SUPREME COURT OF SOUTH AUSTRALIA IN THE EXERCISE OF FEDERAL JURISDICTION

WILSON v DEPUTY COMMISSIONER OF TAXATION (SA)

Mitchell, J

24 October 1968 -

Mitchell, J This is an appeal from a decision of the Commissioner of Taxation disallowing an objection which has now been referred to this Court at the request of the appellant pursuant to s 187 of the Income Tax and Social Services Contribution Assessment Act 1936-1964. The appellant filed notice of objection against an assessment of income tax based on income derived during the year ended 30 June 1962, and issued to him by notice of assessment dated 27 May 1965. He claimed that the assessment should be reduced by the excision of a sum included in the assessable income which was the difference between the sale price and the cost of certain land, being Lots 77, 78, 79, 80, 81 and 82 Shirley Avenue, Croydon Park, in the State of South Australia and being the land comprised respectively in Certificates of Title, Register Book vol 2445, fol 154; vol 2505, fol 6; vol 2443, fol 14; and vol 243], fol 13.

It is agreed between the parties that in the month of April 1962 the appellant sold all the afore-mentioned land to Owen Constructions Ltd for the sum of £10,450. Owen Constructions Ltd was incorporated in South Australia on 30 March 1962. The appellant and his wife, Joyce Lorraine Wilson, are and have been the only directors and shareholders of the company. The Commissioner of Taxation, in assessing the appellant's income for the year ended 30 June 1962, has included therein the difference between the price for which the appellant sold the land to which the objection relates, and the cost to the appellant of such land, being the purchase price which the appellant paid for the land plus certain other costs incurred by the appellant in the construction of a house on one allotment, which house was constructed prior to the sale by the appellant. The Commissioner thus calculated that the appellant had made a profit on the sale of all the allotments amounting to £7118, and that such profit was taxable.

Section 26(a) of the Income Tax and Social Services Contribution Assessment Act renders liable to taxation profit arising from the sale of property acquired for the purpose of profit making by sale, or from the carrying on or carrying out of any profit making undertaking or scheme. The appellant objects that neither of the limbs of s 26(a) applies to the transactions in question.

By virtue of s 190 of the Act the onus of proof is placed upon the appellant. The onus is that of proof upon the balance of probabilities. The appellant has to satisfy me as regards each of the pieces of property in question that he did not acquire it for the purpose of profit making by sale and that the the profit made by him upon the sale was not made from carrying on or carrying out of any profit making undertaking or scheme. Although Mr Jacobs did not concede that the transaction was not caught by the second limb of s 26(a) of the Act, the argument was directed mainly to the question whether it was or was not caught by the first limb of the subsection.

In discussing s 26(a) in Pascoe v Federal Commissioner of Taxation (1956), 6 AITR 315, at p 320; 11 ATD 108, at p 112, Fullagar, J, said with regard to the purchase of a piece of land: "It could conceivably have been acquired without any definite purpose in view at all. … But it is, nevertheless, I think, broadly true to say that, when a man invests money in the purchase of any kind of property, it will generally be either with a view to holding it and deriving income from it, or with a view to realizing sooner or later an enhanced capital value, and, while logically these 'purposes' are not mutually exclusive, it will generally be possible to say that the one or the other is predominant at the time when the purchase is made." It is, as it seems to me in that sense that a court has to consider what was the "dominant purpose" for which property was acquired, in order to decide whether it was or was not acquired for the purpose of profit making by sale.

The appellant gave evidence. He is now 37 years of age and as a child he lived at Kingsley Avenue, West Croydon, which was about one-half mile distant from the subject land. His father had owned a farm in the locality of Days Road, Croydon Park, but when the appellant was very young the family moved to Kingsley Avenue and the father was then carrying on a wholesale and retail milk vendor's business, and the business of pasteurizing of milk. The father owned the subject land and other allotments in the vicinity. The appellant said that he started assisting in the milk vending business when he was eight years of age. He was employed by his father as soon as he left school, and continued to work for his father in the milk business until his father's death on 7 May 1955.

The appellant said that during his father's lifetime the allotments 76-84 on Shirley Avenue, and 85 which had a frontage to Days Road, were fenced around to make one paddock with sufficient fencing to keep horses from the road. There were stable buildings on Lots 76 and 77. The land was used for the stabling of horses used in the milk business, and of a horse which his father had bought for the appellant when he was aged 13. Near the stable buildings there were a number of yards built to keep the horses within the respective yards. One yard was adequate for the staging of rodeos. The appellant said of the land: "All members of the family treated it as if it was their property."

After the father's death, the appellant carried on the milk vending business and he acquired from his father's estate Lots 79, 80, 81 and 82 on Shirley Avenue, Lots 277 and 278 on Days Road, and in due course he acquired Lot 77 Shirley Avenue, which had been purchased by his mother from the estate, and which he said was purchased on his behalf. The contracts for the purchase of the land by the appellant were signed on various days between 19 December 1955 and 12 March 1956, but it appears that the executor of the father's estate allowed to the appellant periods of up to two years for payment of the full purchase price.

The appellant said in evidence: "In buying those allotments of land from the estate, my intention was to carry on the business as my father had run it. The land in Shirley Avenue I intended to carry on as stable property and the land in Days Road I intended to use as a milk depot. At the time of acquiring that land I had no intention of reselling the land or any of it at all. At the time of acquiring the land I had no intention of profit making by sale of the land. I did not intend to sell the land at all. I did not acquire the land in the course of any profit making undertaking or scheme."

The appellant's demeanour impressed me. If I am satisfied on the balance of probabilities that his intention when he purchased the land was as he stated it to have been when he was giving evidence, then he has discharged the onus of proof, and is entitled to the allowance of his appeal. His statement of a previous intention in a matter in which self-interest is paramount, must be scrutinized carefully in the light of the whole of his evidence and of the evidence of Mr Giles, the Investigating Officer in the Taxation Department, who questioned the appellant on some five or six occasions in all between the months of September 1961 and May 1963, and of all the surrounding circumstances.

One circumstances is that the appellant did sell the land for a profit some three years after he had completed paying for it. A further circumstance is that at the time he purchased the land he was aware that land on the opposite side of the street had been developed in the sense that houses had been erected on such land and were occupied. Further, it was shown that between September 1951 and September 1960 the appellant had purchased seven other pieces of land, four of which had been sold by 1962.

The appellant said that after his father's death he carried on the milk vending business exactly as his father had done. He had in addition worked for Motorway Services as a clerk and at some stage for Gordon and Gotch Ltd The appellant took over two milk rounds, one of which he worked himself and one of which he leased to a Mr Julian. Subsequently the second milk round was sold, and Julian was employed until 1965 on the milk round that was retained. The appellant said that the retail round which he ran was always serviced by horse-driven float, the wholesale round by a truck or utility. He said that in the years following his father's death he had two horse-floats and one four wheel horse drawn delivery vehicle, all of which, together with two horses, were kept on the land at Shirley Avenue. The lessee of the second round provided his own horse which was kept at Shirley Avenue. The appellant's brother-in-law, Mr Huddy, whose wife had acquired Lot 76, Shirley Avenue, on her father's death, also had horses on the property. The plaintiff said that he developed a back disability which by 1961 made it practically impossible for him to attend to the milk business, and he therefore decided to enter the building business, and it was for this reason that Owen Constructions Ltd was incorporated on 30 March 1962. The price of £10,450 for which the land was sold to that company was determined by a valuation.

The appellant was cross-examined as to his keeping of horses on the allotments on Shirley Avenue. It was apparent from a perusal of his income tax returns that he did not in any year from the year ended 30 June 1956 to the year ended 30 June 1962 claim as a business expense any fodder for horses, nor did he claim any depreciation for horses nor for milk-floats or for a four wheel horse drawn delivery vehicle. Nevertheless, I have no doubt that he did have horses, milk-floats and a four wheel horse drawn delivery vehicle. He said that the green feed which was given to the horses was supplied to him by his uncle free of charge from blocks which the uncle leased at the sewerage farm. He gave some particulars of the horses on the property. He said that at the date of his father's death, there were two horses belonging to his father, which were used in the milk business, and one which he, the appellant, owned. Later one horse died and another one was sent to the zoo. At some stage one of the horses was replaced by a horse which he still retains and which is used by his daughter as a hack. On this aspect of the matter, as well as on others, it is necessary to compare the evidence of the appellant with the evidence given by Mr Giles as to statements made by the appellant at the various interviews. Mr Giles gave evidence from notes, and was unable to remember, without reference to his notes, even how many interviews he had with the appellant. Mr Jacobs criticized the appellant because in cross-examination he claimed, as various matters were put to him, that he was unable to remember whether he had been questioned by Mr Giles on those matters. He consistently claimed that he could not recollect matters which were put to him as having formed part of the questioning. The interviews took place from seven to five years before the evidence in this matter was given. While the appellant was questioned upon matters which at the time of the questioning, and now, were within his knowledge, he had no notes of the questions or of the answers. It was common ground that he was questioned on a number of other matters as well as the matters relevant in this case. I do not find it any less credible that the appellant should be unable to recollect what he was asked and what he replied at those interviews, than that Mr Giles, who has conducted hundreds of interviews in the meantime, should be unable without the assistance of his notes to recollect what questions were asked or answers given at those interviews. I find that both witnesses were honest. On some occasions the record of the interview made by Mr Giles was in narrative form; on some occasions he had written down questions in anticipation of the interview and transcribed the answers as they were given, but he did not then put down all the words which the appellant said in answer, but what he himself extracted as being the answer to the question from all that the appellant said. Mr Giles said in referring to the appellant: "The taxpayer was a difficult person to keep on a topic," and added: "I recorded that part of what the taxpayer said which I considered was the answer to the question I had asked him."

On the matter of keeping horses in Shirley Avenue, Croydon, Mr Giles said that at the interview on 15 February 1963 he said to the appellant: "How did you use the blocks on Shirley Avenue in the period between purchase and sale?" To this the appellant replied: "The milkies to whom I leased rounds used to run their horses there. There was no charge for this." Mr Giles said: "Did you own any livestock which may have run on them?" The appellant said: "No." The latter answer is inconsistent with the appellant's evidence which is that at all times material he had at least one horse of his own on the property. At the interview on 29 May 1963 at which the questions were prepared in advance, Mr Giles said that he asked the appellant what specific use he had in mind for the Shirley Avenue blocks. To this the appellant replied: "To run the milk horses on. We have a permit from the Council to run two milk horses on the blocks." Mr Giles then said: "Give me the names and addresses of the people who ran horses on the blocks", to which the appellant replied: "One horse belonged to me, my brother-in-law has hunt horses-maybe four, five or six at times." The next question was: "Are they or were they milkmen at any time?" to which Mr Giles said the answer was: "No." This last answer certainly is not in accord with the facts, and I therefore wonder whether the question was asked, or the answer given, in the sequence in which they appear in the notes, the question following as it does an answer in which the only people who could be referred to as "they" were the appellant and his brother-in-law. It is common ground that the appellant had at all material times been a milkman, and the appellant said in evidence that his brother-in-law at one stage had worked as a milkman. It may be that, as Mr Giles said, the appellant was hard to keep to the point in interview, and either some questions may have been misunderstood by him, or Mr Giles may have misunderstood his answers. Mr Giles has no independent recollection of the questions and answers. I do not believe that the appellant was intending to say, on 15 February 1963, that he did not own any livestock at Shirley Avenue, any more than I believe that he was intending to say, on 29 May 1963, that he himself had never been a milkman. In the interview on 29 May 1963 it appears from Mr Giles' evidence that the appellant said further: "I have a permit to run two horses-this was granted by the Council. The land was used by Julian for about five years. My brother-in-law Huddy has several horses there. They are used as hunt horses. I had my own horse there for years. It was used in my own milk business. I do my own shoeing and I buy feed from the sewerage farm-it does not cost very much as it is grass all the year round." Later in the interview, according to the notes, Mr Giles said: "Why didn't you claim for the feed in your income tax return?" to which the appellant replied: "Because it was a negligible amount-it was not worthwhile claiming."

Although the appellant did not, according to Mr Giles, refer to the fact which he has stated in evidence that in any event it was the appellant's uncle who paid for the green feed by leasing land at the sewerage farm, I do not find in this any reason to disbelieve the appellant's evidence. Again I am not satisfied that the notes constitute a complete and accurate record of the interviews, though I accept Mr Giles as an honest witness.

The appellant was questioned by Mr Giles as to his purpose in purchasing the land from his father's estate. According to Mr Giles' notes, at the first interview, on 12 September 1961, the effect of what the appellant told Mr Giles was that he bought the blocks at Croydon from his father's estate as they were going cheaply, and that he intended to use the Days Road blocks for a milk depot. On 22 February 1962, Mr Giles, according to his notes, said to the appellant: "You previously stated that you purchased the blocks at Croydon Park as they were going cheaply." The appellant said: "Yes." Mr Giles said: "This surely indicates that you had in mind some profit making scheme or the intention of buying for resale at a profit" to which the appellant replied: "The blocks are used by the family running horses on them-they used to belong to father and I wanted to keep the blocks for family use. I had an idea at one stage of building a milk depot." Mr Giles then said: "If for a milk depot, why would you require all of these blocks?" and the appellant replied: "The blocks on Days Road were intended for a milk depot. That was when I had the idea of building up the milk business. The other blocks at Croydon were purchased as I thought they would be useful to the family. My sisters and brother also purchased some blocks."

On 15 February 1963 Mr Giles said that he asked the appellant: "Did you take any steps to build the milk depot that you told me you intended to build on Days Road?" to which the appellant replied: "I approached the local council but was knocked back. No written application was made." In cross-examination the appellant was asked: "You say you acquired it with the intention of building a milk depot on it. When did you change your mind?" and he answered: "When the Farmers' Union informed me they intended to build one a few blocks down the road." The two answers are not necessarily inconsistent.

In the interview of 15 February 1963, Mr Giles says that he said to the appellant: "On 22 February 1962 you told me that you purchased the blocks at Croydon and wanted to keep them for family use or that they would be useful to the family, yet you had already commenced to lay foundations and to build a spec house on one of the blocks in Shirley Avenue. What is the reason for this?" The appellant replied: "I had changed my mind about going into the milk business. I originally bought these blocks for the milk business."

At a later stage in the interview, Mr Giles says that he said to the appellant: "Previously you have stated that you purchased the blocks because they were going cheaply." The appellant replied: "I emphatically deny this-you told me this the last time I saw you and I told you then that I did not say it. We got the blocks cheaply but I did not buy them because they were going cheap."

There is no doubt that the questions and answers on the topic of the purchase of the blocks at Croydon may have meant different things to interrogator and interrogated. The answer at the first interview on 12 September 1961 to which I have already referred-"I bought the blocks at Croydon from my father's estate as they were going cheaply"-does not exclude the purpose of retaining them. When, according to Mr Giles' notes, at the interview on 22 February 1962 he referred the appellant to this answer and said: "This surely indicates that you had in mind some profit making scheme or the intention of buying for resale at a profit" the accused did not assent to that proposition, but referred to the use to which the blocks were being put. In that answer he set forth the claim which he reiterates in his evidence, namely that he wanted to keep the blocks for family use, and that he had the idea of building a milk depot. Mr Giles says that it was not correct that at any time before the interview of 15 February 1963 the appellant had denied making the statement that he had purchased the blocks because they were going cheaply. But it does not appear from his notes that he made any protest to the appellant on 15 February 1963, when the appellant claimed that he had previously denied making the statement attributed to him. The system of note-taking adopted by Mr Giles was not conducive to presenting an exact description of any conversation, and in view of his lack of independent recollection it would, in my view, be dangerous to place reliance upon the notes where they conflict with the appellant's sworn testimony.

Mr Jacobs submitted that it was strange that in the acquisition of the land the appellant should have exhausted his cash resources and resorted to borrowing and payment by instalments, if he did not see the transaction as profitable. I see nothing strange in the straining of resources in an endeavour to keep in the family, land which is regarded as being family land. This I believe is what the appellant did, with the intention, as he says, of carrying on the milk business in the way in which his father had carried on the business. Nor do I find it strange that he intended to retain the land for the use of his horses, even though blocks in the immediate vicinity were being sold and built upon. He said in evidence that he had had a horse ever since he was 13, his brother-in-law had an interest in hunters-it appears to me that they had a common interest in keeping sufficient land on which horses could be run.

I have referred earlier to the fact that there were other allotments of land which the appellant had purchased and some of which he had resold between the years 1951 and 1960. I accept the appellant's explanations given in evidence as to the reasons for which he had purchased the various allotments and the reasons for which he had sold those which he did in fact sell. I am satisfied that he was not at the material times engaged in the business of buying and selling land for profit, and the various purchases and sales which he made apart from the purchases and sale in question do not lead me to doubt that the purchase of the subject land was not for the purpose of profit making by sale. I see no reason to disbelieve the appellant's testimony which has satisfied me that he purchased the subject land with the intention of retaining it.

The land at Shirley Avenue, Croydon Park was sold to a company of which the appellant was one of the two directors and shareholders. It was doubtless intended that that company would engage in a profit making undertaking with the land. However, the appellant is not to be identified with the company. For the purposes of s 26(a) any undertaking or scheme for the land after the sale of it was to be an undertaking or scheme of the company and not of the appellant. The second limb of s 26(a) does not apply to this transaction.

For these reasons the appeal will be allowed.