Steinberg v Commissioner of Taxation

Steinberg v Commissioner of Taxation - [1975] HCA 63 - HCA 1973 case summary — Zoe

[160]

Now, whilst it rests on the taxpayer to show that the assessment is excessive, if the facts established before the court cannot support an inference of acquisition with the required purpose, the assessment cannot be supported under the first limb of s. 26(a). In the case of the Innaloo land, its sale was sufficiently proximate to its acquisition, plus the undoubted activities of the taxpayer with respect to it meantime, to support such an inference and warranted his Honour's conclusions. But in the case of the Wanneroo land, all that can be pointed to on the established facts is that one half of the land was sold, in the circumstances in which it was sold, to the Overseas Telecommunications Commission. Of course, if the purpose to purchase for resale at a profit is otherwise made out, a sale under threat of compulsory acquisition will be a relevant sale and the gain made thereby properly brought to tax. But where there is no evidence of the relevant purpose, no inference of its existence at the time of acquisition should, in my opinion, be drawn from the fact of a compulsory sale. No doubt the sale of the thing acquired reasonably soon after its acquisition would afford evidence that the thing was acquired for the purpose of resale in order to make a gain. That inference is made because of evidentiary value of the voluntary act of sale. But the sale to the Overseas Telecommunications Commission was not of such a voluntary kind as to warrant the inference that if land was the thing acquired it was acquired for the purpose of resale. Consequently, in my opinion, there was no material in the proved and accepted facts which would support the inference that the appellant taxpayer acquired his interest in the land, if that is what he did, with the purpose of its resale to gain a profit. Section 190 places upon the taxpayer the obligation in an appeal against an assessment to show that the assessment is excessive. This is not limited simply to the amount of the assessment but extends to its propriety. Assessment does not consist merely in the nomination of a sum of tax to be paid, as contained in the notice of assessment. It is the process of the application by the Commissioner of the appropriate provisions of the Act to the taxpayer's return or to such further or different facts as the Commissioner has ascertained. The Commissioner is provided with officers highly skilled and experienced in the administration of the Act and in the discovery and elucidation of facts. Further, they are able to express and record both the facts upon which the assessment is made and the particular application of the Act to them which yields the amount of tax expressed in the notice of assessment. The Commissioner is, of course, entitled to place his ultimate assessment, i.e. ultimate at the time of the issue of the notice of assessment, upon alternative applications of the Act. But if he does so, that or those alternatives may be expected to be recorded in the files of the Commissioner. Thus, if those files are before the court on appeal, as they should be, the basis of the Commissioner's assessment will appear. It is that assessment which is under attack on the taxpayer's appeal and which the Act says the taxpayer must show to be excessive.

[167]

I turn then to consider whether the assessment could be supported on the second limb of s. 26(a). It is quite clear to my mind that this limb of s. 26(a) is closely related to the first limb of the section. Indeed, the Privy Council in McClelland v. Federal Commissioner of Taxation [30] thought that in relation to the facts of that case the second limb was but another way of expressing the same ideas as the first. The concept underlying the sub-section is that in an Act confined to the taxation of income there are some circumstances in which what are isolated and not repetitive transactions, which in other circumstances would yield a capital gain, can properly be regarded as producing income. One such circumstance is the acquisition of property by the taxpayer with the purpose of its resale at a profit in what is in truth a commercial dealing: that is the first limb of the section. The second limb, in my opinion, is founded upon the same notion but provides for the case where the property acquired is not itself the subject of resale but is intended at the time it is acquired to be the vehicle for making a capital gain, again in the course of an isolated or single though perhaps complex transaction in the nature of a commercial dealing. For there to be a scheme there must be a plan: it must be the taxpayer's plan and it must exist, in my opinion, at the time of the acquisition of the property: indeed, that acquisition, in my opinion, must be itself part of the scheme and the property acquired the intended vehicle for carrying the scheme into execution. Whilst it need not be fully conceived in all its details at the time of acquisition it must exist as a scheme which in principle embraces all the details yet to be worked out. It must, of course, be a profit-making scheme, that is to say, a scheme to make a capital profit, one which would not fall within s. 25. If it were merely a scheme to make an income profit, then it will fall within s. 25. Section 26(a), it seems to me, is aimed at transactions which will not fall within s. 25 and which apart from s. 26(a) would escape s. 25 because the gain would not be an income gain.

[168]

It will not be sufficient, it seems to me, that the scheme is a scheme to resell that which was purchased at a profit. That, it seems to me, is simply another statement of the first limb of s. 26(a). As I have already indicated, it seems to me that the scheme must be a scheme to use that which was acquired as a means of producing a capital gain, not by resale at a profit of that which was acquired. It is because such a scheme does exist at the time of acquisition that the subsequent gain, though by realization of a capital asset, can properly be regarded as income. If no scheme for the use of the property has been formulated at least in definitive principle at the time of the acquisition, the acquired property becomes a capital asset of the taxpayer. Subsequent realization to the best advantage ought not to bring any increase in its worth to tax. Indeed, that position is well authenticated in the decided cases. The realization of an asset in an enterprising way and in order to obtain the maximum advantage therefrom does not make the proceeds liable to income tax. It follows, in my opinion, that a scheme of realization of an asset not contemplated at the time of its acquisition but subsequently conceived and formulated, is not a scheme within the scope of the second limb of the section. Anything in the decided cases which would suggest that it may be such a scheme ought not, in my opinion, to be followed. I am unable, with great respect, to accept the views expressed by Sir Victor Windeyer in Buckland v. Commissioner of Taxation [31] . The scheme, if there be one, must be more specific than an intention to turn to profitable account what is acquired. Of course, a scheme, entertained at the point of acquisition, may contemplate alternatives in its execution and, having determined the principles of the scheme, leave details for later decision. But, with due respect to what Sir Owen Dixon said in Premier Automatic Ticket Issuers Ltd. v. Federal Commissioner of Taxation [32] , there must be an identifiable specific scheme existing at the date of the acquisition of the property which is to be used to execute the scheme to make a profit. That case, it seems to me, was really a case of income derived in carrying on a business by use of the patent rights which had been acquired rather than a case falling within s. 26(a).

[170]

Now, to apply these principles to the present case, it is necessary to observe the facts which remain as proved facts after Mr. Morris Steinberg's evidence has been rejected. He made no relevant admissions, that is to say, relevant to the use of the Wanneroo land entertained when the shares were acquired: nor, on the alternative view, when the interest in the land was acquired. There are many uses to which land or an interest in land may be put in order to profit by its possession. The mere fact of its acquisition does not itself dominate any particular purpose to which the land is to be put: nor itself raise an inference that it is to be resold at a profit. It seems to me, so far as the Wanneroo land is concerned, that all that is relevantly known is that the shares in the company were acquired with a view to gaining possession of that land by means of a liquidation and a distribution in specie of its assets. I have already indicated that I do not think that any relevant inference can be drawn from what was in truth a compulsory sale of part of the land to the Overseas Telecommunications Commission. Granted that there was a plan which would qualify as relevantly a scheme at the time the shares were acquired, a scheme which involved taking the various steps to obtain possession of the Wanneroo lands or of an interest in them, there is, in my opinion, no basis on which an inference can be drawn as to the particular use to which it was part of that scheme to put the Wanneroo lands. Of course, if it were possible to draw an inference that a part of the scheme was their realization by sale at a profit, I would be able to conclude that there was, at the time of the acquisition of the shares, a scheme to use those shares as a means of making a capital gain by the sale of the Wanneroo lands. However, as I am unable to infer any particular purpose or end to which the Wanneroo lands were to be put when in the possession of the taxpayer, I am unable to conclude that there was a scheme within the meaning of the second limb of s. 26(a). In my opinion, the appeal as to the Wanneroo land ought to be allowed and the assessment set aside: the case does not fall within either limb of s. 26(a).

[171]

Mr. and Mrs. Morris Steinberg took up the whole of the issued capital in a company known as Malgor Pty. Ltd. ("Malgor"), which I am prepared to accept was formed at the instance of Mr. Morris Steinberg to acquire the Rockingham land. Again, I accept the finding of my brother Mason that the evidence of Mr. Morris Steinberg as to what it was then intended to do with the Rockingham land is not acceptable. We are thus left with no material as to the purpose for which the company acquired this land: for I do not see that any relevant inference can be drawn from the other evidence in the case. Subsequently, Mr. Morris Steinberg intended to give five hundred shares in this company to his son, Malcolm. The accountant's method of implementing his instructions from Mr. Morris Steinberg would make it appear that the gift was of money and the money was applied by Mr. Malcolm Steinberg in taking up the shares. But, whichever view is taken of the matter, that is to say, whether the gift to Mr. Malcolm Steinberg be regarded as a gift of shares or a gift of money so that Mr. Malcolm Steinberg acquired the shares by a cash subscription, there is no evidence, in my opinion, that the purposes which Morris Steinberg may have had in forming Malgor were communicated to, adopted and acted upon by Malcolm Steinberg as purposes of his own. I think it quite insufficient in matters of this kind that one should act upon suspicion. No doubt one may readily suspect that in family matters there may be free communication between the members of the family on matters of business. On the other hand, many men play their cards very close to their chest and do not even discuss their affairs with their wives, let alone their sons, notwithstanding the involvement of those members of the family in those affairs. Each of these appellants is to be treated, in my opinion, as an individual and not treated as if wholly involved in all the planning and purposes of Mr. Morris Steinberg. There is no suggestion that the gift, whether it be of money or of shares, by Mr. Morris Steinberg to Mr. Malcolm Steinberg was other than an outright gift and that he did not hold the shares beneficially.

[186]

The question that then arises, however, is whether it was right to conclude, as his Honour did, that the shares in the company were bought to enable the purchasers to acquire the land for the main or dominant purpose of profit-making by sale. The fact that a witness is disbelieved does not prove the opposite of what he asserted: Scott Fell v. Lloyd [33] ; Hobbs v. Tinling (C.T.) & Co. Ltd. [34] . It has sometimes been said that where the story of a witness is disbelieved, the result is simply that there is no evidence on the subject (Jack v. Smail [35] ; Malzy v. Eichholz [36] ; Ex parte Bear; Re Jones [37] ), but although this is no doubt true in many cases it is not correct as a universal proposition. There may be circumstances in which an inference can be drawn from the fact that the witness has told a false story, for example, that the truth would be harmful to him; and it is no doubt for this reason that false statements by an accused person may sometimes be regarded as corroboration of other evidence given in a criminal case: Eade v. The King [38] ; Tripodi v. The Queen [39] . Moreover, if the truth must lie between two alternative states of fact, disbelief in evidence that one of the state of facts exists may support the existence of the alternative state of facts: Lee v. Russell [40] . In the present case, Morris Steinberg had, between 1956 and 1969, been a member of no less than thirteen syndicates which had been formed for the purpose of acquiring land and reselling it at a profit. The Wanneroo land, when purchased, was not put to any use; it is true that the owners were virtually compelled to sell some of it quite soon after it was acquired, but over 300 acres were, at the date of the trial, still retained, and no suggestion was made of any intention to use them for any purpose except letting as ten-acre lots. In these circumstances, the fact that Morris Steinberg told a false story as to the purpose for which the land was intended to be used assisted the conclusion, to which the other evidence pointed, that the true purpose of acquiring it - a purpose which Morris Steinberg did not wish to reveal because it would harm his case - was to resell it at a profit. The conclusion which Mason J. reached on this issue was, in my opinion, correct.

[191]

In this instance the relevant figure is what it cost the individual to acquire his interest in the land. The cost to the individual was the amount which he expended in the purchase of the shares together with any other expense incurred in obtaining a title to the land. It is true that the price paid for the shares could not accurately be described as the price of the land, for it is clear that the purchasers did not, simply by acquiring their shares in Golden West, acquire the land which was an asset of that company. It is true also that since the distribution in specie was made in satisfaction of the rights of the shareholders, the "consideration" for the acquisition by the shareholders of the land from the company would be the full value of the land at the time of distribution: Archibald Howie Pty. Ltd. v. Commissioner of Stamp Duties (N.S.W.) [43] ; Davis Investments Pty. Ltd. v. Commissioner of Stamp Duties (N.S.W.) [44] . In applying the provisions of s. 26(a), it is not permissible to ignore or gloss over the legal effect of the transactions actually carried out: Hobart Bridge Co. Ltd. v. Federal Commissioner of Taxation [45] . However, s. 26(a) speaks of the "profit arising from the sale" - it does not refer to the price of the property, or the consideration paid for it. The profit arising from the sale will be the net pecuniary gain resulting from the acquisition and resale of the property, and will be represented by the excess of the amount received on the sale over the amount outlayed in acquiring the asset plus the expenses incurred in getting it ready for sale and selling it. It is not uncommon for the cost of the acquisition of property to be incurred before the property is acquired. For example, on a sale the price may be paid before the property passes. In the circumstances of the present case, where the shares were bought to enable the land to be acquired, the cost of the shares and of the winding up of the company and distribution of the assets can rightly be regarded as the amount actually outlayed for the purpose of, and in the process of, acquiring the land, although the acquisition was effected not directly, but by a number of steps. In my opinion, therefore, Mason J. was right for the reasons which he gave. It should be added that if he had been wrong, and if it had been necessary to ascertain the price by comparing the amount obtained for the land with its value at the date of distribution (plus of course expenses of sale), the taxpayer has produced no evidence to show that the price paid for the shares in July did not represent the value of the land in or about the following October when the land was distributed, and has not discharged the burden cast on him by s. 190(b) of the Act in proving that the assessment is excessive. This would not have precluded the Court from remitting the matter to the Commissioner if it had appeared that he had assessed on an erroneous principle but, as I have said, that is not the case. 1. (1948) 77 C.L.R. 143. 2. (1958) 100 C.L.R. 392, at pp. 407-408. 3. (1951) 82 C.L.R. 372, at pp. 385-386.

[193]

The remaining appeals concern the sale of shares in Malgor Pty. Ltd. ("Malgor") and the sale of land at Rockingham. Malgor was formed on 7th November 1960 to purchase the Rockingham land; its initial shareholders were Morris Steinberg and Judith Steinberg. Mason J. rejected the evidence of Morris Steinberg that the land was bought as a grazing property and held that it was acquired pursuant to a plan or scheme which had the making of a profit as the end in view. This finding was in my opinion correct - I would add nothing to what Stephen J. has said as to the facts relevant to this question, although I shall add a few observations as to the nature of a scheme within the meaning of s. 26(a) of the Act. On 25th March 1963 new shares in Malgor were issued - some to Morris Steinberg and to Judith Steinberg, but in addition 500 "C" class shares to their son Malcolm. The shares were issued to Malcolm because his father wished to make a gift to him of some of his shares, but because of the manner in which the instructions given by Morris Steinberg were put into effect, the gift technically was not of the shares but of the moneys paid in respect of them. On 1st July 1963, Morris Steinberg and Judith Steinberg sold their shares to M.J.S. Investments, a partnership which had been formed on 1st June 1963 between Morris Steinberg, Judith Steinberg and Mr. Rhine as the trustee of eighteen trusts (including Judith Steinberg No. 2 Trust). This action was taken on the advice of Mr. Rhine for the purpose of reducing Morris Steinberg's liability to income tax and estate duty. According to the agreement setting up M.J.S. Investments, Morris Steinberg and Judith Steinberg both held "A" units in the partnership which conferred on them controlling voting powers but only limited rights to share in the profits and in the distribution of assets on a winding up. Early in 1964, Morris Steinberg was short of funds and to raise money he eventually arranged with one Markham that the latter would buy half of the share capital in Malgor. Pursuant to this arrangement, on 31st July 1964 each shareholder in Malgor transferred to Mr. Markham one-half of his or her holding in that company. The Commissioner has assessed to tax for the year ended 30th June 1965 the share of the trustee of Judith Steinberg No. 2 Trust in the profit derived by M.J.S. Investments on the sale of the shares in Malgor beneficially owned by M.J.S. Investments and the profit made by Malcolm Steinberg on the sale of his shares in Malgor and these assessments are the subject of two of the appeals. In July 1965, because of changes in the income tax law, the eighteen trusts were terminated and their assets, namely the units in the partnership, were distributed under the powers contained in the trust instruments to various of the beneficiaries named therein, including Morris Steinberg and Malcolm Steinberg. Subsequently, Malgor was wound up and it was resolved that the liquidator should divide among the members shares in the land in accordance with their respective shareholdings. In consequence of this resolution undivided interests were, on 3rd March 1967, transferred to Morris Steinberg, Judith Steinberg and Malcolm Steinberg - Malcolm's interest was 250/2,200. The interests acquired by Morris Steinberg and Judith Steinberg belonged beneficially to M.J.S. Investments (to which their shares had, as I have said, been sold) and those interests were divided amongst the various beneficiaries so that a further interest of 68/792 was transferred to Malcolm and an interest of 85/792 to Morris Steinberg. Finally the interests of the members of the Steinberg family in the Rockingham land was sold on 3rd November 1969. The inclusion in the assessments of Morris Steinberg and Malcolm Steinberg for the year ended 30th June 1970 of the profit said to result from the sale of these interests forms the subject of the other appeals.

[199]

However, the position of the other appellants is materially different. In 1960 Malcolm Steinberg had no shares in Malgor and Judith Steinberg No. 2 Trust was not then in existence - it is clear that at that time neither Malcolm Steinberg nor Mr. Rhine, who subsequently became the trustee, was a party to the scheme. Mason J. found that Malcolm Steinberg was at all times aware of his father's intentions with respect to the land and that Mr. Rhine also was aware of those intentions. He further found that subsequently they participated in the events which occurred, culminating in the sale of the land, and concluded that they became parties to the scheme and executed it so far as it was necessary for them to do so. Although I accept as correct the findings of ultimate fact made by Mason J., I am, with respect, unable to accept his conclusion that Malcolm Steinberg and the trustee of Judith Steinberg No. 2 Trust derived a profit from the carrying out of a profit-making scheme. I have already pointed out that the scheme to which s. 26(a) refers must be the scheme of the taxpayer. The income of a taxpayer is not assessable within s. 26(a) simply because he has profited from another's scheme. The question then is whether Malcolm Steinberg and the trustee of Judith Steinberg No. 2 Trust at some time in or after 1963 became parties to the scheme originated by Morris Steinberg so that thereafter the scheme was executed on their behalf as well as on behalf of Morris Steinberg. Before attempting to decide that question, it is convenient to point out that the profit made by these taxpayers is not assessable within the first limb of s. 26(a). Malcolm Steinberg acquired his shares through the bounty of his father, even if, technically, the gift was of money rather than of shares. There is nothing to suggest that the gift was solicited or conditional. McClelland v. Federal Commissioner of Taxation [50] and Federal Commissioner of Taxation v. Williams [51] provide sufficient authority for the view that the shares were not acquired by Malcolm Steinberg for the purpose of profit-making by sale. The same of course is true of the acquisition of the interest in land which was transferred to Malcolm Steinberg because he was a shareholder in Malgor. The other property now in question comprises the shares which came to belong beneficially to M.J.S. Investments (from the sale of which the trustee of Judith Steinberg No. 2 Trust derived a benefit), and the interests in land (one of which was transferred to Malcolm Steinberg) which can be regarded as the fruit of those shares. M.J.S. Investments acquired its shares in Malgor because it was thought convenient for income tax planning and estate duty purposes that the property of Morris Steinberg and Judith Steinberg should be sold to the partnership and that trusts should be created. The transfers of the land made to the beneficiaries (including Malcolm Steinberg) when the trusts were terminated were made because changes in the law made it no longer convenient to preserve the trusts for the purposes of income tax and estate duty planning. It is clear that the reasons for the issue of shares to Malcolm Steinberg and the sale of the shares to M.J.S. Investments and the transfer of the interests in the Rockingham land to the beneficiaries were unconnected with the purpose of making a profit from the Malgor shares or the Rockingham land. The shares acquired by Malcolm Steinberg and by M.J.S. Investments and the land acquired by Malcolm Steinberg were not acquired for the purpose of profit-making by sale, even if it was envisaged or intended that sooner or later the shares or land might be sold at a profit. These circumstances not only render the first limb of s. 26(a) inapplicable but are of importance in deciding whether the second limb applies. I agree with the observation of Menzies J. in Federal Commissioner of Taxation v. Williams [52] , that there may be "cases where a person ventures what has been received by gift in the carrying on or carrying out of a profit-making undertaking or scheme". The present is however not such a case. All that was done by Malcolm Steinberg and by the trustee was to realize assets that they had acquired for purposes other than profit-making. To do that is not to carry out a profit-making scheme within s. 26(a): McClelland v. Federal Commissioner of Taxation [53] . Their actions accorded with the intentions of Morris Steinberg, as they knew, but this was not enough to make them parties to his scheme. It is of crucial importance that they did not acquire the property in question for the purpose of profit-making, or to effectuate the scheme originated by Morris Steinberg; having acquired their property for reasons unconnected with the scheme, they did no more than take advantage of the opportunities that offered to realize it to the best advantage. (No doubt Morris Steinberg also acquired the interest in the land, which he ultimately sold, when the trustee divided the land among the beneficiaries, but from the beginning his purpose had been to profit, in one way or another, from the increase in value of the land.)

[206]

The first transaction concerns a dealing with some seven and three-quarter acres of land at Innaloo near Perth, in Western Australia. Mr. Morris Steinberg first displayed interest in the purchase of this land in December 1959, which he said he hoped to use as the site for a hotel and shopping centre. As a result of transactions the details of which remain obscure Mr. Steinberg and his two brothers, as members of a partnership styled Murray's Furnishing Stores, had, by February 1960, acquired portion of this land together with what may be described as a right of first refusal, for a term of three years, in respect of the balance. Some six weeks later the Steinbergs, in March 1960, were requested to and did grant to a third party, Waikiki Motel Ltd., which was seeking a site for a hotel in the locality, an option to purchase the greater part of the land which they had bought; this option was not exercised and six months later, in September 1960, the partners granted to that company a further option to purchase and to take an assignment of their right of first refusal. This option expired unexercised in October 1961 and in November 1961 the Steinbergs caused an application to be made for rezoning of the land so that it might be used as the site of a hotel, shopping centre and service station. Approval in principle to rezoning as a hotel-motel site, subject to certain conditions, was received in December 1961 but further details were called for by the local authority before it would consider the application for additional re-zoning necessary for the two other proposed commercial uses. On 12th January 1962 the authority's conditions were accepted subject to certain qualifications including its willingness to consider an application for a service station; no further mention was made of the proposed shopping centre. Then three days later, on 15th January 1962, the entire site, less half an acre for a service station, was offered for sale to a brewery, which was informed of the authority's approval in principle and of the Steinbergs' qualified acceptance of the associated conditions. However the brewery rejected this offer and nothing further occurred relevant to the land until mid 1963 when steps, ultimately unsuccessful, were taken to promote the land as a site for a shopping centre. Finally, in March 1965, the whole site was sold for $100,400.

[211]

A second appeal, relating to land at Wanneroo, involves a different taxpayer, in this instance Mr. Morris Steinberg himself. Wanneroo lies a few miles to the north of Perth and there, in 1964, Golden West Land Development Co. Pty. Ltd. owned some 720 acres which had been approved for subdivision into ten-acre lots and which it offered to sell to Mr. Steinberg. He did not accept this offer but did, in September 1964, take on behalf of Malgor Pty. Ltd., a company which he had caused to be incorporated some years earlier, an option to purchase not the Wanneroo land but instead the issued capital of the Golden West company. This option, although later extended in term, was never exercised by Malgor Pty. Ltd. It was the three Steinberg brothers, their wives and a son of Morris Steinberg who, in July 1965, became the purchasers of the issued capital of Golden West for a total purchase price of $147,614. It is conceded that they did this as a means of acquiring the Wanneroo land which was then, it seems, the only substantial asset of that company. Morris Steinberg and his wife together acquired half the issued capital; their son did not in fact continue as a purchaser, instead his small entitlement was added to the shares bought by the other four Steinberg shareholders. Then, in October 1965, Golden West went into voluntary liquidation, and the liquidator later distributed in specie to its six members its interest in the Wanneroo land, its articles of association having been amended so as to permit of the adoption of such a course. Soon afterwards, in the first half of 1966, the Overseas Telecommunications Commission told Mr. Steinberg that it wished to acquire half the Wanneroo land for a radio transmitting station and that it would, if necessary, have recourse to compulsory acquisition. Accordingly, in June 1966, the six Steinbergs sold that half of the land to the Commission for $172,957. It is on his share of the profit disclosed by that sale price when compared with the initial cost of the shares in Golden West that Mr. Morris Steinberg has been assessed to tax, the Commissioner relying upon ss. 25 and 26(a) of the Act. The taxpayer's present appeal is against the dismissal by Mason J. of the taxpayer's original appeal against the Commissioner's disallowance of his objection to that assessment.

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Before

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Judgment (252 paragraphs)

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