Commissioner of Taxation (Cth) v Bidencope

Commissioner of Taxation (Cth) v Bidencope - [1978] HCA 23 - HCA 1978 case summary — Zoe

[9]

Before considering the meaning of s. 26 (a) in relation to this case, it is as well to point out that, assuming that the taxpayer is to be identified with all the motives, knowledge and intentions of his accountant - a proposition the correctness of which I do not find it necessary for present purposes to examine - there was no evidence whatever that it had been decided - and particularly by or on behalf of the taxpayer - at the time that the arrangements were made for the purchase of either "loss company" and for the transfer of its debts, that the debts would at any time necessarily be paid in full. It is perhaps also worth remarking that it was never put to the accountant who gave evidence before the Supreme Court that that was his intention. There is nothing in the evidence, certainly nothing in the findings of the Supreme Court, to suggest that at the inception of the arrangements for the acquisition of the "loss companies" and the transfer of the land, there had been any decision as to the manner in which the affairs of any of the companies should be conducted if and when sufficient profit had been made to absorb the tax deductible losses. Those familiar with the various modes of extracting from a company profits it has made will readily recognize the various courses open to the company and its shareholders when the company had exhausted the advantages of the tax deductible losses by the making of profit. A company with a creditor who was a majority shareholder or one of the majority shareholders would not necessarily pay the amount of the debts due. Having exhausted the benefit of the tax deductible losses, the shareholders might well sell their shares at a premium reflecting the accrued profit. As part of the sale of the shares the shareholder having the benefit of the debts might agree to release them. Indeed, his fellow shareholders might be unwilling that he alone should gain by payment of the debts. They might rather insist that the entire gain from the venture should be shared in proportion to their shareholding. Or, having control of other companies, the shareholders might prefer to transfer their shares to another company and pay a dividend to the other company to be dealt with in that company in some fashion to their advantage. No doubt there are other possibilities in the situation. The matter I want particularly to emphasize is that the payment of the debts in full is not shown in the evidence of this case to be an actual, nor a necessary, part of any arrangement made at the time of the acquisition of the losses or at any other time. If it matters, it was not shown to have been intended by the taxpayer or the accountant.

[29]

The facts of the case are not in dispute. In 1964 the taxpayer was the owner of land in Tasmania which he wished to subdivide and sell at a profit. Although it does not matter, the land had not been acquired by him for the purpose of profit-making by sale. The taxpayer, thinking that the costs of the proposed subdivision might be considerable, and more than he wished to commit himself to, decided to invite two others, Messrs. A. B. Moore and T. K. Shadforth, to join him in the venture. The form of the arrangements which were made was suggested by Mr. Geary, an accountant whom the taxpayer consulted. It was decided that the land should be sold to a company which the three men would control, and that the company should be one which had incurred losses which, under s. 80 of the Income Tax Assessment Act 1936 Cth, as amended ("the Act"), would be available as deductions from any profit that might result from the subdivision and sale of the land. In May 1964 the taxpayer and Messrs. Moore and Shadforth each bought two shares in Denis Lewis Pty. Ltd., a company whose name was thereupon changed to Denland Development Pty. Ltd. ("Denland"), a company which had accumulated losses of over $17,000. The consideration paid for each share was $2, and the shareholding thus acquired represented 75 per cent of the total shareholding. There remained unacquired two shares which were held respectively by Mr. and Mrs. Lewis, the original shareholders in the company. At about the same time the taxpayer and Messrs. Moore and Shadforth took an assignment of all the debts owed by the company to its creditors. The consideration for the assignment was $2,588 and the total amount of the debts assigned was shown in the schedule to the agreement of assignment as $17,504. Somewhat oddly there were added to the typewritten schedule of creditors, below the total just mentioned, the names of Mr. and Mrs. Lewis and the amount of debts said to be owing to them ($1,023 and $371 respectively), notwithstanding that the agreement recited (correctly as the evidence shows) that Mr. and Mrs. Lewis had given an absolute release of all their claims against the company. In about September 1964 an agreement by the taxpayer to sell to Denland the land in question was completed. Thereafter Denland commenced to subdivide and sell the land.

[42]

However in the course of argument it was suggested that in deciding what it cost the taxpayer to obtain what he received when the debts were repaid, it is necessary to take into account that the taxpayer provided the land which, when subdivided, produced the profits for the companies and also that he bought the shares whose value may have been reduced when the companies paid the debts. I do not understand these arguments to be covered by the taxpayer's notice of objection, or to have been relied upon in the Supreme Court, but there are in any case a number of answers to them. In the first place, the taxpayer, upon whom the onus lay of showing that the assessments were excessive, produced no evidence to show that he sold the land to Denland at an undervalue. The fact that the sale of the land produced a profit to the companies did not show that it was worth more at the time when Denland bought it than was paid for it, because at the time of the sale it was intended that it should be developed in subdivision at a cost which the taxpayer did not wish to bear himself. In this respect the case is distinguishable from Federal Commissioner of Taxation v. Becker [8] . In that case the taxpayer, to escape the operation of provisions of the law then in force controlling the price of land, sold to a company which he had formed land, which he believed to be worth $12,000, for a price of $8,000 under a contract which provided that the price was to be satisfied by the issue of shares in the company. At about the same time the taxpayer agreed to sell the shares for $12,000. It was held that the value of the land at all material times was $12,000 and that there was no profit either from the sale of the land or from the sale of the shares. In the present case however it may be inferred - or at least the taxpayer has not disproved - that the land increased in value by reason of the expenditure of money and energy in developing it in subdivision after the taxpayer sold it. So far as the shares were concerned the cost to the taxpayer was merely nominal - that was proved in relation to the shares in Denland and it seems a fair inference that the same was true of the amount paid for the shares in Bathurst - at least the contrary was not established by the evidence. Moreover the value of the shares was not diminished when the company paid the debts, because the liability to pay the debts was subsisting and had to be taken into account in valuing the shares. For reasons which I am about to give it is unnecessary to consider whether that statement needs qualification to the extent to which those debts which had been released by the original creditors were included in the payment; no argument was directed to that question, and it would in any case have only a small effect on the result.

[45]

The undertaking or scheme, if it is to fall within s. 26 (a), must be a scheme producing assessable income, not a capital gain. What criterion is to be applied to determine whether a single transaction produces assessable income rather than a capital accretion? It seems to their Lordships that an "undertaking or scheme" to produce this result must - at any rate where the transaction is one of acquisition and resale - exhibit features which give it the character of a business deal. Later, their Lordships said [10] : The final contention of the respondent is that the profit which arose to the appellant is income according to ordinary concepts, since it arose from an adventure in the nature of trade. Whilst this claim is quite independent of s. 26 (a) it seems to their Lordships to introduce no new element into the problem such as would lead to some different conclusion. The whole of the facts have still to be considered; the same criteria have to be applied; the question to be asked and answered is still whether the facts reveal a mere realization of capital, albeit in an enterprising way, or whether they justify a finding that the appellant went beyond this and engaged in a trade of dealing in land albeit on one occasion only. In these passages their Lordships certainly appear to accept that the second limb of s. 26 (a) includes only profits which are income and that a capital gain is outside its scope. But if that were correct it would appear that the second limb of s. 26 (a) is entirely meaningless and ineffective. If a profit is income according to ordinary usages and concepts (which is no doubt what their Lordships meant by "assessable income" in the first of the passages cited) it is brought to tax by s. 25 without the assistance of s. 26 (a). The very aim of the second limb of s. 26 (a) was to bring "what might otherwise have been thought possibly to be capital profits within the conception of income" (Clowes v. Federal Commissioner of Taxation, per Dixon C.J. [11] ). I have already said that their Lordships cannot have intended to mean that the second limb of s. 26 (a) is entirely otiose: Federal Commissioner of Taxation v. Williams [12] . It is true that there are conflicting dicta on this matter. Since McClelland's Case some members of this Court have said, in accordance with the dicta in that case, that the second limb of s. 26 (a) applies only to profits of an income character: see Eisner v. Federal Commissioner of Taxation, per Walsh J. [13] and Burnside v. Federal Commissioner of Taxation, per Aickin J. [14] . Others have held expressly or by implication that s. 26 (a) extends to capital profits: see Steinberg v. Federal Commissioner of Taxation, per Barwick C.J. [15] ; Investment and Merchant Finance Corporation Ltd. v. Federal Commissioner of Taxation, per Menzies J. [16] ; and Burnside v. Federal Commissioner of Taxation, per Mason J. [17] . I do not understand any decision to depend upon the acceptance of either of the two views, although some of them do depend on the related, but distinct, proposition stated in the passages cited from McClelland's Case [18] , that the realization of a capital asset does not in itself yield a profit within s. 26 (a). In my respectful opinion, both limbs of s. 26 (a) are intended to include in the assessable income profits which would not be described as income in the ordinary sense, and would not be caught by s. 25. That intention would be defeated if the section were construed by reading into its words a limitation which they do not contain and which would restrict its operation to income within ordinary concepts. In other words, s. 26 (a) was intended to include receipts which would otherwise be regarded as capital, although it overlaps s. 25 to some extent and includes also receipts of an income character: see Reseck v. Federal Commissioner of Taxation [19] . In the present case therefore I do not consider that it is relevant to inquire whether the profit derived by the taxpayer was income within ordinary concepts for it was in any case profit within the meaning of s. 26 (a). 1. (1970) 120 C.L.R. 487, at p. 495. 2. (1970) 120 C.L.R., at pp. 495-496. 3. (1954) 91 C.L.R. 209, at p. 217. 4. (1972) 127 C.L.R. 226, at p. 250. 5. (1971) 45 A.L.J.R. 110, at p. 114. 6. (1977) 138 C.L.R. 23, at p. 47. 7. (1975) 134 C.L.R. 640, at pp. 687-688. 8. (1971) 125 C.L.R. 249, at p. 264. 9. (1977) 138 C.L.R., at p. 31. 10. (1970) 120 C.L.R. 487. 11. (1975) 133 C.L.R. 45, at pp. 47-48, 52-53.

[51]

But it is, nevertheless, I think, broadly true to say that, when a man invests money in the purchase of any kind of property, it will generally be either with a view to holding it and deriving income from it, or with a view to realising sooner or later an enhanced capital value. And, while logically these "purposes" are not mutually exclusive, it will generally be possible to say that the one or the other is predominant at the time when the purchase is made. This statement is not however true when men enter into, and carry out, a scheme. Schemes are various, and it is not necessarily possible to say that one purpose of a scheme is predominant; many schemes are designed to secure a number of purposes. If a scheme is designed to secure a profit, it is a profit-making scheme, although it has other purposes as well. This was I think recognized by Jacobs J. in London Australia Investment Co. Ltd. v. Federal Commissioner of Taxation [23] when he said that if the acquisition and disposal of property is part of a business of so doing, the purpose of resale need not be the sole purpose, or the primary or dominant purpose, as is the case under the first limb of s. 26 (a). The present is of course not a case in which property was acquired for resale, but once it is established that profit arose from the carrying on of a scheme, it is enough that the making of a profit of that kind was one of the purposes of the scheme. This question did not arise in XCO Pty. Ltd. v. Federal Commissioner of Taxation, where the persons who acquired shares in the loss company arranged for the debts to be assigned to the taxpayer, and the proper conclusion was that the intention to make a profit was not incidental to any other purpose of the scheme. The facts of that case distinguish it from the present, but the decision did not depend on the acceptance of the view that the purpose of profit-making must be the dominant purpose of the scheme if it is to fall within the second limb of s. 26 (a). In the present case, one of the purposes of the scheme was to make a profit, and it can rightly be described as a profit-making scheme. 1. (1956) 30 A.L.J. 402, at p. 404. 2. (1977) 138 C.L.R. 106, at p. 122.

[60]

In my opinion, once the trial judge reached the conclusion that the purpose of the taxpayer was not the making of a profit but was incidental to the protection of his and other persons' controlling interest in the loss companies, he correctly concluded that the amount realized upon payment of the debts owing by the loss companies and which had been assigned was not a profit within s. 26 (a). If it were correct to isolate the taking of the assignments and the subsequent realization then it might well be possible to find in that isolated course of conduct sufficient to constitute it of itself a profit-making undertaking or scheme. See XCO Pty. Ltd. v. Federal Commissioner of Taxation [26] . However, in a case such as the present, it is not possible to isolate the assignments of the debts and the subsequent realization. There was no separate profit-making undertaking or scheme in relation to them. They formed part of the larger operation - in the case of the taxpayer the development of his lands through companies which were loss companies and the holding by him of substantial investments as a shareholder in those companies. He could do both those things without attracting a liability to tax because his initial acquisition of the land was not with the purpose of profit-making. However he set about the development of the lands, that gain would not be a profit from a profit-making undertaking or scheme. It is true that dividends declared by the companies and received by him after the losses had been absorbed would be taxable and it is also true that by repaying the debts the companies had less money available for distribution as dividends. But it does not seem to me that these are relevant considerations. There is no profit-making scheme involved in this reduction of the funds available for declaration of taxable dividends. There is a difference between a scheme which will reduce or eliminate the liability to tax on moneys received and a profit-making undertaking or scheme and it appears to me that the appellant Commissioner's arguments have tended to overlook this difference. It is to be observed that the payment of the assigned debts did not in the scheme as a whole result in any real gain to the taxpayer. The payment reduced by the amount thereof the funds available for distribution by the companies to the taxpayer by way of dividends. This was a tax advantage, not a profit-making undertaking or scheme.

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