Statham & Anor v. Federal Commissioner of Taxation

Woodward J

Lockhart J
Hartigan J

Full Federal Court

Judgment date: Judgment handed down 23 December 1988.

Woodward, Lockhart and Hartigan JJ.

This is an appeal from a decision of the Administrative Appeals Tribunal (reported as Case V65,
88 ATC 498) which affirmed the disallowance by the respondent, the Commissioner of Taxation, of an objection to an assessment of income tax for the 1982 year of income which included the net proceeds of sale of certain land in Queensland as assessable income in the hands of the applicants.

The applicants are Lindsay Thomas Statham and Sydney Douglas Bickerton, trustees of the estate of Charles Neville Adermann deceased (``the deceased'') who died on 8 October 1980.

The Commissioner assessed the tax payable by the applicants for the 1982 tax year as $29,608.72. The Commissioner adjusted the income of the estate from income as returned at

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$3,881 to a figure of $66,765 which included an amount of $62,884, the amount in contention in these proceedings.

The applicants' case before this Court was that the sum of $62,884 was not income according to ordinary concepts, nor was it profit arising from the sale by the applicants of any property acquired for the purpose of profit-making by sale or from the carrying on or carrying out of any profit-making undertaking or scheme, and thus was not income assessable in the hands of the applicants under either sec. 25(1) or 26(a) of the Income Tax Assessment Act 1936 (``the Act'').

It is necessary to state the material facts in some detail. Our statement of the facts is derived in part from the findings of the learned Deputy President of the Tribunal and otherwise from the evidence which is not, or is not seriously, in dispute. The recitation of facts has been complicated by the absence of specific findings of fact by the Tribunal on various aspects of the case. We have been able, however, with the assistance of counsel for both parties, to complete the factual matrix by reference to largely undisputed evidence.

It is timely for this Court to state that it is the duty of the Tribunal, when reviewing the Commissioner's disallowance of objections under the Act, to make clear and full findings on material questions of fact, referring to the evidence or other material on which those findings were based. See Administrative Appeals Tribunal Act 1975 subsec. 43(2B). That duty must be performed by the Tribunal, although the Court does not hold the Tribunal's reasons for decision to a standard of perfection:
Bisley Investment Corporation v. Australian Broadcasting Tribunal (1982) 40 A.L.R. 233 at pp. 251 and 255;
F.C. of T. v. Cainero 88 ATC 4427 at pp. 4430-4431. Not least of the reasons for requiring the Tribunal to reach adequate findings of fact is the difficulty of the Court determining an appeal on a question of law under sec. 44 of the Administrative Appeals Tribunal Act where such findings have not been or not adequately been made.

In 1970 the deceased acquired a farm near Kingaroy of about 270 acres from his late father, Sir Charles Adermann, so that he might raise his family in a rural environment and in order to engage in some desultory farming. He did not acquire the property with the purpose, let alone the dominant purpose, of subdividing it and selling off the subdivided parts.

In 1976 the deceased sold two urban blocks and a 36 hectare portion of the property. In the same year the deceased's brother-in-law and sister, Dr and Mrs Bickerton, through their company, S.V. and N.V. Bickerton Holdings Pty. Ltd. (``Bickerton Holdings''), purchased from the deceased a half share in most of the balance of the farm property consisting of about 30 hectares. Part of the property, described as lot 11 and consisting of just under 6 hectares, was excluded from the sale and retained by the deceased in order that he might subdivide it. We should say at this point that the Deputy President accepted the evidence of Dr and Mrs Bickerton in its entirety.

Bickerton Holdings acquired its half share in the property without any dominant intention on its part, or on the part of Dr and Mrs Bickerton, to resell the land by subdivision. However, in 1979 there began a deal of activity in relation to subdivision of the property. For convenience, we shall refer to Bickerton Holdings and the deceased and, after the deceased's death, to the applicants, being the trustees of his estate, as ``the owners'' where reference is made to the ownership of the property.

In 1976 the Bickertons (through Bickerton Holdings) and the deceased entered into a partnership known as Fairview Farm Property Ltd. for the purpose of raising beef cattle on the property. However, this purpose was not achieved. There were several reasons for this. The deceased, who was employed as a valuer, had various employment transfers after 1976. His health deteriorated in 1977. The Bickertons, for various reasons connected with Dr Bickerton's medical practice, had their hands full. In addition, the cattle market was in a depressed state. For these and other reasons a decision was made in the middle or latter half of 1979 by the deceased and the Bickertons to change direction by selling the whole or part of the land.

The owners decided to seek approval for a staged plan of subdivision which allowed readily saleable and cheaply developed land with a street frontage to be sold first. The owners applied to the Kingaroy Shire Council for approval to subdivide. The deceased died in October 1980. The first plan of subdivision was not registered until after his death. In all there

ATC 4073

were four stages of subdivision. Between 1 July 1980 and 30 June 1986 a total of 105 lots were sold. The evidence before the Tribunal included the following summary:
Period            No. of lots sold   Gross sales   Cost of sales   Gross profit
                                          $              $              $
1.7.80 to 8.10.80        9             118,275        27,570         90,705
9.10.80 to 30.6.81      14             126,022        42,886         83,136
1.7.81 to 30.6.82       24             209,711        83,627        126,084
1.7.82 to 30.6.83       21             214,919       124,540         90,379
1.7.83 to 30.6.84       15             157,885        36,782        121,103
1.7.84 to 30.6.85       19             241,080       145,323         95,757
1.7.85 to 30.6.86        3              34,314        22,908         11,406
                       ---           ----------     --------       --------
                       105          $1,102,206      $483,636       $618,570
                       ---           ----------     --------       --------

This summary gives a complete picture of the extent of the relevant subdivisional activities from inception to conclusion. The activity for the relevant year of income (the year ended 30 June 1982) is included.

The process by which the land was subdivided was relatively simple so far as the owners were concerned. All that was required of them was the making of applications to the Kingaroy Shire Council and the provision of a bond to it by way of a bank guarantee. The first application to the Council, which was made on 29 January 1980, initiated a deal of activity by it. The Council, after approval of the application, undertook all the necessary subdivisional work. This included roads, earthworks, sewerage and electrical works. Three subsequent applications were made to the Council in relation to stages 2, 3 and 4 of the subdivision.

The owners sold the subdivided land simply by listing it with local real estate agents. The marketing of the land was attended to by the agents without participation by the owners. No site office was set up to cater for sales at the site of the subdivision. No office was set up to conduct the affairs of the owners. The financial books and the accounts in respect of the subdivision were kept by Mrs Bickerton. Dr Bickerton continued in his medical practice.

The owners did not advertise the sale of the subdivided lots by, for example, television, radio or newspaper advertisements. Apart from arranging the bond by way of a bank guarantee, they did not borrow money to enable the subdivision to take place.

Although the owners obtained some professional advice from an engineering firm, they did not engage any contractors to carry out work, leaving that to the Kingaroy Shire Council. After the death of the deceased, the owners, being Bickerton Holdings and the applicants on behalf of the estate of the deceased, would have been content to sell the balance of the land in one parcel, but they were not able to accomplish that. In order to dispose of the land it appeared necessary to sell off more subdivided allotments.

Before this Court, Mr Muir Q.C. for the applicants submitted that the following conclusions emerged from the evidence. First, that at the time the land became the property of the owners in the grazing partnership there was no venturing of the land in any property development exercise. Second, the owners, for personal or domestic reasons, decided to sell the land rather than retain it for grazing purposes. Third, after the death of the deceased, the owners simply continued to realise the land by sale. They did not have any fixed desire to continue with the plan of subdivision. Fourth, the true nature of the activities of the owners in providing land for sale was not the venturing of capital in a business, nor was it part of the setting up of a business. Rather, Mr Muir submitted, it was part of the activity of merely realising a capital asset.

Senior counsel for the respondent, Mr Greenwood Q.C., submitted that, even though the farm was acquired by the owners for domestic purposes, at a date no later than October 1979 the owners committed the farm property to the business of subdivisional land development then being launched by them in partnership. Mr Greenwood's basic submission

ATC 4074

was that the Tribunal's decision was, in reality, a decision on questions of fact. He submitted that the legal principles relevant to the case, although sometimes difficult in application, are clear and have been stated on many occasions.

Section 44 of the Administrative Appeals Tribunal Act 1975 restricts the proceedings in this Court to an appeal on a question of law. As a Full Court of this Court said in Brown v. Repatriation Commission (1985) 60 A.L.R. 289 at p. 291:

``The existence of a question of law is not merely a qualifying condition to ground an appeal from a decision of the [Repatriation Review] Tribunal; rather, it and it alone is the subject matter of the appeal, and the ambit of the appeal is confined to it.''

This approach was affirmed with reference to the Administrative Appeals Tribunal by another Full Court of this Court in
F.C. of T. v. Brixius 87 ATC 4963; (1987) 16 F.C.R. 359.

The questions before this Court involve the application of sec. 25(1) and 26(a) of the Act as they stood at the relevant time.

Whether, once facts have been found, the receipts of a taxpayer constitute income in accordance with ordinary usages and concepts, has been held to be a question of law:
Hayes v. F.C. of T. (1951) 96 C.L.R. 47 per Fullagar J. at p. 51, and
XCO Pty. Ltd. v. F.C. of T. 71 ATC 4152 at p. 4154; (1971) 124 C.L.R. 343 per Gibbs J. at p. 348.

The question whether receipts fall within the second limb of sec. 26(a) of the Act may or may not be a question of law. If the construction of the subsection is involved there is clearly a question of law. If the only question to be answered is whether the receipts fall within the ordinary meaning of the relevant words, no question of law arises:
Hope v. The Council of the City of Bathurst 80 ATC 4386 at p. 4389; (1980) 144 C.L.R. 1 per Mason J. at p. 7.

The Deputy President found that the property was not acquired by the owners with the intention of subdividing it or using it in the business of subdivision. He found that the first limb of sec. 26(a) did not apply. He then turned to consider subsec. 25(1) and the second limb of sec. 26(a). After doing so, he went on to hold that the proceeds of realisation from the sale of the subdivided land fell within both those provisions.

The Deputy President, in stating his conclusion that both sec. 25(1) and 26(a) applied to the facts of this case, said [at ATC p. 501]:

``9. In the current uncertain state of the law in which no one has attempted to define the relationship - if any - between sec. 25(1) and 26(a), I do not see it as part of the function of an administrative tribunal to undertake a task which distinguished Judges have refused to attempt. In the end, I, too, seek refuge behind the statement that it is unnecessary to examine that question here since I consider the amount in question in the present application constitutes income of the taxpayer both pursuant to sec. 25(1) and 26(a) (cf.
F.C. of T. v. Myer Emporium 87 ATC 4363). The law, as I see it in relation to the question posed by this application, comes to this: A tiger can change his spots [sic]. However, if he does so with the intention of selling them profitably, one by one, the gain will be subject to tax. In terms of this application, this `tiger' changed his spots [sic] when he gave up farming and became a land developer, and it is not to the point that the farm had been in the family since the time of Governor Macquarie. Farming is one occupation, land developing another and never the twain shall meet.''

Detailed comment on these findings would be superfluous. The essential task of any primary tribunal is to find the relevant facts and then to evaluate them in the light of applicable law. Obviously there is room for wit or the use of apt quotations or metaphors in reasons for decision, but these should illuminate the path of reasoning and cannot be used as a substitute for clear and specific findings of fact and plain expressions of opinion on relevant issues.

Dealing as best we can with this decision, and leaving aside the improbability of a tiger having spots in the first place, the implied statement of law which underlies the passage is, in the opinion of this Court, clearly wrong.

It is implicit in the Deputy President's statement that, because the owners decided not to persist with farming the land in partnership, but instead to sell it by means of subdivision, the proceeds of realisation necessarily became taxable. This conclusion is erroneous, as is

ATC 4075

shown by the decisions in such cases as
Scottish Australian Mining Co. Ltd. v. F.C. of T. (1950) 81 C.L.R. 188;
F.C. of T. v. N.F. Williams 72 ATC 4069; (1972) 127 C.L.R. 226;
Burnside v. F.C. of T. 77 ATC 4588; (1977) 138 C.L.R. 23;
F.C. of T. v. Whitfords Beach Pty. Ltd. 82 ATC 4031; (1982) 150 C.L.R. 355;
Allied Pastoral Holdings Pty. Ltd. v. F.C. of T. 83 ATC 4015; and
Mount Louisa Grazing Co. v. F.C. of T. 86 ATC 4933.

It is well established by the reported cases, including those mentioned above, that the mere realisation of an asset at a profit does not necessarily render the profit taxable. The profit must arise from the carrying on of a business or a profit-making undertaking or scheme. The mere magnitude of the realisation does not convert it into such a business, undertaking or scheme; but the scale of the realisation activities is a relevant matter to be taken into account in determining the nature of the realisation, i.e. in determining whether the facts establish a mere realisation of a capital asset or a business or profit-making undertaking or scheme.

The Deputy President fell into error in concluding that, when the owners changed their intentions in respect of the land from farming to selling off allotments of the land profitably, the profit from such sales necessarily became subject to tax. The Deputy President expressed his conclusions in these words:

``Farming is one occupation, land developing another, and never the twain shall meet.''

The relevant cases show that these occupations may meet, and in circumstances where the proceeds or profit generated by the land sales are not assessable under either sec. 25(1) or 26(a) of the Act.

In his reasons for decision the Deputy President concluded that the Scottish Australian case was decided by the High Court per incuriam. There is no warrant for that conclusion, which seems to have been based simply on the absence from the reasons for judgment of the High Court (Williams J.) of a reference to
California Copper Syndicate v. Harris (1904) 5 T.C. 159. This decision of the High Court has not been overruled by any subsequent decision. Indeed, it has been referred to with approval or apparent approval in a number of later decisions of the High Court including F.C. of T. v. Williams per Stephen J. at ATC p. 4071; C.L.R. p. 230 and Menzies J., on appeal, at 72 ATC p. 4193; C.L.R. p. 246; and Whitfords Beach per Gibbs C.J. at ATC pp. 4038-4039; C.L.R. pp. 368 and 370 and Wilson J. at ATC pp. 4055-4056; C.L.R. pp. 397-398. Mason J. referred to the decision in Whitfords Beach at p. 385 and questioned the conclusion reached by Williams J. on the facts of the case, but did not cast doubt on his Honour's statements of principle.

It now remains for this Court to consider what course it should take, having identified errors of law made by the Tribunal.

Subsections 44(4) and (5) of the Administrative Appeals Tribunal Act 1975 provide:

``(4) The Federal Court of Australia shall hear and determine the appeal and may make such order as it thinks appropriate by reason of its decision.

(5) Without limiting by implication the generality of sub-section (4), the orders that may be made by the Federal Court of Australia on an appeal include an order affirming or setting aside the decision of the Tribunal and an order remitting the case to be heard and decided again, either with or without the hearing of further evidence, by the Tribunal in accordance with the directions of the Court.''

It would obviously be wasteful of time and costs, and oppressive to witnesses, to order a rehearing if that can be avoided. It would not be appropriate to ask the Deputy President who heard the matter to reconsider an opinion he has expressed so emphatically. It would clearly be far better if this Court could properly dispose of the matter finally provided such course is within this Court's powers. In our view it is permissible and right that we adopt this course in the present case. The facts are largely undisputed and the Tribunal did make some findings of fact on material matters.

In all the circumstances we think it appropriate to review the facts as found, and proceed to consider what orders should be made to dispose of the matter finally.

We have already referred to the Deputy President's findings that the property was not acquired for the purposes of resale at a profit.

ATC 4076

Before us Mr Greenwood Q.C., for the Commissioner, submitted that in para. 4 and 9 of his reasons for decision the Deputy President had, in effect, made findings that the owners were carrying on a business of land development and an undertaking or scheme with the purpose of profit-making. Paragraph 9 has been set out in full above. The relevant sentence in para. 4 reads:

``Certainly, by January 1980, when Hughes & Partners were retained as consultant engineers, there can be no doubt that the Neville/Bickerton partnership was aggressively setting about subdividing the land in a manner most calculated to maximize their profit.''

[The para. 4 referred to in this judgment was deleted from the version of the decision of the Deputy President made available for publication.]

We are unable to read those paragraphs in the way suggested. There is nothing in para. 4 which is inconsistent with a finding that the owners applied themselves in an enterprising way to the realisation of a capital asset. There is nothing surprising in the fact that they went about this realisation in a manner calculated to maximise their receipts. The fact that this occurred does not necessarily make the proceeds either profits from an undertaking or scheme, or income from a business.

Turning to para. 9 of the Deputy President's reasons, we can find nothing in that paragraph which allows it to be said that he made a finding that the owners were carrying on a business. What occurred in para. 9 is that the Deputy President, having looked at the authorities, then turned to the facts, and said that when the owners gave up farming they necessarily became joint developers. It would not be unusual for a taxpayer who is realising an asset by selling land in subdivided lots to give up some other use of the land in favour of development. To that extent, the description of ``developer'' in para. 9 is appropriate to a subdivider.

The Deputy President's failure to identify the relevant circumstances of this particular subdivision prevented him from coming to grips with his task of deciding whether the owners were merely realising an asset or whether they had crossed over the line and conducted a business or a profit-making undertaking or scheme. His finding that he accepted without qualification the evidence of Dr and Mrs Bickerton enables this Court to apply the principles of law which we have identified above to the evidence accepted by the Tribunal.

The questions which the Tribunal had to determine were whether the subdivision of the land in question amounted, on the one hand, merely to the advantageous and enterprising realisation of a capital asset or, on the other hand, to a business of land development carried on by the owners (sec. 25(1)) or to an undertaking or scheme in which an essential element was the purpose of profit-making (sec. 26(a)).

We agree with the submission made on behalf of the applicants that the way in which the subdivision and sale of the land progressed was simple and had few of the hallmarks of a business enterprise. The following matters are significant:

  • (a) the owners were at first content to sell the land as one parcel, but were unable to do so;
  • (b) no moneys were borrowed by them, although a guarantee was provided to the Kingaroy Shire Council by way of bank guarantee;
  • (c) only very limited clearing and earthworks were involved;
  • (d) the owners relied upon the Kingaroy Shire Council to itself carry out roadworks, kerbing, electricity and sewerage works which were required to be done;
  • (e) the owners did not erect buildings on the land; not even, for example, a site office;
  • (f) they had no business organisation, no manager, no office, no secretary, and no letterhead;
  • (g) Dr Bickerton maintained his medical practice;
  • (h) the owners did not advertise the land for sale;
  • (i) apart from the Kingaroy Shire Council's activities, the owners did not engage any contractors, although they did obtain some professional advice;
  • (j) the books kept in relation to the sales of land were kept by Mrs Bickerton; and

    ATC 4077

  • (k) the land was sold simply by listing it with local real estate agents.

The matters which have been listed above strongly suggest to us that the owners were not conducting a business or engaging in a profit-making undertaking or scheme.

Mr Greenwood Q.C., for the Commissioner, submitted that there were facts present which indicated a business or at least a profit-making scheme or undertaking. The first point made in his submission was that the owners were seeking to subdivide land which had been originally zoned as rural land. In our view, nothing turns upon this. The Kingaroy Shire Council in fact approved the subdivision and the evidence was that, at the time of the approval, the council was encouraging subdivision into residential allotments. It was suggested in argument that the subdivision may have been illegal, though it appears the council may have had a discretion to allow a subdivision of rural land in the circumstances of this case. It was prudent for the owners to try to maximise the return from the realisation of their asset. To do this, it was sensible to subdivide their rural land, which was close to the centre of Kingaroy, into residential lots.

The next matter that Mr Greenwood pointed to was that a substantial sum of money had to be spent by way of subdivisional costs even though many of the activities that were necessary in the case of the Whitfords Beach estate were not present in this case. In support of this second point Mr Greenwood submitted that the owners, by providing a bank bond, were prepared to risk up to $950,000, and did in fact risk in excess of $450,000. As he put it, the owners elected to go the path of high risk and high profits rather than the path of a mere realisation of the asset as it stood. He submitted that this was an important consideration in deciding whether the owners' activity fell on the same side of the line as a developer's business venture. Another matter to which he pointed was the fact that the owners engaged in the activity over a long period of time. They proceeded in a methodical manner over a period of years which, he said, characterises the way a professional developer approaches the task of developing residential allotments. Finally, Mr Greenwood pointed out that the subdivision was quite a large one by local standards.

These considerations do not, in our opinion, have the effect of pushing a mere realisation of assets over the line into the region of a business venture or a profit-making undertaking or scheme. In relation to finance, the owners merely had to provide a bond. The period of time involved seems to us to reflect the fact that the subdivision involved land in a relatively small country town. There is no evidence that the owners engaged in some holding exercise, carefully releasing allotments for sale, as one might expect to occur in a business or scheme. So far as the size of the subdivision is concerned, the evidence was that there have been other subdivisions of roughly equal size in the Kingaroy Shire Council area. The total number of lots involved in the subdivision amounted to 105, and the fact remains that the subdivision was organised entirely on a part-time basis.

We are satisfied, after applying the principles of law to which we have referred above to the established facts, that the owners did not enter into the business of selling land. Therefore, the realisation of the land by sale did not result in income being earned by them for the purposes of subsec. 25(1). We are also of the view that this was not a case of profit which arose from the carrying on or carrying out of any profit-making undertaking or scheme. We are satisfied on the facts that what occurred was the mere realisation, by the most advantageous means, of the asset which the owners had on their hands when they abandoned the intention of farming the subject property.

In these circumstances, the applicants' appeal against the income tax imposed for the income year 1982 must be allowed. The Court makes the following orders:

  • 1. The appeal be allowed and the objection against assessment dated 25 July 1983 be upheld.
  • 2. The assessment based on income derived during the year ended 30 June 1982 and issued to the applicants by notice dated 31 May 1983 be reduced by the amount of $62,884.
  • 3. The Commissioner pay the applicants' costs of the appeal.

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