Burnside v. Federal Commissioner of Taxation.

Judges: Barwick CJ
Mason J

Stephen J
Jacobs J
Aickin J

Court:
Full High Court

Judgment date: Judgment handed down 22 December 1977.

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Stephen J.: This appeal concerns the much litigated sec. 26(a) of the Income Tax Assessment Act 1936. In other reasons for judgment appear accounts of the circumstances in which the appellant taxpayer acquired his large parcel of shares in Samin Ltd. and thereafter sold some of them, subsequently being assessed to tax on the resultant substantial profits.

The learned primary judge concluded that those profits did not attract the first limb of sec. 26(a) but were assessable to tax under the second limb of that sub-section. I agree with the reasons given by Mason J. and Aickin J. for the conclusions that in the particular circumstances of this case the first limb does not apply and that the second limb is also inapplicable. I would therefore allow this appeal, only adding to what has been said by others an observation concerning the first limb of sec. 26(a).

It is important to note the nature of the findings of fact by the primary judge which in this case have rendered inapplicable the first limb of sec. 26(a). In summary, they begin with the finding that initially, when it became clear to the taxpayer that shares in Samin Ltd. would be allotted to him, his purpose was that he should acquire them as an investment for long term holding; his purpose at that time was not that of profiting by their re-sale. Then, as the taxpayer's circumstances altered and as the date of acquisition of the Samin shares approached, his intentions underwent some change but his initial purpose was at no time converted into a dominant purpose of profit-making by re-sale. The taxpayer thus lacked, at the critical date of acquisition, that dominant purpose upon which the first limb of sec. 26(a) depends for its operation.

It was here no question of mere uncertainty of mind of the taxpayer as to which particular Samin shares he would sell which was effective to exclude the operation of the first limb of sec. 26(a). If a taxpayer acquires a parcel of shares with the purpose of selling some of them at a profit he will not succeed in an appeal against assessment to tax on profits in fact made on re-sale simply because his purpose of re-sale at a profit, otherwise well defined, did not involve any clear identification of the precise shares to be sold. In the case of a parcel of shares all in one company, each of which is identical and which, under modern company legislation, need not even bear distinguishing numbers, there can scarcely be any question of the buyer, who intends to resell some only of that parcel, turning his mind to the precise identity of those to be sold; they will, in any event, be indistinguishable one from another. Yet neither a consciously created and studiously maintained state of indecision, nor even a quite unstudied and natural state of uncertainty, as to the particular shares which, from the total comprised in the parcel, are to be sold, will suffice of itself to avoid the first limb of sec. 26(a).

Nor will the position be any different whatever may be the nature of the items of property in question, whether shares,

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ATC 4596

subdivisional land and so on and whether or not acquired all at the same time, so long as, at the various dates of acquisition, the taxpayer had in relation to some of them, albeit unidentified, the dominant purpose of reselling them at a profit. In such a case a taxpayer's failure initially to earmark the particular items to be disposed of in satisfaction of his settled intention to resell at a profit will not of itself avoid liability to tax under sec. 26(a). He bears the onus of showing an assessment to be erroneous and will fail to establish that at date of acquisition he had no dominant purpose of reselling at a profit merely by proof that he did not initially identify the particular items which were to be sold to answer his then purpose of reselling some of such items at a profit.

The reported cases appear to be concerned with the more difficult case of the intended resale of part of the one whole entity. In
Chapman v. F.C. of T. (1968) 117 C.L.R. 167 at p. 171 , Menzies J. contrasted such cases with what he regarded as the more straightforward situation which prevails in the present case. It was, he said, ``comparatively easy to treat the purchase of, say, 1,000 shares or 1,000 cattle, as the case may be, as the purchase of 1,000 separate units''. Nevertheless his Honour was able in Chapman's case to assign a dominant purpose of re-sale at a profit to a taxpayer in relation to part only of the forty-four acre lot which he had purchased. His Honour was not there confronted with the difficulty that the taxpayer had not initially decided what he would retain and what re-sell. However in the earlier case of
Wall v. F.C. of T. (1965) 13 A.T.D. 530 his Honour, in relation to what he described as ``subdivisions 49 and 50, Pacific Highway'', concluded, at p. 533, that the taxpayer's purpose had always been to resell a part of the land. In upholding the assessment to tax on profits of re-sale his Honour did not appear to concern himself with identifying the part in fact resold with some identifiable part intended to be resold at the date of original acquisition. In
Smith v. F.C. of T. 72 ATC 4111 ; (1972) 46 A.L.J.R. 518 Walsh J. had to deal with the case of portions of land, unidentified at date of purchase, to which a purpose of re-sale was held to attach. His Honour said of this situation, at ATC p. 4120; A.L.J.R. p. 523:

``In Chapman's case the respective areas acquired for different purposes were clearly defined. In the present case no such definite line can be drawn. But it is clear that both in the Dunbar land and in the Oldfield land the portions with frontages to Walker's Road would be preferred to any other portions for the purpose of subdivision into residential lots for sale. The only sales with which these appeals are concerned are sales of lots with frontages to Walker's Road. If it be accepted that it is probable that the taxpayer had a purpose of retaining for himself part of the Dunbar land and perhaps part of the Oldfield land also, it is not necessary in my opinion, in order to decide these appeals, to fix precisely the boundaries of the land to which that purpose applied. It is enough to say that the land which has been subdivided and sold was not within those boundaries.''

Reference may also be made to Case C21 in
1971 ATC , p. 95. Lack of precise identification, at time of purchase, of those particular items which are to be resold at a profit will not, I think, of itself avail a taxpayer who is assessed to tax on the profits of re-sale.

I would allow this appeal for the reasons stated by my brothers Mason and Aickin.