Memorex Pty. Ltd. v. Federal Commissioner of Taxation.

Judges:
Davies J
Pincus J
Einfeld J

Court:
Full Federal Court

Judgment date: Judgment handed down 2 December 1987.

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Davies and Einfeld JJ.

This is an appeal from a decision of the Administrative Appeals Tribunal [reported as Case U98,
87 ATC 589 ] which affirmed a decision of the Commissioner of Taxation rejecting the objections to assessments lodged on behalf of the applicant, Memorex Pty. Ltd.

The years of income involved are the years of income ended 30 June 1977, 1978, 1979, and 1983 for which the applicant had substituted accounting periods, namely the calendar years 1976, 1977, 1978 and 1982. No objections were lodged with respect to the years of income ended 30 June 1980, 1981, and 1982 though the events of those years were similar to the events in the years with which we are concerned.

The applicant is a distributor of computer equipment, both hardware and software,

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ATC 5036

designed to be used in association with computer equipment manufactured and designed by others. Because of the rapidity of developments in the industry the average commercial life of the equipment is about five years. Most of the equipment distributed by the applicant was new equipment but some was used equipment, for the applicant sometimes took a trade-in on new equipment or took back into its possession equipment that a customer had used.

As a general rule, the applicant sold its equipment outright, either to its customer or to a financier who provided finance to the customer. However, for several years the applicant also leased equipment to its customers and from time to time, especially for some years from 1976, sought to promote this means of distribution. The leases were at first usually for two years but later for up to four years. On the expiration of a lease, the equipment would be re-leased to the customer, if required by the customer, or taken back by the applicant. From time to time, goods which were on lease were sold to the customer, such sales being promoted if funds were required.

Goods which had come back to the applicant on the termination of a lease or as a trade-in might be leased or sold, or if not valuable in this country, scrapped or sent overseas to an associated company.

In 1978, the applicant found it had the need for money and sold certain leased goods to a finance company. This was a confidential transaction between the applicant and its own financier. The lessees were not advised of the sale and the applicant continued to collect the payments of hire in its own name though it passed those payments on to the financier.

The leasing of goods never formed the major part of the business of the applicant and the proceeds which the applicant received from the sale of goods which had previously been leased formed only a small part of the applicant's business. Nevertheless, the sales of goods which had been leased were certainly of sufficient magnitude and of sufficient regularity to be regarded as an ordinary part of the business of the applicant. Thus, in the 1976 calendar year, the applicant had sales of $3,350,227, that item being undivided in the accounts but including in fact both the sale price of goods sold and the hire received for goods leased. The original cost of the goods on lease that year was $826,475. The gross receipts for equipment on lease, which was disposed of, was $651,845. Of the previously leased goods disposed of, $325,710 worth of goods were sold at a profit over and above their original cost. That profit amounted to $145,723. This sum was claimed by the applicant as a capital profit. As in other years, the applicant gave details of this capital profit and the following is the schedule which the applicant submitted with its return of income for the year.

"MEMOREX PTY. LIMITED

YEAR ENDED 31st DECEMBER, 1976

DETAILS OF CAPITAL GAIN IN RESPECT OF EQUIPMENT ON LEASE

              Month                     Month Sold                 Capital

Serial No.   Acquired        Cost        in 1976      Proceeds       Gain

65984        Nov. 1973       2,840        Sept.         4,666        1,826

26767        Nov. 1973       2,899        Sept.         4,666        1,767

26615        Nov. 1973       2,488        Sept.         4,666        2,178

26493        Nov. 1973       2,899        Sept.         4,666        1,767

10133        Nov. 1973       4,033        July          4,600          567

20209        Jan. 1972       3,447        July          4,600        1,153

20839        July 1973       3,051        July          4,500        1,449

20988        Oct. 1973       2,595        July          3,000          405

20162        Oct. 1971       2,553        July          3,000          447

10309        May 1974        1,076        May           1,815          739

10523        May 1974        1,080        Sept.         1,200          120
        

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ATC 5037

10350        May 1974          312        Sept.           536          224

50162        Aug. 1975       3,001        Sept.         4,259        1,258

50153        May 1974        1,127        Sept.         2,118          991

50165        May 1974       10,750        Sept.        25,628       14,878

20172        Dec. 1974       4,022        July          4,500          478

20683        Dec. 1974       4,598        May           4,600            2

             Dec. 1974       4,567        May           5,822        1,255

50170        Nov. 1974         356        Nov.            424           68

50121        Nov. 1974       3,422        Nov.          3,678          256

50168        Nov. 1974       1,218        Nov.          2,103          885

10280        Nov. 1974      12,257        Nov.         30,765       18,508

             Oct. 1975       2,428        May           3,096          668

50174        Aug. 1975       2,900        May           4,315        1,415

20195        Oct. 1975       2,370        July          3,055          685

51222        Dec. 1975      20,325        May          36,000       15,675

51220        Dec. 1975      20,325        May          36,000       15,675

50929        Mar. 1975      25,358        May          36,000       10,642

50101        Mar. 1975       8,710        May           9,500          790

11082        Apr. 1976      22,980        Sept.        71,932       48,952

                           --------                   --------     --------

                           $179,987                   $325,710     $145,723



                                                             PUBLIC OFFICER"
        

The above schedule dealt only with those goods previously leased that had been sold at a profit over and above their original cost. The goods previously leased but sold at a profit merely above depreciated value or at a loss were dealt with in the depreciation schedule submitted with the applicant's return of income.

The issue in this case arises with respect to such of the equipment as had been leased and thereafter sold at a profit over and above its original cost to the applicant. The Commissioner took the view that each such profit was income while the applicant took the view that the profit was a capital gain.

The applicant and the Commissioner were not in dispute that such of the computer equipment as was distributed by leasing should be dealt with, in the first instance, in accordance with the provisions as to depreciation which appear in sec. 54 to 62 of the Income Tax Assessment Act 1936 (Cth) ("the Act"). In brief, subsec. 54(1) provides for an allowance for depreciation on any property being plant or articles owned by a taxpayer and used by him during the year for the purpose of producing assessable income shall be an allowable deduction. Sections 55 and 56 provide for the basis of depreciation and for its calculation. Section 59 provides that, on the sale of depreciated property, if the sale price is less than the depreciated value, the difference shall be an allowable deduction to the taxpayer and, if the price exceeds the depreciated value, the difference shall be brought to account as assessable income of the taxpayer, that is to say as a balancing charge. Section 59 reads, inter alia:

"(1)Where any property of a taxpayer, in respect of which depreciation has been allowed or is allowable under this or the previous Act, is disposed of, lost or destroyed at any time in the year of income, the depreciated value of the property at that time, less the amount of any consideration receivable in respect of the disposal, loss or destruction, shall be an allowable deduction.

(2) If that consideration exceeds that depreciated value, the excess, to the extent of the sum of the amounts allowed and allowable in assessments for income tax under this Act and any previous law of the Commonwealth in respect of depreciation, shall, subject to the succeeding provisions

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ATC 5038

of this section, be included in his assessable income of that year."

We are not concerned in this appeal with the detailed operation of these provisions. The leased plant was depreciated by the applicant at rates acceptable to the Commissioner. If the leased plant was sold or disposed of at less than the depreciated value, the difference was claimed and allowed as a deduction from the applicant's assessable income. If the leased plant was sold or disposed of for a consideration greater than the depreciated value, the depreciation recouped was brought to account by the applicant as a balancing charge.

We are concerned in this appeal solely with those goods which, having been leased, were at some later stage sold, either to the lessee or to another, at a price greater than the sum which those goods had cost the applicant on their acquisition. The profit arising from these sales, that is to say, the excess received over their cost, was considered by the Commissioner to be assessable income and by the applicant to be a non-assessable capital gain.

The applicant put the view, in relation to goods which were depreciable, that sec. 54 to 62 provided a code. The applicant said that, as subsec. 59(2) provided for the bringing to account as assessable income only so much of the consideration receivable on disposal as recovered depreciation previously allowed, it was not permissible to bring some other amount to account on a basis for which these sections did not provide.

The code argument formed part of a number of submissions which were put to the Court, the general effect of which was that the Commissioner's assessment contravened both the basis upon which the Act proceeded and its specific provisions. It was submitted by Mr A.H. Slater, counsel for the applicant, that the Commissioner had brought to account as assessable income net profit arising from the sale of goods in the course of the business of the applicant whereas the Act did not tax profit, as does the legislation in the United Kingdom, but taxable income being assessable income less allowable deductions. Mr Slater submitted that if the sales with which we are concerned were to be brought to account in a calculation of the applicant's taxable income, it could only be by treating the goods as trading stock, in respect of which subsec. 25(1), sec. 28 to 36 and 51 provided the code. Mr Slater submitted that, had the goods been trading stock, their original cost would have been deductible pursuant to subsec. 51(2), their sale price would have been assessable income pursuant to subsec. 25(1) and their value would have been reflected in the opening and closing stock values to be brought to account pursuant to sec. 28. Mr Slater submitted that those sections did not support the Commissioner's assessment, for the Commissioner brought to account not the sale price of the goods but net profit on sale. He submitted that the Commissioner accepted the goods to be plant or articles depreciable in accordance with the provisions of sec. 54 to 62 yet his assessment did not accord with those sections, particularly sec. 59.

The substance of this argument has, however, been rejected by the High Court of Australia in numerous cases. The banking and insurance cases, such as
Colonial Mutual Life Assurance Society Ltd. v. F.C. of T. (1946) 73 C.L.R. 604 ;
Australasian Catholic Assurance Co. Ltd. v. F.C. of T. (1959) 100 C.L.R. 502 ;
National Bank of Australasia Ltd. v. F.C. of T. (1969) 118 C.L.R. 529 make it clear that profit on sale of investments may be brought to account as assessable income in appropriate cases notwithstanding that the investments have not been dealt with by the taxpayer or the Commissioner under the trading stock provisions of the Act. See also
London Australia Investment Co. Ltd. v. F.C. of T. 77 ATC 4398 . In another field, that of the development of land, the High Court of Australia has likewise looked to general principles rather than to the specific provisions as to trading stock. In
F.C. of T. v. Whitfords Beach Pty. Ltd. 82 ATC 4031 , the High Court of Australia held that profits made on the sale of land which had been acquired originally by the taxpayer for a private purpose, but which had subsequently been committed to a business of development and sale, were taxable. The Court remitted to the Federal Court of Australia the question as to the date upon which the land became so committed and its value at that date.

In
Commercial and General Acceptance Limited v. F.C. of T. 77 ATC 4375 at pp. 4379-4381; (1977) 137 C.L.R. 373 at pp. 381-383 , Mason J. discussed the circumstances in which net profit could be brought to account as assessable income pursuant to subsec. 25(1). His Honour said:

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ATC 5039

"The judgment appealed from proceeds upon the footing that, notwithstanding the reference to `gross income' in sec. 25(1), the subsection catches net profit in some circumstances at least. At first glance it might be thought that this view of sec. 25(1) fails to take account of the presence of sec. 51(1) which provides for the deduction of outgoings from a taxpayer's assessable income. In the ordinary case in the process of arriving at the amount of net profit outgoings are deducted. To say that net profit falls within gross income and is therefore within assessable income seemingly is to say that outgoings are deducted before arriving at the assessable income whereas sec. 51 requires that they be deducted from that income.

...

To the extent to which there are cases in which the character of income may attach to a net profit which is derived from a gross receipt which lacks the character of income, the inclusion of the net profit, if otherwise authorized by the Act, can be reconciled with sec. 51(1). The antecedent deduction of outgoings from the gross amount received so as to ascertain the net profit figure would not involve the application of sec. 51 because the gross amount received is ex hypothesi neither gross income nor assessable income. And if it is the net profit only which is taken into assessable income there is no outgoing which has been incurred in relation to that figure which can be deducted.

There is a problem in accommodating the language of sec. 25(1) to the notion that an amount of net profit forms part of gross income. Is the reference in the subsection confined to the gross receipts only of the taxpayer which possess the character of income or does it also include a net amount having that character, provided that the net amount is not itself derived from gross income? The expression `gross income' in relation to a taxpayer conveys the sense of entire income of a taxpayer. No doubt in the context of the Act that income is to be ascertained in the first instance by reference to the gross income receipts of the taxpayer, but in my view it also includes a net amount which is income according to the ordinary concepts and usages of mankind, when the net amount alone has that character, not being derived from gross receipts that are revenue receipts."

His Honour's remarks accord with the view subsequently expressed in F.C. of T. v. Whitfords Beach Pty. Ltd., cited above. At p. 4039, Gibbs J. made it clear that, in his view, the profit made on the sale of the subject land constituted assessable income of the taxpayer. At p. 4048, Mason J. said that the gross income was assessable under subsec. 25(1), but perhaps his Honour had had in mind what was said in Commercial and General Acceptance Ltd. v. F.C. of T., cited above. At pp. 4057-4058, Wilson J. accepted that the profits were assessable income.

Accordingly, we proceed upon the footing that the subject profits were assessable income if properly regarded as income under general principles and that the assessment was not precluded by the fact that, in the circumstances of the case, it is difficult to fit the goods neatly and conclusively at all times into the category of trading stock or of depreciable plant or articles. In particular, in my opinion, sec. 54 to 62 do not provide a complete code as to the taxation of goods which, at some time, may be depreciable. Those sections provide for allowable deductions in respect of goods or articles that fit the sec. 54 criteria and for a balancing charge in a case where depreciation has been allowed and the plant or articles have been disposed of for a consideration greater than the written down value. The ambit of these provisions is plain. They do not purport to nor intend to deal with the assessability of profits being the difference between the cost price of the goods and their sale price. They do not preclude that profit being brought to account pursuant to the provisions of subsec. 25(1) of the Act if it is otherwise proper to do so.

We turn now to the general principles respecting the treatment as income of profits arising from the sale of goods. In London Australia Investment Co. Ltd. v. F.C. of T., cited above, Gibbs J. at p. 4403 said:

"When a taxpayer sells one of its investments, the question whether the profit on the sales should be treated as capital or income is to be answered by applying the tests stated in
Californian Copper Syndicate (Limited and Reduced) v. Harris (1904) 5 T.C. 159 , at pp. 165-166 , in a passage

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ATC 5040

which has constantly been cited, or repeated, with approval: see, for example,
C. of T. (Victoria) v. Melbourne Trust Ltd. (1914) 18 C.L.R. 413 , at pp. 420-421 ;
Ruhamah Property Co. Ltd. v. F.C. of T. (1928) 41 C.L.R. 148 , at pp. 152, 165 ; Australasian Catholic Assurance Co. Ltd. v. F.C. of T. (1959) 100 C.L.R. 502, at p. 506 and
White v. F.C. of T. (1968) 120 C.L.R. 191 , at p. 222 . The principle was stated as follows in Colonial Mutual Life Assurance Society Ltd. v. F.C. of T. (1946) 73 C.L.R. 604, at p. 614.

• Prima facie the depreciation in or accretion to the capital value of a security between the date of purchase and that of realization is a loss of or accretion to capital and is therefore a capital loss or gain and does not form part of the assessable income... But in the words of the Lord Justice Clerk in Californian Copper Syndicate v. Harris which have been so often quoted, `it is equally well established that enhanced values obtained from realization or conversion of securities may be so assessable, where what is done is not merely a realization or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business'.

Their Honours went on to point out that not all of the proceeds of a business carried on by a taxpayer are income for the purposes of the Act; they will be so only if they are income `in accordance with the ordinary usages and concepts of mankind, except in so far as the Act states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income' (see at p. 615). However, it is in my opinion established by this and the many other cases in which Californian Copper Syndicate v. Harris has been applied that if the sale in question is a business operation, carried out in the course of the business of profit-making, the profit arising on the sale will be of an income character. To apply this criterion it is necessary `to make both a wide survey and an exact scrutiny of the taxpayer's activities':
Western Gold Mines N.L. v. C. of T. (W.A.) (1938) 59 C.L.R. 729 , at p. 740 . Different considerations may apply depending on whether the taxpayer is an individual or a company. In the latter case it is necessary to have regard to the nature of the company, the character of the assets realised, the nature of the business carried on by the company and the particular realization which produced the profit:
Hobart Bridge Co. Ltd. v. F.C. of T. (1951) 82 C.L.R. 372 , at p. 383 , citing Ruhamah Property Co. Ltd. v. F.C. of T., at p. 154."

In F.C. of T. v. Whitfords Beach Pty. Ltd., cited above, Gibbs C.J. again examined the issue and reaffirmed the view above stated. At pp. 4037-4038, his Honour said:

"The question whether the profits were income within ordinary concepts depends on the application of the tests laid down in Californian Copper Syndicate v. Harris and in the cases that have followed that decision. Was that was done merely a realization of the taxpayer's asset, or was it something done in what was truly the carrying on or carrying out of a business? In other words 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': see
McClelland v. F.C. of T. 70 ATC 4115 at p. 4120; (1970) 120 C.L.R. 487 at p. 496 , where however the words used are `a trade of dealing in land'; the words which I have ventured to substitute seem more consonant with the Australian authorities. The words `merely' and `mere' in these statements seem to me to be an important part of the definition of the line between profits that are taxable and those that are not. If the taxpayer does no more than realize an asset, the profits are not taxable. It does not matter that the taxpayer goes about the realization in an enterprising way, so to secure the best price. As I have said in
F.C. of T. v. N.F. Williams , 72 ATC 4188 at p. 4194; (1972) 127 C.L.R. 226 at p. 249 :

• `The situation is not altered by the fact that the landowner seeks and acts upon the advice of an expert as to the best method of subdivision and sale or by the fact that he carries out work such as grading, levelling, road building and the provision of reticulation for water and

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  ATC 5041

  power to enable the land to be sold to its best advantage'

Further the mere magnitude of the realization does not convert it into a business:
Commr of Taxes v. British Australian Wool Realization Association (1931) A.C. 224 , at p. 252 . But if the taxpayer does engage in an operation of business, the proceeds are income and taxable."

At p. 4040, Mason J. likewise took as the correct principle that expressed by the Lord Justice Clerk in Californian Copper Syndicate (Limited and Reduced) v. Harris (1904) 5 T.C. 159 at pp. 165-166. At p. 4048, his Honour concluded:

"From what I have said it will be seen that it is my opinion that what the respondent did amounted to more than realization of an asset and constituted the carrying on of the business of land development. Accordingly, the gross income is assessable under sec. 25(1).

But for this conclusion I would have held that the activity of the respondent amounted to the carrying out of a profit-making undertaking or scheme which exhibited the characteristics of a business deal so that net profit of the respondent would have been assessable under the second limb of sec. 26(a), if not under sec. 25(1).

In the result I would allow the appeal."

Murphy J. looked at the matter under para. 26(a) of the Act with which we are not here concerned. At p. 4054, Wilson J. referred to the statement of the Lord Justice Clerk in Californian Copper Syndicate v. Harris and at p. 4057, after referring to remarks of Fisher J. in the Federal Court in
Whitfords Beach Pty. Ltd. v. F. C. of T. , 79 ATC 4648 , his Honour said:

"... I agree with respect with his statement that the true question is whether the taxpayer in proposing to maximise the amount of money which it received on sale of the land committed the land to a business venture or to a profit making undertaking or scheme or merely sold the land to the best advantage."

The principles enunciated in Californian Copper Syndicate v. Harris, London Australia Investment Co. Ltd. v. F.C. of T. and F.C. of T. v. Whitfords Beach Pty. Ltd. have more recently been affirmed and applied in
F.C. of T. v. The Myer Emporium Ltd. 87 ATC 4363 . See also
Jennings Industries Ltd. v. F.C. of T. 84 ATC 4288 ; (1984) 2 F.C.R. 273 and White v. F.C. of T. (1968) 120 C.L.R. 191.

In the light of these authorities, it is helpful to turn to
Gloucester Railway Carriage and Wagon Co. Limited v. I.R. Commrs (1925) A.C. 469 . In that case, a company manufactured railway wagons and dealt with them by selling them or letting them on hire. In one year, the taxpayer decided to sell all the wagons used for letting on hire and did so at sums larger than the sums at which the wagons then stood in the taxpayer's books of account. The House of Lords upheld an assessment of the profit so obtained and held that it was not a capital accretion but was rightly included as a trade profit for the purposes of the corporation profits tax. At pp. 474-475, Lord Dunedin, with whose reasons the other Members of the House agreed, said:

"The appellants argue that this is really a capital increment; and to say so they call these wagons plant of the hiring business. I am of opinion that in calling them plant they really beg the whole question. The Commissioners have found - and I think it is the fact - that there was here one business. A wagon is none the less sold as an incident of the business of buying and selling because in the meantime before sold it has been utilized by being hired out. There is no similarity whatever between these wagons and plant in the proper sense, e.g., machinery, or between them and investments the sale of which plant or investments at a price greater than that at which they had been acquired would be a capital increment and not an item of income. I think that the appeal fails."

A like decision was
Minister of National Revenue v. British and American Motors Toronto Ltd. (1953) C.T.C. 177 which concerned a car dealer who sold new and used cars and trucks. It was held that a profit made on the sale of one vehicle which had been acquired in 1944 and used by an employee until sold in 1949 was a capital profit but that the profits derived in 1949 on the sale of nine cars which had been acquired in 1948 and used by employees for a short time only was part of the dealer's taxable profit. Cameron J. held that the

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ATC 5042

one vehicle had been bought for use as and had been used as a capital asset and that the profit on its sale was a capital profit but that the profits on sale of the other vehicles were profits on the sale of inventory. That decision was followed in
Minister of National Revenue v. J.T. Labadie Ltd. (1954) C.T.C. 90 and
Canadian Kodak Sales Ltd. v. Minister of National Revenue (1954) C.T.C. 375 . The lastmentioned case is of particular interest for in that case the taxpayer had, until 1951, leased out its goods, photographic equipment, and had subsequently changed its business policy and thereafter sold some and leased some. Thorson P. held that the profits on all sales, including on the sale of goods that before 1951 were leased only, were taxable income. A like decision in New Zealand was
Fun Fair Enterprises Limited v. Commr of I.R. (N.Z.) (1963) 9 A.I.T.R. 62 .

In argument Mr Slater submitted that the correct principle was to be found in remarks of Jacobs J. in London Australia Investment Co. Ltd. v. F.C. of T., cited above. At p. 4410 his Honour said:

"Therefore, once profits on sale are found not to fall within the first limb of sec. 26(a), the determinant is the carrying on of a business, not any associated business in a general sense, but the specific business of acquisition with a purpose or intention or expectation of resale and subsequent resale with consequent profit. Though frequent activity of acquisition and resale does not necessarily signify a business, it is evidence from which it may be inferred that there is a business. First, the frequency of the activity may itself tend to show that it is not of a private or of a casual nature, but that rather the person is carrying on the activity as a business operation. Secondly, the frequency of the activity may enable the inference to be drawn, if the fact be in dispute, that there was a purpose or intention or expectation, at the time of acquisition, of dealing at a profit if and when a suitable occasion should arise. Nevertheless, it must be made quite clear that frequency of an activity is not synonymous with business. There may be no business despite frequency and on the other hand there may be a business where the activity is an isolated one. Every business must begin with an initial transaction."

It was submitted that, in his Honour's view, profits were not assessable unless it was shown that the relevant goods had been acquired for the purpose or intention or expectation of resale with consequent profit. It was submitted that, in the present case, it could not be shown that it was intended at the time of the acquisition of the subject goods that they would in fact be sold at a profit as distinct from the best price that could be obtained for them when the time came for their disposal.

We do not take the remarks of Jacobs J. to have the consequence that Mr Slater attributed to them. His Honour later said [at ATC p. 4410]:

"A circumstance which appears to me to be of substantial significance is that referred to by Kitto J. in
National Bank of Australasia Ltd. v. F.C. of T. 69 ATC 4042 at p. 4047; (1969) 118 C.L.R. 529 at p. 537 :

• `... what was recovered through the sale of the shares was circulating capital, and what ultimately was not recovered was a loss on revenue account just as any excess would have been an income profit: cf.
  Punjab Co-operative Bank Ltd., Amritsar v. Income Tax Commissioner Lahore (1940) A.C. 1055 at p. 1072 ; Colonial Mutual Life Assurance Society Ltd. v. F.C. of T. (1946) 73 C.L.R. 604 at pp. 608, 614; Australian Catholic Assurance Co. Ltd. v. F.C. of T. (1959) 100 C.L.R. 502;
  C. of T. v. Commercial Banking Co. of Sydney (1927) 27 S.R. (N.S.W.) 231 ."'

His Honour laid emphasis upon the nature of the business activity. In any event, it is well settled that, if goods are traded in the course of a business of trading in such goods, the trade in particular goods may be on revenue account whether or not the goods were or were not traded in with an expectation of profit. See
Investment and Merchant Finance Corporation Ltd. v. F.C. of T. 71 ATC 4140 ; (1971) 125 C.L.R. 249 at pp. 255, 262 and 269 ;
Patcorp Investments Limited & Ors v. F.C. of T. 76 ATC 4225 and
Curran v. F.C. of T. 74 ATC 4296 ; (1974) 131 C.L.R. 409 .

The principles we have enunciated above are in substance those which were applied by the Administrative Appeals Tribunal. The Tribunal concluded that the profit derived on the sale of the computer equipment was derived in the

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ATC 5043

ordinary course of its business activity. The Tribunal held that the profit was not a profit arising on the mere realisation of capital but arose from dealing in computer equipment to the best advantage of the applicant's business. The Tribunal found, inter alia (at p. 599):

"2. The taxpayer company was involved in acquiring by purchase from its holding company in the United States computer machines, the same to be then sold in Australia and/or leased to customers at and in accord with, the most favourable terms it could obtain.

...

5. Even where there had been a lease to a customer the equipment might be, and in some cases was, sold to the lessee customer or to a third party on the lease being terminated. A sale of a piece of equipment was always in contemplation by the taxpayer, at least as a possible method of realisation of its interest in the computer equipment. The taxpayer always expected and intended to profit by the realisation by lease or sale of its interest in the computer machine, be it that of owner, simpliciter, or owner/lessor. The sale of the leased equipment was not a mere realisation of an investment and/or fixed asset at a profit but a step taken, be it the first step, to give effect to a policy stratagem in `the course of a new part of the taxpayer's ordinary business' (
Jennings Industries Ltd. v. F.C. of T. 84 ATC 4288 at p. 4294 .

6. The advantage to the taxpayer of the one course of dealing or the other might and did change. The proportion of sales of purchased equipment to equipment on lease has already been illustrated. The emphasis as one might expect, in a commercial enterprise seeking to make profits, changed dependent upon an assessment being then made by the executives of the taxpayer and its parent company as to the form of commercial transaction which would result in the most promising profit position for a particular period. Thus, the emphasis changed from sales to leasing, from leasing to sales to lessees, and from leasing back again to sales.

7. I see no reason, on the evidence, to regard the sales the subject of this review as different in any relevant sense from the other sales of the taxpayer. I consider that they were all directly relevant to the profit-making activities of the taxpayer, all designed to turn to account and profit the equipment acquired by it from its holding company, all an integral part of the taxpayer's business to deal in computer equipment. What was done was not merely a realisation of leased equipment but an act truly done in the carrying on of its business."

The Tribunal concluded that the special sale to the financier in 1978 had like features.

In our opinion, no ground has been shown for disturbing the Tribunal's findings on these matters or the conclusion that the subject profits were assessable income of the applicant.

It was submitted by Mr Slater that the applicant's business of leasing computer equipment was a business separate from its business of distributing computer equipment by sale. The outline of counsel's argument contains the following paragraph:

"Commencing in 1976 (35.9) and continuing until at least 1982 (49.2) the Appellant diversified its business activities into a new area, distinct from its previously subsisting activity of selling computer supplies and peripherals. The new area of business was that of owning and hiring out for reward computer peripheral equipment. The object of establishing and operating this business was that of producing a steady income stream which would cover fixed monthly expenses (35.9-36.4)."

The evidence does not support this submission. It is clear from the schedule we have already set out that goods were leased as far back as 1971 and many of the goods sold in 1976 were first acquired in 1973 or 1974. And Mr Chesters, the only witness for the applicant, gave evidence that when he joined the company in 1976 one of the initial tasks was to establish records of all the equipment then on lease. The evidence shows that the usual method of distribution undertaken by the applicant was distribution by sale but that during the years in question, sometimes with more enthusiasm than at others, the applicant offered to its customers the option of purchase or lease of the computer equipment. It was the customer who decided the form that the transaction would take. The evidence shows that the applicant had

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ATC 5044

only one business, that of distributing computer equipment, the distribution involving not only the supply of equipment but also advice as to the nature of the equipment required, the design of equipment packages and the service of the equipment when supplied. The equipment that was supplied was ordinarily equipment which was designed and structured for the needs of the particular customer. The applicant did not have a business in which it held standard pieces of equipment in stock and hired that equipment out to one customer after another. It normally supplied equipment for a particular requirement and supplied that equipment, at the customer's option, either by outright sale or by lease.

Moreover the applicant's preference to lease or sell was very much affected by the need of its business. Thus, in June 1978 the applicant sold to its financier, in the special transaction I have mentioned above, 19 pieces of equipment which it had leased out in February and April 1978. In the same month it sold to a financier for a customer four pieces of equipment it had leased to the customer in April 1978. In some years, the sales tended to be bunched rather than spread randomly throughout the year, an indication that the goods were sold when it was convenient for the applicant to achieve sales. In the 1980 year, most of the sales took place in September and in December. The goods were leased or sold as the exigencies of the business, including its need for cash, demanded.

There is no analogy between this case and the case of plant or equipment that a taxpayer may have and may use as part of the structure of an enterprise. The subject goods were part of the goods in which the applicant was dealing. When it was profitable or financially convenient to do so and the customer agreed, the goods were leased, rather than sold outright. But they were destined for sale or other disposal by the taxpayer sooner or later, either to the customer, another customer, an overseas affiliate or perhaps if they had no value at all, by scrapping.

The term of a lease was not usually for the whole of the effective commercial life of the goods. If the goods were returned by the customer at the end of the lease and they then had value, they would be dealt with again as part of the goods which it was the business of the applicant to supply.

In our opinion, the decision under appeal was correct. It is, therefore, unnecessary to consider whether the Tribunal's finding that the applicant carried on only one business involving both the sale of equipment and the leasing of equipment according to circumstances was a finding which involved a point of law and which thus may be reviewed in an appeal which is limited to points of law only. It is interesting to note that in Gloucester Railway Carriage and Wagon Co. Ltd. v. I.R. Commrs, cited above, Rowlatt J. at first instance, Warrington L.J. and Eve J. in the Court of Appeal and all members of the House appeared to regard the crucial finding of the Special Commissioners as a finding of fact, although Pollock M.R., in the Court of Appeal, thought otherwise.

It is not necessary to consider the issues arising under para. 26(a) and 26AAA of the Act which were touched upon by the Tribunal.

We would dismiss the appeal with costs.