Commissioner of Taxation (Cth) v Whitfords Beach Pty Ltd

[27]

The principle of law is that profits derived directly or indirectly from sources within Australia in carrying on or carrying out any scheme of profit-making are assessable to income tax, whilst proceeds of a mere realization or change of investment or from an enhancement of capital are not income nor assessable to income tax Later they observed [10] : In our opinion the authorities show that the objects and powers of the Company contained in its memorandum and articles of association are not decisive of the question whether the sale was an operation of business in carrying out a scheme of profit-making, but that a consideration of all the matters advanced by the Company was relevant to a determination of that question Subsequently, after the enactment of s. 26(a) in Premier Automatic Ticket Issuers Ltd. v. Federal Commissioner of Taxation [11] , Dixon J., after quoting the passages already cited from Ruhamah , said: The criterion, which the Legislature has now adopted and established, was formulated by the Courts in the absence of any statutory direction upon the way in which capital profits may be distinguished from income profits. So far as it lacks precision or is uncertain in its application, the cause is to be found in the powerlessness of the Courts to do more than state a wide general proposition and to apply it as each case arose. The statement of the proposition was not a definition, but rather an explanation of principle. No doubt, as the language of the statute it must receive a more literal application. It is not easy to say whether the expression "profit-making by sale" refers to a sole purpose, or a dominant or main purpose, or includes any one of a number of purposes. The alternative "carrying on or carrying out" appears to cover, on the one hand, the habitual pursuit of a course of conduct, and, on the other, the carrying into execution of a plan or venture which does not involve repetition or system 1. (1928) 41 C.L.R. 148. 2. (1928) 41 C.L.R., at p. 154. 3. (1928) 41 C.L.R., at p. 151. 4. (1928) 41 C.L.R., at pp. 151-152. 5. (1933) 50 C.L.R. 268, at p. 298.

[120]

The realization of an inheritance even though carried out systematically and in a businesslike way to obtain the greatest sum of money it will produce does not, in my opinion, make the proceeds either profit or income for the purposes of the Act. But, if the inheritor adventures the inheritance as the capital of a business, for example, of land jobbing or developing, the income of that business will be taxable, not, in my opinion, under s. 26(a) but according to ordinary concepts of income. No part of the value of the inheritance will be deductible in determining that income. The inheritance is then but the capital of the business. The point at which what was inherited or acquired not for resale so becomes the capital of a business may be at times difficult of identification. The distinction is also drawn by the former Chief Justice in White v. Federal Commissioner of Taxation [30] : It seems to me that it is not the circumstance that the taxpayer has endeavoured to improve the realizable value of his capital asset which provides the criterion but the circumstance that he has a reality put his capital asset to work as the whole or part of the capital of a business upon which he has ventured. Merely to realize a capital asset may involve money making as distinct from profit making but a business in the relevant sense of necessity involves the earning of or the intention to earn profits. White's Case provides an example of the venturing of land not acquired for the purpose of profit-making as the capital of a business, in that case, the business of timber production and sale. That is a clear case. In Williams [31] , Menzies J. suggests another plain case: There may, no doubt, be cases where a person ventures what has been received by gift in the carrying on or carrying out of a profit-making undertaking or scheme. In the judgment of the majority of this Court - but not in the opinion of the majority of the Privy Council - McClelland v. Federal Commissioner of Taxation [32] was such a case. A plain case can, however, be taken as an instance. There could be no doubt that land which has been given and is later used by the donee in the development of a housing scheme in which lots, with houses built upon them, are sold, could be regarded as committed to a profit-making undertaking. Plain cases, of course, are not likely to occasion a great deal of difficulty. The real difficulty lies in discerning in a case where the answer depends on questions of degree when an alleged "mere realization" is in reality the venturing of an asset not acquired for the purpose of profit-making as the capital of a business. 1. (1969) 118 C.L.R., at p. 371. 2. (1968) 120 C.L.R., at p. 216. 3. (1972) 127 C.L.R., at p. 245. 4. (1970) 120 C.L.R. 487.

[122]

The profits on the sales must therefore be taxable either because the taxpayer was carrying on the business of selling land, in which case the profits would be income on ordinary principles, or because in selling the land the appellant was carrying on or carrying out a profit-making undertaking or scheme in which case the profits would be assessable income under the second limb of s. 26(a). The crucial question is therefore whether the facts justify the conclusion that the appellant embarked on such a business or undertaking or scheme in 1924. The facts would, in my opinion, have to be very strong indeed before a court could be induced to hold that a company which had not purchased or otherwise acquired land for the purpose of profit-making by sale was engaged in the business of selling land and not merely realizing it when all that the company had done was to take the necessary steps to realize the land to the best advantage, especially land which had been acquired and used for a different purpose which it was no longer businesslike to carry out. The plain facts of the present case are that the appellant purchased the Lambton lands for the purpose of carrying on the business of coal mining and carried on that business on the land until it was no longer businesslike to do so. It then had the land on its hands and it was land which because of its locality and size could only be sold to advantage in sub-division. A sale in sub-division inevitably requires the building of roads. If it is advantageous to the sale of the land as a whole to set aside part of the land for parks and other amenities, this does not convert the transaction from one of mere realization into a business. It is simply part of the process of realizing a capital asset. Mr. Forsyth, counsel for the taxpayer, argues that there is no relevant ground of distinction between the Scottish Australian Case and the present case. In each, it was case of land being acquired for a non-profit-making purpose which was now spent, to be followed by the expenditure of energy and enterprise in enhancing the price at which it might be realized. And yet I remain unpersuaded as to the strength of the analogy. Williams J. was clearly impressed by the fact that the cessation of mining on the Lambton lands had not changed the essential character of the company. It was still a mining company, not one formed for the purpose of dealing in land. It found itself possessed of land for which it had no further use, and in his Honour's view set about selling it is an enterprising way. In any event, in this area of discourse, where the line between realisation on the one hand and the carrying on of a business on the other is difficult to draw and the decision in each case must depend on its own facts, one cannot do more than receive the way in which other courts have resolved different fact situations as illustrations, but no more than illustrations, of the operation of the basic principles. 1. (1950) 81 C.L.R. 188. 2. (1950) 81 C.L.R., at p. 192. 3. (1950) 81 C.L.R., at p. 195.

Commissioner of Taxation (Cth) v Whitfords Beach Pty Ltd - [1982] HCA 8 - HCA 1967 case summary — Zoe

At a glance

Court

Decision date

Before

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Judgment (131 paragraphs)

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Cases Cited (1)