M. Steinberg v. Federal Commissioner of Taxation.

Judges: Barwick CJ

Gibbs J
Stephen J

Court:
Full High Court

Judgment date: Judgment handed down 13 October 1975.

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Gibbs J.: The facts of these five appeals are fully set out in the judgment of Mason J. I shall restate some of them, for ease of narration, but only in outline.

The appeal by the trustee of Judith Steinberg No. 2 Trust must clearly fail so far as it relates to the assessment to income tax on the share of the profit derived from the sale of the land at Innaloo. On this aspect of the case I need add nothing to what is said in the judgments of the other members of the Court.

However, the other appeals raise more difficult questions. I shall turn first to the appeal by Morris Steinberg against the order dismissing his appeal against the inclusion in his assessment to tax for the year ended 30th June 1966 of $7,752 which was said to be his share of the profit emerging from the sale of about 384 acres of land at Wanneroo, about twelve miles from Perth. That land formed part of a larger tract of about 720 acres that had been owned by a company, Golden West Land Development Co. Pty. Limited (``Golden West''). In July 1965 all the issued shares in that company were acquired by a syndicate consisting of Morris Steinberg, his wife Judith, and his two brothers and their respective wives. Morris Steinberg acquired 6,803 shares and his wife 6,802 - between them they held one-half of the issued shares. The company was put into liquidation in October 1965 and the land was thereafter distributed in specie, so that Morris Steinberg became entitled to an interest of 6803/27,210 in it. On 21st June 1966 the area of about 384 acres was sold to the Overseas Telecommunications Commission, which had, earlier in that year, told Morris Steinberg that it wished to acquire that area and would, if necessary, do so compulsorily. The acquisition of the land by the Commission was not contemplated when the shares were bought or the distribution in specie was made.

It was admitted that the purchasers bought the shares in Golden West as a means of acquiring the land at Wanneroo which was its principal asset. Morris Steinberg gave evidence that the land was acquired for the purpose of building cottages on ten-acre lots and letting the land to tenants who, it was said, might wish to engage in market gardening. The reasons given by Mason J. for rejecting this evidence were completely convincing.

The question that then arises, however, is whether it was right to conclude, as his Honour did, that the shares in the company were bought to enable the purchasers to acquire the land for the main or dominant purpose of profit-making by sale. The fact that a witness is disbelieved does not prove the opposite of what he asserted: Scott Fell v. Lloyd (1911) 13 C.L.R. 230, at p. 241;
Hobbs v. Tinling (C.T.) & Company Ltd. , (1929) 2 K.B. 1 , at p. 21 . It has sometimes been said that where the story of a witness is disbelieved, the result is simply that there is no evidence on the subject ( Jack v. Smail (1905) 2 C.L.R. 684, at p. 698:
Malzy v. Eichholz (1916) 2 K.B. 308 , at p. 321 ;
Exparte Bear ; re Jones (1945) 46 S.R. (N.S.W.) 126 , at p. 128 ), but although this is no doubt true in many cases it is not correct as a universal proposition. There may be circumstances in which an inference can be drawn from the fact that the witness has told a false story, for example, that the truth would be harmful to him; and it is no doubt for this reason that false statements by an accused person may sometimes be regarded as corroboration of other evidence given in a criminal case:
Eade v. The King (1924) 34 C.L.R. 154 at p. 158 ;

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Tripodi v. The Queen (1961) 104 C.L.R. 1 . Moreover, if the truth must lie between two alternative states of fact, disbelief in evidence that one of the state of facts exists may support the existence of the alternative state of facts: Lee v. Russell (1961) W.A.R. 103, at p. 109. In the present case, Morris Steinberg had, between 1956 and 1969, been a member of no less than thirteen syndicates which had been formed for the purpose of acquiring land and reselling it at a profit. The Wanneroo land, when purchased, was not put to any use; it is true that the owners were virtually compelled to sell some of it quite soon after it was acquired, but over 300 acres were, at the date of trial, still retained, and no suggestion was made of any intention to use them for any purpose except letting as ten-acre lots. In these circumstances, the fact that Morris Steinberg told a false story as to the purpose for which the land was intended to be used assisted the conclusion, to which the other evidence pointed, that the true purpose of acquiring it - a purpose which Morris Steinberg did not wish to reveal because it would harm his case - was to resell it at a profit. The conclusion which Mason J. reached on this issue was, in my opinion, correct.

It then becomes necessary to consider whether the profit that arose on the sale of the land was profit arising from the sale by the taxpayer of property acquired by him for the purpose of profit-making by sale, within the first limb of sec. 26(a) of the Income Tax Assessment Act (Cth.), as amended (``the Act''). To satisfy this provision, it is necessary that the property, whose sale yielded a profit, should be the same property as that which was acquired for the purpose of profit-making by sale and that the taxpayer must have been the person who both acquired and sold the property. The section does not require that the acquisition should have been effected by any particular method - it is not limited, for example, to acquisition by purchase. It is the purpose, not the mode, of the acquisition that is specified in sec. 26(a). Because the acquisition must have been for the purpose stated, it follows that if the taxpayer was a passive recipient of the property - for example, if he acquired it as the result of a bequest ( McClelland v. F.C. of T. 70 ATC 4115; (1970) 120 C.L.R. 487, at p. 493) or as an unsolicited gift (
F.C. of T. v. Williams 72 ATC 4188 ; (1972) 46 A.L.J.R. 611 ) - it will, generally speaking, be impossible to say that it was acquired for the purpose of profit-making by sale. In the present case, Morris Steinberg gained a profit from the sale of an interest in land, and although he first acquired shares, there can in my opinion be no doubt that later, when the company transferred the land in specie to the shareholders, he acquired the interest in the land whose sale yielded the profit. Since the shares were bought to enable the purchasers to obtain their interests in the land, with the main or dominant purpose of selling the land at a profit, it is right to hold that the acquisition of the land was for the purpose of profit-making by sale.

There was no evidence as to the value of the land when the distribution was made to the shareholders. It is apparent either that the purchasers of the shares in Golden West obtained a considerable bargain, or that there was a steep rise in the value of the land between July 1965 and June 1966; whether there was such a rise and, if so, whether it occurred before or after the distribution, does not appear. The Commissioner, in assessing the profit, calculated the difference between the amount obtained on the sale of the land and the amount paid to acquire the shares. The submission that this was erroneous, because the land was acquired at a date subsequent to the purchase of the shares when it might reasonably be thought to have had a different and enhanced value, was rejected by Mason J. I am doubtful whether this submission was open to the taxpayer, since the grounds stated in his objection do not appear to cover it. I respectfully agree that it would be most desirable that rules should be made requiring the Commissioner and the taxpayer to define the issues to be litigated on taxation appeals, but no such rules have been made, and we are bound to apply sec. 190(a) of the Act which limits the taxpayer to the grounds stated in his objection. However, I need not take up time with a discussion of the meaning and effect of the grounds stated in the notice of objection lodged on behalf of Morris Steinberg, because I have in any case reached the conclusion that Mason J. was correct in the view that he formed. His Honour said -

``In this instance the relevant figure is what it cost the individual to acquire his interest in the land. The cost to the individual was the amount which he expended in the purchase of the shares together with any

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other expense incurred in obtaining a title to the land.''

It is true that the price paid for the shares could not accurately be described as the price of the land, for it is clear that the purchasers did not, simply by acquiring their shares in Golden West, acquire the land which was an asset of that company. It is true also that since the distribution in specie was made in satisfaction of the rights of the shareholders, the ``consideration'' for the acquisition by the shareholders of the land from the company would be the full value of the land at the time of distribution: Archibald Howie Pty. Ltd. v. Commr. of Stamp Duties (N.S.W.) (1948) 77 C.L.R. 143;
Davis Investments Pty. Ltd. v. Commr. of Stamp Duties (N.S.W.) (1958) 100 C.L.R. 392 at pp. 407-408 . In applying the provisions of sec. 26(a), it is not permissible to ignore or gloss over the legal effect of the transactions actually carried out:
Hobart Bridge Company Ltd. v. F.C. of T. (1951) 82 C.L.R. 372 at pp. 385-386 . However, sec. 26(a) speaks of the ``profit arising from the sale'' - it does not refer to the price of the property, or the consideration paid for it. The profit arising from the sale will be the net pecuniary gain resulting from the acquisition and resale of the property, and will be represented by the excess of the amount received on the sale over the amount outlaid in acquiring the asset plus the expenses incurred in getting it ready for sale and selling it. It is not uncommon for the cost of the acquisition of property to be incurred before the property is acquired. For example, on a sale the price may be paid before the property passes. In the circumstances of the present case, where the shares were bought to enable the land to be acquired, the cost of the shares and of the winding up of the company and distribution of the assets can rightly be regarded as the amount actually outlaid for the purpose of, and in the process of, acquiring the land, although the acquisition was effected not directly, but by a number of steps. In my opinion, therefore, Mason J. was right for the reasons which he gave. It should be added that if he had been wrong, and if it had been necessary to ascertain the price by comparing the amount obtained for the land with its value at the date of distribution (plus of course expenses of sale), the taxpayer has produced no evidence to show that the price paid for the shares in July did not represent the value of the land in or about the following October when the land was distributed, and has not discharged the burden cast on him by sec. 190(b) of the Act in proving that the assessment is excessive. This would not have precluded the Court from remitting the matter to the Commissioner if it had appeared that he had assessed on an erroneous principle but, as I have said, that is not the case.

For these reasons, in my opinion the appeal by Morris Steinberg relating to the Wanneroo land should fail. It is of course unnecessary, on the view that I take, to consider the alternative argument that the second limb of sec. 26(a) supports the assessment.

The remaining appeals concern the sale of shares in Malgor Pty. Ltd. (``Malgor'') and the sale of land at Rockingham. Malgor was formed on 7th November 1960 to purchase the Rockingham land; its initial shareholders were Morris Steinberg and Judith Steinberg. Mason J. rejected the evidence of Morris Steinberg that the land was bought as a grazing property and held that it was acquired pursuant to a plan or scheme which had the making of a profit as the end in view. This finding was in my opinion correct - I would add nothing to what Stephen J. has said as to the facts relevant to this question, although I shall add a few observations as to the nature of a scheme within the meaning of sec. 26(a) of the Act. On 25th March 1963 new shares in Malgor were issued - some to Morris Steinberg and to Judith Steinberg, but in addition 500 `C' class shares to their son Malcolm. The shares were issued to Malcolm because his father wished to make a gift to him of some of his shares, but because of the manner in which the instructions given by Morris Steinberg were put into effect, the gift technically was not of the shares but of the moneys paid in respect of them. On 1st July 1963, Morris Steinberg and Judith Steinberg sold their shares to M.J.S. Investments, a partnership which had been formed on 1st June 1963 between Morris Steinberg, Judith Steinberg and Mr. Rhine as the trustee of eighteen trusts (including Judith Steinberg No. 2 Trust). This action was taken on the advice of Mr. Rhine for the purpose of reducing Morris Steinberg's liability to income tax and estate duty. According to the agreement setting up M.J.S. Investments, Morris Steinberg and Judith Steinberg both held `A' units in the partnership which conferred on them controlling voting powers but only limited rights to share in the profits

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and in the distribution of assets on a winding up. Early in 1964, Morris Steinberg was short of funds and to raise money he eventually arranged with one Markham that the latter would buy half of the share capital in Malgor. Pursuant to this arrangement, on 31st July 1964 each shareholder in Malgor transferred to Mr. Markham one-half of his or her holding in that company. The Commissioner has assessed to tax for the year ended 30th June 1965 the share of the trustee of Judith Steinberg No. 2 Trust in the profit derived by M.J.S. Investments on the sale of the shares in Malgor beneficially owned by M.J.S. Investments and the profit made by Malcolm Steinberg on the sale of his shares in Malgor and these assessments are the subject of two of the appeals. In July 1965, because of changes in the income tax law, the eighteen trusts were terminated and their assets, namely the units in the partnership, were distributed under the powers contained in the trust instruments to various of the beneficiaries named therein, including Morris Steinberg and Malcolm Steinberg. Subsequently, Malgor was wound up and it was resolved that the liquidator should divide among the members shares in the land in accordance with their respective shareholdings. In consequence of this resolution undivided interests were, on 3rd March 1967, transferred to Morris Steinberg, Judith Steinberg and Malcolm Steinberg - Malcolm's interest was 250/2200. The interests acquired by Morris Steinberg and Judith Steinberg belonged beneficially to M.J.S. Investments (to which their shares had, as I have said, been sold) and those interests were divided amongst the various beneficiaries so that a further interest of 68/792 was transferred to Malcolm and an interest of 85/792 to Morris Steinberg. Finally the interests of the members of the Steinberg family in the Rockingham land was sold on 3rd November 1969. The inclusion in the assessments of Morris Steinberg and Malcolm Steinberg for the year ended 30th June 1970 of the profit said to result from the sale of these interests forms the subject of the other appeals.

The principal submission made on behalf of the Commissioner, and accepted by Mason J., was that the four assessments under appeal were rightly made under the second limb of sec. 26(a). I adhere to the views that I have previously expressed as to the effect of that provision: see
XCO Pty. Ltd. v. F.C. of T. 71 ATC 4152 at pp. 4155-4156; (1971) 124 C.L.R. 343 , at pp. 349-350 ; F.C. of T. v. Williams, at pp. 4195-4196; pp. 616-617, where earlier authorities are cited. A profit-making scheme within sec. 26(a) is a plan, design or programme of action devised and put into effect for the purpose of making a profit. It must be a scheme carried out by the taxpayer himself or on his behalf. It appears that it should - at least where the transaction is one of acquisition and resale - exhibit features which give it the character of a business deal. The mere realization of a capital asset, albeit in an enterprising way, would not amount to the carrying out of a profit-making scheme.

In the present case, Morris Steinberg devised and carried into effect a profit-making scheme when in 1960 he arranged for Malgor to be incorporated and to purchase the Rockingham land. These things were done in accordance with a plan devised for the purpose of making a profit, and what was done had the character of a business deal. It cannot be said with certainty whether the purpose of the scheme was to make a profit from the sale of the shares or from the sale of the land, but that is immaterial: if the scheme had the requisite purpose it was a profit-making scheme notwithstanding that the exact manner in which the profit was to be made had not been finally decided. On the findings of Mason J. it must be concluded that it was part of Morris Steinberg's plan that the Rockingham land should appreciate in value yielding a profit for himself or his family, although how or when he may not have foreseen. I am in agreement with the view expressed by Mason J. that ``it is not an essential element of a profit-making scheme in sec. 26(a) that every step which culminates in the making of a profit should be planned or foreseen before the scheme is put into operation''. Schemes may be precise or vague; every detail may be arranged in advance, or the working out of the plan may be left for decision in the light of circumstances as they arise. It is no objection to a plan that it allows room for manoeuvre. When property is bought with the purpose of making a profit in the easiest or most advantageous way that may present itself, and the taxpayer adopts ``one of the many alternatives'' that his plan leaves open, thereby returning himself a profit, he will rightly be said to be carrying out a profit-making scheme; cf.
The Premier Automatic Ticket Issuers Ltd. v. F.C. of T. (1933) 50 C.L.R. 268 , at p. 300 ;

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Buckland v. F.C. of T. (1960) 34 A.L.J.R. 60 , at p. 62 .

A question of some difficulty is whether the scheme was abandoned when in 1963 Morris Steinberg sold his shares in Malgor to M.J.S. Investments. The partnership was formed and the trusts were created with the intention of diminishing Morris Steinberg's liability to income tax and for estate planning purposes, and not for the purposes of the profit-making scheme. However, that does not mean that the scheme ceased to be carried out - it was still intended to make the profit for which the scheme had been brought into being, although after the events of 1963 Morris Steinberg personally stood to benefit less, and his family more, from any profit that might be made. The profit-making scheme was not abandoned in 1963; the arrangements made in 1963, and varied in 1965, affected the possible destination of the profits made by carrying out the scheme but did not bring the scheme to an end. Morris Steinberg controlled all the relevant events that occurred; his original plan was to make a profit in the way that might appear most advantageous and he put this plan into execution in such a way that in the end he did gain a profit from the sale of his own interest in the land. In my opinion, Mason J. was right in concluding the eventual sale in 1969 by Morris Steinberg of his interest in the land was something done in carrying out the scheme made in 1960, notwithstanding the intervening events. The assessment of Morris Steinberg to tax was rightly made.

However, the position of the other appellants is materially different. In 1960 Malcolm Steinberg had no shares in Malgor and Judith Steinberg No. 2 Trust was not then in existence - it is clear that at that time neither Malcolm Steinberg nor Mr. Rhine, who subsequently became the trustee, was a party to the scheme. Mason J. found that Malcolm Steinberg was at all times aware of his father's intentions with respect to the land and that Mr. Rhine also was aware of those intentions. He further found that subsequently they participated in the events which occurred, culminating in the sale of the land, and concluded that they became parties to the scheme and executed it so far as it was necessary for them to do so. Although I accept as correct the findings of ultimate fact made by Mason J., I am, with respect, unable to accept his conclusion that Malcolm Steinberg and the trustee of Judith Steinberg No. 2 Trust derived a profit from the carrying out of a profit-making scheme. I have already pointed out that the scheme to which sec. 26(a) refers must be the scheme of the taxpayer. The income of a taxpayer is not assessable within sec. 26(a) simply because he has profited from another's scheme. The question then is whether Malcolm Steinberg and the trustee of Judith Steinberg No. 2 Trust at some time in or after 1963 became parties to the scheme originated by Morris Steinberg so that thereafter the scheme was executed on their behalf as well as on behalf of Morris Steinberg. Before attempting to decide that question, it is convenient to point out that the profit made by these taxpayers is not assessable within the first limb of sec. 26(a). Malcolm Steinberg acquired his shares through the bounty of his father, even if, technically, the gift was of money rather than of shares. There is nothing to suggest that the gift was solicited or conditional. McClelland v. F.C. of T. and F.C. of T. v. Williams provide sufficient authority for the view that the shares were not acquired by Malcolm Steinberg for the purpose of profit-making by sale. The same of course is true of the acquisition of the interest in land which was transferred to Malcolm Steinberg because he was a shareholder in Malgor. The other property now in question comprises the shares which came to belong beneficially to M.J.S. Investments (from the sale of which the trustee of Judith Steinberg No. 2 Trust derived a benefit), and the interests in land (one of which was transferred to Malcolm Steinberg) which can be regarded as the fruit of those shares. M.J.S. Investments acquired its shares in Malgor because it was thought convenient for income tax planning and estate duty purposes that the property of Morris Steinberg and Judith Steinberg should be sold to the partnership and that trusts should be created. The transfers of the land made to the beneficiaries (including Malcolm Steinberg) when the trusts were terminated were made because changes in the law made it no longer convenient to preserve the trusts for the purposes of income tax and estate duty planning. It is clear that the reasons for the issue of shares to Malcolm Steinberg and the sale of the shares to M.J.S. Investments and the transfer of the interests in the Rockingham land to the beneficiaries were unconnected with the purpose of making a profit from the Malgor shares or the Rockingham land. The

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shares acquired by Malcolm Steinberg and by M.J.S. Investments and the land acquired by Malcolm Steinberg were not acquired for the purpose of profit-making by sale, even if it was envisaged or intended that sooner or later the shares or land might be sold at a profit. These circumstances not only render the first limb of sec. 26(a) inapplicable but are of importance in deciding whether the second limb applies. I agree with the observation of Menzies J. in F.C. of T. v. Williams, at p. 4192; p. 614, that there may be ``cases where a person ventures what has been received by gift in the carrying on or carrying out of a profit-making undertaking or scheme.'' The present is however not such a case. All that was done by Malcolm Steinberg and by the trustee was to realize assets that they had acquired for purposes other than profit-making. To do that is not to carry out a profit-making scheme within sec. 26(a): McClelland v. F.C. of T. Their actions accorded with the intentions of Morris Steinberg, as they knew, but this was not enough to make them parties to his scheme. It is of crucial importance that they did not acquire the property in question for the purpose of profit-making, or to effectuate the scheme originated by Morris Steinberg; having acquired their property for reasons unconnected with the scheme, they did no more than take advantage of the opportunities that offered to realize it to the best advantage. (No doubt Morris Steinberg also acquired the interest in the land, which he ultimately sold, when the trustee divided the land among the beneficiaries, but from the beginning his purpose had been to profit, in one way or another, from the increase in value of the land.)

For these reasons, I hold that the profit that arose on the sale by Malcolm Steinberg of his shares in Malgor, the profit derived by the trustee of Judith Steinberg No. 2 Trust from the sale of the shares in Malgor and the profit that arose on the sale by Malcolm Steinberg of his interest in the land were not assessable within sec. 26(a).

It was contended on behalf of the Commissioner that the profit which arose to Malcolm Steinberg and the trustee of Judith Steinberg No. 2 Trust was income according to ordinary concepts. In the circumstances that I have mentioned, and having regard to the decision in McClelland v. F.C. of T., this argument cannot succeed.

For these reasons, I would dismiss the two appeals by Morris Steinberg and would dismiss the appeal by the trustee of Judith Steinberg No. 2 Trust in so far as that appeal relates to the appellant's share of profit derived from the sale of the land at Innaloo. However, I would allow the two appeals by Malcolm Steinberg, and would allow the appeal by the trustee of Judith Steinberg No. 2 Trust in so far as it relates to the appellant's share of the profit derived from the sale of the shares in Malgor.