FC of T v KURTS DEVELOPMENT LIMITED

Judges:
Burchett J
Lindgren J
Emmett J

Court:
Full Federal Court

Judgment date: 28 August 1998

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Burchett J

The detailed statement of the facts contained in the reasons for judgment of Emmett J, with which I am in general agreement, makes it unnecessary for me to be exhaustive. I desire only to add a few comments.

In my opinion, the decision in this case is governed by the decision of the High Court in
FC of T v St Hubert's Island Pty Ltd 78 ATC 4104 ; (1977-1978) 138 CLR 210 . There, Aickin J said (at ATC 4124; CLR 248-249) of the conduct of a ``continuing business in which land was being continually bought, held and sold, or bought, developed, subdivided, held and sold'':

``... [ I]t would be right to say that a true reflex of the taxable income would be better, or at least as well, ascertained by treating the land as trading stock, the original purchase price as an allowable deduction and the proceeds of sale of subdivided lots as assessable income, with appropriate adjustments in respect of land on hand at the beginning and end of each year and for development costs....

... In the case of land bought and sold in the course of a continuing business the analogy of manufactured products, though imperfect, may be helpful and a proper result may be arrived at by using it as a guide. The extension for income tax purposes of the concept so as to include raw materials acquired for the purpose of manufacture is no doubt a natural one. It enables one to regard as stock in trade raw materials purchased, not for the purpose of sale, but for consumption or transformation into manufactured goods, produced though not purchased as stock in trade and capable of being on hand at the end of a year. This recognizes the economic and accounting identity in a continuing business of goods purchased and goods manufactured, from raw materials purchased.''

Accepting what Aickin J called ``the analogy of manufactured products'', and accepting the accuracy of the statements I have quoted from his judgment, it seems to me to follow inevitably that, in circumstances such as those of the present case, all the expenditure devoted to the production of saleable lots out of an original parcel of raw land must be taken into account as part of the cost of producing the lots. I agree with Emmett J that it is not appropriate to segregate what has been called the infrastructure land from the balance of the land before the consummation of its being set apart by the registration of a plan of subdivision. However, it is plainly possible to identify this particular part of the land physically from the time of the initial approval of subdivisional plans and the commencement of construction of the roads and other features by which it is marked out. Nevertheless, the appreciation of that fact does not assist the taxpayer. Applying the analogy of manufactured products, it would

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ATC 4879

make no ultimate difference to the cost price, to be taken into account at the end of a year of income, of motor cars manufactured by a motor car manufacturer, if the engines could be separately identified at every stage up to the assembly of the finished vehicle. Upon the completion of the assembly, they would simply cease to be a separate article of commerce, but their cost would not disappear. It would become part of the cost of the vehicle. And, until then, the engines would be stock, either as engines or as partly manufactured goods. Similarly, here, if the infrastructure land be treated as a separate parcel of land, its devotion to the purposes fulfilled by it as infrastructure land would relate it indissolubly to the available lots which are the object of the whole exercise, with the result that its cost, together with the ``external costs'', would be part of the cost of those lots. The analogy is ``imperfect'' (as Aickin J said), for the engine becomes part of the car, whereas the roads et cetera never become part of any lot. But the principle, in both cases, is that one product made or developed by the taxpayer has been devoted to the creation of another, so that it has disappeared as a potential item to be sold, but has at the same time enhanced the value of the ultimate product. The cost price of that ultimate product cannot be computed without including the costs which went into the production of the product effectively consumed to bring it into existence.

Accordingly, orders should be made as proposed by Emmett J.