Whitfords Beach Pty. Ltd. v. Federal Commissioner of Taxation.Judges:
Full Federal Court
Bowen C.J., Morling and Fitzgerald JJ.
The taxpayer, Whitfords Beach Pty. Ltd., having unsuccessfully objected to amended assessments of income tax in respect of the income years ended 30 September 1972, 1973 and 1974 and an assessment in respect of the income year ended 30 September 1975, appealed to the Supreme Court of Western Australia [reported at 78 ATC 4211]. Wickham J. dismissed the appeal. An appeal from the Supreme Court by the taxpayer was allowed by a Full Court of this Court by a majority: 79 ATC 4648. A further appeal by the Commissioner of Taxation to the High Court of Australia was allowed: 82 ATC 4031; (1982) 56 A.L.J.R. 240. The judgment of this Court was set aside and in lieu thereof it was ordered that the appeal from Wickham J. to this Court be dismissed. However, the order of Wickham J. was varied by deleting para. 2, 3, 4 and 5 thereof and the proceedings were remitted to this Court. The result was to leave it to this Court to decide part of the original appeal from Wickham J. which the majority of the previous Full Court of this Court had found it unnecessary to determine.
The High Court held that the proceeds of sale of any part of the taxpayer's land at Whitfords Beach in each of the relevant income years constituted assessable income of the taxpayer under subsec. 25(1) of the Income Tax Assessment Act 1936 (``the Act''). It is common ground between the parties that the amount to be included in the taxpayer's assessable income each year is the amount of the taxpayer's profit from the material sales: see per Gibbs C.J. 82 ATC at p. 4039; 56 A.L.J.R. at p. 245. It is also common ground between the parties that the land was not trading stock of the taxpayer and that the profit is to be calculated by deducting, inter alia, the value at the relevant date of the land sold from the gross proceeds of sale. It is also common ground between the parties that the relevant date at which the land sold is to be valued is the date at which
ATC 4279the taxpayer's business of developing, subdividing and selling land at Whitfords Beach extended to that part of the land; or, in other words, the date when that part of the land was ``ventured in'' or ``committed to'' the taxpayer's business: cf.
F.C. of T. v. N.F. Williams 72 ATC 4188; (1972) 127 C.L.R. 226.
The parties are agreed that the role of this Court is limited to determining the relevant date or dates when the taxpayer's land at Whitfords Beach, or the various parts of it sold in the material income years, were ventured in the taxpayer's business. An agreed statement of issues put before Wickham J. contains the following paragraph:
``4. The parties are agreed that should the Court hold against the taxpayer's contention that no part of the proceeds for sale constitutes assessable income of the taxpayer, then the Court having determined the relevant date or dates or criterion for determining the date or dates in which the subject land or part thereof is to be valued the hearing of the appeals should stand adjourned to enable the parties to attempt to reach agreement as to the value or values, at the date or dates held by the Court to be appropriate and that -
- (a) there be liberty to either party to re-list the appeals for further hearing, should the parties be unable to reach agreement as to the correct value or values; and
- (b) in any event, if agreement is reached, then there be liberty to either party to apply to re-list the appeals in order that judgments be entered accordingly.''
The facts have been fully recorded in the judgments of Wickham J., the members of the previous Full Court of this Court, and the members of the High Court. There is no need to repeat them in detail. The presently material primary facts are not really in dispute.
The taxpayer was incorporated in 1954 and immediately acquired the land at Whitfords Beach, an area of approximately 1,584 acres of undeveloped land contained in two separate titles, one relating to approximately 1,544 acres and the other to approximately 40 acres. Planning restrictions precluded any further subdivision of the land at that time. The taxpayer did not acquire the land for the purpose of profit-making by sale or for any business purpose.
At 20 December 1967, the land remained incapable of subdivision but its value had increased greatly. The parties are agreed that the value of the land at that date was $3.1 million. 630 acres of the land was then zoned deferred urban, 80 acres was zoned parks and recreation, and the remainder was zoned rural.
On 20 December 1967 the then shareholders of the taxpayer sold the entirety of their shares to three purchasers. The purchase price was $1,600,000. The purchasers were the National Mutual Life Association of Australasia Ltd. (National Mutual) as to fifty per cent, Martindale Pty. Ltd. (Martindale) as to twenty-five per cent, and F.D. O'Sullivan Pty. Ltd. as to twenty-five per cent. Martindale was a company controlled by Mr. J.A. McCusker. F.D. O'Sullivan Pty. Ltd. was a company, now called General Development Corporation Pty. Ltd. (G.D.C.), controlled by Mr. F.D. O'Sullivan. Mr. O'Sullivan also controlled a company which traded under the business name of the General Agency Co. The three companies bought the shares in the taxpayer only to obtain control of the land and with the intention that the taxpayer would cause the land to be developed, subdivided and sold as residential sites at a profit. In addition, some of the land was to be used as sites for commercial purposes.
The intention of the taxpayer as and from 20 December 1967 is well established by contemporaneous documents and other evidence adduced before Wickham J. The proposal then and thereafter was always to develop, subdivide and sell the whole of the deferred urban and rural land. It was envisaged from the outset that there would be a comprehensive plan relating to the entire land but that development and subdivision would occur in stages. Initially it was contemplated that the whole of the deferred urban land would be rezoned, developed, subdivided and sold prior to any of the rural land.
A number of significant events occurred on 20 December 1967, the day on which the shares in the taxpayer changed hands. At a series of meetings of directors and shareholders of the taxpayer, transfers of the shares in favour of National Mutual, Martindale and G.D.C. were registered, and new directors, appointed by those transferees, replaced the previous directors. An entirely new set of articles of association was adopted. National Mutual, Martindale and G.D.C. executed a loan agreement defining their respective rights and obligations inter se. The taxpayer by deed appointed Martindale and G.D.C. to be joint managers of the project for a term expiring on 31 December 1982 subject to earlier termination in prescribed circumstances. Their task was:
``... to do all within their power to develop and subdivide into urban allotments such part or parts of the land as the Company may from time to time direct and to sell the land or such part or parts thereof as the Company may from time to time direct in urban subdivisional allotments and generally to ensure that the land is developed subdivided and sold to the best advantage.''
The taxpayer also entered into a contract with the joint managers, who agreed to prepare a plan for development of the land, to prepare a budget and a forecast of expenditure and receipt for the various stages of development, subdivision and sale, and to furnish reports, budgets, and accounts from time to time. The joint managers were empowered to pay all rates, taxes and charges on the land, to employ surveyors and contractors, to seek rezoning and other facilities, to negotiate loans on the security of the land, and (within limits fixed by the taxpayer) to fix the price, terms and conditions of sale of subdivided allotments and (again within limits fixed by the taxpayer) to enter into contracts of sale on the taxpayer's behalf. They were also authorized to appoint agents for the sale of the land. It was expressly provided that such agents might be remunerated at the appropriate Real Estate Institute scale notwithstanding that Martindale or G.D.C. or McCusker or Mr. O'Sullivan might have an interest in such agents. Subsequently, General Agency Co. was appointed by the general managers as the developing and selling agent.
The joint managers were obliged, inter alia, ``to provide for the cost of the development and provision of necessary services to the land in connection with the subdivision thereof by arranging a first mortgage loan for the required amount on security of the land on the best available terms and conditions''. They were not, however, to enter into any firm arrangement for a first mortgage loan without first giving National Mutual the opportunity of making available such a loan on security of the land. The joint managers were entitled to be reimbursed for their expenditure and certain of their costs, but the moneys received by them arising out of the development, subdivision and sale of the land or any parts thereof were to be the property of the taxpayer. Later (on 2 May 1972) a new management agreement was made, bringing in another company, Inchcape (W.A.) Pty. Ltd., as joint manager, but the terms of the new agreement were not significantly different from the old.
Following 20 December 1967 the joint managers proceeded promptly with their task. A project co-ordinator was appointed, and his reports show that a search for a water supply was undertaken, negotiations were started with a local authority for the construction of a road, and preliminary consideration was given to engineering, surveying and planning requirements including sewerage and other essential services.
The joint managers were continuing with their efforts when, in June 1969, a new direction and impetus was provided to the execution of the taxpayer's plans when the government of Western Australia intervened to encourage the speedy development and sale of housing lots of land in the northern corridor from Perth, a corridor which included the taxpayer's land. Representatives of the taxpayer were summoned to a meeting with a Cabinet subcommittee of the government of Western Australia, and the Cabinet view was stated that the taxpayer's land ought speedily to be developed and sold. Thereafter planning proceeded with expedition and with the active
ATC 4281encouragement of government agencies. Planning and subdivisional approvals were negotiated with government instrumentalities, and some exchanges of land were effected in order to meet the requirements of planning authorities.
The taxpayer's urban deferred land was rezoned urban by notice published in the Gazette on 17 October 1969. Rural land was also rezoned. The first application for subdivision was lodged on 23 March 1970. It covered part of the land previously zoned deferred urban and part which had been zoned rural. Subdivision was approved subject to conditions on 8 April 1970. Work was carried out to fulfil the conditions and the Town Planning Board endorsed its approval of the subdivision. The first survey plan providing for 272 lots was lodged at the Titles Office on 3 December 1970. Once the first stage was in the course of development and subdivision, further areas were developed and subdivided, and numbers of different stages proceeded at the same time. National Mutual financed the development in the form of loans to the taxpayer which the taxpayer repaid from the proceeds of sale.
Sales commenced in January 1971. Within weeks two hundred lots had been sold. Overall, during the income years in question, about half of the land, a considerable proportion of which had originally been zoned rural, was sold. All the sales of the land were made as subdivided vacant lots. The taxpayer has relied throughout on the services of its joint managers. It has not maintained any premises or place of business, nor has it employed any staff.
The amounts actually spent on development on the one hand, and sales proceeds on the other, were:
Year Outgoings Sales proceeds $ $ 1970 345,000 1971 1,265,000 490,000 1972 887,000 1,420,000 1973 885,000 2,688,000 1974 1,523,000 1,572,000 1975 843,000 1,710,000
Obviously, there were outgoings prior to 1970, e.g. costs in connection with rezoning and survey costs.
The taxpayer's primary argument was that its business commenced in relation to each part of the land which constituted a separate stage of development only when the physical work was completed and the Town Planning Board's approval of the subdivision was endorsed on the plan for that stage prior to it being lodged for registration. This submission was based upon the premise that sale, or at least unconditional sale, of the allotments prior to that time would not have been permissible under the Town Planning and Development Act (W.A.). It was contended that a business of development, subdivision and sale could not be conducted prior to the point at which sales were lawful. This argument, which is plainly untenable, may well be in conflict with what was said by the High Court in this case, although it is unnecessary to pursue whether that is so: cf.
F.C. of T. v. St. Hubert's Island Pty. Ltd. 78 ATC 4104; (1978) 138 C.L.R. 210. Even if the premise related to the Western Australian legislation is correct, there is obviously no reason why essential activities which chronologically must have preceded the sales did not occur in the course of and form part of the taxpayer's business of development, subdivision and sale. Unless they did, the business did not include development or subdivision but only sale, and the land ventured in the business would have been the developed and not the undeveloped land. An absurd consequence of this approach would be that all the development costs would not have been outgoings of the business.
The taxpayer's alternative argument sought also to focus upon the actual development of the individual stages of the land and to relate the commencement of business in respect of each stage to the point at which, after conditional approval of the particular subdivisional application, physical work on the land in that stage commenced. Only then, according to the taxpayer, was the land in that stage ventured in the business. It is easy to imagine variations of this argument, e.g. to relate the date of commencement of business in respect of a stage to the application for subdivisional approval or the decision to make such an application.
The Commissioner, on the other hand, asserted that the business commenced, and the entire land was ventured in the business,
ATC 4282on 20 December 1967 when, following the takeover, the taxpayer, with the intention of developing and selling all of the deferred urban and rural land, put its plan into operation by the steps which have been described. Further, according to the Commissioner, the High Court has already decided the matter in the way for which he contends, and the remission to this Court was really unnecessary but flowed from the parties' prior agreement that such a course should be followed.
There is certainly force in a submission that the High Court was of the view that the taxpayer commenced business on 20 December 1967. Quite apart from the various dicta to be found in the judgments of Gibbs C.J., Mason and Wilson JJ., such a proposition seems inextricably interwoven with the reasoning underlying their decision that the proceeds of sale constituted assessable income of the taxpayer under subsec. 25(1) of the Act. The emphasis throughout their Honours' judgments was directed to the characterization of the taxpayer's activities as business activities and not merely the enhancement and realization of the land as a capital asset and there does not seem to be any distinction drawn between the activities which commenced on 20 December 1967 and the later activities. A conclusion that the taxpayer's business commenced on 20 December 1967 accords with views previously expressed in this Court by Deane J. who dissented (79 ATC at p. 4666). (See also per Brennan J. at p. 4652.) However, since the High Court has remitted the matter to us, we think it preferable first to form our own conclusion before considering whether it is consistent with what the High Court has said.
The proposition which lay at the heart of the taxpayer's submissions on any view of its argument was that at least the initial activities of the taxpayer on and after 20 December 1967 up to June 1969 were merely preparatory to, and did not form part of, its business of development, subdivision and sale of the land. The contention was advanced that much of what was embarked upon during that period was rendered irrelevant by the Western Australian government's intervention in mid-1969. Were the submissions by the taxpayer that its activities in relation to the land up until that time were merely preparatory to its business to be accepted, it would obviously be necessary to acknowledge as at least a theoretical possibility that, when the business did commence, it did not relate to the entire land but that different parts of the land were ventured in the business as the development and subdivision of the different stages progressed.
The taxpayer submitted that in
Southern Estates Pty. Ltd. v. F.C. of T. (1967) 117 C.L.R. 481 it was held that activities which were engaged in in order to bring land into a condition in which it was possible to use it for primary production were not engaged in in the course of, but were preparatory to, such a use of the land. It is unnecessary to comment upon whether the Southern Estates case is authority for such a wide proposition or otherwise to analyse more closely the basis of what was there decided by reference to the particular provision of the Act which was under consideration. It may be accepted in favour of the taxpayer that questions may arise in various contexts whether activities are preparatory to or in the course of a particular operation; see, e.g.
Owendale Pty. Ltd. v. Anthony (1967) 117 C.L.R. 539 and
Day v. Pinglen Pty. Ltd. (1981) 55 A.L.J.R. 416. The analogy which the taxpayer sought to draw by reference to the Southern Estates case, that activities directed to bringing land into a condition in which it is permissible to sell it ought be regarded as preparatory to and not in the course of a business of selling that land, is dubious to say the least. In any event, the taxpayer's business was not a business merely of selling land but of developing, subdividing and selling it.
Of course it does not follow that all the activities engaged in by the taxpayer were necessarily in the course of that business or that some of them were not merely preparatory to it. In order to determine when the taxpayer's relevant business commenced and when its land or the various parts of it were committed to or ventured in that business, it is necessary to have regard both to the taxpayer's purposes and to its activities.
Although what was done between December 1967 and June 1969 was, in a sense, preliminary to subdivision and development in the narrower sense of the
ATC 4283steps which were directly involved in such operations, the activities in that period were an integral part of the business, and were seen as necessary at the time, even if some of what was done was subsequently rendered unnecessary because of changed circumstances. At least some of the activities during that period related to roads and services, etc., which were of relevance to the development of the whole land, irrespective of the order in which the various parts were later brought forward for development, and some of the activities were material to the determination of the appropriate or most desirable order of development of the land. Changes of plan, whether because of the Western Australian government's intervention in 1969 or for any other reason, and any consequential lack of ultimate utility of any of the steps which had previously been taken, do not in any way indicate that those steps were not taken in the course of the taxpayer's business in accordance with the taxpayer's proposals or hopes at the particular time.
From June 1969 on, the position is even clearer. Whilst at any given time more attention may have been focused on one section of the land than other sections, it was the entire project which progressed stage by stage with operations in respect of some of the stages overlapping. The evidence is overwhelming that, although the project was to extend over a number of years and was to involve development in stages, there was from 20 December 1967 both a persistent intention to develop, subdivide and sell all of the deferred urban and rural land and a continuous course of conduct directed to the implementation of that intention. The conclusion seems inescapable that the taxpayer's business of developing, subdividing and selling the land commenced as soon as the intention to take steps for that purpose in relation to the entire land was formed and activities directed to that end were commenced on 20 December 1967.
Wickham J. was of the same opinion. Further, the conclusion at which we have arrived is at least consistent with the majority judgments in the High Court. We agree with the orders which Wickham J. made in para. 2, 3, 4, and 5 of his judgment. We would answer the questions remitted by the High Court accordingly. The taxpayer must pay the costs of these proceedings.
THE COURT ORDERS THAT:
1. The outstanding questions remitted by the High Court of Australia involved in para. 2, 3, 4 and 5 of the judgment and order of Wickham J. of 19 December 1978 be answered as follows:
- (a) 20 December 1967 was the date at which a business of subdividing developing and selling the subject land commenced;
- (b) As at 20 December 1967 the whole of the subject land was committed to such business;
- (c) The value of the subject land as at 20 December 1967 as agreed between the parties for the purpose of calculating the amounts to be assessed was $3.1 million;
- (d) The amended assessments for the years of income ended 30 September 1972, 1973 and 1974 and the assessment for the year of income ended 30 September 1975 be remitted to the Commissioner of Taxation to be amended in accordance with the judgment and order of this Court and the agreement of the parties referred to in para. (c).
2. Whitfords Beach Pty. Ltd. pay to the Commissioner of Taxation his costs of this appeal.