Case V40

Members:
RA Layton DP
DJ Trowse M
DB Williams M

Tribunal:
Administrative Appeals Tribunal

Decision date: 18 February 1988.

---

R.A. Layton (Deputy President), D.J. Trowse and Dr D.B. Williams (Members)

This is an application for review of a decision of the Commissioner of Taxation (``the Commissioner'') to disallow the applicant's objection to assessment of income tax and penalties amounting to $413,662.74. The objection to assessment related to a surplus resulting from the compulsory acquisition of property owned by the applicant, which the Commissioner regarded as either assessable income pursuant to sec. 25 of the Income Tax Assessment Act 1936 (``the Act'') or, alternatively, assessable income pursuant to either the first or second limb of sec. 26(a) (as it then existed) of the Act.

2. At the hearing, certain concessions were made. Firstly, that the penalty imposed by the Commissioner of $185,172 and which was described in the notice of assessment as being additional tax for incorrect return would be remitted having regard to the decision in
North Coast Grazing Pty. Limited v. F.C. of T. 87 ATC 4553. Secondly, the applicant accepted that an amount of $839 which represented interest added to the compensation whilst held in the Supreme Court of South Australia constituted assessable income in accordance with the general provision of sec. 25 of the Act.

3. The total amount received by way of acquisition was $500,000, of which $330,000 was paid in the 1980 financial year and the balance in the following fiscal period. The issues which require our attention are whether the surplus flowing from those receipts is assessable income and, if so, whether the Commissioner has erred in bringing to account the balance instalment in the determination of the applicant's taxable income in the 1980 year of income. On this same matter, it is notable that the final instalment of $130,000 had been reduced by various legal and valuation fees to an amount of $128,770 and that there was agreement as between the parties that in the event of the Tribunal finding against the Commissioner on this point, then this net figure is to be excluded from the 1980 calculations.

4. At the hearing, both parties were represented by counsel. The information before the Tribunal consisted of documentary evidence and, in addition, a director of the applicant company (``Mr X'') gave oral evidence as did ``Mr L'', a director of a company with whom the applicant had undertaken business negotiations during the relevant period.

5. Turning firstly to consider the facts; Mr X is a director of Y Co., the South Australian managing company of a large group of Mr X's family companies. Y Co. purchased land on the south coast of Adelaide being sections 46 and 350 (hereinafter called ``the subject property'') in addition to 130 subdivided allotments in a mortgagee sale on 6 February 1941, which transfers were registered on the certificates of title on 29 May 1947. Y Co. immediately commenced sales of the subdivided lots, however, the subject property was retained for later sale at an appropriate time.

6. On his return from war service with the AIF in 1947, Mr X initially worked for approximately two years in the Perth office of the family business prior to returning to the Adelaide office of that business in about 1949/1950. At that time, Mr X began operating Y Co. in Adelaide, although his father was still alive. Mr X's father held governing director's shares in Y Co. but Mr X and his brother each had a 25% ownership and Mr X's four sisters each had a 12½ ownership. Mr X's brother was only active in the company for a short period. Mr X's father and four sisters lived in Sydney and therefore Y Co. was effectively run and controlled by Mr X in Adelaide. At that time, Y Co. was involved in various operations of subdivision, selling and trading in land in addition to investment generally in real estate. The company also had a minor interest in primary production.

7. Early on his return to Adelaide, Mr X was anxious to restructure and reorganise Y Co. and its subsidiaries in order to distinguish between the investment and trading functions of the group. The functions were rationalised by forming specific companies for specific purposes, e.g. investment and development companies were formed with specific objects relating to investment and development, and trading companies were formed with the specific object of trading. Examples of both types of companies appear in Exhibits B17 through to B20 hereof. The objects of each of these companies were normally drafted by Y Co.'s very experienced company secretary, ``Mr T''.

8. On 7 January 1951, the unsold portion of subdivision allotments together with the subject

---

ATC 343

property were transferred from Y Co. to Mr X as nominee for the family syndicate (``XFS''). The reason for the transfer from Y Co. to XFS was with a view to minimising taxation as Mr X's sisters were subject to a lower tax rate than that which was then being paid by the companies in the group. XFS had the same proportional ownership as that which prevailed in Y Co. At the time of such transfer, it was thought by Mr X, as the prime mover and adviser of XFS, that in the short term, XFS would hold the land, but that in the long term, XFS would eventually sell the subject property for the purpose of subdivision.

9. The subject property totals 93 acres. It is sited on the outskirts of a beach town with beach frontage. There is a large sandhill on the beach side boundary which runs across the property at a height of up to seven metres. Further back from that sandhill line, there is another line of sandhills which also run across the property. Behind the two lines of sandhills there is some residual rural land which has from time to time been leased out for small horticultural and grazing pursuits.

10. In about 1953/1954, Mr L, a director of a building company (``AB'') approached Mr X to see if Mr X was interested in either selling the subject property or joining with him in a joint venture using the sand on the subject property for brick-making. There was at the time a shortage of available bricks in Adelaide. Mr X expressed interest and thereafter a number of discussions occurred between Mr X and Mr L concerning sand deposits on the subject property and its brick-making potential. Mr L wished to investigate the cost of purchasing brick-making equipment from Germany and investigations had to be undertaken to establish the quantity and quality of the sand on the property for brick-making purposes.

11. On 30 March 1955, the applicant company was set up and registered in Adelaide. The memorandum of association stated the object of the company as being:

``To acquire purchase and take over certain lands in the Hundred of... for the purpose of carrying on the business of working and/or selling the sand thereon and to do all things necessary for carrying out the above and in particular -''

and thereafter appeared a number of powers ancillary to that object which included:

``(a)...

(b) To promote, form, subsidise, and establish any company or companies, corporation, or corporations for the purpose of acquiring all or any of the property, rights, and liabilities of the company, or for any other purposes which may seem directly or indirectly calculated to benefit this company...''

12. It is important to note at this stage that the memorandum of association of the applicant differed significantly from the usual memorandum of association used for investment and development companies set up by Y Co. It is also important to note that there was only one stated object, namely to take over property for the purpose of carrying on the business of working and/or selling sand from the land; no other objects were stated.

13. On 30 June 1955, a draft agreement was prepared to give an option from Mr X to the applicant to purchase the subject property (Exhibit B21). It is doubtful as to whether that option was executed and the consideration mentioned in the option was not received.

14. On 1 July 1955, an agreement was prepared in which Mr X gave to the applicant an option for the applicant to purchase and remove all sand on the said property. The option was expressed to be for a period of one year, for a payment of £3,000 and the applicant agreed that if it purchased the said land, it would:

``1. Remove all sand from the said land except that as may be necessary for levelling within a period of One Year from the time of the taking up of the Option.

2. Level the said land to a height of approximately 10ft. above high water mark at the western boundary to the existing level at eastern boundary of the sand hill within the aforesaid period of one year.''

• (Exhibit B23.)

This option was not executed although Mr X gave evidence that the parties acted as though it had been, although no money appears to have been paid.

15. On 10 February 1956, Mr X received an unexpected notice of application taken out

---

ATC 344

under the Mining Act Amendment Act 1931 (S.A.) by an acquaintance who worked in a nearby office. Unbeknown to Mr X, this acquaintance had applied to peg out an area to be worked under the provisions of that Act on section of the subject property. At the hearing of this application, Mr X gave evidence that he was angry that the acquaintance had not spoken with him before he received the formal notice in terms of that legislation.

16. On receipt of this notice, Mr X made enquiries at the Department of Mines and ascertained that this acquaintance had also pegged out a claim in relation to section 46 of the subject property. However, the mining rights for that section were not held by Mr X as they had been alienated to the Crown and Mr X as nominee therefore had no control over those rights. Mr X decided to prevent his business acquaintance from mining on the land and he understood, on information given to him at the Department of Mines, that the grounds upon which it was possible to object to someone mining on private land were as follows:

``I. Land lawfully and bona fide used as a garden, orchard, or vienyard;

II. Any church, chapel, schoolhouse, college, hospital, or asylum, and any ground enclosing the same and occupied therewith;

III. Any park lands or ornamental or recreation grounds vested in any municipal corporation or district council or in any other public body or trustees;

IV. Any land of less area than half an acre within any city, town, or township;

V. Any land within 150yds. of any artificial well, reservoir, or dam, or of any dwelling-house, factory, or building, in any case in which the well, reservoir, dam, dwelling-house, factory, or building is not of less value than fifty pounds;

VI. Any land within 100yds. of any spring, watering trough, or artificial watering-place which is habitually used for stock.''

• (Exhibit B25.)

17. Mr X then sent a letter to the Department of Mines objecting to the claim sought by his acquaintance in the following terms:

``(a) Sec. 350 and Pt. Sec. 46 to the West are held by me for the purpose of subdividing into building allotments of the usual township size (approximately 7500 sq.ft. each). Much preliminary work has been carried out in this connection and final plans are due shortly to be lodged with the necessary authorities. That this land is admirably suitable for subdivision can be judged by the fact that it adjoins the township of... where allotments are realising up to £600 each and the area was originally laid out by Scott Griffiths probably the best town-planner South Australia has had since Colonel Light.

(b) A company by the name of (applicant) has already been formed, its main object being to deal with the sand on Pt. Sec. 46 and the whole of Sec. 350.

(c) We realise the Mines Department is mainly interested in the mineral development of the State and in this regard I claim to be in a better position to develope (sic) my own property than the said (acquaintance) and if so developed I can co-operate the two processes of treatment and subdivision than (sic) allowing outside interests to trespass on my land.

(d) While realising that the mineral rights on Pt. Sec. 46 belong to the Crown we think it would be just as well if the Department notified the registered proprietor as in this case the said owner may have other plans which conflict strongly with the mining operations, and in this regard I object to the pegging of Pt. Sec. 46.

(e) In addition to these points I object to your granting consent as:

• 1. The whole area (including Sec. 46) will shortly be subdivided into blocks of less than half an acre.
• 2. Portion of the land is closer than 150 yds. to dwelling houses and buildings far exceeding the value of Fifty Pounds. (The... Kiosk recently sold I believe for more than £10,000).
• 3. Portion of the land has a watering place used by stock.''

• (Exhibit B26.)

18. There was considerable examination and cross-examination of Mr X as to whether the

---

ATC 345

contents of this letter were true. That evidence will be discussed in greater detail hereinafter.

19. At the time when Mr X lodged his objection to the mining application, he was unsure of the nature of the mining proposed, although he suspected that his acquaintance may have been interested in rutile mining. In an endeavour to further thwart his business acquaintance, Mr X and a friend pegged out two claims on 22 February 1956 and also instructed an exploration company to conduct a preliminary report including a petrological laboratory report on the content and tonnage of the sand (Exhibit B30).

20. On 23 May 1956, Mr X wrote to the clerk of the district council to give notice of the planned mining claim taken out by his business acquaintance and suggesting that the council may wish to object to the claims as the beach ``could be destroyed as a popular beach by the dredging operations with a resultant drop in land values'' (Exhibit B31).

21. Also on 23 May 1956, Mr X wrote a further letter to the director of mines in the following terms:

``(a) The granting of a mining lease to (Mr W) over Part Section 46 and closed road. The land is held by me for subdivisional and brick manufacturing purposes and the existence of this lease will result in a large financial loss to me. In any case, if the property has any mining possibilities, I claim I am in a better position both as the owner of the fee simple and financially to develop any claim.

(b) I understand that the said (Mr W) and (acquaintance) have applied for four mineral claims covering parts of the beach west of Part Sections 353, 46, 347 and Part 344 Hundred of... being the area between high water level and some fourteen chains to the seaward. As this covers most of the well known and popular... Beach, I object to any mineral claim being granted for these areas as dredging or mining operations will undoubtedly distrub the water and the sea bed making the beach unattractive and dangerous to swimmers thus lowering land values in the area.

(c) I also object to the area between high water mark and Section 46 and other land known as a recreation reserve being opened for mining on similar grounds as (b) above.''

• (Exhibit B32.)

22. At this time, Mr X was still continuing his negotiations with Mr L as to sand use. Mr L had visited West Germany in about 1956/1957 with a view to looking at appropriate brick-making machinery but no firm proposals had been discussed.

23. On 22 October 1957, Mr X wrote to the director of mines indicating he was opposed to any further suspension of the labour conditions with regard to the mining claim of his business acquaintance (Exhibit B33). The Department of Mines replied on 30 October 1957 that it was awaiting results from the mines department laboratories as to the granting of a licence and that in the meantime, suspension of labour conditions was continuing and further, it did not know whether a further extension would be required.

24. On 1 November 1957, Mr X wrote a letter to the Director of Mines in which he stated:

``As it is my intention to subdivide the land I object to any further suspension of Labor Conditions and would particularly ask you not to grant any further claims for suspension.''

• (Exhibit B35.)

25. On 30 June 1958, the applicant entered into an agreement for sale and purchase of the subject property for the sum of £2,000 of which £400 was to be paid by way of deposit and the balance by yearly instalments of £400 terminating on 30 June 1962. The conditions of purchase included a condition that:

``3. The Purchaser shall be at liberty by any ways and means to sell dispose or otherwise get rid of the surplus sand which is now upon certain portions of the said lands, but shall comply with any requirements of the District Council of... in respect thereto.''

• (Exhibit B37.)

Again, it is uncertain as to whether this agreement for sale and purchase was ever executed although it probably was as the sale and purchase are reflected in the accounts of the applicant company (see annexure to Exhibit B37).

---

ATC 346

26. Mr X gave extensive evidence as to the intentions of himself and the applicant company at the time when the applicant entered into agreement with XFS for purchase of the subject property. In effect, Mr X said that the intention of the applicant company was to sell the sand and thereafter to hold the subject property until a time ``down the track'' when the land may become ``ripe'' for subdivision, and then to sell the land to another family company specifically set up for subdivisional purposes or, alternatively, sell to a third party for subdivision if such sale would be of greater financial advantage to the applicant company.

27. Mr X also agreed that the sale of the sand had a two-fold purpose: firstly, as a means of providing cash flow to the applicant company and, secondly, the presence of the sandhills was an inhibitor to subdivision and the excess sand would have to be removed prior to undertaking any subdivision.

28. Mr X also gave evidence that at the time of the transfer of the subject property to the applicant company, subdivision was not a possibility. Apart from the existence of the sandhills, the council would have to agree to subdivision and at that time would probably have required the building of an esplanade along the beach boundary in addition to a bridge across the creek.

29. On 24 June 1955, at a meeting of shareholders of the applicant company, it was recorded:

``The Chairman reported that the Company had been formed to negotiate for an option or to purchase certain lands adjoining the Township of... and to exploit the possibility of disposing of the sand profitably.''

• (Exhibit B45.)

30. On 23 October 1957, at a meeting of shareholders, it was recorded that:

``... as yet no finality had been reached regarding the sand...''

• (Exhibit B45.)

31. On 24 October 1958, at a meeting of shareholders of the applicant company, Mr X reported:

``... that nothing definite had been done regarding the disposal of the sand but negotiations were proceeding to dispose of the surplus sand.''

• (Exhibit B45.)

32. By 1959, negotiations with AB had reached a stage such that AB instructed solicitors to prepare a draft agreement granting AB an option to lease the subject property. It appears that this agreement was never signed but the draft agreement together with amendments made by Mr X and Mr T (who was the co-director of the applicant company as well as the secretary to Y Co.), granted a lease for a term of 15 years with a royalty payment of one shilling for each cubic yard of sand removed (Exhibit B6). An accompanying draft memorandum of lease, also never executed, was amended by Mr X and Mr T to include a covenant that AB:

``... shall have power to enter upon the said lands and win get raise carry away and dispose of all the sand on the said land leaving sand on the release of any cleared area not below the grid line as shown on attached and signed plan.''

• (Exhibit B6.)

There was also a note in the margin made by the secretary of AB that, ``We have to go down to clay floor level in every place whilst working and then to fill up on release''. Also in para. 2(4) of the memorandum of lease, the lessee convenanted that:

``After the expiration of ten years from the date of the commencement of this Memorandum of Lease as any area of 10 acres is completely cleared to release the said area from this Memorandum of Lease for the use of the Lessor provided that the Lessee shall not be liable for any fences or other outgoings by reason of any subdivision or other use by the Lessor of the land so cleared.''

• (Exhibit B6.)

The ten year period mentioned in para. 4 was reduced to a seven year period in a note on the draft agreement hand-written by Mr X.

33. Some suggested additional clauses were drafted by Mr T, as follows:

``To remove not less than 15,000 cbyds. in each year starting from the beginning of production of sand lime bricks during the first 5 years of production and not less than

---

ATC 347

30,000 cbyds. in each year in the following years during the continuation of this lease, unless prevented by any breakdown of the sand-winning, sand-lime brick or lime plant, any unavoidable accident, any lockouts strike or combination of workmen.

If the Lessee is prevented to remove the sand by any failure of the market the payment of the royalties up to the amount for 15,000 cubic yards or 30,000 cubic yards respectively calculated on a yearly basis will be sufficient proof of removal of the sand in the required quantities.''

• (Exhibit B6).

At the end of that notation on Exhibit B6 appears a hand-written note made by Mr X:

``More important to take the sand.''

This note was the subject of considerable cross-examination by counsel for the respondent and we will return to these documents and their notations later in these reasons for decision.

34. On 17 September 1959, Mr X sent to AB a letter enclosing alterations to the draft agreement and expressing the view that:

``Our main difficulty as you know is in ensuring that you progressively remove the sand and do not tie up the area for the term of the lease without removing the sand.

Although there are minor alterations arising on the above mentioned (applicant), the main points we believe are covered in our suggested 2 clauses attached.''

• (Exhibit B8.)

That letter included the following annexure:

``THE LESSEE COVENANTS

That it will remove all the sand above datum level in area 1 in the first year of the said term and thereafter all the sand above datum level in areas marked two in the in the (sic) second year of the said term and thereafter to work consecutively on the area 3 to 15 in each following year.''

• (Exhibit B8.)

There were also hand-written notes on that same page which included a notation by Mr X to the effect:

``In addition: Sufficient sand is required to fill the back water running off the creek to consolated (sic) datum level.''

35. When giving evidence at the hearing of this application, Mr X said that to his knowledge, no plan was drawn up to indicate the order in which sand would be removed from particular areas, but agreed that he wished the sand to be removed in an organised fashion so that the whole 92 acres was not tied up with sand removal or brick-making plant. He disagreed with the view put to him by counsel for the respondent that the reason for wanting land not tied up and to be released progressively was so as to enable him to subdivide land as it was released. Mr X said that at that time, he would not have been interested in subdivision of portions of the subject property as subdivision could not be done piecemeal. Mr X also denied that his note, ``More important to take the sand'' meant that he regarded the removal of the sand as more important than payment in respect of sand. We consider that his evidence was a little ambiguous but in our view, he indicated that primarily he sought a cash flow of money for the removal of sand, although in cross-examination, he agreed that the removal of sand was important for two reasons: both as a cash flow measure and also as a step which would assist future subdivision.

36. By 19 October 1961, the negotiations between AB and the applicant company ceased. The supply of bricks for building purposes in Adelaide had increased thereby making a brick-making business less attractive to AB. In a meeting of shareholders of the applicant on 19 October 1961, Mr X reported:

``... that the demand for sand had fallen away, but with the increase of dwellings in the vicinity prospects for the disposal of the sand should be good.''

• (Exhibit B45.)

37. Between 1958 and 1962, the applicant company received a little income from royalties from the sale of sand to small contractors. A summary of royalties received is contained in Exhibit B63.

38. On 19 October 1962, at an annual meeting of shareholders, Mr X reported that:

---

ATC 348

``... the losses were brought about by the lack of sale of sand and the Council's demands in clearing the land.''

• (Exhibit B45.)

39. In 1962, the subject property was zoned as ``Living'' in a development plan for the metropolitan area of Adelaide. That zoning meant that at some future time the area could, subject to council approval, be available for subdivision. In Mr X's opinion, this development plan was well ahead of its time as subdivision at that time would not have been a possibility owing to the difficulties mentioned in para. 26 hereof.

40. In 1963, no royalties were received for the sale of sand.

41. On 26 August 1964, a letter was sent to Y Co. by the local district council in the following terms:

``Acquisition of land for extension to oval at

...

I am instructed to ask whether you would be prepared to sell to Council a little less than an acre of land on the opposite side of the creek abutting the oval area at...

Council wishes to acquire this land and alter the course of the creek slightly so as to extend the oval area.

It is pointed out that the bringing of this oval area to its full size should tend to enhance the value of your property on Section 350.

If your (sic) are in any way prepared to consider this proposition I would be pleased to know the valuation that you place on the land and I enclose a plan of the proposal.''

• (Exhibit B46.)

As a consequence of that letter, Mr X met with the town clerk for the purpose, as he described, of trying to ``draw from'' him the council's view as to the future use of the subject property. In particular, Mr X was interested in ascertaining whether or not the council would be interested in permitting subdivision of the property in the future with a credit to be given for any land given by the applicant for extension to the oval. Following that discussion, Mr X sent a letter to the council dated 28 August 1964, expressed in the following terms:

``Our Company would be more than willing to co-operate with your Council in providing further land for an extension to the existing... Oval. The land is owned by (applicant) but recently some discussions have been held re their selling or subdividing the land.

We feel that rather than sell your Council the land, that we produce a proposed subdivision of the land and place the reserve in such a way as to increase the existing area. For a start, we think we should meet with you and possibly the Councillors for the Ward to discuss how your Council views the subdivision of the land. Naturally we will have to level the sand hills and possibly moving sand between our title and the actual beach. Our (Mr X) will be available all next week, but will be away in N.S.W. during the following week.''

• (Exhibit B47.)

When giving an explanation of that letter in his evidence to the Tribunal, Mr X said that the discussions referred to were his previous discussions with the town clerk. A further follow-up letter was sent by Mr X to the district council on 9 October 1964 in the following terms:

``Following our recent inspection of the (applicant) land, we confirm that the owners would be quite prepared to transfer an area suitable for Reserve to your Council free of charge (all survey and documenting fees payable by your council) providing that agreement on the future proposed subdivision of the balance of the land was arrived at.

We feel that we should now produce a proposed subdivision of the whole area showing Reserves adjoining the existing Oval etc. As the area of our Reserve will be at least 8 to 9 acres, it may be possible to use most of the existing oval as a caravan park and establish a new oval on our side. However, before we can design a subdivision, we would require your Council to indicate their policy with reference to: -

• (a) Levelling or leaving the Sand Dunes to the front of our Sections.
• (b) Whether a bridge would be required or be desirable across the creek on the Esplanade or some other position. With the proposed new bridge at the rear, we

  ---

  ATC 349

  doubt if the expense of a bridge would be warranted.
• (c) Any other specific requirements.''

• (Exhibit B48.)

42. The district council sent a letter dated 26 October 1964 in reply indicating the council's attitude:

``Your letter of 9th October was brought before Council and the suggestions made were considered to be very helpful. I was instructed to thank you for your co-operative attitude in the above matter.

I was to inform you that Council's ideas on the queries you raised are as follows: -

• (a) It would prefer to have the sand dunes to the front of your sections levelled and covered to prevent sand drift and a road made along the Esplanade area.
• (b) It is thought that a bridge would be required and it is preferred that this should be somewhere on the present alignment of the Esplanade.
• (c) It is considered that all sandhills should be levelled and covered with a sufficient depth of suitable material to prevent sand drift.''

• (Exhibit B49.)

43. A further letter dated 4 November 1964 was sent by Mr X to the district council in the following terms:

``Thank you for your letter of 26th October, and we will now work along the lines suggested for a future subdivision design.

We agree with your suggestions (a) and (c), but regarding (b), it may be too expensive to design and build a large bridge on the Esplanade due to the changing position of the mouth of the Creek and the probable large expense for retaining walls etc.

We will write when we have more definite plans.''

• (Exhibit B50.)

With regard to the ``more definite plans'', Mr X said in his evidence that the applicant company did not have any definite plans at that time.

44. From 1964 until 1972, sale of sand to individual sand contractors occurred on a regular basis (Exhibit B63) and in 1973, the applicant revalued the subject property and sand reserves at $200,000 and issued bonus fully paid shares to the value of $195,000 from the capital reserve created by the revaluation.

45. On 22 March 1973, the local council, pursuant to the Regulations under the Planning and Development Act 1966-1972 rezoned the subject property to ``RuA'' which was rural zoning as distinct from the former ``Living'' zoning given in the development plan for the metropolitan area of Adelaide. The applicant objected to the rezoning because it would devalue the subject property as well as inhibit any future plans for subdivision.

46. In or about 1974, Mr X was approached by persons from the South Australian Museum about possible archaeological investigations which the museum wished to conduct near the creek on the subject property. Mr X agreed to allow certain exploration in what was thought to be an aboriginal burial ground and agreed not to remove any sand from that area. At that same time, a dune survey was undertaken by Mr X.

47. In about 1975, the Coast Protection Board expressed an interest in preserving the dunes owned by the government near the south-western end of the subject property, together with the adjoining strip on the western frontage of the subject property. The board also indicated it would like to retain an area of land near the creek which ran along the northern boundary of the applicant's property.

48. On 11 April 1975, Mr X sent a letter to the State Planning Authority in the following terms:

``We act for (applicant) the owners of some 90 acres of land at... being Pt. Secs. 46 and 350 Hd.... and the whole of the land in Certificate of Title Volume 2207 Folio 57. This land is located partially behind a Government owned ridge of sand dunes and a Government road (not constructed).

At the moment and for a period in excess of 14 years the company has been removing surplus material from the area. Recently a meeting took place on the ground with officers of the S.P.O., Coast Protection Board and the Mines Department regarding the development of the land.

---

ATC 350

At various times over the last fifteen years or so discussions have taken place with officers and Councillors of the... Council concerning the levelling of the land for future subdivision and the position of recreation reserves which naturally were of prime interest to the Council.

From our recent discussions it would appear that any thought of an Esplanade Road has been abandoned and in fact the S.A. Coast Protection Board are anxious to preserve the Government owned dunes, the Government Road and a strip of our western frontage in its present form as an area of consolidated dune. In addition they have indicated that they would also like to retain an area of land alongside the... Creek which runs along the Northern Boundary of the subject land.

The owners of the land are prepared to co-operate in any reasonable manner but wish to point out the following: -

• 1. The frontage and esplanade area of any land facing the sea is always the most valuable.
• 2. Their western frontage dune plus the area adjacent to the Creek would constitute a greater area than any subdivider would be called upon to provide by way of Reserve.

The land was zoned `Living' in the 1962 Development Plan for the Metropolitan area of Adelaide but in its March, 1973 Regulations the District Council of... zoned the area Rural `A' although following our objections they did advise it was a `holding operation' only.

It would appear that the Coast Protection Board would like to take over the frontal dune area as soon as practical and possibly fence to protect and encourage further growth of vegetation.

We believe that the owners would be prepared to co-operate by transfer of the areas mentioned to the Coast Protection Board providing satisfactory arrangements can be made with your Authority, the... Council, and the Coast Protection Board on the following conditions: -

• 1. The value of the land transferred especially in regard to the area over and above normal Reserve Areas.
• 2. That even if the area is fenced in the immediate future that pedestrians would be allowed to cross the dunes on Coast Protection Board walks at a number of agreed places when the land is subdivided.
• 3. That all authorities would allow sand/loam material on the boundaries of the proposed Reserve and the development to be moved or graded in such manner as to prevent retaining walls or fences having to be erected on the boundaries and to allow normal drainage from the subdivision to... Creek.
• 4. That all authorities will give at least `approval in principle' to the land retained by the owners to be subdivided at some future date without having to give further Reserve areas. A general layout of such a subdivision could be produced and agreed. It would contain both normal allotments and possibly some medium density areas.
• 5. It is the intention of the owners to continue to remove surplus material from the land not required for the Reserve leaving the site suitably undulating and held by loam which is obtainable in the South-East corner of the property.

The owners have held the land for very many years and are prepared to co-operate in any reasonable way with all authorities wishing to retain the frontage area in its present state but we do require assurance that we may develop the balance as a high class subdivision without being subjected to more demands.''

• (Exhibit C15.)

49. It was at about this time that Mr X became aware, through his various informal contacts, that the South Australian government was interested in acquiring at least a portion of the subject property. In 1977, the applicant instructed consulting engineers to prepare estimated development costs in relation to the subdivision of section 350 of the property. Four alternative proposals were suggested to the applicant on 30 September 1977 (Exhibit B60).

50. In a note dated 18 August 1977 Mr S, the then secretary of the applicant company who had replaced Mr T, advised the following:

---

ATC 351

``The Government valuer has again queried the zoning. Again I have been through the story and again I have reinforced our attitudes that as far as we are concerned when we would be ready to develop the land that the zoning would be residential.

The Government valuer intends to write to the Council for confirmation that we are and have been (a) proceeding with a levelling to a prearranged agreement and (b) that the council concede that the rezoning from `pink' to rural was done as a holding operation only.''

• (Exhibit C19.)

51. On 21 September 1977, Mr X wrote to the Coast Protection Board and stated, inter alia:

``Because of differing areas and the amount of sand it is necessary to produce some four different subdivisional solutions and of course calculate road and service costs for the varying solutions. This is now being done with all haste and I expect these figures to be available late next week for (the valuer).

I am aware of the Coast Protection Board's real interest and our office is trying to arrive at a workable solution which will place in public ownership the dune area the Board requires without involving the public in unnecessary expenditure.

On the question of time, the Mines Department held us up for nearly two years when the owners (applicant) co-operated and allowed them to carry out their nominated `4 months' of investigations. This held up both the owners sand sales and will ultimately affect their final development programme.''

• (Exhibit C19A.)

52. Thereafter, negotiations took place as to a sale of an area of 49 acres being the whole of section 46 and part of section 350 of the subject property. The applicant sought certain payment and conditions which included ``Balance of land to be immediately rezoned for residential purposes suitable for housing and flats'' and ``Beach access from balance of land by Board walk and fencing along acquisition boundary to be constructed at Crown's expense prior to subdivision completion'' (Exhibit C21).

53. On 29 August 1979, the applicant was served with a Notice of Intention to Acquire Land pursuant to the Land Acquisition Act, 1969-1972 (S.A.) (Exhibit B72).

54. On 6 December 1979, the portion of the subject property was acquired and the sum of $370,000 was paid into court. Mr X considered that the compensation offer of $370,000 was inadequate and on 17 December 1979 lodged with the authority acting for and on behalf of the State Government, a notice of claim in terms of sec. 22 of the Land Acquisition Act (supra). At about that same time, application was made for the release of the $370,000 from the court and soon after, that sum, together with interest of $839, was made available to the applicant.

55. Further negotiation then took place and on 28 November 1980 a formal offer of compensation amounting to $500,000 was made (Exhibit B67), which sum was to include the sum of $370,000 already paid. This offer was accepted and the balance of $130,000 was paid to the applicant on 18 December 1980 (Exhibit B69).

56. Having made the above findings of fact, it is now necessary for us to consider further facts and inferences which we may draw from those facts which are relevant to the application or otherwise of sec. 26(a) and 25 of the Act.

57. Turning firstly to the time when the applicant initially acquired the subject property; we accept the evidence of Mr X that the memorandum of association of the applicant indicates that the subject property was purchased by the applicant for the purpose of carrying on the business of working and/or selling the sand thereon. However, we do not accept that that stated object was the only purpose for which the company purchased the land. It is clear that the previous owners of the land, being Mr X as nominee for the family syndicate XFS, had intended to hold the property for the purpose of eventual sale in the future, preferably by subdivision, and hopefully for a profit. Mr X submitted that one of the reasons for involving the applicant in the activities associated with the extraction of the sand was to limit the exposure to financial risk to the individual members of his family and this we accept. However, that acceptance does not alter our view that the applicant, through the agency of Mr X, acquired the property with a

---

ATC 352

twofold purpose of both working and/or selling the sand and thereafter holding the property until some time in the future when it became appropriate to sell the property either to a company of Y Co. specifically set up for the purpose of subdivision or, alternatively, to a third party subdivider, whichever gave the greatest financial return to the applicant. In our view, however, the dominant purpose of the setting up of the applicant company and its purchase of the subject property was not for sale of the property for profit-making; the dominant purpose was the working and/or selling of sand. The applicant company had been brought into existence for the purpose of working and/or selling sand, but secondary to that, the applicant, through the agency of Mr X, maintained a further purpose of at some time in the future selling the land for profit when the time became ripe for subdivision.

58. That one of the purposes for acquisition of the land by the applicant company included its sale at some future time for a profit is probably best exemplified by Mr X's evidence at p. 168 of the transcript:

``Q. I am asking you whether you considered in 1958 at the time this agreement was drawn that at some time in the distant or not-too-distant future, this land might be usable as subdivided land? -

A. Yes I suppose if you look at - I don't know what the time rate would be - but I suppose someone with my involvement in real estate might think that x years down the track you could do something with this land.''

59. We specifically reject any suggestion made that letters written by Mr X as either director of Y Co. or as director of the applicant company which expressed plans for subdivision of the subject property, were simply efforts made by Mr X to either thwart a mining claim or alternatively negotiate with the council in a manner such that the value of the property would be increased or at the very least, not diminished. We do not accept Mr X's evidence that the references to subdivision in correspondence were merely for the purpose of business negotiation and did not express the intent and purpose of the applicant at the time. Whilst no doubt a number of the letters written by Mr X may have been a ``gilding of the lily'', in that they indicated far more specific proposals than the applicant had in mind at that time, this did not mean that the underlying purpose and intention of the applicant were not accurately expressed. On the contrary, in our view those letters were a true reflection of the applicant's aims at the time they were written. Whilst it may not have been possible to subdivide the subject property at the time it was acquired by the applicant, nor indeed during the period 1956 to acquisition in December 1979, this was still one of the aims of the applicant at the time of purchase of the subject property and remained a purpose up until the time of its compulsory acquisition.

60. We now turn to consider the relevant law and in doing so, it is mentioned that counsel for the respondent relied substantially on the second limb of sec. 26(a) of the Act. However, it is perhaps easiest to consider the applicability of the first limb of sec. 26(a) of the Act. As to this limb, we are required to consider whether the applicant acquired the subject property for the purpose of profit-making by sale. We agree with the submissions of counsel for the applicant that acquisition refers to the date upon which an enforceable agreement was entered into for the applicant to purchase the subject property and not to the date upon which such transfer was registered on the certificates of title (see
Annalong Pty. Ltd. v. F.C. of T. 72 ATC 4141 at p. 4145).

61. The Tribunal must also be satisfied that the dominant purpose for acquisition was one of profit-making by sale (see
Pascoe v. F.C. of T. (1956) 11 A.T.D. 108 at p. 112;
Steinberg v. F.C. of T. 73 ATC 4030 at pp. 4036-4037).

62. We are conscious of the need to distinguish between Mr X as director of the company and the applicant company as a separate entity and the danger of imputing a development purpose for that company because of Mr X's other activities (
Mount Louisa Grazing Company Pty. Ltd. v. F.C. of T. 86 ATC 4933). However, it cannot be ignored that Mr X was the directing mind behind the applicant and that in the circumstances of this application, the intentions of Mr X in fact reflected the intentions of the applicant (
Allied Pastoral Holdings Pty. Ltd. v. F.C. of T. 83 ATC 4015). We are also conscious of the significance of the objects of a company as expressed in its memorandum of association in order to ascertain the objects, aims and intentions of an applicant (see
Adelaide Olive

---

ATC 353

Company Pty. Ltd. v. F.C. of T. 74 ATC 4048). However, it is also to be noted that the objects of a company do not mean that if such objects do not extend to matters relevant to sec. 26(a) of the Act, such intention is thereby excluded. All of the particular facts must be considered - the objects as set out in the memorandum will not of themselves be decisive of the matter (see the comments of members of the High Court in
Ruhamah Property Co. Ltd. v. F.C. of T. (1928) 41 C.L.R. 148 at pp. 151-152).

63. In the circumstances of this application, we consider that the object of the applicant company in conjunction with the negotiations entered into with AB with a view to a sand removal and brick-making business, together with the effect of revaluation of the subject property in 1973 by the issue of bonus shares, and the correspondence which flowed between Mr X and various authorities, mean that one of the purposes of the creation of the applicant company and the transfer of the property to it, was for the exploitation of sand. However, for reasons we have previously expressed, we do not consider that the intention of the applicant in purchasing the land was limited to that object although, in all of the circumstances, we are prepared to accept that the dominant purpose was for the exploitation of sand and not for the purposes of eventual profit-making by the sale of the property. For this reason, therefore, we do not consider that the ingredients of the first limb of sec. 26(a) have been fulfilled.

64. We now turn to a consideration of the possible application of the second limb of sec. 26(a) of the Act, that is, whether the surplus emanating from the disposal is a ``profit arising from the carrying on or carrying out of any profit-making undertaking or scheme''. It is true that an undertaking or scheme must involve a program or plan of action (see Kitto J. in
Clowes v. F.C. of T. (1953-1954) 91 C.L.R. 209 at p. 225) and that it presupposes activities which are co-ordinated by plan and purpose (see Windeyer J. in
Investment and Merchant Finance Corporation Ltd. v. F.C. of T. 70 ATC 4001 at p. 4007). Additionally it should be observed that a scheme or undertaking only answers the second limb description if the taxpayer carries it out with the purpose of profit-making (see decision of Gibbs J. (as he then was) in
XCO Pty. Ltd. v. F.C. of T. 71 ATC 4152 at p. 4155).

65. In the present matter, we are clearly of the opinion that at all relevant times, there existed a plan of action which encompassed the removal of the excess sand so as to render the property more valuable and that those concerned always intended to turn that asset to profitable account as best they could at some stage in the future. It is our view that all the requirements of the second limb are in place and that accordingly any profit flowing from the transaction with the State Government represents assessable income.

66. Finally, we address ourselves to sec. 25 and in so doing, particular consideration is given to the recent decision of the High Court in the case of
F.C. of T. v. Myer Emporium Ltd. 87 ATC 4363, with particular emphasis on the most relevant portions of that decision to this application for review. At pp. 4368-4369 the High Court stated:

``The proposition that a mere realization or change of investment is not income requires some elaboration. First, the emphasis is on the adjective `mere' (Whitfords Beach, at ATC pp. 4046-4047; C.L.R. p. 383). Secondly, profits made on a realization or change of investments may constitute income if the investments were initially acquired as part of a business with the intention or purpose that they be realized subsequently in order to capture the profit arising from their expected increase in value - see the discussion by Gibbs J. in London Australia, at ATC pp. 4403-4404; C.L.R. pp. 116-118. It is one thing if the decision to sell an asset is taken after its acquisition, there having been no intention or purpose at the time of acquisition of acquiring for the purpose of profit-making by sale. Then, if the asset be not a revenue asset on other grounds, the profit made is capital because it proceeds from a mere realization. But it is quite another thing if the decision to sell is taken by way of implementation of an intention or purpose, existing at the time of acquisition, of profit-making by sale, at least in the context of carrying on a business or carrying out a business operation or commercial transaction.''

(Emphasis added.)

and further at p. 4370, the High Court stated:

``If the profit be made in the course of carrying on a business that in itself is a fact

---

ATC 354

of telling significance. It does not detract from its significance that the particular transaction is unusual or extraordinary, judged by reference to the transactions in which the taxpayer usually engages, if it be entered into in the course of carrying on the taxpayer's business. And, if it appears that there is a specific profit-making scheme, it is pointless to say that it is unusual or extraordinary in the sense discussed. Of course it may be that a transaction is extraordinary, judged by reference to the course of carrying on the profit-making business, in which event the extraordinary character of the transaction may reveal that any gain resulting from it is capital, not income.''

67. In the circumstances of this application, it is sufficient, in order to attract the provisions of sec. 25, that a profit-making purpose existed at the time of acquisition and that the sale was envisaged as being part of the overall business operation.

68. Applying these principles of law to the present application, we are of the view that the acquisition of the subject property by the applicant had at least as one of its purposes the holding of the subject property with the intention of making a profit by resale at such time as it became ``ripe'' for subdivision. The fact that any future subdivision may not have been performed by the applicant does not mean that there was not a profit-making motive as part of the intentions of the applicant at the time of its purchase and thereafter. We therefore consider that the eventual sale of a portion of the subject property by compulsory acquisition, which acquisition gave rise to a profit was profit obtained by the applicant in carrying out a scheme which included a plan of profit-making by sale at an appropriate time. There is no doubt that the applicant was also carrying out a business operation in relation to the property, namely, the sale of sand. The only asset of the applicant company was the subject property which was being used by the exploitation of its sand, which exploitation was also compatible with a future plan for its sale for profit-making. In this situation, we consider that the applicant was engaged in a business, part of which related to the sale of the land for profit. In these circumstances, the surplus represents income according to normal concepts and usages and is thus assessable income in terms of sec. 25 of the Act.

69. The final matter requiring our determination relates to the question of whether the final instalment of $130,000 should be brought to account in calculating the profit derived during the 1980 year of income. It is notable that such amount (less legal and valuation fees) was received by the applicant six months after the close of that year and that as at 30 June 1980, any further advancement was no more than a contingency. The assessment of income tax is an annual event and in our view, the measure of taxable income should be based on the position as it existed at the close of the particular year under consideration. As at 30 June 1980, no debt or financial obligation existed, thus our conclusion is that the amount of $128,770 received in December 1980 should be excluded from the calculations which relate to the year under review.

70. As between the parties, it was agreed that the cost of the land sold (50 acres) should be apportioned according to the overall area acquired (93 acres). On this basis, the profit derived in the 1980 year of income is, in our opinion, calculated in the following manner:

                                          $
      Consideration received           370,000
      Less charges                         414
                                       -------
                                       369,586

      Less costs -

      4,000 x 50/93                      2,151
                                      --------
      Profit:                         $367,435
                                      --------
      

71. It is convenient that we now refer to two additional submissions made by counsel for the applicant, the first of which relates to a suggested relationship between the first and second limbs of sec. 26(a). He contended that the second limb has no role independent of the first, and that a finding of no predominant profit-making purpose as required in terms of the first limb is conclusive against the operation of the second limb. Counsel for the applicant referred to the decision of the High Court in
Burnside v. F.C. of T. 77 ATC 4588 as authority for that proposition. In that decision, after concluding that a profit resulting from the sale of shares in a mining company was not

---

ATC 355

caught in terms of the first limb, Mason J. (as he then was) made the following comment at p. 4594:

``In the first place, where the profit in question arises from the purchase and subsequent sale of an asset and it is found that the asset was not acquired for the purpose of profit-making by sale it is very difficult to see how the profit can be said to arise from a profit-making undertaking or scheme (see
McGuiness v. F.C. of T. 72 ATC 4023; (1972) 46 A.L.J.R. 279). In this case the difficulty becomes insurmountable because the finding in connection with the first limb of sec. 26(a) denies the existence of the relevant profit-making undertaking or scheme which is alleged to bring the profit within the second limb.''

72. In our opinion, the views expressed by the learned Judge are no more than a repeat of the requirement that profit-making is an essential element to the operation of the second limb. In the current reference, our finding is that profit-making by sale was one of the purposes of the applicant and on that basis, we consider it inappropriate to apply the reasoning of Mason J. to the circumstances of this application. The question of dual purpose was considered by the High Court in
London Australia Investment Co. Ltd. v. F.C. of T. 77 ATC 4398, and we adopt the following statement made by Jacobs J. at p. 4410:

``If a man makes a business of acquiring property with a dual purpose of enjoying it or its profits and of reselling it eventually at a higher price than he paid for it, then not only the income from the property but also the profit on resale will be income in the ordinary sense of the term, and within the second limb of sec. 26(a).''

73. The other submission made by counsel for the applicant related to the quantum of the profit resulting from the disposal and, more particularly, to whether the amount to be deducted from the proceeds should be a proportionate share of the cost of the property or a figure of $200,000 which represented the value of the asset in 1973 and which resulted in the creation of an Asset Revaluation Reserve Account from which a bonus issue of shares had been made to shareholders. In our view, profit is the product of deducting actual costs from proceeds and we are not able to comprehend any reason for a diversion from that formula.

74. For these reasons, therefore, we vary the decision of the Commissioner on the objection in the following manner:

• (1) as per the Commissioner's concession, the additional tax of $185,172 be remitted in full;
• (2) the profit on the disposal of the 50 acres be brought to account as assessable income to the extent of $367,435.