White v Commissioner of Taxation

The critical question in this appeal is whether when entering upon the disposal of standing timber on his own behalf in 1956 in a way which involved repetitive acts of "sale", or its equivalent for relevant purposes, namely, the grant of a right to enter and take standing timber, the taxpayer went beyond the point of realizing the capital asset, namely the land, which he had acquired for purposes other than resale, and in substance committed the land and the timber growing upon it as the capital of his business of timber production and disposal which he then inaugurated. In cases such as the present, where the line has to be drawn between the proceeds of the realization of an asset not acquired for resale and the income of a business, the discrimen, in my opinion, is whether the asset has produced the money claimed to be income in the course of its realization or whether the asset has become the capital of a business which has produced the money. With every respect to some of the reasons given in Official Receiver v. Federal Commissioner of Taxation (Fox's Case) [1] , it is not enough, in my opinion, to make the proceeds of the realization taxable income, that the taxpayer in realizing his capital asset has taken steps to increase the amount it will realize, even if those steps are clearly commercial steps, and even if they are of an organized or repetitive nature. It seems to me that it is not the circumstance that the taxpayer has endeavoured to improve the realizable value of his capital asset which provides the criterion but the circumstance that he has in reality put his capital asset to work as the whole or part of the capital of a business upon which he has ventured. Merely to realize a capital asset may involve money making as distinct from profit making but a business in the relevant sense of necessity involves the earning of or the intention to earn profits.

In the present case the application of these principles results in the making of a fine but to my mind clear distinction in point of fact. The decision on the one hand is made the more difficult because of the nature of the asset, namely standing timber, which partakes of the nature of the land, whilst on the other hand the regenerative quality of a forest, particularly of a self-regenerating eucalypt forest, makes it easier to regard the land itself as the capital of a timber-producing and timber-disposal business carried on for profit. In my opinion, as in that of my brothers Taylor and Owen, the right conclusion from the facts established in this case is that in 1956, or thereabouts, the taxpayer in substance decided to use his land, not acquired for resale at a profit, as capital in a business of timber production and disposal, the method of disposal being by way of licence to enter, to cut standing timber, and to remove logs granted for consideration otherwise than by way of royalty. It would not, in my opinion, be right thereafter to regard his arrangements for the disposal of the standing timber as mere realizations of parts of his asset, namely, the land, upon an organized and businesslike basis. It follows that nothing in respect of the cost of the land or of the indigenous timber should be deducted from the gross proceeds of the grant of such licences: cf. Kauri Timber Co. Ltd. v. Commissioner of Taxes [1] , which is in point though the notion of an annual value is not present in the Australian income tax legislation.

I should like to add that, in my opinion, the money derived from the disposal of standing timber after 1956 should not be regarded as "profit arising from the carrying on or carrying out of any profit-making undertaking or scheme" except in so far as the income of a business can be said to fall within that part of s. 26 (a). Unless the proceeds of the "sales" of the standing timber can be brought within the concept of the profits of a business carried on by the taxpayer, they cannot, in my opinion, be brought within the quoted words of the section. However, as I have said, upon the facts of this case, they are properly to be regarded as the profits of a business carried on by the taxpayer of which the land and its standing timber are to be regarded as the capital or part thereof. Consequently, I agree that this appeal should be dismissed.

On 2nd August 1945 the taxpayer purchased 5,232 acres of land at Terreel near Ward's River in New South Wales. The land was heavily timbered and in May 1956 he entered into an agreement with a company known as R. J. White & Co. (Sydney) Pty. Limited whereby he undertook to sell and the company purchased 14,991 hardwood poles then standing on the land with the right on the part of the company for a period of six years to cut and remove the timber from the land. For this right the company was to pay, in all, the sum of £52,190, commencing with a deposit of £4,190 and, thereafter, by six annual instalments of £8,000, the first of which was payable on 1st July 1956. Pursuant to this agreement the company cut and removed timber and, in the course of its business as a timber merchant, sold the timber so cut and recovered. During the currency of the agreement and between 1956 and 1960 the company paid approximately £30,690 to the taxpayer and in 1966 it paid a further sum of $5,000. Whether this sum was paid in part satisfaction of the arrears due under the agreement or whether it was paid simply because the parties to the agreement were still acting as if the agreement had continued in force does not appear and is of no significance in the case. The fact is that this sum was paid in the year of income which ended on 30th June 1966 and the respondent has assessed the taxpayer to income tax in respect of that amount as if the sum was part of his assessable income. An appeal by the taxpayer has been dismissed in the original jurisdiction of this Court and this appeal is brought from the order of dismissal.

It is the respondent's contention that in the circumstances of the case the sum in question is assessable income of the taxpayer because it was income in his hands according to the ordinary concept of that term or, alternatively, because it is caught by one or other limbs of s. 26 (a) of the Income Tax Assessment Act 1936-1965. Further the suggestion is made that the agreement was a sham and that the payment should be regarded as a dividend paid by the company to the taxpayer as its principal shareholder but this suggestion was rejected by the learned judge of first instance and on the appeal was, we think, sufficiently disposed of during argument.

It is not possible to examine any of the respondent's three principal contentions without going further into the facts but since the learned judge of first instance has traversed the evidence fully we do not propose to do so again. It will, however, be necessary to make some reference to the evidence and this we shall do as we examine the various contentions.

The first of these to which we shall direct our attention is that the first limb of s. 26 (a) applies to the case. That is to say, the sum in question is profit arising from the sale by the taxpayer of property acquired by him for the purpose of profit making by resale. But there are difficulties in the way of the respondent succeeding on this contention not the least of which is that even if it was the purpose of, or a purpose of, the taxpayer in purchasing the land to sell the standing timber for his own profit, such a purpose might well be thought not sufficient to bring the matter within the first limb. However it is about as clear as it can be that at the time of the purchase of the land the taxpayer had no such purpose. The land was purchased by him as early as 1942, from that year onward until 1956 the company was permitted by the taxpayer to remove timber from it without charge and, apparently, the company paid income tax on the profits of its business during this period of fourteen years including in its receipts the proceeds from the sale and disposal of timber removed from the land. These facts were common ground between the parties and they are quite inconsistent with the taxpayer having purchased the land for the purpose of reselling some interest in it for his own profit. The existence of such a purpose was denied in evidence by the taxpayer and we agree with his Honour that the case does not fall within the first limb of s. 26 (a).

Whether the case falls within the second limb of that sub-section, or whether, according to ordinary concepts, the sum of $5,000 was income in the taxpayer's hands are, we think, related questions and we shall consider them together. "Income from personal exertion" is defined by the Act to mean, inter alia, income consisting of "the proceeds of any business carried on by the taxpayer and any profit arising from the carrying on or carrying out of any profit-making undertaking or scheme". "Business" includes "any profession, trade, employment, vocation or calling, but does not include occupation as an employee". The amount in question will, therefore, be income of the taxpayer if either it represents the proceeds of a business carried on by him or if it represents profit arising from the carrying out or carrying on of a profit-making scheme. These concepts, no doubt, overlap but the latter provision "provides a statutory criterion which must be applied directly and cannot be treated as going no further and producing no different result than would a criterion expressed as "exercising trade" or "carrying on a business" ": Official Receiver v. Federal Commissioner of Taxation (Fox's Case) [1] . Yet it is not to be thought that the mere realization of a capital asset not acquired for the purpose of profit making by sale would constitute a scheme for the purposes of s. 6 and s. 26 (a) even though the realization is effected in the most advantageous manner.

With these observations in mind we observe that the learned judge of first instance accepted the evidence of the taxpayer that he bought the land in 1942 in order that it might be developed into a pastoral property for his son. His Honour said:

I accept completely his evidence that when he bought the land he had in mind that it would probably become in time the property of his son if he should survive the war. I accept his evidence that he had also in mind that it could be progressively cleared and improved for grazing purposes. That I do not doubt was part of his purpose and object in buying land. But his Honour was not satisfied that this was all that he had in mind; he was not convinced by the taxpayer's evidence that he did not consider the timber growing on the land or the possibility of profit being made from it. It is clear, as his Honour said, that "there was much useful timber on the property when the taxpayer bought it" and "although he did not then know the full worth of it, he was aware that the timber had a potential value and this was a factor inducing him to buy the land". It may be observed that although the taxpayer said he was purchasing the property for his son he had not decided whether the transfer would be taken in his son's name, or in his own name, or in the name of the company. As events turned out the land was not transferred until 1945 by which time his son had been killed and it was then transferred to the taxpayer. Yet from the time of the contract the taxpayer had acted as the owner of the land and entitled to possession. From that time onward, as already appears, he permitted the company - in which he owned practically the whole of the shares and of whose business he was entirely in control - to cut and remove timber from the land. In addition, as the demand for timber increased and prices rose, the taxpayer permitted the company to erect a sawmill on the land but this seems to have operated for only a few years. The business of the company was mainly concerned with the supply of poles and piles to constructing authorities and it had not dealt extensively in milled timber. But the fact that it may be impossible to deny that at the date of the purchase the taxpayer intended to permit the company to exploit the timber resources of the land without charge and did, in fact, permit this to be done, could not justify the conclusion that between that date and 1956 the taxpayer carried on a business of his own or that he had embarked upon the carrying on or carrying out of a profit-making undertaking or scheme, or, indeed, that he had at any time during this period conceived any scheme or undertaking the carrying on or carrying out of which would return a profit to him.

However, the agreement of 9th May 1956 marked the commencement of a new era in the management of the property and the disposal of the standing timber. The reason why this agreement was entered into is to be found in the view which, upon advice, the taxpayer formed concerning the effect of the decision in Stanton v. Federal Commissioner of Taxation [1] which was published in October 1955. It seems to have been thought, on the authority of the decision, that if the taxpayer were to sell some of the standing timber to the company and other timber, that is to say mill timber, to other purchasers from time to time for lump sums his receipts would not be liable to tax. But in Stanton's Case [1] the only question that arose for decision was whether a sum of £2,832, being part of an instalment of a lump sum agreed to be paid to the taxpayer for the sale of standing timber on his land, whether removed or not, had been received as a royalty within the meaning of s. 26 (f) of the Act. The transaction was an isolated one and there was no suggestion that the taxpayer was engaged in business or that s. 26 (a) applied to the case; the only question before the Court was whether the amount in question was a royalty. This question the Court resolved in favour of the taxpayer but no such question arises in the present case.

1. (1955) 92 C.L.R. 630. 2. (1955) 92 C.L.R. 630.

The agreement into which the taxpayer entered after Stanton's Case [1] provided, as already appears, for the sale to the company of 14,991 hardwood poles and piles as described in the schedule with the right to the company to enter upon the lane and to cut and to remove the timber therefrom. As already set out the purchase price was to be a lump sum and to be payable by instalments irrespective of the quantity of timber removed. Other standing timber was sold from time to time over a number of years to other purchasers, five in all, and the amounts received from these purchasers pursuant to contracts, which were what may be called Stanton contracts, were as follows:

1956 .. £3,939 1957 .. £7,468 1958 .. £3,815 1959 .. £6,397 1960 .. £6,358 1961 .. £21,958 1962 .. £8,933 1963 .. £14,925 1964 .. £15,264 1965 .. £1,579 1967 .. $15,000.

In 1951 the taxpayer had obtained an assessment of the volume and value of the timber on the land and the comprehensive report of Mr Lane-Poole estimated the value of the timber then remaining on the land at £476,570. Up to this time there had been very little activity on the land apart from the removal of timber and shortly, afterwards, such minor activities as were taking place on the land ceased. Apart from seventy-five or eighty acres there had been no general clearing of the land. A cottage and a few huts had been erected in 1943 or 1944, an overseer had lived in the cottage for a short period, a vegetable garden had been established, and seventy-five acres had been sown to pasture. For some few years from 1953 the taxpayer had a few head of cattle on the land but this ceased in 1959. At the same time the taxpayer had a stallion and four stud mares on the property but this project was also abandoned in 1959. This was because, as the taxpayer said:

We had gradually begun to realize that the timber became a more important function and that it should not be sacrificed in the interests of a few cattle.

There is no doubt that the cutting and removal of timber from the land by the company and, after 1956, the cutting and removal of timber by other purchasers with whom the taxpayer had contracts, constituted part of the business activities of the purchasers. But it cannot be said that at any time prior to 1956 the taxpayer was, qua the timber on the land, engaged in any form of business. Nor is it possible to say; as was suggested, that in 1956 the taxpayer succeeded to any part of the business formerly carried on by the company. But what does appear is that in 1956 it was thought that the taxpayer could profit directly, and without incurring any liability for income tax, from sales of standing timber for lump sums and it was for this reason that the former practice was discontinued and the various sales made by the taxpayer.

As we have already said there is no doubt that a person who purchases land not for the purpose of profit making by resale, does not engage in business merely by reselling it. And the same must be true whether he resells it in one parcel or in several parcels at different times. The distinction between the mere realization of an asset and the sale of an asset in the course of carrying on a business is clearly drawn in the well-known case of Californian Copper Syndicate (Ltd. and Reduced) v. Harris [1] , and it is clear enough, as was pointed out by Rowlatt J. in Alabama Coal, Iron, Land and Colonization Co. Ltd. v. Mylam (H.M. Inspector of Taxes) [1] , that there is no trade or business of "realizing".

1. (1904) 5 Tax. Cas. 159. 2. (1926) 11 Tax. Cas. 232, at p. 252.

On the findings of the learned judge of first instance the land in question here was purchased initially for development as a pastoral property. That in the ordinary course its development would necessitate the removal of a considerable amount of timber is obvious and the effect of his Honour's findings is that it is probable that the timber on the land would be of value to the owner and that this was known to the taxpayer. But its disposal in the course of development would have been only a subsidiary activity in the development of the property and the amount received for it could not be regarded as the proceeds of a business carried on by the taxpayer. But the removal and the sale of the timber did not remain a subsidiary matter in the development of the property; all other purposes became subordinated to the preservation of the timber resources on the land for the purposes of sale and this state of affairs obtained for many years before 1966. In other words, the land became devoted exclusively to the sale of standing timber as it stood from time to time and it was so devoted indefinitely. We cannot, therefore, accept that what took place should be regarded merely as the realization by the taxpayer from time to time of some part of, or some interest in, his asset. Rather the evidence indicates that after 1956 he embarked upon a particular form of trade, that is to say, the sale of standing timber and the land was being maintained exclusively in the interests of such trade. This being so we are of the opinion that the sum of $5,000 was income of the taxpayer according to the ordinary concept of that term and we have no occasion to consider whether, if our view had been otherwise, the second limb of s. 26 (a) would apply.