Bartlett Estates Pty. Ltd. v. Federal Commissioner of Taxation.

Judges:
Hoare J

Court:
Supreme Court of Queensland

Judgment date: Judgment handed down 30 August 1978.

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Hoare J.: As I have come to a clear enough conclusion on the facts, it is not necessary for me to reserve judgment for the purpose of perhaps setting out more elaborately, and possibly more clearly, my conclusion on the law and the facts.

The appeals involve a consideration of sec. 25(1)(a) and 26(a) of the Income Tax Assessment Acts. Submissions have been made as to the applicability of the second part of sec. 26(a) but in the circumstances it does not appear to me to be necessary to refer to these arguments. I accept the propositions as to the law as submitted by counsel for the appellant.

In the income years ended 1967, 1969, 1972, 1973, 1974 and 1975 profits were earned by the appellant company from the sale of certain real estate. Suffice to say, it seems to me that the essential point for determination in these appeals is whether or not the property which has been referred to, the 10-acre part of the land purchased from the Commonwealth, was acquired for the dominant purpose of profit-making by resale. If it was so acquired, the profit was taxable; if not, the profit was a capital profit and was not taxable.

As I have indicated in the course of the addresses, I accept the witnesses Bartlett and McDermott and, indeed, all the witnesses for the appellant as witnesses of truth, but especially so far as concerns the witnesses Bartlett and McDermott there are two important qualifications. After a long passage of time one's memory is likely to be inaccurate unless there were contemporaneous documents which refresh one's memory, and also not infrequently a perfectly honest witness is likely to inaccurately purport to remember details which accord with one's wishes. It is true that Mr. Bartlett has been shown not to exaggerate in that he did not purport to remember some matters which it would be to his advantage to have remembered.

The broad facts are that Mr. John Bartlett was the Chairman of Directors of a group of companies which have been referred to collectively as the Bartlett group of companies. The appellant company was incorporated on 19 January 1959. Its business was to buy land and subdivide it. Another company, John Bartlett Constructions Pty. Ltd., was to build houses on the land, and the selling was to be effected by another company which was formerly owned and controlled by John Bartlett's father.

In 1959 the appellant company bought a considerable amount of land in the Townsville area. The evidence shows that in the first half of 1959 Mr. Bartlett became aware that the Commonwealth had land at Aitkenvale for sale. The area of land was about 25 acres. It had been used by the Army for storage purposes during the war. Mr. Bartlett inspected the property in the company of Mr. McDermott. I am satisfied that they actually saw only two warehouses whereas, in fact, there were three warehouses on the land. This is one of the matters which shows that Mr. Bartlett was not in any way distorting the evidence, because it would have been to the advantage of his case, as I see it, if he had asserted that he was aware of the existence of the three warehouses at the time. The warehouses were very large warehouses, the first two being approximately 100 or 110 feet by about 300 feet. One of the warehouses had a considerable amount of damage apparently caused by the 1956 cyclone; however it would appear that the damage was capable of being repaired at no great expense and they were in fact repaired.

After some negotiations the appellant company submitted a tender to buy the land on terms and this tender was accepted by the Commonwealth. It would appear that there was a contract of sale entered into on 14 October 1959 but no copy of the contract was available to either of the parties. It is accordingly unknown whether any provisions of this contract would have thrown any light on the present problem.

As I have said, the crucial matter for my determination is: what was the dominant purpose for which this area of 10 acres was acquired? I am satisfied that the fact that there were warehouses on the land which would be likely to earn substantial income was an important reason why Mr. Bartlett favoured the purchase. However, I am satisfied that there were other reasons, which I shall refer to shortly.

I make some observations on some part of the evidence. So far as concerns the evidence

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ATC 4529

of the tax investigator, Mr. Mergler, largely because some of the questions, or in some cases assertions, put to Mr. Bartlett were based on wrong premises, I do not regard the answers or, in some cases, the failure to answer as constituting any evidence which assists me in the determination of this case.

Again, I am well satisfied that the circumstances which led to the sale of the subject land were as put forward by the appellant. It is clear that the serious financial position of the appellant company led to the meeting of creditors and the decision to sell off all available assets of any or all of the companies in the group. It is inevitable that the recollection of some of the witnesses would vary as to the details of the calling of the meeting and as to what precisely was determined at the meeting.

An important matter is that the appellant company in fact bought and sold a considerable number of properties. This is readily conceded by counsel for the appellant. The case put forward by the appellant is that as to the area of 10 acres with which I am now concerned on which the warehouses were built, that it was acquired for rental and later development as a warehouse site and that the purpose of its purchase was, as it were, an exception to the ordinary business of the company.

There is no doubt whatever in my mind, as I have already stated, that one of the reasons for the acquisition was that the warehouses would produce income and thus would constitute an asset which it would be advantageous for the appellant company to own in that it would be likely to provide a security for potential lenders more attractive than the prospects of resubdivision and resale of the property. Indeed, if the sole reason for acquisition was in relation to the rental purposes, then it would not matter that the appellant company through its managing director had in mind that possibly at some time in the future the property might be resold.

There are some features which point to the dominant purpose being the rental of the warehouses, but there are others which point to the acquisition of this land being on no different basis from that of its other land acquisitions. I do not deem it necessary to refer to all of the matters which I have considered, but mention some of them. On the balance of probabilities I am satisfied that at the time of acquisition the whole area was referred to as 25 acres and, although there was a street, Fleming Street, which could be regarded as dividing the properties into areas of about 15 acres and 10 acres, nevertheless at the time of purchase it appears to have been referred to as a 25-acre block. It seems to me that the real dichotomy came between the date of the original purchase and the date of transfer. The total area of land included with the warehouses appeared to be considerably larger than would be within the financial resources of the Bartlett companies to build warehouses, at any rate, in the then near future but it is true that the then standing warehouses were very large warehouses and might well be expected to meet the letting requirements in the reasonably near future.

However, it is important that the appellant company bought other land for resale. It in fact bought some land adjoining the northern part of the subject land. This was referred to as the Wormald's land and it also had some lands for subdivision and development about three-quarters of a mile away. Admittedly the subdivisions at about three-quarters of a mile distance were for residential purposes and it is also true that apart from the northern area acquired from the Commonwealth, which the appellant, admittedly, had bought with a view to resale, the appellant had not bought and sold industrial land.

Another matter which I regard as important is that until the accountant, Mr. Trembath, changed the basis of the accounting, the subject lands were treated as part of, what I might call compendiously, ``trading stock of land of the appellant''.

Counsel for the appellant submits that this matter should be regarded as equivocal because a reference to the accounts as well as the evidence of Mr. Trembath, indicates that the accounts prepared by Mr. Trembath were in considerably greater detail than those prepared by the former accountant, Miss Brabazon. This, I think, is true, but I regard as a very important matter that this particular land for some time after its purchase was treated on the same basis as other land acquired by the company which,

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admittedly, was for the purpose of resale. It seems to me that the subject land was clearly not a reasonable prospect for immediate development. At the time, there was no town plan for the City of Townsville. The land would appear to have some potential for industrial development, but as far as I can see from the evidence, failing industrial development, there was no reason to suppose the land would not have potential for residential development. There were other residential developments not very far away.

In some ways, it may be considered a somewhat fine line of distinction between that of a taxpayer who buys land for the purpose of resale at a profit at some time in the future, but intends to use the land in the meantime for income-producing purposes and the case of a taxpayer who buys land for the main, or dominant purpose of earning income from the land with the prospect that at some time in the future the land may be sold. Nevertheless, the results in law are clearly distinct.

I am satisfied in the present case the appellant company through its managing director very much had in mind the great advantages of the subject land because of the availability of rent from the property. However, I am also satisfied that the appellant company intended to resell the land in the future.

The real question for my determination is which was the dominant purpose and which was the subsidiary purpose.

Well, it seems to me that on the balance of probabilities the dominant purpose was to resell the land at some time in the future, although in the meantime, pending development for that purpose, a very useful income would be derived from the land.

For these reasons, in my opinion, the appeals must be dismissed.

Accordingly, I confirm the assessments and dismiss the appeals with costs to be taxed.