no cgt on investment properties????

Federal Court of Australia
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Re: WESTFIELD LIMITED And: COMMISSIONER OF TAXATION No N G545 of 1990 FED No. 97 Income Tax
COURT
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Lockhart(1), Gummow(2) and Hill(3) JJ.
HRNG
SYDNEY
#DATE 20:3:1991

Counsel and Solicitors R.J. Ellicott QC and
for Applicant: R.F. Edmonds instructed by
Freehill Hollingdale and Page

Counsel and Solicitors D.M. Bennett QC and P. Reeves
for Respondent: instructed by the Australian
Government Solicitor
ORDER
The court orders that:
1. The appeal be allowed.
2. The orders of Sheppard J made on 29 August 1990 be set
aside.
3. In lieu thereof there be substituted the following orders;
(a) the respondent’s objection decision be set aside;
(b) the appellant’s objection be allowed;
(c) the assessment be remitted to the respondent for
amendment in accordance with the reasons of the court.
4. The respondent pay the appellant’s costs of this appeal and
of the proceedings before Sheppard J.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal
Court Rules.
JUDGE1
I have had the benefit of reading the reasons for judgment of Hill J. in
draft form. I agree with his Honour’s reasons and the orders which he
proposes.
JUDGE2
I have had the advantage of reading the reasons for judgment prepared by
Hill J.

2. I agree with the orders proposed by his Honour. I do so for the reasons
given by his Honour.
JUDGE3
The appellant, Westfield Limited, appeals against the judgment of a judge of
this court (Sheppard J), in respect of an objection to an assessment of income
tax by the respondent Commissioner of Taxation, for the year of income ending
30 June 1983. At issue in the appeal is whether a profit of $267,906, derived
by the appellant from the sale of land at Mount Gravatt in Queensland, was
income in ordinary concepts, as the Commissioner contends, or was of a capital
nature and accordingly not assessable income, as the appellant submits.
The facts:

2. The appellant is a company, the main activity of which, at relevant times,
was the design, construction, letting and management of shopping centres.
Additionally, the appellant designed and sometimes built hotels and office
buildings. Where the appellant itself designed and constructed shopping
centres on land owned by it, those shopping centres had usually been held by
it as long term investments. Sometimes, however, the appellant, after building
the shopping centre, would sell and lease back the centres as part of a
financing arrangement. Sometimes the appellant was one of a number of joint
venturers which would own and operate the shopping centres, and sometimes the
appellant did not own any part of the shopping centres which it designed and
built.

3. In 1978 there was a reconstruction of the Westfield group of companies, in
which there was established a publicly listed unit trust known as the
Westfield Property Trust. At this date, the appellant, or companies
associated with it, had built and then owned seven major shopping centres in
New South Wales, Victoria and Queensland. It also managed three shopping
centres built by it for financial institutions, and leased back from them
under long term leases. It, or companies associated with it, owned as well,
an office and motel complex in Sydney which it had built. In the 1978
reconstruction, the appellant sold to the Westfield Property Trust, six of the
shopping centres. After that date, save for the land the subject of the
appeal, the appellant had never directly owned any land. The evidence does
not make it clear what happened to the seventh centre.

4. There was no suggestion that, in the years immediately preceding 1981, the
appellant carried on a business of buying and selling land, or that it, or
companies associated with it had, in that time, ever acquired land for the
purpose of resale at a profit. Rather, the appellant only bought land for
future development, in the manner which I have indicated.

5. The appellant’s association with the Mount Gravatt land began in the early
1970’s, when Mr Saunders, its Deputy Chairman, perceived the likelihood of
growth occurring in and around Mount Gravatt, a Brisbane suburb, approximately
15 kilometres south of the city. At that time, Logan Road, which ran through
Mount Gravatt, was the main thoroughfare from Brisbane to the Gold Coast and
further south. At that time also, there was, near the intersection of Logan
Road and Kessels Road, a shopping centre, known as “Garden City”, which was
owned and operated by D J’s Properties Limited, a company associated with
David Jones Limited. South east of Garden City, along the south western side
of Logan Road, were a number of allotments, some vacant, some used for
commercial and light industrial purposes. On the opposite side of Logan Road
was the Greenleaves Nursery, which ran through to another street, Newnham
Road, which intersected with Logan Road.

6. It was Mr Saunder’s view that Garden City would become too small a
shopping centre for the area. He believed that another shopping centre
constructed adjacent to it would be a profitable venture, as would an overall
development of a larger shopping centre complex incorporating Garden City.
Accordingly, on 8 May 1978, an option was secured over one of the blocks of
land adjacent to Garden city, belonging to the Seganfreddo family, opposite
the Greenleaves Nursery (the Seganfreddo’s option). That land is the subject
of the sale, which generated to the appellant a profit. The option was to
remain in force until 31 October 1978, and provided for a purchase price of
$450,000, free of commission. Around the same time, the appellant secured
options to purchase some of the other allotments laying between Garden City
and the Seganfreddo land, which options were expressed to expire on dates
prior to the end of 1978.

7. On 17 August 1978, the appellant applied to the Brisbane City Council for
the rezoning of the land over which it held options. The application was
preceded by discussions between executives of the appellant and executives of
D J’s Properties, in which it appeared that the proposed new shopping centre
was to be linked by a covered walkway to Garden City, and that provision was
to be made for the integration of vehicular movements in the two car parks.
The council required a detailed traffic report and the appellant secured an
extension of the Seganfreddo’s option until 3 November 1979. The report was
obtained in due course and discussions held with council representatives.
While this was happening, the Seganfreddo’s option was extended further until
May 1980, and in certain events, until 3 November 1981.

8. Council was concerned with access roads and suggested that the problem
could be overcome if the appellant were to acquire the Greenleaves Nursery
land and a link road were to be constructed through that land to Newnham Road.
As a result, negotiations commenced with the owners of the nursery, but
ultimately broke down as the price being asked was, in Mr Saunder’s view,
excessive. On 30 January, 1980, the appellant notified the council that it
could not meet the council’s conditions and that it had abandoned the
application for rezoning. It also notified owners of land, over which it held
options, that it had abandoned its plans for the development.

9. Approximately three months later the appellant learnt that a competitor,
not regarded favourably by Mr Saunders, Hersfield, associated with Mr George
Herscu, had become interested in doing the same thing, and was attempting to
secure options over land adjacent to Garden City. Mr Saunders, his Honour
found, was concerned that if Hersfield were successful in securing these
options, that company could capitalise upon the work that the appellant had
done in the preceding two years, in seeking to have the land rezoned.
Accordingly, he decided to secure another option over the Seganfreddo’s land.
Thus in April 1980, a further option was granted to the appellant, for a
consideration of $100,000, to purchase the land for $450,000, the
consideration for the option being applied in the event of exercise in part
payment of the purchase price. The option was to expire on 22 April 1981.
That option was exercised on 16 April 1981 and a contract for the sale of the
land to the appellant was ultimately completed.

10. Some time before the option was exercised, the Garden City shopping
centre was sold to the Australian Mutual Provident Society (AMP). Mr
Saunders, in his evidence, was uncertain whether he knew of this at the time,
but believed he did not. However, on the day the option was exercised there
was, as his Honour pointed out, reference in a letter from the head office of
AMP to its Brisbane office, to a meeting between an officer of the appellant
and a representative of AMP, in which the appellant proposed that it would
carry out project management, design construction and leasing of a completed
shopping centre. The reference to leasing was not correct, as AMP was bound
to deal with an agent who had these rights for a long term.

11. Negotiations between the appellant and AMP continued over a long period
of time. Early, the appellant made it plain that it would be prepared to sell
the land it had acquired to AMP, but that the sale might depend upon
arrangements being entered into between AMP and the appellant for the design
and building of the centre. AMP indicated that it would be prepared to buy
the land at a reasonable price, in line with the prices to be paid to other
owners from whom the AMP had taken options. By November 1982, it became clear
that the project would proceed and that the appellant would design and
construct the centre. Valuations of the land were obtained “to provide the
parties with an indication of the price which should be paid” for the
Seganfreddo’s land, and eventually a contract of sale was entered into on 2
December 1982 for the sale of the land to AMP for $735,000, a price in line
with the prices paid by AMP to adjoining owners, and considerably less than
one of the valuations obtained, which was in excess of $735,000. As his
Honour observed, Mr Saunders could have held out for a higher price, but did
not do so because he wanted to secure the design and construction of the
shopping centre for the appellant.

12. Summarising the history of the matter, his Honour, who had formed a
favourable impression of Mr Saunders in the witness box, said:
“There can be no doubt but that he saw the
potential of the land adjacent to the Garden
City shopping centre from the early 1970’s.
Until 1980 he thought that the applicant would
be able to go ahead on its own account. For a
short time he abandoned the project when he
could not purchase the nursery land for a
reasonable price. He became interested again
when Hersfield came into the picture. He wanted
to keep it out. He then secured the Seganfreddo
land first by option and then by purchase. He
could not then foresee precisely how the matter
would turn out but he knew that the Seganfreddo
land was a powerful card in his hands.
But to take the view that he had purchased that
land merely to await the day when someone would
be forced to buy from him is to oversimplify the
matter. His company was primarily a developer
of shopping centres.”

13. His Honour found that the appellant had never given up its intention of
having a hand in the designing and construction of the centre, if that course
were at all possible. His Honour said:
“He (ie Mr Saunders) acquired the Seganfreddo
land with the short term object of keeping a
competitor out; but his ultimate goal was to
play a significant part in the eventual
development which he was sure would take place.
The whole of his negotiations with the AMP were
on that basis. There are statements in
memoranda and letters which indicate that he was
not interested in the sale of the land unless
the applicant were retained as the developer and
builder … He did not hold out for a top price
let alone an excessive one. Once he had secured
the agreement of the AMP that the applicant
could design and build the shopping centre, the
sale of the land was very much a collateral or
consequential matter. He sold for a reasonable
price and no more.”

14. His Honour held that the land had not been acquired with the dominant
purpose of profit-making by sale, and that accordingly, the profit was not
assessable income within the first limb of s.26(a). There was no challenge to
this finding. His Honour also found that, at the time of acquisition of the
land, there was no intention necessarily to sell it. His Honour said:
“At that time, notwithstanding the incipient
negotiations with the AMP, the applicant’s
preference was itself to develop the land along
with other parcels of land adjacent to it which
it still hoped to obtain.”

15. His Honour said that he had not taken anything from the coincidence of
the date of the exercise of the option and the date of the letter from AMP’s
head office, relating to the negotiations with the appellant. Rather, his
Honour accepted evidence that the Seganfreddo family were not prepared further
to extend the option and that the date of exercise of the option was
indicative of nothing other than the care of the solicitor of the appellant to
ensure that the option was exercised within time. In particular, his Honour
was of the view that the appellant would have exercised the option, regardless
of whether there was some interest by AMP in the concept of a shopping centre.
His Honour said:
“If it had not gone ahead, it is plain that the
applicant would have retained the land in the
hope that eventually it would be able to
construct the shopping centre on its own land or
that someone would wish to construct a shopping
centre and retain the applicant to be, not only
the designer and builder, but also the lessor of
the shops under some form of lease back arrangement.”
His Honour’s conclusions

16. In these circumstances, his Honour was of the view that the resultant
profit was assessable. After a consideration of what had been said by the
High Court in Federal Commissioner of Taxation v Myer Emporium (1987) 163 CLR
199, and by the full court of this court in Jennings Industries Limited v
Federal Commissioner of Taxation (1984) 2 FCR 273, his Honour said:
“… it seems to me, however, that the whole of
the transaction, including the sale of the land,
was one carried out in the ordinary course of
the applicant’s business and was part of an
overall profit making venture. I do not feel
able to separate out the sale of the land from
the totality of the transaction. The sale of
the land was a necessary step in the carrying
out of the entirety of what was involved. …
The evidence establishes, as I have said, that
the applicant intended, when it acquired the
land, to use it in a way which, although not
then precisely foreseen, would achieve for it
participation in the development of it and other
adjacent land into a shopping centre whether
integrated with Garden City or not. It did not
envisage sale as a necessary consequence. But
it was certainly a possibility. As events
turned out the land was sold and the sale
yielded a profit which was realised in the 1983
year of income. In my opinion, it must follow
that the amount of the profit was properly
included in the applicant’s assessable income.
I think this conclusion is required by both the
Jennings Industries and the Myer cases.”
The respondent’s notice of contention

17. By its notice of contention, the respondent claimed that his Honour had
erred in failing to make the following findings of fact:
“2. The appellant was aware at the time of
exercise of the Seganfreddo option on 16
April 1981 that:-
(a) The AMP Society was interested in
the subject area at Mount Gravatt;
(b) The AMP Society was acquiring
options to purchase land in the
subject area;
(c) The AMP Society was likely to extend
its existing centre in the subject area;
(d) There was a real possibility that a
deal of the type which was
ultimately done with the AMP Society
might be done if the Seganfreddo
option were exercised.
3. The possibility referred to in
paragraphs…2(d) above was one of the
purposes of the appellant in exercising
the option.”

18. Particular emphasis was placed in submissions upon the coincidence of the
exercise of the option and the negotiations with AMP. A status report written
on 25 March 1981, and showing on its face that it was to be circulated to Mr
Saunders, referred to the fact that Mr Seganfreddo had told the writer that
AMP had recently made direct approaches to him. The internal letter from AMP
head office to its Brisbane office, to which reference has already been made,
refers to the possibility of an arrangement being entered into at Mt Gravatt.
The letter says:
“Broadly Westfield propose that they would carry
out project management, design, construction,
and leasing together with, if necessary, opening
promotions, and hand over the keys of the
completed Centre..”

19. The acquisition of the Garden City site by AMP, according to evidence
given by a Mr Boyes, who was General Manager of the appellant in 1981, opened
up the possibility of the appellant “working in” with AMP, an opportunity it
had looked for. Mr Boyes said:
“Westfield’s modus operandi at the time was to
work in association with institutions like T and G
Society and the State Superannuation Board with
whom we had developed and then retained an
interest in shopping centres. At that time we
had not done such an arrangement with the AMP
even though they were the biggest institution of
that type in Australia. So that encouraged us
to look forward to opportunities to work for
them – or towards some scheme or arrangement
with them – us having land we believed was
critical to any extension of Garden City …”

20. His Honour, however, accepted that Mr Saunders was aware of AMP’s
interest in a development of the centre, and of its ownership of the Garden
City land, but nevertheless formed the view that the appellant did not have a
purpose of sale at the time of exercise of the option. His Honour did so,
after hearing the evidence of Mr Saunders and observing him in the witness
box. Mr Saunders, in his evidence, agreed that as at the time of exercise of
the option, he did not know exactly how the development would take place, he
knew only that it would. It was frankly acknowledged by Mr Saunders that the
Seganfreddo’s land was critical to any overall development of the whole site.
It was a strategic land holding. However, Mr Saunders, in a passage critical
to his Honour’s finding, said:
“To be honest we put in a lot of effort and we
were hoping that one day we will be able to go
on with the shopping centre because we need
deals with Myers, K-Mart, Target. First of all
our reputation was involved because we could not
deliver. Secondly, we would not do business with
Hirshfield (sic) and thirdly, we were hoping
that one day the people would come to (their)
senses and they will ask not too ridiculous
prices … We were hoping that one day we would
be able to do the shopping centre and it is the
best shopping centre in Brisbane and we realised
that and that is why we were doing it..”

21. Mr Saunders denied that if a buyer had come along after the exercise of
the option, and had offered a high enough price, he would have considered that
offer on its commercial merits. It would have been a different matter if they
had offered a shopping centre contract. He said:
“If somebody else would have come along and
would offer us five times as much as we paid for
the land we would not sell it…we did not buy
the land to cash in on the land.”

22. In the light of this evidence, it was clearly open to his Honour to find
as he did. His Honour had the advantage of seeing the witnesses in the
witness box. We did not. To find, as inferentially the respondents would
have us find, that the appellant had a purpose of selling at a profit, would,
notwithstanding the submissions to the contrary, necessarily involve the
rejection of Mr Saunder’s evidence to the contrary. As pointed out by Lord
Sumner in SS Hontestroom v SS Sagaporack (1927) AC 37 at 47, in a passage
cited recently with approval in the High Court by McHugh J, with whom the rest
of the court agreed (Abalos v Australian Postal Commission (1990) 65 ALJR 11
at 16):
“… not to have seen the witnesses puts
appellate judges in a permanent position of
disadvantage as against the trial judge, and,
unless it can be shown that he has failed to use
or has palpably misused his advantage, the
higher Court ought not to take the
responsibility of reversing conclusions so
arrived at, merely on the result of their own
comparisons and criticisms of the witnesses and
of their own view of the probabilities of the
case. The course of the trial and the whole
substance of the judgment must be looked at, and
the matter does not depend on the question
whether a witness has been cross-examined to
credit or has been pronounced by the judge in
terms to be unworthy of it. If his estimate of
the man forms any substantial part of his
reasons for his judgment the trial judge’s
conclusions of fact should, as I understand the
decisions, be left alone.”
See too, Warren v Coombes (1979) 142 CLR 531 at 537-552.

23. Additionally, the respondent relied on a letter of 19 October 1981,
written by an agent acting for a named developer to Mr Lowy, a director of the
appellant, concerning the concept of a comprehensive redevelopment of the
whole site, including the Garden City Shopping Centre. The letter said in
part:
“The aggregation of the entire parcel could be
achieved either by one owner developer, or
alternatively by two or more developers
participating in a joint venture project. Our
developer client has indicated to us that he
would be very happy to co-operate in such a
project. He would be prepared to aggregate the
balance of the land which remains in multiple
ownership, or to purchase from you, land you do
not require once planning approval has been negotiated.”

24. The nature of the proposal would hardly have been surprising to Mr
Saunders. He had held a concept for the development of the whole site for
some years. However, Mr Saunder’s reaction to the letter is unknown, save
that there is no evidence of a response to the letter. The matter was not
explored in cross-examination, and adds nothing to the case of the appellant.

25. It may be accepted that the evidence makes it clear that AMP was, as at
16 April 1981, interested in a development of the Mount Gravatt land, and that
it was acquiring options to purchase land in the area. The evidence does not,
however, go so far as to demonstrate that a development of the whole site by
AMP was likely, and indeed negotiations to this end continued over a lengthy
time before a decision was made. While there was a real likelihood that AMP
would participate in some form of development of the overall site, the form
that participation would take, like the form of the appellant’s participation,
was uncertain, or at least, unknown to the appellant and Mr Saunders. There
was, of course, a possibility, as at the date of exercise of the option, that
the appellant might sell the land to AMP, but that was but one of the
possibilities open to it. It was the appellant’s preference at that time, as
his Honour found, to itself develop the land. The evidence in fact shows that
some seven months after the appellant acquired the land, instructions were
given to an agent to endeavour to reassemble the various parcels of land, over
which it had originally held options, under its own control.

26. Sale of the land, especially at a profit, was not a purpose of the
appellant, it was, as his Honour found, but a possibility.

27. Accordingly, the respondent’s submissions on its notice of contention can
not be accepted.
The substantial issue in the appeal

28. At the heart of the appeal is the question whether, in the circumstances
found by his Honour, the profit made by the appellant constituted assessable
income. The starting point of its resolution is, as both parties agreed, the
well known discussion of the Lord Justice-Clerk, in Californian Copper
Syndicate v Harris (1904) 5 TC 159 at 165-166:
“It is quite a well settled principle in dealing
with questions of assessment of Income Tax, that
where the owner of an ordinary investment
chooses to realise it, and obtains a greater
price for it than he originally acquired it at,
the enhanced price is not profit in the sense of
Schedule D of the Income Tax Act of 1842
assessable to Income Tax. But it is equally
well established that enhanced values obtained
from realisation or conversion of securities may
be so assessable, where what is done is not
merely a realisation or change of investment,
but an act done in what is truly the carrying
on, or carrying out, of a business.”

29. Later in the judgment (at 166), his Lordship defined the line which
separates the two classes of case, by reference to the following question:
“Is the sum of gain that has been made a mere
enhancement of value by realising a security, or
is it a gain made in an operation of business in
carrying out a scheme for profit-making?”

30. In applying what was said by the Lord Justice-Clerk, it is necessary to
undertake:
“a wide survey and an exact scrutiny of the
taxpayer’s activities”.
(Western Gold Mines N.L. v Commissioner of Taxation (W.A.) (1938) 59 CLR 729
at 740, cited with approval by Gibbs J in London Australia Investment Company
Limited v The Commissioner of Taxation (1976-7) 138 CLR 106 at 116.)

31. The test in Californian Copper was applied in more recent times by the
High Court in Federal Commissioner of Taxation v Myer Emporium Limited (1987)
163 CLR 199 and GP International Pipecoaters Pty Limited v Commissioner of
Taxation (1990) 64 ALJR 392. In appreciating what was said in Myer, it is
important to recall that an argument for the taxpayer was that the transaction
there involved, of selling land, receiving a mortgage back at interest for a
long term, and then assigning the income arising under the mortgage for a lump
sum, was not income in ordinary concepts, because it was an extraordinary
transaction and outside the scope of the taxpayer’s business. It was in
answering this argument, that the judgment of the court in Myer said (at
209):
“Although it is well settled that a profit or
gain made in the ordinary course of carrying on
a business constitutes income, it does not
follow that a profit or gain made in a
transaction entered into otherwise than in the
ordinary course of carrying on the taxpayer’s
business is not income. Because a business is
carried on with a view to profit, a gain made in
the ordinary course of carrying on the business
is invested with the profit-making purpose,
thereby stamping the profit with the character
of income. But a gain made otherwise than in
the ordinary course of carrying on the business
which nevertheless arises from a transaction
entered into by the taxpayer with the intention
or purpose of making a profit or gain may well
constitute income. Whether it does depends very
much on the circumstances of the case. Generally
speaking, however, it may be said that if the
circumstances are such as to give rise to the
inference that the taxpayer’s intention or
purpose in entering into the transaction was to
make a profit or gain, the profit or gain will
be income, notwithstanding that the transaction
was extraordinary judged by reference to the
ordinary course of the taxpayer’s business. Nor
does the fact that a profit or gain is made as
the result of an insolated venture or a ‘one
off’ transaction preclude it from being properly
characterised as income: Federal Commissioner of
Taxation v Whitfords Beach Pty Ltd. The
authorities establish that a profit or gain so
made will constitute income if the property
generating the profit or gain was acquired in a
business operation or commercial transaction for
the purpose of profit-making by the means giving
rise to the profit”.

32. The judgment, not only in this passage, but in several later passages (at
211-213), emphasises that where a transaction occurs outside the scope of
ordinary business activities, it will be necessary to find, not merely that
the transaction is “commercial” but also that there was, at the time it was
entered into, the intention or purpose of making a relevant profit.

33. What was said in Myer has been applied in a number of cases in this court
since. Among them are Moana Sand Pty Limited v Federal Commissioner of
Taxation (1988) 88 ATC 4897, and Federal Commissioner of Taxation v Cooling
(1990) 22 FCR 42. It does not, however, follow from the judgment in Myer, or
for that matter, from the judgments in any later cases, that every profit made
by a taxpayer in the course of his business activity will be of an income
nature. To so express the proposition is to express it too widely, and to
eliminate the distinction between an income and a capital profit. A taxpayer
carrying on a business might sell its headquarters in order to move to larger
premises and make a profit over historical cost. The transaction of sale may
be one which arises in the ordinary course of the taxpayer’s business, but
that profit will not ordinarily be income, particularly where, at the time of
acquisition of the site, there was no intention or purpose of profit-making by
sale when the premises became too small. The profit in Cooling, the receipt of
a leasing incentive payment, was one intended to be made at the time the
transaction with the lessor was entered into, just as the profit in Myer was
one which underlay the whole transaction.

34. When in Myer the High Court spoke of profits made in the ordinary course
of business, their Honours were not speaking in a temporal sense. Rather, as
the judgment of the full court of this court in Federal Commissioner of
Taxation v Spedley Securities Limited (1988) 88 ATC 4126 at 4130 points out,
it is necessary that the purpose of profit-making must exist in relation to
the particular operation. In a case where the transaction, which gives rise
to the profit, is itself a part of the ordinary business (eg a profit on the
sale of shares made by a share trader), the identification of the business
activity itself will stamp the transaction as one having a profit-making
purpose. Similarly, where the transaction is an ordinary incident of the
business activity of the taxpayer, albeit not directly its main business
activity, the same can be said. The profit-making purpose can be inferred
from the association of the transaction of purchase and sale with that
business activity. The cases on profits and losses of insurance companies and
banks are examples: Colonial Mutual Life Assurance Society Ltd v Federal
Commissioner of Taxation (1946) 73 CLR 604; Australasian Catholic Assurance Co
Ltd v Federal Commissioner of Taxation (1959) 100 CLR 502; Chamber of
Manufactures Insurance Ltd v Federal Commissioner of Taxation (1984) 2 FCR
455; Federal Commissioner of Taxation v Employers’ Mutual Indemnity
Association Ltd (1990) 90 ATC 4787; Federal Commissioner of Taxation v
Equitable Life and General Insurance Co. Ltd. (1990) 93 ALR 609; Punjab
Co-operative Bank Ltd., Amritsar v Income Tax Commissioners, Lahore (1940) AC
1055; Union Bank of Australia Ltd v Commissioner of Taxation (NZ) (1920) NZLR
649; Commissioner of Taxation v Commercial Banking Co. of Sydney Ltd (1927) 27
SR (NSW) 231.

35. In London Australia (supra), Gibbs J held that the sale of shares by the
taxpayer in that case was a normal operation in the course of the business
operations, it was a part of the very business itself. That holding depended
upon a finding of fact by the judge below, that it was an integral part of the
taxpayer’s business to deal in shares, in the sense that switching of
investments was necessary, or at least desirable, if the policy of growth
potential adopted by the taxpayer was to be adhered to. Jacobs J, on the
other hand, spoke (at 128) of the necessity that profit-making by sale (the
manner of realisation there involved) needed to be a purpose, albeit not a
dominant one, where the acquisition and disposal of property is part of a
business of so doing. The facts of that case indicated the necessary purpose,
intention or expectation.

36. As to whether there was any real inconsistency between the judgments of
Gibbs and Jacobs JJ., see CMI Services Pty Limited v Federal Commissioner of
Taxation (1990) 94 ALR 153 at 160-63. When one comes to identify the business
activity of the appellant, that activity does not involve the appellant in
reselling land at all, other than on a sale and lease back financing basis,
where, presumably, no profit would be expected to arise. It can not be said,
in the present case, that resale of land was part of the ordinary business
activity at all, or, for that matter, a necessary incident of that business
activity. That business activity was relevantly the construction of shopping
centres, their leasing or management, either on the appellant’s own land, on
the land of others, or on joint venture land.

37. Sheppard J, in his judgment, described what his Honour referred to as the
“whole of the transaction”, by which his Honour probably meant the transaction
of purchase and sale, as being:
“… one carried out in the ordinary course of
the applicant’s business and was part of an
overall profit making venture.”

38. If, by this, his Honour intended to suggest that the transaction was one
done in the ordinary course of business, his Honour fell into error, by
viewing the matter temporally, contrary to the warning in Spedley. It can
hardly be assumed that his Honour was suggesting that the business of the
appellant was concerned with resale of land at a profit, because this would
have been contrary to his Honour’s own findings of fact.

39. Once it is clear that the activity of buying and selling, which generated
the profit, was not an activity in the ordinary course of business, or, for
that matter, an ordinary incident of some other business activity, the profit
in question will only form part of the assessable income of the appellant, by
virtue of its being income in accordance with the ordinary concepts of
mankind, if the appellant had a purpose of profit-making at the time of
acquisition. What is meant by “profit-making” in this context?

40. Sheppard J was of the opinion that there was, in the relevant sense, an
overall scheme of “profit-making”. The scheme of profit-making was said to be
a scheme to achieve participation in the development of a shopping centre.
However, in my opinion, that is not enough in the circumstances of this case.
First, the obtaining of the contract to construct and manage the centre is
not, of itself, relevantly a scheme of profit-making, it is scheme for
deriving assessable income, which income is derived from the performance of
the work under the building and management contracts. Second, where a
transaction falls outside the ordinary scope of the business, so as not to be
a part of that business, there must exist, in my opinion, a purpose of
profit-making by the very means by which the profit was in fact made. So much
is implicit in the decision of the High Court in Myer. There may be a case,
the present is not one, where the evidence establishes that the taxpayer has
the purpose or intention of making a profit by turning an asset to account,
although the means to be adopted to generate that profit have not been
determined: cf Steinberg v Federal Commissioner of Taxation (1972-75) 134 CLR
640. Steinberg was a case decided under the second limb of the then s.26(a)
of the Act. The taxpayer had, having obtained an option to purchase some land
(The Rockingham land), caused a company to be incorporated, the shareholders
of which included his family and himself, intending to turn the land to
account in the most advantageous way, in particular, either by selling the
shares in the company, or liquidating the companies, distributing the assets
in specie, and then selling those assets. It was the latter course that was
taken. The court by majority held, affirming Mason J at first instance, that
it was not necessary to fall within the second limb, that every step which
culminates in the making of a profit should be planned or foreseen. In the
words of Mason J (at 670):
“In a business transaction of this kind where
property is acquired with the intention that a
profit should be made out of its anticipated
appreciation in value by whichever means prove
most suitable, it matters not that the
particular means by which the profit is to be
made are left for subsequent decision.”

41. To the same effect, is the judgment of Gibbs J (at 699-700) and of
Stephen J (at 704-705).

42. While a profit-making scheme may lack specificity of detail, the mode of
achieving that profit must be one contemplated by the taxpayer as at least one
of the alternatives by which the profit could be realised. Such was the case
in Steinberg. But, even if that go too far, it is difficult to conceive of a
case where a taxpayer would be said to have made a profit from the carrying
on, or carrying out, of a profit-making scheme, where, in the case of a scheme
involving the acquisition and resale of land, there was, at the time of
acquisition, no purpose of resale of land, but only the possibility (present,
one may observe in the case of every acquisition of land) that the land may be
resold. The same may be said to be the case where s.25(1) of the Act is
involved. As the court observed in Myer, in the passage already set out, the
property, which generates the gain, must be acquired in an operation of
business or commercial transaction:
“… for the purpose of profit-making by the
means giving rise to the profit” (emphasis added).

43. The decision of the full court of this court in Jennings Industries Ltd v
Federal Commissioner of Taxation (supra), upon which his Honour also relied,
requires no different answer. In Jennings, the taxpayer had acquired half the
shares in a company, pursuant to an arrangement under which it was to
construct a building to be owned by that company. A profit was ultimately
realised on the sale of the shares, and was found to be income in ordinary
concepts. The taxpayer lost at first instance because it had failed to
satisfy the onus of proof. A number of hypotheses were equally open, as to
the taxpayer’s purpose, and the evidence had failed to reveal that any
particular one of these was incorrect. Included as one of the hypotheses, was
the possibility that the share acquisition was for the purpose of
profit-making by sale. On appeal, the court expressed reluctance to consider
the evidence for itself, but in fact did so. It concluded that the taxpayer
always expected and intended to profit by the realisation of its interest in
the project. In other words, there existed from the outset a purpose of
profit-making, in the usual sense of the word, and the taxpayer had not shown
that it had no positive intention that it would realise its interest in the
project by a sale of the shares. Subsequent comments by the court should be
understood in this context. The profit was a step taken by the taxpayer in the
course of its ordinary business.

44. I am of the view that the appeal should be allowed. The orders I would
propose are as follows:
1. The appeal be allowed.
2. The orders of Sheppard J be set aside and in lieu thereof, there
be substituted an order that the respondent’s objection decision
be set aside, that the appellant’s objection be allowed, and that
the assessment be remitted to the respondent for amendment in
accordance with the reasons of the court.
3. The respondent pay the appellant’s costs of this appeal and of the
proceedings before Sheppard J.

[buz2]

Church of The Holy Smokers
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