Case W88

Members:
KL Beddoe SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 25 August 1989.

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K.L. Beddoe (Senior Member)

The question to be decided is whether a profit realised by A Pty. Ltd. (``the trustee''), as trustee for the A Family Trust (``the trust''), from the sale of a grader is assessable income. The trustee is engaged in a business of cane farming and earthworks contracting. The profit of $16,716 realised by the trustee is disputed as to its assessability but not as to its quantum. Nor is there any consequential dispute as to whether the beneficiaries who were sui juris were presently entitled to their share of the net income or that the trustee was liable for tax in respect of the shares of the minor beneficiaries.

2. The statement lodged by the respondent in accordance with sec. 14ZG of the Taxation Administration Act 1953 asserted that the profit was correctly assessable under subsec. 25(1), para. 26(a) or sec. 26AAA of the Income Tax Assessment Act 1936.

3. In its return of income for the year ended 30 June 1980 the trustee disclosed assessable income of $197,040 from cane proceeds and $26,524 from clearing contracts. The depreciation schedule headed ``earthworks'' reveals that the grader was acquired in April 1980 for $11,284, depreciated as to an amount of $212 and disposed of for $28,000 at a profit of $16,716 with the $212 shown as depreciation recouped.

4. The evidence of one of the applicants, who was clearly the controlling mind of the trustee, established that the grader had been leased prior to acquisition and used on the cane farm and for contract earth levelling. Because the trustee had arranged earth levelling contracts of a significant nature well beyond the capacity of the existing grader the trust decided to lease a new grader.

5. The evidence establishes that the new grader was leased by the trust from AGC on 15 April 1980. It was not part of the arrangements for lease of the new grader that the existing grader be traded in or otherwise dealt with by the dealer selling the new grader. The existing grader was to continue in use on the cane farm and for contracting in the Mackay area.

6. It is relevant to note that the trustee had developed certain techniques for levelling land which were thought to be novel at that time. These techniques apparently attracted some publicity with the result that one B had had some discussions with the applicant and an employee of the trust.

7. In early May 1980 the machinery agents made an appraisal of the old grader on instructions from B. It was about this time that the applicant became aware of B's interest in acquisition of the old grader although B had previously evinced interest in the techniques for land levelling used by the trustee. There is no evidence to suggest that the trustee was minded to sell the old grader because of the lease of the new grader. The evidence discloses no such intention but it does disclose an intention to continue using the grader on the cane farm and for contract levelling work in the Mackay district. That is made clear by the applicant's evidence in cross-examination to the effect that the old grader was not for sale as at 2 May 1980 and that he had not given anyone authority to sell the old grader up to that time.

8. When the applicant decided to sell the old grader there were two motivating factors. The first was that the grader operators were likely to remain fully occupied with the operations of the new grader and therefore would not be available to operate the old grader. The second motivating factor was that the offer to purchase the old grader for $28,000 was an offer too good to refuse.

9. However, the evidence makes it clear that those motivating factors were not present when the trustee decided to pay out the lease and acquire the old grader. The lease was paid out because it was too expensive for the trust, given then current bank overdraft rates, the state of its bank account and given the new leases entered upon by the trustee. The evidence is consistent with the trustee making that decision. Although B, as purchaser, was interested in acquiring the grader from the time he became aware that the trustee was purchasing a new grader his interest was not known to the applicant or the trustee so that the decision to purchase the old grader was not motivated by knowledge of a potential purchaser ``in the wings''.

10. The evidence of the purchaser B was somewhat vague as to the timing of his offer to purchase the old grader from the trustee. B appears to have formed the intention to make an offer for the grader early in April 1980 and had discussed the grader with an employee of the trustee. However, it was established that B

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ATC 758

did not convey the offer to the applicant (and thereby the trustee) until he visited Mackay in the first week of May 1980. To the extent that B's evidence suggested that he made an offer to purchase the grader to the trustee before that time I do not accept the evidence. I am satisfied that B made the offer on the basis of discussions with the trust's employee and the appraisal by the machinery merchants, but without prior notice to the trustee, in early May 1980. There is nothing in B's evidence to contradict the evidence of the applicant that he only became aware of B as a potential purchaser when the offer was made in early May 1980.

11. Counsel for the respondent submitted that the profit on sale of the old grader was assessable income within the terms of subsec. 25(1) or para. 26(a) of the Income Tax Assessment Act.

12. The basis for assessability under subsec. 25(1) was said to be the decision of the High Court in
F.C. of T. v. Myer Emporium Ltd. 87 ATC 4363; (1987) 163 C.L.R. 199. The evidence does not support the submission because for the principle in the Myer case to apply here it would have to be the case that, as a matter of fact, the trustee acquired the old grader with the intention of reselling it. The temporal connection between purchase and sale of the old grader makes it necessary for the Tribunal to very carefully scrutinise the evidence. That temporal connection gives rise to an inference that there was an intention of resale at the time of purchase. But the facts established do not support the inference. The trustee acquired the grader for the purpose of using it on the cane farm in particular and for the earth levelling contracts in the Mackay area in general.

13. This is not a case where the grader was acquired for purposes which included sale of the grader when a suitable offer came along and the grader was to be used in the business in the meantime pending such an offer. Nor is it a case where the grader was acquired with the intention of selling it, whether for more or less than the payout figure.

14. Those findings dispose of the submission that the proceeds of sale or the profit on sale are assessable income within the terms of sec. 25. Those findings also dispose of submissions relying on the operation of para. 26(a). There was no purpose of resale at a profit at the time of purchase nor was there any profit-making undertaking or scheme in relation to the grader.

15. It was not seriously suggested on behalf of the respondent that the profit was assessable within the terms of sec. 26AAA. In any event it is clear that subsec. 26AAA(5) operates because of para. (b) of that subsection.

16. The applicants have therefore established that the assessments are excessive. The objection decisions will be set aside and the objections allowed.