M. Steinberg v. Federal Commissioner of Taxation.
Judges: Barwick CJGibbs J
Stephen J
Court:
Full High Court
Stephen J.: These five appeals are from the dismissal by Mason J. of taxpayers' appeals against the Commissioner's disallowance of objections to their assessments to income tax.
A full examination of the complex facts involved in these five appeals had necessarily to be undertaken both at first instance and again by this Court on appeal; the narration of those facts in succinct form appears in the reasons for judgment of the learned trial judge, which have already been reported. Three distinct transactions are involved in these five appeals, which were heard together, and for appellate purposes it will suffice if the facts critical to each are shortly stated as each transaction is dealt with.
The Innaloo Land
The first transaction concerns a dealing with some seven and three-quarter acres of land at Innaloo near Perth, in Western Australia. Mr. Morris Steinberg first displayed interest in the purchase of this land in December 1959, which he said he hoped to use as the site for a hotel and shopping centre. As a result of transactions the details of which remain obscure Mr. Steinberg and his two brothers, as members of a partnership styled Murray's Furnishing Stores, had, by February 1960, acquired portion of this land together with what may be described as a right of first refusal, for a term of three years, in respect of the balance. Some six weeks later the Steinbergs, in March 1960, were requested to and did grant to a third party, Waikiki Motel Ltd., which was seeking a site for a hotel in the locality, an option to purchase the greater part of the land which they had bought; this option was not exercised and six months later, in September 1960, the partners granted to that company a further option to purchase and to take an assignment of their right of first refusal. This option expired unexercised in October 1961 and in November 1961 the Steinbergs caused
ATC 4237
an application to be made for re-zoning of the land so that it might be used as the site of a hotel, shopping centre and service station. Approval in principle to re-zoning as a hotel-motel site, subject to certain conditions, was received in December 1961 but further details were called for by the local authority before it would consider the application for additional re-zoning necessary for the two other proposed commercial uses. On 12th January 1962 the authority's conditions were accepted subject to certain qualifications including its willingness to consider an application for a service station; no further mention was made of the proposed shopping centre. Then three days later, on 15th January 1962, the entire site, less half an acre for a service station, was offered for sale to a brewery, which was informed of the authority's approval in principle and of the Steinbergs' qualified acceptance of the associated conditions. However, the brewery rejected this offer and nothing further occurred relevant to the land until mid 1963 when steps, ultimately unsuccessful, were taken to promote the land as a site for a shopping centre. Finally, in March 1965, the whole site was sold for $100,400.By that time the partnership of Murray's Furnishing Stores no longer consisted of the three Steinberg brothers; in 1963 Mr. Morris Steinberg had re-organized his assets and business interests upon the advice of his accountant with a view to tax consequences and estate planning, so that when the Innaloo land was finally sold in 1965 a share of the proceeds of sale came to the hands of the trustee of a trust established by Mr. Steinberg's wife; it was to the inclusion in the assessable income of that trust of part of that share of proceeds that the objection was taken which forms the subject of this appeal.
The Commissioner justifies his assessment by reference to both limbs of sec. 26(a) of the Income Tax Assessment Act. In view of the restricted terms of the taxpayer's notice of objection no point arises concerning the consequences, if any, of changes in partnership membership between the dates of acquisition and final sale of this land. The only question is whether, when the land was first acquired in 1960, it was acquired for the purpose of profit-making by sale.
Before his Honour the taxpayer relied very largely upon the evidence of Mr. Morris Steinberg to show that re-sale at a profit was not the sole or dominant purpose in acquiring the Innaloo land; however, Mason J. found his evidence to be open to such serious doubt that he was not prepared to accept it on this aspect. His Honour gave quite detailed reasons for this conclusion and nothing that was said by appellant's counsel on this appeal led me to doubt its correctness in any way. My own subsequent reading of the transcript of evidence and exhibits has but confirmed me in this view. His Honour having formed this view of the evidence which he heard from Mr. Steinberg, a view which was clearly open to him, it necessarily followed that he should dismiss the taxpayer's appeal and in my view the appellant cannot now succeed in this present appeal.
The purpose of acquisition of the land advanced on behalf of the appellant was its retention and use as a site for a hotel-motel, shopping centre and service station and not its re-sale at a profit. Yet the light cast upon intention by the steps taken in relation to the land after its acquisition, to some of which I have briefly referred, suggests the contrary; some of those steps were, at best, equivocal and others of them strongly suggest the possession at the time of acquisition of a positive intention to turn the land to account by its profitable re-sale. In such a situation an appellate Court, being in any event slow to form an impression different from that gained by the trial judge when based upon oral testimony which he alone has heard and the effect of which it can only gain from the written word, will be all the less disposed to interfere with the decision at first instance. Here I find no ground for doing so. I would accordingly dismiss this appeal relating to the Innaloo land.
The Wanneroo Land
A second appeal, relating to land at Wanneroo, involves a different taxpayer, in this instance Mr. Morris Steinberg himself. Wanneroo lies a few miles to the north of Perth and there, in 1964, Golden West Land Development Co. Pty. Ltd. owned some 720 acres which had been approved for subdivision into ten acre lots and which it offered to sell to Mr. Steinberg. He did not accept this offer but did, in September 1964, take on behalf of Malgor Pty. Ltd., a company which he had caused to be incorporated some years earlier, an option to purchase not the Wanneroo land but instead the issued capital of the Golden West company. This option, although later extended
ATC 4238
in term, was never exercised by Malgor Pty. Ltd. It was the three Steinberg brothers, their wives and a son of Morris Steinberg who, in July 1965, became the purchasers of the issued capital of Golden West for a total purchase price of $147,614. It is conceded that they did this as a means of acquiring the Wanneroo land which was then, it seems, the only substantial asset of that company. Morris Steinberg and his wife together acquired half the issued capital; their son did not in fact continue as a purchaser, instead his small entitlement was added to the shares bought by the other four Steinberg shareholders. Then, in October 1965, Golden West went into voluntary liquidation, and the liquidator later distributed in specie to its six members its interest in the Wanneroo land, its articles of association having been amended so as to permit of the adoption of such a course. Soon afterwards, in the first half of 1966, the Overseas Telecommunications Commission told Mr. Steinberg that it wished to acquire half the Wanneroo land for a radio transmitting station and that it would if necessary, have recourse to compulsory acquisition. Accordingly, in June 1966, the six Steinbergs sold that half of the land to the Commission for $172,957. It is on his share of the profit disclosed by that sale price when compared with the initial cost of the shares in Golden West that Mr. Morris Steinberg has been assessed to tax, the Commissioner relying upon sec. 25 and 26(a) of the Act. The taxpayer's present appeal is against the dismissal by Mason J. of the taxpayer's original appeal against the Commissioner's disallowance of his objection to that assessment.Two distinct arguments were put on behalf of the taxpayer; first it was said that the intention with which the shares in Golden West were acquired was, through them, to acquire the Wanneroo land but not so as to profit by its sale; rather it was intended to subdivide that land into ten acre residential farmlets, erect improvements on them and lease them to tenant farmers. Secondly it was said that in any event neither limb of sec. 26(a) can have any application; the first limb was inapplicable because, although the taxpayer did sell his interest in the Wanneroo land in 1966, he was never a purchaser of that land, which only came to him on a distribution of assets in specie in a liquidation; moreover there was no assessable profit which arose from the sale of any property acquired by him for the purpose of profit-making by sale. The second limb of sec. 26(a), it is said, was also inapplicable because, even if it be thought, contrary to the taxpayer's primary submission, that the transaction was intended to conclude in sales of the land in subdivision, this constituting a profit-making undertaking or scheme, nevertheless that scheme was interrupted by the forced sale to the Commission; there was thus no profit which arose from the carrying on or carrying out of the scheme. In the course of the hearing of this appeal the taxpayer's second argument came to be somewhat further developed, as will appear when I come to consider it in more detail.
In considering the first argument it is to be noted that it was again Mr. Morris Steinberg whose evidence was largely relied upon as establishing what was the purpose with which the shares, and through them the lands, were acquired. Once again Mason J., after criticising aspects of this witness's evidence, concluded that he was not satisfied that the purpose of acquisition was that of development and letting out on lease to tenant farmers, as Mr. Steinberg had testified. His Honour pointed to a considerable number of aspects which made such a purpose improbable and in consequence specifically rejected Mr. Steinberg's evidence of intention.
Fundamental to the question of intention was acceptance of the view that the land was acquired for the purpose of subdividing it into about sixty-eight ten acre lots, each to have a small cottage built on it and then to be let to a working tenant farmer. According to the taxpayer this concept did not occur to him until after he had obtained an option over the land in favour of Malgor Pty. Ltd., a company in which he and his family then held only a one half interest, the remainder of its shares being held by interests associated with a Mr. Markham who was a very experienced dealer in real estate and the organizer of numerous syndicates for the purchase and re-sale of land in and near Perth. There is nothing in the evidence to negate, and much which supports, the view that at this stage the contemplated purpose was to resell the land either before or after its subdivision.
Mr. Steinberg asserted that later, before actually buying the shares in Golden West, this novel idea of leasing to tenant farmers first occurred to him; he made no enquiries whatever concerning its feasibility, although he had not previously heard of it being attempted,
ATC 4239
nor did he take any steps to have the land's suitability for farming assessed. There was no investigation to determine whether there was any demand for tenancies of this nature or whether it would be possible to find over sixty tenant farmers prepared to undertake market gardening as tenants on ten acre lots on which they would reside. The capital cost of such a venture, according to his own generalized and somewhat tentative estimates, was considerably in excess of half a million dollars and his financial resources and those of his relatives, even with the aid of substantial loan moneys, appeared to be quite inadequate for the purpose.With these considerations in mind and having formed the view that Mr. Steinberg was an astute and able businessman already experienced in land purchase and development it is perhaps not surprising that his Honour was not satisfied that Mr. Steinberg in fact acquired the Golden West shares with a view to developing the Wanneroo land in the manner stated by him but rather concluded that the shares were purchased so as to enable the purchaser to acquire that land for the purpose of profit-making by sale.
I turn now to the taxpayer's second argument, that sec. 26(a) has in any event no application even if Mr. Steinberg's evidence of purpose be rejected.
In my view the Commissioner cannot rely upon the first limb of sec. 26(a) to support his present assessment. The profit included in the taxpayer's assessable income is, broadly speaking, the difference between the price paid for his one quarter interest in the Golden West shares and the price later realized on the sale of his one quarter interest in the Wanneroo land. Implicit in this is the view that the cost of the land to the taxpayer was the cost to him of the shares, yet this is not the case; the taxpayer got no land when he bought the shares but only those rights to which a shareholder is entitled. Those rights include a right, on a winding up, to an aliquot share of the surplus of assets over liabilities, which might in this instance be satisfied by a distribution of assets
in specie;
but only in that loose sense had he any interest in the company's land. As was pointed out by
Gibbs
J. in
Ord Forrest Pty. Ltd.
v.
F.C. of T.
74 ATC 4034
at p. 4041;
(1974) 48 A.L.J.R. 48
at p. 53
, a shareholder obtains no rights of property in the assets of the company in which he holds shares. The fact that the taxpayer bought the shares so as to acquire the land does not, in my view, in any way affect this position; it does not entitle the Commissioner to apply to the land the price paid for the shares.
What then was the price, if any, paid for the land from which a ``profit'' may properly be calculated? In
Archibald Howie Pty. Ltd.
v.
Commr. of Stamp Duties (N.S.W.)
(1948) 77 C.L.R. 143
Dixon
J., at p. 153, described a distribution
in specie
to shareholders as properly to be regarded as the acquisition of assets for a consideration. It is that consideration which may, for the purposes of the first limb of sec. 26(a), be regarded as the cost of the land so as to form the starting point in any calculation of profit; it alone represents the cost to the taxpayer of the property which he subsequently sold. Unfortunately there is no evidence of the money value of that consideration, being the value of Mr. Steinberg's entitlement as a contributory in the winding up of Golden West and which was satisfied by the distribution to him of an interest as tenant in common in the Wanneroo land. Indeed the date of the distribution
in specie,
which I regard as the relevant date, does not clearly appear; the liquidation occurred in November 1965, the shares having been bought for $147,614 only some four months earlier. If that price, in what was a transaction at arms length, in any way accurately reflected the then value of the Wanneroo land it increased very much in the ensuing months since on 13th May of the following year a price of $172,957 for only half the land was agreed to between Mr. Steinberg and the Overseas Telecommunications Commission.
Were it necessary for the Commissioner to rely upon the first limb of sec. 26(a) the appropriate course would be to remit the matter to him for re-assessment, since apart from this question of the basis of calculation of profit I would otherwise regard the first limb of sec. 26(a) as applicable; there was here a relevant acquisition by the taxpayer of the interest in land which he later sold, it occurred when the distribution in specie was made. The taxpayer was no mere passive recipient of the land; the entire transaction, beginning with the Golden West shares, was, on the contrary, initiated by him so that he and others might each acquire an interest in the Wanneroo land with the purpose of its re-sale at a profit.
The same objection to the Commissioner's basis of calculation of profit does not, I think, apply to the second limb of sec. 26(a), which I regard as applicable in the circumstances of
ATC 4240
this case. There was here a profit-making scheme and it commenced with the purchase of the shares in July 1965 for a price of $147,614; the profit from the scheme may then properly be calculated using that price as the starting point.The profit-making scheme was to purchase the issued capital of Golden West, to alter its articles, to secure its voluntary liquidation followed by the distribution
in specie
to shareholders of its valuable asset, the Wanneroo land and, last of all, to sell that asset in subdivision. There was here no question of a mere realization of an asset in an enterprising way, as is referred to in
F.C. of T.
v.
Becker
(1952) 87 C.L.R. 456
,
per Fullagar
J. at p. 460, and subsequent cases. The scheme began with the acquisition of one asset, continued with its translation into a different asset and was to have concluded with the profitable disposal of that latter asset. There was the ``carrying into execution of a plan or venture which does not involve repetition or system''
-
per Dixon
J. in
Premier Automatic Ticket Issuers Ltd.
v.
F.C. of T.
(1933) 50 C.L.R. 268
at p. 298
and that plan or venture had all the aspects of a ``business deal''
-
McClelland
v.
F.C. of T.
70 ATC 4115
;
(1970) 120 C.L.R. 487
.
If this be so it is, I think, nothing to the point that the intervention of the Overseas Telecommunications Commission resulted in a premature conclusion to the scheme so far as half the land was concerned; this only meant that sooner rather than later a purchaser appeared on the scene prepared to buy at a handsome profit and without any need to incur full costs of subdivision
-
cf.
Hobart Bridge Co. Ltd.
v.
F.C. of T.
(1951) 82 C.L.R. 372
at p. 382
.
It is, therefore, the second limb of sec. 26(a) which I regard as justifying the Commissioner's assessment both in respect of the liability of the taxpayer's profit to assessment in his hands and in respect of the quantum of that profit.
In the circumstances it is unnecessary to consider the Commissioner's stated reliance upon sec. 25 of the Act.
I would dismiss this appeal.
The Rockingham Land
The third transaction is relevant to the three remaining appeals, one by Mr. Morris Steinberg, and two by his son Malcolm David Steinberg and also affects the appeal by the trustee of the Judith Steinberg No. 2 Trust, whose assessment to tax in respect of profits on the sale of the Innaloo land I have already dealt with. It relates to the assessability of profits upon sales of shares in Malgor Pty. Ltd. to Mr. Markham and upon the sale of land at Rockingham, a few miles to the south of Perth, to Rockingham Park Pty. Ltd.
As previously, there is first a question whether or not this Rockingham land, bought by Malgor Pty. Ltd., was bought for the purpose of re-sale at a profit. It was Mr. Morris Steinberg who procured Malgor's incorporation in November 1960; he and his wife were its only two original shareholders and he was its chairman of directors. Shortly before its incorporation he had obtained, and had exercised, an option to purchase the Rockingham land, consisting of 1,267 acres of rather poor grazing land, at a price of $15 per acre and after its incorporation it became the buyer of the land. In 1963 five hundred shares in its capital were issued to his son Malcolm David Steinberg, paid for by his father; later, in July 1963, Morris Steinberg and his wife sold to a partnership, M.J.S. Investments, all their shares in Malgor Pty. Ltd. as part of the tax and estate planning proposals to which I have earlier referred. The members of this partnership were Mr. and Mrs. Steinberg and the trustee of each of eighteen family deeds of trust. Then, in July 1964, shares in that company were sold to Mr. Markham so that he came to hold one half of its issued capital, the remainder being retained by M.J.S. Investments and Malcolm David Steinberg. This was the transaction which has given rise to two of the four appeals presently in issue.
Then in August 1966 Malgor Pty. Ltd. went into voluntary liquidation and in a resultant distribution in specie Morris and Malcolm David Steinberg in March 1967 each acquired an interest as tenant in common in the Rockingham land, apparently the company's only substantial asset. I ignore for the present, but will later have to return briefly to a consideration of, possible consequences of Morris Steinberg's disposal of his shares in Malgor Pty. Ltd., which resulted in his former shareholding being held by him on behalf of the M.J.S. Investments partnership; suffice it to say that thereafter efforts were made by Mr. Markham to sell the Rockingham land which was ultimately sold in two separate contracts the first being a sale of the Markham group's interest in the land, the second a sale of the
ATC 4241
Steinberg group's interest, only sold in November 1969. It is with the proceeds of this sale that the two other appeals, by Morris Steinberg and his son, are concerned.Mason J. held that the profits made on the sale of the shares in Malgor Pty. Ltd. and on the subsequent sale of interests in the Rockingham land were profits arising from the carrying out of a profit-making scheme initiated in early 1960 and were assessable accordingly under the second limb of sec. 26(a).
Counsel for the Commissioner supported his Honour's conclusion and, by way of alternative submission, also contended that the circumstance could be viewed as involving a scheme beginning only when it was decided to sell half of the issued capital in Malgor Pty. Ltd. to the Markham interests or, as a further alternative, beginning later still when it was decided that Malgor Pty. Ltd. should be placed in liquidation.
For the taxpayers it was contended that no relevant scheme existed but that the purchase of the Rockingham land was undertaken as an investment in a grazing property. Alternatively it is said that in any event the shares in Malgor Pty. Ltd. were not sold to Mr. Markham by the persons to whom they were originally issued but by the M.J.S. Investments partnership, something which no scheme ever contemplated but which was brought about by the adoption of tax and estate planning advice given to Morris Steinberg which resulted in the substitution of that partnership as shareholder in Malgor Pty. Ltd. in place of Morris Steinberg and his wife. In essence the taxpayers rely upon the fact that the profits which were derived arose in an unforeseen way and hence not pursuant to any scheme.
Before considering the taxpayer's alternative submission I should say that I agree with the conclusion of Mason J. concerning Mr. Morris Steinberg's purpose in buying the Rockingham land and should state briefly my reasons for doing so.
Mr. Steinberg said that he bought the land, having Malgor Pty. Ltd. incorporated so that it might become the purchaser, as a farming proposition with a view to his retirement, having in mind making it ``quite a show place''. This evidence Mason J. rejected, pointing to a number of considerations which led him to that view. Those considerations are indeed powerful and his Honour was not only entitled to take the view he did but could, in my view, scarcely take any other. It is enough to refer to the improbable version given by Mr. Steinberg of what was, according to him, his sudden and wholly unpremeditated entry into grazing activities on a somewhat unpromising property without any prior advice and having neither inspected nor, indeed, made any enquiries at all concerning any other grazing properties available for purchase. When this is combined with the failure, after its purchase, to use the land for grazing, with Mr. Steinberg's considerable past experience in the purchase of land for profit-making by resale, and with his statement at the statutory meeting of Malgor Pty. Ltd. that no definite land development had yet been embarked upon but that a number of propositions were being considered, the conclusion may readily be reached that Mr. Steinberg's purpose in acquiring the land was other than what he said it was.
I turn now to the question of whether in these circumstances sec. 26(a) is applicable to the four receipts of profits involved in this transaction and which the Commissioner has assessed to tax.
The applicability of the first limb of sec. 26(a) may be dealt with quite shortly; there was no evidence to suggest that the shares in Malgor Pty. Ltd. were acquired with any view to their resale, indeed the evidence is, rather, to the contrary. It was only the need for funds and the lack of success experienced in securing those funds from other sources that led to their sale. Profits on their sale by Malcolm David Steinberg and by the trustee of the Judith Steinberg No. 2 Trust cannot in my view be assessed to tax in reliance on the first limb of sec. 26(a). Profits made by Morris Steinberg and his son on the sale of their interests as tenants in common in the Rockingham land are, on the other hand, in my view assessable under the first limb for reasons similar to those I have discussed in the case of the Wanneroo land; the receipt of the interests in the Rockingham land on the making of the distribution in specie was an acquisition within sec. 26(a) and there has been no evidence to displace the inference that it was accompanied by an intention to make a profit by the sale of what was distributed. Mason J. inferred that this had been Mr. Morris Steinberg's intention in relation to the Rockingham land from the outset and I agree, with respect, in his conclusion regarding Malcolm's role from the time he became a party to the transaction; the
ATC 4242
son's evidence is in no way inconsistent with his being an informed and ready associate of his father in relation to all that was thereafter done and intended concerning the Rockingham land.However, in my view, as was the case in relation to the Wanneroo land, any reliance upon the first limb of sec. 26(a) must involve a remission to the Commissioner for reassessment because there is no material before this Court concerning the value of the respective interests in the land as at the date of their distribution in specie and it is at that date and not earlier that, for profit calculation purposes, the cost of the land is to be ascertained.
I turn therefore to the second limb of sec. 26(a); the critical question here is whether there existed any scheme and, if so, whether the profits in question arose from its carrying on or carrying out.
That there was initially a profit-making scheme is, I think, clear and his Honour has so found. It consisted in part of the purchase of the Rockingham land and the incorporation of Malgor Pty. Ltd. so that it might become the purchaser of that land. Whether or not the scheme included any precise plan of the manner in which the land and its subdivisional potential should ultimately be turned to profit does not emerge from the evidence. Nor was it likely to when the taxpayers' case involved a denial that the initial acquisition was with a view to resale at a profit. Once this evidence is rejected there may then remain circumstances from which valid inferences may be drawn concerning the purpose with which acts were done but it is unlikely that they will permit of inferences concerning those details of a scheme which have never been given effect to because the march of events has caused the scheme to be prematurely abandoned or substantially altered.
Before considering what is the consequence of this absence of evidence about any details of the scheme I should state my understanding of certain characteristics of the concept of a scheme for the purposes of sec. 26(a).
Once it is determined that a scheme exists the effect of supervening events which cause a departure from the original scheme will vary depending upon the view taken of those events. If they be seen as involving an abandonment of the scheme as a whole, as in
Kratzmann
v.
F.C. of T.
70 ATC 4043
; (1970) 44 A.L.J.R. 293 at p. 294
, without the substitution of some new scheme
-
Eisner
v.
F.C. of T.
71 ATC 4022
;
(1971) 45 A.L.J.R. 110
-
profits made subsequent to its abandonment will not be assessable under sec. 26(a). If, instead, a scheme in an amended form is thereafter carried out which can be seen to be a different scheme from the original scheme the date of inception of the new scheme will be the starting point for the calculation of profit, so that if the acquisition and resale of land is in question the value of the land at the date of inception of the new scheme will be the relevant starting figure. Again not every change in the planned details will involve the adoption of a new scheme, this will always be a question of fact and will be much affected by the degree to which the original scheme was precise in its details. An imprecise scheme, the details of which have not been worked out in advance, will more readily take in its stride unexpected events without becoming a different scheme.
It is true that an undertaking or scheme must involve a programme or plan of action
-
per Kitto
J. in
Clowes
v.
F.C. of T.
(1954) 91 C.L.R. 209
at p. 225
, and
per Gibbs
J. in
XCO Pty. Ltd.
v.
F.C. of T.
71 ATC 4152
at p. 4155;
(1971) 124 C.L.R. 343
at p. 349
; it presupposes, as
Windeyer
J. has said, activities which are co-ordinated by plan and purpose
-
Investment
&
Merchant Finance Corp. Ltd.
v.
F.C. of T.
70 ATC 4001
at p. 4007;
(1970) 120 C.L.R. 177
at p. 189
. However, as emerges from the judgment of
Windeyer
J. in
Buckland
v.
F.C. of T.
(1960) 34 A.L.J.R. 60
, it may involve no more than a settled purpose on the part of those concerned ``to turn their purchase to profitable account as best they could when they got possession, depending on how the undertaking then developed''
-
at p. 62, although it must necessarily have as its object the making of a profit
-
XCO case
at p. 4155; p. 350. It may involve alternative plans, different routes to the desired profitable end, the selection of one route rather than another being left for determination by future events
-
Elsey
v.
F.C. of T.
69 ATC 4115
at p. 4123;
(1969) 121 C.L.R. 99
at p. 114
. It is clear from what was said by
Dixon
J. in the
Premier Automatic Ticket Issuers' case,
at p. 300, that a venture involving an acquisition of property with a view to ``any profitable dealing with the property'', it being proposed that advantage be taken of whichever of a large number of possible modes of future profitable disposal happens to prove most expedient, may
ATC 4243
constitute a scheme, despite the absence of any particular planned mode of dealing.It may be that the original scheme in this instance was quite precise in its terms; if so, the sale of half the shares in Malgor Pty. Ltd. to the Markham interests could hardly have been anticipated by it, it also probably did not contemplate any winding up and distribution in specie. However, the scheme may equally well have been entirely imprecise in character, no particular steps being worked out by which profit was to be gained from an increase in the value of the Rockingham land; it may have consisted of no more than a scheme whereby a company to be formed, with the Steinbergs as shareholders, would acquire the land and retain it while it appreciated in value, that being followed by a realization of the land by whatever means and with whatever intermediate steps might then appear expedient.
Even were there evidence that the scheme was fully pre-determined from the beginning this would not, I think, mean that what in fact happened involved an abandonment of the scheme so that, as in Kratzmann's case, profits which subsequently arose did not arise from the carrying on or carrying out of a profit-making scheme. Only rarely, I think, can it be said of a scheme for the acquisition of assets for profit-making simply by their resale (of which Kratzmann's case was not an instance) that a frustration of the planned mode of disposal, followed nevertheless by a profitable disposal, results in there being no scheme capable of attracting sec. 26(a) but only in a realization of a capital asset. Here the original object, a profitable sale of the land, was pursued and attained, although the mode of doing so may have been changed so as to accommodate to changing circumstances. Were the scheme thus shown to have been fully pre-determined from the beginning, the most that could be said is that changes made to the scheme resulted in the substitution of a new scheme for the original one, the starting point for calculation of profit therefore being the value of the land at the date of initiation of the new scheme. In fact there is no evidence that the scheme was other than of the simplest sort, devoid of any details of how, precisely, the profit would be realized. It follows that the fact that the profit was in fact realized in part from the unanticipated sale of half the issued capital of Malgor Pty. Ltd. and in part from the sale of land which came to the shareholders by way of a distribution in specie not perhaps originally contemplated does not of itself show the Commissioner's assessment to have been in error.
In the case of the two appeals by Malcolm David Steinberg and of the appeal by the trustee of Judith Steinberg No. 2 Trust, the respective taxpayers clearly enough did not become participants in the scheme until 1963, long after its inception. Mason J. held that both these taxpayers were at all times aware of the intentions of Mr. Morris Steinberg, the originator of the scheme; by their entry, albeit belated, into the scheme as participants with full knowledge of it, what had previously been done by the original participants was adopted by them and they took the benefit of the scheme which they found already on foot. No doubt, as Dixon C.J. observed in Clowes' case at p. 217, sec. 26(a) must be understood as speaking of a scheme carried on or carried out ``by the taxpayer or on his behalf'' and it will not apply to the case of a taxpayer who, as in Clowes' case, derives a receipt from another who has in turn obtained it by the carrying out of such a scheme - per Gibbs J. in XCO case at p. 4155; p. 349. However neither Malcolm David Steinberg nor the trustee can, in my view, call this principle in aid, even for the purpose of having their profits calculated from a starting point in 1963 rather than from the earlier inception of the scheme. They stand in the same position as do the original participants in the scheme in relation to the calculation of quantum of profit.
The position of the fourth appellant, Mr. Morris Steinberg, is in one sense unique. Until the formation of the M.J.S. Investments partnership he was a major shareholder in Malgor Pty. Ltd.; when, on its formation, that partnership acquired nearly all the issued capital of that company, he retained, as a member of the partnership, only a quite small beneficial interest in its capital. Then, when it was found that amendments to tax legislation made it no longer attractive to retain in existence the eighteen trusts which, through their preponderating interest in the partnership, were entitled to most of the half of the capital of Malgor Pty. Ltd. which had not been sold to Markham interests, the ``liquidation'' of the trusts restored to Mr. Steinberg a substantial interest in Malgor Pty. Ltd. It was by means of this interest that, on the distribution in specie, he acquired his interest as tenant in common in the Rockingham land, on the profit from the sale of which he has been
ATC 4244
assessed. Thus through his own actions his interest in Malgor Pty. Ltd. and in the land which he caused it to buy had waned and waxed again during the currency of the scheme. I do not regard this as in any way affecting the application of sec. 26(a); all that happened was brought about by the taxpayer and the ultimate profit he received was in every sense a profit from the carrying out of the profit-making scheme, a scheme of whose inherent flexibility he took advantage from time to time so that he could ultimately derive his profit without ever having to abandon the scheme of which he was the author.It follows that it has not, in my view, been shown that the Commissioner was in error in assessing to tax as profits from the carrying out of a profit-making scheme both the profits from sale of interests in the land and also the profits from sale of shares in Malgor Pty. Ltd. I would accordingly dismiss each of the four appeals concerned with this Rockingham land.
ORDERS:
Appeals No. 4 and 5 of 1973 dismissed with costs. Appeal No. 6 of 1973 in relation to the sale of land at Innaloo dismissed with costs. Appeal No. 6 of 1973 in relation to the sale of the shares in Malgor Pty. Ltd. allowed with costs. Order of Mason J. varied accordingly. No order of cost of appeal to Mason J. Matter be remitted to the Commissioner to reassess in accordance with the reasons of this Court. Appeals No. 7 and 8 of 1973 allowed with costs. Orders of Mason J. set aside and in lieu thereof order that appeals be allowed with costs. Matter be remitted to the Commissioner to reassess in accordance with the reasons of this Court.
This information is provided by CCH Australia Limited Link opens in new window. View the disclaimer and notice of copyright.