Crow v. Federal Commissioner of Taxation

Lockhart J

Federal Court

Judgment date: Judgment handed down 17 August 1988.

Lockhart J.

The question in these four appeals is whether subsec. 25(1) or sec. 26(a) of the Income Tax Assessment Act 1936 (the Act) operates to include in the assessable income of the taxpayer profit derived by him from the sale of land near Hobart. Each of the appeals relates to a separate year of income and there are four years of income, namely, the years ended 30 June 1973, 1974, 1975 and 1976. The four appeals were heard together by consent.

The taxpayer gave evidence himself but called no other witnesses. The Commissioner called Mr J.W. Carr, a valuer with the Australian Taxation Office in Hobart. He gave evidence with respect to the suitability of certain land (which was purchased by the taxpayer and is the subject of these proceedings) for farming purposes and as to its farming and subdivisional potential. Documents were tendered by both parties. The case turns entirely on its facts. The Court's findings of fact depend on an assessment of the witnesses, especially the taxpayer, viewed in the light of the probabilities.

The taxpayer is a farmer who lives at ``Waterloo Farm'', Cremorne in Tasmania which he purchased in 1962. He had been a builder for about 25 years before purchasing the farm when he lived in Montagu Bay in a house owned by him. Waterloo Farm was purchased on 14 February 1962 for $45,000. It is a property of 390 acres and has remained the taxpayer's home and principal farming property. It has not been subdivided in fact, though on 24 June 1964 the taxpayer submitted to the Clarence Council, the municipal council which had control over development in the area, a plan of subdivision of the farm into 38 lots which was approved by the council on 10 July 1964. The taxpayer did not proceed with the subdivision.

Shortly after purchasing Waterloo Farm the taxpayer was granted a lease of land at Clifton Beach and obtained an option to purchase it. Shortly before the expiration of the lease and the option the taxpayer agreed to purchase the Clifton land with settlement to take place 12 months thereafter. The contract is dated 28 January 1965. The taxpayer obtained vacant possession on 1 January 1966. The purchase price was $45,000. The Clifton land is 556 acres and is about five kilometres from Waterloo Farm and lies between South Arm and Clifton Beach Roads. A portion of this land has a common boundary with the Clifton Holiday subdivision and fronts Frederick Henry Bay and Pipe Clay Lagoon.

On 28 March 1968 the taxpayer submitted a plan of subdivision of portion of the Clifton land to the Clarence Council. The plan was approved on 4 July 1968. Other plans of subdivision of this land were submitted by the taxpayer to the council from time to time but were rejected by it.

ATC 4622

The various parcels of land into which Clifton was subdivided were sold over the period February 1968 to June 1980, details of the sales being as follows:

                                                        Sale price
      15 February 1968 ......................             14,000
      1 July 1968 ...........................              4,885
      6 September 1968 ......................              3,000
      22 November 1968 ......................              3,000
      14 March 1970 .........................              1,700
      14 March 1970 .........................              2,950
      22 April 1970 .........................              3,000
      18 May 1970 ...........................              6,500
      30 September 1970 .....................              2,800
      20 October 1970 .......................              8,000
      8 December 1970 .......................              2,200
      8 January 1971 ........................              2,850
      5 April 1971 ..........................              3,950
      3 September 1971 ......................              1,750
      26 April 1972 .........................              4,500
      5 October 1972 ........................              3,000
      16 February 1973 ......................             17,000
      27 March 1973 .........................              1,000
      23 May 1973 ...........................              3,500
      20 August 1973 ........................             13,500
      11 September 1973 .....................              2,600
      28 January 1974 .......................                500
      20 June 1980 ..........................            120,000

The last sale on 20 June 1980 was of a parcel of 153 acres representing the balance of the Clifton land, so that none of it was retained by the taxpayer.

On 1 December 1967 the taxpayer purchased a property of 62 acres known as the ``Cremorne property'' or sometimes as the ``Willing'' property (that being the name of the vendor to the taxpayer). The property adjoins Waterloo Farm and has a common boundary with the township of Cremorne. Approximately 50% of the Cremorne property was sold in subdivision by the taxpayer and the balance retained by him for farming in conjunction with Waterloo Farm. He still retains it. It is in the area which has a common boundary with the Cremorne township that the sales took place.

On 5 August 1968 the taxpayer lodged a plan of subdivision of the Cremorne property with the Clarence Council. It was not until 31 August 1968 that the taxpayer obtained title to the land. The plan of subdivision was approved on 8 November 1968. A further plan of subdivision was submitted by the taxpayer on 14 January 1971.

The history of sales of the various lots into which the Cremorne property was subdivided is as follows:

                                                    Sale price
      14 June 1971 ..........................           1,700
      21 September 1971 .....................           3,300
      21 September 1971 .....................           1,700
      21 January 1972 .......................           3,500
      28 January 1972 .......................           1,700
      22 February 1972 ......................           3,360
      1 June 1972 ...........................           1,600
      28 June 1972 ..........................           1,700
      8 August 1972 .........................           1,750
      15 September 1972 .....................           1,750
      13 June 1973 ..........................           1,750
      29 June 1973 ..........................           1,400
      18 February 1973 ......................           1,000
      24 February 1976 ......................          14,000
      16 November 1976 ......................          11,500
      11 April 1979 .........................          28,500

On 25 September 1972 the taxpayer purchased a property known as the ``Rokeby'' land with an area of 592 acres. The property runs from the Pass Road near Rokeby back to the slopes of Mt Rumney. The taxpayer obtained title to the land on 1 October 1973. In 1975 the Housing Department of Tasmania informed the taxpayer that it wished to purchase part of Rokeby and that, if this could not be done voluntarily, the land would be compulsorily acquired. Accordingly, on 30 May 1975 the taxpayer sold 127 acres of the Rokeby land to the Housing Department for $95,000 and on 10 October 1977 sold 45 acres to the Housing Department for $40,000. The balance was retained by the taxpayer. It appears from the evidence that the land required by the Housing Department was the best part of the property, including a homestead, and that the balance retained by the taxpayer was poorer in quality for purposes of primary production.

The taxpayer purchased land known as ``Action Park'' on 16 April 1973 and obtained title to it on 6 August 1973. This land extends from Acton Road back to Mt Rumney and adjoins the Rokeby land.

ATC 4623

On 8 July 1975 the taxpayer submitted a plan of subdivision of Acton Park to the Clarence Council which was approved on 29 January 1976. Sales of the various lots commenced on 3 December 1978 and continued to 14 April 1981. The whole of Acton Park was sold by the taxpayer. The history of the sales of this land is as follows:

                                                  Sale price
      3 December 1978 .....................          28,000
      18 January 1979 .....................          28,000
      19 March 1979 .......................          27,000
      30 March 1979 .......................          28,500
      November 1979 .......................          25,000
      14 March 1980 .......................          26,000
      16 March 1981 .......................          24,000
      26 March 1981 .......................          23,500
      14 April 1981 .......................          23,300

In 1972 the taxpayer obtained a lease of certain land at Mt Rumney. It was land with two separate titles, one parcel being of about 935 acres and the other of about 220 acres. The taxpayer also obtained an option to purchase this land. On 28 March 1973 the taxpayer agreed to purchase the whole of this land; but, because of his financial difficulties at the time, he did not proceed with the purchase of the smaller block. He obtained title to the parcel of 935 acres on 24 July 1975. On 19 September 1975 the taxpayer lodged a plan of subdivision of the Mt Rumney land. The land was surveyed for subdivisional purposes on 3 November 1978 and sales commenced on 15 May 1981. The whole of the Mt Rumney land was sold by the taxpayer. The history of sales of this land is as follows:

                                                 Sale price
      15 May 1981 .........................          37,500
      14 July 1981 ........................          87,500
      19 July 1981 ........................          35,000

During the period 1 July 1967 to 30 June 1981 the taxpayer made 51 sales of land netting him $388,228. The yearly breakdown is as follows:

                                    Costs (purchase price,
Year ended       Gross sales        subdivisional costs etc.)       Net profits
                      $                         $                         $
30 June 1968       14,000                    10,612                     3,388
30 June 1969       10,885                     3,487                     7,398
30 June 1970       14,150                     3,976                    10,174
30 June 1971       21,500                     5,109                    16,391
30 June 1972       23,110                     5,005                    18,105
30 June 1973       31,150                     6,920                    24,230
30 June 1974       17,600                    16,487                     1,113
30 June 1975       95,000                    27,009                    67,991
30 June 1976       14,000                    18,860                    (4,860)
30 June 1977       11,500                     8,121                     3,379
30 June 1978       40,000                     6,063                    33,937
30 June 1979      140,000                    60,243                    79,757
30 June 1980      171,000                    99,791                    71,209
30 June 1981      108,300                    52,284                    56,016
                 --------                  --------                  --------
                 $712,195                  $323,967                  $388,288
                 --------                  --------                  --------

Before the taxpayer purchased Waterloo Farm he had built a hotel in Glenorchy known as the Hotel Carlyle. There were four owners of the hotel, including the taxpayer and his wife. Each of the four owners had an equal one quarter share. The taxpayer and his wife sold their respective interests in the Hotel Carlyle late in 1966 and the proceeds of sale were applied to reduce the taxpayer's indebtedness to creditors. In 1975 the taxpayer obtained, as joint lessee, a lease of the Hotel Beltana. In approximately 1977 the taxpayer jointly purchased the leasehold and stock of the

ATC 4624

hotel, borrowing the money required to do so partly on the security of his farming properties.

The following table sets out the results of the taxpayer's farming and hotel trading during the years ended 30 June 1966 to 30 June 1981:

        Year           Hotel            Farm
                        $                $
      30.6.66          6,263          (11,185)
      30.6.67          5,501          (15,568)
      30.6.68       Not Trading       (13,706)
      30.6.69       Not Trading       (18,473)
      30.6.70       Not Trading        (6,943)
      30.6.71       Not Trading        (6,856)
      30.6.72       Not Trading        (2,265)
      30.6.73         14,425              839
      30.6.74         27,103          (11,778)
      30.6.75         26,578          (10,903)
      30.6.76         32,691          (14,209)
      30.6.77        (16,280)         (22,368)
      30.6.78         (3,384)         (51,715)
      30.6.79          3,491          (43,226)
      30.6.80          8,518          (82,149)
      30.6.81        (81,049)         (53,365)
                     -------        ----------
                     $23,857        ($363,870)
                     -------        ----------

The properties purchased by the taxpayer were in three separate areas on the eastern side of the Derwent River, namely, Waterloo Farm/Cremorne, Clifton Beach and Rokeby/ Mt Rumney/Acton. The Waterloo/Cremorne properties had a combined area of 452 acres, prior to subdivision of part of the Cremorne property by the taxpayer, and were purchased, as mentioned earlier, in two parcels. This land has flats, hillside paddocks, bush paddocks and a substantial lagoon which was used for irrigation of the flats. The irrigation storage was some 15,000,000 gallons and the taxpayer grew lucerne on the flats. This property has a large, old and renovated house still occupied by the taxpayer. The improvements included a large barn and skillion, an old brick shed and skillion in poor condition which included poor shearing facilities and an old implement shed. The Waterloo/Cremorne land was used by the taxpayer for farming and grazing, but part of the Cremorne land was, as mentioned earlier, subdivided and sold by the taxpayer.

The Clifton land had an area of about 556 acres and was the southernmost of the three areas. It lay on either side of the Clifton Beach Road with the major area extending up to South Arm Road. The land consisted of cleared and mostly improved pasture and some area of bush. When the taxpayer purchased this land its improvements consisted of a cottage, hay shed, shearing shed and stockyards. Clifton was used by the taxpayer for grazing purposes.

The Rokeby/Mt Rumney/Acton properties had a total of approximately 2,015 acres bordering Pass Road, Rokeby, Mt Rumney Road and Acton Drive. The land consisted of improved pasture, cleared land with improved pasture and native pasture, and some area of bush. The water supply was mainly from streams, and watering of stock was from the creek supply. The buildings consisted of a house, garage, barn and a small shearing shed. The farming use to which the taxpayer put the land was mainly grazing, although some cropping could occur on the flats.

There were significant distances between the three areas: approximately 12 kilometres between the Rokeby/Mt Rumney/Acton lands and Waterloo/Cremorne and about five kilometres further between the Waterloo/Cremorne and Clifton Beach properties. I accept the evidence that these distances imposed management problems, limited productivity and restricted the taxpayer's ability to achieve the best possible use of the land and increased farming costs beyond those which would have been incurred if the areas had adjoined each other.

The Waterloo Farm and Cremorne properties were superior to the other properties for farming and grazing purposes. The Clifton property had bush and low areas which had a very limited farming use with the sections last sold and other lower sections having the best farming potential of that land.

The Rokeby/Mt Rumney/Acton land had flats suitable for grazing and some cropping but the slopes and hillsides had a very limited grazing potential.

The taxpayer gave evidence as to his reasons for purchasing each of the properties with which these proceedings are concerned, the arrangements made by him to obtain finance to make the purchases and his reasons for subdividing the properties and selling them. It is unnecessary to set out this evidence in detail. It is sufficient to say, in summary, that he said that he purchased each of the properties for use as a farm; that he had no intention when purchasing them of reselling them in the future

ATC 4625

or subdividing them; and that he was forced to take this course of subdivision and sale because of his poor financial position and the continual demands of his creditors, especially his bank, to repay his indebtedness to them. He remains today on the Waterloo farm, which was farmed by him at least until in 1984 the taxpayer entered an arrangement with his creditors under Pt X of the Bankruptcy Act 1966. There is no doubt that the taxpayer did use much of the land purchased by him for farming, grazing and growing crops.

I accept that the taxpayer nurtured a wish to be a farmer during the years when he was a builder and that, when purchasing each of the parcels of land with which this case is concerned, he intended to use it, at least for a time, as a farm. I do not accept, however, that the taxpayer, when purchasing each of the parcels of land, did so without thought of subdivision and sale. In my opinion, when purchasing the properties the taxpayer knew that he was financially committed to his creditors, in particular his bank, and that at least some portion of land - the precise extent of that portion not being clear to him at the time - would almost certainly have to be sold in the future to repay his debts. In my opinion, the taxpayer intended to meet or cover those debts by subdividing and selling the land.

The taxpayer is a man of limited formal education, but he impressed me as being reasonably intelligent and shrewd. However, during a great deal of his life he has been beset by financial difficulties, due in large part to his being undercapitalised in his various business undertakings. He purchased real estate with little cash of his own and very high borrowings. He raised mortgages to pay out mortgages.

The first question is whether the taxpayer was carrying on a business of land development so that the profits therefrom constitute assessable income under sec. 25 of the Act. The Commissioner included the profits from the sale of the land as taxable income of the taxpayer. No challenge was made to the approach of treating those profits as assessable income if it is correct to describe them as the fruits of the taxpayer's carrying on a business. The taxpayer disputed the correctness of such a description. In particular, it was not argued that treating the gross revenue from the sales of land as brought to account in the year in which they were derived, and the taxpayer's outgoings as deductible in the year in which they were incurred, if the assessment were upheld on the basis that the taxpayer was engaged in the business of land development, would lead to a different result than bringing to tax the net gain on the sales in the years in which they took place under sec. 26(a) of the Act.

It is well established that profits obtained from the realisation of property are to be treated on revenue account and as assessable to tax ``where what is done is not merely a realisation or change of investment but an act done in what is truly the carrying on or carrying out of a business'':
California Copper Syndicate v. Harris (1904) 5 T.C. 159 at p. 166;
F.C. of T. v. Whitfords Beach Pty. Limited 82 ATC 4031; (1982) 150 C.L.R. 355.

Whether or not a business is carried on by a taxpayer is, of course, a question of fact; but the reported cases are of assistance in pointing to certain factors which can provide a useful guide. Continuity and repetition of transactions pointing to a systematic course of conduct are important factors:
Martin v. F.C. of T. (1953) 90 C.L.R. 470. There is a greater scope for the characterisation of a series of acts as being within the scope of carrying on a business where the acts are motivated by the desire for or expectation of profit, although a particular commercial transaction may form part of a business in the absence of the attainment or expectation of profit in that transaction:
Investment and Merchant Finance Corporation Ltd. v. F.C. of T. 71 ATC 4140; (1971) 125 C.L.R. 249 per Barwick C.J at ATC p. 4142; C.L.R. p. 255. A series of repeated transactions of the same kind is often an incident of carrying on a business;
F.C. of T. v. St. Hubert's Island Pty. Ltd. (In Liq.) 78 ATC 4104; (1978) 138 C.L.R. 210 per Jacobs J. at ATC p. 4118; C.L.R. p. 237. Where a realisation of property is motivated by factors other than those normally to be expected in a business context, the Court will be less ready to find that the realisation had the nature of a business transaction. However, where the taxpayer asserts that an asset was purchased for his own use and enjoyment with no purpose of resale, and that resale occurred because of the receipt of an offer to purchase which was too tempting to refuse, ``the fact that there was a quick resale naturally leads one to scrutinise the evidence that it was not envisaged from the first very carefully'':
Turner v. Last (H.M. Inspector of Taxes) (1965) 42 T.C. 517

ATC 4626

per Cross J. at pp. 522-523. In that case the Court upheld the taxpayer's assessment to tax of profits on the sale of farming land despite the taxpayer's contention that the whole of the land had been purchased with the intention of farming, on the ground that the inference that the taxpayer in fact intended to resell the land at a profit could reasonably be drawn from evidence that the taxpayer's financial position before the purchase would not allow him to hold the land indefinitely, that the land had a development potential and that the taxpayer had bought the land for more than its agricultural value.

It is neither necessary nor correct that each individual transaction be analysed for the purpose of determining whether a business is carried on. One must look to the overall affairs of the person concerned and to the system, if any, employed.

In this case the purchase of the various properties and the subsequent subdivision and sale of parcels of land involved transactions which were repetitive and systematic and had the characteristics of a continuing business of land development. The decision in
Scottish Australian Mining Company Ltd. v. F.C. of T. (1950) 81 C.L.R. 188, whatever its status following the observations of Gibbs C.J. on the one hand and Mason and Wilson JJ. on the other in the Whitfords Beach case (supra) does not assist the taxpayer on the present facts, being distinguishable by the period in which the property in question in that case had been operated as a mine prior to its subsequent subdivision and sale over an extended period. I am satisfied that the taxpayer bought and sold the land for the purpose of making a profit. His activities properly answer the description of the carrying on of the business of land development and the profits thereof constitute income for the purposes of sec. 25 of the Act.

The respondent's alternative submission was that the taxpayer's profits on the sales of land were assessable under sec. 26(a) of the Act. This submission has to be treated as a true alternative to the submission that the proceeds of sales were assessable under sec. 25(1) of the Act as transactions within a continuing business of land development. Section 26(a) operates to render profits assessable only if it can be said that no business is being carried on by the taxpayer, and cannot be applied to the profits made in each of a series of transactions taking place within a continuing business: Investment and Merchant Finance Corporation Limited v. F.C. of T. (supra) per Barwick C.J. at ATC p. 4142; C.L.R. p. 255, per Menzies J. at ATC p. 4147; C.L.R. p. 264; F.C. of T. v. St. Hubert's Island Pty. Ltd. (supra) per Mason J. at ATC p. 4114; C.L.R. pp. 229-230; F.C. of T. v. Whitfords Beach Pty. Limited (supra) per Gibbs C.J. at ATC pp. 4036-4037; C.L.R. pp. 366-367, per Mason J. at ATC p. 4046; C.L.R. p. 383. It follows that sec. 26(a) could operate to bring to tax the profits made by the taxpayer on the sales of land only if the proceeds were not assessable as ordinary income under sec. 25(1) of the Act.

Given my findings as to the application of sec. 25(1) of the Act, it is therefore not necessary for me to consider the operation of sec. 26(a). I do so to indicate the result I would have reached had I held that the proceeds of the sales of land were not assessable under sec. 25(1) of the Act. For a transaction to fall within the second limb of sec. 26(a), there must be a profit-making undertaking or scheme in which an essential element is the purpose of the taxpayer to make a profit by the carrying on or carrying out of a scheme:
Steinberg v. F.C. of T. 75 ATC 4221; (1975) 134 C.L.R. 640 per Gibbs J. at ATC p. 4234; C.L.R. p. 699. The second limb looks to the ultimate subjective purpose of the taxpayer and to the actual planning undertaken by the taxpayer in the course of the transactions. The conclusion that a scheme amounts to a profit-making undertaking or scheme is available although the purpose of securing a profit was not the taxpayer's primary purpose See
F.C. of T. v. Bidencope 78 ATC 4222; (1978) 140 C.L.R. 533 and
Macmine Pty. Ltd. v. F.C. of T. 79 ATC 4133; (1979) 53 A.L.J.R. 362.

The advantageous realisation of a capital asset is not in itself sufficient to establish a profit-making undertaking or scheme within the second limb of sec. 26(a):
White v. F.C. of T. (1968) 120 C.L.R. 191 per Taylor and Owen JJ. at p. 219; Macmine Pty. Ltd. v. F.C. of T. (supra) per Jacobs J. at ATC p. 4154; A.L.J.R. p. 377. The undertaking or scheme must, since the decision of the Judicial Committee in
McClelland v. F.C. of T. 70 ATC 4115; (1970) 120 C.L.R. 487, involve a business element or, as it is sometimes called, a ``business deal''.

In my view, the second limb of sec. 26(a) may be applicable where there is evidence of

ATC 4627

system, organisation and of profit-making purpose sufficient to establish a ``profit-making undertaking or scheme'', although such evidence is not sufficient to establish the carrying on of a business giving rise to income for the purposes of sec. 25(1) of the Act. See Parsons, Income Taxation in Australia, 1985, para. 3.14 and 3.65 in the context of isolated business transactions. In my opinion all the elements required to render the second limb of sec. 26(a) applicable would be satisfied in this case, had the sales of land not amounted to the carrying on of a business such as to bring the proceeds to tax under sec. 25(1) of the Act.

I would dismiss all four appeals with costs.

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