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Case K35

Judges:
MB Hogan Ch
P Gerber M
GW Beck M

Court:
No. 3 Board of Review

Judgment date: 21 June 1978.

M.B. Hogan (Chairman): I have had the advantage of reading the reasons prepared by my colleague, Dr. Gerber, in respect of each of the three companies which have referred the Commissioner's decisions on their various objections to this Board. As I do not entirely share the misgivings of my colleague on some of the references, I feel obliged to append some brief comments.

2. I should first record that I found the witnesses in these references refreshingly frank and candid, and, in the case of the younger brother B - (I have adopted Dr. Gerber's nomenclature) - a witness who was painstakingly careful to ensure as accurate a picture of the evidence as the passage of years and the somewhat fragmented records would permit. Where his evidence involved reconstruction rather than recollection, it was expressed in such a way as to make this fact abundantly clear. Having said so much, I will now proceed to comment on the references by the individual companies.

References B.113-117/1977

3. Counsel for the Commissioner in his written address in relation to these references, has argued that the profits fall to be assessed under either limb of sec. 26(a), or alternatively, constitute income within the meaning of sec. 25(1). In so far as this latter claim is concerned, I find that, in relation to the units acquired from the Norseman enterprise, those units were acquired involuntarily and not as part of any operation of business by A Constructions Pty. Ltd. I also find on the evidence that the units were not acquired by A Constructions Pty. Ltd. and transferred to B and C Investments and sold by that company as part of the working out of a profit-making undertaking or scheme. The evidence, in my view, establishes that the units were acquired to minimise the potentiality of loss on a construction project by A Constructions Pty. Ltd. and were later transferred to B & C Investments giving effect to an intention formed some months earlier, of that

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company's utilising them for their rental potential. Though one of the units was sold by B & C investments within a very short time of its acquisition by that company, it was sold in an attempt to cope with the financial stringency then currently affecting the operations of A and B throughout their various corporate structures. Taking the view I do of the evidence, it is not possible to find that the acquisition by A Constructions Pty. Ltd. of the two units, their transfer to B & C Investments and subsequent sale by that company, constitutes a programme or plan of action having as its object the making of a profit; accordingly, the profits which emerged from these transactions, would not be assessable under the second limb of sec. 26(a). On my view of the evidence also, I would find that the inference of the requisite purpose raised by the sale by B & C Investments of unit 8 at a time proximate to its acquisition, has been overcome, vide Barwick C.J. in
Gauci and Ors. v. F.C. of T. 75 ATC 4257 at p.4260 . Simply put, the occasion of the sale of unit 8 was the growing financial stringency affecting the group of companies - the act of sale, albeit within a couple of months of formal acquisition, is not the occasion for raising the inference of the requisite purpose in terms of sec. 26(a). The much later sale of unit 13 raises no such inference of purpose and I accordingly find with my colleagues that the profits on sale of units 8 and 13 in the Norseman exercise are not liable for assessment under sec. 25(1) or either limb of sec. 26(a).

4. Turning to consider the units which B & C Investments received as a result of its participation in the Garden Towers venture, I cannot on the evidence led from B in relation to methods adopted later by the two brothers in carrying on business, find that this venture was the first in a chain of like business ventures. It is clear from the evidence that the modus operandi later adopted, was quite distinct from that adopted for purposes of the Garden Towers venture - see pp. 177,185 of transcript. In my view, the later history of the many ventures by the two brothers - following a complete break between them involving the winding-up of all their existing business structures in which they were in any way associated - cannot be invoked as in any way relating to, or colouring the nature of, the ventures entered into before the lengthy break occurred. Taking that view, I am constrained to look at the venture into Garden Towers in isolation from later events. The brothers were not the initiators of the venture; they were invited to participate by their co-venturers, and, though they assumed the dominant role in the design and construction aspects of the venture, their role in the financial and administrative aspects appears to have been somewhat less than dominant. In the circumstances, I find that the profits realised by B & C Investments from the sale of units emerging from its participation in the Garden Towers venture, were not income assessable in terms of sec. 25(1) as the proceeds of a business.

5. Turning to consider the question of assessability of the profits from the Garden Towers venture under either or both limbs of sec. 26(a), the evidence of B on behalf of the taxpayer, is that it was the aim of the company ``as an investor when we went into the project, to lodge our money and finish up with 5 home units which it was our intention to furnish and let.'' As the evidence unfolded, B was closely questioned as to the reality and reasonableness of any expectation that, starting only a few months before, from such a small capital ( £ 980 and a utility truck), the brothers, through their company, could retain five units in Garden Towers as an investment proposition. His answers continually, and, in my view, correctly, drew the Board back to the situation at the commencement of the Garden Towers enterprise. The answers bore none of the hall marks of rehearsal but were expressed in quite colloquial language, and, because, in my view, they effectively dispose of the contentions advanced on behalf of the Commissioner, I quote them verbatim: -

``Well sir when you go into a project you go into it at the start. It's no good saying at the finish. `Well, put me back! I'm going back again!' Once you're in you're in and it was no good saying in April, 1967, `You know, I don't want to be in it'.''

(In response to a question from me seeking to elicit when the professed investment intention was formed.)

``Yes, sir, but I wasn't aware of that back in October, 1965, that I wouldn't get that money (from the Norseman contract). In October, 1965 I did my sums and said, `Right, Mrs. Fairy's job so much;... Avenue so much; Norseman so much; hopefully Garden Towers as

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building contractor so much. That gives me so much money to put in'.''

(In response to a question on the sources of funds for investment)

``The building commenced February, 1966. But really the idea of going into it started some time from August, 1965 on as the budgets went and they put it to us that we would like to be in this and gee it seemed like the perfect thing to us to be able to build, earn money and invest it for our future. I mean this to me is my ideal to one day have secure investments that I can sit back and look at.''

(In response to a question as to the starting date of Garden Towers).

6. On that evidence, and evidence that the sale of units 17 and 13, and the mortgaging (along with an option to purchase) of unit 11 which took place in the 1967 calendar year, were engendered by the financial stringency suffered in the brothers' operations from April, 1967 on, plus the need to generate funds with a view to participation in the Leaning Towers venture, I am prepared to find that the taxpayer had not any relevant purpose under either limb of sec. 26(a) in entering upon the venture into Garden Towers. Given the brothers' acknowledged lack of financial expertise at the time of their entering upon the Garden Towers venture, and the apparent success of their early ventures - C in cross-examination in his own reference summed up the situation at that stage in the following terms -

``And this all happened within a matter of four or five months of us starting, so to speak, as chippies with nail bags, and now we had become big business men - ''

the over-optimistic expectation that they could capitalise their then freely flowing profits in the form of long term investment in units, is completely plausible. Accordingly, I find that the taxpayer company, B & C Investments, has discharged the onus placed on it by sec. 190(b) and direct that the assessments in this reference be reduced to excise from the assessable income of the various years the amounts specified in para. 23 of the reasons for decision by my colleague, Dr. Gerber.

Reference B.120/1977

7. This reference deals specifically with the profit emerging from the sale of one unit (unit 34) allocated to B's company, B Investment, as a result of participation of B and C in the Leaning Towers venture per medium of their personal investment companies. As will be seen from Dr. Gerber's outline of the facts, B Investments (the taxpayers in this reference) acquired ownership of two units (units 1 and 34) in Leaning Towers in its own right and joint ownership with C's company of another unit (unit 29). To deal effectively with the reference before the Board in respect of the profit on sale of one unit (unit 34), it is obviously necessary to consider the facts also in relation to the other two units (units 1 and 29).

8. However, to some degree, this is complicated by the fact that a ruling was given by the Board early in this reference that there was no decision on objection by the Commissioner which could be the subject of a valid reference to this Board in terms of sec. 187 in relation to that part of the profit arising in the hands of this taxpayer from the sale during the year ended 30th June, 1970 of the jointly owned unit no. 29. In the result no in depth questioning of the facts surrounding the sale of unit 29 was ever undertaken before the Board. All the Board was told in evidence by B was -

  • (i) The original feasibility study for Leaning Towers indicated that six units would become available to the interest of the two brothers, B and C. It was envisaged that each of the private companies would receive title to three units. Due to cost overruns, it became apparent during construction that only five units would be available to the joint interest of the brothers.
  • (ii) Unit 29 was allocated to the brothers' interest ``long before'' unit 34, which latter unit was allocated at least six or eight months before the building was completed. This early allocation of unit 29 was confirmed by C in evidence in relation to the references relating to his private company (B.110-111/1977).
  • (iii) The reason for the early allocation of the unit was ``so that we could dispose of it, because neither of us wanted this joint unit.''

In the course of argument as to whether a reference lay in respect of the profit on sale of

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unit 29, counsel for the Commissioner informed the Board that a deposit on unit 29 was accepted on 4th February, 1969, and that the profit on the sale was originally included in the assessment in respect of the year of income ended 30th June, 1969. However, on objection, the Commissioner took the view that, as the building was not completed until, at the earliest, July, 1969, the profit should be brought into the assessment in respect of the year of income ended 30th June, 1970. It was the failure of the taxpayer to object against an amended assessment for that year of income, incorporating that profit as assessable income, which resulted in no request for reference being lodged in respect of the transaction. So far as I can discover from the transcript, the actual date of sale of unit 29 was never established in evidence. The facts in relation to the transaction in respect of unit 29 are unsatisfactory and incomplete. It emerges as a unique transaction not fully explained.

9. Some explanation of the brothers' attitude to joint ownership of assets can be gleaned from evidence given by C in the hearing of the reference in relation to C Investments. He agreed in reply to a question from me that, by using a private investment company controlled by himself, it was the first time he had been able to sever something out of the operations that he could use for himself. He went on to add that, to that stage, everything had been done together and that his brother and he would have liked to see things under their individual control. Later in the hearing of B & C Investments (references B.113-117/1977), B was to testify that the joint forms of operation the brothers had employed in their early ventures (including Leaning Towers) were a cause of ``big friction in partnerships'' and went on to offer the opinion that, if the brothers had started with the arrangements they currently employ, the problems they ultimately encountered culminating in a split between the brothers may well have been obviated. Simply put, the arrangements currently employed are that all operational work is carried out by a partnership of two personal private companies, the appropriate share of profits on operations distributed to each company and each brother manages his own share of profits through his own private company and bears his own expenditure. The picture that emerges from this evidence, and from the whole of the evidence in these references, is of two strong-willed individualistic men who found extreme difficulty in coping with the problems of operating jointly together. Indeed the evidence shows that, from early 1969 on, there was considerable dissension between them culminating in a break-down of relations between them, with C breaking away from his brother for a period of at least eighteen months, including some thirteen months overseas. All in all, the evidence, though scrappy and incomplete, suggests that by the time they entered the Leaning Towers venture the brothers had set their minds against any form of joint ownership with the problems of accountability one to the other that ensued from that form of holding property. The position in relation to the dealings in respect of unit 29 is that the matter was not fully canvassed before the Board and it does not form part of the reference in this instance. In view of the unsatisfactory state of the evidence in relation to the unit 29 transaction, I can see no basis for drawing any inference from that transaction as bearing on the matter under reference.

10. Turning to the transaction under reference, i.e. the profit emerging from the sale of unit 34, my colleague, Dr. Gerber, has set out the evidence given by B in relation to the purpose entertained by B acting on behalf of B Investments and the adaptation of that initial purpose in relation to unit 34 during the course of development of the Leaning Towers venture. Under cross-examination, it emerged that unit 34 was allocated to B Investments for ``myself (i.e. B) personally'' by agreement of the parties to the Leaning Towers venture about December 1968/January 1969 some six months or more before completion of the building and several months before other allocations were made. He also testified in answer to questions from the Board that -

  • (i) unit 34 was never listed for sale;
  • (ii) the sale emerged from an approach by the managing agent for Leaning Towers who indicated that there was an offer to buy at a certain figure;
  • (iii) the main reason B did not cause unit 34 to be furnished and rented was because he was uncertain whether his wife would return and whether they would live in the unit.

The remark about the matter being ``a bit emotional'' was given in the context of

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answering a question from me seeking to obtain an explanation of the difference in treatment between unit 1, which was furnished and let as soon as it became available in July, 1969, and unit 34 which was held for several months without any effort being made to furnish and let.

11. The other unit allocated to B Investments, unit 1, was furnished and let in July, 1969, on completion of the building - B testified the first rent was received in August, 1969. It continued to be available for rental for a period of over three years, being eventually sold by a contract dated 18th August, 1972, for which settlement was received in late October, 1972. The history of unit 1 accords well with the objective proposed by B on behalf of the taxpayer company of entering the Leaning Towers project with the purpose of obtaining units to let and obtain income in the form of rent.

12. The argument advanced on behalf of the Commissioner in this case is along the same lines as that in ref. B.113-117/1977 viz. that the profit on the sale of unit 34 falls for assessment under sec. 25(1) of the Act as assessable income arising from business operations, or alternatively, that the profit is assessable income under either or both limbs of sec. 26(a).

13. I am not prepared to find on the evidence that this taxpayer, a company which had lain dormant as a shelf company for some years, was brought into action to engage in the business of acquiring and selling strata titles to units at a profit. The evidence is that B Investments ``was only ever involved in Leaning Towers''. There is no evidence to suggest that this isolated transaction was a transaction intended to be repeated, sufficient to support a conclusion that this was ``a first transaction in a business (of dealing in strata titles) then commenced and intended to be carried on.'', vide Barwick C.J. in
Fairway Estates Pty. Ltd. v. F.C. of T. 70 ATC 4061 at p. 4068 .

14. Though the claim for consideration of the assessability of the profit on sale of unit no. 34 under the first limb of sec. 26(a) was not pressed very heavily by counsel for the Commissioner in the course of the hearing, it seems to me that the transaction, on the facts, falls appropriately to be considered under that first limb. The evidence from B, on behalf of his private company B Investments, is clear and unequivocal. Money was subscribed by B Investments as capital of, and advances were made to, the development company controlling the Leaning Towers venture, in order to get or acquire units. In the case of
Steinberg v. F.C. of T. 75 ATC 4221 at p. 4232 , Mr. Justice Gibbs observed in relation to the first limb of sec. 26(a) that -

``The section does not require that the acquisition should have been effected by any particular method - it is not limited, for example, to acquisition by purchase.''

and went on to speak of acquisition " as the result of a bequest (
McClelland v. F.C. of T. 70 ATC 4115 ) or as unsolicited gift (
F.C. of T. v. Williams 72 ATC 4188 ) " . In the matter under reference, it would appear that the units were acquired as a result of construction carried out on behalf of B Investments. Be that as it may, I am firmly of the view that the units were acquired. What is relevant in considering the question under the first limb of sec. 26(a) is to determine ``the purpose, not the mode, of acquisition'', vide Gibbs J. in Steinberg's case at p. 4232, and the purpose when ascertained must be the purpose of profit-making by sale specified in the first limb. The purpose to be sought must be ``the dominant purpose actuating the acquisition of the assets - the use to which they are to be put'', per the joint judgment of Rich, Dixon and Evatt JJ. in
Evans v. D.F.C. of T. (S.A.) (1936) 55 C.L.R. 80 at p. 99 . The problem which then emerges in the circumstances of this reference, is to identify the time of acquisition so that an examination may be made of the evidence pertaining to that time to determine whether there was a predominant purpose apparent which would be determinative of the use to which the asset acquired, viz. unit 34, was to be put.

15. The evidence of B and C bearing on acquisition is in summary:

  • (i) Unit 34 was reserved to B's company, B Investments, as early as December 1968/January 1969.
  • (ii) Unit 34 amongst other units was formally allocated to the interest of the brothers' companies by a minute dated 11th June, 1969, of the company managing the Leaning Towers development.
  • (iii) Title to unit 34 and unit 1 passed to B Investments some time in October, 1969. A copy of Form K, indicating the ``date of

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    sale'' as 13 October 1969, which was forwarded to the Commissioner of Land Tax, was submitted as an exhibit. However unit 1 had been let by the taxpayer since July 1969, the first rentals being accounted for in August 1969.
  • (iv) The other parties in the Leaning Towers venture having agreed to it as ``a special thing'' that unit 34 should be reserved for B Investments for the personal use of B and his wife, B had the building contractor install ``special fittings and finishes to suit my own requirements.''

On the facts, I am of the view that the date of acquisition of unit 34 by B Investments could be no earlier than the minute dated 11th June, 1969 formally allocating that unit amongst others to the brothers' companies. I am of the view that the earlier reservation of the unit to the interest of B Investments was no more than an arrangement to acquire the unit which was finally given effect to in the minute of 11th June, 1969.

16. The undisputed evidence of B and C, undisturbed by cross-examination, as to the purpose actuating the acquisition of unit 34 and the uses to which the unit was to be put, is that unit 34 was reserved by special arrangements to B's interest as early as January 1969 and was specially developed at B's instructions to suit his own requirements as a domestic residence for his wife and himself. Effect was never given to the professed purpose because of the failure of B's marriage, coincidental with the actual acquisition of unit 34. In view of evidence given at the hearing that all matters the subject of these references had been extensively examined by officers of the Taxation Office, I attach considerable importance to the fact that the evidence of B and C in relation to matters pertaining to unit 34, remained unchallenged and undisturbed through the hearing. The evidence is clear and unequivocal, unit 34 was sought, reserved, developed and acquired in B's interest, and on B's initiative, as a domestic residence. The reasons given in explanation of the sale of the unit in March, 1970, are in my view, acceptable, and accordingly, I would find that any inference of a purpose of profit-making by sale which may arise from the fact of a sale at a date proximate to the acquisition of unit 34, has been effectively overcome by the evidence given on the taxpayer's behalf.

17. Having found that the profit does not fall to be assessed under the first limb of sec. 26(a), I turn now to consider whether the profit should be held to be the profit emerging from the carrying on or carrying out of a profit making undertaking or scheme, which was the conclusion strongly urged on the Board by counsel for the Commissioner. Mason J. (with whose reasons Barwick C.J. agreed generally and Jacobs J. agreed), found in the case of
Burnside v. F.C. of T. 77 ATC 4588 at p. 4594 that he ``did not understand their Lordships in McClelland v. F.C. of T., 70 ATC 4115 at p. 4210: (1970) 120 C.L.R. 487 at p. 495 to be saying that the second limb of sec. 26(a) is otiose.'' He went on to observe that ``once attention is given to the findings of fact made by the primary judge and to the conclusion that the first limb of sec. 26(a) has no application, it is impossible to avoid the further conclusion in the circumstances of this case that the profit did not arise from a profit-making undertaking or scheme.'' It is obvious from the language used that the decision that the second limb of sec. 26(a) had no application was very much dependent on the circumstances of the case.

18. In Burnside's case, Hogarth J. who heard the appeal in the first instance in the Supreme Court of South Australia, had found a profit-making scheme developed through changed circumstances after the original arrangements to acquire the Samin shares had been made. In expanding on his decision in Burnside's case, Mason J. stated at p. 4594, 77 ATC: -

``In the first place, where the profit in question arises from the purchase and subsequent sale of an asset and it is found that the asset was not acquired for the purpose of profit-making by sale it is very difficult to see how the profit can be said to arise from a profit-making undertaking or scheme (see
McGuiness v. F.C. of T. 72 ATC 4023 : (1972) 46 A.L.J.R. 279 ). In this case the difficulty becomes insurmountable because the finding in connection with the first limb of sec. 26(a) denies the existence of the relevant profit-making undertaking or scheme which is alleged to bring the profit within the second limb. For the Commissioner's claim is that the essence of the profit-making scheme lies in the purpose of acquiring the Samin shares and selling them at a profit. According to the Commissioner it is that purpose and that

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purpose alone which stamps the scheme with a profit-making character.''

19. In this reference, I have already concluded that, from the time the arrangements were made to secure the acquisition of unit 34 in January, 1969, there was no purpose held by the taxpayer of selling at a profit. If a profit-making undertaking or scheme is to be found, it must in my view be found in the circumstances antecedent to that date, somewhere between the first discussions at which agreement was reached to acquire the initial block of land which led to the Leaning Towers construction, and January, 1969. Counsel for the Commissioner also urged on the Board that the undertaking or scheme should be evaluated for its profit-making purpose in the light of the business ventures by the brothers, B and C, already described in the references of B & C Investments (B.113-117/1977 above) and the history of undertakings or ventures by them through the instrumentality of various company vehicles subsequent to the Leaning Towers venture and to the break in their business relationship which I shall describe later in summarising evidence in relation to C's reference, which break followed close on completion of the Leaning Towers project.

20. That the Leaning Towers profit evolved from the carrying out of an undertaking or scheme is apparent from the facts; whether or not the undertaking or scheme was entered upon by the taxpayer with a purpose of making a profit, is the essential question before the Board, vide Gibbs J. in
XCO Pty. Ltd. v. F.C. of T. , 71 ATC 4152 at p. 4155 -

``The second limb of sec. 26(a), unlike the first limb of that paragraph, does not refer in express terms to purpose but, in my opinion, a scheme is not a `profit-making scheme' simply because it yields a profit when none was intended; in the ordinary sense of the words a `profit-making scheme' is a plan devised in order to obtain a profit, and a scheme only answers that description if the taxpayer carries it out with the purpose of making a profit.''

The profit-making purpose is to be sought in the evidence before the Board; there is no presumption that, because the undertaking yielded a profit, it is a profit-making scheme in terms of sec. 26(a), vide Gibbs J. (supra).

21. The evidence in relation to the period prior to January, 1969 from B and C on behalf of their respective private companies, is that -

  • (i) they were invited by parties with whom they had been associated in the Garden Towers venture, to join in the Leaning Towers venture.
  • (ii) their purpose was to get units and hold them in the names of their private companies with the intention of letting them.
  • (iii) some time before unit 34 was reserved to B's private company, they became aware from cost surveys that they would not receive the six units they had anticipated and they sought and obtained the reservation of unit 29 to their interest. Because they did not want to be involved in further joint ownership - they were involved through B & C Investments and their various operating companies is a form of joint ownership - they made unit 29 available for sale.

The evidence, as I have already noted, was given freely and frankly and bore no indication of rehearsal or of holding back by either witness. I must record that I did not find B or C unacceptable as witnesses. C's evidence, on occasion, lacked certainty in the matter of dates and he sometimes confused, or needed prompting as to, the names of companies involved, but I ascribe these defects in his evidence to the fact that he was principally involved as a supervisor at the workface and not in planning and administration.

22. I have already indicated that I am prepared to draw no inference one way or the other from the fact of the early sale of unit 29 and that I find the evidence of B in relation to the sale of unit 34 overcomes any prima facie inference of purpose of profit-making by sale which might arise under the first limb of sec. 26(a) from the sale of that unit at a time proximate to its acquisition. I will content myself with observing - (without in any way deciding the matter) - in relation to unit No. 1 that I cannot find its retention and letting for a period of more than three years inconsistent with the purpose expressed by B in evidence.

23. Taking the view I do of the evidence in this reference in relation to the taxpayer's involvement in Leaning Towers, and observing the dictum of Barwick C.J. in the case of Gauci v. F.C. of T. 75 ATC 4257 at p. 4259, to the effect that " care must be taken not

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to treat the evidence of a citizen in contest with the revenue as prima facie unacceptable, " I cannot find in the other matters alluded to by counsel for the Commissioner, viz. the transactions of B and C through B & C Investments prior to the venture into Leaning Towers, and the transactions entered into in a completely re-organised working format subsequent to the break in working relationships that followed the completion of Leaning Towers, evidentiary material of sufficient weight to support the claim urged by counsel that the taxpayer company entered upon the Leaning Towers undertaking or scheme with a purpose of profit-making and that the sale of unit 34 was one step in carrying out, or giving effect to that profit-making purpose. Accordingly, I would direct that the assessment in respect of the year ended 30th June, 1970, be reduced to excise the amount of $8,089 being profit arising from sale of unit 34 in Leaning Towers.

References B.110-111/1977

24. These references are in relation to the participation of B's brother, C, through C's company C Investments, in the Leaning Towers venture. His evidence can be very briefly summarised: -

  • (i) He joined his brother, B, in the Leaning Towers venture per medium of his company C Investments ``to acquire a number of properties for rental purposes.''
  • (ii) Instead of the three units indicated by the projections, C, through his company, acquired title only to two and one-half units, the half-unit being unit 29 held jointly with his brother's company. The other units allocated to C Investments by the minute dated 11th June, 1969, were units 5 and 23.
  • (iii) C gave no explanation of the sale of unit 29. As I have noted in the decision on B.120/1977 the matter of unit 29 was not pursued in evidence apparently because of the Board's ruling that there was no reference before the Board in respect of an objection against the assessment of profit emerging from the sale of that unit. As for units 5 and 23, they were never furnished or listed for renting. They were not listed for sale until shortly before the first unit was sold in June, 1970.
  • (iv) Unit 23 was sold under a contract dated 29th June, 1970, and unit 5 under a contract dated 21st August, 1970.

25. C gave evidence that the cause of the sales and the reason for the failure to furnish the units and rent them in accordance with the intention professed by him on behalf of C Investments, were the eruption of a series of disagreements with his brother, B, which culminated in C selling his units, leaving the area and going overseas for a period of 12 to 13 months with his wife and family. Much detailed evidence was given by each of the brothers throughout the hearings of these references as to their respective versions of the causes, and the course of, the breakdown in relationships and I have no doubt that a very real breakdown in relationships did occur. Nor is it disputed by the Commissioner that C did in fact leave the area and travel overseas with his wife and family for a period in excess of twelve months.

26. C, in his evidence, set the timing of the dispute between the brothers, as commencing about March or April, 1969 and extending to the latter part of 1970. Towards the completion of Leaning Towers, which was occupied by July, 1969, the brothers through one of their construction companies had commenced a series of civil works contracts. These civil works involved extensive travel by C as supervisor, and were according to him - (and his evidence in this regard is supported in detail by B) - the cause of a ``lot of friction'' between the brothers. The civil engineering contracts were the direct cause of a long delay in the brothers' severing of their business relationships. C stated that, despite his desire to sever relationships and his refusal to join his brother in further ventures, the civil contracts recently entered into had to be worked through to completion or near completion - (B in his evidence testified that he oversighted the completion of two of the contracts) - before C could break off working relations with his brother.

27. By mid-1970, C, in an endeavour to provide a vehicle for his separate interests, incorporated a company C & Sons Pty. Ltd. through which he intended to operate as a builder in his own right following his return from overseas; that company is a partner with a similar company, formed by B around the same period, in the partnership of B & C through which all building operations, subsequent to C's return from overseas, have been conducted by the brothers. C finally left the area in July 1970 by which time he had booked passages overseas for his wife and

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family. The units were listed for sale at about this time and both were sold within a couple of months of listing. C's explanation in his own words of his retention of the units without furnishing them or renting them is contained in the answers to the following questions -

``Question: What was the reason for keeping the unit so long before it was sold?

Answer: Well I was in two minds about it at that stage because I still thought that it - and always did think that it was a good rental proposition and I was still seriously thinking about leaving it there. After all, I have got three children and I - you know, it's definitely on my mind always to sort of provide them with something, and it was only because of our difficulties on the other side of the businesses that I had numerous offers to sell it before this date, but I always resisted this urge because, well, once you sell it has gone, too, hasn't it?

Question: Why not furnish the unit and rent it in the meantime?

Answer: Well, at this date that it was sold you will note that this is only just a few weeks, or perhaps a couple of months before I actually went overseas and once I decided to go overseas and make a final break I could see no further purpose in keeping the unit sitting there empty or otherwise, and I decided that I would rather withdraw all my interest in this building.''

28. B gave evidence both in the reference in regard to his own private company (B.120/1977) and the reference in regard to B & C Investments (B.113-117/1977) which corroborated C's outline of the course of, and the reasons for, the breakdown in relations between them. B could give no evidence relevant to C's purpose in entering the Leaning Towers project other than that it was their joint purpose ``to acquire units'' - it was in fact the reason why they bought the first parcel of land in September, 1965. The following extract from B's evidence under cross-examination in respect of the reference concerning the profit emerging from the sale of unit 34 (B.120/1977) makes that clear -

``Did you discuss matters with your brother from time to time concerning the disposal of these units? - My units?

Yes? - No.

Did you discuss the disposal of his units at all? - Sir, we would have general conversations. I might say to him, `Well, I am going to do that,' or he might say that to me.''

I think it is quite clear from this extract that each regarded the units to be acquired from the scheme as his own personal assets, even though held in the company names, and that there was not joint planning as to how the units would be utilised.

29. Counsel for the Commissioner argued in this reference as he did in the immediately preceding reference (B.120/1977), that the profit was assessable by reason of sec. 25(1) of the Act, being income arising from the carrying on of a business by the taxpayer, C Investments. Alternatively, he argued that the profit was assessable under either or both limbs of sec. 26(a). For the reasons which I have outlined in the decision in relation to reference B.120/1977, I am not prepared to find that the profit on sale of the units represents the proceeds of a business activity of the taxpayer and assessable by reason of sec. 25(1).

30. As in reference B.120/1977, I find as a fact that the taxpayer acquired the units on the passing of the minute of the development company at the meeting of directors on 11th June, 1969, though it appears from the evidence that occupation of the units was not possible before July 1969. The units were listed for sale in May/June 1970 and sold by contracts dated 29th June, 1970, (unit 23) and 21st August, 1970, (unit 5). It is noted from the photostat copy of the first sheet of the contract of sale for unit 5 that the title for that unit does not appear ever to have been transferred out of the name of the development company. I find that the sale may fairly be described as having taken place at a time proximate to their acquisition by the taxpayer. Accordingly, having regard to the dictum of Barwick C.J. in Gauci's case ``the requisite purpose'' on acquisition of profit-making by sale can appropriately be inferred and the taxpayer bears the onus of overcoming that ``prima facie inference''. (I have already made it clear in my decision on reference B.120/1977 that I draw no inference, one way or the other, from the early sale of unit 29).

31. C, as the witness on behalf of the taxpayer, C Investments, sought to displace the onus by the profession of a purpose from

ATC 320

the very beginning of the Leaning Towers project of acquiring units for the purpose of letting them to derive income. Though he did not specifically say so, the tenor of his evidence appears to suggest that his failure to furnish and rent the units on acquisition arose from his unsettled state of mind - during the breakdown of relations with his brother - a long internal debate appears to have ensued as to whether or not to leave the area and go cruising or go overseas. And, finally, the sale was precipitated by the decision ``to go overseas and make the final break''.

32. Having weighed and tested this evidence very carefully, I have come to the conclusion that it does not overcome the prima facie inference of purpose of profit-making by sale to be derived from the sale of both units within a period of some thirteen months of acquisition. The purpose of acquiring units to let, so strongly espoused by C in his evidence on behalf of the taxpayer, was never carried into effect and no explanation of this notable omission was ever elicited from C except in terms of his answers to questions from his own representative which answers are quoted in para. 26 of these reasons. Nor do I consider those answers to be lacking in a degree of ambivalence; rather the answers suggest a man who at all times was resisting an ``urge'' to sell, one who kept the units in their pristine unfurnished condition with an eye to the opportunity of selling. Of some significance, too, to my mind, is the apparent fact that title to at least one of the units was never transferred to the taxpayer - a taxpayer who was determined to acquire units in its own name for the purpose of long-term investment. Further, the evidence of C received no corroboration of any sort from his brother.

33. I should add that I consider C to have been a completely straight-forward and honest witness who made no attempt to mislead the Board in any way. I am sure that his answers as to the purposes he entertained on behalf of C Investments at the time of entering the Leaning Towers venture are a considered and sincere reflection of his analysis of his recollection of the events of that period - some ten years prior to the hearing of these references. But a Board must have regard to the whole of the evidence and act on that evidence as it sees it. For the reasons to which I have drawn attention in the preceding paragraph, I cannot accept that the taxpayer has overcome the inference of a purpose of profit-making by sale that arises from the facts. Accordingly, sec. 190 requires that I confirm the decisions of the Commissioner on the objections which are the subject of these references, vide Barwick C.J. in Gauci's case at p. 4260, 75 ATC. Formally, therefore, in terms of subsec. (1) of sec. 195, I confirm the amended assessments in respect of years ended 30th June, 1970 and 1971 notices of which issued on 22nd August, 1975.


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