O'Loughlin J

Federal Court

Judgment date: Judgment handed down 23 August 1991

O'Loughlin J

The taxpayers in these matters, Paul and Peter Abeles, are brothers who were born in 1936 and 1939 in the United States of America. In February, 1970 they purchased, for $60,000, 10 acres of land at Forrestfield, a rural area on the outskirts of metropolitan Perth. Upon the land subsequently being rezoned as urban land, they subdivided it into 38 allotments, selling 37 of them in the 1977 financial year and the remaining one eight years or so later in the 1986 financial year.

The respondent, the Commissioner of Taxation did not become aware of the subdivision and the sales until some time subsequent to the 1986 year; but as neither brother had lodged an income tax return for the 1977 year, no time limits were running against the Commissioner. The Commissioner considered that the activities of the taxpayers attracted the provisions of the Income Tax Assessment Act 1936 (Cth) (``the Act''). The question that therefore falls for decision in these proceedings is whether any part of the proceeds enjoyed by the two brothers from the subdivisional sales form part of their assessable incomes for the two financial years in question. I was told from the bar table that if that question was answered in favour of the Commissioner, it would not be necessary for subsidiary issues to be addressed because of arrangements or agreements that had been made between the parties. That being the case, it will be sufficient to reserve for further argument such questions (if any) as may arise as a consequence of the publication of these reasons.

The Commissioner's first proposition was that the land had been acquired for the purpose of profit-making by sale and that, as a consequence, any profits were therefore assessable under the first limb of the old s. 26(a) of the Act. The Commissioner's second and alternative argument had two branches: he claimed that when the taxpayers sold their land, they engaged in activities that amounted to more than the mere realisation of an asset - what they did either constituted the carrying on of the business of land development or the carrying on or the carrying out of a profit-making undertaking or scheme; in the former case, gross income would therefore be assessable under s. 25(1) whilst in the latter case the taxpayer's net profit would be assessable under the second limb of s. 26(a).

In the financial years that are relevant to these proceedings, s. 26(a) of the Act was in the following terms:

``26. The assessable income of a taxpayer shall include -

  • (a) profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme;''

Section 25(1) provided:

``25(1) The assessable income of a taxpayer shall include -

  • (a) where the taxpayer is a resident - the gross income derived directly or indirectly from all sources whether in or out of Australia; and
  • (b) where the taxpayer is a non-resident - the gross income derived directly or indirectly from all sources in Australia,

which is not exempt income...''

Both brothers gave evidence in support of their contention that they had purchased the land for rural residential purposes and that their subsequent disposal was the mere realisation of a capital asset. Although he did not call any witnesses, the Commissioner tendered numerous documents which, so he claimed, supported his proposition that the proceeds of sale were assessable. It will be necessary to address that evidence in some detail.

The elder of the two brothers, Paul, who has tertiary qualifications in chemical engineering and business management, first came to Australia in 1963 as an assisted migrant. However, he returned to the United States in 1965. Not long after his return, he obtained employment with the international business house, Seagrams Distillers Ltd, ultimately becoming its manager for the South-West Pacific area (which included Australia). From 1966 until about April or May 1971 (when his employment with Seagrams was terminated) Paul spent the greater part of his time travelling in the interests of his employer. He still regarded his home as Chester, New Jersey where his widowed mother and bachelor brother lived on a small farm and where both brothers had been born; he also had an office in Park Avenue, New York. However, he

ATC 4758

estimated that he was absent overseas for about 10 months in the year - he also was a bachelor. His travels, which had taken him to every capital city in Australia, had led him to conclude that Perth was his preferred city. His evidence was that he had chosen the rural environment of the outer metropolitan area of Perth as the place where, in the short term future of some three to five years, he wanted to reside. He explained that his family home in Chester, New Jersey was in a small rural community and he wanted his own home to be, ultimately, in the same sort of environment. On the other hand, and unlike the cold of New Jersey, the warmth of Perth's climate was an added attraction.

The background of Mr. Peter Abeles was quite different. He was, and still is, a high school teacher living and working in New Jersey. In 1969 he was intent on obtaining tenure and completing his Master's degree. Tenure in the American educational system means, so he explained, security of employment; it is assured after three years of continuous employment at the same school. He had commenced work on his Master's degree in about 1967 in the knowledge that he then had seven years within which to complete it. In fact, he completed it in 1972.

Some time in late 1969 Paul met Mr. Victor Bercham a land salesman employed by Markham & Heath, land agents of Perth. It is not clear how they met nor, indeed, is the primary reason for their meeting clear. But it is a fact that as a result of meeting Mr. Bercham, Paul ultimately purchased five shares in a property syndicate or trust known as the ``Sultana Road Project'' for $5,000. This was a syndicate that had been formed in Perth to acquire and subdivide rural land into smaller rural blocks. According to maps and plans that were tendered in evidence, Sultana Road was about 16 kilometres west-south-west of the central business district of the City of Perth.

It was Paul's evidence that as an independent exercise Mr. Bercham also showed him other properties which led, ultimately, to Paul, together with Peter, deciding to buy the 10 acre property at Berkshire Road, Forrestfield. Those 10 acres were zoned rural in late 1969 and early 1970 and were about a mile or so further west from the land which formed the ``Sultana Road Project''.

Paul said in evidence that he was at home in Chester, New Jersey for Christmas 1969 and that he there discussed with Peter the prospect of Peter joining with him in purchasing a parcel of rural land near Perth. Paul's evidence was that Peter had expressed some interest in leaving the United States and taking up residence in Australia.

Peter's evidence about his involvement in land in Western Australia was also expressed in general terms. He referred to Paul as being ``pretty excited'' about purchasing land in the Perth area; he also said that he (Peter) was ``interested'' in joining him. He said that he ``still had an idea'' of living somewhere else but that his first needs were to obtain security of tenure and his Master's degree.

When next in Perth, in February 1970, Paul successfully submitted a written offer in the joint names of himself and his brother to purchase the land at Forrestfield; it was then, as was other adjoining land, vacant and unimproved. At that time, the land was described as Lot 574 and was portion of Swan Location 28 on plan 4684. That plan (which was part of Ex. R2) showed that Lot 574 was one of numerous 10 acre blocks in a rural subdivision in the Forrestfield area. Lot 574 was bounded by Berkshire Road and Dawson Avenue. Although it is somewhat inaccurate, it is nevertheless convenient to describe Berkshire Road as running east-west and Dawson Avenue as running north-south; on that premise, Lot 574 was situated in the south-west corner of the intersection of the two roads. Lot 573 can therefore be described as adjoining Lot 574 to the west. Further to the west, adjoining Lot 573, there were more 10 acre lots; there were also 10 acre lots to the east, across Dawson Avenue, and to the north fronting Berkshire Road.

When Paul left the employment of Seagrams in April or May 1971 he first took a holiday and then commenced looking for new employment. Eventually, he received an offer from an Adelaide company which he accepted in April 1972. He came to live in Adelaide and, although he has subsequently changed his employment, he has remained in Adelaide ever since. He took out Australian Citizenship in 1978.

In the course of seeking fresh employment, subsequent to leaving Seagrams, Paul conceded

ATC 4759

that he did not, at any time, make any specific or identifiable inquiry for employment in or near the City of Perth. I regard that fact as one of significance for it rests most uneasily with his earlier evidence that in late 1969 and early 1970 he had so committed himself to residing in Perth in the short term future that he was prepared, not only to purchase an appropriate parcel of land for his future residence, but also to convince his brother likewise to share his future. In my opinion, it was completely contradictory for Paul to assert, as he did when pressed in cross-examination, that his loss of employment was a factor contributing to his decision to sell the land. In view of the fact that he sought and obtained employment in Australia, one would have expected him to have looked for employment in or about Perth (not Adelaide) so that he could take a step closer to the fulfilment of his objective of building his home on the rural site that he and his brother had purchased.

In addition to his failure to seek employment in Perth in 1972 there were other aspects of Paul's evidence that were unsatisfactory. In his evidence-in-chief (p. 14) he was asked to state his intention in buying the land. His answer was:

``My intention was to reside on the property, to build a residence and live there at some future date.''

He was then asked:

``Was there anybody else to live on the property?''

His reply was:

``Yes, I hoped Peter my brother would reside with me.''

This small but important passage of evidence does not fit comfortably with the manner in which the case for the taxpayers was opened. In his evidence Paul was asserting his intention to reside on the land with a hope that his brother Peter would join him. However, in opening, counsel for the taxpayers treated both brothers in common saying that their evidence would be that they purchased the land to build a residence upon it. Peter, in evidence, first said with respect to the purchase of the land:

``And I still had that gleam in my eye of, you know, moving and living someplace else.''

(p. 105)

A few questions later, Peter was asked ``... what (his) intention was in (him) becoming a joint purchaser of the land?'' His answer to that specific question was, contrary to his earlier vague reference to a ``gleam'' in the eye, quite detailed and quite to the point:

``Well, we had discussed, you know, building and living together, since we are both single and Paul was travelling quite a bit at that time, and he thought it would be great that we could both get together and build a house where I would be a teacher of that type. I might be there most of the time and he would have a - a home. He was tired of living out of suitcases and I thought it would be great to - to come to Australia at a future time and to do that - to build a home and to live on a parcel of land similar to the parcel of land we had in size in New Jersey - in Chester.

Did you have any immediate intention of coming to Australia?... No. As I said, I was getting tenure and then also taking my Masters programme so it's two or three years down the Road, but the parcel of land was available at that time. That - that's why I - I agreed that it was time, you know - that it would be great. Let's buy it. Then we can build on at a later date.''

(pp. 105-106)

Another subject that was difficult to comprehend was the relationship between Paul's employment and his intended residence on the land. He failed, for example, to explain how he might be able to continue his employment with Seagrams whilst residing on the land.

``I thought that it might be (nice to) purchase some land there to reside, although at that point in time I had no immediate plans to reside there. There was some discussion at head office in New York that once sales were increased and Seagram products became better established they would open an office here and I would be able to live here.''

(p. 11)

It would seem obvious that his use of the word ``there'' on two occasions in the first sentence was a clear reference to the land at Forrestfield. But he switched to the use of the word ``here'' in the next sentence when talking of his employer opening an office. It seems to me that the use of the word ``here'' in contrast

ATC 4760

to ``there'' indicates that the discussions with respect to the opening of an office were centred on a location other than Perth. ``Here'' might have been intended to refer to Adelaide but with his American background, it is more likely that it was intended as a wider general reference to some part of Australia other than Perth. At that stage in his career, Paul was an American citizen whose work caused him to travel extensively throughout the Pacific Basin and Australia; Perth perhaps had its attractions to him personally but there was no evidence, apart from his and his brother's self serving statements, that remotely suggested that his work would ever give him the opportunity to take up permanent residence in Perth. For example, he gave no explanation for Perth (as distinct from, say, Sydney) being his headquarters as area manager for Australia and the South-West Pacific.

The next area of Paul's evidence that caused disquiet was his claimed lack of knowledge of subdivision and zoning. In answer to a question from his counsel he said that at the time of purchasing the land the possibility of subdividing the land ``never occurred'' to him (p. 15); he made no reference in his examination-in-chief to the Sultana Road project. Information on that topic and an awareness that he had a full understanding of the concept of subdivision came only as a result of cross-examination. He acknowledged that the object of the Sultana Road project was to acquire rural land and subdivide it into smaller rural parcels. I do not accept his evidence where he claimed that the possibility of subdivision never occurred to him when he decided to buy Lot 574. In my opinion, he gave that answer because he thought that a concession that the prospect of subdivision was a matter that aided him in coming to a decision to buy the land would harm his chances in this litigation.

As a result of these inconsistencies in his evidence, I have come to the conclusion that I cannot rely on Paul's evidence when he stated that he purchased the land for the ultimate purpose of residing on it. This finding also taints Peter's evidence about his stated intentions. But, in any event, and independently of Paul's evidence, I have concluded that Peter's evidence on this subject should not be accepted. In 1970 he was not only an American citizen, he was an American resident living at home with his widowed mother intent on pursuing his working career and academic advancement. His claim that he accepted Paul's proposal to purchase the site of their future home in faraway Western Australia without even discussing the subject with his mother was implausible. What was there about Australia in general and Perth in particular that would have caused Peter, in about Christmas 1969, to make a decision that in the near future, when he had finished his studies, he would make it his home? He had visited Australia in 1963 or 1964 but it was not suggested that his visit six years earlier had given him the desire to live in Australia. Perhaps Paul spoke highly of Australia, but if he did so, the evidence on that subject is lacking. Both men expressed their dissatisfaction with standards in the United States at the time. Both mentioned the Vietnam war, racial riots and other subjects which were of concern. I have made allowances for all these matters but I cannot accept that in 1970 Peter had any specific intention, expectation or belief that he would or even might take up permanent residence in Forrestfield, Western Australia. He may have had some ``gleam in his eye'' but that was insufficient to support his stated proposition that Western Australia was to be his ultimate home and that he participated in the purchase of the land for that purpose.

I have rejected the evidence of both brothers about their intentions to reside on the land. I accept their evidence that they were born in and grew up in a rural atmosphere in New Jersey. I also accept their evidence that a rural lifestyle is their preferred lifestyle. But it does not follow that the purchase of those 10 acres in a rural setting on the outer boundary of metropolitan Perth by two American citizens, one of whom had no ties with Australia, was for the purpose of their ultimate residence. I am unable to believe their evidence on this subject.

Putting to one side, questions of onus, mere rejection of that evidence does not, without more, prove anything; my rejection of their stated purpose for acquisition does not prove the existence of some other purpose. For example, it does not prove that they, or either of them, purchased the land for the purpose of profit-making by sale or for the carrying on or carrying out of any profit-making undertaking or scheme. It is therefore necessary to make a

ATC 4761

more extensive examination of the evidence in order to see whether a clearer picture unfolds.

At some unspecified date in either 1971 or 1972 Paul became aware that the land had been rezoned from ``Rural'' to ``Urban''. I accept that he had no knowledge of this change until after the event. It would seem that Mr. John Markham, the land agent (and Mr. Bercham's employer) was the person who told Paul of the change in zoning; I also accept that he told Paul that other adjoining owners of 10 acre lots were intending to subdivide. Paul said that he felt that he was going to be surrounded by quarter acre blocks. He said that it was his ``understanding that there were five 10 acre blocks - one each on each side and a couple further down the road - that were going to be developed at the same time'' (p. 19). The plan Ex. R8 suggests, in fact, that there were six lots involved in one master plan of subdivision, of which the brothers' 10 acres was an integral part. Upon the assumption that each parcel of land was 10 acres or thereabouts and that the brothers' 10 acres produced 38 allotments, the fact that there was a total of 225 allotments also suggests that six lots were involved. Furthermore, letters from the consulting engineers to Paul dated 10 December 1976 and 13 September 1977 (Exs. R11 and R23) suggest, from the number of allotments referred to, that there were six 10 acre lots included in the one subdivision. Although I do not regard it as a matter of great consequence, I conclude, on balance, that there were six 10 acre lots involved in the one plan of subdivision and that Lot 574, comprising the 10 acres belonging to the taxpayers, was one of those six lots.

Paul's evidence was that he felt that because of the rezoning ``it was no longer feasible'' to think of the land as a place of residence in the future. He therefore made a decision to subdivide and sell the land, signing an application for approval of a plan of subdivision in September 1973. For reasons which were not made clear during the course of the hearing that application, although conditionally approved, did not proceed. Nevertheless it is tangible, independent evidence that in mid to late 1973 (if not earlier) the brothers had made a decision to dispose of their land. A second plan of subdivision was prepared, lodged and approved in late 1975.

It is, in my opinion, a matter of some importance to stress that this was not just a plan to subdivide the taxpayers' parcel of 10 acres into 38 allotments; rather, their land was but part of a much larger land mass which encompassed six different but contiguous pieces of land and a total of four different groups of owners.

The inference that I draw from Paul's evidence is that Mr. Markham co-ordinated the owners of the different parcels of land and worked in some capacity, such as the project manager, for the group; he arranged for all contractors who were needed to bring the whole subdivision into saleable form. These contractors covered the whole range of professional advisers and tradespeople. There were planners and engineers: there were road and sewerage and other like works that are common to most large subdivisions. Costs were borne between the land owners rateably according to the number of allotments that would ultimately vest in each owner. As Paul's and Peter's land produced 38 allotments their share of all costs was 38/225ths. Paul acknowledged that he and Peter did not have the financial resources to meet their share of the costs of the subdivision. They therefore obtained a line of credit up to $150,000 from a finance company. Asked whether they had borrowed the whole $150,000 Paul replied:

``No, it was going to be progress payments and it was taken over a period of time. The interest was to accrue within the loan - that's why the amount was so large, because we weren't sure how long or when we could repay it. We hoped to repay it eventually by selling up the blocks, or sufficient blocks to pay off the loan, at least.''

(p. 20)

Another aspect of the plan of subdivision which, in my opinion, was significant was the fact that the plan in its final form was not ``true'' to the outer boundaries of Paul's and Peter's land. In its final form, it was necessary for them to ``give'' a small piece of land to their western neighbour - the owner of Lot 573 - and to ``take'' from that neighbour another compensating piece of land. A perusal of Ex. R8 suggests that this was necessary because of the particular location of roads within the subdivision.

The exchange of land between the taxpayers and their western neighbour raises an immediate problem about the availability of the first limb of s. 26(a) to the respondent.

ATC 4762

Arguably there may be that lack of ``essential identity'' between that which had been acquired and that which had been sold.
FC of T v Whitfords Beach Pty Ltd 82 ATC 4031 at p. 4046; (1981-1982) 150 C.L.R. 355 at p. 382 per Mason J. (as he then was). In the same passage of his judgment, his Honour also allowed for the possibility that ``the first limb looks to a profit made on the sale of property which is in the same condition at the time of purchase and at the time of sale...''. However, these problems do not arise when considering the applicability of either s. 25(1) or the second limb of s. 26(a). As Mason J. said in Whitfords Beach, at ATC p. 4045; C.L.R. p. 381:

``(t)here is a fruitful field for the operation of the second limb in cases where there is a lack of identity between the property acquired and the property sold.''

Putting to one side for the moment, the question of the first limb of s. 26(a), the commencing point for the resolution of these issues is the well-known passage from the judgment of the Lord Justice Clerk in
Californian Copper Syndicate Ltd v Harris (1904) 5 T.C. 159 at pp. 165-166:

``... where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit... assessable to Income Tax. But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable, 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...

What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being - Is the sum of gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operation of business in carrying out a scheme of profit-making?''

The distinction that this passage establishes between, ``a mere enhancement of value by realising a security'' and a ``gain made in an operation of business in carrying out a scheme of profit-making'' remains a valid distinction for the second limb of s. 26(a): Whitfords Beach at ATC p. 4046; C.L.R. p. 383 per Mason J., where his Honour went on to emphasise (as had Deane J. in his dissenting judgment in the Federal Court) the importance and the scope of the word ``mere'': see also
FC of T v The Myer Emporium Ltd 87 ATC 4363 at pp. 4368-4369; (1986-1987) 163 C.L.R. 199 at p. 213.

If then the brothers, by participating with the other land-owners in the 1975 plan of subdivision, did no more than involve themselves in the ``mere'' realisation of their 10 acres of land, it could not be said of them that they had engaged in the carrying on or carrying out of some profit-making undertaking or scheme. Furthermore, it could not be said of them that they were engaging in some business enterprise that would attract the provisions of s. 25 of the Act. What is more, as Gibbs J. (as he then was) pointed out in
FC of T v Williams 72 ATC 4188 at p. 4195; (1972) 127 C.L.R. 226 at p. 249, the proceeds from the mere realisation of a capital asset will not be income ``even though the realisation is carried out in an enterprising way so as to secure the best price...''. Thus the fact that the brothers sold their land in subdivided form does not mean, without more, that any part of the proceeds would be assessable to income tax: see
Statham & Anor v FC of T 89 ATC 4070 at pp. 4074-4075; (1988) 20 ATR 228 at p. 233 and the cases there cited.

On the other hand, the proceeds of the subdivisional sales would be assessable income if the brothers had entered into the subdivisional transaction ``with the intention or purpose of making a relevant profit or gain from the transaction'': Myers case at ATC p. 4367; C.L.R. p. 211 - and this is so notwithstanding that the proceeds arise from an isolated business operation or commercial transaction: see also
Moana Sand Pty. Ltd. v FC of T 88 ATC 4897 at pp. 4902-4903; (1988) 19 ATR 1853 at p. 1859.

In Whitfords Beach Wilson J. acknowledged at ATC p. 4055; C.L.R. at p. 397 that:

``The real difficulty lies in discerning in a case where the answer depends on questions of degree when an alleged `mere realisation' is in reality the venturing of an asset not acquired for the purpose of profit-making as the capital of a business.''

In posing that question, his Honour had earlier noted the remarks of Barwick C.J. in
FC of T v McClelland 69 ATC 4001 at p. 4003; (1969) 118 C.L.R. 353 at p. 371

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and in
White v FC of T (1968) 15 ATD 173 at p. 174; (1968) 120 C.L.R. 191 at p. 216. It was in McClelland's case that the former Chief Justice said:

``But, if the inheritor adventures the inheritance as the capital of a business, for example, of land jobbing or developing, the income of that business will be taxable, not, in my opinion, under sec. 26(a) but according to ordinary concepts of income.''

In the application of these principles to the facts of this case, I have concluded that the taxpayers exceeded the bounds of the mere realisation of their land in an enterprising way. No doubt they were aided by Mr. Markham in making their decisions; perhaps, arguably, he induced them, first to agree to subdivide and then to participate in the larger plan that involved the six blocks and the four groups of owners. But, in these particular circumstances, they cannot hide behind Mr. Markham. He was their agent and his conduct was their conduct. Through Mr. Markham, the brothers went beyond a mere simple subdivision and sale of their 10 acres; they entered into an arrangement that was in the nature of a joint venture, sharing costs and expenses rateably; they even participated in variations to the boundaries of their land in order to present, and participate in, the best plan of subdivision. Their financing commitment was heavy; their established line of credit was $90,000 more than they paid for the land five years earlier; they allowed for the subdivision being a lengthy project and arranged with the finance company to accrue interest on the borrowed moneys. Although the size of a project is not a conclusive factor, it is one of numerous matters that are to be weighed in the balance. In this case, the readiness of the brothers to involve themselves with the other owners was more consistent with a business enterprise than a private realisation. The taxpayers, through their agent, Mr. Markham, chose to embark upon a business-like and efficient program of subdivision.

The extent of these operations had the hallmarks of a business enterprise, a conclusion that I have been able to reach more readily because I have been able to reject the taxpayers' evidence that this land was originally purchased for residential purposes. The fact that I am not able to identify the dominant purpose of purchase is not a matter of concern. I am satisfied that whether one looks at the matter under s. 25 or the second limb of s. 26(a), the Commissioner is entitled to succeed; cf. Moana Sand at ATC pp. 4902-4903; ATR p. 1859.

For the reasons set out above these appeals are dismissed. I will hear the parties on the question of costs and any other consequential matters.


That each appeal be dismissed.

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