Income Tax - Objections and appeals - Reference of decisions on objections to Administrative Appeals Tribunal or Federal Court - Administrative Appeals Tribunal - Nature of review function - Power to make decision outside ambit of decision under review.

Income Tax Assessment Act, 1936

Administrative Appeals Tribunal Act, 1975

Crow v. Federal Commissioner of Taxation (1988) 88 ATC 4620

Federal Commissioner of txation v. Jackson (1990) 90 ATC 4990

Federal Commissioner of Taxation v. Whitfords Beach Pty. Ltd. [1982] HCA 8; (1982) 150 CLR 355

Fletcher v. Federal Commissioner of Taxation (1988) 88 ATC 4834

Statham v. Federal Commissioner of Taxation (1988) 89 ATC 4070

The Scottish Australian Mining Co. Ltd. v. Federal Commissioner of Taxation [1950] HCA 16; (1944) 81 CLR 188

Whitfords Beach Pty. Ltd. v. Federal Commissioner of Taxation (1979) 28 ALR 637

Mr N. Rosenbaum

Counsel for the Respondent : Mr S.P. Charles QC

and Mr T.J. Ginnane

Solicitors for the Applicant : Blake Dawson Waldron

Solicitors for the Respondent : Australian Government Solicitor

The appeal against the decision of the Administrative Appeals Tribunal in respect of the year of income ended 30 June 1982 be dismissed.

The appeal in respect of each of the years of income ended 30 June 1981, 1983, 1984, 1985 and 1986 be allowed and the decision of the Administrative Appeals Tribunal in respect of each said year of income be set aside.

For the decision in respect of the year of income ended 30 June 1981 set aside there be substituted a decision that the respondent's decision under review be varied by adding thereto a decision that the taxable income of the applicant and the tax payable thereon in respect of the said year of income are respectively $138,796 and $74,744.10 and the matter be remitted to the respondent with a direction that he further amend the assessment accordingly.

For the decision in respect of the year of income ended 30 June 1983 set aside there be substituted a decision that the respondent's decision under review be varied by adding thereto a decision that the taxable income of the applicant and the tax payable thereon in respect of the said year of income are respectively $320,051 and $182,737.27 and the matter be remitted to the respondent with a direction that he further amend the assessment accordingly.

For the decision in respect of the year of income ended 30 June 1984 set aside there be substituted a decision that the respondent's decision under review be varied by adding thereto a decision that the taxable income of the applicant and the tax payable thereon in respect of the said year of income are respectively $395,564 and $227,829.58 and the matter be remitted to the respondent with a direction that he further amend the assessment accordingly.

For the decision in respect of the year of income ended 30 June 1985 set aside there be substituted a decision that the respondent's decision under review be varied by adding thereto a decision that the taxable income of the applicant and the tax payable thereon in respect of the said year of income are respectively $445,096 and $257,452.16 and the matter be remitted to the respondent with a direction that he further amend the assessment accordingly.

For the decision in respect of the year of income ended 30 June 1986 set aside there be substituted a decision that the respondent's decision under review be varied by adding thereto a decision that the taxable income of the applicant and the tax payable thereon in respect of the said year of income are respectively $331,260 and $189,160.35 and the matter be remitted to the respondent with a direction that he further amend the assessment accordingly.

The respondent's costs of each appeal (including reserved costs) be paid by the applicant.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

Appeals from decisions of the Administrative Appeals Tribunal varying the respondent's decisions on objections to income tax assessments.

2. The applicant, who was born in 1911, owned and worked a farm of 476 acres which had been in his family since 1904. It was his father's from 1924. He bought it in 1953. In the next decade the State Rivers and Water Supply Commission of Victoria bought 26 acres of the land which was dedicated with other land to the formation of Lake Mulwala near Yarrawonga. In 1971 360 acres were sold to Brymay Plantations Pty. Ltd., which proposed to grow poplars for match wood on it. The remaining 90 acres bordered Lake Mulwala. At that time the applicant, being in the seventh decade of his life, desired to retain about 55 acres around the homestead for himself and his family. A strip of 35 acres adjoining the lake was offered on the applicant's behalf by an estate agent for sale at $520,000. After his invalid daughter died the applicant desired to retain only a few acres for himself and his family. Permission to sell residential blocks of the land was sought in and after 1975. Conditions subject to which permission was granted required substantial expenditure on the provision of water and sewerage reticulation before any blocks could be sold. No offer to buy the land was made at a price anywhere near what the applicant was asking and by the end of 1976 the applicant had resolved to fulfil the conditions himself and to sell the land in subdivided blocks. The effectuation of his resolve was still in train when the Tribunal was hearing the references. The respondent's decisions referred to the Tribunal related to the years of income ended 30 June 1981, 1982, 1983, 1984, 1985 and 1986. Not all the blocks of land, which number more than 220, had been sold by the end of that period, during which receipts in respect of sales of more than 180 blocks aggregated more than $3,000,000 and deductible expenses aggregated more than $1,500,000. The principal issue between the parties, which the Tribunal resolved in the respondent's favour, was whether the receipts were assessable income under s.25(1) of the Income Tax Assessment Act 1936. An alternative submission was advanced before the Tribunal, and before this court, that profit arising from the sales by the applicant of the blocks of land formed part of his assessable income as answering a description contained, until 25 June 1984, in s.26(a) of that Act, and contained on and after that date in s.25A(1) of the Act. The statutory description assigned by the submission is "profit arising .... from the carrying on or carrying out of any profit-making undertaking or scheme", a description commonly called "the second limb" of the sub-section. Of that submission the Tribunal observed that, if it had not found that during the years of income under consideration the applicant "was carrying on the business of subdividing, developing and selling the land", it would have found that in each of those years the applicant was engaged in a profit-making undertaking or scheme.

3. Deputy President Thompson, by which the Tribunal was constituted, included in his reasons for decision a statement of his findings concerning the development and sale of the land. No attack was made in this court on any of those findings, which I set out:

"14. Having decided to subdivide the land into residential blocks

himself, the taxpayer sought the advice of Mr R and his new solicitor.

Negotiations were conducted with a company which was developing some

land nearby to share the cost of external water supply and sewerage

works required for both developments. At about that time the new

solicitor had suggested to the taxpayer that for probate reasons he

should incorporate a company and transfer to it the title to his land.

A company was incorporated but for some reason the land was not

transferred. Nevertheless, the agreement with the other company for the

joint water and sewerage works was drawn up in the name of the company

and contained a recital that the company was the owner of the land. It

is not clear whether the agreement in that form was finally executed by

the company; if it was, it was an aberration. I am satisfied that the

land remained the property of the taxpayer and that it was he who

developed it by subdivision and who in his own name sold the residential

blocks to their purchasers.

15. In May 1977 the taxpayer sought finance from CC, a finance

company, to enable him to pay for the external water supply and sewerage

works to be carried out and for Stage 1 of the subdivision to proceed.

He obtained that finance and by June 1979 work had been commenced on

constructing 6 km of water main from the nearby country town to the

farm, on external sewerage works, including a pump station, on earth

works, on a storm water drain and on road works to construct a sealed,

kerbed and guttered road from the main road through Stages 1, 2 and 3 of

the development. The State Electricity Commission had commenced the

work required to bring a supply of power to the land where the

development of Stage 1 was taking place.

16. The surveyor/planner for the 6 km water main was Mr R; he was the

surveyor/engineer for the other work. He was paid by the taxpayer. The

work on both the water main and all the other works on site was carried

out by W and B, a Division of E Ltd.; the taxpayer contracted with that

company for the work to be done and he himself paid the company for the

work which it did.

17. The plan submitted in 1976 had provided for the development to be

carried out in six stages. It was approved by the X Shire Council

subject to further approval being obtained in respect of each stage

before work on that stage was undertaken. It included the 35 acres

which the taxpayer had wished to sell to a developer and some of the

land which he had intended to keep for himself. He gave evidence that

the original farm homestead was in the middle of where the road through

the development was to run. When he was paid by the company which

bought the 360 acres in 1971, he built a new house on the part of the

land which he intended to retain for himself. One of his two daughters

was spastic and severely crippled. He said that he had wished to retain

part of the land for her sake. He had built the new house in such a way

that her room was in the same position in relation to the main living

area as her room in the old farm house had been. However, she had died

in 1975; thereafter he had lost his desire to retain the land or the new

house. The land on which the new house had been built was incorporated

into Stage 5A of the development plan as submitted in 1976.

18. Mr S gave evidence that, although a plan may be approved for

subdivision to be carried out in stages, the Shire Council did not

normally compel the person concerned to proceed with the subdivision at

all or by stages. As the plan was his, he usually wished to carry out

the subdivision by the stages he had shown in it but that was not

compulsory. Mr S gave evidence also that a number of different plans

had to be submitted in connection with the development of any land. The

first was a general plan to support an application for planning

permission. Planning permission was required where the zoning of the

land had to be changed for the development to take place. Second, a set

of detailed plans of the subdivision was then required before it could

proceed; if it was to be by stages, the plan could be for a stage at a

time. Third, plans which Mr S referred to as construction plans were

required. They enabled the Shire Council and its staff to ensure that

all the work to be done in subdividing the land accorded with the

requirements of the Local Government Act and regulations made under it,

and that the work was actually done in accordance with those plans. He

gave evidence that, when the subdivision work was being carried out on

the taxpayer's land, either he personally or a member of his staff went

there quite frequently to check the work. He said that, although he had

become Shire Engineer only in January 1981 after the death of his

predecessor, his predecessor would have been involved in giving advice

to the Shire Council on the various plans submitted by the taxpayer in

respect of the development.

19. The taxpayer gave evidence that the previous Shire Engineer had

told him in about 1976 that he was obliged to carry out the subdivision

by stages. Mr S gave evidence that, while that was possible, it was

most unlikely. The taxpayer undoubtedly had discussions with the

previous Shire Engineer. I consider it most unlikely that the Shire

Engineer told him that he must carry out the subdivision in stages but,

as they would almost certainly have discussed the plan in terms of

stages, the taxpayer may possibly have erroneously believed that doing

the work by stages, and not all at once, was obligatory.

20. Mr S gave evidence, which I accept, that the application for

development of Stage 1, accompanied by the detailed plans for it were

submitted to the Shire Council on 2 November 1976; the permit, No. 82,

was issued on 28 April 1977. On 5 May 1977 the Council wrote approving

the design for the sewerage rising main. On 27 June 1979 the Shire

Council sealed the plan with endorsements pursuant to sub-section E of

section 569E of the Local Government Act 1958 (Victoria). By 17

December 1979 the work was substantially complete. That is evidenced by

a letter written by the Shire Secretary on 17 December 1979.

21. Stage 1 consisted of 26 blocks. The taxpayer did not engage the

services of Mr O as sole agent to sell those blocks. Instead he gave a

general instruction to a number of estate agents in the area to act on

his behalf in selling them. He also placed an advertisement in `The

Age' in June 1980. He did not erect a site office on the land for the

purpose of selling the blocks and he did not have coloured brochures

printed. He had a plan of the blocks printed on a single sheet of white

paper. Prospective purchasers were invited to `ring' a phone number,

which was that of the taxpayer's home. He displayed a large hand-painted

version of the plan on a wooden cart on the land. He gave

evidence that at weekends people came to view the blocks and, if they

were interested in purchasing, he took their particulars and sent them

to his solicitor to proceed with the sales. The first block was sold on

29 April 1980. The plan for subdivision had been approved by the Titles

Office on 21 December 1979, so that the blocks could have been sold at

any time from then onwards. In the event it took until the middle of

1981 for most of the 26 blocks to be sold. Mr O gave evidence, which I

accept, that the reason for the slow sales was that the prices which the

taxpayer was asking were too high.

22. In August 1977 a progressive mortgage advance of $250,000 had

been approved by CC, to enable the taxpayer to complete Stage 1 and to

assist with Stage 2, which was for the development of a further 35

blocks, and general amenities relating to all the stages which were to

be developed. In December 1979 a further progressive advance of

$240,000 had been approved to enable the first two stages to be

completed. Because of the high cost of the external sewerage and water

supply work which, while it was required for the whole development, had

to be completed before any blocks in Stage 1 could be sold, and because

of the slow sale of the Stage 1 blocks, by the middle of 1981 the

taxpayer was indebted to CC to the extent of about $200,000. He sought

additional funds from the Corporation for the completion of Stage 2 but

his application was declined. It was suggested to him that he should

sell the rest of his land to a developer and not proceed further with

the subdivision himself. He was not willing to adopt that course. In

June 1981 he commissioned Mr M to carry out a feasibility study and

valuation report on Stage 2. He then sought finance from the National

Bank of Australia. He had been a customer of the bank for some years

and his surviving daughter was employed by it. It decided to make the

necessary finance available to him.

23. It is not clear on what date the taxpayer submitted his detailed

plans for Stage 2 to the Shire Council but permission to proceed with

Stage 2 was granted by the Council on 11 August 1981. The taxpayer had

had a disagreement with Mr R and for Stage 2 he employed Messrs G and V

surveyors/planners. He again contracted with W and B for the execution

of the work for Stage 2. The State Electricity Commission did the

necessary work for power to be supplied to the blocks in Stage 2. By

February 1982 the construction work had been completed and in April 1982

the first of the blocks in Stage 2 was sold.

24. Mr M gave evidence that, when he prepared his feasibility study,

he was particularly concerned about the need for a proper marketing

strategy for sale of the Stage 2 blocks. He said, however, that the

taxpayer had not done anything to implement such a strategy. He had not

engaged the services of any agent to market the blocks; nor had he

engaged in the scale of advertising which Mr M considered appropriate,

although he did place some advertisements in the national and local

press inviting inquiries to be made to himself. In spite of that the

blocks in Stage 2 were sold very quickly. Some purchasers bought

through estate agents. The rest of the blocks were sold by the taxpayer

personally. He still had no site office as such on the land but he used

a room in his house as an office where he kept simple books relating to

sales and where presumably he dealt with prospective purchasers. By the

end of June 1982 the income from sales of Stage 2 blocks was such that

he had been able to discharge his financial obligations to CC. From

then on the development was self-financing.

25. In September 1982 the Shire Council gave permission for Stage 3

to proceed and construction work on that stage was commenced in that

month. Again, the taxpayer employed as surveyors/planners Messrs G and V

and contracted with W and B for all the work, other than the

installation of power supply, that was required to be carried out.

Again the State Electricity Commission installed the power supply. The

taxpayer himself again paid Messrs G and V, W and B and the State

Electricity Commission for their work. There were 25 blocks in Stage 3

of the subdivision. The first block was sold in January 1983; the

blocks were marketed by the taxpayer in the same manner as the Stage 2

blocks. Again, they were sold quickly.

26. In March 1983 the Shire Council gave approval for the

commencement of Stage 4. Work on that stage was carried out at the same

time as work on a small public recreational reserve with a toilet block

and the construction of a sea-wall along the whole of the frontage of

the land in the subdivision onto the lake. The taxpayer employed the

same surveyors/planners and the same site contractors as before. He

also paid an electrician to do work in connection with the toilet block

and he again paid the State Electricity Commission to supply power to

the blocks in Stage 4. The construction work on Stage 4 was completed

in March 1984; however, the plan of subdivision of the 47 lots in that

stage had been approved by the Titles Office in September 1983 and the

first sale of a Stage 4 block took place in November 1983. The blocks

were sold in the same way as the Stages 2 and 3 blocks.

27. In 1984 the taxpayer made representations to the State Rivers and

Water Supply Commission regarding the manner in which the sea wall

should be constructed. He proposed a method which was simpler and

cheaper than that originally required by the Commission. He persuaded

the Commission to accept his suggestion; the work was thereafter carried

out accordingly.

28. In about September 1984 the Shire Council approved plans for the

subdivision of Stages 5 and 5A; in November 1984 construction was

commenced on Stages 5 and 5A and also on the earth works for Stages 6

and 7 and the road works for Stage 7. For Stages 5, 5A, 6, and 7 the

taxpayer employed a different surveyor/planner, C and Associates Pty.

Ltd. He employed the same site contractors as before for the work

commenced in November 1984; again the State Electricity Commission

installed the power supply. He paid all of them himself. In November

1984 plans for Stages 6 and 7 were approved by the Shire Council. In

February 1985 the Titles Office approved the plan of subdivision for

Stages 5 and 5A, which together comprised 31 blocks. The first sale of

a Stage 5 block took place in January 1985 and the first sale of stage

5A block in May 1985. By November 1985 construction work on Stage 7 had

commenced with the same surveyor/planner and site contractor. In

December 1985 the Titles Office approved the plan of subdivision for

Stage 7, which contained 21 lots, and in June 1986 construction work on

that stage was complete. The plan of subdivision for Stage 6 is

currently at the Titles Office awaiting approval. No construction work

has been done on Stage 6, which is for the subdivision of land most of

which does not abut the lake. The blocks in Stage 7 also do not abut

the lake; Stage 7 was developed before Stage 6 because the access road

to the earlier stages passed through the Stage 7 land.

29. On the basis of the primary facts set out above I find as fact

that by the end of 1976 the taxpayer had firmly decided to subdivide the

land himself into residential blocks. He no longer had any intention of

selling the land to another person to develop. I find also that shortly

after he had obtained approval from CC for a progressive mortgage

advance of $250,000 and then entered into the agreement for the external

water supply and sewerage work to be undertaken, he committed the whole

of the land to his development of it. His subsequent conduct over the

years satisfies me that that intention and commitment never wavered

thereafter.

30. When the taxpayer had sold the 360 acres, he necessarily had to

reduce his farming business greatly. Questioned by Mr Ginnane about his

income tax returns for 1978 and later, he accepted that during the 1978

tax year he had had 15 head of cattle and that after that he had had no

cattle and income from farming had been very small. He gave evidence

that after 1978 it derived solely from agisting on the land livestock of

other persons. The subdivision is now nearly complete; on a visit to

the land by the Tribunal I saw no sign of farming still being conducted

on any part of it. Clearly the taxpayer had to reduce progressively his

already insignificant farming activities as the subdivision progressed

stage by stage.

31. As to the taxpayer's personal involvement with the subdivision of

the land, he was the sole decision-maker in respect of all matters of

consequence in relation to it; he obtained professional advice but,

except for the submission of the original planning application early in

1975, he chose for himself and directed the course of action to be

followed. Thus at all times he fixed the price to be asked for the

land. He sought and obtained finance and subsequently, having been

refused further finance by that lender, he personally sought and

obtained it from another source. He controlled the marketing of blocks

after subdivision; he dealt personally with many prospective purchasers

when they came to inspect the land. On many occasions over the years he

dealt directly with the X Shire Council and its officers about the

subdivision of the land and their requirements in relation to it. He

similarly dealt personally with the State Rivers and Water Supply

Commission; he personally proposed to it the cheaper way of building the

sea-wall and convinced it to accept his proposal. In addition to his

management role, at times in the course of the development he did work

on the land himself to save the cost of employing a labourer. For

instance, he personally cut and cleared the bull-rushes growing in the

lake adjacent to the land.

32. The amounts spent by the taxpayer in each of the tax years on

subdivision of the land and the amounts which he received from the sale

of the blocks after subdivision in each of the taxation years are not in

dispute. The figures are set out on page 16 of the T documents in

respect of the 1981, 1982, 1983, 1984 and 1985 taxation years and at

page 3 of the T documents in respect of the 1986 taxation year. There

is no need for me to set them out in this statement of reasons.

However, it should be noted that the subdivisional costs incurred in the

1981 tax year were only $235,599. That amount appears to relate

entirely to Stage 1 and not to the external sewerage and water supply

costs. In the report of a real estate valuer, Mr PM, prepared in

September 1977, the amount which it was expected that the taxpayer would

have to pay on his share of the cost of the external works on sewerage

and water supply was $74,200. The total cost of Stage 1, including

those external works, was expected to be $301,330. It seems likely that

the external sewerage and water supply costs were incurred before the

1981 tax year.

4. Upon the question whether the receipts from the sale of the blocks of land were assessable income of the applicant under s.25(1) the Deputy President expressed his conclusion and his reasons for the conclusion thus:

"59. Having given careful consideration to all the facts in their

full context I have come to the conclusion that the taxpayer's

activities between 1975 and 1986 were such that the subdivision,

development and sale of the land which took place during that period

constituted more than the mere realization of a capital asset. I find

that in the 1981, 1982, 1983, 1984, 1985 and 1986 tax years he was

carrying on the business of subdividing, developing and selling the

land. If I had not made that finding, I should have found that in each

of those years he was engaged in a profit-making undertaking or scheme.

60. In coming to the conclusion which I have reached I have taken

into account in the taxpayer's favour the fact that he has never

subdivided, developed and sold any land which was not part of his farm.

I regard as of neutral effect that his intention in subdividing and

developing the part of his land adjacent to the lake was to enhance its

value so that, in his words, he could get `the top dollar' for it. What

has caused me to decide that his activities extended beyond what can be

accepted as being directed to and constituting the mere realization of a

capital asset, albeit with its value enhanced, is their extent. In

particular I regard as significant the degree of his personal

involvement in the planning, in the negotiations with the Shire Council

and the State Rivers and Water Supply Commission, in obtaining finance,

in the employment of contractors, in the marketing of the blocks and in

their actual sale. The subdivision and development was substantial.

The land has been subdivided into over 180 small blocks. The

development has turned farmland which had been unserviced by water

supply or sewerage and without a made road into fully serviced

residential blocks with a sealed road and drainage. The taxpayer not

only obtained finance but he risked it."

Mr Hayne QC, who appeared with Mr Rosenbaum for the applicant, submitted that the two quoted paragraphs disclosed errors of law which vitiated the Deputy President's conclusion. It was an error of law, in Mr Hayne's submission, to assign legal significance, in determining whether the receipts were derived in the carrying on of a business and not in the mere realization of an asset, to the degree of the selling owner's personal involvement in the activities by which the land was converted to saleable residential parcels and sold. Perhaps by way of alternative submission, a contrast was pointed by Mr Hayne between the turning, by an owner from his business or professional activity unconnected with subdivisional land development and sale, to extensive involvement in the subdivision and sale of his own land, and this case, of an elderly farmer deprived, by the sale of most of his farm, of his lifelong work, who lives close by the scene of the subdivisional and selling activity in which he chooses to take a hand.

5. It is no doubt true that a determination as to whether a man is carrying on a business turns largely on a consideration of the activities being undertaken, rather than of the personal activities of that man, as distinct from the servants, agents and others who undertake activities pursuant to contracts with him. But in distinguishing between mere realization of an asset and the carrying on of a business it cannot in my opinion be irrelevant that the owner of the asset undertook much of the planning and managing of the activities. The references in the reasons for judgment in Statham v. Federal Commissioner of Taxation (1988) 89 ATC 4070 to the disengagement of the owners of the land there in question from managerial and organisational activity cannot in my opinion be explained as directed merely to the lack of complexity in the organisation and management of what was done to sell the land. Attention was also directed to what was done by the owners as distinct from those with whom they contracted for subdivision and selling. The enquiry being, in that case as in this, whether the owner of land was "merely realising an asset or ... had crossed over the line and conducted a business" (89 ATC at 4076), what the owner himself did, as well as what was done, was relevant to the enquiry, in my opinion.

6. The applicant's freedom from other claims on his time and his proximity to the site where the subdivisional activity was undertaken no doubt made easier the tasks he undertook. So, too, it may be that his long residence there qualified him to negotiate with the Shire Council and the State Rivers and Water Supply Commission, as well as with contractors. But in my opinion those circumstances would not detract from the significance which his engagement in those activities had in determining whether he carried on a business.

7. Mr Hayne imputed legal error to the Deputy President's reliance on the extent of the activities by which the land was subdivided and sold. He pointed out that the acreage of what the applicant desired to sell determined substantially the number of allotments into which the land had to be divided for sale, and submitted that the number of blocks to be sold could not reasonably be regarded as influencing, much less controlling, the conclusion as to whether what was done was mere realization of an asset. Yet the extent of the activities undertaken was largely determined, it was submitted, by the magnitude of that number.

8. The answer to the submission is to be found, I think, in observations by Deane J. in Whitfords Beach Pty. Ltd. v. Federal Commissioner of Taxation (1979) 28 ALR 637 at 653-654 which were approved and expatiated by Mason J. in Federal Commissioner of Taxation v. Whitfords Beach Pty. Ltd. [1982] HCA 8; (1982) 150 CLR 355 at 385. Deane J. observed:

"Where a person who carries on a business sells an asset which had been

held as a capital asset, one must, in each case, ask the question

whether the asset was devoted to the particular business to such an

extent that it can properly be said that the proceeds of sale represent

profits made in the ordinary course of that business. In a case where

the asset has been divided and the divided parts improved in the course

of a business of dividing and improving such assets, it would be rare

that one could say that the profits from sale of the individual improved

items (after making allowance for the value of the original asset)

represented part of the proceeds of mere realization of a capital asset

as distinct from profits made in the ordinary course of that business.

Where the activities of dividing and improving are of sufficient scale

and scope, the fact that no prior independent business existed will not

prevent those activities themselves constituting a business of which the

profits arising on sale are the ordinary proceeds."

"Deane J. was right in pointing to the circumstance that the asset was

divided and improved in the course of a business of dividing and

improving the asset. In this respect I do not agree with the

proposition which appears to be founded on remarks in some of the

judgments that sale of land which has been subdivided is necessarily no

more than the realization of an asset merely because it is an

enterprising way of realizing the asset to the best advantage. That may

be so in the case where an area of land is merely divided into several

allotments. But it is not so in a case such as the present where the

planned subdivision takes place on a massive scale, involving the laying

out and construction of roads, the provision of parklands, services and

other improvements. All this amounts to development and improvement of

the land to such a marked degree that it is impossible to say that it is

mere realization of an asset. We need to bear in mind that the

subdivision of broad acres into marketable residential

allotments involves much more in the way of planning, development and

improvement than was formerly the case."

It may be that those observations confess part and avoid part of the submission. It is, I think, difficult to discriminate between mere realization and the conduct of a business by reference directly to the magnitude of the physical activity or the physical effect of the activity, although Mason J. does seem to regard the degree of development and improvement of the land as critical. The magnitude of a substantial subdivisional enterprise does, however, commonly entail such a degree of systematic organization, planning, management and repetition of purposeful profit-making activity that the carrying on of a business may be more clearly discerned than in a case "where an area of land is merely divided into several allotments." However that may be, I respectfully accept the observations I have quoted and conclude that no error of law is to be detected in what the Deputy President said about the extent of the activities undertaken in this case.

9. It was submitted on behalf of the applicant that the Deputy President had erred in law in failing to take into account, in favour of a conclusion that what occurred was the mere realization of the asset, the purpose which animated the applicant's decision to undertake the subdivision and sale of the land himself. In support of the submission it was said that a purpose merely to achieve that realization was to be inferred from the whole of the evidence and particularly from the finding that until the end of 1976 the applicant had sought for several years to sell in broad acres all of the land he did not require for his family's use (until his invalid daughter died all but 55 acres and thereafter all but a curtilage of a few acres) and from the finding that only after years of unsuccessful offering of that land for sale and after notification of the grant of permission to subdivide the land had been communicated to those who might have been expected to be interested in purchasing the land did the applicant resolve to subdivide and sell the land himself. Yet the Deputy President had observed: "I regard as of neutral effect that his intention in subdividing and developing the part of his land adjacent to the lake was to enhance its value so that, in his words, he could get `the top dollar' for it." That sentence demonstrated, it was said, the Deputy President's failure to draw the inference as to the applicant's purpose which it was suggested that his findings compelled. Reliance was placed upon the significance which Gibbs J. attributed in the Whitford's Beach Case 150 CLR at 369-371 to the purpose which animated those who controlled the taxpayer company from the time when the subdivision of its land was resolved upon.

10. In my opinion the observation of the Deputy President expressed his recognition that the existence of an intention on the part of a taxpayer to secure the best price for his asset by work which enhances its value does not necessarily tend against the conclusion that what was done to enhance the value did not go beyond mere realization to the carrying on of a business, and that in this particular case the existence of that intention on the applicant's part did not do so. Counsel for the respondent before the Tribunal had cited a passage from the reasons for judgment of Lockhart J. in Crow v. Federal Commissioner of Taxation (1988) 88 ATC 4620; 19 ATR 1565 in these terms: "There is greater scope for the characterisation of a series of acts as being within the scope of carrying on a business where the acts are motivated by the desire for or expectation of profit, although a particular commercial transaction may form part of a business in the absence of the attainment or expectation of profit in that transaction: Investment and Merchant Finance Corporation Ltd. v. F.C. of T. 71 ATC 4140; [1971] HCA 35; (1971) 125 CLR 249 per Barwick C.J. at ATC p 4142; CLR p 255." Then counsel had submitted: "This case par excellence, Mr Deputy President, is one where the taxpayer was motivated by the desire for or expectation of profit. He wanted top dollar." The applicant had said in evidence that he had decided to undertake subdivision and sale of the land himself "to obtain the top dollar." The observations of Lockhart J. were apposite to the facts of the case before him because one of the major issues of fact was whether a number of parcels of land later sold by the taxpayer had been bought by him with an intention that each would, or at least might, be subsequently sold at a profit. But the Deputy President was, as I think, mindful of what had been propounded by Williams J. in The Scottish Australian Mining Co. Ltd. v. Federal Commissioner of Taxation [1950] HCA 16; (1944) 81 CLR 188 at 195 that "(t)he facts would, in my opinion, have to be very strong indeed before a court could be induced to hold that a company which had not purchased or otherwise acquired land for the purpose of profit-making by sale was engaged in the business of selling land and not merely realizing it when all that the company had done was to take the necessary steps to realize the land to the best advantage, especially land which had been acquired and used for a different purpose which it was no longer businesslike to carry out." In the course of his careful review of authorities the Deputy President had devoted a paragraph to making that very point, by reference to that decision of Williams J. In stating that an intention to get the top dollar, "to realize the land to the best advantage", was not an obstacle to a conclusion of "mere realization" the Deputy President made, in my opinion, no error of law, and certainly not an error to the prejudice of the applicant.

11. Mr Hayne's complaint was that there was a failure to recognise what he called "an archetypal case of advantageous realization of the kind spoken of by Gibbs C.J., and spoken of by him in distinction from engaging in a business." The purpose of getting more for the land than those who had been offered it in broad acres were willing to pay, by doing work to enhance its value, ought in Mr Hayne's submission to have been recognised as tending to induce the conclusion that no more than mere realization had been undertaken. I cannot accept the submission. The purpose is, in my opinion, neutral, as the Deputy President said, in a case such as this, where the taxpayer is the person in whose hands the asset has become redundant and by whom it is to be sold because it has become redundant. Realization is the purposed end. But the question is whether the means to achieve the end is to be characterised as the carrying on of a business or as no more than realization.

12. The Tribunal found that the land was committed to the business of development, subdivision and sale in October 1977, a date several years earlier than the date on which the respondent had found that commitment to have been made by the applicant. The value of the land on the earlier date was agreed by the parties before the Tribunal at an amount less than the amount at which the respondent had valued it in assessment and in making his decisions on the applicant's objections. Calculations based on that agreed value led to the conclusions that greater amounts of taxable income and of tax than had been assessed by the respondent should have been assessed in respect of each of the years of income under consideration. The decisions of the Tribunal were expressed thus:

No. VT87/2154: "1. The objection decisions under review are

varied by amending the assessments of the

taxpayer's taxable income and the tax payable

thereon made in respect of the taxation years which

ended

respectively on 30 June 1981,

30 June 1983, 30 June 1984 and 30 June 1985 by

increasing the amounts of the taxable income and

the tax payable thereon to the following amounts:-

Year Taxable Tax

Income Payable

1981 $138,796 $ 74,744.10

1983 $320,051 $182,737.27

1984 $395,564 $227,829.58

1985 $445,096 $257,452.16

2. The objection decision in respect of the

taxation year which ended on 30 June 1982 is

affirmed."

No. VT88/622: "The objection decision under review is varied by

amending the assessment of the taxpayer's taxable

income and the tax payable thereon made in respect

of the taxation year which ended on 30 June 1986 by

increasing the amount of the taxable income to

$331,260 and by increasing the tax payable thereon

to $189,160.35."

13. Neither party submitted that the Tribunal was empowered itself to amend any of the assessments: that was accepted to be a function which the Act conferred on the respondent.

14. Notwithstanding the Tribunal's conclusion that in respect of the year ended 30 June 1982, as in respect of the other years, a greater amount of taxable income and of tax should have been assessed than had been assessed by the respondent the respondent's decision in respect of that year was affirmed. The respondent's decision had been made on 28 October 1986, upon objection by the applicant against an amended assessment. The first assessment in respect of that year had been made on 7 January 1983 and the tax became due and payable under that first assessment on 7 April 1983. The first assessment was made after the applicant had made to the Commissioner a full and true disclosure of all the material facts necessary for his assessment. Section 170(3) provided in respect of such an assessment as follows:

"(3) Where a taxpayer has made to the Commissioner a full and true

disclosure of all the material facts necessary for his assessment, and

an assessment is made after that disclosure, no amendment of the

assessment increasing the liability of the taxpayer in any particular

shall be made except to correct an error in calculation or a mistake of

fact; and no such amendment shall be made after the expiration of 3

years from the date upon which the tax became due and payable under that

assessment."

When the respondent made his decision on the objection against the amended assessment on 28 October 1986 more than 3 years had elapsed from the date on which the tax first assessed and notified became due and payable. For that reason the Tribunal, conceiving itself to have only such a power to increase the liability of the taxpayer as the respondent had at the time he made his decision, affirmed the respondent's decision. Neither party sought to displace that decision of the Tribunal.

15. The first assessment by the respondent in respect of the year ended 30 June 1981 was made in November 1981, before the applicant had made full and true disclosure of all the material facts necessary for that assessment. The date upon which the tax became due and payable under that assessment was 7 April 1982. Section 170(2) provided in respect of such an assessment as follows:

"Where a taxpayer has not made to the Commissioner a full and true

disclosure of all the material facts necessary for his assessment, and

there has been an avoidance of tax, the Commissioner may -

(a) where he is of opinion that the avoidance of tax is due to fraud

or evasion - at any time; and

(b) in any other case - within 6 years from the date upon which the

tax became due and payable under the assessment,

amend the assessment by making such alterations therein or additions

thereto as he thinks necessary to correct an error in calculation or a

mistake of fact or to prevent avoidance of tax as the case may be."

There was no suggestion that paragraph 170(2)(a) was applicable. On 10 February 1986 an amended assessment was made by the respondent in respect of the year ended 30 June 1981. It was the respondent's decision on the applicant's objection against that amended assessment which had been referred to the Tribunal. Having noted that the date on which the respondent made that decision, 28 October 1986, was within 6 years from the date on which the tax became due and payable under the first assessment, and having expressed the opinion that the Tribunal has the same powers as those which the respondent had when he made that decision on 28 October 1986, the Tribunal concluded that it had power to vary the decision by further amending the assessment.

16. The Tribunal's decision was made on 15 June 1989. If it had been for the Tribunal itself to exercise, in place of the respondent and by virtue of an authority deriving from s.43(1) of the Administrative Appeals Tribunal Act 1975, the power conferred on the respondent by s.170(1) to "amend any assessment by making such alterations therein and additions thereto as he thinks necessary", that was a power subject to the limiting provisions of s.170(2). The parties were, however, at one in assuming that no such a power was reposed in the Tribunal. Having regard to the provisions of s.200B and s.170(7), the assumption is in my opinion correct. In Federal Commissioner of Taxation v. Jackson (1990) 90 ATC 4990 at 4999 Hill J., in whose reasons for judgment Burchett and von Doussa JJ. concurred, expressed the opinion that the Full Court of this Court in Fletcher v. Federal Commissioner of Taxation (1988) 88 ATC 4834 "may have taken the view that the Tribunal, in conducting its review of the Commissioner's objection decision, had conferred upon it by sec. 43 the power to make an assessment." But Hill J. did not himself endorse such a view, nor assert that such a view had been expressed in Fletcher's Case; only that that view may have been taken by the Full Court in that case. I am not persuaded that that view was taken by the Full Court and therefore think myself free to hold the opinion I have expressed that the Tribunal has not such a power.

17. Mr Charles QC, who appeared with Mr Ginnane for the respondent, submitted that the Tribunal had the power, and the duty, to give effect to its own conclusion as to the taxable income which should have been assessed by setting aside the respondent's decision and substituting therefor a decision that the taxable income and the tax assessable in respect of the 1981 year were the amounts respectively determined by the Tribunal. It would then be for the respondent to give effect to that decision by making and notifying an amended assessment. Upon the exercise of that latter function no limitation of time is placed, it was submitted, by s.170(2) or any other provision of s.170. Section 170(7) brings about that result, in these terms:

"Nothing contained in this section shall prevent the amendment of any

assessment in order to give effect to the decision upon any appeal or

review, or its amendment by way of reduction in any particular in

pursuance of an objection made by the taxpayer or pending any appeal or

review."

18. Mr Hayne on the other hand submitted that the conclusions to which the Tribunal came authorised nothing but a decision that the respondent's decision should be affirmed. What had been committed to review by the Tribunal was the respondent's decision. That decision was one which s.186 committed to the respondent in these terms:

"186. The Commissioner shall consider the objection, and may either

disallow it, or allow it either wholly or in part, and shall serve the

taxpayer by post or otherwise with written notice of his decision."

The Tribunal's function in reviewing the decision was limited, in Mr Hayne's submission, to the same extent as the Commissioner had been limited in the performance of the function conferred on him by s.186 - to disallow or allow in whole or in part the objection to the amended assessment. It was submitted that any conclusion to which the Commissioner might have been led, during the performance of his function of considering the objection,that a greater taxable income should have been assessed than was determined by the amended assessment, and any exercise of power conferred by s.170(1) to give effect to such a conclusion by making an amended assessment, went beyond the making of the decision which s.186 authorised. Therefore, according to Mr Hayne's submission,if the Tribunal were led to such a conclusion in a case where the Commissioner had not been, no other effect could be given to that conclusion than to affirm the Commissioner's decision because the Tribunal's function of reviewing that decision was defined by s.186: to disallow the objection or allow it either wholly or in part.

19. In Fletcher v. Federal Commissioner of Taxation (1988) 88 ATC 4834 the Administrative Appeals Tribunal had in reviewing a decision of the Commissioner found a scheme to which it held that Part IVA applied in relation to each of four taxpayers and had thereupon exercised functions conferred by s.177F on the Commissioner. On appeal to a Full Court of this Court it was submitted on behalf of the taxpayers that the grant, by s.43(1) of the Administrative Appeals Tribunal Act 1975 to the Tribunal, of power to "exercise all the powers and discretions that are conferred by any relevant enactment on the person who made the decision" under review by the Tribunal, is limited in its application to powers relevant to the making of the decision under review. The powers and functions conferred by s.177F were for exercise at the earlier stage of assessment, not at the time of considering the taxpayers' objection, it was submitted. In reference to these submissions the Full Court observed (88 ATC at 4845-4846):

"As a matter of principle, it must be correct, as submitted on behalf of

applicants, that the powers and discretions referred to by sec. 43(1)

are the powers and discretions vested in the original decision maker for

the purposes of making the decision under review. They do not include

any powers and discretions which may be vested in the decision maker for

some other purpose. If authority be needed for this conclusion it is to

be found in Repatriation Commission v. O'Brien (1984-1985) 155 CLR

422 at p 429. See also Secretary, Department of Social Security v.

Riley (1987) 13 ALD 608.

However, we do not think that it follows that, in the present case, the

Tribunal lacked jurisdiction to exercise the discretion conferred upon

the Commissioner by sec. 177F(1). It is necessary to examine closely

the relevant statutory provisions. Section 166 of the Income Tax

Assessment Act empowers the Commissioner, from the taxpayer's return and

from any other information in his possession, to `make an assessment of

the amount of the taxable income of any taxpayer, and of the tax payable

thereon'. There is no doubt that, in taking that step, the Commissioner

is entitled, in a proper case, to exercise the discretion conferred upon

him by sec. 177F(1). That latter subsection specifically provides for

including particular sums `in the assessable income of the taxpayer' and

that a `deduction ... shall not be allowable to the taxpayer'. Section

185 provides for the making of an objection by a `taxpayer dissatisfied

with any assessment'. Thereafter, by virtue of sec. 186, the

Commissioner incurs a duty to consider the objection, to disallow it or

to allow it either wholly or in part, and to notify the taxpayer of his

decision. In considering the objection, the question for the

Commissioner is the correctness of the original decision, that question

being considered in the light of the terms of the objection by taking

account of all the information then available to the Commissioner

regarding the amount of the taxable income of the taxpayer and the

amount of the tax payable thereon. It may well happen, for example,

that, between the date of the original assessment and the date of

determination of an objection, new information comes to the Commissioner

or that there is some change in the relevant law. Subject to the

limitations imposed by sec. 170 of the Act, these are matters properly

to be taken into consideration by the Commissioner, in any case, in

determining whether to issue an amended assessment. As the issue of an

amended assessment is a possible result of the consideration by the

Commissioner of an objection to an assessment, it must be appropriate

for the Commissioner to take account of such matters in determining an

objection to an assessment.

It follows that, in determining an objection to an assessment, the

Commissioner is entitled to make a determination under sec. 177F of the

Act; and thereafter to give effect to that determination by an

appropriate decision under sec. 186.

By force of sec. 43 of the Administrative Appeals Tribunal Act, the

tribunal has all the powers and discretions that are conferred by sec.

186 of the Income Tax Assessment Act upon the Commissioner. In

exercising those powers and discretions the Tribunal was bound to

consider the facts as they were proved in evidence before the Tribunal,

making the decision which, upon that evidence and at that time, was the

correct or preferable decision to be made in considering the objection.

The Tribunal was not confined either to the material which was before

the Commissioner, as primary decision maker, or the events which had

occurred up to that time: see Drake at p 419, Nevistic v. Minister for

Immigration and Ethnic Affairs [1981] FCA 41; (1981) 34 ALR 639; Commonwealth v.

Ford (986) 65 ALR 323 at p 328; Freeman v. Secretary, Department of

Social Security (Davies J., 18 August 1988, not reported).

Once it is understood that, in exercising his powers under sec. 186, the

Commissioner would have been free to exercise a discretion under sec.

177F of the Income Tax Assessment Act, it follows that, in reviewing the

Commissioner's decision under sec. 186, the Tribunal is free to exercise

that same discretion if, upon the material then before it, it seems

proper to take that course.

In coming to that conclusion, we appreciate that sec. 177F(3)-(8)

provides a regime whereunder the Commissioner may make compensating

adjustments in respect to any taxpayer. That taxpayer may be a person

different from the taxpayer in connection with whose affairs a

determination has been made under sec. 177F(1). In a case where the

requisite adjustment is to an assessment which is before the Tribunal at

the time of the exercise by it of its discretion under sec. 177F(1), we

see no difficulty about the Tribunal making the adjustment. The

Tribunal would only be doing what the Commissioner could himself do in

connection with that assessment at the time of considering the

objection. In a case where the requisite adjustment needs to be made to

an assessment not before the Tribunal - either because it relates to

some other taxpayer or to some other year of income - the Tribunal could

not itself make an adjustment under sec. 177F(3). But we see no

difficulty about the Commissioner following up the decision of the

Tribunal by making the appropriate adjustment, in the same way as he

would do if he himself had made the original sec. 177F(1) determination.

Upon the view just expressed, the current position is similar to that

which applied during the period in which the jurisdiction to review

taxation determinations was vested in Boards of Review constituted under

the provisions of Div. 1 of Pt V of the Income Tax Assessment Act.

Those provisions were repealed in 1986, at the time when jurisdiction

inaxation matters was conferred upon the Administrative Appeals

Tribunal. Section 193(1), which was also repealed at that time,

formerly provided that, for the purposes of reviewing decisions of the

Commissioner under the Act `the Board shall ... have all the powers and

functions of the Commissioner in making assessments, determinations and

decisions under this Act, and such assessments, determinations and

decisions of the Board, and its decision upon review, shall for all

purposes (except for the purpose of objections thereto and review

thereof and appeals therefrom) be deemed to be assessments,

determinations or decisions of the Commissioner'.

In our opinion the Tribunal did not err in law in holding, in the

present case, that it had jurisdiction to determine under sec. 177F that

the deductions claimed by the applicants should not be allowable in the

relevant year of income."

20. In my opinion the reasoning of the Full Court is applicable to the questions which Mr Hayne's submissions raise. If the result of the Tribunal's making a determination under s.177F must necessarily have been a conclusion that the amount of taxable income was that which had been determined in the assessment, objection against which the Commissioner had considered and wholly disallowed, or a lesser amount than that which had been so determined, it could have been said that the reasoning of the Full Court did not touch the question whether the Tribunal can give effect to a conclusion that the amount of taxable income is greater than the sum assessed. But the discretionary powers conferred by s.177F(1) might have been, although they had not been, so exercised by the Tribunal as to produce the result that the taxpayers' taxable incomes were greater in amount than the taxable incomes specified in the assessment. It is not to be thought that the Full Court overlooked that possible result of the exercise of the powers, for the orders the Court made remitting the matters for further hearing by the Tribunal were made in contemplation of the possibility that the Tribunal might reach different conclusions in relation to the application of Part IVA from those on which it had based the decisions which were the subjects of the appeals to the Full Court, and which were set aside. And the Full Court commented (88 ATC at 4848) on the discretionary nature of the powers conferred by s.177F(1). The reference by the Full Court, in the passage quoted, to "the limitations imposed by sec. 170 of the Act" on exercise by the Commissioner of his powers also suggests that the Full Court contemplated that the Tribunal might, in exercise of those powers, which the Court held that the Tribunal also possessed, bring about the result that the taxable income, and the tax, in respect of a year of income would be greater than that specified in the assessment, objection against which had brought the Commissioner's decision before the Tribunal for review.

21. In my opinion the reasoning of the Full Court in Fletcher's Case strongly supports, if it does not require, the conclusion I reach that the Tribunal did not lack power to give effect to its conclusion that the taxable income of the applicant, and so the tax due, in respect of the year of income ended 30 June 1981 were amounts greater than the respective amounts specified in the amended assessment, objection against which had been wholly disallowed by the respondent. The means available to the Tribunal to give effect to that conclusion was in my opinion to make decisions, first, that the respondent's decision under review be varied by adding thereto a decision that the taxable income of the applicant and the tax payable thereon in respect of the year of income were respectively the amounts determined by the Tribunal and second, that the matter be remitted to the respondent with a direction that he further amend the assessment accordingly. Such decisions could in my opinion involve no contravention of the letter or the spirit of any provision of s.170. Contravention of the letter of s.170 is not possible, because no command is addressed to the Tribunal, or authority conferred on the Tribunal, by any provision of that section: the Tribunal does not, and cannot, amend an assessment. Contravention of the spirit of the section is not effected by such decisions because s.170(7) manifests a clear legislative intention that the time which elapses between a decision by the Commissioner on an objection against an assessment and the amendment of that assessment "in order to give effect to the decision upon any review" is not to be included in the measurement of the periods ordained by other provisions of that section.

22. In the case of the 1982 year a decision that the applicant's liability be increased would have violated the policy which informs s.170(3). Section 170(7) authorised the Tribunal to disregard the lapse of time between a decision by the Commissioner on an objection and its own decision on its review of his decision. But s.170(3) operated to deny to the Commissioner, at the time he made his decision on the objection, the power he would have had if the prescribed period of 3 years had not elapsed of increasing the liability of the applicant on his consideration of the objection. That power not having been available to the Commissioner, s.43(1) of the Administrative Appeals Tribunal Act 1975 did not confer it on the Tribunal, in my opinion. It is true that the power to which I refer is in the case of the Commissioner exercisable by a means which is not in any event available to the Tribunal: amendment of an assessment. But the power,the existence of which the Full Court in my opinion impliedly affirmed in Fletcher's Case, is to be conceived as distinct from the means by which it is exercised, in my opinion. And whether the power is available to the Tribunal will in my opinion depend on whether it was available to the Commissioner when he made the decision which is the subject of the reference.

23. In the case of each of the other years of income the first assessment made after the applicant had made full and true disclosure specified a date upon which the tax became due and payable which was less than 3 years before the date on which the respondent Commissioner made the decision which was the subject of the reference to the Tribunal. For the reasons I have stated the Tribunal was empowered, and required, to give effect to its conclusion as to the correct amount of taxable income and the tax payable, in my opinion.