St. Hubert Island Pty. Limited v. Federal Commissioner of Taxation.

Mahoney J

Supreme Court of New South Wales

Judgment date: Judgment handed down 6 May 1976.

Mahoney J.: On 25th August 1960, the taxpayer was incorporated for the purpose of acquiring two small islands situated in Brisbane Water near Woy Woy. Its intention was to develop the islands into a condition suitable for residential subdivision, to subdivide them into residential lots and to sell those lots at a profit.

The company acquired title to the islands (or the substantial portion of them) but, for reasons to which I shall refer, the taxpayer itself did not proceed to such development and subdivision.

On 17th March 1971, the taxpayer went into voluntary liquidation and subsequently the liquidator transferred the ownership of the land to the then sole beneficial shareholder of the taxpayer, Portuland Developments Pty. Limited.

The Commissioner of Taxation assessed the taxpayer to income tax for the year ended 30th June 1972, upon the basis that that transfer of the land gave rise to taxable income in the amount of $1,343,580.

The present appeal is brought to test that assessment.

In outline, the facts by reference to which the present questions arise are as follows: For some years prior to 1960, a Mr. Powell and a Mr. Hughes had been associated in ventures concerned with the winning and sale of sand. These ventures had apparently been conducted mainly, if not totally, by companies in which they and a third person, Mr. Plummer, were interested.

At a time prior to 1960, Mr. Hughes and Mr. Powell discussed the possibility of acquiring the ownership of the two small islands in question, St. Hubert's Island and Riley's Island. These two islands were situated in Brisbane Water near the township of Woy Woy. They appear to have been sandy islands situated a short distance off the mainland. Their total areas were in the vicinity of 150 acres and 100 acres respectively, and details of them are depicted in the photograph (Ex. B) and in the plan (Ex. 2).

Various proposals were discussed between Mr. Hughes and Mr. Powell as to the use of the islands, if acquired, but I infer that ultimately they determined that a company would be formed to acquire the islands and that that company would carry out the necessary development works, subdivide the land into

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residential blocks and sell those blocks. Mr. Powell appears to have had some general views as to the possibility of obtaining sand for sale from the general vicinity of the islands, but this in my opinion, was not the immediate purpose that they saw for the acquisition of the islands nor their dominant purpose.

Mr. Hughes and Mr. Powell caused the taxpayer to be incorporated on 25th August 1960, and the shares in the taxpayer were held as to 20 shares in the taxpayer were held as to 20 shares by Bukit Timah Investment Pty. Limited (a company controlled by Mr. Hughes' family), as to 20 shares by Powell Holdings Pty. Limited (a company controlled by Mr. Powell's family) and as to 7 shares by Mr. Plummer.

On 26th August 1960, at the first meeting of directors of the taxpayer, it was resolved that Riley Island and part of St. Hubert's Island be purchased for $77,700, and a transfer of that land to the taxpayer was subsequently effected. The company did not, at this stage, acquire title to the whole of the land on St. Hubert's Island; the land which it did not acquire was the lesser part of the total land and this land was not initially acquired because of difficulties in locating the owners of it.

In order that the contemplated development of the island could be carried out, at least three problems required to be solved: first, the rezoning of the land; second, the alteration of the physical condition of the land; and third, the financing of the development works.

At the time when the land was acquired, its zoning under the relevant town planning legislation restricted the use to which it could be put in a manner not consistent with residential subdivision. It was therefore necessary for the company to arrange a rezoning.

An application for rezoning was made. Some steps had been taken generally in this regard prior to the incorporation of the company and a letter of application was written to the Council on 13th August 1960 (Ex. 7).

However, on 1st December 1961, the rezoning application was refused.

On 6th October 1961, Mr. A.E. Hughes had died, and, as far as the evidence before me indicates, such active steps as were taken thereafter were taken by or at the instance of Mr. Powell.

Late in 1963 or early in 1964, Mr. Powell approached Mr. Vogan, one of the senior executives of the Hooker Group of companies. Initially, I infer, Mr. Powell hoped that he could avail himself of the expertise of the Hooker Group for the purpose of pressing what was described as an appeal in respect of the zoning of the land.

However, it was soon clear, between Mr. Powell and Mr. Vogan, that the expertise of the Hooker Group would be available to the company only upon the basis that the Hooker Group would have, if the appeal was successful, an option to acquire the company's interest in the land and to undertake the development of the land on its own account.

Discussions took place between the parties and letters were exchanged, culminating in a letter of 12th October 1964, from Hooker-Rex Pty. Limited, in which the terms of the proposed arrangement were set forth. Shortly thereafter, Mr. Powell indicated the acceptance in principle of these terms. Whether thereby a firm contract was made or whether the matter remained in the state of negotiation need not be determined; the parties had committed themselves to carry out a transaction of the kind which ultimately resulted.

Steps were taken by representatives of the Hooker Group of companies to obtain an appropriate rezoning of the land and by a letter dated 4th February 1965, the State Planning Authority indicated that a rezoning would be carried out subject, inter alia, to the erection of a bridge in the area.

Negotiations took place thereafter concerning that condition which resulted ultimately in the condition being withdrawn.

On 29th August 1966, a document granting an option to purchase the shares of the taxpayer was executed: see annexure ``N'' to Mr. Vogan's affidavit. This option was exercised and by an agreement dated 26th July 1968, an agreement was made between the then shareholders of the taxpayer and Hooker Town Developments Pty. Limited for the sale to the latter of the shares in the taxpayer. On 7th August 1968, the company's directors approved the registration of transfers of its shares to that company and its nominee. Thereafter, some 11 lots of land on St. Hubert's Island were acquired and transferred to Hooker Town Developments Pty. Limited, and these lots were, before liquidation of the

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taxpayer company, transferred to it. Subsequently, the purchaser company assented to an arrangement whereby the shares would be acquired by a joint venture company controlled by I.A.C. Limited and by a company of the Hooker Group. This company, Portuland Developments Pty. Limited, resolved, on 18th December 1968, that the shares be acquired by it.

Detailed evidence was not placed before me as to the nature of the work required to be done to put the land into a condition in which it could be subdivided into residential blocks. However, there was at the relevant time, a proclamation under the Public Health legislation which effectively prevented such development unless the level of the land was raised by some three feet, as calculated by reference to a datum specified in the particular proclamation: see Ex. C. The work which was carried out ultimately was of a substantial cost, amounting to some hundreds of thousands of dollars and it was not suggested that this expenditure was otherwise than necessary and appropriate to enable the development and subdivision to be carried out.

None of this work was done prior to the agreement in 1968 for the sale of the shares in the taxpayer to the company selected by the Hooker Group. Work in fact commenced late in 1968 or early in 1969. By 17th March 1971, the date of the resolution for the voluntary winding up of the taxpayer, substantial expenditures had been incurred. The circumstances in which the work was done were referred to in the evidence in general terms. The decision had been made by the Portuland company that, in accordance with a practice which the Hooker companies had followed in other cases, the taxpayer would be placed in voluntary liquidation and the land transferred in specie by the company to the Portuland company. Although the shares in the taxpayer were transferred to the Portuland company and its nominee on or about 23rd June 1969, there were, for reasons which do not appear, no steps taken to place the taxpayer in liquidation until March 1971, On 17th March 1971, the resolution for voluntary liquidation was passed and Mr. Dixon was appointed liquidator. The taxpayer was then indebted to the Portuland company in respect of the cost of the work which had been done upon the land. The basis upon which it became so indebted was not reduced to writing, but the companies appear to have accepted that the cost of work done upon the land prior to liquidation should be borne by the taxpayer; in any event, the indebtedness as at the date of liquidation related to such work.

On 27th August 1971, the liquidator executed transfers of the relevant land to the Portuland company and that company accepted the transfers as effecting both a discharge of the indebtedness to it of the taxpayer and also the final distribution in specie to it as sole beneficial shareholder, of the taxpayer's assets. The land was transferred to the Portuland company in October 1971.

It had at all relevant times been contemplated by those then controlling the taxpayer and the Portuland company that on liquidation of the taxpayer, there would be a distribution in specie in this way. The resolution for liquidation purported to authorise a distribution in specie: see annexure ``T'' to Mr. Vogan's affidavit.

There was in the Memorandum of Association of the taxpayer a provision (cl. 2 [an]) relating generally to distribution of assets in specie. There was no relevant article in the Articles of Association of the taxpayer; the taxpayer had adopted Table A of the Companies Act 1936, with certain amendments, and counsel have accepted that no basis for distribution in specie existed by reason of these Articles of Association. In the present case it has not been suggested that anything turns upon the existence or non-existence of such a power.

Before making this distribution in specie, the liquidator sought the assent of the Commissioner of Taxation and this assent was given, subject to the Portuland company undertaking, as it did, to meet any income tax liability of the taxpayer: see annexures ``H'' and ``I'' to the affidavit of Mr. Dixon, the liquidator.

On 31st October 1972, the Commissioner of Taxation assessed the taxpayer to tax in the sum of $638,200.50. For the purpose of this assessment, the Commissioner brought to account as assessable income the value of the land at the date on which it was transferred by the company to the Portuland company, namely $2,250,000, and allowed as an allowable deduction $906,420, being the amount of the taxpayer's indebtedness in respect of the work done in developing the land.

It is relevant now to consider the basis of this assessment.

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Under the general law, assets distributed it, the course of liquidation are capital and not of the nature of income and, therefore, prima facie, are not liable to tax as income: see
Webb v. F.C. of T. (30 C.L.R. 450);
Resch v. F.C. of T. (66 C.L.R. 198). Therefore assets such as trading stock, the disposal of which during the operations of the company would be brought to revenue account in calculating the company's profit or income, may, after liquidation, be distributed as capital.

In the United Kingdom such distributions are, as such capital:
Staffordshire Iron and Coal Co. Ltd. v. Brogan (1963) 1 W.L.R. 905; but, insofar as the liquidation involves a discontinuance of the company's trade, provision has been made to bring to tax amounts calculated by reference to the then existing trading or revenue assets: see Halsbury's Laws of England (3rd ed.) vol. 20, pp. 134-139, para. 236-245.

In the Income Tax Assessment Act 1936, as amended, two general provisions have been made in this regard. First, by sec. 47, distributions to shareholders of a company by a liquidator in the course of winding up are, with the exceptions referred to in the section, deemed to be dividends paid to the shareholders ``to the extent to which they represent income derived by the company''. Whether a distribution in specie of the kind here envisaged would result in any income content of the asset distributed being ``derived'' by the company is a matter which in argument was in issue between the parties, but the Commissioner conceded that sec. 47 did not apply in this case.

Second, provision is made by sec. 36 for the value of trading stock disposed of otherwise than in the ordinary course of carrying on the company's business to be included in the company's assessable income. Mr. Needham, counsel for the Commissioner, stated at the commencement of the present appeal, that it was upon this section alone that the present assessment was made and was supported.

There has been no contest as to the value of the land or the quantum of the assessment; the sole question at issue in the appeal has been whether sec. 36 operates to require that the value of the land be included in the taxpayer's assessable income.

The taxpayer advanced three reasons why, in its submission, sec. 36 did not have this result:

  • 1. It submitted that the land was not at any relevant time ``trading stock'' within sec. 36;
  • 2. It submitted that (if it was trading stock) it had not been an asset ``of a business'' carried on by the taxpayer; and
  • 3. It submitted that what the taxpayer had done in the distribution of the land to the Portuland company did not constitute a ``disposal'' of it within sec. 36.

1. ``Trading Stock''

The taxpayer submitted that the land in the present case was not trading stock either within the meaning of that term as it is generally understood or within its meaning as defined by sec. 6 of the Act.

The taxpayer sought, by reference to general definitions of the term, and to what has been said to be its common usage, to establish that it does not include the land. Mr. Ellicott, counsel for the taxpayer, submitted primarily that the term is limited to things such as goods, chattels or articles. He cited in support of this submission, the relevant definitions in the Shorter Oxford English Dictionary OA(Stock: The aggregate of goods or of some specified kind of goods which a trader has on hand as a provision for the possible future requirements of customers; and Stock in Trade: The goods kept on sale by a dealer, shopkeeper or peddlar). Reference was made also to
Seymour v. Rapier (1718) Bunb. 28 and
England v. Downs (1842) 6 Bevan 269 at pp. 273-6.

However, at least in the context of income tax, the term must now be taken to apply to choses in action such as shares in companies:
Investment & Merchant Finance Company Limited v. F.C. of T. (71 ATC 4140 at pp. 4142, 4145, 4147 and 4149; 125 C.L.R. 249 at pp. 254, 261, 265 and 270).

Also, as the Commissioner pointed out, in this country the term has, in the course of judgments, been applied to land held by a company for sale:
Melbourne Trust Limited v. C. of T. (Vic.) (15 C.L.R. 274 at pp. 293, 303); (18 C.L.R. 413);
Ruhamah Property Co. Limited v. F.C. of T. (41 C.L.R. 148 at p. 156).

Reference was made to decisions under the United Kingdom Income Tax legislation where land has been referred to as trading stock:
Hudson v. Wrightson (26 T.C. 55 at pp. 59-60);
Bradshaw v. Blunden (36 T.C. 397);
Moore v. R.T. MacKenzie & Co. Limited (1972) 1 W.L.R. 359; 48 T.C. 196. Mr. Ellicott

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submitted that, at the relevant times, the definition of trading stock in the United Kingdom legislation was in terms wide enough to include realty and that it is this which accounts for the description in such cases of land as trading stock.

Whether land of its nature is not capable of being trading stock, as the term is generally understood, has not been finally determined in Australia. As was said by Windever J. in
Spence v. F.C. of T. (42 A.L.J.R. 3 at p. 6), it may have the same economic function as trading stock in a particular case, but the question was reserved by his Honour in that case and by Stephen J. in
Tikya Investments Pty. Limited v. F.C. of T. (72 ATC 4231 at p. 4236; 47 A.L.J.R. 32 at p. 41A). Having regard to the views which I have formed, it is not necessary for me to express any concluded view upon this question.

The taxpayer submitted, alternatively, that if land could in appropriate circumstances be trading stock, the term did not include land in globo held as the present land was held.

It was argued, for the taxpayer, that the land, in the state it was when it was purchased, required substantial alteration or development in order to produce something, viz., individual residential lots, apt for sale in the manner contemplated by the taxpayer. It was argued that an asset such as the land here in question, purchased for the purpose of development over a substantial period and for the purpose not of selling it in globo but of deriving from it individual lots of land for sale should be brought to account for income tax purposes (insofar as it is to be brought to account), not as trading stock, but on some other basis, e.g., upon what has been described as the ``profit emerging basis'': see
Thorogood v. F.C. of T. (40 C.L.R. 454);
J. Rowe & Son Pty. Limited v. F.C. of T. (71 ATC 4001; 124 C.L.R. 421). The taxpayer referred, by way of analogy, to cases in which the source or ``raw material'' from which trading stock or saleable assets have been derived has been held to be a capital and not a revenue asset: see, e.g.,
Kauri Timber Co. Limited v. C. of T. (1913) A.C. 771 (cost of standing timber capital, though the sale proceeds of the timber brought to account for income tax purposes);
Glenboig Union Fire Clay Co. Limited v. I.R. Commrs. (12 T.C. 427) (right to mine fire clay capital, though proceeds of the sale of clay, when won, brought to account in calculating tax).

In order to support his argument that land should be treated as trading stock, and, in particular, that land which was in the course of improvement for the purpose of being subdivided and sold should be so treated, the Commissioner drew attention to the question of how, if not so treated, such land and the expenditure upon it should be brought to account for tax purposes. His argument, as I understand it, suggested that, unless land in the course of improvement in this way was not treated as trading stock within the Act, the land and the expenditure upon it could not adequately be dealt with under the Act.

In my opinion, land which is ultimately intended to be sold in subdivision in the course of trade, which is not yet in the state in which it can be subdivided and sold, and which is in the course of improvement for that purpose, can be brought to account under the Act in a manner akin to the manner in which work in progress is brought to account. It is not necessary, in order to accommodate such a situation to the terms of the Act, to treat the land, in that state, as being trading stock, as that term is used in the Act.

Historically, in the United Kingdom, income tax has been imposed on a taxpayer carrying on business by reference to the ``annual profits or gains arising or accruing'' from the trade or business: see, e.g., sec. 122 and 123 of the Income Tax Act 1952. Provisions of this kind rendered it necessary to determine, not only what had been the profits or gains of a business, but which of those profits or gains were of the nature of income and in what tax period they had arisen or accrued.

In an early case, the matter was put, as a matter of principle, in terms of receipts and expenditure. In
Russell v. Aberdeen Town & Country Bank (1888) 13 A.C. 418 at p. 424; 2 T.C. 321 at p. 327, Lord Hershell said:

``My Lords, the duty is to be charged upon `a sum not less than the full amount of the balance of the profits or gains of the trade, manufacture, adventure or concern;' and it appears to me that that language implies that, for the purpose of arriving at the balance of profits, all those deductions from the receipts, all that expenditure which is necessary for the purpose of earning the receipts, must be deducted, otherwise you do not arrive at the balance of profits, indeed you do not ascertain and cannot ascertain whether there is such a thing as

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profit or not. The profit of a trade or business is the surplus by which the receipts from the trade or business exceed the expenditure necessary for the purpose of earning those receipts. That seems to me to be the meaning of the word `profits' in relation to any trade or business. Unless and until you have ascertained that there is such a balance, nothing exists to which the name `profits' can properly be applied.''

See also
Minister of National Revenue v. Anaconda American Brass Limited (1956) A.C. 85 at p. 102.

However, in determining what are receipts or expenditures for this purpose, it was soon settled that the principles of commercial accounting should be applied, and that, for example:

``... in the profit and loss account of a merchant's or manufacturer's business the values of the stock in trade at the beginning and at the end of the period covered by the account should be entered at cost or market price, whichever is the lower; although there is nothing about this in the taxing statutes:''

Whinster & Co. v. I.R. Commrs. (12 T.C. 813 at p. 823); cited in Minister of National Revenue v. Anaconda American Brass Limited (supra) at p. 101. The courts have followed the process, as the occasion has arisen, of determining whether and to what extent a particular amount is to be brought into account in determining such profits and gains: cf. the observations of Dixon J. (as he then was) in
Carden's case (63 C.L.R. 108 at pp. 153-4).

The process by which it was determined to what extent particular receipts and expenditures were to be brought to account and at what times was referred to by Lord Reid in
Duple Motor Bodies Limited v. Ostime (1961) 1 W.L.R. 739 at p. 751; 39 T.C. 537 at pp. 569-70, in the following terms:

``The findings in the Case Stated may be more easily understood if I first set out what I believe to be the background of this matter. It appears that at one time it was common to take no account of the stock in trade or work in progress for income tax purposes; but long ago it became customary to take account of stock in trade, and for a simple reason. If the amount of stock in trade has increased materially during the year, then in effect sums which would have gone to swell the year's profits are represented at the end of the year by tangible assets, the extra stock in trade which they have been sent to buy; and similar reasoning will apply if the amount of stock in trade has decreased. So to omit the stock in trade would give a false result. It then follows that some account must be taken of work in progress. Suppose that the manufacture of an article was completed near the end of an accounting period. If completed the day before that date the article, if not already sold, has become stock in trade; if completed the day after that date, it was still work in progress on that date. It could hardly be right to take that article into account in the former case but not in the latter. I do not know when it became customary to take into account work in progress, but it appears that that has been customary for many years, and it is not disputed that, at least in all ordinary cases, that must now be done. Then the question is, what figure should be taken to represent the stock in trade. If it consists of articles bought for resale, the answer in obvious - the price the taxpayer paid for them, or their cost to him. If market value were taken, that would generally include an element of profit, and it is a cardinal principle that profit shall not be taxed until realised: if the market value fell before the article was sold the profit might never be realised. But an exception seems to have been recognised for a very long time: if market value has already fallen before the date of valuation so that, at that date, the market value of the article is less than it cost the taxpayer, then the taxpayer can bring the article in at market value and in this way anticipate the loss which he will probably incur when he comes to sell it. That is no doubt good conservative accountancy, but it is quite illogical. The fact that it has always been recognised as legitimate is only one instance going to show that these matters cannot be settled by any hard or fast rule or strictly logical principle.

The earliest authority dealing with this matter along general lines appears to be Whinster & Co. v. I.R. Commrs. (12 T.C. 813). The opinion of Lord President Clyde has always been followed, and Lord Sands's opinion is also instructive. It is not disputed that the principles there expressed apply both to stock in trade and work in progress. But there was no discussion there as to the

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meaning of `cost' and that is the problem that now confronts your Lordships.''

For present purposes, two observations may be made as to this process of decision. First, in determining what is or is not to be taken into account for the calculation of profits or gains, and in determining in what particular year it is to be taken into account, the matter is to be determined by considering what will, to use the words of Dixon J. in Carden's case (63 C.L.R. 108 at p. 154) give ``a true reflex'' of the taxpayer's profits or gains in the particular period. Second, the fact that an asset or transaction is to be taken into account in calculating the company's profit or gain for the particular period does not mean that it is, therefore, trading stock. The suggestion was made, at one stage during argument in the present case, that because land was, in some of the authorities cited, taken into account in this way, it should therefore be categorised as trading stock. However, Duple Motor Bodies Limited v. Ostime (supra) illustrates that assets are brought to account in this way even though they are not trading stock, and Viscount Simonds and Lord Reid, with whose speech Lord Tucker and Lord Hodson agreed, each in terms contrasted stock in trade and work in progress.

The necessity to treat in this way matters such as stock in trade and work in progress arises from the necessity to ensure that items of expenditure are properly treated in the accounting. In determining what are the profits or gains of a particular period for general purposes, all expenditures are to be taken into account in some fashion. However, where the accounting is made for the purpose of determining the amount of the profits or gains which are income, two qualifications upon the general deduction of expenditures have been made.

First, traditionally, the income tax legislation has excluded from the computation particular kinds of expenditures, e.g., non-business or private expenditures and expenditures of capital: see, e.g., the Income Tax Act 1952, sec. 137 (a), (b) and (f).

Second, where the expenditures have resulted in the creation of an asset, it may be necessary, in order that the accounting results in a true statement of the profits or gains of the particular period, that that expenditure be in effect excluded from the accounting by, e.g., bringing to account that asset and setting the expenditure off against it. It would be wrong to reduce the sum of the profits or gains by the amount of the expenditure when the expenditure had resulted in the creation of the relevant asset.

This consideration was stated by Lord Reid in Duple Motor Bodies Limited v. Ostime (supra) (39 T.C. 537 at p. 571) as follows:

``The Crown first submitted an argument which, if sound, would carry them a long way: indeed, it would carry them further than they wanted to go. It was based on an assumption that expenditure shown in a profit and loss account can all be divided into manufacturing and selling expenditure, and that the manufacturing expenditure can and should be attributed entirely to goods manufactured or partly manufactured during the year of account. If that were so, it might follow that you should allocate that expenditure between all those goods: if you refuse to allocate any of it to that part of the goods still unsold (stock in trade) or still unfinished (work in progress) you overload the goods already sold with more than their share and so reach a final figure less than the true profit. But the assumption is wrong. It has long been established that you are entitled to include in expenditure for the year all business expenses in that year not excluded by the old Rule 3 of the Rules applicable to Cases I and II of Schedule D now sec. 137 of the Income Tax Act 1952, whether or not they can be attributed to the production of goods in that year. It matters not that certain expenditure may have proved abortive, or may have been spent solely with a view to production and profit in some future year and have no relation at all to production during the year of account. This was settled as long ago as 1910 in Vallambrosa
Rubber Co. Limited v. Farmer, 5 T.C. 529, a decision often followed and never questioned. Expenditure which it is permissible to include in the account is the whole general expenditure during the period, and it can only be said to have been spent to earn the profits of that year in the sense that it was all spent during that year to keep the business going and that, during that year, the business yielded the profits shown in the accounts. So the question is not what expenditure it is proper to leave in the account as attributable to goods sold during the year, but what expenditure it is

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proper in effect to exclude from the account by setting against it a figure representing stock in trade and work in progress. You must justify what you seek to exclude in this way as being properly attributable to and properly represented by those articles.''

It is upon such a line of reasoning that, it may be, it is in an appropriate case proper to adopt what has been described in the present case as a ``profit emerging basis'' of calculation of profits or gains. Upon this basis of bringing to account expenditures, the cost of acquiring and improving or preparing for sale an appropriate asset does not effectively reduce the profits or gains of the particular year of expenditure; in the year when the asset is finally disposed of the profits or gains are first affected, by increase or reduction, by the profit or loss upon the disposal of the asset. This result is, in my opinion, achieved, not by ignoring the expenditure in the process of accounting in the year in which the expenditure is made, but by taking into account that expenditure and setting it off, in the manner described by Lord Reid, against the asset resulting from it, brought to account at cost. Upon this basis, when the asset is ultimately sold, that which is the balance of the transaction is the difference between the proceeds of sale and that cost and that amount is then taken into account in determining the profits or gains in the year of disposal.

Such a treatment of expenditures is, in my opinion, applicable in any appropriate case, whether the asset resulting from the expenditure be properly described as stock in trade or work in progress or by some other name.

Can these principles be applied having regard to the structure of the Australian Act?

By the Australian legislation, income tax is imposed upon taxable income which is by definition the surplus of assessable income over allowable deductions: sec. 6.

In determining what is income or assessable income, in the context of a business, where the income arises from the turning over of its circulating capital:
John Smith & Sons v. Moore (1921) 2 A.C. 13; 12 T.C. 266, per Lord Haldane; the Court will, in the absence of a statutory direction determine what is income and when it is derived, by reference to the same commercial and accounting principles as have been applied in the United Kingdom.

In J. Rowe & Son Pty. Limited v. F.C. of T. (71 ATC 4001 at p. 4008; 124 C.L.R. 421 at p. 434), Walsh J. said:

``That case (Carden's case) does not provide for me the answer to the question raised by the present appeals, but for several reasons I think it is important to make some examination of it. In the first place I think it indicates that the difference between the Commonwealth Act and the English Income Tax law may more often be of importance in deciding questions as to the allowance of deductions (as for example in
F.C. of T. v. James Flood Pty. Limited (88 C.L.R. 492)) than in determining the manner in which, or the period at which, items of revenue should be taken into account in computing income (or profit) and in particular in determining the use which may properly be made of the principles and methods recognised and followed in making those computations in business and in commerce. I do not mean that questions as to income or as to profits cannot be affected by special provisions in a particular Act. But generally speaking I am of opinion that Carden's case (63 C.L.R. 108) and other cases suggest that when a decision is required as to the time at which a transaction is to be brought to account or as to the extent to which accepted business and accountancy methods are relevant, the making of such a decision is not greatly affected by any distinction between the ascertainment of the profit of the year and the ascertainment of the income of the year. The South Australian Act considered in Carden's case, (63 C.L.R. 108), provided that income included `every kind of profit and every kind of gain'. In this respect it was closer to English legislation than to the terms of the Commonwealth Act. But most of what Dixon J. said (at pp. 151-6) as to the use of commercial and accountancy principles appear to me as applicable to the Commonwealth Act as to the South Australian Act or the English legislation. It is appropriate to add at this point that it was affirmed in the judgment of the Court in
Arthur Murray (N.S.W.) Limited v. F.C. of T. (114 C.L.R. 314 at p. 320) that in determining what is income for the purposes of the Commonwealth Act regard may be had to accounting and commercial principles.''

On appeal, Gibbs J. (at 71 ATC 4157 at p. 4160 and C.L.R. pp. 451-2) said:

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``However for the reasons given by my brother Menzies, I agree that for taxation, as well as for business purposes, income of a trading business is derived when it is earned and the receipt of what is earned is not necessary to bring the proceeds of sale into account. When the Act gives no directions on the point, the question when income is earned, and the method of accounting to be adopted for the purpose of ascertaining the income, depends upon business conceptions and the principles and practices of accountancy (see C. of T. (S.A.) v. Executor Trustee and Agency Co. of South Australia Limited (Carden's case) (63 C.L.R. 108 at pp. 152-6), and
Arthur Murray (N.S.W.) Pty, Limited v. F.C. of T. (114 C.L.R. 314 at p. 318)). The method adopted should be that which is `calculated to give a substantially correct reflex of the taxpayer's true income: Carden's case (63 C.L.R. 108 at p. 154)'.''

For the purpose of determining what is income or assessable income, a specific direction is given by the Act in respect of stock in trade: sec. 28-34. But, subject to this and to the exact scope of the operation of these sections, the determination of what is income and when it is derived is left to be determined by reference to the commercial and accounting principles. In particular, insofar as they are not dealt with by sec. 28-34, questions relating to the derivation of income in relation to work in progress and other employments of traders' circulating capital, are left to be so determined. In answering these questions, decisions given in relation to the United Kingdom legislation may be of assistance.

However, the determination of what are allowable deductions, that is, what expenditures may be deducted and in respect of what year they should be deducted, is more specifically provided for by the legislation. ``Taxable income'' is defined to ``mean'' ``the amount remaining after deducting from the assessable income all allowable deductions'': sec. 6; and ``allowable deduction'' is defined to ``mean'' ``a deduction allowable under this Act''. Under the general scheme of the Act, it is only ``allowable deductions'' which are to be deductible from assessable income: see, e.g., sec. 48.

In cases where the determination of the taxable income of a business is concerned, the only provision for allowable deductions here relevant is that contained in sec. 51. It is by reference to the provisions of sec. 51 that the manner of bringing to account outgoings in respect of, e.g., work in progress (insofar as it is not comprehended by the ``stock in trade'' provisions) and land purchased in globo and improved, as in the present case, is to be determined. In my opinion, neither the general scheme of the Act nor the terms of sec. 51 require that outgoings of that nature can be brought to account only if they be treated as falling within the ``stock in trade'' provisions.

Section 51 provides:

``Sec. 51(1). All losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, or are necessarily incurred in carrying on a business for the purpose of producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital or of a capital private or domestic nature or are incurred in relation to the gaining or production of exempt income.

(2) Expenditure incurred or deemed to have been incurred in the purchase of stock used by the taxpayer as trading stock shall be deemed not to be an outgoing of capital or of a capital nature.''

It has not yet been settled whether the opening words of sec. 51(1) (``all losses and outgoings...'') include outgoings of whatever nature and whether of a capital or revenue nature, it being left to the words of the exception (``except to the extent...'') to exclude outgoings of a capital, etc, nature. The alternative construction of the subsection is one which would restrict the meaning of the words ``all losses and outgoings'' to losses and outgoings of a revenue nature. The former appears to have been the view of Walsh J, in
Poole v. F.C. of T. (70 ATC 4047 at p. 4051; 122 C.L.R. 427 at p. 435) and accords with the principles developed in England, as referred to by Lord Reid in the Duple Motor Bodies case in the passage to which I have referred. It may also be the view most consistent with the specific provision, in sec. 51(2) in relation to trading stock, which appears to be framed upon the basis that an expenditure in the purchase of trading stock would be such a loss or outgoing were it not for the fact that it was an outgoing of capital or of a capital nature.

Whichever interpretation of sec. 51 be adopted, expenditure of the kind to which I have referred may, in my opinion, appropriately be brought to account consistently with sec. 51. In the normal case,

ATC 4090

expenditure upon work in progress (which is not within the definition of trading stock) is an outgoing of a capital nature and is not, as such, a deduction against the assessable income of the taxpayer in the year of expenditure. It is brought to account as part of the cost of that which it brings into being, when it falls to be determined what income arises from the sale or other disposition of that asset in the course of the taxpayer's trade. If the expenditure is made upon an asset which, in due course, becomes trading stock, then it is taken into account as part of the cost price of that item or otherwise appropriately under sec. 28-31. If the expenditure is made upon an asset which is not or does not become trading stock within the Act, but the disposition of which produces income, it is taken into account, upon the ordinary principles of accounting to which I have referred, in determining what income has been derived from the taxpayer's activities in the relevant tax period.

Stock and work in progress of the kind to which I have referred are, of their nature, capital assets, and the profit or income, if it is derived, is derived from the disposal or sale or the ``turning over'' of such assets. In principle, and apart from statutory provisions, these items are capital, circulating capital. The distinction between a capital account concerned with a trader's fixed capital, such as land and buildings, and a revenue account concerned with a trader's trading or circulating capital, has been frequently referred to in income tax cases. Thus, in
Atherton v. British Insulated Helsby Cables Limited (1926) A.C.205; 10 T.C. 155. Lord Blanesburgh (at p. 231; 206) said:

``I do not myself see how any of these payments could properly be charged to capital account by any company which keeps its accounts on the double account system. And as the Income Tax Acts contemplate that accounts will be so kept, no other system need here be considered. Under that system, as is well known, the two accounts, capital and revenue, or trading account, as in business language it is usually termed, are separate accounts. The capital account is concerned with the company's fixed capital and its applications. The revenue account is concerned with the company's trading or circulating capital, and its application. Dividends may lawfully be paid, although, it may be, the whole of the company's capital has disappeared. No profits available for dividend are, however, existent, unless the company's trading capital would remain intact after they had been distributed as such.''

Trading stock and material to be worked upon to produce trading stock or items for sale have been recognized as part of the circulating capital of a business. Thus, in
John Smith & Son v. Moore (1921) 2 A.C. 13; 12 T.C. 266, Lord Haldane (at pp. 19-20; p. 282) said:

``My Lords, it is not necessary to draw an exact line of demarcation between fixed and circulating capital. Since Adam Smith viewed the distinction in the Second Book of his Wealth of Nations, which appears in the chapter on the distinction of stock, a distinction which has since become classical, economists have never been able to define much more precisely what the line of demarcation is. Adam Smith describes fixed capital as what the owner turns to profit by keeping it in his own possession: circulating capital is what he makes profit of by parting with it and letting it change masters. The latter capital circulates in this sense.''

His Lordship was prepared to treat the coal which might have been purchased under the contracts there in question as circulating capital but the contracts whereby the coal was purchased were not, in his opinion, circulating capital.

Golden Horseshoe (New) Limited v. Thurgood (1934) 1 K.B. 548; 18 T.C. 280; it was held that the purchase price paid for mine tailings was deductible for income tax purposes. Romer L.J. (at p. 562; p. 300) said:

``The question to be decided in this case is whether the dumps are to be regarded as fixed capital or as circulating capital. If they are the former, it is conceded by the appellants that the assessment made on them is correct. If on the other hand they are floating or circulating capital, it is conceded that the cost of them to the appellant must be debited in the profit and loss account, the account being credited with the cost price of what was left of the dumps at the end of the year of assessment. The dumps in other words must be dealt with in the profit and loss account of any other trader. The reason for this distinction being drawn between fixed and floating or circulating capital is not far to seek. In assessing a trader to Income Tax under Schedule D Case I, the Revenue authorities are only concerned with his annual gains and profits; that is,

ATC 4091

gains and profits in the year of assessment, or whatever may be the other material interval of time. They are not in the least concerned with his financial position as a whole at the end of the time, as compared with his financial position as a whole at the beginning. Changes in the value of his fixed capital are therefore disregarded except where it is otherwise expressly provided in the Act. On the other hand changes in his floating or circulating capital must be taken into consideration in ascertaining his annual gains or profits. For the profits or losses in a year of trading account cannot be ascertained unless a comparision be made of the circulating capital as it existed at the beginning of the year with the circulating capital as it exists at the end of the year. It is indeed by causing the floating capital to change in value that a loss or profit is made.

Unfortunately, however, it is not always easy to determine whether a particular asset belongs to the one category or the other. It depends in no way upon what may be the nature of the asset in fact or in law. Land may in certain circumstances be circulating capital. A chattel or a chose in action may be fixed capital. The determining factor must be the nature of the trade in which the asset is employed. The land upon which a manufacturer carries on his business is part of his fixed capital. The machinery that a dealer in machinery buys and sells in part of his circulating capital, as is the coal which a coal merchant buys and sell in the course of his trade. So, too, is the coal that a manufacturer of gas buys and from which he extracts his gas. For the purpose of ascertaining his profit in a year, it is clear that he must debit his profit and loss account with the pruchase price of the coal that he treats in the course of that year, and that, too, whether he buys it in that year or buys it in advance, it is part of the cost of producing the gas that he sells.... If on the other hand, instead of buying the mine the gas manufacturer had bought a quantity of coal already extracted from the mine and stacked on the surface, the price of the coal would have been regarded as part of the circulating capital.''

The Act provides a particular procedure for calculating the income derived from ``turning over'' trading stock: sec. 28-31. No such procedure is laid down in respect of items of trade which are not trading stock, within the statutory definition. In such circumstances, in my opinion, the profit or income which is derived is, prima facie, to be calculated according to the accounting principles to which I have referred. Whilst there has not been a definitive judicial determination of this question, it has been recognised that in an appropriate case, the court may treat as income of a particular year part only of the amount which has been received or which has come home to a taxpayer, the quantum of the income being determined by reference to expenditure made in previous years. As was pointed out by Walsh J. in J. Rowe & Son Pty. Limited v. F.C. of T. (71 ATC 4001 at p. 4010; 124 C.L.R. at p. 437-8), the use of a ``profit emerging basis'' for calculation of income, in an appropriate case, is not contrary to principle.

Insofar as it may be relevant, this appears to have been the manner in which the expenditure of the taxpayer upon the land in the present case was brought to account. As Mr. Needham pointed out in argument, this expenditure was not brought to account when incurred, but was, as he put it ``included in the value of the asset'': no claim for a deduction under sec. 51 was made in the year in which it was incurred. However, in the year in which the land was transferred to the Portuland company, the expenditure was brought to account and the Commissioner assessed upon this basis. Mr. Needham contended that this was not inconsistent with his argument on this point; he contended that the Commissioner's action was to be explained upon the basis that in the 1972 tax year, he had allowed the deduction under sec. 51. But this, in my opinion, is not correct. What the Commissioner did, and in my opinion rightly did, was to take the expenditure (which had, at least as to part, been made in previous tax years) and bring it to account in calculating the cost of the asset sold by the taxpayer. He treated the consideration on sale as liable to be brought to account for tax purposes and deducted from it the total cost of the land, including that expenditure. If the consideration received by the taxpayer was liable to be brought to tax, the manner in which the Commissioner treated the expenditure was, in my opinion, correct, even if the asset was not trading stock within the Act.

Counsel have, by their clear and helpful argument upon this aspect of the matter, invited me to deal in detail with it. It is proper that I add a qualification to what I have said. I have indicated my view that, prima facie, expenditure of the kind here in question is to be

ATC 4092

taken into account not by way of allowable deduction in the year of expenditure, but in calculating the cost when ultimately the asset is brought to account for tax purposes. However, as has been said on other occasions, the principles established in this field are established for the purposes of obtaining a true reflex of the income derived by a taxpayer at a particular time. It is possible that, upon the facts of a particular case, the determination of the true income may require that income be treated as derived from what would otherwise be work in progress notwithstanding that it has not yet been completed or disposed of. Similarly, as to outgoings, the requirements of sec. 51 are, in my opinion, sufficiently flexible to allow outgoings which prima facie would be of a capital nature for this purpose, to be treated as of a revenue nature, because of the period of use of, or the amount of, the expenditure, the recurrent nature of the outgoing or other relevant considerations: compare, e.g., the observations of Lord Reid in
Hinton v. Maden & Ireland Ltd. (1959) 1 W.L.R. 875; 38 T.C. 391

My conclusion that the scheme of the Act does not require that the land in question be treated as trading stock does not determine the matter against the Commissioner. It remains to be considered whether, upon the facts of this case, the land should be so treated.

Considering the matter as one of fact, I conclude that the land was not, in this case, trading stock. I take for this purpose the relevant date to be the date, in the 1972 tax year, when the land was transferred to the Portuland company. I do not think that, at this date, the land (assuming it could so be) had been converted into trading stock. There was very little evidence given as to the state of the land at this date. It is clear that, at the time when the land was acquired, very considerable work had to be done, of a physical nature and otherwise, before it was converted into residential lots apt to be sold by the company. The original cost of the land was less than $100,000. The Public Health Notice (Ex. C) required the surface of the land to be raised and evenly graded with soil or sand to a height of 3ft. above the relevant datum point. It is not clear from the evidence what portion of the expenditure of over $900,000 represented expenditure on physical work and what on other matters, but the inference which I draw from the evidence as a whole is that a very considerable amount of work and effort was required before, as contemplated, subdivisional lots became available for sale. I conclude that the land was not in this state at the time of its transfer. In argument it was, without qualification, described as being ``land in globo'' and, upon the plan tendered by the Commissioner of Taxation to show the nature of the land (Ex. 2) it was shown as not being subdivided in any relevant way, with no roadworks or other such development as may be inferred would be necessary before it was put in the state where such lots were created for sale: cf. the consent of 4th February 1965.

But Mr. Needham submitted that, accepting it to be in such a state, it was trading stock for purposes of the Act by virtue of the statutory definition. Section 6 of the Act provides that ``trading stock'' ``includes anything produced manufactured acquired or purchased for the purpose of manufacture sale or exchange, and also includes livestock''.

Mr. Needham submitted that, as he put it, ``it is not sufficient to say that the land was not trading stock and that the taxpayer was only getting ready to produce trading stock''. He conceded that the cases in which sec. 6 has been considered were ``inconclusive'', but he submitted that, as a matter of language, the land in such a state fell within the definition. He did not, in my opinion rightly, contend that the land had been purchased by the taxpayer ``for the purpose of manufacture'': what the taxpayer intended to do with the land could not be so described. However, he contended that the land was ``purchased for the purposes''.

I do not think that this submission should be accepted. Whether or not the definition is exclusive: cf.
Modern Permanent Building and Investment Society Ltd. (in liq.) v. F.C. of T. (98 C.L.R. 187 at p. 190) and Investment & Merchant Finance Corporation Ltd. v. F.C. of T. (71 ATC 4140; 45 A.L.J.R. 432) per Walsh J.; it may be that, as Mr. Needham argued, the definition enlarges the ordinary meaning of trading stock. It may be. e.g., that, by the words ``purchased for the purposes of manufacture'' it applies the term ``trading stock'' to items which would otherwise not be trading stock but would be more aptly described as work in progress or in some other way. Upon this submission, I do not express any concluded view. However, I do not think that, when the taxpayer purchased the land (which is the relevant date) its purpose in respect of the land is properly described as the purpose of sale within the definition. The

ATC 4093

taxpayer's purpose was, as I have indicated, to carry out substantial work to convert the land to a different condition, render it saleable in lots, and then sell off those lots. No doubt there may be a purpose of sale notwithstanding that that which is purchased is to be worked upon in some way; this will depend upon the facts of the particular case. Insofar as the matter is one of degree or fact, my conclusion is that what was intended to be done to the area of some 250 acres or more which was acquired and what ultimately was to be sold does not bring the taxpayer's purpose within the statutory definition.

In my opinion, therefore, the land, when transferred, was not stock or trading stock within the Act.

2. Asset ``of a business''

In view of the conclusions which I have formed upon the first matter, it is not necessary for me to deal with this or the succeeding matter. However, as counsel have submitted full and careful arguments upon each matter, I shall state shortly the conclusions which I have formed.

If sec. 36 is to apply, as the Commissioner contends, it must be shown that the taxpayer disposed, by sale, gift or otherwise, of ``property being trading stock'' which constitutes or constituted ``the whole or part of the assets of a business which is or was carried on by the taxpayer'': sec. 36(1) (a) and (b). Mr. Ellicott submitted that the land transferred had never been such an asset because the taxpayer was not, at any relevant time, carrying on a business. The argument was that the taxpayer itself was not carrying on any business at all, and that, from the time its shares were acquired by the Hooker interests it was merely ``treated as a shell''.

I do not accept this submission. What was being done in relation to the land is, in my opinion, within the meaning of the term ``business''. Steps taken to convert the land into residential lots, of the kind here in question, and the systematic carrying out of such activities with a view to the sale of those lots constitute, in my opinion, a business. However, Mr. Ellicott submitted that, if there was a business, it was not a business ``carried on by the taxpayer'' as the section requires.

There are, in my opinion, two answers to this submission. First, it is sufficient that the property in question constituted part of the assets of a business ``which is or was carried on by the taxpayer''.

After the acquisition of the land in 1960, some steps were taken by Mr. Powell and those associated with him with a view to carrying out the company's intentions concerning the land. Taking into account only those which occurred after the incorporation of the taxpayer, there was sufficient, in my opinion, to conclude that the company was then carrying on a business. Steps were being taken with a view to obtaining a rezoning of the land and approaches were subsequently made by Mr. Powell to Mr. Vogan for the purpose of enabling the company to carry out its purposes. Taking into account all of the evidence, I am of opinion that during this period the company was carrying on a business and that the land was an asset of it.

However, subsequently, when Mr. Vogan completed his negotiations with Mr. Powell, steps were taken to secure the rezoning of the land. These involved pursuing an appeal against the refusal of the company's rezoning application and these, though performed by the Hooker interests, were acts of or on behalf of the taxpayer. Thereafter, steps were taken to obtain variations of the rezoning approval, including the withdrawal of the condition as to the erection of a bridge. These also were, in my opinion, acts of or on behalf of the taxpayer. I am of opinion that what was done up to the time when the Portuland company acquired its interest in the shares of the taxpayer was sufficient to constitute the relevant business.

If this be correct, it does not matter that (if it be the fact) the taxpayer carried on no further business thereafter. The land was an asset of a business which was carried on by it and that is sufficient to satisfy the section.

Second, I accept the submission of the Commissioner that what took place after the Portuland company acquired its share interests in the taxpayer evidenced the carrying on of a business by the taxpayer. The relevant work was in fact carried out by persons directly employed by other companies of the Hooker Group. Little effort appears to have been made to determine the precise legal relationships involved in the carrying out of the work upon the land owned by the taxpayer but, as Mr. Mecham, the Secretary of Hooker-Rex Pty. Limited, indicated, there was an attempt made to dissect the expenses incurred and to attribute to the taxpayer the correct

ATC 4094

proportion of them, based on the areas of land owned by the taxpayer. Although the taxpayer had no bank account at the time, accounts were opened which, in a business sense, enabled expenses to be debited to the taxpayer and in fact, in the taxpayer's accounts, it was shown as a debtor in respect of amounts spent in this way. In the circumstances of this case, I do not think it is necessary to attempt to determine whether what was done was done by the other companies as agents for the taxpayer, or as independent contractors for it, or without any such formal arrangement. It is proper to infer that the taxpayer was, through its then directors (who were associated with the Hooker Group), aware of and party to what was taking place. It has been stressed that what was being done was done in contemplation that the land would in due course, be transferred as it was, to the Portuland company, but I do not think that this precludes the conclusion that the taxpayer was then carrying on a business. Had the land remained in the ownership of the taxpayer and had the taxpayer continued, after the creation of the separate lots, with the sale of such lots, it would be clear that what it was doing in this period constituted the carrying on of a business. The difficulty posed by Mr. Ellicott's submissions lies in the fact that those controlling the companies ignored their corporate existences and proceeded with the commercial activities involved. In these circumstances, the proper conclusion is that each company, as it successively was involved, was involved in a business concerning the land.

3. Did the taxpayer ``dispose'' of the land?

Mr. Ellicott submitted that the transfer of the land to the Portuland company was not a disposal by the taxpayer, within sec. 36, because when the company went into voluntary liquidation, the company became a trustee of the land or ceased, at any event, to be the beneficial owner of it and Portuland, as the sole beneficial shareholder, acquired such rights in it that, when the land was transferred to the Portuland company in the succeeding taxation year, what took place was not a disposal by the taxpayer.

Mr. Ellicott, in the course of a detailed argument upon this matter, analysed the provisions of the Companies Act 1961 and referred, inter alia, to
Joshua Bros. Pty. Limited v. F.C. of T. (31 C.L.R. 490 at p. 494-5, 496-7); in
re Strathblaine Estates Limited (1948) 1 Ch. 228;
Olive Mill Limited (1963) 1 W.L.R. 712 at 726-7;
Pritchard v. M.H. Builders Limited (1969) 1 W.L.R. 407; and
Franklin Self-Serve Pty. Ltd. v. F.C. of T. (70 ATC 4079 at pp. 4089-4090; 125 C.L.R. 52 at p. 68-70). Counsel conceded that the word ``dispose'' has a wide meaning:
F.C. of T. v. Wade (84 C.L.R. 105 at p. 110). In referring to
Henty House Pty. Limited (in voluntary liquidation) v. F.C. of T. (88 C.L.R. 141), where the words ``is disposed of lost or destroyed'' were considered in the context of the ``balancing charge'' section, sec. 59, Mr. Ellicott acknowledged that the court there, whilst pointing to the difference between a voluntary and an involuntary disposition, accepted that a sale by a liquidator in a winding up by the court or by a receiver appointed by the court would be a disposition. However, he submitted that the present case was distinguishable. There must, he argued, be a disposition by the taxpayer. He conceded that, if there were a simple sale effected by a liquidator of the company's trading stock, this would be a disposal within the section, for the sale would be an act of the company, though the company would act as the result of the statutory powers of the liquidator. But, he argued, where the company is a mere trustee of the assets, the transfer does not constitute such a disposal. As he pointed out, it is unnecessary to consider whether, in going into voluntary liquidation, the company effected any such disposal because the voluntary liquidation took place in a year prior to the year of the assessment.

Mr. Ellicott's argument depends upon the effect upon the taxpayer's ownership of the land of its going into voluntary liquidation.

If the argument be that the effect of liquidation is that the company is a bare trustee of the assets, I do not think it should be accepted. Were the matter free from authority, I would be inclined to think that the company's relationship to its assets would be inappropriately described by use of the term ``trust''; the relationship would be more accurately described as one in which the company was subjected to statutory duties and restrictions as to the manner and extent of its dealing with its assets: see
Franklin Self-Service Pty. Limited v. F.C. of T. (70 ATC 4079 at p. 4089; 125 C.L.R. 52 at p. 70).

However, I do not think it is necessary for me to attempt an analysis of the cases upon which Mr. Ellicott relied, I would, with respect, follow the method of reasoning adopted by Menzies J. in the Franklin's case. The question

ATC 4095

to be determined is whether, assuming sec. 36(1)(a) envisages a voluntary disposition by a taxpayer of the relevant asset, a transfer of the asset by the taxpayer is not such a disposition because of the effect upon the taxpayer's interest in the asset of its voluntary liquidation. I do not think that this is so. To hold otherwise would place an unnecessary restriction upon the section. One of the reasons why the section was enacted was to bring to account the accrued profit inherent in trading stock. As was pointed out by Windeyer J. in the
Elders Trustee case (104 C.L.R. 12 at p. 15) upon cessation of a business, trading stock would be a capital asset which could be distributed as such without attracting tax. The legislature saw a mischief in this and sought to prevent it. One of the common circumstances in which trading stock might be distributed in this way obviously is upon the liquidation of a taxpayer company and I do not think it should be inferred that either the mischief or the remedy enacted should, if the words of the statute be appropriate, be seen as not including such a case. A sale by a company in liquidation of its trading stock would be within the section, notwithstanding what was the effect of the liquidation upon the company's interest in the stock. I do not think that a transfer in specie to the sole beneficial shareholder of the company on liquidation is any the less a disposal, or a disposal by the taxpayer.

Reference was made, in the evidence and in argument, to the fact that the transfer was taken to be a satisfaction of the taxpayer's indebtedness to the Portuland company. The resolution in question was:

``It was resolved that the liquidator be empowered to distribute the assets of the company in specie to the contributories in accordance with their respective rights and interests.''

That resolution, passed on 17th March 1971, was carried into effect in the following October by the transfer in question.

No argument was pressed to the court as to the nature of the transfer made in these circumstances.

In my opinion, the transfer would, had sec. 36 been applicable, have been a disposal within the section.

Since these reasons were prepared, decision has been given by the House of Lords in
Averst v. C. & K. (Constructions) (1975) 3 W.L.R. 16 a case concerned with the effect of discontinuance of a trade under the United Kingdom Finance Act 1954, sec. 17. The speech of Lord Diplock in that case, is not in my opinion, inconsistent with the conclusions which I have expressed as to the effect of sec. 36.

It follows from the conclusions which I have expressed that the taxpayer should succeed in its appeal against the Commissioner's assessment. When the matter was argued before me, the parties indicated that no question arose as to the precise sums at issue and that it was desired that I deal with the submissions made upon the basis of principle. Upon the material before me in evidence, it appears that there are, or may be inconsistencies as to the amounts involved in, e.g., expenditures made by the taxpayer at different times. I shall, at this stage, merely direct that Counsel for the taxpayer bring in Short Minutes of Order to give effect to the findings which I have made.

If it is felt necessary to deal with such matters, they may be dealt with in the form of the orders to be proposed.

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