McClelland v Commissioner of Taxation

McClelland v Commissioner of Taxation - [1969] HCA 72 - HCA 1969 case summary — Zoe

[7]

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:

[21]

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.

[32]

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.

[35]

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.

[43]

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.

[48]

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.

[51]

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] .

[53]

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.

[54]

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.

At a glance

Court

Decision date

Before

Source

Judgment (59 paragraphs)

Parties