Westfield Ltd v Commissioner of Taxation

Re: WESTFIELD LIMITED
And: COMMISSIONER OF TAXATION
No. N G650 of 1988
FED No. 455
Income Tax

COURT

IN THE FEDERAL COURT OF AUSTRALIA

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

CATCHWORDS

Income Tax - whether profit arising from sale of land assessable income - land acquired by company engaged in development of shopping centres as part of potential shopping centre development - applicant originally hoping to develop land itself - in the result land sold to life insurance company which engaged the applicant to design and build shopping centre - whether profit derived from sale of land acquired for the purpose of profit making by sale or from the carrying on or carrying out of profit making undertaking or scheme.

Income Tax Assessment Act 1936, ss 25, 26(a) and 190(b)
Note: Transaction governed by Act as in force for the year of income ending 30 June 1983.

HEARING

SYDNEY

#DATE 29:8:1990

Counsel for the Applicant: Mr R.F. Edmonds

Solicitors for the Applicant: Freehill, Hollingdale and Page

Counsel for the Respondent: Mr D.H. Bloom QC and Mr S.M.P. Reeves

Solicitors for the Respondent: Australian Government Solicitor

ORDER

The respondent further amend the notice of amended assessment of income tax dated 14 May 1985 by omitting therefrom the amount of $72,591 assessed as additional tax.

The application be otherwise dismissed.

The applicant pay to the respondent his costs of the appeal.

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

JUDGE1

This is an appeal from a decision of the Commissioner of Taxation to disallow an objection by the applicant to an assessment of income tax in respect of the year ending 30 June 1983. The applicant contends that its assessable income for the year of income in question should be reduced by $267,906, that being the profit derived by the applicant from the sale of land at Mount Gravatt in Queensland. The applicant contends that the sum in question was received by it on capital account and not on revenue account.

In respect of the amount in question the Commissioner imposed additional tax amounting to $72,591. It was contended by the applicant that the Income Tax Assessment Act 1936 ("the Act") did not, in the circumstances of this case, authorise the imposition of the additional tax. In the result the Commissioner did not contend that it did. It is unnecessary to refer further to this matter except to direct the amendment of the amended notice of assessment to remove the additional tax from it.
The principal evidence given in support of the applicant's case was given by Mr. Saunders who is its Deputy Chairman. At the time of the transaction, and until November 1987, he was one of two joint managing directors of the applicant; Mr. Lowy was the other. Mr. Saunders said that the main activity of the applicant was the design, construction, letting and management of shopping centres. Additionally the applicant designed and sometimes built hotels and office buildings. The shopping centres were usually held for long term investment but sometimes the applicant was one of a number of joint venturers, sometimes lease back arrangements were involved and sometimes the applicant did not own any part of the shopping centres which it designed and built.
The business of the applicant in 1978 was summarised in a letter it wrote to the Commissioner on 31 March of that year. At that stage the applicant, or companies associated with it, had built and then owned seven major shopping centres in New South Wales, Victoria and Queensland. It was also managing three shopping centres built by it for financial institutions and leased back from them under long term leases. The only other significant developments undertaken and owned were an office and hotel block and a motel complex in Sydney.
In 1979 there was a reconstruction of the Westfield Group of companies. A new company, Westfield Holdings Limited, was formed. On 2 July 1979 it was listed on the stock exchange. The applicant had been listed but was delisted after Westfield Holdings Limited became the holding company of the Group. The Westfield Property Trust was also established as part of the reconstruction and was listed on the stock exchange. The effect of what was done was summarised in the 1979 Annual Report of the holding company for 1979. The summary was in part as follows:-

"(a) Westfield Holdings Limited was formed to become the Group's holding company with Westfield Limited becoming its wholly owned subsidiary.

(b) The Westfield Property Trust was established and Westfield Limited sold to it six shopping centres for $100,500,000. The Trust Manager is Westfield P.T.M. Limited, a wholly owned subsidiary of Westfield Limited.

(c) The stock units comprising the capital of Westfield Limited (other than the five held by or on behalf of Westfield Holdings Limited) were cancelled and all qualifying former stockholders of Westfield Limited received for each stock unit previously held by them:

(i) eight units fully paid in the Westfield Property Trust, and

(ii) one fifty cents fully paid share in Westfield Holdings Limited (9,919,052 shares in total)."

In the early 1970s Mr. Saunders' gaze fell on Mount Gravatt. Mount Gravatt is a Brisbane suburb about fifteen or so kilometres south of the city. At the time, Logan Road, which ran through it, was the main road from Brisbane to the Gold Coast and further south. Since the transaction in question Mount Gravatt and Logan Road have been by-passed by a freeway. Situated in Logan Road, near its intersection with Kessels Road, was an existing shopping centre known as Garden City. It was owned and operated by D.J.'s Properties Limited, a company associated with David Jones Limited. South east of Garden City along the south western side of Logan Road were a number of allotments of land, some vacant and some used for a variety of commercial and light industrial purposes. On the opposite side of Logan Road was the Greenleaves Nursery which, in a diagonal direction, ran through to another street which intersected with Logan Road, namely, Newnham Road.
Mr. Saunders perceived the likely growth of Mount Gravatt and its surrounding area and concluded that the Garden City shopping centre would become too small for what the area required. He thought that another shopping centre constructed next to the Garden City shopping centre or one overall centre spreading over the whole area would be a profitable investment.
On 8 May 1978 a family known as the Seganfreddos granted an option to purchase over one of the blocks of land adjacent to Garden City. It was triangular in shape and opposite the Greenleaves Nursery. A purchase price of $450,000 free of commission was provided for. The option was to remain in force until 31 October 1978. The Seganfreddo land is the land in question in this appeal.
In April and May of 1978 the applicant obtained other options to purchase some of the allotments of land lying between Garden City and the Seganfreddo land. The options were expressed to expire on dates before the end of 1978.
On 17 August 1978 the applicant's solicitors made an application to the Brisbane City Council for the rezoning of the land over which it held options. Prior to making this application, discussions had taken place between executives of the applicant and executives of D.J.'s Properties Limited. On 24 July 1978 the applicant sent to D.J.'s Properties Limited a copy of its development application. The letter said that the new shopping centre and Garden City were to be linked by a covered walkway and provision had been made for the integration of vehicular movements in the two car parks.
On 8 November 1978 the Council wrote to the applicant's solicitors seeking a detailed traffic report. The Seganfreddos' option was extended to 3 November 1979.
The traffic report was obtained. A number of letters passed between the traffic engineers and the Council and eventually a meeting was held with Council representatives. On 23 October 1979 the Seganfreddos' option was extended to 3 May 1980 or in events which it is unnecessary to specify, 3 November 1980, and in some circumstances, 3 November 1981.
In responding to the application for rezoning the Council said, amongst other things, that it was dissatisfied with the access roads in the area. It was thought that the problem could be overcome if the applicant were to acquire the land occupied by the nursery opposite the Segenfreddo land and a link road were constructed through to Newnham Road. Negotiations with the owner of the nursery were entered into. Eventually they broke down because of Mr. Saunders' view that the price being asked for the nursery land was excessive. On 30 January 1980 the applicant's solicitors wrote to the Council saying that the applicant could not meet the Council's conditions and that the application for rezoning was abandoned.
For a short time nothing further happened. But soon after the letter to the Council withdrawing the application for rezoning, Mr. Saunders discovered that one of the applicant's competitors, a company known as Hersfield, was attempting to secure options over parcels of land adjacent to the Garden City shopping centre. Mr. Saunders was concerned that, if Hersfield was successful in securing these options, it might be able to capitalise on all the work that the applicant had done in seeking to have the land rezoned over the previous two years. He decided that the applicant should secure another option over the parcel of land owned by the Seganfreddos.
He instructed a Mr. Frost to obtain an option from the Seganfreddos, who lived in Townsville, and not to come back without it. Eventually the Seganfreddos granted a further option in April 1980 for $100,000. The sale price was to be $450,000 less the $100,000 paid for the option. The option was to expire on 22 April 1981. The option was exercised on 16 April 1981 and a contract for the sale of the land by the Seganfreddos to the applicant was eventually completed.
It would appear that Hersfield then dropped out of the matter and the Australian Mutual Provident Society ("the A.M.P.") became interested in it. On 16 April 1981, the same day as the option was exercised, there is mention in a letter written from the head office of the A.M.P. to its Brisbane office of a meeting by Mr. Stevens of the applicant with some A.M.P. executives. The letter said that the applicant proposed that it would carry out project management, design, construction and leasing and hand over the keys of the completed shopping centre. In fact the leasing rights were not available because the A.M.P. was bound to deal with an agent which had these rights for some years to come.
Negotiations continued for some time. On 28 January 1982 Mr. Owens of the A.M.P. referred, in a file note, to a meeting on 26 January 1982 with two of the applicant's executives. He said that the applicant was prepared to sell the land, that is the Seganfreddo land, over which the A.M.P. required access but that the sale might depend on some arrangements pursuant to which the applicant would design, build and lease the centre. Mr. Owens said that the A.M.P. would be prepared to buy the land subject to the price being reasonable and in line with the price nominated in the option agreement signed with adjoining owners. Mr. Owens said that the project was still in the planning stages.
Negotiations continued between the A.M.P. and the applicant until November 1982 when it became clear that the project would proceed and that the applicant would design and build the centre. It agreed to sell the subject land. Valuations were obtained to provide the parties with an indication of the price which should be paid. Eventually the parties agreed upon the price of $735,000. An agreement for sale was entered into on 2 December 1982.
The Commissioner contends that the difference between the sale price of $735,000 and the purchase price of $450,000 less certain expenses was assessable income in the hands of the applicant.
In the course of his evidence Mr. Saunders agreed that no-one could construct a major shopping centre in the area without the Seganfreddo land. He knew that when the applicant acquired it. In the course of his evidence he drew attention to the fact that the applicant accepted a price for the land which was in line with the prices paid for adjoining blocks. The point he was making was that, if he had wanted to make a substantial profit, he could have done so by asking for a much greater price. One of the valuations was for an amount well in excess of $735,000 and, because the Segenfreddo land was the last to be acquired, he could have held out for substantially more. Inferentially, the reason he did not do this was because he wanted to secure the contract for the design and construction of the shopping centre which the A.M.P. wished to establish.
I formed a favourable impression of Mr. Saunders and accept the general purport of his evidence. There can be no doubt but that he saw the potential of the land adjacent to the Garden City shopping centre from the early 1970s. Until 1980 he thought that the applicant would be able to go ahead on its own account. For a short time he abandoned the project when he could not purchase the nursery land for a reasonable price. He became interested again when Hersfield came into the picture. He wanted to keep it out. He then secured the Seganfreddo land first by option and then by purchase. He could not then foresee precisely how the matter would turn out but he knew that the Seganfreddo land was a powerful card in his hands.
But to take the view that he had purchased that land merely to await the day when someone would be forced to buy from him is to oversimplify the matter. His company was primarily a developer of shopping centres. It made its money out of designing, building and managing them. He had endeavoured to achieve this for the applicant in the negotiations that ensued between 1978 and 1980. Despite the fact that these broke down, he never gave up his intention of having a hand in the designing and building of the shopping centre if that were at all possible. He acquired the Seganfreddo land with the short term object of keeping a competitor out; but his ultimate goal was to play a significant part in the eventual development which he was sure would take place. The whole of his negotiations with the A.M.P. were on that basis. There are statements in memoranda and letters which indicate that he was not interested in the sale of the land unless the applicant were retained as the developer and builder - he realised that he could not obtain the leasing or management rights as well. He did not hold out for a top price let alone an excessive one. Once he had secured the agreement of the A.M.P. that the applicant could design and build the shopping centre, the sale of the land was very much a collateral or consequential matter. He sold for a reasonable price and no more.
Counsel for the Commissioner pressed upon me submissions that I could not be satisfied what the applicant's purposes or intentions were. They criticised the applicant's case because neither Mr. Stevens, one of its own executives, nor any of the relevant A.M.P. executives was called. Attention was drawn to evidence given by Mr. Saunders that the applicant would have secured the contract to design and build the centre in any event. This was because of the high regard in which Mr. Saunders said the applicant was held by the A.M.P. I have taken these and other matters into account. I am satisfied, however, that the facts were as I have found them to be. The various documents in evidence and the overall probabilities of the case support this view. The question is, what is the legal conclusion which results from these facts?
The Commissioner contended that the amount of the profit in question was properly brought to tax either because it was income according to ordinary concepts or because it fell within either or both limbs of s.26(a) of the Act as it was at the relevant time, that is he contended that the land had been acquired for the purpose of profit making by sale or the profit had been derived from the carrying on or carrying out of a profit making undertaking or scheme. Both counsel, correctly, I think, put their cases on the basis that there was little difference in effect whether one approached the matter under s.25 - income according to ordinary concepts - or under the second limb of s.26(a). Different considerations applied in relation to the Commissioner's case based on the first limb of s.26(a).
I deal first with the question whether the profit was income according to ordinary concepts. Counsel for the Commissioner relied generally on two authorities, namely, Jennings Industries Limited v. Federal Commissioner of Taxation (1984) 84 ATC 4288, a decision of the Full Court of this Court, and Federal Commissioner of Taxation v. Myer Emporium Limited (1987) 163 CLR 199, a decision of the High Court. In the Jennings Industries' case the taxpayer, which was engaged in the building construction industry, took up half the shares in a company which it intended to use for the acquisition and development of a building site. Under an agreement with the other shareholder, the taxpayer was responsible for constructing the building; the other shareholder was to be the owner of the building which was to be leased on completion. Almost two years later, and before the building was completed, the taxpayer and the other shareholder agreed to sell their shares in the company to a life office. The Supreme Court of Victoria decided that the whole of the profit from the sale of the shares should be included in the taxpayer's assessable income. It was held on appeal that the sale of the shares was not the mere realisation of an investment at a profit but a step taken in the course of the taxpayer's ordinary business. The profit was assessable under s.25 as income according to ordinary concepts, the sale being an integral element of a wider transaction which had profit as its motive.
The Full Court said (pp 4,293-4):-

"Part of the taxpayer's motivation in entering the agreement of 4 February 1972 pursuant to which it acquired its initial shares in T.P.D. (the developer) plainly was to obtain the construction agreement in order to earn a profit. Further, insofar as the taxpayer had decided that it would or might retain its initial shares in T.P.D. for a period, it had the further intention to profit by reference to the income from those shares although only after a necessary delay of eight years. We are satisfied that the taxpayer also always expected and intended to profit by the realisation of its interest in the project. Sufficient reference has already been made to the different possibilities concerning when such a sale might take place. It is not certain that the taxpayer had a positive intention that it would realise its interest in the project by a sale of its shares in T.P.D. but the contrary is not established; a sale of shares was always in contemplation by the taxpayer at least as a possible method of realisation of its interest in the project. ........ ........ ........ ........ ........ ........ ........ . An intention to retain the shares in T.P.D. for a lengthy period and to derive income from them during that period might tend to support a conclusion that the shares were an investment, particularly if the share acquisition itself constituted the entire transaction. Here it did not. It was an integral element of a wider transaction. Each aspect of the transaction and the transaction as a whole had profit as the motive."

The decision in the Myer case is well known and I will not recount the facts of it. It is important, however, to cite some passages from the joint judgment of the High Court. Amongst other things the judges said (pp 209-210):-

"... a gain made in the ordinary course of carrying on a business constitutes income, it does not follow that a profit or gain made in a transaction entered into otherwise than in the ordinary course of carrying on the taxpayer's business is not income. Because a business is carried on with a view to profit, a gain made in the ordinary course of carrying on the business is invested with the profit-making purpose, thereby stamping the profit with the character of income. But a gain made otherwise than in the ordinary course of carrying on the business which nevertheless arises from a transaction entered into by the taxpayer with the intention or purpose of making a profit or gain may well constitute income. Whether it does depends very much on the circumstances of the case. Generally speaking, however, it may be said that if the circumstances are such as to give rise to the inference that the taxpayer's intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer's business. Nor does the fact that a profit or gain is made as the result of an isolated venture or a "one-off" transaction preclude it from being properly characterized as income: Federal Commissioner of Taxation v. Whitfords Beach Pty. Ltd. (1982) 150 CLR 355, at pp 366-367, 376. The authorities establish that a profit or gain so made will constitute income if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit."

Later their Honours said (p 211):-

"The important proposition to be derived from Californian Copper and Ducker is that a receipt may constitute income, if it arises from an isolated business operation or commercial transaction entered into otherwise than in the ordinary course of the carrying on of the taxpayer's business, so long as the taxpayer entered into the transaction with the intention or purpose of making a relevant profit or gain from the transaction."

The references to Californian Copper and Ducker are references respectively to Californian Copper Syndicate v. Harris (1904) 5 TC 159 and to Ducker v. Rees Roturbo Department Syndicate (1928) AC 132.

The final passage to be quoted from the judgment in the Myer case is the following (p 213):-

" ... profits made on a realization or change of investments may constitute income if the investments were initially acquired as part of a business with the intention or purpose that they be realized subsequently in order to capture the profit arising from their expected increase in value: see the discussion by Gibbs J. in London Australia (London Australia Investment Co. Limited v. Federal Commissioner of Taxation (1977) 138 CLR 106 at pp 116-118). It is one thing if the decision to sell an asset is taken after its acquisition, there having been no intention or purpose at the time of acquisition of acquiring for the purpose of profit-making by sale. Then, if the asset be not a revenue asset on other grounds, the profit made is capital because it proceeds from a mere realization. But it is quite another thing if the decision to sell is taken by way of implementation of an intention or purpose, existing at the time of acquisition, of profit-making by sale, at least in the context of carrying on a business or carrying out a business operation or commercial transaction."

In the submission of counsel for the applicant the onus of proof cast upon it by the Act (s.190(b)) was discharged if it established that the profit from the sale of the land was not a profit which arose in the ordinary course of the applicant's business. It was not its business to buy and sell vacant land. Hence the profit was not income according to ordinary concepts. No more was involved than the realization of one of its capital assets. Counsel submitted that in 1978 the applicant's purpose was to construct a free standing shopping centre albeit that it was to be integrated with Garden City. Its aspirations were frustrated by the difficulties to which I have referred but they did not change. All along the applicant intended to play a part in the future development of the site. That was the reason why the land had been bought, but its acquisition and sale were not part of the ordinary business activities of the applicant. It had turned the land to account, but the receipt of the proceeds of sale was a capital receipt, not a receipt of income.
I agree with counsel for the applicant that, at the time of the acquisition of the land, there was no intention necessarily to sell it. At that time, notwithstanding the incipient negotiations with the A.M.P., the applicant's preference was itself to develop the land along with other parcels of land adjacent to it which it still hoped to obtain. Counsel for the Commissioner emphasised that the relevant time to consider the applicant's intentions was the date of the acquisition of the land, that is, the date of the exercise of the option, namely, 16 April 1981. They relied on the coincidence of the date of the exercise of the option and the date of the letter from the A.M.P. to its Brisbane office in which reference was made to the possibility of the A.M.P. going ahead with the proposal. I have not taken anything from that circumstance. I accept evidence that the Seganfreddos were not prepared further to extend their option. It expired on 22 April 1981. The date of the exercise of it was 16 April 1981. I do not think that that is indicative of anything other than care on the part of the solicitor to ensure that the option was exercised within time. I am satisfied that the applicant would have exercised the option whether or not there was some sign of the A.M.P. having some interest in the proposed shopping centre or not. It was a long time after 16 April 1981 before the parties decided to proceed. In the period of over 18 months that was involved, most of the negotiations were concentrated upon the terms upon which the applicant would be retained to design and build the centre. Until late in 1982 there was no certainty that the transaction would go ahead. If it had not gone ahead, it is plain that the applicant would have retained the land in the hope that eventually it would be able to construct the shopping centre on its own land or that someone would wish to construct a shopping centre and retain the applicant to be, not only the designer and builder, but also the lessor of the shops under some form of lease back arrangement.
On the basis that these would be my conclusions, counsel for the Commissioner said that the profit from the sale of the land was nevertheless assessable income under s.25 because the land was treated by the applicant, not as a long term investment, but as an asset available to be dealt with in the ordinary course of its business. The fact that it had not previously held land in this way was of no relevance. The ultimate object of the applicant being to design and construct the shopping centre, the land was the asset which gave it the means of securing its retention as designer and builder by any developer. In the event, that was precisely how matters turned out.
Counsel for the Commissioner relied, as I have mentioned, on the decisions in Jennings and Myer. Counsel for the applicant sought to distinguish them. Obviously both cases have to be looked at upon the basis of their own facts, but the general statements in them are relevant to be taken into account in deciding the question here.
In the first of the passages I have quoted from the Myer case, the Court makes it clear that a gain made in the ordinary course of carrying on a business is invested with a profit making purpose so that the profit is stamped with the character of income. On the findings of fact that I have made, the profit in the present case was to arise from the contract, which the applicant would have, to design and build the centre. The profit to be derived from the sale of the land was very much an incidental matter. All that the applicant did was to ensure that it received a fair price for the land determined by reference to prices which the A.M.P. had paid to adjacent land holders. The sale of the land to the A.M.P. for the purpose of the centre was not a matter which occupied the parties' minds to any great extent. It was a necessary or incidental consequence of the transaction but that was all.
That having been said, it seems to me, however, that the whole of the transaction, including the sale of the land, was one carried out in the ordinary course of the applicant's business and was part of an overall profit making venture. I do not feel able to separate out the sale of the land from the totality of the transaction. The sale of the land was a necessary step in the carrying out of the entirety of what was involved. The matter has to be looked at as it was at the date of the acquisition of the land, namely, April 1981. Critical to be taken into account are the applicant's intentions and purposes at that time. The evidence establishes, as I have said, that the applicant intended, when it acquired the land, to use it in a way which, although not then precisely foreseen, would achieve for it participation in the development of it and other adjacent land into a shopping centre whether integrated with Garden City or not. It did not envisage sale as a necessary consequence. But it was certainly a possibility. As events turned out the land was sold and the sale yielded a profit which was realised in the 1983 year of income. In my opinion, it must follow that the amount of the profit was properly included in the applicant's assessable income. I think this conclusion is required by both the Jennings Industries and the Myer cases. It is to be observed that the facts in the Jennings Industries case, although not precisely the same as those in question here, are closely similar to them.
My conclusion makes it unnecessary to consider the Commissioner's case based on s.26(a). I should say, however, that I am satisfied that the first limb of the section is not applicable. The land was not acquired with the dominant purpose of profit making by sale; cf. Moana Sand Pty. Limited v. Federal Commissioner of Taxation (1988) 88 ATC 4897 at p 4902. I do not express a concluded view about the applicability of the second limb, but it would seem to me that this is a case where the considerations which govern the assessability of the profit made upon the sale of the land under s.25 are similar to those which apply in relation to the second limb of s.26(a).
In the result I dismiss the application subject to directing the Commissioner to amend the notice of assessment by omitting therefrom the amount of $72,591 imposed by way of additional tax. The applicant is to pay the Commissioner's costs of the application.

[1990] FCA 455

29 AUGUST 1990