Western Gold Mines NL v. Commissioner of Taxation (WA)
59 CLR 729[1938] ALR 203
(Judgment by: Latham CJ)
Between: Western Gold Mines NL
And: Commissioner of Taxation (Western Australia)
Judges:
Latham CJStarke J
Dixon J
Evatt J
McTiernan J
Subject References:
TAXATION AND REVENUE
Dividend duty
Sale of mining leases
Realization of capital
Legislative References:
Dividend Duties Act 1902 (WA) (No 32) -
Judgment date: 24 February 1938
Melbourne
Judgment by:
Latham CJ
A person may buy something for the purpose of keeping it with the object of earning income or deriving other advantages from it; or, on the other hand, he may buy something to sell at a profit. When in fact it happens that an opportunity offers for selling at a profit what has been bought, questions arise as to whether the transaction of sale is a change of a form of investment or whether it is the making of a profit in a commercial transaction. In the former case the profit is not taxable as income; in the latter case it is. The mere fact that something has been sold at a profit does not make that profit part of the income of the seller. In the case of an individual it is sometimes easy to draw the distinction. If a man buys a house for the purpose of living in it, and subsequently sells it at a profit, that sale is not a step in a profit-making transaction and it does not produce income.
If, however, a person is found to be in the habit of buying and selling dwelling-houses, even though he lives in them himself, he may be held to be engaged in a business of deriving income from such sales. On the other hand, the purchase of stock-in-trade for the purpose of resale is plainly the beginning of a profit-making enterprise which is completed by the resales and the receipt of the profits. Any profit made upon such a transaction is plainly to be taken into account in estimating the income of that person. In the case of companies which carry on business for the purpose of profit the question appears to me to be more difficult than in the case of individual persons. Such a company has no private life, but the distinction between making an investment or changing the form of an investment, on the one hand, and trading in things for the purpose of making a profit, on the other hand, is necessarily recognized also in the case of companies. If a company sells its business premises at a profit, the profit would not be income. But, if it carries on a business of selling land, the profits are income.
A difficulty arises in the case of both individuals and of companies with respect to isolated transactions. The fact that a transaction is isolated does not necessarily show that it is not a profit-making enterprise. Every business must begin with a single transaction, but when the question arises after only one transaction has taken place the question becomes more difficult. In what I have said I have attempted to state the principles for which certain well-known cases may be cited as authority (Californian Copper Syndicate Ltd v Harris; [F1] Tebrau (Johore) Rubber Syndicate Ltd v Farmer; [F2] Commissioner of Taxes v Melbourne Trust Ltd; [F3] Ruhamah Property Co Ltd v Federal Commissioner of Taxation). [F4]
The present case arises under the Dividend Duties Act 1902 (as amended) of Western Australia. Dwyer J. has held that a profit on the sale by Western Gold Mines No Liability of certain mining leases to Triton Gold Mines No Liability is a profit assessable to duty under the Act. Western Gold Mines No Liability has appealed to this court.
The tax is payable in respect of all profits made by the company in Western Australia (s. 6). In W. Thomas & Co Ltd v Commissioner of Taxation (W.A.) [F5] it was held that the Act applies only to trading or business profits and not to profits arising from the realization of capital assets. (See also Forwood Down & Co Ltd v Commissioner of Taxation (W.A.) [F6] ).
The company actually acquired the leases in question on 22nd September 1933, admittedly with the object of reselling them at a profit to the Triton company, which was formed for the purpose of acquiring them. The agreement for sale to the Triton company was made with a trustee for that company on 28th September 1933 and was adopted by that company on 2nd October 1933. It is urged for the commissioner that these facts are conclusive-that they show that the actual acquisition of the leases at the time when they were acquired-in September 1933 - was purely and simply for the purpose of resale at a profit. It is argued, on the other hand, that it is not proper to look only at these facts-that the whole dealing of the company with the leases must be considered before reaching a conclusion upon the question whether, in what the company did with respect to the leases, it was engaged in a profit-making transaction by way of trading in leases. I agree that the whole transaction must be considered (See Ruhamah Property Co Ltd v Federal Commissioner of Taxation). [F7]
The further relevant facts are that the company acquired an option to buy the leases on 23rd January 1933, and, by the agreement made on that occasion, undertook to test and explore the land. The company spent some PD15,000 in doing this. The result was that it was ascertained that the development and exploitation of the property would require much more capital than that controlled by the company. There were practical difficulties in the way of increasing the capital of the company and accordingly it was decided to form a new company-the Triton company-for the purpose of acquiring the leases and working them. The consideration was taken by Western Gold Mines No Liability in the form of PD50,000 cash and 200,000 10s. shares-the PD50,000 cash was paid away as the purchase price of the leases under the agreement under which the company had the option of purchase. It is sought to impose tax upon the value of the 200,000 shares less certain deductions.
The case is, in my opinion, by no means free from difficulty, but I have reached the conclusion that the profit in this transaction is not taxable under the Act. I base this conclusion upon the following considerations:Western Gold Mines company is a no-liability company formed under Part II, of the Companies Act 1928 of Victoria. It is a company formed "for mining purposes." The rules of the company empower it to sell its property, but this fact throws no light upon the nature of any particular sale. The evidence shows, I think, that there was no intention, when the option was acquired, to sell the leases. The intention was to explore and examine and, when further information was obtained as a result of investigation, to determine how best to exploit the property, if such exploitation should appear to be probably profitable. If the investigation had shown that the property was of little or no value, the option would not have been exercised. The investigation in fact showed that the property was of considerable value, and the question which arose was that of determining how best to develop and work the property so as to obtain that value. The capital of the company was insufficient for that purpose: further capital was necessary. The sale to the Triton company, from which the profit alleged to be taxable was obtained, was a means of bringing in further capital so as to work the mining property and to obtain profits from it by way of dividends upon the 200,000 shares.
Thus, I regard the whole transaction, not as part of a business of trafficking in mining leases, but as consisting in the acquisition of and dealing with mining leases for the purpose of securing a profit from working the leases. The company acquired the leases, sold them, and took shares in the purchasing company, not for the purpose of making a profit on the sale, but for the purpose of securing to itself a share in the profits to be obtained from working the leases. Thus, in my opinion, the profit on the sale was not a trading profit gained in the carrying on of a business, and it is not taxable under the Act.
The question asked in the originating summons is:
"Whether under the provisions of the Dividend Duties Act 1902 and the amendments thereto the said assessment by the respondent of the profits of the appellant for the year ended 30th June 1934 at PD42.736 was correct."
In my opinion the appeal should be allowed and the question answered in the negative.