Official Receiver v Commissioner of Taxation

Official Receiver v Commissioner of Taxation - [1956] HCA 63 - HCA 1956 case summary — Zoe

[7]

The basis of the assessment is the view adopted by the commissioner that the official receiver derived income by carrying on or carrying out a profit-making undertaking or scheme, or even by carrying on a business, to which undertaking scheme or business the official receiver had succeeded when the property of the deceased debtor vested in him. The deceased debtor William Fox, commonly known as William Rankin, died on 7th June 1951. At that date the value of his assets may have exceeded his liabilities, but after his death the commissioner amended certain assessments for income tax which had been made upon him in his lifetime, increasing the tax due to the commissioner to such an extent that the executors to whom probate had been granted on 31st October 1951 decided to seek an order for the administration of the estate in bankruptcy. The order was made on 3rd July 1953. Rankin, as it is perhaps better to call the deceased debtor, described himself as a "casket agent", but he does not seem to have confined his business pursuits to selling lottery tickets. As early as 1938 he had become a member of a partnership the business of which was to reclaim and sell land at Southport. In 1946 he became the sole owner of the business. The land which he set about reclaiming was low-lying and swampy and for the most part affected by tidal waters. The method of reclamation was by the pumping of sand in a fluid state from a neighbouring river bed until the level of the land was sufficiently raised. Then it would be top-dressed with soil. It was intended then to form roads, construct water channels and drains and to sub-divide the land into allotments for the purpose of sale. Rankin had, before the end of 1948, obtained from the Land Administration Board permits to reclaim sixty-seven acres of land on the Nerang River south of the Jubilee Bridge at Southport. The period of the permits was three years from 1st September 1948, a period which had almost three months to run when Rankin died. Under the permits Rankin was to have a special lease of the reclaimed land for a term of thirty years at a rent to be determined. The board agreed also that, subject to compliance with the conditions as to improvement of the land, it would consent to the conversion of the special lease to a perpetual lease and to the sub-division of the land contained in the perpetual lease. The special lease would be granted under s. 179 and the perpetual lease under s. 175B of The Land Acts 1910 to 1951 Q.. Rankin caused to be prepared a plan of sub-division of the land as it would be after reclamation and this was submitted to the Southport Town Council. An agreement dated 13th April 1949 was entered into between Rankin and the Council by which the latter agreed to approve of the plan and Rankin agreed to reclaim the land by filling it up with sand and top-dressing it to the levels shown by the plan. Certain reserves, roads and footpaths were shown on the plan and Rankin's obligations were specifically described with reference to the top-dressing and filling of these areas. The Council undertook certain obligations as to road-making, channelling and drainage and as to the vesting in Rankin of part of the land forming the reserves and as to resuming another piece of land. Rankin was to contribute only a proportion of the cost of the work done by the Council.

[19]

The question whether the official receiver should be assessed as a trustee assumes, of course, that he has derived taxable income upon which, in accordance with s. 17 of the Income Tax and Social Services Contribution Assessment Act 1936-1954, tax may be levied, and that he derived the taxable income in his capacity of trustee of Rankin's estate. On this assumption it seems clear enough that Div. 6 of Pt. III of that Act would apply to the case. Were it otherwise the official receiver would be taxed on the aggregate of his personal income with the total of whatever taxable income he might derive from the investments or activities which he made or conducted in the various estates of which he is trustee. The definition of trustee in s. 6 (1) is certainly wide enough to include him and there is no reason why Div. 6 should not apply to him. Section 99 operates to impose on a trustee the obligation of paying the tax "where there is no beneficiary entitled to any part of the income of a trust estate". In the case of a trustee in bankruptcy, who has not reached the point of having a surplus in his hands all creditors having been paid, there can be no doubt that there is no beneficiary presently entitled to any part of the income of the trust estate. The creditors are not presently entitled to income as such. It was suggested that s. 99 pre-supposes the existence of beneficiaries who have or might have some title to the income but are not presently entitled, and that the section cannot apply in a case where such a beneficiary could not exist. That is to mistake the purpose of the provision. Section 97 is the provision which shows the primary policy of the Division, which is to ensure that the income to which a beneficiary is presently entitled is included in his income so that it forms part of his aggregate taxable income. That policy is carried out in detail by ss. 98, 100 and 101 in the special cases for which those sections provide. Section 99 deals with the contrary case where these provisions cannot apply and makes the trustee liable simply in default of persons filling the condition for which ss. 97, 98 and 101 provide. If the activities of the official receiver in the course of his administration of the trust estate have given rise to taxable income there can be no doubt that it is income of the trust estate within s. 99. The real question in the case is whether the official receiver has derived taxable income in the course of his administration of the trust estate.

[22]

It is true that there is no direct inconsistency between the exercise of such powers for such a purpose and the production of income either from carrying on the business or the carrying on or carrying out of a profit-making undertaking or scheme within s. 6 (1) (definition of income from personal exertion) and s. 26 (a) of the Income Tax and Social Services Contribution Assessment Act 1936-1954. As was said by Isaacs J. in Joshua Bros. Pty. Ltd. v. Federal Commissioner of Taxation [1] : "Capital is still capital, and, if it fructifies and produces income, as it may, the income is still income. If a company in process of liquidation has deposits in a bank or outstanding mortgage investments, the interest does not change its legal character by reason of the winding up resolution" [2] . His Honour went on to speak of the fallacy of seeking to drown under the general term "assets" the inherent distinction between capital and income. His judgment proceeds: "A profit made by an isolated transaction outside trade by which property is simply transformed, say land into cash, is not income. It is then a mere change in form of capital by which the resultant form may be larger or smaller than the original form. No legal formula can determine for all cases whether an enhancement is increased capital or is income. It must be determined by commercial principles. But one thing is very clear, namely, that profits made in the ordinary course of business are income. It was contended on behalf of the appellant that the process of selling the company's stock was properly described as "realization". The same could be truly said of all sales in business" [2] . But, true as this all is, the character which a trustee in bankruptcy fills and the purpose with which he enters into transactions have a dual importance in considering a claim that a taxable profit has arisen from his operations. In the first place the assets are vested in him as capital and they are vested in him without reference to their value or to any criterion of value. In the next place, conversion into money to the extent needed for payment of creditors is the object, not employment of the assets for the earning of income. We may put aside the carrying on of an indefinitely continuing business which with its goodwill may itself be realised as capital. Whatever else may be said about the nature of the transaction in the present case by which the work of reclamation was completed and the land sold, it clearly was a thing done once for all and for the purpose of converting the whole of the assets into money. There was no continuing business. The profit, if there be one, on such a transaction must consist in an enhancement of price recovered above value at the inception. When you see that such a thing has occurred, then and only then does the question arise whether the enhancement of price recovered has been brought about in such a way as to bring it within the general conception of income or the special test laid down in s. 26 (a), a test which is included also in the definition already mentioned in s. 6 (1).

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Before

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Judgment (30 paragraphs)

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