McClelland v Commissioner of Taxation

The taxpayer's uncle, Henry John Spaven, died on 27th September 1958. He left a large estate. The main items were certain shares and other investments, two stations near Shark Bay, and the land at Rockingham. This land had before his death been used by him, or let by him, for agistment of stock and in part for farming. At the date of his death part of it was under crop. By his will and codicils thereto he gave certain pecuniary legacies. Subject to those, he gave the whole of his estate to trustees upon trust to convert it (with power to postpone conversion), and to hold the proceeds upon trust to set aside two sums of £15,000 and £10,000 respectively and pay the income to two named beneficiaries for their lives. Subject to these provisions, he directed his trustees to hold the capital and income of his estate upon trust for his nephew, Reginald Spaven, and his niece (the taxpayer) "as shall survive me and if both survive me then as tenants in common in equal shares". The trustees of the will are Messrs. Ian George Medcalf and Brian Simpson, solicitors, of Perth. Probate was granted to them. Mr. Medcalf gave evidence before me explaining the course of events in the administration of the estate.

The taxpayer would have been glad if some arrangement could have been made for the two station properties to be kept and worked by her and her brother as partners. But that was impossible, for two reasons. Her brother would not agree; and it was necessary to realize the stations to pay the testator's debts and the duties on his estate. These absorbed the proceeds of the sale of the stations. By 1962 the estate had been so far administered that debts, funeral and testamentary expenses had been paid, and the trustees had set aside investments which it was thought would probably be enough to provide two sums of £15,000 and £10,000 to meet the two life interests. The residue had been substantially ascertained. It seemed certain that the Rockingham land or most of it would form part of the residue. Therefore, although the legal title was still in the trustees it was recognized that the taxpayer and her brother would be entitled in equal shares to the proceeds of the sale of this land, if the trustees were to sell it pursuant to the direction for conversion in the will - or alternatively to have it as tenants in common in equal shares - unless it proved necessary to sell it to make up the two funds for life tenants. Therefore the taxpayer and her brother were both interested in the disposition of this land. They dealt with one another on the basis that they had equal interests in it as tenants in common in equity.

The taxpayer had from soon after the testator's death been well aware of the value of this land and of the prospect that it would increase in value. She was keenly interested in turning to account to the best advantage of herself and her family what her uncle had left her. To this end she wished that the land should not be sold, but that it should be retained against a rise in its market value. Her brother had different views. He wanted his share of the estate in money, and he did not want to wait for it. He made that clear at a meeting which, in May 1962, he and the taxpayer had with the trustees to discuss what should be done about the land. At this meeting, or at some meeting at about that time, he informed the taxpayer that he had a buyer who was prepared to pay him £40,000 for his interest in the land. He told the taxpayer that this buyer would be willing to buy her share also for the same sum. He did not say who the prospective buyer was. The taxpayer was not willing to sell her share. Her main purpose throughout was to keep the land for subdivision later. She had suggested a partition, but to this her brother would not agree. Her brother's statement that he intended to sell his share for £40,000 was, she said, "a bombshell". She was concerned that she might find herself a tenant in common with someone unknown to her whose ideas about how to deal with the land would not be acceptable to her. But she certainly was not willing to sell out her interest for £40,000. As a result of inquiries which she and her husband made she had high hopes that in time she would get much more from her share than that. She saw a way out. Her brother had said he proposed to sell his share for £40,000. If she could somehow raise that amount and buy his share herself, she would be in command of the future and could deal with the land as and when she liked. But her brother wanted cash. How was she to raise £40,000? She was not without some means. Her income tax return shews receipts of some £1,500 from dividends. But she had, she says, no ready money. She conceived the idea that she might obtain all the money she needed by selling in advance part of what would become hers when she bought out her brother. She therefore asked him to give her an option to buy his share. He agreed, and on 26th July 1962, Mr. Medcalf prepared and the brother signed a document addressed to the taxpayer in the following terms:

I hereby agree to give you an option to purchase my half share in Rockingham land of the estate of the late H. J. Spaven for £40,000 cash, option to be exercised in writing by 15th September 1962, at 5 p.m.

Deposit ten per cent to be paid on exercise of option, balance on transfer of title.

Thereafter the taxpayer, acting throughout in consultation with her husband, had a plan made for the subdivision of the land into three portions which were later described, in a plan approved by the Town Planning Board, as portions 4, 5 and 6. Portions 4 and 6, having a total area of 525 acres, were the parts which the taxpayer wished to keep, being nearest to the beach where land was most likely to increase in value. Portion 5, 3,073 acres, was the part which she proposed to sell. Only a comparatively small part of it fronts the Bay Road. Most of it is well away from the water. That a buyer could be found for it was not in doubt. The taxpayer had during this period been approached by several land developers interested in this land. Some of their proposals were unacceptable, as they were to purchase on terms, whereas she would need cash to pay to her brother. But the prices which they suggested shewed that her plan was feasible. Early in September she had an offer of £40 an acre for the part she proposed to sell. This would have been acceptable to her. But the title to the land was still in the trustees and Mr. Medcalf would not agree. The proposed subdivision had not then been approved by the authorities. Mr. Medcalf considered the trustees ought not to assent to any sale until approval was obtained. Moreover he still had to be assured that the two life interests were secured. That proposal therefore fell through. However, later on the subdivision was approved and the trustees were agreeable to the land being sold provided that the taxpayer and her brother each deposited £10,000 with them. They required this as without it they were uncertain whether investments they had set aside to provide the two sums for life interests would prove sufficient. They were not willing to let the Rockingham land go until these amounts were provided.

On 10th September the taxpayer wrote to her brother as follows:

I hereby exercise the option the subject of your memorandum of 26th July 1962 to purchase for £40,000 your half share in Rockingham land of the estate of the late H. J. Spaven. Herewith £4,000 being ten per cent deposit as required. It seems probable that at this date the taxpayer knew, or had at least good grounds for thinking, that she could get perhaps £50 per acre for portion 5. She had had the offer of £40 per acre, and later a suggestion of £45 per acre. When she exercised the option she was in no doubt that it was to her benefit to do so. She in fact sold portion 5 for £50 per acre. The contract of sale is dated 5th October. The purchasers paid a deposit of £50,000, the balance to be paid on the registration of the transfer. The taxpayer paid her brother £40,000 out of the £50,000 she thus received; and she deposited £10,000 with the trustees as they required. The transaction was then completed by the trustees transferring to her, with the assent and at the direction of her brother, all their right, title and interest in the Rockingham land. She thus became empowered to convey the land to the purchaser pursuant to her contract.

The taxpayer had thus carried into effect the plan she had formed. She was the owner of a considerable part of the land which she could hold with a view to selling it in the future, and she had done very well by her sale of portion 5.

As I have said, the Commissioner's case is that the plan which she had carried into effect yielded her a "profit" which by virtue of par. (a) of s. 26 of the Income Tax Assessment Act was part of her assessable income.

The concept of profit is one of the more debatable aspects of economic theory. But from a practical point of view when a thing is bought for sale and afterwards sold the difference between on the one hand the costs of acquisition and of selling and on the other the price realized is profit. This is reflected in s. 26 which so far as relevant reads as follows:

5. 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.

This provision of the Act brings to tax profits which because of the singular or isolated transactions out of which they arose might not otherwise be income of the taxpayer. The words of the paragraph are derived from expressions used in this Court by way of explanation of the nature of profits of an income character, which are taxable, as distinct from capital appreciation, which is not. But, as Dixon J. pointed out, the words having been adopted by the legislature and inserted in the statute, are now to be applied more literally: see Premier Automatic Ticket Issuers Ltd. v. Federal Commissioner of Taxation [1] . Unless the words of the enactment strictly and literally read describe the present case the taxpayer's appeal must in my opinion be upheld. The Commissioner points to no other provision by which he can bring to tax any part of the price the taxpayer received for the land she sold. 1. (1933) 50 C.L.R. 268, at p. 298.

Turning then to the paragraph of the statute: It covers two different things, expressed as alternatives - one, profits made by the sale of property bought for sale; the other, profits made by carrying into effect some profit-making undertaking or scheme. The first is expressed as "a profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale". 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. She acquired the other half share by purchase. She did this so that she might as owner of the entirety sell it to her own advantage. She bought an undivided share. She sold an entirety, portion 5. The first part of s. 26 (a), that is the part quoted above, applies to a transaction whereby a taxpayer sells any property he acquired for the purpose of sale. It applies whether he sells that property as a whole or in parts, and whether when he sells he sells to one buyer or to several buyers as joint tenants or tenants in common. But, as I read it, it does not apply when what is sold is essentially different in kind from the thing acquired. It would apply in the case of a taxpayer A who, by purchasing from two tenants in common, B and C, the share of each, acquired Blackacre for the purpose of thereafter selling it at a profit. There the thing acquired for the profit-making purpose was Blackacre. That is not this case. I cannot accept the proposition, put for the Commissioner, that when Mrs. McClelland sold portion 5 she sold two separate shares in it, hers and her brother's. She did not. She was not selling separate shares. The shares had disappeared into a unity. She sold an entirety.

I turn then to the alternative in the enactment. Was there "a profit arising from the carrying on or carrying out of any profit-making undertaking or scheme"? The taxpayer undoubtedly had a programme or plan of action. She can certainly be said to have engaged in an undertaking or scheme designed by her to enable her to turn to the best advantage for herself what she had got from her uncle. But was it a profit-making undertaking which produced a profit within the meaning of the Act? As I understood the argument for the Commissioner portion 5 was sold by the taxpayer pursuant to an undertaking or scheme; and the price realized included an ascertainable element of profit attributable to her having purchased her brother's share. I doubt whether this proposition is really different from that advanced under the first alternative in s. 26 (a).

It seems to me that, whatever part of s. 26 (a) the Commissioner relies on, his case must really be that whenever the taxpayer sold, or in the future sells, any part of the land a profit arose, or will or may arise, forming part of her assessable income. The sale of portion 5 should not stand in any special position. That it was sold when it was so that the taxpayer might thereby obtain moneys to pay her brother seems to me immaterial. Would it have been different if she had paid her brother otherwise and have held it for sale later? Certainly she did well out of this sale. She may do well out of selling the land which remains. To turn a gift into money is not to make a profit, but to realize a capital asset. To hold a gift for a time until it becomes enhanced in value, and then to sell it, is still only to realize a capital asset; a better price got by waiting is not a profit of an income character. The owner of a capital asset which he proposes to sell may expend money to increase its market value. I do not think that simply because he does so he can be said to be engaged in a profit-making scheme from which a taxable profit arises. For example, the owner of premises let to a tenant may pay money to the tenant in consideration of his surrendering his term. By doing so he may get a better price for the freehold. Or a landowner proposing to sell land not readily accessible from a road may acquire a right of way or an adjoining property and thus make his land more valuable. A multitude of similar instances can be readily imagined. Probably such cases may sometimes depend upon matters of fact and degree. A man might perhaps buy something and then sell it along with something he already had, and thus derive a taxable profit from the sale of what he bought. But that it seems to me is not this case. The taxpayer bought her brother's interest in the Rockingham land so that she might realize her plan of retaining her interest under her uncle's will as far as possible in the form of land. The sale immediately of portion 5 was part of her plan. It was necessary to achieve her object. Looking at her plan as a whole I do not think that it was in the relevant sense "a profit-making scheme". I am satisfied that her dominant purpose throughout was to ensure as far as she could that the land would not be sold until some time in the future and that she would be in control of it.

For these reasons I think that no part of the proceeds of the sale of portion 5 should have been included in the taxpayer's assessable income.

I should add that even if I thought there was a profit brought to tax by s. 26 (a), I could not accept the Commissioner's computation of it as £56,951 ($113,902). I shall explain why I say so.

On this aspect the case has some peculiar features. The taxpayer in her return of income said nothing at all about the Rockingham land except that she claimed as a deduction £305 for rates which she had paid to the Rockingham Road Board. The Commissioner made his own inquiries. When forwarding his notice of assessment he sent an adjustment sheet showing two items as additions to the taxable income as returned. The first was described as "profit arising from the sale of Rockingham land £56,951". (The second was a sum of £31, a deduction of certain education expenses claimed but not allowable. It is not in dispute.) On 15th August 1966, that is within a few days of the issue of the assessment, the taxpayer's solicitors wrote to the Deputy Commissioner as follows:

We have instructions to lodge an objection on behalf of the abovenamed against Assessment 57398 for the purposes of which the taxable income was increased in respect of "assessable income from the sale of portion of Cockburn Sound Location 16 - Lot 5" by $113,902. We find ourselves in some difficulty as we do not understand how this figure was arrived at. Would you please let us know?

(The land referred to is the Rockingham land.) The Commissioner did not then, nor I am told did he at any time thereafter, reply to this letter. This seems to me an unusual way for the Crown to treat a subject. At least I hope it is unusual; for it seems to me to have been unfair. The Commissioner was not obliged to tell the taxpayer the basis on which he calculated the figure which he added to her taxable income. But he was not obliged to refrain from doing so. Certainly he was not required to refrain from replying at all to what seems a reasonable request in a courteous letter. There are cases in which the Commissioner must make a more or less arbitrary assessment, leaving it to the taxpayer to dispute it if he can. But I can see no reason why in the present case the Commissioner should not have told the taxpayer's solicitors the method by which he assessed what he said was a "profit". Cases such as Trautwein v. Federal Commissioner of Taxation [1] , seem to me far removed from this case. 1. (1936) 56 C.L.R. 63.

The taxpayer's solicitors having after ten days not had a reply to their letter sent a notice of objection which, after a reference to the assessment, reads as follows:

The taxpayer claims that the said assessment was excessive erroneous and contrary to law and should be reduced in that for the purposes of the assessment there was wrongly included in the taxable income the sum of $113,902 described as assessable income from the sale of portion of Cockburn Sound Location 16 - Lot 5.

The grounds upon which the taxpayer relies are that the whole of the sale price of the said land was a capital receipt and no part thereof constituted assessable income of the taxpayer.

It was impossible to make an alternative objection to the actual sum of $113,902 for it was impossible for the taxpayer to know how the Commissioner had arrived at it.

The objection made was not allowed. The taxpayer thereupon requested that the objection be treated as an appeal and forwarded to this Court. It is therefore this objection which I have to consider.

Counsel for the Commissioner did inform counsel for the taxpayer before the case came on for hearing before me of how the figure in question was calculated. Nevertheless he felt obliged on his instructions to support a proposition that the figure was not challengeable. The assessment, he said, was a "default assessment" made pursuant to s. 167 (c). He relied upon the requirement of s. 185 that the objection must state the grounds relied upon "fully and in detail". He pointed to s. 190, which provides that the taxpayer is limited to the grounds stated in his objection, and that the burden of proving the assessment is excessive is on the taxpayer. While supporting the Commissioner's view that these provisions prevented my examining the manner in which the figure was arrived at, counsel for the Commissioner did, at my request, explain this to me, as he had, in my view quite properly, explained it to counsel for the taxpayer. The process of calculation was as follows. The Commissioner obtained valuations of the freehold of portions 4, 5 and 6, the values being assessed as at 10th September 1962, the date the taxpayer exercised the option. Portion 4 was valued at $180,000: portion 5 at $276,630: portion 6 at $108,000. This makes a total of $564,630, as the value of the whole of the Rockingham land. The fractional value of portion 5 was thus 276,630 564,630 . Applying this fraction to $80,000, the amount the taxpayer paid her brother for his half interest, yields $39,730. This sum was then assumed to be the part of the price attributable to the purchase of a half interest in that part of the land which was later to be separated from the rest as portion 5. The price which the taxpayer got when she sold portion 5 was, after deducting the costs of selling, found to be $307,264. Half of this, namely $153,632, was then assumed to represent the interest which the taxpayer had bought from her brother. Subtracting $39,730, the price it was assumed she had paid for this interest, the result is $113,902. Therefore this is said to be profit made by the taxpayer by buying and selling a half interest in portion 5.

This seems to me a highly artificial and most questionable proposition. Of course, if the trustees of the will had sold the Rockingham land, or any part of it, the taxpayer and her brother would have been entitled to the proceeds in equal shares (subject to any prior claims in the administration of the testator's estate). But when, having bought her brother's interest, the taxpayer as beneficial owner of the land sold a part of it, why should half of the price she got be regarded as the proceeds of the sale of something she had bought from her brother? To repeat what I have already said, what she bought was the undivided share of a tenant in common in the whole of the land: what she sold was the entirety of a part of what had become hers as a tenant in severalty. The market value of the share of a tenant in common in vacant land is, generally speaking, considerably less than an amount calculated by reference to his fractional interest in the freehold value of the entirety. That is well recognized as a general proposition. It applies emphatically in the case of a speculator buying vacant land with a view to realization. The only evidence of the market value of an equal undivided share in the Rockingham land on a cash sale basis is that the taxpayer's brother said he had been offered £40,000 ($80,000). Of course to the taxpayer her brother's share was worth much more than it would have been to a stranger; and no doubt she was fortunate that he was willing to sell it to her for the price which he said he had been offered by a stranger. It was worth more to her than to a stranger simply because its acquisition made her the sole owner of the land. But it is, in my view, still a fallacy to assume that the difference between the price paid for an undivided half share in land and half the price realized upon a sale of the land is profit arising from the buying of the half share.

I should add that I doubt the validity of another aspect of the Commissioner's calculation. The figures on which he relies as his starting point are freehold valuations of portions 4, 5 and 6. Obviously they are not comparable on the basis of a uniform value per acre, because 4 and 6 are per acre more valuable than 5 by reason of their situation; and I do not think that the criticism which counsel for the taxpayer made by comparing the valuations on the basis of area is valid. But is it right to assume the values of the interest of a tenant in common in the separate portions to be proportionate to the freehold market value of each portion? It may be so. I do not say that it is not, although it seems to me a doubtful assumption.

As in my opinion the taxpayer's appeal succeeds on the major issue, I do not have to say what course I would take if the only question were whether the figure of $113,902 should stand. I should say that Mr. Reilly, for the taxpayer, questioned it only in one respect. Assuming that he was not confined by the terms of the notice of objection, he said that the valuations which the Commissioner used could be seen to be mistaken because of the variations in the value per acre of each portion, and because the value put upon portion 5 was $276,630, whereas it actually fetched $307,366. But Mr. Downing, for the Commissioner, rightly said that the purpose of the valuations was only to determine relative values of portions 4, 5 and 6, not to determine their absolute values. The taxpayer thus did not successfully challenge the Commissioner's calculation. The Act puts upon an appellant taxpayer the burden of shewing that the assessment is excessive. Section 199 provides that the Court hearing the appeal may make such order as it thinks fit and may confirm, reduce, increase or vary the assessment. I do not accept the proposition that if the Commissioner had given no information to the taxpayer or the Court of how he arrived at the amount in question, the Court would have been bound to dismiss the appeal and confirm the assessment. That question does not arise, however, because I was told how the amount was calculated. Knowing that, is the Court to dismiss an appeal and confirm an assessment although it appears to have been made on a wrong basis, simply because the taxpayer has not challenged it or has had no opportunity to do so? I think not. If I had not come to the conclusion that the taxpayer should succeed on the main issue, I would have been disposed to direct the Commissioner to reconsider the manner in which he had determined the profit said to arise from the taxpayer's transaction in respect of the Rockingham land. Section 199 would, I think, enable such an order to be made.

I set the assessment aside and direct the Commissioner to re-assess the tax payable by the taxpayer without including in the assessable income any part of the proceeds of the sale by her of any part of the land at Rockingham which formed part of the estate of Henry John Spaven, deceased.

The detailed facts of this matter are fully set forth in the reasons for judgment of my brother Windeyer, from whose order allowing the respondent taxpayer's appeal the appellant Commissioner now appeals. The basic structure of the somewhat unique state of facts disclosed by the evidence was that the respondent inherited an interest in common with her brother under the will of their uncle in some 3,600 acres of land at Rockingham near the City of Fremantle in Western Australia. But the trustees of the deceased estate were quite properly unwilling to convey the land to the respondent and her brother until some £20,000 was provided to secure the interests of other persons under the will. The respondent's brother wanted to realize upon his interest immediately and claimed to have a potential buyer for it for the sum of £40,000. The respondent was anxious not to sell her inheritance or the land but, on the contrary, desired to maintain them against the future when she thought the land would become much more valuable, particularly if then sold in subdivision. She did not want a stranger as her co-tenant, and therefore desired, if her brother did not remain her co-tenant, to be in sole control of the land. She was prepared for the land to be partitioned, thus giving her sole control of what would then be hers but to this her brother would not agree. Thus, to achieve her purpose, she must buy out her brother: but she lacked the ready money to do so. To effect her overall purpose of retaining at least the more valuable portion of the land in her sole control, she conceived a plan which involved the purchase of her brother's interest at his price by means of money obtained by the sale of some of the less valuable land. His Honour's finding as to her purpose in conceiving and carrying on this plan was (supra, at p. 361):

I am satisfied that her dominant purpose throughout was to ensure as far as she could that the land would not be sold until some time in the future and that she would be in control of it.

The formal steps to carry out the plan consisted of, first, the obtaining of an option to buy the respondent's brother's interest in the land. Second, to obtain local government approval to subdivide the land so as to enable a sale to be made of what I have called a less valuable part of it. Third, the exercise of the option to purchase the brother's interest. Fourth, the sale of a subdivided portion of the land on terms that the usual percentage of the price be paid as a deposit. And, finally, the completion of both transactions. The deposit on the sale of the land was the sum of £50,000 which covered the purchase price of the brother's interest in the land and the respondent's share, £10,000, of the sum required by the trustees before conveyance of the land. Thus the respondent retained the entirety in the more valuable portion of the land in which she inherited an equal interest in common with her brother, and received £153,632, the price of the land she had sold out of which she had paid her brother £40,000 and the trustees £10,000.

My brother Windeyer decided that no part of the money received by the appellant as the consideration for the sale of portion of the land was taxable as a profit arising from the sale of property acquired for the purpose of profit making by sale within the meaning of s. 26 (a) of the Income Tax and Social Services Contribution Assessment Act 1936-1963 Cth (the Act). In my opinion, his Honour was plainly right in this conclusion. The respondent did not purchase her brother's interest with a view to its resale, and, in my opinion, she did not in any significant sense resell it. Upon her acquisition of it, no doubt her own interest in the land was enlarged so that she became solely entitled to the land. Further, though I do not think it matters, there is nothing in the evidence to establish that the interest in common of her brother was worth any more in the market than the sum for which she acquired it, though doubtless the appellant thought her interest worth more than that sum. But it cannot be doubted that upon her acquisition of it her own interest in the land not merely became larger in extent but became very much more valuable. She undoubtedly made a profit by getting in her brother's interest but that was not a taxable profit. The profit consisted of the increase in value of her inheritance, the entire interest in the land being much more valuable than the sum of values of the separate interests in common, though, of course, no longer capable of being regarded as consisting of two parts.

My brother Windeyer also decided that no part of the money received by the respondent from the sale of the portion of the land she did sell was profit arising from the carrying on or carrying out of a profit-making undertaking or scheme. And, in my opinion, with due respect to those of a contrary opinion, in this his Honour was also right. Indeed, for my part, I am unable to see how consistently with the earlier finding and the disclosed facts there could be in this case a profit-making scheme. Were it not that other views are entertained, I would be prepared fully to endorse his Honour's reasons for decision on the footing that the finding as to the respondent's purpose, which I have quoted, was not read, as I do not read it to be, as a paramount consideration in reaching the conclusions at which his Honour arrived. For those reasons, I would be content to dismiss this appeal. However, in the circumstances I shall shortly explain why, in my opinion, there was no profit arising from the carrying on or carrying out of a profit-making scheme.

Before doing so, I should observe that it was not suggested in argument that the proceeds of the sale of the land were income according to ordinary notions. But I shall advert to that aspect of the matter. In White v. Federal Commissioner of Taxation [1] , the Court dealt with a case in which land not purchased for resale was subsequently adventured as the capital of a business of timber extraction and sale. What I then said is applicable, in my opinion, to the present situation. 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. But, in my opinion, there is no difficulty in this case in deciding that the respondent did not at any time make the land or her interest in it the capital of a business of land jobbing or developing. She no doubt resolved that she would realize the land to the best advantage by selling it in parcels. But neither her delay in selling the land nor her sale of it in subdivision, though each would increase the amount of money she would receive for the land, could be said in a relevant sense to result in a profit to her, nor make her realization of the land a business so that the gross returns of the realization became income in the ordinary sense of that word.

What I have so far said in reality disposes of the submission that the respondent was engaged in carrying out a profit-making scheme. I am unable to conceive of a profit in the relevant sense in circumstances such as those with which we are here dealing which does not represent a surplus over cost. The respondent had not acquired her inheritance nor could be said to have cost her any sum of money. I am quite unable to accept the Commissioner's submission that a cost of the land sold can be worked out by valuation of the interests in the land or of the land itself. His attempt to do so which is reflected in his Honour's reasons was, in my opinion, not only unconvincing but lacked commercial reality. Clearly the sum paid to her brother was not the cost of the land sold. It was of course the only disbursement by the respondent in respect of her ownership of the entirety in the 3,600 acres: and, as I have said, its disbursement brought the respondent a profit, namely, the enlargement of her interest in the land. But that profit was clearly not taxable. If it had been, the amount of the profit could have been determined by valuation because it was the increase in value of the respondent's interest in the land which was the profit. Thereafter, having the ownership of the entirety in the land, her sale of the portion was, in my opinion, but a realization of part of her asset. It would not matter in this connexion, in my opinion, whether that realization was in anticipation of obtaining title to the whole of the land, or occurred subsequently at any interval of time. Whenever it happened it would be no more than a partial realization of a capital asset. Nor, in my opinion, can it matter that there was an overall plan which included the acquisition of the brother's interest in the land and the sale of part of, or for that matter the whole of, the land after subdivision in compliance with the requirements of the appropriate authority. Given that the profit represented by the enlargement and the increase in value of the appellant's interest in the land is not taxable, I can find no basis for saying that the sale of the asset thus acquired yields a profit, or that the plan of action I have described was a profit-making scheme. At best it was, in my opinion, no more than a scheme or plan to realize the enlarged interest in the land to the best advantage. It was a money-making scheme or plan but not, in my opinion, a profit-making scheme or undertaking.

Before parting with the matter, I should observe that the purpose of the respondent in formulating and carrying through her plan does not, in my opinion, control the result of this case. No doubt being found to be as his Honour expressed it, that purpose does not support the view that the respondent had decided to carry on a business and to employ therein the land or some part of it as capital. But, on the other hand, if in truth the facts of the case had established that she had engaged in a business or the existence of a profit-making scheme within s. 26 (a), the tenure of the stated purpose would not have prevented the taxation of the income of the business or the profits arising from carrying out the scheme as the case may be.

In assessing the income tax and social services contribution payable by the present respondent in respect of income derived in the year ended 30th June 1963, the Commissioner included as part of the respondent's assessable income an amount of $113,902 which had found no place in the respondent's return of income for that year. The only explanation which the Commissioner offered for the inclusion was in a description of the amount, in an adjustment sheet which accompanied the notice of assessment, as "profit arising from the sale of Rockingham land £56,951".

A request by the respondent's solicitors to be allowed to know how the figure had been arrived at, reasonable though it was and courteously expressed, met with no response. When ten days had elapsed, a notice of objection was lodged claiming that the assessment was excessive and contrary to law and should be reduced, in that for the purposes of the assessment the whole of the sale price of the land sold at Rockingham was a capital receipt and wrongly included as assessable income. The grounds as stated were that the whole of the sale price of the land sold was a capital receipt and that no part of it constituted assessable income of the respondent. The objection was disallowed, and the respondent appealed to this Court. She obtained an order upholding the appeal, setting aside the assessment, and directing the Commissioner to assess the tax without including in her assessable income any part of the proceeds of sale of any part of the Rockingham land. From that order the Commissioner appeals.

The notice of objection described the land that had been sold as lot 5 of Cockburn Sound Location 16, and the order referred to it as being part of the land at Rockingham which formerly formed part of the estate of Henry John Spaven deceased. Henry John Spaven was the respondent's uncle. At his death, which occurred on 27th September 1958, he owned land within Cockburn Sound Location 16, and the lot 5 that is referred to is a part of what he owned there. By his will as modified by codicils he bequeathed certain pecuniary legacies, forgave a certain debt, and subject to those dispositions he devised and bequeathed the whole of his real and personal property to his trustees upon trust to convert it into money, out of the moneys so arising and his ready moneys to pay his funeral and testamentary expenses, debts and probate and estate duties, and to invest the residue of such moneys. The investments and such portions of his residuary estate as should for the time being remain unconverted (all of which he referred to as his trust estate) he directed should be held upon trusts to set aside £15,000 and pay the income therefrom to a Miss Hoult, to set aside a sum of £10,000 and pay the income therefrom to a Mrs. Burns, and subject as so provided to hold the capital and income of his trust estate (in the events which happened) upon trust for his nephew Reginald Spaven and his niece the respondent as tenants in common in equal shares. Reginald Spaven was the respondent's brother.

By May 1962, all the debts, funeral and testamentary expenses and duties had been paid or were about to be paid, and the trustees had set aside certain investments as a tentative appropriation to provide the sums of £15,000 and £10,000 in accordance with the will; but they considered that these investments were not altogether satisfactory for the purpose and accordingly they had yet to complete the setting aside of the two funds. At a conference with the respondent and her brother in that month, they said that because of "administration problems" - an expression which seems to have referred to the completion of the setting aside of the two funds and the obtaining of necessary official approvals to a mode of subdivision - any sale of the Rockingham land would need to be deferred for another three or four months. The brother, who had wanted an immediate sale of the land and a distribution of the proceeds, then disclosed that he was considering a sale of his interest in the land to a stranger for £40,000. He suggested that the respondent might sell her interest at a similar price, but this she was unwilling to do. She foresaw that at least a part of the land, facing a road called Safety Bay Road and near to a beach, would become in time very valuable as an area for sale in subdivision, and she desired that it should be retained for realization at a future date. She was averse, however, to finding herself tenant in common with a stranger, and accordingly she set about considering whether she could buy her brother out. He promised her the first refusal of his interest at £40,000, and later gave her a formal option of purchase at that price exercisable by 15th September 1962. She did not have £40,000 available for the purpose and her first thought was that the executors might sell the less valuable part of the land, which lay back from the Safety Bay Road, and so put her in a position to exercise the option. Difficulties arose however as to the mode of effecting such a sale, and the respondent fell back upon another idea. If she could get the executors to transfer to her the legal estate in the whole of the Rockingham land she might sell off the portion that was least likely to grow in value, and pay her brother off out of the proceeds. The executors were not prepared to give her a transfer unless she lodged £10,000 with them to ensure that they could set aside the two funds, so the sale that she contemplated would need to bring her £50,000 in cash immediately.

She consulted a town planner, who told her that in order to get a good price it would be necessary to sell a small part of the better land together with the land back from the road, and prepared a plan of subdivision showing as lot 5 an area of about 3,000 acres consisting mainly of the land least worth retaining, and showing as lots 4 and 6 the parts the respondent was most anxious to keep. The respondent then found a purchaser for lot 5 at the price of £153,632 on terms which provided for the immediate payment of a deposit of £50,000. The subdivision was approved by the Town Planning Board, and the respondent exercised her option to buy her brother's interest in the whole of the land. Receiving £50,000 as a deposit under the contract of sale, she paid £40,000 to her brother as the price of his interest, lodged £10,000 with the executors, and received from them a transfer of the fee simple in the whole of the Rockingham land. Then she completed the sale of lot 5. Her plan was thus, by the end of the relevant year of income, carried to the point where in place of her interest under the will in respect of the Rockingham land she had £103,632 in cash, her interest in the £10,000 she had lodged with the executors, and the fee simple of lots 4 and 6.

"Her main purpose throughout", the learned Judge found, "was to keep the land for subdivision later"; and her evidence, which his Honour accepted, was to the effect that the taking of a transfer from the executors and the selling of part of the land to a stranger were steps she took in order to be able to retain most of the part that she expected would increase greatly in value. "I was not interested in selling at all," she said in her evidence; "I wanted to hold the land. I have a family " And again: "I just knew I wanted to hold (the) land and I did not know how much I could afford to sell because I had to meet this price" (the £40,000). She wanted £50 per acre for lot 5, and that, approximately, was the price at which she succeeded in selling it.

These facts having been established to the satisfaction of the learned Judge, the respondent contends that his Honour was right in holding that the grounds of her objection to the assessment were made out. It is necessary first to recognize that the finding that her main purpose was "to keep the land for subdivision later" brings out an important distinction between this case and cases of the kind of which Plimmer v. Commissioner of Inland Revenue [1] is an example. There, a group of taxpayers anxious to acquire the ordinary shares of a certain company found that the holder would not sell them except together with the preference shares of the same company. They did not want the preference shares, but they bought the shares of both classes with the aid of bank finance, and then resold the preference shares at a price higher than they had paid for them. The profit thus made was held not to be taxable as income, because although the taxpayers had acquired the preference shares intending to resell them, they had not acquired them for the purpose of profit making by the resale: their purpose had been to overcome an obstacle to the acquisition of the ordinary shares. In the present case, what the respondent bought was her brother's half interest in the Rockingham lands, and her purpose was to enable herself to sell the fee simple in those lands, that is to say to sell part of them immediately and the rest at a future time. She had no other purpose than that of selling the entirety, and of doing so in such a way as would bring in the best price. This means that the plan she finally worked out and adopted was a plan for the making of profit by selling part of the lands immediately and the rest at a future time, at prices which would show her a profit over what she had laid out. The learned Judge rightly held that her purpose was not one of profit making by sale of the brother's half interest either in lot 5 or in the whole of the Rockingham land; but the point to which I respectfully think that his Honour did not give due weight is that the purpose was one of profit making by a process which involved bringing both that half interest and her own to an end by uniting them in her own hands and then selling the resulting entirety in subdivision, over a period, for more than the entirety had cost her. What it had cost her consisted of the half interest she had become entitled to under the will plus £40,000. The excess arising from the carrying out of the scheme would plainly be profit which would answer the description in the second limb of s. 26 (a) and would also, I think, be income according to ordinary concepts since it would be the net proceeds of an adventure in the nature of trade: cf. Iswera v. Commissioner of Inland Revenue [1] .

1. (1957) 7 A.I.T.R. 286. 2. [1965] 1 W.L.R. 663.

It is a question for consideration, however, whether any of the profit which the scheme was devised to produce arose in the relevant year of income. At the trial, counsel for the Commissioner had the fairness to disclose how the figure which had been treated in the assessment as profit had been arrived at: the respondent was regarded as having purchased her brother's interest in lot 5 for £19,865 (by applying to £40,000 the proportion which the estimated value of lot 5 at the date of exercise of the option bore to the estimated aggregate value of lots 4, 5 and 6 at that date) and as having sold it for £76,816 (half the sale price of lot 5). The difference is £56,951. Until long after the time allowed for objecting to the assessment the respondent, despite her solicitor's request to the Commissioner for information, was left in the dark both as to the method that had been followed in order to arrive at this figure and as to the amounts that were taken as the values of lots 4, 5 and 6. Thus she had been effectually prevented from formulating any more specific challenge to the figure than her notice of objection contained. Yet the submission was made in this Court, and even pressed, that the notice of objection should be construed as conceding that a profit of £56,951 arose from the sale of lot 5, with the result that the respondent is here restricted to contending that that amount is a capital profit not included by s. 26 (1) in her assessable income. The submission is erroneous, as well as being unfair. The assertion in the notice of objection that "the whole of the sale price of the said land was a capital receipt" did not stand alone: it was followed by the specific statement that "no part thereof constituted assessable income of the taxpayer". To the officers who had charge of the matter in the department this must necessarily have brought home that they were being required to reconsider in regard to each of the limbs of s. 26 (a) whether the essential elements were present, and in particular whether the £56,951 or any part of it was a profit which arose in the 1963 year.

I turn, therefore, to that question. As the Court observed in Official Receiver v. Federal Commissioner of Taxation (Fox's Case) [1] , taxable income has, under the Act, to be ascertained annually, and therefore if a transaction or scheme for the acquisition and sale of property extends over more than one year, the profit for a particular year which ends before the transaction or scheme has been carried to completion may properly be estimated, provided that property realized in the year is taken into the account as at the opening of the year at a known or ascertainable value. The argument presented for the Commissioner in support of the assessment in the present case was that not only did the respondent have a general scheme for turning the £40,000 and her half interest in the Rockingham land into the total proceeds of realization of that land, but she had within that scheme a separately identifiable scheme in relation to lot 5, namely a scheme for turning the estimated cost to her of lot 5 - the value as at the initiation of the scheme of her half interest in lot 5 plus so much of the £40,000 as was referable to lot 5 - into the proceeds of sale of lot 5. Thus, it was said, the surplus of the proceeds of lot 5 over its estimated cost was profit which arose in the relevant year of income from the profit making scheme for lot 5. Against this contention it was argued for the respondent that there was really only one scheme, namely the scheme for the acquisition and resale in subdivision of the entirety in the Rockingham land as a whole, and that it will not be possible to identify as profit any part of the receipts from the carrying out of that scheme, until sales shall have brought in to the respondent more than the cost to her of the whole of the Rockingham land, that is to say more than £40,000 plus the estimated value, as at the initiation of the scheme, of her half interest in that land. It seems to me unsound to regard the respondent's acquisition and sale of lot 5 as steps in a self-contained scheme concerning that lot as a separate parcel of land. There was in truth but one scheme, a coherent scheme for the acquisition of the Rockingham land, an immediate sale of lot 5, and later sales of lots 4 and 6. But it does not follow from this that an assessment is necessarily wrong which treats as profit from that entire scheme an estimated amount of profit from the sale of lot 5 by itself. It is true that any estimated profit from the sale may be partly or wholly counterbalanced by losses from the later carrying out of the rest of the scheme, for the respondent's confident expectations for the land she has retained may be sadly disappointed. In that event the scheme as a whole will have given rise to less profit or to no profit at all. But unless and until such an untoward event occurs, the surplus cannot be denied the character of an estimated profit arising in the 1963 year from the sale of lot 5. As s. 170 (9) recognizes, an estimated profit may properly be included in an assessment as assessable income on the basis that the assessment will be appropriately amended if events falsify the estimate. The estimate stands at the present time unfalsified, and the respondent must therefore fail in her contention that no amount should have been included in the assessment as profit arising from the sale of lot 5.

What remains to be considered is whether the respondent has shown that the figure of £56,951 is excessive. To show that she would need to establish that the estimate which the Commissioner adopted of the cost to her of acquiring the entirety of lot 5 was too low. It is necessary to explain in more detail how the estimate was made. The Commissioner treated the date of the respondent's exercise of the option to buy her brother's half interest as the initiation of the scheme, and that seems plainly to be right. The assessment was based upon valuations (as at that date) which the Commissioner obtained. According to his Honour's judgment - and that is our only source of information on the point - they were: lot 4, £90,000; lot 5, £138,315; and lot 6, £54,000, making a total of £282,315. It is the fraction 138,315 over 282,315 applied to £40,000 that is said to give the figure £19,865 as being the part of the £40,000 which the Commissioner treated as referable to lot 5. The net proceeds of sale of lot 5 proved to be £153,632. Half of this was taken to relate to the interest (in lot 5) that the respondent had acquired under her uncle's will, and half to relate to the interest (in that land) which she had bought from her brother. Subtracting £19,865 from £76,816 (half of £153,632), one gets the Commissioner's figure of £56,951 as the excess of the net proceeds of the realization of the brother's half interest over the cost thereof to the respondent. (There seems to be a small error in the figures but it is in favour of the respondent.)

To prove the assessment excessive the respondent would have had to show by evidence that the valuations failed to provide a true basis for the apportionment that was made of the £40,000. She addressed no evidence to this matter, and the only comment that could be made on her behalf, that the value assigned to lot 5 was less than the amount which that lot actually produced upon sale, gets nowhere. I am unable to see any ground for regarding the estimate of profit as excessive. The learned Judge offered criticisms of it, mainly because of the fallacy of assuming "that the difference between the price paid for an undivided half share in land and half the price realized upon a sale of the land is a profit arising from the buying of the half share". But the assessment is not based upon such an assumption. It proceeds on the view that in this case a profit arose from the sale of the entire interest in lot 5 because that lot was sold for more than the money equivalent of what it cost the respondent to get that entire interest. The only questionable assumption that seems to lie behind the assessment is that the respondent's own original half interest in lot 5 was worth half the amount which lot 5 brought on sale. Only on this assumption could half the proceeds of sale be taken as relating to her former half interest. Almost certainly it was worth less than half. But any error in this respect necessarily operated in favour of the respondent.

In my opinion the assessment was not proved to be excessive. I would allow the appeal, set aside the order appealed from, and order instead that the appeal against the assessment be dismissed.

I have had the advantage of reading the judgment of Kitto J. and I wish to do no more than express my agreement with it.

I have had the advantage of reading the judgment prepared by my brother Kitto. I agree with it and have nothing to add.