Case B41

Judges:
FE Dubout Ch
G Thompson M
N Dempsey M

Court:
No. 3 Board of Review

Judgment date: 10 July 1970.

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F. E. Dubout (Chairman): This reference arises out of the disallowance by the Commissioner of a claim, made by the taxpayer in his return for the year ended 30 June 1967, for a deduction of an amount of $7,152. This amount was claimed pursuant to sec. 52, and was represented as the loss incurred by the taxpayer upon the sale of property, or from the carrying on or carrying out of an undertaking or scheme, the profit (if any) from which sale, undertaking or scheme would have been included in his assessable income.

2. The facts in the reference have been set out at length by my colleague, Mr. Dempsey, and it is not necessary for me to repeat them in full. I propose, however, to isolate for consideration a few fundamental facts or propositions on which the taxpayer seeks to establish his claim. They are really just the bare bones on which a claim might be founded under sec. 52. As I see it, these fundamental matters are as follows -

(a) In the year of income ended 30 June 1967, the taxpayer purchased a piece of land upon which was situated a house. After bringing to account legal expenses, stamp duty and other charges, the total cost was $10,876. This was apportioned $3,694 to land and $7,182 to improvements (i.e. the house). It may be accepted that the apportionment reflects true values. Treating the house as something separate from the land to which it was affixed, it may be said that the taxpayer purchased the house for $7,182;

(b) It was the taxpayer's stated intention or purpose to remove the house from the land upon which it stood and to re-erect it upon another piece of land in his ownership, and then sell that other piece of land with the house thereon, at a profit, that is, for a price in excess of the sum of (i) the cost of the house, and (ii) the cost of that other piece of land;

(c) The stated intention or purpose having been in one way or another frustrated, the taxpayer, in the same year of income as that in which he acquired it, sold the house for demolition for $30;

(d) The loss now claimed under sec. 52, viz. $7,152, is the difference between what was paid for the house ($7,182) and what it realised upon sale for demolition ($30).

3. That was the form or outline of the plan of profit-making, in relation to this house, which the taxpayer claims to have resolved upon and to have set out to achieve. If indeed there was such a plan, it could have attracted tax (assuming that a profit did in fact result) only under the second limb of sec. 26(a). There would have been no purchase and resale of the house as a separate piece of property. Although it is possible, conceptually, to look upon a house as an entity separate from the land upon which it stands at the time of purchase or sale of that land, the plan said to have been intended in this case did not contemplate a separate dealing with the house, but required for its successful execution the attachment of the house to the land with which it was to be sold. If a profit was sought, it was per medium of the carrying on or carrying out of a profit-making undertaking or scheme.

4. Assuming for the moment that the expressed purpose accords with reality, the land upon which the house originally stood, and from which it was to be removed, remains as a kind of loose end. This residual land takes no direct part in the profit-making scheme; its only function is to yield up the house for removal to the new site. But in making the wide survey and exact scrutiny which is called for in matters arising under sec. 26(a) (
Western Gold Mines (N.L.) v. C. of T. (W.A.) (1938) 59 C.L.R. 729 ; 4 A.T.D. 453 ), one finds that the residual land was conveniently situated and otherwise suitable for the construction thereon of flats, and that after no great interval of time the taxpayer did build a block of flats there, at a cost in excess of $30,000.

5. This puts the taxpayer's purchase of the land, which carried the house, in a different light. It seems to me to be beyond doubt that when the taxpayer purchased this land, his dominant purpose in making the acquisition was to utilise the land for the erection of flats. I do not believe that before he purchased the land, he looked at the house located on it, and said to himself, in effect: ``This house offers a favourable profit-making opportunity. I shall purchase this land for the purpose of removing the house therefrom, transferring it to my other land, and then selling that other land with a view to profit.'' On the other hand, I believe that in the course of his plan to build flats, the taxpayer did hope to turn the house to the best advantage. The greater the proceeds from the house, the less would be the financial drain in building the flats. That is not to say, however, that the taxpayer ever

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embarked upon a profit-making venture in which the house was to play the major role.

6. On the facts of this case, and in particular having regard to the taxpayer's neglect to make inquiries on matters that might have vitally affected the outcome of his stated plan, I think the inevitable conclusion here is that what the taxpayer had was, at best, a mere hope of profit, and not an expectation of profit based upon an analysis of all the factors affecting his stated plan. It is probably not going too far to say that all persons who acquire property nourish the hope that they may resell it one day at a profit. This they are entitled to do without becoming liable (merely on account of entertaining that hope) for assessment under sec. 26(a). As was said by
Schreiner J.A. in Commissioner of Taxation (Southern Rhodesia) v. Levy (1952) 18 S.Af. T.C. 127 at p. 136 , in relation to a provision comparable with sec. 26(a) -

``Unless one were to hold, what the legislature could not have intended, that the taxpayer must exclude the slightest contemplation of a profitable resale of the property, it seems to me that the only test to apply is that of a main or dominant purpose.''

On the matter of dominant purpose, see also
Evans v. D.F.C. of T. (S.A.) (1936) 55 C.L.R. 80 at pp. 98-99.

7. For present purposes, the point to be made is this - a taxpayer may have a slight hope or contemplation of profitable resale without necessarily attracting liability under sec. 26(a); likewise, he may have some slight hope of profit, without being able to demonstrate, for purposes of sec. 52, that his dominant purpose was one of profit-making by resale or from the carrying on or carrying out of a profit-making undertaking or scheme. That is the position in which it seems to me this taxpayer is placed, and therefore his claim must fail.

8. Accordingly, I would disallow the objection and confirm the Commissioner's assessment.