Milne v Federal Commissioner of Taxation [1976] HCA 2; (1976) 133 CLR 526 (11 February 1976)

HIGH COURT OF AUSTRALIA

MILNE v. FEDERAL COMMISSIONER OF TAXATION [1976] HCA 2; (1976) 133 CLR 526

Income Tax (Cth) - Practice

High Court of Australia
Barwick C.J.(1), McTiernan(2), Gibbs(3), Stephen(4) and Murphy(5) JJ.

CATCHWORDS

Income Tax (Cth) - Assessable income - Proceeds of profit-making undertaking or scheme - Payments to holder of forestry bond - Payments representing share of proceeds of thinning and felling - Whether income under ordinary conceptions - Whether profits arising from carrying on or carrying out of profit-making undertaking or scheme - Income Tax Assessment Act 1936-1973 (Cth), ss. 25, 26(a).

Practice - Precedent - High Court - Decision in &which members of Court equally divided - Absence of subsequent legislation affecting matter determined by decision.

HEARING

Adelaide, 1975, September 19;
Sydney, 1976, February 11. 11:2:1976
CASE STATED under s. 18 of the Judiciary Act 1903-1973 (Cth).

DECISION

1976, February 11.
The following written judgments were delivered:-
BARWICK C.J. The Supreme Court of South Australia, pursuant to s. 18 of the Court setting out the relevant facts, of which the following are basic to the resolution of the questions posed for decision. (at p529)

2. In 1930 the appellant, George Devereux Milne, applied for a forestry bond of the 1928 series issued by South Australian Perpetual Forests Ltd. ("the company"), a company incorporated under the Companies Act, 1892 (S.A.) by its former name of Perpetual Pine Forests Australia Ltd., with memorandum and articles of association. The seedling radiata pines were planted on land either owned by the company or leased by it from the Crown. (at p529)

3. The procedure followed by the company was to issue a series of bonds either at a face value or at a premium on the face value, the price being payable in instalments, by which the company promised the bondholder to plant, tend and maintain softwood plantations on described land for a period of twenty years or such shorter period as the bondholders through the trustees should direct. The company reserved the right to thin the plantation, the net proceeds of the thinning being payable to the trustees for the benefit of the bondholders. The bond incorporated as part of the company's obligation the contract entered into by the company with the trustees of a trust deed. By the terms of the bond, each bondholder became entitled as tenant in common with the other bondholders of the same bond series to one acre of freehold land in the described area of land. But the title to the entire area of the land remained vested in the company. (at p529)

4. The parties to the trust deed to which the bond made reference were the company and two persons named as trustees. With the trustees the company covenanted, amongst other things, to observe and perform the terms and conditions contained in the bonds, to do various specific things in the maintenance and protection of the plantations, to establish a "maintenance fund" out of the proceeds of the sale of bonds, to tend and supervise the plantations, taking all requisite measures in accordance with the best principles of forestry for the protection and preservation therof and to report to the trustees at stated times on the company's operations in respect of the plantations. The trustees for their part covenanted to make payments to the company out of the maintenance fund in a manner and at times stipulated. They were empowered to exercise on behalf of bondholders the rights given them by the deed, to invest moneys in their hands not immediately required for the performance of their obligations and to require the realization of the land on which the plantations were established whenever they were of opinion that such a course would best serve the interests of bondholders, the deed containing provisions for ascertaining the wishes of the bondholders as to the most desirable method of realization. They were also required when requested by a majority of bondholders to realize the property to which the bonds related. (at p530)

5. In respect of the 1928 series bond, the appellant received payments almost yearly from and including the year 1943 to the year 1973 which totalled the sum of $538.61 which included a sum of $30.64 payment in respect of the repurchase by the company of the land rights to which the 1928 bond series related. Apart from this sum of $30.64, the sums paid to the appellant represented the share appropriate to the bond held by him of the thinning and felling of the timber on the plantation to which the 1928 bonds series related. (at p530)

6. In 1937 the appellant took up a bond in the 1936 bond series issued by the company. This bond was in similar terms to those of the 1928 bond series with the one exception that there was no entitlement to each bondholder as tenant in common with the other bondholders of the same bond series to one acre of freehold land in the described area of land. A trust deed was entered into by the company with two persons nominated as trustees. The provisions of this deed were substantially the same in relevant respects as those of the earlier deed except that the company, in respect of bonds which required it so to do, was to carry out certain grazing work and pay to the trustees the proceeds thereof for distribution amongst the bondholders of bonds which contained the obligation to carry out grazing work. (at p530)

7. In respect of the bond in the 1936 bond series, the appellant received in almost every year from and including the year 1956 to and including the year 1973 amounts which totalled $343.15, being the proceeds of the thinning and felling of the plantations and perhaps, though the matter is not expressly evidenced, including proceeds of any use made of the land for grazing. The cost to the appellant of the bond in the 1928 series was $60.40 and of the bond in the 1936 series $75.00. (at p530)

8. The respondent included in the assessable income of the appellant for the year ending 30th June 1973 the sums of $4.70 and $94.80, being the amounts received by the appellant in that tax year in respect of the bond in the 1928 bond series and of the bond in the 1936 bond series respectively. (at p530)

9. An objection by the appellant to these inclusions in the assessable income having been disallowed, the appellant's objections were treated as appeals and forwarded to the Supreme Court of South Australia. Hence the present stated case by which the learned judge of the Supreme Court of South Australia asks whether on the facts stated he is at liberty or bound to find: (1) that the amounts received by the appellant during the year ended 30th June 1973 from the forest company with respect to the bond and covenant or either of them held by the appellant are income in the hands of the appellant and therefore assessable against the appellant under s. 25 of the Income Tax Assessment Act 1936, as amended ("the Act"); (2) that the amounts received by the appellant during the year ending 30th June 1973 from the forest company with respect to the bond and covenant or either of them held by the appellant are not income in the hands of the appellant and therefore are not assessable against the appellant under s. 25 of the Act; (3) that the said amounts or either of them are assessable income in the hands of the appellant being profits arising from the carrying on or carrying out of a profit-making undertaking or scheme under s. 26(a) of the Act; (4) that the said amounts or either of them are not assessable income in the hands of the appellant not being profits arising from the carrying on or carrying out of a profit-making undertaking or scheme under s. 26(a) of the Act. (at p531)

10. This Court decided the case of Clowes v. Federal Commission of Taxation [1954] HCA 10; (1954) 91 CLR 209 in April 1954. The case concerned the assessability as income of the proceeds of a forestry bond. The Court was composed of four Justices. They were evenly divided in opinion as to the result of the taxpayer's appeal. But, by reason of s. 23(2) of the Judiciary Act 1903, as amended, the opinion of the Chief Justice, who presided, prevailed. Accordingly, an order was made allowing the taxpayer's appeal and reducing the assessment by the amount which represented the sums received in the year of income as proceeds of the forestry bond. The Commissioner in that case sought to treat the difference between the price paid for the bonds and the total amount paid in the tax year out of the proceeds of the marketing of timber produced upon the lands to which the agreements related, as income in the year in which that amount or any part of it was received. (at p531)

11. Dixon C.J. and Kitto J. were of opinion that the sums received were not assessable income. Webb and Taylor JJ. were of a contrary opinion. (at p531)

12. Dixon C.J. said (1954) 91 CLR, at pp 216-217 :

"From the taxpayer's point of view he laid out a sum of
money entitling him at the end of a protracted period of
time to an uncertain return in a lump sum which he hoped
might prove larger than his outlay though it might well
prove smaller".

In answer to a submission that there was " 'one profit-making undertaking or scheme, to which those who entered into contracts with the company' ", i.e. the forestry company, " 'were parties...' " (1954) 91 CLR, at p 217 , his Honour said:

"When s. 26(a) speaks of the carrying on or carrying
out of a profit-making undertaking or scheme it means the
carrying on or out by the taxpayer or on his behalf...To
enter into a contract to provide a specified sum...and then
to await results cannot in my opinion be properly described
as 'carrying on or carrying out a scheme or undertaking'.
If the case is considered apart from s. 26(a), then I think
the taxpayer's gain should be held to be a mere enlargement
of capital. In the case of each of the two contracts,
a single sum was paid in the expectation or hope of the
return of a single sum, an increased sum. From the taxpayer's
point of view it was nothing but a casual investment
of capital in hope of enlargement at the end of many years.
It was not done in the course of the taxpayer's business.
There is no suggestion that it formed part of any system
or practice." (1954) 91 CLR, at pp 217-218 (at p532)

13. Kitto J., after referring to the facts of the case, which as I shall point out, are indistinguishable in relevant structure from those in the stated case, said:

"These being the relevant facts, the case, considered from
the appellant's point of view, is one of a purchase of a
right to receive a fixed proportion of a future fund as to
which everything was uncertain. Whether the fund would
ever come into existence; when it would come into existence
if it ever should; and in that event how much it
would be; all these things were uncertain; and consequently
the purchaser, when he laid out his purchase money,
accepted the risk that it might be lost wholly or in part,
and by the same token gave himself the chance that it
might return to him augmented after a period of years.
The risks were quite serious: the trees might be inexpertly
planted or unwisely tended; the land or climate might prove
unsuitable for them; fire might destroy them; and, even if
everything else should go well, the timber might have to be
sold on a depressed market and the lot-holders might for
that reason get back less than they had put in or nothing
at all. Nevertheless, to the appellant and the other lotholders
it must have seemed that the chance of a profit
was sufficiently bright to justify the risk of loss. In the event,
it was a profit and not a loss that was realized. If there had
been a loss, it would have been a loss of capital, beyond all
question. Is not the profit likewise to be conceded a capital
nature?" (1954) 91 CLR, at pp 221-222

In relation to the submission based on s. 26(a), his Honour said:

"The scheme is said, according to one form of the argument,
to have consisted of the investment of $150, upon the
terms of the agreements of 1926 and 1929, for the purpose of
deriving a profit from the carrying out by the company of
the profit-making scheme which it had evolved. This contention
must be rejected because a profit to which s. 26(a)
applies, since it must be a profit arising to the taxpayer,
must be a profit arising from the carrying on or carrying
out by him or on his behalf of an undertaking or scheme,
that is to say by him or on his behalf either alone or with
others. The appellant's profit cannot be said to have arisen
to him from the carrying out by the company of its scheme.
The entire net proceeds of marketing the timber constituted
a profit which arose therefrom, but it arose to the company;
and the payment of the $210 by the company to the appellant
was simply the agreed application by the company
of a proportionate part of that profit, so that the $60 profit
arose to the appellant from his investment and not from
the carrying out of the company's scheme." (1954) 91 CLR, at p 224. (at

p533)

14. It is true that on the theory of judicial precedent, a case decided by what is sometimes styled "a statutory majority" forms no precedent. But the views expressed by Dixon C.J. and Kitto J. have been acted upon by the Commissioner and taxpayers alike for twenty-one years. Though it may not bear on the construction or application of the Act, the fact is that, though it has amended the Act about twice in each intervening year, the Parliament has not seen fit to intervene. (at p533)

15. However, the Commissioner now seeks from this Court a contrary decision, even if the facts of the present case are indistinguishable from those in that case. He also seeks to distinguish those facts in what he claims are relevant respects. (at p533)

16. The difference in the two sets of facts is said to lie in the circumstance that in the former case the payment received by the taxpayer was a single lump sum, whereas here the total recovery of the appellant was in annual or almost annual sums. But it is erroneous to insist that the return to the taxpayer in the former case was only of one sum though in truth there was only one sum paid in the year in question. There is nothing in the facts of that case to suggest that the only sum which the agreement was to produce for the lot holder was that single sum. It is highly unlikely that a lot in a plantation, where progressive thinning and felling could be expected to take place, would produce only one sum. Of course, in dealing with an annual period for tax purposes, only the sum received in that year could be dealt with: and, in any case, the detail of the operations of the forestry company were treated by the parties as immaterial (1954) 91 CLR, at p 216 . I am unable to accept the submission that in this respect any valid distinction can be drawn between the two sets of facts. The character of the proceeds of these bonds cannot depend on whether they are paid in one or in more than one amount. If when paid in one sum they do not constitute income, they will not do otherwise if paid in instalments. (at p534)

17. It was then said that, in the present case, the trustees, as agents of the bondholders, could participate in the control of the company's operations so as to be participants in the company's profit-making scheme, whereas in the former case, to quote Dixon C.J.'s words: "It", the forestry company, "made the contract", i.e. with the lot holders, "for its own advantage and in performing it acted independently of the direction or control of any lot holders, whose relationship to the company was simply that of persons providing it with money on special terms" (1954) 91 CLR, at p 217 . But, whilst there may be this difference in the two situations, I am unable to accept that the trustees' power to direct realization of the lands of the plantations involved the bondholders in any participation in the company's business. That business consisted in the selling, as the case stated says, of its covenants, i.e. its obligations assumed towards the bondholders by the bonds and the trust deed. The bonds were sold at a price for a profit to the company. The profit it sought was quite unrelated to the gain the bondholders stood or hoped to make. In no relevant sense did the bondholders join in that profit scheme of the company. Accordingly, in my opinion, the basic facts of the former case and this case are indistinguishable. (at p534)

18. I turn then to consider whether the views of Dixon C.J. and Kitto J. are now unacceptable or those of Webb and Taylor JJ. are to be preferred: or whether, neither being acceptable, it should be decided that for some other reason the sums now in question ought to be held to be assessable income. (at p535)

19. After due consideration, I feel bound to say that I am not convinced by the reasons proffered by the former case by Webb and Taylor JJ. The nub of their Honours' view is, as expressed by Taylor J. (1954) 91 CLR, at p 232 :

"But once it be accepted that the carrying out of a profit-making
scheme does not necessarily involve a series or repetition
of acts I fail to see why the investment of a sum of
money for the purpose of securing to the investor an aliquot
share of the net profits of a business undertaking should
not itself, be regarded as a profit-making scheme or plan."

This is a statement I am unable to accept. I agree with Kitto J. that, if that proposition were accepted, a contract of life assurance would be a profit-making scheme. (at p535)

20. Nor can I accept that the presence in the company's obligations under the bond of the promise to plant further parts of the land connected the taxpayer with the company's profit-making undertaking or scheme. I have already indicated what I regard as the company's scheme of making for itself a profit by the sale of the bonds. (at p535)

21. I am in agreement with the analysis made by Dixon C.J. and Kitto J. in the passages from their respective reasons which I have quoted. Whether or not an acquisition of an interest in land be regarded as involved in the purchase of a bond, it seems to me that the appellant had no scheme or plan other than to participate in the result of the company's covenanted activities on the land by way of capital increment to the amount invested in the bond. Of course, the bondholder hoped for a gain: but, in my opinion, he had no scheme of profit-making. (at p535)

22. In my opinion, the same result should follow in this case as resulted in Clowes V. Federal Commissioner of Taxation [1954] HCA 10; (1954) 91 CLR 209 . The questions in the stated case should be answered favourably to the taxpayer. (at p535)

McTIERNAN J. Notwithstanding the forceful argument of Mr. Matheson I see no reason to depart from the decision in Clowes V. Federal Commissioner of Taxation [1954] HCA 10; (1954) 91 CLR 209 . I would answer the questions asked in this stated case in favour of the taxpayer. (at p535)

GIBBS J. I have had the advantage of reading the reasons for judgment prepared by the Chief Justice and am in agreement with them. I would accordingly answer questions 1 and 3 "No" and questions 2 and 4 "Yes". (at p536)

STEPHEN J. I would answer the questions asked in this stated case in a sense favourable to the taxpayer and would do so for the reasons appearing in the judgment of the Chief Justice. (at p536)

MURPHY J. I will not repeat the facts. Although there are some differences, the facts are sufficiently close to those in Clowes V. Federal Commissioner of Taxation [1954] HCA 10; (1954) 91 CLR 209 that this case should not be distinguished from it. In Clowes' Case this Court was evenly divided, the opinion of Dixon C.J. and Kitto J. prevailing by virtue of s. 23(2) of the Judiciary Act 1903 over the dissent of Webb and Taylor JJ. That decision has stood for more than twenty years. Parliament has not seen fit to alter the Income Tax Assessment Act 1936 in such a way as to overcome the effect of that judgment. I see no reason to depart from Clowes' Case. (at p536)

2. It follows that the questions in the stated case should be answered: (1) No. (2) Yes. (3) No. (4) Yes. (at p536)

ORDER

The questions asked in the case stated are answered as follows:
1. Are the amounts received by the appellant during the year ended the 30th June 1973 from the forest company with respect to the bond and covenant or either of them held by the appellant income in the hands of the appellant and therefore assessable against the appellant under s. 25 of the Income Tax Assessment Act 1938 (as amended)?
Answer: No.
2. Are the amounts received by the appellant during the year ending 30th June 1973 from the forest company with respect to the bond and covenant or either of them held by the appellant not income in the hands of the appellant and therefore not assessable against the appellant under s. 25 of the said Act?
Answer: Yes.
3. Are the said amounts or either of them assessable income in the hands of the appellant being profits arising from the carrying on or carrying out of a profit-making undertaking or scheme under s. 26(a) of the said Act?
Answer: No.
4. Are the said amounts or either of them not assessable income in the hands of the appellant not being profits arising from the carrying on or carrying out of a profit-making undertaking or scheme under s. 26(a) of the said Act?
Answer: Yes.

Remit case to the Supreme Court of South Australia for determination in accordance with the answers given.

Commissioner to pay appellant's costs of the case stated.