Mount Louisa Grazing Company Pty. Ltd. v. Federal Commissioner of Taxation.
Judges:Dowsett J
Court:
Supreme Court of Queensland
Dowsett J.
The taxpayer was incorporated in August 1960 at the instigation of Mr John Colin Bartlett who at all material times was effectively in control of the company. The evidence which I accept indicates that at the time of incorporation, Mr Bartlett was acting upon the advice of his accountants who had suggested among other things that a series of companies be formed to carry on the different aspects of Mr Bartlett's business activities. These companies included Bartlett Investments Pty. Ltd. which was a non-trading investor in real and personal property, Bartlett Holdings Pty. Ltd., a public company for tax purposes which was the holding company, John Bartlett Constructions Pty. Ltd. which was a building company, Bartlett Estates Pty. Ltd. which was a land developer and Mount Louisa Grazing Company Pty. Ltd., the taxpayer, which it is alleged was incorporated for the purpose of carrying on a grazing business. Mr Bartlett said, and again I accept this evidence, that since his youth, he has maintained an interest in grazing matters although it seems probable that, prior to the incorporation of the taxpayer, his activities in this area were limited.
On 28 September 1960 the taxpayer entered into an agreement for the purchase of portions 73, 74, 50 and 81 in the County of Elphinstone, Parish of Coonambelah, those blocks all being either perpetual leases or, in one case, a special lease. That purchase was effected in the names of Alan Herbert Maiden and Joan Claire Maiden, but it is common ground that the purchase was on behalf of the taxpayer. On 5 January 1962 the taxpayer purchased portion 76, an adjoining portion.
All of this land was in close proximity to the Garbutt Sale Yards and was, it is asserted by Mr Bartlett, ideally suited by location for use as holding yards for cattle. He said in evidence that cattle were often brought long distances to Townsville for sale. The consequence of this was that when the price was down at the sale yards, it was not financially viable to decline the price and return the cattle to the properties whence they came. His idea was that this property could be used as holding yards so that cattle offered for sale at the sale yards for which no appropriate price was offered could be returned to the holding yards to await an increase in the market price. Portion 76 had the additional advantage of containing a cattle dip which was the main dip within the region, and cattle going from Townsville to other areas were regularly dipped there for a fee. The evidence which I accept indicates that the taxpayer has, subsequent to its incorporation, been active in cattle trading and has made substantial amounts therefrom. Mr Bartlett said in evidence that in acquiring portion 76, he had given some thought to the fact that the property might be suitable for residential subdivision at some time in the future, but his principal idea was to add it to the land already held for use in the cattle operation to which I have referred.
By the mid-1960s, the Bartlett group was in financial difficulties, and the operations of the various companies were being closely supervised by persons representing creditors. Realisation of some assets was necessary in order to pay debts, and in those circumstances, part of portion 76 was subdivided. The nature of the subdivision appears from ex. 14. It was decided that a number of blocks should be excised from the road frontage and these sold. A plan of subdivision was drawn up, and all of the allotments so created were sold between August and November of 1965, each of the 15 allotments being sold for £800. The ready realisation of these blocks suggests either a ready market for blocks in the area at that time or alternatively that the asking price was an attractive one. The fact that no further
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subdivision was effected by the taxpayer at that time gives support to the assertion that the land was held for some purpose other than subdivision and sale. I accept Mr Bartlett's account of the reasons for acquisition and the course of dealings with this land by the taxpayer. Mr Maiden's evidence generally supports that of Mr Bartlett.On 2 February 1968 the taxpayer purchased certain land described as resubdivisions 4, 5 and 6 of subdivisions 1 and 2 of portion 68, and portion 18 in the County of Ward Parish of Gilston, containing 267 acres and 10 perches, referred to in the evidence and hereafter in this judgment as the ``Nerang land''. I am satisfied that this land was acquired to be used for cattle fattening activities. I am satisfied also that it was used for that purpose and that when it was sold in August 1971, it was because the taxpayer had decided to abandon that business. I am satisfied that two-thirds to 75 per cent of the subject land was in a flood plain and that the taxpayer at no time had the intention of using the land for any purpose other than cattle fattening. I am satisfied that most of the land was unsuitable for residential development, and I accept Mr Bartlett's evidence concerning the acquisition, use and disposal of this land. Mr Bartlett's evidence is generally supported by the evidence of Mr Earle.
This appeal relates to the 1971-72 tax year. When the taxpayer realised the Townsville land in the second half of 1965, disclosure was made of the proceeds of sale. See ex. 45. There was no challenge made by the Commissioner at that time to the implicit assertion that the sale was a realisation of a capital asset. As has already been mentioned, the Nerang land was sold in August 1971. The fact of realisation was disclosed in the return for the appropriate tax year, 1971-72. The Commissioner again assessed the taxpayer for that year upon the basis that the proceeds were proceeds of the realisation of a capital asset. As appears from ex. 1, an amended assessment was raised on 8 February 1979 for that income tax year. It was common ground before me that the substance of the reassessment depended upon the determination by the Commissioner that the proceeds of sale of the Townsville land and the Nerang land were liable to taxation pursuant to either sec. 25 or 26(a) of the Act. The return for the 1971-72 year showed an operating profit for the year, but this was set off against losses carried forward from 1961 and succeeding years. The year 1970-71 was the first tax year in which a profit was made, a profit of $14,094. The total of accumulated losses was $49,090. Thus the sum of $34,996 was available to be carried forward for the 1971-72 year. This was set off against profits and other income to show a taxable income for that year of $3,936. Of course, the availability of those losses was dependent upon the correctness of the treatment of the net proceeds of sale of the Townsville land as being of a capital nature. Similarly, if the net proceeds of sale of the Nerang land were to be treated as taxable, then those proceeds would also be taxable income for the purposes of the 1971-72 year. A letter of 10 July 1979 from the Deputy Commissioner to Messrs Taafe, Klaas and Power being part of ex. 1 indicates the method of calculation.
A preliminary matter was raised for determination. Mr Hack for the Commissioner asserted that the notice of objection did not appropriately raise the actual issues sought to be determined. He pointed out correctly that the complaint made by the taxpayer was that the Commissioner had disallowed the application of ``carried forward'' losses in reduction of taxable income by reducing the losses carried forward by the amount of the profit notionally derived in respect of the Townsville land and by treating the notional profit from the Nerang land as income. He asserted that the notice of objection did not deal with this procedure. It is true that the notice of objection does not in terms deal with the precise course by which the Commissioner arrived at the amended assessment. However, given the probable state of knowledge of the taxpayer at that time, this is perhaps not surprising. None the less, it seems that the taxpayer made an accurate assessment of the basis of the Commissioner's assertion, his actual thought process being revealed by the subsequent letter of 10 July 1979 to which I have previously referred.
Mr Davies Q.C. for the taxpayer submitted that there is no substance in this point. I am quite sure that this submission is correct, and I am reluctant to favour the Commissioner's submissions on this point with any further consideration because it seems to me to be quite clear that the submissions are incorrect. Mr Davies pointed out that all assessments are in effect assessments of income. The disallowance of losses is no more than a step in
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that process. The real point between the parties at all material times has been the assessability to income tax of profits derived from the sale of the Townsville land and the Nerang land. The notice of objection is appropriate to raise that point. Clearly, the Commissioner, in notifying the basis of amended assessment, assumed that the taxpayer would understand the basis of the reassessment. The absence of particulars indicates as much. It seems not inappropriate that the taxpayer should assume the same knowledge on the part of the Commissioner in responding thereto. In any event, I consider that the notice of objection is adequate to raise the point ventilated before me.If I may say so with respect, the Commissioner's argument proceeded upon the basis that because Mr Bartlett was involved in property development, therefore any land-owning company with which he is involved must own that land for the purpose of property development. I hasten to say that such an assertion was not made in so many terms. Obviously, no party hoping to be taken seriously could make such an assertion. None the less, in the submissions, the cross-examination of witnesses and the presentation of material to me, this assumption was present at all times. Obviously, each taxpayer must be treated separately, and each notice of objection and appeal must be treated upon its own merits. I accept that for all relevant purposes Mr Bartlett was the person in control of the taxpayer, and I also accept that Mr Bartlett is a man who can be taken to have been experienced in property development. This of course does not exclude the possibility that he may have also an interest in grazing and that companies in which he is involved may also have such an interest. It was urged upon me by Mr Hack that I must closely examine the evidence called on behalf of the taxpayer and that for some reason such evidence should prima facie be treated as being of dubious value. Again, Mr Hack did not use those terms, but it was the inference he was inviting me to draw from what he was saying. He submitted that certain remarks in the judgment of Gibbs J. as he then was in
McCormack v. F.C. of T. 79 ATC 4111 at p. 4121; (1978-1979) 143 C.L.R. 284 at p. 301 supported this view. It is true that his Honour there said:
``Although evidence given by a taxpayer as to the purpose with which he acquired property must, for obvious reasons, `be tested most closely, and received with the greatest caution'... I completely agree with Barwick C.J.... that it would be wrong for a judge to regard the evidence of a taxpayer as prima facie unacceptable. The taxpayer's evidence must of course be considered on its merits, in the light of the circumstances of the case, without any prepossession, favourable or unfavourable. If the taxpayer gives evidence that the property in question was not acquired by him for the purpose of profit-making by sale, and that evidence is accepted, he of course succeeds.''
In McCormack, the Court was concerned with a situation in which the taxpayer had not given such evidence. I do not take McCormack as in any way requiring me to apply a different onus to the taxpayer from that which automatically follows from the fact that he bears the probative onus in these proceedings. Of course, to the extent that information is solely within the knowledge of the taxpayer, I accept that there is a need for close scrutiny. The situation is no different from that which regularly arises in other civil litigation where some facts are peculiarly within the knowledge of one party.
When one sets aside the prejudice against the taxpayer which appears to have clouded some of the submissions made on behalf of the Commissioner and looks at the facts, even in the light of Mr Bartlett's experience as a property developer and the fact that the taxpayer has itself made some money from land sales since 1975, it can be readily seen that the Commissioner's position with respect to both the Townsville land and the Nerang land is untenable.
Dealing firstly with the Nerang land, I see no reason whatsoever to doubt the evidence given on behalf of the taxpayer as to the purpose with which that land was acquired. I accept that the disposal of this land was initiated by loss of faith in the pastoral house together with other surrounding circumstances including unseasonal wet weather. Some attempt was made by Mr Hack to demonstrate that there were no cattle or too few cattle to justify the acquisition of the property for the asserted purpose. Cross-examination to this effect appears at p. 32 et seq. of the transcript. Much of that cross-examination assumed that accurate documentation including invoices may
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reasonably be expected still to exist relating to transactions which took place in the early 1970s, notwithstanding the fact that it was not until 1979 that any attack was made by the Commissioner upon the taxpayer's treatment of the proceeds of sale of the Nerang land, and that the appeal has not come on for hearing until 1986. I am happy to accept the evidence of Mr Bartlett in this regard, as I have said. I am therefore satisfied that the property was not acquired for the purpose of resale at a profit and that the profit therefrom is not assessable pursuant to the first limb of sec. 26(a).It is also clear to me that the proceeds of sale of the Nerang land, or the profits therefrom, cannot be properly characterised as income for the purposes of sec. 25. I will discuss this matter later.
Turning to the Townsville land, the position is somewhat more complex, although my final conclusion is again that the Commissioner is in error in seeking to treat the proceeds of sale as income.
I have already indicated that I generally accept the evidence of Mr Bartlett as to the purpose motivating the taxpayer in the acquisition of the property in question. I have closely scrutinised the cross-examination of Mr Bartlett and also the voluminous documentation which has been tendered. There are a few documents which might be taken on one view to support the Commissioner's case, but on another view they do not have this effect. A number of matters have in the final result supported my view of Mr Bartlett's credibility in this respect. It is the Commissioner's case that the Townsville property was acquired with the intention of its being sold at a profit or yielding a profit as part of a profit-making undertaking or scheme. Alternatively, it is said that the Townsville property was subsequently appropriated to such a business. Dealing first with the intention at the time of acquisition, it is not irrelevant that the vehicle chosen for the acquisition was a company not then in the business of property development. Further, the vehicle company has, since acquisition, been involved in pastoral pursuits. Of course, one must not permit a taxpayer to use cosmetic devices to avoid the incidence of income tax. However, it is clear that the taxpayer has carried on this pastoral business and has used the subject property. Obviously, the close proximity of other land holdings vested in other companies in which Mr Bartlett had an interest is apt to raise suspicions about the true intention of the taxpayer. On the other hand, Mr Bartlett is by no means a foolish man, and it is reasonable to assume that he was aware of that difficulty at the time of acquisition. The use of a different vehicle company would not be a particularly subtle way of concealing a profit-making intention. Further, as late as 1969, the taxpayer acknowledged in writing that the property was ``in the path of future growth, hence its value''. See ex. 19.
One would have thought that if the use of the Mt Louisa vehicle was designed to conceal a profit-making intention in the acquisition or in the holding, such a device would have been accompanied by a scrupulous avoidance of any such compromising observation. I should say that Mr Bartlett also conceded before me that at the time of acquisition, he was not unaware of the possibility that development would extend in that direction.
A second aspect of the history of the matter which seems to support the taxpayer's contention is the subdivision of 15 allotments which occurred in 1965 which is really at the heart of the Commissioner's reassessment and to which I have previously referred. Although it seems likely that the excision of those blocks was done in such a way as not to impede any future development of the balance land, the subdivision was itself of a very simple kind and I have little hesitation in accepting that it was motivated by the need to realise funds quickly to pay creditors. The course adopted was designed to maximise the proceeds of realisation at the same time as minimising the costs of such realisation. It seems to me to be unlikely that if portion 76 were being held for long-term development, there would have been such ready acquiescence in the excision of a substantial part of the block's road frontage. On the other hand, the road frontage would be of less importance if the real purpose of the holding were pastoral in nature. Of course, it is the taxpayer's case that it had little or no influence upon the decision to carry out that excision. No doubt that is true. On the other hand, one would expect that there would have been evidence of some attempt to dissuade the creditors from that step if it had been thought to be undesirable in the long-term developmental interests of the company.
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Finally, much attention was paid to a letter which is document 39 in ex. 3, a letter of 15 March 1962 from Mr Bartlett to the Local Authority. The letter related to an application by another company, Beedell Farms and Grazing Pty. Ltd., for approval of a plan of subdivision. This approval had been obtained but, at the time of the letter, the time within which certain steps were to be taken had almost expired. The letter sought an extension of time in respect of the approval and stated, ``We have not yet lodged the survey plan in the Titles Office as it has been necessary for us to withhold publication of this subdivision whilst arrangements were being made for the acquisition of an adjoining property''.
In the second paragraph of the letter, it was pointed out that there had been delays in obtaining contract documents and the wet season had intervened. It was asserted that if the plan were lodged, the Valuer-General would be required to value the property on a subdivided basis, creating a heavy obligation to pay rates for the current year. Documents 49A and B in ex. 3 are said to comprise the plan referred to in the letter of 28 February 1961 which is document 40 in ex. 3. This is also the subdivision referred to in the letter of 15 March 1962, document 39. As much appears from the transcript at pp. 60-62. The subdivision is of portion 72 which was owned by Beedell. Thus, although it might be possible to infer from the letter of 15 March 1962 that the acquisition of an adjoining property was in some way connected with the lodgment of the plan of subdivision, this is simply not substantiated by the facts. The subdivision did not depend in any way upon the acquisition of any adjoining land. Mr Bartlett agreed in cross-examination that the reference to such acquisition was probably a reference to the acquisition of portion 76. There is no doubt that the taxpayer was negotiating to acquire portion 76 in 1961 or early 1962. This has never been in dispute. It does not follow however in any logical sense that portion 76 was therefore being acquired for a purpose akin to the use being made by Beedell of portion 72. It does indicate that Mr Bartlett and therefore the taxpayer were aware of the subdivisional potential of the adjoining land, but that does not necessarily lead to the view that the subject land was also acquired for a similar purpose. There can be no doubt that the approval of a plan of subdivision for adjoining property would influence the value of the subject land and that for that reason the taxpayer might be desirous of restricting public access to knowledge of such a proposed subdivision. The fact still remains, however, that with the exception of the partial subdivision in 1965 for reasons which I have already found, it was not until many years later that any interest was shown in subdivision of portion 76.
The subdivision of the Beedell land was brought about by the termination of the arrangement pursuant to which that company had bought the land so that the fact of the subdivision is not as persuasive as it might otherwise be on the issue of the readiness of the area for subdivision.
Although in 1971 a joint subdivision of portions 72 and 76 was effected involving a small part of portion 76, this does not lead me to the conclusion either that such use was the purpose with which portion 76 was acquired, or that such utilisation was in mind at any relevant earlier time.
The facts of this case raise for consideration the vexing question of the interrelationship between sec. 25 and the two limbs of sec. 26(a) of the Act. I was referred in particular to the decisions of the High Court in
Burnside v. F.C. of T. 77 ATC 4588 at p. 4590; (1977) 138 C.L.R. 23 at p. 27;
Steinberg v. F.C. of T. 73 ATC 4030 and 75 ATC 4221; (1975) 134 C.L.R. 640; and
F.C. of T. v. Whitfords Beach Pty. Ltd. 82 ATC 4031; (1982) 150 C.L.R. 355. In the face of such recent and extensive consideration of the question by the High Court, it is not appropriate for me to look further afield with a view to determining the application of those sections to this problem. However, it is also true to say with respect that there is some diversity of opinion amongst the members of the High Court on this subject. In Steinberg (supra) at 73 ATC p. 4048; C.L.R. p. 671, Mason J., the Justice at first instance, observed with respect to the second part of sec. 26(a) that although
McClelland v. F.C. of T. 70 ATC 4115; (1970) 120 C.L.R. 487 had established that such provision had no application to the mere realisation of a capital asset albeit in an enterprising way, none the less the second limb might apply where what was involved was more than a mere realisation of a capital asset, having rather the characteristics of a ``business deal''.
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At 75 ATC p. 4228; C.L.R. p. 687, Barwick C.J. discussed in great detail the operation of the second limb of sec. 26(a). In particular the learned Chief Justice said:
``The concept underlying the subsection is that in an Act confined to the taxation of income there are some circumstances in which what are isolated and not repetitive transactions, which in other circumstances would yield a capital gain, can properly be regarded as producing income. One such circumstance is the acquisition of property by the taxpayer with the purpose of its resale at a profit in what is in truth a commercial dealing: that is the first limb of the section. The second limb, in my opinion, is founded upon the same notion but provides for the case where the property acquired is not itself the subject of resale but is intended at the time it is acquired to be the vehicle for making a capital gain, again in the course of an isolated or single though perhaps complex transaction in the nature of a commercial dealing. For there to be a scheme there must be a plan: it must be the taxpayer's plan and it must exist, in my opinion, at the time of the acquisition of the property: indeed, that acquisition, in my opinion, must be itself part of the scheme and the property acquired the intended vehicle for carrying the scheme into execution. Whilst it need not be fully conceived in all its details at the time of acquisition it must exist as a scheme which in principle embraces all the details yet to be worked out. It must, of course, be a profit-making scheme, that is to say, a scheme to make a capital profit, one which would not fall within sec. 25.''
Gibbs J. as he then was at 75 ATC p. 4234; C.L.R. p. 699 said of the second limb:
``A profit-making scheme within sec. 26(a) is a plan, design or programme of action devised and put into effect for the purpose of making a profit. It must be a scheme carried out by the taxpayer himself or on his behalf. It appears that it should - at least where the transaction is one of acquisition and resale - exhibit features which give it the character of a business deal. The mere realization of a capital asset, albeit in an enterprising way, would not amount to the carrying out of a profit-making scheme.''
His Honour otherwise agreed with Stephen J. on this point. At 75 ATC p. 4242 et seq.; C.L.R. p. 714 et seq. Stephen J. said of the second limb:
``It is true that an undertaking or scheme must involve a programme or plan of action... it presupposes, as Windeyer J. has said, activities which are co-ordinated by plan and purpose... However, as emerges from the judgment of Windeyer J. in Buckland... it may involve no more than a settled purpose on the part of those concerned `to turn their purchase to profitable account as best they could when they got possession, depending on how the undertaking then developed'... although it must necessarily have as its object the making of a profit... It is clear... that a venture involving an acquisition of property with a view to `any profitable dealing with the property', it being proposed that advantage be taken of whichever of a large number of possible modes of future profitable disposal happens to prove most expedient, may constitute a scheme, despite the absence of any particular planned mode of dealing.''
In Burnside (supra), Barwick C.J. at ATC p. 4590; C.L.R. p. 27 reasserted the view adopted by him in Steinberg (supra). Mason J. (with whom Stephen J. agreed on this point) disposed of the application of the second limb of sec. 26(a) in that case by virtue of the fact that the trial Judge had found that there was no intention to resell at a profit at the time of acquisition of the shares in question. As the Commissioner's claim that the profit-making undertaking or scheme lay in the acquisition of shares and their sale at a profit, the finding of fact disposing of the first limb of sec. 26(a) also disposed of the Commissioner's case under the second limb. Jacobs J. apparently agreed in this view at ATC p. 4597; C.L.R. p. 38 as did Aickin J. at ATC p. 4603; C.L.R. p. 49. At ATC p. 4603; C.L.R. p. 50, his Honour made it clear that the second limb of sec. 26(a) would only apply where the profits derived were on income account rather than capital.
Finally I turn to Whitfords Beach (supra). At ATC p. 4037; C.L.R. pp. 366-367, Gibbs C.J. observed that:
``Not without some doubt I have therefore reached the conclusion that although the provisions of sec. 26(a), if given full effect,
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would overlap those of sec. 25, the second limb of sec. 26(a) applies only to `profits not attributable to gross income that has already been captured by sec. 25'...''
His Honour continued:
``It is implicit in what I have said that I consider that the second limb of sec. 26(a) includes profits which would not otherwise have fallen within sec. 25, because they could not be described as income in the ordinary sense... However, I should make it clear that I regard it as established that profit yielded by the mere realization of a capital asset not acquired for the purpose of profit-making by sale would not be either assessable income within sec. 25(1) or the profit arising from the carrying on or carrying out of a profit-making undertaking or scheme within sec. 26(a)... If the second limb of sec. 26(a) had the effect of including such profits in assessable income, the first limb would be entirely nugatory.
It is clear that the first limb of sec. 26(a) has no application to the present case. As I said in Steinberg `... to satisfy the first limb of sec. 26(a), it is necessary that the property, whose sale yielded a profit... '.''
His Honour went on to find that the profits in question were taxable pursuant to sec. 25.
Mason J. at ATC p. 4045 et seq.; C.L.R. p. 381 et seq. observed as follows:
``Section 26(a) does not narrow the circumstances in which entire or isolated transactions generate income. In deciding that the first limb speaks of a dominant purpose the Court has reflected the condition according to which a profit made on the sale of property would ordinarily yield income - it is the existence of the purpose of profit-making by sale, the dominant purpose, which is critical to the character of the profit as income under the general law and under sec. 26(a). The second limb does not speak of purpose. No doubt the expression `profit-making' as applied to `undertaking or scheme' looks to the intention or purpose of profit-making. If the second limb looks to dominant purpose, it is to the dominant purpose of `profit-making', rather than the dominant purpose of `profit-making by sale'...
There will be cases in which property will be acquired for the purpose of profit-making otherwise than by sale. Then so long as the acquisition is an element in a profit-making undertaking or scheme the resultant profit will be caught by the second limb, even though the undertaking or scheme lacks the repetitive or recurrent characteristics that are regarded as the hallmark of business activity. There is a fruitful field for the operation of the second limb in cases where there is a lack of identity between the property acquired and the property sold. Take for example the acquisition of property by a company with the expectation on the part of the company and its shareholders that the property will sharply rise in value and with the intention on their part that the increase in value will be realized either by selling the property at an increased price or by selling the shares in the company at a price which will reflect the increased value of the property acquired. The profit derived from the sale of the shares will escape the first limb, but why should it escape the second limb?
...
I am still inclined to think that... the second limb of sec. 26(a) applies only to `profits not attributable to gross income that has already been captured by sec. 25'...
... It is possible that the second limb applies when the taxpayer's activities amount to more than the mere realisation of an asset but do not constitute the carrying on of a business because they lack the characteristics of repetition or recurrence...
If the taxpayer's activities do amount to the carrying on of a business then sec. 25(1) will certainly apply. It was not intended that the second limb should apply to cases in which the taxpayer is carrying on a business because this would give the second limb a very extensive operation at the expense of sec. 25(1).
The principal, if not the essential, question under the second limb of sec. 26(a), as under sec. 25(1), is whether more is involved than the mere realization of an asset. As Deane J. noted in his dissenting judgment in the Federal Court, we must not overlook the importance and the scope of the word `mere'. To bring this case within
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the second limb the Commissioner does not need to show that the respondent was carrying on a business. As we have seen, it is enough to answer the statutory description that there was a profit-making undertaking or scheme which exhibited the characteristics of a business deal, even though it did not amount to the carrying on of a business. If what has happened amounted to no more than the mere realisation of an asset then it was not a profit-making undertaking or scheme.''
Murphy J. at ATC p. 4048; C.L.R. p. 386 said:
``The land development scheme falls easily within the conception of a profit-making undertaking or scheme. The development involved not only subdivision, but planning and building of roads and other services, as well as other activities involved in modern land development schemes, and it was undertaken for profit-making. This is not a borderline case. It is altogether different from, for example, simple realisation of a large allotment by subdivision into several smaller blocks. The profit therefore comes within sec. 26(a) as profit from a profit-making undertaking or scheme.''
To similar effect is the passage from the judgment of Wilson J. at ATC p. 4054; C.L.R. p. 395 commencing with the words, ``There is authority for the proposition...''. His Honour was of the view that the case fell fairly within the provisions of sec. 25.
It is with respect difficult to spell out from their Honours' judgments clear principles governing either the interrelationship between sec. 25 and 26(a) or between the two limbs of sec. 26(a). There seems to be some support for the proposition that income caught by sec. 25 will not also be within sec. 26(a). There is some authority for the proposition that whereas to be within sec. 25 it may be necessary to show that there was the carrying on of a business, the second limb of sec. 26(a) will not require this to be shown. However, the mere realisation of an asset will not be assessable under either sec. 25 or the second limb of sec. 26(a) if it be a mere realisation. For the purposes of the present case at least, the applicability or otherwise of the first limb of sec. 26(a) is not difficult to determine, being satisfied as I am that the dominant purpose in the acquisition was not resale at a profit.
In so far as the Commissioner sought to justify the amended assessment pursuant to sec. 25, it was asserted that the taxpayer was in the business of subdivision from an early time. In particular reference was made to documents including ex. 31 (minutes of a meeting of 19 June 1962) and ex. 38 (minutes of a meeting of 5 February 1964). It is true that the former minutes ex. 31 refer to a plan of survey of ``subs. 1 to 15 of Portion 50''. Mr Bartlett was unable to explain this but said that he recalled some discussion about the subdivision of portion 50. He was of the opinion that nothing had ever happened concerning the proposal. Nobody has suggested before me that any such plan was ever lodged in the Titles Office. There was some suggestion in evidence that the reference related to the subdivision of portion 76 which is the subject of the appeal. However that seemed also unlikely in view of the time frame. There was no suggestion that the plan of subdivision of portion 76 had been executed as early as 1962.
As to the minutes contained in ex. 38 there is a reference to a plan of subdivision concerning land in Ross River Road sealed on 12 March 1963. Mr Bartlett could not remember the taxpayer ever owning land in Ross River Road. It seems likely to me that this reference is an error, referring to a plan executed by another company in the Bartlett group.
Although these references in the minutes are in some respects unexplained, I consider that they are too vague to justify me in taking them as in any way undermining the credibility of Mr Bartlett whom I otherwise accept, particularly having regard to the lapse of time since the events in question.
By 1972, the company was entering the area of subdivisional activity. Since 1975, amounts have been earned in this area and have been liable to income tax. However, I am satisfied that there was no such business prior to 1972. Thus I am of the view that the realisation of the Townsville land was the realisation of a capital asset. A simple but effective method was adopted to excise part of that land and to subdivide it. This activity does not seem to me to have the so-called badges of business sufficient to make it anything other than the realisation of a capital asset in a favourable way.
As to the Southport land, as I have said, I am satisfied that it was a sale in globo of land
ATC 4942
acquired for pastoral purposes. It does not seem to me that such a realisation can in any way be characterised as producing income within the usual meaning of that term, nor do I think that the land was sold as part of any business conducted by the taxpayer. In those circumstances, neither the proceeds of the Townsville sale nor the Nerang sale should properly be characterised as income pursuant to sec. 25.As to sec. 26(a), as I have said, I am satisfied that neither property was acquired for the purpose of resale at a profit. It therefore remains only to determine whether or not any profit was derived from a profit-making undertaking or scheme. It is difficult to identify the profit-making undertaking or scheme to which the Commissioner points. As to the Nerang land, as in some of the earlier cases referred to above, once the finding is made that there was no intention to resell at a profit at the time of acquisition, there is little room for the operation of the second limb of sec. 26(a). It is not suggested that there was any development proposed for the land other than perhaps pasture-improvement. I am unable to discern any profit-making undertaking or scheme in respect of that land.
As to the Townsville land, again, any profit-making undertaking or scheme involving an intention of resale at the time of acquisition is excluded by my finding. It is theoretically arguable that the subdivision which was carried out in 1965 was itself such a profit-making undertaking or scheme. However, the cases make it clear that the second limb of sec. 26(a) is not designed to render liable to income tax the mere realisation of a capital asset in a favourable way. See especially Mason J. at ATC pp. 4046-4047; C.L.R. pp. 383-384 in Whitfords Beach (supra). I can see nothing about that particular transaction to characterise it as a business dealing rather than the realisation of an asset, and I so find.
In the circumstances the appeal must be allowed, the amended return should be varied so that the taxable income for the year is the sum shown in the original assessment namely $3,936 and the tax assessed is $1,476. I will hear submissions as to other orders.
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