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Federal Commissioner of Taxation v McConochie [1960] HCA 3; (1960) 102 CLR 561 (22 February 1960)

CATCHWORDS

HEARING

DECISION

2. In the following March he sold them, or to be exact, 3,120 of them, for 7 pounds 7s. 6d. a head for delivery on 1st July 1953, when payment was to be made. The contract of sale was in writing; and it may be doubtful whether it should be construed as a sale passing the property in the sheep at once or an agreement to sell under which the property did not pass until delivery. Be that as it may, the contract particularly provided that the purchaser might, indeed should, shear the sheep before delivery. For by March they had twelve months wool upon them and more. The clause provided that the sheep should be shorn about March 1953 by the purchaser at her expense at a specified place under the supervision of the taxpayer's manager and that the wool should be consigned to a named wool-selling broker for sale on the purchaser's behalf but that the proceeds should be held by the broker until the sheep were paid for. It is of course evident that between the time of shearing and the time when the sheep were delivered losses of sheep might occur; yet under the contract the purchase money would be calculated upon the count of sheep at delivery. To meet the contingency a clause provided that the vendor should receive from the purchaser a pro rata proportion of the wool proceeds on a per head basis on any difference between the number of sheep shorn and the number delivered. (at p565)

3. The sheep were in fact shorn as provided and the money held by the wool-selling broker. Account sales rendered on 12th May 1953 showed that one hundred and thirty-nine bales had been sold on account of the purchaser of the sheep and had produced a net amount of 13,033 pounds 1s. 6d., and on 2nd July account sales for four more bales showed a net return of 305 pounds 12s. 6d. As at 1st July 1953 the Commissioner treated the four bales as "wool on hand" of the value of 305 pounds 12s. 6d. The cost of shearing, cartage and the like was 842 pounds. The Commissioner of Taxation deducted that amount from the sum of the wool proceeds and by an amended assessment included the net figure, namely 12,496 pounds, in the taxpayer's assessable income for the income year ending 30th June 1953. (at p566)

4. I am of opinion that this cannot be right. What the taxpayer sold or agreed to sell was not wool but sheep. No price was fixed by him for a sale of the wool to the purchaser of the sheep. Perhaps it might be right to imply in the contract a term that in the contingency of the sale of the sheep falling through by the default of the purchaser the wool moneys held by the wool-selling brokers should be handed to the vendor, the taxpayer. But no such contingency arose. The contract was performed: the sheep were delivered and the purchase price for them was paid. That took place in the next year of income, that beginning 1st July 1953 and ending 30th June 1954. The result was that the proceeds of the wool became payable absolutely by the brokers to the purchaser of the sheep. What the contract of sale yielded to the taxpayer was the price of the sheep. Among the live-stock taken into account by the taxpayer as at the end of the year of income ending 30th June 1953 were the sheep afterwards delivered to the purchaser pursuant to the contract all of which had been shorn by that purchaser under the terms of the contract. In his return of income for that year the taxpayer included the sheep under gross sales. That basis was of course appropriate on the footing, which the taxpayer adopted and perhaps correctly, that the property in the sheep passed to the purchaser only when the sheep were delivered. The price of the sheep, that is to say, 7 pounds 7s. 6d. a head, is the only consideration which passed to the taxpayer under the contract. It is nothing to the point that under the contract the purchaser became entitled, or was obliged, to shear the sheep in advance of the property passing and to sell the wool. The contract gave the taxpayer as vendor of the sheep no right to payment for the wool, that is unless possibly in the event which did not occur of the contract failing by reason of a default of the purchaser. If on the other hand the hypothesis be adopted that, contrary to the view upon which the taxpayer's returns were constructed, the property in the sheep passed under the contract immediately it was made, that is to say that the contract amounted to a sale de praesenti, not to an executory agreement to sell de futuro, then it would be equally indefensible to include in the assessable income the proceeds of the wool as a separate item. On the footing that the property in the sheep passed immediately on the signing of the contract it might have been right to take at once into the live-stock account as sales the whole purchase money of 7 pounds 7s. 6d. per head, notwithstanding that payment was postponed until the next accounting period, when delivery would be made. But that would mean that the value of the sheep could not be included at the end of the year expiring 30th June 1953 in the live-stock account, when that account was made up in accordance with s. 32 of the Income Tax and Social Services Contribution Assessment Act 1936-1953. We are told that in fact they were included by the taxpayer in his return at 4 pounds 2s. 0d. a head, the taxpayer having elected for value at cost. But there could be no separate inclusion of the proceeds of the wool. It would remain true that the wool was not sold, it was the sheep; that there was no separate consideration for the wool bargained for and none received. (at p567)

5. Originally the assessment of the taxpayer upon the income of the year ending 30th June 1953 accepted the hypothesis of the taxpayer and treated the sheep as remaining on that date the property of the taxpayer. On that footing the sheep took their place in the live-stock account as live-stock on hand valued at cost 4 pounds 2s. 0d. By an amendment, however, the Commissioner brought the proceeds of the wool into the assessable income of that year, leaving the sheep still in the live-stock account as livestock on hand valued at cost 4 pounds 2s. 0d. It is obvious that when in the next year the sheep went out of the live-stock account, as they must consistently with the basis thus adopted by the Commissioner, and were replaced by the purchase price of the sheep reduced by the proceeds of the wool, the transaction would be reflecting a loss in that year. The case stated does not show how the assessment in respect of the year of income ending 30th June 1954 has been in fact dealt with, but the consequence just stated seems inevitable and it illustrates the difficulty, the impossibility indeed, of regarding the contract for the sale of the sheep as composed of two transactions, one a sale of the wool by the taxpayer and the other a sale of the sheep by him, transactions each involving a separate consideration or both involving separable or at all events apportionable considerations. (at p567)

6. The question asked in the case stated is whether the amount of 12,496 pounds referred to above or any part of that sum is assessable income of the taxpayer of the year of income ended 30th June 1953 within the meaning of the Income Tax and Social Services Contribution Assessment Act 1936-1953. (at p567)

7. In my opinion that question should be answered No. (at p567)

McTIERNAN J. I agree that the question in the stated case should be answered No. I concur in the reasons for judgment of the Chief Justice, and have nothing to add. (at p567)

FULLAGAR J. Having had the advantage of reading the judgment of the Chief Justice, I find it sufficient to say that I entirely agree with it. I do not regard the case stated by Kitto J. as raising any other question than as to the correctness of the basis of the Commissioner's assessment, which is made plain by the adjustment sheet accompanying the second amended assessment and by par. 15 of the case. I express no opinion on the question - which on its face is a much more difficult question - whether the whole of the contract price for the sheep ought not to have been brought into account for the year ended 30th June 1953. (at p568)

TAYLOR J. In my opinion the question raised by the case stated should be answered in the negative. I have had the opportunity of considering the reasons prepared by the Chief Justice and Menzies J. and I concur in the reasons which have led them to the same conclusion. (at p568)

MENZIES J. This is a case stated by Kitto J. upon an appeal by the Commissioner from a decision of the Board of Review that the Commissioner had by amended assessment wrongly included in the taxpayer's assessable income for the year ended 30th June 1953 the sum of 12,496 pounds which, according to the adjustment sheet issued with the amended assessment, was made up as follows:

Proceeds 139 bales wool sold 12/5/53 re sheep
sold to H.R. Ellison 12/8/53 . . . . . . . . . 13,033 pounds
Wool on hand 30/6/53 (4 bales) . . . . . . . . 305 pounds
--------------
13,338 pounds
Deduct - shearing, cartage etc. . . . . . . . 842 pounds
--------------
12,496 pounds
-------------- (at p568)

2. The relevant facts are that the respondent, R.K. McConochie of "Willancorah", a grazier, bought in October 1952 3,150 wethers at 82s. 0d. per head. On 7th March 1953 he sold to Mrs. Ellison of "Narringa" 3,120 of these wethers at 147s. 6d. per head. In the contract the sheep, which had been inspected and approved on behalf of the purchaser, were described by breeding and drop and it was stated "Numbers more or less believed to be approximate but not guaranteed". The purchaser was given the right to reject "lame, blind and sheep unfit to travel". Delivery was to be on 1st July 1953. It was agreed that in the meantime the sheep were to be shorn about March 1953 by the purchaser at her expense but under the supervision of the manager of "Willancorah" and the wool consigned to the Australian Mercantile Land and Finance Co. Ltd. for sale on the purchaser's account but with the stipulation that "proceeds are to be held by the A.M.L. & F. Co. Ltd. until the sheep are paid for". Clauses 4 and 8 of the contract are as follows: "4. The vendor is to receive from the purchaser a pro rata proportion of the wool proceeds on a per head basis on any difference between the number of sheep shorn and the number finally delivered." "8. In the event of the purchaser selling the sheep before 1st July the proceeds are to be held in trust by George Paul, Agent, Wellington until 1st July on account of Mrs. H. R. Ellison the aforesaid purchaser." The vendor was to run the sheep at "Willancorah" free of agistment until 1st July. There were special stipulations in the event of "Willancorah" becoming flooded, or of apprehension of this. What was described as pro forma delivery was to be given and taken and the stock counted on 1st July 1953 at "Willancorah," and such delivery was to be considered actual delivery (without further count) upon payment in full. It was also provided that until payment in full "the purchaser shall hold the stock (or the proceeds of the sale, if resold) as agent only and upon trust for and at the disposal of the vendor or his agents". (at p569)

3. The sheep were shorn, and of the clip one hundred and thirty-nine bales were sold in April 1953 for 13,733 pounds 10s. 1d. gross, 13,033 pounds 1s . 6d. net, while four bales were sold in June 1953 for 313 pounds 12s. 6d. gross, 305 pounds 12s. 6d. net, the net figures amounting in all to 13,338 pounds 14s. 0d., which corresponds with the figure upon the adjustment sheet already referred to. The net amounts were credited by the Australian Mercantile Land and Finance Co. Ltd. to the account of Mrs. Ellison. It is stated without further elaboration that delivery of the sheep was taken by Mrs. Ellison shortly prior to 12th August 1953 when the count was 3,114 sheep. On 12th August 1953 the sum of 12,496 pounds 9s. 0d., being the credit balance of Mrs. Ellison's account in the books of the Australian Mercantile Land and Finance Co. Ltd., was transferred to the credit of the respondent's account in the books of the company. This was done with the authority of Mrs. Ellison in part satisfaction of the consideration payable under the contract. The balance, 10,909 pounds 16s. 2d., was paid to the respondent on 15th October 1953. It is to be observed that the amount paid as consideration was 23,406 pounds 5s. 2d., whereas 3,114 sheep at 147s. 6d. per head totals 22,965 pounds 15s. 0d: the difference, 440 pounds 10s. 2d., has not been explained and so far as I can see, it is not explicable on the footing that some larger number than 3,114 but not exceeding 3,120 sheep were shorn, whereas only 3,114 were delivered, so that some amount was to be received by the vendor from the purchaser pursuant to cl. 4 of the contract, because upon the average each sheep cut something like 4 pounds 5s. 0d. worth of wool. Whatever may be the explanation, we are bound to proceed on the basis that all the wool sold came from sheep the subject of the contract. (at p570)

4. The Commissioner broke up the contract and what was done thereunder into two transactions, namely: first, a sale of the wool clip from the flock at a price equivalent to the net proceeds of the sale after a deduction for shearing, cartage, etc. (12,496 pounds), which, so it was claimed, took place in the year of income ended the 30th June 1953; and, secondly, a sale of 3,114 sheep in three months' wool on 12th August 1953 at approximately 70s. 0d. per head, this transaction occurring in the following year of income. It was contended that this splitting up of what occurred corresponded with the reality of the situation and that the form of the contract between the respondent and Mrs. Ellison must yield to that reality. This I reject at all points. The reality of the situation was clearly enough the sale of a flock of sheep at a stipulated price per head, but because it was intended that the price should not be paid before 1st July 1954 and in the meantime the sheep should be shorn and the wool sold, and because it was contemplated that the sheep might be sold by the purchaser before 1st July 1954, provisions were inserted in the contract relating to the proceeds of the wool and of the sheep, if sold, to ensure that whatever happened, there would be available for payment to the respondent vendor a substantial part, at least, of the purchase price. The agreement, however, recognized clearly enough that the wool clip should belong to the purchaser, and the attempt of the Commissioner to treat it as belonging to the vendor, as is shown by the adjustment sheet already referred to, and the more subtle attempt of his counsel to treat the property in the wool as passing to the vendor by sale upon the shearing at a price determined by the net selling price of the wool at later dates, are both entirely contrary to the agreement between the vendor and the purchaser. Whatever the wool brought, the price of the sheep was 147s. 6d per head and there is no basis upon which the consideration eventually paid can be treated as made up of two variables, one the net proceeds of wool and the other the consideration for the sheep sold and delivered, calculated by deducting the net proceeds of wool from a figure arrived at by multiplying 147s. 6d. by the number of sheep delivered. (at p570)

5. The fallacy of treating the proceeds of the wool as belonging to the taxpayer is demonstrable by supposing that in the event the proceeds of the wool had exceeded the price of 147s. 6d. per head for 3,120 sheep. In such circumstances, the vendor could not have been entitled to the proceeds of the wool; all he was entitled to was 147s. 6d. for the sheep delivered with the addition, if more sheep were shorn than delivered, of a pro rata payment from the purchaser in accordance with cl.4. The contract clearly contemplates that upon the sale of the wool (and unlike the shearing, the time for the sale of the wool is not specified), the proceeds would belong to the purchaser but her liberty to deal with those proceeds is limited in the manner provided to ensure that she will, when the time comes, pay the vendor for the sheep. It is true, no doubt, that the balance to the credit of her account with the Australian Mercantile Land and Finance Co. on the 12th August was attributable either wholly or in part to the crediting of the wool proceeds to that account, but, even in the events which happened, the whole of the net proceeds of the wool were not paid to the vendor by the purchaser. Nor was there any obligation on her part to do so. Her only obligation was to pay for the sheep delivered 147s. 6d. per head together with any further amount due in accordance with cl.4 - a liability that could only come into existence at the date of delivery. (at p571)

6. I think what the Commissioner seeks to do is to dismember one transaction, not because of its unreality but because it is only by doing so that the consideration which the respondent received can be regarded as having been derived partly in one year and partly in another. In Webster v. Deputy Federal Commissioner of Taxation (W.A.) [1926] HCA 52; (1926) 39 CLR 130 an attempt by a taxpayer to apportion the purchase price of sheep between the sheep and the wool they were carrying at the date of sale failed because, as Knox C.J. and Rich J. said, of the wool "the agreement in this case was not for the purchase of the wool on the sheep's backs, but for the purchase of the sheep" (1926) 39 CLR, at p 134 . The same is true here. (at p571)

7. It would be possible to stop here and merely answer in the negative the question stated, that is: - "Is the amount of 12,496 pounds referred to in par. 15 hereof or any part thereof assessable income of the respondent of the year of income ended 30th June 1953, within the meaning of the Income Tax and Social Services Contribution Assessment Act 1936-1953?" To do so would involve the conclusion that the assessment appealed from was incorrect and that the Commissioner's appeal should be dismissed. The facts of the case do, however, give rise to a further and more difficult question - whether the income which the respondent derived from the sale of the sheep was derived in the year of income ended 30th June 1953 or in the following year. This I think it proper to decide. It may be that the question is not to be answered merely by determining whether the property in the sheep passed on the date of the contract or upon delivery, but it seems to me that such a determination must be an important consideration, and unless the property passed at the date of the contract so that on 30th June 1953 the sheep were the stock on hand of the purchaser, there seems to be good reason for treating the respondent as not having derived the income until the purchase price became payable. I turn, therefore, to the question of the date when the property in the sheep passed from the respondent to the purchaser. (at p572)

8. In favour of the conclusion that the property did not pass until delivery on 12th August 1953, there are the considerations (i) that the contract, although for the sale of specific sheep, (Goldsbrough, Mort & Co. Ltd. v. Carter [1914] HCA 80; (1914) 19 CLR 429 ) did not fix precisely the number of sheep sold; (ii) that a count on 1st July 1953 was required; (iii) that delivery was expressed to depend upon payment of the purchase price in full, cf. Smith Bros. v. Madden Bros. (1945) QWN 39, at p 43 ; (iv) that until payment in full the sheep were to be held by the purchaser "as agent only and upon trust for and at the disposal of the vendor or his agents"; and (v) that until delivery it could not be determined whether anything was payable under cl. 4 of the contract. (at p572)

9. From these things, it is apparent that there are strong grounds for treating the stock, if not resold in the meantime, as the property of the vendor on 30th June 1953 and for treating the whole of the consideration as derived after that date. (at p572)

10. In favour of the conclusion that the property in the sheep passed on 7th March 1953 when the contract was made, there are the considerations (i) that the purchaser was to shear the sheep, sell the wool as her own and receive and own the proceeds; (ii) that the purchaser was at liberty to sell the sheep before delivery to her; and (iii) that the vendor was given rights and subjected to obligations with respect to the running of the sheep before 1st July 1953 that would seem hardly to have been necessary had he retained ownership of the sheep. (at p572)

11. Weighing these competing considerations, I have come to the conclusion that it should be held that the parties intended that the property in the sheep should pass not at the date of the contract, but, in the events which have happened, upon the date of delivery. On this ground and because nothing became payable to the respondent under the contract until delivery and the amount he was entitled to receive as consideration could not be determined in advance of the date of delivery, I have reached the conclusion that the income which the respondent derived from the transaction was derived by him in the year ended 30th June 1954. (at p573)

12. Taking this view, it is proper to return to the proceeds of the sale of the wool and to state how I consider that the purchaser became entitled to the wool (and the proceeds thereof) cut from sheep that then, according to the decision I have reached, belonged to the respondent. My view is that upon the shearing of the sheep, the contract operated to entitle the purchaser to the property in the wool. There was not a sale of the wool by the respondent to the purchaser, but because the sheep were the subject of a contract of sale which provided that upon shearing the wool should belong to the purchaser, she, upon the sheep being shorn, obtained a primary and not a derivative title to the wool as a separate subject of ownership. I should perhaps add that upon my reading of the contract, the property in the sheep would have passed if the purchaser had, before delivery, resold them to a new purchaser. Whether the property would have passed directly from the original vendor to the new purchaser or have passed to the new purchaser through the original purchaser is something it is not necessary to decide. (at p573)

13. I think this case should be disposed of simply by answering the question in the case stated - No. (at p573)

ORDER