GUTWENGER v FC of TJudges:
Full Federal Court
Black CJ, Sheppard J and Jenkinson J
This is an appeal from a judgment of a Judge of this Court (Olney J) in which his Honour dismissed an appeal by the appellant against the disallowance by the Commissioner of Taxation of two assessments of income tax. The question which the appeal raises for decision is whether moneys received by the appellant from the sale of certain allotments of land in the Frankston area are, after allowing for appropriate deductions, part of the assessable income of the appellant for the years of income ending 30 June 1987 and 1988. Before his Honour, it was claimed that the profit arising from the sales was assessable income because it was income, according to ordinary concepts (subsec. 25(1) of the Income Tax Assessment Act 1936 (``the Act'')), income derived from a profit-making undertaking or scheme (subsec. 25A(1)), profit made on the sale of property within 12 months of its acquisition (s. 26AAA) and a capital gain within the meaning of the provisions of Part IIIA of the Act.
His Honour concluded that there was no basis for the Commissioner's case based on s 25A. No submission in relation to that section was made on behalf of the Commissioner before us. The appellant does not contend that any profit arising from the sale of allotments of land within 12 months of their acquisition was not assessable income under s 26AAA of the Act. Nor does he contend that Part IIIA of the Act does not apply to the sale of the remaining allotments. He says, however, that the amount of income tax or capital gains tax which would be payable as a consequence of the application of those sections to the circumstances of the case would be comparatively small.
The two substantial issues which have arisen for decision are:
- 1. Whether the profit arising on the sale of the allotments was income according to ordinary concepts.
- 2. If that question be answered in the negative, whether, in the circumstances of the case, the amount of tax payable pursuant to s 26AAA of the Act is to be calculated without taking into account the value of the land, when transferred to the appellant, as part of the cost base for the purpose of determining the amount of profit which was made. No such problem arises in relation to capital gains tax because of the specific provisions of Part IIIA which deal with the matter; see subsec 160ZH(9).
It is important that the facts of the matter be set out in a little detail. The account we give is taken substantially from his Honour's judgment. The appellant is German and, at all relevant times, has resided in Germany. His wife, Mrs Gutwenger, is an Australian by birth but she resides with her husband in Germany. The two were married in Australia in May 1973. They have resided in Germany since their marriage, but have made frequent visits to Australia during the intervening period.
Mrs Gutwenger has a brother living in Australia, Mr Holloway. Until his death in August 1983, Mrs Gutwenger's father, Mr Holloway senior, also lived in Australia.
At all material times the appellant has been employed by a large confectionery company based in Frankfurt known as Ferrero OHGmbH. During 1980 and 1981 he was dissatisfied with his job and had private discussions with the Australian manager of Ferrero who was then wanting to transfer to a position in the United States. At that time the appellant was interested in becoming the Australian manager should the position become vacant. As it happened, it did not. In any event, from early 1983, the appellant's career with Ferrero improved so that he no longer wished to come to Australia.
His Honour found that Mrs Gutwenger and her brother had always enjoyed a close relationship. This relationship was shared by the appellant and Mrs Holloway. Until his death, Mr Holloway senior was part of this close family group. In October 1978 Mr Holloway senior suffered a stroke and moved from his home at Brighton into a nursing home at Frankston. The Holloways resided in the Frankston area and the nursing home was close to their home.
Between 1973 and 1983 the appellant and Mrs Gutwenger made annual visits to Australia, usually at about Christmas time. Until Mr Holloway senior was moved to the nursing home, they stayed with him; thereafter they stayed with the Holloways. The Gutwengers gave thought to acquiring a house in the Frankston area. There were a number of reasons for this. The Holloways lived in the area. They could be close to the nursing home where Mr Holloway senior lived after October 1978 and the Frankston area had an added attraction for Mrs Gutwenger in that a close personal friend, Mrs Streader, whom she visited frequently when in Australia, also lived in Frankston. The Gutwengers had in mind a house where Mrs Gutwenger's father could stay with them during their visits to Australia.
Early in 1982 Mrs Gutwenger purchased about 20 acres of land in Overport Road, Frankston. The land was later subdivided into 27 allotments and transferred to the appellant. Within a year of the transfer 20 of the allotments were sold by the appellant. The remaining allotments were sold within a relatively short time thereafter. Profits said to have arisen from the sales are claimed by the Commissioner to be assessable income, as to the 20 lots, under subsec 25(1) or s 26AAA of the Act, and as to the remaining lots, under subsec 25(1) or the provisions of Part IIIA of the Act.
It is necessary to give an account of the way in which the land came to be purchased by Mrs Gutwenger and subsequently transferred by her to her husband. In January 1982, the Gutwengers were staying at Frankston. They became aware of a property in Overport Road which was to be sold at auction late in the month. The property comprised about 8 acres on which was erected a large house. From what they were able to ascertain, it appeared that the house could be adapted to accommodate both families, that is the Holloways and the Gutwengers. Alternatively, it was thought that a second house could be built on the land so as to provide separate accommodation for each family. However, the land was withdrawn from sale before the auction and the appellant returned to Germany. Mrs Gutwenger remained for a further 3 weeks or so.
Shortly after his return to Germany, the appellant received a telephone call from Mrs Gutwenger in which she told him that the land adjacent to the land which had been withdrawn from auction was available for sale. Mrs Gutwenger had become aware of the land as a result of a telephone call to Mrs Holloway by an estate agent. The land comprised about 20 acres on which the only improvements were some fencing and a water tank. At its highest point the land provided a view across Port Phillip Bay and to Melbourne. It was for sale at the price of $175,000. Mrs Gutwenger thought that the land would provide an ideal site on which to build a large family home. The appellant agreed that she should purchase it, although he had no recollection of the land. On 5 February 1982, Mrs Gutwenger signed a sale note whereby she agreed to purchase the land for $175,000. The land was zoned residential `D' by the Frankston City Council.
Mrs Gutwenger returned to Germany on 12 February 1982. Before she did so, she executed a power of attorney in favour of Mr Holloway to enable him to complete the purchase of the land. The balance of the purchase price was paid in February 1984 out of funds available to Mrs Gutwenger from her father's estate. She took title to the land on 24 February 1984.
The facts to which we have referred are not in issue. They were found by his Honour. No challenge to any of his findings concerning these or other matters was made on the appeal. His Honour said that he accepted Mrs Gutwenger's evidence to the effect that her intention in purchasing the land was to use it for the purpose of building on it a large single house sufficient to accommodate both the Holloway family and her own as well as providing the facility for her father to visit.
No professional advice was sought at the time of purchase. His Honour said that, had the future development of the land into subdivided lots been contemplated, it would be reasonable to expect that some inquiry would have been made as to zoning and related matters. Furthermore, so his Honour said, some investigation as to the cost of development and the likely market for the subdivided lots would have been made. He said that Mrs Gutwenger simply paid the price that was being asked for the land. Nothing was done to protect Mrs Gutwenger's interests as purchaser of the land by way of lodging a caveat against the title. His Honour added, ``The manner in which the land was acquired bore none of the hallmarks of a commercial enterprise''. His Honour also remarked that, at the time the land was purchased, the appellant and his wife were actively considering the prospect of taking up residence in Australia. It was not until about a year later that they became aware that the appellant's long term future with Ferrero was to be in Germany. His Honour said that he had no hesitation in finding that Mrs Gutwenger purchased the land with the intention that it should be used as a site for a home for her immediate family and possibly for her brother and his family. His Honour found that the land was not acquired by Mrs Gutwenger for the purpose of profit-making by sale.
His Honour made some findings about the zoning of the land. He said that the conditions which applied at the time the land was purchased were such that a detached house could not be erected on an allotment smaller than 0.26 of a hectare unless the allotment was already in existence at 3 November 1971. Furthermore, only one detached house could be erected on an allotment and no building could be constructed to a height greater than two storeys ``except in accordance with a permit''. The land could not be subdivided into allotments smaller than 0.26 of a hectare which is approximately equivalent to two-thirds of an acre.
Several months after Mrs Gutwenger purchased the land - his Honour thought in April or May 1982 - Mr Gutwenger spoke to Mr Holloway and asked him to investigate the possibility of being able to build two houses on the land and to ascertain whether there were any legal restrictions on building. Mr Holloway visited the office of the City of Frankston. He was told that it would be impossible to build a single house on the land. Instead, the land had to be subdivided before it could be built on. It would appear that this information was not correct but Mr Holloway did not know this at the time.
Mr Holloway made further inquiries from other authorities and engaged a firm of land surveyors and civil engineers to ascertain what could be done with the land. It is not necessary to set out his Honour's account of what occurred in relation to their inquiries or further inquiries made by Mr Holloway himself. The upshot was that the matter would be left in abeyance until the Gutwengers, next visit.
During the early part of 1983 Mr Holloway senior's health deteriorated. His prognosis was poor. Mrs Gutwenger returned to Australia in June. The appellant followed in July. Mr Holloway senior died in August 1983.
In the latter part of July 1983, the appellant consulted a local estate agent about what could be done with the land. By that time the appellant knew that his career with Ferrero in Germany was assured so that a move by him to Australia was no longer a realistic prospect. Although his Honour does not mention it, it would have been apparent to him at that time that Mr Holloway senior was unlikely to live for very long so that plans which the Gutwengers had to have a home where he could stay during their visits to Australia were not likely to be fulfilled. On the advice of a friend, the appellant consulted a different firm of civil engineers. A summary of estimated costs and a cash flow was prepared. According to the estimate given the appellant, it would cost almost $500,000 to develop the land into 26 allotments (at that stage not 27) over a period of 12 months.
Two matters required attention before a subdivision could be approved. One related to drainage and the other to the ownership of a
ATC 4013private road along the southern boundary of the land. Although this road had the appearance of an ordinary street, the strip of land immediately adjacent to the southern boundary of the land was privately owned and remained registered in the name of a Mr Watson, the person from whom Mrs Gutwenger had purchased it. Before the land could be subdivided, it was necessary for the road either to be declared a public road or brought into common ownership with Mrs Gutwenger's land.
The appellant returned to Germany leaving Mr Holloway to look after things. On 6 August 1985 Mrs Gutwenger executed a general power of attorney in favour of Mr Holloway authorising him to do on her behalf anything that she could lawfully do herself.
The process of acquiring the title was, as his Honour said, a ``tortuous business''. In the upshot, it was not until October 1985 that the title to the road was acquired by Mrs Gutwenger and not until July 1986 that the City of Frankston gazetted it as a public road. The drainage problem was ultimately solved but not without a considerable degree of effort over a long period. This involved agreement being reached with the adjoining owner for the grant of a drainage easement.
The subdivision of the land into 27 allotments was dealt with in 3 stages. Stages 1 and 2 were approved by the City of Frankston on 18 April 1986 and stage 3 on 18 July 1986. Tenders were called for street construction in July 1986 and work began some weeks later. The plans of the subdivision were registered on 7 April 1987 when separate titles were issued for each lot.
His Honour made some findings about the way the development was financed. In May 1986 the District Commercial Manager of Westpac at Frankston advised Mr Holloway that the bank would be prepared to consider an application for a loan of $600,000.00 to assist with the subdivision. The bank recommended a commercial bill facility over a period of 12 months. The facility was approved on 30 September 1986. A mortgage in favour of Westpac was executed on behalf of Mrs Gutwenger and was registered on 3 November 1986. His Honour said that correspondence in evidence showed, that from time to time, commercial bills were discounted and the proceeds credited to an account in the name of Mrs Gutwenger. The costs associated with the development were paid out of the same account upon which Mr Holloway had authority to operate. There was no evidence as to the precise amount of finance actually provided by the bank but it appears to have been somewhat less than $600,000.00. In addition to the borrowed funds, other funds were provided by the Gutwengers from joint funds in Germany.
It is next necessary to refer to the evidence of the circumstances in which Mrs Gutwenger transferred the land to the appellant. In her evidence, Mrs Gutwenger said that, until early 1987, no firm decision on what to do with the subdivided lots had been made. She said that one serious possibility considered was building houses to let. She said that the decision to sell the lots was made early in 1987. She added that she did not want to be involved in the decision concerning the sale of the lots as the thought of selling the land was ``quite depressing''. Consequently, so she said, she decided that she would transfer ``by way of gift'' all of the land to her husband. This was effected by a transfer of the land which she signed in March 1987. The appellant said that, prior to 1987, his wife had not made any firm decision about what she would do with the land when it was subdivided. He confirmed that serious consideration had been given to building houses on the land to be let. He said that the decision to sell was made early in 1987. He also said that Mrs Gutwenger did not want to be involved in decisions about the sale of the subdivided lots. She transferred the land to him by way of gift. He thereupon instructed the firm of estate agents to sell the land and he gave Mr Holloway a power of attorney to act on his behalf.
His Honour said that he did not accept the evidence given by the two witnesses. He thought that there was an overwhelming preponderance of evidence which demonstrated that from mid-1983 onwards a decision had been made to sell the land in subdivided lots. This was the basis upon which Mr Holloway had sought finance for the project and it was the basis upon which finance was granted by Westpac. His Honour added:
``Given the high hopes she had when the land was purchased, and the unfortunate circumstance of her father's death which in effect removed one of the primary reasons for the plan she had originally contemplated, it is understandable that Mrs Gutwenger may have regarded the idea of selling the
ATC 4014land depressing, but I am satisfied that the decision to sell was made well before early 1987.''
The transfer of the land was expressed to have been made in consideration of ``a gift between husband and wife''. It was executed on 24 March 1987. The power of attorney given by the appellant to Mr Holloway was executed on the same day. The transfer was registered on 9 April 1987, i.e. two days after the registration of the subdivision plans and two days before the offering for sale at public auction of the first l0 lots.
The transfer could not be registered without the bank's consent. The consent was given on the understanding that the debt to the bank was not to increase and that no further funds could be drawn without a new mortgage being executed. Notwithstanding the transfer of the land into the appellant's name, Mrs Gutwenger remained liable to the bank for the amount which was outstanding. The liability was subsequently satisfied by the application of part of the proceeds of the sale of the subdivided lots to the bank. His Honour said that there was no evidence of any specific arrangement having been made as between the appellant and Mrs Gutwenger concerning her liability to the bank. He said, ``From the facts established I draw the inference that the applicant accepted the transfer of the land subject to an understanding that he would discharge Mrs Gutwenger's liability to the bank from the sale proceeds''.
In relation to this matter it is important to note the provisions of s 46(2) of the Transfer of Land Act 1958 (Vic) which provides that, in every transfer of land which is subject to a mortgage or annuity, there shall be implied a covenant with the transferor by the transferee binding the latter to pay the interest secured by the mortgage at the rate and times and in the manner specified in the mortgage and to indemnify the transferor against all liability in respect to the principal sum secured by the mortgage and any other covenants therein contained or implied. It is to be observed that the provisions of the section are consistent with the inference which his Honour himself drew that the appellant would discharge his wife's liability to the bank from the proceeds of sale.
His Honour continued:
``There is no evidence to suggest that the gift of the land was solicited by the applicant or that it was made pursuant to any preconceived plan or arrangement between the Gutwengers. Nor is there any evidence to suggest that any advice was obtained in advance as to the taxation or other consequences that may flow from the gift apart from the advice that Holloway's solicitor gave concerning stamp duty.
Until she transferred the land to her husband, Mrs Gutwenger was clearly the beneficial owner of the land. It had been purchased in her name. She had paid the initial deposit of $5,000. Apart from the balance of the deposit ($45,000) which was paid from joint funds remitted from Germany, she had paid the balance of purchase price from her own resources in Australia. Some of the interest payments were remitted from Germany but later interest was paid out of Mrs Gutwenger's funds in Australia. To a substantial extent the cost of the subdivision was met from money borrowed in her name, with the balance paid out of joint funds from Germany. At all times prior to 24 March 1987 Holloway had acted as her agent pursuant to powers of attorney granted by her. He had incurred liabilities in her name and had met them from funds drawn from her account.
Throughout this whole process the applicant had taken an active interest in what was being done. Clearly, Mrs Gutwenger relied upon her husband's advice and assistance. But until he became the owner of the land the applicant's role was consistent with the role that may be played by many husbands in like circumstances. His involvement prior to March 1987 does not give rise to any inference that he had, or expected to receive, any proprietary right in the land or to the proceeds from its sale. Whilst the course of conduct engaged in by Mrs Gutwenger, the applicant and Holloway from mid-1983 onwards may be indicative of Mrs Gutwenger being involved in the carrying out of a profit-making undertaking or scheme in relation to the land, there is no basis upon which it can be said that the applicant was similarly involved. At least, not until after the land was transferred to him.''
Although his Honour did not refer specifically to the cross-examination of the appellant and his wife, it is pertinent to set out
ATC 4015part of the evidence which they gave when asked questions concerning the transfer of the property to the appellant on 24 March 1987. Amongst other things Mrs Gutwenger said:
``The subdivision part of that work was drawing to a close and at that stage it was clear to me that the land was going to be sold. It was a depressing sort of feeling for me because I wanted something that I couldn't have and my father was no longer alive and it was going to be, in my opinion, a very drawn out business doing this thing, maybe, over years. I didn't know how long it was going to take to do it. And I just felt I didn't want any more to do with that. I just wanted not to think about it any more, not to have to do with it.''
Later her evidence proceeded as follows:
``At the time the transfer was prepared, it was the position, was it not, that it was hoped by your husband that all of the properties would be sold very shortly? - I can't say that was the hope. I understood it was going to be going on for I don't know how long, because it was quite a lot of pieces of that. I don't think there was the hope that it could be very quick.
Well, what was it about your involvement with the property that you wanted to change by signing the transfer? - It wasnt only the fact that it was depressing. It was uninteresting to me. And at the time, I had a very ill son, who had to have an operation that particular year. My job is mother. My job is family, and my job is not being interested in such a thing as that. And I was not interested in that part of that sort of business. It just became a burden when I had other things which were more pressing on my time.''
The evidence of the appellant included the following statements:
``My wife did make a gift to me.
Why did your wife make the gift to you? - I don't know exactly but I think what she thought but that is - you have to ask that, her, but I can tell you what I think she thought but I don't know if I have to say that.
Why did you think she was giving you a gift? - Because she wanted to get rid of it because she doesn't like being involved in administration, signing, talking, things like that.''
It will have been observed from the quotations from his Honour's judgment which we have earlier set out that his Honour accepted the entirety of the evidence of the witnesses called by the appellant subject to his not being satisfied that the decision to sell the land was made in 1987. He thought that the probabilities were such that that the decision must have been made at a much earlier point of time. Subject to that matter, he accepted that the land was not originally bought for the purpose of resale, he accepted the evidence given about the family's circumstances and the Gutwengers' desire to have a house in Australia especially because of their wish to participate in the care of Mr Holloway senior, and, inferentially, Mrs Gutwenger's evidence concerning her reason for making the gift of the land to her husband.
The appellant disclosed the sales of some of the allotments in his income tax return for the year ended 30 June 1987. But, although he gave details of the transactions, he claimed that the profit arising from the sales was not assessable income. That led to assessments by the Commissioner which treated the sales both during the year ended 30 June 1987 and the year ended 30 June 1988 as part of his assessable income. Annexed to the assessment in respect of the 1987 year was an adjustment sheet which said simply, ``Taxable Income adjusted to reflect profit on sale of land subdivision in the 1987 financial year''. An amended assessment in respect of the 1988 year also had attached to it an adjustment sheet which used similar language. After the assessments were received, notices of objection were lodged. The objections were disallowed and that disallowance led to the appeals to this Court.
It is not clear on the face of the record what the basis of the Commissioner's assessments was. However, we were informed by counsel for the Commissioner that the assessments were raised on the basis of deducting from the proceeds of sale the total of the costs of the acquisition of the land, the costs of the subdivision, and other costs such as advertising expenses and legal costs. His Honour did not approach the matter in this way. Rather, he concluded that the assessable income of the appellant for the two years should include an amount reflecting the gross proceeds of sale
ATC 4016less the amount needed to satisfy the indebtedness to the bank. He reached this conclusion by deciding that the transfer of the land to the appellant was not by way of gift but was a transfer to him in consideration of his assuming Mrs Gutwenger's obligation to pay the amount owing to the bank. That was the only deduction he made from the gross proceeds of sale because, by the time that the transfer to the appellant was made on 24 March 1987, all costs in relation to the acquisition and subdivision of the land had been incurred by her. In round figures the result of this exercise led his Honour to conclude that the amount of profit in the 2 years of income was $1.7 million. That figure was reached by deducting from the gross proceeds of sale of approximately $2 million the sum of $300,000 or so, that being the amount owing to the bank at the time of the transfer to the appellant. If this were the correct way to approach the matter, the tax which would be payable would be in excess of that assessed by the Commissioner. In consequence, the assessments were not excessive within the meaning of para 190(b) of the Act which was in force at the relevant time; see now s 14ZZO of the Taxation Administration Act 1953. It was on this basis that the appeals were dismissed.
There is no question but that, when he made his assessments, the Commissioner approached the matter by treating the whole operation under which the land was acquired, subdivided and sold, as an exercise conducted by the appellant either directly or indirectly through the agency of his wife. In other words, although the land was acquired in Mrs Gutwenger's name and the subdivision was carried out while she was still the holder of the title, the Commissioner thought that the proper approach was to treat the appellant as the person who had engineered the whole transaction, had backed it financially and had become entitled to the profit that ultimately resulted. Not surprisingly, in the light of his findings, his Honour rejected this case. Furthermore, he rejected the case made by the Commissioner in so far as it relied upon the appellant having formed an intention to resell the land before he acquired it. His Honour put paid to this suggestion by accepting the evidence of Mrs Gutwenger that she purchased the land for the reason she gave in her evidence, namely to erect a house on it and to be able, when she was in Australia, to have her father to stay with her from time to time. His Honour concluded that he should accept her evidence in this regard supported as it was, in his opinion, by the inherent probabilities of the matter and many of the surrounding circumstances.
No doubt it was the totality of all those circumstances which led his Honour to conclude that the transfer of the land by Mrs Gutwenger to her husband was neither solicited nor procured by him. Strangely, however, at a later point in his judgment, his Honour said, ``I think that whilst the language used may not be entirely apt it can reasonably be said that by being a party to the transfer of 24 March 1987 the applicant `caused' the land to be transferred into his own name''. The word ``caused'' comes from particulars supplied by the Commissioner in which it was alleged that the appellant had caused, procured or solicited, with the intention of deriving a profit thereby, the purchase and subdivision of the land and the transfer of it into his own name. His Honour continued:
``The evidence does not support many of the assertions of fact contained in the respondent's particulars. I have already expressed my findings as to the intention Mrs Gutwenger had at the time she purchased the land and to her subsequent development of the land. There is no evidence to suggest that the applicant either caused, procured or solicited the purchase of the land by his wife. The idea was clearly her own. The applicant had never seen the land. His only involvement in the decision to purchase was to agree with Mrs Gutwenger that she should do so. At the time of purchase neither Mrs Gutwenger nor the applicant had any profit-making intention with respect to the land. And there is certainly no evidence to suggest that before early 1987 either party had the intention that the land should be transferred to the applicant, nor that the applicant solicited the transfer.''
There then followed the words which we have earlier quoted in which his Honour concluded that the applicant caused the land to be transferred into his own name. With respect to his Honour, we have the greatest difficulty in understanding how this could be so in the light of his earlier findings. The whole tenor of his Honour's findings up to that time was that the appellant had not been involved in relation to the land except as an adviser to his wife. The
ATC 4017participation he had was that of a concerned and caring husband giving his wife advice about the way in which an asset which was hers and not his should be dealt with. In all these circumstances it is difficult to understand how the transfer of the land to the appellant was in any way ``caused'' by him.
No challenge was made to any finding of fact made by his Honour. No attempt was made, during the argument before us, to support the assessments upon the original basis upon which they were made by the Commissioner. Instead, the principal approach was to accept the way his Honour had approached the matter and to support his judgment in this way. Absolutely critical for this exercise was his Honour's conclusion that the transfer to the appellant was a transfer for consideration and not by way of gift. If that conclusion be wrong, his Honour's judgment cannot be supported. Alternatively, the Commissioner submitted that the appellant did not receive the land as capital. He received it as land which was committed to being sold at a profit. The land was committed to profit making, so the Commissioner's counsel said, from the moment of its acquisition by the appellant. The Commissioner further contended that, if this were the correct position, it would be inappropriate to take into account as an offset to the profit which was made, the value of the land at the time of its acquisition by the appellant on 24 March 1987.
Counsel for the appellant contended that his Honour was wrong in concluding that the transfer was for valuable consideration. Furthermore, he denied that the land was received by the appellant as land committed to being sold at a profit and said that, in any event, it was necessary to take into account the value of the land which was given his client in determining what precisely the profit made was. Throughout his submissions he emphasised that his Honour had found that the gift was neither solicited nor procured by the appellant. Again there was no challenge to that finding by Counsel for the Commissioner.
In addition to these submissions, there were submissions concerning the question whether the value of the land at the time of the transfer to the appellant was to be taken into account in determining the liability to tax under s 26AAA of the Act. As mentioned, no such problem arises in relation to Part IIIA because of the specific provisions of that Part (subsec. 160ZH(9)) making it clear that the value is to be taken into account. We shall refer to the detail of the submissions concerning s 26AAA of the Act after we have dealt with the submissions which arise in relation to subsec 25(1).
The first matter with which we deal is the question whether the transfer to the appellant on 24 March 1987 was a transfer by way of gift or a transfer in respect of which there was consideration, namely, an undertaking by the appellant to be responsible, as between Mrs Gutwenger and himself, for the payment of the indebtedness to the bank. We have reached the conclusion that the transfer was by way of gift and not one for consideration.
The question whether a gift has been made is determined by ascertaining the intention of the transferor or disponor of the property or money which has passed to the other party to the transaction. There must be an animus donandi.
Leary v FC of T 80 ATC 4438; (1980) 47 FLR 414 was a case dealing with the application to the facts of the case of the provisions of subpara 78(1)(a)(ii) of the Income Tax Assessment Act 1936. Relevantly, the section provided that gifts made by the taxpayer in the year of income to any of a number of funds, authorities or institutions in Australia were to be allowable deductions. In the course of his judgment Bowen CJ referred to
FC of T v McPhail (1968) 15 ATD 16; (1968) 117 CLR 111 where Owen J had said (at ATD 19; CLR 116) that he thought it was clear that, to constitute a gift, it must appear that the property transferred was transferred voluntarily and not as the result of a contractual obligation to transfer it and that no advantage of a material character was received by the transferor by way of return. Bowen CJ continued (at ATC 4439; FLR 415):
``In this statement his Honour was mentioning what was appropriate to the facts before him. He was not putting forward a test to be used as a substitute for the words of the section. It seems that a payment may be regarded as voluntary though made under a sense of moral obligation, but will not generally be regarded as voluntary if made under an obligation imposed by law, whether under contract or otherwise. Where the payment is made in pursuance of a contract but is not gratuitous, the person making the payment may fail to obtain the deduction under para. 78(1)(a) in any event.
ATC 4018However, it is possible there may be circumstances where the taxpayer would not lose the deduction simply because he had contracted to make the payment. Thus, where A and B agreed to make gifts to C, an institution within subpara. 78(1)(a)(ii), or A agreed with B to match any gift made by him to C, there would seem to be no reason why either A or B should be deprived of his deduction. It seems it will depend upon the circumstances whether the fact that a payment is made in accordance with the provisions of a contract will render that payment incapable of being described as voluntary and incapable of entitling the payer to a deduction.''
Later his Honour said (at ATC 4441; FLR 417):
``Another question which arises is whether the payment must be by way of benefaction. It seems that a transfer of property, to qualify as a gift under para. 78(1)(a) need not be made out of motives of benevolence... [
Peers' case (1921) 29 CLR, at p. 121; cf.
Cuming Campbell Investments case (1940) 63 CLR, at p. 644], but the essential idea of a gift is the transfer of property by way of benefaction [
Cuming Campbell Investments case (1940) 63 CLR, at pp. 634, 641, 642].
In para. 78(1)(a) the notion of benefaction appears to be an essential idea, particularly having regard to the nature of the funds, authorities and institutions listed in the 45 subparagraphs. The purpose of para. 78(1)(a) seems clear enough. It is to offer an allowable deduction for income tax purposes in order to encourage benefactions to the bodies specified, which clearly are considered to be bodies which it is in the public interest to assist.''
Earlier his Honour had said (at 416) that a question not expressly covered by what Owen J had said in McPhail was whether a deduction was allowable notwithstanding that the person making the payment received a material advantage provided that material advantage did not proceed from the payee. That passage has relevance to the present case because it could be said that Mrs Gutwenger did receive a material advantage as a result of the transfer of the property to her husband. That advantage was the obligation assumed by him to be responsible, as between himself and his wife, for her indebtedness to the bank. She, of course, remained liable to the bank for the amount which was outstanding because the bank had not released her from her obligations to it.
In the course of his judgment, Brennan J, when a Judge of this Court, said (at ATC 4451-4452; FLR 432-433):
``When the context in which the notion of gift is invoked as a legal criterion shows that the term `gift' is not used as connoting merely a mode of transferring property, the motive of a disponor and the purpose of the disposition are critical matters for consideration. So it was in Roman law, as Professor Sohm Institutes of Roman Law, Ledlie Translation, 3rd ed., pp. 211, 212 noted:
`A gift (donation) is a transaction whereby one person, from motives of liberality, i.e. with a view to enriching another person, makes over to that other person some property or benefit.... The special characteristic of a gift is the motive which underlies it, the ``animus donandi'', or motive of liberality.'
And in the United States (though in a statutory context quite different from sec. 78(1)(a)) the term `gift' in a tax Act has evoked a judicial inquiry into the disponor's intention. Thus, in
Commissioner v. Duberstein 363 US 278 (1959) Brennan J. delivering the Opinion of the Supreme Court said:
`A gift in the statutory sense, on the other hand, proceeds from a ``detached and disinterested generosity''
Commissioner v. LoBue 351 U.S. 243; 246; ``out of affection, respect, admiration, charity or like impulses'' Robertson v. United States at p. 714. And in this regard, the most critical consideration, as the Court was agreed in the leading case here, is the transferor's ``intention''.
Bogardus v. Commissioner (1937) 302 US 34, at p. 43...'''
Later Brennan J said (at ATC 4452; FLR 433) that questions of degree and purpose turned upon the particular facts of each case. He went on to consider the facts of the matter that he had to decide.
In the context of what Brennan J said, it is apposite to refer to Gifts and Promises - Continental and American Law Compared, John P. Dawson, (1980) at 85 where the author,
ATC 4019dealing with the law of France, refers to the animus donandi under the heading, ``The Requirement of Altruism''.
In Leary's case Deane J (as a judge of this Court) said (at ATC 4455; FLR 438):
``If a transfer of property is in return for valuable consideration received by the transferor from the transferee, it will not be a gift [received] by the transferor. If the relevant property is not, for that reason, precluded from being properly regarded as a gift, the abovementioned considerations indicate usual attributes of a gift, namely, that a gift will ordinarily be by way of benefaction, that a gift will usually be not made in pursuance of a contractual obligation and that a gift will ordinarily be without any advantage of a material character being received in return. I would add, to those usual attributes of a gift, the attribute that a gift ordinarily `proceeds from a ``detached and disinterested generosity''
Commissioner v. LoBue (1956) 351 U.S. 243, 246; ``out of affection, respect, admiration, charity or like impulses'',
Robertson v. United States (1952) 343 U.S. 711, 714 (
Commissioner of Internal Revenue v Duberstein et ux. (1960) 363 U.S. 278 at p. 285.)'''
It is to be observed that his Honour said that a gift will ordinarily be without any advantage of a material character being received in return.
Re ``The Land Tax Act 1887'', Ex parte Finlay (1884) 10 VLR (Eq) 68, it was held by the Full Court of the Supreme Court of Victoria that, in the particular circumstances of the case in question, the liability under the ``Transfer of Land Statute'' (a predecessor of the Transfer of Land Act) of the transferees to pay the mortgage debt did not form a valuable consideration for the transfers to the children that had been effected in that case. Such a dealing by a father of a family in favour of his children was not a transfer for valuable consideration within the meaning of the Land Tax Act. Holroyd J, giving the judgment of the Court, said (at 82-83):
``The land purchased by Mr Finlay having been brought under the `Transfer of Land Statute', the legal estates in their several portions passed to his children subject to the mortgages; and the law has imposed on them (or at least on the adults) the obligation of paying the interest and indemnifying their father against the principal and against any liability on his covenants, so far at least as their respective shares are concerned. The obligation here is cast on the transferees by Statute as an implied covenant (No. 301, sec. 63); but we cannot distinguish it in principle from that which would be enforced in Equity against the grantee of an equity of redemption. It is an obligation attached to the gift, an incident of the thing given. The owner of a `landed estate' subject to a mortgage is an owner subject to the land tax, notwithstanding all his liabilities as mortgagor; and, if he voluntarily transfers the mortgaged estate without further consideration than that arising from the acceptance of the transfer, he transfers the subject of the tax without any consideration. If the gift is onerous, the donee may reject it.''
This case was discussed by Fullagar J in
Comptroller of Stamps (Vic.) v Rylaw Pty Ltd 81 ATC 4411. The transaction with which Fullagar J was concerned is complex and it is not helpful to refer to the detail of it. Fullagar J referred to another passage from Holroyd J's judgment where his Honour said (at 82) that an obligation arising by law out of the acceptance of a gift of an estate which was mortgaged could not constitute a valuable consideration. This was admitted. His Honour added that the gift itself was not of an estate clear, but only cum onere. No consideration moved from the donee in accepting the onus which was part of the gift.
The question to be decided is a question of fact. The evidence which his Honour accepted in the present case establishes, in our opinion, that Mrs Gutwenger intended to make a gift of the land to her husband. That was the tenor of her evidence and also the tenor of her husband's evidence. It is plain, as we have mentioned, that his Honour accepted this evidence. Of course, there could be transactions in which the owner of mortgaged land transferred the land to another person in consideration of that person undertaking to indemnify the transferor in respect of the liability under a mortgage. The facts show that that is not the case here. The land is under Torrens title so that it is not correct to speak of there being an equity of redemption. But effectively what was transferred to the appellant was the land subject to the charge created in favour of the bank by the mortgage. There is no indication in the
ATC 4020evidence that Mrs Gutwenger and the appellant discussed the question of what was to happen in relation to the discharge of the obligation to the bank. The subsequent facts indicate that he must have assumed that the liability was to be paid out of the sales of the allotments. That is what occurred. But that does not mean that it was not Mrs Gutwenger's intention to make a gift of the land, subject to the mortgage, to her husband. That is precisely what she intended to do and, in substance and effect, it is what his Honour found occurred. It was only because of his view about the effect of the appellant assuming his wife's liability for the mortgage debt - a view which, with respect, we disagree - that he reached the conclusion that he did.
In all the circumstances we are satisfied that there was a gift by Mrs Gutwenger of the land to her husband. His Honour's conclusion that the transaction was for consideration is, in our respectful opinion, incorrect.
The next question is whether there were nevertheless circumstances disclosed in the evidence which should lead us to conclude that the amount of the profit was assessable income according to ordinary concepts. It is to be emphasised that the starting point for the consideration of this question is the fact that the transfer to Mr Gutwenger was by way of gift. Furthermore, the gift which was made was neither solicited nor procured by him. Nor, in our opinion, was it caused by him in any sense of that word. His Honour may have concluded that the gift was ``caused'' by the appellant because of his view that the transaction was for consideration. It may be that, had his Honour taken a different view, he would not have expressed the matter in this way. Be that as it may, we are satisfied that the appellant did not ``cause'' the transfer of the land to be made to him.
Thus, counsel for the Commissioner had to approach the question now under consideration on the basis that the land had been transferred to the appellant by way of an undoubted gift. Nevertheless, he contended that the profit arising from the sale of the land was income according to ordinary concepts. He said that, having regard to a number of findings of fact to which we shall refer in a moment, it could not be concluded that all that happened was the mere realisation by Mr Gutwenger of a capital asset. He said that the land itself was never a capital asset of his. At the time it was transferred to him, it was already committed to being sold off for profit in subdivided lots as part of a revenue producing dealing. The appellant himself acquired the land with the intention and expectation that it should be sold in subdivided lots for profit and be dealt with solely on that basis. In counsel's submission, neither the land nor the profit from the sales of the allotments was capital in the hands of the appellant.
The various evidentiary matters upon which counsel relied to support his argument were as follows:
- (a) On 23 March 1987 the appellant ``pre- sold'' Lot 22 in anticipation of the gift on 24 March 1987.
- (b) On 24 March 1987 the appellant executed the transfer on the basis that he would discharge the liability of his wife to the bank from the proceeds of the sale.
- (c) The land was transferred into the appellant's name in a state ready for sale in lots ``for profit''; after the transfer the intention to sell at a profit was that of the appellant.
- (d) At the time he acquired the land, arrangements had already been made to auction Lots 1 to 10.
- (e) At the time he executed the transfer, the appellant executed the power of attorney in favour of Mr Holloway, authorising him to do on his behalf anything that he might lawfully authorise an attorney to do in relation to the sale, disposal or other dealings in relation to the land.
- (f) On 7 April 1987 the plans of subdivision were registered at the Land Titles Office and a separate title issued for each lot.
- (g) A transfer into the name of the appellant was registered at the Land Titles Office on 9 April 1987. Two days later, i.e. on 11 April 1987, the first ten allotments were offered for sale at public auction.
- (h) A number of the lots were sold at the auction on 11 April 1987; thereafter the appellant caused the land to be marketed effectively so that by 30 June 1988 all but one of the 27 allotments had been disposed of.
Counsel also submitted that the appellant acquired the land with the intention of selling it at a profit. That is a reference to a finding by his Honour in which his Honour said that there
ATC 4021could be no other explanation ``than that the applicant [the appellant] acquired the land with the intention of selling it at a profit''. In our respectful opinion this begs the whole question. One has to look at the circumstances as they existed on 24 March 1987. One has to bear in mind the accumulation of findings made by his Honour concerning the conduct of Mrs Gutwenger and her husband in relation to the land since 1982. One has to take into account his Honour's findings that the transfer to the appellant was neither solicited nor procured by him. One also has to take into account the circumstance that on no basis was the land transferred to the appellant as a consequence of anything he himself did. He did not cause the transfer to himself nor did he solicit or procure it.
A number of authorities were referred to during argument. These included
Official Receiver in Bankruptcy (As Trustee of the Estate of William Fox) v FC of T (1956) 11 ATD 119; (1956) 96 CLR 370 (Fox's Case),
FC of T v Williams 72 ATC 4076; 72 ATC 4188; (1972) 127 CLR 226,
Tikva Investments Pty Ltd v FC of T 72 ATC 4231; (1972) 128 CLR 158, and
FC of T v Whitfords Beach Pty Limited 82 ATC 4031; (1981-1982) 150 CLR 355. All these cases have relevance to the present problem but each depends upon its own facts and circumstances. This is perhaps best shown by a comparison of the two decisions of Williams and Tikva. Both were decided at first instance by Stephen J. Both were decided in the same year. Williams went on appeal to a Full Court; Tikva did not. Stephen J, whose judgment in Williams was upheld by the Full Court, considered that there was no liability to tax in Williams. On the other hand, the proceeds of sale in Tikva were, he thought, properly treated as assessable income. As is so often the case, the value which the various authorities have is not in the application of them to the case in hand in any direct way, but for the help they provide in the statements of principle or the indication of guidelines which assist a court in its determination of a matter in the same area.
In Williams, Stephen J said (at ATC 4074; CLR 234) that, in concluding that the proceeds of sale received by the taxpayer were not income according to ordinary usage and concepts, he had not specifically relied upon the fact that only one isolated transaction was in question. However, he added that that fact, together with the circumstance that the taxpayer acquired her interest in the land by gift from her husband, went to make up the totality of matters which were to be considered in determining that there was no more than a mere realisation of an asset by the taxpayer.
On appeal, Barwick CJ said (at ATC 4190; CLR 241):
``Further, the acceptance of the gift was not, in my opinion, an acquisition of the interest in the land with the purpose of profit- making. I find it difficult to conceive of the unsolicited receipt of a gift as purposive in any relevant sense on the part of the beneficiary. But in particular, I am unable to accept the submission that the acceptance of such a gift can be held to be an acquisition for the purpose of profit-making, however much the receipt or the prospect of the receipt of the donation might excite in the mind of the donee a vista of money-making by its subsequent sale. Also, having had the benefit of the argument in this case, including consideration of the advice of their Lordships in
McClelland v. F.C. of T. 70 ATC 4115; (1970) 120 C.L.R. 487, I remain of the opinion that the realisation of a gift, however elaborately made, can neither yield a profit nor in itself be a profit-making scheme.
The facts of the present case eloquently illustrate the point. The respondent was given an interest in land in common with others. To realise her asset, she must either seek partition, or join with her co-owners in selling the entire interest in the land. As I have mentioned, one co-owner did not wish to sell. The sale in sub-division, some lots being withheld to be attributed to the unwilling co-owner's interest in the entirety, was at once a substitute for partition and the realisation of the respondent's asset in the most beneficial manner. In the first place it is impossible, in my opinion, to discover a `profit' made by the respondent by this realisation. There was no cost to her of her asset. Her contribution to the cost of sub- dividing the land was part of her expense of realisation and nothing more. In the second place, neither the resolution to realise the land by sub-division and sale, nor the sub- division and sale could, in my opinion, constitute a profit-making scheme so far as the respondent was concerned. Lastly, the
ATC 4022respondent did not adventure her interest in the land as capital in a business in any relevant sense.''
Menzies J said (at ATC 4191-4192; CLR 244):
``There can, of course, be no doubt that in 1959 the land was acquired for the purpose of profit-making by sale. It is also clear that when the taxpayer received the gift from her husband, there was a common, intent that the land would be sold when the time was ripe. The taxpayer's only concern with the land was in its eventual sale. Furthermore, she was at all times ready to be guided by her husband about the time for selling the land and the method of selling it: after all, apart from anything else, he was an estate agent and had given her his interest in the land. Accordingly, when in 1968 the husband advised the taxpayer that it would be a good time to sell the land, she accepted his advice and left all the arrangement, so far as she was concerned, to him.''
Later Menzies J said (at ATC 4192; CLR 245):
``It is my opinion that it could only be in very special circumstances that what has been given can be regarded as acquired by the donee for the purpose described in the section [s. 26(a)] and that the difference between the value of the gift when given and the price received upon the sale of the gift is a profit. There are not circumstances here that warrant either conclusion.''
In the course of his judgment Gibbs J (as he then was) said (at ATC 4194-4195; CLR 249):
``An owner of land who holds it until the price of land has risen and then sub-divides and sells it is not thereby engaging in an adventure in the nature of trade, or carrying out a profit-making scheme. The situation is not altered by the fact that the landowner seeks and acts upon the advice of an expert as to the best method of sub-division and sale or by the fact that he carries out work such as grading, levelling, road-building and the provision of reticulation for water and power to enable the land to be sold to its best advantage. The proceeds resulting from the mere realisation of a capital asset are not income either in accordance with ordinary concepts or within the second limb of sec. 26(a), even though the realisation is carried out in an enterprising way so as to secure the best price...''
Later his Honour said (at ATC 4195; CLR 250):
``Turning now to the Commissioner's argument that the case comes within sec. 25(1) of the Act, it seems to me that the co- owners did no more than realise their asset in an ordinary and prudent way. There are no circumstances that could enable it to be said that in so doing they carried on a business or engaged in an adventure in the nature of trade. The Commissioner placed some reliance upon the decision of the House of Lords in
Edwards (Inspector of Taxes) v. Bairstow  A.C. 14 . That case shows that the fact that a transaction is an isolated one does not necessarily prevent it from being an adventure in the nature of trade, but it has otherwise little bearing on the present question. There the taxpayers bought machinery with the intention, not to use or hold it, but to resell it quickly and make a profit on the deal  AC, at pp. 36-37. The transaction was a commercial one, and nothing but a commercial one, from beginning to end. The case is thus quite distinguishable from the present, where it is impossible to say that the taxpayer began an adventure in the nature of trade when she received her interest in the land. The proceeds which the taxpayer derived from the sale were not income within the ordinary understanding of the term.''
In the present case the appellant did not procure, solicit or cause the land to be transferred to him. He gave no consideration for it. When he took title, the land was in a condition in which it could be sold. It had been subdivided, the subdivision had been approved, arrangements had been made for the auction and one lot had in fact been sold. His Honour's findings establish that the appellant's interest in the matter had never been a business interest. Furthermore, the whole history of the matter, as found by his Honour, indicates that the decision to subdivide and sell by Mrs Gutwenger had come about, not because of some preconceived plan on her part, but by reason of the force of circumstances stemming from her father's illness and subsequent death and her husband's decision to remain in employment in Germany. Her original ideas for the land ceased to be
ATC 4023relevant. It was no longer required for the purpose she had in mind. She set about selling it, to use the words of Gibbs J in Williams, in an ``enterprising way''. If she had remained the owner of the land throughout there may have been a question whether she was liable for income tax in respect of profit received by her. She would not have been liable for tax pursuant to the provisions either of s 26AAA or Part IIIA of the Act because she acquired the land in 1982. The question whether she would have been liable for income tax upon the basis that the profit made on the sale was income according to ordinary concepts is a matter that is not before us. It does not arise for decision. It is not appropriate to speculate on what the position may have been if that had been the case to be determined. We mention the matter only to emphasise the difference which there is between her situation and that of her husband.
Prior to 24 March 1987 the appellant had absolutely no interest in the land in any relevant sense. He had nothing to do with it. Of course he knew about it and he had no doubt given certain advice and help to his wife in relation to it. But he had no legal or financial interest in it and no expectation of any such interest. On 24 March 1987 he accepted the gift that was made to him of the land. All arrangements were in place. Nothing had to be done except to let matters take their course. That is what he did. He received a gift of a capital asset and disposed of it in a way that had been predetermined for him by the actions taken by his wife. He did not engage in any business venture or any profit-making undertaking or scheme. Rather, he completed what was already well under way. In those circumstances it would not be correct to apply to him Gibbs J's allusion to the sale of property in an enterprising way. The appellant did not have to be enterprising about the matter at all. All that was over. All he had to do, and the only sensible thing for him to do, was to allow events to take their course and accept the proceeds of sale after payment out of the bank and other expenses. In our opinion the transaction was of a capital nature and not of a revenue nature. No part of the proceeds of sale was income accordingly to ordinary concepts.
If that view were wrong, the position is little different. In that event the value of the land at the date of the transfer to the appellant would have to be taken into account in determining what, if any, profit resulted from the sales. It would be quite wrong to do as the Commissioner did and apply to him the cost base applied by the Commissioner which brought the land to account at the price Mrs Gutwenger had agreed to pay for it in 1982. The Commissioner failed to establish the case he set out to make, namely that Mr Gutwenger had master minded the whole transaction from start to finish and that Mrs Gutwenger was at all times acting in some capacity on behalf of the appellant. That case failed. The evidence established that it was without foundation. Statements in both Fox's case and Williams' case make it clear that, in the event of the transaction being a business transaction involving the generation of income, one would have to take into account the value of the land at the time of the gift. If that were to be done, the exercise would be little different from that which will need to be done in any event, as will be seen in a moment, under s 26AAA. It would be most unlikely that the profit which would be ascertained on that basis would be of substantial significance.
In all these circumstances we have reached the conclusion that the proceeds of sale received by the appellant were not received by him as income according to ordinary concepts under subsec 25(1) of the Act.
That leaves the question which arises for decision in relation to s 26AAA of the Act.
Subsection 26AAA(2) provides:
- (a) a taxpayer has purchased property after 21 August 1973 and before the commencement of this section or purchases property after the commencement of this section; and
- (b) the taxpayer has, whether before or after the commencement of this section, sold the property or an interest in the property before the expiration of the period of 12 months from the date on which he purchased the property,
then, subject to this section, the assessable income of the taxpayer includes any profit arising from the sale of the property or interest.''
It is to be observed that what is to be included in the assessable income of a taxpayer is the profit arising from the sale of the property or interest within the period to which the section refers. Where, as here, there has been a
ATC 4024transfer without consideration, para 26AAA(1)(f) operates to deem the transfer to constitute a sale and a purchase. Although s 26AAA contains a great many provisions, there is nothing in it to suggest that the word ``profit'' is not to have its ordinary meaning. If one were concerned with the determination of profit for the purposes of subsec 25(1) of the Act, one would have little difficulty in reaching the conclusion, that, in a case like the present, where the taxpayer had received a gift of property the sale of which had subsequently resulted in a profit, the taxpayer was entitled to have taken into account the market value of the property at the time of the gift. The profit would be ascertained by deducting from the gross proceeds of sale the amount of that value together with other expenses incurred in the realisation of the asset. That was also the position in relation to para 26(a) of the Act when it was in force. As mentioned, statements in both Fox's case and Williams' case make this clear. The position is clear also under Part IIIA of the Act but that is because of the specific provisions of subsec 160ZH(9).
The question is whether the provisions of s 26AAA should be given any different meaning or effect from the provisions of subsec 25(1) or the repealed s 26(a). In the light of the fact that the word in question is ``profit'', there does not appear to be any reason why one should take that course. There is nothing to support it. Moreover, the form of para 26AAA(1)(f), which operates to deem a transfer without consideration to constitute a sale and a purchase to which the general provisions of subsec 26AAA(2) can apply and which, unlike subsec 26AAA(4), does not deal with value, tends to suggest that ``profit'' should not be given a different meaning. If one were to contemplate giving ``profit'' a different meaning, one would have to consider whether it was a likely outcome because of the consequence for taxpayers of such a view. It would mean that they would be bound to pay tax on the value of gifts to them when the property, the subject of the gifts, was sold within 12 months. In that event, the tax payable would have at least some of the hallmarks of a gift duty. This may raise the question - it was not referred to in argument - whether the Act infringes s 55 of The Constitution because it might be said that it deals with more than one subject of taxation. In all the circumstances it seems unlikely that the section was intended by Parliament to operate as a tax on gifts. If the view contended for by the Commissioner be correct, that would be the effect of what was involved. In our opinion, although the proceeds of sale, so far as concerns lots sold within 12 months of 24 March 1987 are concerned, are liable to be treated as assessable income under s 26AAA there has to be taken into account, in ascertaining the profit, the value of the gift, that is to say the value of the land, at the time the gift was made.
It follows that we would answer the second of the questions posed at the commencement of these reasons in the negative. It follows that the Commissioner has failed on both of the points relied upon by him. In the result the appeal must be allowed and the orders made by the primary Judge set aside. It will be necessary for the matter to be remitted to his Honour for the determination of the value of the land at the date of the gift for the purpose of ascertaining the liability to tax under both s 26AAA and Part IIIA of the Act. It is to be hoped that the parties may be able to agree on that value and upon the amount of income tax, if any, which upon the view we take of the matter, is payable by the appellant.
In due course it will be necessary for orders to be made setting aside the assessment for the 1987 year and the amended assessment for the 1988 year. That is a matter best done, however, by the primary Judge after the further hearing has taken place. The costs of the appeal must be paid by the Commissioner. The costs of the proceedings before the primary Judge will be a matter for the primary Judge to determine after the further hearing has taken place.
THE COURT ORDERS THAT:
1. The appeal be allowed.
2. The respondent pay the appellant's costs of the appeal.
3. The order made by Olney J on 20 July 1994 be set aside.
4. In lieu thereof the matter be remitted to Olney J for further hearing in accordance with the reasons for judgment of this court and for the making of an appropriate order for the costs of the proceedings at first instance.