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

Commissioner of Taxation (Cth) v St Hubert's Island Pty Ltd - [1978] HCA 10 - HCA 1978 case summary — Zoe

[15]

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.

[90]

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.

[108]

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.

[110]

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.

[121]

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.

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Judgment (126 paragraphs)

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