Victoria Park Racing & Recreation Grounds Co Ltd v Federal Commissioner of Taxation [1934] HCA 65; (1934) 52 CLR 9 (20 December 1934)

Victoria Park Racing and Recreation Grounds Company Limited Appellant; and The Federal Commissioner of Taxation Respondent.

Sec. 5 (1) of the Income Tax Act 1931, provides that, in addition to income tax otherwise payable, there shall be payable a further income tax of ten per cent of the amount of the taxable income derived by any person from three specified sources. The first source is property. The second is by way of interest, dividends, rents or royalties; and the third source, with which we are concerned in this appeal, is "in the course of carrying on a business, where the income is of such a class that, if derived otherwise than in the course of carrying on a business, it would be income from property." In our opinion, sec. 5 (1) (c) refers to a class of business income. It is the class made up of those items of business receipts which, but for their association in fact with the business activities of the taxpayer, would be properly regarded as income from property. In the case of any disputed item of such business income, the Court is therefore required to dissociate the item from the particular business of the taxpayer, in order to ascertain the class to which the item is to be referred for the purpose of the sub-paragraph. If such dissociation is not reasonably possible or practicable, we think that the sub-paragraph does not operate at all. If it is reasonably possible or practicable, the Court must assume such dissociation, and then determine whether the item in dispute would be income from property.

(a)

The bookmaker's fees are items of the taxpayer's business receipts which cannot reasonably or practicably be treated as severed from the taxpayer's business of conducting race meetings. The fees are collected, not by the taxpayer, but by an association to which the taxpayer belongs. It is true that the taxpayer allots a suitable position within a betting-ring to individual bookmakers, but the case suggests that the bookmaker makes no claim to occupy any particular position in the betting-ring. In other words, the licence or permit which the bookmaker obtains to carry on his business is so closely associated with the taxpayer's business activities, and so little associated with the taxpayer's occupation of the racecourse that sec. 5 (1) (c) does not apply to the items of income so received.

(b)

The receipts in respect of catering rights belong, in our opinion, to a different category. The successful tenderer for such rights obtains the right of using the liquor bars and soft drinks kiosk, forming part of the company's land and premises. Such right is described in the contract as "the exclusive right of all those the rooms and appurtenances known as the liquor bars and soft drinks kiosk forming portion of the Company's premises situate at Zetland in the State of New South Wales in the Grand Stand Saddling Paddock and Leger Reserve respectively for Race and Trotting Meetings of the said Company to be held from January 1st to December 31st 1930 at the fee and subject to the terms and conditions hereinafter mentioned." The precise nature of the tenderer's occupancy was discussed in argument, but it is sufficient to say that the income received in respect of the use of the land and premises by the successful tenderer can be dissociated from the conduct of the taxpayer's business. Indeed, it is quite reasonable to suppose cases in which the power to confer such rights of catering would be in the hands of persons other than those conducting the race meetings themselves. The moneys paid for the enjoyment of this right, unlike those paid by the bookmakers, are income of a class which the taxpayer might receive as owner of the land if it were not an entrepreneur of horseracing. When dissociation from business activities is made, as the sub-paragraph requires, the income receipts stand revealed as income derived from the exclusive right of using portion of the land and premises upon certain occasions throughout the year. Although the motive for such use by the caterer is to attract the custom of the racegoers, the items of income so derived appear to us to be properly regarded as income from property.

(c)

The training-fees are fees collected by the appellant from horse trainers or owners for permitting them to train the horses on the appellant's racecourse on days other than race days. Such items of income can be dissociated from the appellant's business of conducting race meetings, and are more closely related to the appellant's ownership of property. If the dissociation is made as the sub-paragraph requires, the income would be income from property.

In our opinion, the case stated should be answered as follows:—(1) As to the items of revenue referred to in pars. 11 (a) and 11 (d): Yes. As to the items of revenue referred to in pars. 11 (b) and 11 (c): No. (2) As to the items of revenue referred to in pars. 11 (a) and 11 (d): No. As to the items of revenue referred to in pars. 11 (b) and 11 (c): Yes.

I have read the judgment of my brother Dixon and agree with it. I answer the questions submitted: (1) Yes; (2) No.

Case stated for the opinion of this Court pursuant to the provisions of the Income Tax Assessment Act 1922-1931. The facts are fully set out in the case, but they may be summarized as follows:—The appellant is a racecourse proprietor, and conducts race meetings at Victoria Park. It is also a member of an association called "The Associated Racing Clubs." This association regulates and controls horse and pony racing on the courses of its members. It regulates, amongst other matters, the registration of bookmakers and their clerks, the licensing of bookmakers to conduct the business of bookmaking on the courses of its members, and the fees to be paid in respect of such registration and licensing. It pays to the appellant one-fourth of the net fees which it receives from these sources. The appellant allots and regulates the positions on its racecourse which the licensed bookmakers may use in the conduct of their betting operations. Further, the appellant grants the right of selling refreshments—catering rights—on its racecourse to various tenderers, in consideration of certain sums paid by the tenderers to it. It grants the tenderers the exclusive right of using refreshment rooms and liquor bars on race days during the period of the arrangement, but retains extensive powers of supervision and control. The appellant has constructed training tracks on its racecourse. It permits owners and trainers of horses to use these tracks for the purpose of training their horses, and charges them fees for using the tracks.

The Commissioner has assessed the appellant to "further income tax" under the Federal Income Tax Act 1931, No. 24, sec. 5, in respect of income received by it from the registration and licensing of bookmakers, the catering rights, and the training tracks, after allowing certain deductions which are not in contest here. The question is whether he was right in so doing, and that depends upon the construction of the section. It provides: "(1) In addition to any income tax payable under the preceding provisions of this Act, there shall be payable upon the taxable income derived by any person—(a) from property; (b) by way of interest, dividends, rents or royalties, whether derived from personal exertion or from property; and (c) in the course of carrying on a business, where the income is of such a class that, if derived otherwise than in the course of carrying on a business, it would be income from property, a further income tax of ten per centum of the amount of that taxable income."

Admittedly, apart from this section, the income in question here would have fallen within the description of income from personal exertion, for it is the proceeds of a business carried on by the appellant. (See Income Tax Assessment Act 1922-1934, sec. 4, "Income from personal exertion.") But the object of sec. 5 of the Act No. 24 of 1931 is to enlarge the definition of "income from property" which under the Income Tax Assessment Act 1922-1934, sec. 4, means "all income not derived from personal exertion." "Income from personal exertion" does not include interest, unless the taxpayer's principal business consists of lending money, and does not include rents and dividends (Income Tax Assessment Act 1922-1934, sec. 4). But sec. 5 of the Act No. 24 of 1931 includes, for the purposes of that section, interest in cases in which the taxpayer's principal business consists of lending money. The provisions of sec. 5 (1) (a) and (b) are, however, inapplicable to the facts of this case, so we come to sec. 5 (1) (c), which is the provision relied upon by the Commissioner.

The income was derived in the course of carrying on a business But is it of such a class that if derived otherwise than in the course of carrying on a business it would be income from property? Segregate the items assessed from the business, says the Commissioner, and then ascertain whether they are not of a class that would be income from property. All income that is not income from personal exertion must be income from property, and subject to the special tax. But whether the income is income from personal exertion or income from property must depend upon its essential characteristics. In the Commissioner's view, the essential characteristic of the income in question here is that it is derived from land, from the right to go upon the appellant's land or racecourse and conduct operations there. But in my opinion the real characteristic of the income is that it is derived from permission to carry on certain callings or operations in conjunction with the appellant's undertakings or race meetings, and in substance is not a payment for the use of the appellant's land or racecourse.

The questions for our decision arise under par. (c) of sub-sec. 1 of sec. 5 of the Income Tax Act 1931. Sec. 5 (1) is as follows:—"In addition to any income tax payable under the preceding provisions of this Act, there shall be payable upon the taxable income derived by any person—(a) from property; (b) by way of interest, dividends, rents or royalties, whether derived from personal exertion or from property; and (c) in the course of carrying on a business, where the income is of such a class that, if derived otherwise than in the course of carrying on a business, it would be income from property, a further income tax of ten per centum of the amount of that taxable income."

This provision contains many difficulties. The first to present itself is in the expression "taxable income." By sec. 4 of the Income Tax Assessment Act 1922-1931 which is incorporated and to be read as one with the Income Tax Act 1931 (see sec. 2) the words "taxable income" mean the amount of income remaining after all deductions allowed by the Income Tax Assessment Act have been made. It is difficult to believe that in sec. 5 (1) the expression should be given this meaning. It appears to refer to that part of the taxable income which is attributable to the sources described in pars. (a), (b) and (c). But as it most certainly refers to net income and not gross, a question at once arises how the total deductions made from the total assessable income are to be allocated or distributed in arriving at the net income which should be attributed to these sources. By sec. 23 (2) of the Income Tax Assessment Act directions are given for the solution of the similar but by no means identical question which arises in the discrimination between tax upon income derived by individuals from property and tax upon income derived by them from personal exertion. But no directions are given which apply to sec. 5 (1) (b) and (c) of the Income Tax Act. Probably in cases falling under par. (a) of sec. 5 (1) the provisions of sec. 23 (2) of the Income Tax Assessment Act do apply. But, as to the rest, apparently for such items of expenditure as are not by their very character connected with income, some method of apportionment must be adopted. Fortunately in the present case the taxpayer has accepted the method which the Commissioner has applied in allocating disbursements. But, if the words "taxable income" are not to receive their defined meaning, ought it not to follow that the words following "taxable," namely "income derived by any person from property" should be treated as a compound expression possessing its defined meaning? This expression is defined by sec. 4 of the Income Tax Assessment Act to mean all income not derived from personal exertion. Except for what par. (b) contains, there is no reason why the expression should not be so understood. Par. (b) expressly includes interest, dividends and rents. But, by the definition of income from personal exertion in sec. 4 of the Income Tax Assessment Act, that category does not include interest unless the taxpayer's principal business consists of the lending of money and does not include rents and dividends These forms of income are accordingly income from property. To apply the statutory meaning, therefore, involves a duplication in the inclusion in par. (b) of dividends, rents and all interest. But redundancies are not uncommon in a statute. This duplication does not appear to me to be sufficient ground for excluding the application of the statutory definition of income from property. The result is that all that par. (b) adds to what is already contained in par. (a) is interest when the taxpayer's principal business consists of the lending of money and royalties. Moreover, income from royalties will seldom be income from personal exertion unless they are derived as the result of some activity which has many, if not all, of the characteristics of business. It is difficult, therefore, to see what par. (b) achieves. For so much of what it deals with as does not fall under par. (a) would almost certainly fall under par. (c) which relates to income derived in the course of carrying on a business. It does, however, help to illustrate the meaning of the vague language in which par. (c) is expressed. Par. (b) enumerates kinds of revenue which ordinarily arise from property, but which nevertheless are capable of being so earned that they form part of a taxpayer's income from personal exertion. They are, prima facie, income from property, because they flow from a fund. In the case of interest, the fund is invested on loan, in the case of dividends, it is invested in shares, in the case of rent, in land, and in the case of royalties in some other form of property, e.g. mines. These sources of income usually involve no substantial exertion by the taxpayer. But if he acquires the sources of income as part of an organized and systematic series of operations which he carries on as a business, as, for instance, the money lender or the stock and station agent derives interest, the taxpayer's exertions constitute a further source constituting the real cause of the derivation of the income which forms only part of the proceeds of his enterprise. Par. (c) of sec. 5 (1) appears to be framed as a general clause to bring all such income under the special tax which the section imposes. It describes the income to which it refers by two characteristics. First, it must be derived in the course of carrying on a business. Next, it must be of such a class that, if not so derived, it would be income from property. Now all income not derived from personal exertion is income from property, and, therefore, if any income actually derived from carrying on a business were conceived as income derived by the taxpayer but yet not derived from carrying on a business it would then fall within the class of income from property. But it is obvious that the paragraph does not mean to impose the special tax on all income from business, and, doubtless, it is for this reason that it introduces the conception of a class of income. It must be "income of such a class" that it would be income from property were it not for the fact that it is derived in the course of carrying on a business. The classification of the income is, therefore, the essence of the application of the provision. The paragraph does not demand the hypothesis that income is derived from property although its only source is carrying on a business. It is dealing with classes of income having defined characteristics. The income must be of a class which has a prima facie source taking it within the definition of income from property. When income of such a class is actually derived by a given taxpayer in the course of his business, then, although in his case he has obtained it by his exertions and not merely by his possession of its prima facie source, yet it is to be specially taxed like income from property. In my opinion the meaning of par. (c) would not be altered if it were expressed—"income derived by any person in the course of carrying on a business, if the income is of such a class that, when it is derived otherwise than in the course of carrying on a business, it is income from property."

The business of the taxpayer in the present case is that of conducting race meetings. In the course of that business it received income from fees, from bookmakers and their clerks, from contracts conferring catering rights and from fees payable by trainers and owners for the use of training tracks. The Commissioner has included all these receipts in the income upon which the special tax is imposed. He has done so on the footing that they are really payments made for the use of the land, and for this reason should be regarded as a class of income which, if not derived in the course of carrying on the racing business, would be income from property. In my opinion this view is erroneous.

The bookmakers' fees and those of their clerks are paid to an association formed by the taxpayer and three other racing bodies. The association licenses the bookmakers and together with the constituent bodies controls their conduct in carrying on their vocation. It distributes the net proceeds of the fees in four equal shares. The bookmaker does not pay for the use of the land as such. He pays in order that he may be allowed to ply his calling in connexion with the business carried on by the taxpayer and the associated bodies. The caterers differ from the bookmakers in having allotted to them a specific part of the taxpayer's premises which, no doubt, is arranged and fitted for the convenient supply of refreshments. But they obtain no exclusive occupation of this defined area. They are mere licensees. Moreover, they operate under a special executory contract requiring them to supply refreshments to the racegoers. The payment they make is not simply a consideration for the use of the premises. It is made in exchange for the opportunity of carrying on a business with the persons whom the taxpayer's enterprise brings to the course.

The use of the training tracks presents features which bring the revenue so produced more nearly within the provision. But the taxpayer provides the services of men who maintain the tracks and supervise the operations of those training horses so that they may be conducted without intrusion or disorder. The course is chosen as the training ground because it is the racecourse. The charges made are intimately connected with the business of racing conducted by the taxpayer and it is, in my opinion, wrong to consider them as belonging to a class of revenue which might be derived otherwise than in the course of conducting the undertaking.

For these reasons I think the questions in the special case should be answered: (1) Yes; (2) No.

Case stated answered as follows:—(1) As to the items of revenue referred to in pars. 11 (a) and 11 (d): Yes. As to the items of revenue referred to in pars 11 (b) and 11 (c): No. (2) As to the items of revenue referred to in pars. 11 (a) and 11 (d): No. As to the items of revenue referred to in pars. 11 (b) and 11 (c): Yes

Solicitor for the respondent, W. H. Sharwood, Crown Solicitor for the Commonwealth.

High Court of Australia

Victoria Park Racing & Recreation Grounds Co Ltd v Federal Commissioner of Taxation [1934] HCA 65; (1934) 52 CLR 9 (20 December 1934)

HIGH COURT OF AUSTRALIA