Case V65

Members:
P Gerber DP

Tribunal:
Administrative Appeals Tribunal

Decision date: 15 April 1988.

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Dr P. Gerber (Deputy President)

The material facts in this application can be simply stated. In 1970 the applicant acquired the family farm in Gympie - a property of some 240 acres or so from his father. It was conceded that the transfer was not at arm's length, but the kind of family transaction customary in farming families. Nothing turns on this. I accept the evidence of the applicant's widow that the property was acquired to raise a family in a rural environment and to engage in some desultory farming; it was not acquired with a purpose, let alone a dominant one, to subdivide and sell the farm. To the extent that such a suggestion was made by the Crown, I wholly reject it. It is true that little farming was, in fact, carried out. However, this is explained by the various transfers of the applicant, who was employed as a valuer in the Lands Department. The farm was proximate to the township of Gympie and, as the town grew, it became apparent that the property had substantial subdivisional potential. In 1976, two urban blocks were sold off in Smith Street as well as some 36 hectares, which were sold to one, Sloane. By 1978, the applicant had begun to subdivide and sell a substantial part of the farm as suburban allotments and I find that by the following year he had become a professional developer. The issue in this application is whether the profit from the subdivision and development in the 1982 tax year constitutes assessable income.

2. Turning to the law, I indicated to the parties at the end of the case that I was satisfied that the evidence did not support an argument under the first limb of sec. 26(a), that is, I accept that the applicant had not acquired the property with the intention of subdividing it. If he is to be taxed on the net profit of the undertaking, the answer must lie elsewhere in the Tax Act. The question to be asked is therefore whether or not the profit is assessable

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under sec. 25(1) and/or the second limb of sec. 26(a)?

3. The relationship between sec. 25 and 26(a) of the Tax Act is a minefield of single instances through which the Judges of the past have preferred to travel hopefully rather than to arrive. It would be presumptuous of me if I attempted to enlarge upon their decisions.

4. I begin this exploration by noting that it is generally accepted that enhanced values obtained from the realisation of property may be on revenue account ``where what is done is not merely a realisation or change of investment but an act done in what is truly the carrying on or carrying out of a business''
Californian Copper Syndicate v. Harris (1904) 5 T.C. 159 at p. 166). To the extent that this statement can be said to constitute received wisdom, it is not easy to reconcile at first blush with the decision in
Scottish Australian Mining Co. Ltd. v. F.C. of T. (1950) 81 C.L.R. 188. The facts, taken from the headnote, were as follows:

``The memorandum of association of a company formed primarily and essentially for the purpose of carrying on the business of coal mining, contained powers to sell, improve, manage, develop, turn to account or dispose of any of the company's property. Certain land, purchased by the company in 1863 for the purpose of carrying on coal-mining operations, was, after those operations by the company had ceased in 1924, sold, from time to time in parcels, at a considerable profit, for residential and other purposes, and for which the land had been subdivided, roads and a railway station constructed, sites made available for schools and churches and areas set aside for parks.

Held that the company was not engaged in the business of selling land as from 1924 but was engaged in realising a capital asset the profits from which should not be included in its assessable income.''

Two matters are worth noting. It is of some significance that the case was only argued on the basis that the profits were income from personal exertion; alternatively ``income'' by operation of either or both limbs of sec. 26(a). Since the property was acquired as a mine and operated as such for more than half a century until its deposits had been exhausted, it must have required some ingenuity to submit that, more than half a century after acquisition, the land had been acquired with the dominant purpose of resale at a profit. The other matter of interest is that the Californian Copper Syndicate case and the line of authorities cited therein were not referred to in the judgment of Williams J. Dealing with the authorities deemed relevant, his Honour observed (at pp. 195-196):

``The facts are, in my opinion, such that the appellant is entitled to rely on the principles laid down in
Hudson's Bay Co. Ltd. v. Stevens (1909) 5 Tax Cas. 424 and
Rand v. Alberni Land Co. Ltd. (1920) 7 Tax Cas. 629. The facts in these cases where the court decided in favour of the taxpayer and also in
Alabama Coal, Iron Land and Colonization Co. Ltd. v. Mylam (1926) 11 Tax Cas. 232 where the court decided the other way were all special to those cases and unlike the present facts in many respects. But the judgments contain important statements of principle. There is the statements of principle. There is the statement in the judgment of the Master of the Rolls in Hudson's Bay Co. Ltd. v. Stevens (supra at p. 436) that he was unable to attach any weight to the circumstance that large sales were made every year. There is also the statement of Farwell L.J. that `a land owner may lay out part of his estate with roads and sewers and sell it in lots for building, but he does this as an owner not as a land speculator... it would be different if a land owner, an individual, entered into the business of buying and developing and selling land; but the case of the owner, whether of land, or pictures, or jewels, selling his own property, although he may have expended money on them in getting them up for sale, is entirely different; he sells as owner, not as trader' (supra at p. 437).''

5. In
F.C. of T. v. Whitfords Beach Pty. Ltd. 82 ATC 4031, the taxpayer company bought some 1,600 acres of land adjacent to Whitfords Beach, 24 km north of Perth in 1954. The land was acquired to give shareholders of the company access to beach-front shacks and not for profit-making by sale or for business purposes. On 20 December 1967 (by which time the market value of the land had increased), all of the shares in the company were acquired by three other companies for the sole purpose of gaining control over the land to enable it to be subdivided, developed and sold

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at a profit. New Articles of Association were adopted by the taxpayer company to permit it to achieve this purpose. Two of the prospective companies were appointed by the taxpayer company as managers to carry out the work, including the procuring of the necessary rezoning of the land. The project was carried through on a massive scale, involving provision of roads and parklands. Eventually, substantial profits from the sale of these allotments were received by the taxpayer company, which was assessed for income tax in the years 1972, 1973, 1974, and 1975. Whilst the whole Court was unanimous in the result, namely that the profits were assessable income, there was little unanimity in their Honours' reasoning. Thus Gibbs C.J., Mason and Wilson JJ. concluded that after 20 December 1967, the taxpayer had become a company which existed for the sole purpose of carrying out the operation on which its new shareholders had decided when they acquired their shares. In the light of these circumstances, the development, subdivision and sale were therefore more than the mere realisation of an existing asset (such as was found in the Scottish Australian Mining Co. case (supra)) and amounted to the carrying on of a business of land development. In the result, the profits constituted income within ordinary concepts, and assessable under sec. 25(1). Wilson J. took the view that on such a finding, no concluded decision on the application of sec. 26(a) was required. Gibbs C.J. and Mason J., on the other hand, concluded that sec. 26(a) would only operate where sec. 25(1) does not (a view which sits uneasily with the majority decision of the Privy Council in
McClelland v. F.C. of T. 70 ATC 4115, Murphy J. concluded that the profit constituted assessable income pursuant to the second limb of sec. 26(a); viz. that what was done constituted ``a profit-making undertaking or scheme''. It will therefore be seen that, whilst the whole Court concluded that the proceeds of sale constituted assessable income, the ratio decidendi is likely to elude all but Professor Glanville Williams. Doing the best I can, there appears to be a clear majority (Gibbs C.J., Mason and Wilson JJ.) who concluded that the proceeds of sale were received in the course of carrying on a business of developing, subdividing and selling the land and thus constituted income under ordinary concepts (sec. 25(1)). For good measure, Gibbs C.J. and Mason J. concluded that the second limb of sec. 26(a) only ``catches'' gross income that has not already been ``captured'' by sec. 25(1), whilst Wilson J. ventured no further than the statement that since the profit was assessable under sec. 25(1), no concluded opinion on the applicability of sec. 26(a) was required. Murphy J. based his decision exclusively on the second limb of sec. 26(a). Again, the learned Chief Justice, on the one hand, clearly regarded as a material fact that the share structure of the taxpayer had been radically changed on 20 December 1967, resulting in the replacement of the fishing enthusiasts by professional land developers, whilst Murphy J., on the other hand thought this fact to be irrelevant.

6. There is considerable lack of unanimity on whether the magnitude of the undertaking can operate as a test in determining whether the proceeds of a sale constitute income. This aspect was noted as early as 1904 in the Californian Copper Syndicate case, where (as previously noted) the Lord Justice Clerk observed (at p. 159):

``But it is equally well established that the enhanced values obtained from realisation or conversion of security may be so assessable where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business.''

This was expanded upon by Deane J. (diss.) in Whitfords Beach Pty. Ltd. v. F.C. of T. in the Federal Court (79 ATC 4648) where his Honour noted (at p. 4665):

``The distinction between the `mere' realization of a capital asset and an act done in carrying on or carrying out a business has been recognized in a number of subsequent cases in both the Privy Council and the High Court as a touchstone for determining whether the proceeds of sale of an asset do not or do constitute income. The touchstone will however, conceal the essence if the importance and scope of the word `mere' is overlooked and attention is unduly concentrated upon the manner in which an asset had been acquired or was held to the neglect of the circumstances surrounding its preparation for sale and sale. In a case such as the present, the fact that the relevant receipts represent the proceeds of sales of parts of what had been held as a capital asset is but one factor in the determination of the essential question. That question is whether

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all or any of the proceeds of the sales of subdivided lots should properly be seen as representing profits made in the ordinary course of what is in truth a business.''

7. On appeal to the High Court, Gibbs C.J. observed (at p. 4039):

``In the present case I gravely doubt whether the profits resulting from the development, subdivision and sale of the land would have been taxable if it had not been for the events that occurred on 20 December 1967. Had those events not occurred, the situation of the taxpayer would have been analogous to that of the company in Scottish Australian Mining Co. Ltd. v. F.C. of T. However, on 20 December 1967, the taxpayer was transformed from a company which held land for the domestic purposes of its shareholders to a company whose purpose was to engage in a commercial venture with a view to profit.''

8. It would seem from the above, that Gibbs C.J., at least, had no doubt that the Scottish Australian Mining Co. case was correctly decided. On the other hand, Mason and Wilson JJ. experienced some ``difficulty'' with the decision, whilst the case is wholly inconsistent with the view which found favour with Murphy J. (who did not refer to it). Whatever else one may say about the Scottish Australian Mining Co. case, it appears to have been decided per incuriam.

9. In the current uncertain state of the law in which no one has attempted to define the relationship - if any - between sec. 25(1) and 26(a), I do not see it as part of the function of an administrative tribunal to undertake a task which distinguished Judges have refused to attempt. In the end, I too, seek refuge behind the statement that it is unnecessary to examine that question here since I consider the amount in question in the present application constitutes income of the taxpayer both pursuant to sec. 25(1) and 26(a) (cf.
F.C. of T. v. The Myer Emporium Ltd. 87 ATC 4363). The law, as I see it in relation to the question posed by this application, comes to this: a tiger can change his spots [sic]. However, if he does so with the intention of selling them profitably, one by one, the gain will be subject to tax. In terms of this application, this ``tiger'' changed his spots [sic] when he gave up farming to become a land developer, and it is not to the point that the farm had been in the family since the time of Governor Macquarie. Farming is one occupation, land developing another and never the twain shall meet.

10. For purposes of ascertaining the profit for the 1982 tax year, the parties agreed that the value of the land was $230,000.

11. For the reasons stated above, I have concluded that the proceeds from the sale of the subject land in the 1982 tax year constitute assessable income.