White v Federal Commissioner of Taxation

(1968) 120 CLR 191
43 ALJR 26

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(Judgment by: Windeyer J.)

WHITE
v FEDERAL COMMISSIONER OF TAXATION

Court:

Judges:
Windeyer J.Barwick C.J.
Taylor and Owen JJ.

Judgment date: 25 June 1968

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Judgment by:
Windeyer J.

June 25.

WINDEYER J. This is an appeal by Mr. Ernest Keith White, whom I shall call the taxpayer, against the decision of the Commissioner of Taxation disallowing his objection to the Commissioner's assessment of income tax in respect of the year ended 30th June 1966. Evidence and argument finished last week and I have since the adjournment considered the matter. The case was restored to the list today as I wished to hear any submission either party might wish to make about the effect of s. 124J of the Income Tax Assessment Act 1936-1966 (Cth), which had not been mentioned earlier. This matter having been discussed, I can now give judgment. I shall do so orally. (at p192)

The question turns upon the inclusion by the Commissioner of a sum of $5,000 in the assessable income of the taxpayer. This sum was on 20th June 1966 credited to the taxpayer's account in the books of a company, R. J. White & Company (Sydney) Pty. Limited, in respect of timber disposed of by the taxpayer to the company. The taxpayer claims this sum was not part of his assessable income. Alternatively he said that, if it is assessable income, he is entitled to a deduction calculated by reference either to the cost to him of the acquisition of the timber or to its value at the date when it was taken by the company. (at p192)

The taxpayer has for many years past been engaged in the business of a timber merchant. He has so described himself and has been so described in legal documents. As a description of the nature of his occupation, the term is entirely apt, although since 1926 he has carried on business mainly by the medium of the company, R. J. White & Company (Sydney) Pty. Limited, a private company formed by him, which, as I shall explain later, was and is entirely under his control, the beneficial interest in which belongs - substantially at all events - to him. (at p193)

It is helpful for the determination of the questions I have to decide to notice the history of the taxpayer's timber business. His father, the late R. J. White, had a timber business, originally at Gosford. Later he moved to Sydney and carried on as a timber merchant from there. The taxpayer is a man now aged I believe about seventy-five years. He served with distinction in the war of 1914-1918. On his return from active service he joined his father in partnership, and they carried on business as timber merchants under the name R. J. White & Company. This partnership business continued until 1925 when the father, R. J. White, died. (at p193)

The taxpayer carried on the business for a short time after his father's death on his own account. Then in February 1926 a company, R. J. White & Company Limited, was formed to take over and carry on the business. This company entered into some association with another company or firm known, I think, as Lamb & Company. In 1935 the persons then concerned with the Lamb organization withdrew from the timber business. The taxpayer then reconstructed his business affairs ; and on 18th July 1935 the company R. J. White & Company (Sydney) Pty. Limited was formed to take over the timber business. This company I shall hereafter refer to as "the company". (at p193)

The taxpayer and six other persons were the original subscribers of the memorandum of association, and each held one share. On 29th October 1935, 2,100 shares were allotted to the taxpayer and in each of the years 1938 and 1939 a further 10,000. Disregarding some intermediate dealings, the position was that until 1953, 22,100 out of 22,108 issued shares stood in the name of the taxpayer. The single shares of the original subscribers' shares were afterwards transferred to him. In 1953 one share was issued to one R. K. Whatley. This share was, as I shall mention later, some years afterwards transferred to the taxpayer. In 1956, 100 shares were issued to one W. A. Tyrrell who, I was told, is a relative of the taxpayer. In the result the taxpayer up till 1964 held 22,108 shares out of 22,209 issued. In 1964 his holding was reduced by 6,400 shares, as he transferred 5,000 of his shares to a subsidiary company then formed known as E. K. White Pty. Limited, a private family company, and 400 shares to Tyrrell and 500 shares each to M. A. Archibald and T. E. McCauley, employees of the company. This, of course, left the taxpayer still by far the largest shareholder. He was in complete control of the company even if the shares transferred to employees belonged to them wholly beneficially, as to which there is no evidence. The taxpayer agreed in the witness box that he has in fact controlled and controls "the day-to-day business of the company". (at p194)

By the company's Articles of Association he is the managing director until he resigns from office or ceases to hold 100 shares. Until then the Articles provided by Article 90:

"The Managing Director shall have power to conduct the business of the Company and to exercise all the powers authorities and discretions vested in the Directors generally or in the Company."

By Article 91:

"Any powers conferred by these Articles on Directors of the Company shall not take effect or come into operation until the termination of the original management "(that being defined as the period of Mr. White's continuance in the office of managing director)" it being the intention to confer on the Managing Director the right to exercise all the powers of the Company . . . including all powers in these Articles expressly conferred on the Directors with the privilege of delegating such powers. . . . The persons to whom such delegation is made will with the Managing Director constitute a Board of Directors but until the termination of the original management such Board shall exercise such powers so delegated at the will of the Managing Director and subject to such restrictions as the Managing Director may impose." (at p194)

These facts are, I consider, relevant. Of course they do not mean that the taxpayer and his company are to be indentified and regarded as one person at law. I am not concerned in this case with what has been called "enterprise entity" rather than "corporate entity", in Professor Gower's book Modern Company Law, 2nd ed. (1957), p. 193. But it is necessary to keep the close relationship between the taxpayer and the company in mind. To see the true legal effect of some of the taxpayer's acts, it becomes important to see which hat he was wearing when the particular act was done by him: was he the managing director of the company or was he the individual, E. K. White? (at p194)

There is no suggestion that he in any way misused his powers as managing director, or that he did anything which was not in accordance with law. And the Commissioner expressly disclaims any reliance on s. 260 of the Act. The company's affairs and profits were, as a matter of book-keeping, kept separate from the taxpayer's personal and domestic affairs and income. He had, however, an advance account and a drawing account with the company and at times his personal debts were discharged by the company and the matter later adjusted by debiting his account. (at p195)

From the time the company was formed the whole, or nearly all, of the affairs with respect to timber in which the taxpayer was interested were conducted through or by the company. The principal business, at all events until the 1940s, consisted in supplying, mainly to government departments and local authorities, poles (for use, for example, as telegraph poles) and piles (for example, turpentine wood piles for use in wharves and other erections in salt water). Logs for these purposes were bought by the company's agents from timber-getters in various parts of the coastal or near coastal area of New South Wales. They were then shipped, mainly from Coffs Harbour in the north or Eden in the south, to Sydney or wherever they were required. Stocks of timber were not ordinarily carried. The business was conducted by procuring timber as required to meet demands. Sawn timber was not a major item in the business, although when a buyer called for a quantity of sawn timber to be supplied along with poles or piles the company, rather than lose the contract to a competitor, would obtain from a sawmiller what sawn timber was wanted. (at p195)

The business was conducted in that way until the outbreak of war in 1939. Soon after that time a new phase begins with the purchase by the taxpayer of a property of 5,232 acres near Gloucester in northern New South Wales. This property was, and a great part of it still is, heavily timbered. This case arises as a result of moneys derived by the taxpayer by the disposal of timber from the property to the company. (at p195)

Much of the evidence which I heard was directed, in one way or another, to ascertaining the precise purpose which the taxpayer had in mind at the time he bought this property. I turn to this although, as will appear, I do not think it a critical matter in the case. (at p195)

The property has been called in these proceedings Terreel. It is in fact part of a larger area of that name which belonged to an old pastoral family named White, not relatives of the taxpayer. The main holding of the White family is at Belltrees on the Hunter River near Scone, some distance from Terreel. The taxpayer was friendly with Mr. A. J. White, a member of this family who lived in Sydney. In 1939 or thereabouts the taxpayer heard that part of Terreel was for sale. He had some knowledge of the district where it lay and he thought of buying it. It was in fact put up for auction in Gloucester, and he was represented at the auction sale: but the property was not sold. Thereafter he had discussions and negotiations extending over some time with A. J. White as a representative of the owners. He, the taxpayer, made two inspections of the land which was for sale; but he viewed it only from its outskirts and did not ride over it. Finally he agreed to purchase it at twenty-nine shillings per acre. A deposit was paid. However, this agreement was not proceeded with at the time as the taxpayer found that his business had been disturbed by the outbreak of war and shipping difficulties. But, after further conversations with A. J. White, the matter was re-opened and a contract for purchase was signed in September 1942. The written contract is not before me. In a letter dated August 1942 the taxpayer said:

"Whether the property will be bought in my own name, that of the Company or my son, I have not yet decided, but I presume that the agreement can go ahead in any name and the ultimate transfer can then be in the desired distinction."

(It seems that "distinction", in the copy supplied to me, is probably a misprint for "direction".) (at p196)

The taxpayer had an only son who was born in 1923. He left school at the end of 1941 and very early in 1942 he enlisted in the Royal Australian Air Force. On completing his training he went on active service in Europe. He was killed in action in July 1944. He had while at school said that he wished to go on the land. I have no doubt that his father's intention was that he should do so. The family plan, apart from the intervention of the war and the son's prompt acceptance of the duty of service, was that he should go to an agricultural college as, apart from some school holidays spent in the country, he had no experience in or training for rural pursuits. He accompanied the taxpayer to Terreel on one of the two brief visits made before it was purchased. Otherwise he, the son, because of his duties in the Air Force never had an opportunity of any further direct connexion with the place. The taxpayer got possession of the property when the contract was signed; but the conveyance was not executed until 2nd August 1945. The taxpayer then took the transfer in his own name. His son had meantime been killed. (at p196)

Some years after the purchase of the 5,232 acres a small adjoining parcel of land on which a cottage stood was bought by the taxpayer as an addition to the main holding, but nothing turns on the purchase of this small additional area. (at p196)

The taxpayer says that his purpose in buying the main area was to develop it into a pastoral property for his son; that after his son's death he kept it for himself and with a view to developing it for pastoral pursuits. I accept completely his evidence that when he bought the land he had in mind that it would probably become in time the property of his son if he should survive the war. I accept his evidence that he had also in mind that it could be progressively cleared and improved for grazing purposes. That I do not doubt was part of his purpose and object in buying the land: but I am not satisfied that it was all that he had in mind: I am not convinced that he did not consider the timber growing on the land or the possibility of profit being made from it. I do not mean to suggest that the taxpayer was as a witness deliberately untruthful, though he seemed ready and careful to discount any suggestion that he saw any value in the timber when he visited the land before purchasing it. Indeed he went so far as to say that he barely noticed the timber. He said that he rode along the boundary fence and "in passing I observed it was not very good timber at all, it was scruffy stuff that was not of any commercial value whatever". And, "I was not interested in the timber; I was buying the property for the purposes of creating a pastoral property for my son". He was asked, "Did you contemplate at the time you purchased your portion of Terreel the sale of timber on it as a commercial proposition?" He answered, "I never even considered it at all, I expected to clear the timber off the property and to create a grazing property". I do not doubt that then and later this was the taxpayer's "vision", as the witness Mackay called it.

But when the manner of his replies is considered with the evidence of what he actually did after the property was bought, and in the light of the whole of the circumstances I am not persuaded that he, a timber merchant and a man experienced in inspecting timber-bearing lands, gave no thought at all to the timber on the land he was purchasing or that he was not influenced at all by its being there. The explanation of what he said about this is I think, in part at all events, that he lost his only son in the war, and that memories of the hopes he had for him dominate his thoughts when the purchase of the property is recalled to his mind. That wishes for his son's future in years to come were a main motive at the time can be understood and accepted. Recollections of this probably now suppress in his memory other things then in his mind. (at p197)

A brief description of the area purchased is necessary. I said I would visit it if it was thought that any good purpose would be served by that. But neither party urged that I do so; and from the evidence given and some general knowledge of country in and north of the Hunter Valley I think I have a sufficient understanding of the kind of place that the taxpayer purchased. (at p198)

The 5,232 acres were at the time separated by a fence from the rest of Terreel, which was kept by the vendors. The part they retained, on which the Terreel homestead stands, had been largely cleared before the taxpayer went there. Its state made him aware, he said, that the adjoining land he was buying could be treated in the same way and thus converted to pasture. His part adjoined the residue of Terreel on one side. It was surrounded on the other sides by State forests known as the Craven Forest and the Myall River Forest. The trees in these forests and on the taxpayer's property were much the same according to the witness McInnes who knew the land well. (at p198)

The taxpayer's part differed from the rest of Terreel not only in being heavily timbered. It is higher, and apparently more rugged. It rises from 500 feet on the south to 1,900 feet at its highest point known as Tallowwood Knob near its north-eastern corner. It lies on a watershed between Terreel Creek, which runs into Ward's River, and the Upper Myall River. There are some deep gorges and steep slopes, but according to the report of Mr. Lane-Poole made in 1951, to be mentioned later, the opening of logging tracks through the land would not be a serious difficulty. (at p198)

The taxpayer said that the whole of the area he purchased was capable of being cleared right up to the highest parts, but that when he went there, because of the vegetation, trees and vines, in some of the gullies parts of the property were virtually inaccessible. He gave this as a reason for his not having gone beyond the outskirts of the area at the time he bought it; and this, he said, was one reason why he was not aware then of the value of the timber. However I am satisfied by the evidence of the witness McInnes, whose statements I accept, that although there was some dense scrub in parts of the gorges and gullies, much of the land was, using his description, "open forest country that is suitable for grazing". He said that it was not difficult to get about on the property and that in fact before it was sold to the taxpayer the vendors, the Whites of Belltrees, had had cattle running there; that two hundred and thirty head were mustered and moved before the taxpayer went into possession. (at p198)

The witness George Mackay was, I thought, an entirely reliable and honest witness. He is a sawmiller at Ward's River, the nearest settlement to the land. He is very experienced in timber matters. In 1941 or 1942 he had a contract to cut trees on the old part of Terreel, that is, the part retained by the vendors. The taxpayer says that Mackay was doing this "for a nominal royalty", and with an obligation to push the heads together and burn them off, that this was a method of clearing the land. From this I was asked to infer that in themselves the trees were more or less an encumbrance and not an asset. Mackay however gave evidence that the royalty he paid for the trees he cut on Terreel was more than the ruling rate for timber at the time, that the timber he got was useful timber, and that the proposal that he should bring the heads together and burn them off as part of his work was not acceptable to him and was not in fact, generally speaking at all events, carried out. He says that he simply felled the trees, removed the logs to his mill and paid the royalty for doing so. Although there is some evidence that the nearest timber on the land purchased by the taxpayer was not as good as the trees still standing on part of Terreel which was being cut by Mackay, it was far from valueless. Mackay had in fact offered to purchase this timber too; but the owners, the Whites, were not willing to sell the timber apart from the land on which it stood, as to do this would have left them with an obligation to pay land tax in respect of the land. It would have been denuded of the valuable timber but still carrying scrub. They wanted to sell the 5,232 acres with the timber standing. This is what in fact they did, selling to the taxpayer. (at p199)

Taking the evidence as a whole, I conclude that there was much useful timber on the property when the taxpayer bought it. I think too that, although he did not then know the full worth of it, he was aware that the timber had a potential value and that this was a factor inducing him to buy the land. (at p199)

Soon after he had got possession of the land in 1942 he began to exploit it for its timber. In 1943 the first road, then a short length only, was put in to enable timber to be got out. In that year and in the next year turpentine and hardwood logs were taken from the land to meet orders the company had from the government. Arrangements for this were made by the taxpayer in the name and on behalf of his company, not on his own account. There was at that time a growing demand for timber. This greatly increased after the war ended. The demand was then for timber of all sorts, particularly for milled hardwood for house building. Prices rose. New sawmills were set up. In this situation a sawmill was in 1946 set up on the taxpayer's land. It was operated by the company, nine to eleven men being employed in its operations. The mill was worked for a few years only. The sawmill licence, tendered as an exhibit, appears to have been renewed until it expired in 1960; but it seems that some ten years before then regular milling operations had been discontinued. For the taxpayer and the company the milling was in a sense a sideline; the main business was in the supply of logs for poles and piles. Poles and piles have been cut on the property and sold by the company continuously up to the present time. (at p200)

Concurrently with the trading in timber from the land by the company, the taxpayer carried on in the early years, from 1943 onwards, some other activities there. The cost of these apparently fell ultimately on him personally, although in some cases payments were made from the company's account and afterwards was debited to his account with the company. Near where the mill had been erected a cottage and some huts were built. About eight acres in that vicinity were cleared and fenced. Part of this area was sown with grass, another part was planted with corn and lucerne. A vegetable garden was started. This work began, as I have said, in 1943 or 1944. A man, in addition to the employees of the mill, was employed as a kind of manager or overseer. This man lived at the place. He was I assume paid by the taxpayer and not by the company. He received instructions from the taxpayer, given by the taxpayer in person on visits to the property or sometimes in writing. (at p200)

In addition to the eight acres or so at what may be called the headquarters area, some seventy-five acres, in patches elsewhere, were cleared, and, in part at all events, sown for pasture. Some dams were constructed across creeks. All this work was done progressively from 1944 onwards until 1951 or 1952. A small area was planted later with pines and another with gums as a kind of experiment in afforestation. One of the areas so planted was at a later stage - I think 1964 - transferred to the family company, E. K. White Pty. Limited, but nothing I think turns on that. In the areas from which the larger timber had been taken clearing was completed by the removal of scrub and undergrowth: but, except on these patches, there was, so far as the evidence shows, no systematic clearing. Large trees were felled for sale or milling but, so far as the evidence shows, there was no general removal of trees and scrub from the land by ringbarking, suckering, poisoning, burning off and scrub clearance. (at p200)

The taxpayer had a few head of cattle on the property for some years from about 1953 - and before then two or three milking cows and a few riding horses for the employees. As the taxpayer expressed it, "Any worthwhile stock was not put on until 1953". A red poll bull and some stud heifers and cows were then put on; and from time to time until about 1959 sales of cattle were made by the taxpayer. There were never more than thirty-five to forty head of cattle on the place, counting them all, bulls, cows, heifers and calves. Partly because of the difficulty of obtaining and retaining a suitable man as a manager, the cattle then remaining were sold in 1959. (at p201)

A little time after the keeping of cattle began the taxpayer bought a stallion and four stud mares which were put on the land with some other horses. The taxpayer was interested in racing. The horse was raced and also a mare which the taxpayer had bred. But after a few years he sold most of his horses, keeping only a few riding horses. (at p201)

The taxpayer regarded his cattle and horse-breeding activities as a more or less minor matter, a hobby apparently. He never returned either profits or losses arising therefrom in his income tax returns. These projects were abandoned by 1959. He said, "We had gradually begun to realize that the timber became a more important function and that it should not be sacrificed in the interests of a few cattle". (at p201)

In 1951 the state of the timber market, the unsatisfied demands for timber and the increased royalties paid for timber cut in the State forest, led the taxpayer to employ an expert, Mr. Lane-Poole, to make a complete survey of his property and to assess the value of the timber on it. His report dated 10th December 1951 was put in evidence. It is an impressive document which shows in close detail the number, type and size of useful timber trees on different parts of the land. Its most significant features for present purposes are that it shows the total value of turpentine, ironbark and hardwood piles and poles - it was before the time of decimal currency - at 11,148 pounds, and the total value of the forest at 476,570 pounds for all mill logs, sleepers, piles and poles, but not including certain brush timbers of uncertain value. (at p201)

Thus, although much timber had already been taken off the land, Mr. Lane-Poole's report revealed that timber still there when he surveyed it was at its then state of growth worth something approaching half a million pounds. These valuations were made at then generally recognized rates, now said to be low in comparison with present prices. The taxpayer accepted the report, and accepts it now as a correct assessment of the amount and value of the trees. He quoted the figures in a letter he wrote to a company, the Masonite Corporation, in 1952 asking whether it would be interested in buying the property. No sale eventuated. (at p201)

Until 1956 the company went on selling timber from the land in quantity each year as part of its regular timber business. HOW much was disposed of in this was not exactly established; and it does not, I think, matter. What is significant is that the timber was sold in the name of the company. No amounts were credited to the taxpayer for his timber thus taken. His personal advantage came simply from his interest in the company, the principal shareholder entitled to dividends from the profits made by the company. His counsel explained to me that at this stage the taxpayer or his advisers thought that if he were paid directly for timber taken from the land to supply the orders which the company received, he would be liable to income tax upon the amounts he received on the basis that the payments were royalties. This was thought to be the result of the decision in McCauley v. Federal Commissioner of Taxation (1944) 69 CLR 235 However, in 1956 a new chapter begins. The decision of the Court in Stanton v. Federal Commissioner of Taxation (1955) 92 CLR 630 was given in October 1955. (at p202)

The taxpayer or his advisers learnt of this decision. It was thought that if the company were to buy timber standing on the taxpayer's land he could take the price spread over a period of years free of tax. Moreover, although the taxpayer says that it never entered his head at the time, the proposal had another advantage for him in that the amount which the company paid him each year as the price of the timber would be treated as an outgoing in gaining its income: the tax that it had to pay would be reduced accordingly and the dividends the taxpayer could receive from its activities might be correspondingly increased. Whether or not he appreciated this incidental effect of the scheme the company has in fact claimed as deductions amounts paid to him. (at p202)

How far the taxpayer concerned himself with whether or not there was any real similarity between his position and the facts in Stanton's Case (1955) 92 CLR 630 does not appear. Someone was apparently told to draw an agreement between the taxpayer and the company similar to the agreement in Stanton's Case (1955) 92 CLR 630 So faithfully was this instruction carried out that a document was produced which is so far a verbatim copy of that document regardless of differences of fact that it is ungrammatical and muddled. In commenting on its defects, I do so without knowing how it came to be prepared. I should however make it clear that the solicitor acting for the taxpayer in the present proceedings was not, nor was anyone associated with him, responsible for it. The parties to the Stanton agreement were, of the one part, two persons described as registered proprietors as tenants in common of the land on which certain timber stood. The party of the other part was a sawmiller described as the purchaser of the standing timber. In the agreement which the present taxpayer made in 1956, he is described as the registered proprietor as tenant in common of the Terreel land; and the company is treated as if it were an individual who could have executors and administrators. Furthermore, although for the noun "vendors" in the Stanton agreement the singular "vendor" has been substituted in the taxpayer's agreement, the related verbs remain in the plural; and cl. 18 has been copied so exactly that the taxpayer is called "they". The taxpayer never was in fact a registered proprietor as tenant in common of his Terreel land. It had been conveyed to him alone by the Whites of Belltrees as tenant in fee simple under common law title. I am assured by counsel for the taxpayer, and counsel for the Commissioner assents, that there was between 1945 and 1956 no dealing by the taxpayer of his sole fee simple interest.

The statement in the document that he was a tenant in common is, I am told, to be regarded as copyist's mistake, as are the other oddities, and that they are all to be ignored. The document, it is said, should be read as an agreement by the taxpayer for the sale of timber by him to the company. I am prepared so to read it. The taxpayer relies upon it, and he is not to be prejudiced in his case by the mistakes of an incompetent draftsman. (at p203 )

The document was, according to the date it bears, executed on 9th May 1956. The original was tendered. It is not stamped in accordance with the Stamp Duties Act, 1920-1852 (N.S.W.). It is suggested that it may be exempt on the basis that it is an agreement for the sale of goods, wares and merchandise; but that is certainly debatable. However, on an undertaking that it will be stamped if liable to stamp duty, I have considered it as in evidence. The taxpayer signed it and the company executed it under its common seal, stated to have been affixed in the presence of W. A. Tyrrell and R. K. Whatley, directors. Whatley was a shareholder at that time, holding one share as I have said. Tyrrell was, as I have said, a shareholder holding a substantial number of shares. When Whatley and Tyrrell became directors and what part they took in the company's affairs does not appear. But, although counsel for the Commissioner at one stage of his argument described the document as a sham, I see no reason for thinking that it was not duly executed. It was not for that reason that he called it a sham. I turn therefore to its terms. Its main operative clauses are as follows:

"1. The Vendor hereby sell and the Purchaser hereby purchases Fourteen thousand Nine hundred and Ninety One (14,991) Hardwood Poles and Piles as described in the Schedule hereinafter and now standing thereon together with the right to cut and remove the said timber from the said land and the said hardwood poles and piles hereby sold shall except where the context otherwise indicates be referred to hereinafter as 'the said timber'.

"2. The Purchase price therefor shall be the sum of Fifty Two thousand One hundred and Ninety pounds (52,190 pounds) which said sum shall be paid by the Purchaser to the Vendor in manner following, that is to say by a deposit of Four thousand One hundred and Ninety pounds (4,190 pounds) on the execution hereof and the balance namely the sum of Forty Eight thousand pounds (48,000 pounds) by Six equal yearly payments of Eight thousand pounds (8,000 pounds) each the first of such payments to become due for payment by the Purchaser on the first day of July 1956 and thereafter such payments shall become due for payment on the first day of July in every year until the balance of the said purchase money shall be fully paid and discharged.

"3. No interest shall be paid by the Purchaser.

"4. For the consideration herein mentioned the Vendor will permit and allow the Purchaser and/or his duly appointed agents or servants for a period of Seven years from the first day of July 1956 to enter upon the said land and to fell thereupon the said timber until the quantity thereof hereby sold is produced and to remove all said timber from the said land and generally to carry out his operations hereunder." (at p204)

There are numerous ancillary clauses. These include provisions about shutting gates, not disturbing stock, etc., etc. derived verbatim from the Stanton agreement. The schedule gives details of turpentine, ironbark and hardwood trees for poles standing on various parts of the land. The number and measurements of trees in feet are given. I need not read them. They are fully set out in the document. These descriptive details seem to have been got from Lane-Poole's report: but, of course, some of the trees he mentioned in 1951 had grown larger before the document was executed in 1956. Indeed there has been a continuous growth of timber. (at p204)

The terms of this 1956 agreement were, it is said, complied with up to a point and for a time. The taxpayer received the stipulated deposit from the funds of the company: and some amounts said to have been on account of instalments payable, were drawn by him from the company, or they were credited to him in the company's books. The evidence shows these amounts, and the years in which they were paid or credited, to have been as follows:

The taxpayer was managing the company's affairs as he thought fit and he did not require it to comply with the agreement. The limitation of the period of the agreement to seven years was entirely disregarded. It is said that at the present time the amounts payable to the taxpayer under the agreement are in arrears to the extent of $38,000. These facts and the irregularity of such payments as were made are relied upon by counsel for the Commissioner as showing that the agreement was a sham in the sense that the parties to it never meant it to have effect according to its tenor, that it was to be merely ostensible to meet the impact of income tax law on the taxpayer's business. In the view I take it is not essential to make a finding as to this. I say only that, on the evidence before me, I do not think that the agreement was at its inception intended to be merely a pretence. I think it was intended to be a reality, although of course produced by considerations of the incidence of income tax; but that as time went on it became convenient to the taxpayer, on his own account and as the controller of the company's affairs, to ignore the agreement. However, $5,000 for the year 1966 was, according to a letter from the accountant acting for the taxpayer, "credited to the taxpayer's account in the books of R. J. White (Sydney) Pty. Limited on 20th June 1966 for the disposal of the timber under the contract of 9th May 1956". This it is now said was on account of the total amount owing. It is this amount which the Commissioner has included in the taxpayer's assessable income for the year ended 30th June 1966. It is the sum in issue in these proceedings. (at p205)

Whatever was the position on the financial side after 1956, poles and piles were thereafter from time to time felled and sold in the name of the company to fill orders as they were received. In short, the company's business in timber obtained from the land continued to be carried on as it had been before the 1956 agreement: whatever the change in the legal complexion of the company's affairs vis-a-vis the taxpayer, its business with buyers of poles and piles obtained from the Terreel land went on as before. There was, however, a change in the way the taxpayer dealt with other timber on the land. (at p206)

Before the 1956 agreement all sales of timber had been in the name of the company and in the course of its business. If there were any exceptions to this they were very few. The company obtained gratuitously from the taxpayer the timber which it sold from the land. But from 1956 onwards the taxpayer regularly sold timber from the land on his own account. This went on concurrently with the sales by the company of timber from the land. The taxpayer had found that selling timber from the land would not necessarily make him liable to tax on the basis that the receipts were royalties. By what seems to have been a misunderstanding of Stanton's Case (1955) 92 CLR 630 , he now, it seems, thought that he could himself sell timber regularly to buyers without incurring a liability to tax in respect of the proceeds. From 1956 to 1967 he sold quantities of timber to various buyers. The evidence discloses the following particulars of sales to persons, five in all, other than the company in that period.

The first question in the case, as I see it, is whether amounts received by the taxpayer from the disposal of timber, whether received from the company, as was the particular sum in question in these proceedings, or received from other buyers, were all part of the taxpayer's assessable income as the Commissioner claims. The onus is on the taxpayer to establish that the assessment is erroneous. His case has been conducted on the basis that the question depends primarily upon the effect of the 1956 agreement. (at p207)

The Commissioner's first contention is that the amounts the taxpayer received, including that in question here, are gross income of the taxpayer according to the ordinary conception and meaning of that term, and thus made part of his assessable income by s. 25 of the Act. Alternatively, or additionally, it is said for the Commissioner that the amount in question is profit, or contains for the taxpayer an element of profit, arising from the carrying on by him of a profit-making undertaking or scheme within the meaning of s. 26 (a) of the Act. (at p208)

The taxpayer's main answer, as I understood the argument, is that the amounts he received for the timber he sold pursuant to the agreement were the proceeds of the realization of part of a capital asset. Standing timber, it was said, is part of the realty; and the land was acquired for the purpose of holding it as land and developing it for grazing: the selling of timber was an incidental activity. (at p208)

I do not think it is necessary to determine in exact detail what was the state of the taxpayer's knowledge, mind, purpose or intentions in buying the land; nor do I think it necessary to consider the distinction which has been made in some cases, particularly in New Zealand, between a purpose and the ways by which a man may intend to accomplish his purpose. All I would say is that I consider that the taxpayer expected the property to be in one way or another a revenue-producing asset for himself or his son and that he purchased it with that in mind. (at p208)

I do not think that the case falls within the first limb of s. 26 (a). I do not think that for its decision it is necessary to resort at all to s. 26 (a), although if it were, the second limb would I consider cover the case. In H. R. Lancey Shipping Co. Pty. Ltd. v. Federal Commissioner of Taxation (1951) 5 ALTR 135

Williams J. pointed out that:

"Prior to the enactment of s. 26 (a), however, it had long been the law that profits made on a realization or conversion of securities are assessable income where what is done is not merely a realization 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 TC 159, at p 166; Colonial Mutual Life Assurance Society Ltd. v. Federal Commissioner of Taxation (1946) 73 CLR 604 , at p 614The purpose of enacting s26 (a) appears to have been to overcome the decision of the House of Lords in Jones v. Leeming [1930] AC 415 , that a profit arising from an isolated transaction of purchase and sale is not in the nature of income but an accretion to capital" (1951) 5 AITR, at p. 140.

The position in my view is made perfectly clear in the judgment of Dixon J. in Premier Automatic Ticket Issuers Ltd. v. Federal Commissioner of Taxation (1933) 50 CLR 268 where his Honour said:

"In Ruhamah Property Co. Ltd. v. Federal Commissioner of Taxation (1928) 41 CLR 148 , at p 151, in the judgment of Knox CJ, Gavan Duffy, Powers and Starke JJ., the rule was restated: 'The principle of law is that profits derived directly or indirectly from sources within Australia in carrying on or carrying out any scheme of profit making are assessable to income tax, whilst proceeds of a mere realization or change of investment or from an enhancement of capital are not income nor assessable to income tax' . . ." (1933) 50 C.L.R., at p. 297.

His Honour further said that the phrase "carrying out" appears to cover the habitual pursuit of a course of conduct. That, I think, is what occurred in this case, the selling of timber from the land as a regular business and course of conduct carried on with a view to profit. In the earlier years the selling was done by the taxpayer on behalf of and acting as managing director of his company. In the later years the business was carried on by him on his own behalf. (at p209)

I turn to some of the cases which are cited; I do not think it necessary that I discuss all of them but there are some observations to be made. (at p209)

In McCauley's Case (1944) 69 CLR 235 , a landowner was paid money by a timber-getter who was given the right to cut and remove standing timber on the land for a stipulated price for each and every hundred superficial feet of timber cut. The moneys thus received by the landowner were held by a majority of this Court to be royalties within the meaning of s. 26 (f) of the Act and thus to be part of the landowners' assessable income. It is important to notice that in that case, as Chief Justice Latham expressly said (1944) 69 CLR, at p 239 , it was not contended "for the Commissioner that the taxpayer was carrying on a business of selling timber, and that the facts" shewed "that no such contention could have been supported". The timber sold under the agreement there was therefore regarded as a capital asset sold and paid for by instalments. The amounts received were thus not income according to ordinary concepts. They were made part of the assessable income by a special statutory provision. In Stanton's Case (1955) 92 CLR 630 the facts were essentially different in their legal complexion. Again it was not contended that the taxpayer was carrying on a business of selling timber. That it was not was said arguendo, as appears from the report in the Commonwealth Law Reports at p. 636; and this was not controverted. The transaction was an isolated one. What the taxpayers in fact did was to sell 5,000 super feet of standing millable timber to a sawmiller for a stipulated price; the price was payable by the buyer by quarterly instalments whether or not any timber was cut; and the cutting or removal of the timber was not the occasion of the payments; in fact there was a single sale of a stand of timber The only question submitted to the Court in Stanton's Case (1955) 92 CLR 630 was whether the amounts received were received by way of royalty and thus taxable according to the decision in McCauley's Case (1944) 69 CLR 235 The facts were, as the Court said, markedly different.

It was held that the moneys in question were royalties. That decision has thus very little bearing on the question I have to decide, for it is not suggested by the Commissioner that the sum here in question was a royalty. (at p210)

The question is not I think resolved by saying that growing timber on land is part of the freehold and thus a capital asset, for the sale of the particular asset may occur in the normal course of business to produce income: see the judgment of Menzies J. in Australasian Catholic Assurance Co. Ltd. v. Federal Commissioner of Taxation (1959) 100 CLR 502 (at p210)

In Clowes v. Federal Commissioner of Taxation (1954) 91 CLR 209 , the two members of an equally divided Court whose view prevailed, held that the moneys in question were not income because the transaction from which they arose was not done in the course of the taxpayer's business. Dixon C.J. said (1954) 91 CLR, at p 218 "There is no suggestion that it formed part of any system or practice". Kitto J. said (1954) 91 CLR, at p 223 "It was not in the course of any business of his that the appellant entered into his transactions with the company. So far as appears, he was making isolated investments of capital". I quote these passages simply to show that the question in this case is quite unlike anything there under consideration. (at p210)

Thomson v. Deputy Federal Commissioner of Taxation (1929) 43 CLR 360 is distinguishable on its facts from this case. But it is significant that the Court there said that "there is . . . no question in this case of a business, trade, pursuit or avocation" (1929) 43 CLR, at p 363 When land is used in a business of extracting and selling things growing thereon or forming part thereof, the proceeds of the business are income. And, although they be derived from land which is thus a wasting capital asset, expenditure in acquiring that asset, or the value thereof, is not ordinarily deductible. It is not an outgoing on revenue account. It is an outgoing of a capital nature and thus not deductible: s. 51 (1). This can be made to appear to contradict the general statement made in Webster v. Deputy Federal Commissioner of Taxation (W.A.) (1926) 39 CLR 130 , at p 138 that "in calculating taxable income for the purposes of the Act the profits of a business can only be determined after providing the commodities in which it is dealing". But I do not think that the taxpayer's purchase of the land with its growing crop of timber can be regarded as a purchase of the timber as trading stock within the meaning of s. 51 (2). (at p211)

I was referred to a number of cases in which what I take to be the governing principle was mentioned. I have considered them and others. It is, I think, enough to mention here Kauri Timber Company Ltd. v. Commissioner of Taxes (N.Z.) [1913] AC 771 ; Mohanlal Hargovind of Jubbulpore, Messrs. v. Commissioner of Income Tax, Central Provinces and Berar, Nagpur [1949] AC 521 (a different kind of case), at pp 528-529 , and Stow Bardolph Gravel Co. Ltd. v. Poole (Inspector of Taxes) [1954] 3 All ER 637 In the Kauri Timber Company's Case [1913] AC 771 the Privy Council (1913) AC, at p 778 said that the broad general principle, settled in relation to mines, is equally applicable to timber-bearing land. The latter indeed provide a plainer case. Forests regenerate themselves in time. Young trees grow to maturity. The land, the capital asset, is not wasted by removal of timber in the same way as is a mine by extraction of minerals. When cleared of timber the land can be put to new uses. (at p211)

In my view the sum in question in this case formed part of the taxpayer's assessable income. The appeal must therefore be dismissed. (at p211)

There is, however, a further question. In the notice of objection the taxpayer claims and puts as a secondary objection, as follows:

"That if the amount in question is held to be the proceeds arising from a business of the selling of timber or rights to remove timber, then I am entitled to a deduction from such amount of the value of the growing timber disposed of which until its severance from the land formed part of my grazing property and, therefore, part of my non-circulating capital and that the value of the said growing timber at the date of its severance was not less than the aforesaid amounts paid to me." (at p211)

If s. 26 (a) were relied upon as the sole source of the liability to tax, then it may be that the taxpayer's claim to a deduction could be sustained. (at p212)

The second limb of s. 26 (a) is in terms descriptive in this case, because the moneys in question were earned in the carrying on of a profit-making undertaking. If that were all, it would be necessary to inquire whether the whole amount of the $5,000 was, within the meaning of that section, profit arising from the carrying on of the undertaking. The whole of the proceeds of the undertaking may not be profits within the statutory description: but that s. 26 (a) aptly describes the source of this revenue does not mean that without the aid of that provision it would not be part of the taxpayer's assessable income. I accept the view of s. 26 (a) which Dixon C.J. expressed in Clowes' Case (1954) 91 CLR, at p 217, that it was "aimed at bringing what might otherwise have thought possibly to be capital profits within the conception of income". As I understand it, s. 26 makes some receipts of money which might not on general principles be regarded as income assessable income for the purposes of the Act. It does not I think have the reverse effect and make "not income" any sums, or parts of sums, which would on general principles be income. (at p212)

It was not disputed that if the sum of $5,000 in question formed part of the taxpayer's assessable income, it was to be taken into account in the year ended 30th June 1966. (at p212)

One question remains. That is whether any part of the sum of $5,000 is made an allowable deduction by s. 124J. I raised this question and it was argued by counsel this morning. Mr. Deane, for the Commissioner, urges that I ought not to consider it at all, as it was not expressly mentioned in the taxpayer's notice of objection; and s. 190 provides that "the taxpayer shall be limited to the grounds stated in his objection". There are, I think, two answers to that. The first is that the taxpayer did claim by his objection that if the sum in question were part of his assessable income he was entitled to a deduction for the cost or value of the timber. That this proposition was in the objection stated, and argumentatively expanded, without reference to s. 124J, does not I think preclude consideration of the bearing of that section on the objection made. Secondly I refer to s. 199. If facts fairly given in evidence within the scope of the objection showed that the taxpayer was entitled to an allowable deduction, and that this had not been allowed in making the assessment, I do not think that the Court should confirm the assessment expressly or by implication. Yet there would be no material in evidence on which to determine by what amount it should be reduced or varied. In such a case I would therefore remit the matter to the Commissioner for him to amend the assessment or to issue a fresh assessment. Section 199 empowers the Court to make such order as it thinks fit. And that I think would in such a case be the just order to make. That being my view of the power and the duty of the Court, I have considered whether s. 124J does apply to this case, and I have heard submissions by counsel on both sides on that. (at p213)

Section 124J, when it applies, displaces the effect of some of the decisions to which counsel for the Commissioner referred; and it enables certain expenditure on capital account to be set against timber royalties, which although they may be of a capital character are counted as income by the Act. However, it seems to me that in relation to the sum of $5,000 now in dispute the section does not apply. I say that because it could only arise if, within the words of par. (b) of it, timber was felled in the year of income in question pursuant to a right granted by the taxpayer to the company to fell timber in consideration of payments as or by way of royalty. But the taxpayer's whole case is based on the proposition that the $5,000 had no relation to any timber taken by the company in the year in question, and moreover that payments under the 1956 agreement were not by way of royalties. The 1956 agreement was in fact modelled on that in Stanton's Case (1955) 92 CLR 630 to avoid the possibility of royalties and the Commissioner concedes that assuming it to have been intended to operate according to its tenor, it does so. Whether s. 124J would apply to the sums the taxpayer received for timber sold in other years to persons other than the company I do not have to decide. Details of those transactions are not before me and no question about them arises directly in this case. I therefore say only that so far as the evidence goes no part of the price which the taxpayer paid for the land was expressly attributed by the parties to the contract to the timber on it. And the taxpayer has been at some pains to say that he did not place a value on the timber when he acquired the land. That may not mean that no part of the price of the land can - using the word of s. 124J - be said to be "attributable" to the timber. That, however, I need not consider and as to it I express no opinion. (at p213)

For the reasons I have given I dismiss the taxpayer's appeal from the Commissioner's decision. (at p213)

The Commissioner asks for costs: I dismiss the appeal with costs. (at p214)

As the taxpayer's advisers wish to consider the position when they have been provided with a written transcript of my reasons after I have had an opportunity to revise it, I shall make the formal order date as of today week. It will include the usual order as to exhibits but exhibit B, the 1956 agreement, may be handed out in the meantime to the solicitor for the taxpayer for the purpose of its being stamped if it be dutiable under the New South Wales Stamp Duties Act. (at p214)

The taxpayer appealed to the Full Court of the High Court against the judgment and order of Windeyer J. (at p214)

P. J. Kenny Q.C. (with him C. V. Cullinan), for the appellant. The sale on terms was only a realization of property acquired as capital. A sale for the purpose of realization is not converted into a business simply because a number of sales is made instead of one: Scottish Australian Mining Co. Ltd. v. Federal Commissioner of Taxation (1950) 81 CLR 188 Australasian Catholic Assurance Co. Ltd. v. Federal Commissioner of Taxation (1959) 100 CLR 502 is distinguishable: the realization of investments as a step in carrying on a business of insurance is entirely unlike this case. The spreading of realization over a series of sales, even accompanied by some acts intended to promote sales, does not convert the process of realization into the carrying on of a business. The indicia of a business are not present; there is no repetition of acts: Blockey v. Federal Commissioner of Taxation (1923) 31 CLR 503 (He referred to Tweddle v. Federal Commissioner of Taxation (1942) 7 ATD 186 , at p 188 .) (at p214)

(TAYLOR J. referred to Dudman v. Federal Commissioner of Taxation (1963) ALR 31 .) (at p214)

If the taxpayer was carrying on a business the sum sought to be brought to tax is a deduction referable to the value of the property committed to the business at the time it was commenced. (He referred to New Zealand Flax Investments Ltd. v. Federal Commissioner of Taxation (1938) 61 CLR 179 , at p 197 ; Ballarat Brewing Co. Ltd. v. Federal Commissioner of Taxation (1951) 82 CLR 364 , at pp 368, 370 ; Colonial Mutual Life Assurance Society Ltd. v. Federal Commissioner of Taxation (1946) 73 CLR 604 , at pp 615, 621 ; Official Receiver v. Federal Commissioner of Taxation (1956) 96 CLR 370 ; Sharkey v. Wernher [1956] AC 58 , at p 72 .) Hobart Bridge Co. Ltsd. v. Federal Commissioner of Taxation (1951) 82 CLR 372 , at p 384 shows that it is incorrect to ascribe to a taxpayer the activities of a company he controls. (at p215)

W. P. Deane Q.C. (with him C. S. C. Sheller), for the respondent. The amount received is income in the ordinary sense of the word and is brought to duty by s. 25. The taxpayer has made regular sales of timber and has received regular receipts therefrom. The intention of the taxpayer is also important. Stanton v. Federal Commissioner of Taxation (1955) 92 CLR 630 is distinguishable: there was only one sale in question there. There can be no deduction of the value of the timber: Kauri Timber Co. Ltd. v. Commissioner of Taxes [1913] AC 771 ; Hood Barrs v. Inland Revenue Commissioners [1957] 1 All ER 832 It is relevant to whether the taxpayer carries on a business that he has done the same type of thing through a company controlled by him. Even if the receipt is not income in the ordinary meaning of the word, it is caught by the second limb of s. 26 (a). For the purpose of s. 26 (a) the distinction between a man and his company should not apply. The taxpayer carried out his profit-making scheme by directing all the timber into the hands of the company in which he held all the shares. (at p215)

P. J. Kenny Q.C., in reply. There is no scheme within s. 26 (a) because there was no programme or plan of action: Clowes v. Federal Commissioner of Taxation (1954) 91 CLR 209 , at p 225 A general feeling in a taxpayer that property might be used to make money in the future is not enough. There must be something to indicate in what way it is to be turned to advantage. There is no scheme when all that is contemplated is a sale of property which a taxpayer already owns: Federal Commissioner of Taxation v. Becker (1952) 87 CLR 456 , at p 460

Cur. adv. vult. (at p215)