Federal Commissioner of Taxation v. N.F. Williams.

Judges:
Barwick CJ
McTiernan J
Menzies J
Gibbs J

Court:
High Court (Full Court)

Judgment date: Judgment handed down 1 November 1972.

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Barwick C.J.: The respondent was given by her husband a one-third interest in land in Dianella, a suburb of Perth, held in common with two other persons. She was duly registered as the proprietor of that interest. That was in 1962. In 1968, the respondent and one of her co-owners of the land, on the advice they then received, decided that the time was opportune to sell the land. It was obviously most profitable to sell it in

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ATC 4189

sub-division. Such a course had the additional advantage that the wishes of the third co-owner who was not desirous of selling could be met by reserving from sale some lots which could remain in the absolute ownership of that former co-owner. Accordingly, in order to meet the wishes of that co-owner and to realise to the best advantage so much of the land as it was agreed should be sold, the land was sub-divided and prepared for sale by roading etc. The respondent received out of the proceeds of the sales which were subsequently effected a net sum of $72,400 representing her interest in the land.

The appellant has claimed that this sum less the estimated value of her interest in the land at the time of its gift to her (namely $6,666) is assessable under the provisions of the Income Tax Assessment Act 1936-1970 (the Act) either as income within the ordinary concepts of income and thus under sec. 25 of the Act or as falling within the terms of sec. 26(a) of the Act. He assessed the respondent to tax accordingly.

The elements of fact on which the appellant founds his assessment are that the respondent's husband had acquired his former interest in the land purposing to make a profit by its resale; that the respondent's husband had given the interest in the land to the respondent so that she rather than he should gain by its ultimate sale; that the respondent intended at the time of accepting a transfer of the interest in the land to realise it in the future for more than the value it had when she received it; and the business-like manner of realisation of the land in sub-division in agreement with the other co-owners.

The appellant says that, because of these circumstances, the purchase of the interest in the land, its transfer to and acceptance by the respondent and its realisation constituted a profit-making scheme to which the respondent's husband as well as the co-owners of the land were parties. Alternatively, it is submitted that the acceptance by the respondent of her interest in the land with the intent she then had and its subsequent realisation was a profit-making scheme on her part. In either case it is said the terms both of sec. 25 and of sec. 26(a) were satisfied. It was also said that the acceptance of the gift by the respondent with an intention in due course to sell it in collaboration with the co-owners to the best advantage warranted the conclusion that the respondent acquired her interest in the land for the purpose of resale at a profit.

But, assuming these facts to have been established in the evidence, though not all found by the Justice who heard the taxpayer's appeal at first instance, the receipt by the respondent of the proceeds of the sale of the land cannot, in my opinion, be regarded as income according to ordinary concepts of income. The intention with which the respondent's husband purchased his interest in the land and his purpose in divesting himself of that interest are, in my opinion, irrelevant to the determination of the character for the purposes of the Act of the receipt by the respondent of the proceeds of the sale of her interest in the land. Neither the fact that the respondent's husband had purchased what he later gave to his wife with a view to its resale by him at a profit nor the fact that the respondent's husband subsequently decided to transfer the interest in the land to the respondent so as to deny himself the opportunity to make a profit by its sale and to provide the respondent with an opportunity to make money is relevant, in my opinion, to the determination of whether or not the respondent received assessable income when she obtained her share of the proceeds of the sale of the land.

It is essential, in my opinion, to the success of the submission that the proceeds of the realisation of the land constituted in this case income within sec. 25 that they were received in the course of a business venture. There is no warrant, in my opinion, for coalescing the intentions and purposes of the respondent's husband with those of the respondent in realising her interest in the land so as to attribute to her an intention to conduct a business. So far as the taxation of the respondent is concerned, the matter begins with her acceptance of a gift. Neither in holding the land whilst it appreciated in value nor in selling it in collaboration with her co-owners was she engaging in any business. The circumstances that the respondent relied upon her husband's advice and assistance in the realisation of the land, and that her

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ATC 4190

husband conferred with her co-owners or their representatives in connection with the decision to sell and the manner of sale of the land, in my opinion, do not affect the relevant character of her receipt of part of the proceeds of the sale of the land. Assuming the respondent at the time of the receipt by her of the title to the one-third interest in the land to have intended to accept the advice of her husband that she should hold that interest until it could be realised at a price greater than the amount he had paid for it or greater than its value at the time of the gift, the proceeds of sale were, in my opinion, no more in the hands of the respondent than the result of the realisation of a capital asset. Those proceeds in the circumstances could not properly be included as assessable income under sec. 25.

Further, the acceptance of the gift was not, in my opinion, an acquisition of the interest in the land with the purpose of profit-making. I find it difficult to conceive of the unsolicited receipt of a gift as purposive in any relevant sense on the part of the beneficiary. But in particular, I am unable to accept the submission that the acceptance of such a gift can be held to be an acquisition for the purpose of profit-making, however much the receipt or the prospect of the receipt of the donation might excite in the mind of the donee a vista of money-making by its subsequent sale. Also, having had the benefit of the argument in this case, including consideration of the advice of their Lordships in
McClelland v. F.C. of T. 70 ATC 4115 ; 120 C.L.R. 487 , I remain of the opinion that the realisation of a gift, however elaborately made, can neither yield a profit nor in itself be a profit-making scheme.

The facts of the present case eloquently illustrate the point. The respondent was given an interest in land in common with others. To realise her asset, she must either seek partition, or join with her co-owners in selling entire interest in the land. As I have mentioned, one co-owner did not wish to sell. The sale in sub-division, some lots being withheld to be attributed to the unwilling co-owner's interest in the entirety, was at once a substitute for partition and the realisation of the respondent's asset in the most beneficial manner. In the first place it is impossible, in my opinion, to discover a ``profit'' made by the respondent by this realisation. There was no cost to her of her asset. Her contribution to the cost of sub-dividing the land was part of her expense of realisation and nothing more. In the second place, neither the resolution to realise the land by sub-division and sale, nor the sub-division and sale could, in my opinion, constitute a profit-making scheme so far as the respondent was concerned. Lastly, the respondent did not adventure her interest in the land as capital in a business in any relevant sense. In that connection, I ought to mention that in saying in
F.C. of T. v. McClelland , (1968) 118 C.L.R. 353 at 371 , that where the inheritor adventures the inheritance as the capital of a business no part of the value of the inheritance will be deductible in determining the income of that business, I had in mind a business which yielded recurrent income and not merely a profit, in the sense of the difference between the total sum put into the venture at its inception and the total realised by its close. In the latter case, as for example, the building of houses for sale on inherited land, the value of the land at the time it is adventured into such a ``business'' would be a deduction against the total return. However, as I have said, the respondent, in my opinion, did not use her interest in the land as the capital or part of the capital of a business venture.

For these reasons, I accept the conclusion of my brother Stephen that the assessment in this case should be set aside.

Before parting with the matter, I should say that in expressing my views in this case I have not found it necessary to discuss the precise extent of all the reasons given by their Lordships in McClelland v. F.C. of T. (supra) for the advice tendered in that case. Such a discussion is unnecessary in order to dispose of the present case and must await an occasion when it becomes necessary to enter upon it.

In my opinion, the appeal should be dismissed.