Allied Pastoral Holdings Pty. Limited v. Federal Commissioner of Taxation.

Judges:
Hunt J

Court:
Supreme Court of New South Wales

Judgment date: Judgment handed down 2 February 1983.

David Hunt J.

The taxpayer was incorporated as a company in 1966. It had been formed for the specific purpose of acquiring a property known as ``Yarrick'' in the Forster area of New South Wales. This property was acquired by the taxpayer shortly after incorporation.

The taxpayer was then called Lucas & Tait Ranches Pty. Limited. The subscribers and the initial directors were Mr. Ralph Lucas and Mr. George Tait, who had been associated with each other for many years, mainly in real estate development. Their family companies became shareholders in the taxpayer company, together with Cambridge Credit Corporation Limited, Mr. Yates (then the Sydney manager of Cambridge Credit) and Mr. Chopin (then the Company's solicitor) through his own family company. Mr. Tait was the Chairman of Directors.

Portion of this property (which was referred to at the hearing as ``Yarrick No. 1'') was subdivided and some of that portion so subdivided was sold by the taxpayer in 1968. No question arises in relation to this portion in these appeals. In the same year, the taxpayer changed its name to its present name, Allied Pastoral Holdings Pty. Limited. In 1970, the taxpayer acquired a further property (which was generally referred to as ``Yarrick No. 2''), such property being contiguous to and to the north of Yarrick No. 1. In 1972, the remainder of Yarrick No. 1 and the whole of Yarrick No. 2 were subdivided into 25-acre lots and sold by the taxpayer during the 1973 and 1974 financial years. From these sales, the taxpayer obtained a profit of $648,363 which the Commissioner included within its assessable income for those years as well as assessing Div. 7 tax upon the undistributed amount of that income. In support of his assessment, the Commissioner has relied upon the Income Tax Assessment Act 1936, sec. 26(a) - both limbs - and sec. 25(1).

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Objections against each assessment were unsuccessful, and the present appeals were then instituted. An extension of the period within which to make a sufficient distribution of income was sought by the taxpayer, such period to be extended until the appeals relating to the primary tax had been disposed of, and this request was granted. Notwithstanding that grant of the taxpayer's request, the assessment of Div. 7 tax has not been withdrawn, and the Commissioner refuses to accept that, in those circumstances, the Div. 7 assessments must be set aside whatever the result of the appeals concerning the primary tax imposed. He submits, as I understand it, that the extension which he granted was invalid, upon the basis that the period of the extension which he granted was (very sensibly) left open and was not fixed. The actual wording of the Deputy Commissioner's letter was:

``Your request dated 19 March 1979 for a further period within which to make a sufficient distribution in relation to those years of income has been granted. This period will be further advised when the liability for the said years of income has been finally determined.''

The Commissioner seeks to have the appeals against the Div. 7 assessments stood over generally, and to be dealt with only if a sufficient distribution is not made by the taxpayer following the disposal of the appeals concerning the primary tax. This extraordinarily obdurate, unnecessarily over technical and probably quite wrong approach has little to commend it except expediency, and upon that basis alone I did not hear further argument upon the appeals against the Div. 7 assessments.

The principal issue in these appeals at the time they were heard was whether the dominant purpose of the taxpayer company in acquiring the land at Forster was ultimately to resell it at a profit: Income Tax Assessment Act 1936, sec. 26(a) (the so-called ``first limb''). Subsequently, and after the decision of the High Court in
F.C. of T. v. Whitfords Beach Pty. Ltd. 82 ATC 4031; (1982) 39 A.L.R. 521, further submissions were made which placed greater emphasis upon the alternative bases of the Commissioner's assessment: sec. 25(1) and the second limb of sec. 26(a). Because of the way in which the appeals have been argued, I propose to deal first with the first limb of sec. 26(a). Such an approach has the virtue also of concentrating attention initially upon events which happened chronologically earlier than those upon which the other statutory provisions depend.

The decision to acquire Yarrick No. 1 was formally taken by the then directors of the company (Messrs. Lucas and Tait) at their meeting on 24 March 1966, the first held following the statutory general meeting of shareholders. The taxpayer tendered in evidence various discussions between the directors of the company and between those directors and its beneficial shareholders and others, such discussions having taken place both prior to and subsequent to the company's decision to acquire the land and many of them prior to its incorporation. All such discussions were objected to by the Commissioner as being irrelevant.

A company is, of course, an abstraction. It has no mind of its own, and its state of mind must consequently be found in the person or persons who is or are really the directing mind and will of the company, ``the very ego and centre of the personality of the corporation'':
Lennard's Carrying Co. Ltd. v. Asiatic Petroleum Co. Ltd. (1915) A.C. 705 at p. 713 (Viscount Haldane L.C.). See also
H.L. Bolton (Engineering) Co. Ltd. v. T.J. Graham & Sons Ltd. (1957) 1 Q.B. 159 at pp. 172-183 (Denning L.J.);
Shedlezki v. Bronte Bakery Pty. Ltd. (1970) 72 S.R. (N.S.W.) 378 at p. 385 (Asprey J.A.);
Tesco Supermarkets Ltd. v. Nattrass (1972) A.C. 153 at pp. 170-171 (Lord Reid) and p. 187 (Viscount Dilhorne);
Smorgon & Ors. v. F.C. of T. & ors. 76 ATC 4364 at p. 4368; (1976) 134 C.L.R. 475 at pp. 482-483 (Stephen J.).

In the present case, the relevant persons would therefore appear to be the then directors of the company, Messrs. Lucas and Tait (particularly the latter for reasons which will later become apparent), although evidence was also tendered from each of the beneficial shareholders of the company and, in accordance with the way the appeals were conducted, I have taken their evidence into account as well in determining whether or not the property was acquired by the taxpayer for the relevant dominant purpose. The inquiry is thus into the state of mind of

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these men at the time the land was acquired. The state of a man's mind is as much a fact as is his state of digestion:
Edgington v. Fitzmaurice (1885) 29 Ch.D. 459 at p. 483 (Bowen L.J.). So far as these men are concerned, their state of mind may therefore be established by their direct statements as to what their state of mind was and by evidence of their words and acts which point to or identify that state of mind:
Lloyd v. Powell Duffryn Steam Coal Co. Ltd. (1914) A.C. 773 at pp. 751-752 (Lord Moulton);
Peipman v. Turner (1960) 78 W.N. 362 at p. 364 (Full Court);
Nash v. Commr. for Railways (1963) 63 S.R. (N.S.W.) 359 at pp. 359-360 (Full Court);
Elsey v. F.C. of T. 69 ATC 4115 at p. 4120; (1969) 121 C.L.R. 99 at p. 108 (Windeyer J.);
Bernard Elsey Pty. Ltd. v. F.C. of T. 69 ATC 4126 at p. 4127; (1969) 121 C.L.R. 119 at p. 121 (Windeyer J.);
Eisner v. F.C. of T. 71 ATC 4022 at p. 4025; (1971) 45 A.L.J.R. 110 at p. 112 (Walsh J.);
Dobson v. Morris (N.S.W. Court of Appeal, unreported, 5 June 1975);
Leary v. F.C. of T. 80 ATC 4438 at p. 4441; (1980) 32 A.L.R. 221 at pp. 224-225; and Wigmore (3rd ed., 1940), para. 661. For a more recent statement of the relevant principle, see F.C. of T. v. Whitfords Beach Pty. Ltd. (supra), at ATC p. 4039; A.L.R. p. 530 (Gibbs C.J.) and ATC p. 4047; A.L.R. p. 541 (Mason J.).

Such evidence is admissible even though self-serving, and whether or not the statements and acts are substantially contemporaneous with the time when the state of mind is relevant (that is, in this case, the acquisition of the land): Dobson v. Morris (supra, Glass J.A.). The evidence is not hearsay; rather it is direct evidence of conduct which throws light upon the underlying state of mind: Lloyd v. Powell Duffryn Steam Coal Co. Ltd. (supra) at p. 741 (Lord Atkinson); Dobson v. Morris (supra, Reynolds J.A.).

It is but a very familiar principle of the law of evidence that subsequent behaviour may be regarded in order to indicate a state of mind which existed at an earlier time:
Herald & Weekly Times Ltd. v. McGregor (1928) 41 C.L.R. 254 at p. 265 (Isaacs J.). Remoteness of the statements and acts in time goes to the weight, not to the admissibility, of the evidence:
Barrett v. Long (1831) 3 H.L.C. 395 at p. 414 (Parke B.); 10 E.R. 154 at p. 162; and it matters not whether they precede the point in time at which the state of mind is relevant: ibid.; or succeed it:
Simpson v. Robinson (1848) 12 Q.B. 511 at p. 513 (Lord Denman C.J.); 116 E.R. 959 at p. 960. See also In re Grove;
Vaucher v. Treasury Solicitor (1888) 40 Ch.D. 216 at p. 242 (Lopes L.J.).

In Eisner v. F.C. of T. (supra) at ATC p. 4026; A.L.J.R. p. 112, Walsh J. quoted the following statement from the judgment of Dixon J. (as he then was), in
Williams v. Lloyd (1934) 50 C.L.R. 341 at p. 371:

``Ex post facto statements of a narrative order are not admissible upon the state of mind at a past date of the person who makes them''

in determining the state of mind of the taxpayer in that case at the time when he acquired land. It is, however, clear from the context in which this passage appears in both judgments that a statement or act indicating a state of mind which is made or which occurs subsequently to the relevant point in time at which the state of mind must be established is not by reason of that fact alone inadmissible. By ``statements of a narrative order'', Sir Owen Dixon was referring to a mere description or record of antecedent facts:
Adelaide Chemical & Fertilizer Co. Ltd. v. Carlyle (1940) 64 C.L.R. 514 at pp. 530-531; and not to subsequent facts or statements which indicate a state of mind which existed at an earlier time. In Eisner's case, Walsh J., having quoted from Williams v. Lloyd (supra), went on to hold that subsequent statements would be admissible whenever they appear to be capable of throwing light upon the earlier intention if that earlier intention is a fact directly in issue.

The existence of a state of mind depends upon many things. It may be induced by what is known or believed by the person whose state of mind is relevant, such knowledge or belief being based upon what has been personally perceived or done or upon what has otherwise been derived from the statements or acts of others. It may also be induced by a belief or an assumption which exists or is made at the time but which subsequently turns out to be erroneous or baseless. Everything relating to the subject in question which came to the notice of the person whose state of mind is relevant

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becomes admissible to establish that state of mind, as are his own specific beliefs and assumptions relating to that subject in question. Particularly must this be so where the burden of establishing a negative (that he did not have a particular state of mind) is placed upon the taxpayer: Assessment Act, sec. 190.

It was for these reasons that I admitted evidence of the discussions referred to.

The Commissioner further objected that a company's state of mind cannot be established by evidence of what was said or what had happened prior to its incorporation. No specific authority was cited for this further objection and the proposition it involves cannot, in my view, stand in the light of the authorities I have already cited.

Before detailing the material relating to the acquisition of Yarrick No. 1, it is appropriate that I should say something in relation to the burden of proof imposed upon the taxpayer by sec. 190. It is appropriate because of a number of recent statements made by Board of Review No. 1 concerning its interpretation.

Section 187 of the Assessment Act requires the Commissioner, upon the taxpayer's request, either to refer his decision to a Board of Review for review or to treat the taxpayer's objection as an appeal and forward it to a Supreme Court. Section 190 then provides that:

``Upon every such reference or appeal -

  • ...
  • (b) the burden of proving that the assessment is excessive shall lie upon the taxpayer.''

It should be noted that the statute says nothing about the degree or standard of proof required or the weight of evidence which must be adduced by the taxpayer to discharge that burden.

In
Nixon v. F.C. of T. 79 ATC 4377 - a case under sec. 26(a) concerning the purpose with which the taxpayer acquired certain property - I drew attention (at p. 4381) to the direction onus usually given to a jury in civil cases, which is illustrated by reference to a pair of scales in which the evidence and the arguments of the plaintiff are placed on the one side and on the other are placed the evidence and arguments of the defendant; the jury is told that if the plaintiff succeeds, in its estimation, in weighing down those scales ever so slightly in his favour then he has discharged the burden he carries of proving to its reasonable satisfaction that whatever he asserts is more probably correct than not. I went on to say that I did not see why a similar degree of proof is not applicable where a taxpayer is obliged to establish the absence of a particular purpose in acquiring property. I went on to suggest that the approach of the Board of Review to the discharge of the taxpayer's burden in that particular case appeared to have placed a weight upon the taxpayer similar to that placed upon Atlas, who carried the whole weight of the heavens as well as the globe of the universe upon his shoulders.

Upon appeal to the Federal Court,
F.C. of T. v. Nixon 80 ATC 4297 at p. 4300, my criticism that the Board had placed an unduly heavy burden on the taxpayer in that particular case was thought not to be justified, although the appeal was dismissed. It is, however, significant that the joint judgment of that Court (at p. 4300) specifically identified the burden of proof imposed by sec. 190 to be ``the ordinary civil onus of proof''. Two statements from the High Court may be quoted to support that proposition. In
McCormack v. F.C. of T. 79 ATC 4111 at p. 4121; (1979) 143 C.L.R. 284 at p. 303, Gibbs J. (as he then was), said:

``The taxpayer bears the burden of proving that the assessment was excessive. To discharge that burden in a case such as the present [also a sec. 26(a) case] he must prove affirmatively, on the balance of probabilities, that the property was not acquired for the purpose of profit-making by sale.''

In
Macmine Pty. Ltd. v. F.C. of T. 79 ATC 4133 at p. 4146; (1979) 24 A.L.R. 217 at p. 235, Stephen J. said:

``... given an assessment, a taxpayer who seeks to challenge it bears the onus of showing from the evidence that it is excessive, that he does by disproving, on ordinary civil standards of proof, the basis of assessment adopted by the Commissioner.''

That was also a sec. 26(a) case.

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These statements do not seem to have been appreciated by Board of Review No. 1, which appears, from statements made in subsequent cases, to have completely misconceived what was said by the Federal Court in the Nixon case. In my position in the judicial hierarchy I can, of course, have no quarrel with the finding of the Federal Court that my criticism of the Board's approach to the taxpayer's burden of proof in that particular case was not justified: it was open to that Court to disagree with the impression I have formed from the reasons which the Board has given. There was certainly nothing expressly said in those reasons which suggested that the Board had imposed a burden other than the ordinary civil standard of proof. That is why I said that it was only my impression that an unduly heavy burden had been imposed by the Board of Review. In disagreeing with my impression, the Federal Court unfortunately did not have the benefit of the clear concession since made by the No. 1 Board that it does indeed impose a burden other than the ordinary civil standard of proof in sec. 26(a) cases. Such a concession was made in the course of that Board's examination and purported refutation of my criticism of it in the Nixon case, and it has been repeated in a number of cases since. In my respectful view, this concession completely confirms the criticism which I made but which the Federal Court thought was not justified in that case.

In Case L46,
79 ATC 292 at pp. 299-300, Mr. Fairleigh undertook such an examination of the criticism I made. The basis of his purported refutation was that what he called the ``statutory onus'' does not normally arise in civil actions (whether or not heard with a jury); and that, where on a taxation reference the taxpayer withholds a material witness or otherwise fails to expose all the material facts:

``... the position is not reached... of simply looking to the right conclusion to be drawn from the whole of the evidence, as occurs in the ordinary civil action.''

So far as I am aware, this was the first time that the suggestion has ever been made expressly that a ``statutory'' onus of proof requires a different degree or standard of proof to the ordinary civil action, although Mr. Fairleigh's statement is in my view clearly consistent with what is widely believed to be the approach of certain of the Boards of Review: see ``The Independence of Boards of Review'', an editorial published in the Australian Tax Review (March, 1980), at p. 2.

The expression ``statutory onus'' was used again by Mr. Fairleigh in the same context in Case L67,
79 ATC 519 at p. 540, where he suggested that the ``general principle'' concerning such an onus was expounded by Mason J. in
General Motors-Holdens Pty. Ltd. v. Bowling (1976) 12 A.L.R. 605 at p. 617. To that case I will return later.

In Case N3,
81 ATC 22, Mr. Fairleigh was joined by Mr. Harrowell in taking me to task once more for the criticism which I had expressed in the Nixon case. They said (at p. 28):

``... the statutory onus at times... makes the metaphor of the scales inapplicable; and the remark as to the tribulations of Atlas needs no comment as the more colourful the metaphor, the more extravagant it will be.''

Reference is then made to a repetition by me of similar criticism in relation to the decision of the No. 1 Board in another case. That criticism is said to have been made by me ``without even a cursory reference to the Federal Court's evaluation of his criticism'' (that is, in the Nixon case). They continue:

``Under these circumstances we see no reason to depart from our earlier statements on onus of proof.''

It would not be profitable to set out the somewhat discursive passages in which Mr. Fairleigh has attempted in Case L46 to expound his views concerning the ``statutory onus''. It is, however, clear from what he says (79 ATC at pp. 299-300) and from the context in which the subsequent remarks in Case L67 and Case N3 are made that it is the view of at least Board of Review No. 1 that the ``statutory onus'' imposed by sec. 190 is not discharged by the taxpayer unless he calls all the material witnesses and produces all the material documents to support his own evidence, and that in this way the ``statutory onus'' differs from (and is more onerous than) the standard of proof required in the ordinary civil case. The statements made by

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Mr. Fairleigh (and joined in by Mr. Harrowell) cannot be interpreted in any other way.

In both Case L46 and Case N3, the Federal Court's decision in the Nixon case is cited by the Board of Review as supporting this extraordinary proposition. In each case, attention is drawn to the differences in the factual situations which faced the Board and myself on appeal in that case. Before the Board, the taxpayer had given evidence that he had acquired the mining shares in question after a conversation with his niece (who had an interest in geology) in which she passed on inside information that she had obtained concerning the mining company's prospects. He did not call his niece before the Board to corroborate that evidence. Moreover, the Commissioner relied to a large extent upon a letter written on behalf of the taxpayer by a taxation consultant which asserted a number of facts that conflicted with the taxpayer's evidence. That taxation consultant was not called before the Board to explain how the letter came to be written. The Board upheld the Commissioner's decision to include the profit obtained on the sale of the shares within the taxpayer's assessable income, saying (Case K49,
78 ATC 462 at pp. 469, 471) that the taxpayer had failed to discharge his onus of proof. Before me, the taxpayer repeated his evidence but also called his niece (who substantially confirmed his evidence) and the taxation consultant (who explained the conflict between his letter and the taxpayer's evidence and upheld the appeal.

It should be firmly stated that, contrary to what the Board of Review has now twice expressly stated, there is no difference whatever in the burden of proof which must be discharged by a taxpayer in those two situations. The sole question in each situation was whether the relevant tribunal of fact should accept the taxpayer's evidence that he did not acquire the shares with the purpose of profit-making by sale. If that evidence was not accepted, then the taxpayer failed. If it was accepted, then the taxpayer succeeded. It is, of course, important in many cases in determining whether or not the evidence of the taxpayer should be accepted to consider whether it is corroborated. That may well have been so in the Nixon case because the objective facts surrounding the mining boom of 1969-1970 could in some minds be sufficient to cast doubts upon the mere sayso of the taxpayer (albeit on oath) that he did not have the relevant purpose in acquiring the mining shares. That, as I say, was relevant to considering whether the taxpayer's evidence should be accepted. The absence of such evidence before the Board of Review may well have been a reason why the Board should not have accepted his evidence; and its presence may well be regarded as the reason why I did accept his evidence. But it has nothing to do with the taxpayer's burden of proof. And it is not obligatory for a taxpayer, before he can discharge his burden of proof, to call all the material witnesses and to produce all the material documents which support his evidence, as Mr. Fairleigh suggests. It is certainly wiser for the taxpayer to do so in most cases so as to ensure that his own evidence is accepted, but even where he does not do so the tribunal of fact may nevertheless be sufficiently impressed with the taxpayer as a witness that his evidence is accepted without such corroboration or without the whole of such corroboration. If his evidence as to his purpose is accepted, then he has discharged his onus of proof whatever corroborative evidence he has or has not called.

There is no requirement of law that a taxpayer on a taxation reference or appeal is obliged to produce other evidence to corroborate his own evidence, nor should there be any rule of practice adopted in such cases by which such corroboration is required. That was apparently a requirement of Canon Law under the influence of Roman Law, but (except in prosecutions for perjury) there is no such requirement in the Common Law: Cross on Evidence (2nd Aust. ed.), para. 9.2, 9.3. There is absolutely nothing in the Federal Court's decision in the Nixon case which supports the now expressly stated approach of the Board of Review. Indeed, what that Court said is directly opposed to such an approach. At 80 ATC 4297 at p. 4301, the joint judgment said:

``The evidence of the taxpayer as to his purpose in acquiring the shares needed to be examined and tested against the context of the objective facts. As the reasons of the members of the Board of Review had demonstrated, there was

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much in those objective facts which was calculated to excite scepticism as to the reliability of the taxpayer's evidence that he had not purchased the shares for the purpose of profit-making by sale. Plainly, however, if the taxpayer's evidence as to his purpose was both honest and accurate, that was the end of the matter''

(Emphasis added.)

I sought to make the same point, although in a slightly different context, in
Coppleson v. F.C. of T. 81 ATC 4019 at p. 4022; (1981) 34 A.L.R. 377 at p. 382. See also McCormack v. F.C. of T. (supra) at ATC p. 4121; C.L.R. p. 302. The taxpayer bears no onus to negate each of the objective facts in the evidence which may be consistent with the purpose of profit-making by sale. Those facts must, as I have said, be considered by the tribunal of fact when determining whether or not to accept the taxpayer's evidence that his dominant purpose in acquiring the property was not one of profit-making by sale. But once that evidence of the taxpayer's purpose is accepted, the other objective facts in the evidence are irrelevant and they must be discarded; the taxpayer has discharged his onus and the reference or the appeal must be allowed. There is no legal obligation upon the taxpayer to produce other evidence to corroborate his evidence before it can be accepted.

One error in the approach of Board of Review No. 1, as it was first expressly stated by Mr. Fairleigh in Case L46 (supra), appears to result from a confusion in his mind between the discharge of a party's burden of proof and the acceptance of his evidence as true. Although the taxpayer's burden of proof usually cannot be discharged unless his evidence as to purpose is accepted as true (but see McCormack v. F.C. of T. (supra) at ATC p. 4121; C.L.R. pp. 302-303), it is quite wrong to impose as a requirement for the discharge of that burden a legal obligation to produce corroborative evidence which is no more than relevant to the question whether that evidence of the taxpayer should be accepted, however desirable it may be to have such evidence in most cases so as to ensure that his evidence as to purpose is accepted.

Another error in the Board's approach as stated by Mr. Fairleigh is his apparent assumption that the imposition of that burden upon the taxpayer by the statute governs not only the incidence of the burden but also the weight of evidence which must be adduced by the taxpayer to discharge it. I have already pointed out that sec. 190 itself is completely silent as to the degree or standard of proof required. The reason why the statute places the burden upon the taxpayer is obvious: he is usually the person best able to give evidence of his purpose in acquiring the property in question; and quite often he is the only person so able to give that evidence as the facts are peculiarly within his own knowledge. That is a circumstance which the common law (as well as the legislature) takes into account in determining where the incidence of the burden should lie:
Williamson v. Ah On (1926) 39 C.L.R. 95 at pp. 113-115. But that circumstances does little if anything to assist a tribunal of fact in determining whether the taxpayer has discharged his burden of proof under a provision such as sec. 26(a).

It will no doubt be pointed out, in contradiction of that assertion, that in
Trautwein v. F.C. of T. (1936) 56 C.L.R. 63 at p. 87, Latham C.J. said:

``The circumstance that the facts are (or were) peculiarly within the knowledge of one party is a relevant matter in considering the sufficiency of evidence to discharge a burden of proof. (See cases cited by Isaacs J. in Williamson v. Ah On (1926) 39 C.L.R. 95 at pp. 113-115.) Obviously the facts in relation to his income are facts peculiarly within the knowledge of the taxpayer.''

There are a number of matters concerning this statement to which reference should be made. The decisions to which Isaacs J. referred in Williamson v. Ah On are concerned, as I have already said, with the incidence of the burden of proof, not with the weight or sufficiency of the evidence required to discharge that burden. There is, of course, clear authority for the proposition that, where one party bears the onus of proof and the facts are peculiarly within the knowledge of the other party, comparatively slight evidence will be sufficient to discharge that onus: see, for example,
Parker v. Paton (1941) 41 S.R. (N.S.W.) 237 at p. 243;
Hampton Court Ltd. v. Crooks (1957) 97 C.I.R. 367 at p. 371.

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But there is no binding authority for the converse proposition, that where the facts are peculiarly within the knowledge of the party who bears the onus of proof, more evidence is required than in the ordinary civil action for that party to discharge that onus. Yet that is what Mr. Fairleigh asserts in Case L46 (supra). Insofar as the passage I have quoted from the judgment of Latham C.J. in Trautwein v. F.C. of T. suggests to the contrary - and I am by no means convinced that properly understood it does make that suggestion - then with the utmost respect I am unable to accept it as a correct statement of principle. It certainly finds no support in the judgments of the other members of the Court. And it is no more than obiter, as the issue was not as to the degree or standard of proof or the weight of evidence which must be adduced by the taxpayer to discharge his burden of proof, but rather whether it was necessary for the taxpayer to show not only that the Commissioner's assessment was wrong but also what it should have been. That was an issue of statutory interpretation of the combined effect of what are now sec. 177(1) and 190, not of the weight of evidence required to discharge the burden of proof imposed by what is now sec. 190. Moreover, the Chief Justice concluded (at p. 88) that it was unnecessary for him to decide even that issue. The correct interpretation was finally placed beyond any doubt in
George v. F.C. of T. (1952) 86 C.L.R. 183 at p. 201, when the Court went on to quote from
F.C. of T. v. Clarke (1927) 40 C.L.R. 246 at p. 251:

``The onus may prove to be dischargeable easily or with difficulty according to circumstances.''

I am satisfied that there is no warrant for Mr. Fairleigh's proposition that the burden of proof for a party in whose peculiar (that is, exclusive) knowledge the facts lie is any different to that for any party in the ordinary civil action.

The failure of a party to call witnesses whose evidence is relevant or to produce material documents is not, contrary to Mr. Fairleigh's apparent belief, conduct exclusively that of taxpayers in taxation references and appeals. The situation in such cases is exactly the same as in ordinary civil litigation. The inference available from such failure (where that failure is unexplained) is the same in each type of case: that the evidence of such witnesses or the contents of such documents would not have helped that party's case:
Jones v. Dunkel (1959) 101 C.L.R. 298 at p. 321. That unexplained failure may also be taken into account in determining whether the tribunal of fact should draw any other inference which is otherwise open upon the evidence and which may have been contradicted by that witness or document: ibid. at pp. 308, 312, 319. In either case, the result of such unexplained failure may well be fatal to that party's case. Particularly might this be so where, as in sec. 26(a) cases, the facts are usually peculiarly within the knowledge of that party. But the tribunal of fact is not bound to draw either inference; nor because of the taxpayer's unexplained failure to produce the missing material is it bound to disbelieve his own evidence or to find against him. That much is clear from the judgment of Gibbs J. in McCormack v. F.C. of T. (supra) at ATC p. 4121; C.L.R. pp. 302-303, to which reference has already been made.

What Mr. Fairleigh and Board of Review No. 1 have done, however, is to elevate the inference which may be drawn from the taxpayer's unexplained failure to call this evidence, and which may be used in determining whether or not to accept his own evidence, to the status of a legal obligation upon the taxpayer to produce such evidence in order to discharge his burden of proof. This is clearly wrong.

Nor is there anything to support such an approach in the judgment of Mason J. in General Motors-Holdens Pty. Ltd. v. Bowling (supra) upon which reliance is placed by Mr. Fairleigh. That was a case concerning the dismissal of a shop steward from the appellant's employment. It is an offence under the Conciliation and Arbitration Act 1904, sec. 5, to dismiss an employee who is a union official if that circumstance is a substantial and operative factor in the reasons for the dismissal. What was in dispute in that case was whether the appellant was so actuated by that circumstance in dismissing the shop steward. Section 5(2) places the onus upon the employer to prove that he was not so actuated. At (1976) 12 A.L.R. 605 at pp. 616-617, Mason J. points out that the

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consequence of the onus being placed upon the employer, because the facts are peculiarly within its knowledge, is that the employer must establish what were the real reasons for dismissal and that the employee's union position was not a substantial and operative factor in those reasons; there is no requirement upon the prosecution to bring forward evidence that it was such a factor. The similarity to what has been said in relation to sec. 177(1) and 190 of the Income Tax Assessment Act in Trautwein v. F.C. of T. (supra) and in George v. F.C. of T. (supra) is reasonably clear. But once again, what was said by Mason J. in General Motors-Holdens Pty. Ltd. v. Bowling is directed to what must be proved by the employer, not as to the weight of the evidence which is required to prove it.

In Macmine v. F.C. of T. (supra), in a long review of the cases dealing with the taxpayer's burden of proof, Murphy J. quotes (at ATC p. 4157; A.L.R. p. 252) part of the relevant passage of this judgment of Mason J. His Honour's conclusions from that review are expressed in this way:

There is nothing in his Honour's judgment which supports Mr. Fairleigh's propositions that the statutory burden of proof imposed by sec. 190 obliges the taxpayer to call all the material witnesses and to produce all the material documents which support his own evidence, and that the degree or standard of proof or the weight of evidence which is required to discharge that statutory burden is any different to that in the ordinary civil action.

Nor - despite the Board's animadversions in Case N3 (supra) at p. 28, upon my failure to consider it - is there any support for those propositions in the Federal Court's decision in the Nixon case in which, as I have already pointed out, that Court held specifically to the contrary, that the burden of proof imposed by sec. 190 is ``the ordinary civil onus of proof'': 80 ATC 4297 at p. 4300; as did Stephen J. in Macmine Pty. Ltd. v. F.C. of T. (supra) at ATC p. 4146; A.L.R. p. 235.

These propositions now expressly espoused for the first time by Board of Review No. 1 are therefore overruled. I should add that not even the Commissioner was prepared to support them in the argument before me in the present case, although the concession was in the following limited terms:

``For the purposes of this case, the Commissioner does not wish to argue that the statute imposes any higher burden or standard than the ordinary civil standard.''

It is to be hoped that both he and Board of Review No. 1 will finally come to accept what has now been said in the High Court, the Supreme Court and the Federal Court on this issue of the taxpayer's burden of proof imposed by sec. 190.

I turn then in more detail to the circumstances in which it is asserted by the taxpayer that Yarrick No. 1 was acquired.

Messrs. Lucas and Tait, as I have already said, had been associated with each other for many years, mainly in real estate development. At some time in 1961 they were associated in a contract-carrying business, and they discussed the purchase of a rural property. Mr. Tait's idea was that they should ``not have all of [their] eggs in one basket''. A property at Eumungerie, near Dubbo in the west of New South Wales and known as ``Lynsdale'', was purchased by them in partnership. In 1963, this property was transferred to Lucas & Tait Pty.

ATC 4025

Limited, a company formed in that year to take over the contract-carrying and rural activities of the partnership. That company, which is controlled by the Lucas and Tait families, has not been involved in real estate development, despite some understandable confusion in various documents between it and Lucas & Tait Sales Pty. Limited, a company formed in 1965 and which certainly has been so involved. Lucas & Tait Pty. Limited still owns ``Lynsdale'', a property of some 4,000 acres, and operates it for sheep and cattle breeding and for wheat farming.

As a result of the severe drought in the west of New South Wales during 1964-1965, that company was obliged to agist its cattle. Messrs. Lucas and Tait then discussed purchasing another property in a drought-free area on the coast, which would be run in conjunction with ``Lynsdale''. Mr. Lucas ascertained that Yarrick No. 1 was for sale. Mr. Tait visited Forster and discussed this property with Mr. David Gregory, who knew the area well. Mr. Gregory told Mr. Tait that it was brush country and very fertile. He said that if the property were cleared and put under pasture improvement it would be excellent cattle property, and he estimated that it would run between 400 and 500 head of cattle. The property was also inspected later by Mr. Colin McCarthy, the manager of ``Lynsdale'', who was experienced with cattle (and the brother-in-law of Mr. Tait). He thought that it was very good land, that it would make an ideal cattle property with pasture improvement and clearing and that it should be purchased. After a detailed examination of the finances involved, which need not be rehearsed here, Messrs. Lucas and Tait agreed with the advice which they had been given.

The taxpayer company was then formed for the purpose of acquiring Yarrick No. 1. It was not purchased by Lucas & Tait Pty. Limited, which owned ``Lynsdale'', because the money required to develop Yarrick No. 1 made it necessary to bring in other shareholders. The first source from which capital investment was sought was Cambridge Credit Corporation Limited, with whom Messrs. Lucas and Tait through various real estate development companies had had many dealings. The initial negotiations with Cambridge Credit were conducted through Mr. Yates, then the manager of that company's Sydney branch. Mr. Yates in turn discussed the proposal with Mr. Hutcheson, then the managing director of the company, who decided that Cambridge Credit should make the investment. With that company came as investors Mr. Yates and Mr. Chopin, then the company's solicitor, each in his personal capacity.

Each of the directors and those beneficially interested in the shares issued by the taxpayer gave evidence of the purpose for which Yarrick No. 1 was acquired. Each stated that it was acquired for farming, for improvement for cattle grazing and for similar pastoral purposes. The effect of their evidence was to deny that there was any purpose, let alone any dominant purpose, of utilizing the land for real estate development or otherwise of ultimately reselling it at a profit.

Yarrick No. 1 was, as I have said, acquired by the taxpayer on 24 March 1966. Thereafter, it is not now disputed by the Commissioner, the property was in fact worked as a grazing property for some six years, and money was spent by the taxpayer upon improvements for that purpose. It is unnecessary to detail them in this judgment. Mr. Gregory managed the property for the taxpayer.

In 1968, it became apparent to the directors and shareholders of the taxpayer that the amount of interest being paid it to Cambridge Credit upon advances made by that company was preventing the property from producing the profits which had been anticipated. There was therefore a capital reconstruction: Cambridge Credit agreed to take up 50% of the company's capital (which was increased), Messrs. Lucas and Tait (through their family companies) took up the other half and Messrs. Yates and Chopin relinquished their shares. Mr. Dobbins, then the manager of Cambridge Credit's Sydney branch, was appointed a director together with a Mr. Goddard who also represented Cambridge. Later the same year, the company's name was changed to its present name of Allied Pastoral Holdings Pty. Limited.

At this time also, a decision was made to sell portion of Yarrick No. 1. As I have already said, no question arises in relation to

ATC 4026

the sale of this portion in these appeals. It was situated at the southern end of the property, and had been determined to be useless for grazing purposes. This advice was given by Mr. Gregory, the manager. The land was subdivided and sold under the name ``Holiday Ranches Estate''. In fact, more than the actual area indicated by Mr. Gregory as being useless was subdivided by the surveyor, but the additional area so subdivided was not sold at this time.

The next event of importance was the acquisition by the taxpayer of Yarrick No. 2. This followed a separate venture which the taxpayer and Cambridge Credit had undertaken whereby another property further to the north, known as ``Coomba Park'', had been stocked by the latter and managed by the former as a pastoral property. Cambridge Credit had resisted offers by Mr. Tait on behalf of the taxpayer to purchase ``Coomba Park''. When the property contiguous to and immediately to the north of Yarrick No. 1 became available, it was purchased by Messrs. Lucas and Tait through another company, Commercial Land Pty. Limited. This property became known as ``Yarrick No. 2''. Its value to the taxpayer's operation carried on at Yarrick No. 1 was pointed out by Mr. Gregory. The intention of Messrs. Lucas and Tait was to sell the land to the taxpayer to be run as an enlarged grazing property with Yarrick No. 1 in return for the taxpayer's participation in the equity of Cambridge Park - in other words, as a lever upon Cambridge Credit to acquire that equity. The Commercial Land company, which was otherwise involved with real estate development, was utilized by Messrs. Lucas and Tait for the initial purchase of this additional land because it had the cash available to pay for it. In fact, Yarrick No. 2 was thereafter run with Yarrick No. 1 as the one property. Part but not all of Yarrick No. 2 was improved for pastoral purposes.

Messrs. Lucas, Tait and Hutcheson (of Cambridge Credit) gave evidence that prior to the purchase by the taxpayer of Yarrick No. 2 there had been no conversation relating to its ultimate resale by way of subdivision or otherwise, either alone or in conjunction with Yarrick No. 1. The effect of their evidence was that the only purpose for its acquisition by the taxpayer was for use as a grazing property together with Yarrick No. 1.

In 1972, however, the decision was taken by the taxpayer to sell Yarrick No. 2 and the remainder of Yarrick No. 1. The reasons for this decision were many and, as their honesty is strongly attacked by the Commissioner, it would be more appropriate to elaborate upon them later in this judgment. The properties were subdivided and sold during 1973 and 1974.

It is accepted by the Commissioner (at least for the purposes of this case) that, if I accept the evidence of the directors and of the beneficial shareholders of the taxpayer denying that the dominant purpose in acquiring each of the two properties was to resell it at a profit, then the profit arising from that resale was not assessable income within the first limb of sec. 26(a) of the Assessment Act. The Commissioner does, however, submit that I should not accept their evidence and that as a consequence the taxpayer has not discharged its burden of proving that his assessment was excessive.

The Commissioner relies upon a number of matters which he submits should lead me to reject that evidence. Many of them overlap and I propose to deal with these matters in groups. By approaching the case in this way, I do not intend to suggest that the Commissioner bears any onus of persuading me that the taxpayer's evidence should not be accepted. That clearly is not the position. But where (as here) there was generally nothing about the witnesses themselves or about the evidence which they gave which led me to disbelieve it as it was being given, there is in my view some factual obligation upon the Commissioner at least to point to reasons why that evidence should be disbelieved: cf.
Casuarina Pty. Ltd. v. F.C. of T. 70 ATC 4069 at p. 4076; (1970-1971) 127 C.L.R. 62 at p. 72;
Bailey v. F.C. of T. 77 ATC 4096 at p. 4104; (1977) 136 C.L.R. 214 at pp. 227-228. Those matters upon which the Commissioner relies must then be considered before determining whether the taxpayer has persuaded me that its evidence should be accepted.

The Commissioner's principal argument as to why I should disbelieve the evidence led by the taxpayer seeks to meet head-on the most telling fact in favour of the taxpayer,

ATC 4027

namely, the long period which elapsed between the initial acquisition of Yarrick No. 1 in 1966 and its eventual resale in 1973 and 1974 (after being subdivided for that purpose in 1972), during which period the land was used for grazing.

What the Commissioner submits is this:

All but the first and second of these are said to be inferences which I should draw from the whole of the evidence in the case. Then, having drawn those inferences, it is submitted. I should disbelieve the evidence of the directors and of the beneficial shareholders denying that the taxpayer's dominant purpose in acquiring each of Yarrick No. 1 and Yarrick No. 2 was to resell it by way of subdivision at a profit.

The taxpayer replies to this submission in various ways. To those arguments I will turn later. First and foremost, however, there is one answer to the Commissioner's submission which raises an important question of practice that was debated at some length during the final addresses at the hearing. It arises from the fact that at no time did counsel for the Commissioner put to any of the taxpayer's witnesses in cross-examination the so-called ``staged development'' theory upon which his client so strongly relies to contradict their evidence denying any dominant purpose in the acquisition of each of the properties to resell it at a profit, nor did he give any notice that such was the case he would be seeking to make. It certainly was not a case which should have been apparent without such express notice.

It has in my experience always been a rule of professional practice that, unless notice has already clearly been given of the cross-examiner's intention to rely upon such matters, it is necessary to put to an opponent's witness in cross-examination the nature of the case upon which it is proposed to rely in contradiction of his evidence, particularly where that case relies upon inferences to be drawn from other evidence in the proceedings. Such a rule of practice is necessary both to give the witness the opportunity to deal with that other evidence, or the inferences to be drawn from it, and to allow the other party the opportunity to call evidence either to corroborate that explanation or to contradict the inference sought to be drawn. That rule of practice follows from what I have always believed to be rules of conduct which are essential to fair play at the trial and which are generally regarded as being established by the decision of the House of Lords in Browne v. Dunn (1894) 6 R. 67.

No doubt because that decision is to be found only in an obscure series of law reports (called simply ``The Reports'' and published briefly between 1893 and 1895), reliance upon the rules said to be enshrined in that decision seems often to be attended more with ignorance than with understanding. The appeal was from a defamation action brought against a solicitor and based upon a document which the defendant had drawn whereby he was to be retained by a number of local residents to have the plaintiff bound over to keep the peace because of a serious annoyance which it was alleged he had caused to those residents. Six of the nine signatories to the document gave evidence on behalf of the defendant that they had genuinely retained him as their solicitor and that the document was really intended to be what it appeared on its face to be. No suggestion was made to any of these witnesses in cross-examination that this was not the case and, so far as the conduct of the

ATC 4028

defendant's case was concerned, the genuineness of the document appeared to have been accepted. However, the defence of qualified privilege relied upon by the defendant depended in part upon whether the retainer was in truth genuine or whether it was a sham, drawn up without any honest or legitimate object but rather for the purpose of annoyance and injury to the plaintiff. This issue was left to the jury. The plaintiff submitted to the jury that the retainer was not genuine and was successful in obtaining a verdict in his favour. In support of that submission, the plaintiff asked the jury to disbelieve the evidence of the six signatories who had said that the retainer was a genuine one.

Lord Herschell L.C. said (at pp. 70-71):

``Now, my Lords, I cannot help saying that it seems to me to be absolutely essential to the proper conduct of a cause, where it is intended to suggest that a witness is not speaking the truth on a particular point, to direct his attention to the fact by some questions put in cross-examination showing that that imputation is intended to be made, and not to take his evidence and pass it by as a matter altogether unchallenged, and then, when it is impossible for him to explain, as perhaps he might have been able to do if such questions had been put to him, the circumstances which it is suggested indicate that the story he tells ought not to be believed, to argue that he is a witness unworthy of credit. My Lords, I have always understood that if you intend to impeach a witness you are bound, whilst he is in the box, to give him an opportunity of making any explanation which is open to him; and, as it seems to me, that is not only a rule of professional practice in the conduct of a case, but is essential to fair play and fair dealing with witnesses.''

His Lordship conceded that there was no obligation to raise such a matter in cross-examination in circumstances where it is ``perfectly clear that [the witness] has had full notice beforehand that there is an intention to impeach the credibility of the story which he is telling''. His speech continued (at p. 71):

``All I am saying is that it will not do to impeach the credibility of a witness upon a matter on which he has not had any opportunity of giving an explanation by reason of there having been no suggestion whatever in the course of the case that his story is not accepted.''

Lord Halsbury said (at pp. 76-77):

``My Lords, with regard to the manner in which the evidence was given in this case, I cannot too heartily express my concurrence with the Lord Chancellor as to the mode in which a trial should be conducted. To my mind nothing would be more absolutely unjust than not to cross-examine witnesses upon evidence which they have given, so as to give them notice, and to give them an opportunity of explanation, and an opportunity very often to defend their own character, and, not having given them such an opportunity, to ask the jury afterwards to disbelieve what they have said, although not one question has been directed either to their credit or to the accuracy of the facts they have deposed to.''

Lord Morris (at pp. 78-79) said that he entirely concurred with the two speeches which preceded his, although he wished (at p. 79) to guard himself with respect to laying down any hard-and-fast rule as regards cross-examining a witness as a necessary preliminary to impeaching his credit. The fourth member of the House, Lord Bowen, is reported (at pp. 79-80) to have said that, on the evidence of the six signatories, it was impossible to deny that there had been a real and genuine employment of the defendant. But his Lordship made no statement of general principle.

These statements by the House of Lords led to the formulation of a number of so-called ``rules''. They have been stated in various ways in the cases and by textbook writers, and it is fair to say that there is some room for debate as to their correct formulation. For example, in Cross on Evidence (2nd Aust. ed., 1979), the authors state (at para. 10.50):

``Any matter upon which it is proposed to contradict the evidence in chief given by the witness must normally be put to him so that he may have an opportunity of explaining the contradiction, and failure to do this may be held to imply acceptance of the evidence in chief.''

ATC 4029

In Phipson (12th ed., 1976) the authors state the rule somewhat more discursively (at para. 1593):

``As a rule a party should put to each of his opponent's witnesses in turn so much of his own case as concerns that particular witness, or in which he had a share... If he asks no questions he will in England, though not perhaps in Ireland, generally be taken to accept the witness's account and he will not be allowed to attack it in his closing speech, nor will he be allowed in that speech to put forward explanations where he has failed to cross-examine relevant witnesses on the point... where it is intended to suggest that the witness is not speaking the truth upon a particular point his attention must first be directed to the fact by cross-examination, so that he may have an opportunity of explanation; and this probably applies to all cases in which it is proposed to impeach the witness's credit... Failure to cross-examine, however, will not always amount to an acceptance of the witness's testimony, e.g. if the witness has had notice to the contrary beforehand, or the story is itself of an incredible or romancing character...''

Many of the cases in which attempts were made to formulate these rules are collected and discussed by Newton J. in
Bulstrode v. Trimble (1970) V.R. 840. To the lists enumerated (at pp. 846 and 848), I would add
Unsted v. Unsted (1947) 47 S.R. (N.S.W.) 495 at p. 500. There have been many cases since Bulstrode v. Trimble to which I will refer shortly.

As Newton J. observed (in Bulstrode v. Trimble, at p. 846), there are two aspects to be considered. Firstly, there is a rule of practice or procedure, based upon general principles of fairness, which is designed to achieve fairness to witnesses and a fair trial between the parties; and, secondly, there is a rule relating to the weight or cogency of the evidence. His Honour went on to say (at pp. 848-850) that the second rule in or aspect of Browne v. Dunn meant no more than that if a witness is not cross-examined in relation to a particular matter upon which he has given evidence, then that circumstance would often be a very good reason for accepting the evidence of that witness upon that matter; there is, however, no requirement in law that the tribunal of fact must accept that evidence, and no basis in law upon which the other party is precluded by his failure to cross-examine from leading evidence in direct contradiction to that evidence. The status of some of these propositions must be considered doubtful in the light of the subsequent decision of the High Court in
Precision Plastics Pty. Ltd. v. Demir (1975) 132 C.L.R. 362 at p. 372 (per Gibbs J., with whom Stephen and Murphy JJ. agreed; Barwick C.J. contra at p. 365). But this second rule or aspect is not applicable in the present case.

I turn then to the cases in which the first rule or aspect has been considered since Bulstrode v. Trimble.

The first is
Cullen v. Ampol Petroleum Ltd. (N.S.W. Court of Appeal, 20 October 1970, unreported). This was an appeal by the defendant from the trial of an action for malicious prosecution. The action arose out of a charge of embezzlement preferred by the defendant against a former employee. He was committed for trial but the Attorney-General declined to file a Bill. The judgments of the Court of Appeal fill 96 pages of the Appeal Book subsequently lodged in the High Court. The facts are intricate and involved. It was no doubt for these reasons that the decision has never been reported even in part. The Court of Appeal allowed the defendants's appeal, set aside the jury's verdict in favour of the plaintiff and entered judgment for the defendant upon the basis that the plaintiff had failed to establish an absence of reasonable and probable cause for the defendant's prosecution. On his appeal to the High Court, the plaintiff argued only a few of the matters considered by the Court of Appeal, and the judgment of the High Court dismissing his appeal (unreported, I December 1972) does so without further consideration of any of those matters.

Because these judgments have remained unreported, it is necessary to elaborate to some extent upon the issues which were raised. In order in part to establish an absence of reasonable or probable cause for the prosecution, the plaintiff had submitted to the jury that the defendant's lack of honest belief in his probable guilt was established, inter alia, from its alleged failure

ATC 4030

to investigate the circumstances of his guilt until after the Information which commenced the prosecution had been sworn. It was in relation to this submission that the rule in Browne v. Dunn was considered. Evidence had been given by a large number of witnesses on behalf of the defendant as to the material concerning the circumstances of the plaintiff's guilt which had been discovered before the Information was sworn. This evidence was of interrelated inquiries and conferences over three days or so. There was little cross-examination of these witnesses by the plaintiff, the principal issue raised being that they had failed to make any inquiries of the plaintiff before the Information had been sworn. A Mr. Cooper, the defendant's branch office retail manager, gave evidence that, during the course of the defendant's inquiries, he had made a telephone inquiry of a bank as to when a particular cheque had been cashed. Mr. Cooper said that the answer to his inquiry had been confirmed by a letter from the bank. That letter was identified during the course of his evidence and marked for identification but it was not at that stage tendered. One possible view of Mr. Cooper's evidence was that the confirmatory letter had been received by the defendant upon the same day as its inquiries concerning the plaintiff's guilt had been commenced. After all the oral evidence had concluded, counsel for the plaintiff for this letter and tendered it. In his final address, he used this letter from the bank for a purpose which had not in any way been foreshadowed. The date which it bore was the same as that upon which the Information had been sworn against the plaintiff. Based upon this circumstance and upon the possible view of Mr. Cooper's evidence to which reference has already been made, counsel for the plaintiff submitted to the jury that the only inquiries which had been made by the defendant prior to swearing the Information against the plaintiff must have been made within a few hours on that day immediately before the Information was sworn. As I have said, the evidence of inquiries extending over some three days or so before the Information was sworn had never been challenged in cross-examination. Any number of explanations could have been given if the attention of any witness (particularly that of Mr. Cooper) had been drawn to the proposed use of the date of the letter from the bank. Some of his evidence upon which was based the interpretation that he had received the letter on the same day as the defendant's inquiries into the plaintiff's guilt had commenced was couched in terms of uncertainty. If his attention had been drawn to the importance of this date, he may well have suggested that such an interpretation of his evidence was mistaken. (There was other evidence in the case which made the commencing date of the inquiries more probably some four days earlier.) Evidence could have been called from the author of the letter from the bank to corroborate the defendant's case that the inquiry had been made some days earlier than the date which the letter bore (there was nothing in the terms of the letter itself to suggest that it had been written contemporaneously with the actual inquiry), or that the date which it bore was simply wrong.

The joint judgment of Sugerman P. and Moffitt J.A. (as he then was) interpreted the plaintiff's submission to the jury as meaning that numerous witnesses, police and both present and past employees of the defendant, had collaborated to produce an elaborate interlocking fabrication in relation to the issue of the investigation which had been carried out prior to the swearing of the Information against the plaintiff. They said:

``Even if the date on the letter came as a surprise to the plaintiff's counsel, if it had been intended to make the submissions which so gravely reflected on the honesty of witnesses in respect of evidence which had been let go unchallenged, counsel had the clearest duty to raise the matter in some way [Browne v. Dunn (supra) at pp. 70-71, 76-78, 79], such as seeking the recall of at least Cooper so as to put the matter to him including his suggestion that the evidence as to inquiries were [sic] a concoction.''

(Appeal Book, p. 934.)

The third member of the Court, Holmes J.A., said:

``... if the letter of the 20th December was to be relied on one would expect that counsel would ask for the recall of a number of witnesses... for further cross-examination. No such application was made. The bank officer responsible for handing it out or despatching it might

ATC 4031

have been a relevant witness. If ever there was an ambush this was it.''

(Appeal Book p. 952.)

In
Reid v. Kerr (1974) 9 S.A.S.R. 367 at pp. 374-375, Wells J. discussed in some detail (but without reference to much authority) the application of Browne v. Dunn to the situation where a defendant had cross-examined an expert called by the prosecution merely to have him affirm a conclusion which it was the defendant's aim to refute, and had then called his own expert who relied upon a vast mass of new material to express the contrary conclusion. His Honour (at p. 375) held that counsel for the defendant had failed in his obligation to challenge the prosecution expert with the substance of the evidence which he proposed to call, thereby permitting the prosecution to call rebutting evidence in order to grapple, for the first time, with the new material introduced by the defence expert. If no application were made to call such evidence, his Honour said, the defendant would not be entitled to challenge the prosecution evidence by relying upon his own. Reliance for this prosecution was placed upon the decision of the English Court of Criminal Appeal in R. v. Hart (1932) 23 C.A.R. 202, but that is a case in which, on a crucial part of the case to do with an alibi, the prosecution had not cross-examined the witnesses called by the accused at all yet had invited the jury to disbelieve their evidence. Wells J. did, however, also quote an earlier (unidentified) judgment of his own in these terms (at p. 375):

``... it is manifestly unfair to leave unchallenged part of a witness's evidence and then, through another witness, called by the side represented by the cross-examining counsel, to suggest something that is contrary to the first-mentioned witness's testimony, or which has never been covered by him.''

Although dealing at least in part with the first rule or aspect of Browne v. Dunn, this is of no more than general assistance to the particular situation with which I am presently concerned, but it is profitable to quote also these further portions of his Honour's earlier (unidentified) judgment (at p. 374):

``It has always seemed to me that if some kind of imputation is to be made against witness, then, at some stage - ultimately - the precise nature of that imputation should be made clear to the witness so that he is given an opportunity to meet it and, if he can, to explain it or destroy it... I am well aware that there are more ways of taking a fort than by frontal attack, but I hold it to be a fundamental principle that, when all arts and devices of cross-examination have been exhausted for the purpose of testing whether a particular witness merits adverse criticism, then, at some stage, and in some manner, he should be given the opportunity of meeting the implication and answering it.''

Chronologically, the next case is the decision of the High Court in Precision Plastics Pty. Ltd. v. Demir (supra), which related as I have said to the second rule or aspect of Browne v. Dunn, as to the weight or cogency of evidence which is not challenged in cross-examination at all.

In
Thomas v. Van den Yssel (1976) 14 S.A.S.R. 205 at p. 207, the Full Court of South Australia cited Reid v. Kerr (supra) as authority for the proposition that:

``... it is necessary that any contrary version or any relevant new matter which might contradict or qualify the import of his evidence and which it is intended to prove should be put to him.''

The Court rejected a complaint that the trial Judge in that case had not been entitled to disbelieve the plaintiff's evidence because, it was claimed, the plaintiff had not been warned that his credit was under attack. It was held that the cross-examination should have put the plaintiff and his advisers on notice that his credit was being attacked.

Browne v. Dunn was also considered by the N.S.W. Court of Appeal in
Seymour v. Australian Broadcasting Commission (unreported, 3 June 1977). This was a defamation action in which the defendant had successfully justified the imputation that the plaintiff had knowingly been involved as a solicitor with fraudulent land deals. The appeal was concerned not so much with counsel's obligation in cross-examination before making a submission based upon inferences in the evidence as with the consequences on appeal of his failure to do

ATC 4032

so in a jury trial where the trial Judge had taken no or insufficient action to cure the situation.

In his final address, counsel for the defendant had asked the jury to infer the plaintiff's involvement in the fraud (the existence of which not being in dispute) from a number of specific matters in the evidence. Such an interpretation of these matters had not been put to the plaintiff in cross-examination. It was accepted by Glass J.A., with whom Reynolds J.A. agreed, that Browne v. Dunn expresses a rule of professional practice and as well a rule of conduct which is essential to fair play at the trial and to fair dealing with witnesses. His Honour said (at p. 7):

``If counsel proposes to submit that a witness's evidence should not be accepted or that a particular construction should be placed on his conduct, the witness should be allowed an opportunity to deal with the suggestion.''

Later (at p. 8), his Honour spoke of the necessity for the ``implications'' in the evidence to be put to the party against whom the ``inference'' is to be drawn. Although this had not been done by counsel for the defendant in relation to at least some of the matters upon which he ultimately relied in his address to the jury, a new trial was refused because it was held that, in the particular circumstances of that trial, it should already have been apparent to the plaintiff that his association with the fraud would be suggested by reference to those matters. The third member of the Court, Mahoney J.A., agreed (at p. 18) that there had been no surprise and that there had been ample opportunity for an explanation.

Finally, in
R. v. Schneidas (No. 2) (14 May 1981, reported in relation to other matters at (1981) 2 N.S.W.L.R. 713), the N.S.W. Court of Criminal Appeal applied Browne v. Dunn to uphold the trial Judge's decision to refuse to allow an unrepresented accused to give evidence of matters concerning the credit of a Crown witness (demonstrating his bias) which had not been put to him in cross-examination by the accused. It was held (at p. 18 of the judgment, not included in the report) that the accused appeared to have been well versed in the art of cross-examination and in general Court procedure, so that the trial Judge had not erred in refusing to exercise his discretion in criminal cases to depart from the usual procedure and allow such evidence (subject to recalling the Crown witness in reply) where an accused is unrepresented. It was said that to have allowed the accused to give the evidence would have created an unfairness to the Crown.

So much for the authorities which support the rule of professional practice as I have stated it. Before turning to the one authority upon which the Commissioner relies to deny its existence, it is timely to give some consideration to the need for such a rule, and to the multitude of situations in which it applies.

A challenge made to the evidence of a witness in the course of a final address may take place in various ways. The opposing party may ask the tribunal of fact simply to disbelieve that evidence; if he has led evidence in direct contradiction of the evidence of that witness, he may then ask the tribunal of fact to accept the evidence of his own witnesses in preference to that of the witness in question; or he may point to other evidence in the case, led by either party, which tends either to contradict the evidence of that witness or to destroy his credit. There are many reasons why it should be made clear, prior to final addresses and by way of cross-examination or otherwise, not only that the evidence of the witness is to be challenged but also how it is to be challenged. Firstly, it gives the witness the opportunity to deny the challenge on oath, to show his mettle under attack (so to speak), although this may often be of little value. Secondly, and far more significantly, it gives the party calling the witness the opportunity to call corroborative evidence which in the absence of such a challenge is unlikely to have been called. Thirdly, it gives the witness the opportunity both to explain or to qualify his own evidence in the light of the contradiction of which warning has been given and also, if he can, to explain or to qualify the other evidence upon which the challenge is to be based. It is this third reason for the application of the first rule in or aspect of Browne v. Dunn which is applicable in the present case.

In many cases, of course, counsel for the party calling the witness in question will be

ATC 4033

alert to the relevance of the other material in the case to be relied upon for the challenge to the truth of the evidence given by his witness or to the credit of that witness, and in those circumstances counsel will be able to give his witness the opportunity to deal with that other material in his own evidence in chief. But sometimes quite properly he may not be aware either of the other material or of its relevance; or for quite legitimate tactical reasons he may prefer his opponent to be the first to raise the matter, and then deal with it in re-examination or (if allowed) in his case in reply. But at some stage during the course of the evidence, the witness must be given a proper opportunity to deal with the material to be relied upon for the challenge. If he has not been given that opportunity during the course of his own evidence, the situation may in some cases be remedied by his recall. Sometimes, particularly in jury trials, a party's failure to give such an opportunity to his opponent at the proper time may in justice require a ruling that a challenge to the evidence of the witness cannot be permitted or, if such a challenge has been made without warning, either the discharge of the jury in order to redress the unfairness which results. The various courses open in such a trial and the remedies upon appeal are discussed by the N.S.W. Court of Appeal in Seymour v. Australian Broadcasting Commission (supra).

The situation in which most problems arise, and that which arose in the present case, it where the witness is not given the opportunity to deal with the other material upon which the challenge is based and where the relevance of that evidence to the challenge is not immediately apparent. Usually, but not always, such a challenge will be based upon some inference which arises from that other evidence in the case. During the course of the argument in the present case, an example was postulated in which, I believe, the question in issue is pointed up clearly. That example was as follows.

An issue between X and Y is whether X was in Melbourne upon a specific date and at a specific time. X bears the onus of proving that he was not in Melbourne. He gives evidence in his case in chief that he spent the whole day in Sydney with A and B. There are then a number of different situations which may arise:

It is the situation postulated in (5) which is applicable in the present case.

In accordance with the decision of the Court of Appeal in Cullen v. Ampol Petroleum Ltd. (supra), consistently with all the other authorities to which reference has been made, and provided that such a use of the diary had not in any way been foreshadowed, it would in my view be wholly unfair for Y to rely upon the diary in seeking to have the tribunal of fact disbelieve the evidence of X that he was not in Melbourne. If the diary had been put to X, or its significance had in some other way been made apparent, X could have explained, for example, that the entry had been made in error, or that the appointment had been cancelled, and he could have called Z to corroborate his explanation for the existence of the entry. In the absence of forewarning, X would have no chance to do any of these things. He would, to use the expression of Holmes J.A., in Cullen, have been well caught in an ambush.

The Commissioner argues that no obligation would arise for the diary to be put to X to enable him to deal with it. He says that once the evidence of X (that he was not in Melbourne) was directly challenged in cross-examination, the cross-examiner would be entitled to rely upon any other evidence in the case to establish that he was in Melbourne, whether or not X had been given the opportunity to deal with that other evidence. The Commissioner says that the law entitled him to take advantage of the ambush in which X is caught.

In support of this stand the Commissioner relies upon the decision of the N.S.W. Court of Appeal in
Poricanin v. Australian Consolidated Industries Ltd. (1979) 2 N.S.W.L.R. 419. That was an appeal from the decision of the Workers' Compensation Commission refusing to find that the worker's accepted partial incapacity for work was deemed to be total incapacity upon the ground that he was ready willing and able to enter into suitable light employment with the employer but the employer had failed to provide such employment: Workers' Compensation Act, 1926, sec. 11(2). The onus of establishing the ingredients of sec. 11(2) rests upon the worker. He gave evidence that he wanted to work, provided that the work was within the limitations of his partial incapacity. No questions were put to him in cross-examination to suggest that this stated willingness on his part was not to be accepted. The Judge held that the worker had not satisfied him that he was ready and willing and motivated to carry out such work if it had been made available to him by the employer.

An appeal from the Workers' Compensation Commission to the Court of Appeal is limited to questions of law: Workers' Compensation Act, sec. 37(4)(a). Whether the evidence tendered to establish a fact ought to be accepted is itself a question of fact and not a question of law: Poricanin's case, at p. 424. It was submitted by the worker that the Judge's refusal to accept his evidence (that he was ready and willing to work) amounted to an error of law where he had not been cross-examined upon that evidence. So stated, the argument which the worker was putting depended, it seems clear, upon the second rule or aspect of Browne v. Dunn, not upon the first which is the rule or aspect of that case with which I am concerned in these proceedings. The judgment of the Court of Appeal is, however, instructive in the present case, for it appears that the Judge's refusal to accept the worker's evidence that he was ready and willing to do a limited type of work was based upon other evidence in the case which had been led by the worker and which suggested that at the relevant time his physical condition would not have permitted

ATC 4035

him to do such work. This suggestion or inference from the other evidence had not been put to the worker in cross-examination to enable him to deal with it.

The Court of Appeal rejected the worker's appeal based upon these matters, but only upon the ground that they did not constitute a question of law so as to give the Court of Appeal jurisdiction to deal with them. The joint judgment of Hope and Glass JJ.A. said (at p. 426):

``A tribunal of fact may, and indeed generally should, have regard, in deciding what its findings of fact should be, to the failure of a party to cross-examine his adversary upon evidence which the adversary has given to satisfy the onus which lies upon him. As Browne v. Dunn shows, it may be wrong in many cases for a party to suggest that the other party's evidence should not be accepted, if there has been no relevant cross-examination; and, if a tribunal of fact rejects that evidence in those circumstances, the result may be a wrong finding of fact, or, to use other language, an unreasonable: cf. Precision Plastics Pty. Ltd. v. Demir, or even a perverse finding of fact. However, even if, in the circumstances, a tribunal ought to accept evidence upon which there has been no cross-examination, its failure to do so is not a mistake of law. A finding of fact based upon a rejection of that evidence will be one which an appellate tribunal having jurisdiction to deal only with errors of law cannot touch.''

And again (at p. 427):

``... although the failure of the respondent to cross-examine the applicant directly in respect of his readiness and willingness to work could support a submission that the rejection of his evidence, and the failure to draw the appropriate inference was unfair or wrong, no error of law would result, even if the submission was to be accepted. It would not be open to this Court to review the decision.''

In my opinion, Poricanin's case provides no support whatever for the Commissioner's argument; on the contrary, it demonstrates that, in order to achieve fairness to witnesses and a fair trial between the parties, it is indeed necessary in cross-examination to give the witness an opportunity to deal with the matters from which an inference can be drawn which contradicts his evidence (although a failure to achieve such fairness does not amount to an error of law).

Diametrically opposed views are held within the profession upon the existence of the rule of professional practice which I formulated at the commencement of this part of my judgment and which I repeat in the next paragraph. That such opposed views are held appears to result from the inaccessability of the only report of Browne v. Dunn itself and from the fact that the relevant application of the rule in that case by the Court of Appeal in Cullen v. Ampol Petroleum Ltd. did not lend itself to being reported. So far as I have been able to discover, the particular application of that rule in those and in the present circumstances is not the subject of any reported case. That it is not is, in my opinion, a matter of some concern, for it is a situation which is often met in practice, and the view which is now espoused by the Commissioner is productive of grave unfairness.

I remain of the opinion that, unless notice has already clearly been given of the cross-examiner's intention to rely upon such matters, it is necessary to put to an opponent's witness in cross-examination the nature of the case upon which it is proposed to rely in contradiction of his evidence, particularly where that case relies upon inferences to be drawn from other evidence in the proceedings.

That rule was not complied with in the present case. The consequence of that non-compliance does not, of course, mean that I cannot accept the submission by the Commissioner that, by reason of the inferences available from the evidence as a whole, I should disbelieve the evidence led on behalf of the taxpayer. It is clear from all the cases that it does not mean that. But, as it was said by the Court of Appeal in Poricanin's case (supra), at pp. 426-427, it would in many cases be wrong, unreasonable or even perverse for a tribunal of fact to reject evidence upon which there has been no relevant cross-examination. I am satisfied with the description that it would usually be

ATC 4036

unfair to do so where the rule in Browne v. Dunn has not been complied with, and where the witness has not otherwise been given the opportunity to deal with the suggestion now made for the first time in the final address.

I am also satisfied that this is one of those cases where it would be unfair to accept the submission by the Commissioner that I should disbelieve the evidence led by the taxpayer by reason of the inference said to be available from the evidence as a whole that the ``staged development'' theory operated in relation to the taxpayer's property. No application was made by the Commissioner for the taxpayer's witnesses to be recalled to give them the opportunity to deal with his suggestion. The stand was simply taken that it was unnecessary to do so. The Commissioner's argument is rejected.

I said earlier that in any event the taxpayer replies to the ``staged development'' argument in various ways. I do not feel that it is necessary to detail the real estate development around the western and southern shores of Wallis Lake in which Messrs. Lucas and Tait were otherwise involved. It may be taken as having been extensive. However, the taxpayer company itself was not at the relevant time involved in such development. Nor was Cambridge Credit involved in all of it. Mr. Tait himself was not directly involved in every one of the developments. The type of land subdivided in these other developments was not always the same as that in the properties acquired by the taxpayer. But the Commissioner says, in effect, that a leopard cannot change its spots (Jeremiah 13: 23). It was argued that, such was the history of Messrs. Lucas and Tait as real estate salesmen, agents and developers and such was their experience and that of Cambridge Credit in selling small rural subdivisions in the general area, it is improbable that a site such as Yarrick No. 1 would have been chosen by them for any other purpose.

If this is so, what then was the reason for the long delay before the subdivision was effected? What benefit did the taxpayer obtain by using the property for grazing purposes for some six years before it was resold? It certainly did not make great profits in doing so. Other than the ``staged development'' theory, the Commissioner could suggest no reason. It was submitted that this six-year operation was no more than an elaborate scheme to deceive the Commissioner as to the true purpose for which the property was acquired. That somewhat extraordinary proposition was, however, never put to any of the taxpayer's witnesses. As pointed out by the taxpayer in argument, the Commissioner's submission requires me to accept either that the ``real'' purpose for which the land was acquired - namely, to subdivide it - was carefully locked in the mind of each of the participants throughout that acquisition and throughout the six-year period during which the property was used for grazing, without any communication of such a purpose between them or that all of these participants had collaborated to produce on oath an elaborate interlocking fabrication as to the real purpose for which the land was acquired: cf. Cullen v. Ampol Petroleum Ltd. (supra). I do not accept either.

Attention was drawn by the Commissioner to the initial purchase of Yarrick No. 2 by Messrs. Lucas and Tait through the Commercial Land company (to which transaction reference was made earlier) contemporaneously with the admitted real estate development by that company of another area immediately to its north called ``Waterfront Acres Estate''. The reason why the Commercial Land company was utilized by Messrs. Lucas and Tait for the initial acquisition of Yarrick No. 2 has already been stated. I have re-read with care all of the transcript references given by the Commissioner in relation to this matter but I can find in them or elsewhere no reason to disbelieve the explanation given; the inquiry after all is as to the purpose for which the taxpayer acquired the land, not that for which another company beneficially owned by some of its shareholders had earlier acquired it.

A similar significance was sought to be placed by the Commissioner upon the participation by Messrs. Lucas and Tait through another company in the subdivision of the Tarbuck Estate, which was land immediately to the west of what in 1968 became the ``Holiday Ranches Estate''. This land had been held by that other company for a period of four years before subdivision. No questions were asked by the

ATC 4037

Commissioner of either Mr. Lucas or Mr. Tait as to why that delay had occurred, but Mr. Tait (who in any event had not been directly involved with that property) suggested during the course of his evidence that there had been some problems with the local Council. Apparently his brother had become interested in using the property for rural purposes, and Mr. Gregory (who managed Yarrick for the taxpayer) was asked to advise him upon its suitability. But there the matter rested so far as the evidence went. It was nevertheless submitted by the Commissioner that the delay was caused by the size of the subdivision of the remainder of Yarrick (known as the ``Lakelands Estate''), and thus part of the staged development theory put forward after the evidence had concluded. For the reasons already given, I am not prepared to draw an inference that such a theory operated in relation to the taxpayer's property.

The Commissioner points to what is suggested to be similar fact evidence concerning the taxpayer's acquisition of the ``Coomba Park'' property, its use for grazing and its ultimate sale by subdivision. The earlier venture whereby this property was stocked by Cambridge Credit and managed by the taxpayer as a grazing property has already been described, as have the taxpayer's attempts to purchase it from Cambridge Credit. These attempts were finally successful in 1970, when Cambridge Credit sold the land but remained as mortgagee. In 1972, a plan of subdivision was prepared and approved. In 1974, Cambridge Credit went into receivership. In 1975, that company's shares in the taxpayer company were purchased by Messrs. Lucas and Tait. In 1976, the business affairs of Messrs. Lucas and Tait were separated and each went his own way. Mr. Tait took over all the rural properties. The subdivision of ``Coomba Park'' went ahead in order, Mr. Tait says, to provide the cash which he needed to meet his financial obligations to Mr. Lucas arising upon their separation. Part of the property was sold in 1977, and the remainder continued to be used as a cattle property until it was sold during 1979-1981. The ultimate purpose for which this property was initially acquired by the taxpayer in 1970 was not investigated at the hearing, and no question arises in relation to that acquisition in these appeals. So far as the evidence goes, it does not in my view establish that the taxpayer's dominant purpose upon that occasion was ultimately to subdivide that property, but in any event it throws but faint light upon the acquisition of the properties which are in question in these appeals.

Certainly, the general and real estate development background of the participants in the acquisition of Yarrick by the taxpayer requires their evidence that this acquisition was not another such development to be carefully scrutinized. But the mere existence of that background does not compel disbelief of that evidence. Moreover, Messrs. Lucas and Tait had been involved in other pastoral activities, and Cambridge Credit was by no means involved only in real estate development. Mr. Tait gave evidence that at the time Yarrick No. 1 was acquired in 1966 the land was unsuited for subdivision of the type carried out in 1972. 1972 was, of course, a boom year for real estate when, Mr. Tait said, it was surprising just what could be sold. The earlier subdivision of Yarrick No. 1 carried out in 1968 had not been good land for that purpose. On the other hand, the other areas around the foreshores of the Wallis Lake which were subdivided during the period when pastoral activities were carried out on the taxpayer's land were, he said, different in quality. Although he contested the truth of Mr. Tait's evidence upon these matters, the Commissioner did not lead other evidence to contradict it.

In relation to the participation by Cambridge Credit in the venture, it is I feel fair to say that, despite a disclaimer by Mr. Hutcheson during cross-examination, his decision on behalf of that company to invest in Yarrick No. 1 (or, more correctly, in the company formed to acquire that property) was not attended with quite the same amount of investigation as were other ventures by that company outside its ordinary business of real estate development, but the explanation given by Mr. Hutcheson is acceptable to me - that the company had had a close and successful association with Messrs. Lucas and Tait, their pastoral activities were known to him, and he was impressed with the fact that Mr. Yates, his Sydney manager, wished to invest personally in the company as well. Such proposed investment by Mr. Yates was of course more than merely the purchase of

ATC 4038

shares. It was never clearly, or at all, put to Mr. Hutcheson, or to any other witness from Cambridge Credit, that this lack of investigation on the part of that company resulted from the knowledge or the belief upon their part that the acquisition of Yarrick No. 1 was no more than just another real estate development. Indeed, both Mr. Yates and Mr. Chopin, the solicitor for Cambridge Credit, were concerned to ensure that the taxpayer's business in which they were about to invest was not going to be in opposition to that of Cambridge Credit, as such would produce for them a conflict of interest which they wished to avoid.

It may be, of course, that with the background they had, each of the participants in the taxpayer company at the time when Yarrick was acquired had in mind some idea that, if that land ever had to be sold, it would be sold by way of subdivision; in any event, it would not be surprising if this were so. But it is taking a long step in the circumstances of this case to say that for this reason their dominant purpose in acquiring the land was ultimately to resell it at a profit: cf.
Smithfield Pastoral Co. Pty. Ltd. v. F.C. of T. (1966) 14 A.T.D. 170 at pp. 171-172. But, as I have already stated, the real estate development background of the participants requires their evidence to be carefully scrutinized, and the possibility that such an idea existed in their minds is obviously a relevant fact to be considered in determining their purpose in acquiring this land.

There were other matters put forward by the Commissioner as demonstrating the improbability of the taxpayer's evidence.

It was said that the initial naming of the company Lucas & Tait Ranches Pty. Limited was such a matter. I do not see that there is much weight which can be placed upon that fact, even when coupled with the further fact that the subdivision effected in 1968 was sold under the name ``Holiday Ranches Estate''. This was one matter which was properly put to Mr. Tait in accordance with the rule in Browne v. Dunn, and he denied that there was any association between the name chosen for the company and the purpose for which that company had acquired the land.

The Commissioner also sought to demonstrate the improbability of the taxpayer's acquisition of Yarrick No. 1 for pastoral purposes by pointing to the lack of inspection of it by the participants at the time of purchase. He says only that Mr. Tait inspected the property. In fact, Mr. McCarthy, the manager of the property near Dubbo, also inspected it, but he was not a participant in the taxpayer company itself. However, Mr. Tait himself had at that stage carried out the various rural activities of Mr. Lucas and himself on behalf of the partnership and their related companies. He was closely examined by Mr. Chopin as to his knowledge of the area before Mr. Chopin took up his shares, and Mr. Tait relied to some extent upon the views of Mr. McCarthy and also upon those of Mr. Gregory who was familiar with the property. Those views were also made known to Mr. Lucas. I have already mentioned the basis upon which Cambridge Credit left the matter generally to Mr. Tait. Both Mr. Yates and Mr. Hutcheson relied upon his advice and expertise. I see nothing strange in this. The Commissioner says that the taxpayer, or rather its shareholders, should have obtained advice from agronomists, and independent valuations. A counsel of perfection may suggest that this would have been beneficial, even desirable, but hardly obligatory. The shareholders did have the strong and favourable advice of both Mr. McCarthy and Mr. Gregory, who were reasonably expert. (I am satisfied that Mr. Gregory's evidence which placed some of his conversations with Mr. Tait upon this subject in a different context is clearly in error: I deal with Mr. Gregory's evidence generally later in this judgment.) A careful and detailed examination of the finances involved was undertaken, and a budget drawn up.

Then the Commissioner argues that the failure of the property to realize the budgeted expectations of profit indicates the absence of any purpose to acquire the property for pastoral purposes. Necessarily inherent in this argument is the proposition that either the budget was a sham or those responsible for the operation of the property deliberately avoided making the profit which that budget anticipated. Neither alternative was put to any of the relevant witnesses. What the Commissioner really asks me to do is to test the taxpayer's foresight with the benefit of hindsight. That process is not permissible:
Hart v. Lancashire & Yorkshire Railway Co. (1869) 21 L.T. 261 at p. 263;

ATC 4039


Roe v. Minister of Health (1954) 2 Q.B. 66 at p. 83; nothing is so easy as to be wise after the event:
Cornman v. Eastern Counties Railway Co. (1859) 4 H & N. 781 at p. 786; 157 E.R. 1050 at p. 1052.

It is submitted by the Commissioner that in any event the absence from the budget of any provision for staff housing indicates that the grazing enterprise was not intended to last long. It is clear from all of the evidence that the taxpayer proposed to employ Mr. Gregory to manage the property, and he lived nearby at Forster. The budget covers a period of five years only, and the availability of funds at the end of that period could reasonably have been anticipated to be sufficient to construct a house for Mr. Gregory's successor. In fact, of course, these figures were not realized.

Next, the Commissioner - although ultimately accepting that Yarrick No. 1 was in fact worked as a grazing property for six years - relies upon the fact that no improvements were effected to that portion of Yarrick No. 1 which was in 1968 subdivided as the Holiday Ranches Estate. But it was because that land was unsuitable for pastoral activity that the decision was taken to sell it. I see no significance in the fact that it had not been improved for pastoral purposes before it was sold.

The Commissioner says that the larger than necessary subdivision of Yarrick No. 1 in 1968 shows the existence of an intention on the part of the taxpayer to subdivide the whole property well before it concedes that such an intention was formed. Mr. Tait gave evidence that the instructions given for the survey were to subdivide only that portion identified by Mr. Gregory as useless. This area produced 10 lots in subdivision, but the surveyor (a Mr. Graham) produced a plan of 23 lots. Only the 10 lots were sold at the time. Mr. Graham received his instructions thirdhand, not directly from Mr. Tait. His fees were objected to by Mr. Tait at the time upon the basis that he had not been instructed to do all of the work for which he had charged. There was no cross-examination of this evidence by Mr. Graham of Mr. Tait's contemporaneous statement, although the Commissioner submitted that I should not accept either Mr. Graham's evidence or Mr. Tait's explanation.

The Commissioner also criticized the lack of improvements effected to Yarrick No. 2. However, boundary fencing was erected, some 200 acres of the best part of the soil were cleared, raked and stocked, and the land was used for general grazing. Both Mr. Tait and Mr. Gregory explained that at that stage the taxpayer was concentrating on improving Yarrick No. 1 Mr. Tait said that Yarrick No. 2 was treated as a standby grazing development. Mr. Gregory described it as a handy second paddock. It should not be overlooked that the acquisition of Yarrick No. 2 did not involve a large area of land or any significant outlay by the taxpayer; that acquisition was in no sense comparable with that of Yarrick No. 1. The fact that the taxpayer took its time in developing this ``handy second paddock'' seems to me to be of minor importance.

The Commissioner's submissions also dismiss Yarrick No. 2 as swampy low land, affected by brackish water and intrinsically unsuited for grazing purposes. That description is not supported by the evidence. Mr. Gregory said that there was not much swamp at Yarrick No. 2, although it did hold water when there had been heavy rain. He described the remainder of the land in varying terms but, he said, generally it was good country. An attempt to fit Mr. Gregory with a verbal admission by him to an inspector of the Taxation Department was unsuccessful and was not pursued, as it could have been, by calling the inspector pursuant to the Evidence Act, 1898, sec. 54.

A strong attack was made by the Commissioner upon the reasons expressed by the taxpayer's witnesses for the decision in 1972 to sell the properties in question. The overriding reason expressed by the taxpayer for the decision to sell was that the property was not and would not be profitable. It was said that this unprofitability had arisen because:

The actual decision to sell the property was prompted by three additional factors which would have, or which it was believed would have, aggravated that unprofitability:

The taxpayer had originally budgeted for income to exceed expenditure in the third year of operation. As at June 1971, however, the taxpayer owed its shareholders in excess of $136,000 even after previous loans had effectively been capitalized following the capital reconstruction in 1968. The reduction in the value of the land as the company's principal asset called into question the whole viability of the project as a grazing property.

The Commissioner relied upon what were seen as inconsistencies between the taxpayer's witnesses as to the real reasons for the decision to sell. It was said that so improbable were these stated reasons when compared to the objective facts that they must be untrue. There was some degree of confusion in the Commissioner's submissions between the reasons asserted for the unprofitability and the additional factors which prompted the actual decision to sell. Some of the conflicts in the evidence relied upon by the Commissioner are clearly of no importance. For example, it was submitted that Mr. Tait had contradicted himself: at one place (p. 11) Mr. Tait said that the property:

``... had failed to be profitable for so long;''

later (p. 68) he agreed with the proposition that the property:

``... had not reached the stage of profitability [he] hoped for;''

and he had proposed to the meeting of directors of the company in March 1972 (Exhibit K) that:

``... the property is uneconomical to run and no future plan can be budgeted to return a profit and recoup a portion of capital advanced for the operating costs.''

Whatever conflicts there are here are certainly not such as to demonstrate that the explanation given by Mr. Tait was false.

Other conflicts relied upon by the Commissioner depend upon differences in evidence between Mr. Gregory and the taxpayer's other witnesses. These, however, relate more to the objective facts than to the reasons given for the decision to sell. Mr. Gregory denied the existence of any problem with ticks with any of the cattle, Hereford or other. However, Mr. Moore, the Veterinary Inspector employed by the local Pastures Protection Board, gave evidence that tick infestation had been quite common in the cattle when he had inspected the property, and that heavy levels of bush ticks were experienced in the early 1970s. Again Mr. Gregory denied that the fences had been inadequate to cope with the Brahmin cross-breeds. Yet Mr. Moore gave evidence that because Brahmins are nervous, a better class of fencing is required for their handling. Mr. Lee, a stock and station agent, also described Brahmins as excitable animals. There was no disagreement between the witnesses that the Brahmins had not sold well.

I found Mr. Gregory to be a somewhat unsatisfactory witness in various aspects of his evidence. By the time the appeals were heard he was obviously a very old man in his demeanour: he appeared to have trouble understanding some questions and may not have been fully in control of all his faculties. At least, that is how he struck me. He had a poor recollection of some fairly fundamental matters. I suspect that he was regarded by Mr. Tait as a very worthy farmer but not very bright and that although his advice was sought he had not been taken into the

ATC 4041

directors' confidence on any decisions of significance. More importantly, Mr. Gregory had given the original advice that the property would be good for grazing, and my impression of him as a witness was that of a man obstinately refusing to concede any error in that advice, even stupidly obstinate at times during the course of his evidence. Where his evidence is in conflict with that of other witnesses, I prefer that of the other witnesses.

Another area of dispute relied upon by the Commissioner related to the prospect in March 1972 of further reduced cattle prices, one of the factors which prompted the actual decision to sell. The evidence given by Mr. Lee, the stock and station agent, fully supports the drop in cattle prices at the relevant time. The drop was of some $20 per vealer head, and it was very much greater than had previously been experienced at that time of the year. Various exercises by the Commissioner with the figures produced (Exhibit V) were met with exercises by the taxpayer based upon the same figures and which led to contrary conclusions. The Commissioner did not produce evidence to contradict that of Mr. Lee, and his somewhat selective interpretation of Mr. Lee's evidence does not accord with the facts. Mr. McCarthy also gave evidence of graziers' concern at what was going to happen with the beef market at that time.

The Commissioner submitted that the taxpayer must have known that the zoning limitations were going to change, and that it would not be profitable to use the property for pastoral purposes when the value of the property fell following that change. There is no direct evidence that anyone on the part of the taxpayer had such knowledge. I have carefully reread all of the transcript references given to me by the Commissioner but I cannot see that such a proposition was ever put to any of the taxpayer's witnesses. In any event, there is in my view no basis in the evidence upon which such an inference should be drawn against the taxpayer.

I turn finally to the question whether the taxpayer has persuaded me that its evidence as to the purpose for which it acquired the property in question should be accepted. I have given careful consideration to all of the matters which the Commissioner has submitted should lead me to reject that evidence, both separately and together. The taxpayer's principal witness was its Chairman of Directors, Mr. Tait. I have already outlined how the initial investigation into the acquisition of the property and its subsequent overall management was largely in the hands of Mr. Tait. By the time when the appeals were heard he was the beneficial owner of the whole company and, so far as the evidence went, the only witness with a pecuniary interest in their outcome. His evidence was erroneous in some minor details, errors which he readily conceded. In general, however, his evidence was supported by that of the taxpayer's other witnesses; I have already stated that where the evidence of Mr. Gregory was in conflict with that of another witness I have preferred the evidence of the other witness. The existence of any other discrepancies is hardly surprising after such a long period of time. I am satisfied that at all times Mr. Tait gave his evidence honestly; the further his long cross-examination proceeded, the more his credit as a witness was confirmed in my view. I accept his evidence as both honest and truthful. And, except for the reservations which I have expressed concerning some of Mr. Gregory's evidence, I accept the evidence of the taxpayer's other witnesses.

These findings necessarily lead to the conclusion that the profit arising from the taxpayer's resale of the properties in question was not assessable income within the first limb of sec. 26(a) of the Assessment Act. I propose to deal next with the alternative bases upon which the Commissioner made his assessment - firstly with sec. 25(1) and then with the second limb of sec. 26(a).

Section 25(1) of the Assessment Act makes assessable income the gross income of the taxpayer which is not specifically exempted by other provisions of the Act. The proceeds of the sale by the taxpayer of an asset will be treated as assessable income within sec. 25(1) if those proceeds are regarded as income in accordance with the ordinary concepts and usages of mankind:
Scott v. C. of T. (N.S.W.) (1935) 35 S.R. (N.S.W.) 215 at p. 219; it is the net profit which has that character rather than the gross receipts:
Commercial and General Acceptance Ltd. v. F.C. of T. 77 ATC 4375 at p. 4380; (1977) 137 C.L.R. 373 at pp. 381-383. It has long been accepted that the mere realization of an

ATC 4042

asset is not such a profit; it must be a gain made in an operation of business in the carrying out of a scheme for profit-making: Californian Copper Syndicate (Limited & Reduced) v. Harris (1904) 5 T.C. 159 at pp. 165-166. That realization is not converted into such a scheme by reason of the fact that it was of some magnitude:
C. of T. (Vic.) v. British Australian Wool Realization Assn. Ltd. (1931) A.C. 224 at p. 252; or the fact that it was carried out in an enterprising way:
McClelland v. F.C. of T. 70 ATC 4115 at p. 4120; (1970) 120 C.L.R. 487 at p. 496; or so as to secure the best price:
F.C. of T. v. N.F. Williams 72 ATC 4188 at pp. 4194-4195; (1972) 127 C.L.R. 226 at p. 249.

Only one of these propositions has been affected by the decision of the High Court in F.C. of T. v. Whitfords Beach Pty. Ltd. (supra) upon which the Commissioner strongly relies. Mason J. in that case (at ATC p. 4047; A.L.R. p. 542) took into account the ``massive scale'' of the subdivision undertaken by that taxpayer in finding that it had gone beyond the mere realization of an asset, and Wilson J. held (at ATC p. 4057; A.L.R. p. 554) that the magnitude of the operation was relevant in determining its nature. Otherwise the position has not altered. The question remains in each case whether the sale of land by way of subdivision amounted to more than a mere realization of the taxpayer's asset: ibid., at ATC pp. 4037, 4040, 4053-4054, 4057; A.L.R. pp. 528, 531-532, 550-551, 554. Gibbs C.J. (at ATC p. 4037; A.L.R. p. 528) adapted the words of the Privy Council in McClelland's case to accord with the Australian authorities:

``... the question is `whether the facts reveal a mere realization of capital, albeit in an enterprising way, or whether they justify a finding that the [taxpayer] went beyond this and engaged in a [business of profit-making] in land albeit on one occasion only.'...''

In the Whitfords Beach case, the original shareholders of the taxpayer company had acquired the land in question to ensure continued access to their fishing shacks. After 13 years, they sold their shares in that company to new shareholders who overnight transformed it from one which held the land for the domestic purposes of its shareholders to one whose purpose was to engage in a commercial venture with a view to profit, so that it continued to exist solely for making that profit (at ATC p. 4039; A.L.R. pp. 530-531). The Articles of Association were changed to give the taxpayer the new object of developing, subdividing, and selling the land (at ATC p. 4056; A.L.R. p. 553) and a legal impediment to the development of the land was removed (at ATC p. 4057; A.L.R. p. 555). Had the new shareholders purchased the land and not the shares, it was conceded, their profits would have been taxable (at ATC p. 4047; A.L.R. p. 541). Over a period of 10 years, 630 acres were to be subdivided into 2,200 residential lots and sold; it was anticipated that a further 874 acres would then be re-zoned and subdivided into more residential lots, leaving 80 acres of public open space; and the appointment of the general manager of the project was for a period of 15 years (at ATC pp. 4050-4052; A.L.R. pp. 546-548).

None of those circumstances is applicable in the present case. The changes in the shareholding of the taxpayer in 1968 and in 1975-1976 had nothing to do with the subdivision in 1972 and sale in 1973-1974. That has not been suggested by the Commissioner even in argument. Nor was it suggested to any of the taxpayer's witnesses. The Articles of Association have remained unchanged. So, to adopt the phrase of Deane J. when the Whitfords Beach case was in the Federal Court (79 ATC 4648 at p. 4664), there has been no transformation of the taxpayer's substratum. The taxpayer continued for many years after Yarrick had been sold to operate as a pastoral company at ``Coomba Park'' to its north. The asset sold by way of subdivision had been acquired for a different purpose which it was no longer businesslike to carry out. No legal impediment existed to this particular development of the land - indeed, the imminence of the proposed zoning change, which would have imposed such an impediment (and substantially reduced the value of the company's principal asset), was one of the factors which prompted the actual decision to sell the properties. To have sold the properties for grazing purposes when their inherent value as land was just about to be substantially reduced strikes me as being a foolhardy realization of the asset and one

ATC 4043

designed to secure the lowest possible price. This was not a case where the decision was taken to sell and then to subdivide: the subdivisional value of the land was part and parcel of the decision to sell. Nor, so far as the evidence went, was this a realization even comparable to the massive scale which Mason J. said (at ATC p. 4047; A.L.R. p. 542) made it impossible to say that it was merely the realization of an asset.

Giving all the emphasis required to the word ``mere'' in the phrase ``mere realization'' in the test posed in the Californian Copper Syndicate case and followed in the Whitfords Beach case, I am nevertheless satisfied that the subdivision in question in the present case did not go beyond the mere realization of an asset which could no longer profitably be used in the taxpayer's continuing activities. It follows that the proceeds of sale (or the net profit) were not assessable income within sec. 25(1).

The third and final basis for the Commissioner's assessment was that the subdivision amounted to a profit-making undertaking or scheme carried on by the taxpayer, so that the profits arising from that undertaking or scheme became assessable income within the second limb of sec. 26(a) of the Assessment Act.

In the Whitfords Beach case (supra), however, it was acknowledged that such profits yielded by the mere realization of a capital asset not acquired for the purpose of profit-making by sale would not be assessable income within either sec. 25(1) or the second limb of sec. 26(a): Gibbs C.J. at ATC p. 4037; A.L.R. p. 528; Mason J. at ATC p. 4047; A.L.R. p. 541; Wilson J. at ATC p. 4053; A.L.R. p. 550. In the light of the findings which I have already made, therefore, it follows that the profits obtained by the taxpayer from the subdivision were not assessable income within the second limb of sec. 26(a).

In these circumstances, the taxpayer's appeals against the primary tax imposed for the 1973 and 1974 years must be allowed. I make the following orders:

 

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