Barina Corporation Limited v. Federal Commissioner of Taxation.
Judges:Rogers J
Court:
Supreme Court of New South Wales
Rogers J.
The appellant was described by its managing director as a project builder. From 1979 onwards, the appellant had purchased large tracts of vacant land in the western and outer western suburbs of Sydney, subdivided it, built houses and shops on the subdivided blocks and then sold them. By contract bearing date 20 March 1981, it purchased 57.257 ha of vacant land at Plumpton near Sydney from Entrad Limited for $1,505,000 that became Lot A in the consolidation for subdivision. By contract bearing date 1 May 1981 it purchased 7.736 ha from Mr and Mrs Brickwood for $500,000 that became Lot D. Mr and Mrs Skevket sold it Lot C, 1.769 ha, by contract bearing date 10 July 1981 for $145,560. Finally, by contract bearing date 26 August 1981, Finance Facilities (Trading) Pty. Limited sold to it Lot B, 10.631 ha, for $700,000. At the time of purchase of the four blocks of land, they were zoned under Interim Development Order No. 133, proclaimed on 21 October 1977, substantially as non-urban ``B''. That zoning called for a minimum area for a dwelling of two hectares (cl. 6). Already at the time of the entering into of the first of the contracts, there was exhibited
ATC 4849
a draft environmental planning instrument rezoning the whole of the land. That provided for most of the land to be zoned residential, although some small parcels were zoned as special uses areas. The rezoning was implemented by Blacktown Local Environmental Plan No. 18 proclaimed on 23 October 1981.On 10 February 1982, the appellant prepared an overall plan for the proposed eventual subdivision and the utilisation of the aggregate of the four large blocks of land purchased (exhibit C). The plan contemplated that the subdivision would take place in seven stages. It was recognised at all times that some substantial deviation was possible from this overall plan in a number of material respects. As it happened, even before the proposed plan of subdivision was fully drawn up in February 1982, three development applications had been lodged with the local council, which was the appropriate planning authority, on 12 and 13 November 1981. Each of the applications was accompanied by a plan of subdivision. The areas the subject of the applications constituted but a small fraction of the four blocks then owned by the appellant. On 1 April 1982, all three applications received the approval of the local council subject to numerous conditions, including requirements for monetary contributions to be made. The conditions required a great deal of work to be carried out including road construction and drainage works. Before engineering work could commence, engineering plans were required to be submitted. Although land was cleared for roads and lots were pegged by a surveyor, none of the work required to comply with the conditions imposed was carried out until after June 1982. No proper engineering plans were prepared prior to June 1983. The position was stated by the managing director of the appellant thus:
``Q. You mean you agree with me no work was done until after 30 June? - A. Physical work?
Q. Yes? - A. Yes.
Q. And there were thereafter engineering plans that had to be prepared, actual pegging out of the areas of land and so on, which ultimately had to be achieved before the council would certify any of those three plans for its approval to subdivision? -
A. Well the work, clearing etc., was required to be done before the surveyor would have been able to prepare his engineering plans.
Q. But these are the steps, are they not, after the council has approved in principle, they are a preparation of the engineering designs? - A. Yes.
Q. Which are no doubt the responsibility of the surveyor? - A. Yes.
Q. Then there is physical clearing, pegging, completion of all the conditions which the council imposes, and then the plan is ready to be given back to the council for its approval? - A. Well the physical preparing may have to take place prior to the surveyor being able to prepare his plans.
Q. You agree with me that the following steps had not been taken as at 30 June 1982: The first one is the preparation of proper engineering plans? - A. Yes.
Q. The second one is the complying with the conditions of the council? - A. Yes.
Q. The third one is the final pegging out of the survey plan? - A. Yes.
Q. And then the final matter was the presentation of the final plan to council for its -? - A. Of the engineering plan, the presentation of the engineering plan was.
Q. The presentation of the final plan? - A. The engineering plan.
Q. To the council for certification, not the engineering plan, the plan of subdivision has finally, after all the conditions have been fulfilled, presented to the council for its certification? - A. No, the engineering plans have to be prepared in step four. The final plan of subdivision takes place after the engineering plans are prepared.
Q. The final step then is the final plan being lodged with the council and the council endorsing its approval? - A. After the physical work has been done.
Q. I think in respect of each of these three stages, that was some considerable time after 30 June 1982 before the council finally gave its approval? - A. Yes.
Q. I think those are the dates that appear in around about December 1983 on the plans of subdivision? - A. Yes.
ATC 4850
Q. Of course, there is no commitment at the time you lodge a subdivision plan to precisely follow that subdivision when it is merely approved in principle? - A. I'm sorry, I don't follow.
Q. I will withdraw the question. As at April 1982 when the subdivision plan was approved, as a matter of principle, your company was not committed to following it in precise detail at that stage, was it? - A. How precise?
Q. Can I put it to you this way: If your company decided that the conditions were too onerous, it need not proceed at all with the subdivision? - A. That's correct.
Q. Or, alternatively, it might decide to vary the locations of lots and seek council's approval of that variation? - A. That's correct.
Q. And I suppose from time to time that happens? - A. Yes.
Q. So in that sense the company is not in any way committed to proceeding with precisely that subdivision at the time it lodges for approval in principle a subdivision plan? - A. Could you repeat that again? - (Question read) - A. Yes.
Q. Can I take you back to your affidavit. Look at annexure F, which is the minutes of meeting on 25 June? - A. Yes.
Q. You will see under the heading `East Plumpton land' that it is said that you gave a report to the meeting that the land was already rough subdivided? - A. Yes.
Q. Roads were cleared and in position? - A. Yes.
Q. Are you talking there about the whole of that subdivision as shown in that plan on the wall? - A. No. What I am referring to there is stages; possibly stage one and two where the centre line of the road had been surveyed and the centre line of the road would have to be cleared of trees to enable the pegs for the centre line of the road to be put in. That is what I am referring to there.
Q. Stage one is very small and virtually is immaterial? - A. Yes.
Q. What you are referring to then is that the roads, as they ultimately were to appear in stage - or had appeared in the plan that is stage two - had been partly surveyed; is that the case? - A. The centre lines of the road marked with pegs, yes.
Q. You say that the various residential lots were identified; which residential lots do you refer to? - A. In stage two.
Q. Two and three? - A. I could have been referring to three as well.
Q. Not all of those areas that are shown in that plan attached to the valuation report could possibly be said to be at that stage identified, could they? - A. Not at that stage, not all of it. I wasn't referring to all of it.
...
Q. There were no survey areas of any of this land other than those that were on stages one, two and three as at 30 June 1982, were there? - A. No.
Q. And the only guidance one had to these areas coloured on the plan attached to that valuation report would be by reference to the local environmental planning zone plan? - A. Yes.
Q. Indeed that local environmental plan does not delineate boundaries with precision, does it? - A. No, it can be varied slightly. But the overall area ends up the same.
Q. It is in one sense a planner drawing a line which ultimately has to be determined by survey to establish precisely where the appropriate line should be? - A. Yes.''
(pp. 13-15)
It was not until about December 1983 that there was full compliance with the conditions imposed by council and thereupon the plans of subdivision submitted for the first three stages received approval. In lieu of the cash contributions called for by council's conditions, totalling approximately $204,000, it was agreed between the appellant and the local planning authority that the appellant should dedicate 3.9 ha of the land in the special uses areas. That land was dedicated in 1983.
At this stage, I mention only one further historical fact before outlining the problem calling for decision in this appeal. At a meeting of directors of the appellant held on Friday 25 June 1982, the managing director reported that the subject land:
ATC 4851
``was already rough sub-divided, and that roads were cleared and in position, and the various residential lots and areas for School, Roads (including road widening), Local Open Space, etc were identifiable. Following Mr Hoyle's report to the Meeting on the Land at East Plumpton, it was resolved that the said land, being a sub-division of various parcels of land purchased from Entrad, Brickwood, Skevket, and Finance Facilities, which sub-division was to be effected in accordance with the Development Application approved to the company by the Blacktown Municipal Council on 1 April 1982, be and is hereby treated as sub-divided as at the date hereof in accordance with that Application, ie in the fashion disclosed by the physical condition of the Land at present. It was further resolved that each area of Land as described in the valuation report of N J Bridger & Associates Pty Limited, have attributed thereto as separate items of Stock on Hand at the 30th of this month, the values shown for those areas in the said Report, that the Business and School Sites be valued at Current Market Selling Value as advised by Mr Len Hoyle, and that the Residential Land be valued at average cost price as calculated on the schedule attached hereto, and further that no value be ascribed to the land to be dedicated to Blacktown Council for Recreation, Local Open Space and Road Widening.''
The Schedule referred to as being attached to the minutes became exhibit B and it is necessary to set it out in full:
``BARINA CORPORATION LIMITED
LAND AT EAST PLUMPTON
Vendor Cost Price Entrad $1,546,472.75 Brickwood 514,788.50 Skevket 149,970.85 Finance Facilities 720,372.30 ------------- Total Cost of 76.669 ha 2,931,604.40 ------------- Average Cost per ha $38,236.66PROPOSED VALUATION OF LAND AT 30 JUNE 1982
Zone Area Value per ha Value ha $ Non-Urban B 22.54 MSV as per independent valuation 210,000.00 Residential 2(a) 38.01 38,236.66 (at cost) 1,453,375.45 School .938 12,000.00 (at MSV) 11,256.00 Business 3(g) .180 12,000.00 (at MSV) 2,160.00 Arterial Road 6.722 MSV as per independent valuation 48,000.00 Recreation 6(c) 4.129 nil Local Open Space 3.550 nil Road Widening .600 nil nil ------ --------------- 76.669 $1,724,791.45 ------ --------------- MSV = Market Selling Value Total Cost Price 2,931,604.40 Proposed Valuation at 30 June 1982 1,724,791.45 ------------- TOTAL PROPOSED REDUCTION IN COST OF LAND $1,206,812.95 -------------''
ATC 4852
The appellant's return of income for year ended 30 June 1982 reflected this approach to the valuation of the East Plumpton land. However, by an adjustment sheet, the Commissioner increased the item ``Value of completed houses and work in progress'' as at 30 June 1982 from $2,088,825, as shown in the return, to $3,334,065, a difference of $1,245,240. By a notice of objection, the appellant sought the excision of the sum of $1,206,813, part of the adjustment figure. The amount sought to be excised, of course, is the amount of the valuation adjustment shown in the directors' resolution. In essence, the appellant claimed that the selling value of the Plumpton land other than the residential land was $271,416 whilst the cost, taken on a simple proportionate basis of land size, was $1,478,229, throwing up the decrease in value of $1,206,812. The Commissioner disallowed the objection and the appellant therefore comes to this Court.
Section 28 of the Income Tax Assessment Act seeks to ensure that in calculating the income of a taxpayer any increase or decrease in the value of trading stock is brought to account in the relevant year of income. For this purpose, the section provides as follows:
``(1) Where a taxpayer carries on any business, the value, ascertained under this subdivision, of all trading stock on hand at the beginning of the year of income, and of all trading stock on hand at the end of that year shall be taken into account in ascertaining whether or not the taxpayer has a taxable income
(2) Where the value of all trading stock on hand at the end of the year of income exceeds the value of all trading stock on hand at the beginning of that year, the assessable income of the taxpayer shall include the amount of the excess.
(3) Where the value of all trading stock on hand at the beginning of the year of income exceeds the value of all trading stock on hand at the end of that year, the amount of the excess shall be an allowable deduction.''
There is no doubt that the appellant carried on the business of acquisition and subdivision of land and project building and sale of dwellings and shops. Furthermore, since the decision of the High Court in
F.C. of T. v. St Hubert's Island Pty. Ltd. 78 ATC 4104; (1977-1978) 138 C.L.R. 210, it has been clear that land may be ``trading stock'' within the meaning of the section.
Section 31 of the Act is a machinery provision which confers an option upon taxpayers in determining the value of trading stock. It provides as follows:
``(1) Subject to this section, the value of each article of trading stock (not being live stock) to be taken into account at the end of the year of income shall be, at the option of the taxpayer, its cost price or market selling value or the price at which it can be replaced.''
It will have been perceived that what the appellant sought to do was to take the market selling value of some of the lots of land contemplated by its plan of 10 February 1982. In the case of residential land, it purported to opt for cost. The blocks of land in the areas zoned as special uses were valued at nil. The primary question posed for resolution by the appeal is whether blocks of land, not yet able to be subdivided, and certainly not yet formally subdivided, and not marketable until capable of subdivision can be an ``article of trading stock'' within the meaning of sec. 31. Naturally, the appellant submitted that an area of land not formally subdivided may be an ``article of trading stock''. As long as the blocks of land were identifiable and intended ultimately to be sold, it mattered not that in their then present condition, they could not be made legally the subject of immediate sale and transfer. The Commissioner submitted that an area of land is an ``article of trading stock'' only if it is capable of being the subject of sale and transfer. Accordingly, it was submitted, the only ``article of trading stock'' relevantly owned by the appellant was either the four blocks of land in globo or the four individual blocks purchased from the four vendors.
The question thus thrown up for determination, what is an ``article of trading stock'' in the case of undeveloped and unsubdivided land, has not been the subject of judicial determination. If the question is answered favourably to the appellant, a further
ATC 4853
question arises as to whether the values allocated to the special uses areas were in truth ``market selling value'' within the meaning of sec. 31(1).If the appellant's approach to the problem is correct, its manifestations could be quite curious. Assume a leather merchant purchased the hide of a cow for the purpose of selling the leather to a shoe manufacturer. The shoe manufacturer demands that the hide be cut into leather required for twelve pairs of shoes. That will use say 95% of the hide but there are bits and pieces that have to be thrown away. The merchant, on the appellant's approach, may, prior to cutting up the hide, value it at 95% of cost so far as the sections he will be utilizing are concerned and at nil market value for the bits and pieces. The fact that he knows at the time of purchase that he will have to throw away bits and pieces, and calculates the price he pays with the knowledge that only 95% of the hide will be saleable, is irrelevant if one follows the appellant's approach. That would be an odd result from the statutory endeavour to throw up a more accurate barometer of the financial results of a business.
Although it was accepted by the parties that the question posed for my consideration was not decided in St Hubert's Island, both sides sought to obtain comfort from what fell from members of the courts concerned with that case. The appeal from the Commissioner's disallowance of the objection in that case initially came before Mahoney J. in the Supreme Court of New South Wales and his decision is reported in 76 ATC 4080. The taxpayer in that case was incorporated in 1960. Initially, the taxpayer acquired title to some vacant land known as Riley Island and part of St Hubert's Island. Subsequently, the rest of St Hubert's Island was also acquired. Before the land owned by the taxpayer could be developed, at least three problems were required to be solved. First, the land had to be rezoned. Second, the physical condition of the land required to be altered and, third, finance was required for the development work. In 1965, the State Planning Authority indicated that a rezoning would be carried out subject, inter alia, to the erection of a bridge in the area. Subsequent negotiations resulted in that condition ultimately being withdrawn. Although the Judge did not have detailed evidence as to the nature of the work required to be done to put the land into the condition in which it could be subdivided into residential blocks, it was clear that the level of the land was required to be raised by some three feet. Ultimately, that work cost some hundreds of thousands of dollars. By 17 March 1971, substantial expenditure had been incurred on this work. By a resolution of 17 March 1971, the owner was placed into voluntary liquidation to enable the land to be distributed to the shareholders in specie. It was this distribution which occasioned the dispute with respect to liability to tax. It was the Commissioner who contended that the land was trading stock, whilst the taxpayer contested that claim. It was on what fell from both the primary Judge and members of the High Court on the question whether land could be trading stock that the parties fastened for support. There was an alternative submission for the taxpayer that even if land could, in appropriate circumstances, be trading stock, the term did not include land in globo. It was argued for the taxpayer that the land in the state it was when it was purchased required substantial alteration or development in order to produce individual residential lots for sale in the manner contemplated by the taxpayer. Mahoney J. was of the opinion that land, which was ultimately intended to be sold in subdivision in the course of trade, and which was not yet in the state in which it could be subdivided and sold, and which was in the course of improvement for that purpose, could be brought to account under the Act in a manner akin to the manner in which work in progress is brought to account. In his Honour's view it was not necessary to treat the land in that state as being trading stock (p. 4085).
His Honour's decision was reversed by a majority of the High Court and his approach to the problem was rejected. One of the dissentients in the High Court was Stephen J. At ATC p. 4107; C.L.R. p. 217, his Honour addressed the argument that ``each article of trading stock'' and variations of that phrase which appear in sec. 29 and 31 are inappropriate to apply to land. His Honour said:
``The phrase appears in sec. 29 and 31 when reference is being made to the value of each distinct item or unit of a taxpayer's trading stock. It is used to describe each item, the sum of which make up a taxpayer's stock and to each item of which a value is to be
ATC 4854
assigned. If that which is traded in happens to be land it is no less appropriate to speak of each parcel of land, capable of being separately dealt with and valued, as an article, than it is to speak in this way of units of any bulk commodity, be it wheat, wool, wine, coal or petrol. The use of `article' is, perhaps, not elegant, but if elegance of language is to be a criterion of what is intended by `trading stock', bulk commodities generally would seem also to be excluded. I regard the use of this phrase in these sections, used as it is to denote individual items of stock, is no sufficient indication that land is to be excluded from `trading stock'.''(my emphasis)
Now, it is quite clear that his Honour was directing his consideration to a question totally different from that posed before me. Thus, it is somewhat unfair to read his Honour as specifying the requirement for the parcel of land to be able to be ``separately dealt with and valued'' so as to constitute an ``article''. Certainly, one must be able to value it separately in order to make use of sec. 31 but the requirement that it should be capable of being separately dealt with in the sense of being readily transferable is not quite so clear. A little later (ATC p. 4109; C.L.R. p. 221) his Honour was addressing the question of what is required in order to satisfy the call of being ``trading stock'' accepting that land may, in appropriate circumstances, satisfy the requirement. He said:
``For assets of a taxpayer to form part of his trading stock they will, I think, generally speaking, require to possess the character of being substantially in the state in which the taxpayer intends to trade in them. For this reason the particular trade of the taxpayer will be critical. To a trader in broad acres his stock of broad acres will be trading stock, but if his trade, and by this I refer to that which he sells, is in subdivisional lots it will generally only be subdivided lots that qualify as his trading stock and they will become a part of that stock when, by whatever processes of improvement may be involved, they come substantially to answer the description of that which he trades in. However, it may be that cases will arise in which such a trader's stock can be shown to include not only lots ready for sale but also broad acres ready for prompt conversion into lots as and when the time is ripe for their sale; whether or not this will be so in any particular case will be a matter of fact for decision when the case arises.''
Needless to say, that approach to the problem does not have a direct bearing on the question before me but it is the point on which his Honour dissented.
The approach of Mason J. commanded the adherence of the majority. At ATC p. 4113; C.L.R. p. 228, his Honour said:
``If trading stock according to its ordinary meaning denotes land as well as goods and commodities, it must follow that land may form part of the trading stock of a business before it has been converted into the condition in which it is intended to be sold. Just as raw materials and partly manufactured goods form part of the trading stock of a manufacturer, so also virgin land which has been acquired by a land developer for the purpose of improvement, subdivision and sale in the form of allotments will form part of his trading stock. If the statutory definition of `trading stock' in sec. 6(1) were an exclusive and comprehensive definition it might be possible to draw a distinction between land and goods and to assert that the presence of the word `manufacture' in that definition has a restricted effect so as to exclude land acquired for the purpose of improvement and development antecedent to sale, thereby overcoming the argument that land so acquired is none the less land acquired for the purpose of sale within the meaning of the definition.
But the statutory definition is inclusive only and no distinction should be drawn between goods on which work is to be done before they are converted into the condition in which they are intended to be sold and land on which work is to be done before it is converted into the condition in which it is intended to be sold.
Once it is accepted that land acquired for the purpose of improvement and development as a preliminary to sale in allotments in its improved form constitutes part of the trading stock of the land developer's business, notwithstanding that the land as acquired differed in condition from the land as intended to be sold, the issue in the
ATC 4855
present case is whether the land in question was acquired by the respondent taxpayer for its business as a land developer, that is, for improvement and development as a preliminary to sale in subdivided allotments. That substantial work remained to be undertaken in connection with the land before it would achieve the condition in which it was intended to be sold is an immaterial consideration. It is enough that the respondent was carrying on the business of a land developer and that it acquired the land in the course of carrying on that business. The facts as outlined by the primary judge make it plain that the land was acquired by the respondent taxpayer for this very purpose.''
Murphy J. agreed with Mason J. Jacobs J. expressed a view similar to that of his Honour at ATC p. 4117; C.L.R. p. 235.
I have sought to derive all the assistance that I can from what fell from their Honours both in this Court and in the High Court in considering the questions before them. Ultimately, however, the question to which consideration was given in St Hubert's Island was whether the land there could be said to be trading stock, and not whether an individual component of it was an ``article''. It seems to me that I am left to consider the matter simply on the textual context in which the disputed phrase is found and what I divine to be the legislative purpose of the sections under consideration.
So far as textual context is concerned, the item of trading stock must be one to which can be ascribed an appropriate market value. Let it be assumed that on 30 June of the appropriate financial year there are on the floor of the plant of a motor vehicle manufacturer a motor car chassis, an engine, doors, wheels, tyres and so on. Could it be said that the value to be ascribed to those items together is the value of the motor car? The manufacturer trades in motor vehicles, not in chassis, doors etc. Let it be assumed that by dint of using a robot machine it would require only an hour or two's work to assemble all these items into a motor vehicle. Is the relevant ``article'' a motor vehicle? It defies common sense or reality to say so. Yet the present is a situation in reverse, although accentuated by problems of non-marketability and non-transferability. There are the undivided and presently undividable blocks of land. Furthermore, until capable of subdivision, they are unsaleable. How then could these items, unidentifiable without survey, indivisible for the time being, unmarketable as they are, be said to be articles conceivably having a market selling value?
The purpose of this Part of the Act, dealing with trading stock, is fairly self-evident. It enables adherence to the notion that taxpayers should, at the end of the year, be able to bring to account either the gains or losses incurred in relation to what is genuinely its trading stock. Let me, however, revert to my example of the unassembled motor vehicle. Let it be assumed that the engines are made of some type of alloy which unexpectedly rises immensely in value at the end of June. Thus, although the components which went into the manufacture of the alloy engine cost only $x at the time of its manufacture, on 30 June the component was worth $3x. Is the engine to be thought of as an article of trading stock in that context? Again, I think the answer should be no.
It seems to me that proper effect can be given both to the text and to the legislative purpose if one regards, in the context of land proposed to be sold by subdivision, an article as trading stock only where the block of land is, in fact, marketable. Absent marketability there can be no market selling value. If absence of marketability is due to the fact that the land has not yet been converted to a subdivisible state, then I do not think that its individual but unidentifiable and non-segregated components can be said to be each an ``article'' of trading stock distinct from the land in globo.
In the result then, I think that the resolution of the directors of the appellant failed to have the desired effect and that makes it unnecessary to consider the subsidiary question whether the items of value ascribed to the special uses land were correctly stated. However, should the matter go on appeal and my views found to be incorrect, I need to record that I found the valuer called by the Commissioner to be completely unhelpful and his valuation cannot be relied upon. Again, for the reason sought to be illustrated by my example of the leather merchant, I cannot accept the appellant's valuations either. More particularly is this the case in the light of the fact that the directors' resolution itself speaks of land ``to be dedicated to Blacktown Council''. It resolves that no
ATC 4856
value be ascribed to that land. Yet, that very land went to discharge the appellant's liability to a monetary contribution to be made to the council in excess of $200,000. In view of the fact that the onus rests on the appellant to support the valuation, I would, on that ground also, not uphold the appeal.In the result, the appeal is dismissed and I order the appellant to pay the respondent's costs.
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