Cowan & Ors. v. Federal Commissioner of Taxation.
Judges:Gowans J
Court:
Supreme Court of Victoria
Gowans J.: I have before me a number of appeals from decisions of the Commissioner of Taxation disallowing objections to assessments of income tax made by him. They have been forwarded to this Court at the request of the taxpayers pursuant to
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sec 187 of the Income Tax Assessment Act 1936-1971 and have been heard together. There are involved the assessments of four taxpayers for each of the tax years of 1966, 1967, 1968, 1969 and 1970. Substantial amounts of income and tax are in question.The taxpayers concerned are Newell David Cowan, his wife Christina Margaret Cowan and his two daughters, Deidre Catherine Cowan and Judith Ellen Keukenmeester. The first of these, Newell David Cowan, is concerned on his own with assessments issued in respect of gains made by him in dealings with land at Tullamarine, and all four members of the family are concerned with assessments in respect of gains made by them in dealings with land in the North Croydon area.
I turn first to the land at Tullamarine. That term in its widest significance refers to a property that can conveniently be called the ``Gowan Brae'' farm (which is to be understood as not to include the homestead block) and to the property constituting the homestead block itself. The farm was purchased by Newell David Cowan (who will be referred to as ``the taxpayer'') acting jointly with one Ansell, for a cash price of £37,500 under a contract of sale made in March 1955. Early in 1955 about 14 acres was sold by them for a drive-in theatre at a cash price of £10,500. The balance was sold by them for a price of £134,000 in May 1958 to a company called Stanhill Estates Pty. Ltd. The price was payable on terms extending over 8 years. The homestead block was purchased by the taxpayer, acting on his own account, under a contract of sale made in May 1955 for a price of £14,000. It was sold by him to Stanhill Estates Pty. Ltd. under a contract of sale of the same date as that of the farm, 13 May 1958, for a price of £20,000, payable on terms over a like period of 8 years. These contracts for the sale of the farm and the homestead ran a chequered course on account of defaults by the purchaser after paying the deposit and some instalments and in the course of time in June 1963 they were rescinded by the vendors. During this period steps were projected by the Country Roads Board to acquire some of the farm property for the purpose of making the Tullamarine Highway, although at this stage the steps taken appear to have been tentative and the proposed acquisition of a relatively minor character. After the notices of rescission of June 1963 had been given, lengthy litigation ensued with the purchaser as to the efficacy of the notices and the consequences which would follow if they were effective. But the litigation had hardly been launched, when, in September 1963, Ansell's half interest in the land of the farm and under the joint contract with Stanhill Estates was bought by the taxpayer for a price of £24,000 payable within 3 years. The latter obtained possession of the farm and the homestead by some arrangement with the liquidator of Stanhill Estates, although the litigation had not yet been determined. Then the acquisition of a substantial area of the farm by the Country Roads Board was projected and subsequently in September 1964 an area of 66 acres or so was resumed, compensation amounting to $335,953 being paid in June 1969. In May 1964, the taxpayer entered into a conditional contract for the sale of another area of the farm, about 15 acres, to a company called Frozen Foods Pty. Ltd., with whom Stanhill Estates had been in negotiation, but he was at that time unable to carry the sale to completion since the litigation was not determined. That did not eventuate till October 1966, when the rescissions were upheld by the Court. The sale to Frozen Foods was then carried through to settlement by the taxpayer in January 1967 when a sum of $100,000 was paid to the taxpayer in satisfaction of the price. In 1966, an option to purchase a further area of about 24 acres had been given to Preston Motors Pty. Ltd. and in March 1967 the taxpayer sold 21 acres or so to that company for $130,400, settlement being made in October. Early in 1967 the State Electricity Commission took steps to acquire an easement over part of the land left, and in June 1970 compensation of $10,726 was paid for that easement to the taxpayer. These disposals left him with 160 acres of the Gowan Brae farm and the homestead. By contract of sale dated 7 April 1970 (varied in two revised contracts on 20 October 1970) he then sold the homestead with a small surrounding block to Western Interstate Pty.
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Ltd. for a price of $200,053. That left about 160 acres of the farm with the taxpayer. It is still being used for grazing in conjunction with another area known as Palmer's which his family partnership N.D. Cowan and Co. had acquired.In this summarised statement I have disregarded a mention of the original purchase made jointly with Ansell having been made by Mrs. Cowan rather than her husband. This reference came out of an admission in cross-examination by the taxpayer that income tax returns in respect of the farm operations had been returned in the names of Mrs. Cowan and Ansell and that she was the beneficial partner in the farm. But the relevant documents of purchase were made out in the names of Ansell and the husband, and those of sale in their names or that of the husband alone, and whatever may have been the position as to the farming operations carried on on the property, the taxpayer having been assessed by the Commissioner in respect of the dealings in the land and it being no part of the taxpayer's case that he was wrongly assessed in place of his wife, I treat this matter as having no bearing, except as to credit, on any issue to be determined.
In respect of the disposals to the Country Roads Board, Frozen Foods Pty. Ltd., and Preston Motors Pty. Ltd. an imputed profit has been assessed for tax by the Commissioner. The disposals to the State Electricity Commission, and Western Interstate Pty. Ltd. were, at first brought into account by the Commissioner, but were later deleted by amended assessment. It is the assessment of the taxpayer in respect of the imputed profits derived from the disposals of the parts of the ``Gowan Brae'' farm to the Country Roads Board, Frozen Foods Pty. Ltd. and Preston Motors Pty. Ltd. that constitutes the bone of contention in the first instance.
I turn next to the land at Croydon. The association of the four members of the family (whom I shall call ``the family taxpayers''; they traded as N.D. Cowan and Co.) with the land in the North Croydon area began with a purchase by them from the deceased estate of one Brothers in March 1962 of a block of 54 acres or so situate on the Maroondah Highway on the boundary between the Shires of Croydon and Lilydale. This is ``the Highway Block'' bought for a price of £15,000 cash. This transaction was followed by the purchase from the same vendor in November 1962 of a farm of 312 acres or so (``the Brushy Park property'', a mile or so away to the north, run in association with the homestead paddock in the Highway Block) for a price of £56,171.5.0. payable on terms over 8 years. About the time of this dealing the Country Roads Board initiated action to acquire 3½ acres of the Highway Block for road widening. Compensation of $10,826 was paid in the years 1965 and 1966. In April 1966 the Brushy Park property was sold by the family taxpayers to one Erdi and his wife for $150,000 payable in 6 months. In December 1967, the family taxpayers sold the balance left of the Highway Block to a company called Ramset Fasteners (Aust.) Pty. Ltd. for a price of $96,283.69 on terms extending over 3 years.
In respect of these disposals of the Highway Block to the Country Roads Board and Ramset Fasteners (Aust.) Pty. Ltd. and of the Brushy Park property to Mr. and Mrs. Erdi, the Commissioner has assessed the family taxpayers for tax on imputed profits in the years 1966, 1967, 1968, 1969 and 1970. This raises the issue so far as the family taxpayers are concerned.
The foregoing narrative merely outlines the subject matters in the dispute.
The taxpayer has to carry the burden of establishing that the assessments made against him in respect of the profits derived from the disposals of the land at Tullamarine are excessive. The Commissioner defends them on the general basis that whether the taxpayer is taken as having acquired property at the time of the joint purchase of the ``Gowan Brae'' farm in March 1965, or whether he is taken as having acquired property when the contract of sale of that land was rescinded in June 1963, or whether he is to be taken as having acquired property when he bought out his co-owner in September 1963, in each case, by the subsequent disposals to the Country Roads Board, Frozen Foods Pty. Ltd. and Preston
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Motors Pty. Ltd., he either derived income in the ordinary sense covered by sec. 25 of the Act, or he made a profit from the carrying on or carrying out of a profit-making undertaking or scheme within the second limb of para.(a) of sec. 26, or he made a profit arising from the sale by the taxpayer of a property acquired by him for the purpose of profit-making by sale within the first limb of that paragraph.More particularly however the Commissioner's contentions have been -
(1) that the taxpayer's acquisition in 1955 of a half interest in the ``Gowan Brae'' farm was for the dominant purpose of profit-making by sale, and his acquisition in 1963 of Ansell's half interest was for a similar purpose (within the first part of sec. 26(a)), and the property so acquired in 1955 and 1963 was sold in parts with a resultant profit, so that the profit was assessable under that part of the section;
(2) that the taxpayer's re-acquisition in June 1963 of his half interest in the ``Gowan Brae'' farm by the rescission of the Stanhill contract was an acquisition of property for the dominant purpose of profit-making by sale, and his acquisition in September 1963 of Ansell's half interest was for the same purpose, and the property so acquired in June and September 1963 was sold in parts with a resultant profit, so that the profit was assessable under the first part of sec. 26(a);
(3) that in connection with the rescission and the re-acquisition of his half interest in the ``Gowan Brae'' farm, and his acquisition of Ansell's half interest, and the subsequent disposals of parts of the farm, the taxpayer was carrying on or carrying out a profit-making undertaking or scheme and the profit derived from it was assessable under the second part of sec. 26(a);
(4) that as from the time in March 1962 when he acquired the Highway Block at Croydon the taxpayer was carrying on the business of a land dealer and using his various interests in land as capital of that business, and the gains from the sales of parts of the ``Gowan Brae'' farm thereafter were profits which were income according to ordinary concepts.
The taxpayer has therefore to overcome these contentions.
The family taxpayers too carry the burden of showing that the assessments made against them are excessive. The Commissioner's contentions as to these assessments were put on the basis -
- (1) (a) that the acquisition by the family taxpayers in March 1962 of the Highway Block at Croydon was for the dominant purpose of profit-making by sale and the property so acquired having been sold in parts with a resultant profit that profit was assessable under the first part of sec. 26(a); and
(b) the acquisition by them of the Brushy Park property in November 1962 was for a dominant purpose of the same kind and that property having been sold with a resultant profit that profit was likewise assessable under that part of the section;
(2) that as from the time of the acquisition of the first of these properties at Croydon, the family taxpayers were carrying on the business of land dealers and using their interests in the land acquired as capital of that business and the gains from the sales of those properties thereafter were profits which were income according to ordinary concepts.
The family taxpayers have therefore to overcome these contentions.
The submissions of the Commissioner have not been set out here in the order in which they were presented and consequently the order does not provide any reflection of the relative weights attributed to them. They have been arranged in an order which suits the sequence of the narrative.
Before proceeding to a closer examination of the facts bearing upon these issues, it is
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necessary to mention a submission made for the taxpayer that in relation to the assessments made upon him in respect of his separate dealings, the Commissioner, had, by the particulars he had furnished, committed himself to an assessment based, so far as dealings with the ``Gowan Brae'' land were concerned, on the actions of the taxpayer in acquiring property in 1963 consisting of the share of his co-owner, and that he was precluded from any contention based upon the acquisition of a share of the farm property in 1955. In support of this it was said that to travel further back by way of investigation than the happenings of September 1963 would involve the Court in making a determination on evidence which by reason of this understanding of the Commissioner's contentions, might be less complete than it might have been made.Insofar as this submission implied that the taxpayer might have been misled in the preparation of his case in the relevant respect, it was rebutted by the production of a letter of 2 August 1971 from the taxpayer's solicitors to the Deputy Crown Solicitor raising a query about the very point, which evoked a reply dated 6 August 1971 expressing an attitude on the part of the Commissioner to the effect ``that the whole of the events which led to the derivation of profits are potentially material and he is not prepared to limit the area of the Court's field of enquiry''.
In these circumstances I put aside any suggestion that the taxpayer was misled or hampered in the presentation of his case, but I find it convenient to defer consideration of any question as to the compression of the area of dispute by reference to technical considerations based on particulars furnished with the notices of assessment.
I turn then to set out in some detail the background against which the Tullamarine land was acquired by the taxpayer in the first instance.
The taxpayer came from farming origins. He was born in Numurkah in Victoria in 1912 and brought up in the country. He left school early and worked for his father on a wheat farm near Wagga. He was assisted by his father in buying a neighbouring farm property and worked it till the depression when he returned to run his father's property at Numurkah. In 1935 he bought that farm and farmed it until it was taken over for soldier settlement in 1948. He then went to live in Tocumwal, New South Wales, but he acquired a wheat and wool property of 1,475 acres at Nathalia and farmed it with the help of a manager. He or his family firm has retained it ever since. At Tocumwal, in the subsequent years, he carried on a wholesale produce business with a lucerne mill. He also had a real estate agent's licence. The business was successful. But a large income tax assessment in 1952 and the demands on time and energy made by the business engendered some disillusionment in the advantages of that kind of business and he decided to sell out. He decided then, he said, to ``go into semi-retirement and concentrate on the farm''. In 1954 he disposed of the business and went to live in Albury. But he paid frequent visits to Melbourne. A man named Vernon Ansell was a business associate of his who carried on a wholesale produce merchant's business in Melbourne. He had had dealing with the taxpayer when the latter was in a similar business in Tocumwal. Ansell was providing fodder for the ``Gowan Brae'' property at Tullamarine on which one Bruce Small carried on a dairy farm and provided agistment for race-horses. The homestead on the property was situate about 10 miles from the G.P.O. at Melbourne on the Bulla/Lancefield Road, a little beyond the Essendon Airport. Ansell suggested that a lease of that property could be obtained because Small had been trying to sell the property without success. He proposed that Cowan and he should go into it together. In or about November 1954 they obtained from Small a lease of 300 acres of the ``Gowan Brae'' farm lying to the north of the railway line to Broadmeadows and also of 154 acres of land known as ``Strathmore Heights'' to the south of the railway line, lying between the Gowan Brae farm and the airport, which it abutted. The homestead and the agistment farm on the ``Gowan Brae'' property were excluded from the lease. The Strathmore Heights portion was in fairly close proximity to a built-up or subdivided area bordering on the airfield, and Small had hopes of being
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able to subdivide it in time. He was therefore unwilling to tie it up by leasing it for too long. The term granted in the lease was for 2 years. There was no option of purchase, although it seems to have been discussed, but there was an option to renew the lease for a further 2 years. Dairy equipment was let with the farm and there were covenants by the lessees to maintain the property as a farm. There was a Milk Board contract for the supply of milk and this was taken over by them. After taking possession in November 1954 Ansell and Cowan carried on together, Ansell doing much of the immediate supervision and the taxpayer paying visits from Albury periodically for the purposes of inspection and consultation. Attention will have to be directed to the question of the intention with which the taxpayer entered into this venture. I will advert to this later.This state of affairs under which Ansell and Cowan leased the farm property did not last long, for the lessees decided to negotiate with Small for the purchase of the property leased. As early as 4 February 1955, they were sounding out their bank (the Commercial Bank) with a view to obtaining finance for the purchase. The price asked for the Strathmore Heights portion proved to be too much for them. As mentioned above, it was in fairly close proximity to a settled or subdivided area, although that area was a couple of miles distant from the ``Gowan Brae'' homestead. But a price for the ``Gowan Brae'' farm (still excluding the homestead and about 20 acres around it and excluding the agistment farm of about 32 acres) together with the dairying plant and equipment on the farm was agreed upon at £37,500 cash. A contract was signed on 15 March 1955 for the sale of this property to the purchasers ``as tenants in common in equal shares''. Settlement of the purchase money was made on or about 20 July 1955 and the two purchasers became registered as proprietors as tenants in common in equal shares on that date. The Strathmore Heights portion continued on lease. The whole of the land bought and the land leased continued to be conducted as a dairy farm, with the exception of a corner which was disposed of in circumstances to which I will shortly advert.
Before long the vendor Small approached the taxpayer with a suggestion that the latter should buy the homestead to live in. It was a fairly elaborate home with a billiard room and a maids' quarter. The vendor wanted £30,000. Cowan got his wife down from Albury to see if she approved of it as a home and with the object of making an offer. Having got her approval and some promise of financial assistance from Small's bank (the Commonwealth Bank), Cowan offered £14,000 cash and a sale was made to him on 4 May 1955 at that price. He said he was influenced by various factors - the desire to be near the ``Gowan Brae'' dairy farm, his own dislike of living in Albury, and the desire to have his two daughters aged then about 10 and 12 years respectively attend a branch of the Presbyterian Ladies College in Moonee Ponds. A title issued to him on 26 August. He then later in 1955, before September, moved his family from Albury to the homestead.
At this time then, late in 1955, the taxpayer had acquired for himself the whole interest in the homestead in which he was living and a half interest in the 300 acres of the ``Gowan Brae'' farm, and was working that area along with 154 acres of the Strathmore Heights area, leased jointly with Ansell, as a single dairy farm. The area constituting the stud or agistment farm was retained by Small and it was subsequently sold by him in the early 1960's. It will be necessary later to consider in the light of all the circumstances what was the purpose for which the taxpayer acquired his share in the farm property.
I now turn to the dealings with these properties. The first dealing by way or disposal came some time in the first half of 1955. A proposal was received to buy a corner of the farm property on Bulla Road for the purpose of erecting a drive-in picture theatre, a novel form of venture in Australia in those days. The taxpayer puts this approach at a time after he went into residence late in 1955. But there is evidence, which I accept, that as early as 3 June 1955, Ansell (who, I think, in the circumstances, must be taken as acting as spokesman for himself and Cowan in dealings concerning
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the joint overdraft at the Commercial Bank) was informing that bank that an option to purchase 12 acres had been granted at £725 per acre and that if it were exercised the overdraft would be reduced. A fortnight or so later on 22 June, he was informing the bank that a settlement of the purchase of the farm property was about to take place and that the option granted was for 13 acres for a drive-in theatre project. On 13 August Ansell was telling the bank that the proceeds of the sale of 14 acres would shortly be received and an amount of £7,000 would then be available to reduce the overdraft. He also said that the co-owners had under consideration the sale of a further 20 acres for £20,000. A sale of 14 acres or so to Village Drive-In (Essendon) Pty. Ltd. was ultimately completed on 26 September 1955 for £10,500. A title issued in respect of this dealing on 11 October 1955. The significance of this early disposal of part of the area is in question. The taxpayer accounts for it on the basis that it helped to reduce the overdraft and that since feeding in the bad months of the year would make demands on their finances, the co-owners thought they would be financially stronger if they sold off a part which was remote from the dairy and would not interfere with its operations. The Commissioner relies on this dealing as indicative of the purpose for which the land was originally bought. No assessment of tax has been issued in respect of this disposal.In the following year speculators or developers were showing interest in the locality, possibly, as the taxpayer suggests, because of the advent of the drive-in theatre, or because an American company, referred to as the Caterpillar Company, had acquired an interest over the Bulla road opposite the ``Gowan Brae'' homestead, or possibly because of more permanent characteristics of the locality. At the time the ``Gowan Brae'' land was still zoned as rural land. By the middle of 1956, the taxpayer must have had present to his mind the potential of the land for development in the future. On 24 May he was discussing with a surveyor (Mr. Tuxen) a proposal for some small extension of the drive-in theatre area and in the course of doing so, he mentioned the need to keep in mind the consideration that although the land was in a green belt area, subdivision into residential lots might eventually be allowed, having regard to rapid development taking place in the locality. From towards the end of 1956, the co-owners were responding to approaches for sales. On 19 October 1956, Ansell was telling the Commercial Bank that they were considering the sale of the farm property for £132,000 for use as a factory site. On 7 February 1957, he was informing it that the co-owners had recently refused an offer of £85,000 for the property, as they were awaiting a zoning arrangement under which the land would become eligible for use as building blocks. In June 1957 the taxpayer had a conference with an officer of the Commonwealth Bank with which he had his personal account, with respect to an approach by a real estate firm, Apex Realty Pty. Ltd., with a proposal for subdivision, which the owners did not pursue. On 8 October 1957 the taxpayer was seeing the same bank again saying that owing to dry conditions and the need for hand-feeding the stock, he was dissatisfied with results from the partnership and the property was ``on the market''. He said that they had received many offers for purchase on long terms. He told the bank officer on this occasion that the property was under offer to a London concern. On 18 November he told the Commercial Bank that an offer of £143,000 on terms had been received from United Investments Pty. Ltd., and also that an offer from Clyde Industries for cash was under consideration. He told the bank that the co-owners were prepared to sell for £400 cash per acre. A week or so later on 28 November he told the Commonwealth Bank, where he had his personal account, that he was considering an offer by Dominion Pty. Ltd., a subsidiary of the Stanhill group, for purchase on long terms. On 2 December both co-owners told the Commercial Bank that they had received an offer of £107,000 cash for the property but that they could not agree whether to accept or negotiate for more. On 9 December the taxpayer told the Commonwealth Bank that they had given an option to A.V. Jennings & Co., construction engineers, to purchase the farm for £156,750, while retaining the homestead. On 10 January 1958 he reported to the bank that
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since giving the option to A.V. Jennings & Co. the owners had received an offer from Clyde Engineering Company for £125,000 cash. Later in that month he said that A.V. Jennings had decided not to go on with the option but that he and his partner were going to sell to Clyde Engineering and that the latter company's proposition included the homestead but allowed for him to continue in residence for some months.In May 1958 he reported to the Commonwealth Bank that he was making a sale to Stanhill Estates Pty. Ltd. That company was prepared to buy the farm property at £134,000 and the homestead for £20,000 on terms spread over 8 years. This offer was accepted. The contracts of sale of the farm by the co-owners and the homestead by the taxpayer respectively were executed on 13 May 1958. The taxpayer moved with his family to Flemington where his daughters would still be near their school at Monee Ponds and Stanhill Estates went into possession.
I think it is appropriate to halt the narrative at this stage to consider the issues that emerge from it so far.
While scrutinising with care the taxpayer's account of his actions and intentions when he turned his interest to the locality of Melbourne, because of a tendency displayed in his evidence to tone down the colour of facts appearing to operate against his case, I do not feel disposed to reject the view that his purpose, in entering upon the lease, was to reengage in farming operations. I do not regard the prospect of acquiring land for sale at a profit as dominating his outlook. The action of taking a lease in the first instance may have been an exercise in testing out the productive possibilities of the property, or it may have been a manoeuvre to enable negotiations for purchase to be carried on from a position of advantage. But in either case that does not advance the view that the objective at that time was acquisition for the purpose of re-sale for profit. I think the known circumstances point the other way and to the probability that what the taxpayer had in mind was setting himself up in a farm venture. It was a real dairy farm that was taken over. Furthermore, when one turns to the subsequent purchase, it is an understandable attitude on the part of the lessees that they should consider that, with such a short-term lease, they were at risk as to retaining the benefit of any money spent by them on improvements on the dairy farm and of not being able to keep the milk contract if the lessor were to sell. I am prepared to accept the taxpayer's explanation that he considered that if they owned the property he might be able to get his wife to come down from Albury to live in the locality of Melbourne. There is nothing in what has emerged as to the circumstances in which the property was bought to require a conclusion that what was occupying the minds of the purchasers was profit-making by re-sale. I have not had the benefit of any evidence from Ansell. There is no explanation of that and that increases my caution. But the records of Ansell's communications to the bank soon after the purchase do not contain anything indicating that the object of the exercise was to make a profit by re-selling the land, or to re-sell at all, except with regard to the small area for the drive-in theatre or some minor extension thereof. The contention that the assumption on which the assessments were made - that the taxpayer's interest in the ``Gowan Brae'' farm was purchased for the purpose of profit-making by sale - should be left undisturbed, is based substantially upon the view that an inference should be drawn from the early grant of an option of purchase over a part of the land for the drive-in theatre, that the purpose of buying the property in the first instance was to sell it off in whole or in part at a profit. But the limited nature of the disposal made in connection with the drive-in theatre and the explanation of the considerations for realising on that small area put forward by the taxpayer (supported as I think it is by the probability emerging from the evidence of the bank officers that the bank did not look with favour on overdraft accommodation on a long-term basis for the purpose of a capital outlay of this kind and therefore looked to an early reduction of the overdraft) militate against any inference that might otherwise be drawn that the owners were already launched on or looking forward to a programme of re-sale. Such information
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as can be gleaned from the evidence as to the conditions operating at that time and place rather favour the view that the market for land in the area had not then begun to move. It was not until the last quarter of 1956 that there appears to have been any move to interest the owners in the sale of the property. I think the existence of some activity at that stage provides an insecure foundation for an inference that that interest was foreseeable 18 months or so before and that that factor was a dominating influence in the purchase then made.I have already set out my view that the taxpayer joined in the lease in the desire to carry on a farming venture. I am persuaded that this purpose governed him in the acquisition of his half interest in the farm by the joint purchase. The continuance of the lease of the Strathmore Heights area after the purchase of the ``Gowan Brae'' area points to that. So does the purchase of the homestead for the purposes of a home. So does what the taxpayer said at the time to the Commonwealth Bank officer, Mr. Irwin. The taxpayer may have had his eye on values, as a man with his background, and perhaps any sensible man in his position, would have had. But I do not think that that consideration took such a place in the factors influencing him in acquiring the property that it could properly be said that the property was acquired for the purpose of profit-making by sale. I take the word ``purpose'' to indicate the object wished for and aimed at and governing the projected use or disposition of the property, either entirely or in a dominant way (see
Pascoe v. F.C. of T. (1956) 11 A.T.D. 108,
Craddock v. F.C. of T. 69 ATC 4108). I do not think a purpose of this kind was present when the property was bought.
I do think however that as from the last quarter of 1956, the co-owners had their eye on re-sale at a profit and were interested in seeing what might be the most advantageous offer that would come along. They thought it came with the Stanhill Estates' offer in May 1958, and they entered into the contracts of that date for the sale of the farm and the homestead respectively. But I do not think the profit then made could have been brought to tax.
The foregoing findings make it unnecessary to consider the submission on the part of the taxpayer that the particulars furnished with the notices of assessment were so limited as to make it impermissible to support the assessments by reference to the taxpayer's dealings with the ``Gowan Brae'' property before 1963. I am not called upon to decide the point.
After the execution of the contracts of sale to Stanhill Estates in May 1958, there followed 5 years during which the future of these contracts was from time to time uncertain on account of default by the purchaser in payment of instalments and in the carrying out of other obligations. These defaults occurred on various occasions between 1958 and 1963. After notices of recission had been given by the vendors on three occasions and had been waived or withdrawn, notices of rescission dated 7 June 1963 were finally given, based on the failure to pay rates and taxes in accordance with the contracts, and a demand was made for possession. The period of the notices expired by 26 June. The purchaser did not comply or give up possession.
It was then sought to bring the matter to a head by the issue of writs on 30 August 1963 seeking declarations that the rescissions were effective in the case of each of the contracts and seeking orders for possession. In the end it was held that the notices of June 1963 had been effective to produce a rescission of the contracts. But that was not till October 1966.
In the period between the giving of possession under the contracts in 1958 and their rescission in 1963, the taxpayer was living in a home purchased by him in Flemington. He had given up the lease of the Strathmore Heights land in 1959. He had become aware about 1960 or 1961 that the Tullamarine Airport was to be established off the Bulla road beyond ``Gowan Brae''. Somewhere about the same time in August 1961 he had learned of the intention of the Country Roads Board to acquire 26½ acres of the land for the purposes of the highway to the airport. He had become aware that in these circumstances the Gowan Brae
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property was no longer a good farming proposition and that it was now predominantly suitable for subdivision. At some time, perhaps no earlier than the time of giving the rescission notices, he had become aware that a company called Frozen Foods Pty. Ltd. had manifested some interest in buying some of the land. In June 1963 just after the notices of rescission had been given, in conjunction with a man called McLean, the taxpayer bought a farm property named Mitchell's, somewhat further out along the Bulla road from the Gowan Brae property, from Stanhill Development Pty. Ltd., an associate of Stanhill Estates Pty. Ltd. In connection with this transaction the taxpayer had some interviews with a Mr. Nowland of the Commonwealth Bank. In the course of the first of these interviews on 20 June 1963, the taxpayer intimated an intention to re-sell the ``Gowan Brae'' property if the rescissions proved effective.This is the setting in which the notices of rescission were given in June 1963.
In the examination of the actions of the taxpayer for the purpose of ascertaining the purpose with which he did anything in relation to his interest in the Tullamarine land, there cannot be left out of consideration activities of his in relation to other property about the same time. But to do more at this juncture than indicate the nature of those activities would tend to confuse the story of the Tullamarine land. It is sufficient to say that in March 1962 the taxpayer on behalf of the family taxpayers acquired the two items of property at Croydon, which in the period between then and the end of 1967 were disposed of at a profit to the Country Roads Board, the Erdis and Ramset Fasteners (Aust.) Pty. Ltd.
It will be necessary to come back to a consideration of the significance of the rescission of the farm contract. But it is convenient to go on to set out what followed.
Soon after the writs had been issued the taxpayer acquired from his co-owner Ansell his interest in the farm property and under the contract of sale for that property. After the actions had been commenced, and it had appeared after a conference with senior counsel, that the co-owners might be faced with a claim to make a substantial refund in respect of instalments paid prior to rescission, Ansell got cold feet at the prospect of a lengthy litigation and the possible refunds and it was agreed (whether at the taxpayer's suggestion or Ansell's is not clear) that the taxpayer should take over Ansell's interest in the farm property and pay him for it the amount of principal which Stanhill Estates would have paid him if the contract had been completed according to its terms. A price was fixed at £24,000 and made payable as to £2,000 by the transfer to Ansell of the taxpayer's interest in a partnership between them in a street-cleaning business known as A.C. Contracting Company carried on at Hawthorn, and as to the balance in 3 years. The agreement was executed on 12 September 1963. As from this date the taxpayer became the beneficial owner of the other half interest in the ``Gowan Brae'' farm as well as of his own half share. The sale of Ansell's interest to Cowan was not due to be completed for 3 years and that did not happen until 1966. Owing to some conveyancing obstacles it was not until 11 July 1967 that a transfer was registered from Ansell and Cowan together to Cowan on his own.
In an interview on 19 September 1963 with an officer of the Commonwealth Bank, in the course of setting out information as to his financial position for the convenience of the bank, from which he was seeking accommodation to enable the completion of the purchase of Mitchell's, the taxpayer expressed an expectation of the Country Roads Board acquiring some 50 acres of the farm property for the purpose of the Tullamarine Highway and of receiving compensation in an amount between £70,000 and £100,000, and also his expectation of being able in due course to take over from Stanhill Estates, the sale which that company had negotiated with Frozen Foods Pty. Ltd., in respect of 13½ acres, for a price of £37,125 payable over 2 years.
This is the setting in which the taxpayer acquired Ansell's half interest.
It will be necessary to come back to
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consider the significance on this transaction, but the narrative as to the ``Gowan Brae'' property may be completed.Soon after the taxpayer had taken over Ansell's share, Stanhill Estates Pty. Ltd. had gone into liquidation and the liquidator had for some reason delivered possession of the farm property and the homestead to the plaintiff and had directed tenants to pay rents to the taxpayer. (This was subsequently held to estop Stanhill Estates from alleging that the contracts had not been validly rescinded.) The taxpayer went back into residence in November 1963. He sold his house at Flemington and went back personally into possession of both the farm and the homestead. During the possession by Stanhill Estates the Milk Board contract had been lost, the land had to run to thistles, the pastures had gone into a bad state, and the taxpayer himself (he said) had acquired a disinclination to take up dairying work again. But he set out to restore things, and he put in a herd of cows and sowed a couple of crops. But early in 1964 it was made clear that the Country Roads Board had much more extensive plans for the acquisition of portion of the ``Gowan Brae'' property than had heretofore been intimated. These plans involved taking a considerable area (it turned out to be 66 acres) running through the property and fragmenting it into a number of parts. The taxpayer has asserted that it was from that time that he became concerned to sell.
On 7 May 1964 a contract was entered into by the taxpayer for the sale of an area of about 15 acres of the ``Gowan Brae'' farm to Frozen Foods Pty. Ltd. for a price of £2,750 per acre, conditional on the vendor getting rid of the Stanhill Estates interest. (By some error the sale was made out in the names of Ansell and Cowan instead of Cowan alone). This contract was not carried through until after the Stanhill Estates litigation had been determined. It then resulted in the payment to the taxpayer of $100,000 in satisfaction of the price.
Negotiations for the return by Stanhill Estates of the property had been going on since the issue of the writs. Agreement on the moneys to be retained or returned by the taxpayer could not be reached. This appears to have been what the fight was about. In the meantime the delivery of the defences in the actions had been deferred. Then with the delivery of the defences and a counterclaim for specific performance on 15 May 1964, the purchaser tendered the balance of the purchase money owing, together with rates, taxes, interest and costs. The tender was not accepted.
On 9 September 1964 notice to treat was given by the Country Roads Board covering 66 acres or so. It resulted later in the payment of compensation to the taxpayer of a sum amounting to $335,953.
Early in 1966 an option was granted by the taxpayer to a company called Preston Motors Pty. Ltd. for the purchase of 22 acres of the farm, and on 21 March 1967 a contract was entered into for its sale at a price of $130,400.
Completion of these matters had to await the determination of the Stanhill Estates litigation. The action was heard towards the end of 1966 and judgment was given on 18 October establishing the validity of the rescission (
Cowan v. Stanhill Estates Pty. Ltd. (No.2) (1967) V.R. 641). The various disposals to the Country Roads Board, Frozen Foods Pty. Ltd. and Preston Motors Pty. Ltd. were then carried to completion.
At this stage it is appropriate to turn back to the recission of the Stanhill Estates contract. As mentioned earlier it was part of the respondent's submission that the rescission constituted an acquisition of property by the taxpayer for the purpose of profit-making by sale within the first part of sec. 26(a).
The theory relied on for this contention was that after contract and pending conveyance or transfer the vendor is a trustee for the purchaser who is the real owner, and upon rescission the vendor is restored to his position as owner, so that by the rescission he re-acquires the property from the purchaser.
The position however requires a little more in the way of analysis. It is said on high authority that as from the date of a contract,
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which is capable of specific performance, while the vendor remains the owner in law, the estate is considered in equity as belonging to the purchaser, subject to the vendor's lien for his purchase money, and that this is the product of the doctrine of equity which regards that which ought to be done under a binding agreement as actually accomplished (Williams on Vendor and Purchaser, 3rd Edition, Vol.1, p.480-481). The matter has been the subject of much explication. (See Articles - ``The Vendor as Trustee'' 11 A.L.J. 79; and ``Vendor and Purchaser - Damages for Tort by third Party'' 33 A.L.J. 340.) But as I see it, once the vendor lawfully rescinds the contract for the purchaser's breach and the agreement ceases to be enforceable, equity withdraws its recognition of ownership from the purchaser and the vendor is remitted to his former position as full owner of the land (see Williams Ib. Vol.11, p.1019). However, in my view, the vendor's position is restored, not by a passing of property, but by the extinguishment of the rights and interest formerly recognised in the purchaser. The contract being rescinded, the foundation for the recognition ceases to exist. This is all subject to what the contract provides and the conditions of the contract of sale with Stanhill Estates (which can conveniently be studied in the report of Cowan v. Stanhill Estates (No.2) (1967) V.R. at p.642) provided for a special form of rescission to which resort was in fact made. It provided that if the conditions prescribed were fulfilled ``the contract shall thereupon become rescinded'' and certain rights then accrued to the vendor. Whatever the precise sense in which the word ``rescinded'' is used, that meant that the purchaser's right to have the sale carried out came to an end. The vendors were discharged from their obligations in that regard. Prior to that happening, the purchaser had an interest in the land of a kind which may well constitute ``property'', as that word is used in sec. 26(a) of the Act. It could have been ``acquired'' from the purchaser by a third party. But after the rescission the purchaser had no such interest or ``property''. That was, however, because of an extinction of the interest or a destruction of the ``property'' and not by disposition. The vendors' interest was then restored to its former condition, but not by reason of ``property acquired''. In my opinion, for this reason, the rescission could not operate to bring the taxpayer and his co-owner within the first limb of sec. 26(a).There is a second reason for this conclusion. Even if the vendors could be said to have ``acquired property'' by the rescission, it was a form of ``property'' which, once in the hands of the vendors, was no longer a separate vendible form of property. They could sell the land but not the interest they had acquired from the purchaser. That being so there could not be associated with such an ``acquisition'' a ``purpose of profit-making by sale''. Nor could there be a ``sale'' or a ``profit arising from a sale''. For this reason also the first part of sec. 26(a) could not apply to circumstances such as these.
A third reason for the action of the taxpayer in respect of the rescission not bringing him within this part of sec. 26(a) is that if any property were returned to the vendors it was the purchaser's interest in the property as a whole and not two half shares in such an interest. They had sold the property as joint contractors not as tenants in common in equal shares, though it was, of course, as tenants in common in equal shares that they would have made a transfer of the land in fulfilment of the contract. What is said to have been sold by the taxpayer in due course was his own half share and the half share he acquired from Ansell. This was not the ``property acquired'' from the defaulting purchaser.
Finally there is the question of fact as to whether what was done by the taxpayer in respect of the rescission, even if it otherwise attracted the operation of that part of the section, was done ``for the purpose of profit-making by sale''. On the evidence which I have set out, I would be ready to find that it was done for the purpose of re-sale. But a purpose of profit-making by sale is a different matter. Much reliance was placed by the Commissioner on the fact that at the time of delivery of its defences in the action on May 1964 the purchaser has tendered to the taxpayer (who was then solely interested) a sum representing the balance of purchase
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money owing, together with rates, land tax and cost, and it was refused. It was said that this indicated a collateral motive for the rescission. But when it is remembered that this was eight months after the rescission, and that in the meantime the taxpayer had been allowed back into possession of the properties and had sold his home in Flemington for that purpose, and had spent money in restoring the condition of the properties, his refusal to take the bare sum as payable under the contract loses any claim to the significance attributed to it.On this question of fact, I would find that, although the taxpayer and his co-vendor looked to re-sale and hoped for a profit on re-sale, the apparent purpose with which the rescission was made - to get rid of an unsatisfactory purchaser while retaining as much of the moneys received as possible - was, in fact, the actual dominant purpose of the vendors and of the taxpayer considered apart.
For these reasons, I would exclude the fact of rescission by the taxpayer from consideration as the source of ``property acquired for the purpose of profit-making by sale'' within sec.26(a).
Having reached these conclusions as to the character to be assigned to the taxpayer's dealings in 1955 and to his part in the rescission of the contract in June 1963, I have now to give consideration to his action in September 1963 in buying Ansell's half share of the land when he already had a half share of his own. The questions raised are whether, in the light of all the circumstances, this evidences a case, within the first part of sec.26(a), of acquiring property for the purpose of profit-making by sale from the sale of which a profit arose, or a case within the second part of sec.26(a) of carrying on or carrying out a profit-making undertaking from the carrying on or carrying out of which a profit arose. The subsequent disposals of various parts of the land are of course part of the circumstances to be taken into account.
The first arm of this question is one on which there is help to be had from high sources. Apart from that assistance it would appear to me fairly obvious that the first part of sec.26(a) is concerned with a sale of the same property as is acquired for the specified purpose. Since the property that is acquired, in the situation under consideration, is the undivided half share of a tenant in common in land, it is the same half share that has to be the subject of sale. That leaves however a question as to whether a half share is sold when the entirety is sold. In
McClelland v. F.C. of T. 118 C.L.R. 353, Windeyer J. dealt with a similar situation and said at p.359:
``The taxpayer had, by the bounty of the testator, acquired an undivided share in the land... She acquired the other half by purchase. She did this so that she might as owner of the entirety sell it to her advantage. She bought an undivided share. She sold an entirety, Portion Five. The first part of sec.26(a), that is the part quoted above, applies to a transaction whereby a taxpayer sells any property he acquired for the purpose of sale. It applies whether he sells that property in whole or in parts and whether when he sells to one buyer or to several buyers as joint tenants or tenants in common. But as I read it it does not apply when what is sold is essentially different in kind from the thing acquired... She was not selling separate shares. The shares had disappeared into a unity. She sold an entirety.''
On appeal (McClelland v. F.C. of T., 69 ATC 4001) Barwick C.J. agreed with this. At p.4002 he said:
``The respondent did not purchase her brother's interest with a view to its re-sale, and, in my opinion, she did not in any significant sense re-sell it... The profit consisted of the increase in value of the inheritance, the entire interest in the land being much more valuable than the sum of the values of the separate interests in common, though, of course, no longer capable of being regarded as consisting of two parts.''
In the judgment of Kitto J. (with whom Menzies and Owen JJ. agreed) there are passages which appear (though not clearly)
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to confer the same approval. At p.4006 he said -``In the present case what the respondent bought was her brother's half interest in the Rockingham lands... she had no other purpose than that of selling the entirety... The learned Judge rightly held that her purpose was not one of profit-making by sale of the brother's half interest either in Lot 5 or in the whole of the Rockingham land...''
When the matter went on appeal to the Privy Council (70 ATC 4115; 120 C.L.R. 487) the aspect of the first part of sec.26(a) to which attention was directed was that as to the purpose for which the brother's half share was acquired, and the aspect of the identity of the land sold with the property in that share passed without comment (albeit without unfavourable comment) on the view of the learned trial judge (see pp.4118-9). It is of importance to note that the observations quoted were made in a case where what it was sought to bring to tax was the profit on the sale of the entirety of the land. That encountered the difficulty that one half interest was held to have been acquired in circumstances falling outside the first part of sec.26(a). The same situation applies here. But it is put that if the profit from the sale of the whole is not taxable, the profit from the sale of either of the halves is.
In
McGuiness v. F.C. of T., 72 ATC 4023; 46 A.L.J.R. 279, Walsh J. considered the possibility of the first part of sec.26(a) being applicable to the sale within an entirety of a share acquired for the purposes of profit-making by sale. The learned Judge considered that what had been said in McClelland's case did not bind him to hold that as a matter of construction the section would not be applicable (p.4029). He considered that as a matter of mechanics a proportionate part of the sale price could be taken as attributable to the share acquired and a cost could be attributed to it provided sufficient material were made available. But a final decision as to whether the first part of sec.26(a) could be applicable on the basis discussed was never made by the learned Judge, for after the publication of his preliminary reasons the case was settled. The learned Judge parted with the matter by saying (inter alia) -
``It is possible that the parties, after their advisers have perused these reasons, may be able to make an agreement... as to the figure that should be taken to represent the profit realised by the appellant if the first part of sec.26(a) is held to be applicable upon the basis here under discussion... It may of course be argued on behalf of the appellant that the circumstances are such that it is just not possible to ascertain by any means an amount of profit accruing from the sale upon which, on the basis here being considered, sec.26(a) would operate.''
If Walsh J. was not bound by what was said in McClelland's case on this matter, then neither am I bound to come to the conclusion expressed in that case. Nor am I bound by Walsh J.'s tentative view. The position is one which I think I should resolve upon the weight of persuasive authority unless I hold a clear view to the contrary. I do not hold a view that a sale of an entirety is a sale of an undivided half share. For what it is worth and with due respect, my view is to the contrary. I think the owners of two undivided half shares can combine to convey the entirety and therefore can undertake to sell it, but in doing so they do not sell their respective shares or convey them. I therefore hold that the first part of sec.26(a) does not apply to bring to tax profit on the sale of the whole interest in the land or profit on the sale of the undivided half share acquired from Ansell.
That conclusion makes it necessary to turn to the alternative of applying to the buying of Ansell's share the latter part of sec.26(a). This submission was put at the top of the Commissioner's contentions. As its foundation there were linked together the taxpayer's actions in relation to the rescission of the contract, his actions in the buying of Ansell's interest and, his actions in the subsequent disposal of various parts of the farm.
On this subject, too, there is assistance to be had from the high authority of
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McClelland's case.It is clear from all that was said, both in the High Court and in the Privy Council, that the words ``profit-making undertaking or scheme'' import a plan or design, something in the nature of a blue-print, for profit-making, of which the conduct relied upon constitutes an implementation. Furthermore the majority judgment in the Judicial Committee laid it down (p.4120) that such an ``undertaking or scheme'' must be one producing assessable income rather than a capital accretion and ``must - at any rate when the transaction is one of acquisition and re-sale - exhibit features which give it the character of a business deal''. It was held that the purchase of a half interest and its inclusion in the sale of the whole may take on the aspect of being merely a means to an end, and if the end is not profit-making, an undertaking or scheme within the section is not shown.
Applying these tests to the circumstances of the present case, I would, in the first instance eliminate from the structure of any plan or design, the acquisition of the farm in 1955. Having regard to what I have found as to that, I see no link between what was done then and what was done in 1963. I would also eliminate the rescission of the contract in June 1963. My finding as to that was that although done for a purpose of re-sale it was not done for the purpose of profit-making by re-sale, but to get rid of the unsatisfactory purchaser while retaining as much as possible of the moneys already received. I see no link between that and the subsequent acquisition of Ansell's half share except an historical one. Behind the Commissioner's case is no doubt a view that this was all part of a pre-existing design. I do not think it was. I think the rescission was the product of its contemporary situation. Putting those matters aside however it would still be possible to treat the buying out of Ansell's half share and its joining with the taxpayer's half share so as to unite them in his own hands, as an undertaking or scheme of the necessary kind if the purpose were to sell the entirety for more than they together cost. But the contemporary setting is again important. At the time this was done the prospect ahead was for one of a long stretch of litigation, a judgment in due course requiring at best the return of a substantial sum of money, as counsel had advised, and the purchaser in possession in the meantime. Facing this prospect with the taxpayer was a reluctant partner. The immediate need was to take over the subject matter of the litigation. No doubt the taxpayer thought that in the long-run he would come out of it all right and no doubt he hoped for a profit. But this was impossible at the time, and, as it turned out well ahead. The end which dominated his actions at the time was the salvage and preservation of the rights involved in the litigation. I think it is this end which must be regarded as colouring the purpose of the acquisition and not that of profit-making. For these reasons I find that there was no profit-making undertaking or scheme evidenced by the buying of Ansell's share.
I turn then to the next submission of the Commissioner. This was that as from the time in March 1962 when he acquired the Highway Block at Croydon the taxpayer was carrying on the business of a dealer in land and using his various interests in land as capital of that business so that the profits from the sale of parts of the ``Gowan Brae'' farm constituted income in the ordinary sense.
As the majority in the Judicial Committee put it in McClelland's case (supra) at p.4120
``The question to be asked and answered is still whether the facts reveal a mere realisation of capital, albeit in an enterprising way, or whether they justify a finding that the appellant went beyond this and engaged in a trade of dealing in land...''
The submission selects the buying of the Highway Block at Croydon as the beginning of the business alleged. It is necessary now to turn to that transaction bearing in mind that it was done in the name of and by the family taxpayers, and that if it were a dealing in a business of land dealing, it was a business the family taxpayers were carrying on. However, its significance is that the taxpayer was one of this group and admittedly its guiding spirit.
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I turn then to the story of the properties at Croydon.
After the taxpayer and his co-owner had given possession of the ``Gowan Brae'' property and homestead to Stanhill Estates in 1958 and before the taxpayer's return into possession about September 1963, he was residing at Flemington, although still continuing farming operations at Nathalia. Defaults by Stanhill Estates had already required the giving of a notice of rescission in August 1961. But this had been waived or withdrawn after payment or promise of payment. The taxpayer had become interested in acquiring another farm and this time for the benefit of his family as well as himself. His daughters were then aged about 19 and 17 years respectively. After some looking around in various areas he found a farm at Brushy Park North Croydon. The property was a cattle-raising farm of 312 acres which was being run in conjunction with a homestead block of 54 acres a mile or so away on the Maroondah Highway between Croydon and Lilydale. The properties had been offered for sale at auction but had not been sold. The taxpayer made an offer for the homestead block with the idea of securing it first and then buying the farm later. This block (``the Highway Block'') and the house on it was purchased in the names of the family taxpayers by contract of sale dated 2 March 1962 for £15,000. Part of this block was then, subject to acquisition action by the Country Roads Board to widen the highway. The fact of the Country Roads Board's intention to acquire was notified in the contract.
At the time of the purchase the taxpayer informed an officer of the Commonwealth Bank where he kept his personal account that he was buying the land ``as an investment''. At all events that is how the interview was recorded. But it is not certain whether the phrase was his or the bank officer's. Both gave evidence that it would have been used by either in the sense of an outlay of capital for the earning of an income.
Negotiations then proceeded for the purchase of the Brushy Park Farm. It was acquired on 14 November 1962 in the names of the family taxpayers at a price of £56,171.5.0 (£180 per acre) payable by terms over a period of 7 years. At the same time formal notice to treat was given by the Country Roads Board in respect of 3½ acres of the Highway Block. The rest of that block and the Brushy Park farm were thereafter used together to raise beef cattle and as holding paddocks for cattle moving between the saleyards at Newmarket and the Nathalia property.
At the time of the purchase of the Brushy Park farm, Stanhill Estates was again in arrears with the instalments and interest due on the Gowan Brae farm contract, and another notice of rescission was given; but it too was waived or withdrawn. A third notice was given in February 1963 which was also waived or withdrawn. This course of conduct and the communications made by the taxpayer to his bank over the period indicate a concern more with the money position than the resumption of the land in order to turn it over again.
In April 1966 it was decided to sell the Brushy Park property. It was then in fact not yet paid off. On 7 April it was sold to Mr. and Mrs. Erdi for £150,000 payable over 6 months. It was sold with its stock and continued to be used by the purchasers as a farm.
In due course compensation amounting to £10,826 was received for the C.R.B. acquisition of the strip of the Highway Block for the roadway, one payment being made in the year of tax 1966 and the last payment being received in September 1966.
Then the Highway Block (which had been expanded by the purchase of an additional 7 acres to facilitate access) was put on the market and ultimately sold on 13 December 1967 at a price of $96,283 payable over 2 years to Ramset Fasteners (Aust.) Pty. Ltd. for industrial purposes.
In the determination of the question as to whether the facts show merely the realisation of capital assets or the engagement in the trade of dealing in land, it is necessary to have regard to various considerations - to the multiplicity and frequency, or scarcity or infrequency, of the acquisitions of land; to
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the question whether they were acquired for the purpose of re-sale at a profit, or whether, on the other hand, in the absence of such a purpose they were adventured as stock in trade in a business of land dealings; to the use to which they were put after acquisition; to the length of time for which they were held before re-sale; to the reasons for re-sale; and to the extent and nature of the search for a market or for a price. The fact that one or more of the dealings is or are admittedly or inferentially a part of a land trading business may indicate but is not necessarily conclusive of the fact that another or others is of the same character.In respect of acquisitions, the Commissioner pointed to the purchase by the family taxpayers of the Highway Block at Croydon in March 1962; to their purchase of the Brushy Park farm in the same area in November of the same year; to the abortive purchase by the taxpayer with McLean of Jeffrey's land at Tullamarine in May 1963; to their purchase of Mitchell's land in the same area in June 1963; to the rescission by the taxpayer and Ansell of the ``Gowan Brae'' farm contract in June 1963 and to the purchase by the taxpayer of Ansell's share therein in September. These land transactions were of a number and proximity in time that could be significant. I have already expressed the view however that in relation to the ``Gowan Brae'' farm, the rescission of the contract and the purchase of Ansell's share are to be explained by their own circumstances and were not acquisitions for the purpose of profit-making by sale, and although that is not inconsistent with the land to which they related being thereafter devoted to the business of land dealing, it is not inconsistent with the land being merely realised upon as a capital asset appropriate for disposal.
Jeffrey's land was not taken into possession by the taxpayer and McLean when its purchase was negotiated in May 1963 because they had to abandon that transaction when the bank refused to finance both it and the Mitchell transaction, but if the transaction had been completed the land would have been used for the same purpose as Mitchell's land with which it was connected, and Mitchell's land was in fact put to grazing purposes after its purchase in June 1963 and continued thereafter to be used as such without disposal.
The ``Gowan Brae'' land continued to be used by the taxpayer for grazing and farming while its future ownership was uncertain between 1963 and 1966. The Commissioner points to the unprofitable character of the farming operations, as evidenced by the returns made, as indicative of their lack of substance. But in the conditions operating in this period this cannot carry the significance sought to be attached to it. It had become clear to the taxpayer early in that period as a result of the Country Roads Board's plans that the property had no future as a farming proposition. Nevertheless after 1966 (subject to the resumption by the Country Roads Board, and the sales to Frozen Foods Pty. Ltd. and to Preston Motors Pty. Ltd. early in 1967) it continued to be used for grazing, and about half of the original purchase is still so used by the taxpayer.
In these circumstances, I would regard the purchase and use by the taxpayer of Mitchell's property as giving no colour of land dealing to the taxpayer's disposals of the parts of the ``Gowan Brae'' land or to the family taxpayers' transaction with respect to the Croydon lands.
The resumption by the Country Roads Board of a substantial area running through the ``Gowan Brae'' farm may fairly be regarded as something that overcame the property after its original acquisition and displaced its intended use or realization. And this resumption, and the sales to Frozen Foods Pty. Ltd. and Preston Motors Pty. Ltd., were in effect substitutes for the sale to Stanhill Estates which had aborted itself some years before. In these disposals there was lacking the kind of organised marketing that would have been indicative of a land dealing business.
Taking account of the tests I have referred to above, I would conclude that the proper character to be attributed to the disposals of the parcels of the ``Gowan Brae'' land by the taxpayer was that of realisation by him of a
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capital asset which had been originally acquired for farming purposes and then sold, and, by the failure of that sale, had fallen back on his hands at a time when dedication to the original purpose for which it was acquired was no longer a practical proposition. Disposal in parts to anyone concerned to buy was then a reasonable outcome of the situation. Regarded in this light, the taxpayer's activities in respect of the Tullamarine land do not carry the aspect of engaging in a trade of dealing in land.But the taxpayer's part in the dealings of the family group in the Croydon land cannot be left out of account. The Highway Block and the Brushy Park farm were a farming proposition when purchased in 1962 apart from the strip of 3½ acres of the former required by the Country Roads Board for road widening. The farm could not fairly be regarded as a potential development project, unless it were on a very long-term basis, in the light of the fact that it was sold as and is still being used for farming. The existence of an old subdivisional plan never implemented can carry little weight in the face of that fact. The pieces of land were put to use for farming purposes between the time they were purchased in 1962 and the time when the farm was sold as a farm for farming purposes in April 1966 and the block was sold to the company for industrial purposes in December 1967. The returns made for tax purposes, although bringing in also the operations at Nathalia, are, at least consistent with this. The periods of retention are not significantly short. The reason given for the disposal of the farm in April 1966, shortness of ready money and bank pressure in the face of commitments shortly requiring fulfilment with respect to Ansell and in respect of the imminent Court hearing in the Stanhill litigation, and those still being carried in respect of the Mitchell venture and the Brushy Park farm itself, has no inherent improbability about it, and I am not disposed to reject it on general considerations of credit. The sale has about it all the appearances of realising on a farm asset for ready money and not those of carrying out a deal in the course of a land jobbing trade. The reason given for the sale of the Highway Block has some persuasiveness about it. After the Stanhill litigation it was realised that the repayments ordered therein and the costs would impose a heavy burden. The block had been re-zoned from rural to garden industrial without any importuning on the taxpayer's part. After the sale of the farm it was understandable enough to enter into the negotiations which ended in the sale of the block in December 1967.
In the end these matters come to an issue of credibility and, while examining the taxpayer's story carefully, I do not feel disposed to reject it.
In the light of all these considerations I would regard the family taxpayers' purchase, use and disposal of the Croydon land as not indicative of a course of land dealing in the way of trade.
In the end I find that neither the taxpayer in relation to the Tullamarine land nor the family taxpayers in relation to the Croydon land derived profits from a trade of dealing in land.
I also find that the family taxpayers did not acquire either the Highway Block nor the Brushy Park farm with a dominant purpose of profit-making by sale. It is true that in each case a substantial profit was made. In the case of the farm, there was a gain from about $360 an acre to about $480 an acre in 3½ years. Why there should have been an enhancement of this kind with a property bought as a farm and sold as a farm to private individuals and thereafter worked by them as a farm may appear curious to uninitiated; but it does not lead to the conclusion that it was due to a foresight of future development on the part of the original buyers and a purpose on their part of securing advantage from it. Indeed the reason for the enhanced price does not appear. In the case of the Highway Block the initial price of about $555 an acre moved to $3,609 an acre for the 3½ acre strip resumption (which however involved the destruction of the homestead) and to $1,900 an acre for the rest of the 54 acres, in the course of 5½ years. But neither this nor the change in zoning which made the latter price possible requires or justifies the conclusion
ATC 4141
that it was all foreseen and that it coloured the purpose of the original buyers. It does not follow that because the Maroondah Highway was to be widened, development would ensue.In the end the case comes down to one in which substantial profits were made from the purchase of two properties and their sale in due course - in the course of a period as long as 12 years in the case of one and 3½ to 5 years in the case of the other - and it is a question of the inferences that should be drawn in the light of the established tests, when all the explanations are given and all the circumstances are examined. I do not think that inferences should be drawn that mean that the profits are taxable income.
The appeals will therefore be allowed in each case and the assessments remitted with a direction that the taxpayers be re-assessed without including in the assessable income any part of the proceeds of sale or resumption of the land at Tullamarine or any part of the proceeds of sale or resumption of the land at North Croydon.
The appellants' costs are to be taxed and must be paid by the Commissioner.
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