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

Members: Barwick CJ
McTiernan J
Menzies J

Gibbs J

Tribunal:
High Court (Full Court)

Decision date: Judgment handed down 1 November 1972.

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Gibbs J.: On this appeal, which is brought by the Commissioner of Taxation from a judgment of Stephen J., the facts are not in dispute. The respondent taxpayer is the wife of one Williams who in 1959 bought with two other men, Campbell and Scahill, as tenants in common in equal shares, two adjoining lots of land, ten acres in area, on the outskirts of Perth in what is now the suburb known as Dianella. The land, which was bought for a total price of £ 2,000, was sandy and covered with dense scrub; it was unsuitable for agriculture and was inaccessible but it was likely that, as the city developed, it would prove valuable for residential purposes. Williams said that he bought his interest as an asset for his old age and a buffer against inflation, and it seems clear, or can at least be assumed, that he bought it for the purpose of holding it and later reselling it at a profit. In 1962 Williams consulted an accountant and was told that if the land were sold the Commissioner would probably seek to tax him on the profit arising from the sale, but that if he made a gift of his interest to his wife it would be unlikely that she would be taxed on any profit that she might make on a sale. Williams repeated this advice to Campbell and both decided to act on it. Scahill, however, wished to retain his interest in the land. On 18 October 1962 the three co-owners executed a transfer from themselves to Mrs. Williams, Mrs. Campbell and Scahill as tenants in common in equal shares. Williams paid gift duty on the transactions and for the purposes of assessing that duty the land was valued at £ 10,000. It was not suggested by counsel for the Commissioner in argument before us that the gift by Williams to his wife was anything other than a genuine transaction; there was no suggestion, for example, that it was intended that Williams should continue to own the interest in the land and that the transfer was merely intended to cloak his continuing ownership. Moreover, Stephen J. found, and his finding was not challenged, that although Mrs. Williams welcomed the gift she in no sense solicited or procured it. Mrs. Williams said in evidence that at the time when the interest in the land was transferred to her she understood from the explanations given to her by her husband that he intended that she should hold it until the price of the land had risen and the time was favourable to sell or until she needed to sell. There was, however, no evidence that she made any agreement with her husband that she would follow any particular course with regard to the retention or disposal of the interest in the land.

Williams, Campbell and Scahill had referred to themselves as members of a syndicate and after the transfer it appears that Mrs. Williams, Mrs. Campbell and Scahill similarly regarded themselves as members of a syndicate. This was only another name to describe their position as co-owners, for before about 1968 they had not agreed to do any more than keep the land indefinitely. Between 1962 and 1968 there had apparently been a considerable rise in the price of land in

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Western Australia but in the latter year Williams, who was a partner in a firm of real estate agents and experienced in these matters, formed the opinion that the boom was over and told his wife that it would be a good time to sell. There is no doubt that Mrs. Williams was guided entirely by her husband in relation to the land, and she accepted his advice. Mrs. Campbell also agreed to sell but Scahill was reluctant to do so, because he feared that he would be liable for tax on his profits. However, application was made to sub-divide the land and in December 1968 approval was obtained to its sub-division subject to certain conditions, including the construction and drainage of roads and the regrading of the land at the sub-dividers' expense. These conditions were later fulfilled. Eventually the three co-owners agreed on a method of disposal of the land. There were thirty-five blocks in the sub-division and of these it was agreed that Scahill should be entitled to ten, that Mrs. Williams and Mrs. Campbell should be jointly entitled to twenty and that all three of the co-owners should be jointly entitled to five. In the event, all the blocks jointly owned by Mrs. Williams and Mrs. Campbell and by Mrs. Williams, Mrs. Campbell and Scahill, and two blocks owned by Scahill alone, were submitted for sale by auction; of the blocks so submitted most were sold by auction and the others were sold by private treaty. Mrs. Williams' net share of the proceeds of sale was $72,400. The Commissioner by an amended assessment assessed her to tax on $65,734 which represents the amount of the proceeds of sale which she received less one-third of the total value of the land as accepted for gift duty purposes in 1962. On appeal to Stephen J. this amended assessment was set aside.

It was submitted on behalf of the Commissioner that the amount of $65,734 was income either within sec. 25(1) of the Income Tax Assessment Act (Cth), as amended (``the Act''), or within sec. 26(a) of the Act. It is convenient first to deal with the contention upon which the Commissioner placed the least reliance, viz. that the amount represented profit arising from the sale by the taxpayer of property acquired by her for the purpose of profit-making by sale within the first limb of sec. 26(a). In my opinion it is impossible to maintain that contention, having regard to the decision in McClelland v. F.C. of T. 70 ATC 4115; 120 C.L.R. 487 and to the facts of the present case. It is not a natural use of language to say that a person who becomes the owner of property as the result of an unsolicited and unconditional gift has acquired that property for the purpose of profit-making by sale, even if he intends to sell the property after he gets it. In applying the first limb of sec. 26(a) it is necessary to determine what was the main or dominant purpose actuating the acquisition of the property (see the cases cited in
Jacob v. F.C. of T. 71 ATC 4192 at pp.4193-4194 ). If a donee who passively receives property the subject of a gift can be said to acquire that property within sec 26(a) (which is doubtful), the main or dominant purpose with which he acquires that property (as distinct from any purpose for which he may later hold it) is simply to accept the bounty of the donor.

The Commissioner's main submissions were that part of the proceeds received by the taxpayer was income according to ordinary concepts or was profit arising from the carrying on or carrying out of a profit-making undertaking or scheme within the second limb of sec. 26(a). According to the Commissioner the three co-owners of the land adopted and put into effect a plan pursuant to which they held the land until its price reached the right level and then with professional assistance, improved and sub-divided the land and sold it in a methodical fashion; all this, it was said, meant that the co-owners had engaged in an adventure in the nature of trade which produced a receipt of an income nature and also meant that the co-owners were parties to a scheme whose features gave it the character of a business deal and brought it within the second limb of sec. 26(a).

An owner of land who holds it until the price of land has risen and then sub-divides and sells it is not thereby engaging in an adventure in the nature of trade, or carrying out a profit-making scheme. The situation is not altered by the fact that the landowner seeks and acts upon the advice of an expert as to the best method of sub-division and sale or by the fact that he carries out work such as grading, levelling, road-building and the

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provision of reticulation for water and power to enable the land to be sold to its best advantage. The proceeds resulting from the mere realisation of a capital asset are not income either in accordance with ordinary concepts or within the second limb of sec. 26(a), even though the realisation is carried out in an enterprising way so as to secure the best price: McClelland v. F.C. of T., supra, at pp. 4119, 4120, and cases there cited;
Eisner v. F.C. of T. , 71 ATC 4022 at p. 4034; 45 A.L.J.R. 110 . The decision in
Official Receiver v. F.C. of T. (Fox's case) (1956), 96 C.L.R. 370 cannot be regarded as an authority to the contrary, notwithstanding some expressions in the judgment in that case which are somewhat difficult to explain. One Fox had carried on the business of reclaiming and selling land which was low lying and swampy and affected by tidal waters. After his death, the Official Receiver, as trustee of his bankrupt estate, completed such of the work as remained to be done - mainly spreading top-dressing, re-shaping allotments and park areas and providing roads and drainage - and sold the allotments. The Court said that the land, which, as it came into the hands of the Official Receiver (the taxpayer), possessed a fixed and definite value, was, as a result of the activities of the taxpayer, made to yield net proceeds considerably in excess of what otherwise could be obtained (see at p.387). The decision that the Official Receiver had carried out a profit-making undertaking or scheme must have proceeded on the view that his activities went beyond those of mere realisation. It has often been said that the line between realisation, on the one hand, and the carrying on or carrying out of a business or a profit-making scheme, on the other, is difficult to draw and that the decision of each case must depend upon its own facts. The circumstances of Fox's case were, as the Court there recognised, exceptional.

So far I have been discussing together the questions whether the proceeds derived by the taxpayer from the sale of the land were income within ordinary usages and concepts and whether those proceeds were profits arising from the carrying out of a profit-making scheme within the second limb of sec. 26(a). However, although closely related, they are separate questions, since sec. 26(a) ``provides a statutory criterion which must be applied directly and cannot be treated as going no further and producing no different result than would a criterion expressed as `exercising trade' or `carrying on a business':'' Official Receiver v. F.C. of T. (Fox's case), supra, at p.387;
White v. F.C. of T. (1968), 120 C.L.R. 191 at p.219 . I do not understand the remark in McClelland v. F.C. of T., supra, at p.4120, that the same criteria had to be applied in considering the two questions, as intended to mean that the second limb of sec. 26(a) is entirely otiose; their lordships were there speaking of the particular situation before them and expressly said that the Commissioner's case under sec. 25(1) was ``quite independent of sec. 26(a)''. However, it is not necessary in the present case to discuss either the full scope and meaning of the second limb of sec. 26(a), or all the implications of McClelland v. F.C. of T., supra.

Turning now to the Commissioner's argument that the case comes within sec. 25(1) of the Act, it seems to me that the co-owners did no more than realise their asset in an ordinary and prudent way. There are no circumstances that could enable it to be said that in so doing they carried on a business or engaged in an adventure in the nature of trade. The Commissioner placed some reliance upon the decision of the House of Lords in
Edwards (Inspector of Taxes) v. Bairstow , [1956] A.C. 14 . That case shows that the fact that a transaction is an isolated one does not necessarily prevent it from being an adventure in the nature of trade, but is has otherwise little bearing on the present question. There the taxpayers bought machinery with the intention, not to use or hold it, but to resell it quickly and make a profit on the deal (see at pp. 36-37). The transaction was a commercial one, and nothing but a commercial one, from beginning to end. The case is thus quite distinguishable from the present, where it is impossible to say that the taxpayer began an adventure in the nature of trade when she received her interest in the land. The proceeds which the taxpayer derived from

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the sale were not income within the ordinary understanding of the term.

In elaboration of the Commissioner's contentions under the second limb of sec. 26(a), it was submitted that the three original co-owners had formed a plan (which it was said was a scheme within that section) to buy the land, hold it and then sell it at a profit, and that subsequently a new scheme within the meaning of the section had been entered into between the three original co-owners and the two wives; this scheme involved the transfer of the interests from the husbands to the wives, the further retention of the land by the new co-owners and the subsequent disposal of the land. There is simply no evidence to support the argument that the taxpayer carried into execution a plan to which the three original co-owners were parties. The Commissioner relied upon the fact that the taxpayer acted upon the advice of her husband to hold the land and then to sell it, and in some way he sought to make it relevant that the husband had (so he submitted) acquired his interest in the land in the first place for the purpose of profit-making by sale. In this case, where it is conceded that the gift to the taxpayer was genuine, unsolicited and unconditional, and that the taxpayer entered into no agreement with her husband to engage in any subsequent dealing with the land, it seems to me that the purpose (whatever it was) with which the husband acquired his interest was quite irrelevant and that the fact that the taxpayer acted on her husband's advice did not make the taxpayer and her husband parties to a scheme. The Commissioner's further argument was, as I have indicated, that there was a second scheme at about the time of the gift. It appears that the land was retained by the new co-owners after October 1962 rather by tacit understanding than in pursuance of any plan. However, it may be right to say that in 1968 or 1969 the co-owners formed a plan to sub-divide and sell the land and put that plan into effect. If it be assumed that the taxpayer in joining in the sub-division and sale of the land was carrying out a scheme, the question that remains is whether it was a profit-making scheme. In my opinion it was not. The scheme, if there was one, was simply for the realisation of a capital asset. For the purposes of this branch of his argument the Commissioner relied on the fact that the three co-owners acted in combination. Obviously enough it will frequently be the case that the owners of undivided shares in land can realise their shares to best advantage only by acting in concert to sell the land. A realisation which, if effected by a sole owner, does not amount to the carrying out of a profit-making scheme, does not change its character because it is carried out by a number of co-owners. In my opinion the taxpayer did not carry out a profit-making scheme in the present case.

For the reasons I have given, it was right to hold that no part of the proceeds of the sale of the land at Dianella should be included in the assessable income of the taxpayer. It is therefore unnecessary to consider a submission that the taxpayer had made to the Commissioner a full and true disclosure of all the material facts necessary for her assessment, within sec. 170(2) of the Act, and that the Commissioner had no power to amend the assessment.

I would dismiss the appeal.

ORDER:

Appeal dismissed with costs.