APPEAL pursuant to s.187 of the Income Tax Assessment Act 1936-1965 (Cth).

WINDEYER J. delivered the following written judgment:-

These are three appeals by a taxpayer company against assessments of income question is whether the proceeds of sales by the company of land, and of land and buildings, at Coolangatta in Queensland was assessable income. I heard the appeals together. They all relate to dealings by the taxpayer with land which it purchased in 1963. The first two of the three appeals (Nos. 6 and 7 of 1964) arise as a result of a sale of part of that land to Esso Standard Oil (Australia) Limited for a motor vehicle service station. This sale was made in June 1964. The taxpayer company in its income tax return for that year shewed a loss. It brought nothing in in respect of the sale to Esso. The Commissioner, accepting the position that there was a loss, did not assess the company to tax in respect of that year. But later, as a result of an investigation his officers conducted, he formed the opinion that the taxpayer's transaction with Esso had produced assessable income. Therefore he disallowed the alleged loss to be carried forward and taken into account in the next year. The details of this do not matter. The result is simply that appeals Nos. 6 and 7, although in respect of different income tax years, turn on the same question arising from the same facts - the consequences for taxation purposes of the sale to Esso. Did it result in a profit in the nature of income? The third appeal concerns the proceeds of sales by the taxpayer company to four separate buyers of four shops it had built in 1965 on part of the land it had purchased in 1963. (at p121)

2. I heard these appeals immediately after I heard and had reserved my judgment in two appeals (Nos. 4 and 5 of 1969) by Bernard Elsey, a taxpayer, against assessments of his income. In my judgment in those appeals, which I shall deliver with this judgment, I have set out some matters which form a general background of all the cases. I shall not repeat all of that, as this judgment and my judgment in those appeals [1969] HCA 48; (1969) 121 CLR 99 , which I shall refer to as the last case, can be read together. (at p121)

3. The company Bernard Elsey Pty. Limited was formed in 1951 by Mr. Bernard Elsey, whom I shall for convenience call simply Elsey. The company then carried on a radio business at Toowoomba. This business was given up in 1956, and the company was thereafter inactive until it entered into the transactions out of which this case arises. It was, however, still in existence; and when the present story begins it was there, a legal person ready and waiting to be used by Elsey for his purposes. He and a Mr. J. F. McConachie of Toowoomba, an accountant who was his taxation agent, were at all relevant times directors of the company. They were the only shareholders, Elsey having nine hundred and ninety-five shares and McConachie five shares. Elsey was in complete control of the company's business. The company existed simply to do his bidding and to alleviate his liabilities. Indeed it was for him really only a name of convenience: he personally carried out the undertakings of the company with which this case is concerned. I assume that these undertakings were all within the powers the company had under its memorandum of association. When the purpose with which it entered into business transactions is to be considered, it is Elsey's purpose that is meant. (at p121)

4. His mind was the company's mind. Indeed when speaking of the affairs and transactions of the company he did so in the first person, regarding all its affairs and transactions as his. (at p121)

5. The story begins with a purchase Elsey made in 1963 of land for a motel at Coolangatta - the transfer being, at McConachie's suggestion, taken in the name of the company. This purchase occurred within a month of Elsey's purchase of the land at Surfers Paradise on which his motel known as "Tiki Village" was to be built. Elsey's plans and purposes for a motel at Surfers Paradise were, in essentials, matched by his company's plans and purposes for a motel at Coolangatta. I have in my judgment in the last case described how he had become taken with the idea of a motel in the same building as or alongside a service station. He saw an opportunity of acquiring a site suitable for his purpose at what may be called the entrance to the Gold Coast at Coolangatta. This occurred when a stretch of the old railway land there was advertised for sale by public auction on 28th September 1963. The land was bounded by Griffith Street, the main highway there from the New South WalesQueensland border. The old railway land and Griffith Street there run approximately from east to west. I shall for convenience refer to the end of the land in question which is nearest the border as the eastern end. Between it and the border there was a further stretch of the old railway land which was at a later date purchased by Elsey. This was the land which it was suggested should be a park, that I had to consider in the last case. The land now in question was numbered, from its western end, as lots 1 to 17. The centre part of it, lot 11, was low-lying, wet and swampy. Lots 12 to 17 at the eastern end were on higher ground. Elsey, when he learnt of the intended sale, had his eye on this part. He discussed his plan with Mr. R. A. Gardiner, a representative of the Caltex company. Mr. Gardiner was called as a witness. An answer he gave in cross-examination explained Elsey's idea:

"Mr. Elsey has always believed, one of the theories that

business brings business. He believes in destination point:

and if you can get people to arrive at a destination point

where they can get a bed, a meal, and get their car serviced,

they will work hand in glove."

Elsey thought that a motel at the entrance to the Gold Coast, the first motel in Queensland, could be made a likely destination for travellers from the south. The difficulty was that lots 12 to 17 were not in all a large area. They were apparently planned as separate shop sites, being in a locality zoned in the city plan for commercial use. They had frontages of only 21 feet each to Griffith Street, with varying depths, all less than 100 feet. The total area was barely sufficient, according to the Caltex company's requirements, for a service station. Elsey, however, was persistent in his proposal. It was that motel rooms should be built above a service station, and that either the oil company should own the land and lease part of the building to him, or that he financed by a loan from the oil company should build the building and lease it to the oil company. His plans were nebulous but his hopes were earnest. He thought that if the area of lots 12 to 17 was not quite enough for the combined-purpose building he envisaged, their buyer might be able to get a small strip from whoever bought lot 11. Lot 11, the low-lying land, was a large block. It had a frontage of about 343 feet, although by some curious error a figure of only 246 feet had appeared in the brochure advertising the sale. Its depth was 79 feet at its western end and 94 feet on the east where it adjoined lot 12. These measurements are approximate, as I have neglected odd inches and stated them only in feet. (at p123)

6. Elsey attended the auction sale with a view to buying lots 12 to 17. He had arranged with his bank for a temporary overdraft which would enable him to bid up to 20,000 pounds. At the sale the lots at the western end were put up first. Lots 1 to 6, which were firm ground, were bought by the Total oil company which had outbid the Caltex company for them. Lots 7 to 10 were then disposed of. Then the auctioneer put up numbers 11 to 17 together as one lot. Elsey was surprised at this; but he started the bidding and went up by steps to 28,000 pounds. There had appeared to him to be another bidder; but it seems there was not really and that the auctioneer was merely encouraging Elsey to advance his bids. When he stopped the land was passed in and the auction was brought to an end. However, Mr. Chalk, who was Minister for Transport in the Queensland Government, and who was thus concerned with the sale of the railway land, was present. He approached Elsey and offered him lots 11 to 17 for 32,500 pounds. Elsey readily agreed and signed a contract note then and there. Later he or his company executed a formal contract. Elsey had speedily to seek money to pay for the land, for his arrangement with the bank was only for an overdraft of 20,000 pounds. He was elated with his purchase. The price seemed cheap, as Total had bid 43,500 pounds for lots 1 to 6. He had got a much larger area. He had what he had originally wanted, lots 12 to 17, and also the large lot 11, all for 32,500 pounds. He could entirely recast his plan. If lot 11, or a substantial part of it, could be reclaimed from swamp there would be ample room there for the motel. There would be no need to put it above a service station. That idea, always more attractive apparently to Elsey than to any oil company, could be abandoned. Lots 7 to 12 could be for the service station with a strip of lot 11 added if that were necessary. Excited about this new prospect, he and Miss Collins, who as I have explained in my judgment in the last case was his regular companion in the planning of motels, went to the land late at night after the auction. Lot 11 was too much under water for them to walk over it then; but they walked along its boundary on Griffith Street, pacing out distances and discussing plans. They both gave evidence of this. Miss Collins said:

"We walked along the boundaries of the land and we

marked out by pacing, sort of walked up and down, paced

it out up and down to work out where we were going to put

driveways, the office, the swimming pool, the restaurant,

and that sort of thing."

The service station she said was to go at the eastern end "to hook into the motel". As a result of his pacing Elsey discovered that he had acquired even more land than he had thought. As I have said, lot 11 had in fact a frontage to Griffith Street about 100 feet longer than was shewn in the sale brochure. Two needs faced Elsey. He must borrow money to pay the purchase price of the land. He must make some arrangements for financing the building of the motel. Various negotiations to meet these needs extended over months. Immediately after he had bought the land, Elsey applied to the Gold Coast City Council for approval for the use of two parts of it - one at the western end, the other lots 12 to 17 - as service stations. He had little hope that both proposals would be accepted; and the Council at first would not approve either, perhaps because Total intended to put a service station on lots 1 to 6. However, Elsey pressed his application, and appealed to the Minister for Local Government. In the upshot approval was given, in December 1963, for the use of the eastern part, lots 12 to 17, for a service station. Elsey still hoped to interest Caltex in this land and suggested some form of lease and loan arrangement: but, for one reason or another, Caltex broke off negotiations. In the meantime Elsey had been in touch with Esso also. That company was not interested in a leasing plan. But it was agreeable to buying lots 12 to 17 from Elsey - more accurately from his company - for a service station to be built next door to a motel to be built on lot 11. This is what happened. On 24th June 1964 the taxpayer company sold lots 12 to 17 to Esso for 30,000 pounds for a service station there. The motel - called the Beachcomber Motel, Coolangatta - built and conducted by the taxpayer company, opened in October 1964. The association between the taxpayer's motel at Coolangatta and Esso was later matched by a similar association at Elsey's Tiki Village motel at Surfers Paradise, the story of which I narrated in the last case. (at p125)

7. The Commissioner says that the price obtained by the taxpayer by the sale to Esso of land at Coolangatta contained an element of profit which should be included in the assessable income by virtue of par. (a) of s. 26 of the Act. This was put for the Commissioner in two ways, one on the first branch of par. (a), the other on the second. (at p125)

8. As to the first, it is said that the taxpayer had acquired the land sold to Esso for the purpose of profit-making by sale, and that it sold it for more than it had paid for it: the price of 30,000 pounds represented, the Commissioner said, an average price per perch for lots 12 to 17 which is more than the average price per perch of lots 11 to 17 represented by the purchase price of 32,500 pounds. The proposition thus stated seems to me a compound of fallacies. The evidence does not shew that the taxpayer company acquired lots 12 to 17 for the purpose of selling them. They were bought by Elsey and made over to the company. They were bought along with lot 11. Elsey's purpose throughout was to acquire the whole so that he might have a motel and service station placed in juxtaposition. The negotiations he had with oil companies shew that that purpose could have been achieved to his satisfaction by other means than a sale. Indeed he would have preferred some kind of lease and loan arrangement. And moreover the price of 30,000 pounds was not paid to the taxpayer company for a particular area of land which had been bought for a lower price. What had been bought was a larger area of vacant land for one undivided sum. No part of the sum can by any averaging calculation be attributed to any particular part of what was bought. In the last case, I referred to the errors of this averaging notion. Its inaptness is the more striking in this case. Part of the land, lots 12 to 17, was suitable for building; but the larger part, lot 11, had to be drained and filled before it could be built upon. I can see no basis at all for saying that the total price for the whole area, 32,500 pounds, can be regarded as representing an equal price per perch throughout, for dry land and wet land, or that the cost of filling the low land can be distributed as part of the cost of each perch of the whole area. On the other side of the account supposed, there is also a fallacy. What the taxpayer sold to Esso was not simply an area of vacant land. It was an area of vacant land suitable for a service station adjoining a place where a motel was being built. It is no doubt, as Elsey appreciated, an advantage for a motel to have a service station alongside. It is equally, no doubt, an advantage for a service station to be alongside a motel. The whole circumstances of the sale to Esso were far from a simple case of a sale at a profit of property acquired for profit-making by sale. But, said the Commissioner, if I am turned aside from the first branch of s. 26 (a) I resort to the second branch: the sale to Esso was the carrying out of a profit-making undertaking or scheme. The scheme, it was said, lay in Elsey's obtaining the council's approval for a service station upon the land and thereafter selling it. The approval, it was said, gave the land an enhanced value. Even considered in the abstract, the proposition is unconvincing to my mind. There is no reason to suppose that the oil company would not have been as well able as Elsey to obtain approval for a service station. If the assumption is that the value of the land was enhanced by this approval and the price at which it was sold was thus enhanced and that there was thus a profit arising from carrying out a scheme, then the way in which the Commissioner has calculated the profit seems unrelated to this assumption. But in fact the evidence does not support the idea that the taxpayer company, or Elsey on its behalf, ever had such a simple scheme in mind. The taxpayer's scheme in the mind of Elsey was a much more complex one - to acquire land and build a motel to be alongside a service station - or on top of a service station, as in the earlier stages Elsey contemplated. I reject in this case, as I did in the last case, the proposition that by selling land to Esso for a service station, to be set up adjoining a motel the taxpayer was setting up, the taxpayer made a profit in the nature of a trading profit or a profit answering to either branch of the description in par. (a) of s. 26. The fallacy involved in the manner in which the Commissioner computed the profit which he included in the taxpayer's assessable income by reason of the sale to Esso therefore becomes immaterial. (at p126)

9. I leave now the taxpayer's transactions with lots 12 to 17. They were at the eastern end of its land, where it was intended throughout that the service station would be. I go now to the taxpayer's dealings with the most western part of its land, that is the western end of lot 11. They raise questions of a different sort. (at p126)

10. The motel building when built occupied about three-quarters of lot 11. On its western side a vacant area remained, having a frontage of almost 100 feet to Griffith Street. In 1965 Elsey, acting for, or as, the taxpayer company, had a line of four shops built on a part of this land, having a frontage of about 64 feet to Griffith Street with a depth of about 38 feet. The remainder of lot 11 was kept vacant for access to the shops and as a parking area for the inmates of the motel. These shops were sold by the taxpayer on various dates in late 1965 and early 1966 - one for 8,000 pounds, two for 7,000 pounds, the fourth for 6,500 pounds. The Commissioner's assessment is based on the proposition that the prices which the taxpayer received for the shops contained an element of profit which he again says formed part of the taxpayer's assessable income by virtue of s. 26 (a). This makes it necessary to consider the light shed on the taxpayer's intentions and purposes - which are Elsey's intentions and purposes - by certain events which passed between 28th September 1963 the date when Elsey agreed to buy the land, lots 11 to 17, and the time when the shops were built and sold on part of lot 11. The starting point is Elsey's discovery that he had more land than he thought. Lot 11 had a frontage of about 100 feet more than the sale plan had shewn. Elsey became aware that this seemed to be so when he and Miss Collins made their nocturnal visit to the land after the auction and paced it out along Griffith Street. He went home, studied maps and was satisfied he had more land than was needed for the motel and service station he now had in mind. As soon as he realized this he began to consider how he might advantageously use or dispose of the surplus at the western end. But it cannot be said that this had been "acquired by him for the purpose of profit-making by sale" within the meaning of s. 26. After he had acquired the land he found it was a larger area than he had thought. It cannot be said that a person who acquires something unexpectedly, as Elsey did, acquired it for the purpose of selling it. Elsey's main and dominant purpose throughout was to acquire land on which to set up a motel alongside or above a service station. If the Commissioner's claim with respect to the shops is to be upheld, it must be on the basis of "a profit-making undertaking or scheme" evolved by Elsey after his purchase of lot 11, and carried out by him for the taxpayer company. I need not go through all the evidence given by witnesses in examination and cross-examination. It was detailed and lengthy. I shall state only the inferences which I draw from it and the main conclusions I have reached. (at p127)

11. In 1963 the taxpayer company had no funds or assets. Elsey had therefore to arrange for finance for it to carry out his project. He was not putting in any money himself. He planned to raise what was needed by loans. Negotiations with Caltex proved fruitless. Not until the sale to Esso in June 1964 did the taxpayer gain anything to offset the cost of the land. In the meantime Elsey was pressing on with the building of the motel. Much of lot 11 was filled with soil removed from the higher parts of the land to make it firm and dry. This cost about 5,000 pounds. The taxpayer, through Elsey, borrowed initially 40,000 pounds on mortgage of the land from a finance company, General Credits (Finance) Pty. Limited. Statements which Elsey made to a Mr. Wright, a representative of the finance company, were relied on for the Commissioner. It was said that they shewed that it was always Elsey's intention to sell parts of what had been purchased. The evidence certainly establishes that in extolling the value of the land as a security Elsey made optimistic statements of what he thought parts of it would realize if sold to oil companies and others whom he envisaged as possible purchasers. I have no doubt that he did in one way or another suggest that the taxpayer's debt could be reduced by the sale of so much of the land as was surplus to his requirements for the motel. He made known several possibilities which he had entertained in his mind and some rather indefinite proposals he had discussed. And he seems to have done so as if they had more substance and more probability of fruition than in fact they had. They included a use of the western half of lot 11 as a bus terminal, as another service station and as further motel accommodation to be set up and managed by another proprietor to take, he said, the overflow from his motel. At one stage he handed to Mr. Wright a printed or lithographed plan on which the western part of lot 11 beyond the site of the motel was marked "Land for Sale". When he was faced with this in cross-examination he gave an explanation which on any construction of it was disquietingly unsatisfactory. He said the document was prepared for Mr. Wright to submit it to the head office of the finance company in support of the application for a loan. In his cross-examination this occurred:

"Mr. Row: Do you see on the western end of sub. 11 an

area hatched where it is written 'land for sale'? - Yes.

What did you intend with regard to the land at that time?

- That land could never be sold. I can't impress that enough.

It can't be sold. By law you can't sell it. You have to

provide parking for cars and what was done with the land

always was a plan to try and borrow money.

Why is put thereon the words 'land for sale'? - It could

have been to submit to a finance company, the possibility

of what land could be availed for. They want to know how

much value land is and they have to submit those things to

their head office, and you must give them some sort of proof.

Are not you saying land could not be sold? - Yes.

That statement would be clearly misleading then? - It is

not when you present a proposition to bankers. You must

help them in an endeavour to get your loan through." (at p128)

12. Because of the gravity of the suggestion contained in the questions if left there, I thought I should know precisely what the witness meant to convey. I therefore questioned him myself as follows:

"What you are saying is this, the land is marked as land

for sale? - Yes.

And is marked on a plan prepared apparently for you or

your company? - He would request this to go to his head

office.

You gave it to him? - Yes.

And it had written on it 'Land for sale'? - Yes.

You mean it was not for sale? - No, it never was for sale,

it could not be sold.

I want to be clear, because perhaps you do not appreciate

the gravity of this. - I do.

What you are saying, is, as I understand it - and I want to

be clear in fairness to you if there be some explanation -

that you were tendering a false document with a view to

getting some benefit? - It would be a document asked for

by Mr. Wright.

I do not care about Mr. Wright, but if you knew it was

false you were giving a false document, is that true or untrue?

- It would be a false document, yes."

Elsey reiterated this in re-examination. Speaking of his interview with Wright, he said:

"He said he wanted as much detail as possible to help me

get the loan through, as his company was not very keen on

lending money on the Gold Coast. I had to make it as

attractive as possible, he would do his best to assist it. He

anticipated leaving the company very shortly, he said this

may be the last loan he could put through. I then prepared

that other document for him.

Mr. Kelly: What other document are you referring to?

- That is the one with land for sale on it."

Counsel for the taxpayer in his address adopted Elsey's evidence without any qualification. He said his case was that the statement "Land for Sale" was false. This unmitigated description of it is perhaps unwarranted. Although I am reluctant to say that I do not accept Elsey's testimony given on oath, I do not think that he was speaking the whole truth when he insisted that what was written on the plan he gave to the finance company was altogether untrue. In the hope of advancing his case he repudiated what he had caused to be written. In this he may not have done himself justice. The plan - of which there seems to have been only the one copy, that given to Wright - is not I think to be read as necessarily meaning that the land was being offered for sale. Rather I think that it was meant to indicate to the prospective mortgagee that part of the security offered was vacant land which could be realized. Certainly the document is misleading, and counsel for the Commissioner naturally used it and what Elsey said of it to challenge his credit on other aspects. But I do not think that this really carried the case far. I do not think that because in January 1964 part of the taxpayer's land was shewn in a plan as for sale I am to infer that it was bought for this purpose in September 1963. Nor do I think that the words "Land for Sale", written in January 1964, shew the existence then of a profit-making scheme. The land marked as for sale was never in fact advertised for sale or put in the hands of an agent for sale. A part was sold much later when shops had been built on it. Part remained the property of the taxpayer. (at p130)

13. Was the construction of the shops and the subsequent sales of them the carrying out of a profit-making scheme? If so, did it yield a profit? These are the critical questions. For the Commissioner it was said that they arise under the second branch of s. 26 (a) as an alternative proposition to that which he founded on the first branch. Counsel said that the Commissioner was indifferent to which branch he relied upon, and that he claimed that the amount in question was the same under either. That appears to me to be mistaken. The two branches of s. 26 (a) reflect different economic concepts. They are expressed as alternatives. Sometimes they may overlap, and one be involved in the other. Sometimes they may be equally descriptive of a profit arising in a particular state of facts. But that is not this case. It does not follow that a profit falling within the description of the second branch of s. 26 (a), when that is applicable and the first branch is not, is to be calculated as if the first branch were applicable. (at p130)

14. Once it was apparent to Elsey that he had acquired for the taxpayer more land than was needed for carrying out his project his mind unquestionably went to ways in which he might use the surplus, or dispose of it in some way ancillary or related to, or at least for a use compatible with, the motel business next door. If the surplus land had been simply sold as vacant land, then, since it was not acquired for the purpose of resale, the proceeds would not include any element of income. The transaction would have been the realization of part of a capital asset. If the proceeds of its sale were applied in reduction of the debt incurred for buying land and building a motel, that would not, in my view, have made any difference. I do not think that anything said in Iswera v. Inland Revenue Commissioners (1965) 1 WLR 663 compels some other conclusion. Is there then a difference because what was sold was not one piece of vacant land, a capital asset, but four shops which the taxpayer had built on that land? The taxpayer had not entered upon land jobbing or land developing as a business. As the Chief Justice recently remarked, in White v. Commissioner of Taxation [1968] HCA 41; (1968) 120 CLR 191 , the proceeds of realizing a capital asset are not made taxable income merely because a taxpayer has taken steps to increase the amount it will realize. In Stevens v. Hudson's Bay Co. (1909) 101 LT 96, at p 98 , Farwell L.J. expressed the same idea:

"A landowner may lay out part of his estate with roads

and sewers and sell it in lots for building, but he does this as

owner, not as a land speculator. . . . It would be different if

a land company or an individual entered into the business of

buying and developing and selling land. But the case of the

owner, whether of land or pictures or jewels, selling his own

property, although he may have expended money in them in

getting them up for sale, is entirely different; he sells as

owner, not as trader."

But when the question arises not in the abstract as distinguishing between capital and income receipts, but under statutory provisions, rather different considerations prevail. The whole of the circumstances must be looked at to see whether there was a profit-making undertaking or scheme within the meaning of s. 26. And as I understand the decisions of this Court - in Fox's Case (Official Receiver in Bankruptcy v. Federal Commissioner of Taxation) [1956] HCA 63; (1956) 96 CLR 370 and Federal Commissioner of Taxation v. McClelland [1969] HCA 72; (1969) 118 CLR 353 - I must regard as one significant circumstance that what the taxpayer sold was not simply part of its capital asset, land, but something very different in a commercial sense, namely shop premises. This thing, the property sold, had been created by the taxpayer. What was in mind, that is in Elsey's mind, when the shop premises were built is a matter of inference. Elsey says that they were built for letting, not for sale, but I think sale was always in his mind, and that probably it was the dominant idea. One shop was let for a brief time to a Mrs. Leslie. She purchased it after a few months. It seems to me that it was probably always intended that it should become hers. Elsey in fact aided her by guaranteeing a loan she obtained to enable her to purchase it from the taxpayer. In another of the shop premises Miss Collins conducted a gift shop as it was called, for a short time, selling articles such as beach towels, apparently mainly for inmates of the motel. Another of the shops was furnished as a coffee shop with furniture belonging to Elsey, or to one of his companies, which was brought there from Surfers Paradise. But although set up as a coffee shop, no business was carried on in it. The inference I draw from the evidence as a whole is that it, and probably also Miss Collins' gift shop, was intended to make the line of shops appear occupied, not merely vacant shells, and thus attractive to either tenants or buyers, and I am inclined to think preferably the latter. Was there then a profit-making undertaking or scheme within the meaning of the Act? If so, did the proceeds of the sales of the shops include a profit arising from the carrying out of that undertaking or scheme? I have not found either question simple. But I have come to the conclusion that each should be answered affirmatively. The building of the shops and the ultimate sales of them after a period of letting amounted, it seems to me, to more than the realization of a capital asset. I think they were the results of a "programme or plan of action", to use the expression of Kitto J. in Clowes v. Federal Commissioner of Taxation [1954] HCA 10; (1954) 91 CLR 209, at p 255 , amounting to a profit-making undertaking. This took shape in Elsey's mind sometime in the second half of 1964. On 18th November 1964 he saw Mr. B. H. Connolly, then the manager in Queensland of a finance company, Deposit and Investment Pty. Limited. Mr. Connolly was called as a witness for the Commissioner. I accept his testimony as reliable. The most relevant part was as follows:

"Mr. Row: Did you know Mr. Elsey? - Yes.

And you have had dealings with him in connexion with the

company, Bernard Elsey Pty. Ltd.? - Yes.

Did you have an interview with him on or about 18th

November 1964? - Yes.

Was that in connexion with the company, Bernard Elsey

Pty. Ltd.? - Yes.

What was the purpose of the interview? - The purpose of the

interview was to obtain a loan of 40,000 pounds of which

10,000 pounds was to be utilized to pay out an existing

mortgage to General Credits Ltd. and a sum of 27,000 pounds

was to be utilized to pay outstanding accounts on the

erection of the Beachcomber Motel at Coolangatta.

There was a margin left? - There was a margin of 3,000 pounds

allowed.

On questioning Mr. Elsey did you ask him as to his proposed

method of repayment of this advance? - Yes.

What did he tell you on that occasion? - The main means

by which he intended to eventually repay the loan was after

he had erected some four shops on land adjoining the Beachcomber

Motel at Coolangatta and also surplus income which he anticipated

deriving from the operations of the motel.

Did he tell you what figure he anticipated he would realize

for each shop? - Approximately 8,000 pounds.

Did he tell you how many shops? - Four.

And did he tell you how much the costs of those shops were?

- Approximately 6,000 overall pounds." (at p133)

15. In May 1965 Elsey again saw Connolly with a view to borrowing money. Connolly's evidence of this interview contains the following:

"What did he tell you as to his proposed method of repayment?

- He intended repaying the loans by the sale of the

four shops which were to be erected, and from surplus income

once again."

Elsey in his cross-examination substantially assented to this.

"Do you recollect being interviewed by Mr. Connolly, the

Queensland manager, about 18th November 1964 with regard to

seeking a sum of 40,000 pounds to pay out General Credits and

also to pay the balance of accounts due to sub-contractors in

respect of the Beachcomber Motel? - Yes.

At that time did you have any conversation with Mr.

Connolly regarding the position of shops adjacent to the

motel? - Yes.

In particular did you have some conversation, relative to

that, so far as the method of repayment of the proposed loan

was concerned? - Yes, he would have asked for that.

Did you tell him that you anticipated that the four shop

sites beside the motel at Coolangatta would realize 8,000

pounds upon completion of the shops, costing 6,000 pounds in

all? - That is referring to each shop?

I should imagine it refers to each shop? - Yes, I think it

refers to each shop.

Did you further tell him that it would be from this source,

mainly, as well as excess profits, that the debt would be

cleared to Deposit and Investment within twelve months? -

I would have told him that, yes.

So that at that time you agree that you had intended to sell

the shops to pay off the loan which you had proposed from

Deposit & Investment for 40,000 pounds? - No, only to sell

those necessary to liquidate my loan." (at p133)

16. The plan for four shops, which had been prepared late in 1964 and early in 1965, was formally approved by the City Council in May 1965. Some preparatory building work may have been started before then. The building was completed within a few months. The dates of the sale of the shops I have already mentioned. I conclude, from the evidence as a whole, that the shops were built and sold pursuant to a scheme intended to yield a profit. The question of the computation of that profit is more difficult. (at p134)

17. I was told by counsel for the Commissioner that the way in which the Commissioner actually arrived at what he claimed were the total profits which he sought to bring to tax was as follows. The total area purchased was 156.9 perches: the total cost price according to the Commissioner allowing for incidental expenses was 33,988 pounds. The cost to the taxpayer of the 43.5 perches sold to Esso was on this basis taken to be 9,423 pounds 1s. 2d. The 43.5 perches were sold to Esso for 30,000 pounds. The result of the subtraction of sale price from assumed cost is thus 20,577 pounds or $41,154, said by the Commissioner to be profit forming part of the assessable income. (at p134)

18. On the same average basis, the 9.25 perches on which the shops were built cost the taxpayer 2,003 pounds 15s. 1d. To this were added figures for wages and other construction costs which the Commissioner obtained by inspection of the taxpayer's books, giving a total of 12,004 pounds ($24,008) as the cost to the taxpayer of the shop premises. The total of the prices for which the taxpayer sold the four shops was taken by the Commissioner as 28,172 pounds ($56,344). Subtracting from this 12,004 pounds ($24,008) the Commissioner reached the conclusion that the undertaking had yielded a profit of 16,168 pounds ($32,336). This he treated as part of the assessable income. (at p134)

19. So far as this computation is based upon the sale to Esso I have already excluded that. So far as it is based on profit arising from the taxpayer's undertaking in respect of the shops it seems to me to be basically erroneous. That profit should be ascertained by deducting from the amount realized by the sale of the shops all outgoings incurred in the carrying out of the profit-making undertaking. These outgoings were not merely the sums the taxpayer paid out or the debts it incurred. They include the value of any property which it had embarked in the carrying out of the undertaking. The main thing of that kind was the land on which the shops were built. The taxpayer put this into the venture. It should be brought to account at its value at the time. It is a misconception to suppose that this value at that date is to be ascertained by taking an average from the price paid for a larger area some fourteen months earlier. That price was paid when the whole was vacant land. The part where the shops were built was afterwards filled to be made firm. The additional value which this work gave to the shop sites cannot be assessed by distributing the cost of filling in the manner adopted by the Commissioner. The shop sites fronted Griffith Street. When the taxpayer conceived and entered upon the profit-making undertaking of building them, the place where they were to stand was no longer vacant and swampy land distant from buildings. It was firm land alongside a flourishing motel in a street which had become a built-up commercial locality, a place where if shops were built they could be sold, a locality in which high prices had apparently been paid for nearby land. It is with considerations such as those in mind that the value of the land the taxpayer put into the project must be determined as a factor in arriving at the profit the project yielded. The taxpayer's expenses incurred in the carrying out of the scheme must also be brought to account. These include, of course, the actual cost of the construction of the shops, material, and labour. They include too interest upon money borrowed for that purpose calculated until the times when the shops were sold, also the costs of preparing plans and obtaining the approval of the City Council, legal expenses, estate agents' charges and similar outgoings attributable to the project. It is only from valuations and accounts compiled in this way that the profit arising from the carrying out of the undertaking can properly be determined. It is important to remember that this profit-making undertaking was not conceived or entered upon at the time Elsey bought the land. It only began after earlier ideas for the use of the land, including the contemplated bus terminal, had been abandoned. It cannot be regarded as an incident of any plan which Elsey had in mind when he bought the land after the auction sale. It was a plan which first took shape in Elsey's mind long after the land had become a capital asset of the company. (at p135)

20. The taxpayer did not in its notice of objection specifically challenge the manner in which the Commissioner had calculated the profit said to be taxable. Elsey I think did not know how it was calculated although his accountant and fellow director, McConachie, perhaps did. I am satisfied that the basis of the Commissioner's calculation of the profit arising from the profitmaking undertaking is erroneous. I do not doubt that there was a profit; but the material before me does not enable me to quantify it: cf. Fox's Case (1956) 96 CLR, at p 388 . (at p135)

21. I direct the Commissioner to amend his assessment in two ways to give effect to my decision: first he must exclude from the assessable income whatever sum he had included in respect of the taxpayer's sale of lots 12 to 17 to Esso: secondly he must calculate the profit arising from the construction and sale of the shops in accordance with this decision: and he must amend the assessment of tax accordingly. (at p136)

22. In the result the taxpayer has wholly succeeded in respect of the sale of land to Esso. It has failed in its contention in respect of the profit arising from the sale of the shops, although in the result the Commissioner's calculation of this has been set aside. The appeals were heard together. The most satisfactory course is to make one order to cover them all. In the circumstances I make no order as to costs. (at p136)

Declare that no part of the moneys received by the taxpayer upon the sale by it to Esso Standard Oil (Australia) Limited of land at Coolangatta in 1964 was assessable income of the taxpayer.

Declare that the profit arising from the carrying out by the taxpayer of its undertaking of constructing and building shops at Coolangatta was assessable income of the taxpayer.

Cases remitted to the Commissioner to amend the assessments of tax.