Federal Commissioner of Taxation v. Firstenberg.

McInerney J

Supreme Court of Victoria

Judgment date: Judgment handed down 29 June 1976.

McInerney J.: This is the hearing of two appeals, one by the Commissioner of Taxation pursuant to notice of appeal dated 28 September 1973, and the other by the taxpayer, pursuant to notice of appeal dated 1 October 1973, from the decision of the Commonwealth Taxation Board of Review (No. 2) given on 30 August 1973. [Case E35,
73 ATC 295].

The matter came before the Board of Review by way of review of the Commissioner's disallowance, in part, of an objection lodged by the taxpayer against the assessment by the Commissioner of tax in respect of income derived during the year ended 30 June 1970, notice of which assessment issued to the taxpayer on 14 September 1971. The Commissioner, upon consideration of the objection, allowed it in part and amended the assessment accordingly. Notice of the amended assessment was issued on 3 March 1972.

The taxpayer, being dissatisfied with the decision of the Commissioner, requested in writing that the decision be referred to a Board of Review for review. By a majority decision, handed down on 30 August 1973, the Board of Review upheld the taxpayer's objection to the extent of upholding his claim that the assessment was to be made upon a ``cash receipts'' basis in lieu of the ``earnings'' basis adopted by the Commissioner, but disallowed so much of the taxpayer's objection as related to the inclusion in the assessment of a sum of $2,421 being profits gained from the sale of Lots 20 and 21 Orchard Road, Bayswater which the Commissioner treated as assessable income pursuant to the provisions of sec. 26(a) of the Act.

The taxpayer's return of income for the year ended 30 June 1970 was made on 31 August 1970. Folio 2 of that return showed ``Gross receipts from the profession of solicitor carried on by the taxpayer $17,031.07''. After deducting expenditure totalling $9,624.40, a nett profit was shown as $7,406.67, to which there was added interest and dividends which brought the total nett income to $7,521.32. Concessional deductions totalling $4,501.06 were claimed, leaving a taxable income of $3,020.26.

By letter dated 27 November 1970 the Commissioner informed the taxpayer that it was not proposed to accept lodgment of the return on a cash receipts basis, and requested the taxpayer to advise details of amounts of debtors as at 1 July 1969 and 30 June 1970 and of amounts owing in respect of costs incurred on behalf of clients as at 1 July 1969.

In his letter dated 28 May 1971, the taxpayer furnished the information requested by the Commissioner but contended that

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Henderson's case (
Henderson v. F.C. of T. 70 ATC 4016; (1970) 119 C.L.R. 612) did not on its proper construction apply to his case and urged the Commissioner to accept his return on his return on a ``cash receipts'' basis. He indicated that if the Commissioner refused to do so he would lodge a formal notice of objection to the assessment.

The Commissioner's assessment issued 14 September 1971, assessed the taxable income at $8,828. This result was arrived at, first, by adding $274 as a result of assessing the taxpayer on a credit basis in accordance with the `Henderson decision', secondly, by including the sum of $5,524 representing the profit on the sale of the two lots of this 20 and 21 Orchard Road, Bayswater, and thirdly, by disallowing a claimed deduction of $10.

The taxpayer on 12 November 1971 lodged an objection to this assessment. Grounds 1 to 4 claimed that his income should have been calculated on a cash receipts basis and not on a ``credit basis'' in purported pursuance of the `Henderson decision'. Grounds 5 to 6 contended that the assessment did not in any event correctly calculate his income on an earnings or credit basis, and that his assessment was excessive to the extent of $10,079.91. Grounds 7 to 9 claimed that any profit or gain derived by the taxpayer on the sale of his properties 20 and 21 Orchard Road, Bayswater were not assessable income. Grounds 10 to 12 claimed that the profit on the sale had been incorrectly calculated, in that it had not taken account of deductions totalling $4,778.74.

On consideration of the taxpayer's objection, the Commissioner issued an amended assessment. He accepted the validity of the taxpayer's claim to a deduction of expenses totalling $4,778.74 claimed by the taxpayer in folio 15 of his notice of objection dated 12 November 1971 (thereby reducing the profit on the sale of land to $2,421). He acknowledged and corrected errors in calculation which had been pointed out to him by the taxpayer. As a result, the nett income from business was shown at $6,328, (as against the $7,406.67 returned by the taxpayer) and the amended taxable income, according to the amended assessment, was $4,372.

On 2 May 1972 the taxpayer notified the Commissioner that he was dissatisfied with the Commissioner's decision and requested him to refer his decision to a Board of Review for review.

The findings of fact made by the Board of Review, and not challenged before me, were that the taxpayer had from 1949 onwards practised as a solicitor in Melbourne on his own account, never in partnership with another solicitor. He had never employed a qualified employee or law clerk, his only employee at all relevant times having been a secretary/typiste/telephoniste. So far as the details of his mode of conducting his practice and of keeping financial records of the receipts and disbursements of that practice are concerned I am content to adopt the statement of facts contained in the reasons for decision written by Mr. R.K. Todd, Member of the Board of Review, as though they were set out in full herein.

No evidence was led by the Commissioner before the Board of Review, but before me the Commissioner called as a witness one Kenneth Conway Keown, and the taxpayer called one Henry Charles Barrass, both persons of considerable experience in the field of accountancy practice. Broadly it may be said that Keown contended that ``accruals'' method was the proper method to use in arriving at the taxpayer's assessable income, while Barrass considered that the ``cash receipts'' basis was the more appropriate method.

The distinction between the two methods of accounting is well stated by Lord Clyde in
I.R. Commrs. v. Morrison (1932) S. C. 638; 17 T. C. 325 at p. 330.

``In assessing the profits of such a professional business as this, one or other of two modes of computation are in use, which have, no doubt, been found alternatively convenient and appropriate according to particular circumstances. It is obvious that the usual mode which applies to the assessment of the profits of a trading business which buys and sells, or to a manufacturing business which buys raw material and makes it up and sells the finished product, would not be practically capable of application to an ordinary professional business in which the professional man markets nothing but his own services and in-gathers nothing but professional fees. The two alternative modes of computation are known as the `cash' basis mode and the `earnings' basis mode. According to the first, the profits of the business are estimated according to the excess of the actual cash receipts during the year over the cash outlays and expenses actually disbursed or paid during the year. This mode takes no account of what are called `outstandings', that is, fees earned but not yet in-gathered,

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either at the beginning or at the end of the year. According to the `earnings' basis mode, the actual cash receipts during the year and the actual cash outlays during the year are treated in the same way as before; but, to the favourable balance this brought out, there is added the amount of the fees earned but not yet collected at the end of the year, and then there is deducted the amount of the fees earned but not yet collected at the beginning of the year. Both modes appear to be somewhat rough and ready; but I suppose that - one year with another - they are found to work out with sufficient accuracy. The first has the merit of avoiding all the trouble which the second imposes on the taxpayer in calculating the `outstandings' on current jobs.''

The appeals brought before me under sec. 196 (as amended by Act No. 53 of 1973) fall to be determined, in my opinion, on the same basis as appeals to the High Court under the former sec. 196(1) of the Act. Under the former sec. 196 it was held that on an appeal from the Board of Review, the High Court was exercising original jurisdiction - see
Watson v. F.C. of T. (1953) 87 C.L.R. 353 especially at pp. 371-4.

The parties were therefore not limited to the material before the Board of Review but were entitled to adduce and, indeed, as previously mentioned, did adduce before me additional evidence in support of or in answer to the appeal. (
F.C. of T. v. Lewis Berger & Sons (Aust.) Ltd. (1927) 39 C.L.R. 468 at p. 469).

Since the decision of the Board of Review involved (in my view) a question of law, the appeal before me is competent, whether or not the question of law involved was erroneously decided by the Board of Review. It is not necessary to show that the decision of the Board of Review upon the question of law was erroneous - compare
Ruhamah Property Co. v. F.C. of T. (1928) 41 C.L.R. 148 at p. 151 and p. 155 and
F.C. of T. v. Shaw (1950) 80 C.L.R. 1 at p. 8 per Latham C.J., but if a question of law is involved, the whole decision of the Board and not merely the question of law is then open to review - see Ruhamah Property Co. Ltd. v. F.C. of T. (1928) 41 C.L.R. 148 at p. 151 - per Knox C.J., Gavan Duffy, Powers and Starke JJ.,
F.C. of T. v. Miller (1946) 73 C.L.R. 93 at p. 100 per Rich J.,
Caltex Ltd. v. F.C. of T. (1953) 10 A.T.D. 301 and
Buckland v. F.C. of T. (1960) 12 A.T.D. 166.

The Commissioner has contended that the question of law involved in that part of the decision of the Board of Review which is the subject of the Commissioner's appeal was: -

``Whether on the true construction of the Income Tax Assessment Act 1936-1969, and in particular Section 25 thereof, the gross income derived by the taxpayer during the financial year ended 30 June 1970 includes all professional fees earned by the taxpayer during that financial year whether or not they were received by him during that financial year.''

A more fundamental question of law involved in the decision, however, is the question what is the meaning of the word ``derived'' as used in the phrase ``the taxable income derived during the year of income by any person'' in sec. 17, in the phrase ``the gross income derived directly or indirectly from all sources'' in sec. 25(1)(a), and in the phrase ``the total income derived... during the year of income'' in sec. 161(1) of the Income Tax Assessment Act.

Secondary to this is the question whether the Commissioner and the Board of Review were (as the Commissioner and also the Chairman of the Board considered) bound by the decision in Henderson v. F.C. of T. (supra) to reject the taxpayer's contention that a ``cash receipts'' basis was the proper basis on which to compute the taxpayer's total income derived during the relevant year of income, or was appropriate to achieve the purpose of ascertaining the (taxpayer's) true income and to give a substantially correct reflex of the taxpayer's true income - per Dixon J., in
Carden's case (C. of T. (S.A.) v. Executor & Trustee Co. (1938) 63 C.L.R. 108 at p. 154).

For the Commissioner, reliance was placed on the provisions of sec. 190 of the Income Tax Assessment Act and it was said that this appeal must fail unless the taxpayer showed that the assessment was excessive.

That section provides that on every reference (to a Board of Review) or appeal (that is from the Commissioner to the Supreme Court of the State) the burden of proving that the assessment is excessive shall lie on the taxpayer. This provision has been held to mean that the burden lies upon the taxpayer ``of establishing affirmatively that the amount of taxable income for which he has been assessed exceeds the actual taxable income which he has derived during the year of income''.
George v. F.C. of T. (1952) 86 C.L.R. 183 at p. 201;
Trautwein v. F.C. of T. (No. 1)

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(1936) 56 C.L.R. 63 at p. 88 where Latham C.J., obiter, said:
  • ``If it were necessary to decide the point I would as at present advised be prepared to hold that the taxpayer must at least as a general rule, go further and show, not only negatively that the assessment is wrong, but also positively what correction should be made to make it right, or more nearly right''. He added:
  • I say `as a general rule' because, conceivably there might be a case where it appears that the assessment had been made upon no intelligible basis even as an approximation, and the Court would then set aside the assessment and remit it to the Commissioner for further consideration.

However this may be on question of fact it seems to me that sec. 190 can have no bearing on a pure question of law, as in relation to the meaning of the word ``derived'' in the sections to which I have already made reference, viz., sec. 17, 25(1)(a) and 161(1) of the Act. There can be no onus of proof in relation to the construction of an Act of Parliament.

Once the meaning of the word ``derived'' as used in those sections is determined, there then arises a question of fact, to be determined on the evidence presented in the case, whether the ``earnings'' or ``accruals'' basis, or the ``receipts'' basis of making up the accounts constitutes or yields or is more calculated to constitute or yield ``a full and complete statement of the total income... derived by (the taxpayer)... during the year of income, and of any deductions claimed by him,'' (sec. 161(1)) or, putting it another way, whether a return calculated on one or other of these bases is appropriate or more appropriate to achieve ``the purpose of ascertaining the true income'', (per Dixon J. in Carden's case at p. 154) or ``to give a substantially correct reflex of the taxpayer's true income.''

It might be thought that at this point there is scope for the application of sec. 190. But even there I find some difficulty, on the Commissioner's appeal - and for the matter of that, also on the taxpayer's appeal - in treating the decision in the present case as determined by or dependent upon the questions of the onus of proof. As it seems to me, the facts in this present case are not really in dispute. There is no question as to what the taxpayer's books of account show. They show what moneys (or income) he received during the relevant year of income and what moneys (or income) he earned during that period. There is, as I see it, no scope for the application of sec. 190 as to the primary facts, i.e. as to the contents of the financial records kept by the taxpayer.

The questions before this Court are, first, what is the meaning of the phrase ``income derived'' in the various sections to which I have referred, and, secondly, whether a return compiled from those books on an ``accruals'' or ``earnings'' basis is more appropriate than a return compiled on a ``receipts'' basis to show the taxable income derived by the taxpayer during the relevant year of income. From neither point of view, as it seems to me, is sec. 190 of the Act - as expounded in recent decisions of the High Court, of any real assistance. I refer in particular to what has been said by the present Chief Justice of the High Court in
Steinberg v. F.C. of T. 75 ATC 4221 at p. 4224; (1975) 8 A.L.R 155 at p. 158.

The present case is, in truth, one where the figures (in the taxpayer's books of account) are not in dispute. The ``accruals basis'' applied by the Commissioner yields one figure of the assessable income derived by the taxpayer: the receipts basis, applied by the taxpayer yields a different figure. In this situation I heard from Counsel for the Commissioner argument the substance of which was not indistinguishable from that so decisively rejected by Barwick C.J. at p. 647-8 of his reasons for judgment in Henderson's case.

The remarks of the learned Chief Justice (at pp. 647-8) were made in respect of an attempt to extend beyond permissible limits a passage in the judgment of Dixon J., in Carden's case (
C. of T. (S.A.) v. Executor, Trustee and Agency Company of South Australia, Ltd. (1938) 63 C.L.R. 108 at p. 151) to the following effect:

``The substantive question for that period may perhaps be more accurately stated to be whether it is wrong on the part of the Commissioner to compute the professional income upon an earnings basis. For one view suggested is that the choice between the two methods is permitted by law and that choice lies with the Commissioner''

In Henderson's case (supra) counsel for the Commissioner sought to push that passage to the length of claiming that the Act gave the Commissioner

``an `initiative' to determine the assessable income of a taxpayer and that so long as in determining that income he employed a

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method which was not inconsistent with any of the provisions of the Act, there would be no ground for setting aside the figure at which he arrived for that income.''

From this it was argued:

``that it was not enough for the appellant to establish that a computation on an earnings basis is also appropriate, or even that the figure of assessable income which it produces is a better indication of that income than the figure at which the Commissioner assessed by a computation upon a cash basis. Nothing short of establishing that the basis of calculation was inconsistent with the provisions of the Act will suffice, according to the argument, to warrant the setting aside of the assessment.''

(70 ATC 4016 at p. 4017; 119 C.L.R. 646 at p. 647).

That argument was rejected by Barwick C.J.... he said (at ATC pp. 4018-9; C.L.R. pp. 647-8):

``The taxable income results from the application of the provisions of the Act to what is in fact the assessable income of the taxpayer.... That assessable income when ascertained must be expressed in a figure. There cannot in fact be alternative figures for such an assessable income. The figure determined at that income may be the result of estimation, as well as of calculation, and its determination may involve the acceptance of opinions, expert or otherwise. In the long run it may be the outcome of an exercise of judgment. But however arrived at, the result is a figure, the assessable income in fact of the particular taxpayer for the year of tax.''

He added: -

``Of course, the Commissioner has the capacity under the Act to make an assessment of the income tax payable by the taxpayer, that process involving the formation of opinion of judgment as to the taxpayer's assessable income, and, having regard to the terms of sec. 190, it must rest on the taxpayer in an appeal against an assessment based on the amount of assessable income so determined to show that the Commissioner's figures for that is wrong. But the question of onus apart, the issue on such an appeal is what in fact is the assessable income of the taxpayer derived in the relevant year of tax. No doubt where the Commissioner's figure is the result of the application of some method of computation to figures not otherwise in dispute, the contest may appear to be one as to the appropriate method of computation of the income derived: and the determination of such a method of computation will resolve the issue, which is what is the amount of the assessable income derived. But unless the method of computation yields what is in fact the correct figure for that income it cannot be said to be appropriate in the circumstances or to be not inconsistent with the provisions of the Act. Whilst opinion may differ as to that fact, ultimately the opinion of this Court will determine it.''

It follows that it is for this Court to say which method is more calculated to yield the correct figure for the amount of assessable income derived by the taxpayer in the relevant year of income.

It is clear from the Commissioner's file that he rejected the taxpayer's return only because he considered that he was bound by the decision in Henderson's case (supra) to do so, and that he at no time applied his mind to the appropriateness in the individual facts of the taxpayer's case, of using a ``receipts'' basis rather than an ``accruals'' basis. But if the Commissioner never exercised his discretion in relation to the taxpayer's return the question will still have to be answered whether, properly applying his mind to the matter, the Commissioner would have been wrong in rejecting the ``receipts'' basis and in assessing the taxpayer upon an ``accruals basis''.

In determining this question it is important to go back to the terms of the Act, and in particular to the terms of sec. 17, (which imposes the liability to pay tax) sec. 25 (which defines what is included in the assessable income of a taxpayer), sec. 161 (which imposes the obligation to furnish a return of total income derived), sec. 166 which confers the power to assess the amount of the taxable income and finally sec. 6 (the definition section). Each of these sections is expressed in terms of ``income'', and sec. 17, and 25 and 161 all speak of ``income derived.'' There is not, however, in the Act any definition of the word ``income'' or, for the matter of that, of the word ``profit''.

In this context it is not inappropriate to set out a passage from the reasons for decision of the accountant member of the Board (Mr. G.R. Thompson) - a passage so vivid as to justify reproduction verbatim: -

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``The Income Tax Assessment Act with which this reference is concerned imposes a tax upon `income' and not, with the exception of the special provisions of sec. 26(a) upon `profit'.

When the Act was first presented like a blushing debutante to the public, it could be seen that it espoused this principle. That distinguished it from the English legislation, which embodied by definition a concept of tax upon profit. Although it has been bludgeoned and ravished by successive generations of tax agents, subjected by precedents to the danger of miscegenation with the English Act, and corseted temporarily at times by the Commissioner and even by Boards of Review into the uncomfortable and restricted confines of administrative pigeon-holes, the Act still stands, somewhat fatter and middle aged, liberally tattooed by draftsmen with a variety of alphabetical symbols, and held together more by the scar tissue of a series of facial lifts, skin-grafts and surgical repair than by healthy growing flesh. It still expounds the same principle.''

As to this, however, it is necessary to bear in mind what was said, in relation to a trading company dealing in goods, by Walsh J., in J.
Rowe & Son Pty. Ltd. v. F.C. of T. 71 ATC 4001 at p. 4008; (1971) 45 A.L.J.R. 21 at p. 26 as follows:

``It was said that the Act taxes `income derived' and that the concepts and methods which are applicable to the ascertainment of `profits' or `profits and gains' are not appropriate under the Commonwealth Act, as they are under legislation in the United Kingdom. There are important differences between the legislation in force here and that in force in England. But I am of opinion that there is not really a difference between the concept of income and that of profit or of gain which is significant for the purpose of answering the questions raised by these appeals.''

Later (at ATC p. 4008; C.L.R. p. 27), Walsh J. said:

``Differences 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. Ltd. (1953) 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 profits) 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.''

The liability to tax derives from the Act: tax is payable on ``taxable income derived during the year of income'' (sec. 17). The Commissioner's duty, likewise statutory, is to make ``an assessment of the amount of taxable income of (the) taxpayer, and of the tax payable thereon.'' (sec. 166).

The Commissioner makes that assessment from the taxpayer's return, or from any other information in his possession, or from any one or more of those sources (sec. 166).

The taxpayer, in his return, is required to set forth ``a full and complete statement of the total income... derived by him during the year of income, and of any deductions claimed by him'' (sec. 161(1)).

The obligation, therefore, of a taxpayer making a return is not - in express terms at all events - an obligation to furnish a profit and loss account nor to furnish a statement of accounts compiled or computed according to commercial principles of his receipts and expenditure. His obligation is to furnish a return which constitutes ``a full and complete statement of the total income derived by him during the year of income and of any deductions claimed by him'' (sec. 161).

The Commissioner is concerned, therefore, not with the task of ascertaining the profit of the taxpayer during the year of income (although, in the result, a nett profit, for taxation purposes, may be ascertained from the process of setting out, on the one hand, the total income derived by the taxpayer and on the other the allowable deductions referable to and incurred in the conduct of the taxpayer's professional practice). In the compilation of a return for income tax purposes allowable deductions are not limited to losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income other than losses or outgoings of capital or of a capital, private or domestic nature or incurred in relation to the gaining or production of exempt income (see sec. 51(1) of the Act), but may include also concessional deductions having little or nothing to do with the gaining or deriving of

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the assessable income, as well as other deductions, sometimes in respect of capital expenditure, allowed under the Act.

It follows - at all events, in the case of taxpayers not engaged in trading in goods - that one is not necessarily concerned with matching expenditure against income in accordance with the ``matching principle'' mentioned during the cross-examination of the witness Barrass. Losses and outgoings incurred in gaining or producing ``the'' assessable income will normally, I suppose, be matched against the income produced as a result of the incurring of those losses and outgoings but only to the extent to which they are so incurred - sec. 51(1). But the losses or outgoings ``necessarily incurred in carrying on a business for the purpose of gaining or producing such income'' need not necesarily ``match'' the ``assessable income''. The word ``outgoings'' does not require that there should have been an actual disbursement; it is sufficient that there be an outgoing ``to which the taxpayer is definitively committed in the year of income although there has been no actual disbursement'' - see F.C. of T. v. James Flood Pty. Ltd. (1953) 88 C.L.R. 492 at p. 506.

In the case of continuing business, the phrase ``all losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income'' has been interpreted in such a way that expenditure may be allowed as a deduction though it produces, and is possibly designed to produce results in the way of income in a future year and not in the year of expenditure - see Amalgamated Zinc (
DeBavay's Limited v. F.C. of T. (1935) 54 C.L.R. 295 at pp. 303 and 309. It is clear also that the expenditure the subject of the second limb of sec. 51(1) need not necessarily have been sustained or incurred in the year of income in which the assessable income was derived - see
Herald and Weekly Times Ltd. v. F.C. of T. (1932) 48 C.L.R. 113 at p. 118, and
Texas Co. (Australasia) Ltd. v. F.C. of T. (1940) 63 C.L.R. 382 at p. 427 per Latham C.J. Indeed, the section permits the taxpayer to claim expenditure incurred in carrying on activity which is related to gaining income from another activity - see Yarra Glen and
Lilydale Hunt Club v. F.C. of T. (1954) 90 C.L.R. 348. It follows that a process of matching expenditure against income is not necessarily required by sec. 51(1) of the Act. The allowable deductions are not confined to those which are relevant from the point of view of ascertaining what profit or gain has been made by the individual in pursuing his avocation during the income year in question: the taxpayer is entitled to have deducted from the assessable income all allowable deductions and to have the amount remaining treated as the taxable income on which he will be required to pay tax.

The enquiry then is as to ``income derived''. The definition of ``income from personal exertion'' is treated in the definition section (sec. 6(1)) as synonymous with ``income derived from personal exertion''. The definitions of ``income from personal exertion'' and ``income derived from personal exertion'' state exclusively and exhaustively what classes of income are earnings from personal exertion. All income which does not form within those definitions falls into the category of ``income from property'' or ``income derived from property''. The distinction between the two categories of income is important from some points of view e.g., compare sec. 50, but for present purposes the relevance of the definition is in relation to the meaning to be attached to the word ``derived'' both in the definition and under sec. 17, 19, 25 and 26 of the Act.

The overall emphasis of the definition (in sec. 6(1)) of ``income from personal exertion'', is on ``receipt'' of the earnings, salaries etc., rather than on the mere earning thereof. The terms of sec. 19 appear to me to proceed primarily on the view that income cannot be regarded as having been ``derived'' by a person within the meaning of this Act unless it has been received by him, and that it was necessary to make special provisions for the case dealt with in that section which otherwise might be held not to fall within the concept of ``income derived''. Cp.
Californian Copper Syndicate v. Harris (1904) T.C. 159 at pp. 167-8 per Lord Trayner; and see
F.C. of T. v. Clarke (1927) 40 C.L.R. 246 at pp. 260-261 per Isaacs A.C.J. Cp. however,
Perrott v. C. of T. (N.S.W.) (1922) 23 S.R. (N.S.W.) 118 at p. 124.

At the other end of the scale, there are cases where moneys falling within the concept of income have been received, and yet the Courts have declined to hold that they constituted ``income derived''. Such cases constitute almost the antithesis of the cases mentioned in sec. 19. The facts in
Arthur Murray (N.S.W.) Pty. Ltd. v. F.C. of T. (1965) 114 C.L.R. 314 constituted such a case. There the court prefaced its decision by some observations concerning
Carden's case (63 C.L.R. 108) as follows:

``The question there was whether fees

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earned by a doctor in his medical practice might be treated as assessable income of the year in which they were earned even though not received in that year; and it was held, as regards each year which had ended before the doctor's death, that earning without receipt did not make income. In the case before us the question is whether, in the circumstances, it may properly be held that receipt without earning makes income.''

(114 C.L.R. 314 at pp. 317-8 per Barwick C.J., Kitto and Taylor JJ.)

Having cited the observations of Dixon J. in Carden's case (63 C.L.R. 108 at p. 155) that -

``speaking generally, in the assessment of income the object is to discover what gains have during the period of account come home to the taxpayer in a realized or immediately realizable form,''

Their Honours went on to comment (114 C.L.R. 314 at p. 318): -

``The word `gains' is not here used in the sense of the nett profit of the business, for the topic under discussion is assessable income, that is to say gross income. But neither is it synonymous with `receipts'. It refers to amounts which have not only been received but have `come home' to the taxpayer; and that must surely involve, if the word income is to convey the notion it expresses in the practical affairs of business life, not only that the amounts received are unaffected by legal restrictions, as by reason of a trust or charge in favour of the taxpayer - not only that they have been received beneficially - but that the situation has been reached in which they may properly be counted as gains completely made, so that there is neither legal nor business unsoundness in regarding them without qualification as income derived.''

The present case is concerned, however, with a different problem, namely whether income can be said to have been ``derived'' at the point of time when it has been ``earned'', irrespective of whether it has then been received. Fundamentally this is an enquiry as to legal concept of `income derived' and as to the application of that concept to the facts of each particular case.

As was pointed out in the Arthur Murray case (at p. 318), the elucidation of that concept

``may be assisted by considering standard accountancy methods for they have been involved in the business community for the very purpose of reflecting received opinions as to the sound view to take of particular kinds of items.''

But the issue is not one simply of ascertaining established book-keeping methods.

``What ultimately matters is the concept; bookkeeping methods are but evidence of the concept''

(114 C.L.R. 314 at p. 318).

At many points of the definition of income from ``personal exertion'' and of ``income derived from personal exertion'' contained in sec. 6(1) the Act appears to fasten onto the receipt of income by the taxpayer - e.g. in the phrase ``income consisting of earnings, salaries, wages, commissions, fees, bonuses, pensions, superannuation allowances, retiring allowances and retiring gratuities, allowances and gratuities received in the capacity of employee or in relation to any services rendered'', and in the phrase ``any amount received as a bounty or subsidy in carrying on a business''. But the same definition refers to ``the proceeds of any business carried on by the taxpayer either alone or as a partner with any other person'' - which perhaps points to accrual rather than receipt.

In the practice of a profession, professional services are normally rendered by the practitioner on the footing or in the expectation of being remunerated therefor. Whether the remuneration is to be paid in advance of the performance of the service or from time to time during the performance of the service or only on the completion of the performance of those services is a matter which may be regulated by express or implied agreement between the professional man and the client. In some cases, the agreement will be express that no work is to be done until payment has been received. Agreements of this nature are common enough in relation to appearances in criminal trials and in relation to the conduct of divorce proceedings. In other cases, the nature of the services to be performed e.g. in relation to the conduct of the common law action, may lead to an inference that progress payments are to be made as and when work is performed or during the conduct of the work. In many cases, in the absence of special stipulation to the contrary, the principle in
Cutter v. Powell (1975) 6 T.R. 320 will apply, so that no fee is payable by the client until the professional services to be performed have been completed.

ATC 4150

In relation to the point of time at which professional fees might be regarded as income derived, Barwick C.J., in Henderson v. F.C. of T. 70 ATC 4016; (1970) 119 C.L.R. 621 rejected the notion that such fees could be regarded as income derived unless they had been earned and become recoverable.

``When the service is so far performed that according to the agreement of the parties or in default thereof, according to the general law, a fee or fees have been earned and it or they will be income derived in the period of time in which it or they have become recoverable. But until that time has arrived, there is, in my opinion, no basis when determining the income derived in a period for estimating the value of the services so far performed but for which payment cannot be properly demanded and treating that value as part of the earnings of the professional practice up to that time and as part of the income derived in that period.''

(70 ATC 4016 at p. 4020; 119 C.L.R. at p. 650.)

Or as Windeyer J., (as the Judge at first instance) said (at 69 ATC 4049 at p. 4060; C.L.R. p. 636): -

``An accountant engaged to conduct a continuous audit may be entitled to be paid for the hours he has spent and for his attendances, although he only asks to be paid periodically. But when a professional man is, according to the terms of his engagement, not to be paid until his task is completed. I do not think he can be said to have earned anything by that task until then. A lawyer retained to write an opinion or draw a deed cannot ordinarily say that he has earned any income by his work until he has produced the result of it. Similarly with an auditor employed to give a certificate, an architect to prepare plans, an accountant to produce a balance sheet. A half-written legal opinion, a deed drawn in part only, plans unfinished and still on the drawing board, an incomplete balance sheet, are not like goods in the course of manufacture. When completed they are not valuable because of their physical properties, but for the information they convey or the legal effect they produce.''

The observations of Barwick C.J., just quoted were relied on by counsel for the Commissioner as supporting the proposition that the income of this taxpayer was derived by him at the point of time when the professional work which he had been engaged or retained to do had been so far completed as to entitle him to send an account for that work to his client. Insofar as the learned Chief Justice makes recoverability the test, I doubt whether in Victoria it would be invariably correct to say that a solicitor had derived income from personal exertion as soon as he had, in a client's ledger kept in the solicitor's office, debited the client with an amount representing the total of the total of the scale or agreed costs. Furthermore I doubt whether it would, in all cases, be correct to regard that amount as income derived, or as an amount recoverable by the solicitor upon the mere rendering to the client of an account for the costs and disbursements involved in performing the professional services for the client. See
Malleson and Others v. Williams (1930) V.L.R. 410; (1930) A.L.R. 310. For, in strictness and in the absence of a special agreement in writing under sec. 87 of the Supreme Court Act 1958, costs are not recoverable by the solicitor until the expiration of one month after the delivery by the solicitor to the client of a signed bill of costs conforming with the requirements of sec. 81 of the Supreme Court Act 1958. The point of recoverability will, therefore, in Victoria at least, not necessarily be the point of time at which the work is completed or a charge therefor debited to the client's account in the ledger or even the point of time at which an account is sent to the client. See per Barwick C.J., in Henderson's case 70 ATC 4016 at p. 4020; 119 C.L.R. 612 at pp. 650-1. See also Oliver on Costs pp. 23-25.

In practice, of course - especially in conveyancing and probate matters - costs are often paid to, or recovered by a solicitor by deduction from moneys held in the trust account in trust for and on behalf of that particular client, the amount of costs being stated merely in association with an adjustment sheet and other documents giving a full account of the disposition of moneys received by the solicitor for or on behalf of the client. In common law matters, the solicitor's costs of the solicitor acting for the plaintiff will often be deducted from moneys received under and by virtue of some antecedent judgment or compromise.

In criminal cases, and what may be called family law matters - divorce, custody, maintenance matters - the solicitor will in many, if not most cases, have required a

ATC 4151

payment, either in full or on account, before the work is done, and this is often true in other cases - e.g. of contract or of tort - in which a solicitor acts for persons rather than for a company. In cases where the solicitor acts for a large company, bank or insurance company, the solicitor will often be content to do the work without requiring payment in advance, in which case the costs will be received only after a bill of costs has been rendered.

It is fair to say, however, that in Victoria, even when a bill of costs is rendered it is seldom, in the first instance, a signed bill, and that, as a rule, a signed bill is delivered only after it has become abundantly clear that the solicitor will have to sue to recover the fees, charges or disbursements.

The most recent discussion of Carden's case (supra) and Henderson's case (supra) is to be found in the reasons for judgment in the case of
J. Rowe and Son Pty. Ltd. v. F.C. of T. 71 ATC 4001; (1971) 45 A.L.J.R. 21 (Walsh J.) affirmed 71 ATC 4157; 45 A.L.J.R. 428.

Rowe's case was a case of a taxpayer whose business was the selling of goods, and to that extent it is illustrative of the proposition that the book debts of a trader may be treated as part of his income - see per Walsh J., 71 ATC at p. 4009; 45 A.L.J.R. 21 at p. 27. Further, as the learned Judge expressly found, (71 ATC at p. 4008; 45 A.L.J.R. 21 at p. 26) the method which the company adopted for arriving at its income produced a result entirely contrary to the true result of the trading for the year, and therefore did not give a ``substantially correct reflex of the taxpayer's true income'' (Carden's case 63 C.L.R. 108 at p. 154). Walsh J., further held that the Act did not make necessary a computation of income or of loss for tax purposes which was unrelated to the profit or the loss of the trading business (71 ATC at p. 4009; 45 A.L.J.R. 21 at p. 29).

He further held (ibid) that there was no principle which bound him to hold that amounts not yet paid or payable could not be brought into account in ascertaining the trading profit for the year or in ascertaining for tax purposes the gross income of the business.

It is clear that in Rowe's case Walsh J. accepted the correctness of the decision in Carden's case (supra). He pointed out (ATC at p. 4009; A.L.J.R. at p. 27) that in Carden's case no question was at issue which required a decision to be made as to the precise application of the rule that a trader's book debts are to be taken into account in computing his income.

He said (at ATC p. 4009; C.L.R. p. 27): -

``The question was whether income should be reckoned only by cash receipts or should be reckoned on an earnings basis.''

He regarded Henderson's case as involving the same issue, and evidently regarded the circumstances of the business in that case as dictating the decision given that ``what such a business earns in a year will represent its income derived in that year'' and (at ATC p. 4009; C.L.R. p. 27) as involving a ruling that an allowance ought not to be included for ``work in progress'' where the fees had not been earned, because the work which had to be done to entitle the taxpayer to payments had not been completed.

The decision of Walsh J., was affirmed by the Full High Court (71 ATC 4157; 45 A.L.J.R. 428). Barwick C.J., Menzies and Gibbs JJ., were in agreement that (1) 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 sales into account (ATC at p. 4159; A.L.J.R. at p. 430 per Menzies J.; at ATC p. 4160; A.L.J.R. p. 431 per Gibbs J.).

Gibbs J., further held (2) that when the Act gives no directions on the point, the question when income is earned, and the method of accounting for the purpose of ascertaining the income, depend upon business conceptions and the principles and practices of accountancy (at ATC p. 4160; A.L.J.R. p. 431) and

(3) That ``The method adopted should be that which is calculated to give a substantially correct reflex of the taxpayer's true income'' (at ATC p. 4160; A.L.J.R. p. 431).

For myself, in the formulation of the second point I would prefer to substitute the word used in the Act, viz. ``derived'', for the word ``earned''. The observations of Gibbs J. must, I consider be read subject to and in the light of what was said in the Arthur Murray case (114 C.L.R. 314 at p. 318) that ``what ultimately matters is the concept (sc. of `income derived'); book-keeping methods are but evidence of the concept''.

Menzies J., (with whom Barwick C.J., expressed his agreement,) drew upon what was said in Carden's case to emphasize the

ATC 4152

distinction between the income derived from trading, (in which case income was derived when it was earned) and the case of income not derived from ``trading''.

In the later case he accepted - at all events as to the facts in Carden's case - the view expressed by Dixon J., in the case ``there must be something `coming in', that is, for income tax purposes receivability without receipt is nothing''. Equally he accepted (at ATC p. 4160; A.L.J.R. p. 430) that Henderson's case (supra) decided that the proper basis for the taxation of a professional partnership employing staff and needing capital was the earnings of the year, not the receipts of the year.

Rowe's case, then, does not overrule the decision or the reasoning in Carden's case. On the contrary, it expressly recognises the authority of Carden's case as an exposition of the distinction between income derived from trading in stock and income derived by a professional man, and of the propriety in certain cases of adopting a receipts basis for ascertaining the income derived by a professional man carrying on a ``one-man practice''.

It is apparent, from a review of the cases cited that the concept of ``income derived'' is one which will often take its content from the context in which it has to be applied, and that it may have very different content and significance when applied to the financial operations of a huge multi-national corporation, or a large trading company or business, or a large professional partnership respectively than it would in the case of a one man professional practitioner.

I have come to the conclusion that in the case of a one-man professional practitioner the essential feature of income ``derived'' is receipt, and that, to adopt the phrase of Sir Houldsword Shaw and Mr. Baker cited with such evident approval by Dixon J., in Carden's case (at pp. 154-5) -

``receivability without receipt is nothing''.

In reaching this conclusion, I have applied what I understand to have been decided by the majority Judges in Carden's case (supra). It is true that the decision there was concerned with the proper method of assessment, under the Taxation Act 1927-1935 of the State of South Australia, of the income of a medical practitioner engaged in a one-man practice. The provisions of the South Australian Act there in question were not however, in substance distinguishable from the provisions of the Income Tax Assessment Act of the Commonwealth. Consequently what was said by Dixon J., in Carden's case in relation to the provisions of the South Australian Act may properly be taken to be and has always (see, for instance, the Arthur Murray case, Rowe's case and Henderson's case (supra)) been taken as an authoritative exposition of the law in relation to the provisions of the Commonwealth Act.

If my view be correct as to the meaning, in relation to the facts of this case, of the phrase ``income derived'' as used in sec. 6(1), 17, 25(1)(a), 161(1) and 166 of the Act, it would seem to follow that the taxpayer was correct in compiling his return for income tax purposes on a ``receipts'' rather than an ``accruals'' basis.

The Commissioner, and, in the Board of Review, the Chairman of the Board, have, however, held that a return compiled on such a basis is not to be accepted. The Commissioner, and also, as I understand it, the Chairman, took the view, that the decision in Henderson's case, (supra) left the Commissioner no option but to reject a return compiled on a ``receipts'' basis. I am of the view that in this respect the Commissioner erred in law - and this whether or not I am correct in the interpretation I have placed on the phrase ``income derived''.

In the first place, I think that Henderson's case did not purport to lay down any rule that there was only one method - namely, the accruals method - of computing the taxable income of a taxpayer. The passage, already cited, from ATC pp. 4016-7; C.L.R. pp. 647-8 of the reasons for judgment of Barwick C.J., in Henderson's case (supra) makes it clear that there may be room for a contest as to the appropriate method of computation of the income derived, and that, in the last resort, it is for the court to determine what, is the appropriate method in the case then before it. Furthermore, the reference (at ATC p. 4016; C.L.R. p. 647) to the ``cash basis'' adopted in Carden's case (supra) so far from suggesting that the learned Chief Justice was purporting, in Henderson's case, to overrule the decision in Carden's case, suggests, on the contrary, that he was content to accept that decision as appropriate to the facts of Dr. Carden's one-man practice.

For the Commissioner it was suggested that a real justification for the view expressed by Dixon J., in Carden's case as to the suitability of the ``receipts'' basis was to be found at p. 159 of the judgment: -

ATC 4153

``If in a given medical practice there is but little certainty about the payment of fees, I should have thought that a receipts basis of accounting would alone reflect truly the income and for most professional incomes it is the more appropriate. But to a great degree the question whether income of a particular kind can be properly calculated upon one basis alone or upon either, must depend upon the nature of the source of income.''

For myself I do not consider that the judgment in Carden's case was based on that passage alone. Other cogent reasons for concluding in favour of a ``receipts basis'' are to be found in a passage at pp. 157-8 as follows.

``Where there is nothing analogous to a stock of vendible articles to be acquired or produced and carried by the taxpayer, where outstanding on the expenditure side do not correspond to, and are not naturally connected with, the outstandings on the earnings side, and where there is no fund of circulating capital from which income or profit must be detached for actual enjoyment, but where, on the contrary, the receipts represent in substance a reward for professional skill and personal work to which the expenditure on the other side of the account contributes only in a subsidiary or minor degree, then I think according to ordinary conceptions the receipts basis forms a fair and appropriate foundation for estimating professional income. But this is subject to one qualification. There must be continuity in the practice of the profession.''

In Henderson v. F.C. of T. 70 ATC 4016; (1970) 119 C.L.R. 612 Barwick C.J., in discussing Carden's case makes no reference to the question of uncertainty as to the payment of fees.

What must not be overlooked is that in Henderson's case the High Court did not purport to over-rule Carden's case (63 C.L.R. 108) which has for many years been treated as an authoritative exposition of the Act (see per Windeyer J., in Henderson's case at 69 ATC pp. 4055-6; C.L.R. pp. 627-8) and see also Rowe's case (71 ATC at p. 4009; 45 A.L.J.R. 21 at p. 27 per Walsh J., ATC at p. 4159; A.L.J.R. at p. 430 per Menzies J., ATC at p. 4160; A.L.J.R. at p. 431 per Gibbs J. Nor is there any warrant for seizing on the incidence of bad debts in Henderson's case as the feature which served to distinguish that case from Carden's. For, as was pointed out in the article quoted by Mr. R.K. Todd in his Reasons for Decision, it does not follow that a light incidence of bad debts makes the earnings basis appropriate.

In my view, it is much more likely - as Messrs. G.K. Thompson and R.K. Todd (members) each suggest in their respective Reasons for Decision - that the real distinction between the cases was that in Henderson's case the income of the taxpayer could only be ascertained after the nett result of the partnership activities in the relevant year had been ascertained - see per Windeyer J., 69 ATC 4055; 119 C.L.R. 612 at pp. 626-7.

I am not, in the case before me, dealing with the return of assessable income of a member of a large partnership carrying on a practice of the type considered in Henderson's case where a considerable amount - possibly the great bulk - of the work done by and in the name of the partnership was done by employees. Nor am I concerned with the proper method of computation of the assessable income of a member of a firm of solicitors practising their profession on a scale comparable with that of the firm of accountants in Henderson's case. How far Henderson's case is of general application I need not and do not seek to determine. My only concern is with the question whether a return of assessable income of this taxpayer, based on fees received, and not on fees earned, during the year of income, sets forth ``a full and complete statement of the total assessable income received by the taxpayer during that year of income'' - cp. sec. 161(1) and sec. 166 of the Act.

In the relevant year the taxpayer conducted a one-man practice in which the exercise by him of his own personal professional skill and experience - his personal exertion - was the source of the income derived by him. The receipts of the practice during the relevant year represented in substance a reward for the professional skill and work of the taxpayer. The services rendered by his secretary - typiste - telephoniste - in return for the salary paid to her may be regarded as having contributed in a lesser and probably ``only in a subsidiary or minimal degree'' to the professional work for which the fees or costs were charged to and paid by the various clients for whom that professional work was performed.

It is apparent also that there was, in the professional practice carried on by the taxpayer, ``no fund of circulating capital from

ATC 4154

which income or profit must be detached for actual employment.''

Moreover, for the reasons stated by Mr. G.R. Thompson, member, at paragraphs 4 to 6 and 9 to 14 of his Reasons for Decision, there was, in the present case, no danger of an element of capital creeping into the assessable income of the taxpayer and there was no need to employ accounting techniques such as the ``accruals basis'', to guard against that danger. There was no occasion to ascertain the ``capital account'' or ``the loan account'' of the taxpayer. It was, of course, necessary to record the professional services rendered by the taxpayer to his clients and to quantify the value thereof at least for the purpose of knowing at what point of time the taxpayer was legally entitled to charge the client with or render an account to the client for the costs of the work and to take steps to recover payment of those costs either by deducting (pursuant to some agreement express or implied with the client) the amount charged from any moneys held by the taxpayer in his trust account on trust for that client, or, if there were no such moneys held in the trust account, by rendering a bill to the client and in the event of that bill not being paid suing to recover the same.

The step of recording the professional services done and quantifying the value thereof would, of course, have enabled the taxpayer to discover, by a process of periodical comparisons, the upwards or downwards trend of his practice. Such comparisons might alert him to the necessity of pruning expenditure or assist him to plan future expenditure. The recording and quantifying of the professional services rendered could equally, of course, by appropriate book entries, have been used as a basis of compiling accounts on an accruals basis.

This is not necessarily to say, however, that the ``accruals basis'' ascertains ``income derived'' during any given year of income. Indeed, from many points of view it might be a very misleading guide as to what ``income'' was ``derived'' during the relevant period by a professional man practising on his own account. The tax position of such a man, is in my view, more readily assimilated with that of a wage earner or salaried man who would ordinarily be understood as having derived only the income which he had received into his hands or which he had under his control. It is, and has for a number of years, been notorious `hat in their first years at the Bar junior barristers often have to wait a long time before they receive payment of fees earned and thereupon entered in their fee-books. A junior barrister who in his first year at the Bar had entered into his fee-book fees totalling $500 but had received payments totalling only $90 would, be surprised to hear it said that he had in that first year derived an income of $500. He might regard himself as having earned $500 but would probably say that he had during that first year derived from his practice at the Bar an income of only $90. His opinion, on this matter might perhaps prove to be wrong in law but he would perhaps claim support for his opinion in the statement in the joint judgments in the Arthur Murray case (114 C.L.R. 314 at p. 318) ``that earning without receipt did not make income'', and the observations of Sir Houldsworth Shaw and Mr. Baker that ``for income tax purposes receivability without receipt is nothing,'' cited by Dixon J., in Carden's case 63 C.L.R. at pp. 154-5. Consideration of the remarks of Barwick C.J., in Henderson's case 70 ATC at pp. 4018-9; C.L.R. at pp. 647-8 indicates that it would be a misunderstanding to treat them (as the Commissioner appears to have done) as affirming the proposition that there is only one way of arriving at the assessable income of all individual taxpayers (including a ``one-man'' practitioner such as this taxpayer), namely, the ``accruals basis''.

It is, in each case, a question of fact whether the ``accruals basis'' (as the Commissioner contends) or the ``receipts basis'' (as the taxpayer contends) constitutes the correct method of ascertaining the assessable income derived by this taxpayer from his professional practice.

In those circumstances it becomes necessary for me to consider, on the evidence, whether the ``receipts basis'' forms a correct foundation for estimating the professional income of this taxpayer.

The witness Keown asserted that ``accrual basis'' was alone capable of yielding a correct foundation. Keown's evidence, however, was, I think, founded on an erroneous conception of the nature of a solicitor's practice and in particular of the basis of charging for legal professional services rendered, and he did not appear to me to have applied his mind to the case of a ``one-man'' practitioner such as this taxpayer.

Moreover, he failed at many points (until his attention was specifically directed thereto) to

ATC 4155

draw any distinction between the concepts of ``income'' and ``profit''. He seemed unaware - until directed thereto by a most leading question - of the Commissioner's course of practice since Henderson's case.

In the result, I do not feel able to attach the weight to the opinion of the witness Keown which his prior experience and qualifications might otherwise have suggested. I prefer the evidence of the witness Barrass.

I am of the view that the ``accruals basis'' is, in the case of a practice such as this taxpayer's, an artificial, unreal and unreasonably burdensome method of arriving at the income derived. The provisions of sec. 63 as to bad debts do nothing to remove this impression. The books of account kept by the taxpayer were adequate for ascertaining the income received by him in any year of income. His return of income received, based on the information contained in those books, constituted a full and complete statement of the total income ``derived'' by him during the year as income and ought to have been accepted by the Commissioner, for the Commissioner was, by that return, enabled to make an assessment of the taxable income derived by the taxpayer. I am, therefore, of the view that the Board of Review rightly upheld the taxpayer's objection to the Commissioner's amended assessment insofar as it related to the method of assessing the taxable income of the taxpayer derived from the conduct of his practice as a solicitor.

I turn now to the taxpayer's appeal against the decision of the Board of Review upholding the Commissioner's disallowance of the taxpayer's objection to the inclusion in his assessable income for the year ended 30 June 1970 of the sum of $2421 profit arising on the sale of Lots 20 and 21, Orchard Road, Bayswater.

The Commissioner assessed this amount of tax pursuant to the provisions of section 26(a) of the Income Tax Assessment Act which provides: -

``The assessable income of a taxpayer shall include -

  • (a) profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme.''

The taxpayer's objection, dated 12 November 1971, asserted that the properties and his interest in the properties at and known as Lots 20 and 21 Orchard Road, Bayswater were not acquired for the purpose of profit-making undertaking or scheme or in the course of any business whether of obtaining property or otherwise, that any profit or gain derived by him from the purchase and subsequent resale of the said properties or interests therein was a fortuitous or chance profit or gain not of an income nature; and that any profit or gain derived by him from the sale of either of the said properties or interests therein was not assessable income. The validity of three other objections contending that if the profit was part of the taxable income the profit was less than the sum included in the assessment, has been acknowledged by the Commissioner in making the amended assessment the subject of the present appeal, and it is unnecessary to notice them further.

This particular part of the appeal falls to be determined in the light of the evidence adduced by the Board of Review, no evidence relevant to this matter having been offered before me. So far as I can gather nothing turns on the questions of credibility and I am not, as I understand it, disadvantaged by not having seen the taxpayer giving evidence. The question appears to be one of the proper inferences to be drawn from that evidence.

I am content to adopt the statement of the relevant facts set out in the Reasons for Decision of Mr. R.K. Todd, member of the Board of Review.

There was tendered in evidence before the Board of Review, and also before me, a statement made by the taxpayer in 1967 concerning the purchase of these lots. So far as relevant, the explanation is in these terms: -

``Because of the inflation and loss of money values at the time of purchase it was my idea to preserve the value of money held at the time and also of any savings made in the future. Because money values were depreciating the lots were purchased as an investment. The value of land would not fall in my opinion and the instalments used to pay off the land would retain their value, whereas had this money been banked it would not have been worth as much in purchasing power today. By purchasing the land I thought that the money used would

ATC 4156

thereby retain its value in equivalent purchasing powers through the maintenance of land values generally.''

In the Board of Review, Mr. R.K. Todd, with whose Reasons for Decision the other two members concurred on this point, held that the taxpayer had not shown on the balance of probabilities that resale at a profit was not the dominant purpose actuating the acquisition, citing -
Jedburgh Stock Company Pty. Ltd., v. F.C. of T. 73 ATC 4082. That was a case where it was admitted that profit-making by sale was one of the purposes for which the land was initially acquired - see pp. 4084 and 4086.

Mr. Todd's reasons were stated as follows: -

``It would be possible to imagine certain circumstances in which the purpose of acquisition of property could be accepted as being directed to providing a hedge against inflation without necessarily involving the conclusion that resale of the property would be a necessary concomitant of such purpose. For instance, the purchase of industrial land suitable for development and retention could be so seen. But it seems to me that for the purchase of 15 residential building blocks to be seen as having as its purpose the creation of a hedge against inflation, it is necessary to conclude that resale of the property must have been a constituent element of that purpose. The stipulated purpose could not be realised otherwise. To speak of this kind of operation as an investment is not to use that word in a sense which is meaningful in the context of section 26(a). `Investment' is not constituted by vagueness of purpose, nor by a feeling that it may be a long time before the asset can be realised. Here the taxpayer had an economic purpose (compare the facts in Case B46,
72 ATC 261) and that purpose was inseparably connected with the profitable sale, at some indeterminate time in the future, of the property acquired.

I do not for moment suggest that the taxpayer was being anything but completely truthful in his own mind when he denied in 1973 that the land was in 1957 purchased for the purpose of profit-making by sale. The question is, however, resolved against him because I am unable to put on his actual reasons for acquisition the construction which he felt able to place upon that. He has not shown on the balance of probabilities that resale at a profit was not the dominant purpose activating the acquisition.''

The question must be whether the land at Bayswater was acquired by the taxpayer ``for the purpose of profit-making by sale'' or ``from the carrying on or carrying out of any profit-making undertaking or scheme''. What matters is the purpose at the time of the purchase and if there is more than one purpose the inquiry must be as to the predominant purpose, - see per Gowans J., in Cowan v. F.C. of T. (1973) V.R. 402 at p. 411: -

``I take the word `purpose' to indicate the object wished for and aimed at and governing the projected use for this position of the property, either entirely or in a dominant way - see
Pascoe v. F.C. of T. (1956) 30 A.L.J.R. 402, 11 A.T.D. 108;
Craddock v. F.C. of T. 69 ATC 4108.''

The taxpayer insisted that at the time of the purchase he was not thinking of the selling of land, that he was making only enquiries about selling the land, what it might be worth and at the time what was predominant in his mind was to find some investment which would guard his capital (p. 70). The allotments of the land were not income producing lots, they were vacant land (trpt. 53). He said his thinking was: -

``Here in the land, I will invest that money into it, the money will retain its value. Whether the land would appreciate and by how it would appreciate, he thought on his general experience that land values would certainly not go down.''

In answer to a question by Mr. Thompson (member) at p. 55 as to how he expected to get back more than he put into the investment, the taxpayer said: -

``What I expected was that if I buy a block of land for £350 - $700 - whenever I find a better investment, an income producing investment because that investment in land was only taking the money out of my pocket, not putting any money into my pocket. When the opportunity would arise and I should be able to put money into an income producing property, then I should convert that land investment into the income producing investment and I would have put in $700. I shall probably get $1000 but $1000 would only be worth somewhere around the $700.''

Mr. Murphy (for the Commissioner):

``But the only way you could realise on an investment as an investment is to sell the land at an increased sum, over the above

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what you have had to pay plus the outgoings, plus the cost of sale?''


``You may look at it that way, but that is not the way I look at it.''

As I read the taxpayer's answer to the question put to him by Mr. Thompson (member), the taxpayer was contemplating a transposition of investments, his concern at all times being to have his money in the form which it would retain its value but if possible produce an income as well. To invest his money in vacant land would ensure that the asset he purchased would be an asset which moved in value with movements of the purchasing power of money. Such an investment, however, would do no more than to preserve the capital, bringing in no income at all on the capital invested. It is clear that he was not concerned merely with the acquisition of an asset which would produce income. Income alone was not sufficient if at the end of the period of investment he got back no more than the original face value of the money he had invested (see pp. 54-55). What he was concerned to do was to put his money into some form of property which would, when realised, return as much in purchasing power as the money when invested would have done.

Counsel for the Commissioner contended that the present case was indistinguishable from the decision of the Court of Appeal in
Wisdom v. Chamberlain (1969) 1 W.L.R. 275. The facts in that case, were, however, very different from the facts in the present case. On the facts in that case the Court concluded, upholding the decision of the General Commissioners, that the transaction was one entered into on a short term basis for the purpose of making a profit out of the purchase and sale of a commodity so that it was an adventure in the nature of trade.

``It was expected that there would be a devaluation, and the reason for wanting to make a profit was that there would be a loss on devaluation, but that does not make any difference, it seems to me, to the fact that the motive and object of the whole transaction was to buy on a short term basis a commodity with the view to its resale at a profit. That, as it seems to me, is an adventure in the nature of trade...''

(per Harman L.J. at p. 282).

The Court of Appeal held that the transaction did not lose that nature of trade simply because it was a ``hedge against devaluation''.

For the Commissioner, reliance was also placed on the views expressed by Fullagar J., in
Pascoe v. F.C. of T. (1956) 30 A.L.J.R. 402, 11 A.T.D. 108 at p. 112 where it was said: -

``The direct inference which these circumstances invite is rather a negative inference that the property was not acquired by the syndicate for the purpose of holding it as a more or less permanent income-earning asset and it may be said that it does not necessarily follow that it was acquired for the purpose of resale at a profit. It could conceivably have been acquired without any definite purpose in view at all. There is force in this. But it is, nevertheless, I think, broadly true to say that, when a man invests money in the purchase of any kind of property, it will generally be with either the view to holding it and deriving income from it, or with the view to realising sooner or later an enhanced capital value. And, while logically these `purposes' are not mutually exclusive, it will generally be impossible to say that the one or the other is predominant at the time when the purchase is made... Evidence which tends to exclude one of the two contrasted `uses' as the use intended will generally, I think, tend to support an inference that the other was the use intended. I am, of course, speaking only of purely commercial transactions, and not of such matters as (for example) the purchase of a home for use.''

I think counsel for the Commissioner felt some difficulty in supporting the conclusion that the profit on the resale of this land was taxable on the basis of the inference drawn by the Board of Review.

If the true facts were that the taxpayer bought this land simply to convert his money - which almost invariably depreciates in value if left uninvested - into an asset which would appreciate in value with changes in the value of money, I do not think that that in itself would be enough to bring the acquisition of the property within the ambit of sec. 26(a). To invest money in acquiring an asset which will appreciate in value in the manner corresponding at least with the movements in the value of money does not necessarily carry the consequence that the asset was acquired with the view to resale or, to quote the words of the Act ``for the purpose of profit-making by sale'' or as part of any ``profit-making undertaking or scheme''. If no more is established than that the taxpayer wanted to

ATC 4158

secure the then value of his money so as to have that asset available as part of his estate at any given time, the case would not, in my view, fall within sec. 26(a). To buy property as a hedge against inflation must, of course, have the consequences that money could be raised on the security of the asset by mortgaging it. It would also carry the consequence that the assets so acquired would form a valuable part of the purchaser's estate to be disposed of by his will or to be divided among his next of kin on intestacy. I do not think that the fact of the purchase of fifteen residential building blocks necessarily requires the conclusion that resale of the properties must have been a constituent element of the taxpayer's purpose in acquiring these properties or that the stipulated purpose of the ``creation of a hedge against inflation'' could not be achieved otherwise. Nor do I think that it was necessary for the taxpayer to prove that the acquisition was an ``investment'' within the meaning of that word as understood by Mr. Todd, (member). The question under sec. 26(a) is not a question of investment: it is simply a question whether a property, on the sale of which profit has ex hypothesi been made, was a property acquired by the vendor ``for the purpose of profit-making by sale'', or in the course of the carrying on or carrying out of any profit-making undertaking or scheme.

Furthermore, the statement of Fullagar J., in Pascoe v. F.C. of T. cited above cannot be regarded as prescribing straight-jacket alternatives into one or other of which every case must fall. Fullager himself expressly qualified his proposition by saying ``it will generally be either with the view to holding and deriving income from it or with a view to realising sooner or later an enhanced capital value''. If the evidence shows that that latter alternative was merely a possibility to which the taxpayer had not in truth applied his mind, that in short it was no more than a possibility, open to the taxpayer only in consequence of his acquisition of the property, and not a purpose with which the property was acquired, then the case cannot be brought under sec. 26(a).

For myself, I would certainly not be prepared to affirm that the mere purchase of the property ``as a hedge against inflation'' must in all cases fall within sec. 26(a). Instances have been known where persons have set about acquiring real estate upon the basis that land will hold its value, a view which time tends to vindicate, as, for instance, in the well-known cases of the Howey estate in Collins Street, Melbourne and Dr. Backhaus' estate in Bendigo and surrounding districts. I am fortified in this view by the observations of Barwick C.J., in
Steinberg v. F.C. of T. (1975) 7 A.L.J.R. 491 at p. 498; 75 ATC 4221 at p. 4227 in relation to sec. 26(a) of the Act):

``Because the Act by sec. 190 places the onus upon the appellant taxpayer of showing that the Commissioner's assessment is excessive, there are expressions to be found in cases decided upon the first limb of sec. 26(a) to the effect that there is a presumption which the taxpayer must overcome by the evidence accepted by the Court on this appeal. But, in my opinion, there is no presumption that property is acquired for profit-making by resale. The presence of sec. 26(a) in the Act does not mean that property cannot be acquired as an investment, as a hedge against the loss of value in the currency; or that the only investment advantage of the acquired property which is outside the reach of sec. 26(a) is the income it will produce. The retention of property in the hope or expectation that its value will increase is a justifiable form of investment. That the increased value may only be realised by sale does not deny that the purpose of its acquisition was investment or establish that the purpose of its acquisition was to use it as a subject of trade by reselling it at a profit. No doubt in borderline cases the distinction may tend to become blurred but it is none the less a valid distinction and capable of resolution by the Court.

When the facts relating to the acqusition of the property are evidenced before the Court, the question is whether on those facts the necessary inference of purposes can be drawn. The evidencing of the facts and the inability to draw that inference from them, in my opinion, satisfies in this case the onus existing on the taxpayer. If... those facts, including those the Commissioner establishes, do not warrant the inference of the requisite purpose, assessment based on the first limb of sec. 26(a) cannot be supported.''

See also:
Gauci v. F.C. of T. 75 ATC 4257; (1975) 8 A.L.J.R. 155 (Full High Court) reversing the decision of Lavan J., reported 75 ATC 4149; (1975) 6 A.L.J.R. 183.

In the present case, the Board of Review concluded that the stated purposes of acquiring the land as a ``hedge against inflation'' could not be achieved unless there

ATC 4159

was a resale of the land. I do not think that necessarily follows, for the taxpayer could obtain his ``hedge against inflation'' by the simple process of retaining the land. He had his money in the form of property which would not unlikely depreciate in value even if it were not returning any income. The question whether the taxpayer would sell or retain the land might, in the end depend on whether the value of the land proved to be great enough to compensate for the lack of income. In any event, even assuming that the purpose of having a hedge against inflation could not be achieved without a resale of the land, it certainly would not follow that such resale would be by the taxpayer. It might equally be by some person claiming under his will or his intestacy and the profit on resale is assessable only if the property was acquired by the taxpayer for the purpose of profit-making by sale by him: it is not enough if some other person has made the profit upon the resale.

It will not be enough if the taxpayer's devises or next of kin hereafter effect a resale at a figure which, when compared with the original purchase price, shows a profit. The profit would in that case not have enured to the taxpayer. The profit which enures to the devisee or next of kin is a profit on a property which was not acquired by the devisee or next of kin ``for the purpose of profit-making by sale''. (See
Williams v. F.C. of T. 72 ATC 4188; 127 C.L.R. 226. See also
McClelland v. F.C. of T. 69 ATC 4001; (1968) 118 C.L.R. 353; 70 ATC 4115; 120 C.L.R. 487, and
Steinberg v. F.C. of T. 75 ATC 4221 at 4232 per Gibbs J.

When the answer given by the taxpayer to Mr. Thompson at p. 55 of the transcript is analysed, the proper conclusion, in my view, is that the taxpayer was saying that if the opportunity came of exchanging a non-income earning investment for an income-earning investment he would take it, and that he envisaged that with the change in the value of land he would get in money terms more than it had cost him to purchase the land but that the money coming from the sale of the land would be worth no more than the money laid out in the purchase of the land. I think what he put there was one of the possibilities which would be open to him of improving his position in relation to providing a hedge against inflation but it was only one of several possibilities. The Board obviously did not feel able to take from that answer that he had purchased the land with the predominant intention of resale - see the remarks of Mr. Todd (member) at p. 113 of the transcript.

It follows, in my opinion, that the conclusion which the Board drew from the evidence was one not warranted in law. The Board has nowhere indicated that it drew from the taxpayer's answer given to Mr. Thompson at p. 55 of the transcript, the conclusion which Mr. Tadgell invited me to draw. Indeed it would appear that the Board did not accept that evidence as indicating the intention or the dominant intention or purpose which the taxpayer had in acquiring this property. It is not possible, in my view, to say that the Board must have accepted that as the dominant purpose; and they do not appear to have so accepted it, and they reached their conclusion on a basis which, in my view, was erroneous in law.

The taxpayer's intention being established by the evidence and the inference from that intention not being the inference which the Board drew, it follows, in my opinion, that the taxpayer has established that the property was not acquired for the purpose of profit-making by sale. Nor can it be said that on the evidence that the taxpayer was at any relevant time engaged in any profit-making undertaking or scheme or that the profit arising from the sale of the Bayswater lots arose from the carrying on or carrying out by the taxpayer of any such profit-making undertaking or scheme, - see
XCO Pty. Ltd. v. F.C. of T. 71 ATC 4152 at p. 4155; (1971) 124 C.L.R. 343 at p. 349 per Gibbs J. And also see
Steinberg v. F.C. of T. 75 ATC 4221 at p. 4224 per Barwick C.J. The case does not, therefore, fall within either limb of sec. 26(a) and the Commissioner was wrong in including the sum of $2421 in the taxpayer's assessable income. The taxpayer's appeal therefore succeeds.

The order of the Court will therefore be:

The appeal by the Commissioner is dismissed, and the appeal by the taxpayer is allowed. The amended assessment issued on 3 March 1972 must therefore be varied by excluding from the taxable income of the taxpayer the sum of $2421 wrongly included by the Commissioner as profit arising from the sale by the taxpayer of Lots 20 and 21 Orchard Road, Bayswater. The matter will be remitted to the Commissioner to issue a further amended assessment to give effect to this decision.

As to costs the taxpayer succeeded both on his appeal and on the Commissioner's appeal. The taxpayer's costs of the appeals must therefore be taxed and when taxed paid by the Commissioner.

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