Official Receiver v Commissioner of Taxation

Oct. 15 Dixon C.J., Williams, Webb, Fullagar and Kitto JJ.

This proceeding came before the Full Court in the form of a reference under s. 18 of the Judiciary Act 1903-1955 of two appeals under s. 196 of the Income Tax and Social Services Contribution Assessment Act 1936-1954. But inasmuch as s. 197 of that Act provides that such an appeal shall be heard by a single justice and the power of the single justice given by s. 198 to obtain a decision of the Full Court is limited to a case stated upon questions of law, it was thought proper not to deal with the matter as a reference but to allow a case to be stated on the questions of law which appeared to arise. The parties accordingly agreed on a statement of facts and certain questions have been submitted for the opinion of the Full Court by Webb J. by whom the evidence had been heard.

The appeal is against an assessment for income tax which the commissioner made upon the official receiver as trustee of the property of a deceased whose estate is being administered in bankruptcy in consequence of an order made under s. 155 of the Bankruptcy Act 1924-1954. The assessment is made upon the official receiver as a trustee in respect of income of the trust estate, that is to say as under the authority of s. 99 of the Income Tax and Social Services Contribution Assessment Act 1936-1954, which makes the trustee assessable in respect of the net income of the trust estate where there is no beneficiary presently entitled to any part of that income.

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.

The land was divided into three sections, A, B and C, shown on the plan and the agreement prescribed by reference to these sections the order in which the work was to be done. When section A was complete Rankin might sell the sub-divisional blocks comprised in that section. When he had sold sixty per cent of them the Council was required to proceed with section B, and so on. The three sections were each divided into survey sections. When Rankin died the work had been completed on three survey sections of section A except that the roads had not been sealed with bitumen. On three other survey sections of the same section the work had been done up to the point of grading the roads. The land in sections B and C, consisting of forty acres, had been reclaimed by filling with sand before Rankin's death and the greater part of it had been top-dressed and some roads had been formed. The work that remained to be done was to top-dress about fifteen acres, to form and top-dress a great number of roads and to construct the drains. As to title, it appears that before his death Rankin obtained perpetual country leases of the three survey sections of section A where the work had been completed except for the bitumen on the road surface. The three survey sections comprised twelve acres. With respect to the three survey sections completed to the point of grading the roads, Rankin had obtained a special lease according to the permit of 1948. The area of the three survey sections comprised in the special lease was fifteen acres. With respect to the remaining forty acres contained in sections B and C, Rankin had not obtained any lease or licence and his rights rested on the permit.

His executors did not carry on the work after his death. Three things only took place that are material between that date and the making of the order for administration in bankruptcy. In the first place, the period of three years from 1st September 1948 limited in the permit ran out. In the second place, the executors conveyed some allotments contained in the perpetual lease to the purchasers to whom Rankin had sold them. In the third place, not a little damage was done by rain and wind to the unfinished roads and to the drains.

After the order was made the official receiver summoned a meeting of creditors and to them the position was explained. A summary of assets and liabilities was before the meeting in which the assets available to unsecured creditors were put down at about £47,000 and the unsecured creditors at about £93,500, of which amount £53,000 was owing to the Commissioner of Taxation. After hearing the views of Rankin's engineer and others concerning the situation and the prospects of paying the creditors in full if the work were completed and the allotments sold, it was decided to call another meeting. At that meeting, which was held on 17th August 1953, a resolution was passed by the creditors (the commissioner's representative abstaining from voting) which was expressed to authorise the official receiver to complete the reclamation project at Southport and to utilise moneys in the estate for this purpose. Next day the official receiver wrote to the Land Administration Board explaining his appointment and seeking an extension of the period of the permit with respect to the forty acres comprised in sections B and C. On 1st September 1953 an extension of the period for completing the work of reclamation was granted until 31st December 1953. Although the reclamation was not completed by that date the official receiver was successful in securing a special lease for the area. The special lease was granted to him on 1st October 1954 commencing from that date. Certain portion of the area reserved for a park was not included. This was because it was arranged by the official receiver that the property in the park reserves should vest in the Crown, an arrangement which was carried out by the surrender of so much of the park reserves as had already been included in the special lease

Ultimately the special lease of the area comprised in sections B and C was converted into a non-competitive perpetual lease under s. 175B of The Land Acts 1910 to 1951 Q. and the special lease of the fifteen acres, being survey sections of section A, was similarly converted into a non-competitive perpetual lease. Both leases were, of course, granted to the official receiver as trustee of Rankin's estate; the former commencing on 1st July 1955 and the latter on 1st October 1954.

The official receiver encountered some difficulty with the South-port Town Council, which made some attempt to treat the agreement with Rankin as no longer binding upon it. But after discussions and negotiations with the official receiver the council agreed to go on with the contract. The official receiver then arranged terms with a contractor for the execution of the greater part of the work necessary to complete the undertaking left unfinished by Rankin. The work included some measures to put right the damage caused by weather in the interval. A contract was let dated 4th December 1953 which covered the supply and spreading of top-dressing, the re-shaping of certain allotments and park areas, the formation of some roads and footpaths and some drainage and other incidental work. The contract price was £5,585.

During the financial year ended 30th June 1954, the official receiver sold thirty-two allotments of land for a gross return of £13,130, paying selling commissions to an amount of £851 3s. 5d. The thirty-two allotments all form portion of those survey sections of section A on which at Rankin's death the work had been completed except for the sealing of the roads with bitumen.

During the next financial year, viz. that ending 30th June 1955, sixty-six more allotments were sold by the official receiver for a gross return of £30,900, paying selling commissions to an amount of £954 7s. 6d. Of these allotments sixteen formed part of the same survey sections and fifty formed part of those survey sections of section A the work on which at Rankin's death had been completed up to the point of grading the roads. As at 30th June 1955 there remained about two hundred and thirty-five allotments to be sold. There also remained the necessity of expending a not inconsiderable sum in completing the work before all these allotments could be sold.

On 29th September 1955 the commissioner issued two assessments for income tax upon the official receiver as trustee of Rankin's estate, one in respect of the year ended 30th June 1954 the other in respect of that ended 30th June 1955.

The first of these was based upon a taxable income for the year of £3,896 14s. 0d., but this was reduced to £2,911 14s. 0d. by deducting a loss of £985 for 1952-1953 said to have been made by the executors. The assessable income from which the taxable income results is the sum of £13,130, being the gross proceeds of the sale of the thirty-two allotments. On the side of deductions comes first a sum of £7,068, which is described as the cost price, and then the commission of £851 3s. 5d. The balance of £5,210 16s. 7d. is then reduced to the amount of £3,896 14s. 0d. by various deductions, such as interest rates and insurance of plant, which need not be stated more particularly. The cost of £7,068 is composed of two items, £5,826 for "reclamation etc." and £1,242 for road-making. The latter seems to be an expenditure by the official receiver but the former is a cost incurred by Rankin. It represents that proportion of the expenses he had incurred in his lifetime in the work which was attributed to the thirty-two allotments sold by the official receiver. It appears that Rankin had sold certain allotments and the basis on which he should be taxed had arisen as a question in his lifetime. Of the costs he had incurred in respect of the work done, a very considerable amount was treated by him as the capital outlay upon the respective sections A, B and C and apportioned among these sections. Then the average cost of a block in the given survey section was obtained from the apportioned cost and adjustments made for site and other advantages or disadvantages. Profit was calculated by deducting the cost of the block so determined from the net proceeds of sale of the block. Apparently it is on this basis that the item "£5,826 reclamation etc." is put down in the account for the purposes of assessment.

In the assessment for the following year, 1954-1955, the taxable income was set down as £12,057. This is based on an assessable income of £30,900 consisting in the gross proceeds of the sale of the sixty-six allotments sold in that accounting period. On the side of the deductions the first items consist of "cost price". It is split into three amounts representing the allotments of three respective survey sections. These amounts are arrived at on the same basis of apportionment of the cost incurred by Rankin as in the corresponding item of "cost price" in the previous year. Then follows a deduction for commission and for the cost of road-making, presumably incurred by the official receiver. There are further deductions for other expenditure by the official receiver for interest rates and incidental expenses, leaving the net total of taxable income at £12,057.

The notices of objection are widely drawn and cover the questions (1) whether the official receiver was assessable at all as trustee; (2) whether any part of the proceeds of the sale of the blocks could be considered profit or income liable to be brought into assessment; (3) whether the basis adopted for ascertaining whether any and if so what taxable income arose in the respective years of assessment was lawfully open to the commissioner.

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.

The difficulty in supporting the assessments which have in fact been made in respect of the supposed income of the official receiver is that they do not recognise that the official receiver is not in the same situation as the deceased debtor Rankin but that on the contrary as trustee he begins ab initio with the assets that come to his hands and is pursuing a course for their realisation to the best advantage. If he has made a gain or profit in his capacity as trustee of Rankin's estate by the realisation of the assets that came to his hands, it must be because on a comparison, on the one hand, of the value of the assets in the condition in which they came to his hands when the order for administration of Rankin's estate in bankruptcy was made with, on the other hand, the net proceeds of sale after the deduction of all expenditure, it appears that owing to his activities there has been a real gain or profit. It is only when this appears that, if the matter be considered logically, the question presents itself whether the activities which gave rise to the gain or profit are of such a kind that it must be considered income liable to tax in the official receiver's hands.

A trustee of an estate administered in bankruptcy may no doubt be carrying on a business or be carrying on or carrying out a profit-making undertaking or scheme within the definition of income from personal exertion in s. 6 (1) of the Income Tax and Social Services Contribution Assessment Act 1936-1954. But a trustee's purpose is to realise the estate so that he may fulfil the duty placed upon him by s. 112 (1) of the Bankruptcy Act 1924-1954 which requires him, with all convenient speed, to declare and distribute dividends amongst the creditors who have proved their debts. His power of sale given by s. 105 (a) enables him to sell the property in parcels and so does that given to him by s. 107 (a). The powers given by s. 107 (a) are subject to the resolution of the creditors or the leave of the court and it is a power given by that provision which warrants him in carrying on the business of a bankrupt. But it enables him to do so only "so far as may be necessary for its beneficial winding-up".

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).

1. (1923) 31 C.L.R. 490. 2. (1923) 31 C.L.R., at p. 497. 3. (1923) 31 C.L.R., at p. 497.

Again the transaction upon which the official receiver embarked was an entirety. He was not selling blocks of land as a person habitually trading in land. He was simply realising assets in the way which appeared most advantageous. His profit, if any, could not be ascertained by reference to the costs incurred by Rankin and considered to be apportionable to the blocks sold by the official receiver. No doubt taxable income must be ascertained annually and no one would deny that if gains from the transaction were taxable a profit for a year might be estimated provided, however, that the value at which the land is taken into the account at the opening of the year were a value known or ascertainable. But in the end it would on that footing be essentially a case for the application of s. 170 (9). In any case the manner in, or the basis upon, which Rankin was taxed has nothing to do with the question.

It is clear, therefore, that the assessments made by the commissioner are made up upon a basis erroneously conceived and for that reason cannot be supported. No facts are made to appear from which we can know whether the land, as it came to the official receiver with the work uncompleted, possessed an ascertainable value in his hands which has been enhanced by his activities, so that the net proceeds have been enlarged. Conceivably the commissioner's method of assessment is more favourable to the taxpayer than a correct method might prove to be, but that we cannot know, though we may guess that it is unlikely. If the value of the land as it came to the hands of the official receiver were to be assessed for the purposes of compensation or in order to assess a rate or tax upon its capital value, doubtless the valuers would take into account the expenditure of Rankin; but it would be necessary also for them to consider what might be obtained for the land from persons who might acquire it for the purpose of completing the work and doing just what the official receiver has done: see Turner v. Minister of Public Instruction [1] . But to obtain a value thus involves a process of discounting the estimated returns by the rate of profit which such persons would look for. To adopt such a method would almost be the equivalent of opening the account with a value based on the net enhancement of return for which, according to opinion more or less expert, the official receiver or the creditors should look in deciding to complete the work and sell in sub-division. If that were done, the other items of the account on which taxable income would be assessed would serve little purpose but to adjust expected return with actual results.

But let it be supposed that by some means it could be ascertained that the land as it came to the hands of the official receiver possessed a quite definite value which could be and was in fact fixed and that an account made up on that foundation disclosed a clear profit. On that assumption it is difficult to resist the conclusion that the activities of the official receiver producing the result would fall within s. 26 (a). It may be conceded that for the purpose of that provision the "profit-making undertaking or scheme" must be one pursued by the taxpayer, that is to say by the official receiver. But there can be little doubt that in embarking, in pursuance of the resolution of creditors, upon the course of strengthening the title to the land, persuading the Southport Town Council to continue the agreement and allow him to fulfil it, causing the work to be completed under contract and causing the sub-divisional sales to be made through commission agents, the official receiver was adopting a set plan with a view of securing from the ultimate sale of the land a much greater net return than otherwise could be expected. These activities were planned, organised and coherent. True it is that they formed only the final stages of a plan conceived by Rankin and carried partly into execution by him. But given the basal facts that land of a definite value was thus made to yield net proceeds considerably in excess of what otherwise could be obtained, it seems too difficult to deny that the official receiver adopted and pursued an undertaking or scheme that from his point of view satisfied the description "profit-making" and that he carried it out.

There is no reported case quite like this one. Moreover, although s. 26 (a) is founded on language which was used in judicial decisions (see Premier Automatic Ticket Issuers Ltd. v. Federal Commissioner of Taxation [1] ) yet it 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". English cases applying those tests cannot govern the application of s. 26 (a), although no doubt they may give some assistance. Of course in the end the question whether a case falls under the operation of s. 26 (a) must be determined as a matter of fact. It may be added that this is even more true of the essential question whether a profit was produced by the carrying on or carrying out of the undertaking or scheme.

But the Full Court is concerned with specific questions of law. Had it been otherwise it would have been easy, and no doubt it would have been proper, to dispose of the case simply by setting aside the assessments as misconceived basally and remitting them to the reconsideration of the commissioner. If it were objected to such a course that the taxpayer had not, by demonstrating that the basis of assessment was misconceived, sufficiently discharged the onus placed upon him by s. 190 an answer might be made depending on two considerations. One is that by destroying the assessments actually made upon him the taxpayer has advanced the proof a considerable distance, leaving nothing further than the bare logical possibility that even so he might turn out to be liable to no less tax, if the question of his assessability were examined afresh on a proper footing.

Secondly, having regard to what has already been said as to the difficulty of establishing a profit and as to the nature of the whole transaction as one and entire, it seems sufficiently unlikely that this logical possibility would turn out to be correct. But these are matters which would concern us only if we were called on to dispose of the appeals altogether.

As it is the questions submitted for the consideration of the Full Court should be answered to the following effect. The learned judge was at liberty and ought as a matter of law to find that the official receiver carried out a profit-making undertaking or scheme but not that what is shown as income is the profit arising therefrom; because the basis of assessment is erroneous. The learned judge is, however, at liberty to find that some profits arose from the carrying out of such undertaking or scheme. He is so at liberty because the materials do not show the contrary, though they do show the assessments to be wrong. The official receiver is liable to be assessed under s. 99 on such profits if ascertained. There are no materials enabling the learned judge to quantify the profits.