Federal Commissioner of Taxation v Williams

The history of this land, so far as presently relevant, begins in 1959. In that year Mrs. Williams' husband was advised by Mr. Gordon Campbell, the senior partner of a leading Perth firm of estate agents of which Mr. Williams was then a junior partner, that the land was for sale and he strongly recommended its purchase. Acting on this recommendation, Mr. Williams, together with Mr. Gordon Campbell's son, Bruce Campbell, also a junior partner in that firm of estate agents, and a Mr. Scahill, the son of a close friend of Mr. Gordon Campbell, purchased the land, comprising two lots having a total area of about ten acres, for $4,000. They bought as tenants-in-common in equal shares and Mr. Williams contributed one-third of the purchase price. Mr. Scahill was then, and remained for some years after, a stranger to Mr. Williams.

The land was then covered with dense scrub, incapable of use for agriculture and so inaccessible, despite its close proximity to the city of Perth, that Mr. Williams did not attempt to inspect it but was content to view it from some high ground two miles away in a suburb known as Mt. Yokine, an outer suburb developed post-war, which was at the then extremity of suburban development. The land was, to Mr. Williams' knowledge, zoned as urban land at that time.

After purchasing the land nothing further was done with it for some years; indeed it was not until some ten years later, in 1968 and 1969, after suburban development had reached it, that it was cleared and subdivided and lots were sold by auction. However, in 1962, Mr. Williams conferred with his accountant and as a result of advice received, he decided to transfer to his wife, the appellant, by way of gift his interest in the land. He informed his partner and co-owner, Mr. Bruce Campbell, of his intention and the up-shot was that late in 1962 both he and Campbell transferred their interest in the land to their respective wives by an instrument of transfer dated 18th October 1962. The remaining co-owner, Mr. Scahill, retained his one-third interest in the land. This gift to Mrs. Williams was in no sense solicited or procured by her; she welcomed it because she regarded it as providing an opportunity of acquiring for herself an asset which she could ultimately convert into some income-earning form, thereby providing her, for the first time, with an independent income of her own.

Following upon this gift to Mrs. Williams, rates on the land continued for some years to be paid, as to one-third, by Mr. Williams and Mrs. Williams took little interest in the land. She first saw it some time after the making of the gift when she and her husband went as near to the land as they could and obtained a general view of an area of bush.

During the ensuing six or seven years, suburban land prices in Perth rose steeply and in 1968 her husband advised Mrs. Williams that it would be a good time to sell the land.

Mrs. Williams left all the arrangements for sale to her husband. A difficulty arose at the outset due to the fact that whereas Mrs. Williams and Mrs. Campbell were desirous of selling Mr. Scahill did not wish to do so. A meeting took place early in 1969 between Mr. Scahill and the husbands of the two other co-owners, in which immediate subdivision was resolved upon and in which Mr. Scahill's tax situation if the land was to be sold was referred to. Apparently he anticipated that he would be assessed to tax on any proceeds of sale, whereas it was thought that the other two co-owners, Mrs. Williams and Mrs. Campbell, would not be liable to tax on proceeds of sale. This was, it seems, the reason for the divergent views as to the desirability of selling. A means was found of giving effect to the wishes of each of the co-owners; the land was subdivided into thirty-five lots and, of these, twenty-seven lots were offered for sale by auction late in 1969 and were either sold at the auction or shortly afterwards, the vendors being the three co-owners selling as tenants-in-common. The result of these sales was that Mrs. Williams and Mrs. Campbell each received $72,400; neither she nor Mrs. Campbell retained any beneficial interest in the remaining eight lots, to which Mr. Scahill became absolutely entitled. Mr. Scahill received a much smaller sum out of the total proceeds of sale and the evidence suggests that this outcome was in accordance with his wish, in effect, to spread the sale of his interest in the land over a period of years so as to lessen the impact of tax, which he anticipated he would be required to pay on proceeds of sale received by him.

The question is whether Mrs. Williams' assessable income for the 1970 year of income includes proceeds of sale of this land. It is common ground that the only relevant sections of the taxing legislation are ss. 25 (1) (a) and 26 (a); the Commissioner has assessed upon the footing that the net proceeds of sale received by Mrs. Williams, $72,400, less the value of the gift to Mrs. Williams of her husband's interest in the land, valued at $6,666 according to the figure returned by Mr. Williams and accepted by the Commissioner for purposes of Commonwealth Gift Duty in 1962, is assessable income under one or other of these sections.

I have concluded that the Commissioner was in error in assessing Mrs. Williams to tax on any part of the proceeds of sale of the land.

Those proceeds were not, I think, assessable under s. 25 (1) (a) as "income according to ordinary usages and concepts", Colonial Mutual Life Assurance Society Ltd. v. Federal Commissioner of Taxation [1] . The Lord Justice Clerk's formulation, in Californian Copper Syndicate v. Harris [2] , of the relevant question to be asked in determining whether a receipt is of this character:

Is the sum of gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operation of business in carrying out a scheme for profit-making? has very recently been described by a majority of their Lordships in McClelland v. Federal Commissioner of Taxation [1] as clearly stating the governing principle. 1. (1946) 73 C.L.R. 604, at p. 615. 2. (1904) 5 Tax Cas. 159, at p. 166. 3. (1970) 120 C.L.R. 487, at p. 496.

In applying that principle to particular facts, the circumstance that the taxpayer, in going about the task of realization of his asset, does so -

systematically and in a business-like 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 (per Barwick C.J. in Federal Commissioner of Taxation v. McClelland [2] , and see Scottish Australian Mining Co. Ltd. v. Federal Commissioner of Taxation [3] ). The proceeds of a "mere realization or change of investment or from an enhancement of capital are not income nor assessable to income tax" - Ruhamah Property Co. Ltd. v. Federal Commissioner of Taxation [4] . 1. (1969) 118 C.L.R. 353, at p. 371. 2. (1950) 81 C.L.R. 188, at pp. 195-197. 3. (1928) 41 C.L.R. 148, at p. 151.

Looking at the facts of this case, I conclude that the amount now sought to be included in Mrs. Williams' assessable income was not other than a receipt resulting from a mere realization of an asset and was not income according to ordinary concepts.

Mrs. Williams accepted this unsolicited gift from her husband in 1962, saw the land once only soon after the gift was made and did not thereafter interest herself in it in any way for some years; during this period she neither met nor communicated with her co-owner, Scahill, and did not discuss the land with the other co-owner, her husband's partner, Campbell.

Then in 1968, on the suggestion of her husband, she decided that it would be an appropriate time to sell the land, something which she had always contemplated she would do when "it was a prudent time to sell", meaning a time when the market was favourable because the price had risen. She formed the view that 1968 was such a time and did so very largely as a result of the views of her husband whom she regarded, no doubt correctly, as having very well informed views on the matter. He was an active and experienced estate agent and had concluded that the phenomenal rise in land values in Perth had, by 1968, reached a plateau from which a decline appeared likely.

She left to her husband all the details of the sale, agreeing to a sale by auction after subdivision, but taking no part whatever in this process. Her husband acted for her in this and discussed a sale with the husband of Mrs. Campbell who agreed to it; Mr. Scahill, however, for reasons already stated, did not favour an immediate sale of the whole of the land. The outcome was that it was agreed between Mr. Scahill and the husbands of the two co-owners that the land should be subdivided, and the greater part of it sold by auction.

The proceeds of sale were to be distributed between the three co-owners; it is not clear on the evidence whether this was to be as a result of a notional partition of the land, with appropriation of specific lots or the proceeds of sale of those lots to the respective co-owners, or whether there would simply be a division of the total net proceeds between them so that Mrs. Williams and Mrs. Campbell would, in effect, receive the fruits of a realization of the whole of their interests in the land while Mr. Scahill would receive a smaller share of the proceeds of sale but would also become solely entitled to the eight remaining lots reserved from sale.

Whatever was the precise method adopted, the result was that a total of twenty-seven blocks were sold late in 1969 and, after defraying the costs of subdivision, including the cost of extensive works required to be carried out to satisfy the conditions subject to which planning permission was obtained, Mrs. Williams received $72,400 and ceased to have any further interest in the remaining unsold lots.

I discern nothing in the acts of Mrs. Williams, or in those of her husband acting on her behalf, which would suffice to characterize her dealing with her interest in the land as an adventure in the nature of trade, rather than as "its realization in an enterprising way so as to secure the best price": McClelland v. Federal Commissioner of Taxation [1] . Her activities, and those of her husband on her behalf, amounted to no more than the retention of her interest in the land for some six years; the subsequent subdivision of the land, involving the necessary compliance with the Town Planning Board's requirements as to street construction, water reticulation and the setting aside of portion for a public recreation reserve, and its ultimate sale. The latter was complicated by the fact that Mrs. Williams was only one of three co-owners thus giving rise to the need for agreement between them as to the mode and timing of realization; but the reconciliation of what they felt to be their differing interests was no more than the inevitable consequence of co-ownership. It does not of itself appear to me in any significant way to alter the character of the transaction.

It was said on behalf of the Commissioner that regard should be had not only to events from and after the making of the gift to Mrs. Williams but also to antecedent events; to the circumstances of her husband's acquisition of his interest in the land, his purpose at the time of acquisition and his action in making a gift of his interest to his wife. In addition, what was said to be the purpose of the other two original co-owners was relied upon by the Commissioner.

This approach was said to be called for because Mrs. Williams had become a member of a profit-making syndicate. This is not in accord with the facts; all that her husband gave her was an interest in real property. There is no evidence to suggest that anything in the nature of a partnership existed between the three original co-owners; there is, on the other hand, clear evidence that all that Mrs. Williams received from her husband was a transfer of his estate as a tenant-in-common in the land, that and no more. She acquired no share in any land dealing partnership and her interest in the land was in no way subjected to the terms of any agreement to which it might be suggested that the original co-owners were parties. In those circumstances, I see no justification in seeking either to transmit to Mrs. Williams any tax consequences said to flow from any purpose which her husband or the other two original co-owners might have possessed, or otherwise to affect the liability to tax of her proceeds of sale by reason of the prior history of dealing in the land in which she acquired an interest by gift from her husband.

I thus regard as irrelevant to the question of Mrs. Williams' liability to tax under s. 25 (1) (a) Mr. Williams' purpose when he originally acquired his interest in the land or the purpose which it is said I can properly infer to have been in the minds of each of the other co-owners when the land was purchased in 1959.

In Clowes v. Federal Commissioner of Taxation [1] Dixon C.J., dealing with the second limb of s. 26 (a), stated that there must be found to be an undertaking or scheme carried on or carried out by or on behalf of the taxpayer himself; he referred to the use in that sub-section of the phrase "by the taxpayer" [2] . Where s. 25 (1) (a) is in question and something in the nature of an adventure in trade is looked for as producing a taxable consequence, it must, I think, equally be the taxpayer's adventuring that is relied upon, not that of some predecessor in title to property the sale of which by the taxpayer produces the receipt which is said to be assessable income in his hands. In Official Receiver v. Federal Commissioner of Taxation (Fox's Case) [1] , it was emphasized that in seeking to compute a gain or profit by the official receiver it must be recognized that he begins ab initio with the assets that come to his hands and it is the effect, upon the value of assets in his hands, of his activities alone, and not those of the deceased debtor, that determines whether there has been any gain or profit; moreover the only relevant profit-making undertaking or scheme must be one pursued by the taxpayer, the official receiver, and not by the deceased debtor, at p. 387. The same considerations apply, I think, where s. 25 (1) (a) is in question; it is Mrs. Williams' actions that are material and not the acts or purpose of the original co-owners.

1. (1954) 91 C.L.R. 209. 2. (1954) 91 C.L.R., at p. 217. 3. (1956) 96 C.L.R. 370, at p. 384.

Lest I am wrong in this view, I should state shortly what are my findings of fact concerning Mr. Williams and the other two original co-owners. I find that Mr. Williams acquired his interest in the land in the belief that it would enhance in value with the passing of time; not merely, as was urged on behalf of the taxpayer, in the sense that with inflation its money value would increase while its value in terms of purchasing power would remain constant, but in the sense of an increase in value in real terms. His intention was that the land should be retained in its virgin state for an indefinite period in the future and be ultimately realized by sale at an enhanced value; he was satisfied that as a tenant-in-common he could exercise independent control of his interest in the land and do with it as he saw fit. He had no intention of putting the land to any use himself and regarded his interest in it as no more than an asset to hold and ultimately to realize at a profit by sale. I find that no scheme for realization of the land was devised by him before he disposed of his interest in it to his wife in 1962 and that at the time of purchase and for some time afterwards one of his co-owners, Scahill, was a stranger to him.

As to the other two co-owners, I infer from the nature of the land and the circumstances of acquisition that they too acquired their interests with a purpose of ultimate re-sale at a price which would result in a profit in real terms. There is no evidence to suggest that either of them at any time prior to 1968 formulated any scheme for the realization or development of the land.

In concluding that the proceeds of sale received by Mrs. Williams were not income according to ordinary usage and concepts, I have not specifically relied upon the fact that only one isolated transaction is in question; however, this fact, together with the circumstance that Mrs. Williams acquired her interest in the land by gift from her husband, go to make up the totality of matters which are to be considered in determining, as I have, that there was here no more than a mere realization of an asset by the taxpayer.

I turn now to s. 26 (a) of the Act. If, in cases in which profits on the sale of land are in question, certain observations of the majority of their Lordships in McClelland v. Federal Commissioner of Taxation [1] apply to both limbs of s. 26 (a) and not to the second limb only, no separate consideration of each limb is called for in view of the conclusions at which I have arrived concerning assessability under s. 25 (1) (a). However, I do not so understand that decision and will state shortly my reasons.

Before the Judicial Committee the respondent submitted, in the alternative to arguments founded on s. 26 (a), that the taxpayer's profit was income according to ordinary concepts because it arose from an adventure in the nature of trade and was accordingly assessable under s. 25 (1) (a). The majority of their Lordships, having earlier concluded that both limbs of s. 26 (a) were inapplicable, said of the argument based upon s. 25 (1) (a) that it introduced no new element into the problem and that [2] :

the same criteria have to be applied; the question to be asked and answered is still whether the facts reveal a mere realization of capital, albeit in an enterprising way, or whether they justify a finding that the appellant went beyond this and engaged in a trade of dealing in land albeit on one occasion only. To this question their Lordships think that, as in the case of the question arising under s. 26 (a) the answer should be in the negative. 1. (1970) 120 C.L.R., at p. 496.

As I read their Lordships' judgment, the foregoing is directed only to the second limb of s. 26 (a) and not to both limbs. It was in disposing of the respondent's contention founded upon the second limb that their Lordships had earlier spoken of a realization of land in an enterprising way as not rendering the resultant profit assessable under the second limb. It is certainly to their consideration of the second limb that reference is made in the immediately succeeding reference to s. 26 (a), where it is said that the sub-section is subject to their Lordships' "already stated" view that something in the nature of an operation of business must be implied as a condition of its operation. Their Lordships had said earlier, at p. 495, in dealing with the second limb, that only an undertaking or scheme which exhibits features giving it the character of a business deal falls within the limb.

If the foregoing be correct it follows that my conclusions concerning s. 25 (1) (a) dispose also of the Commissioner's contention that the second limb of s. 26 (a) renders assessable the proceeds of sale; because nothing in the nature of a business transaction was involved in Mrs. Williams' acquisition and subsequent sale of her interest in the land, the second limb of s. 26 (a) is inapplicable. This view accords with observations of the Chief Justice in White v. Federal Commissioner of Taxation [1] and in Eisner v. Federal Commissioner of Taxation [2] . Walsh J. adopted a like approach in the case of a profit-yielding transaction involving purchase and subsequent re-sale of land, concluding that it did not attract the second limb of s. 26 (a), and saying [3] :

I do not think that the acquisition and the sale of the land "had the character of a business deal" or constituted "an adventure in the nature of trade". 1. (1968) 120 C.L.R. 191, at p. 217. 2. (1971) 45 A.L.J.R. 110. 3. (1971) 45 A.L.J.R., at p. 114.

The Commissioner also relied upon the first limb of s. 26 (a), and in view of my understanding that their Lordships' above remarks in McClelland's Case [4] are limited to the second limb, it is necessary to consider separately the respondent's submission on the first limb. It was contended that there could be a relevant acquisition by a taxpayer albeit as donee of a gift, that such an acquisition could be one having associated with it the necessary purpose of profit-making by sale and that in the present case there was such an acquisition from which a profit had arisen. Whatever may be the situation where a gift is successfully solicited by a donee who at the time of solicitation has the relevant purpose, I am satisfied in the present case that it cannot be said of Mrs. Williams that she acquired her husband's interest in the land for the purpose of profit-making by sale. To so describe the circumstance where a wife is presented by her husband with the gift of an asset appears to me to be to disregard the words of the sub-section; they call for a purpose possessed by the tax-payer no later than the time of acquisition and which to some degree at least accounts for his acquisition. This concept is, I think, implicit in the phrase used by Taylor and Owen JJ. in White v. Federal Commissioner of Taxation [5] , when in their joint judgment, they referred to the purpose of the taxpayer in purchasing the land there in question. Earlier in Evans v. Deputy Federal Commissioner of Taxation (S.A.) [1] , in their joint judgment, Rich, Dixon and Evatt JJ. said of the predecessor of s. 26 (a) that the purpose of which it spoke was the dominant purpose actuating the acquisition of the relevant assets.

1. (1970) 120 C.L.R. 487. 2. (1968) 120 C.L.R. 191, at p. 218. 3. (1936) 55 C.L.R. 80.

In Federal Commissioner of Taxation v. McClelland, Windeyer J., in discussing the application of the first limb of s. 26 (a) to an interest in land inherited by the taxpayer, said, after setting out the terms of that first limb [2] :

Was there such a profit here? I think there was not. The taxpayer had, by the bounty of the testator, acquired an undivided share in the land. This was given to her. It was not acquired by her for the purpose of profit-making. 1. (1969) 118 C.L.R. 353, at p. 359.

In the Privy Council the majority [3] referred with approval to what had been said by Windeyer J. on this aspect, quoting portion of the passage set out above and said that:

It is not inaccurate to describe sister and brother as acquiring the land through the bounty of the testator. On that footing it would be quite inappropriate to say of the appellant that she acquired land through the bounty of the testator "for the purpose of profit-making by sale". [4] 1. (1970) 120 C.L.R. 487, at p. 492. 2. (1970) 120 C.L.R., at p. 493.

As I read what was said in the dissenting judgment nothing in it is opposed to the foregoing.

It follows, I think, that there was here no acquisition by Mrs. Williams which can be said to have been an acquisition for the purpose of profit-making by sale. This is sufficient to dispose of the respondent's argument based on the first limb of s. 26 (a). It is therefore unnecessary to consider a further submission urged on behalf of the appellant, namely that where land is acquired by way of gift, whether testamentary or inter vivos, there can be no profit in the sense referred to in the first limb of s. 26 (a). Support for that proposition was sought in what was said by the Chief Justice in Federal Commissioner of Taxation v. McClelland [5] , where it was said of an inheritance that a profit in the relevant sense must represent a surplus over cost and an inheritance involves no sum of money as a cost.

Since, in my opinion, the taxpayer's appeal succeeds, it is unnecessary for me to express any views upon the correctness of the basis adopted by the Commissioner in calculating the amount of his amended assessment.

I set the amended assessment aside and direct the Commissioner to re-assess the tax payable by the taxpayer without including in her assessable income any part of the proceeds of sale of the land at Dianella.

The respondent was given by her husband a one-third interest in land in Dianella, a suburb of Perth, held in common with two other persons. She was duly registered as the proprietor of that interest. That was in 1962. In 1968, the respondent and one of her co-owners of the land, on the advice they then received, decided that the time was opportune to sell the land. It was obviously most profitable to sell it in subdivision. Such a course had the additional advantage that the wishes of the third co-owner who was not desirous of selling could be met by reserving from sale some lots which could remain in the absolute ownership of that former co-owner. Accordingly, in order to meet the wishes of that co-owner and to realise to the best advantage so much of the land as it was agreed should be sold, the land was subdivided and prepared for sale by roading etc. The respondent received out of the proceeds of the sales which were subsequently effected a net sum of $72,400 representing her interest in the land.

The appellant has claimed that this sum less the estimated value of her interest in the land at the time of its gift to her (namely $6,666) is assessable under the provisions of the Income Tax Assessment Act 1936-1970 (the Act) either as income within the ordinary concepts of income and thus under s. 25 of the Act or as falling within the terms of s. 26 (a) of the Act. He assessed the respondent to tax accordingly.

The elements of fact on which the appellant founds his assessment are that the respondent's husband had acquired his former interest in the land purposing to make a profit by its resale; that the respondent's husband had given the interest in the land to the respondent so that she rather than he should gain by its ultimate sale; that the respondent intended at the time of accepting a transfer of the interest in the land to realise it in the future for more than the value it had when she received it; and the businesslike manner of realization of the land in subdivision in agreement with the other co-owners.

The appellant says that, because of these circumstances, the purchase of the interest in the land, its transfer to and acceptance by the respondent and its realization constituted a profit-making scheme to which the respondent's husband as well as the co-owners of the land were parties. Alternatively, it is submitted that the acceptance by the respondent of her interest in the land with the intent she then had and its subsequent realization was a profit-making scheme on her part. In either case it is said the terms both of s. 25 and of s. 26 (a) were satisfied. It was also said that the acceptance of the gift by the respondent with an intention in due course to sell it in collaboration with the co-owners to the best advantage warranted the conclusion that the respondent acquired her interest in the land for the purpose of resale at a profit.

But, assuming these facts to have been established in the evidence, though not all found by the Justice who heard the taxpayer's appeal at first instance, the receipt by the respondent of the proceeds of the sale of the land cannot, in my opinion, be regarded as income according to ordinary concepts of income. The intention with which the respondent's husband purchased his interest in the land and his purpose in divesting himself of that interest are, in my opinion, irrelevant to the determination of the character for the purposes of the Act of the receipt by the respondent of the proceeds of the sale of her interest in the land. Neither the fact that the respondent's husband had purchased what he later gave to his wife with a view to its resale by him at a profit nor the fact that the respondent's husband subsequently decided to transfer the interest in the land to the respondent so as to deny himself the opportunity to make a profit by its sale and to provide the respondent with an opportunity to make money is relevant, in my opinion, to the determination of whether or not the respondent received assessable income when she obtained her share of the proceeds of the sale of the land.

It is essential, in my opinion, to the success of the submission that the proceeds of the realization of the land constituted in this case income within s. 25 that they were received in the course of a business venture. There is no warrant, in my opinion, for coalescing the intentions and purposes of the respondent's husband with those of the respondent in realizing her interest in the land so as to attribute to her an intention to conduct a business. So far as the taxation of the respondent is concerned, the matter begins with her acceptance of a gift. Neither in holding the land whilst it appreciated in value nor in selling it in collaboration with her co-owners was she engaging in any business. The circumstances that the respondent relied upon her husband's advice and assistance in the realization of the land, and that her husband conferred with her co-owners or their representatives in connexion with the decision to sell and the manner of sale of the land, in my opinion, do not affect the relevant character of her receipt of part of the proceeds of the sale of the land. Assuming the respondent at the time of the receipt by her of the title to the one-third interest in the land to have intended to accept the advice of her husband that she should hold that interest until it could be realized at a price greater than the amount he had paid for it or greater than its value at the time of the gift, the proceeds of sale were, in my opinion, no more in the hands of the respondent than the result of the realization of a capital asset. Those proceeds in the circumstances could not properly be included as assessable income under s. 25.

Further, the acceptance of the gift was not, in my opinion, an acquisition of the interest in the land with the purpose of profit-making. I find it difficult to conceive of the unsolicited receipt of a gift as purposive in any relevant sense on the part of the beneficiary. But in particular, I am unable to accept the submission that the acceptance of such a gift can be held to be an acquisition for the purpose of profit-making, however much the receipt or the prospect of the receipt of the donation might excite in the mind of the donee a vista of money-making by its subsequent sale. Also, having had the benefit of the argument in this case, including consideration of the advice of their Lordships in McClelland v. Federal Commissioner of Taxation [1] , I remain of the opinion that the realization of a gift, however elaborately made, can neither yield a profit nor in itself be a profit-making scheme.

The facts of the present case eloquently illustrate the point. The respondent was given an interest in land in common with others. To realize her asset, she must either seek partition, or join with her co-owners in selling the entire interest in the land. As I have mentioned, one co-owner did not wish to sell. The sale in subdivision, some lots being withheld to be attributed to the unwilling co-owner's interest in the entirety, was at once a substitute for partition and the realization of the respondent's asset in the most beneficial manner. In the first place it is impossible, in my opinion, to discover a "profit" made by the respondent by this realization. There was no cost to her of her asset. Her contribution to the cost of subdividing the land was part of her expense of realization and nothing more. In the second place, neither the resolution to realize the land by subdivision and sale, nor the subdivision and sale could, in my opinion, constitute a profit-making scheme so far as the respondent was concerned. Lastly, the respondent did not adventure her interest in the land as capital in a business in any relevant sense. In that connexion, I ought to mention that in saying in Federal Commissioner of Taxation v. McClelland [2] , that where the inheritor adventures the inheritance as the capital of a business no part of the value of the inheritance will be deductible in determining the income of that business, I had in mind a business which yielded recurrent income and not merely a profit, in the sense of the difference between the total sum put into the venture at its inception and the total realized by its close. In the latter case, as for example, the building of houses for sale on inherited land, the value of the land at the time it is adventured into such a "business" would be a deduction against the total return. However, as I have said, the respondent, in my opinion, did not use her interest in the land as the capital or part of the capital of a business venture.

For these reasons, I accept the conclusion of my brother Stephen that the assessment in this case should be set aside.

Before parting with the matter, I should say that in expressing my views in this case I have not found it necessary to discuss the precise extent of all the reasons given by their Lordships in McClelland v. Federal Commissioner of Taxation [1] for the advice tendered in that case. Such a discussion is unnecessary in order to dispose of the present case and must await an occasion when it becomes necessary to enter upon it.

I have come to the conclusion that the evidence in this case brings the proceeds of sale of the respondent's interest in the land in question within the second limb of s. 26 (a) of the Income Tax Assessment Act 1936-1971 Cth.

In my opinion, it is a reasonable inference from the evidence that upon receiving the gift of a third interest in land at Dianella, a suburb of Perth, the respondent, as co-owner, formed in her mind the "scheme" of holding the land because the value of the market price appeared likely to rise greatly. The holding of that interest involves a speculative element and it was not a mere holding of the land and a realization of it.

The sale of the land, which appears to have been at or very near the height of the boom, was, in my opinion, the fruition of that scheme. I think, therefore that the sale was not a mere realization of the respondent's interest, but rather "profit arising from carrying out a profit-making scheme".

I would allow the appeal and restore the amended assessment.

This is an appeal from a judgment of Stephen J. in favour of a taxpayer who successfully appealed against an amended assessment made by the Commissioner whereby there was included in her assessable income for the year ended 30th June 1970, a sum of $65,734. This sum represented the difference between $72,400 (which she had, in November 1969, received as her share of the net proceeds of the sale of land at Dianella Heights, an outer suburb of Perth) and the value attributed by the Commissioner to her interest in the land in 1962 when it passed to her by gift from her husband, namely, $6,666. In her income tax return for that year she had included the following statement:

Interest on Loans Perth Motel Syndicate 53.21 Town & Country Building Society 597.92 Francis Investments Pty. Ltd. 1,560.00 $2,211.13

The capital employed to generate this interest came from the realization of the Dianella land owned by taxpayer since approximately 1964, when it was given to her by her husband by registered deed of gift (duly returned). Date of sale was 8th November 1969, amount $72,400.

The original assessment did not include this $72,400 as assessable income.

The story leading to the receipt of this $72,400, although it extends over some years, can be told briefly. In 1959, the land - about ten acres in area and zoned urban - was purchased for $8,000 by a Mr. Williams (the husband of the taxpayer and a partner in Joseph, Charles, Learmonth, Duffy & Co., a firm of estate agents), Mr. Bruce Campbell (a son of the senior partner of that firm), and Mr. Scahill (a son of a close friend of that senior partner). The purchase was made upon the advice of Mr. Campbell, senior. The purchasers bought as tenants-in-common in equal shares. The land was inaccessible scrub, useless except for future subdivision when suburban development reached it. It remained as it was until 1969 when it was cleared and subdivided into thirty-five lots, of which twenty-seven were offered for sale and sold. The unsold lots went to Mr. Scahill who preferred land to money and who, for reasons connected with income tax, received less than one-third of the proceeds of the lots that were sold. The difference was made up by his taking the unsold lots.

In the meantime, Mr. Williams had given to the taxpayer his one-third interest in the land. This was in October 1962. About the same time, Mr. Bruce Campbell gave his one-third interest in the land to his wife. These gifts were made after a consultation with a taxation advisor who apprehended that profits upon sale by the original purchasers would be likely to attract tax.

Accordingly, at the time of the subdivision and sale, the owners of the land were the taxpayer, Mrs. Bruce Campbell and Mr. Scahill.

There can, of course, be no doubt that in 1959 the land was acquired for the purpose of profit-making by sale. It is also clear that when the taxpayer received the gift from her husband, there was a common intent that the land would be sold when the time was ripe. The taxpayer's only concern with the land was in its eventual sale. Furthermore, she was at all times ready to be guided by her husband about the time for selling the land and the method of selling it: after all, apart from anything else, he was an estate agent and had given her his interest in the land. Accordingly, when in 1968 the husband advised the taxpayer that it would be a good time to sell the land, she accepted his advice and left all the arrangements, so far as she was concerned, to him. The arrangements were made by Mr. Williams, Mr. Bruce Campbell and Mr. Scahill. His Honour referred to a problem that arose as follows [1] :

A difficulty arose at the outset due to the fact that whereas Mrs. Williams and Mrs. Campbell were desirous of selling Mr. Scahill did not wish to do so. A meeting took place early in 1969 between Mr. Scahill and the husbands of the two other co-owners, in which immediate sub-division was resolved upon and in which Mr. Scahill's tax situation if the land was to be sold was referred to. Apparently he anticipated that he would be assessed to pay on any proceeds of sale, whereas it was thought that the other two co-owners, Mrs. Williams and Mrs. Campbell, would not be liable to tax on proceeds of sale. This was, it seems the reason for the divergent views as to the desirability of selling. A means was found of giving effect to the wishes of each of the co-owners; the land was subdivided into thirty-five lots and, of these, twenty-seven lots were offered for sale by auction late in 1969 and were either sold at the auction or shortly afterwards, the vendors being the three co-owners selling as tenants-in-common. The result of these sales was that Mrs. Williams and Mrs. Campbell each received $72,400; neither she nor Mrs. Campbell retained any beneficial interest in the remaining eight lots, to which Mr. Scahill became absolutely entitled. Mr. Scahill received a much smaller sum out of the total proceeds of sale and the evidence suggests that this outcome was in accordance with his wish, in effect, to spread the sale of his interest in the land over a period of years so as to lessen the impact of tax, which he anticipated he would be required to pay on proceeds of sale received by him. The co-owners did, in fact, eventually enter into a deed of partition to give effect to their arrangement. 1. Ante, pp. 228-229.

If the $65,734 that the taxpayer received were assessable income, it must be so by virtue of s. 26 (a) of the Income Tax Assessment Act which provides:

26. The assessable income of a taxpayer shall include -

(a) profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme;

It was contended by counsel for the appellant that the circumstances mentioned left open to the Commissioner the conclusion that the sum received by the taxpayer was a profit arising from the sale by her of property acquired by her for the purpose of profit-making by sale. I think not. It may be that if, in 1959, when Mr. Williams joined with the other two purchasers to buy the land, it had been arranged then with his wife that he would make over to her the interest he was acquiring that such a conclusion could have been drawn. Upon the facts as found, however, the only question is whether because, when her husband gave her his interest in the land, the taxpayer intended to sell it when it had appreciated further in value, she acquired it for the purpose of profit-making by sale and that when she sold it the difference between $6,666 and $72,400 was profit.

It is my opinion that it could only be in very special circumstances that what has been given can be regarded as acquired by the donee for the purpose described in the section and that the difference between the value of the gift when given and the price received upon the sale of the gift is a profit. There are not circumstances here that warrant either conclusion.

Alternatively, it was contended that upon the facts, it was open to the Commissioner to conclude that the $65,734 was profit from the carrying on or carrying out by the taxpayer of a profit-making undertaking or scheme. Again, I do not think so. 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 [1] 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. To determine the profits of such an undertaking the value of the land at the time when it was so committed would have to be taken into account. Here, however, there was no profit-making undertaking to which the taxpayer committed what had been given to her. All she did was to co-operate with her co-owners in a business-like realization of capital which she had been given years earlier. The well-known principle applied in Scottish Australian Mining Co. Ltd. v. Federal Commissioner of Taxation [1] applies here.

1. (1970) 120 C.L.R. 487. 2. (1950) 81 C.L.R. 188.

Taking the view that I do, I have refrained from any examination of the observations of the majority of the Privy Council in McClelland v. Federal Commissioner of Taxation [2] . That is a task for another day. This appeal can be decided without any reliance upon anything said in that opinion.

For the reasons which I have given, I would dismiss this appeal.

On this appeal, which is brought by the Commissioner of Taxation from a judgment of Stephen J., the facts are not in dispute. The respondent taxpayer is the wife of one Williams who in 1959 bought with two other men, Campbell and Scahill, as tenants-in-common in equal shares, two adjoining lots of land, ten acres in area, on the outskirts of Perth in what is now the suburb known as Dianella. The land, which was bought for a total price of £2,000, was sandy and covered with dense scrub; it was unsuitable for agriculture and was inaccessible but it was likely that, as the city developed, it would prove valuable for residential purposes. Williams said that he bought his interest as an asset for his old age and a buffer against inflation, and it seems clear, or can at least be assumed, that he bought it for the purpose of holding it and later reselling it at a profit. In 1962 Williams consulted an accountant and was told that if the land were sold the Commissioner would probably seek to tax him on the profit arising from the sale, but that if he made a gift of his interest to his wife it would be unlikely that she would be taxed on any profit that she might make on a sale. Williams repeated this advice to Campbell and both decided to act on it. Scahill, however, wished to retain his interest in the land. On 18th October 1962 the three co-owners executed a transfer from themselves to Mrs. Williams, Mrs. Campbell and Scahill as tenants-in-common in equal shares. Williams paid gift duty on the transaction and for the purposes of assessing that duty the land was valued at £10,000. It was not suggested by counsel for the Commissioner in argument before us that the gift by Williams to his wife was anything other than a genuine transaction; there was no suggestion, for example, that it was intended that Williams should continue to own the interest in the land and that the transfer was merely intended to cloak his continuing ownership. Moreover, Stephen J. found, and his finding was not challenged, that although Mrs. Williams welcomed the gift she in no sense solicited or procured it. Mrs. Williams said in evidence that at the time when the interest in the land was transferred to her she understood from the explanations given to her by her husband that he intended that she should hold it until the price of the land had risen and the time was favourable to sell or until she needed to sell. There was, however, no evidence that she made any agreement with her husband that she would follow any particular course with regard to the retention or disposal of the interest in the land.

Williams, Campbell and Scahill had referred to themselves as members of a syndicate and after the transfer it appears that Mrs. Williams, Mrs. Campbell and Scahill similarly regarded themselves as members of a syndicate. This was only another name to describe their position as co-owners, for before about 1968 they had not agreed to do any more than keep the land indefinitely. Between 1962 and 1968 there had apparently been a considerable rise in the price of land in Western Australia but in the latter year Williams, who was a partner in a firm of real estate agents and experienced in these matters, formed the opinion that the boom was over and told his wife that it would be a good time to sell. There is no doubt that Mrs. Williams was guided entirely by her husband in relation to the land, and she accepted his advice. Mrs. Campbell also agreed to sell but Scahill was reluctant to do so, because he feared that he would be liable for tax on his profits. However, application was made to subdivide the land and in December 1968 approval was obtained to its subdivision subject to certain conditions, including the construction and drainage of roads and the regrading of the land at the subdividers' expense. These conditions were later fulfilled. Eventually the three co-owners agreed on a method of disposal of the land. There were thirty-five blocks in the subdivision and of these it was agreed that Scahill should be entitled to ten, that Mrs. Williams and Mrs. Campbell should be jointly entitled to twenty and that all three of the co-owners should be jointly entitled to five. In the event, all the blocks jointly owned by Mrs. Williams and Mrs. Campbell and by Mrs. Williams, Mrs. Campbell and Scahill, and two blocks owned by Scahill alone, were submitted for sale by auction; of the blocks so submitted most were sold by auction and the others were sold by private treaty. Mrs. Williams' net share of the proceeds of sale was $72,400. The Commissioner by an amended assessment assessed her to tax on $65,734 which represents the amount of the proceeds of sale which she received less one-third of the total value of the land as accepted for gift duty purposes in 1962. On appeal to Stephen J. this amended assessment was set aside.

It was submitted on behalf of the Commissioner that the amount of $65,734 was income either within s. 25 (1) of the Income Tax Assessment Act Cth, as amended ("the Act"), or within s. 26 (a) of the Act. It is convenient first to deal with the contention upon which the Commissioner placed the least reliance, namely, that the amount represented profit arising from the sale by the taxpayer of property acquired by her for the purpose of profit-making by sale within the first limb of s. 26 (a). In my opinion it is impossible to maintain that contention, having regard to the decision in McClelland v. Federal Commissioner of Taxation [1] and to the facts of the present case. It is not a natural use of language to say that a person who becomes the owner of property as the result of an unsolicited and unconditional gift has acquired that property for the purpose of profit-making by sale, even if he intends to sell the property after he gets it. In applying the first limb of s. 26 (a) it is necessary to determine what was the main or dominant purpose actuating the acquisition of the property (see the cases cited in Jacob v. Federal Commissioner of Taxation [2] ). If a donee who passively receives property the subject of a gift can be said to acquire that property within s. 26 (a) (which is doubtful), the main or dominant purpose with which he acquires that property (as distinct from any purpose for which he may later hold it) is simply to accept the bounty of the donor.

1. (1970) 120 C.L.R. 487. 2. (1971) 45 A.L.J.R. 568, at p. 569.

The Commissioner's main submissions were that part of the proceeds received by the taxpayer was income according to ordinary concepts or was profit arising from the carrying on or carrying out of a profit-making undertaking or scheme within the second limb of s. 26 (a). According to the Commissioner the three co-owners of the land adopted and put into effect a plan pursuant to which they held the land until its price reached the right level and then, with professional assistance, improved and subdivided the land and sold it in a methodical fashion; all this, it was said, meant that the co-owners had engaged in an adventure in the nature of trade which produced a receipt of an income nature and also meant that the co-owners were parties to a scheme whose features gave it the character of a business deal and brought it within the second limb of s. 26 (a).

An owner of land who holds it until the price of land has risen and then subdivides and sells it is not thereby engaging in an adventure in the nature of trade, or carrying out a profit-making scheme. The situation is not altered by the fact that the landowner seeks and acts upon the advice of an expert as to the best method of subdivision and sale or by the fact that he carries out work such as grading, levelling, road building and the provision of reticulation for water and power to enable the land to be sold to its best advantage. The proceeds resulting from the mere realization of a capital asset are not income either in accordance with ordinary concepts or within the second limb of s. 26 (a), even though the realization is carried out in an enterprising way so as to secure the best price; McClelland v. Federal Commissioner of Taxation [1] , and cases there cited; Eisner v. Commissioner of Taxation of the Commonwealth [2] . The decision in Official Receiver v. Federal Commissioner of Taxation (Fox's Case) [3] cannot be regarded as an authority to the contrary, notwithstanding some expressions in the judgment in that case which are somewhat difficult to explain. One Fox had carried on the business of reclaiming and selling land which was low lying and swampy and affected by tidal waters. After his death, the official receiver, as trustee of his bankrupt estate, completed such of the work as remained to be done - mainly spreading top-dressing, re-shaping allotments and park areas and providing roads and drainage - and sold the allotments. The Court said that the land, which, as it came into the hands of the official receiver (the taxpayer), possessed a fixed and definite value, was, as a result of the activities of the taxpayer, made to yield net proceeds considerably in excess of what otherwise could be obtained [4] . The decision that the official receiver had carried out a profit-making undertaking or scheme must have proceeded on the view that his activities went beyond those of mere realization. It has often been said that the line between realization, on the one hand, and the carrying on or carrying out of a business or a profit-making scheme, on the other, is difficult to draw and that the decision of each case must depend upon its own facts. The circumstances of Fox's Case [4] were, as the Court there recognized, exceptional.

1. (1970) 120 C.L.R., at pp. 494, 496. 2. (1971) 45 A.L.J.R. 110, at p. 114. 3. (1956) 96 C.L.R. 370. 4. (1956) 96 C.L.R., at p. 387. 5. (1956) 96 C.L.R., at p. 387.

So far I have been discussing together the questions whether the proceeds derived by the taxpayer from the sale of the land were income within ordinary usages and concepts and whether those proceeds were profits arising from the carrying out of a profit-making scheme within the second limb of s. 26 (a). However, although closely related, they are separate questions, since s. 26 (a) "provides a statutory criterion which must be applied directly and cannot be treated as going no further and producing no different result than would a criterion expressed as "exercising trade" or "carrying on a business" ": Official Receiver v. Federal Commissioner of Taxation (Fox's Case), [1] ; White v. Federal Commissioner of Taxation [2] . I do not understand the remark in McClelland v. Federal Commissioner of Taxation [3] , that the same criteria had to be applied in considering the two questions, as intended to mean that the second limb of s. 26 (a) is entirely otiose; their Lordships were there speaking of the particular situation before them and expressly said that the Commissioner's case under s. 25 (1) was "quite independent of s. 26 (a)". However, it is not necessary in the present case to discuss either the full scope and meaning of the second limb of s. 26 (a), or all the implications of McClelland v. Federal Commissioner of Taxation [4] .

1. (1956) 96 C.L.R., at p. 387. 2. (1968) 120 C.L.R. 191, at p. 219. 3. (1970) 120 C.L.R., at p. 496. 4. (1970) 120 C.L.R. 487.

Turning now to the Commissioner's argument that the case comes within s. 25 (1) of the Act, it seems to me that the co-owners did no more than realize their assets in an ordinary and prudent way. There are no circumstances that could enable it to be said that in so doing they carried on a business or engaged in an adventure in the nature of trade. The Commissioner placed some reliance upon the decision of the House of Lords in Edwards (Inspector of Taxes) v. Bairstow [5] . That case shows that the fact that a transaction is an isolated one does not necessarily prevent it from being an adventure in the nature of trade, but it has otherwise little bearing on the present question. There the taxpayers bought machinery with the intention, not to use or hold it, but to resell it quickly and make a profit on the deal [6] . The transaction was a commercial one, and nothing but a commercial one, from beginning to end. The case is thus quite distinguishable from the present, where it is impossible to say that the taxpayer began an adventure in the nature of trade when she received her interest in the land. The proceeds which the taxpayer derived from the sale were not income within the ordinary understanding of the term.

1. [1956] A.C. 14. 2. [1956] A.C., at pp. 36-37.

In elaboration of the Commissioner's contentions under the second limb of s. 26 (a), it was submitted that the three original co-owners had formed a plan (which it was said was a scheme within that section) to buy the land, hold it and then sell it at a profit, and that subsequently a new scheme within the meaning of the section had been entered into between the three original co-owners and the two wives; this scheme involved the transfer of the interests from the husbands to the wives, the further retention of the land by the new co-owners and the subsequent disposal of the land. There is simply no evidence to support the argument that the taxpayer carried into execution a plan to which the three original co-owners were parties. The Commissioner relied upon the fact that the taxpayer acted upon the advice of her husband to hold the land and then to sell it, and in some way he sought to make it relevant that the husband had (so he submitted) acquired his interest in the land in the first place for the purpose of profit-making by sale. In this case, where it is conceded that the gift to the taxpayer was genuine, unsolicited and unconditional, and that the taxpayer entered into no agreement with her husband to engage in any subsequent dealing with the land, it seems to me that the purpose (whatever it was) with which the husband acquired his interest was quite irrelevant and that the fact that the taxpayer acted on her husband's advice did not make the taxpayer and her husband parties to a scheme. The Commissioner's further argument was, as I have indicated, that there was a second scheme at about the time of the gift. It appears that the land was retained by the new co-owners after October 1962 rather by tacit understanding than in pursuance of any plan. However, it may be right to say that in 1968 or 1969 the co-owners formed a plan to subdivide and sell the land and put that plan into effect. If it be assumed that the taxpayer in joining in the subdivision and sale of the land was carrying out a scheme, the question that remains is whether it was a profit-making scheme. In my opinion it was not. The scheme, if there was one, was simply for the realization of a capital asset. For the purposes of this branch of his argument the Commissioner relied on the fact that the three co-owners acted in combination. Obviously enough it will frequently be the case that the owners of undivided shares in land can realize their shares to best advantage only by acting in concert to sell the land. A realization which, if effected by a sole owner, does not amount to the carrying out of a profit-making scheme, does not change its character because it is carried out by a number of co-owners. In my opinion the taxpayer did not carry out a profit-making scheme in the present case.

For the reasons I have given, it was right to hold that no part of the proceeds of the sale of the land at Dianella should be included in the assessable income of the taxpayer. It is therefore unnecessary to consider a submission that the taxpayer had made to the Commissioner a full and true disclosure of all the material facts necessary for her assessment, within s. 107 (2) of the Act, and that the Commissioner had no power to amend the assessment.