McFarlane v. Federal Commissioner of Taxation.

Judges:
Lucas J

Court:
Supreme Court of Queensland

Judgment date: Judgment handed down 12 June 1981.

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Lucas J.

I have before me two series of appeals against assessments to income tax which were heard together. The appellants are Clement Lloyd Keyte and Kevin John McFarlane. Keyte's six appeals relate to the financial years ended 30 June 1970 to 30 June 1975. McFarlane's appeals relate to the same financial years, except that it is agreed between the parties that no effective appeal was instituted by him in respect of the financial year ended 30 June 1973.

The substantial question which arises in each of the appeals is whether certain

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payments, which were received by the appellants pursuant to options which they had granted over mining leases held by them, were assessable as income. The leases were over part of an area known as the Diane reef in North Queensland, and the mineral which was thought to be present in the area was copper.

Keyte was a diamond driller by occupation. He came from a family which had been concerned with mining and he was described by a witness, an officer of a company which had employed him, as one of the best diamond drillers in Australia. He had no formal geological qualifications, but he had a great amount of mining experience. At the time at which the first steps were taken towards the acquisition of the leases, that is at the end of 1965, he was working in North Queensland for North Broken Hill Ltd. In 1955 he had been employed as a driller in the Diane area, and McFarlane was his offsider. He was then working for a company called Uranium Corporation of Australia and over a period of five months he and McFarlane drilled two holes in the area in positions which, incidentally, Keyte thought were unsuitable. Between 1955 and 1965 Keyte and McFarlane did not work together but kept in touch with each other. During that period Keyte returned to his home town, Majors Creek in New South Wales, and engaged in prospecting there. In 1963 he acquired a small tin mining lease at Panorama in North Queensland. It was only five acres but he mined it himself, deriving a small profit from it. He still holds that lease. These activities were undertaken between his periods of employment as a diamond driller, work in that occupation not always being plentiful.

McFarlane, who is now engaged professionally in the cultivation of orchids, also had some experience in mining, though not nearly as extensive as that of Keyte. He had spent three or four years after 1949 fossicking in the Mt. Carbine area for wolfram and scheelite, out of which he ``just about made a living''. In 1954 he joined Mr. Bob Keddie, one of the then holders of the Diane lease, in prospecting there; that was before he joined Keyte in working for the Uranium Corporation.

In December 1965 Keyte and McFarlane met again at the Australia Hotel in Cairns. Over a drink McFarlane mentioned that he had recently heard that the Diane lease was free, that is, it was available for acquisition. Keyte said that the price of copper was going up, and the two of them thereupon determined to go out to the field and peg a lease. Keyte telephoned the mining warden at Cooktown, who confirmed that the leases were open for anyone to peg. They went there immediately, pegged a lease of 14 acres, and went on to Cooktown, where they camped for the night and registered the lease with the mining warden the next morning. The application for the lease was advertised in a local newspaper on 29 December 1965. Keyte and McFarlane returned to Cairns, calling in on the way at the home of Mr. Jim Keddie, an old miner whom they knew, the brother of Mr. Bob Keddie the previous holder of the Diane lease.

As, in my opinion, the outcome of these appeals largely turns upon my finding of fact as to the purpose with which they acquired the Diane lease and later, another 14 acre lease known as Diane Extended, I should record in some detail what their evidence was. Keyte's evidence was as follows:

``Before we go to the physical things you did when you went out there with Mr. McFarlane to peg it, could you tell his Honour what you had in your mind at that stage when you expressed keenness to go out and peg the Diane lease? - I always liked the idea of the thing and I liked to sort of look at something which had been my idea and I wanted to prospect this and look particularly at a spot which I had in my mind which geologists had passed by and said had absolutely no value and that was the reason. I thought that there might have been a mining proposition of a low-grade or a low-type thing which would be suitable.

Can I put it in a converse way to you? When you suggested to Mr. McFarlane that you and he go out and peg it, did you have in mind that you would peg it and then offer it around to mining companies with a view to sale? - No. Under no circumstances did we even discuss this factor.

Did you ever have that in mind, whether you discussed it or not? - No, I never

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had it in mind. It was purely my interest in the thing, that I wanted to look for myself and I wanted to prove something which was a theory of my own.

What did you have in mind once you had had a look at it? What did you have in mind after you thought about it, if you thought about it at all, about methods of doing something about it? - The idea was to try and sink a small shaft on it to find out if the ore body below the ground had any value.

This is in this favourite spot of yours? - That is correct, yes, and if they had any value, we would send a bulk sample away to have assayed to see how they could be treated because they were oxide ore, also to possibly set up a leaching process to leach out copper from this particular area because this was copper carbonate and very soft material.

When did you first hear about this leaching process? - I heard about the leaching process possibly in the fifties, initially and in 1963 I talked to people from Vam Mining who had a leaching thing going at a place in New South Wales called Emogy and they discussed what they were doing there and how it was working. An old mine had been abandoned and they were pumping water through the drives and through the stopes and so forth and putting their scrap metal in and the acid content and the copper content was high enough to replace the scrap metal at that stage with copper. Also with the Gilmore Mine, that was another acid-type mine.

Where is that? - That is the one I worked with Clutha in 1959 and the water content of that area was high, even though it was a tin mine. It was so high in acid content that everything that went down that shaft turned to copper and it completely came out as pure copper.

Is there any reason why you pegged only 14 acres? - We just looked at that 14 acres as a sort of small mining proposition and we thought we had the measured outcrop. We didn't know what type of ore body it was or a great deal about it.

You had by this time a great deal of experience working on large mining concerns or drilling for large mining concerns, had you? - Drillingwise, yes.

I just want to ask you this: what sort of areas did the mining companies in your experience ordinarily have? - 320 acres or even half-a-dozen leases of 320 acres. They didn't go in and peg a small area because it is worthless to them. They had to have something to move around on if they want to get back and drill. They have to stay on their ground to drill, virtually.

In 1965 if you had it in mind pegging a lease at Diane and attempting to sell it to a mining company? - I would have pegged 320 acres.

Would there have been any physical difficulty this day that you and Mr. McFarlane were there in pegging 320 acres? - No, none at all, because in those days all you did was put your peg in, cut your trenches in the directions and you only had to give an approximate direction. You didn't have to have a compass. You gave an approximate direction to the east, an approximate direction to the west, to the north, a southern direction to the point of commencement from where you started from. That was pegged off. You put only one peg in. The peg had to be a peg of 4" at the top, 4 feet out of the ground with the initials of both parties cutting the peg. If you couldn't trench the ground, you put in two cans of rocks which defined the directions that you had on the lease boundaries.

How much extra time would it have taken you to have pegged 320 acres? - Exactly the same time it takes to peg 14 acres.''

McFarlane's evidence was as follows:

``And then at about that time did you, in your own mind, form any intention with respect to that lease, if you were able to peg it - as to what you would do with it? - Yes. When I was working down there with Clem Keyte previously on this adit, Jim Keddie said, `You are pegging the wrong place. You should be up - up higher where there is some honeycomb ironstone'. I always remember that. I thought, you know, for all the work we done there, I would always like to put down holes. Jim was pretty wise on that

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sort of thing. He had been in the mining game, and I think he could nearly smell where to put a thing like that.

So, when you had in mind to peg that lease, what did you have in mind with respect to doing -? - Well, what we had in mind was - what I had in mind was to put a hole down in that area that Jim mentioned years before, and if we could not find anything, well, drop the lease.

Was there ever any discussion that you can recall about leaching? - Clem and I discussed - I heard Clem discuss it. It was just talk about leaching the first time when we were prospecting the Diane lease for Uranium Corporation. As was mentioned - Clem just said then, `Surely something can be done about leaching'.

Yes. What about in 1965? Was there any discussion about leaching then? - Yes. Well - 1965 - that's when we pegged it, yes. We decided about putting a hole down, and we thought, well - I didn't know nothing about this, but just from the previous talk about leaching, I thought if we put a hole down and we didn't find an ore body, then we could throw scrap in it - in the bottom - and put water in it, and look into the leaching process, and perhaps utilise that hole we intended to put down if we didn't find anything.

If you didn't find anything in the hole? - Yes.

You found that the lease was free. You found out from the mining warden and you then went out and pegged it? - Yes.

Can you recall any observations you made when you went out? You hadn't been out there for 10 years? - Yes. The adit we put in - when we left there it was all sandstone type of - creamy type of substance, but when we came back, the whole thing was green from leaching - the sides of everything were all just green.

You then pegged 14 acres? - Yes.

Why did you peg 14 acres? Why that area? - Well for a small time miner, we thought it was going - that would have been sufficient to sort of cover most of the outcrop that was there.

Did you have in mind at that stage selling off to a large corporation, or anyone for that matter? - No.

Had you had that in mind, what would you have done with respect to pegging? Would you have pegged 14 acres? - In my opinion, I think 14 acres would be a bit of a joke if you were pegging it to sell it off. You could have covered the whole thing with 320 acres. Not many companies would have anything to do with 14 acres.

Would there have been any difficulty, in your view, in pegging 320 acres? - No difficulty at all; we could have pegged 320 acres.

It is much the same as pegging 14 acres? - You could have pegged any amount there. It was all free.''

Mr. Jim Keddie gave evidence as follows:

``They called in; what was the conversation? That was the first time you knew about it? - Yes. They asked me for my advice. Of course, they always did that, anyhow. I told them what I thought.

Tell us what was said as best you can recall it. Tell us generally what was said? - Well, `What do you reckon is the best thing to do?', and you know, you could put an 80 ft. hole down and you might find out something. You can't see through under the dirt. That's the way it came into the general conversation. I think at that time I said, `Look, if you sink a drill hole, there is the cash, and it might cost 500 quid and you might have to dig for five months to do this thing.'

That was the general discussion at that time? - Yes. The discussions always had a...

You discussed mining generally; is that right? - Yes.

You knew they pegged 14 acres? - Yes, they told me that.

Was there any discussion at that time that they sell if off to a big company? - No, nothing at all.

At that time before they granted the option to North Broken Hill, did either of them ever suggest to you anything about the possibility of selling it off to anyone?

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- There was talk of that - with mining, it's like this: if you have got a lease and if a company comes along and gets interested and they dig a bore hole and they find nothing that's good for them, it might suit you nicely, and that's something good for you. It's bad luck if they take up the option - if you follow me?

Yes, I do. When you say there was talk of selling up, when was that? Can you recall whether it was before or after the option was granted to North Broken Hill - if there was talk about it? - I think it would have to be after. I'm not sure about that point.

When there was talk after the option had been granted to North Broken Hill, can you tell us, so far as your own view was concerned at that time - was there a difference between what might be suitable to a gouger and what might be attractive to a company like North Broken Hill? - Yes. You see, they might put down a couple of bore holes, and it might be absolutely no good to them, and at the same time, they might strike something that is good for you, and you are on the pig's back from then on.

And for a company to come on to the mine, what would you have in mind? - What I would have in mind is, it may be better to have someone to locate it for you.

It is no good, I take it, for them to take up an option where the ore is two to three feet -? - Three to four feet.

That is no good for a big company? - No.

For a small miner, he would be on the pig's back? - That is right.''

In that part of North Queensland the wet season starts at about Christmas time and continues until March. It appears that the lease which had been pegged was inaccessible, or at least very difficult of access, during the wet season. At all events the appellants did not visit the lease during that period. In March 1966 Keyte received notice of his transfer to Broken Hill, but he did not start work there until June. In the meantime a Mr. Peter Healy, a geologist employed by North Broken Hill, had come to Keyte's camp and expressed interest in the lease. Mr. Healy inspected it with Keyte and Jim Keddie in May 1966. They walked around and Healy took some samples and later told Keyte that the results of some of them were ``pretty smart''. Later, before Keyte went to Broken Hill, Healy told him that the company was interested in the lease and would like to take an option on it. Keyte said he would have to refer to McFarlane, with whom Healy was unacquainted. He did so, and McFarlane was agreeable. Healy suggested a purchase price of $50,000 which was satisfactory to both Keyte and McFarlane.

Later, after he had gone to Broken Hill, Keyte received an agreement for an option, which he executed. It is Exhibit 1, is dated 17 September 1966, and is executed by Keyte, McFarlane and North Broken Hill. It provided for an option to purchase for $50,000 exercisable within a period of 36 calendar months. The consideration for the grant of the option was $2, but if the company after one year wished to extend it for a further 12 months they were required to pay $2,000, and after two years a further sum of $4,000 to extend it into the third year.

After he had arrived in Broken Hill Keyte looked round the area and noted the position of the outcrops. As a result of what he saw he wrote to McFarlane enclosing a map which he had drawn showing a further area of 14 acres, adjoining the existing lease, which he thought it would be desirable for McFarlane and himself to acquire. The letter has been lost, but the map was tendered as Exhibit 2. Accordingly, McFarlane applied for the additional area on behalf of Keyte and himself in equal shares on 26 September 1966; the application for the lease, to be known as ``Diane Extended'' was advertised on 27 September, and the lease was subsequently granted.

North Broken Hill took an option over Diane Extended, which was recorded in an agreement dated 20 September 1967. It was on somewhat similar terms to those of the option over Diane, but the company surrendered it before any money became payable over and above the $2 which was the consideration for the option. On the other hand, the company did pay the amount required to extend the option over Diane into the second year. That option was ``dropped''

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in June 1968 after the company had done quite extensive drilling which had resulted in the discovery of a very low grade type of ore body. These results indicated to Keyte that Diane was ``a pretty useless'' proposition from a prospector's point of view.

In about March 1968 Keyte resigned from North Broken Hill and returned to diamond drilling in North Queensland. In October 1968 McFarlane, accompanied by a Mr. Halliday, the chief geologist of Kennicott Explorations (Australia) Pty. Ltd. (``Kennicott'') came to Keyte's house and inspected the core samples which had been supplied by North Broken Hill. On 15 November 1968 the appellants executed an agreement whereby they agreed to grant Kennicott an option to purchase both Diane and Diane Extended during a period of four years. Kennicott were to make payments at the conclusion of every year from the date of the agreement. Subsequently a deed of variation was executed extending the option for a further year in consideration of a further payment. The purchase price was $278,000 less all amounts which had been paid annually before the option was exercised. Kennicott gave up this option about October 1972.

On 24 November 1972 the appellants granted an option to purchase Diane and Diane Extended to Mareeba Mining & Exploration Pty. Ltd. (``Mareeba''). At first Keyte was reluctant to do business with Mareeba, but eventually agreed to do so. The purchase price was $300,000 made under the agreement. In due course Mareeba, having made various payments, exercised the option and paid a further $300,000 in November 1974. The leases were transferred to Mareeba by an instrument dated 22 November 1974.

Details of the amounts received by the appellants under the various options are as follows:

           Date                Amount             Received from
                                 $
      11 October 1967          2,000             North Broken Hill
      29 October 1969          4,000             Kennicott
      5 November 1970          8,000                 ''
      November 1971           16,000                 ''
      18 May 1973              7,500             Mareeba
      late 1973                7,500                 ''
      November 1973 to     12 payments of
      November 1974          1,000 each              ''
      November 1974            300,000               ''
      

For the years ended 30 June 1970 to 30 June 1975 Keyte lodged income tax returns which had been prepared on his behalf by his accountants. The first such return in which the receipt of option payments was disclosed was that for the year ended 30 June 1974. In that year and in the following year the returns disclosed the receipt of these amounts but did not include them in the assessable income. Why the accountants chose this time to make the disclosure is not clear; perhaps by then an investigation was under way, but that is speculation. At all events, Keyte gave evidence, which I accept, that he had revealed these payments to his accountants, and I do not regard the failure to disclose the receipts as in any way reflecting adversely on Keyte's credit.

In respect of each of the years to which Keyte's appeal relates, the Commissioner issued an amended assessment dated 24 May 1976, bringing to account for tax a half share of the payments which had been made under the options during the year to which the amended assessments related. Thus, for the year ended 30 June 1970 an additional $2,000 was brought to account; for the year ended 30 June 1971 an additional $4,000; 30 June 1972, $8,000; 30 June 1973, $7,000; 30 June 1974, $4,000, and 30 June 1975, $152,000.

An objection was lodged to each of the amended assessments on 18 October 1976 and these objections were disallowed on 24 January 1977. An appeal to this court was in each case instituted on 25 February 1977.

In McFarlane's case, a full disclosure was made by his accountants, a different firm, throughout the relevant period, but at first the Commissioner did not assess the amounts so disclosed to tax; it had been asserted in the

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returns that they were not subject to tax. It is a little difficult to follow the course followed by the Commissioner in making his assessments, but that is irrelevant.

In respect of the year ended 30 June 1970, an amended assessment was issued on 24 May 1976, bringing an additional $2,000 into account. In respect of the year ended 30 June 1971, the original assessment was not issued until 24 May 1976, bringing $4,000 into account which had been disclosed but not returned as income. In the next year, an amended assessment was issued on 24 May 1976, bringing a further $8,000 into account. In respect of the year ended 30 June 1973 it is agreed that no effective appeal was instituted by the taxpayer. In respect of the next year, that ended 30 June 1974, an original assessment was issued on 24 May 1976, bringing an additional $4,000, over the amount returned, into account, and in respect of the year ended 30 June 1975, in the original assessment, again issued on 24 May 1976, an additional $152,000 was brought into account.

In each of the years to which this taxpayer's appeals relate, objections were made and disallowed, and appeals to this Court were duly instituted.

The appellants, upon whom of course the onus of proof lies, advanced arguments which may be summarised as follows:

1. None of the payments were income in the ordinary meaning of the word, and therefore were not assessable under sec. 25.

2. The payments did not constitute profit arising from the sale by the appellants of any property acquired by them for the purpose of profit-making by sale, nor from the carrying on or carrying out of any profit-making undertaking or scheme. Section 26(a) did not therefore operate to make the payments subject to tax.

3. Alternatively, the payments, or at least some of them, constituted income which was exempted from tax under sec. 23(p).

I have no difficulty in deciding that the payments were not income in the ordinary sense of the word. The appellants were not engaged in the business of dealing in mining leases, and the payments accordingly, in my opinion, were payments for the disposal of an interest in a capital asset, or, in respect of the payment of the purchase price when Mareeba exercised its option, for the disposal of the capital asset itself.

The substantial question for decision, therefore, is whether the appellants, have satisfied me that when they acquired the Diane lease, and later, when they acquired the Diane Extended lease, they did not do so with the dominant purpose of profit-making by sale. The answer to the question depends largely upon whether in general I accept the evidence of the appellants themselves. In considering that evidence I have had regard to what was said by Gibbs J. in
McCormack v. F.C. of T. 79 ATC 4111 at p. 4121; (1979) 53 A.L.J.R. 436 at p. 443:

``In a case arising under sec. 26(a) the taxpayer is usually the person best able to give evidence as to the purpose for which the property in question was bought. 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' (
Pascoe v. F.C. of T. (1956) 30 A.L.J. 402, at p. 403 citing
Cox v. Smail (1912) V.L.R. 274, at p. 283), I completely agree with Barwick C.J. in
Gauci v. F.C. of T. 75 ATC 4257 at pp. 4259-60; (1975) 135 C.L.R. 81, at p. 86, 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 this case I have come to the conclusion that the evidence of the appellants ought to be accepted. I have already set out the parts of the evidence in which they spoke of their intention when they acquired the Diane lease; I find nothing improbable in their having that intention, particularly in view of the fact that they had both had experience in mining. There is also certain evidence which in my opinion supports the proposition that their dominant intention was to work the lease themselves. First, their contemporaneous declarations to Jim Keddie, made on the very

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day on which they had pegged the lease. Barwick C.J. recognised the value of contemporaneous statements when he said in McCormack v. F.C. of T. (at ATC p. 4116; C.L.R. at p. 439):

``... statements made to her which, as I have said, were sufficiently contemporaneous to have not merely some but, to my mind, very considerable evidentiary value.''

Secondly, there was the pegging of an area of 14 acres only. Both appellants said that if their dominant purpose had been to sell the lease at a profit they would have pegged a much larger area, in which a big company could be more likely to be interested. It was just as easy, they both said, to peg 320 acres as to peg 14. In fact, North Broken Hill, according to McFarlane, while they held the option, pegged additional leases round the Diane, as also did Kennicott, according to Keyte. This evidence was not contradicted.

Thirdly, Mr. White, a witness for the appellants, the exploration manager for Commonwealth Aluminium Corporation Ltd., gave evidence that there were several small one or two man copper mining operations in various parts of Australia in 1965.

There was no direct evidence for the respondent as to the appellant's intentions, although Mr. Healy, of North Broken Hill, who has already been mentioned, was in the precincts of the Court and could have been called if he had anything to contribute. As it stands, however, the evidence shows that the approach came from Healy to the appellants; they did not seek out Healy with the object of offering an option to North Broken Hill.

An attempt was made to show that the recovery of copper by leaching, which was one of the methods which Keyte said that he had in view, was impracticable in the circumstances. The attempt, I think, failed, but, as I was reminded, even if leaching were not feasible that does not necessarily show that the appellants' dominant purpose in December 1965 was not to work the mine themselves.

On all the evidence I am satisfied that the appellants have discharged the onus of showing that when they acquired the Diane lease in December 1965, they did not have the purpose of reselling it at a profit.

What of the acquisition of Diane Extended? This lease was pegged on 25 September 1966 and the application advertised the next day. At that time Keyte was working in Broken Hill, and no option over Diane had formally been granted to North Broken Hill. The appellants, however, had by that time agreed to grant such an option; it was eventually embodied in the agreement of October 1966, but it conferred no rights over Diane Extended. The evidence disclosed what could be a good reason for granting an option while retaining an intention eventually to work the property as a small operation. McFarlane said:

``Did you have a subsequent conversation with Mr. Keyte? - Some time later Clem asked me would I - would we be interested in North Broken Hill taking an option on the lease, and I thought it over and I said, `Well, go ahead, providing we get the results of it, all the drillings. If they are going to drill it, provided they give us the results, it will help us if they find anything small that we can - it might give us some indication of what's down below if we wanted to work it'.

What was in your mind at that time? What was your view as to their prospects of finding anything substantial? - Uranium Company walked out of it and said it was no good, and they are supposed to have the top geologist - one of the top geologists in Australia at that time, so we didn't have must [sic] faith in them finding anything as regards a company.

What about finding something that you might be interested in? - That was the idea of it. We said if they found something small - perhaps they run into a little rich body that could be used like a gouger, or someone like us, or who could put a hole down.

But something too small for the company? - Yes.

You then agreed to granting an option to North Broken Hill? - Yes.

Is there any difference, in your view, between what is worthwhile for mining by a big company such as North Broken Hill and what is worthwhile to mine for a small concern such as you and Mr. Keyte? - Yes, there would be a big difference.

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At the time that you and Mr. Keyte, or that you, perhaps I should say, decided to grant the option to North Broken Hill, what was your expectation as to whether they would be likely to find something worthwhile for a company like North Broken Hill? - I'd say nil, sir, if the previous drillers walked out of the other one.

What was your expectation or hope as to the possibility that they might find something worthwhile for the small miners such as you and Mr. Keyte? - While there is a drill going in the ground you have always got a chance of finding something, hitting some small ore body or rich ore body that would be no good to anybody else except for a small concern.

You mentioned a small rich ore body. Could you explain and tell us about the sort of find which would be suitable for mining by you and Mr. Keyte but quite unsuitable for mining by a large company like North Broken Hill? - From my previous experience on my type of small mining, anything from two feet to four feet or something like that would be suitable for us.

That is the width of the ore body? - Yes. Width of the seam, is it? - Yes, as long as it is rich enough.

If it is rich? - If it is rich enough. You could even get smaller, but if it is richer.

Why, in your view, was that unsuitable for a company like North Broken Hill? - They just couldn't be bothered about little things like that.

Why is that? - They wouldn't put a couple of men in to mine a small thing like that. They would just walk out of that. That would be no use to them whatsoever.

That is only a proposition for mining for a couple of men? - Yes.''

This was borne out by Jim Keddie in the passage from his evidence which I have already set out.

I do not think that when they acquired Diane Extended their original intention, as I have found it to be in December 1965, had changed.

So far I have been dealing with the first limb of sec. 26(a); in my opinion there is in this case no room for the operation of the second limb. In
Steinberg v. F.C. of T. 75 ATC 4221 at p. 4228; (1975) 134 C.L.R. 640 at p. 687, Barwick C.J. said:

``It is quite clear to my mind that this limb of sec. 26(a) is closely related to the first limb of the section. Indeed, the Privy Council in
McClelland v. F.C. of T. 70 ATC 4115; (1970) 120 C.L.R. 487 thought that in relation to the facts of that case the second limb was but another way of expressing the same ideas as the first. 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.''

And in
Burnside v. F.C. of T. 77 ATC 4588 at p. 4590; (1977) 138 C.L.R. 23 at p. 27, he said:

``Where nothing more appears than that an asset acquired, but not for the purposes of profit-making by sale, has been sold at a price in excess of the price at which it was acquired, there can in my opinion be no basis for holding that that gain is a profit arising from a profit-making undertaking or scheme. The circumstances lack not only the elements of an undertaking or scheme but the profit-making purpose of any

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undertaking or scheme which is essential to satisfy what is generally referred to as the second limb of sec. 26(a).''

In the same case Mason J. said (at ATC p. 4594; C.L.R. p. 37):

``In the first place, where the profit in question arises from the purchase and subsequent sale of an asset and it is found that the asset was not acquired for the purpose of profit-making by sale it is very difficult to see how the profit can be said to arise from a profit-making undertaking or scheme.''

In these appeals, of course, the payments included payments which were not made in settlement of the purchase price, but it seems to me that no profit-making undertaking or scheme emerges. And if, as Barwick C.J. suggested in Steinberg v. F.C. of T., the decisive date is the date of acquisition of the property, it is certain that no profit-making undertaking or scheme existed at that date.

My conclusion as to sec. 26(a) makes it unnecessary to consider sec. 23(p) and I express no opinion upon it.

In my opinion all the appeals should be allowed with costs. In Keyte's case each of the amended assessments should be set aside. In McFarlane's case the amended assessments for the years ended 30 June 1970 and 30 June 1972 should be set aside, and the assessments for the years ended 30 June 1971, 30 June 1974 and 30 June 1975 should be remitted to the Commissioner for reassessment in accordance with this judgment.