Bernard Elsey Pty Ltd v Federal Commissioner of Taxation [1969] HCA 46;

Bernard Elsey Pty Ltd v Federal Commissioner of Taxation [1969] HCA 46; - HCA 1969 case summary — Zoe

[13]

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:

[15]

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)

[17]

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)

[19]

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)

[20]

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:

[30]

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:

[39]

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)

At a glance

Court

Decision date

Before

Source

Judgment (45 paragraphs)

Bernard Elsey Pty Ltd v Federal Commissioner of Taxation [1969] HCA 46; (1969) 121 CLR 119 (10 October 1969)

Parties

Legislation Cited (1)

Cases Cited (6)