Commissioner of Taxation (Cth) v St Hubert's Island Pty Ltd

The Commissioner then assessed the taxpayer to tax, treating this transfer as a disposal by it of trading stock within s. 36 (1) of the Income Tax Assessment Act 1936 and accordingly including in its assessable income an amount representing the value of the land transferred. The taxpayer was successful in an appeal against that assessment, the only issue in that appeal being whether s. 36 (1) was applicable in the circumstances.

(a) a taxpayer disposes by sale, gift, or otherwise of property being trading stock, standing or growing crop, crop-stools, or trees which have been planted and tended for the purpose of sale;

(b) that property constitutes or constituted the whole or part of the assets of a business which is or was carried on by the taxpayer; and

(c) the disposal was not in the ordinary course of carrying on that business,

the value of that property shall be included in the assessable income of the taxpayer, and the person acquiring that property shall be deemed to have purchased it at a price equal to that value.

Mahoney J., in the Supreme Court of New South Wales, in allowing the appeal, considered three distinct arguments: that the land was not trading stock, that even if it were it was not an asset of a business carried on by the taxpayer, and that in any event there had been no disposal of the land by it.

The Commissioner now appeals, contending that the land was trading stock to which s. 36 applies. The respondent not only contests this but also maintains its contention, unsuccessful below, that there was, in any event, no such disposal as s. 36 contemplates. It does not, however, seek to challenge the conclusion of Mahoney J. that the land was an asset of a business carried on by it.

The first matter to be decided is whether or not the land was "trading stock" within s. 36 (1). This resolves itself into two parts, a broad question whether land may ever be trading stock for the purposes of the Income Tax Assessment Act and, in particular, of s. 36 of the Act, and a quite narrow one, whether in the circumstances of this case this particular land was trading stock.

Section 36 (1) itself provides no clear answer to the broad question, save in the negative sense that there is nothing in its wording opposed to the inclusion of land in the term "trading stock". It is in other sections of the Act, especially in ss. 28-31, that there are said to occur indications which show that land cannot be "trading stock" for the purposes of the Act. Before examining those sections the particular meaning which the Act assigns to "trading stock" should be noticed. Section 6 (1) of the Act includes the following provision: " "trading stock" includes anything produced, manufactured, acquired or purchased for purposes of manufacture, sale or exchange, and also includes live stock".

The terms in which this statutory meaning are expressed throw little light upon whether land may be trading stock. I do not regard its use of the word "anything" as limiting the definition to chattels. "Anything" is a word of the widest meaning, as apt to describe land as to describe chattels; indeed it can also be applied appropriately enough to intangibles. One may speak of abstract ideas in this way, as in "Anything speculative attracted his mind". As the Oxford English Dictionary observes, the word is "A combination of Any and Thing, in the widest sense of the latter, with all the varieties of sense belonging to Any".

There is another aspect of this statutory meaning of trading stock which is of present relevance. It is whether it is a true definition, giving to "trading stock" when used in the Act an exclusive meaning, so that anything falling outside it will not be trading stock although answering that description according to common usage; or whether, on the contrary, it operates as merely expansive of what would otherwise be conveyed by the ordinary meaning of "trading stock".

In deciding this question one notes, at the outset, that the statutory meaning, by including in "trading stock" things acquired not only for purposes of sale or exchange but also for purposes of manufacture, enlarges the ordinary meaning of the term. Dictionary meanings of "stock", in the sense of stock-in-trade or trading stock, generally involve the concept of being kept on hand by a trader for sale by him and would not extend so as to include raw materials acquired for purposes of manufacture. The inclusion of live stock effects a further enlargement of the meaning of trading stock, a dairy farmer's milking herd, although "live stock", would not be trading stock as ordinarily understood. The statutory meaning uses the word "includes" rather than "means" and is, in that respect, to be contrasted with many of the other provisions of s. 6 (1). An examination of s. 6 (1) suggests that care has been taken to use "include" where it is not intended to substitute a statutory meaning for the ordinary meaning of words but, rather, to confer some meaning additional to the ordinary meaning. This intention has sometimes been obscured in s. 6 (1) by including meanings which would in any event be included in a word's ordinary meaning; the meaning given to "trading stock" provides an example of this. This is due, no doubt, to the draftsman's desire to avoid any possible doubt concerning the extent of the ordinary meaning. Nevertheless, in the case of a sub-section constructed as is s. 6 (1), using both "means" and "includes", a meaning which is expressed in terms of "includes" and which may be seen to be at least partially expansive in its operation should not, I think, be treated as an exclusive definition, but rather as operating cumulatively upon the ordinary meaning of the word or phrase in question and conferring added meaning for the purposes of the Act. This whole question of the effect to be given to "means" and to "includes" in definition sections was extensively discussed in this Court in Y. Z. Finance Co. Pty. Ltd. v. Cummings [50] . Nothing in the majority judgments in that case requires, I think, any different conclusion in the present case.

The importance of this conclusion in the present case lies in the use made of the purpose of acquisition in the statutory meaning of trading stock in s. 6 (1); only that which is acquired for one of the specified purposes, "manufacture, sale or exchange", is given the statutory character of trading stock. Mahoney J. has held that the land here in question was not acquired with any such purpose. That would be enough to conclude the matter in favour of the taxpayer if the statutory meaning is an exclusive definition. However, if, as I believe, the statutory meaning only operates cumulatively upon the ordinary meaning of trading stock, it will be necessary to consider whether, at any time after acquisition, this land became trading stock, in the ordinary meaning of that term, in the hands of the taxpayer. Such inquiry belongs, however, to what I have called the second and narrower question concerning trading stock and must be deferred until the terms of ss. 28-31 of the Act have been examined for those indications which they are said to contain that when "trading stock" is used in the Act it is not intended to extend to land.

Three features of the drafting of these sections are relied upon. First, the repeated use of the phrase "on hand" to describe the trading stock in question is said to be inappropriate to land, which, unlike chattels, is not spoken of as being "on hand". Curiously enough, one of the examples given in the Oxford English Dictionary, in a passage from Lytton, uses "on hand" in the relevant sense in relation to an "abode which had so evidently hung long on hand"; I see no reason why it is inappropriate, when speaking of a trader in land, to refer to the various parcels of land which he has for sale as being land which he has "on hand".

Then the phrase "each article of trading stock", and variations of it, which appear in these sections, are said to be inappropriate to apply to land. The phrase appears in ss. 29 and 31 when reference is being made to the value of each distinct item or unit of a taxpayer's trading stock. It is used to describe each item, the sum of which make up a taxpayer's stock, and to each item of which a value is to be assigned. If that which is traded in happens to be land it is no less appropriate to speak of each parcel of land, capable of being separately dealt with and valued, as an article, than it is to speak in this way of units of any bulk commodity, be it wheat, wool, wine, coal or petrol. The use of "article" is, perhaps, not elegant, but if elegance of language is to be a criterion of what is intended by "trading stock", bulk commodities generally would seem also to be excluded. I regard the use of this phrase in these sections, used as it is to denote individual items of stock, as no sufficient indication that land is to be excluded from "trading stock".

The third feature relied upon is the use of the words "replaced", "obsolescence" and "of the same kind" in various parts of s. 31. It is said that any parcel of land is, inherently, both unique and incapable of obsolescence, so that these words are inapt to refer to land. An examination of the use made of the first two of these words in the section disposes of this argument: "replaced" and "obsolescence" each occurs in the description of only one of the three alternative courses open to the taxpayer or the Commissioner (as the case may be) and, if it be the case that the nature of land renders them inappropriate, the consequence is only that in the case of land the choice of courses is narrowed down to only two. The phrase "of the same kind", in the sense in which it is used in s. 31 (2) (c), is, I think, as readily applicable to some parcels of land, for instance some subdivisional lots, as it would be to some paintings or sculptures in an art-dealer's trading stock or to some jewellery, precious stones or bloodstock in the stock-in-trade of a jeweller or dealer in racehorses; no doubt in all these cases some items of stock would be unique: if so, par. (c) would be inapplicable but it does not follow that the whole of the provisions of the Act dealing with trading stock are thereby rendered inapplicable.

Since s. 36 itself contains nothing suggesting that "trading stock" is necessarily inapplicable to land and since the term, both in its ordinary meaning and in the extended meaning given by s. 6 (1), is wide enough to include, in appropriate circumstances, land, I reject the taxpayer's submission that land can never be trading stock for the purposes of the Act and, in particular, of s. 36. I am fortified in that conclusion by three considerations. The first concerns the nature of this legislation. As its short title indicates, it is a measure for the imposition, assessment and collection of a tax upon incomes. Except where specific provision is made for specific cases, the Act is concerned quite generally with income however derived and, except by express mention, does not discriminate between particular income-generating sources. To exclude from the concept of "trading stock" the parcels of land in which a dealer in land trades would be to make such a discrimination solely by reference to the particular subject-matter traded in; yet it is with the trader's income that the Act is concerned and not with the particular subject matter in which the trade is carried on. Clear words or compelling necessity would, I think, be required if the quite general provisions dealing with trading stock were to be made inapplicable to particular trades because of the nature of that which was traded in. I do not find either in the provisions of the Act.

The second consideration in a sense echoes the first. InCommissioner of Taxes (S.A.) v. Executor Trustee and Agency Co. of South Australia Ltd. (Carden's Case) [51] Dixon J. said "The basis of a trading account is stock on hand at the beginning and end of the period and sales and purchases." As his Honour explains [1] , it is impracticable to estimate income from trade otherwise than by means of a profit and loss account and the computation of profits from trading "has always proceeded upon the principle that the profit may be contained in stock-in-trade " Only by taking account of stock-in-trade in the conventional way can a correct reflex of the trader's income for the accounting period be obtained. Within the framework of the Australian tax system, with its assessment of tax upon the excess of assessable income over allowable deductions, it is the provisions of ss. 28-31 which ensure such a correct reflex in the case of stock-in-trade. To remove from the operation of these sections transactions in one type of trade, trade in land, would be anomalous. A land dealer who carries forward from one financial year to the next subdivisional lots as part of his stock-in-trade may wish to reflect in his accounts for tax purposes at the end of the first year their gain or loss in market value, as compared with cost, thereby "spreading" his ultimate realized gain or loss. If he does so his true financial position will have been the more acurately reflected in his taxable income. He may do this only because of the options afforded to him by s. 31(1) and then only if his land is "trading stock" for the purposes of the Act.

1. (1938) 63 C.L.R. 108, at p. 156. 2. (1938) 63 C.L.R., at p. 155.

In the judgment under appeal Mahoney J. [2] cited a passage from the speech of Lord Reid in Ostime (Inspector of Taxes) v. Duple Motor Bodies Ltd. [3] . Portion of that passage illustrates how integral in the computation of a trader's income is the reckoning of stock-in-trade on hand: his Lordship said:

long ago it became customary to take account of stock-in-trade, and for a simple reason. If the amount of stock-in-trade has increased materially during the year, then in effect sums which would have gone to swell the year's profits are represented at the end of the year by tangible assets, the extra stock-in-trade which they have been spent to buy; and similar reasoning will apply if the amount of stock-in-trade has decreased. So to omit the stock-in-trade would give a false result. 1. (1976) 6 A.T.R., at pp. 189-190; 76 A.T.C., at p. 4086. 2. [1961] 1 W.L.R. 739, at p. 751; [1961] 2 All E.R. 167, at pp. 172-173; (1961) 39 T.C. 537, at pp. 569-570.

The third consideration is that in Investment and Merchant Finance Corporation Ltd. v. Federal Commissioner of Taxation [4] this Court held that shares in the hands of a trader and held by him for sale were stock-in-trade, and this despite the fact that some of the phrases upon which the taxpayer has relied in the present case are no more apt when applied to shares than when applied to parcels of land. The decision in that case does, I think, present formidable difficulties for the taxpayer's present argument.

In considering this question I have had reference to, although I have not specifically cited, those reported cases in which land has been spoken of in judgments as stock-in-trade, trading stock or the like. I have also had regard to those judgments in which passing but inconclusive reference has been made to the question whether land may be "trading stock" for the purposes of the Income Tax Assessment Act. That question has also arisen quite directly for decision on a number of occasions before Boards of Review and the reasons of Mr. Dempsey in Case F. 58 [5] provide ready reference to those instances. However in no precedent decision of an Australian court has the present question squarely arisen for decision.

1. (1974) 74 A.T.C. 326; 19 C.T.B.R. (N.S.) Case 76, 515.

It is for the foregoing reasons that I have concluded that land may be "trading stock" for the purposes of the Act and, in particular, for the purposes of s. 36.

I turn now to the narrower question whether this land on these two islands was trading stock when transferred to Portuland late in 1971. His Honour, in the course of this part of his judgment, referred to but did not decide whether for the purposes of the Act the statutory meaning given to "trading stock" by s. 6(1) was exclusive of the ordinary meaning of the term; instead he left the matter unresolved and referred to the Investment and Merchant Finance Corporation Case [6] where Walsh J. had done likewise. Nevertheless, as I would understand his Honour's judgment, he did in fact test the character of this land as trading stock of the taxpayer by reference both to the ordinary meaning of that term and to its statutory meaning. For the purposes of the first his Honour was, of course, concerned with the land in the state in which it was transferred to Portuland, having undergone some degree of transformation while in the taxpayer's hands.

The evidence showed that what the taxpayer had bought, the greater part of two low-lying islands in tidal waters, had to be very much altered in appearance and in facilities before it would reach a state in which it could be described, in the hands of the taxpayer, as anything resembling a number of marketable parcels of land such as the taxpayer intended to sell. To comply with Public Health Department requirements the entire surface of one of the islands had to be raised to a specified elevation above datum. In addition, in order to be permitted to subdivide and sell the land in residential lots, the taxpayer would have to undertake some major bridge construction work, albeit less than initially anticipated, the building of extensive sea walls and the construction of an entire system of canals; much dredging of sand had to accompany this work and all this had to be completed before carrying out the more normal clearing, levelling, draining, and road construction work usually involved in large scale subdivisional development. What the evidence did not disclose was precisely how much of this work had been undertaken, and with what effect upon the character of the land, by the time the taxpayer transferred it to Portuland. However, doing the best he could with the available evidence, his Honour concluded that at the time of transfer the land was still not in any state ready for sale in lots. The land was, he said [7] , referred to in argument, and without any qualification, as then being still "land in globo"; argument, it seems, proceeded before his Honour upon that footing. His Honour accordingly concluded that at the time of transfer the land had not "been converted into trading stock", that it was not then in such a state that subdivisional lots had been created and were available for sale.

1. (1976) 6 A.T.R., at p. 197; 76 A.T.C., at p. 4092.

To the extent to which his Honour was led to this conclusion by the common assumption of the parties during argument, his conclusion should not, I think, be lightly departed from on this appeal. It was, moreover, a conclusion open to his Honour upon such evidence as bore on the point and it should not now be disturbed.

I would not myself regard it as always conclusive of the question whether land owned by such a taxpayer as the respondent is "trading stock" according to the ordinary meaning of the term, that the land is not, at the relevant time, available for sale in subdivided lots. For assets of a taxpayer to form part of his trading stock they will, I think, generally speaking, require to possess the character of being substantially in the state in which the taxpayer intends to trade in them. For this reason the particular trade of the taxpayer will be critical. To a trader in broad acres his stock of broad acres will be trading stock, but if his trade, and by this I refer to that which he sells, is in subdivisional lots it will generally only be subdivided lots that qualify as his trading stock and they will become a part of that stock when, by whatever processes of improvement may be involved, they come substantially to answer the description of that which he trades in. However, it may be that cases will arise in which such a trader's stock can be shown to include not only lots ready for sale but also broad acres ready for prompt conversion into lots as and when the time is ripe for their sale; whether or not this will be so in any particular case will be a matter of fact for decision when the case arises.

Having regard to his Honour's understanding of how the case was put on the Commissioner's behalf, the present case is not, I think, one in which, on this appeal, this Court should entertain the view that, by the time of its transfer to Portuland, this land, although not yet subdivided, had reached a state in which it was trading stock in the ordinary meaning of that term. It was, in my view, clearly not in that state when acquired by the taxpayer. Despite the extensive work carried out on it while owned by the taxpayer, the parties apparently treated it as still devoid of any of the characteristics of subdivided land when it was transferred to Portuland. In the circumstances his Honour was, in my view, entitled, in the absence of any evidence that it fell within what I have suggested as a possible exception to the general position, to conclude that it was not then trading stock as ordinarily understood.

His Honour next turned to what was apparently the substantial contention urged on behalf of the Commissioner at the trial, that the statutory meaning of trading stock in s. 6(1) applied to this land so as to make it trading stock of the taxpayer. His Honour, correctly in my view, attached importance to the reference to "purposes" in the statutory meaning. He concluded that when the taxpayer purchased the land its condition was such that the taxpayer's purpose could not properly be described as then being that of sale. It was, rather, that of converting the land to a different condition by carrying out substantial work on it, of rendering it saleable in lots and only then of selling off those lots. His Honour regarded it as essentially a question of fact and degree in each case whether the work necessary to convert land into its intended saleable state was such as to preclude the land from being trading stock; he made it clear that not every case where land had to some extent to be worked upon to bring it into a saleable condition was for that reason to be excluded from trading stock as statutorily defined.

His Honour did, I think, correctly regard the critical time, so far as concerns the statutory meaning of trading stock, as the time of purchase since the statutory criterion of purpose is related to purpose at the date of purchase. The facts of this case, and in particular the very extensive nature of the work which had to be done before any question of subdividing the land could be entertained, do, in my view, provide ample grounds for his Honour's conclusion that, at the time of purchase by the taxpayer, the land did not answer the description in s. 6(1), that of land purchased by this taxpayer for purposes of sale.

It follows that I regard as correct his Honour's view that neither according to its ordinary meaning nor according to the meaning given to it by s. 6(1) was this land trading stock in the hands of the taxpayer.

This conclusion necessarily leads me to decide that the Commissioner was wrong in applying s. 36(1) of the Act to the value of the land transferred to Portuland. However before leaving this case I should deal briefly with one particular submission made on the Commissioner's behalf on this appeal. It was said that it was wrong to pay regard to the particular state or condition of the taxpayer's land at any particular time, that this mattered not at all in determining whether that land was trading stock. This was said to be so either because what is in question in the case of land is an estate in fee simple in respect of a particular area of the earth's surface, something incapable of being affected by changes in the condition of that surface: or else because, even if what is in question be regarded not as the legal estate but as the material substance, it is of a character which is inherently unaffected by changes in its condition. Either of these views may be well enough in many statutory contexts but not, I think, when trading stock is in question and is legislated for as it is in ss. 28 to 37 of the Income Tax Assessment Act. In such a context it is very much with practical matters, with dealings by merchants, that the legislation is concerned. It is the tax treatment of that which merchants keep for dealing in that is being legislated for, and then only so long as it is in substantially the condition in which it is to be dealt in, so that it forms part of the merchant's stock-in-trade, kept by him to meet his trading needs.

In view of my conclusions concerning the inapplicability of s. 36(1) to the taxpayer's land it is unnecessary that I should go on to deal with the submissions made as to whether there was here any such disposal as is contemplated by s. 36(1). I would dismiss this appeal.

Part of the problems which confront the Commissioner in this case might have been avoided had the definition of trading stock in s. 6(1) of the Income Tax Assessment Act 1936, as amended ("the Act") been altered so as to incorporate some of the elements of the statutory definition contained in the United Kingdom legislation. By s. 6(1) the expression is so defined as to include "anything produced, manufactured, acquired or purchased for purposes of manufacture, sale or exchange, and also includes live stock". The application of these words to virgin land acquired by a land developer for the purpose of substantial improvement, subdivision and sale is fraught with some difficulty.

The problem was solved in the United Kingdom forty years ago by the inclusion in s. 26 of the Finance Act, 1938 of a definition of "trading stock" which was subsequently re-enacted in s. 143 of the Income Tax Act, 1952, s. 137 (4) of the Income and Corporation Taxes Act 1970 and cl. 16 of Schedule 10 of the Finance (No. 2) Act 1975 which also includes work in progress. By these definitions "trading stock" means

property of any description, whether real or personal, being either -

(a) property such as is sold in the ordinary course of the trade, or would be so sold if it were mature or if its manufacture, preparation or construction were complete, or

(b) materials such as are used in the manufacture, preparation or construction of any such property as is referred to in paragraph (a) above.

What the United Kingdom definition makes plain the Australian definition leaves obscure. By virtue of the United Kingdom definition, land may form part of the trading stock of a taxpayer and unimproved land acquired for the purpose of improvement and sale may also form part of the trading stock of a taxpayer.

That the uncertainties arising from the Australian statutory definition have not been cleared up by legislation is the more surprising when we recall that for many years there have been conflicting expressions of opinion in the Boards of Review upon the question whether land may form part of trading stock for the purposes of the Act [7a] . The preferred view, with which I agree, has been that land may form part of a taxpayer's trading stock for the purposes of s. 36. It is a view which is not assisted by our statutory definition; it prevails in spite of the definition. The ordinary meaning of "trading stock" cannot be restricted by a definition which is expressed to be inclusive, not exclusive. No doubt it extends the ordinary meaning by its reference to "live stock" in the manner explained inFederal Commissioner of Taxation v. Wade [8] , but in other respects it may be doubted whether the definition does more than express inadequately what one might have gathered from the ordinary meaning of the term.

1. (1952) 3 C.T.B.R. (N.S.) Case 111, 702, at p. 704; (1958) 8 C.T.B.R. (N.S.) Case 48,230, at p. 234; (1974) 19 C.T.B.R. (N.S.) Case 76, 515, at pp. 527-531. 2. (1951) 84 C.L.R. 105.

It is generally accepted that land may become "trading stock" or "stock-in-trade" according to the common understanding of these expressions. Judges both here and in the United Kingdom have spoken of land as trading stock or stock-in-trade on occasions too numerous to mention them all. It is sufficient to refer to some of the many examples - see Melbourne Trust, Ltd. v. Commissioner of Taxes (Vict.) [9] ; Ruhamah Property Co. Ltd. v. Federal Commissioner of Taxation [10] ; London Investment and Mortgage Co. Ltd. v. Worthington (Inspector of Taxes) [11] ; Orchard Parks Ltd. (In liq.) v. Pogson (Inspector of Taxes) [12] ; and Snell (Inspector of Taxes) v. Rosser, Thomas & Co. Ltd. [13] . I reject the suggestion that in the English cases no more is said than that land acquired for trading purposes should be treated as if it were stock-in-trade. Likewise, I reject the suggestion that the English cases do no more than reflect the United Kingdom statutory definitions of "trading stock" to which I have referred. Earlier decisions such as Pearn v. Miller [14] and Hudson v. Wrightson (H.M. Inspector of Taxes) [15] reveal that land was considered to constitute trading stock or stock-in-trade in appropriate cases well before the introduction of the statutory definition to which I have referred. That definition to the extent to which it includes real property should not be regarded as extending the ordinary meaning but rather as confirming and giving specific effect to that meaning.

1. (1912) 15 C.L.R. 274, at p. 303. 2. (1928) 41 C.L.R. 148, at p. 156. 3. [1959] A.C. 199, at pp. 206, 210-211. 4. (1964) 42 T.C. 442. 5. [1968] 1 W.L.R. 295, at pp. 300-305; [1968] 1 All E.R. 600, at pp. 603-607; (1968) 44 T.C. 343, at pp. 349-354. 6. (1927) 11 T.C. 610. 7. (1934) 26 T.C. 55.

I acknowledge that some of the provisions contained in ss. 28 to 36 of the Act are so expressed that they cannot readily be given an operation in relation to land. But this is not enough in itself to sustain the conclusion that the provisions in their entirety were not intended to apply to land. A similar objection was made to the proposition that shares may constitute trading stock for the purposes of the Act; yet the Court overruled that objection in Investment and Merchant Finance Corporation Ltd. v. Federal Commissioner of Taxation [16] .

It has been suggested that the definition contained in s. 6(1) of the Act, to the extent to which it refers to anything "acquired or purchased for the purposes of manufacture", represents an extension of the accepted meaning of the term. No doubt it is correct to say that historically "trading stock" and "stock-in-trade" denoted the stock of goods acquired by a trader or dealer and held for sale. Even today it would be correct to speak of the trading stock or stock-in-trade of Steptoe & Son. But whereas both expressions may have had this limited meaning in times gone by, trading stock has acquired a more extensive denotation in modern times. It is a commercial term, ordinarily employed by accountants and auditors and it is to usage by commercial men that we must look in determining what it signifies, rather than to standard dictionaries which so often fail to reflect current usage and just as frequently fail to reflect modern commercial usage.

As applied to the business of a manufacturer of goods, accountants and commercial men by their use of the expression "trading stock" denote not only the goods which he has manufactured and holds for sale but his stock of raw materials, components and partly manufactured goods. Whiteman and Wheatcroft on Income Tax, 2nd ed. (1976), p. 444, under the heading "Stock-in-Trade and Work in Progress", say -

A manufacturer who buys raw materials, processes them and sells the finished product will normally have on hand some unused raw materials, some partly manufactured goods and some finished goods awaiting sale. The first and last are stock, the partly processed goods being sometimes called stock and sometimes work in progress. In addition, a manufacturer may have on hand goods which he consumes in the course of his manufacture, such as coal; this is also regarded as stock. See also Simon's Taxes, 3rd ed., (1970), vol. B, pp. 411 et seq.

The view expressed by Whiteman and Wheatcroft is not a mere outgrowth of the United Kingdom statutory definitions to which I have already referred. It is a reflection of commercial usage arising from the development of accounting principles over a long period of time. The authors refer, in support of the last sentence in the passage quoted, to the decision of Rowlatt J. in George Thompson & Co. Ltd. v. Commissioners of Inland Revenue [17] where a shipping company having contracted to purchase a quantity of coal for the purpose of running its ships subsequently transferred the benefit of the contract at a profit - when its ships were requisitioned in 1916, there being no need for the coal. It was held that the coal was bought on revenue account as consumable stores as part of the business and that therefore the profit was taxable. In effect the coal was treated as part of the taxpayer's trading stock.

The recognition by accountants and commercial men that raw materials used for the purpose of manufacture in a manufacturing business and partly manufactured goods form part of the trading stock of the business was an almost inevitable development. It enabled the value of raw materials and partly manufactured goods to be included in the value of trading stock at the beginning and end of an accounting period and by this means it led to the making of a more accurate calculation of the profit earned or the loss sustained in that period. It is not easy to see how an accurate calculation of profit or loss could be made unless the value of raw materials and partly manufactured goods was taken into account. Of course the value might be taken into account, even though by different means. Partly manufactured goods may be dealt with as "work in progress", as indeed they are sometimes, but this expression is no more than an alternative description except in so far as it is intended to introduce different methods of valuation.

In this respect I agree with Aickin J. that the House of Lords in Duple Motor Bodies Ltd. v. Ostime [18] did not treat work in progress as being essentially different from trading stock. Their Lordships used the expression "work in progress" as an alternative description for partly manufactured goods which, like raw materials and completed goods, form part of the trading stock of a business and which, as that case illustrates, give rise to special problems of valuation. Lord Reid, with whose judgment Lord Tucker and Lord Hodson agreed, said [19] :

Suppose that the manufacture of an article was completed near the end of an accounting period. If completed the day before that date the article, if not already sold, has become stock-in-trade, if completed the day after that date, it was still work in progress on that date. 1. [1961] 1 W.L.R. 739; [1961] 2 All E.R. 167; (1961) 39 T.C. 537. 2. [1961] 1 W.L.R., at p. 751; [1961] 2 All E.R., at p. 172; (1961) 39 T.C., at p. 569.

In Henderson v. Federal Commissioner of Taxation [20] , Windeyer J., after referring to this statement, said: "These propositions relate to "work in progress" as a synonym for tangible things, goods in process of manufacture from raw materials, things which when completed will become stock-in-trade." These observations were directed to the question whether the stock of partly manufactured goods is to be treated for taxation purposes in the same fashion as completed goods and to this question an affirmative answer was returned. The expression "work in progress" was used to differentiate goods in the former from those in the latter category. It is, I think, taking too much from what was said to conclude that these statements positively express the view that goods in process of manufacture are excluded from "trading stock". If they go so far, I would, with respect, disagree with them. The wide view of the ordinary denotation of "trading stock" is not something which is peculiar to the United Kingdom and foreign to Australia. In Case No. 120 [20a] the Chairman, Mr. Gibson, observed that he had little doubt that raw materials came to be regarded long ago commercially as trading stock.

1. (1970) 119 C.L.R. 612, at p. 635. 2. (1951) 1 C.T.B.R. (N.S.) 568, at p. 572.

It has been pointed out previously that, unlike the United Kingdom income tax legislation, the Act does not provide for the assessment of tax on the profits or gains of a business - see Commercial and General Acceptance Ltd. v. Federal Commissioner of Taxation [21] and the cases there cited; J. Rowe & Son Pty. Ltd. v. Federal Commissioner of Taxation [22] . One consequence of this difference is that some accounting principles and practices which have been held to be appropriate in the ascertainment of a taxpayer's profit may have no application here because our statutory provisions specifically instruct us as to what constitutes assessable income and as to the items that shall be allowed as deductions from that income. The trading stock provisions contained in ss. 28 to 36 are a case in point. Accounting principle and practice cannot prevail over them. However, as the definition of trading stock contained in s. 6(1) is not an exclusive definition, it requires us to give effect to the ordinary, and in this case that happens to be the commercial, meaning of the expression, notwithstanding that in part at least it is a meaning which may have derived from or may have been influenced by accounting principle or practice.

1. (1977) 137 C.L.R. 373. 2. (1971) 124 C.L.R. 421, at pp. 450-451.

If trading stock according to its ordinary meaning denotes land as well as goods and commodities, it must follow that land may form part of the trading stock of a business before it has been converted into the condition in which it is intended to be sold. Just as raw materials and partly manufactured goods form part of the trading stock of a manufacturer, so also virgin land which has been acquired by a land developer for the purpose of improvement, subdivision and sale in the form of allotments will form part of his trading stock. If the statutory definition of trading stock in s. 6 (1) were an exclusive and comprehensive definition it might be possible to draw a distinction between land and goods and to assert that the presence of the word "manufacture" in that definition has a restricted effect so as to exclude land acquired for the purpose of improvement and development antecedent to sale, thereby overcoming the argument that land so acquired is none the less land acquired for the purpose of sale within the meaning of the definition.

But the statutory definition is inclusive only and no distinction should be drawn between goods on which work is to be done before they are converted into the condition in which they are intended to be sold and land on which work is to be done before it is converted into the condition in which it is intended to be sold.

Once it is accepted that land acquired for the purpose of improvement and development as a preliminary to sale in allotments in its improved form constitutes part of the trading stock of the land developer's business, notwithstanding that the land as acquired differed in condition from the land as intended to be sold, the issue in the present case is whether the land in question was acquired by the respondent taxpayer for its business as a land developer, that is, for improvement and development as a preliminary to sale in subdivided allotments. That substantial work remained to be undertaken in connexion with the land before it would achieve the condition in which it was intended to be sold is an immaterial consideration. It is enough that the respondent was carrying on the business of a land developer and that it acquired the land in the course of carrying on that business. The facts as outlined by the primary judge make it plain that the land was acquired by the respondent taxpayer for this very purpose.

I do not accept the submission that had the respondent proceeded with its plan and sold the land after it had been improved and subdivided the respondent's profit arising on sale would have been assessable under s. 26 (a), not s. 25 (1). Whether the trading stock provisions can have any application to a case which would yield assessable income only because it falls within s. 26 (a) is questionable. In Investment and Merchant Finance Corporation Ltd. v. Federal Commissioner of Taxation, Barwick C.J. said [23] : "Section 26 (a) is intended in my opinion to deal with transactions which are entire in themselves and do not form part of a more extensive business." The Chief Justice went on to express his agreement with Menzies J. who said [24] :

the whole of the carrying on of a business of buying and selling is not to be comprehended within s. 26 (a), nor does that provision aptly apply to the particular dealings constituting, in total, the carrying on of a business. Section 26 (a) deals with particular transactions which might otherwise escape from the tax net and it brings into assessable income profits, after outgoings attributable to the particular transaction have been taken into account. 1. (1971) 125 C.L.R., at p. 255. 2. (1971) 125 C.L.R., at p. 264.

Thus a profit made on the sale of property acquired by a taxpayer, who does not carry on the business of dealing in land, for the purpose of profit-making by sale would not fall within s. 25 (1), but it would fall within s. 26 (a). The trading stock provisions do not readily apply to such a case. Section 28, which is the operative provision requiring that trading stock be taken into account in the ascertainment of a taxpayer's taxable income, applies only when the taxpayer carries on a business.

However, this is not a matter which needs to be pursued because, on the view which I take of this case, the respondent was carrying on a business and its business was such that the profits which it stood to make on the sale of the land in subdivision would have formed part of its assessable income under s. 25 (1).

The lands in question consisted of 110 acres on St. Hubert's Island and 100 acres on Riley's Island, each island being situated in Brisbane Water near Woy Woy. The lands were acquired by the respondent in a series of transactions. Although Riley's Island was purchased in its entirety from its former owner, the 110 acres on St. Hubert's Island were purchased in twenty separate parcels from individual owners. The two islands were sandy, situated a short distance from the mainland. The primary judge found, in accordance with the evidence, that the respondent was formed for the purpose of acquiring the lands, carrying out development work, subdividing and selling them as residential allotments.

The proposed undertaking was one of some magnitude and complexity. It involved, first, the rezoning of the lands because the existing zoning was not appropriate to residential development of the kind proposed. It then involved engineering and hydrographic work on a large scale. A bridge was to be constructed to connect the islands to the mainland, the level of the islands was to be raised to an acceptable height and canals were to be constructed in order to provide "marina or quay" type water frontages. Although the cost of the lands was of the order of $100,000, the cost of the proposed development greatly exceeded this amount and, by virtue of improvements carried out before the transfer of the land by the liquidator of the respondent to its sole shareholder, Portuland Developments Pty. Limited, the value of the land had risen to $2,250,000.

The features to which I have referred stamp the enterprise with the characteristics of a business which had as its object the making of a profit from the ultimate disposition of the land in subdivided form. The land was acquired in 1960 in a series of transactions as the first step in a substantial business undertaking which was to endure for some years. Indeed, it was a long way from completion in 1972 though it is fair to say that the respondent encountered some difficulties which may not have been foreseen. The land was not acquired as an investment and its development for subdivision and sale was not simply the realization of a capital asset. In these circumstances it is impossible to treat the proposed enterprise as one which lacked the characteristics of a business and to say that it constituted no more than an isolated transaction capable on yielding assessable income under s. 26 (a) rather than s. 25 (1).

The final question to be decided is whether the transfer by the respondent to its sole shareholder in the course of a voluntary winding up brings into play s. 36 (1) which provides that where "(a) a taxpayer disposes by sale, gift, or otherwise of property being trading stock ; (b) that property constitutes or constituted the whole or part of the assets of a business which is or was carried on by the taxpayer; and (c) the disposal was not in the ordinary course of carrying on that business," the value of the property shall be included in the taxpayer's assessable income. Unless this question is answered in the affirmative the value of the property transferred does not form part of the respondent's assessable income under the Act. In Rose v. Federal Commissioner of Taxation the Court said [25] :

In employing the words "dispose of" s. 36 doubtless meant to include every alienation of trading stock. "Disposition" and "dispose of" are expressions of the widest import. But the subject of the disposition must be considered as well as the ambit of the expression "dispose of". Later, in Henty House Pty. Ltd. v. Federal Commissioner of Taxation [26] , Williams A.C.J., Webb, Kitto and Taylor JJ. said: No doubt the notion primarily conveyed by the words "disposed of" is the notion of a disposition by the taxpayer; but it is not necessarily so confined, and the use of the passive voice, without specific words of restriction referring to the person by whose act the disposal takes place, leaves ample room for a construction in keeping with the general tenour of the section The Court was there speaking of s. 59 which was in terms identical with s. 36 in the form in which it stood when Rose's Case was decided. However, in 1952 s. 36 (1) was amended so as to take its present form which, as its language shows, confines it to a disposition by the taxpayer. The respondent seized upon this circumstance and the change from the passive to the active voice to submit that the disposition now contemplated by s. 36 (1) does not extend to a transfer of assets in specie by a liquidator of a company to its sole shareholder. It seems to me that, measured against the generality of the language of s. 36 (1), these considerations are too frail to support the conclusion which the respondent seeks to sustain. 1. (1951) 84 C.L.R. 118, at p. 123. 2. (1953) 88 C.L.R. 141, at p. 151.

Next, it was submitted that, to fall within the sub-section, a disposition must be a voluntary disposition. The response to this contention is that the disposition by the liquidator to Portuland was a voluntary disposition. It was not deprived of its character as such a disposition by the circumstance that the liquidator was under a duty to make the transfer by virtue of s. 264 of the Companies Act, 1961, as amended, which requires that "the property of a company shall, on its winding up, be applied in satisfaction of its liabilities equally, and subject to that application shall unless the articles otherwise provide be distributed among the members according to their rights and interests in the company."

As it happened, Portuland was at the time when the transfer was executed a creditor of the respondent, its debt not having been paid by the liquidator. The transfer was executed in satisfaction of the rights of Portuland as a creditor and as the sole shareholder of the respondent.

The respondent then submitted that s. 36 (1) has no application to a disposition of the bare legal estate in property, that it cannot apply to a disposition of the legal estate in property the beneficial interest in which is already held by the transferee. In support of this submission the respondent relied on the observations of Lord Diplock, with whom the other members of the House of Lords agreed, in Ayerst (Inspector of Taxes) v. C. & K. (Construction) Ltd. [27] . There it was held that when a company was ordered to be wound up under the Companies Act 1948 U.K. the effect was to divest it of "the beneficial ownership" of its assets within the meaning of s. 17 (6) of the Finance Act 1954 U.K. since it could not use them for its own benefit. See also Shaw Savill and Albion Co. Ltd. v. Commissioner of Inland Revenue [28] : cf. Franklin's Selfserve Pty. Ltd. v. Federal Commissioner of Taxation [29] , where Menzies J. held that a company which owns shares beneficially in another company does not cease upon its liquidation to own those shares beneficially. It is unnecessary to examine this apparent conflict of opinion in order to resolve the issue which arises on the respondent's submission. It is sufficient for me to say that the language of s. 36 (1) is wide enough to embrace a transfer, executed by a liquidator on behalf of a company in the course of voluntary winding up, of its assets to a sole shareholder in satisfaction of its rights as a shareholder and creditor, even on the assumption which I am prepared to make that the company cannot be regarded as the beneficial owner of those assets.

1. [1976] A.C. 167, at pp. 176-180. 2. [1956] N.Z.L.R. 211. 3. (1970) 125 C.L.R. 52, at pp. 70-71.

Finally, it was contended that as a disposition by a liquidator of a company in favour of a shareholder falls within the statutory definition of dividend contained in s. 6 (1) of the Act it should not be regarded as a disposition for the purposes of s. 36 (1). I do not see that there is any inconsistency involved in treating a transfer by a liquidator as a disposition within s. 36 (1) as well as regarding it as a distribution constituting a dividend within the meaning of the statutory definition contained in s. 6 (1).

For these reasons the transfer by the liquidator was in my opinion a disposition by the respondent which fell within s. 36 (1).

The facts and the relevant legislation appear in the reasons for judgment prepared by other members of the Court and I shall not repeat them. Two questions have been argued on the hearing of this appeal. First, was the land which the liquidator of the taxpayer company transferred in specie to its shareholder "trading stock" within the meaning of those words in s. 36 (1)? Secondly, did the taxpayer company "dispose of" the land when its liquidator transferred it to the sole shareholder, Portuland Developments Pty. Ltd?

I would answer both these questions in the affirmative. I therefore conclude that the appeal should be allowed. I agree with the reasons which have been expressed by Mason J. but on the question whether the land was trading stock I would express some reasons for myself. First, there is the question whether land may in any circumstances be trading stock. I agree with the conclusion of Stephen J., Mason J. and Aickin J. that it may be. I cannot usefully add anything to the reasons which they have expressed for that conclusion. That still leaves the question whether this land was trading stock of the taxpayer.

I do not find it possible to answer the question whether the land was trading stock except through an examination of the nature of the business of which the land may be the trading stock. Although it was submitted on behalf of the taxpayer in the Supreme Court of New South Wales that the land, even if it were found to be "trading stock", was not an asset of a business which was or had been carried on by the taxpayer, that submission was not pursued in this Court. Mahoney J. found that the taxpayer had been engaged in the conversion of the land into residential lots in a systematic manner with a view to the sale of those lots and he held that that activity constituted a business. That finding is not challenged but it leaves open the question whether that finding is the apposite finding in the context of s. 36 (1). I cannot separate the question whether the land was trading stock of the taxpayer from the question whether it was an asset of a business carried on by the taxpayer, as I shall attempt to explain.

The description "assets of a business" is not satisfied simply by examining as disparate questions whether the taxpayer carries on any kind of business and then whether the property is to be regarded as an asset of that business carried on by the taxpayer whatever it may be. In order to satisfy the requirement of s. 36 (1)(b) the property must bear the quality of its description in s. 36 (1)(a) in the business which must be found to be or to have been carried on by the taxpayer. For instance, a man may be a shopkeeper and out of the accumulated profits retained in the business he may purchase an area of land with the purpose of selling it at a profit at some time in the future. In one sense the land is an asset of the business, but not, I think, in the sense of s. 36 (1). There must be a relationship between the property and the business whereby it can be said that the property bears the description of one or another of the kinds enumerated, not in a general sense, but in specific relation to the business which was or is carried on. Thus property, being trading stock, must be an asset of a business of trading in that stock.

Even apart from the provision in s. 36 (1) (b) it is necessary to find the existence (present or past) of a business before the description "trading stock" can be applied to any particular property; and the definition in s. 6 must be read with that consideration in mind. There is no reference to the carrying on of business in the definition in s. 6 because the definition is concerned with the kinds of property which may be trading stock. The purpose of the definition is to ensure that not only that which is in a condition ready for sale but also that property (at any rate movable property) which is intended to be worked on or even used up in a process of manufacture will fall within the meaning of the words "trading stock" in the Act, as well as the things produced or manufactured and things acquired or purchased for purposes of sale and exchange. The definition must, however, be read in the light of the fact that it is trading stock in a business to which the definition will be applied in the substantive provisions of the Act. It is true that this observation cannot be as generally applied to livestock as it can to other kinds of property but otherwise it is of general application.

Once it is concluded that land may be trading stock, then I can see no reason to limit the application of the words to land which is in the condition in which it is intended that it should be sold. I am inclined to the view that land acquired or purchased for purposes of sale falls within the words of the definition whether or not the land is in the condition in which it is proposed that it shall be sold. The definition does not say otherwise. But whether this be so or not, the definition is by way of extension, not limitation, of the ordinary meaning of the words "trading stock"; and undeveloped and unsubdivided land acquired for the purpose of development, subdivision and sale is a stock of land in which the person acquiring it may be said to trade or to propose to trade. It may therefore properly be described as trading stock not only when the processes of development and subdivision have been carried out but also when it is acquired for the purpose of carrying out those processes upon it. Whether or not it will be held to be trading stock depends on whether the person carries on or had previously carried on the business of trading in that land.

I turn now to the facts of the present case. It can be accepted that the taxpayer was at a relevant time carrying on the business of developing and improving and of subdividing land with the intention of selling it in subdivided lots in its improved and developed state. But so to find does not answer the question whether the taxpayer was engaged in the business of trading in the land so that the land may be regarded as its trading stock. It seems to me that the essential question in the present case is - what must be found before it can be said that the taxpayer was carrying on the business of trading in the land? More particularly, did the taxpayer commence to carry on the business of trading in the land by acquiring the land for the purpose of developing and improving it, of subdividing it and of selling it off in subdivided lots? If it did not commence to carry on the business of trading in the land at that time of acquisition I do not consider that it can be said to have commenced to trade in the land or to carry on the business of trading in the land at any subsequent point of time. At the most it carried on the business (and I assume that it can be so described) of developing and improving and subdividing the land for the purpose of sale in lots. That is not the relevant business, nor is the land appropriately described as the trading stock of such a business.

I am prepared to accept that the acquisition of the land was an isolated or, more expressively, a "one-off" transaction even though various parcels were purchased at different times. There was no intention of "turning over" the land in a course of separate acts of buying and selling. The intention was to acquire a particular area of land in whole before any resale. The chance that this involved a number of separate purchases does not affect the quality of the activity which was being carried on. So the question is whether a "one-off" purchase of a quantity of land with the intention of improving and subdividing and selling it in subdivided lots can be the commencement of the business of trading in that land. If it can be, there seems to me to be no reason why there was not the commencement of such a business in the present case or why the land did not thereupon become the trading stock of that business.

The purchase in a one-off transaction of land or of a commodity which is personal property in bulk with the intention of reselling it in bulk is not of itself the commencement of a business of trading in that land or that commodity and neither the land nor the commodity is trading stock of a business. The concept of trading in this connexion involves at least repeated acts of selling, and the business of trading cannot be commenced unless at least there are intended to be repeated acts of selling. Again, the purchase in a one-off transaction of land or of a commodity in bulk with the intention of breaking down the bulk at some indefinite time in the future and of selling in broken down parcels does not appear to me to be the commencement of a business of trading in that land or that commodity, and the land or commodity cannot be regarded as the trading stock of a business of trading in that land or commodity. There is not then that continuity of activity which characterizes a business. The acquisition of the land or commodity is a first step in what may or may not develop into a business. Lastly, the intention to develop and sell off an asset not acquired for the purpose of so doing or the activity of development and sale of such an asset is not the carrying on of a business of trading in that asset. The asset must at least have been acquired for the purpose of resale before the question can arise whether the activities are trading activities.

But none of these cases is the present case. Here there was what I think should be treated as a "one-off" purchase of an area of land with an intention thereafter, as one continuous course of activity of which the purchase was the commencing act, to improve, develop, subdivide and sell in subdivided lots the area of land so purchased. Did the taxpayer thereby carry on the business of trading in that land? I have come to the conclusion that it did, and that the land became the trading stock of that business even though at the relevant time none of the land had been sold. The fact that none of the land had then been sold did not change the character of the business carried on or the character of the stock, the land, held as an asset with which it was intended to trade.

A contrary conclusion would appear to me to involve the proposition that a person can only carry on the business of trading if he does or intends to do repeated acts both of buying and of selling in the course of the business. Ordinarily to carry on the business of trading in a thing does involve repeated acts of buying and of selling. There is a turnover and the proceeds of sale of some thing are used in the business for the purchase of further stock which in turn will be sold. However, although this repetition of both buying and selling is a usual feature of trading I do not think that it is an essential feature. Even though the concept of trading involves repeated acts of selling a person will in ordinary language be described as trading if, having purchased a commodity in bulk for the purpose of resale he then proceeds to sell it on the occasions where and in the quantities for which there is a market. Such trading is not common but it is not unknown. A form of trade well known in the past was to charter a ship, load it with a cargo consisting of some commodity for which there was a market across the seas and carry that commodity to the various places where a market for that commodity could be expected to be found. The person who did that could properly be described as a trader and the cargo was his trading stock. It was not necessary, before he and his cargo could be so described, that he repeat or intend to repeat the venture. The one venture was a single trading operation. And that, it seems to me, is the position here. Once it is recognized that land may be trading stock then an acquisition of land for the purpose of resale, after development improvement and subdivision, in subdivided lots, and a continued activity in fulfilment of that intention brought into existence a trading operation. The company was carrying on the business of trading so long as it was pursuing its activities with an intention to sell off the land in subdivided lots and the land was its trading stock so long as the intention continued. That is sufficient to satisfy the conditions of s. 36 (1) (a) and (b). The property was trading stock which constituted assets of a business of trading in that land which had been commenced by the taxpayer. The use of the past as well as the present tense in s. 36 (1) (b) makes it clear that the relevant business did not need to be still being carried on at the time of disposition of the property.

I agree with Mason J. and Jacobs J. The appeal should be allowed.

This is an appeal from a decision of Mahoney J. in the Supreme Court of New South Wales in which he upheld an objection by St. Hubert's Island Pty. Ltd. (In liquidation) ("the taxpayer") against an assessment to income tax in respect of the year of income ended 30th June 1972 [30] .

The taxpayer was incorporated on 25th August 1960 and those who formed it had in mind that it should purchase two small islands, St. Hubert's Island and Riley's Island (situated in Brisbane Water) on the north coast of New South Wales.

The learned trial judge found that the immediate purpose which the participants, and therefore the company, saw in the acquisition of the islands was the carrying out of the necessary development works to enable the land to be subdivided and residential blocks sold, notwithstanding that one or both of them entertained views or hopes of the possibility of obtaining sand from the vicinity of the islands for sale or perhaps use in the development project, which involved substantially raising the level of the land.

There were however problems connected with the zoning of the land at that time and steps were taken to seek an alteration in the zoning to permit that kind of land development. Ultimately permission was obtained though it was subject to stringent conditions with respect to raising the level of the land on the islands, the construction of a bridge and the effecting of a variety of works with respect to draining, access and development generally. Substantial expenditure was incurred in the early stages of the project.

One of the original participants died in 1961 and subsequently discussions took place with a company called Hooker Rex Pty. Ltd. which ultimately undertook in 1964 to pursue the application for re-zoning on the basis that that company or a member of that group would purchase the whole of the shares in the taxpayer. On 29th August 1966 the shareholders granted an option to Hooker Town Developments Pty. Ltd. to purchase the whole of the issued shares. That option was exercised and the shares from the original holders transferred to Hooker Town Developments Pty. Ltd. That company subsequently disposed of the shares to another company which was described as a joint venture company in which the Hooker group had an interest. That company, Portuland Developments Pty. Ltd. ("Portuland"), acquired the whole of the shares in the taxpayer on 18th December 1968.

During the period up to the acquisition of the shares by Portuland substantial work had been done on the islands towards making them physically capable of being used for subdivision purposes, but there remained outstanding compliance with the requirements that the level of the land must be raised by some three feet before development permission would be available and that a bridge be constructed. That work had not been done prior to the sale of the shares to Portuland but work commenced in late 1968 or early 1969 and by 17th March 1971 substantial expenditure had been incurred, mostly financed by borrowings from Portuland, though the work was still incomplete and apparently no subdivisional plans had been approved.

On 17th March 1971 an extraordinary general meeting of the taxpayer resolved that it should be placed in voluntary liquidation and a liquidator was appointed. At that stage, it was indebted to Portuland in respect of amounts advanced for the cost of the work done on the island and for work done by Portuland on its behalf. It appears that at that stage there was no other creditor and the extraordinary general meeting authorized the liquidator to distribute the assets of the company in specie to the contributories. There was in fact only one contributory, namely, Portuland and shortly thereafter the liquidator, on behalf of the taxpayer, transferred the land in question to Portuland in specie, thereby discharging the debt owed to it by the taxpayer and satisfying Portuland's interest as a contributory. The details by which the amounts in question were arrived at are not material to the question now in issue.

The exact date of the transfer of the land by the liquidator to Portuland does not appear, but it evidently was after 1st July 1971 because the Commissioner assessed the taxpayer to tax in respect of the year ended 30th June 1972 upon the basis that the transfer of the land gave rise to assessable income and that its taxable income for that year was some $1.3 million. This assessment was made upon the footing that the transfer of the land by the liquidator constituted a disposal of trading stock by reason of s. 36 (1) of the Income Tax Assessment Act 1936, as amended.

The only point involved in the appeal to the Supreme Court of New South Wales from that assessment was whether s. 36 (1) was applicable to the circumstances. Three separate questions were argued in the Supreme Court, first, whether the land was trading stock within the meaning of the section; second, whether it was an asset of a business carried on by the taxpayer; and third, whether there had been a disposal of the land by the taxpayer within the meaning of the section. Mahoney J. found that the land was not trading stock, but that it was an asset of a business carried on by the taxpayer and that it had been disposed of by the taxpayer. In this Court, the Commissioner contended that the land was trading stock to which s. 36 applied. The taxpayer maintained its argument that the land was not trading stock and also argued that there was no disposal within the meaning of s. 36, though it did not pursue the point that the land was not an asset of a business carried on by it. In order to succeed the Commissioner must establish both that the land was trading stock within s. 36 (1) and that there was a disposal of it. The first of these two questions involves in itself two aspects, first whether land is capable of being trading stock within the meaning of s. 36, and second whether this land was trading stock.

The question whether land can be trading stock within the meaning of this definition and of s. 36 has been discussed on a number of occasions in this Court but there is no decision which settles the point. The relevant statutory provisions with respect to trading stock are the definition in s. 6 and the provisions of ss. 28-31, s. 36 and s. 51 (2). Section 6 provides that: " "trading stock" includes anything produced, manufactured, acquired or purchased for purposes of manufacture, sale or exchange, and also includes live stock". Section 28 contains provisions designed to bring into the assessable income of a taxpayer, or to provide for an allowable deduction equal to the difference between the value of trading stock on hand at the beginning of the year of income and at the end of the year of income. Section 31 (1) requires that the value of each article of trading stock (not being live stock) to be taken into account at the end of the year of income shall be, at the option of the taxpayer, its cost price or market selling value or the price at which it can be replaced. Sub-section (2) enables a different method of valuation to be adopted where the Commissioner is satisfied that the value of stock is less than the lowest value ascertained under sub-s. (1). It is to be that which is fair and reasonable having regard to a number of factors including "the quantity of the trading stock sold, exchanged or used in manufacture by the taxpayer after the end of the year of income and the prospects of sale, exchange or use in manufacture of further quantities to that trading stock".

Section 36 provides, so far as material, that where a taxpayer disposes by sale, gift, or otherwise of property being trading stock, and the property constitutes the whole or part of the assets of a business which is, or was, carried on by the taxpayer, and the disposal was not in the ordinary course of carrying on that business, then the value of that property shall be included in the assessable income. Section 51 (2) provides that expenditure incurred in the purchase of stock used by a taxpayer as trading stock shall be deemed not to be an outgoing of capital or of a capital nature.

The definition and the operation of ss. 28 and 31 show that the term "trading stock" and the adjustments in respect thereof as between the beginning and the end of the year of income are not confined to what may be regarded as the ordinary or basic meaning of "trading stock", i.e. goods purchased for re-sale in the course of a business which involves the carrying of a stock of goods of the relevant kind which are acquired, held and disposed of, either exactly as they are purchased or after no more than repacking in smaller quantities or packages, as would be the case with both wholesalers and retailers. The extension is involved in the notion that raw materials purchased for the purpose of use in manufacturing processes are treated as trading stock, notwithstanding that they may be consumed in the process of manufacture and replaced by a finished product, being goods of a different nature, which are then sold or enter into the trading stock at the end of the year. The definition makes this clear, although its precise operation may be a matter of some grammatical difficulty because the "purposes of manufacture, sale or exchange" must be read selectively in their application to the earlier words.

The questions which arise in determining whether land may be trading stock are whether it can be described as or brought within the ambit of the word "anything", and whether it can be made to fit the provisions of this group of sections so as to be capable of being described as being "on hand" or as an "article" of trading stock, being something which is capable of being "replaced" or becoming "obsolescent" or whether two parcels can be of "the same kind" within the meaning of these provisions. The word "thing" is not readily to be taken as including within its ambit land, but it is not necessarily right to read the word "anything" as if it were two words, though its primary meaning is a "thing of any kind". Neither land itself nor interests in land would ordinarily be thought of as being "things". The provisions to which I have just referred are sufficient to indicate at least that there are expressions used in relation to trading stock which are not readily applicable to land. No doubt occasions could arise in which one piece of land could be said to be "of the same kind" as another, as in the case of adjoining blocks in some subdivisions, and it may in some instances be possible to say that one allotment could be "replaced" by another in the same subdivision, or perhaps even some other subdivision. In the case of business premises the word "replaced" might be used by saying, e.g. that a branch at one location has been replaced by another at a new location.

It does not seem to me however that the conception of trading stock necessarily involves that the articles which are bought and sold must be identical or that what replaces one item of trading stock must be identical with that which it replaces. It is easy enough to formulate examples where this would be so. One such example is the case of an art dealer whose business comprises the buying and selling of paintings, including old masters. It would be as proper to describe each of the latter as being "unique", as it would be to use that expression in relation to a particular parcel of land. Yet it would be difficult to say that the art dealer does not have trading stock comprising pictures bought for purposes of sale and that when he sells a number of masterpieces and buys other paintings by other painters, or even of the same painter, that he is not replacing the stock which he has sold. The expression "of the same kind" cannot be read too strictly. It would be an affront to common sense to require absolute identity, particularly in sections of the Act dealing expressly with business transactions. Common sense alone would tell us that in the ordinary course of trade in goods one line may be discontinued but none the less accurately described as "replaced" by another.

These considerations are of course not to be looked at individually but should be looked at collectively in order to see whether the apparently wide word "anything" in its ordinary meaning includes land when used in this particular context. I am disposed to the view that land may in some circumstances be trading stock and it does not much matter whether it is because of the ordinary meaning of that expression or by reason of such extension as may be effected by the words which follow the word "includes". The definition is not perhaps very helpful because that which it "includes" would seem to be a greater part or, on one view, the whole, of that which is the ordinary meaning of the term "trading stock". There are difficulties with definitions of this kind where an ordinary well-known expression is taken and then said to include other things, some or perhaps all of which, fall within the ordinary meaning. This kind of problem was discussed in Y. Z. Finance Co. Pty. Ltd. v. Cummings [31] . I do not think that for present purposes it is necessary to decide whether the word "includes" in this definition has the meaning "means and includes" so as to make it exclusive as well as inclusive, even though to some extent different from the ordinary meaning.

The decision in Investment and Merchant Finance Corporation Ltd. v. Federal Commissioner of Taxation [32] shows that stocks and shares may be "trading stock" in the hands of a share trader, notwithstanding earlier views that choses in action were outside that conception. The term "trading stock" thus extends beyond tangible movables. In such circumstances there seems no valid reason for excluding from the term "trading stock" any property which is capable of being bought and sold in the course of a business of buying and selling items of such property and maintaining a stock thereof for the purpose of such a business. It appears to me that there may be circumstances in which land, or interests in land, may be trading stock, but, for reasons which I shall indicate, the mere commercial purchase of land for resale, either in globo or in subdivided parts, is not sufficient to make such land trading stock.

We were referred in the course of argument to certain English authorities which treat land as capable of being trading stock, but it was said that they were of no significance in the Australian scene because in the English income tax legislation there was a definition of trading stock which included land. This view is misconceived, because in the provisions of the English income tax legislation which require the ascertainment of the balance of profits and gains of a trade or business, there is no definition of trading stock and indeed no provisions corresponding to ss. 28-31. However the course of authority has there produced the result that trading stock must be taken into account in the ascertainment of the balance of profits and gains in much the same way as is expressly provided in ss. 28-31. Land has there been treated as trading stock and those principles applied in bringing it into account. See Pearn v. Miller [33] and Hudson v. Wrightson [34] . There are, however, certain parts of the Income and Corporation Taxes Act, 1970 U.K. which contain a definition of trading stock for special purposes. Thus in s. 137 (originally s. 26 of the Finance Act, 1938 U.K.) there is a definition to be used in ascertaining the profits and gains to be brought to tax where a business has been discontinued. That definition expressly includes real property and it also expressly includes "property such as is sold in the ordinary course of the trade or would be so sold if it were mature or if its manufacture, preparation or construction were complete" and "materials such as are used in the manufacture, preparation or construction of any such property " Again in the Finance (No. 2) Act, 1975 U.K. a definition is provided for the purpose of providing relief from the consequences of high level inflation on the value of trading stock. That definition expressly includes what is described as "work-in-progress", a term which itself is defined in a manner somewhat similar to the relevant part of the definition in s. 137.

These definitions are none the less instructive as reflecting the course of authority in the English courts. The general problem presented by the need to construct trading accounts for persons who buy and sell or buy raw materials from which they manufacture finished products for sale has been dealt with progressively by decided cases in England. The situation is succinctly described by the learned authors of Whiteman and Wheatcroft on Income Tax, 2nd ed., (1976), par. 9-28:

A trader who buys and sells goods will normally have on hand a quantity of goods which he has purchased but not yet sold. These are called his trading stock. A manufacturer who buys raw materials, processes them and sells the finished product will normally have on hand some unused raw materials, some partly manufactured goods and some finished goods awaiting sale. The first and last are stock, the partly processed goods being sometimes called stock and sometimes work in progress. After giving other illustrations, the learned authors say: Unless a trader is on a "cash basis" it is clear that at the end of his first trading period some figure must be added to the credit side of his accounts in respect of his stock and work in progress, otherwise his accounts would not fairly show the profit of the period. These items should normally be brought in at the end of the first trading period at their cost and deducted at the same figure in opening the account of the second trading period. It does not seem to me to matter whether partly manufactured goods are called "work-in-progress" rather than trading stock but on the whole it seems preferable to regard them as trading stock because in truth they represent trading stock, namely raw materials, in the course of transformation into a different kind of trading stock, namely finished products. Something which arises out of work done on trading stock in order to produce other trading stock may be accurately described itself as trading stock. I am not able to agree with the observation of Mahoney J. that the House of Lords in Ostime (Inspector of Taxes) v. Duple Motor Bodies Ltd. [35] regarded work-in-progress as being essentially different from trading stock and to be treated by way of contrast with it. The reasons given by their Lordships demonstrated that the approach to work-in-progress is identical to the approach properly to be made to stock in trade in the sense of that which is purchased, or that which is manufactured. This, I think, is apparent from the speeches of Viscount Simonds [36] , Lord Reid [37] , and Lord Guest [38] . The case itself was concerned only with the proper method of valuing work-in-progress and took for granted the proposition that that which is truly work-in-progress should be brought into account in the ascertainment of the profits and gains in the same manner as raw materials and finished products, i.e. at cost or market value whichever is the lower, in accordance with principles long settled in relation to stock-in-trade in the narrower sense. The problem there was how cost should be ascertained in the case of work-in-progress. The case does not draw any distinction between the valuation of trading stock in the narrower sense of goods purchased on the one hand and work-in-progress on the other, save to observe that in the former case cost may be readily ascertained, whereas in the second, difficulties are encountered. The case is by no means authority for the proposition that work-in-progress is to be taken into account when it arises out of work done on property which is not itself trading stock in the sense of raw materials. 1. [1961] 1 W.L.R. 739; [1961] 2 All E.R. 167; (1961) 39 T.C. 537. 2. [1961] 1 W.L.R., at pp. 748-749; [1961] 2 All E.R., at p. 170; (1961) 39 T.C., at p. 567. 3. [1961] 1 W.L.R., at p. 751; [1961] 2 All E.R., at p. 172; (1961) 39 T.C., at p. 569. 4. [1961] 1 W.L.R., at p. 757; [1961] 2 All E.R., at pp. 176-177; (1961) 39 T.C., at p. 574.

If one were to carry the analogy of manufactured goods into the realm of real estate, it would require that land which was purchased as trading stock might, when work is done upon its development, be brought into account at the end of the year, if still retained, either at cost (which would include cost of all work done on it) or at market value under the English system, or at cost, market value, or replacement cost under ss. 28-31, but it would not follow that individual allotments of a subdivisional estate, which were ready for sale and which might lawfully be sold, would be trading stock when the work was completed in circumstances in which the original land acquired in globo was not trading stock.

Notwithstanding that I take the view that land is capable of being trading stock, I am satisfied that in the circumstances of the present case the land in question was not trading stock of the taxpayer and therefore that s. 36 of the Act has no application.

I have reached that conclusion for somewhat different reasons than those adopted by the learned trial judge. In my opinion items of property (including land) can only be regarded as trading stock in circumstances in which the business in which they are employed involves some continuity or repetition of both buying and selling, so that one is able to say in a real sense that the stock is being turned over by a process of buying and selling. That is the kind of business with which this group of sections is dealing.

A single purchase of land, however substantial in area, made, not as part of a continuing business of trading in land, but none the less with a view to its subdivision and development into a residential area, individual allotments in which will be sold, does not seem to me to have the qualities required for answering the description of trading stock, nor for the application of the processes for calculating its effect upon the taxable or assessable income which are prescribed by ss. 28, 29, 31 and 51 (2). If however a dealer or a "subdivider" were engaged in a continuous process of purchasing, holding and reselling subdivided land or of purchasing land for development, subdividing and selling in allotments and, as such subdivision and sales progressed, purchasing further land to hold in readiness for subdivision as and when the existing "stock" of saleable allotments approached its end, it would be proper to say that land from time to time unsold would be trading stock. Such a process is essentially different from a single operation involving the acquisition of a single area with a view to its physical development and subdivision with a view to sale in allotments. No doubt the initial step in the former kind of business may appear very similar to that in the latter and at that stage it would depend upon the intention with which the activity had been embarked upon. In dealing with the converse situation in Investment and Merchant Finance Corporation Ltd. v. Federal Commissioner of Taxation, Barwick C.J. said [39] :

In the first place it is an error in my opinion to think that the transactions of a business can be taken item by item and each treated as falling within s. 26 (a). The business must be regarded as a whole, its receipts being assessable income from which the permitted deductions are to be deducted. Section 26 (a) is intended in my opinion to deal with transactions which are entire in themselves and do not form part of a more extensive business. In that event they are regarded as yielding a profit which will be calculated according to the circumstances of the transaction, the profit only being assessable income.

In the second place, my earlier conclusion that the transaction formed part of the appellant's business of trading in shares denies any basis for treating it as an isolated transaction to which s. 26 (a) may apply.

Menzies J. made similar observations [40] . 1. (1971) 125 C.L.R., at p. 255. 2. (1971) 125 C.L.R., at p. 264.

The fact that an item of property ("any thing") is, in a commercial transaction, purchased for purposes of sale is not of itself sufficient to enable that thing to be characterized as trading stock. So to characterize it would be to give no force to the word "trading" and to produce the result that there is no room for the operation of s. 26 (a), a result not consonant with the general scheme of the Act.

In the present case there is no question that the taxpayer's objective was to improve, develop and subdivide only these two islands with a view to selling the allotments and thereby deriving a profit from the undertaking. There is no suggestion that it was part of any wider business operation or that there was any intention of maintaining a stock of land or of allotments, by purchasing new land for subdivision as the old was gradually sold off. The activity upon which the taxpayer embarked is no doubt a business activity and a profit-making venture, but that does not mean that the business is one to which ss. 28-31 and 51 (2) can apply. It is appropriately classified as being a profit-making undertaking or scheme within the second limb of s. 26 (a). Indeed it may be regarded as a characteristic example of the kind of situation with which the second limb deals.

If it were sought to say that such an undertaking would produce income in the ordinary sense of that term as used in s. 25 (1) it would be only the profit arising from the undertaking which would constitute such income. It does not seem to me however that it would be appropriate to deal with it under that section. If however such an enterprise were conducted as part of a larger continuing business in which land was being continually bought, held and sold, or bought, developed, subdivided, held and sold, it would be right to say that a true reflex of the taxable income would be better, or at least as well, ascertained by treating the land as trading stock, the original purchase price as an allowable deduction and the proceeds of sale of subdivided lots as assessable income, with appropriate adjustments in respect of land on hand at the beginning and end of each year and for development costs. However that is not this case.

It was suggested that land purchased in a manner and for a purpose such as the present will become trading stock where the process of development and subdivision has reached the stage where either the whole or some part (it is not clear which) of the total area is capable of sale in subdivided allotments. Mahoney J. concluded that at the time of the transfer of the land it had not been "converted into trading stock" in that subdivisional lots had not been created and none were available for sale. This view of the facts was apparently common ground at the hearing and was plainly open on the evidence. No reason exists for departing from that view of the facts. However, in so far as his judgment may suggest that the allotments which ultimately emerge from the development and subdivision of this land as saleable lots would, on completion of that process, have become trading stock of this taxpayer, I am unable to agree with it. The completion of that process would not have converted this land into trading stock of this taxpayer. In the case of land bought and sold in the course of a continuing business the analogy of manufactured products, though imperfect, may be helpful and a proper result may be arrived at by using it as a guide. The extension for income tax purposes of the concept so as to include raw materials acquired for the purpose of manufacture is no doubt a natural one. It enables one to regard as stock in trade raw materials purchased, not for the purpose of sale, but for consumption or transformation into manufactured goods, produced though not purchased as stock in trade and capable of being on hand at the end of a year. This recognizes the economic and accounting identity in a continuing business of goods purchased and goods manufactured, from raw materials purchased. This extension of meaning has occurred in England without legislation. The definition of trading stock in s. 6 of the Act likewise establishes that for Australian purposes raw materials purchased for the purpose of manufacture in the course of a continuing business are to be treated in the same way as in England.

If it is right to conclude in a particular case, as in my opinion the trial judge rightly concluded in this case, that the relevant land as purchased was not trading stock, then it must follow that the allotments which arise from the process of development and subdivision are likewise not trading stock, and that where the purchase is a business undertaking it falls to be taxed under s. 26 (a) and the provisions with respect to trading stock have no application to the process of ascertaining that profit.

It follows from the view which I take of the nature of the profit-making undertaking in this case that the land is not trading stock and that therefore s. 36 has no application. That is sufficient to decide the appeal in favour of the taxpayer.

It is accordingly not necessary to consider the question of whether what was done by the liquidator constituted a "disposal" of the land by the taxpayer. That depends in part upon the true nature of a liquidation, the rights and duties of a liquidator and the nature of the interest of a contributory. In Franklin's Selfserve Pty. Ltd. v. Federal Commissioner of Taxation [41] Menzies J. in dealing with the question of whether a company in liquidation was the beneficial owner of shares held by it in a subsidiary company, said that he did not think that liquidation of itself deprived the company of the beneficial ownership of the shares for the purposes of the required continuity of shareholding under s. 80 and associated sections. Since that decision the House of Lords has considered the effect of a winding up order on the beneficial ownership of assets of a company: see Ayerst (Inspector of Taxes) v. C. & K. (Construction) Ltd. [42] where their Lordships held unanimously that when an order for the compulsory winding up of a company is made the effect is to divest the company of the beneficial ownership of its assets. The only speech was that of Lord Diplock who drew no distinction between a winding up order and a voluntary winding up, although he did not expressly refer to voluntary winding up. In the light of my conclusion that this land was not trading stock, it is not necessary to consider whether a transfer by a liquidator of that which is at least a legal title of land to a sole creditor or a sole contributory constitutes a disposal of the land. In so far as there is a conflict between the views expressed by Menzies J. and those expressed by Lord Diplock, it must be resolved in other proceedings.

1. (1970) 125 C.L.R. 52, at pp. 68-70. 2. [1976] A.C. 167.

For the above reasons I am of opinion that the appeal should be dismissed.