FC of T v HYTECO HIRING PTY LIMITED

Members: Black CJ
Wilcox J

Hill J

Tribunal:
Full Federal Court

Decision date: Judgment handed down 27 October 1992

---

Hill J

The appellant, the Commissioner of Taxation, appeals against the judgment of a judge of this Court (Beaumont J), setting aside the decisions made by the Commissioner to disallow objections to assessments of the income tax of the respondent, Hyteco Hiring Pty Limited (``Hyteco'') for the years of income ended 30 June 1977 to 1979 inclusive and the year of income ended 30 June 1983. At issue is the assessability of certain profits made by Hyteco on the sale by it of forklift trucks used by it in its business of hiring out such trucks.

Hyteco had, since 1967, carried on a business of hiring out forklift trucks to customers. It carried on no separate business of buying and selling such trucks. A company or companies related to it had, however, carried on such a business since at least 1965. In 1973 a related company, Hyteco (NSW) Pty Limited, had acquired the right to distribute ``Hyster'' forklift trucks in New South Wales and the Australian Capital Territory and at the same time Hyteco had acquired from Lawrence Tootill (Hire) Pty Limited (``Tootill'') that company's fleet of forklifts which had been hired out by Tootill. In the years of income in question, 28 of the forklifts sold were forklifts purchased from Tootill (``the Tootill forklifts''). In the majority of cases existing finance leases entered into by Tootill with financiers were taken over by Hyteco.

Although outright purchase was the preferred option, other forklift trucks (some of which had been part of the Tootill fleet and others of which had been purchased new from Hyteco's related sales companies) were leased by Hyteco from a financier. Forklift trucks were only obtained under lease financing where a lack of available funds forced Hyteco to secure such financing. The finance leases were usually for a term of five years and provided for a residual value of 20 percent of cost. At least in the majority of cases, the residual value was greater than the market value of the forklift at the expiration of the finance lease. At that time Hyteco would either purchase the forklift from the financier at the residual value or enter into a further leasing arrangement.

A Mr Jacobs, who had been Hyteco's Rental manager for its New South Wales Division since 1976 and General Manager of that division in 1984 and 1985 (and whom his Honour described as an ``honest and reliable witness''), deposed that Hyteco would purchase forklifts at the expiration of the finance leases not because by so doing Hyteco would acquire an asset which it could, if it wished, immediately sell for a higher price, but because at the end of the lease the trucks were five years old and could be let out for hire for another four or five years and earn rental revenue.

The judge below found that Hyteco's policy was to make new or, occasionally, as new, forklifts available for long-term hiring. The rental on such hirings was calculated so as to return between 20 percent and 30 percent on funds invested. For casual or short-term hire the applicant employed second-hand or used trucks. At the expiration of a long-term hire, Hyteco would decide whether the forklift so hired should be available for rehire long-term, available for hire on a casual, short-term basis, or whether it was unsuitable for further hiring and should be disposed of. Hyteco's experience was that the average useful hiring life of a forklift was in the range from five to eight years, although examples were given of a hiring life up to 15 years. On a few occasions when a lease was paid out by Hyteco paying the residual value, the truck the subject of the lease might be sold soon after. Such a case was, however, referred to in the judgment below as ``exceptional''.

The decision whether a forklift should be rehired or disposed of was based upon an assessment as to the likely reliability of the truck. Factors taken into account were the physical condition of the truck, ie its age, general state of repair, its load capacity, the availability of spare parts, the estimated amount of time that would have to be spent on maintenance and repairs on the truck on a monthly basis, its fuel efficiency and its ease of operation. Also relevant was the current state of demand for casual hiring of trucks of that type. There may have been occasions when trucks were disposed of because they were surplus to Hyteco's requirements.

It was, naturally, conceded that inevitably a time would come when a forklift truck would

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ATC 4697

need to be disposed of. Once that decision was made, the trucks were disposed of for the benefit of Hyteco by the related corporation, Hyteco (NSW) Pty Ltd, a company whose business it was to sell new and second-hand forklift trucks. In no case did the sale price received by Hyteco exceed the original cost of the forklift as a new truck. In the case of the sales which formed the basis of the assessment, however, the sale prices exceeded the original cost to Hyteco of the trucks. It may be inferred that this most likely came about where the truck was acquired for the residual value under a finance lease.

The judgment appealed from

From the primary facts, which were not in dispute, his Honour was of the view that the evidence as a whole justified the conclusion that Hyteco was carrying on a business of hiring out forklifts rather than a business of hiring out forklifts and selling them. The forklifts were fixed assets of the applicant, not part of its trading stock. After reviewing a number of authorities which his Honour found to be in point, especially,
FC of T v The Myer Emporium Ltd 87 ATC 4363 ; (1987) 163 CLR 199 ;
London Australia Investment Co Ltd v FC of T 77 ATC 4398 ; (1976-1977) 138 CLR 106 ;
Memorex Pty Ltd v FC of T 87 ATC 5034 ; (1987) 77 ALR 299 and
FC of T v GKN Kwikform Services Pty Ltd 91 ATC 4336 , his Honour concluded that the profit accruing to Hyteco in the sales in question was not income in accordance with the ordinary concepts of mankind assessable under s. 25(1) of the Income Tax Assessment Act 1936 (``the Act'') and allowed Hyteco's appeal accordingly. His Honour also rejected arguments advanced by the Commissioner, based upon the provisions of s. 26(a) and s. 26AAA of the Act. These arguments were not advanced before us, although amended notices of appeal filed by leave in court at the commencement of the appeal continued to deal with them. As no argument was addressed to them, it is unnecessary to deal with them.

The submissions of the Commissioner

The Commissioner founded his submissions upon a passage in my judgment in
Westfield Ltd v FC of T 91 ATC 4234 ; (1991) 28 FCR 333 , a judgment with which the other members of the Court in that case (Lockhart and Gummow JJ) agreed. After referring, inter alia , to Myer , I said (at ATC 4242; FCR 342-343):

``In a case where the transaction, which gives rise to the profit, is itself a part of the ordinary business (eg a profit on the sale of shares made by a share trader), the identification of the business activity itself will stamp the transaction as one having a profit-making purpose. Similarly, where the transaction is an ordinary incident of the business activity of the taxpayer, albeit not directly its main business activity, the same can be said. The profit-making purpose can be inferred from the association of the transaction of purchase and sale with that business activity. The cases of profits and losses of insurance companies and banks are examples...''

It was submitted in the present case that, while it may be accepted that the main business activity of Hyteco was the leasing of forklift trucks to its customers, nevertheless, the sale of the trucks at the time they had become unsuitable for further hiring and a decision had been made to dispose of them was an ordinary incident of the business activity of Hyteco, such that the profits made on such sales would be income in accordance with the ordinary concepts of mankind and so made assessable income in accordance with s. 25(1) of the Act. In what may perhaps have been an alternative way of advancing the same submission, the Commissioner contended that, on a proper analysis of the evidence, the business of Hyteco included the obtaining of income from the sale of forklifts at a time most advantageous to Hyteco. So, it was submitted, his Honour had erred in characterising the business of Hyteco simply as that of hiring out forklifts.

In support of these submissions, senior counsel for the Commissioner pointed to the impact of the profits made on the sale of forklift trucks on Hyteco's overall profit in the years in question, the regularity with which these profits were made and the fact that the profits were substantial and, so it was said, essential to the profitable conduct of Hyteco's business. Figures were extracted from the evidence and set out in the Commissioner's outline of submissions which it was submitted showed that the profits on the sale of forklifts accounted for a large proportion (or all) of Hyteco's profits as disclosed in its accounts. The figures so extracted were as follows:

        



         +-----------------------------------------------------+

         | Year | Net Profits (A) | Sale Profits | Profit/Loss |

         |      |                 |     (B)      | other activ-|

         |      |                 |              | ties (A-B)  |

         |------|-----------------|--------------|-------------|

         | 1977 |   $230,129*     |    $81,985   |   $148,144  |

         |------|-----------------|--------------|-------------|

         | 1978 |   $211,287      |   $142,608   |    $68,579  |

         |------|-----------------|--------------|-------------|

         | 1979 |   $438,493      |   $219,489   |    $219,004 |

         |------|-----------------|--------------|-------------|

         | 1983 |   $ 19,517      |   $140,065   |  ($120,548) |

         +-----------------------------------------------------+

         *After adjustment of $7,158 Future Income Tax Benefits.



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

With respect to the Commissioner, the table as reproduced hardly compares like with like. The ``Profit/Loss on other activities'' is calculated by throwing all the costs of the business, including, inter alia , depreciation of the trucks, against the rental receipts. In consequence, the comparison is distorted. A comparison of the gross receipts from the sale of the trucks and the gross income from the hiring out of the trucks put forward by the taxpayer suffers from not taking into account the specific historical cost of the trucks and is, in my view, similarly unhelpful. This comparison was as follows:

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



+------------------------------------------------------------------+

|       |      A       |     B      |       C       |       D      |

|-------|--------------|------------|---------------|--------------|

| Year  | Gross Income |   Gross    |Total of A + B |   B as a     |

|       |              |  Receipts  |               | proportion of|

|       |              |  from sale |               |   A + B      |

|       |              | of relevant|               |              |

|       |              |   trucks   |               |              |

|-------|--------------|------------|---------------|--------------|

| 1977  |  1,992,647   |   162,750  |   2,155,397   |     7.55%    |

|-------|--------------|------------|---------------|--------------|

| 1978  |  1,964,802   |   265,587  |   2,230,389   |     11.9%    |

|-------|--------------|------------|---------------|--------------|

| 1979  |  2,024,910   |   389,105  |   2,414,015   |     16.12%   |

|-------|--------------|------------|---------------|--------------|

| 1983  |  3,731,655   |   332,500  |   4,064,155   |      8.18%   |

+------------------------------------------------------------------+



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

A useful perspective of the significance of the sales to Hyteco's business is perhaps to be found in a comparison of the number of trucks sold in a year with the number of trucks the subject of depreciation at the end of that year. This table reveals the following information:

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



   +--------------------------------------------------------------+

   | YEAR |    NO. OF TRUCKS SOLD     | NO. OF TRUCKS DEPRECIATED |

   |      |                           |         (APPROX.)         |

   |      |                           | (excluding trucks still   |

   |      |                           |      under lease)         |

   |------|---------------------------|---------------------------|

   | 1977 | 26 (21 Leased, 5 Tootill) |            282            |

   |------|---------------------------|---------------------------|

   | 1978 | 46 (38 Leased, 8 Tootill) |            308            |

   |------|---------------------------|---------------------------|

   | 1979 | 59 (44 Leased, 15 Tootill)|            319            |

   |------|---------------------------|---------------------------|

   | 1983 | 31 (All Leased)           |            378            |

   +--------------------------------------------------------------+
      

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ATC 4699

Whether the profits were income in ordinary concepts

No case concerned with the characterisation of profits as income or capital is complete without reference to the well known comments of the Lord Justice Clerk (the Right Honourable JHA MacDonald) in
Californian Copper Syndicate v Harris (1904) 5 TC 159 at 165-166 :

``It is quite a well-settled principle in dealing with questions of assessment of Income Tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit in the sense of Sch.D of the Income Tax Act of 1842 assessable to income tax. But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable, where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business.''

An alternative formulation of the same test appears later in the same judgment in the following terms:

``Is the sum of gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operation of business in carrying out a scheme for profit-making?''

Each of these formulations emphasises that which underlies the common understanding of the notion income, namely, that a business profit will be income. It does not, of course, follow from this that non-business profits can never be income. A profit on the sale of assets acquired for the purpose of profit-making will be income, albeit that the acquirer carries on no business, if the transaction giving rise to the gain has the character of a business deal and is made in carrying out a scheme of profit- making.

The formulation in Californian Copper has been adopted in Australia in London Australia and in Myer. In the context of determining whether a profit is a business profit and for that reason income, it is, as is well recognised, necessary to make ``a wide survey and an exact scrutiny of the taxpayer's activities'': see
Western Gold Mines NL v FC of T (W.A.) (1938) 59 CLR 729 at 740 ; London Australia at 116;
GP International Pipecoaters Pty Ltd v FC of T 90 ATC 4413 at 4420 ; (1990) 170 CLR 124 at 138 . That survey his Honour undertook in concluding that the business of Hyteco was the leasing of forklift trucks to customers. On the evidence it would have been erroneous to characterise the business as being both the hiring of forklift trucks and the sale of such trucks. The trucks were not purchased for the purpose of sale but for the purpose of leasing them out. This is so, notwithstanding that the sale of trucks no longer suitable for leasing can be said to have been inevitable or, at least, the only alternative to scrapping them when their useful life was over.

In Myer , the High Court was concerned with a transaction said to be outside the ordinary course of business. In the course of its judgment the Court said (at ATC 4366-4367; CLR 209-210):

``Although it is well settled that a profit or gain made in the ordinary course of carrying on a business constitutes income, it does not follow that a profit or gain made in a transaction entered into otherwise than in the ordinary course of carrying on the taxpayer's business is not income. Because a business is carried on with a view to profit, a gain made in the ordinary course of carrying on the business is invested with the profit- making purpose, thereby stamping the profit with the character of income. But a gain made otherwise than in the ordinary course of carrying on the business which nevertheless arises from a transaction entered into by the taxpayer with the intention or purpose of making a profit or gain may well constitute income. Whether it does depends very much on the circumstances of the case. Generally speaking, however, it may be said that if the circumstances are such as to give rise to the inference that the taxpayer's intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer's business. Nor does the fact that a profit or gain is made as the result of an isolated venture or a `one-off' transaction preclude it from being properly characterized as income (
F.C. of T. v. Whitfords Beach Pty. Ltd. 82 ATC 4031 at

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ATC 4700

pp 4036-4037, 4042; (1982) 150 C.L.R. 355 at pp 366-367, 376 ).''

The present is not a case where it may be inferred that in acquiring the trucks Hyteco's intention or purpose was to make a profit by the resale of the trucks. This being the case, the profits made will be income only if made in the ordinary course of carrying on Hyteco's business.

It might be added that neither regularity nor the scale of profits compel the result on the facts of the present case that the profits are income in ordinary concepts. While regularity of receipt may often indicate that particular amounts have the character of income, (cf
FC of T v Dixon (1952) 86 CLR 540 at 557 ), mere regularity on its own will seldom be determinative. The donee of gifts at Christmas and at birthdays may receive those gifts regularly, but the gifts would scarcely be regarded for that reason as income. Something more is required, such as that the receipts be intended by the payer to be used by the recipient for regular expenditure and be relied upon by the recipient: cf
FC of T v Harris 80 ATC 4238 . Likewise, a single payment may, in a particular case, be income, notwithstanding that it be not repeated: cf
Smith v FC of T 87 ATC 4742 ; (1988) 164 CLR 513 . Regularity will be relevant, but not determinative of the question. In particular, regularity may be an indicator in a particular fact situation that a business is being carried on and in the result that the proceeds of that business are income: see, eg,
Hope v Bathurst City Council 80 ATC 4386 at 4390; (1980) 144 CLR 1 at 9 . That, however, is not the situation here.

Nor can the magnitude of the profits made have great relevance to the characterisation of those profits as having the character of income. The profits made by the taxpayer in AGC
(Investments) Ltd v FC of T 92 ATC 4239 were very large (indeed in the 1986 year, $9,889,457) yet were held not to be of an income nature. See too
Commissioner of Taxes v British Australian Wool Realization Association Ltd [1931] AC 224 at 252 .

As I sought to emphasise in Westfield , the words ``in the ordinary course of business'' must be understood in their context. In particular, it does not follow from these words, as used by the High Court in Myer , that every gain made by a taxpayer carrying on a business and which has some relationship to that business will be taxable. To so hold would be to destroy completely the distinction between capital and income, blurred though such a distinction may sometimes be. In Westfield I said (at ATC 4241-4242; FCR 342):

``It does not, however, follow from the judgment in Myer , or, for that matter, from the judgments in any later cases, that every profit made by a taxpayer in the course of his business activity will be of an income nature. To so express the proposition is to express it too widely, and to eliminate the distinction between an income and a capital profit. A taxpayer carrying on a business might sell its headquarters in order to move to larger premises and make a profit over historical cost. The transaction of sale may be one which arises in the ordinary course of the taxpayer's business, but that profit will not ordinarily be income...

When in Myer the High Court spoke of profits made in the ordinary course of business, their Honours were not speaking in a temporal sense.''

We were referred to a number of cases involving sales of items which, at some stage in their useful life, had been plant and which had been the subject of depreciation, but which subsequently had been sold at a profit. While a consideration of these cases is not unhelpful, it must be borne in mind that the resolution of each case ultimately depended upon its own facts.

Reference was made by senior counsel for the Commissioner to the decision of the House of Lords in
Gloucester Railway Carriage and Wagon Company Limited v Commissioners of Inland Revenue [1925] AC 469 . The taxpayer in that case carried on the business of manufacturing railway wagons and of selling and letting out on hire those and other wagons purchased by them. Wagons let out for hire and depreciated in the taxpayer's books were sold at sums larger than the amounts at which those wagons were held in the taxpayer's books. The decision to sell the wagons was made as a result of a conclusion that it would be more profitable to sell all the wagons which the taxpayer was using for hiring. The Commissioners of Inland Revenue had found that the business of the company was a single business, namely to make a profit in one way or another out of manufacturing wagons, a finding not open to attack in the courts, unless it involved an error

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ATC 4701

of law. It was held that the ``profit'' was not a capital profit. In giving the judgment, concurred in by Viscount Cave LC, Lord Atkinson, Lord Sumner and Lord Buckmaster, Lord Dunedin said (at 474-475):

``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.''

It is clear that the result of the case depended upon the finding that the taxpayer was in the business of buying and selling carriages. In that respect it differs markedly from the facts of the present case. The case clearly enough does not stand for the proposition that sales of depreciated plant at prices greater than the cost of that plant by a taxpayer who has let that plant out for hire will always be income. So much is made evident by the comment which follows the passage cited above (at 475):

``There is no similarity whatever between these wagons and plant in the proper sense, eg, 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.''

There have been three decisions of full courts of this Court which may be thought to be relevant to the present problem. We were taken to each of them.

The first is
FC of T v Cyclone Scaffolding Pty Ltd 87 ATC 5083 ; (1987) 77 ALR 319 . In that case the taxpayer's main business was found to be the hiring out of scaffolding. Although it did sell equipment, sale was the exception. The case turned substantially, if not exclusively, in the view of Bowen CJ and Beaumont J, upon the question whether the accounting procedure adopted by the taxpayer (which consisted of treating scaffolding initially as if it were trading stock and, if not sold after the first year, thereafter as plant or fixed assets) gave a true reflex of its income, an issue not presently relevant. Wilcox J, dissenting, did not regard the accounting treatment as conclusive and was of the view that the profit made by the taxpayer had the character of income. In so doing his Honour found that the gains in question were made in the ordinary course of the taxpayer's business. In his Honour's view the facts were indistinguishable from those in Memorex Pty Ltd v FC of T 87 ATC 5034; (1987) 77 ALR 299, to which I will shortly turn.

It is apparent, however, that the majority were of the view on the facts of that case that, if the scaffolding was properly to be treated as plant, the profits made by the taxpayer were not income in ordinary concepts. Their Honours said (at ATC 5089; ALR 325):

``They [ie the transactions] should be seen as part of the whole scheme of the taxpayer's treatment of its activities. So regarded, the sales in question are treated as the disposal of part of the taxpayer's profit- making apparatus and thus of fixed assets. Any profit thus accruing is on capital, not revenue account .''

(emphasis added).

Judgment in Memorex was given shortly before that in Cyclone Scaffolding. The taxpayer in Memorex was carrying on a business of selling outright computer equipment. It also leased equipment to its customers, sometimes selling the goods to the customer at the end of the leases, sometimes leasing them and again sometimes scrapping or sending them overseas to an associated company. In these circumstances, the court upheld the conclusion, arrived at by the Administrative Appeals Tribunal, that profits made on the sale of the equipment were income in ordinary concepts. In so holding, the court applied, inter alia , the principles enunciated in Californian Copper and London Australia. The Tribunal had found that the sales generating the profits in question were no different from the other sales made by the taxpayer, all being designed to turn to account and profit from the equipment. All the transactions were, in the view of the Tribunal, an integral part of the taxpayer's business to deal in computer equipment. This crucial finding was not disturbed.

In Cyclone Scaffolding , the majority sought to distinguish Memorex in the following passage (at ATC 5090; ALR 326):

``It was there held that the goods supplied by that taxpayer were not part of its fixed assets at the relevant date... Here, the position is different. Under this taxpayer's accounting method, equipment is treated as if it were trading stock in the first instance and, after the first year, as plant or fixed assets. As has been said, the inquiry is one as to the appropriateness of the suggested

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ATC 4702

method... We do not, however, suggest that such a method would have been appropriate on the facts in Memorex . By the same token, the decision and reasoning in Memorex cannot be applied here.''

The reference cited for the proposition, in the first sentence quoted, is probably to the following passage from the judgment of Davies and Einfeld JJ (at ATC 5044; ALR 310), which is pertinent to the facts of the present case:

``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.

...

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.''

The final case, to which reference should be made, is FC of T v GKN Kwikform Services Pty Ltd 91 ATC 4336. Like the taxpayer in Cyclone Scaffolding , the taxpayer in GKN Kwikform hired out scaffolding. No question of consistency of accounting treatment arose as it had in Cyclone Scaffolding. Under hiring agreements entered into by the taxpayer, a hirer was obliged on termination of the hire to pay to the taxpayer an amount sufficient to cover all losses at the then current list price for lost items. The amount included in assessable income of the taxpayer, referred to in the judgment as ``Services'', was concerned with the profits which Davies J described (at 4338) as:

``the inevitable and known consequence that the compensation received for short-returns would be greater than the cost price to Services of the goods which were hired.''

In one sense, it was not necessary to regard the amounts received by the taxpayer as profit from the sale of scaffolding. There was no separate bargain and sale between the taxpayer and its customer which brought about the receipt; the amount received was not, in a strict sense, the sale price of the scaffolding. Rather, the amount received was in the nature of an amount agreed upon between the parties as a genuine pre-estimate of the loss occasioned to the taxpayer by the non-return of scaffolding hired and the profit component was as much part of the proceeds of the hiring business as were the hiring fees paid by the customers. This was the basis for the decision of Beaumont J (see at 4341-4342) with whose judgment, it would seem, O'Loughlin J agreed. Beaumont J did not find it necessary to decide what result would have followed if scaffolding hired had in fact been contracted to be sold to the hirer. For this reason his Honour regarded both Cyclone Scaffolding and Memorex as distinguishable.

Davies J, with whose judgment it would seem O'Loughlin J also agreed, appears to have taken a similar view, when (at 4338) his Honour referred to the fact that:

``profit-making resulting from the enforcement of the compensation clause was a regular incident of Services' business of hiring out scaffolding.''

Referring to Memorex , his Honour said:

``The present is a clearer case even than Memorex Pty Ltd v. FC of T 87 ATC 5034; (1987) 77 A.L.R. 299, in which the judgment went against the taxpayer. In the present case, there is no doubt that what occurred was a regular and ordinary incident of Services' business. In Memorex , it was necessary to examine the facts and to pay regard to what was said in cases such as
Gloucester Railway Carriage & Wagon Co. Ltd. v Inland Revenue Commissioners [1925] A.C. 469 before coming to that conclusion. Once that finding had been made, the Court considered that the profit derived was assessable in accordance with the principle enunciated in Californian Copper Syndicate Ltd v. Harris (1904) 5 T.C. 159 and the many decisions of the High Court of Australia applying that principle.''

The present case is clearly distinguishable from GKN Kwikform. The profit in question in the present case was not inevitable; nor did it arise as part of the leasing transaction itself. What the present case is concerned with is a profit arising on a sale to third parties of the very apparatus with which the taxpayer conducted its business, not a profit from the process by which the taxpayer operated to obtain regular returns by means of regular outlays: cf Sun Newspapers Ltd & Associated Newspapers Ltd v FC of T (1938) 5 ATD 87 at 93; (1938) 61 CLR 337 at 359; GKN Kwikform

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ATC 4703

at 4339. It is a profit of a capital nature and not a revenue profit.

The courts in New Zealand and Canada have taken a similar view. In
Rank Xerox (NZ) Ltd v Commissioner of Inland Revenue (1982) 6 TRNZ 1 , profits from the sale of copying machines and duplicating equipment sold ex- hire after the taxpayer had extended his business to include the selling of equipment both new and second-hand were held to be taxable as profits or gains of a business. It is important to note, however, that the profit was required to be calculated by taking into account the market value of the equipment at the date of transfer, not the initial purchase price. This reflects the acceptance that the goods hired out were capital assets, until the decision to sell them was made. Any gain or loss from the time of acquisition until the decision to sell would thus have been on capital account.

In
Anthes Equipment Ltd v The Minister of National Revenue 87 DTC 59 , sales by a company which rented out scaffolding and shoring for construction and renovation projects and which sold that equipment when its usefulness had become exhausted by wear and tear or when it had become technically obsolete, were held to be on capital account. However, sales of equipment from the rental inventory to customers were treated differently and it was held that the profits on these sales were taxable on the basis that the taxpayer was in the business of selling that equipment. In so holding the Canadian Tax Court followed, inter alia ,
Canadian Kodak Sales Ltd v The Minister of National Revenue 54 DTC 1194 where the profits on sale of ex-leased equipment was held taxable, but only where the vendor was also carrying on a business of selling that equipment.

It is necessary before concluding this judgment to return to the initial passage cited in Westfield. In that passage I referred to the case where a transaction was an ordinary incident of the business activity of a taxpayer, albeit not directly its main business activity. Reference was then made to the insurance and banking cases by way of example. These cases I have discussed in some detail in
FC of T v Employers' Mutual Indemnity Association Ltd 90 ATC 4787 at 4796-4801 . A subsequent appeal brought in that case was dismissed by the full court (see
Employers' Mutual Indemnity Association Limited v FC of T 91 ATC 4850 ). The banking and insurance cases are discussed in the same case in the judgment of Sheppard J at 4852, Burchett J at 4855-4857 and Gummow J at 4860-4861. Reference may also be made to the judgment of Pincus J in
FC of T v Equitable Life and General Insurance Co Ltd ; Equitable Life and General Insurance Co Ltd v FC of T 90 ATC 4438 at 4456 . Although that was a dissenting judgment, the discussion cited is not affected (see per Gummow J in Employers' Mutual at 4864).

The business of banking and the business of insurance both require those who engage in them to invest cash received on deposit or by way of premiums and surplus to the immediate needs of the business, so as to provide for interest, or certain or expected payouts of benefits or claims. The moneys so invested form part of the circulating capital of the business and the investment is so integrally related to the business that it may truly be said that the act of realising those investments is an act done in the carrying on of the banking or insurance business: cf
Punjab Co-operative Bank Ltd, Amritsar v Commissioner of Income Tax, Lahore [1940] AC 1055 at 1073 . The money held by a bank or insurance company for this purpose is at least analogous to its trading stock.

It has been made clear by Gibbs J, as he then was, in London Australia (at 118) that the banking and insurance cases do not reflect a distinct and separate line of authority. They are, rather, but examples of the principle enunciated in Californian Copper. That being so, it may perhaps be misleading to treat the insurance and banking cases as a separate category of case where the main business of the company (banking or insurance) is treated as distinct from the business activity which is, however, closely associated to it (the making and realising of investments). It may well be that the proper characterisation of a banking business, for example, is both banking and investing. But whatever be the correct characterisation of a banking or insurance business, the making and realising of investments is so integral to the banking or insurance business that a profit on realisation will form part of the income of banking or insurance business. It is in that sense that I said in Westfield that the profit-making purpose inherent in the realisation can be inferred from the association of the investment activity to the

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ATC 4704

main business activity. There may be examples, other than banking and insurance, where the same result follows, not as a matter of law but as a matter of fact. However, in the sense in which I used the words in Westfield , the sale of forklift trucks at a profit is not an ordinary incident of the business activity of a company hiring out such trucks, any more than the sale of redundant typewriters or word processing equipment is an ordinary incident of the business of a solicitor or accountant.

I would dismiss the appeal and order that the Commissioner pay the respondent's costs of it.