberg, is in one sense unique. Until the formation of the M.J.S. Investments partnership he was a major shareholder in Malgor Pty. Ltd.; when, on its formation, that partnership acquired nearly all the issued capital of that company, he retained, as a member of the partnership, only a quite small beneficial interest in its capital. Then, when it was found that amendments to tax legislation made it no longer attractive to retain in existence the eighteen trusts which, through their preponderating interest in the partnership, were entitled to most of the half of the capital of Malgor Pty. Ltd. which had not been sold to Markham interests, the "liquidation" of the trusts restored to Mr. Steinberg a substantial interest in Malgor Pty. Ltd. It was by means of this interest that, on the distribution in specie, he acquired his interest as tenant in common in the Rockingham land, on the profit from the sale of which he has been assessed. Thus through his own actions his interest in Malgor Pty. Ltd. and in the land which he caused it to buy had waned and waxed again during the currency of the scheme. I do not regard this as in any way affecting the application of s. 26(a); all that happened was brought about by the taxpayer and the ultimate profit he received was in every sense a profit from the carrying out of the profit-making scheme, a scheme of whose inherent flexibility he took advantage from time to time so that he could ultimately derive his profit without ever having to abandon the scheme of which he was the author. (at p717)

44. It follows that it has not, in my view, been shown that the Commissioner was in error in assessing to tax as profits from the carrying out of a profit-making scheme both the profits from sale of interests in the land and also the profits from sale of shares in Malgor Pty. Ltd. I would accordingly dismiss each of the four appeals concerned with this Rockingham land. (at p717)

Orders

Appeals No. 4 and 5 of 1973 dismissed with costs.

Appeal No. 6 of 1973 in relation to the sale of land at Innaloo dismissed with costs.

Appeal No. 6 of 1973 in relation to the sale of the shares in Malgor Pty. Ltd. allowed with costs.

Order of Mason J. varied accordingly. No order of cost of appeal to Mason J.

Matter be remitted to the Commissioner to reassess in accordance with the reasons of this Court.

Appeals No. 7 and 8 of 1973 allowed with costs.

Orders of Mason J. set aside and in lieu thereof order that appeals be allowed with costs.

Matter be remitted to the Commissioner to reassess in accordance with the reasons of this Court.