Ruhamah Property Company Limited v Federal Commissioner of Taxation [1928] HCA 22

Ruhamah Property Company Limited v Federal Commissioner of Taxation [1928] HCA 22 - HCA 1928 case summary — Zoe

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const" the power must be in pursuance of a business operation in carrying Taxarion. out a scheme of profit-making. That is distinctly a question of Knox tu, law, and we do not think that it follows either necessarily or at all Pores 3" that a sale in such circumstances is a business operation carrying Starke J. out a scheme of profit-making. A man has capacity to sell his property, but he may be realizing it and changing his form of investment and not engaging in a profit-making scheme. So it is with a company with power to sell: it may be realizing its property and changing the form of investment and not engaging in any profit-making scheme. Much must depend upon whether the company has taken the property into its trade and traded in it: whether it conducted a trading concern as opposed to a mere realiza- tion (cf. Alabama Co.'s Case (1)). The nature of the company, the character of its assets, the nature of the business carried on by it and the particular sale or realization are all relevant to the issue. In our opinion, therefore, a question of law is involved in the decision of the Board of Review, and it is consequently appealable to this Court. Further, it appears to us that the Board did not consider all the relevant factors for the proper determination of this case, and so misdirected itself and erred in point of law. Accordingly it is for this Court to determine the fact in issue upon a proper view of the law. In our opinion the sale of the George Street property was not, on the facts proved, a business operation carrying out a scheme of profit-making but the realization of a capital asset. The facts that lead us to this conclusion are (1) the character of the Company, a family company with family capital and family shareholding - it is not perhaps unimportant to observe that the father retained a half interest in the property by his shareholding ; (2) the holding of the property during the lifetime of the father Thomas Morrow ; (3) that the Company did not acquire or deal in any property but the George Street property transferred to it by

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regret to say, I find myself unable to share the prevailing opinion. I can find no error whatever in the law as apprehended by the majority of the Board. I have read and re-read with great care the opinion delivered by the chairman (Mr. Hulme), whose views were in brief terms concurred in by Mr. Lightband, as I read that gentleman's words. Mr. Hulme, it was urged before us, erred in assuming that the result in fact was conclusively established by the objects of the Company's memorandum, and therefore did not examine those facts for himself. I can see no trace of any such procedure on his part. He certainly gave very great weight, and in a sense a determining weight, to the objects of the Company, but only applied that to the resultant conclusion of fact after examination of the evidence. In justice to both members constitut- ing the majority, I think I should let their own words speak for themselves. After recounting certain undisputed facts, the chairman first set aside the personal intentions of the late Thomas Morrow as irrelevant to the matter in hand, and then proceeded: "This brings me to a consideration of the memorandum of association, and the objects of the Company as set out therein, and as to whether the sale of the properties in question are in furtherance of those objects." After referring to what he considered the principal objects, stating in summary form the broad facts appearing in evidence, he continued : - " The objects stated appear to me to be not only the principal objects, but also include the main purposes for which the Company was formed, and, in my opinion, the Company's action in selling the land and investing the proceeds after payment of the liabilities referred to, was merely carrying into effect its principal objects and purposes. After a very full consideration of all the facts submitted, and also of the decision referred to . . . I am of opinion that the Commissioner's contentions must be upheld and that the appeal should be dismissed." Mr. Lightband said : - " After considering the facts adduced at the hearing and the arguments

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(3) It is not uncommon to hear it said, as Mr. Graham has in effect put it, that a company is only the alter ego or the agent of an individual, and that its activities are so coloured by his interests and directions and intentions. That was the root idea of the unsuccessful argument in the celebrated one-man company case (Salomon v. Salomon & Co. (1) ). The complete legal independence of a company was then established. But in different forms the same erroneous notion persists and reappears. It» has reappeared in this case. It reappeared in Gas Lighting Improvement Co. v. Commissioners of Inland Revenue (2). Lord Sumner took occasion to say of the company's activities (3) : - "It is said that all this was 'machinery,' but that is true of all participations in limited liability companies. They and their operations are simply the machinery, in an economic sense, by which natural persons, who desire to limit their liability, participate in undertakings which they cannot manage to carry on themselves, either alone or in partnership, but legally speaking, this machinery is not impersonal though it is inanimate. Between the investor, who participates as a shareholder, and the undertaking carried on, the law interposes another person, real though artificial, the company itself, and the business carried on is the business of that company, and the capital employed is its capital and not in either case the business or the capital of the shareholders. Assuming, of course, that the company is duly formed and is not a sham (of which there is no suggestion here), the idea that it is mere machinery for effecting the purposes of the shareholders is a layman's fallacy. tis a figure of speech, which cannot alter the legal aspect of the facts." (See also per Sargant L.J. in Commissioners of Inland Revenue v. Westleigh Estates Co. (4).) It is, I think, rare and deserving of acknowledgment that laymen, however experienced, so clearly perceive and act on the true legal position upon this phase of the law, as did Mr. Hulme

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Warrington said : - "It was contended indeed that the company was merely in the position of an ordinary landowner dealing with his land and granting leases thereof and so receiving rents and profits. But, assuming that in the case of an individual to do such things would not be to carry on a trade or business, it does not at all follow that the conclusion would be the same in the case of a company the end and object of whose being is to transact the business in question, and thereby to make a profit for division among its shareholders. (See the remarks of Lord Sterndale, Master of the Rolls, in Commissioners of Inland Revenue v. Korean Syndicate Ltd. (2) ). It seems to me also quite immaterial that the actual operations of the company have been few in number and perhaps of no great importance. If you find a company formed to carry on a business, and in fact carrying it on, it cannot matter that its activities have been restricted. The learned Judge seems to ground his decision largely on the notion that the company 'did nothing except what would have been done by the executors and trustees of a will administering the trusts for the beneficiaries.' With all respect, this at all events is a false analogy. The company is not a trustee in any sense; it is doing on its own account and for its own profit the several things authorized by its memorandum." Sargant L.J. (3) disagreed with the view of Rowlatt J. (very similar to the one presented by the appellant in this case) that the company had come into existence for a certain purpose, not with any notion of trade or business, but to act as an executor. The Lord Justice said : - ' The company has become the absolute legal and beneficial owner of the estates, and no relation of trustee and cestuis que trust exists between it and the beneficiaries. They are relegated to the ordinary position and rights of shareholders in an ordinary limited company, and have no further or other interest in the properties which formerly belonged to them." Then the learned Lord Justice says : "T am altogether unable to distinguish the case from the ordinary case of the out-and-out sale of a mining or urban estate to a company which is thereafter to manage, improve and develop it, and to

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Judgment (99 paragraphs)