Federal Commissioner of Taxation v. N.F. Williams.

Judges: Barwick CJ
McTiernan J

Menzies J
Gibbs J

Court:
High Court (Full Court)

Judgment date: Judgment handed down 1 November 1972.

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Menzies J.: This is an appeal from a judgment of Stephen J. in favour of a taxpayer who successfully appealed against an amended assessment made by the Commissioner whereby there was included in her assessable income for the year ended 30 June 1970, a sum of $65,734. The sum represented the difference between $72,400 (which she had, in November 1969, received as her share of the net proceeds of the sale of land at Dianella Heights, an outer suburb of Perth) and the value attributed by the Commissioner to her interest in the land in 1962 when it passed to her by gift from her husband, viz. $6,666. In her income tax return for that year she had included the following statement -

      ``Interest on Loans

      Perth Motel Syndicate                53.21

      Town 
&
 Country Building

      Society                             597.92

      Francis Investments

      Pty. Ltd.                         1,560.00

                                       ---------

                                       $2,211.13

                                       ---------
      

The Capital employed to generate this interest came from the realisation of the Dianella land owned by Taxpayer since approximately 1964, when it was given to her by her husband by registered deed of Gift (duly returned). Date of Sale was 8th November 1969, amount $72,400.''

The original assessment did not include this $72,400 as assessable income.

The story leading to the receipt of this $72,400, although it extends over some years, can be told briefly. In 1959, the land - about ten acres in area and zoned urban - was purchased for $8,000 by a Mr. Williams (the husband of the taxpayer and a partner in Joseph, Charles, Leamonth, Duffy & Co., a firm of estate agents), Mr. Bruce Campbell (a son of the senior partner of that firm), and Mr. Scahill (a son of a close friend of that senior partner). The purchase was made upon the advice of Mr. Campbell snr. The purchasers bought as tenants-in-common in equal shares. The land was inaccessible scrub, useless except for future sub-division when suburban development reached it. It remained as it was until 1969 when it was cleared and sub-divided into 35 lots, of which 27 were offered for sale and sold. The unsold lots went to Mr. Scahill who preferred land to money and who, for reasons connected with income tax, received less than one-third of the proceeds of the lots that were sold. The difference was made up by his taking the unsold lots.

In the meantime, Mr. Williams had given to the taxpayer his one-third interest in the land. This was in October 1962. About the same time, Mr. Bruce Campbell gave his one-third interest in the land to his wife. These gifts were made after a consultation with a taxation advisor who apprehended that profits upon sale by the original purchasers would be likely to attract tax.

Accordingly, at the time of the sub-division and sale, the owners of the land were the taxpayer, Mrs. Bruce Campbell and Mr. Scahill.

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

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ATC 4192

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. The arrangements were made by Mr. Williams, Mr. Bruce Campbell and Mr. Scahill. His Honour referred to a problem that arose as follows -

``A difficulty arose at the outset due to the fact that whereas Mrs. Williams and Mrs. Campbell were desirous of selling Mr. Scahill did not wish to do so. A meeting took place early in 1969 between Mr. Scahill and the husbands of the two other co-owners, in which immediate sub-division was resolved upon and in which Mr. Scahill's tax situation if the land was to be sold was referred to. Apparently he anticipated that he would be assessed to tax on any proceeds of sale, whereas it was thought that the other two co-owners, Mrs. Williams and Mrs. Campbell, would not be liable to tax on proceeds of sale. This was, it seems the reason for the divergent views as to the desirability of selling. A means was found of giving effect to the wishes of each of the co-owners; the land was sub-divided into 35 lots and, of these, 27 lots were offered for sale by auction late in 1969 and were either sold at the auction or shortly afterwards, the vendors being the three co-owners selling as tenants-in-common. The result of these sales was that Mrs. Williams and Mrs. Campbell each received $72,400; neither she nor Mrs. Campbell retained any beneficial interest in the remaining eight lots, to which Mr. Scahill became absolutely entitled. Mr. Scahill received a much smaller sum out of the total proceeds of sale and the evidence suggests that this outcome was in accordance with his wish, in effect, to spread the sale of his interest in the land over a period of years so as to lessen the impact of tax, which he anticipated he would be required to pay on proceeds of sale received by him.''

The co-owners did, in fact, eventually enter into a deed of partition to give effect to their arrangement.

If the $65,734 that the taxpayer received were assessable income, it must be so by virtue of sec. 26 (a) of the Income Tax Assessment Act which provides -

``26. The assessable income of a taxpayer shall include -

(a) profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme;''

It was contended by counsel for the appellant that the circumstances mentioned left open to the Commissioner the conclusion that the sum received by the taxpayer was a profit arising from the sale by her of property acquired by her for the purpose of profit-making by sale. I think not. It may be that if, in 1959, when Mr. Williams joined with the other two purchasers to buy the land, it had been arranged then with his wife that he would make over to her the interest he was acquiring that such a conclusion could have been drawn. Upon the facts as found, however, the only question is whether because, when her husband gave her his interest in the land, the taxpayer intended to sell it when it had appreciated further in value, she acquired it for the purpose of profit-making by sale and that when she sold it the difference between $6,666 and $72,400 was profit.

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 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.

Alternatively, it was contended that upon the facts, it was open to the Commissioner to conclude that the $65,734 was profit from the carrying on or carrying out by the taxpayer of a profit-making undertaking or scheme. Again, I do not think so. There may, no doubt, be cases where a person ventures what has been received by gift in the carrying on or carrying out of a profit-making

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ATC 4193

undertaking or scheme. In the judgment of the majority of this Court - but not in the opinion of the majority of the Privy Council
McClelland v. F.C. of T. 70 ATC 4115 ; 120 C.L.R. 487 was such a case. A plain case can, however, be taken as an instance. There could be no doubt that land which has been given and is later used by the donee in the development of a housing scheme in which lots, with houses built upon them, are sold, could be regarded as committed to a profit-making undertaking. To determine the profits of such an undertaking the value of the land at the time when it was so committed would have to be taken into account. Here, however, there was no profit-making undertaking to which the taxpayer committed what had been given to her. All she did was to co-operate with her co-owners in a business-like realisation of capital which she had been given years earlier. The well-known principle applied in
The Scottish Australian Mining Co. Ltd. v. F.C. of T. (1950), 81 C.L.R. 188 applies here.

Taking the view that I do, I have refrained from any examination of the observations of the majority of the Privy Council in McClelland v. F.C. of T. 70 ATC 4115; 120 C.L.R. 487. That is a task for another day. This appeal can be decided without any reliance upon anything said in that opinion.

For the reasons which I have given, I would dismiss this appeal.