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

Judges:
Stephen J

Mason J
Jacobs J
Murphy J
Aickin J

Court:
Full High Court of Australia

Judgment date: Judgment handed down 18 April 1978.

Stephen J.: The taxpayer company, owner of the greater part of two small islands in inland waters north of Sydney, went into voluntary liquidation in March 1971, it having been resolved that its liquidator be empowered to distribute its assets in specie to contributories. Portuland Developments Pty Limited (``Portuland'') was the beneficial holder of the whole of the issued capital of the taxpayer and late in 1971 the liquidator of the taxpayer accordingly transferred title to these islands to Portuland.

The Commissioner then assessed the taxpayer to tax, treating this transfer as a disposal by it of trading stock within sec. 36(1) of the Income Tax Assessment Act 1936 and accordingly including in its assessable income an amount representing the value of the land transferred. The taxpayer was successful in an appeal against that assessment, the only issue in that appeal being whether sec. 36(1) was applicable in the circumstances.

Section 36(1) is as follows:

``36. - (1) Subject to this section, where -

  • (a) a taxpayer disposes by sale, gift, or otherwise of property being trading stock, standing or growing crop, crop-stools, or trees which have been planted and tended for the purpose of sale;
  • (b) that property constitutes or constituted the whole or part of the assets of a business which is or was carried on by the taxpayer; and

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  • (c) the disposal was not in the ordinary course of carrying on that business,

the value of that property shall be included in the assessable income of the taxpayer, and the person acquiring that property shall be deemed to have purchased it at a price equal to that value.''

Mahoney J. in the Supreme Court of New South Wales, in allowing the appeal, considered three distinct arguments: that the land was not trading stock, that even if it were it was not an asset of a business carried on by the taxpayer, and that in any event there had been no disposal of the land by it.

The Commissioner now appeals, contending that the land was trading stock to which sec. 36 applies. The respondent not only contests this but also maintains its contention, unsuccessful below, that there was, in any event, no such disposal as sec. 36 contemplates. It does not, however, seek to challenge the conclusion of Mahoney J. that the land was an asset of a business carried on by it.

The first matter to be decided is whether or not the land was ``trading stock'' within sec. 36(1). This resolves itself into two parts, a broad question whether land may ever be trading stock for the purposes of the Income Tax Assessment Act and, in particular, of sec. 36 of the Act, and a quite narrow one, whether in the circumstances of this case this particular land was trading stock.

Section 36(1) itself provides no clear answer to the broad question, save in the negative sense that there is nothing in its wording opposed to the inclusion of land in the term ``trading stock''. It is in other sections of the Act, especially in sec. 28-31, that there are said to occur indications which show that land cannot be ``trading stock'' for the purposes of the Act. Before examining those sections the particular meaning which the Act assigns to ``trading stock'' should be noticed. Section 6(1) of the Act includes the following provision:

```trading stock' includes anything produced, manufactured, acquired or purchased for purposes of manufacture, sale or exchange, and also includes live stock;''

The terms in which this statutory meaning are expressed throw little light upon whether land may be trading stock. I do not regard its use of the word ``anything'' as limiting the definition to chattels. ``Anything'' is a word of the widest meaning, as apt to describe land as to describe chattels; indeed it can also be applied appropriately enough to intangibles. One may speak of abstract ideas in this way, as in ``Anything speculative attracted his mind''. As the Oxford English Dictionary observes, the word is ``A combination of Any and Thing, in the widest sense of the latter, with all the varieties of sense belonging to Any''.

There is another aspect of this statutory meaning of trading stock which is of present relevance. It is whether it is a true definition, giving to ``trading stock'' when used in the Act an exclusive meaning, so that anything falling outside it will not be trading stock although answering that description according to common usage; or whether, on the contrary, it operates as merely expansive of what would otherwise be conveyed by the ordinary meaning of ``trading stock''.

In deciding this question one notes, at the outset, that the statutory meaning, by including in ``trading stock'' things acquired not only for purposes of sale or exchange but also for purposes of manufacture, enlarges the ordinary meaning of the term. Dictionary meanings of ``stock'', in the sense of stock-in-trade or trading stock, generally involve the concept of being kept on hand by a trader for sale by him and would not extend so as to include raw materials acquired for purposes of manufacture. The inclusion of live stock effects a further enlargement of the meaning of trading stock, a dairy farmer's milking herd, although ``live stock'', would not be trading stock as ordinarily understood. The statutory meaning uses the word ``includes'' rather than ``means'' and is, in that respect, to be contrasted with many of the other provisions of sec. 6(1). An examination of sec. 6(1) suggests that care has been taken to use ``include'' where it is not intended to substitute a statutory meaning for the ordinary meaning of words but, rather, to confer some meaning additional to the ordinary meaning. This intention has sometimes been obscured in sec. 6(1) by including meanings which would in any event be included in a word's ordinary meaning; the meaning given to ``trading stock'' provides an example of this. This is due, no doubt, to the draftsman's desire to avoid any possible doubt concerning the extent of the ordinary meaning. Nevertheless, in the case of a subsection constructed as is sec. 6(1), using both ``means'' and ``includes'', a meaning


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which is expressed in terms of ``includes'' and which may be seen to be at least partially expansive in its operation should not, I think, be treated as an exclusive definition, but rather as operating cumulatively upon the ordinary meaning of the word or phrase in question and conferring added meaning for the purposes of the Act. This whole question of the effect to be given to ``means'' and to ``includes'' in definition sections was extensively discussed in this Court in
Y Z Finance Co. Pty Ltd v. Cummings (1964) 109 C.L.R. 395 . Nothing in the majority judgments in that case requires, I think, any different conclusion in the present case.

The importance of this conclusion in the present case lies in the use made of the purpose of acquisition in the statutory meaning of ``trading stock'' in sec. 6(1); only that which is acquired for one of the specified purposes, ``manufacture, sale or exchange'', is given the statutory character of trading stock. Mahoney J. has held that the land here in question was not acquired with any such purpose. That would be enough to conclude the matter in favour of the taxpayer if the statutory meaning is an exclusive definition. However, if, as I believe, the statutory meaning only operates cumulatively upon the ordinary meaning of trading stock, it will be necessary to consider whether, at any time after acquisition, this land became trading stock, in the ordinary meaning of that term, in the hands of the taxpayer. Such enquiry belongs, however, to what I have called the second and narrower question concerning trading stock and must be deferred until the terms of sec. 28-31 of the Act have been examined for those indications which they are said to contain that when ``trading stock'' is used in the Act it is not intended to extend to land.

Three features of the drafting of these sections are relied upon. First, the repeated use of the phrase ``on hand'' to describe the trading stock in question is said to be inappropriate to land, which, unlike chattels, is not spoken of as being ``on hand''. Curiously enough, one of the examples given in the Oxford English Dictionary, in a passage from Lytton, uses ``on hand'' in the relevant sense in relation to an ``abode... which had so evidently hung long on hand''; I see no reason why it is inappropriate, when speaking of a trader in land, to refer to the various parcels of land which he has for sale as being land which he has ``on hand''.

Then the phrase ``each article of trading stock'', and variations of it, which appear in these sections, are said to be inappropriate to apply to land. The phrase appears in sec. 29 and 31 when reference is being made to the value of each distinct item or unit of a taxpayer's trading stock. It is used to describe each item, the sum of which make up a taxpayer's stock, and to each item of which a value is to be assigned. If that which is traded in happens to be land it is no less appropriate to speak of each parcel of land, capable of being separately dealt with and valued, as an article, than it is to speak in this way of units of any bulk commodity, be it wheat, wool, wine, coal or petrol. The use of ``article'' is, perhaps, not elegant, but if elegance of language is to be a criterion of what is intended by ``trading stock'', bulk commodities generally would seem also to be excluded. I regard the use of this phrase in these sections, used as it is to denote individual items of stock, as no sufficient indication that land is to be excluded from ``trading stock''.

The third feature relied upon is the use of the words ``replaced'', ``obsolescence'' and ``of the same kind'' in various parts of sec. 31. It is said that any parcel of land is, inherently, both unique and incapable of obsolescence, so that these words are inapt to refer to land. An examination of the use made of the first two of these words in the section disposes of this argument: ``replaced'' and ``obsolescence'' each occurs in the description of only one of the three alternative courses open to the taxpayer or the Commissioner (as the case may be) and, if it be the case that the nature of land renders them inappropriate, the consequence is only that in the case of land the choice of courses is narrowed down to only two. The phrase ``of the same kind'', in the sense in which it is used in sec. 31(2)(c), is, I think, as readily applicable to some parcels of land, for instance some subdivisional lots, as it would be to some paintings or sculptures in an art-dealer's trading stock or to some jewellery, precious stones or bloodstock in the stock-in-trade of a jeweller or dealer in racehorses; no doubt in all these cases some items of stock would be unique: if so, para. (c) would be inapplicable but it does not follow that the whole of the provisions of the Act dealing with trading stock are thereby rendered inapplicable.

Since sec. 36 itself contains nothing suggesting that ``trading stock'' is necessarily inapplicable to land and since the term, both in


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its ordinary meaning and in the extended meaning given by sec. 6(1), is wide enough to include, in appropriate circumstances, land, I reject the taxpayer's submission that land can never be trading stock for the purposes of the Act and, in particular, of sec. 36. I am fortified in that conclusion by three considerations. The first concerns the nature of this legislation. As its short title indicates, it is a measure for the imposition, assessment and collection of a tax upon incomes. Except where specific provision is made for specific cases, the Act is concerned quite generally with income however derived and, except by express mention, does not discriminate between particular income-generating sources. To exclude from the concept of ``trading stock'' the parcels of land in which a dealer in land trades would be to make such a discrimination solely by reference to the particular subject-matter traded in; yet it is with the trader's income that the Act is concerned and not with the particular subject-matter in which the trade is carried on. Clear words or compelling necessity would, I think, be required if the quite general provisions dealing with trading stock were to be made inapplicable to particular trades because of the nature of that which was traded in. I do not find either in the provisions of the Act.

The second consideration in a sense echoes the first. In
Commr. of Taxes (S.A.) v. Executor Trustee and Agency Co. of South Australia Ltd. (Carden's case) (1938) 63 C.L.R. 108 , at p. 156 , Dixon J. said ``The basis of a trading account is stock on hand at the beginning and end of the period and sales and purchases''. As his Honour explains at p. 155, it is impracticable to estimate income from trade otherwise than by means of a profit and loss account and the computation of profits from trading ``has always been upon the principle that the profit may be contained in stock-in-trade...''. Only by taking account of stock-in-trade in the conventional way can a correct reflex of the trader's income for the accounting period be obtained. Within the framework of the Australian tax system, with its assessment of tax upon the excess of assessable income over allowable deductions, it is the provisions of sec. 28-31 which ensure such a correct reflex in the case of stock-in-trade. To remove from the operation of these sections transactions in one type of trade, trade in land, would be anomalous. A land dealer who carries forward from one financial year to the next subdivisional lots as part of his stock-in-trade may wish to reflect in his accounts for tax purposes at the end of the first year their gain or loss in market value, as compared with cost, thereby ``spreading'' his ultimate realized gain or loss. If he does so his true financial position will have been the more accurately reflected in his taxable income. He may do this only because of the options afforded to him by sec. 31(1) and then only if his land is ``trading stock'' for the purposes of the Act.

In the judgment under appeal Mahoney J. cited a passage from the speech of Lord Reid in
Duple Motor Bodies Ltd. v. Ostime 39 T.C. 537 at pp. 569-570 . Portion of that passage illustrates how integral in the computation of a trader's income is the reckoning of stock-in-trade on hand: his Lordship said: -

``... long ago it became customary to take account of stock-in-trade, and for a simple reason. If the amount of stock-in-trade has increased materially during the year then in effect sums which would have gone to swell the year's profits are represented at the end of the year by tangible assets, the extra stock-in-trade which they have been sent to buy; and similar reasoning will apply if the amount of stock-in-trade has decreased. So to omit the stock-in-trade would give a false result.''

The third consideration is that in
Investment and Merchant Finance Corporation Ltd. v. F.C. of T. 71 ATC 4140 ; (1971) 125 C.L.R. 249 this Court held that shares in the hands of a trader and held by him for sale were stock-in-trade, and this despite the fact that some of the phrases upon which the taxpayer has relied in the present case are no more apt when applied to shares than when applied to parcels of land. The decision in that case does, I think, present formidable difficulties for the taxpayer's present argument.

In considering this question I have had reference to, although I have not specifically cited, those reported cases in which land has been spoken of in judgments as stock-in-trade, trading stock or the like. I have also had regard to those judgments in which passing but inconclusive reference has been made to the question whether land may be ``trading stock'' for the purposes of the Income Tax Assessment Act. That question has also arisen quite directly for decision on a number of


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occasions before Boards of Review and the reasons of Mr. Dempsey in Case F58,
74 ATC 326 , provide ready reference to those instances. However in no precedent decision of an Australian Court has the present question squarely arisen for decision.

It is for the foregoing reasons that I have concluded that land may be ``trading stock'' for the purposes of the Act and, in particular, for the purposes of sec. 36.

I turn now to the narrower question whether this land on these two islands was trading stock when transferred to Portuland late in 1971. His Honour, in the course of this part of his judgment, referred to but did not decide whether for the purposes of the Act the statutory meaning given to ``trading stock'' by sec. 6(1) was exclusive of the ordinary meaning of the term; instead he left the matter unresolved and referred to Investment and Merchant Finance Corporation where, at ATC p. 4149; C.L.R. p. 269, Walsh J. had done likewise. Nevertheless, as I would understand his Honour's judgment, he did in fact test the character of this land as trading stock of the taxpayer by reference both to the ordinary meaning of that term and to its statutory meaning. For the purposes of the first his Honour was, of course, concerned with the land in the state in which it was transferred to Portuland, having undergone some degree of transformation while in the taxpayer's hands.

The evidence showed that what the taxpayer had bought, the greater part of two low-lying islands in tidal waters, had to be very much altered in appearance and in facilities before it would reach a state in which it could be described, in the hands of the taxpayer, as anything resembling a number of marketable parcels of land such as the taxpayer intended to sell. To comply with Public Health Department requirements the entire surface of one of the islands had to be raised to a specified elevation above datum. In addition, in order to be permitted to subdivide and sell the land in residential lots, the taxpayer would have to undertake some major bridge construction work, albeit less than initially anticipated, the building of extensive sea walls and the construction of an entire system of canals; much dredging of sand had to accompany this work and all this had to be completed before carrying out the more normal clearing, levelling, draining, and road construction work usually involved in large scale subdivisional development. What the evidence did not disclose was precisely how much of this work had been undertaken, and with what effect upon the character of the land, by the time the taxpayer transferred it to Portuland. However, doing the best he could with the available evidence, his Honour concluded that at the time of transfer the land was still not in any state ready for sale in lots. The land was, he said, referred to in argument, and without any qualification, as then being still ``land in globo''; argument, it seems, proceeded before his Honour upon that footing. His Honour accordingly concluded that at the time of transfer the land had not ``been converted into trading stock'', that it was not then in such a state that subdivisional lots had been created and were available for sale.

To the extent to which his Honour was led to this conclusion by the common assumption of the parties during argument, his conclusion should not, I think, be lightly departed from on this appeal. It was, moreover, a conclusion open to his Honour upon such evidence as bore on the point and it should not now be disturbed.

I would not myself regard it as always conclusive of the question whether land owned by such a taxpayer as the respondent is ``trading stock'' according to the ordinary meaning of the term, that the land is not, at the relevant time, available for sale in subdivided lots. For assets of a taxpayer to form part of his trading stock they will, I think, generally speaking, require to possess the character of being substantially in the state in which the taxpayer intends to trade in them. For this reason the particular trade of the taxpayer will be critical. To a trader in broad acres his stock of broad acres will be trading stock, but if his trade, and by this I refer to that which he sells, is in subdivisional lots it will generally only be subdivided lots that qualify as his trading stock and they will become a part of that stock when, by whatever processes of improvement may be involved, they come substantially to answer the description of that which he trades in. However, it may be that cases will arise in which such a trader's stock can be shown to include not only lots ready for sale but also broad acres ready for prompt conversion into lots as and when the time is ripe for their sale; whether or not this will be so in any particular case will be a matter of fact for decision when the case arises.


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Having regard to his Honour's understanding of how the case was put on the Commissioner's behalf, the present case is not, I think, one in which, on this appeal, this Court should entertain the view that, by the time of its transfer to Portuland, this land, although not yet subdivided, had reached a state in which it was trading stock in the ordinary meaning of that term. It was, in my view, clearly not in that state when acquired by the taxpayer. Despite the extensive work carried out on it while owned by the taxpayer, the parties apparently treated it as still devoid of any of the characteristics of subdivided land when it was transferred to Portuland. In the circumstances his Honour was, in my view, entitled, in the absence of any evidence that it fell within what I have suggested as a possible exception to the general position, to conclude that it was not then trading stock as ordinarily understood.

His Honour next turned to what was apparently the substantial contention urged on behalf of the Commissioner at the trial, that the statutory meaning of trading stock in sec. 6(1) applied to this land so as to make it trading stock of the taxpayer. His Honour, correctly in my view, attached importance to the reference to ``purposes'' in the statutory meaning. He concluded that when the taxpayer purchased the land its condition was such that the taxpayer's purpose could not properly be described as then being that of sale. It was, rather, that of converting the land to a different condition by carrying out substantial work on it, of rendering it saleable in lots and only then of selling off those lots. His Honour regarded it as essentially a question of fact and degree in each case whether the work necessary to convert land into its intended saleable state was such as to preclude the land from being trading stock; he made it clear that not every case where land had to some extent to be worked upon to bring it into a saleable condition was for that reason to be excluded from trading stock as statutorily defined.

His Honour did, I think, correctly regard the critical time, so far as concerns the statutory meaning of trading stock, as the time of purchase since the statutory criterion of purpose is related to purpose at the date of purchase. The facts of this case, and in particular the very extensive nature of the work which had to be done before any question of subdividing the land could be entertained, do, in my view, provide ample grounds for his Honour's conclusion that, at the time of purchase by the taxpayer, the land did not answer the description in sec. 6(1), that of land purchased by this taxpayer for purposes of sale.

It follows that I regard as correct his Honour's view that neither according to its ordinary meaning nor according to the meaning given to it by sec. 6(1) was this land trading stock in the hands of the taxpayer.

This conclusion necessarily leads me to decide that the Commissioner was wrong in applying sec. 36(1) of the Act to the value of the land transferred to Portuland. However before leaving this case I should deal briefly with one particular submission made on the Commissioner's behalf on this appeal. It was said that it was wrong to pay regard to the particular state or condition of the taxpayer's land at any particular time, that this mattered not at all in determining whether that land was trading stock. This was said to be so either because what is in question in the case of land is an estate in fee simple in respect of a particular area of the Earth's surface, something incapable of being affected by changes in the condition of that surface: or else because, even if what is in question be regarded not as the legal estate but as the material substance, it is of a character which is inherently unaffected by changes in its condition. Either of these views may be well enough in many statutory contests but not, I think, when trading stock is in question and is legislated for as it is in sec. 28 to 37 of the Income Tax Assessment Act. In such a context it is very much with practical matters, with dealings by merchants, that the legislation is concerned. It is the tax treatment of that which merchants keep for dealing in that is being legislated for, and then only so long as it is in substantially the condition in which it is to be dealt in, so that it forms part of the merchant's stock-in-trade, kept by him to meet his trading needs.

In view of my conclusions concerning the inapplicability of sec. 36(1) to the taxpayer's land it is unnecessary that I should go on to deal with the submissions made as to whether there was here any such disposal as is contemplated by sec. 36(1). I would dismiss this appeal.


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