Case P51
Members: HP Stevens ChJR Harrowell M
BR Pape M
Tribunal:
No. 1 Board of Review
J.R. Harrowell (Member)
I have had the opportunity to read the decision of my colleague Mr. H.P. Stevens, Chairman. I agree with his findings of fact and with his final conclusion with these further comments of mine.
2. For the year ended 30 June 1974 the taxpayer returned a taxable income of $13,424. The Commissioner by notice of assessment dated 19 March 1975 increased that figure to $45,956, the difference being explained on the attached adjustment sheet as follows:
$
Taxable income as
returned 13,424
Balance of the sur-
plus on disposal of
the (subject) prop-
erty (vide 1973 ad-
justment sheet) 32,532
_________
Taxable income $45,956
_________
3. The 1973 adjustment sheet contained the following details:
$ $
Loss as returned 25,607
Deduct:
Loss carried
forward 81
Proportion (1/2) of
the surplus
received on the
disposal of the
(subject) property
considered to be
assessable income 32,533 32,614
________ ________
7,007
Less:
Previous years
losses recouped
as under -- 1972
Loss brought
forward 81
Recouped 81 81
______
Loss carried
forward nil
______ ________
Taxable income $6,926
4. The taxpayer's 1973 return of income contained the following references to movements in reserves and the calculation of stock:
``SCHEDULE 4 - MOVEMENTS IN RESERVES
The company sold 14-20... Street,... on 30 March 1973 for $136,540. One half of the selling price was paid to the company on exchange of contract with the balance payable on 10 August 1973. Accordingly one half of the surplus of $65,065 was realised at 30 June 1973 and has been transferred to an asset realisation reserve. The balance will be realised on 10 August 1973 and in the meantime has been transferred to a deferred asset realisation reserve.
The properties at 18-20... Street were acquired by the company in September 1969 for the purpose of carrying out a profit-making scheme of building home units for resale. The company lodged a development application with the... Municipal Council on 27 February 1970 which was rejected because of excessive site coverage and inadequate landscaping. The council advised the company that if it purchased an adjoining property the application would be successful. Offers made by the company to purchase 14-16... Street and 24... Street were rejected. The company received an offer to sell the properties in January 1971 which was rejected because it still intended to develop the property. In March 1971 the company purchased 14-16... Street after it was offered for sale. The company's builders immediately approached the council with the view to establishing the type of development that would be most favourable to the council.
The company's managing director (witness' husband), was involved in a serious accident on 8 July 1971 and later suffered from a heart attack. The company had at this stage entered into a contract to build nine home units at... Street. It was therefore decided to postpone the development of... Street. The company received an offer to buy the... Street properties in November 1971. As (witness' husband) was still seriously ill the company decided that it would sell the properties.
ATC 239
The company did not purchase the properties for the purpose of profit making by sale. The properties were purchased as part of a profit-making undertaking which it did not proceed with because of (witness' husband's) illness. Accordingly, the surplus on sale is not assessable income.
SCHEDULE 11
Basis of Valuation of Stock and Method used:
- (a) Basis - Cost
- (b) Method - Books of Account.''
5. The following objection dated 26 March 1975 was lodged on behalf of the taxpayer:
``We hereby object on behalf of the above taxpayer against the assessment based on income derived by it during the year ended 30 June 1974 and issued by notice of assessment dated 19 March 1975 and claim that the taxable income should be reduced to $13,424 upon the following grounds:
1. Surplus received on disposal of the (Z) Street property is not assessable income under any provision of the Income Tax Assessment Act.
2. The taxpayer did not acquire the said property for the purpose of resale at a profit.
3. The property concerned did not constitute trading stock of any business carried on by the taxpayer.
4. The taxpayer is entitled to a deduction for previous year losses in terms of sec. 80 of the Income Tax Assessment Act.
As pointed out in the taxpayer's 1973 income tax return the land was initially purchased for the purpose of constructing home units for resale. A series of factors which included a heart attack suffered by the taxpayer's managing director forced the company to abdicate from its proposed course of action and subsequently the property was sold.
It is our opinion that the sale of the property had no element of a business deal as countenanced in McClelland's case; sale of the property was effectively the realisation of a capital asset which had not yet been committed to any business venture.''
6. The 1973 year is not before the Board and as I read this objection, in conjunction with the wording on the 1974 adjustment sheet, the word ``surplus'' means the figure of $32,532, being one half of the total surplus of $65,065 which the Commissioner has treated as income in the 1974 year now before the Board.
7. The taxpayer company was incorporated on 10 July 1964 and lodged its first return of income for the period ended 30 June 1965. In that and all subsequent returns its nature of business was described as ``Property Development''. The Chairman has fully dealt with the company's land and property transactions since incorporation. It is sufficient for me to say that the subject land prior to sale was treated in the company's trading account as trading stock throughout the years it was owned by the taxpayer.
8. By contract of sale dated 30 January 1973 the subject land was sold for $136,540 and settlement was as follows:
$ $
Deposit on signing 13,654
Cash on completion 54,616 68,270
________
Balance shall be
deemed to have
been paid by the
Purchaser to the
Vendor on the
Purchaser
executing a first
legal mortgage
over the security
of the property
hereby sold to
secure the said
sum of . . .
($68,270)
repayable on the
10 August 1973 68,270
_________
136,540
_________
9. The mortgage was duly executed on 30 March 1973 and it required the principal $68,270 to be repaid on 10 August 1973. In
ATC 240
accordance with terms of the contract of sale the mortgage contained a special condition that the principal would not be repaid before that date.10. On these facts I find that the subject land was sold on 30 March 1973. The receipt of $68,270 on 10 August 1973 was not the proceed from a sale; it was the repayment of a principal sum due under a mortgage. For this reason I consider that the whole of the resulting surplus ($65,065) should have been treated as being derived during the year ended 30 June 1973.
11. It was argued by the taxpayer's representative that the matter fell within sec. 26(a) not sec. 25(1). He argued that the taxpayer purchased the subject land not for the purpose of profit making by sale (sec. 26(a) first limb) but as a profit-making undertaking or scheme where the company would be selling units it had erected on that land (sec. 26(a) second limb). He further argued that the company's other land transactions, excluding the properties purchased as fixed assets, were separate ventures each falling within sec. 26(a) second limb, not sec. 25(1). In other words the company had not been carrying on business since its incorporation.
12. Alternatively he argued that if the surplus of $32,532 was taxable, which the taxpayer did not concede, it was not taxable in the 1974 year.
13. Counsel for the Commissioner submitted that the matter should be dealt with under sec. 25(1) and the taxpayer's alternate argument was not covered by the grounds of objection.
14. Dealing with the alternate argument first I agree that the surplus of $32,532 should be dealt with in the 1973 year but I find that it was not open to the taxpayer to so argue ``as the grounds (of objection) were not intended to cover the point that has been made and that they would not convey it to the Commissioner'' (
Dixon
J., as he then was, in
A.L. Campbell
&
Co. Pty. Ltd.
v.
F.C. of T.
(1951) 82 C.L.R. 452
).
15. I return to the main argument
-
that the matter should be dealt with under the second limb of sec. 26(a), not sec. 25(1). These two sections have been the subject of much judicial thought but in my opinion I need only to refer to
F.C. of T.
v.
Whitfords Beach Pty. Ltd.
82 ATC 4031
. In that case
Gibbs
C.J. dealt in detail with the relationship between sec. 26(a) and sec. 25(1). On the facts of this case it seems quite clear that the taxpayer company was carrying on the business of property development. Except for the properties it purchased to hold as fixed assets it did nothing else but purchase land for the purpose of developing for subsequent resale. To argue that each of these transactions were not part of a business but instead were entirely separate undertakings or schemes flies in the face of the information contained in the company's returns of income and the audited financial accounts and the directors' reports thereon for the ten years ended 30 June 1974. As
Barwick
C.J. said in
Investment and Merchant Finance Corporation Ltd.
v.
F.C. of T.
71 ATC 4140
at p. 4142;
(1971) 125 C.L.R. 249
at p. 255
:
``In the first place it is an error in my opinion to think that the transactions of a business can be taken item by item and each treated as falling within sec. 26(a). The business must be regarded as a whole its receipts being assessable income from which the permitted deductions are to be deducted. Section 26(a) is intended in my opinion to deal with transactions which are entire in themselves and do not form part of a more extensive business. In that event they are regarded as yielding a profit which will be calculated according to the circumstances of the transaction, the profit only being assessable income.''
In the same case Menzies J. said at ATC pp. 4146-4147; C.L.R. p. 264:
``I do not think that every business that involves the buying and selling of stock in trade is to be fragmented into a large number of separate transactions and the dealer taxed on the aggregate of the profits derived from each transaction considered separately... It is significant that sec. 26(a) defines but one item to be included in assessable income, and, in my opinion, the whole of the carrying on of a business of buying and selling is not to be comprehended within sec. 26(a), nor does that provision aptly apply to the particular dealings constituting, in total, the carrying on of a business.''
ATC 241
16. The taxpayer's representative submitted that at the time the subject land was purchased it was the taxpayer's intention to build units on it and to sell those units. However because of the ill health of the governing director and the local council's refusal to approve the company's building plans it was decided that the taxpayer would not proceed with that ``undertaking or scheme'' and so the land was sold. In his view the subject land was not trading stock but was part of ``a profit-making undertaking or scheme'' falling within the terms of the second limb of sec. 26(a). He concluded that when the taxpayer abandoned that scheme the surplus on the sale of the land was not taxable.
17. For the reasons already stated I have concluded that the company was carrying on business and that the subject land was trading stock. It seems to me that the failure to receive the appropriate approval from a local council is a normal hazard facing those engaged in the business of land development. In this instance the approval to build was not obtained and as a consequence the taxpayer disposed of the trading stock (the subject land). In my opinion the proceeds from that sale form part of the taxpayer's assessable income under sec. 25(1).
18. I uphold the Commissioner's decisions on the objections and the assessment of primary tax and the assessment of Div. 7 tax.
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