N.F. Williams v. Federal Commissioner of Taxation.

Judges:
Stephen J

Court:
High Court

Judgment date: Judgment handed down 22 May 1972.

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Stephen J.: The appellant, Mrs. N.F. Williams, returned her taxable income for the year ended 30 June 1970, as somewhat in excess of $3,500 and was assessed accordingly in March 1971. In May 1971, the Commissioner issued a Notice of Amended Assessment by which he included in her taxable income an amount of $65,734, described as ``Profit on Sale of Land'', and amended her assessment to tax accordingly. It is against this amended assessment that Mrs. Williams now appeals.

Mrs. Williams received, in the relevant income year, $72,400 as her share of the net proceeds of the sale of land at Dianella, a suburb of Perth, of which she was one of three tenants-in-common in equal shares.

The history of this land, so far as presently relevant, begins in 1959. In that year Mrs. Williams' husband was advised by Mr. Gordon Campbell, the senior partner of a leading Perth firm of estate agents of which Mr. Williams was then a junior partner, that the land was for sale and he strongly recommended its purchase. Acting on this recommendation, Mr. Williams, together with Mr. Gordon Campbell's son, Bruce Campbell, also a junior partner in that firm of estate agents, and a Mr. Scahill, the son of a close friend of Mr. Gordon Campbell, purchased the land, comprising two lots having a total area of about ten acres, for $4,000. They bought as tenants-in-common in equal shares and Mr. Williams contributed one-third of the purchase price. Mr. Scahill was then, and remained for some years after, a stranger to Mr. Williams.

The land was then covered with dense scrub, incapable of use for agriculture and so inaccessible, despite its close proximity to the city of Perth, that Mr. Williams did not attempt to inspect it but was content to view it from some high ground two miles away in a suburb known as Mt. Yokine, an outer suburb developed post-war which was at the then extremity of suburban development. The land was, to Mr. Williams' knowledge, zoned as urban land at that time.

After purchasing the land nothing further was done with it for some years; indeed it was not until some ten years later, in 1968 and 1969, after suburban development had reached it, that it was cleared and sub-divided and lots were sold by auction. However, in 1962, Mr. Williams conferred with his accountant and as a result of advice received, he decided to transfer to his wife, the appellant, by way of gift his interest in the land. He informed his partner and co-owner, Mr. Bruce Campbell, of his intention and the up-shot was that late in 1962 both he and Campbell transferred their interest in the land to their respective wives by an instrument of transfer dated 18 October 1962. The remaining co-owner, Mr. Scahill, retained his one-third interest in the land. This gift to Mrs. Williams was in no sense solicited or procured by her; she welcomed it because she regarded it as providing an

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ATC 4071

opportunity of acquiring for herself an asset which she could ultimately convert into some income-earning form, thereby providing her, for the first time, with an independent income of her own.

Following upon this gift to Mrs. Williams, rates on the land continued for some years to be paid, as to one-third, by Mr. Williams and Mrs. Williams took little interest in the land. She first saw it some time after the making of the gift when she and her husband went as near to the land as they could and obtained a general view of an area of bush.

During the ensuing six or seven years, suburban land prices in Perth rose steeply and in 1968 her husband advised Mrs. Williams that it would be a good time to sell the land.

Mrs. Williams left all the arrangements for sale to her husband. A difficulty arose at the outset due to the fact that whereas Mrs. Williams and Mrs. Campbell were desirous of selling Mr. Scahill did not wish to do so. A meeting took place early in 1969 between Mr. Scahill and the husbands of the two other co-owners, in which immediate subdivision was resolved upon and in which Mr. Scahill's tax situation if the land was to be sold was referred to. Apparently he anticipated that he would be assessed to tax on any proceeds of sale, whereas it was thought that the other two co-owners, Mrs. Williams and Mrs. Campbell, would not be liable to tax on proceeds of sale. This was, it seems, the reason for the divergent views as to the desirability of selling. A means was found of giving effect to the wishes of each of the co-owners; the land was sub-divided into 35 lots and, of these, 27 lots were offered for sale by auction late in 1969 and were either sold at the auction or shortly afterwards, the vendors being the three co-owners selling as tenants-in-common. The result of these sales was that Mrs. Williams and Mrs Campbell each received $72,400; neither she nor Mrs. Campbell retained any beneficial interest in the remaining eight lots, to which Mr. Scahill became absolutely entitled. Mr. Scahill received a much smaller sum out of the total proceeds of sale and the evidence suggests that this outcome was in accordance with his wish, in effect, to spread the sale of his interest in the land over a period of years so as to lessen the impact of tax, which he anticipated he would be required to pay on proceeds of sale received by him.

The question is whether Mrs. Williams' assessable income for the 1970 year of income includes proceeds of sale of this land. It is common ground that the only relevant sections of the taxing legislation are secs. 25(1)(a) and 26(a); the Commissioner has assessed upon the footing that the net proceeds of sale received by Mrs. Williams, $72,400, less the value of the gift to Mrs. Williams of her husband's interest in the land, valued at $6,666 according to the figure returned by Mr. Williams and accepted by the Commissioner for purposes of Commonwealth Gift Duty in 1962, is assessable income under one or other of these sections.

I have concluded that the Commissioner was in error in assessing Mrs. Williams to tax on any part of the proceeds of sale of the land.

Those proceeds were not, I think, assessable under sec. 25(1)(a) as ``income according to ordinary usages and concepts'',
Colonial Mutual Life Assurance Society Limited v. F.C. of T. (1946) 73 C.L.R. 604 at 615. The Lord Justice Clerk's formulation, in
Californian Copper Syndicate v. Harris (1904) 5 Tax Cas. 159 at p.166; of the relevant question to be asked in determining whether a receipt is of this character.

``Is the sum of gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operation of business in carrying out a scheme for profit-making?''

has very recently been described by a majority of their Lordships in
McClelland v. F.C. of T. 70 ATC 4115 at p.4120; 120 C.L.R. 487 as clearly stating the governing principle.

In applying that principle to particular facts, the circumstance that the taxpayer, in going about the task of realisation of his asset, does so

``systematically and in a business-like way to obtain the greatest sum of money it will

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ATC 4072

produce does not, in my opinion, make the proceeds either profit or income for the purposes of the Act''

per Barwick C.J. in
F.C. of T. v. McClelland 69 ATC 4001 at p.4118; 118 C.L.R. 353, and see
Scottish Australian Mining Co. Ltd. v. F.C. of T. (1950), 81 C.L.R. 188, at pp.195-197. The proceeds of a ``mere realisation or change of investment or from an enhancement of capital are not income nor assessable to income tax'' -
Ruhamah Property Co. v. F.C. of T. (1928), 41 C.L.R. 148, at p.151.

Looking at the facts of this case, I conclude that the amount now sought to be included in Mrs. Williams' assessable income was not other than a receipt resulting from a mere realisation of an asset and was not income according to ordinary concepts.

Mrs. Williams accepted this unsolicited gift from her husband in 1962, saw the land once only soon after the gift was made and did not thereafter interest herself in it in any way for some years; during this period she neither met nor communicated with her co-owner, Scahill, and did not discuss the land with the other co-owner, her husband's partner, Campbell.

Then in 1968, on the suggestion of her husband, she decided that it would be an appropriate time to sell the land, something which she had always contemplated she would do when ``it was a prudent time to sell'', meaning a time when the market was favourable because the price had risen. She formed the view that 1968 was such a time and did so very largely as a result of the views of her husband whom she regarded, no doubt correctly, as having very well informed views on the matter. He was an active and experienced estate agent and had concluded that the phenomenal rise in land values in Perth had, by 1968, reached a plateau from which a decline appeared likely.

She left to her husband all the details of the sale, agreeing to a sale by auction after sub-division, but taking no part whatever in this process. Her husband acted for her in this and discussed a sale with the husband of Mrs. Campbell who agreed to it; Mr. Scahill, however, for reasons already stated, did not favour an immediate sale of the whole of the land. The outcome was that it was agreed between Mr. Scahill and the husbands of the two co-owners that the land should be sub-divided, and the greater part of it sold by auction.

The proceeds of sale were to be distributed between the three co-owners; it is not clear on the evidence whether this was to be as a result of a notional partition of the land, with appropriation of specific lots or the proceeds of sale of those lots to the respective co-owners, or whether there would simply be a division of the total net proceeds between them so that Mrs. Williams and Mrs. Campbell would, in effect, receive the fruits of a realisation of the whole of their interests in the land while Mr. Scahill would receive a smaller share of the proceeds of sale but would also become solely entitled to the eight remaining lots reserved from sale.

Whatever was the precise method adopted, the result was that a total of twenty-seven blocks were sold late in 1969 and, after defraying the costs of sub-division, including the cost of extensive works required to be carried out to satisfy the conditions subject to which planning permission was obtained, Mrs. Williams received $72,400 and ceased to have any further interest in the remaining unsold lots.

I discern nothing in the acts of Mrs. Williams, or in those of her husband acting on her behalf, which would suffice to characterise her dealing with her interest in the land as an adventure in the nature of trade, rather than as ``its realisation in an enterprising way so as to secure the best price'', McClelland v. F.C. of T. 70 ATC 4115 at p.4119; 120 C.L.R. 487. Her activities, and those of her husband on her behalf, amounted to no more than the retention of her interest in the land for some six years; the subsequent subdivision of the land, involving the necessary compliance with the Town Planning Board's requirements as to street construction, water reticulation and the setting aside of portion for a public recreation reserve, and its ultimate sale. The latter was complicated by the fact that Mrs. Williams was only one of three co-owners thus giving rise to the need for agreement

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ATC 4073

between them as to the mode and timing of realisation; but the reconciliation of what they felt to be their differing interests was no more than the inevitable consequence of co-ownership. It does not of itself appear to me in any significant way to alter the character of the transaction.

It was said on behalf of the Commissioner that regard should be had not only to events from and after the making of the gift to Mrs. Williams but also to antecedent events; to the circumstances of her husband's acquisition of his interest in the land, his purpose at the time of acquisition and his action in making a gift of his interest to his wife. In addition, what was said to be the purpose of the other two original co-owners was relied upon by the Commissioner.

This approach was said to be called for because Mrs. Williams had become a member of a profit-making syndicate. This is not in accord with the facts; all that her husband gave her was an interest in real property. There is no evidence to suggest that anything in the nature of a partnership existed between the three original co-owners; there is, on the other hand, clear evidence that all that Mrs. Williams received from her husband was a transfer of his estate as a tenant-in-common in the land, that and no more. She acquired no share in any land dealing partnership and her interest in the land was in no way subjected to the terms of any agreement to which it might be suggested that the original co-owners were parties. In those circumstances, I see no justification in seeking either to transmit to Mrs. Williams any tax consequences said to flow from any purpose which her husband or the other two original co-owners might have possessed, or otherwise to affect the liability to tax of her proceeds of sale by reason of the prior history of dealing in the land in which she acquired an interest by gift from her husband.

I thus regard as irrelevant to the question of Mrs. Williams' liability to tax under sec. 25(1)(a) Mr. Williams' purpose when he originally acquired his interest in the land or the purpose which it is said I can properly infer to have been in the minds of each of the other co-owners when the land was purchased in 1959.

In
Clowes v. F.C. of T. (1954) 91 C.L.R. 209 Dixon C.J., dealing with the second limb of sec. 26(a), stated, at p.217, that there must be found to be an undertaking or scheme carried on or carried out by or on behalf of the taxpayer himself; he referred to the use in that sub-section of the phrase ``by the taxpayer''. Where sec. 25(1)(a) is in question and something in the nature of an adventure in trade is looked for as producing a taxable consequence, it must, I think, equally be the taxpayer's adventuring that is relied upon, not that of some predecessor in title to property the sale of which by the taxpayer produces the receipt which is said to be assessable income in his hands. In
Official Receiver v. F.C. of T. (Fox's case) (1956) 96 C.L.R. 370 at 384, it was emphasised that in seeking to compute a gain or profit by the official receiver it must be recognised that he begins ab initio with the assets that come to his hands and it is the effect, upon the value of assets in his hands, of his activities alone, and not those of the deceased debtor, that determines whether there has been any gain or profit; moreover the only relevant profit-making undertaking or scheme must be one pursued by the taxpayer, the official receiver, and not by the deceased debtor; at p.387. The same considerations apply, I think, where sec. 25(1)(a) is in question: it is Mrs. Williams' actions that are material and not the acts or purpose of the original co-owners.

Lest I am wrong in this view, I should state shortly what are my findings of fact concerning Mr. Williams and the other two original co-owners. I find that Mr. Williams acquired his interest in the land in the belief that it would enhance in value with the passing of time; not merely, as was urged on behalf of the taxpayer, in the sense that with inflation its money value would increase while its value in terms of purchasing power would remain constant, but in the sense of an increase in value in real terms. His intention was that the land should be retained in its virgin state for an indefinite period in the future and be ultimately realised by sale at an enhanced value; he was satisfied that as a tenant-in-common he could exercise independent control of his interest in the land and do with it as he saw fit. He had no intention of putting the land to any use

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ATC 4074

himself and regarded his interest in it as no more than an asset to hold and ultimately to realise at a profit by sale. I find that no scheme for realisation of the land was devised by him before he disposed of his interest in it to his wife in 1962 and that at the time of purchase and for some time afterwards one of his co-owners, Scahill, was a stranger to him.

As to the other two co-owners, I infer from the nature of the land and the circumstances of acquisition that they too acquired their interests with a purpose of ultimate re-sale at a price which would result in a profit in real terms. There is no evidence to suggest that either of them at any time prior to 1968 formulated any scheme for the realisation or development of the land.

In concluding that the proceeds of sale received by Mrs. Williams were not income according to ordinary usage and concepts, I have not specifically relied upon the fact that only one isolated transaction is in question; however, this fact, together with the circumstance that Mrs. Williams acquired her interest in the land by gift from her husband, go to make up the totality of matters which are to be considered in determining, as I have, that there was here no more than a mere realisation of an asset by the taxpayer.

I turn now to sec. 26(a) of the Act. If, in cases in which profits on the sale of land are in question, certain observations of the majority of their Lordships in McClelland v. F.C. of T. 70 ATC 4115; 120 C.L.R. 487, apply to both limbs of sec. 26(a) and not to the second limb only, no separate consideration of each limb is called for in view of the conclusions at which I have arrived concerning assessability under sec. 25(1)(a). However, I do not so understand that decision and will state shortly my reasons.

Before the Judicial Committee the respondent submitted, in the alternative to arguments founded on sec. 26(a), that the taxpayer's profit was income according to ordinary concepts because it arose from an adventure in the nature of trade and was accordingly assessable under sec. 25(1)(a). The majority of their Lordships, having earlier concluded that both limbs of sec. 26(a) were inapplicable, said of the argument based upon sec. 25(1)(a) that it introduced no new element into the problem and that (70 ATC 4115, at p.4120) -

``... the same criteria have to be applied; 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 albeit on one occasion only. To this question their Lordships think that, as in the case of the question arising under sec. 26(a) the answer should be in the negative.''

As I read their Lordships' judgment, the foregoing is directed only to the second limb of sec. 26(a) and not to both limbs. It was in disposing of the respondent's contention founded upon the second limb that their Lordships had earlier spoken of a realisation of land in an enterprising way as not rendering the resultant profit assessable under the second limb. It is certainly to their consideration of the second limb that reference is made in the immediately succeeding reference to sec. 26(a), where it is said that the sub-section is subject to their Lordships' ``already stated'' view that something in the nature of an operation of business must be implied as a condition of its operation. Their Lordships had said earlier, at p.4120, in dealing with the second limb, that only an undertaking or scheme which exhibits features giving it the character of a business deal falls within the limb.

If the foregoing be correct it follows that my conclusions concerning sec. 25(1)(a) dispose also of the Commissioner's contention that the second limb of sec. 26(a) renders assessable the proceeds of sale; because nothing in the nature of a business transaction was involved in Mrs. Williams' acquisition and subsequent sale of her interest in the land, the second limb of sec. 26(a) is inapplicable. This view accords with observations of the Chief Justice in
White v. F.C. of T. (1968) 120 C.L.R. 191 at p.217 and in
Eisner v. F.C. of T. 71 ATC 4022; 45 A.L.J.R. 110 Walsh J. adopted a

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like approach in the case of a profit-yielding transaction involving purchase and subsequent re-sale of land, concluding that it did not attract the second limb of sec. 26(a), and saying (at p.4034) -

``I do not think that the acquisition and the sale of the land `had the character of a business deal' or constituted `an adventure in the nature of trade'.''

The Commissioner also relied upon the first limb of sec. 26(a), and in view of my understanding that their Lordships' above remarks in McClelland's case are limited to the second limb, it is necessary to consider separately the respondent's submission on the first limb. It was contended that there could be a relevant acquisition by a taxpayer albeit as donee of a gift, that such an acquisition could be one having associated with it the necessary purpose of profit-making by sale and that in the present case there was such an acquisition from which a profit had arisen. Whatever may be the situation where a gift is successfully solicited by a donee who at the time of solicitation has the relevant purpose, I am satisfied in the present case that it cannot be said of Mrs. Williams that she acquired her husband's interest in the land for the purpose of profit-making by sale. To so describe the circumstance where a wife is presented by her husband with the gift of an asset appears to me to be to disregard the words of the sub-section; they call for a purpose possessed by the tax-payer no later than the time of acquisition and which to some degree at least accounts for his acquisition. This concept is, I think, implicit in the phrase used by Taylor and Owen JJ. in White v. F.C. of T. (1968), 120 C.L.R. 191, at p.218, when in their joint judgment, they referred to the purpose of the taxpayer in purchasing the land there in question. Earlier in
Evans v. D.F.C. of T. (1933), 49 C.L.R. 480, in their joint judgment, Rich, Dixon and Evatt JJ. said of the predecessor of sec. 26(a) that the purpose of which it spoke was the dominant purpose activating the acquisition of the relevant assets.

In F.C. of T. v. McClelland (1967), 118 C.L.R. 353, at p.359, Windeyer J., in discussing the application of the first limb of sec. 26(a) to an interest in land inherited by the taxpayer, said, after setting out the terms of that first limb -

``Was there such a profit here? I think there was not. The taxpayer had, by the bounty of the testator, acquired an undivided share in the land. This was given to her. It was not acquired by her for the purpose of profit-making.''

In the Privy Council the majority (70 ATC 4115 at p.4118; 120 C.L.R. 487) referred with approval to what had been said by Windeyer J. on this aspect, quoting portion of the passage set out above and said at p.4119, that -

``... it is not inaccurate to describe sister and brother as acquiring the land through the bounty of the testator. On that footing it would be quite inappropriate to say of the appellant that she acquired land through the bounty of the testator `for the purpose of profit-making by sale'.''

As I read what was said in the dissenting judgment nothing in it is opposed to the foregoing.

It follows, I think, that there was here no acquisition by Mrs. Williams which can be said to have been an acquisition for the purpose of profit-making by sale. This is sufficient to dispose of the respondent's argument based on the first limb of sec. 26(a). It is therefore unnecessary to consider a further submission urged on behalf of the appellant, namely that where land is acquired by way of gift, whether testamentary or inter vivos, there can be no profit in the sense referred to in the first limb of sec. 26(a). Support for that proposition was sought in what was said by the Chief Justice in F.C. of T. v. McClelland 69 ATC 4001 at p.4002; 118 C.L.R. 353, where it was said of an inheritance that a profit in the relevant sense must represent a surplus over cost and an inheritance involves no sum of money as a cost.

Since, in my opinion, the taxpayer's appeal succeeds, it is unnecessary for me to express any views upon the correctness of the basis adopted by the Commissioner in calculating the amount of his amended assessment.

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I set the amended assessment aside and direct the Commissioner to re-assess the tax payable by the taxpayer without including in her assessable income any part of the proceeds of sale of the land at Dianella.

The Commissioner will pay the taxpayer's costs.