McFarlane v Federal Commissioner of Taxation [1925] HCA 2; (1925) 35 CLR 414 (7 April 1925)

HIGH COURT OF AUSTRALIA

McFarlane Appellant; and The Federal Commissioner of Taxation Respondent.

H C of A

7 April 1925

Knox C.J., Isaacs and Rich JJ.

Sir Edward Mitchell K.C. (with him Abrahams), for the appellant.

E. M. Mitchell, for the respondent.

Sir Edward Mitchell K.C., in reply.

Knox C.J.

The appellant, before the year 1908, carried on business as a grazier on a property known as "Glensloy." In that year he transferred portion of the land on which the business was carried on to his wife absolutely, and at the same time she made a will disposing of the land transferred in favour of the appellant or his appointees and entered into a covenant not to alter the will or deal with the land in any manner which might defeat or prejudicially affect the devise. Par. 4 of the special case is in the words following:—[His Honor read the paragraph.] I read this as meaning that the appellant had no right or title either legal or equitable to the possession of the land in question for any period, though he in fact occupied it until the year 1921 and continued till that time to use it in the business carried on by him as a grazier. In this state of facts the appellant has, in my opinion, failed to establish that in respect of his occupation of this land there was any asset of the business in existence at any relevant time, or that this land or any estate or interest in it formed part of the capital of the business within the meaning of the Act.

Both questions should be answered in the negative.

Isaacs J.

read the following judgment:—In my opinion, the determining factor of this matter is found in the concluding words of the fourth paragraph of the case stated. The taxpayer had, some years before the period of assessment, made a complete gift to his wife of certain land upon which he had been carrying on business. Contemporaneously there were two distinct arrangements made between them. One was of a strict and binding character, by which the wife made a will leaving the land to her husband, and also covenanted not to alter or revoke the will so far as it related to the land and not to deal with the land prejudicially to the devise. The other arrangement was quite informal, namely, that the husband should go on using the land as before, making improvements and taking all profits and proceeds from the land, and this without any particular period of time being mentioned. The husband did go on using the land for his business; and now the question arises whether he is entitled to regard the land in any way or to any extent as part of the capital within the meaning of sec. 17 of the War-time Profits Tax Assessment Act 1917-1918.

If it were not for the final clause of par. 4 of the case as stated, I might have had more difficulty in coming to the conclusion I have formed. The case of Doe d. Hull v. Wood[1], cited by Sir Edward Mitchell, might possibly have been applied but for that final clause (see Landale v. Menzies[2]). That is to say, the circumstances might have led to the implication of a tenancy, and a tenancy is both a contract and the creation of an estate (Whitehall Court Ltd. v. Ettlinger[3], approved in Matthey v. Curling[4]). But there cannot be a contract without the intention to make one. Two recent cases will exemplify this. In Balfour v. Balfour[5] the relationship of husband and wife so entered into the circumstances that the Court of Appeal concluded there was no contractual obligation intended by the parties. The domestic relationship indicated that the promise relied on as a contractual promise was merely friendly and non-enforceable. Again, in Rose & Frank Co. v. J. R. Crompton & Bros. Ltd.[6] an express clause inserted in an agreement, and stating that the arrangement was not entered into as a formal or legal agreement, affected the whole transaction and prevented it from being a contract (see the authorities cited by Scrutton L.J.[7] and the formulation of principle by Atkin L.J.[8]). Here the parties negative expressly their intention to enter into a binding agreement. The final clause of par. 4 excludes all fiduciary or contractual obligations in respect of the appellant's user of his wife's land. It might well be that the same conclusion would be eventually arrived at apart from that final clause. It is not improbable that a wife, who had just had a gift of the land for her life from her husband on condition that if she predeceased him he was to have it again, might in an obedient and friendly way assent to his occupying and using it without any idea of contractual obligation arising on either side. But I am relieved from considering that possibility by the express admission of the appellant that no "binding agreement" was intended. That circumstance dominates the transaction; for, as was said in Smith v. Overseers of St. Michael, Cambridge[9], "we must look not so much at the words as the substance of the agreement."

The substance being outside all legal and equitable obligations, the arrangement was nothing in substance but an authority to use by way of loan—so far as that expression can be applied to an immovable—and to return when desired by either party. That being the position in fact, how does the case fall with respect to sec. 17 of the Act? In my opinion, the land was not, nor was any interest in it, "capital" within that section. "Capital" there, apart from accumulated profits and balances brought forward, may be shown if "the owner," that is, the owner of the business, has paid it up either in "money or in kind." If paid up in money, that money is capital of the business. If capital is not paid up in money, but is represented by some "asset"—which necessarily means an asset belonging to the owner of the business, something which represents money by reason of its value—then sub-sec. 4 applies. It provides that, where any asset has been (1) paid for otherwise than in cash, or (2) created or (3) acquired without purchase, then its value shall be taken to be its value at the time the asset was (a) created or (b) acquired. Now, the word "created" can only apply to a bringing into existence; as, for instance, the building of a store, or the sinking of a well, and so on. The word "acquired" is used to include two cases. The first is where an asset has been paid for otherwise than in cash; and this implies a purchase though not for money. The second is where the asset has been acquired without purchase, as by inheritance or gift. But the asset must be "created" or "acquired" by the owner of the business. In the circumstances of this case, what is the "asset" which in any reasonable sense the taxpayer has "acquired"? The friendly authority to use the land, terminable instantly and referable to no legal relation, could not lead to the "acquisition" of anything in the nature of a capital asset in or appertaining to the land. It was suggested that Perry v. Clissold[10] lent authority for the contrary view. But there the possession was, as Lord Macnaghten said[11], "in the assumed character of owner." There are other distinctions between that case and this, but the words quoted are sufficient to make the case inapplicable.

In my opinion the questions should be answered in the negative.

Rich J.

It is unnecessary, in my opinion, to label the nature of the precarious occupation of the subject land by the appellant. Clause 4 of the special case precludes the creation of any legal or equitable rights and obligations, express or implied. Consequently I am at a loss to understand how any asset capable of estimation has been acquired by the appellant within the meaning of sec. 17 (4) of the War-time Profits Tax Assessment Act.

I answer both questions in the negative.

Both questions answered in the negative.

Solicitors for the appellant, Gordon, Garling & Giugni, Young, by H. C. M. Garling.

Solicitor for the respondent, Gordon H. Castle, Crown Solicitor for the Commonwealth.

[1] [1845] EngR 1213; (1845) 14 M. & W. 682.

[2] (1909) 9 C.L.R., at p. 129.

[3] (1920) 1 K.B. 680.

[4] (1922) 2 A.C. 180.

[5] (1919) 2 K.B. 571.

[6] (1923) 2 K.B. 261.

[7] (1923) 2 K.B., at pp. 288, 289.

[8] (1923) 2 K.B., at p. 293.

[9] [1860] EngR 1214; (1860) 3 E. & E. 383, at p. 390.

[10] (1907) A.C. 73.

[11] (1907) A.C., at p. 79.