Jedburgh Stock Company Pty. Ltd. v. Federal Commissioner of Taxation.Judges:
Mason J.: The taxpayer has appealed against its assessment to income tax for the years ended 1966 to 1970 inclusive, on the ground that the Commissioner was in error in including in its assessable income in each year the substantial profits which it derived from the sale of allotments forming part of a parcel of seventy-eight acres of land which it acquired at Kenmore, seven and one-half miles to the west of Brisbane, in 1961. The Commissioner's case is that the land was acquired for the purpose of profit-making by sale and that the profits are therefore assessable income under the first part of sec. 26(a) of the Income Tax Assessment Act 1936, as amended. The issue is whether the taxpayer has succeeded in showing that the land was not acquired for the purpose of profit-making by sale.
The taxpayer's case rests largely on the oral evidence of Mr. Stubbs, a solicitor, who is a director of, and a substantial shareholder in, the taxpayer. He says that the taxpayer was incorporated with a view to buying the land at Kenmore and developing it as a feed lot for fattening cattle.
In 1957 Mr. Stubbs came from New Zealand to Brisbane where he practised as a solicitor. His wife's family had for the past seventy years a substantial interest in a very large grazing property known as ``Jedburgh'', having an area of 300,000 acres, situated on the Barcoo River in the south-western corner of Queensland near Jundah, some 150 miles from the South Australian border and 120 miles south-west of Longreach. In 1959 and in the years that followed, the property was owned by the Henderson family (Mrs. Stubbs' family) and the Reid family in the proportions of nine to eight respectively. The grazing business was conducted by a company, Henderson & Reid Pty. Ltd., the share capital in which was held by the two families in like proportions. Sheep and cattle were depastured on the property. Their numbers varied, as the rainfall in the region fluctuates considerably and the Barcoo River flows only in times of heavy rainfall. The area is one of very low rainfall, the average annual rainfall being in the vicinity of twelve inches. In the years 1958-1959, 1961, 1963-1966 the rainfall was well below average with the result that the carrying capacity of the property fell sharply. The carrying capacity of the property varied from 36,000 livestock in a very good season down to 4,000 in 1972, a bad year. In the decade 1960-1970 wool prices decreased sharply. From 1960 onwards the operating company paid no dividend and incurred substantial liabilities for running expenses, as did the members of the two families in order to keep the grazing business on foot. Pressure has been exerted by the Bank to secure a substantial reduction in these liabilities. The families, discouraged by these events, are now contemplating a sale of ``Jedburgh'' and hope to defray their liabilities out of the proceeds of sale.
Cattle turned off the property are railed in trucks from the nearest railhead at Yaraka to the Cannon Hill sale yards in Brisbane where they are sold. The journey is long and arduous with the consequence that the cattle are in poor condition when they arrive in Brisbane. Indeed, it is necessary to build them up prior to their departure from Yaraka to enable them to withstand the rigours of the journey.
In 1959 Mr. Stubbs, who then lived at St. Lucia, a suburb of Brisbane, decided to search for a semi rural property of two and one-half acres on which to live. He attempted
ATC 4084unsuccessfully to purchase a two and one-half acre allotment from the Hosier family near the junction of the Brisbane River and Moggill Creek. He then ascertained that Mr. Hosier had for sale the subject property which was adjacent. It was not subdivided but the Brisbane City Council had given its approval to subdivision into two and one-half acre allotments. Mr. Stubbs was minded to acquire the land so as to provide a suitable home site for himself and to sell the balance at a profit. He had discussions with Mr. Henderson, his father-in-law, and the latter's partner Mr. Reid, and it was decided that a company should be formed to undertake the purchase. The company, Glendowie Pty. Ltd., was incorporated on 16 November 1959. Its shareholders consisted of Mr. Stubbs, Mrs. Stubbs, Mr. Henderson, Mrs. Henderson and Mr. Reid, each holding twenty per cent of the share capital. The directors were Mr. Stubbs, Mr. Henderson and Mr. Reid. The company purchased the land from Mr. Hosier on 20 November 1959 for the sum of $60,000. A subdivisional road was constructed on the land and steps were taken to move the existing farmhouse to another site on the land. Some four months after the land had been acquired a silo pit was discovered and, according to Mr. Stubbs, this discovery induced the directors to believe that the land would be suitable for use as a feed lot for fattening cattle brought from ``Jedburgh'' prior to their sale at Cannon Hill.
In the course of a trip which they had made to the United States in 1956 Mr. Henderson and Mr. Reid had devoted attention to feed-lot operations carried on there. Later they gave consideration to establishing a similar operation on the east coast of Queensland as an adjunct to their grazing operations at ``Jedburgh''. With this in mind the three directors decided to investigate the possibility of using the subject property for this purpose and made inquiries as to its suitability and obtained the co-operation of the University of Queensland which conducted an experimental farm nearby. Mr. Stubbs says that they became convinced that the property could be used for this purpose and that they planned to breed at ``Jedburgh'' approximately 600 two-year-old cattle which would be brought down annually to the subject property for fattening prior to their sale. However, it was recognized that it was a long-term operation because it would be necessary to plan and set up a suitable breeding cycle at ``Jedburgh'' which would not be advanced to completion for a period of five years. Mr. Stubbs made a calculation of the costs of setting up a feed-lot operation at Kenmore (excluding the cost of the land), but he did not prepare detailed estimates of the anticipated revenue and cost of maintaining such an operation. He says that the operating company was to find the funds for the operation and that it was not intended that the taxpayer should make a profit from it. He was content to draw director's fees and allow ``Jedburgh'' to make whatever profit might accrue from having its cattle fattened before sale.
Having come to the conclusion that the land should be devoted to this purpose in lieu of the purpose for which it was originally acquired, the directors were advised by Mr. Wruck, the accountant to the company and to the ``Jedburgh'' property, that a new company should be incorporated to acquire the land. They incorporated the taxpayer on 5 July 1960. Mr. Stubbs, Mr. Henderson and Mr. Reid became the directors. Its share capital was held by the same persons and in the same proportions as the share capital in Glendowie Pty. Ltd., although in 1965 Mr. and Mrs. Henderson transferred their shares to the children of Mr. and Mrs. Stubbs. The only significant difference in the structure of the two companies was that the objects clause in the Memorandum of Association of Glendowie Pty. Ltd. was appropriate to an investment company whereas that of the taxpayer was appropriate to that of a pastoral and agricultural company.
The taxpayer purchased the Kenmore land from Glendowie Pty. Ltd. on 28 June 1961 for the sum of $76,000 which was satisfied by the taxpayer assuming the vendor's debt of $30,000 to the Bank of New South Wales and by payment of the balance of purchase price in cash. The Bank loan had been obtained in November 1959 on the understanding that it would be repaid by 30 June 1960 out of the proceeds of sale of allotments. The Bank was informed of the change of intention with respect to use of the land and did not insist on repayment
ATC 4085according to the terms initially agreed. In fact the loan was not repaid until 1970.
From the time in 1960 when the directors first conceived the notion that the Kenmore land could be used for fattening or stocking cattle, it has been used for stocking cattle on a limited scale and for various activities, mainly of an experimental kind, designed to establish its capacity to grow feed and carry stock and to improve its potential in that respect. The evidence does not indicate with precision when particular activities were undertaken, but it is clear enough that Mr. Stubbs, who acted throughout as the Brisbane representative of the directors, the other directors residing elsewhere, made many inquiries before 28 June 1961 respecting the potential and practicability of developing the land as a feed-lot for ``Jedburgh'' cattle, in particular from the Department of Agriculture and the University of Queensland.
As early as the end of 1960 a mob of fifty-three cattle were brought on to the property. Thereafter over the years stock were depastured on the land, and a bull was introduced for breeding in more recent times. But the use made of the land for stock feeding and breeding has been very limited. According to the evidence, in the years 1962-1971 (inclusive) the taxpayer depastured 105 cattle only on the land, generally in mobs of twenty-five to thirty. In the same period the taxpayer bought and sold 469 cattle of which the great majority were not brought on to the land. No ``Jedburgh'' cattle were depastured on the land. The reason for this I shall explain shortly.
Improvements were made to the property, but it is not altogether clear when they were effected. At the time of acquisition by Glendowie Pty. Ltd. there were old cattle yards in existence which were in disrepair. They were rebuilt; a machinery and hay shed was constructed and a tractor purchased. New Cyclone steel yards were erected, together with fencing, in particular on each side of the new road. The possibility of building a dam across Moggill Creek was investigated. It seems that a rough earth and timber barrage was constructed across the Creek after 1969 at a cost of $2,000 to $3,000, but it was washed away. There was a question whether it would provide a permanent supply of fresh water, because the Brisbane River at its junction with Moggill Creek is tidal. Subsequently, however, a suitable source of underground bore water was discovered on the property.
The areas bordering the Creek were particularly suitable for crop growing under irrigation. In fact crops were sown in an area of seven to eight acres and were successful. The crops sown included cow pea and tropical legumes. In addition there was an area of Japanese millet originally sown by a previous occupier. The sale of allotments made later left remaining an area of twenty-five acres which included the best agricultural land.
According to Mr. Stubbs it was the succession of poor seasons, falling wool prices and the consequential financial difficulties of the operating company and its shareholders that prevented ``Jedburgh'' from undertaking the breeding programme which was an essential element in the plan to use Kenmore as a feed-lot. It is beyond question that the operating company's financial position deteriorated markedly in the years 1960-1968. At 30 June 1968 its liquid funds exceeded its liabilities by $3,769. At 30 June 1963 (some six months before the taxpayer decided to sell part of the Kenmore land) its excess of liabilities over liquid funds was $44,746. Twelve months later (shortly after the Council approved a subdivision of the Kenmore land into thirty-eight allotments) its excess of liabilities over liquid funds had diminished to $9,302, but thereafter the excess rose to $66,336 on 30 June 1965 and to $158,382 at 30 June 1966. As I have already mentioned, members of the family, including Mrs. Stubbs, had lent money to the operating company to keep it in business, although they received no dividends over a long period of time. The Bank was pressing the operating company for repayment of its liabilities and the taxpayer for payment of its debt.
It is against this background that one must look at the events which led to the sale of part of the Kenmore land. The taxpayer's case here is that under the City of Brisbane (Town Plan) Act of 1959 the Council made an
ATC 4086Ordinance regulating interim development pending the adoption of a Town Plan for the City of Greater Brisbane. It seems that before 1959 the land had been tentatively zoned as non-urban, or rural and that in or about 1961 it was tentatively zoned as to part for open space, as to part for future urban and as to the balance for non-urban, with an expressway passing through it. As a result of objections lodged by the taxpayer the proposal for an expressway was dropped and the land was zoned partly future urban and partly non-urban. The Town Plan as adopted in 1965 so zoned the land.
It was in December 1963 when the situation at ``Jedburgh'' was serious, following a rainfall of one inch in the previous eight months, that the directors of the taxpayer decided to sell seven 2½ acre blocks at Kenmore to pay off the debt owing by the taxpayer to the Bank and thereby enable the operating company to borrow more money from the Bank. Following this decision the Town Clerk suggested that the land should be re-subdivided into smaller allotments so as to result in a more economic development yielding a greater rate revenue to the Council. Although this suggestion was inconsistent with earlier Council policy, the taxpayer acted upon it and on 8 June 1964 the Council approved a plan of subdivision of land into thirty-eight allotments and later an amended plan of subdivision into fifty-eight allotments. The plan preserved a farming area of twenty-five acres.
Sale of the allotments commenced in July 1965. The profits thereby made year by year are -
Year ended 30th June Profit 1966 $48,064 1967 $24,405 1968 $35,502 1969 $17,623 1970 $40,053
Much of what Mr. Stubbs said in evidence is not in question. There can be no doubt that after Glendowie Pty. Ltd. bought the land the directors genuinely conceived the idea that it could be put to an agricultural use, that they investigated this possibility in the hope that it would come to fruition and that the taxpayer was formed to acquire the land when the directors formed the opinion that the land could be put to an agricultural use. But this conclusion does not foreclose the issue in favour of the taxpayer for it bears the onus under sec. 190(b) of showing that the assessment is excessive and Mr. Stubbs' evidence respecting the change of intention must be scrutinised with care (see
Pascoe v. F.C. of T. (1956) 11 A.T.D. 108, at pp. 111-112, per Fullagar J.). And the crucial question is whether the evidence as to change of intention justifies the conclusion that the land was not acquired by the taxpayer for the dominant purpose of profitmaking by sale.
There are a number of admitted or objective circumstances which tend to cast some doubt on the taxpayer's case, and the persuasive value of the oral evidence given by Mr. Stubbs is to be ascertained in the light of these circumstances. First and foremost is the admitted circumstance that profit-making by sale was one of the purposes for which the Kenmore land was initially acquired by Glendowie Pty. Ltd. in November 1959. The existence of this fact makes it the more difficult for the taxpayer to demonstrate, as it claims, that it had entirely discarded the purpose of re-sale at a profit when it acquired the land some nineteen months later. The taxpayer's case might have been more persuasive had it asserted that re-sale at a profit was still contemplated as a possible use of the land, although use for agricultural purposes was preferred. But Mr. Stubbs said unequivocally that the intention of re-selling at a profit was ``completely abandoned'' and that the purchase was not considered on that basis.
The taxpayer's case might also have been more persuasive had it been able to show that the land had been used for the purpose of fattening some ``Jedburgh'' cattle before a decision to sell was made at the end of 1963. In fact no ``Jedburgh'' cattle were ever brought on to the property. No doubt there were difficulties in bringing ``Jedburgh'' cattle to Kenmore before a suitable breeding programme was initiated, but no evidence was led to suggest that any steps were taken before the end of 1963, or at any time, to initiate such a programme, even on a very limited scale for experimental purposes. Certainly, from some time after 30 June 1964
ATC 4087the financial plight of the operating company would have inhibited expenditure for such a purpose, but the position was not so unfavourable before that time. In 1960 and 1961 the operating company had incurred expense in re-stocking ``Jedburgh'' with 27,000 young wethers, but its financial position did improve somewhat in the years ended 30 June 1962 and 30 June 1964.
At the same time there is strong evidence that from 1959 onwards it was reasonably apparent to a person with an eye to the future that the Kenmore land was suitable for residential development. Although it was then open farm land, large parcels of land in the vicinity, including some further from the city, were purchased for residential subdivision. The Blue Hills subdivision (sixty-two lots of two and one-half acres each) and the new Blue Hills subdivision (eighty lots of two and one-half acres each) were mainly sold in 1957. The taxpayer was not unaware of these developments. True it is that there were some disadvantages attaching to the subject land: it was not tentatively zoned for urban development, with the consequence that it was difficult, although not impossible, to secure Council approval of a subdivision into lots smaller than two and one-half acres; and the construction of a bridge across the Brisbane River at Jindalee giving direct access to the city was not undertaken until 1962 or 1963, although the proposal for the construction of a bridge at Jindalee was put forward in late 1959, a matter which was known to Mr. Stubbs as solicitor for the company then carrying out residential development at Jindalee.
There is also evidence from valuers called by the Commissioner which demonstrates that the price paid by the taxpayer for the land significantly exceeded the price which land on the outskirts of the city, not suitable for residential subdivision, would have brought, if purchased purely as a feed lot or for agricultural purposes. The price paid by the taxpayer was $1,000 per acre, approximately, which was little below the general price level of land purchased for residential subdivision at that time. Land bought for agricultural purposes fetched a much lower price. The taxpayer, accordingly, paid much more than it might have been expected to pay for land not intended to be used for residential subdivision. This circumstance again tends to suggest that the taxpayer's purpose in acquiring the land was to put it to a use which would reflect the price paid for it.
Finally there is the circumstance that Mr. Reid, a director of the taxpayer, who was closely acquainted with the grazing business conducted at ``Jedburgh'', was not called as a witness. Mr. Henderson, the other director of the taxpayer, died in 1966. No explanation was advanced for the omission to call Mr. Reid who, it might be thought, would be able to confirm Mr. Stubbs' evidence concerning the change of intention with respect to the use of the Kenmore land and the circumstances which led to the taxpayer's inability to use it for the purpose contemplated. I therefore conclude that Mr. Reid's evidence would not have helped the taxpayer's case (
Jones v. Dunkel (1959) 101 C.L.R. 298, at pp. 320-321).
In the light of these circumstances it seems to me that the evidence is susceptible of the interpretation that, although the directors of the taxpayer hoped to use the land to fatten stock for sale as an adjunct to the grazing operations at ``Jedburgh'', they had not finally decided that it was economic or practical to do so at the time of purchase in June 1961. They were at that time testing the capacity of the land to carry and fatten stock, an experimental use of the land which had not concluded when the taxpayer decided to sell a large part of it in subdivision. I do not doubt that the directors hoped that it would be possible to set up a feed-lot operation for fattening ``Jedburgh'' cattle, but I am not persuaded that at the time of purchase the process of experiment had so advanced that the directors were satisfied that the land could and would be used for that purpose.
I am therefore not satisfied that the purpose of re-sale at a profit had been discarded or that it was not the dominant purpose activating the acquisition by the taxpayer. In coming to this conclusion I should say specifically that I have not rejected the evidence of Mr. Stubbs which in many respects is in accord with the facts. It is rather that, giving weight to his evidence, I
ATC 4088am not satisfied that the taxpayer has discharged the onus which rests upon it.
I therefore dismiss the appeal with costs.
Appeals dismissed. Assessments confirmed. Appellant to pay the respondent's costs of the appeals.
Usual order as to exhibits.