Whitfords Beach Pty Ltd v The Commissioner of Taxation of the Commonwealth of Australia

--	CATCIIWORDS

Income tax - Assessable lncome - Taxpayer company

acquiring

l a n d

n o t

for

t h e p u r p o s e

p r o f i t - m a k l n g

s a l e -

Change

i n s h a r e h o l d l n g and

d l r c c t o r s of

company

S u b d i v l s l o n and

s a l e o f

t h e l a n d

o v e r

s e v e r a l y e a r s

B u s l n e s s

Mere

r e a l i ~ a t l o n

o f

c a p i t a l a s s e t -

S a l e i n t h e o r d l n a r y

c o u r s e

o f

b u s l n e s s

whethe r

p r o c e e d s

o f

s a l e c o n s t i t u t e

a s s e s s a b l e lncome -

Income Tax Assessmen t A c t 1936

- -

- --

( C t h )

s s . 2 5 , 2 6 ( 5 ) .

Coram : Brennan, Deane and F ~ s h e r

JJ.

- --	-
20	Deceml~cr 1979.

Sydney.

I N THE FEDERAL COURT OF AUSTRALIA	)
1

WESTERN AUSTRALIA D I S T R I C T REGISTRY )

W.A.

NO. G 1 of 1979

GENERAL

D I V I S I O N

)

ON Al'PEAL FROM TllE SUPREME! COURT

.- ----

OF WESTERN AUSTRALIA

BETWEEN

: WHITFORDS BEACH PTY .LTD.

Appellant

AND : THE COMMISSIONER OF TAXATION_

- -

OF TliE COYflONhTALTH OF

AUSTRALIA

Respondent

O R D E R

JUDGES M A K l N G ORDER	: Brenndn, Deanc and Flsiler JJ.
.-p
DATE O F ORDSR	: 20 Dccemher 1979.
WHERE MADE	: Sydney.

-- --

Tl lE COURT ORDERS THAT:

l.	The appeal be allowcd.

2. T h e ludgment and orders appealed from be set

aslde and in lieu thereof it be ordered that -

(a)

the appelldnt's appeals agalnst its amended assessments to Income tax for the years of income ended 30 September 1972, 1973 and

1974 and its assessment to lncume tax Tor the

year of lncome ended 30 Scptcmber 1975 be

allowed;

( b )

t h e ma t t e r s

rernlt ted

t o t h e

respondent

t o r e - a s se s s

t h e footxng

t h a t no

p a r t

o f

t h e proceeds

t h e s a l e o f

1,584 a c r e s of

l and be ing

t h e land

acqulred by

t h e a p p e l l a n t

from one Thomas W l l l l e Slmpson

i n o r about

April

1954

constitutes

a s s e s s a b l e Income

o f

t h e

a p p e l l a n t ;

( C )

t h e

respondent

pay

t o t h e

a p p e l l a n t

t h e

a p p e l l a n t ' s

c o s t s

t o be

taxed

o f

;le

hea r lng

o f

t h e appea ls i n t h e Supreme Court of

Wcstcrn

Aus t ra l ~

3 .

The

q u e s t i o n

o f

any

o t h e r c o s t s

i n t h e Supreme

C l a r t

Wcstcrn Australia

r e m l t t r d t o t h a t Court t o dctcrioine

havlng r c y a r d t o t h e reasons

f o r judqment

t h l s Collrt.

4 .

Thc respondc'nt

pay

t o t h e an.;lclldnt

i.ts c o s t s o f Chc

a ~ ~ p e a l

t o t h l s Court .

I N THE F E D E W COURT OF AUSTRRLIA

)

WESTEm' AUSTRALIA DISTRICT REGTSTRY

)	W .A. NO. G 1 of 1 9 7 9

- - - - - -. -- - -. - .- - - - - - . -. . - - -

OX AI'PEAT, YROOM THE SU?l3:?IE COURT

O F IvESTCRN AUS'i'PJIT,T A

-- -.

- -

- --

BETWEEN

: WIIITFOXlS IIEAClI lJTY . LTD.

- -

- .

- --

-- -

Al.'pcllailt

AND

TJJE C~.)!vi.iM [ S S JOKER OF T;'i?;ATIOI<

- - - -

- .

- -

- - --

- -

Or' Tll E CC,! :~.3<5Iv\<b

AIJT12 Oi.'

- .

-- --

. .

- -

- .

-- -

ATIS'J'RI".LlA

- - . - -- - - .-. -- -

CrlKqbl

: Brcnnan,

D e a n e h ~ ? d

F~shr-r JJ.

- .

- - -

- -

! .my

---

\Ch~.tfords

Lc ach Pty. T,i.d.

, the ~,>,,cllanr

t < ~ > - p a y e r ,

\;as formed on 26 Apr3l 1954.

I t s sj1~rf:iolrlers

r?@~-c

1-he

,>ccupit.~-s

i l s h ? n g ,;hacks

, a n d ] n g on

hear-h:ro!~t

I C::C?~VC,

a C i.:h~:-i

lrris Ccach,

north of P c ] - t h .

7,t

~'1~21:

t 3 1 ~ e

1 1 1 ~ 1 <,I.E~:

! ~ ~ ? h i ~ , d

l.!le

:-<r::clvc

r v , ~ c , u n t i ~ : v r l r ~ l ~ c d

;h-~r! %a,;

i , . + i i ~ >

t . ne

1 .

T h e f ~ n l y ccr,ss

the

C:.!,

i ; , r j

=.i-;-rks ;.,3s

hi-ouyh

S ~ ~ y , s u n '

I dud .

TI:e

ii rst

i;h~> OL jl- CCS

1 . h ~

?;:>'.I-

' S n~r- :~iord~idum

of ;issocl ,:tlon

i n c l u i i e d

the

a~::u? . ; j tl o n

S lmpson ' s

l a n d ,

whlch

consisted

o f

t w o p a r c e l s

( o f

approximately

1544 a c r e s and 40 a c r e s respectively),

f o r

t h e p u r p o s e

o f maklng

r e s l d e n t l a l sites

available

f o r t h e

s h a r e h o l d e r s .

The

t a x p a y e r

adop ted

a r t l c l e s

n s s o c l a t l o n

whlch

contained

p r o v l s l o n e n t l t l l n g a

h o l d e r o f

g roups

500

s h a r e s

t o have

a l l o c s t r d and

t r a n s f e r r e d t o h ~ m

t h e

f r e e h o l d

t l t l e

t o one

o r Ittore

r e s l c l e n t l a l

s l tes

conta lnc-d

w l t h l n

o n e o f

t h ?

p a r c e l s o f Slmpson's

l a n d .

A f t i p-

t h e taxl.,dyer was jncol-poratcr3,

i t cntc:-ed

into

c o n t r a c t t o buy

t h c

!:do

p a r c e l s

l a n d f o r ~ 2 3 , 7 6 0 .

1t.s p u r p o s e

i n a c q u i r l n q ihc

l a n d b-.2s

t o s e c u r e

i-o

t h e

o ~ - l y l n a l

s h a r e h o l d e r s

ct~ni. ir tued zcr:t:ss

t o a ~ r ?

u s e of

i:lic~r

shacks

a l o n g

t h e

L s a c h i r o n t .

was

l o t p o s - l b l e t o a c h ? c v c

this

e n d by

a c q u l r l n g

p o r t l c m

o n l y

o f

S311lp'-<~tI'~

l a n d .

I t

u s s n c c e s s a r y

t o p o r c h a s e

t h e wholc

b o t h pdrcels.

I t W,-1s

lntcnd,?d,

p o - , s l b l e ,

t o subdivide

t h e l a d olld

110

g l v c t o

e a c h o f

t h e o r l g l n a l s h a r r h o l d c r s

separate

r l t l e t o a

s e p i ~ r a t e

l o t on

or n e a r t h e h c - ~ c h f r o n t . I.".-

t -

- C

e r ~ x i y

132 <;~?ld

- 3 s

t o t h e v a l l d l t y of

t h e

r r r t ? c l e w l l ~ r : h L

i ,

r3i -d 111

zccr,~-c?,~ncc

w l t h Chat int,:ntlr,n,

tht? I 1'1 ~ i ~ t

I fin \%.I:;

n o t cdrJ:J r d

1nt.o e f f e c t d u r ~ n g

t h e

y c ~ 1 - s

when

1.hr:

o r i q l r ? ~ l .

: : l ~ ; l ~ c ? 1 > 0 1 ~ 3 ~ r ~

(~v:st o f w l l o m continued Lo ocr:ul.,y

t ! ~ c ~

st.irc:.r,)

r~: t ; l lned

Chr .1~ < h a r e s .

T n e

r c s p e c t l v e

:~ar-cls of

1;jrld

{<ere not

s ~ t ~ 2 1 ~ 3 T j e d .

L t p p l l c a t l u n f o r ;~pf , roval t o

subdivj .de

some

n o t a c q u l r e t h e subject

l a n d

(as t h e p a r t l e s c a l l e d t h e

I I

t w o p a r c e l s	o f	l a n d )	f o r t h e p u r p o s e	o f p r o f i t making	by	I	l
sale.

Wlth

t h e p a s s a g e

t i m e ,

t h e r a t e s and

t a x e s

upon

t h e

l a n d

i n c r c a s c d .

The

t a x p a y e r

c h a r g e d

i ts

s h a r e h o l d e r s

s m a l l

11ual sum

t o d e f r a y expensds

and

l s s u c d

f u r i h e r

s h a r e s

t o p r o v l d e

i t w l t h moncy

t o c a r r y on .

The

v a l u e

o f

t h e

l a n d r o s c a n d ,

i n a b o u t

1966,

t h e

td : -payer

becjan

t o r c c c l v e approaches

irom

p e r s o n s

l n t e r e s t c d

I n

a c g u l r l n g

either

t h e

C a x p a y e r ' s

l a n d or

t h e whole

o f

its

i s s u e d c a p ~ t a l . None

o f

thclse

a y ~ ~ ~ r o ~ c k o s

l e d t o a

,:ale

u n t i l

LIr.

F.D.

O I S u l l l v a n a c t l n g o n l.~eRalf o f

T n v e s t m r r ~ t F l n a n c e

Group,

; h e

d e s c r l l > e d it,

i r i ? ~ : ~ iin

a p p r o a c h o n

1 9 Oc tobe r

1967 f o r Che

i c ~ ~ u l s l t i o n

o f

the

l a n d o r s t a r e s a t a 1.ric:

o f

51 , 500 ,000 .

A f t e r sc!:ic

n c g o t l a t l o n s

w i t h

Chc

tal.1.rdq.i r ' s

boz.1~1 o f

d l r cc to l -S ,

i h e

s h a r e h o l d e r s o f

t h e t a x p c y e r

o : i r r ed

t o g r h n t

t o t h e

I r ? v c s t n ~ ~ ? n t

F m s n c e Croup

v1:mLicn

t o l-,uy 2 1 1 t h e 1<>?r :? l l

s h a l - e s f o r

$1 , G00,OOO.

C b z t

1.1

IIIC L I I C

~ ~ r v , ; l > e o t l i l c

p u r c l ~ a s e r s WC?-c Mr.

0 ' S u l l ~ u : j n , a

Mr.

J . A .

KcCuskcr

,l!id

The N a t ~ o n a l

1.lurual

L l f e A c s c c ~

c l t lon

o f

A u c t r a l ,zcla

i , l r r l~ tc ,d

( " h r a t l o n a l !ioCudl") .

o p t l u n t o ~ J ~ L C I I ~ ~ C

WLS

C e ~ I : I C N ~

20 l;ccc.nbr!r

1967 by N a t i c n a l i~luCl1,;1, !1artli?cial.e I;'iy.Li-c:.

( a company

c o n i r o l l e d b y M r .

Mc Cuskcr- to w h ~ c h

h e

hzd

a s s i g n e d h l s l n t e r e s t

i n t h e o p t i o n ,

h e r e a f t e r

" M a r t i n d a l e " )

a n d

F.D.

0 8 S u l l l v a n P t y . L t d .

( a company

c o n t r o l l e d b y

M r .

O ' S u l l i v a n

t o w h i c h

h e h a d

a s s l g n e d

h l s i n t e r e s t i n t h e op t ion

a n d w h l c h

s u b s e q o e n t l y

c h a n g e d

I t s

name

t o G e n e r a l

D e v e l o p m e n t

C o r p o r a t 3 o n

P t y . L t d . ,

h e r e a f t e r

"GDC") .

A t t h a t tlrne

630

a c r e s o f

t h e l a n d h r ~ d

z o n e d

d e f e r r e d u r b a n ,

a c r e s h a d

b e c n

zoned

p a r k s

a n d

I - e c r e a t i o n ,

a n d

t h e h a l a n c e h a d

b e e n

z o z d

,:~lral.

S u b d i v i s i o n d,?pencied	uimn	e f i c c t i n g a	ch,;:lr;e	1.11	7o : i ln r~ to
u r b a n .

!i,:ssrs.

O ' S u l l j v a n

a n d

YcCusker i\..;c.re

k ~ 1 5 ~ l e d , ; . ? ~ ! > l e

i n r e a l state

m a t t e r s ,

a n d 1.r.q'

~,~p?-?clc. ' :?d

t h e p r o f l t p o t e n t 1 2 1 of

t h e s u b j e c t l a n d .

T h e y ,

o r

cu inpan lcs

w h i c h

t h e y

c o n i r o l l c d ,

h a d

I-,?c:n

entj?y%d z o g r 'lli 2r

I n p u r c h a s l n q

l a n d

I n I ~ u l k , s u b d l v ~ d ~ ~ > g

.an6 :,?l! jnq i t .

sa:nc

o c ~ - ; i s > r ~ n s

110:1!~:s

had b e c n hu11.t

o n ~ h c

-,~!:.,j~vlf:-,Cj

i ~ l ! o t ~ n t + n t s

! > e r a r e s a l e ;

o n

o t h e r o c c z s ~

o n s

t h e

!;~'.,dlv? d-d

. Z l l . o t

t,~.fiC:?

.)ere s o l d w l t i l o u t

I l a l l r . c ~ r , .

J* !*X%S?-~ .

C J ' ! ~ L ' ~ ~ ~

-.l

,,?id

ticC~:::::rl-

.v:~oi-e CO

l : a t i o , 1 a l

~ ;u tu . -11

o n 15 :<~~v~r-;tll.;-r

i ? 6 ;,

c > l ' r c s s l n y

t h e c~!,ln?on

illat:

t h e l.?bd wzs

"o l ,v?ou~; ly q~~l! , i ] ) lc

for cie~~elr_.-,z~*'.nt

1.ntO

m a j o r h o u s l n y

p ~ o j t - . c t "

, ~ l l d

li$,pirmg

t h a t t h e l r I - c c e n t d l ~ . : : l l : ; ~ ~ ~ ~ ~ ~

wlLh l\;a%l.it!l~l lIl;-ci?rll b:,'~uI~l

" ~ z u l m ~ n o t e

117 rJdr jo i l i t ownc~rsh:p of ,3

C<T':J;.!~~'

'.~1-7wn z s

: Y h l t f o r d s

E,r:ach

P t p . 1 , t r l . " .

I<i,en t h a t I i q e ~:CIS

f a 1 f 1 l l c < d ,

t h e new

s h a r e h o l d e r s

b o u g h t

t h e

s h a r e s w i t h

t h e

l n t e n t l o n

t h a t t h e t a x p a y e r

s h o u l d c a u s e

Che

l a n d

b e

d e v e l o p e d ,

subdivided a n d s o l d .

20 Dt?ceml>er 1967 , when

t h e new

s h a r e h o l d e r s	o b t a i n e d	c o n t r o l o f	t h c t a r p ~ y e r ,	i t	a d o p t e d	I
i

an e n t i r e l y new

se t o f

a r t i c l e s which were

a p p r o p r i a t e

for c a r r y l n g o u t t h e intention

o f

i t s ncw

~ h a r e h o l d ' r s .

The

t a x p c y e r

f o r t h w i t h

appointed

N a r t l n d a l e

2nd

GDC

a s joint

managers

" t o d o a l l w l t h l n t h e i r power

t o do1,elop

and

S U ~ J ~ ~ V I

I n t o u r b a n

a l l o t ; l e ~ ~ t s

:;11ch pa r t 01-

y r t s o f

t h e

l , ?nd a s t h c Co~rpany nay

f rom t i z l c

t ~ m e

d ~ r c c t

a n d

t o

s e l l

i!le

1;rnd

o r such 1,;irt

o r p a r t s i l ~ e r c o f

;..S t h e Co::q>ally ]nay

f l -o~n

t ~ l , i r + CO time d j r c c t 1.n

ur:,::n

~ ~ t . i i ~ v ~ h v > r ~ l

~ 1 1 ~ : . i ~

t f l l t S

and

g e n e r a l l y t o en511re chat

l- i~e

laid 1s r;.;-\-i.lu;jed

~ ; b d i v ? d ? 6

.dnd s o l d t o t h e best zdv611tzqc".

The

~z..!:=ycr en t

r e d l n ~ o

C G r i i r c l c t w ~ L h

t h c j a l n t iqanagers , who

ri?r?cd

t o pl-i-p><e G

r.l-an

for-

E e v c l o p l n ~ n t

o f t h e l h n d , t o r~~:t:p;jie

a buC.>ct. 2nd a

C01-(:c&st

o f

~ x p c n r l l i u r c ?

~ n d

iecc:~pl.s ioi-

i l ~ c

va i - iouz

st.l?cs

c l t v ? l u l ~ ! n i ? ~ ~ t ,

ss'-di vision

clnil

s a l e ,

,~r:? t o ;urn7 s h I i 2 l j 6 l l r 5 ,

t h e 1~1.-lcs

,tcr~,'s

and c o n d l t l o n s

*;~l .e

L ' L J ~ > ~ ~ v ]

d e d

a l l oCa,cr,

a n d

(,x<;.;.?n w i tl-,;

1 ] m 1 C S

f l :_cr l b y

t h e

tXip;ryff)

t o c n t r r i n t o coni-l-';c:-s

o f

-.rile fin ~ l i c

. : :J~JI .~GJ~'s

Lc!~ , i l f .

The

j o l n t

managers w e r e o b l l g e d ,

l n t e r a l l a ,

" t o p r o v l d e

f o r t h e cost

o f

t h e deve lopment

and

p r o v l s l o n

o f

n e c e s s a r y

s e r v i c e s CO

t h e l a n d

~n connect1011

w i t h

t h e

I I

s u h d i v l s i o n

the ; -eof

arran<:lng

f l r s t n~or tgar jc l o a n

f o r t h e r e q u i r e d

amount

s e c u r l i - y o f

t h e

l a n d

t h e

b e s t

a v a l l a h l e

t e r m s and

con21 t i o n s . "

They

wt?1-e

r e ~ l u l r e d ,

hcwever ,

n o t t o e n t ( > r I n t o any

f i r m a r r a n g e m e n t

'or

T i t - s t

~ ~ l o r t q a y e

l o a n

w l t h o u t

f l i s t g i v i n g

E ja t lona l

Mutua l

~ ; p p o r t u n l t y o f

nia1:lng

uv;llldh!e

zilch

l o a n on

s e c u r l t y

I J ~

t l ~ e

l a n d .

T h e

~ o l n t

nld:>;l.;ers

WC-I-?

c n t i t l c r l t o be

r t ? j ,~J>ursed

f o r t h ~ ~ r

i - > . ~ ~ i ~ > c 3 1 C ~ 1 r - c

AI>(?

~ . ~ = l - l r , l n

o f

Ch>? l r c ~ s t s ,

!:\ut

t h e moneys

rc .c~? ivcd by

t11f.n

a r ~ s ? n , -

o u t 0 5 t-he

~ ' , - ' ~c l . o~ . r r~on t ,

su l~r i

i v l s ] un

c ~ i r ! ?a1

o f t h e 1.anrl or :?ny

p z r t s C-hc r e o f rkre t o he 111,:

~ r o i ~ $ ? ~ ~ y

C l ~ etLxpzq.fr.

T d t i ? r ( o n 2

?<ay 1972) ;I

n,.w

:l,--.

d,;~:~ocnt

z g r e c - n e l ~ t w a s

: : 1 : 6 r ,

!3~11-1jinq

I n

a n o - ~ l ; ~ . ~

c:(,r,:;;%::y,

Tr~c!~cz i , c

( W . A . )

F t y . J 2 i - 2 . ,

,:.S

G ~ o l n t

rrcinaqcr,

i I

o f '

ncw

E< r c em-nt r. i-,

:I?* s l g n l f ~ c ~ n t l y

Gal-fr-.t.,:nt

ilrc-~.n ::!>c-

o l t i .

P1 l.:~o:iQ,

P,=:- ,>]-S. McCusker ,]nil (> 'S i l l ~v;r!-. o r thr-I r c o ~ ~ i - ~ ~ i ~ c . ~

11. 6

:c;;+tllrlr?r, hu1 l t l louses r,n

l ~ t s

a.Illc11 i.!~cy 11;,,1

' , o ~ i r h Z

L:~r: ~-iil>r31v1.~:ed

i.or s a l e , 1-L !-.-!S JIG^ ~l,i,?:,r:eG hk21- T!I?

L - . l ' ayer

shr,uI d

build

I?oil;t.~; 1 ~ 1 1 1i.s

y ul,dl v: ,is11 i ;:i,:l.

l.;c.;ic-dpe l>ough t so;;:?

l o l . ~

, b d l l t ll.;c~sc:;

t-ht=>-r:i>:?

;!I<

s ( : l G

i h ~

i!l,proved

lot . ; ,

l , 7 ~ C -cl-.?

l~:.->;l>c-r

r: , ls

n u t t:i?<.~ycli ~q

i h7.t

l~us l r ?e -c s .

Thc development and subdivision of

t h e l a n d

p roved

t o b e a

l a r g e and

complex a x e r c l s e .

Contemporary

r e p < -ts by

p r o j e c t

C O - o r d i n d t o r show

t h a t a

s e a r c h f o r

w d t e r s u p p l y

was

u n d e r t a k e n ,

n e g o t l a t l o n s ws re

s t a r t e d

w i t h a

l o c a l autlm.)rl ty

f o r a

roadway

t o he

c o r ~ s t r u c t e d ,

dnd

preliminary

cons3 d e r a t l o n was

g l v e n

t o cnylneor in~: ,

s u r v e y i n g ,

and

p l x i ~ r n g

r eyu1 r cmcn t s .

R u t

t-hose

e r Forts

wcre

n o t v c r y m ~ i i e r ~ a l

t o a

p l a n whlch was

d t ? ~ e i ~ i , ? d

i lCcr

t h e

O ~ C I J I - I - L ~ I I : ~

~n J u l y

1 9 6 9 o f

hzppy

c v e n t ,

a s :.ir.l;cLus>.er

c a l l e d

i t .

wlCh a C ~ h 1

n13t s u b -ci~1-rnittee of

C!le

Govc cllio?:lt

u f

: ;CS ,.t:rr:

? : u r ~ t : r ~ l l a ,

;3nil

thc

C a b i n e t VIEW

has

s t a t e ?

: : ! l i t ::h*

!-rixpay,?r's

1.md ouci i t s p e c d ~ l y

t o ix

d~+vt:lv:-etl :nd 5c!3 L'.

P 1 ~ 1 1 n l n g

',:id

C , I I ~ ~ ~ V I , . L O I I ~ ~

. + ~ , ! : x f > \ ~ ~ - l s

L:F:I-:

t l~eil

~ : c ( j o t ~

atcd w l t h quvt21 ilmont

1nsi-ruruc:nta11 tl c:;, snd

so~ne

c.xuhangcs o l 1 a!-i3 ::.- 1-1.

c ? f i c c t c d i n c:~.rj:r

:-a

I .,;;et

?!I(?

1-cg l l l rc~~ncnts

of pl;r!iliung . tu thor i t . i r . s .

T>c f 1 : s t ~ b l ~ ~ . ~ ~ ~ ~ ~ ~ ; l ~ ) l ~ ~ ~ l

s u r v e y 1.12175

p rov i r2'1:q

f o r 2 7 2

lol ls xpre

l03~:ed b1i:h

tl:e

T3 t1

Of:]

3 P. c - c j ~ b e r 1 9 7 0 dnd

~-c l>cr r t

c o

'ihc

Directors '

M c c t l n q on

F e b r u a r y

1 9 1 1 s t a t e d i h a t t h e

f i r s t 200

sales

h a d

b e e n m a d e .

L a r g e

skns wc:re

b o r r o w e d

f r o m ~ a t i o n a l

M u t u a l ,

a n d l a r g e amounts were

expended

d e v c l o p n i e n t .

" c a s h h1 s t o r y "

t h e

t a x p z y e r w a s

t c n d e r c d

f o r t h e y e a r s e n d e d 30 Juqc

1 9 6 8 t o 30

J a n e 1 9 7 5 i n c l u s l ~ ' ~

wh1.ch

showed r e c c l p t s f r o m N a t l o n a l Mutua!

o f

$436 ,000

i n

1 9 7 0 , a n d t o N d t l o n a l F ! l ~ t ~ a l

o f

$ 9 2 6 , 0 0 0

i n 1 9 7 1 ;

a l s o showed

r c p a y m f . , l t s

o f

$300 ,000

i n 1 9 7 3 a n d o f

$ 7 0 0 , 0 0 0

i l l

1974 .

The

~ ~ q o ~ . i l n t s

S p e n t

o n

d e v c l o p r ~ t - n t wcre

$ 3 4 5 , 0 0 0

i n

1 9 7 0 ,

$ 1 , 2 G 5 , 0 0 0

i n 1 9 7 1 ,

7 8 8 7 , 0 0 0

? n 1 9 1 2 ,

f 5 3 5 , 0 0 0

i n

1 9 7 3 ,

$ 1 , 5 2 3 , 0 0 0

i n

1974 a n d

$ 8 4 3 , 0 0 0

i n 1975.

i-rotn

1 9 7 1

o:~s ; i rds

.;a1

p1 ,->cac.rjs w e r e

r e c e ~ \ c . r ? : c.490,

000

I n 1971 ,

$!,

: ? 0 , 9 0 0

~ r .

l r i 2 ,

$ 2 , l ~ S S , 0 0 0 2 .3

/ ? ,

< 1 , 5 7 % , 0 9 0 i n

1 9 7 4 ,

2nd

$ 1 , 7 1 0 , 0 0 0

i n 1 9 7 5 .

7!1c

rc: t<pondent

C O J - ~ ~ I I S S I O ~ ( : J -

z~s?,:5t?d <:l15 cz?:~)r.yc!r

7.0

t.:x zn rcsp r.t

of \),ilri.ou,;

L . i ~ , ~ . , u ~ ~ ~ c

.;!; c:l I:,-?

ci:ccril>c.d i n

L : , t

;

- 5 S

i -

- 1 r

7r.W

{-he ~,;c,:~~ltc

~ C : C J - > ; c n(:,:d

S, ~ , r c . ~ o l x ~ c

i ? ,

? g 7 3 d!'d

1 9 7 4 ,

'1!1t3

"1 , r11f l t on

lcjnd

s a 1 ~ - . ~ "

i o r

;-h.-

I I I I : \ ~ K I ?

: C L T

- ?n l?d

20 ,?cpt,:: :I lLI)75. ' ~ h c

t.:y!'.;y(7-rr

~ I ~ : ' L , ? ~ J

L'].

~uL.;.~:? ,-1111\.

.-;!,,,.~.?.[.z

t o t!,[:

b.,;

n 5 : n i q ,

,:lc(l

,-Q

iL:113

.:~~-,:li>?

(:(>#?it

<>f V;t:';ip,-n

A~: : ; t -~-c j l

I a.

p;]

ck11 2 1 3

,T.

% . l S I , , ~

r?:?d

h,? <.:)!1\:-215,

;

p .

, '

i ilc-

SlAt),

C ,112 Codrl:,

l;] S lifi?lOlli :1,.~11ri:

t h l n k t h a t i n t h l s case

t h e f ac t s compel

t h e conclusion

t h a t t h e a p p e l l a n t w a s ,

a s f rom

t h e 2 0 t h

December

1967,

carrying

o n

t h e b u s l n e s s

s u b d i v l d l n g ,

d e v e l o p i n g

and

s c l l l n g l a n d

l o t s

f o r r e s l d c n t l a l o r ancillary

p u r p o s e s

and

w a s d o l n g so w l t h a view CO p r o f i t .

When

t h j s i s

f o u n d t o b e t h e c a s e it

f o l l o w s ,

Irhlnk

m a t t e r of

l aw,

t h a t t h c p r o c c e d s

o f

s u c h a

v e n t u r e

c o n s t i t u t e a s s c s s a b l c

l n c o n e wlChjn

t h e mcanlng

o f

S. 2 5 of

t h e A c t .

T e s t s have been

~ ? e v ~ s c d

f o r d rawing

t h e l l n e

be tween c a p l t a l and Income,

b u t my

own v iew i s

t h a t t h i s c a s e i s r e a l l y nowhere

n e a r

t h e l l n e ,

b e l n g obvious

t h a t t h e a p p e l l a n t was

a t a l l

m , : t e r i a l

t l m e s c a r r y l n g on

t h e b u s i n c s s

t h e

k l n d rnent loned.

P r o f l t s made

i n

t h e o r d l n a r y

c o u r s e

o f

h u s i n c s s

a re

income

O f f l c l a l R e c c ~ v c r

v .

F e d e r a l

Co~nmlss loncr o f

Tc:xat30n

9 6

C . I , . R .

3 1 0

. - t

- -- -. -

- .

- -

-. p .-p

- .

- -

5 2 5 ;

Whl te

v .

Fe r l c ra l

Co~iinl>

s s i o n e r of

T a x a t i o n

. P

- p- -.

. . -

.. P

-. - .

- --

120 C.L.R.191

d t 219.

A I t!lnuyh

t.lle

n l t l m a t e

c -onc lus ion a s t o 1nr:onc

o r n o t i s a c:uc=st,on

o f

l aw ,

t h c i n f e l - e n c e 2s

t o k ~ ! - ~ ; ~ t

was bei.112

done

' y o ~ o

Irhc

c l r c u m s t a n c c s

i s a

c:ii.:.stion

o f

f a c t -

F e l ? e r a l

Cr,~rmisc.lnner o f

' r a x a t l ~ n

T<il l . la~ns

1 2 7

C . L . F ( . ? f h

- - - -

. -

--p -

- . .

. -

p c r Glbbs J.

a t 2 4 9 .

T h e r e IS

a da~i<jc?r

o i cl: l~?si;~on

b e q g l n g

~ n v o l v s d

i n t h e c o n c l u s l u n

hat

Caxpaycr

1 s

c a r r y l n q on

b u s i n e s s

a s d ~ s t l n c t

fro111 9o1r-g

z b o u t

~ t s

a f f a i r s i n a

b u s i n e s s

l1L.e rr,?linc=r, b u t t h e

c o n c l u s i o n

i s

n o t

sy l?or j i , t i c

h u t

j l~r luccr j fr-01:;

w h a t 1s b e l n g done znd h

-ind why

t h e

t -azyiycr

i s d o i n g it.

d o n o t t.hink

t1 ic : t

I n t h c ~ r r l i r ~

, r y

u:;e

u f l a n q u a ~ c

l t can s.:r~%>!,ly lie

s a l d Chat

:-he

a p p r l l . a n t was n o t a t A n 6 tro.n

Dccc!nl;(,r

1967 i n

~ ~ I S ~ ~ > C S S

idnd

i n Che b u ~ ; i n e s s or'

13nd

+ \ e l o p e r s

a n d

s c l l . e r s

and

t h a t

i t

, 7 ~ t . u a l l y

i . :srrylng

Chdt

b u s z n e ~ ; s .

I t f o l l c ~ i ~ s

t ! ~ a t t h ~ ?

bus ln txss

pr011ts

o f

t h a t i j u s lnchs

,.e,-r a s ~ c : ; : ; ~ ~ b l c

t o t a x

1 ~ c ~ : l i . s ~

o f

t h e ~ I I O V I S I O ~ I S O C

5 . 1 5

(31:

TIIC

A c t ?!?d

t h a t i t i s urlr lccessaly

t.12

tYJIlS1der

t.he

p r o v l s ~ . o ~ l s

tlle

s c c o n d p a l - t of

s .20(;1) . l 1

I l l s

Honour ' s

c a r e f u l r c c l t a t i o n of

t h e

fac ts ,

some

o f whlch were

a g r e e d ,

o t h e r s of

which h e found upon

t h e c v l d c n c e ,

d c m o n s t r a t c s

buyond

argurncnt

Chat

t h e

a c t l v l t i c s i n w h l c h

t h e t a x p y e r engaged

a f t e r 2 0

Dcccmbcr

1967 t h r o u g h

t h e

j o i n t managers

o f

t h e p r o j e c t ,

wcrc

l n d l s t l n g u i s h a b l e

from

some

o f

t h e

i a m l l l a r a c t l v l t i e s o f

l and

t r a d l n g

compan ies whlch buy ,

d e v e l o p ,

s u b d l v ~

d e and

s e l l

l a n d

a t

p ro f i t .

The

a c t i v l t i c s o f

d c v e l o p ~ n g ,

s u b d l v i d l n g and

s e l l l n q ;i~-e

sornc

o f t h c o r d i n a r y ~ c t l v l t l e 5

t h e b u s l n c s s

l a n d t r i i d ~ n q

colnpany,

and I

. . hou ld n o t

doub t

th.-it,

i f s u c h a

coinpany Loucjht

l a n d and

t11cn c n c j ; r g ~ d

I n t h e k l n d of

a c t l v l t l e s i n whlch t h c 1:dvpdyer

c:!iqz~jod a f t e r

20 December

1967 ,

i t would b e r l c j h t t o s a y t h a t it was

ther-cby c d r r y l n g o n

l t s bus1nec.s.

A I t h o u g h

t h e

t a x p a y e r ' s

11cw

c.l?.?r-cholrlcrs il c s t

s o u g h t

t o buy

i t s

l a n d

r a t h e r

t h z n

1 1 s i s s u c ~ d

cap1 t a l , '2nd

a l t h o u g h

it mdy

h a v e

bcen

m a t t e r o f

co17une~-clal n d i Cfcl-c?nc:e

t o them w h e t h e r

t h e y ~ c q u l r e d

t h e l a n d o r t h e shaves,

it d o e s

n o t fol- low t h a t t h e t a x consrqncrlce

o f

1.11c s h a r e pi1?-(:112::e

:he

samc a s t h e t a x con:;cqaence

o J a

l i u ~ - r : h ~ ~ s i .

thi?

l d n d .

I:'hcCh1?1- or n o t S . 26 ( a ) would 11 ,ve

in~i~u.-crl

upcon :.]>c

purchasers

1 . 1 a h l l i i y

fo r t a x ilpon

t h c i I-

profits

i f t h e y

hbd

b o u g h t

a n d

s o l d t h e

l a n d ,

o r whct l ier

l t

L~ii:,osr:s

upon

t:- em

l l a b l l i t y i n r e s p e c t of

n s inzde

1 n consecluc=ncc o f

t h e

s h a r e p u r c h a s e

.are

c ~ u c s t i o n s

whlch do n o t now arise f o r

c o n s i d e r a t i o n .

I t i s t h e t a x p a y e r ' s

l l a b l l l t y wh lch

i s

I n i s s u e , and t h a t depends upon whether its activities

i n d e v e l o p i n g

s u b - d i v i d l n g

and

s e l l i n g c o n s t i t u t e

t h e

c a r r y i n g on

o f

b u s l n c s s .

I t d l d n o t c a r r y

t-he b u s j n e s s

o f

l a n d trading.

Development

and

sale o f

l a n d whlch

i s n o t a c q u l r e d f o r

t h e p u r p o s e

o f

r e s a l e d o e s

n o t amount

t h e c?] - ry ing

o f

' r u s ~ n e s s

o f

t r a d l n g

I n

l a n d ,

a s J a c o h s

p o l n t c d

o u t

I n F c d c r a l

Conlmissloner

o f

T d x a t i o n

v .

S t . A u b e r t l s

J s l a n d

- -- -- - -- -

--- - -.

- -

-. - -

- --

- -

---

- - --

P_ly.T,td.

78 W C

4 1 0 4 a t p.4118:

- .-

" . . . t h e

I n t e n t i o n

to d e v e l o p

and

se l l o f f

a s s e t n o t a c q u l r c d

f o r t h e purpose

o f

s o d o ~ n g

t h e

a c t l v l t y o f

deve lop~r , en t

and

sale o f

s u c h

a n asset

1s not

the c a r r y l n g on o f

b u s ? . l ~ c s s

o f

t r a d ~ n c ~

i n t h a t a s s e t .

The

.?sset n m s t at

least have hc-en . ~ c q u ~ r e d

;or t h e :JUrLloSe o f rcsale

b e f o r e

t h c q u i - s t l o n

can

drj.se

\<ilct.tier t h e

a c t l v l t l c s

are

trading

a c t l v l t l . ~ . s . "

r~cv?lol~rnc:nt

, ; u b i i ~ v l : ; ~ o n

and

s i l l of

ly, , ; l ,

t l ~ ~ l u ~ j i l

t 1 1 ~ y

.lee

srinie

o f

t h c ' i c t l v l i l e s

o f

~ I I ~ I I I C E S

c ~ i

li 'nil

ir.

r i lny,

d o

n o t

t 1 ~ c n s e l v c s

c o n s t l t u C e

t h a t b u s t n c s s ,

and

t h e

s u r p l u s

1 - e a l i a e d on

t h c

s a l e o f

l a n d :ili~cll hds

n o t l x e n

acqul l-cd f o r i h c p u r p o s c o f rcsale

i s n o t J.

r o E l t

e a r n e d

i n a

1ruslncr;s

t r a d l n g

i n l ; ~ n d , ;S

\ < ~ l l l : ~ n ~ s

J .

s n l d l n

Scot t-: 511

A u s t r a l . ] an

Mininq

C o . 1,i.d.

l3r;.dera1 C c F l ~ n l

SSJ o n c r

- - - - - -. - -.

- .-

.. .

-- -.

- -.

- . --

- -- -

- -

- - -

- - - - -

o f 'Taxati.on

(1950) 8 1 C.L.R.166

a t p .196 :

-- -

- - - --

"The re

i s t h e s t a t e m e n t i n t h e judqn12nt of

t h e M a s t e r o f

t h e R o l l s i n Hudson ' s

Bay

Co.Ltd.

- --

v.	S t e v e n s ( ( 1 9 0 9 )	5	Tax.Cas. ,	at-5x7-ihatthT
--U

w a s u n a b l e

t o a t t a c h anv w c l r ~ h t

t o t h e

c i r c u m s t a n c e

t h a t l a r g e sales w e r e n a d c

e v e q

y e a r .

T h e r e

i s

a l s o

t h e

s t a t e m e n t

o f

F c r w c l l

L . J .

( (1909)

Tax .Cas . ,

a t p . 4 3 7 )

C h a t

' a

l a ,>d

owner nap

l a y o u t p a r t o f h l s e s t a t e w i t h r o a d s

a n d sewers

a n d s e l l it i n lo ts

f o r bu1lci ing.

b u t

h e d o e s t h l s a s an

owner n o t a s a

l a n d

s p e c u l a t o r .

. ~t would be

d l f f e r f n t i f a

l a n d

owner ,

i n d i v > r j u a l , e n t e r e d

j n t o t h e hu?~.:li\cs

o f b u y l n g

and

d e v e l o p i n g

and

s c l l l n g l u n d ;

b u t

t h e c a s e of

t h e o k n e r ,

w h e t h e r

o f

l a n d ,

o r

~ ) i c t u r e s , o r

j?~.e ls , s e l l i n g h i s

o in prdpel-:y,

a1 though h e inay h ~ v e

P ~ D .

~ ~ d e d

Inor:=y on th?rr.

i-n

t ? ,= t t l nq f ! . r ~ m

u p

f o r s . j l e ,

I S

E I : ~ I r ~ 1 y

t l l f f i .1 -cn t ;

h e

s e l l s .?S

o:,ncr,

~ : o t

a s tratic-

. '

Thi-le

, S a l s o C!le

s i ~ t c n - . n t

J i L ) w i a t t J.

1 ,

Til~!~;ir;,a C o a l ,

T 1-03, J..~nd ;11d

Colon1 ~ ; j L ? o n C(>. L? d.

-- .- - - . .-p

- .-

P - .

- p

- - - - .

v .

h:yl; i~

. ..

( ( l a % 6 ) - ' i i T;:x.c,--S.,

a t ~ . ~ 5 4 )

,t-Fr7t-

' 3 n orir,r %!>ply, here ~ c z t

t o see

c l r i z r l y

t h h t

the

i i t ~ . ? : ( ~ : ~ ' ?

. . ?F:\' . .

I:;'?

. .

( 0

' 7 z ~ . C ; t - .

4 2 4 ) , f < ~ r

~nc,t-;::!-,cc, r1ol.s .ioi:

l-J:

5 ( > , 1 ~ 1 . i 1 - ~ 1 , 1 > 311

: } I C

I>tq'l-i~q a t zny

r o t e ,

;:!,d

] l o t I . I : ; I ~ ? ~ ~

r<11118?,

~ h i < . h

2 , s ; : I , > J - ~ ~ I I ~ I I ? > ~

y o u r

p~.ope:-i)~

L Y I I C

- J . , : ) ~ .

. .

J i ~ s

i, ,

r:.r-:-:?p'.,

S ; i:,.l,,=:it

( (1326) 1.1 rr;-::.c~

5 . ,

p . 2 5 2 )

L~,? .L

'.,,;:-;,ly

rc-,;11?7?qq i s ;~ot

r ,~( : ' - i lg .

T ' i

7 t l

a 7

r ' r ? t

t ;l?: b-

1 . ) ; a t

-C ' I>?)-

( ::]l?

o:(-I,I

1,- : .SIC ' , .

C S )

. . I -GQ

5 :

~ i ~ e y

:I~->,-C t r i :n

lm?-c>r.-ss fii I ( a ? i z ? : ~ ~ j

I J ~ I

rr,,..>~r'?~:r-d

i t 1 1 1 A

111 z -.= s o t h a t i n r1.c c,:1'1-?,2

. ~ f

J y t,<;,.c 1,) ; , , , - . l .

, - 1,

l ? ,: ;c

:,< ,m,e ,-l!l,vfi7.7,11 (,I

1 1 1 :

r1-1,-y

C ~ > ; i , ~ ( : i l

C I > ~ , I ,

~ 3 , : ,,>I-

l~;:<,>s;

v .

j : ~ - ~ c : c ' ~ i

~~ -

- . .

- .

- - . .

. - -.

.--

P':s6.!-,=1l;.n It'~>o!

, I - !

( ( ~ ? , l )

. . - . -

. ..- -. - . - - --

?*-.(:.-72<,

2 t p . 2 5 2 ) .

I n ~ . h a t

~?,;c i l l ~

i > r ~ x y

Clqjncl

; :>c> in~r -d

o r i t C l ,3t t h e i:cr-c .> '.<~;,<j:>

L .-A?:

of t h e o l - t : , - ~ -

;?:.ion

c,e:

i o L . - 1 1.:~ .-n L - s.:t

o:: - ~ ,

:-:,

g;.,(

1 t 5 , = 1 f 8

;

.,.118?

7 , > 1

: c > , '

i (> l.,,:..,- ,SE

! :i

,.<.

J Q, 1:

Z I I C ~ ; > ~ ~ y < ~ i i

r , z - 6

s -i

V ; , S

( ( I O l i l )

% . C . ,

.+t

p . 2 5 2 ) .

The

t a x p a y e r

w a s n o t e n g a q c d

i n a

l - ~ u s l r i c s s

o f

t l - a t l ~ n g

I n

l a n d ;

t h e t a x p a y e r

had

b o u g h t

o t h e r

l a n d ,

n o r

d l d it h a v e any

o t h e r l a n d t o s e l l .

Accord3ng ly ,

t h e

p r o c e e d s o f t h e s a l e o f t h e l a n d a r e n o t and

110

n o t

i n c l u d e

income

d e r i v e d

f rom t h e c a r r y i n g on

o f

s u c h

b u s i n e s s .

B u t

i f t h e p r o c e s s

o f

realizing

t h e l a n d w e r e

"embedded

i n a

t r a d e "

o t h e r t h a n

l a n d t r a d l n g ,

t h e income

d e r l v e d

f rom

t h e c a r r y i n g on

o f

t h a t o t h e r t r a d e would

b e

a s s e s s a b l e ,

w h e t h e r

n o t t h a t lncome

r e f l e c t e d

t h e v a l u e

t h e l a n d .

The

income o f

b u s l n e s s

does n o t c e a s e t o b c

a s s e s s a b l e b e c a u s e

a n a s s e t whlch

h a s

been

v e n t u r e d

i n t h e

b u s l n c s s

was

n o t

a c q u i r e d

f o r

t r a d i n g

p u r p o s e s .

I n

F e d e r a l

Com.nl s s l o n e r o f

T a x a t l o n v.

M c C l e l l a n d

( 1 969)

118 C . J..R.

353,

- - -

- .

- - -

Barwlck

C.J .

a t p . 3 7 1

s a l d :

"The

r e a l i z a t i o n o f

a n

inhe r lL :~nce even

though

c a r r l c d o u t s y s t e m a t i c : a l l y

and

i n a

h u s l n c s s l l k e

way

t o o b t a i n t h e g r e a t e s t sum o f money

~t w l l l

p roduce

d o e s

n o t ,

l n my

o p i n l o n ,

x a k e t h e

p r o c e e d s

e i t h e r p r o f l t o r income

f u r t h e pulrposcs

o f

t h e A c t .

B u t ,

i f t h e i n h c r l t o r adventures

t h e

I n h e r i t a n c e

a s t h e c a p l t a l o f

~ ~ J s ~ I I c s s , f u r

example ,

l a n d j o b b l n g

o r developing,

t h e income

t h a t b u s l n e s s w i l l b e

t a x a b l e ,

n Q t ,

I n my

o p m i o n ,

u n d e r

S -26

( a ) b u t according

t o o r d i n a r y

c o n c e p t s o f

income.

N o p a r t o f

t h e v a l u e

ihe

i n h e r ~ t a n c e

w l l l b e deductible

I n dc terminlnc .~

t h a t

income.

The

l n h e r i t d n c e

thc.!~ b u t

t h e

capital

o f

t h e b u s i n e s s .

' ~ 'hc

p o i n t

a t whlch

w h a t w a s l n h e r ~ t e d

o r a c i ~ u l r e d

n o t

f u r r c s a l c

so becomes

t h e c a p i t a l o f d b u s l n r s s may

b e a t

t l n ~ e s

d l f f l c u l t o f

1 d e n t i . f i c a t l o n . "

The

d l f f l c u l t y was

manifest

i n McClc l land ' S

c a s e

- .- - -

~ C s e l f . I t wen t

a p p e a l

t o t h e l 'rlvy

Counc l l

( (1970)

120 C.L.R.487)

, w h e r e

t h e m d l o r l t y o p m l o n a g r e e d

i n t h e

Chie f

Justice's

c o n c l u s i o n i n t h d t c a s e .

W I

t h

r c f e i - e n c e

t o

t h a t o p l n i o n ,

Menzics

s a l d i n I ' cdc ra l

Co1:1mlsr;3-oner o f

- -. .-

- - - -

T a x a t i o n

W i l l l a m s

(1972) 127 C.L.R.226

a t p.245:

"There may,

n o d o u b t ,

b e c a s e s where

p e r s o n

v e n t u r e s wha t

h a s been

r e c e l v e d by

g l f t i n t h e

c a r r y i n g on

ca r -cy lng o u t

o f

p r o f l t - m a k i n g

h n d e r t a k i n g or

scheme.

I n t h e judgment

o f

t h e

m a j o r i t y o f

t h i s C o u r t

b u t

n o t

i n t h e o p i n l o n

o f

t h e m a j o r i t y

t h e P r l v y Counc i l

McClel land

-- -

v.	F e d e r a l	Commissioner	o f	T a x a t l o n w a s	s u c h	a
--

case.

p l a i n c a s e c a n ,

however,

t a k e n

a s a n

i n s t a n c e .

T h e r e

c o u l d

b e

doub t

i l l a t

l a n d

which

h a s been

g i v e n and is l a t e r used by

t h e

donee

i n t h e development o f

a h o u s l n g scheme i n

which

l o t s , w l t h h o u s e s b u l l t upon

thcm,

a r e

s o l d ,

c o u l d b e

r e g a r d e d

comrnltted

t o a

p r o f ~ t -

making undertaking. "

Cascs wherc

t h e p r o c e e d s o f

t h c sale o f

l a n d

a c q u l r c d a s c a p l t a l are t h e lnconle

o f

a ~ I I S ~ I ~ C S S

a r e

e x c e p t i o n a l ,

dnd

t h e f a c t s o f

i h o s c casts

must

show

t h a t

t h e r e

i s

so~r~e i lh lny

t h a n

"a mel-c

r c . a l l z ; l t ~ o n o f

capital,

albeit

i n an

c n t e r p r l s i n g way"

( t o q u o t e

t h e P r l v y

Counc l l

i n M c C l e l l a n d ' s

c a s e ,

s u p r a ,

120 C.I,.R.at

p .496) .

A s

. -

- -

- - -

- -

- - -- -

W l l l ~ d ~ n s

o b s e r v e d

i n t h e S c o t t l s h Australian

. 14lnlnq

- -

Co.Ltd.

- .-

case,	s u p r a ,	a t p .195:
.-

"The C..~cts

would ,

I n my

o p l n l o n ,

hcve CO be

v e r y

s t r o n g

i n d e e d b e f o r e

c o u r t

c o u l d

br?

i n d u c e d

t o h o l d

t h a t a

coFpany whlch

had

n o t p u r c h a s e d

otherwise

a c c j u ~ r c d

l,?.,nd

f o r t h e p u r p o s e

o f pl-oflt-nic3klny by

s a l e

was engaged i n t h e b u s l n c s s of

s ~ l l l n g

l z ~ d

dnd n o t rnerc1.y

r e a l l z i n q IC

when

a l l t h a t

t h e company

had

done

was

t o t a k c t h e n c c c s s a r y

s t e p s t o realize

t h e l a n d t o t h e b c s C advan ta r j c ,

e s y e c l a l l y l a n d wlllch h

bcen

acqul~-i:d and

used

i o r a

different

p u r p o s e w h ~ c h

it was n o

l o n q e r

h u s i n e s s l l k e

t o c d r r y

o u t . "

N e l t h c r

e x t e n s l v c n e s s o f

t h c organization

whlch

t a x p a y e r

sets

t o r e a l l z e i t s c a p l t a l a s s e t ,

n o r

t h e

magnitude

t h e amounts

r e t u r n e d by

r c a l 1 7 ; l t l o n

nccc,;q;jcl

l y

r e q u l r e

conclusion

t h a t t h e

t a x p a y c r c a r r i e d on

b u s l n e s s ,

d i s t l n c t from

realizing

i t s c a p i t a l a s s c t i n

e F e d e r a l

most

cornmerc la l ly

advantageous

way.

I n

Whlte -v.

Commissioner

o f

Taxa t lon

-- (1968) 120 C.L.R. 191,

Barwlck C.J.

e x p r e s s e d t h e criterion

i n t h e s e te rms

( a t

" I n

c a s e s l l n e h a s t o be

s u c h a s t h e p r e s e n t ,

where

t h e

drawn between t h e proceeds

o f

t h e realization

o f

a s s c t n o t a c q u l r c d

f o r resale

and t h e income

o f

a b u s i n e s s ,

t h e

d i s c r l m e n ,

i n my

o p i n i o n ,

i s whether

t h c

asset h a s produced t-he money c la imed t o b e

Income i n t h e c o u r s e o f i t s r c > a l i z a t l o n o r

w h e t h e r

t h e asset h a s hccone t h e capital

a b u s j n e s s whlch h a s I J ~ O ~ U C ~ ~

t h e money.

K i t h e v e r y r e s p e c t

t o some

o f

t h e

r e a s o n s

g ~ v e n

i n O f f l c l a l

R e c c l v e r

v .

I'etleral

-- -- --

Corrnnlssjoncr

o f

~ a x a t - l o n

( ~ o x ' . ;

Case)

( ( 1 9 5 6 )

- -

-- --

- -. -

--A

-- - --

- -

C.L.R.3701,

~t I S n o t c l l b u ~ ~ h ,

I n nlv

o r ~ ~ n l o n ,

. .

- -

t o make

t h e

p r o c e e d s

o f

t h e

r c a l l z a t i o n

t , x z h l e

income,

t h a t t h e

t a x r a y e r

i n r e a l i z i n g h l s

c a p i t a l a s s e t h a s

t a k e n

s t e p s

t o 3ncrc . l se t h e

amount i t w l l l r e a l i z e , even

i f t h o s e

s t e p s s r e

r l c a r l y c o m ~ e r c l a l

s t e l ~ s ,

a ~ i d

even li t h e y a r e

o f

a n organized

o r r c p e t l t i v a n a t u r e .

I t seems

t o m e t h a t i t is n o t t h e c l r cums tancc t h ~ t

t h e

t a x p a y e r

h a s

endedvour fd

t o improve

t h e

r c a l l z a h l e v a l u e

o f

h i s c a p ~ t a l

a s s e t w h ~ c h

p r o v i d e s

C-he crlterl on

h u t l.he

c l i -~un~s: -dnoe

t h a t Ine

1,'s

i n r c a l l t y p u t h l s cap] t a l ;i:.:..et

t o

work

t h e whole o r p a r t o f

t h e c d p ~ t a l

b u s l n c s s upon

whlch he h a s vc~ntured .

Kere ly

t o

r e a l i z e a

cap]

t a l dssct may

~.r lvolve

irlo?iey il!:k111~~

a s d l s t l n c t f rom p r o f l t mak.~ng b u t a

b ~ ~ s l n e s s

i n

t h e r e l e v a n t

s c n s e

o f

i u ? c e s s i t y

l n v o l v e s

t h e

c a r n l n g o f

o r t h e i n ILrhntlon

t o eacn

p r o f i t s . "

I n c h d t c a s e ,

t h e p r o c e e d s

o f

t h e s.2le

t ~ r n b e r yrv7dinq on

l a n d

acc;r~lred as

c a p l t a l a s s e t w e r e h e l d t o bc

t.?val>lc

I ~ e c i ~ u s c

t h e owner

coliunlt.ted

t h c l a n d t o a b u s ~ n c ~ s s

o f timber

production and s a l e I n which h e was engaged

(see pp.209,210,

216,223).

he land became devoted exclusively and

l n d e f i n l t e l y t o t h e

s a l e o f

s t and lng

t lmber

a s

it s tood

from t ime t o t l m e (p.223).

I n White 's

c a s e ,

t h e

s a l e and

harvesting

o f a

s t a n d o f

t lmber

l e f t t h e land

on whlch i t s t o o d available f o r growing new

t lmber ,

and

t h e s a l e s o f

t imber

i n t h e course o f

c a r r y i n g on

t h e

b u s l n e s s

d l d n o t exhaus t

t h e c a p i t a l

a s s e t ventured

i n

i t .

The

c a p l t a l a s s e t was

n a t u r e regenerating,

y i e l d l n g

i t s produce

f o r s a l e l n a

con t lnu lng bus ines s .

I n

t h e

p r e s e n t

c a s e ,

however,

t h e moneys

whlch

a r e s a l d t o b e a r

t h e c h a r a c t e r of

Income

a r e t h e proceeds

o f

t h e

s a l e o f

t h e

t a x p a y e r ' s

l and

i t s e l f , n o t o f

]'is

s e v e r a b l e produce.

What

t h e taxpayer

s o l d from y e a r t o y e a r were

p a r t s o f

i t s c a p l t a l a s s e t -

~mproved

and

s S d l v l d e d ,

b u t

n o t changed i n subs tance

( s o f a r a s t h e cv ldence shows)

from

what was

bought

from Sllnpson

s h o r t l y a f t e r t h e taxpayer w d s

formed.

Glven

t h e substantial

l d e n t i t y o f what was

s o l d

w l th what was

bought a s a c a p l t a l a s s e t ,

it 1s difficult

t o

r ega rd

t h e procceds

s a l e d s o t h e r than

t h e procceds

o f

r e a l l z a t l o n o f

t h e c a p i t a l a s s e t .

The lnzklng

improvements

and

t h e subd lv ld lng o f

t h e land

a r e s t c p s

i n t h e r c a l l z a t l o n

o f

t h a t a s s e t .

I t may

be concc-ded t h a t t h e Improvements

were

extensive

(though t h e r e was

on ly s l e n d e r ev ldence of

t h e

lmprovernents made),

t h a t expenditure on t h e land was

l a r g e ,

and

t h a t an

r ,xtcnslve

s a l c s o r q a r n z a t i o n was

required.

l a r g e a r e a o f

l and ,

a s p lanning r

qulrements w e r e m e t ,

and

progressive

s u b d i v l s i o n a l

approva ls were

obtained.

Had

t h e o r l g l n a l

sha reho lde r s

r e so lved

t h a t t h e t a x p a y e r ' s

c a p l t a l a s s e t shou ld be

r e a l l z e d ,

they

may

w e l l have

caused

t h e t axpaye r

t o t ake

s t e p s o f

t h e same

k ind

a s t h o s e

which

t h e new

sha reho lde r s caused

i t t o t a k e towards

s e l l i n g i ts

land .

There was

evldence o f

t h e t a k l n g o f

any

s t e p whlch was

c a l c u l a t e d

t o do more

than

e f f e c t t h e

s a l e o f

t h e

t a x p a y e r ' s

c a p l t a l

a s s e t .

Had

t h e taxpayer uscd t h e land t o produce a

s a l e a b l e

e n t l t y whlch was

s u b s t a n t i a l l y d i f f c r e n t

from

t h e

land a c q u l r e d from Slmpson,

t h e production

and

s a l e o f

t h e

new

e n t i t y mlght n o t be

regarded

a s a

mere

r e a l l z a t l o n o f

t h e a s s e t .

t a k e t h e " p l a l n case"

t o whlch Menzies

r e f e r r e d :

~ f l a n d were

Improved

and

subdiv ided ,

and houses

b u l l t upon

t h e subdivided

l o t s ,

t:he

s a l e of

t h e houscxs would

n o t be a m e r e realization of t:hc

land on whlch they a r e

b u i l t .

The

e n t i t y s o l d would

s u b s t a n t l a l l y different

from t h e land i t s e l f .

Where physical

~mplovements become

t h e predominant

f e a t u r e of

t h c land on whlch

they a r e

c o n s t r u c t e d

o r where

they

s u b s t a n t l a l l y

change

t h c c h a r a c t e r

l a n d ,

a d l s t l n c t i o n may

have CO be drawn between

t h e

unimproved

l a n d and t h e land a f t e r lmprovcmcnts

a r e made

upon it.	But i f t h e improvcrnents do no more than en l~ance
t h e va lue	o r m a r k e t a b l l l t y of l and , t h e s a l e o f l a n d l n an

imi~rovcd s t a t e i s n o t t o be

regarded

a s t h e s a l e o f

e n t i t y r e l e v a n t l y different

from t h e land

i n i t s unimproved

s t a t e .

c a s e ,

perhaps

n o t s o p l a i n as

t h e example of

t h e development of

t h e houslng scheme,

where

t h e e n t i t y

s o l d was

d i f f e r e n t

from

t h e asset flrst acqu l r ed a s

c a p l t a l ,

i s O f f i c i a l

Recelver

- v.

Fede ra l Commlssloner

of -

Taxat ion (Fox ' s ca se )

(1956) 96 C.L.R.370,

where t h e

O f f i c l a l Recelver s o l d land which he had n o t only physically

improved,

b u t t o whlch he

d i d n o t have

a s a l e a b l e t l t l e a t

t h e

t i m e when

h e undertook

t h e a d m l n l s t r a t i o n

o f

t h e e s t a t e

( s e e p .387) .

141s

activities produced

s a l e a b l e t l t l e t o

t h e improved

land ,

and

t h e sale of

t h e land wl th t h a t t l t l e

gave r i s e t o a p r o f i t from t h e a c t l v l t l e s i n which he had

engaged:	he d l d n o t mcrcly r e a l ~ z e	t h e a s s e t s w h ~ c h	he	had
acqul red .

I n t h e p r e s e n t

c a s e ,

however,

t h e

a s s e t wlnch

t h e t axpaye r s o l d was

t h e a s s e t it acqul red

a s c a p l t a l .

The

s a l e s o f

t h e subdlvlded

l o t s w e r e mere

r e a l l ~ a t l o n

p a r t s

t h a t a s s e t , and what preccdcd t h e s a l c s were

tllc

s t e p s

,.:)propriate

t o t h e realization of

t h a t a s s e t .

Nei ther t h e

magnitude

t h e procceds

o f

s a l e

nor t h e bus lncs s - l t ke

manner

o f

t h e p r c p a r a t l o n

and

s c l l l n q

conver t

t h e process

o f

realization

l n t o a bus ines s .

I t fo l lows

t h a t t h e

proceeds

o f

s a l e were

n o t

a s s e s s a b l e

income wl th ln

S . 25 (1)

The respondent submitted, however,

t h a t t h e

proceeds

s a l e contained

p r o f l t a r l s l n g "from t h e

c a r r y i n g on

o r c a r r y i n g o u t o f

any

profl t-maklng

undertaking

o r scheme"

w l t h i n t h e second

limb of

s . 2 6 ( a ) .

Proceeds

a mere

r e a l l z a t l o n of

c a p l t a l a s s e t have

never been

t r e a t e d a s f a l l i n g wi th ln

t h e second

limb

s . 2 6 ( a )

( s e e Premier

Automatic

T lcke t

I s s u e r s

Ltd.

v .

Fede ra l Comrnlssloner o f Taxat lon (1933) 50 C.L.R.268

a t

p.297;

McClelland v. Fede ra l Commissioner of Taxat ion,

-- .-h -- - -

sup ra , 120 C.L.R.at

p. 4 9 5 , Rurnside v.

Federa l Coli~rnlssloncr

-.-p-

of Taxation (1977) 138 C.L.R.23

a t p .50 ) .

ThcrC i s no

evldencc of

any

unde r t ak ing o r scheme o t h e r than

t h e

realization

t h e t a x p a y e r ' s

c a p i t a l a s s e t .

I t fo l lows t h a t ,

I n my

judgntcnt,

t h e appcal

should be al lowed.

A s w e hdve n o t been

furnlsh<:d u l t h

r e c o n c l l l a t l o n o f

t h e f l g u r e s whlch

appear

i n t18,-.

ad jus tment s h e e t s w l t h

t h e

f l g u r e s

appcar lng

i n

t h e

t a x p a y e r ' s

r e t u r n s ,

and

a s t h e p a r t l e s concurred

i n

submitting t o t h e Supreme Court of Wcstcrn Australia a

q u e s t i o n

i n

t h e

form:

"Does any p a r t of

t h e procecds of

s a l e of

t h e s u b j e c t l and

~ o n s t l t u t e

assessable Income of t h e taxpayer ,

and i f s o on what ground?"

t h l s Court

should r c m i t t h e m a t t e r

t o t h e

r e s p n d e n t t o

r e a s s e s s

t h e

t axpaye r

i n r e s p e c t o f

each

jncomc

p e r i o d

t h e s u b j e c t l a n d c o n s t i t u t e s a s s e s s a b l e income of

t h e

t a x p a y e r .

The

r e s p o n d e n t

s h o u l d

r ~ a y

t h e

a ! > p c l l a n t l s

c o s t s of	t h l s a p p e a l dnd	t h e c o s t s of	t h e h c a r l n g I n t h e	1
I

Supreme

C o u r t of

W e s t e r n k u s t r a l l a .

The other costs

i n

t h e Supreme C o u r t of	Western	A u s t r a l i a were	t h e s u b j e c t	!
S

s p e c i a l o r d e r of

t h a t Cour t .

A s t h e c i r c u m s t 2 n c c s

whlch led t o t h e making of

t h e s p ~ c l a l

o r d e r w e r e n o t

c;.nvzsscd

,?fore t - h ~ s

C o u r t ,

t h e q u p s t ~ o n

costs o t h e r

t h a n

t h e c o s t s o f

t h e h e a r ~ n g

i n the S U ~ A - ~ I I I P

C o u r t

IGcstcrn

Ausrralla

s h o u l d be

I - c~ r j z t i~ -d

C O

1 L l ~ ~ a t

COui-t t o

~:4;?;-e 5bch e_ rd? r a s 1.t

s e c s fit '~;.\ln? lc-(;c;rd

t o % h 2

r c - s o n s

i o r judgment

t h l s C( ,d~r - t .

I certlfy t h a t thls a26 t h e

/ ;I

preceding

pages a r e a t r u e copy o f

t h e

Reasons f o r Judgmek~t horeln o f h l s Honour 1

I N THE FED!??AI, COURT OF AUSTRALIA

)

- -

)

W.A.

NO.

G 1

o f

1 9 7 9

GENERAL	DIVISION	1
\

WESTERN AUSTRAI~IX DISTRICT	)
1
REGISTRY
p--	)

ON APPEAL FROM THE SUPREME COURT OP

WESTERN AUSTRALIA

BETWEEN:

hJITFORDS DCACH PTY.

LIMITED

A p p e l l a n t .

R e s p o n d e n t

CORAM:

B r e n n a n ,

Deane

a n d

F i s h e r

JJ.

T h u r s d a y ,

2 0

D e c e m b e r ,

1 9 7 9 .

REASONS

FOR

JUDGMENT:

DEANE

T h l s

i s

a n

a p p e a l

b y

W h i t f o r d s

Beach

P t y .

L i r n ~ t c d

( " t h e

t a x p a y e r " )

f r o m

d e c i s i o n

t h e

S u p r e m e

C o u r t

W e s t e r n

Australia

(W~ckham J.)

i n

r e l a t i o n

t o a s s e s s m e n t s

o f

income

t a x

i s s u e d

b y

t h e

r e s p o n d e n t

Cornmiss loner

o f

T a x a t l o n

( " t h e

Commissioner")

t o t h e

t a x p a y e r

f o r

i ts

s u b s t i t u t e d

t a x

y e a r s

ended

September ,

1972 ,

1973 ,

1974

and

1975

r e s p e c t ~ v e l y .

The

a s s e s s m e n t s

f o r

t h e

1 9 7 2 ,

1 9 7 3

a n d

1 9 7 4

y e a r s

a r e

amended

a s s e s s m e n t s

w h i l e

t h a t

f o r

t h e

1 9 7 5

y e a r

i s

t h e

o r i g i n a l

a s s e s s m e n t .

The

p r i m a r y

q u e s t l o n

a t

i s s u e

t h e

a p p e a l

i s

whether

a n y ,

and

i f

s o what ,

p a r t o f

t h e p r o c e e d s

o f

s a l e by

t h e

t a x p a y e r

o f

l o t s

i n

r e a l

e s t a t e

s u b d l v i s l o n

a t W h i t f o r d s

Beach

Western

A u s t r a l i a

c o n s t i t u t e d

a s s e s s a b l e

income

f o r

t h e

p u r p o s e s

o f

t h e Income Tax Assessment Act

1936

( " t h e A c t " ) .

The

l e a r n e d

j u d g e

a t

f i r s t

i n s t a n c e

r e j e c t e d

t h e

t a x p a y e r ' s

s u b m i s s i o n

t h a t

t h e

p r o c e e d s

o f

s a l e

t h e

r e l e v a n t

l a n d

were

c a p l t a l

r e c e i p t s

which

d i d

n o t

c o n s t i t u t e

a s s e s s a b l e

income

f o r

t h e

p u r p o s e s

o f

t h e

Act.

h e l d

t h a t

a l l

o f

t h e

p r o f i t s

a r i s i n g

f r o m

t h e

s a l e

o f

l o t s

l n

t h e

s u b d i v i s i o n

c o n s t i t u t e d

a s s e s s a b l e

Income

under

t h e

p r o v i s i o n s

o f

s .25

o f

t h e

Act.

H i s Honour

d i r e c t e d

t h a t c e r t a i n amendments

be made

t o t h e

f o u r

a s s e s s m e n t s

t o r e f l e c t

ag reemen t

between

t h e

p a r t i e s

t h a t

a s a t 2 0 December,

1967 , which

h e h e l d t o be t h e d a t e on which

t h e

r e l e v a n t

l a n d

was

committed

t o

t h e

b u s i n e s s ,

t h e

v a l u e

t h e

whole

o f

t h e

l a n d ,

" f o r

t h e p u r p o s e

o f

c a l c u l a t i n g

t h e

amount

t o

a s s e s s e d

was

3 .1

m l l l l o n

d o l l a r s " .

Otherwise,

t h e

e f f e c t

o f

h i s

Honour ' s

d e c i s l o n

was

t o c o n f i r m

t h e

a s s e s s m e n t s .

The

e s s e n t i a l

f a c t s

a r e

l a r g e l y

n o t

i n

d i s ~ u t e .

The

f o l l o w i n g

s t a t e m e n t

o f

them

draws

s u b s t a n t ~ a l l y

upon

s t a t e m e n t

o f

a g r e e d

f a c t s whlch

was

p l a c e d

i n e v t d e n c e

b e f o r e Wickham

and

which

s e t o u t i n h i s r e a s o n s

f o r judgrncnt.

For

some

y e a r s p r l o r

t o 26

A p r i l ,

1954 ,

number

o f

p e r s o n s

had

o c c u p ~ e d f i s h i n g

s h a c k s

e r e c t e d

upon

r e s e r v e

v e s t e d

i n

t h e

Counc i l

o f

t h e

S h i r e o f

Wanneroo

o n

t h e

beach

f r o n t

a t

W h i t f o r d s

Beach,

w h ~ c h 1s

some

k i l o m e t r e s

n o r t h

o f

P e r t h .

Each

" shack

owner"

p a t d

nominal

a n n u a l

r e n t t o t h e

Counc i l

f o r

u s e o f

t h e

l a n d

upon

which

h l s

s h a c k

was

c o n s t r u c t e d .

A d j o l n l n g

t h e

Council's

r e s e r v e

was

a n

a r e a o f

1 , 5 8 4

a c r e s o f

undeveloped

bush

w h ~ c h

was

h e l d

i n two

s e p a r a t e t l t l e s o f

1 , 5 4 4 a c r e s and

4 0 a c r e s

r e s p e c t i v e l y

and

o v e r

which

i t

was

n e c e s s a r y

t q

p a s s

t o o b t a l n

a c c e s s ,	by	l a n d ,	t o	t h e	r e s e r v e	upon	which	t h e	s h a c k s	were
.

e r e c t e d .

s h a l l ,

o c c a s i o n ,

r e f e r

t o t h i s a r e a o f

some

1 , 5 8 4

a c r e s

a s

" t h e

s u b j e c t

l a n d " .

2 6

A p r i l ,

1954,

t h e

t a x p a y e r

was

i n c o r p o r a t e d .

The

o r i g i n a l

s h a r e h o l d e r s

i n t h e

t a x p a y e r

were

t h e

owners

o f

s h a c k s

a t

W h i t f o r d s

Beach.

T h e i r

o b j e c t i v e

i n

formlng

t h e

company

was

t h a t

t h e

company

would

a c q u i r e

t h e

s u b j e c t

l a n d

and

t h e r e b y

s e c u r e

t o

e a c h

s h a r e h o l d e r

c o n t i n u e d

u s e

o f ,

and

a c c e s s

t o ,

h i s

shack .

I t

was

n o t

p o s s i b l e

t o a c h i e v e

t h i s o b j e c t i v e

a c q u i r i n g

p o r t i n n

o n l y

o f

t h e

l a n d

f o r

t h e

r e a s o n

t h a t

t h e

t h e n

c u r r e n t

zonlng

p r e c l u d e d

s u b d ~ v i s i o n o f

t h e

l a n d

h e l d

I n

e ~ t h e r

t l t l e .

I t was

i n t e n d e d ,

when

t h l s

was

p o s s i b l e

under

zoning

p r o v i s i o n s ,

t o

s u b d i v i d e

p o r t t o n

o f

t h e

s u b j e c t

l a n d

and

g i v e

e a c h

o f

s h a r e h o l d e r s ,

s o

f a r

a s

practicable,

s e p a r a t e

t l t l e

t o

p a r t i c u l a r

subdivided

l o t on

o r

n e a r

t h e b e a c h f r o n t .

The

Commissioner

and

t h e

t a x p a y e r

a r e

a g r e e d

t h a t

t h e

t a x p a y e r ,

f o r

i ts

p a r t ,

a c q u i r e d

t h e

s u b j e c t

l a n d

f o r

t h e

p u r p o s e

o f a c h l e v ing o f profit-mak~ng

t h e above-mentioned

o b j e c t ~ v e

and

n o t

f o r

a n y

p u r p o s e

s a l e .

A r t i c l e

3 (A)

o f

t h e

A r t ~ c l e s o f

A s s o c l a t i o n

o f

t h e

t a x p a y e r

p r o v l d e d

t h a t

t h e

h o l d i n g

o f

s p e c ~ f i e d

g r o u p s

o f

s h a r e s

i n t h e t r a n s f e r r e d

company

would

e n t i t l e

t h e

h o l d e r

t o

have

a l l o c a t e d

and

t o

him,

upon

s u b d i v i s i o n

o f

t h e

l a n d ,

t h e

f r e e h o l d

t i t l e t o one

o r

residential

s l t e s

' l . . .

s o

t h a t

t h e

t o c a l

m a r k e t

v a l u e

o f

t h e

s i t e

o r

s l tes

o f

t h e

s a l d

l a n d

a l l o c a t e d

t o

e a c h member

o f

t h e Company

s h a l l be

a s n e a r l y a s p o s s i b l e e q u a l

a t

t h e

t i m e

o f

s u c h

a l l o c a t i o n " .

Any

s u r p l u s

l a n d

a f t e r

s u c h

allocation

was,

a c c o r d i n g

t o A r t i c l e

3 ( A ) , t o be

d e a l t w i t h

a s t h e

company

i n g e n e r a l m e e t i n g

s h o u l d ,

f rom

t i m e

t o t i m e ,

d e c i d e .

The

p r o v i s i o n s

o f

t h a t

Ar t i c le

were

a r g u a b l y

l n v a l td

a s

purpol-tec3ly

authorizing

a n

u n l a w f u l

r e d u c t i o n

o f

c a p l t a l .

t h l s a s ~t may,

t h e y

p l a l n l y

underlined

t h e

f a c t

t h a t

t h e

t a x p a y e r

was

n o t

i n c o r p o r a t e d

t o

e n g a g e

~ n

a n y

b u s ~ n e s s o r

p r o f i t - m a k i n g

u n d e r t a k i n g .

I t

was

i n c o r p o r a t e d

t o

s a f e g u a r d

t h e

en joyment

t h e

shack

owners

o f

t h e i r

f l s h i n g

s h a c k s

a t W h i t f o r d s

Beach

b y

acquiring

t h e

s u b j e c t

l a n d

a n d ,

e v e n t u a l l y ,

d i v i d i n g

t h e

s u b j e c t

l a n d

among

t h e

t a x p a y s r ' s

s h a r e h o l d e r s ,

and

when

s u b d ~ v l s i o n became

p o s s i b l e ,

i n

p a r c e l s

which

were ,

a s

n e a r l y

a s

p o s s i b l e ,

o f

e q u a l

v a l u e .

Over

t h e

n e x t

t h i r t e e n

y e a r s

t h e

marke t

v a l u e

o f

t h e

s u b j e c t

l a n d

d r a m a t i c a l l y

i n c r e a s e d .

R a t e s

a n d

t a x e s

a l s o

i n c r e a s e d

r a p i d l y

o v e r

t h e

l a t t e r

p a r t

o f

t h e

p e r i o d .

O t h e r w i s e ,

l i t t l e

o c c u r r e d

t o

a l t e r

t h e

p o s i t i o n

which

had

e x i s t e d

A p r i l ,

1954.

The

s u b j e c t

l a n d ,

which

c o n s t i t u t e d

t h e

t a x p a y e r ' s

o n l y

significant

a s s e t ,

remained

l a r g e l y

u n s u b d i v i s i b l e .

s i x

hundred

and

t h l r t y a c r e s were

zoned

d e f e r r e d

urban .

E i g h t y

a c r e s

were

zoned

p a r k s

and

r e c r e a t i o n .

The

b a l a n c e

was

zoned

r u r a l .

l e t t e r

from

t h e

Town

P l a n n i n g

Board

r e c e i v e d

i n

F e b r u a r y ,

1965,

i n

answer

t o a n

i n q u i r y a s t o t h e possibility

o f

f u t u r e subdivision,

was

i n d e f i n i t e

a s

t o when

s u b d i v i s i o n

migh t

p e r m i s s i b l e .

The

l a n d

remalned

undeveloped .

P a r t o f

i t was

used

l e s s e e

f o r

g r a z i n g

p u r p o s e s .

Most ,

b u t

n o t

a l l ,

o f

t h e

s h a r e h o l d e r s

i n

t h e

c a p i t a l

o f

t h e

t a x p a y e r

were

s t i l l

shack

owners .

The

e v i d e n c e

d o e s

n o t

d i s c l o s e

t h e

e n t h u s ~ a s m of

t h e

s h a r e h o l d e r s

f o r

t h e

f i s h i n g

a t W h i t f o r d s

Beach.

The

d r a m a t i c

i n c r e a s e

i n

t h e m a r k e t

v a l u e

t h e

l a n d

and

t h e

i n c r e a s e d

burden

o f

r a t e s and

t a x e s

n o t

s u r p r i s i n g l y

b r o u g h t

t o

t h e

f o r e

e n t h u s i a s m

o f

a n o t h e r

k i n d .

The

s h a r e h o l d e r s

combined

t o a t t e m p t

t o

s e l l

t h e

whole

o f

t h e

i s s u r d

s h a r e s

i n t h e

t a x p a y e r .

The

p r i c e which

t h e y

i n i t i a l l y s o u g h t

was

$1 .5

m i l l i o n .

T h i s

p r i c e

was

s u b s e q u e n t l y

i n c r e a s e d .

December,

1967 ,

t h e

s h a r e h o l d e r s

s o l d

a l l

t h e

i s s u e d

s h a r e s

i n

t h e

t a x p a y e r

t o

t h r e e

p u r c h a s e r s

f o r

t o t a l

p u r c h a s e

p r i c e

o f

$1 ,600 ,000 .

The

p u r c h a s e r s

were

t h e

N a t i o n a l

Mutual

L l f e

Association

o f

A u s t r a l a s t a

L tmi t ed

( " N a t i o n a l Mutua l" )

a s

t o

50%, M a r t i n d a l e

P t y .

L imt ted

( " M a r t t n d a l e " )

a s

t o

25% and

F.D.

O ' S u l l l v a n

P ty .

L ~ m i t e d a s

t o

25%.

I t

c l e a r

from

t h e

e v i d e n c e

t h a t

t h e

p u r c h a s e r s

o f

t h e

s h a r e s

were

m o t i v a t e d

w e l l - f o r m u l a t e d

p l a n s

t o

s u b d i v t d e

and

d e v e l o p

t h e

s u b j e c t

l a n d

and

t o s e l l l o t s t n

t h e

r e s u l t t n g

s u b d ~ v i s i o n

f o r

u l t i m a t e p r o + ~ t

t o

t h e m s e l v e s

a s

s h a r e h o l d e r s

t n

t h e

t a x p a y e r .

N a t i o n a l

Mutcal

had

been

i n t r o d u c e d

t o t h e p r o j e c t by

Mr.

J . A .

McCuskerr

and

tlr.

F. D.

O I S u l l i v a n .

Mr.

McCusker

c o n t r o l l e d

M a r t i n d a l e

and

14r.

O I S u l l l v a n

c o n t r o l l e d

F . D .

O ' S u l l l v a n

Pty .

L l m t t e d ,

whzch

1;ow

c a l l e d

Genera l

Development

C o r p o r a t t o n

P t y .

L imi ted

( " G . D . C . " ) .

N a t i o n a l

M u t u a l ' s

r o l e

was

t h a t

o f

f i n a n c i e r

o f

b o t h

t h e

p u r c h a s e

o f

t h e

s h a r e s

a n d

t h e

p l a n n e d

s u b s e q u e n t

d e v e l o p m e n t

a n d

s u b d i v i s i o n

o f

t h e

s u b j e c t

l a n d .

The

e v i d e n c e

i n d i c a t e s

t h a t

t h e

s u b j e c t

l a n d

was

bl-ought

t o t h e

a t t e n t i o n o f

Mr.

O ' S u l l t v a n

employees

i n a

r e a l e s t a t e

b u s i n e s s

c a r r i e d

o n ,

under

t h e

name

Genera l

Agency

Company

O ' S u l l ~ v a n ' s G e n e r a l

Agency

Company

which

Mr.

0 ' S u l l i v a n

a l s o

c o n t r o l l e d .

Mr.

O ' S u l l i v a n

was

informed

t h a t

t h e r e was

company

( 1 . .

t h e

t a x p a y e r )

which

owned

l a r g e

p r o p e r t y

i n what

was

commonly

r e f e r r e d

t o

a s

" t h e

n o r t h e r n

c o r r t d o r "

and

t h a t

"1:he

p r i c e

o f

a p p r o x i m a t e l y

$ 1 . 5

million

c o u l d

p u r c h a s e

t h e

p r o p e r t y " .

A " f a t r l y O ' S u l l i v a n

s o p h t s t i c a t e d

f e a s t b i l i t y

s t u d y "

c o i l v ~ n c e d Mr.

t h a t

p r ~

was

" v e r y

v e r y

c h e a p " .

Mr.

O ' S u l l i v a n ' s

"p r ime

o b j e c t i v e "

was

s t a t e d ,

b y

hlm,

t o

have

been

" t o

f l n d

c l i e n t

who

I n

f a c t would

p u r c h a s e

t h e

company

end

a p p o i n t

u s

h l s r e a l

e s t a t e a g e n t

s o

w e

c o u l d

a c t

f o r

him

and

e a r n

commission

from

t h e deve lopment

and

s a l e o f

t h e l a n d .

A s p a r t and

p a r c e l

o f

t h a t

( h e )

was

keen

t o p a r t i c ~ p a t e

i n

t h e

e q u i t y of

t h e

company

b e c a u s e

t h e r e

was

s u b s t a n t i a l

p r o f ~ t

p o t e n t i a l " .

Mr.

O t S u l l l v a n

and

Mr.

McCusker

w e r e ,

t h r o u g h

t h e l r

respective

companies ,

engaged

t o g e t h e r

i n

l a n d

development

p r o j e c t s .

Mr.

O I S u l l i v a n b r o u g h t

t h e

o p p o r t u n i t y

t o Mr.

McCusker 's

attention

2nd

t h e y

d e t e r m i n e d

t h a t

t h e y

would

a t t e m p t

t o

i n t e r e s t

N3tioncll

Mutual

i n

i t .

The

Chairman

o f

t h e Western

A u s t r a l i a n

Branch

o f

N a t i o n a l

Mutual

(Mr.

Bunning)

g a v e

e v i d e n c e

t h a t

a t a l l t l m e s

t h e

p r o j e c t

was

s e e n

a s

t h e

p u r c h a s e

o f

l a n d

w i t h

d e v e l o p m i l n t

p o t e n t i a l

w i t h

v i ew

t o

developing,

s e l l l n g

and

p r o d u c i n g

p r o f i t

and

t h a t

t h e

p u r c h a s e

t h e

s h a r e s

i n

t h e

t a x p a y e r

was

s e e n

a s a method

o f

a c q u i r i n g

t h e

l a n d .

I t

was

s e e n ,

h e s a i d ,

a s

" a sound

development proposition

o v e r a l ong

t e rm" .

The

documents

i n e v i d e n c e

s p e l l o u t

l n

some

d e t a i l

t h e

p l anned

deve lopmen t ,

subd i v i s l o n

and

s a l e s .

Pro] e c t l o n s

p r e p a r o d

M a r t i n d a l e

and

G . D . C .

showed

a n

a n t i c i p a t e d

g r o s s

r e t u r n

o f

$11,000,000

from

t h e s a l e o f

l o t s i n t h e S I X

hundred

and

t h i r t y

a c r e s which

were

zoned

d e f e r r e d

u rban .

The

a n t l c l p a t e d n e t

r e t u r n

b e f o r e

t a x

from

t h e

s a l e

o f

t h e s e

l o t s

was

$7 ,165 ,000 .

Thpse

a n t i c i p a t e d

r e t u r n s

d t d

n o t

make

any

a l l o w a n c e

f o r

t h e a d d ~ t ~ o n a l

r e c e i p t s which

were

anticipated

from

t h e

s a l e o f

t h o s e

l o t 4 w h ~ c h

would

designated

f o r u s e a s a

ne ighbourhood

shopp lng

c e n t r e ,

h o t e l

s l t e ,

s e r v i c e

s t a t i o n

s i tes ,

f l a t s

s i t e s

and

d u p l e x

s ~ t c s

w i t h i n

t h e

p l a n n e d

s u b d i v i s i o n

r e a s o n

o f

t h e

enhance;*nt

i n

v a l u e

r e s u l t i n g

from

t h e i r

be ing

s o

d e s t g n a t e d .

The

a n t i c t p a t e d

n e t

r e t u r n

d i d

n o t

make

any

a l l o w a n c e

f o r

t h e

v a l u e

o f

t h e

S I X

hundred

and

t h i r t y

a c r e s

o f

d e f e r l e d

u rban

l a n d

a t

t h e

t i m e

t t

would

commit ted

t o

t h e

p r o j e c t .

I t

was

t n d i c a t e d

i n

t h e

projections,

which

were

communtcated

t o

N a t i o n a l

Mutua l ,

t h a t

t h e s e

a n t t c i p a t e d

r e t u r n s

would

r e a l i z p d

w i t h ~ n

t e n

y e a r s

o f

t h e

a c q u i s i t i o n o f

t h e

s h a r e s

i n

t h e

t a x p a y e r ,

and

t h a t ,

t o q u o t e

a l e t t e r o f 1 5 November,

1967 from Mr.

McCusker

and Mr.

O ' S u l l i v a n

t o

N a t i o n a l

Mutual :

A t t h e

end

o f

t h e

10 y e a r s

t h e

Company

would

s t i l l own

874

a c r e s a f

r u r a l l a n d

a t

t o d a y ' s

v a l u e s .

W e would

c o n f i d e n t

t h a t

o n c e

t h e

630

a c r e s

o f

d e f e r r e d

u rban

h a s

b e e n

f u l l y

d e v e l o p e d ,

t h e

M e t r o p o l l t a n

R e g i o n a l

Town

P l s n n l n g

A u i t h o r i t y would

c o n s i d e r

t h e

r e z o n i n g

o f

t h e

r u r a l

l a n d

f o r

f u r t h e r

h o u s i n g

development" .

A t

s e r l e s o f

m e e t i n g s

o f

d i r e c t o r s and

s h a r e h o l d ~ r s

o f

t h e

t a x p a y e r

h e l d

2 0

December,

1967,

t r a n s f e r s o f

s h a r e s t o t h e

p u r c h a s e r s

( N a t i o n a l

M u t u a l ,

M a r t i n d a l e

a n d

G. D. C . )

wcre

r e g i s t e r e d

a n d

d i r e c t o r s

r e p r e s e n t l n g

t h o s e

t h r e e

c o m p a n t e s

r e p l a c e d

t h e

p r e v i o u s

d i r e c t o r s .

The

A r t i c l e s

o f

A s s o c t a t i o n

o f

t h e

t a x p a y e r

were

" v a r i e d

d e l e t i n g

t h e whole

o f

t h o s e

A r t i c l e s

and

substituting

f o r

them

set o f

new

A r t i c l e s

o f

A s s o c ~ a t i o n " .

The

new

A r t l c l e s o f

A s s o c t a t i o n

c o n t d ~ n e d

a r t i c l e c o r r e s p o n d ~ n g

t o

t h e

o l d

A r t i c l e

3 ( A ) .

t h e

same

d a y

t h e

t a x p a y e r ,

d e e d ,

a p p o i n t e d

M a r t i n d a l e

and

G . D . C .

a s

" g e n e r a l

manage r s" ,

f o r

p e r i o d

o f

s l t g h t l y

t h a n

f i f t e e n

y e a r s ,

" t o

a l l

w t t h i n

t h e i r

power

t o

s u b d ~ v i d e and

d e v e l o p

i n t o

u rban

a l l o t m e n t s

s u c h

p a r t o r

p a r t s o f

t h e

s u b j e c t

l a n d

a s

( t h e t a x p a y e r )

may

from

t i m p

5	t o t ime	d t r e c t and	t o	s e l l	t h e	l a n d	o r	s u c h p a r t	o r	p a r t s	t h e r e o f
a

a s

( t t le

t a x p a y e r )

may

f r o m

t i m e

t o

t i m e

d i r e c t

i n

u r b a n

s u b d i v i s i o n a l

a l ' l o tmen t s

and

q e n e r a l l y

t o

e n s u r e

t h a t

t h e

l a n d

d e v e l o p e d ,

s u b d i v i d e d

and

s o l d

t o

t h e

b e s t

a d v a n t a g e " .

M a r t l n d a l e

and

G . D . C .

were

authorized

t o a p p o i n t

a g e n t s

f o r

t h e

s a l e o f

t h e

l a n d .

was

e x p r e s s l y

p r o v i d e d

t h a t

s u c h

a g e n t s

migh t

r e m u n e r a t e d

a t

t h e

a p p r o p r i a t e

R e a l

E s t a t e

I n s t ~ t u t e

s c a l e

n o t w i t h s t a n d i n g

t h a t

M a r t i n d a l e

o r

G . D . C .

o r

McCusker

o r

Mr.

O ' S u l l i v a n

mlght

have

a n

i n t e r e s t

i n

s u c h

a g e n t s .

S u b s e q u e n t l y ,

Gene ra l

Agency

Company

was

a p p o i n t e d

b y

t h e

Genera l

Managers

a s

t h e

d e v e l o p i n g

and

s e l l i n g

a g e n t s .

I t

p l a i n

t h a t

t h e

e f f e c t

o f

t h e

t r a n s a c t i o n :

i;nd

e v e n t s

o f

2 0

December,

1967

was

c o m p l e t e l y

t o

t r a n s f o r l n

t h e

sub - s t r a tum

t h e

t a x p a y e r .

A t

t h e

commencement

o f

t h a t d a y ,

t h e

t a x p a y e r was

a company

whose

o n l y significant

a s s e t was

l a n d whlch

had

been

a c q u i r e d

f o r

t h e

p u r p o s e

o f

s a f e g u a r d i n g

t h e

I n t e r e s t s o f

i ts

s h a r e h o l d e r s

a s

owners

o f

t h e

W h ~ t f o r d s Beach

s h a c k s

and

which ,

under

t h e

A r t i c l e s

o f

A s s o c i a t i o n ,

was,

when

subd l v i s 1 ~ 1 1

became

p o s s i b l e ,

t o

a l l o c a t e d

among

t h e

s h a r e h o l d e r s

w l t h

a n y

s u r p l u s

t o be

d e a l t w i t h

a s t h e company m ~ g h t ,

i n

g e n e r a l

m e e t i n y ,

of t h e f r e q u e n t l y

a l lcge(1 bus ines s

a c t l v l t y

( r io twl t l~s tan( i lng

t?,at

i t * a s

bus ines s - l l ke

a c t l v l t y w h ~ c h

would

o r d ~ n a r l l y

seen by

t h e layman

a s a b u s i n ~ s s

a c t l v ~ t y ) ,

t h r ~

c h a r a . 3 ~ 1

t h e a s s e t

s o l d

anrl

t h e clrcumstanci .s of

i t s a c q ~ l i s l

t l o n .

Three f u r t h e r gene ra l n a t t e r s 1n;iy

l)(- clis1,ljsed

G €

a t t h i s

s t age .

It was

t h e a l l e g a t l o r l of

t h r ~

Commissionex tilat the

proceeds of

s a l e of

t h e land c o n s t ~ t ~ t r d

:ithcl-

a s s c s ~ a b l . ~ ~

lncome under

25(1) o r a l t e r n a t i v e l v prof l :

a r l s l n q

i - - ~ r ~

Lhe

c a r r y l n g o u t of

a po f l t - rnak lng

undt:r-taklng

o r

:;che~rue and[+'-

t h e second limb of

S. 2 6 ( a ) . Thc t ~ r l a l

judge

conslc lcre~l

on ly

t h e f i r s t contention,

and

it was

g e n e r a l l y accey~tc:d tx.fo:r-

IJS

t h a t i n t h e circumstances of

t h l s n a t t e r

t h e ~ e

was no n c ~ d

f o r

s e p a r a t e

t rea tment .

I f

S. 25(1)

had

a p p l ~ c a t l o n ,

s o d ~ ~ l

the

second limb of

s . 2 6 ( a ) .

I f

s .L5(1)

d l ( l not zpnly tr, t h e proceeds

of s a l e , l n t h e S c o t t l s h Mlnlnq

s . 26 (a )

could

no t

l u s t l f y an

assessment.

W~l l i a rns J.

c a s e ,

suprd

s t a t e s t h l s quite

c l e a r l y a t

p.195

when

h e

sa ld , i n - e f f e c t t h a t

c a r r y l n q

or1

t h e busin~-.ss

s e l l l n g land was

v i r t u a l l y

t h e

same

a s c a r r y l n g o u t

p r o f i t

number- of

authorities

from t1-1~ Engl l sh Coui t s were c l t e d

t o u s ,

where

t h e expression

" ~ x e r c l s i n a

t r a d e " o r the. !:a?d

" t r a d e " was

used.

I t was no t contended t h a t t h c s + words were

n o t

f r e e l y

in te l -changeable wl th

t h c

Acstr -a l lan ter;nlnology

"earl-ying on a bus iness" o r "business".

I n f a c t such appears

t o be t h e c a s e i n t h e Unzted K~ngdom: cf

Grainqer &

Scn v

Gouqh

118963

A.C.

325 a t p.343 where Lor,! Morrls s t a t e s a s fol lows:

"There can be

no d e f l n i t l o n of

t h c w ~ r d s

' e x e r c i s l n q

a t r a d e ' .

I t 1s only another mode of

exp rcs s lna

' c a r r y l n g

b u s i n e s s ' . "

t h e

same

e f f e c t

i n A u s t r d l ~ d , M e r ~ z l e s

l n

Ji~hrl F i i l~ ia - . :

& Sons pty .

Ltd.

v Federa l Comm~ssianc!r of ' l 'axatlsn (12153) 101

C.L.R.

30 a t p.49

s a i d i n rc=:a~~on

t o 5.51 of t h e ~ c t :

"The element t h a t I t h lnk i t n-?r:essar-y t o cmpha.-,l~c

h e r e i s t h a t t h e o u t l a y must.

have

been

Incu r red

i n

t h e c a r r y l n g on of

a bus lncs s ,

t h a t i s , it must

p a r t of

t h e c o s t of

trading

ope rd t lons . "

The t r i a l judge

i n t h l s mat tcr

w . 1 ~

prepared

t o conc luc l~

;:l

t h e f a c t s b e f o r e him

t h a t

t h e taxpaycl- was

c:ar:ylng

o11 1.11~

b u s l n e s s of developlnq and

s e l l l n g larid.

Ilowcver,

i t 2 s

g e n e r a l l y considered

t h a t t h e q u c s t l o n

whcthr.r

tnxpayc l .

1s i n t h e

r e l c v a n t

s ense c a i r y i n q

sT:ch a

t r a d e or- l>uslness

is a ques t lon of

law.

I r eLf r i n p a r t ~ c u l a ~

t o twu passages

I n t h e reasons of

t h e Master of

t h e R o l l s I n

The 14ud:.or1's Bav

CO. Ltd. v Stevens (1909) 5 T .C .

424 both a t p.436 -

" M r .

J u s t i c e Channel1 h a s

t r e a t e d i t

conc lus lo r~

law

frsm t h e f a c t s s t a t e d i n Chc

c a s e ,

t h a t

t h c

Company

were

c a r r y l n g on

t h e t r a d e of

s c l l l nc j l a d .

Wlth

y r c a t

r e s p e c t

t o t h e

l e a l n r ~ i

]udg(-. I a:n unabl r

t o accep t

t h a t vlew."

" I n my

opln lon

t h e f a c t s s t a t e d i n t h e Case

dr,

n o t

i n p o l n t of

law justify

t h e conclusion

t h a t t h c sum

I n q u e s t l o n

i s l l a b l e t o incontc

t a x . . ."

I n t h e s e circumstances

i s a p p a l ~ n t

t h a t

c c n c l u s ~ o r ~

dl-abll

from t h e f a c t s t h a t t h e taxpayer was

111 t h e sense ur~rlqzt.stst;d

t h e layman c a r r y l n g on a business

i s nut.

t h e r:d of

th(?

mat t e r .

I n determining

t h e

t r u e n a t u r e L)€

t h e a c t i v l t l t . 5 of

t h e

taxpayer

t h e r e i s much

authority

i t , r

t h e p ~ o ~ ) o s ~ t l o l l

t h a t

t h e r e

1s no

bus lnes s

r e a l l z l n g ,

l f t h e i ? ; l l l z a t l on

l , c of

capital

a s s e t .

I r e f e r t o The Alabaln3 C o ~ l

JLOKI .

Lanrl

arid

C o l o r ~ l z a t l o q

Company Llmlted v Mylam

(1926) 11 1 . C .

2 3 2 a t p.352 v7:ierr

Eiijwlatt

said:

" ... merely r e a l ~ z l n g

i s r ~ ( - . , t t r dd lng .

I t

i r no

q~jod

saylng it

i s a t r d d ~ ?

r e a l l z l n r ~ . " 'I'hls approach wab

;1pprovetl

t h e P r lvy Council

i n Comnls s lo~ l i~~-

o i 'I'JXX-.~

BL l

t l s ? ~

i.u.?tral l a n

" . . . I n

t h e l r Lordship's

]udqmeni.

t h e r e 1s i n t h e s p c c l a l

c a s e n e l t h e r

f l n d l r ~ g , nor

any

stat-ernent

f a c t s

war ran t lng

t h e

conc lus lon

tna t

t h l s A s s ~ c l a t i o n

rvsr

lndulged i n any a c t l v l t y cx rep t that- of

~ e a l l z d t

i o n ,

whlch,

a s Rowlatt J.

has s a l d ,

' L ;

no t a t r a d e ' .

Upon

t h e

f a c t s s t a t e d ,

any

o t h e r

conc lus lon

woulcl

t a n t a ~ m u n t

t o say lng t h a t a

r e a l l z a t ~ o n

suzh

a s t h a t z f f e c t e d by

t h e Assoc la t ion mmlst be a t r n d c because s f t h e ~ L - L I I ~ ~ I I ~

l n t o existence

s e l l l r i g 01-ganizaclon made

n f~ces sa ry

on ly by

reason of

t h e mere rndgnltud~' of

t h e r e a l l ? a t l c r ~

p r c p o s l t l o n

not

t o be

en t - I L ~ l n e ~ l .

A s Taylor and Owen

JJ.

s a l d 11-1 Whl?.*.'s c a s e ,

sllpra a t p. % L % ,

. . l t i s c l e a r enough,

a s was po1ntr.d

ou t hy

l iowlatt J....

t h a t t h e r e 1s no

t r a d e or

bus lnes s oE

' r e a l ~ z l n o ' . "

The taxp:!)er

1s e n t i t l e d t o ~ - e ~ a l ~ z < >

l t s a s s e t

all,-i t o

r e a l l z e i t

t o t h e b e s t

advantage without

i n c u r r l n q t a x cn

th,?

proceeds .

A s i t was p u t by

Stcphcn J.

I n Vcric.ral

~ O I M

L S Z L O I I E ~ c f

Taxat lon v N,F.

Wllllams

( 1 9 7 2 ) 127 C.18.Ei. 2 L t a t p.530:

" I n

a p p l y ~ n g

t h a t principle

t o particular

f a c t s , t11c

circumstance t h a t t h e t axpaye r ,

in going ~ b d u t

Chrs tzsk

o i r e a l l z a t l o n

h l s a s s e t ,

riots

' s y s t c m a t l c a l l y

and i n a bus lncs s - l l ke

way

t 7 c>bta ln Chr g ~ ~ a t e s t

n1n-r

of money it w l l l produce docs n o t , 111 my

op ln lon , maJ:s

t h e proceeds either- p r ~ f l t

o r lncotnc

f o r the p u l p i ~ s c s

t h e A c t ' ,

( p e r Barwlck

C . J .

111 Federal

C o m l s s l o n r r

of Taxat lon v McClelland (1969) 118 C.L.R.

353 a t p.371

and sec? S c o t t i s h Australian MlnLnq Co.

Ltd.

v Frdc~i-a1

Commlssloner of Taxat lon (1550)El C.L.R.

182 d t pp.

195-197).

The Proceeds of a

'mere r e a l l z a t l o n 01 cliancc

2 ~

of	investment o r from an ~nhancenl(2rlt. of capital a r e

n o t Income P rope r tv Co. Ltd. v Fecleral Cor:unlsslqr-rcr of Tax;ltlorl

nor

a s s e s s a b l e

t o llrconr

t a x 1 - Ruhamah

(1928) 41 C.L.R.

148 a t p.1s.L

The p o s l t l o n

i n law i s s e t t l e d arid

i t h a s not

over

t h e

y e a r s been doubtc-d t h a t so long a s t h c a = t l v l t i e s do

n:)t

beyond

t h e

r e a l l z a t i c n

t h e asset

i n t h e most

e n t e ~ - r ~ ; l s l n q

mar;;lcr

and t o t h e maxlmlm advantage,

t h e l and w i l l 110% be fu11:13

t c have

been

"ventured i n a b u s l n e s s " ,

"8-mbrrld(.d i n a

t r a d e " o r "t:nmmitted

va r lous l a b e l s app l l ed Erom

iinc tr, tlrne

In I e1.1.3t1(m

t:i

t r a n s d c t l o n s

whlch

have

procluce(1

[ ) r c > f l t

1Jr income a~:;r:.~:-zblc

under t h s A c t .

The statcmerlt of t.h(. l ~ ~ v

v ~ l c h

e s t a b l i s h e d

t h e

d l s t l n c t : ~ > n

between

r ea l l za t - i on 01:

l m d and

rh? x,Fntur>nq

i t

i n a

bus ines s i s t h a t of

Wlllii~rns J.

1 1 1 t h e S c b t r . ~ s h

-.-p

A u s t r a l ~ a i i

M l n l n q c a s e ,

S L . [ ' I ~ a t p.l'.>?:

"The

c r -uc la l quest i on

i s thc7-r?f~r-i .

wht,ther

t h e fact::,

j u s t l f y

t h e concL~l;lon t h a t the.

dppe l l an t

enbar-;:?cl

suc11 a b u s l n e s s o r undertalrlr~<: a1

schcrr.? ;n

1\24.

The

f a c t s would,

i n my op ln ion ,

have t o be very s t ronq

Indeed be fo re a

c o u r t could bc

lrlduccd t c ho ld

t h a t a

compaIly whlch had n o t purchaser1 or otherwise a c q u i ~

cc1

l a n d

for- t h e purpose of profit-maklrig by s a l e was cngaged 111

t h e bus lnes s of

s e l l i n g land

and

not merely

r e a l i z l n c i t

when

a l l t h a t t h e company had cl,>r~e

was t o take t h r

necessary

s t e p s t o r e a l l z e t h e land

t o t h e b e s t

advantage,

especially l and which had been acqui red and u s ~ d

far a

d i f f e r e n t purpose which

i ~ , l s

rio

lorlgcr

b u s l n c > ~ s - l l k e

t o c a r r y

ou t . "

course

t h e p o s l t l o n

1s o t h e ~ w i s c

i f t h e land was

o r l g l n a l l y

accjulred

f o r t h e purposf, L)+

p ~ o f l t - m a k i n g 1 q s,.le

o r a s an a s s e t i n t h e cou r se of

b u s l n ~ s s

b u y ~ n g

and

s e l l i n g land .

The purpose of

t h e a c q u l s i t l o r ~ L S

crucial,

i'cr

I£

acqui red

f o r

t h e purpose

p ro f~ t -mz ia r ig by

s a l e ,

t h e

proceeds w l l l be

a s s e s s a b l e under

s . 2 b ( a ) ,

and

i f acqui rcd

a s

an a s s e t i n t h e course of

such a bus ines s ,

t h ~

procccds w l i l

a s s e s s a b l e

Income

under

S. 2 5 ( 1 ) .

P ~ o c e e d s

prlrna

i a c i e not

a s s e s s a b l e because

t h e purpose of

~ c a l i z a t i o n

was no t :he

purpose

a c q u i s i t i o n may

bcl

a s s c s s a b l c i f .i~ld

coliseqllcnt ilprn ;I

change of purpose.

However t n l s w l l l on ly be? t h e ?as? li zpurl

t h e change I n purpos?

t h e land i s comr:itted t o a pzcflt-rrakir;q

under taking o r scheme o r vcnturcd as a n dsset

i n i b u s i n c s s

t h e activities of whlch extend bc.yon.1	t l ic s a l c of tht- s1;blcct
land.

There I S ,

i n my

opinion,

noth lnq i r l t h e a c t s of

tbc- taxpayer

"whlch would .suff ice t o cha:-actrrlzc-"

~ t s

df:..alinq v,itn L K L

i n t e r e s t i n t h e land

" a s an

adventure

i n t.he

n a t u r c o t t ~ a d e ,

r a t h e r than

a s

'its

r e a l i z a t i o n 111 dn

n t e r p r i s l n g .*,ay

s o a s

t o s ecu re

t h e b e s t

p r i c e ' :

McCle l l~~r id

v CommissLoncr ot

Taxat ion" ,

( p e r Stepnen J.

i n N . r .

W ~ l l l d m s

c a s e ,

s c r r a a t p.231).

Even

counsel f o r t h e Commlssloner

cild no t c ~ n t e n d

khdt i n

d e a l i n g wi th t h e l a n d ,

t h e taxpayer

\;cent

bcyortd

-.+*hat

had t o b e

done

t o comply

wi th

s u b d i s r ~ s i o n a l

l t qu i r cmen t s .

Rather

h e

d i r e c t e d

a t t e n t i o n

t o t h e

s i z e U£

l t w o p ? r d t i c n ,

t h e

clu:-irtl-rm

of t h e s e l l i n g progranune and ~ t s

p l o l i t i i h i l i t y ,

a i l

r,f

'n l l~ch

m a t t e r s ,

i n my

view of

t h e a u t h o r ~ t i ~ l s ,

a r e

i r r c l c v a r l t .

I I e

a l s o of

cou r se l a i d stress 3n t h e cllarige of

awric1-ship nf

t h e

company and t h e characteristics of t hr.. new shal-eholder; ancl

d l r e c t o r s , w h l c h

>,l11

cons ide r

l a t e : .

I n my

op in ion ,

t h e taxpayer

d ~ r l

no t do more than -ceT~llze

t h l s

a s s e t , wl~lch i t was

longer bds incs s - l l ke

t o hul-rt,

I n

o rd ina ry and prudent manner.

I n so l31 L ~ S

it r l?d fijt (12 r r c ~ i e

than Kecessary t o comply with

~ u b t l i v i s i o n ~ l

requirr .m~-. r? t~

and

d i d n o t ,

f o r example,

dcvelop tlrc

l and hy

1 ,u~lu inq h(,~~s;.s

t l x r eon ,

lt can n o t be

s 3 i d t o have committc-J t h e l a n d t o a p r ~ f l t -

rnaklng under takinq o r scheme.

Fdrthermorc,

i t can not i ,c:

contended t h a t t h e taxpayer

comnutted i t s l and a s capital

a bus ines s of l and development, f o ~

i+.s a c t i v l t i c s w e r e

iil.iltc-d

s o l e l y t o t h e

s a l e of

t h e

s u b ~ e c t

land.

I t had no otiicr

b u s l n e s s activities and i t acqui red nil

~ t l ~ e r

l and

fo r

t l ~ c

purpose

t h e a l l e q e d bus iness .

I t

i s t h e r e f o r e ,

i n my

o p i n i s n ,

l n d c c . ~ r d

w ~ t h

a u t ! , o r ~ t y

t o determine t h a t t h e taxpayer d i d r1c.t

conunit.

t h e iancl C,;

bus ines s o r a pr-',fit-making

undc:rtnkln(j u r schrrw, i n whLch

c a s e t h e proceeds of

i t s s a l e cornprl:;c

r i c ~ t h e r

incomc no]:

p r o f i t

a s s e s s a b l e

under

t h e

Act.

flowever, counsel f o r t h e Cornmlrsl,;nd?:

cor,tcnrlerl l-harr t h e

gene ra l r u l e had no application t o tile f a c t s of

t!!is n13ttc.?.-

because of t h e r a d i c a l change whlch o~:ca!red

whc'n t h ~

o i i g i n a l

members

so ld t h e i r sha re s .

U p u n t l l t11.3t t l ~ n r ~

t he larltl

liar1

c n l ?

been used i n p a r t f o r t

purposes of th s mcmbcrs'

Leach shacks

and

i n p a r t a s a

bu f f e r

zone t o e*ribiIe a r c e s s t o t h a c ~ ~

shacks.

Upon

s a l e by

t h c ~ mernbers

t h e i r sh , i res , h e salcl,

thi.

taxyayc.r

company was acqui red by npw m e m b e ~ s

who

i lb ta i r i~cl

c:a~ntr:;l rmf t ' le

lancl

f o r t h e purpose of

o b t a i n ~ n g

lxof l t s pursu3nt

t c)

~ c J s L : ~ ~ ~ ~ . : ;

of developing t h e land .

The c r u c ~ a l

f a c i c r s

W I ? T ( ~ t!lv

d i f f e r e n t

purpose of

t h e new members and t h e f a d t h a t i n rio:'ll:Lat 1 1 1 ~

d i r e c t o r s t h e members

b rcuyht ,

d r i t l l,?-

3uqht

deLlberatclLy.

J r ! t l~ t h e

management

t h e t a ~ y a y e r

conipany

e x p o ~ t i s e

i n t h c devclr>p~r,li-r.nt

l and f o r s a l s .

These factor-S, tuge ther

w i t 1 1 t h e nlunrier

l n

which

t h e directors went

about t h e r c a l ~ z a t l o r i

:hc.

1 a r . f ~ .

hold ing back t h e s a l e of

some of

Chc larid and dt-srclo]>inq L ( . w1 tt.

t h e proceeds of

e a r l i e r s a l e s and qc:ri',rdLly

rndnipulat:lrlq

i ~ z

r e s p e c t

t h e land

t h e t l m e of

i e~c . , . :~q ,

~ b t a i n ~ n c j

of suh-

divisional

approva ls and

s e l l i n g ,

a l l i n a l c a t e d , h?

s a l ~ i ,

t h a t

t h e company

had

gone beyond

t h e a c t ~ r r l t y

merp

r t d l z a t l z n .

Tlir f l r s t comr~ent I w!)uld ,nak.-? 1s

chat this arg8-lra.?nt. dssunte:.

t h a t

t h e new

purpose

t h e t a x p d y ~ : ~

ti c!isy~osr ol

11-:,

lanr l

dcterxjlnes the

charact i - r f o r irlcclnr.

t a x purpoccs L J ~

flit' ~ I - O C C ~ ~ S

s a l e of

t h e l a n d ,

and

t h a t

t h e ~ u I . ~ o : : ?

c ~ f

t he ~ n ~ ~ \ b ~ ' i s

111

acqu l r lng t h e l r

s h a r e s ,

namely

fo:

p z 3 1 i t maklng,bccame

t!ie

purpose of

t h e company.

The l a t t c > ~ p r o p o s l t l o n I n my

vlc-w can

not

c o r r e c t ,

i n t h a t

t h e m e m b i i r s '

~.>l~rposcl

was

t h e p U r p i > C : ~

a c q u l s l t l o n of

t h e s h a r e s whereas

thi?

taxpayer

ha< a

t i j t a l l y

different purpose,

nalnely

t h e pu lpose of

dlspos lny c b f

an ?.ss&

longe r r equ l r ed

f o r i t s o r l g l n a l purposf..

Moreqvcr

do n o t

s ee t h e t a x p a y e r ' s then purpose a s r:rnclal.

I t 1s w h ~ t

i t 3icl

I n r e s p e c t of

t h e Land whlch

Lnlpr>r t a n t .

~.lncicr:stdn,!di>I

l t pror~osed

t o mdxlmlse t h e amount c ' f nwney whlch 1t rchcelve*-i

sale of

t h e l a n d ,

and t h e t r a e ques t lon 1s whet-he:

t o ach:.cve

t h s purpose i t comnlltteci t h e l and t.;

a hi is lness venturr? o r tc

a prof lt-maklng

undert aklng o r schetne qr merely so13 t:hr>

I.acfl

t o t h e b e s t

advantage.

I f t h e taxpayer

acqul red any

ful-thr.1 l a n d ,

t h sn the. p\:rpJsc-

i t s a c q u i c ~ t l o n

would

r e l c v a r ~ t Cactar

i n cl*?tc~nlni.rlg

t h e

c h a r a c t e r f o r income

t a x purposes of

the procer?ds of

s d l e .

can ay ree t h a t i n t h e s e circumstances

t h e purpose of

i t s directors

I n acquiring t h e land w3uld be t h e purpns? of t h e taxpayer,

c£ H.L.

Boltcn

( E n q ~ n e e r l n q )

Co. Ltd. v T.J. Gi-aham & Sens b954

? A l l E .R .

t;24

a t p.630, Adelalde O l lve Company Pty. Ltd. v

Federal Conunlssloner of Taxat lon (12774) 7 4 A.T.C.

4038 a t p.4055,

Bernard Elsey P ty . Ltd. v Federa l C-n,m:ssloner

of Taxat lon (19693

1 2 1 C.L.R.

1.13

a t p.121.

I n my

opln lon however,

t h l s 1s d

s l t u j t l c j n 1r1 wlilch

t h p

s e p a r a t e

c o r p o r a t e

existence

t l ic

t a ~ p a y c r

should b~

acknowledged

and

i n d ~ t e r m l n l n g

thc.

c h a r > d - c r of

1:5

ol:d;rations

t h e r e i s no

warrant t o a t t r l b ~ t e

t.3 Lh12 taxpayer

t n e pL:rpa:;e

f o r wlilch

i t s ncw

rnembe~s acqul red

t h c ~ r

s h a r e s and

~n zunseqllencc

galned c o n t r o l cf

t h e taxpayer

company.

That nLrposc- h a s no

r e l evance .

Moreover, I dc not s e e thit t h c experlct lcc aricl tlir

c x p e r t l s e of

t h e

new

d l r e c t ~ 3 r s

111 t:he

h u s l n r s s I n buylrl7,

d e v e l o p ~ n g

and

s e l l l n g land

has

any

~ l : l ~ = v a n c e

t o

t h e dctermlnat:ori

t h e c h a r a c t e r f o r t h e purpose of

t h ? Act

t h e pl-aceeris

sa le

l and o r l g l n a l l y acqul red f o r a pl?.pn:.e

o t h e r than a

hub~n(.:,:;

purpose.

I n N.F.

Wllllams c a s e , suprd St tyhcn J.

(p.232) an.3

Barwlck C . J .

(p .240) o n appeal each ~qavc?

c.orisldcr-atlori ~ o t h

t o t h e purpose f o r whlch

t h e husband of

t i i+ taxpayer

a c q u ~ r e d

t h e l and t h c s u b l e c t ma t t e r of

g ~ f t

o h e r ,

and

t h e Lact

t h a t he was

ari e s t a t e agent upon who>+! a c l i ~ ~ ~ e

i n r e s p e c t

th,?

l a n d t h e taxpayer r e l l e d .

Both Stcphcn LT.

and Barwick C . J .

considered

oach

t h e s e matt121 S

1:-rclrvarit.

FOL f ~ r - t h c r

.zapport

r e f e r t o S t e ~ n b e r q

v Federa l Conun~ssl,nt+r of

Taxat lvn

( 1 9 7 5 )

134 C.L.R.

640 a t G82

p e r Barwlck C.J . :

"Fu r the r

t h e r e a r e c e r t a l n pr lnc~pl0:s t o be

born2

I n inincl

whlch

a r e q s l t e b a s l c

i n t h e n p p l l c a t l o n

law ?f

taxation.

F l r s t t h e l e g a l e f f w t of

transactions which

a r e no t pre tended

o r l l l u a o r y i n ~ ~ s t

~ e g a r d c c

arld aLlowed

t o be effective: secondly , thi. icp-iIatc 1.dsnt1t.y oL

i n

incorporated company from t h a t c11 ~ t s

:;.harc:i~ldri-s mncst

be	respec ted . "

I would a l s o r e f e r t o Hobart Brldqc Co.

Ltci.

v Federal

Commlssloner of Taxat lon (19511 F12 C.L.R.	372 a t 396 p?;
K l t t O J.:

" I n t r u t h ,

t h e z t tempt

t o a s s l i n l l d t e ,

fo:-

t h e pdIl>>lcr

dec id lng t h e ~ r

income o r c d p l ~ a l

n a t u l c ,

pr3Tlt.s

whlch

t h e a p p e l l a n t

company

(lc?rl.~cti

from ~ h c

rr-all:,.oi.lon

sha re s l n a

subsldlar-y 1 ~ 1 1 4 1 clcallnq company

L-h

p r o f i t s whlch

i t would have dc.~:rrtxrl

I £

i t .

had

~ t . s r : l ;

conducted

o p e r a t i o n s of

l and

deci l lng 1s ar? iitte1111;t

whlch f a l l s under t h e condcnulatlun

. ~ f

t h e Dukr

Westminster's

c a s e

(C19361

A . C . 1 ) .

I t

l n v l t e s t h e

c o u r t t o b l u r

d l s t l n c t l o n s which

a r c r e a l

and

s l a r ~ ~ f l c a n t :

and

i t must be m e t by

an i n s l s t i n c e upon

the nc>cess l ty

dec id ing t h e c a s e i n hand >;poll i t s own

f a c t s .

T h r

assessment

which

i s c h a l l e r ~ g c ~ l

was an assessmc:nt rw.111:

a g a l n s t

t h e

a p p e l l a n t

company

and

not

a y a l n s t

a n y j c r

e l s e .

Therefore lt i s necessary t o clccldc what

t h e c h ~ r a c t c z

t h e p r o f l t whlch

i s sought t o btl

t axed ,

i n r e l a t l b ~ ~

t h e

a p p e l l a n t

company

and

i n rc? la t l . -~n

t o i t a lone .

'To

t h i s end it i s necessary t o c o r ~ s ~ ~ l e r

t he purpos(:

f o i wI?ict

t h e a p p e l l a n t

company

acqulrod

and

hc,ld

t h e ~ h d i - e s

;n t.h*?

Derwent Company from t h e real lz ; l t lc>n of

whlch t h e p r ~ f l t

a r o s e ,

and not

t o any purpose

>f t h e i r ld ivjdualv b ~ h l n d

t h e a p p e l l a n t

company

o r t o i

11,. L)t,rpr>sc whlc.11

t h e Del-wc.nt

Company

e x l s t e d

t o ef f e c t u a t c . "

I t fo l lows

t h a t , l n my

o p l n l o n ,

t h ~ ,

q ~ n e r a l

p ~ l n c l p l c

t h a t

t h e proceeds o f

r e a l l z a t l o n by

cullpariy of laxid nut acclllr cd.

f o r t h e p u p o s e of

p r o f l t maklnq

s a l e a r e c a p i t a l

h a s

a p p l l c a t l o n t o t h e f a c t s of

t h l s inat I.e.:

1::

PSF>F?ct.lVc of

t h e

purpose f o r whlch t h e members acqulrt"l i h c ~ r

shar-c.s and t;lf..

particular

expcr lence and e x p c r t l s c whlch !:ht.lr

nomlnat-cl

directors brought t o t h e taxpayer cunpany.

I n my

op ln ion ,

t h e appeal

s h o ~ ~ l c i

b r

a l l obed

w l t l ~

c o s t ~

and

ag ree w l th t h e o r d e r s proposed

b l o t h e r i31c.nnan.

I certtty that this and the 1 3

precedlna

pages are a true copy of the Reasons for

Judgment of Mr

c ate d.

[1979] FCA 140

20 Dec 1979