Pastoral and Development Pty Ltd v Commissioner of Taxation

The respondent contends that the evidence does not establish that there was any sale of the cattle by the appellant to Murray Valley and that in reality the appellant itself sold and delivered its cattle to Amagraze and must be treated as having become entitled to the amount which Amagraze paid for the cattle. The respondent contends, also, that if the appellant did sell the cattle to Murray Valley that was a sale to which s. 36 of the Income Tax Assessment Act 1936, as amended (the Act) applied, so that the value of the cattle, ascertained in accordance with that section, should be included in the assessable income. Finally, the respondent contends that if it be found that there was an agreement for a sale by the appellant to Murray Valley and a further agreement for a sale by Murray Valley to Amagraze, he is entitled to rely upon s. 260 of the Act and to say that as against him those agreements were void, and upon that footing to treat the appellant as if it had received the whole of the price paid by Amagraze.

The appellant claims that the decision of the Board involved a question of law because it put a construction upon s. 36 which was contrary to the submissions made by the appellant to the Board and repeated in this Court. In my opinion, a question of law was involved and this appeal is properly before me in accordance with s. 196 of the Act.

The appellant carried on a pastoral business upon a property known as Mt. Surprise Station in North Queensland. It had been promoted in 1948 by Mr. F. G. Irving to acquire three properties including Mt. Surprise and he acted as its managing director. At the time of the transactions with which I am concerned, it was a subsidiary of a company called Valley Investments Pty. Limited, of which Murray Valley was also a subsidiary. On 6th April 1960 Amagraze sent to Mr. Irving a letter enclosing a contract for the purchase of 4,000 (minimum) mixed cattle ex Mt. Surprise Station at the price of "160/- per 100 lbs cold weight over scales Cairns for all cattle other than condemnations". Mr. Irving signed this contract, which bears the date 6th April 1960. He did not sign it on behalf of the appellant which owned the cattle but on behalf of Murray Valley, of which he was chairman. He sent signed copies of the contract back to Amagraze, with a letter of 21st April 1960. The name of Murray Valley had been changed at about this time from Murray Valley Coaches Limited to Murray Valley Holdings Limited. Its objects were subsequently altered, by resolutions lodged with the Registrar in June 1960, by which express powers to deal in cattle were added to its objects.

On 6th April 1960 Mr. Irving sent to the manager at Mt. Surprise a telegram which included the following:

Company proceeding change policy operating brooklands as breeding property with young breeders only mt surprise as fattening depot (.)

Intend reducing live stock by 50% this year including turnoff all aged and dry females also all males number sixes and over and some number sevens (.)

Have accepted queerah offer 4000 cattle weight basis including delivery minimum 1600 prior 31st may balance june july (.)

Brooklands was the name of another property of the appellant. In the telegram "Queerah offer" means the offer made by the letter of 6th April from Amagraze. The meat works are at Queerah on the Queensland coast. The telegram was followed on 11th April 1960 by a letter to the manager which set out the telegram. The letter referred to the recent arrangement of Valley Investments Pty. Limited to take over all the shares of the appellant. It referred to Murray Valley and then went on in these terms: The latter Company will operate as a Live Stock and Property Company, and we are arranging that it will purchase at least half the livestock from Mt. Surprise, and will proceed to dispose of these cattle at the best possible price.

On behalf of Murray Valley Holdings Ltd. I have arranged to sell as many cattle as possible to the Queerah Works on weight basis at £8 per 100 for all grades, with the exception of condemned.

The contract of 6th April 1960 with Amagraze was replaced by two contracts dated 20th May 1960. Both were expressed to be with Murray Valley and were signed on behalf of that company. One was for the sale and purchase of 1,272 head of mixed cattle to be delivered on trucks at Mt. Surprise before 31st May. The price was stated as £32 per head but in a letter from Mr. Irving proposing the new contracts it was stated that in the event of the cattle "killing out" at more or less than 160/- per 100 lbs, an adjustment would be made on the June delivery of cattle. It was stated that the per head figure should be equivalent to the weight basis. The other contract of 20th May was for a minimum of 2,728 head of mixed cattle to be delivered at the works at Queerah during June and July. The price was stated as being "as arranged at time of delivery estimated at approx. 160/- per 100 lbs." I am of opinion that the reasons for substituting these contracts for the contract of 6th April and the fact that that substitution was made have no bearing upon the questions I have to decide and I need not go into further details about those matters. But it is interesting, having regard to the contents and to the date of the substituted contracts, to find that in the minutes of a meeting of the Directors of Valley Investments Pty. Limited held on 24th May 1960, Mr. Irving is stated to have made a report which included this paragraph:

Our Subsidiary, Murray Valley Holdings Ltd., has also been successful in purchasing 4,000 mixed cattle running on the property of Pastoral & Development Pty Ltd, Mt. Surprise, North Queensland, for £12 per head, and is negotiating for the sale of 1,272 of these cattle for delivery to Queerah Meat Works, Cairns at the end of this month. The reference to £12 per head instead of £12 10s. 0d. per head may be no more than a slip which is of little significance. But there is an attractive touch of the whimsical in the reference to Murray Valley being "successful" in buying the cattle and to its "negotiating" for the sale of 1,272 of them to the Queerah Meat Works. This report came before the Directors on the very day that the contracts dated 20th May were sent to Amagraze and even if these had not been accepted, the earlier contract of 6th April would have remained operative.

No written agreement was made between the appellant and Murray Valley for the sale of any of the cattle. No record appears in the minutes of either company of any resolution relating to such an agreement. Oral evidence was given by Mr. Irving before the Board of Review in which he said:

As to the books of account, did you give any directions yourself as to how the transaction of sale as you say it was, Pastoral and Development to Murray Valley Holdings should be recorded in the books of account of either company? I did not give any direction. As a Board we discussed this and resolved that we would permit ourselves to buy these cattle and proceed to handle them and, the other company agreed to receive £50,000 for 4,000 cattle.

As a Board you so resolved, is that right? Yes, I believe that.

But there is no record of either Board having so resolved. Mr. Irving said that it was he who fixed, or at any rate suggested, the price of £12.10s.0d. In giving reasons for the extremely wide margin between that price and the price at which, as was already known, the cattle would be taken by Amagraze, he referred to risks and expenses which would be incurred by Murray Valley in connection with the transporting of the cattle to the meat works. This is a matter to which I shall refer later, but I say at once that I find it completely unconvincing as a reason for the fixing of the price at £12.10s.0d. per head.

I think also that no real weight can be given to the suggestion that when that price was fixed it was believed that the Amagraze contract could be satisfied, to a much greater extent than turned out to be possible, by supplying cows which were aged and in poor condition and that this was an important factor in fixing a lower price than would have been appropriate, if it had been known that many younger and heavier animals, including bullocks, would have to be supplied. In evaluating that suggestion it is to be noticed that in a letter written on 19th May, Mr. Irving was assuming that on an average the "mixed cattle" to which that letter referred would weigh 420 lbs and that allowing for freight, £32 per head f.o.r. should be equivalent to "the weight basis", that is, to 160/- per 100 lbs. But according to the evidence of Mr. Bruce Irving the cattle which were available for delivery and were delivered in May were cows and it was later that the better class stock had to be supplied. It is true that it turned out that the cows delivered in May were of an average weight of 353 lbs., not 420 lbs., and in consequence their price upon the weight basis would have been about £28 rather than £32 per head. But what seems relevant in relation to the fixing by Mr. Irving of the price to be received by the appellant is what he expected to be obtained from Amagraze, not what was subsequently obtained in fact or what upon a proper assessment of the situation he ought to have expected. What he did expect in May was to obtain about £32 per head. The evidence does not persuade me that in April he had expected less. In any event this question is not really of much importance. On any view of the matter, it is clear that he knew that the price to be realized from Amagraze would be very greatly in excess of £12 10s. 0d. and, as he well knew, it could not be supposed that an independent vendor, which had the opportunity to sell to Amagraze upon the terms offered by that company, would have chosen instead to sell at £12 10s. 0d. to an intermediate purchaser.

It is plain that a market existed at this time which was far more favourable to sellers than that which had earlier been available. In evidence in this Court Mr. Moore, a man of much experience in the operations of large pastoral properties in Queensland, explained that from about 1958 an American market for hamburger meat became available and by 1960 the proprietors of meat works were offering greatly increased prices for low grade meat. In consequence, there was a strong inducement for pastoralists to cull their herds very heavily and to sell stock at prices so high that they would be able with the proceeds of sale to buy younger and better stock. This new market for meat was the reason for the high price which Amagraze was willing to pay for the cattle. At the same time it has an obvious bearing upon the question whether the appellant did really sell the cattle to Murray Valley at £12.10s.0d, upon the question whether, if it did so, that was a disposal of the cattle in the ordinary course of carrying on the appellant's business and upon what was the real value of the cattle at that time.

The facts to which I have so far referred are such that there is much to be said for the contention of the respondent that I should not be satisfied that any sale of the cattle by the appellant to Murray Valley took place. For the appellant, it was argued that this contention is not open to the respondent and that the only matters with which I am concerned are the matters relating to s. 36 of the Act. I do not think that the appeal is limited in that way. But in any event, I do not think that I should decide this appeal by finding that the respondent was justified in making the assessments upon the basis that there had been no sale to Murray Valley and that the appellant had sold the cattle to Amagraze. In spite of the lack of satisfactory direct evidence, either written or oral, of the making of a contract of sale between the appellant and Murray Valley and of the terms of that contract, it is not proper, in my opinion, to make a finding which disregards the manner in which the transactions were recorded in the books of both companies and the manner in which they dealt with the money paid by Amagraze. It was not all paid to Murray Valley, that is, it did not all go into that company's bank account. Some of it went to the appellant and a large part of it went to Valley Investments Pty. Limited. But it is not disputed that a proper conclusion from the evidence is that the cheques were made out in favour of Murray Valley and it appears that in the books of account, Murray Valley obtained credits for the amounts banked in the account of the appellant or in the account of Valley Investments Pty. Limited. Furthermore, although there are some inconsistencies in the entries in the relevant books of the appellant and of Murray Valley, it is proper to find that the transactions were recorded as sales by the appellant to Murray Valley and as purchases by it from the appellant. It has been urged that these entries were not proved to have been made earlier than September 1960, that is to say, after the transactions had been completed. But even if they were not, I do not regard that as preventing me from concluding that I should proceed upon the basis that there was a sale of the cattle to Murray Valley. Counsel for the respondent put forward, as an analysis of the transactions, the theory that Murray Valley should be treated as having made its written contracts with Amagraze as agent for the appellant, its undisclosed principal and that the proceeds should be treated as income "derived" by the appellant within the meaning of s. 19 of the Act, although instead of being actually paid over to it the proceeds were dealt with in accordance with the directions of Mr. Irving, who was its managing director. This does not appear to me to be a satisfactory statement of the legal effect of what took place. What is disclosed by the books is that the proceeds of sale paid by Amagraze were treated as belonging to Murray Valley. They were not treated as money belonging to the appellant which was handed over by it to Murray Valley.

I turn now to consider s. 36 of the Act. The primary submission for the appellant is that s. 36 can apply only in a case in which a taxpayer, who disposes of trading stock, ceases to carry on the business the assets of which include the trading stock. It is submitted that it can never apply if the taxpayer continues to carry on that business. In support of these propositions reference was made to decisions given both before and after the passing of the 1936 Act but before s. 36 was enacted in its present form. These included Commissioner of Taxation (W.A.) v Newman [1] , and Hickman v Federal Commissioner of Taxation [2] , and in particular, reliance was placed on what Latham C.J. said in Farnsworth v Federal Commissioner of Taxation [3] . Speaking of s. 36 in the form which it was then expressed his Honour said:

The terms of the section show that it was intended to be applied to a case where there was a disposal of the assets of a business as such whether in whole or in part, and whether or not the assets were disposed of because the seller was going out of business or because the business was sold to another person. The section is intended to deal with a walk-in walk-out sale, with a clearing sale, and with a transaction which represents, not an ordinary sale of goods in the course of carrying on a business, but a disposal of the assets of the business so that the business is no longer being carried on by the person who has disposed of it. 1. (1921) 29 C.L.R. 484. 2. (1922) 31 C.L.R. 232. 3. (1949) 78 C.L.R. 504, at p. 514.

It was submitted that the operation of s. 36 in its present form is likewise limited in the manner indicated by that statement of the way in which the earlier section was intended to operate. In my opinion, the Board of Review was correct in not accepting that view of s. 36. It may be acknowledged that the purpose or at any rate the primary purpose of the enactment of the section in its earlier form was to bring into assessable income the value of certain kinds of property with which a taxpayer parted when he was going out of business. It may be acknowledged also that the section was then construed as having a meaning somewhat less extensive than the literal meaning of its words. This is indicated by the passage I have just stated from the judgment of Latham C.J. in Farnsworth's Case [1] . But even if s. 36 had remained in that form, it would have been necessary to consider that passage in the lights of the comments made upon it by Dixon J. and Fullagar J. in Federal Commissioner of Taxation v Wade [2] . Their Honours did not treat the passage as warranting a conclusion that the section could not apply to gifts or sales for an inadequate consideration, otherwise than in the ordinary course of business. The view which they expressed in that case was in accordance with what Dixon J. had stated in Farnsworth's Case [3] , namely, that the section had no application to "the regular disposal of trading stock in the ordinary course of carrying on a business". Upon that view, if part of the assets of a business, which continued thereafter to be carried on by the taxpayer, were disposed of otherwise than in the ordinary course of carrying on the business, there would have been no reason to deny the application of the section to that disposal.

1. (1949) 78 C.L.R. 504. 2. (1951) 84 C.L.R. 105, at p. 111. 3. (1949) 78 C.L.R., at p. 519.

These considerations appear to me to show that the main proposition put forward by the appellant as to s. 36 is not supported by the authorities to which I was referred. But in any event the proposition must be rejected in my opinion because it does violence to the language of s. 36 (1), in the form in which it was enacted in 1952 not long after the cases of Farnsworth [1] and Wade [2] were decided and in which it has remained. It provides:

(a) a taxpayer disposes by sale, gift, or otherwise of property being trading stock, standing or growing crops, crop-stools, or trees which have been planted and tended for the purpose of sale;

(b) that property constitutes or constituted the whole or part of the assets of a business which is or was carried on by the taxpayer; and

(c) the disposal was not in the ordinary course of carrying on that business,

the value of that property shall be included in the assessable income of the taxpayer, and the person acquiring that property shall be deemed to have purchased it at a price equal to that value.

There can be no doubt in this case that the appellant disposed of property being trading stock, that is, the cattle, and that the property constituted part of the assets of a business then carried on by it. It is plain, in my opinion, that if the disposal of the property was not in the ordinary course of carrying on that business, s. 36 (1) must apply to it. The argument that in dealing with the transaction for taxation purposes one never "gets to" s. 36, because it cannot apply unless the business of the taxpayer comes to an end, introduces into the provision a qualification for which there is no warrant in its language. It seems to me that the enactment in its present form expresses in plain terms the intention which was discerned in the earlier form of the section, namely, that it should not apply to a disposal of property in the ordinary course of carrying on a business. But except for that limitation, expressed in par. (c), there is no exclusion from the operation of the section of any disposition which falls within the ordinary meaning of the words used in pars. (a) and (b) of s. 36 (1). 1. (1949) 78 C.L.R. 504. 2. (1951) 84 C.L.R. 105.

I conclude, therefore, that the application of s. 36 in this case depends solely upon the question whether the sale of the cattle by the appellant to Murray Valley (which is here assumed to have been made) was or was not in the ordinary course of carrying on the appellant's business. That is a question of fact. I am not satisfied that it was in the ordinary course of carrying on that business. On the contrary, I think that the proper finding on the evidence is that it was not. It would be fruitless to survey all the evidence bearing upon the question. But I shall refer to some of the facts that I have taken into account.

The offer made by Amagraze, since it related to the appellant's cattle, was one which could not be made into an effective business contract merely by acceptance of the offer, unless accepted by the appellant itself. It is true, of course, that a person who does not own property may make a contract to sell it. But he can perform that contract only if he is able to induce the owner to make an agreement which enables him to do so. Otherwise the contract will remain unperformed, although the person who contracted to sell the property will become liable to pay damages for breach of it. Here, the evidence must be taken to establish that Murray Valley made the first contract with Amagraze before it made any agreement with the appellant. It is true that the contract was not sent back to Amagraze until about 21st April 1960. But as early as 6th April, Mr. Irving stated in his telegram that the offer had been accepted. In making that statement, he was acting as managing director of the appellant. There is no reason for not accepting it as an admission by the appellant. The evidence does not enable a date to be fixed as that upon which the agreement between the appellant and Murray Valley was made. Mr. Irving said that "it would have been about the middle of April" when the price was fixed. Certainly it must have been later than 6th April. If the appellant had declined to sell to Murray Valley, the latter's contract with Amagraze could not have been fulfilled. Looking at the matter from the appellant's point of view, it must be taken to have sold its cattle at £12 10s. 0d. per head, knowing that the purchaser from it had to get them in order to fulfil a contract which, on the best view of the evidence from the point of view of the appellant, and allowing for contingencies, would produce a net return of more than twice that amount. In these circumstances the price at which the appellant sold shows, in my opinion, that this was not a sale by it in the ordinary course of its business.

I do not assert as a general proposition that a sale by one company to an associated company upon terms that allow the latter to make a substantial profit and give the former less profit than otherwise it might be possible for it to make is never a sale in the ordinary course of the carrying on of the business of the former company. It is common enough that business is conducted in that fashion between associated companies, not by way of an exceptional and isolated transaction, but as a regular method of trading: cf. Cecil Bros. Pty Ltd v Federal Commissioner of Taxation [1] . My conclusion is concerned with the particular facts and circumstances of this case. The conclusion to which those facts and circumstances lead, in my opinion, is that the price was an arbitrary one and was so low as to take the transaction outside the category of an ordinary business transaction.

The appellant sought to show by evidence that the anticipated expenses and the risks of selling the cattle direct to Amagraze were important factors in relation to the price. This is a matter to which I have already referred above. But it would not be right to leave it without referring to the evidence of Mr. Moore. I do not doubt his honesty or his knowledge and experience. He said that in the transporting of stock from the station property to the meat works there would be a risk the degree of which would depend upon the condition of the cattle. Because of that risk he would be willing to take less per head at the railhead. When asked to quantify that difference he was not able to be definite, because various different factors might come into its assessment in different situations. He did not think that one could lay down any rule of thumb. But he spoke in approximate terms of a reduction of about £1.10s.0d. to £2.10s.0d. per head. It is shown by his evidence that the risk could be a factor in fixing the price but, in relative terms, it would be a small factor in the sales with which this case is concerned. It seems to me that it is idle to suggest that in the fixing of the price of £12 10s. 0d. as that which the appellant was to receive this was a factor which had any real significance. The attempted justifications of the price of £12 10s. 0d. as a reasonable price in the circumstances are contradicted by a document compiled by the appellant's own directors. That was a report relating to the trading in the year which ended on 30th June 1961. It stated that in the first three months of that financial year there had been a sale of 856 cattle to Murray Valley for £12 10s. 0d. per head, and that this "was far below the then current market price".

In considering whether there was a sale in the ordinary course of the carrying on of the appellant's business another fact which may be taken into account is that it had been decided, by 6th April 1960, that there was to be a change of policy in the appellant's operations and that in that year its livestock would be reduced by 50 per cent. This meant that there would be sales of cattle going beyond the normal culling out of old and poor quality stock and beyond the normal sales of stock which it had been accustomed to making in its regular course of trading. It was not intended that the appellant would follow the course which Mr. Moore described of selling off more than the usual number of inferior beasts on the exceptional market then available, in order to replace them with better quality stock. Sales were to be made to implement a new policy in the conduct of its business, by which the stock would be drastically reduced. I do not regard this fact as decisive, but I think it supports the conclusion which, in my opinion, should be reached upon a consideration of the whole of the circumstances, that the sale of the cattle to Murray Valley was outside the ordinary course of the carrying on of the appellant's business.

I find that s. 36 was applicable to that sale. It is not clear whether the respondent ever formed the opinion that there was insufficient evidence of the market value of the stock, so as to bring into operation par. (a) (ii) of sub-s. (8) of s. 36. But the Board of Review considered, I think correctly, that the matters which under sub-s. (8) were to be determined by the respondent had become matters for determination by the Board, in accordance with s. 193 (1) of the Act. I have been somewhat concerned by the manner in which the Board proceeded to deal with those matters; but I do not think that the difficulty which suggests itself to me can have any effect upon my decision in this appeal. From the reasons given by the Board, it appears that it was disposed to find that the net price paid by Amagraze represented the market value of the stock at the relevant time. But it did not actually make that finding, although it stated that there was a good deal to be said for it. The Board said that if that were not the market value, then the market value could not be determined and a reasonable value had to be adopted in its stead. It found that the net price paid by Amagraze was a reasonable value for the cattle on the day that they became the property of Murray Valley. The Board's method of dealing with the question of value may be suggested, if its reasons are read literally, to be a method which is not entirely in accordance with the terms of par. (a) of s. 36 (8) which are:

(a) the value of any property or live stock shall be -

(i) the market value of the property or live stock on the day of the disposal; or

(ii) if, in the opinion of the Commissioner, there is insufficient evidence of the market value on that day - the value which in his opinion is fair and reasonable.

The provision seems to require that a finding should be made by the respondent, or subsequently by the Board, of what is the market value, unless of opinion that there is insufficient evidence of it. The value thought to be fair and reasonable is to be adopted only if it has been decided that for lack of evidence the market value cannot be determined. The Board did not say that it could not determine the market value and it did not state an opinion that there was insufficient evidence of that value. But having considered the reasons of the Board in the light of the facts and the submissions with which the Board was dealing, I have come to the conclusion that the Board's decision was not vitiated by any error of law as to the way in which s. 36 (8) should be applied. Subject to one matter to which I shall refer presently, I feel no difficulty in saying that a finding was justified that the net price paid by Amagraze was the market value of the cattle at the relevant time. I think that that was in reality a finding which the Board made and upon which it considered that the respondent's assessments were justified. Upon a fair reading of the Board's reasons, it appears that the Board then proceeded to add that if it were wrong in that view the case was one in which there was insufficient evidence upon which to fix any other figure as being the market value and, therefore, the value regarded as fair and reasonable might be adopted.

I have said that subject to one matter I had no difficulty in regarding the price paid by Amagraze as representing the market value. I said that because I have felt that perhaps some deduction should have been made from that price, by reason of the contingencies to which I have already referred, in order to compute, at least in relation to some of the cattle, their market value at the time of their disposal. But I have come to the conclusion that I need not take that into account in deciding this appeal. As I understood the submissions of learned counsel for the appellant, this point was not one which was argued by him. Although he did contend that the net price paid by Amagraze was not the market value to be taken into account under sub-s. (8), it was not argued that even if all other submissions failed the values adopted for the purposes of the assessments should be reduced by some relatively small amount in order to allow for this factor. No submission was made as to what the amount of such a reduction ought to be, apart from the general submission that the relevant market value was to be ascertained by looking at the price which Murray Valley was to pay to the appellant. In any event, in relation to the particular circumstances of this transaction I think the factor was not of much significance, and it would not be proper because of it to find that the decision of the Board of Review was wrong.

At the hearing of the matter by the Board there was evidence, to which I have not yet referred, by which the appellant endeavoured to show, by reference to certain other sales of livestock said to have been made in the same year at or about the time of this transaction, that the value of the cattle was less than £12 10s. 0d. per head. But these matters have not been pressed in this Court. In my opinion, the Board of Review was correct in deciding that any value could not be determined by reference to that evidence.

I am satisfied that the argument for the appellant that the sale at £12 10s. 0d. between the appellant and the Murray Valley provides the measure of the market value cannot be accepted. My reasons for that conclusion have been sufficiently indicated by what I have already said concerning that price and concerning the circumstances in which it was fixed.

Having regard to the foregoing conclusions as to the operation of s. 36, I need not consider the submissions made to the Court in relation to s. 260 of the Act.

I am of opinion that the appeal should be dismissed.

I order that the appeal be dismissed with costs. The exhibits may be handed out to the persons who produced them or to a solicitor authorized by any such person to receive any exhibit or to the solicitor for the party who, then having possession and custody of any exhibit, tendered it, upon such solicitor giving a proper acknowledgment of such receipt.