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High Court of Australia |
STEINBERG v. FEDERAL COMMISSIONER OF TAXATION ;
TRUSTEE OF JUDITH STEINBERG v. FEDERAL COMMISSIONER OF TAXATION ;
STEINBERG v. FEDERAL COMMISSIONER OF TAXATION (1975) 134 CLR 640
Income Tax
High Court of Australia
Mason J.(1),
Barwick C.J.(2), Menzies, Gibbs(3) and Stephen(4) JJ.
(THE RIGHT HONOURABLE MR. JUSTICE MENZIES died before judgment was delivered
in this case.)
CATCHWORDS
Income Tax - Profit arising from sale of property acquired for purpose of profit-making by sale - Identity of property acquired and property sold - Purchase of all shares in land-holding company as means of acquiring land - Voluntary liquidation - Distribution of company's assets in specie - Subsequent sale of land by individuals who received land as tenants in common - Calculation of profit - Evidence of taxpayer about purpose of acquiring land not accepted - Burden of proof - Income Tax Assessment Act 1936-1970, ss. 26(a), 190(b).Income Tax - Profit arising from carrying on or carrying out profit-making scheme - "Scheme" - Acquisition of property with intention of making profit - Manner in &which profit to be made not then decided - Company incorporated to acquire property - Voluntary liquidation - Distribution of company's assets in specie - Subsequent sale by individuals who received land as tenants in common - Participation by individuals in scheme - Income Tax Assessment Act 1936-1970, s. 26(a).
HEARING
Perth, 1972, September 8,11,14;DECISION
1973, May 4.
2. In 1949 Mr. Steinberg commenced to carry on in partnership with his two
brothers, Reuben and Matthew, the business of furniture
manufacturers. In
1953 the wives of the three partners, including Judith, Mr. Steinberg's wife,
became members of the partnership.
It then acquired a retail firm in Murray
St., Perth, and commenced to carry on a furniture retailing business under the
name of
Murray's Furnishing Stores. The business prospered until 1955 when
its turnover was $360,000 and its profit in excess of $28,000
for the year.
(at p644)
3. However, the firm then ran into difficulty. The premises in which it
carried on business were acquired by Woolworths Ltd. and
the partnership was
compelled to move to other premises. Thereafter its business fell away.
Within two years the turnover had fallen
to $250,000 and the profit to $11,000
per annum. It was then decided that the partnership should look for some
other income-producing
venture. (at p644)
4. In 1956 Mr. Steinberg had become acquainted with Percy Markham, a real
estate agent. In that year Mr. Steinberg became a member
of a syndicate
formed by Mr. Markham to acquire land at Gosnells, an outer suburb of Perth,
with a view to its resale at a profit.
Thereafter Mr. Steinberg, at Mr.
Markham's invitation, became a member of a number of syndicates formed for the
purpose of acquiring
land and re-selling it at a profit. The syndicates,
thirteen in all, were formed and carried on business in the succeeding years.
The last syndicate was formed in December 1969. Each syndicate acquired a
large parcel of land in outlying suburbs of Perth; the
land was unsubdivided
land. Without exception the syndicates were profitable, some exceedingly so.
The profits thus made formed
part of the assessable income of the syndicate
members and were disclosed as assessable income in the partnership and
individual
tax returns. In some instances Mr. Steinberg held his interest in
the syndicate as a nominee for Murray's Furnishing Stores, sometimes
in his
own right and in one case as a nominee for his wife and himself. (at p645)
5. In addition Mr. Steinberg became a member of a syndicate which acquired
land at Kelmscott with his wife, his brothers and their
wives in 1967. The
land was sold at a profit in subdivision. In the same year with his wife and
two sons Malcolm and Gordon he formed
a syndicate which acquired land at Swan
View. In 1969 he formed two syndicates in which his wife and a family
company, as well as
himself, and in one case his two sons, were members. One
syndicate acquired land at Gosnells which was sold at a profit and the
other
acquired land at Kelmscott which is still held. (at p645)
6. In 1963 on the advice of his accountant Mr. Eli Rhine, steps were taken by
Mr. Steinberg to reorganize his affairs so as to reduce
his liability to
income tax and for estate planning purposes. These steps, which I shall set
out in detail, resulted in a change
in the membership of the partnership of
Murray's Furnishing Stores. Mr. Steinberg was advised that he and his wife
should transfer
their assets to a new partnership, M.J.S. Investments, and
that a number of discretionary trusts should be created to become members
of
that partnership. (at p645)
7. With this end in view, eighteen deeds of trust were executed on 1st June
1963. Mr. Rhine was the trustee appointed under each
deed. Judith Steinberg
was the settlor under three deeds of trust, including the Judith Steinberg No.
2 Trust. In each case the
sum of fifty dollars was settled on the trustee who
was given power to enter into a partnership, in addition to power to invest.
The trustee was required until the expiration of eighty years to hold the
trust fund upon trust to divide or apply the whole of the
income between all
or any of the persons living and included in the class of beneficiaries
mentioned in the Schedule to each deed
in such proportions and in such manner
as he in his absolute discretion might think fit. Subject to these
provisions, the trustee
was directed to hold the capital and income upon trust
for the members of the class living at the end of eighty years. The trustee
was given power to pay or apply the whole of the trust fund to any one or more
of the beneficiaries before the expiration of the
eighty years (cl. 1). Power
was conferred on Mr. Steinberg or his wife to remove trustees and appoint new
trustees (cl. 7). (at
p646)
8. The beneficiaries of the Judith Steinberg No. 2 Trust were expressed to
include the husband, children (except Gordon Steinberg)
and remoter issue of
Judith Steinberg. There were variations in the description of the class of
beneficiaries under each of the
deeds, but they included the children of Mr.
Steinberg and his wife, sometimes excluding one of the children and sometimes
including
Mrs. Steinberg, although she was not a beneficiary under the three
deeds under which she was a settlor. (at p646)
9. On the same day a deed of partnership was executed between Mr. Steinberg,
Mrs. Steinberg and Mr. Rhine as trustee of the eighteen
trusts. The business
of the partnership was expressed to be general dealers and investors. The
capital was $1,000. The deed provided
that the partners should be deemed to
hold units in partnership. The units were divided into two classes, A units
and B units. (at
p646)
10. The deed of partnership provided that Mr. Steinberg and his wife were
each to hold fifty dollars in A units and that Mr. Rhine
as trustee of each of
the trusts was to hold fifty dollars in B units. The A units carried the right
to cast fifty-one per cent of
the rights exercisable at every general and
committee meeting of partners, but in other respects they carried limited
rights. The
holders of A units were entitled to a preferential payment out of
the annual profits of an amount not exceeding ten per cent of the
nominal
amount of the A units held, but no further right to participate in the
distribution of profits. Likewise they were entitled
on a winding up to a
return in property of the original capital but no right to receive any
distribution in excess. (at p646)
11. On 1st June 1963 Mr. Reuben Steinberg, Mr. Matthew Steinberg and their
two wives agreed in writing to M.J.S. Investments, the
new partnership,
succeeding to the capital and interests of Mr. and Mrs. Steinberg in the
partnership of Murray's Furnishing Stores.
On the same day Mr. Steinberg sold
to M.J.S. Investments his one-sixth share in Murray's Furnishing Stores as at
that date for the
sum of $10,000 or such higher figure as the Commissioner of
Stamps might assess and Mrs. Steinberg likewise sold her one-sixth share
for
the sum of $19,600 or such higher figure as the Commissioner of Stamps might
assess. (at p647)
12. By a deed dated 1st July 1963 Mr. Steinberg sold to M.J.S. Investments
his 1,000 A class and 200 D class shares in Malgor Pty.
Ltd., together with
the shares which he held in a company known as Indoor Amusements Games Pty.
Ltd., for the sum of $32,400 or such
higher figure as the Commissioner of
Stamps might assess as the value for the purpose of stamp duty. On the same
day Mrs. Steinberg
sold to M.J.S. Investments her 500 B class shares. (at
p647)
13. As a result of these transactions the sole asset of the trusts was their
investment in the partnership M.J.S. Investments which
acquired the assets of
Mr. and Mrs. Steinberg including their interests in Murray's Furnishing
Stores. As Mr. Rhine explained in
his evidence profits earned by the
partnership Murray's Furnishing Stores would be distributed between its
members, including M.J.S.
Investments, and thereby to the trusts which were
members of that partnership. The consequence was that Mr. and Mrs. Steinberg
would
receive less income from Murray's Furnishing Stores than they would have
received had the arrangement not been made. (at p647)
14. By Act No. 110 of 1964 amendments were made to the Income Tax Assessment
Act which adversely affected the liability to income
tax of discretionary
trusts. On 24th July 1965 Mr. Rhine "liquidated" the trusts by making a
distribution of their assets, the B
units in M.J.S. Investments to each member
of the partnership as follows: To Mr. Steinberg 125 B units held by five
trusts, including
the Judith Steinberg No. 2 Trust; to Mrs. Steinberg 125 B
units held by five trusts; to Malcolm Steinberg 100 B units held by four
trusts; and to Gordon Steinberg 100 B units held by four trusts. The transfer
of the units was approved by the other partners in
Murray's Furnishing Stores.
The result was that the membership of the M.J.S. Investments partnership
consisted of Mr. Steinberg and
the three members of his family. M.J.S.
Investments continued to be a member of the Murray's Furnishing Stores
partnership, together
with Mr. Steinberg's two brothers and their wives. (at
p647)
15. An understanding of these arrangements is essential to an appreciation of the various appeals which arise for decision. As will appear, the affairs of the Steinberg family were to become more complex when Malgor Pty. Ltd., a company which Mr. Steinberg caused to be incorporated, acquired land at Rockingham and was subsequently wound up, the liquidator transferring the land in specie to the shareholders, and the members of the family acquired the share capital of Golden West Land Development Co. Pty. Ltd., a company which owned land at Wanneroo. This company also was wound up and its land transferred in specie to its shareholders. There is at this stage no occasion to deal with the history of the two companies; it is recounted more conveniently when I come to consider the appeals that relate to the profits made on the sale of the land at Rockingham and Wanneroo. (at p648)
The sale of land at Innaloo - appeal by the trustee of the Judith Steinberg
No. 2 Trust.
16. In February 1965 Murray's Furnishing Stores sold land at Innaloo, near
Perth, to the Grove Shopping Centre Ltd. for $100,400,
thereby making a profit
of $60,298. At that time M.J.S. Investments held a one-third interest in
Murray's Furnishing Stores, the
members of M.J.S. Investments being Mr. and
Mrs. Steinberg (each holding A units with limited rights) and the eighteen
trusts (each
holding B units), including the Judith Steinberg No. 2 Trust. (at
p648)
17. The profit was disclosed in the partnership income tax return lodged by
Murray's Furnishing Stores for the year ended 30th June
1965. It was claimed
that the profit did not form part of the assessable income of the partnership
on the ground that the land was
purchased for the purpose of developing it as
a site for a hotel and a shopping centre. It was said that the land was
ultimately
sold because the development contemplated could not be carried out
and because funds were required for the purpose of investing in
a land-owning
company called Golden West Land Development Co. Pty. Ltd. (at p648)
18. The trust was assessed to income tax for the year ended 30th June 1965 on
the footing that its share of the profit made on the
sale of the land at
Innaloo formed part of its assessable income for the year. Its taxable income
as returned was $378, to which
was added the sum of $1,124 reflecting its
share of the profit on the sale of the land, and the sum of $1,658
representing the trust's
share of profit on the sale of shares in Malgor Pty.
Ltd., making a total of $3,160. The trustee objected to the inclusion of both
amounts as assessable income. (at p648)
19. As a preliminary to the history of the acquisition and sale of the land
at Innaloo I should mention Mr. Steinberg's acquisition
of a hotel site in the
Nollamara area. In 1958 acting on behalf of Murray's Furnishing Stores, he
tendered successfully for the
site which had been made available by the State
Housing Commission. The amount of the tender was $24,500. The partnership did
not
proceed with the project of building a hotel on the land by reason of its
inability to raise the necessary finance for the construction.
Mr. Steinberg
made efforts to raise a substantial loan in Perth and in Melbourne but he was
unable to do so on satisfactory terms.
In October 1958 he requested the
Housing Commission to defer payment of the balance of the purchase price on
the ground that he
and his associates were having difficulty in securing
sufficient mortgage money, but the request was refused. In the result the land
was returned to the Housing Commission. (at p649)
20. In December 1959 Mr. Steinberg was informed by an estate agent that a
property at Innaloo, being lot 1 at the corner of Oswald
St. and Scarborough
Beach Road, containing seven and three-quarter acres, owned by Mr. Frank
Randall, was for sale. Mr. Steinberg
inspected the property and was shown a
letter dated 26th November 1959 from the Perth Road Board stating that the
town planning board
would not agree to rezoning of the land which permitted
shops or industry, but would consider development as a public building,
including
a hotel. The letter did not rule out the possibility of development
of the land for a supermarket or a department store limited
in area. (at
p649)
21. On 29th January 1960 Mr. Steinberg paid Mr. Randall $110 for an option to
purchase as follows: (i) five acres for $15,000;
(ii) the whole of the land
(excluding a part not less than one and one-sixth acres in area) for $27,000;
or (iii) the whole of the
land for $32,000. It is not entirely clear whether
Mr. Steinberg exercised the option to purchase the whole of the land
(excluding
one and one-sixth acres) shortly thereafter, but on 11th February
1960 he paid the sum of $400 on behalf of himself and his two brothers
to Mr.
Randall as an initial deposit on the purchase of the whole of the land less
the one and one-sixth acres for the price of $25,000.
(at p649)
22. On the next day, 12th February 1960 an agreement was executed by Mr.
Randall as vendor and Mr. Steinberg and his two brothers
as purchasers. It
provided for the sale and purchase of the five-acre parcel of land for
$15,000. It acknowledged that the sum of
$800 had already been received as a
deposit and it provided that the sum of $4,200 should be paid as a further
deposit on execution
and the balance of $10,000 by equal half-yearly payments.
Clause 20 of the agreement gave the purchasers an option (to be exercised
on
or before 12th May 1960) to purchase the parcel of land being not less in area
than one and one-sixth acres for $10,000. Clause
21 gave the purchasers an
option to acquire the balance of the land, in the event that the vendor
elected within three years to sell
that land, at a valuation. (at p650)
23. Neither the evidence nor the documents demonstrate with clarity whether
the land which was the subject of cl. 21 of the agreement
was acquired by Mr.
Steinberg and his brothers. But within six weeks of the making of the
agreement of 12th February 1960 Mr. Steinberg,
acting on behalf of himself and
his brothers, granted the Waikiki Motel Ltd. an option to purchase part of lot
1, being four and
a half acres, and including the land which was the subject
of cl. 21, for the sum of $56,000, subject to the obtaining of a provisional
certificate for a general publican's licence. This option was expressed to
expire on 22nd December 1960. It was followed by an
agreement dated 27th
September 1960 by which the three brothers granted to the company an option to
acquire the whole of the land
in lot 1 until 22nd October 1961 for the sum of
$50,000. It seems that little or nothing was done in connexion with the land
until
the option expired on 22nd October 1961. (at p650)
24. Mr. Steinberg says that it was then decided to develop the site as a site
for a hotel, shopping centre and service station.
Mr. Duirs, an accountant
experienced in developments of this kind, was retained. On 22nd November 1961
he made an application to
the Shire of Perth for its approval to the proposed
development, but the shire indicated that it was not prepared to approve the
hotel/motel development which involved direct access to Scarborough Beach
Road. Despite further efforts on the part of Mr. Duirs
and Miss Feilman, a
town planner who had also been engaged, to secure approval on the basis of
favourable road access, neither the
Shire of Perth nor the town planning board
was willing to approve a hotel development on the site of a kind which the
owners considered
satisfactory. By letter dated 15th January 1962 on the
instructions of Mr. Steinberg, Mr. Duirs offered the whole site (excluding
the
service station only) to the Swan Brewery Co. Ltd. for purchase for the sum of
$60,000, on terms that the company was to be responsible
for all development
work required by the local authority. The offer was immediately rejected. (at
p650)
25. In evidence Mr. Steinberg said that up to 12th January 1962 he was
considering the formation of a syndicate to develop the land
as a site for a
hotel and a shopping centre. He admitted that he had taken no steps before
that date to seek finance or to invite
a retailer to take an interest in the
shopping centre because, as he said, he was waiting for the site to be
rezoned. He claimed
that shortly before the offer was made to the Swan
Brewery Co. Ltd. on 15th January he came to the conclusion that "we were not
going
to get anywhere with the site" because there was very little hope of
approval of a development with satisfactory road access. It
was, he claimed, a
consequence of his reaching this conclusion that the offer was made to the
Swan Brewery Co. Ltd. He still had
it in mind that part of the land might be
developed as a shopping centre, although from that time onwards he abandoned
the proposal
for development of part of the site as a hotel. (at p651)
26. Thereafter nothing was done in connexion with the land until the middle
of 1963 when Mr. Gordon Campbell approached Mr. Steinberg
and said that his
firm would be pleased to promote the land, or part of it, as a shopping
centre. Mr. T. Ahern was approached with
a view to his firm becoming the
retailer in the shopping centre. Mr. Ahern requested the submission of layout
plans and instructions
were then given to Messrs. Oldham, Boas & Ednie-Brown
to prepare suitable plans for such a development. The plans were prepared
in
or about the month of April 1964 at a fee of $210. However, Mr. Ahern
indicated that his firm was not interested in the proposal.
(at p651)
27. Although on the documents it appears that Mr. Steinberg initially
acquired the option to purchase and later that he was acting
on behalf of
himself and his two brothers, the return of income was lodged by the
partnership Murray's Furnishing Stores and assessments
issued to the members
of the partnership, including the trustee of the Judith Steinberg No. 2 Trust.
It is accepted by the parties
that the land was acquired by the partnership
Murray's Furnishing Stores and sold by that partnership. (at p651)
28. In support of the assessment reliance was placed on both parts of s.
26(a). The onus is on the taxpayer to show that the profit
made does not fall
within either part of the provision. To escape the first part of the
provision the taxpayer must show that the
land was not acquired for the
purpose of profit-making by sale, that resale at a profit was not the
partnership's sole or dominant
purpose in acquiring the land (see Evans v.
Deputy Federal Commissioner of Taxation (S.A.) [1936] HCA 2; (1936) 55 CLR 80, at p
99 , per
Rich,
Dixon and Evatt JJ.). (at p651)
29. The taxpayer's case rests mainly on the oral evidence of Mr. Steinberg
and it is necessary that I weigh his evidence carefully
for it was not
corroborated by his brothers or by the other members of the partnership. I
have come to the conclusion that his evidence
concerning his attitude and that
of his associates to the purchase of the land is open to such serious doubt
that I am not prepared
to accept it. My reasons for that conclusion may be
shortly stated. (at p652)
30. Mr. Steinberg, as his earlier association with the Markham interests
showed and his later association with these and other interests
was to show,
was a man with a keen eye for the prospect of making a profit by the purchase
and sale of land. However, throughout
his evidence he was at pains to disavow
any skill, experience or perception in that field. In these appeals three
large parcels
of unsubdivided land on the outskirts of Perth were purchased on
Mr. Steinberg's decision and were subsequently resold at a very
large profit.
In each case Mr. Steinberg says that the land was not bought for resale, but
for retention for a purpose which would
yield income and that the prospect of
profitable resale did not occur to his mind, firmly fixed as it was on other
and distant prospects
not mentioned in s. 26(a). In each case the profit made
was not contemplated by Mr. Steinberg and the manner of its making was
apparently
not foreseen by him. In my view this account conveys a picture of
Mr. Steinberg's talents which is too modest by far for in my assessment
he is
an astute and able businessman with a keen sense for the prospect of a profit.
(at p652)
31. There are a variety of circumstances which combine to invest Mr.
Steinberg's account of the purpose for which the land was bought
with an air
of improbability. His account of his intentions, and those of the partnership
for which he is acting, is best summarized
in his own words: "We were going
to build a hotel motel and a shopping centre, but if we didn't get a licence
it would be a motel
and shopping centre." Yet all that he had at the time of
purchase by way of assurance that the land could be developed for these
purposes was the letter dated 26th November 1959 which raised doubts
concerning the future use of the site for shops, a supermarket
or a department
store. (at p652)
32. The development proposed by Mr. Steinberg required substantial
expenditure. Apart from his expressed belief that finance could
be obtained,
no evidence was offered of the Steinbergs' financial resources at the time or
of the availability of finance. The failure
of the Nollamara venture due to
lack of finance in the previous year would have alerted Mr. Steinberg to the
difficulty of procuring
capital on satisfactory terms. (at p653)
33. The principal point of criticism of Mr. Steinberg's account is that his
actions after the purchase of the land were inconsistent
with his earlier
intentions as he expressed them. Within six weeks of the purchase he granted
an option to purchase the major part
of the land for $56,000 to Waikiki Motel
Ltd. The option was extended to 22nd October 1961. Shortly after its expiry
he caused the
land to be offered to the Swan Brewery Co. Ltd. for $60,000
excluding a service station site which he hoped to sell independently.
These
actions he sought to explain by saying that the option was granted because it
was then realized that the shopping centre could
be more readily developed
with the proceeds of sale of the hotel site and that by early 1962 he realized
that he had little hope
of securing approval of his proposals for the
development of the hotel. I am not convinced that these explanations are
accurate;
indeed, I think it more likely that Mr. Steinberg had envisaged the
sale of the site from the moment when he decided to buy it.
According to him
the development of the land for a hotel was his primary purpose, yet on his
account he was prepared to abandon that
purpose within six weeks of the
purchase. At the time when the land was offered to the Swan Brewery Co. Ltd.
his proposals for development
were under consideration by the town planning
board and a decision had not been received on that proposal. (at p653)
34. At no time did Mr. Steinberg seek finance for the development of the
land. Nor did he seek to interest a major retailer in participating
in a
shopping centre there until the middle of 1963. In the intervening three
years he had displayed a masterly inactivity, except
for his attempts to
secure approval of a hotel development. Those attempts do not evidence an
intention to develop; they are consistent
with a desire to achieve the highest
price on resale by selling the site on the footing that there was a firm town
planning approval
for the erection of a hotel. The hypothesis remains that
profit-making by sale was the purpose for which the land was acquired.
I do
not regard Mr. Steinberg's evidence of intention, which is unsubstantially, if
not wholly, uncorroborated, as dispelling that
hypothesis. (at p653)
35. I am therefore not satisfied on the probabilities that the land at
Innaloo was not acquired for the sole or dominant purpose
of profit-making by
sale (see Evans v. Deputy Federal Commissioner of Taxation (S.A.) (1936) 55
CLR, at p 99 ). It was objected
that none the less that part of the proceeds
of sale received by the Judith Steinberg No. 2 Trust was not assessable income
because
there was no evidence to show that it or the partnership of which it
was a member had acquired the land for profit-making by resale.
The Murray's
Furnishing Stores partnership which sold the land differed in its membership
from the partnership which bought the
land, by reason of the formation of the
trusts, the formation of the M.J.S. Investment partnership and the transfer by
Mr. and Mrs.
Steinberg to that partnership of their assets, including their
interest in the Murray's Furnishing Stores partnership, in July 1963.
(at
p654)
36. Had the point been available to the appellant in this appeal, it may have
proved difficult of resolution. A partnership is
not an entity distinct from
its members; it is not the partnership that carries on business as such, but
the individual members who
carry on business in partnership (Income Tax
Commissioners for City of London v. Gibbs (1942) AC 402 ). Section 6 of the
Income
Tax Assessment Act defines "partnership" to mean an association of
persons carrying on business as partners or in receipt of income
jointly. But
neither this definition nor the provisions of div. 5 of Pt III relating to
partnerships qualifies the principle of the
general law that a partnership is
not a distinct legal entity (see Rose v. Federal Commissioner of Taxation
[1951] HCA 68; (1951)
84 CLR 118 ; Federal
Commissioner of Taxation v. Happ (1952) ALR 382;
(1952) 9 ATD 447; 5 AITR 290 ). By virtue of ss. 90
and 92
the assessable
income
of a partner includes his individual interest in the "net income" of
the partnership, which expression
is defined
to mean the assessable
income of
the partnership, calculated as if the partnership were a taxpayer, less
certain allowable
deductions.
(at p654)
37. For the purpose of applying s. 26(a) to the profit made on the sale of
land which constituted partnership property it would
have been necessary to
ascertain the purpose for which the property was acquired by the members who
constituted the relevant partnership.
In this case the relevant partnership,
Murray's Furnishing Stores, consisted of Mr. Steinberg's brothers and their
wives and the
members of the M.J.S. Investments partnership which was created
on 1st June 1963 but did not acquire the interests of Mr. and Mrs.
Steinberg
in Murray's Furnishing Stores until 1st July 1963. (at p654)
38. In the light of the finding which I have already made, the interest in
the land which the four continuing partners acquired
must be regarded as
having been acquired for the purpose of profit-making by sale. But it does
not necessarily follow that the same
could be said of the incoming partners.
As it happens, I should not have come to a different conclusion had the
question arisen for
decision, for no evidence has been led with a view to
satisfying me that the trusts acquired their interests in the Murray's
Furnishing
Stores partnership otherwise than with a view to the sale of the
Innaloo land at a profit. What I have said would not dispose of
the
difficulty of ascertaining how much of the profit made on the sale of the land
constituted assessable income of the trusts. (at
p655)
39. However, these difficulties may be put aside because, when regard is had
to the relevant returns of income and the notice of
objection, the point is
not available to the taxpayer. The return of income lodged on behalf of
Murray's Furnishing Stores disclosed
the profit as a capital profit made by
that partnership, constituted as it was after the transactions entered into in
June and July
1963. The statement accompanying that return which related the
circumstances in which the land had been acquired and sold proceeded
on the
footing that the partnership which sold the land in 1965 was the partnership
which bought it in 1960. The notice of objection
to the assessment lodged on
behalf of the trustee of the Judith Steinberg No. 2 Trust took as its
principal ground the contention
that the land at Innaloo was not acquired by
the Murray's Furnishing Stores partnership for the purpose of profit-making by
sale
and that the sale did not form part of the carrying on or carrying out of
a profit-making undertaking or scheme. The objection did
not take the point
that the partnership which sold the land was a different partnership from the
partnership on whose behalf the
land was acquired, or that the acquisition by
the trust took place in July 1963 or that the trust had acquired an interest
in the
land for a purpose different from the purpose for which the land had
initially been acquired in 1960. Accordingly, I am of opinion
that the
submission made on behalf of the taxpayer in this respect is not open to it
under the notice of objection. I am therefore
of opinion that the appeal
fails so far as it relates to the profit made on the sale of land at Innaloo.
(at p655)
40. The second question, which concerns a profit made on the sale of shares in Malgor Pty. Ltd., will be more conveniently taken up when I deal with the profits made on the purchase and sale of land at Rockingham.
The sale of shares in Malgor Pty. Ltd. and the sale of land at Rockingham.
41. The acquisition of a large parcel of land at Rockingham in 1960, the
incorporation of a company known as Malgor Pty. Ltd. which
became the
purchaser of that land, the allotment of shares in the capital of that company
to members of Mr. Steinberg's family, the
sale of one-half of those shares to
Mr. Markham, the liquidation of the company followed by the transfer of the
land in specie to
its shareholders and its ultimate sale at a vast profit give
rise to a number of questions of considerable difficulty. (at p656)
43. The appeals raise the following issues concerning the shares in Malgor
Pty. Ltd. and profits made on the sale of the land at
Rockingham: (a) whether
the profit of $1,655 made by the Judith Steinberg No. 2 Trust on the sale of
shares in Malgor Pty. Ltd.,
beneficially owned by M.J.S. Investments, to Mr.
Markham in July 1964 was assessable income by virtue of ss. 25 and 26 of the
Act
(Appeal No. 3 of 1972 by the trustee of the Judith Steinberg No. 2 Trust);
(b) whether the profit of $8,778 made by Malcolm David
Steinberg on the sale
of 250 C shares in Malgor Pty. Ltd. to Mr. Markham in July 1964 was assessable
income by virtue of ss. 25 and
26 of the Act (Appeal No. 4 of 1972 by Malcolm
David Steinberg); (c) whether the sum of $10,442, being the taxpayer's share
of the
profit of $48,648 made on the sale of the land at Rockingham in the
year ended 30th June 1970, was assessable income of Morris Steinberg
by virtue
of ss. 25 and 26 of the Act (Appeal No. 2 of 1972 by Morris Steinberg); and
(d) whether the sum of $19,410, being the taxpayer's
share of the profit of
$48,648 made on the sale of the land at Rockingham in the year ended 30th June
1970, was assessable income
of Malcolm David Steinberg by virtue of ss. 25 and
26 of the Act (Appeal No. 5 of 1972 by Malcolm David Steinberg). (at p656)
44. Some issues set out above involve more precise questions, but they are
more conveniently discussed when the relevant circumstances
have been stated
comprehensively. Once again it is necessary to keep steadily in mind the
transactions which took place in June
and July 1963 respecting the affairs of
Mr. and Mrs. Steinberg for, as in the case of the land at Innaloo, they have
an importance.
(at p656)
45. In or about the month of June 1960 Mr. Steinberg was approached by Mr.
Charles Heppingstone, a stock and station agent, who
had available for sale a
property owned by the McLarty family, which was in the vicinity of Mandurah
some twenty-eight miles from
Perth. The land had an area of 700 acres and was
used for grazing purposes. Mr. Steinberg drew Mr. Markham's attention to the
land
and they inspected it together. Mr. Markham considered that the land
should be bought and proposed that a company should be formed
under the name
of the Southern Pastoral Co. However, the company was not formed and the land
was purchased in the name of Mr. Markham
who formed a syndicate in accordance
with his usual practice. Mr. Steinberg became a member of the syndicate. It
is acknowledged
by Mr. Steinberg that the land was acquired for the purpose of
resale. As yet the land has not been resold. (at p657)
46. In July 1960 Mr. Heppingstone informed Mr. Steinberg that another grazing
property owned by the McLarty family was available
for sale. This property
consisted of 1,267 acres of land south of Rockingham. It was fenced; it had a
windmill with water troughs
for cattle and good natural pasture. The land was
situated a mile or less from the sea and was in a rural area. There was no
urban
development in the vicinity. At the time, the McLartys had cattle
grazing on the property. (at p657)
47. Mr. Steinberg inspected the land and decided that he would buy it. In
evidence he said: "I was interested in it from a grazing
point of view. I
thought it would be an ideal site to make up a grazing property, somewhere
where later on I could retire to, when
circumstances warranted it, and I had
in mind to make it quite a show place. I did really have that in mind." (at
p657)
48. On 1st August 1960 he secured an option to purchase the land from Mr.
Edwin McLarty, the vendor. The option recited that in
consideration of the
payment of $100 the vendor granted an option to purchase the land at a price
of $15 per acre, payable as to
$5,000 by the way of deposit and as to the
balance within twelve months at six per cent interest. The option was
expressed to expire
on 15th August. Mr. Steinberg exercised the option and
paid $5,000 to the vendor on 13th August 1960. (at p657)
49. On 7th November 1960 Malgor Pty. Ltd. was incorporated at the instance of
Mr. Steinberg. It became the purchaser of the Rockingham
land and its
principal object was expressed in its memorandum of association as the
acquisition of land for pastoral pursuits and
the conduct of the business of
farming and grazing. Its initial shareholders were Mr. Steinberg and Mrs.
Judith Steinberg. As a result
of an issue of shares made in March 1961 they
held 100 A class and 100 B class shares respectively in the company. (at
p657)
50. The statutory general meeting of the company was held on 27th January
1961. According to the minutes of that meeting Mr. Steinberg,
who was elected
chairman, reported: "As yet the company had not embarked upon any definite
land development but was considering
a number of propositions." In evidence
Mr. Steinberg said that the resolution referred to "a certain number of ideas"
as to what
they were going to do with the farm. He said: "It was just for
the purpose of developing the farm. That was what we were considering."
(at
p658)
51. Early in 1962 Malgor Pty. Ltd. made application to the Commercial Bank of
Australia for an advance. The bank requested Mr.
Steinberg to obtain a
valuation of the Rockingham land. A valuation was obtained from Mr. Gordon
Campbell, a real estate agent and
valuer, who inspected the land and valued it
for the purpose of obtaining mortgage finance. In his report he stated that
the land
had potential for subdivision, an opinion which he confirmed in his
oral evidence, by reason of its situation and the development
of industry
south of Perth in the Kwinana region. (at p658)
52. In a report made by the relieving manager, Mr. Williamson, to the
inspectors of the bank, which I admitted in evidence under
s. 79c of the
Evidence Act, 1928-1967 (W.A.), the business of the company was given as
"graziers" and it was stated that the company
had been formed to purchase the
property "as a grazing property and future subdivisional proposition and with
a view to providing
financial security for sons". An advance of $12,000 was
granted. (at p658)
53. Mr. Steinberg denies that he told the bank that the land had been
purchased for subdivision and that he had any such purpose
in mind at the
time. His evidence on the point was as follows:
"At the time you exercised the option, did you see thisHe did concede, however, that any information given to the bank must have come from him. (at p658)
land as having future subdivisional prospects? - No. It was in
the middle of nowhere. It was purely a rural area, and it was
a farming proposition.
Did you at any stage see it as having future subdivisional
prospects? - Only in 1933 when they brought out the Metropolitan
Region plan.
In 1963? - In 1963 - my apology."
54. At the time of the purchase of the Rockingham land Mr. Steinberg had no
knowledge or experience of farming and grazing. Apart
from such conversations
as he had with the McLartys and Mr. Charles Heppingstone he did not obtain any
advice with respect to using
the land for farming and grazing purposes. After
acquisition of the land he had some discussion with Mr. Heppingstone's
brother,
Hubert, with a view to Hubert selecting and running cattle on the
property, but nothing came of this proposal. Hubert advised Mr.
Steinberg that
the property could be run successfully only in conjunction with another
property because the land suffered from a
copper deficiency and the cattle
became "coasty" and debilitated. He said that therefore it was suitable for
seasonal grazing only,
the use to which it had in fact been put by the
McLartys. However, Mr. Sloan, a neighbouring grazier, disagreed with this
opinion
and expressed the view that the difficulty could be overcome by copper
dressing and putting copper elements in the water. (at p659)
55. At no time did Mr. Steinberg or the company use the land for grazing
purposes. Their activity was limited to one occasion when,
according to Mr.
Steinberg, they dressed sixty or seventy acres with superphosphate and
strawberry clover as an experiment. For
some months after the purchase the
McLartys were allowed to graze cattle on the land. Nothing was thereafter
done until the end
of 1961 when Mr. Sloan, the neighbour, was permitted to
graze cattle on the land in return for a payment of $100 per annum, making
a
firebreak and keeping up fences. This arrangement continued until the land
was ultimately sold to Rockingham Park Pty. Ltd. in
1969. (at p659)
56. Some time before 1956 a plan had been prepared for the Perth metropolitan
region by Professor G. Stephenson and Mr. G.A. Hepburn.
It showed part of the
land at Rockingham within an area designated "primarily for residential use"
and the balance as "public open
space". This plan, known as the "Stephenson
Plan", became the basis of Interim Development Order No. 1 of 3rd September
1956 under
s. 7A of the Town Planning and Development Act (W.A.). It was the
subject of a formal announcement made in May 1955 by the minister
for town
planning and it was given wide publicity at the time. By that order a large
portion of the subject land was designated
"proposed area for urban
development", the balance being designated as "public purposes". (at p659)
57. In 1963 Interim Development Order No. 1 was superseded by the
Metropolitan Regional Scheme which was gazetted on 30th October
1963 under the
Metropolitan Region Planning Scheme Act, 1959 (W.A.). Under the scheme a
portion of the subject land comprising some
550 acres was designated "urban
deferred" and the balance was set aside for "parks and recreation". (at p659)
58. Mr. Steinberg asserts that he was quite unaware of the zoning of the land
until September or October 1963 when, according to
him, publicity was given to
it in the press. He says "it was just out of curiosity that I went up to the
town planning board".
He then ascertained that a portion of the land was
zoned for urban development. He claims that having ascertained this
information,
he abandoned his intention to use the property for grazing
purposes and was minded to sell it thereafter to the best advantage. (at
p660)
59. I have already mentioned that before 1963 Mr. Steinberg held 100 A class
shares and his wife held 100 B class shares in Malgor
Pty. Ltd. In 1963,
before the transactions of June-July 1963, 900 A class and 200 D class shares
were issued to Mr. Steinberg, 400
B class shares to Mrs. Steinberg and 500 C
class shares to Malcolm Steinberg. The issue of shares to Malcolm Steinberg
had come
about in circumstances described by Mr. Rhine in his evidence. He
said:
"In about August 1962 Mr. Morris Steinberg said to me:The sum of $4,000 which Mr. Rhine mentioned was the payment which Mr. Steinberg had made on behalf of the company to Mr. McLarty in respect of the land at Rockingham. (at p660)
'I want to give 500 shares to Malcolm'. At that time the
company owed him approximately $4,000 which he paid in,
but the books were not written up until about a year afterwards.
It was only a very, very small company and I didn't
write up the books on a day-to-day basis, but just at the end
of the year when it came to the taxation, and I had forgotten
his implicit instructions, and I simply apportioned the $4,000
to the credit of his loan account, his wife's loan account and
his son's loan account, and then issued shares against which
I debited the cost; if I had followed the instructions implicitly
I would of course have issued the shares to him initially
and then transferred them from him back to his son, but I
took a short cut, not realizing there would be any implications
such as this."
60. In consequence of the dispositions made on 1st July 1963 by Mr. and Mrs.
Steinberg of their assets to M.J.S. Investments, the
shares which they held in
Malgor Pty. Ltd. became partnership property of M.J.S. Investments. Malcolm
Steinberg continued to hold
beneficially the 500 C class shares which had been
allotted to him. (at p660)
61. Early in 1964 Mr. Steinberg informed Mr. Markham that he was short of
funds and was unable to get an extension of his overdraft
with the Commercial
Bank. Mr. Markham suggested that he approach the National Bank. Mr. Steinberg
acted on this suggestion but was
unsuccessful. Shortly thereafter it was
agreed that Mr. Markham would purchase a half-interest in the land at
Rockingham for $50,000.
On 31st July 1964 an agreement between Malgor Pty.
Ltd. and Mr. Markham was executed by which the company agreed to sell Mr.
Markham
a half undivided share in the land at Rockingham for $50,000 payable
as to the sum of $2,000 by way of deposit on the execution of
the agreement.
The document was executed by Mr. Steinberg on behalf of the company. It does
not appear that Mr. Steinberg was authorized
by the company to execute the
agreement on its behalf. (at p661)
62. It seems that Mr. Steinberg then discussed the transaction with Mr. Rhine
who advised that the transaction should not be carried
out in the form of the
agreement executed by Mr. Steinberg and Mr. Markham. He advised that there
should be a transfer of half the
share capital in Malgor Pty. Ltd. to Mr.
Markham, in lieu of the transfer of a half-interest in the land. (at p661)
63. Mr. Steinberg says that Mr. Rhine so advised because a sale of shares
would enable Mr. Steinberg and his family to receive the
purchase price,
whereas a sale of the land would leave the purchase price in the hands of the
company. A memorandum was prepared
by Mr. Rhine in which he set out the steps
that should be followed in order to implement his advice. The heading of the
memorandum
was "Suggested method of selling half interest in land in order not
to attract tax liability". Mr. Rhine in evidence said that the
reference to
tax liability was a reference to the liability of avoiding income tax on the
dividends which would be paid by the company
to its shareholders out of
profits to be made by the company on the sale of a half-interest in the land.
The steps proposed by Mr.
Rhine included the proposal that the company should,
after the share transfers had taken place, go into a members' voluntary
liquidation
and convey the land to the shareholders in satisfaction of loans
made to the family and the return of their share capital. He pointed
out that
the land would then be held as tenants in common as follows: M.J.S.
Investments 17/44; Malcolm Steinberg 5/44; Markham
Interests 22/44. (at p661)
64. The advice given by Mr. Rhine was executed. On 31st July 1964 the
directors of Malgor Pty. Ltd. approved the transfer to Mr.
Markham of 500 A
and 100 D class shares by Mr. Steinberg, of 250 B class shares by Mrs.
Steinberg and 250 C class shares by Malcolm
Steinberg. Mr. Markham says that
some of these shares were transferred to members of his family, not to
himself, but in my opinion
he is mistaken. In my opinion it was later that
members of his family acquired an interest in the land. (at p661)
65. Thereupon Mr. Rhine, who had formerly kept the books of the company and
lodged its taxation returns, handed the books over to
Mr. Warner, Mr.
Markham's accountant, and he acted for the company. On 8th April 1965 Mr.
Steinberg concurred in the removal of
the company's bank account to the
National Bank of A/asia Ltd., Mr. Markham's bank. On the same day Mr.
Steinberg notified the company
that during his absence abroad he had appointed
Mr. Markham his attorney under power to act for him in all matters pertaining
to
the company. (at p662)
66. Subsequently Mr. Markham formed the Safety Bay Land Syndicate by bringing
in Leslie Gunzberg and Ellen Louisa Michelides to
whom he transferred some of
the shares in the company which he had acquired. After the company had been
wound up the syndicate was
expanded by the admission of further members, but
the evidence does not reveal when this occurred. (at p662)
67. As early as 12th March 1964 before he had taken a transfer of shares in
the company, Mr. Markham sought approval from the town
planning board of the
release of 200 lots annually in the area zoned as "deferred urban". This
perhaps was no more than a preliminary
inquiry by Mr. Markham designed to
establish that the land could be subdivided and developed before he agreed to
purchase a one-half
interest. (at p662)
68. However, after a one-half interest had been transferred to him he set
about securing the necessary approvals and sought to interest
likely
purchasers. On 4th February 1965 he wrote to the town planning board and
submitted a proposal on behalf of Malgor Pty. Ltd.
for the subdivision of the
land zoned "deferred urban" and asked that it be altered to "urban". He made
a similar request on behalf
of the company to the Shire of Rockingham on 29th
April 1965. The town planning board gave its approval to subdivision on 25th
March
1966. (at p662)
69. On 18th August 1966 a special resolution for the voluntary winding-up of
Malgor Pty. Ltd. was passed at an extraordinary general
meeting of
shareholders. At that meeting it was unanimously resolved that the liquidator
divide among the members in accordance with
their respective shareholding in
the company the following undivided shares in the land in specie, namely: To
Leslie Gunzberg 73/2200;
Percival Wynyard Markham 991/2200; Ellen Louisa
Michelides 36/2200; Morris Steinberg 600/2200; Judith Steinberg 250/2200;
Malcolm
David Steinberg 250/2200. By a transfer dated 3rd March 1967 the
liquidator transferred the Rockingham land in specie to the persons
set out
above. (at p662)
70. The shares in the company held by Mr. and Mrs. Steinberg were assets of
the M.J.S. Investments partnership, as were the interests
in the land which
they acquired in specie from the liquidator. To give effect to the
entitlement of the members of the family in
that partnership Mr. and Mrs.
Steinberg transferred their interests in the land with the result that, apart
from the 250/2200 share
in the land which Malcolm David Steinberg enjoyed in
his own right, the members of the family held the following interests in the
land: Malcolm David Steinberg 68/792; Gordon Steinberg 68/792; Morris
Steinberg 85/792; Judith Steinberg 85/792; holding between
them as tenants in
common in the shares set out above 306/792 undivided shares of an estate in
fee simple. (at p663)
71. Mr. Markham continued in his efforts to sell the land. On 26th April
1967 he submitted a proposal for the rezoning, subdivision
and sale of the
land to the Minister for town planning and followed this with an application
to the Shire of Rockingham for the rezoning
of the "deferred urban" land as
"urban". (at p663)
72. Subsequently he offered the land to Page, Johnson & Co. of the United
Kingdom. He was authorized at a meeting of the syndicate
to travel to the
United Kingdom in connexion with the negotiations. The syndicate indemnified
his expenses to the extent of $3,000.
The negotiations proved unsuccessful
but shortly thereafter Mr. Markham commenced negotiations with Rockingham Park
Pty. Ltd., the
ultimate purchaser. (at p663)
73. Mr. Steinberg asserted that the Safety Bay Land Syndicate consisted
exclusively of Mr. Markham and those persons whom he brought
into the venture.
This was denied by Mr. Markham who said that the syndicate included the
Steinbergs. Mr. Markham was an impressive
witness and I accept his evidence
on this question. The documentary evidence indicates that Mr. Markham acted
on behalf of the company
after he became a shareholder in seeking to obtain
approvals from the shire and the town planning board and in seeking to find a
purchaser. Apart from the ultimate negotiations with Rockingham Park Pty.
Ltd., Mr. Steinberg did not participate in these activities.
Indeed, when
half of the shares in the company were transferred to Mr. Markham, Mr.
Steinberg acquiesced in Mr. Markham having control
of its activities. The
books were kept by Mr. Markham's accountant and the bank account was
transferred to Mr. Markham's bank. A
letter dated 12th September 1967 from Mr.
Markham to the National Bank states that after the company went into voluntary
liquidation
those interested in the land, including the Steinbergs, were
members of the syndicate which had its bank account with the National
Bank,
Messrs. Markham, Steinberg and Gunzberg accepting responsibility for the
overdraft. (at p663)
74. The ultimate sale of the land to Rockingham Park Pty. Ltd. was effected
by two contracts of sale. The first, dated 15th May
1969 related to the sale
of the one-half interest in the land held by Mr. Markham and the persons whom
he had brought in. The purchase
price was $750,000 payable as to the sum of
$50,000 by way of deposit, as to the sum of $100,000 by four equal annual
instalments
commencing on 1st May 1970 and as to the sum of $600,000 by ten
equal annual instalments commencing on 1st May 1974. So much of
the purchase
price unpaid at any time was to carry interest at five per cent per annum.
The contract gave the purchaser a right to
rescind in the event that the
Steinbergs did not agree to sell their one-half interest to the purchaser on
or before 1st November
1969. (at p664)
75. Mr. Markham did not have authority to sell the Steinberg interests to
Rockingham Park Pty. Ltd. He transmitted at least one
offer from that company
to Mr. Steinberg which was rejected. Ultimately Mr. Steinberg accepted a
purchase price equal to that paid
to Mr. Markham and his associates. The sale
was effected by a contract dated 3rd November 1969 in which Mr. and Mrs.
Steinberg and
their two sons were the vendors, agreeing to sell the following
shares in a one-half undivided interest in the land: Morris Steinberg
2125/19,800; Judith Steinberg 2125/19,800; Malcolm Steinberg 3950/19,800;
Gordon Steinberg 1700/19,800. By the contract the balance
of the purchase
price remaining after payment of the deposit of $50,000 was made payable by
ten equal annual instalments commencing
on 1st November 1974. (at p664)
76. The appellant sought to show that the land at Rockingham was bought as a
grazing property with the intention that it should
be retained for that
purpose and that it was not acquired for the purpose of profit-making by sale.
It was urged that Mr. Steinberg's
evidence established the nature of his
intentions and those of Malgor Pty. Ltd. There are a number of considerations
which induce
me not to accept Mr. Steinberg's evidence concerning his
intentions and those of the company before and at the time of purchase.
(at
p664)
77. First, at this time Mr. Steinberg had as a member of the Markham
syndicates a record of investment in land for resale at a profit.
Less than
two months before he took an option over the land at Rockingham he had been
offered grazing land further south of Perth
and the Kwinana industrial area by
Mr. C. Heppingstone, the stock and station agent, who subsequently offered him
the Rockingham
land. Yet he did not purchase that land for grazing and made
it available to Mr. Markham to form a syndicate for the purpose of
profit-making by sale. Despite this he said that he regarded the Rockingham
land as a grazing and not as a subdivisional proposition
until October 1963.
I find it difficult to accept that Mr. Steinberg, with this background, did
not give serious consideration to
the possibility of profitable resale. I
find it difficult also to accept that he was quite unaware until October 1963
that there
was a real prospect that a significant part of the land would be
zoned as "urban" or "deferred urban" land. (at p665)
78. Apart from his other interests in land which would have made him aware of
the importance of zoning and of the developing town
plan which had been
emerging for the Perth region since 1956, he knew Mr. Markham and other agents
who would have been aware of zoning
considerations by reason of the wide
publicity given to them. (at p665)
79. Secondly, it is somewhat remarkable that Mr. Steinberg who had no
previous experience or knowledge of grazing should have bought
the land for
that purpose, at the suggestion of Mr. C. Heppingstone. Mr. Steinberg had not
been looking for a grazing property.
Nor was it suggested that he had
informed Mr. Heppingstone that he was looking for such a property. He made no
inquiry of those
expert or experienced in the field with a view to
ascertaining whether the property was suitable for grazing or whether a
grazing
operation could be profitably undertaken there. It seems remarkable
that he inspected no other property if his real intention was
to own and run a
grazing property. (at p665)
80. Thirdly, at no time after the option was acquired on 1st August 1960 did
Mr. Steinberg or Malgor Pty. Ltd. put the land to any
grazing use, apart from
the experimental sowing of strawberry clover and the spreading of
superphosphate over some acres. Nor did
he formulate any plans for its future
development for that purpose. It is significant that the land was not used by
its owner for
the purpose for which it is claimed to have been purchased. Yet
no satisfactory explanation was given for the failure to use the
land for
grazing purposes. It could not be suggested that the property yielded an
economic income from the use to which it was in
fact put after acquisition.
The only income which it produced was the princely annual sum of $100 paid by
Mr. Sloan and the $300
paid by Bell Bros. for the privilege of removing marl.
(at p665)
81. It is true that the Steinberg family at the time of the purchase of the
Rockingham land was short of ready money, but this circumstance
suggests that
the Steinbergs may not have had the financial resources at the time of
purchase to develop the property as a grazing
property and stock it. The land
at Innaloo had been acquired earlier in the year. If, as Mr. Steinberg
claims, it was intended
to develop that land as a site for a hotel and
shopping centre, a considerable financial outlay would have been required. If
Mr.
Steinberg is not correct in that claim, and as I have said, I do not
accept it, there was still a shortage of available money. In
August 1961 Mr.
Steinberg sought from Mr. McLarty and was granted a deferment of the payment
of the balance of the purchase money
for the Rockingham land. (at p666)
82. Finally, the statement made by Mr. Steinberg at the statutory meeting of
the company on 27th January 1961 that the company "had
not embarked upon any
definite land developments, but was considering a number of propositions",
suggests that he then had under
consideration a development of the land other
than grazing. Mr. Steinberg sought to explain this statement by saying that it
referred
to grazing activities, but he gave no indication of what the
propositions referred to were. The report to the inspectors of the
National
Bank on 1st March 1962 also points to the possibility of development by way of
subdivision and does so in the context of
a statement of the reasons why the
company bought the land. (at p666)
83. Attention was drawn to the first object in the memorandum of association
of the company which accords, so it is said, with the
notion that the primary
purpose of the acquisition was for grazing and pastoral purposes. No doubt it
does, but in my opinion its
significance is limited when regard is had to the
other material to which I have referred. (at p666)
84. Mr. Toohey for the respondent submitted that once Mr. Steinberg's
evidence of intention is discarded, the case is simply one
of a profit-making
scheme within s. 26(a). The land was acquired with the intention that a
profit should be made from its sale;
there followed a succession of steps and
events which culminated in the sale of the land at a profit. That is enough,
according
to the argument, to constitute a profit-making scheme within the
meaning of s. 26(a). (at p666)
85. The absence of other evidence as to Mr. Steinberg's intentions before and
when the land was acquired is disadvantageous to the
appellants for they bear
the onus of showing that the assessments are excessive. It is for them to
satisfy me on the probabilities
that the profits in question do not fall
within either part of s. 26 (a), in particular that the profits were not made
pursuant to
a profit-making undertaking or scheme. The appellants' cause is
not advanced to any significant extent by the evidence of Malcolm
Steinberg
and Mr. Rhine. (at p666)
86. Malcolm Steinberg did not impress me as a witness. The effect of his
evidence was that his father did not discuss in detail
with him the affairs of
Malgor Pty. Ltd. or the transactions which took place concerning that company
and the Rockingham land, and
that his participation in these matters was
limited to acting in accordance with requests made or directions given by his
father.
I do not accept that this was so. In my opinion Malcolm Steinberg was
at all times aware of his father's intentions relating to
the company and the
land. It is of special significance that Malcolm Steinberg gave no evidence
of what his father had said to him
concerning the reasons why the Rockingham
land had been purchased and the intentions he had with respect to it. Nor did
he give
evidence of why his father wanted him to have shares in the company.
Indeed he had nothing to say as to what he proposed to do with
the shares
which he acquired in his own name, the 500 C class shares. No doubt he was
prepared to deal with them in accordance with
his father's wishes. His
evidence does not establish that the profits made fall outside s. 26(a). (at
p667)
87. As a witness Mr. Rhine stands in a different category. His oral evidence
and some documentary evidence show that the transactions
of June-July 1963,
the sale of shares (in lieu of land) to Mr. Markham in 1965, the winding up of
the company with the consequential
transfer of the land in specie to the
shareholders and the termination of the eighteen trusts took place on his
advice. But Mr. Rhine
did not tell us of discussions with Mr. Steinberg
relating to the use to which the land would be put, other than a reference to
an
instruction that the main objects clause of the company should include
husbandry and ancillary projects. Mr. Rhine acted for Mr.
Steinberg in
connexion with the incorporation of the company. He was therefore in a
position of advantage to speak of Mr. Steinberg's
plans for the future of the
company and of the Rockingham land. Nor did he give evidence as to the
intention with which he as the
trustee of the eighteen trusts participated in
the purchase of the shares in Malgor Pty. Ltd., held by Mr. and Mrs.
Steinberg, apart
from stating that the transactions took place on his advice
for estate planning purposes. Again, having regard to these considerations,
Mr. Rhine's evidence does little to assist the appellants in discharging the
onus which lies upon them. (at p667)
88. On the probabilities I am satisfied that before the Rockingham land was
acquired, Mr. Steinberg believed it would appreciate
substantially in value
and that this was the reason why he caused it to be purchased. I do not
accept that he was ignorant until
October 1963 of the possibility that some
part of the land would be zoned "deferred urban" or "urban". Moreover, I am
satisfied
that he caused the company to be incorporated and to purchase the
land with a view to realizing the profit which was to be made out
of the
anticipated appreciation in value and ensuring that he and the members of his
family participated in that profit. The acquisition
of the Rockingham land,
viewed in the light of Mr. Steinberg's membership of the Markham land dealing
syndicates, was not an isolated
transaction, but a business venture in which
Mr. Steinberg decided to use a company as a vehicle for participation by the
members
of his family, perhaps because it offered a variety of ways of
realizing a profit. (at p668)
89. I consider that the land was acquired pursuant to a plan or scheme which
had the making of a profit as the end in view. At
this point it becomes a
matter of difficulty to define the elements of Mr. Steinberg's scheme. The
cause of that difficulty is the
paucity of evidence upon the point: although
it is possible that a contributing cause was the circumstance that the precise
mechanism
by which the profit was to be made had not then been determined and
was left for later decision. (at p668)
90. When property is acquired in the expectation that it will increase in
value with the intention that a profit is to be made out
of that increased
value and a company is incorporated to acquire the property, the profit may be
realized in a variety of ways. First,
the company may sell at a profit which
is then distributed by way of dividend to the shareholders. Secondly, the
increased value
of the property will reflect an increased value of the shares
which may be sold at a profit by the shareholders. Thirdly, the company
may
be placed in voluntary liquidation in the course of which the liquidator may
distribute the property in specie. Other methods
of realizing and
distributing a profit arising from the increased value of the property, or a
combination of methods, may be selected.
(at p668)
91. The first method is the most common, but it may be pursued in combination
with the second method, although it may appear that
when a company has been
incorporated with a view to acquiring property and selling it at a profit, the
shareholders have taken up
shares not with a view to selling them at a profit,
but to participate by way of dividend in the profit to be made by the company
on resale. (at p668)
92. The evidence does not point to a plan or scheme which envisaged
profit-making in the form of a sale by the company to the exclusion
of any
method of making a profit. Mr. Steinberg was concerned to deny that
profit-making by sale was a purpose of the acquisition
at all. The evidence
does not displace the hypothesis that the company was incorporated and the
land acquired with the intention
that a profit should be made out of its
appreciation in value and that the details of the method by which the profit
was to be realized
and channelled into the hands of Mr. Steinberg and his
family were left for later decision. Nor does the evidence displace the
possibility
that before the time of acquisition Mr. Steinberg contemplated the
sale of the shares in the company, its liquidation and the distribution
in
specie of its assets as steps which might be taken as a means to the end which
he had in view. (at p669)
93. The need for additional finance in 1964, the intended sale of an interest
in the land to Mr. Markham, followed by Mr. Rhine's
advice that shares should
be sold and the company wound up, do perhaps suggest that neither the sale of
shares nor the distribution
in specie was contemplated earlier. The onus is
on the appellants to establish that this was so, but their evidence does not
persuade
me of it. The evidence was of course directed to a different end,
seeking to establish that the land was purchased as a grazing
property. (at
p669)
94. Although the occasion for the sale of shares was the Steinbergs' need for
finance, I am not satisied that this was the only
reason for allowing Mr.
Markham to participate in the venture. He had been closely associated with Mr.
Steinberg in other land sale
ventures and he had great experience in the sale
and development of land. I do not discount the possibility that from the
beginning
Mr. Steinberg had foreseen that Mr. Markham should have an interest
in the venture. And the articles of association of Malgor Pty.
Ltd. from the
beginning conferred a power on the liquidator to distribute assets in specie.
(at p669)
95. The word "scheme" in s. 26(a) connotes some "programme or plan of action"
(Clowes v. Federal Commissioner of Taxation [1954]
HCA 10; (1954)
91 CLR 209, at p 225 , per
Kitto J.; XCO Pty. Ltd. v. Federal Commissioner of Taxation [1971] HCA 37; (1971) 124
CLR
343, at p 349 , per Gibbs J.).
In Investment and Merchant Finance Corporation
Ltd. v. Federal Commissioner of Taxation
[1970]
HCA 1; (1970) 120 CLR 177, at pp 188-189 ,
reversed
on appeal [1971] HCA 35; (1971) 125 CLR 249 , speaking of the expression
"undertaking
or scheme" where used in s. 26(a), Windeyer J. said:
"A scheme presupposes some programme of action, a
series of steps all directed to an end result. Similarly, an
undertaking is an enterprise directed to an end result. Each
word connotes activities that are co-ordinated by plan and
purpose - that whatever is done under the scheme or pursuant
to the undertaking is done as a means to an end. There
may, in one sense, be several transactions, but they are
related because all directed to the attainment of the one end,
profit." (at p670)
96. But in my view it is not an essential element of a profit-making scheme
in s. 26(a) that every step which culminates in the
making of a profit should
be planned or foreseen before the scheme is put into operation. 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.
(at p670)
97. Once Mr. Steinberg's evidence is rejected the acquisition of the land,
the incorporation of the company and the issue of shares
to members of his
family are seen as a business transaction having as its objective the making
of a profit by the members of the
family from the anticipated increase in
value of the land. The means by which it was achieved was a means to an end
and was not
an essential element of the scheme. (at p670)
98. To bring the profit made within the second part of s. 26(a) it is
necessary that the profit-making undertaking or scheme should
have been
carried on or carried out by the taxpayer or on his behalf (Clowes v. Federal
Commissioner of Taxation
[1954] HCA 10; (1954) 91 CLR 209
; XCO Pty. Ltd. v. Federal
Commissioner of Taxation [1971] HCA 37; (1971) 124 CLR 343 ). Here there is no question
that
the scheme was acted upon
by the taxpayers. The scheme of which Mr. Steinberg
was the author was a scheme designed to benefit
himself and the members of his
family. Mr. Steinberg and his wife were subscribers
to the memorandum of
association of the company
and shares were issued to them.
There was evidence
from Mr. Steinberg that he intended
that his sons should have an interest in
the company. Malcolm acquired shares
in 1963 and Mr. Rhine as trustee of the
eighteen trusts
agreed to the purchase by M.J.S. Investments
of Mr. and Mrs.
Steinberg's
shares in July 1963. By doing so Malcolm Steinberg and the
trusts
became parties to the scheme. I have
already said that I infer
that Malcolm
Steinberg was at all times aware of his father's
intentions with respect to
the land and I
do not doubt that Mr. Rhine
was aware of those intentions.
Subsequently they participated
in the events which occurred culminating
in the
sale of the land, to
the extent which was necessary. Mr. Rhine's participation
was
limited to agreeing to a sale of one-half
half of the shares to Mr.
Markham, terminating the trusts and distributing the assets of
the trusts,
namely the units in the M.J.S.
Investments partnership.
The scheme was
therefore executed by Mr. Steinberg, Malcolm
and Mr. Rhine as trustee of the
Judith Steinberg
No. 2 Trust so far
as it was necessary for them to do so. (at
p671)
99. I accept that the creation of the trusts, the formation of the M.J.S.
Investments partnership, its acquisition of Mr. and Mrs.
Steinberg's shares in
Malgor Pty. Ltd. and the termination of the trusts were transactions entered
into with the intention of diminishing
Mr. and Mrs. Steinberg's liability to
income tax and for estate planning purposes, but I do not regard this finding
as affecting
the conclusion which I have otherwise reached. The circumstance
that the shares in Malgor Pty. Ltd. were so acquired by Mr. Rhine
as trustee
of the trusts was not necessarily inconsistent with an intention that the
shares should be held and dealt with in accordance
with the profit-making
scheme formulated by Mr. Steinberg. (at p671)
100. I am therefore of the opinion that the appellants have failed to show
that the sale of the shares to Mr. Markham, the winding
up of the company, the
transfer of the land in specie to the shareholders and the subsequent sale of
the land were not steps taken
pursuant to a profit-making scheme under which
the land and the shares were initially acquired. Difficult questions would
have arisen
had I concluded that the profit-making scheme as initially
formulated was confined to a sale of land by the company and that it was
altered or amended in 1964 and 1965 so as to provide for the steps which were
thereafter taken, but those questions do not call for
decision. (at p671)
101. The appellants relied on the decision in McClelland v. Federal
Commissioner of Taxation (1970) 120 CLR 487
which establishes
that the second
part of s. 26(a) has no application to the mere realization of a capital
asset, albeit in an enterprising
way. Here,
however, more was involved than
the mere realization of a capital asset. The company was formed and the land
acquired
with the purpose
of making a profit from the anticipated appreciation
in value of the land by means of the sale of the land or some
other suitable
means. The entire transaction had the characteristics of a "business deal",
to use their Lordships' expression. (at
p671)
102. The remarks of Windeyer J. at first instance and Barwick C.J. on appeal
to the Full Court in the same case
[1969] HCA 72; (1969) 118 CLR 353,
at pp 359, 372 were
relied on to support the submission that s. 26(a) has no application to part
of the profits
made by Malcolm
Steinberg because part of the profits which he
made were attributable to the ownership of 500 C class shares in the
company
which
he acquired by way of gift from his father. The short answer to this
submission is that, although Mr. Steinberg may
have intended
to make a gift of
some of his shares to his son, the transaction took a different form. Malcolm
was allotted shares
by the company.
As it turned out the gift was of money,
not of shares. (at p672)
103. Accordingly, as no argument was addressed to me on the quantification of
the profits made, I am of opinion that the appeals
relating to the profits
made on the sale of shares in Malgor Pty. Ltd. and the sale of the interests
in the Rockingham land should
be dismissed. In the light of this conclusion I
need not deal with an alternative argument advanced by the respondent to the
effect
that there was a profit-making scheme culminating in the sale of the
interests in the land, which began with the resolution to wind
up the company
when, by agreement of the parties, the land had a value of $400,000. (at
p672)
The sale of land at Wanneroo - Appeal No. 1 of 1972 by Morris Steinberg.
104. In respect of the year ended 30th June 1966 Mr. Steinberg was assessed
to income tax on the footing that there was included
in his assessable income
a sum of $7,752, being his share of the profit made on the sale in that year
of certain land at Wanneroo.
The respondent supports the assessment by
reference to ss. 25 and 26(a) of the Act and the appellant has argued that the
profit does
not fall within these provisions. (at p672)
105. In this instance the land was acquired by Mr. and Mrs. Steinberg, Mr.
Steinberg's two brothers and their wives. The land was
owned by a company,
Golden West Land Development Co. Pty. Ltd., in which the Steinberg family
acquired shares. The company was subsequently
wound up and the land
distributed by the liquidator in specie to the shareholders who, having
acquired the land, sold it to the Overseas
Telecommunications Commission which
indicated that, if the Steinbergs would not agree to sell, it would exercise
its power to acquire
the land compulsorily under s. 55 of the Overseas
Telecommunications Commission Act 1946 (Cth), as amended. (at p672)
106. The history of the acquisition of the land commences in August 1964 when
Mr. Rawle, the local secretary of the Golden West
company, offered Mr.
Steinberg 720 acres of land at Wanneroo, some twelve miles to the north of the
city of Perth, between Kingsway
and Gnangara Roads. Mr. Rawle informed Mr.
Steinberg that approval had been granted for subdivision of the land into
ten-acre lots.
Mr. Steinberg inspected the land and ascertained that there
were a few farmlets in the vicinity in Kingsway and Gnangara Roads.
There was
some vegetable and flower growing on the farmlets. Apart from several
cottages, there was no housing in the area. The
offer took the form of an
offer of the shares in the company. (at p673)
107. Mr. Steinberg said that, having inspected the land, he thought it was
well suited to development by way of subdivision into
ten-acre lots for
leasing. His evidence on the prospective use to which the land would be put
is best set out in his own words:
"When I looked at it, I thought: 'There's a possibility
here. There is the right of 10-acre lots and we might build
two or three bedroom cottages, put a wire fence round them,
put a bore down' - because water was there in abundance
and the water level was very high there. Our thoughts were
that we would let these out at, say, a five-year lease with the
first year at $25 a week and the subsequent four years at $35
a week. In the first year we thought we would give the
tenant a chance to build up whatever it was - flowers or
vegetables, or whatever occupation he proposed to do - and
we looked at it from this point of view. The land was costing
us roughly $146,000 (I have to rely on my memory). We
reckoned $2,000 it would cost for transfers etc.; we thought
the roads would cost about $35,000 - which was more than
they actually cost; and about $5,000 for survey. I estimated
that we would get sixty-eight lots out of it, so roughly I
thought it was going to cost $2,800 per lot. Therefore I took
a round figure of $3,000, allowing for the incidentals.
We thought the cost of building a little cottage on it
would be around $6,000. We also said to ourselves that $1,000
would cover the cost of fencing. After all, they are against
each other, so it's almost half the fencing of one block. All
in all, we said that the whole lot would cost us approximately
$10,000. We anticipated or we thought we'd raise $6,000 on
them as a mortgage. I don't think we would have had any
trouble to borrow that." (at p673)
108. He denied that it was bought with a view to resale at a profit, although
he acknowledged that in the distant future the land
had potential for
subdivision. He claimed that he considered that it would not be profitable to
subdivide and sell and that it was
"the last thing in my mind". (at p673)
109. However, it seems that when Mr. Rawle offered the land to him it was
offered as land having potential for profitable resale
in subdivision. Mr.
Steinberg obtained from Mr. Rawle a document setting out short details of the
company and the land. According
to the document the primary object of the
company was: "To carry on the businesses of real property dealing and
development and
building promotion and for such purposes to develop,
subdivide, lay out, prepare and turn to account any real property or any
estate
or interest therein." (at p674)
110. It made the following remarks concerning the land:
"The Southern boundary of this land is situated approximately
twelve mile from Perth by Road and approximately
nine mile in a direct line. The northern boundary of the
State Housing Commissions land would be in the vicinity of
3/4 of a mile from the Southern boundary of the Golden West
land.
Recent sales in the area:
Land as shown on the plan is selling on the opposite of
Kingsway Road in five acre lots at an average price of 870
per block on the following terms: 10 deposit and the
balance at 10 per month at six per cent interest computed
and adjusted quarterly on the unpaid balance. From the 1st
July, 1961, twenty of these lots have been sold, without any
advertising and for taxation reasons this is the quota for the
year." (at p674)
111. On 7th September 1964 for the sum of 200 Mr. Steinberg obtained an
option expressed to be granted on behalf of the Golden
West company in favour
of Malgor Pty. Ltd. to purchase the 27,210 issued shares in the Golden West
company for 2 18s. 3d. per share.
On 27th November 1964 the option was
extended to 15th February 1965 in consideration of the payment of an
additional $400. On 15th
February 1965 Malgor Pty. Ltd. offered
2 14s. 3d. per share for the issued capital of the Golden West company.
Ultimately, by a deed which was undated but which was stamped
on 27th July
1965 Mr. Steinberg, his two brothers, the three wives and Malcolm David
Steinberg purchased the 27,210 issued shares
of the Golden West company from
the shareholders for 2 14s. 3d. per share, a total of $147,614. How the
individuals came to purchase
the shares in lieu of Malgor Pty. Ltd. is not
entirely clear; the deed recites that Malgor Pty. Ltd. nominated the
purchasers, and
that it at no time had any beneficial interest in the shares.
(at p674)
112. By the deed the individual purchasers agreed to acquire the shares in
Golden West in the following: Morris Steinberg twenty-five
per cent; Judith
Steinberg twenty-five per cent; Reuben Steinberg eleven and a quarter per
cent; Joy Steinberg eleven and a quarter
per cent; Matthew Steinberg eleven
and a quarter per cent; Lilian Steinberg eleven and a quarter per cent.
However, it seems that
Malcolm David Steinberg did not become a shareholder in
the company and his five per cent was distributed equally between the six
remaining purchasers. The reason for the changes in the identity of the
purchasers is, as I have said, not clear, but it seems that
it was connected
with the termination of the eighteen trusts which took place several days
before the deed was stamped on 27th July
1965. (at p675)
113. Shortly after the shares had been acquired, the company went into
voluntary liquidation pursuant to a special resolution passed
by the members
on 8th October 1965. Mr. Rhine who was appointed liquidator then transferred
the land in specie to the shareholders,
an amendment to the articles having
been made to enable that to be done. Mr. Steinberg made it clear in his
evidence that the shares
had been purchased as a means of enabling the
purchasers to acquire the land so that the liquidation took place as a
preliminary
transfer in specie by the liquidator. (at p675)
114. In consequence of those transfers the land was held as follows: Morris
Steinberg as to a 6803/27,210 interest; Judith Steinberg
as to a 6802/27,210
interest; Reuben Steinberg as to a 3401/27,210 interest; Joy Steinberg as to a
3401/27,210 interest; Matthew
Steinberg as to a 3401/27,210 interest; Lilian
Steinberg as to a 3402/27,210 interest. (at p675)
115. As evidence confirming Mr. Steinberg's account of the motives which
inspired the purchase, reliance was placed on the evidence
of Mr. D. G.
Ferris, shire clerk at Wanneroo, who said that at the end of 1965 or early in
1966 he had a conversation with Mr. Steinberg
who made an inquiry concerning
the subdivision of the land stating that he proposed to subdivide it into ten
acre allotments and
lease them. I see no reason why I should not accept the
evidence of Mr. Ferris, but I am not convinced that the statement then made
by
Mr. Steinberg reflected the intentions that he and his associates then held
with respect to the land. (at p675)
116. Mr. Steinberg made arrangements with a surveyor for the design of an
amended subdivision of the land and with the Council for
road construction, at
a cost of $1,413 and $15,440 respectively. Subsequently the Overseas
Telecommunications Commission approached
Mr. Steinberg and made it clear that
it wished to acquire one-half of the land as a site for a radio transmitting
station. In those
discussions Mr. Steinberg indicated that he and his
co-owners were not anxious to sell. Mr. J. M. Long of the Commission
indicated
that if agreement could not be reached on price the Commission would
exercise its powers to acquire the land compulsorily. By an
agreement dated
21st June 1966 Mr. Steinberg and his wife, his two brothers and their wives
sold one-half of the land approximately
to the Commission at the price of $450
per acre for the sum of $172,957, payable as to the sum of $57,657 on
execution of the agreement
and as to the balance by two equal instalments on
1st December 1966 and 1st December 1967, the balance owing from time to time
to
carry interest at the rate of two and a half per cent. According to Mr.
Long, the agreement recited that the vendors "although desirous
of retaining"
the land "for development have reluctantly acceded to the purchaser's offer
... for the reason that the land is urgently
required". Mr. Steinberg had
sought to receive the purchase price in instalments spread over a longer
period of time, whereas the
Commission had been willing to pay cash and was
not ready to defer payment to an extent greater than that provided for by the
agreement.
(at p676)
117. Expert evidence was tendered by the respondent with a view to showing
that the land at Wanneroo was not suitable for grazing
purposes and not
particularly suitable for growing crops and vegetables, although it was
conceded that some land in the vicinity
was used for vegetable and flower
growing and for poultry farming. I am disposed to accept the evidence to this
effect by Mr. Langdon,
an adviser in the pastoral agronomy section of the
Department of Agriculture, and Mr. Hardie, a vegetable instructor in the
Department.
(at p676)
118. However, it seems to me that what tells against Mr. Steinberg's evidence
of intention is not so much the effect of the expert
evidence as his omission
to make comprehensive inquiries concerning the suitability of the land for
agricultural purposes before
buying the land. The plan which he outlined in
evidence was, to say the least of it, a novel one. In essence it was to
establish
a colony of tenant farmers or market gardeners in an area of land
twelve miles from Perth for which market gardeners had shown no
particular
predilection in the past. It is remarkable that Mr. Steinberg should purchase
the land for such a purpose without making
detailed inquiry as to its
suitability for development of that kind. It is significant also that the
plan was formulated on his
own initiative after the property was brought to
his notice. It is not suggested that Mr. Steinberg had earlier formed an
intention
to establish a colony of tenant market gardeners and was looking for
a property suitable for that purpose. (at p676)
119. There is as well the absence of any attempt to formulate a detailed plan
and to estimate costs of development and building
with some precision before,
and for that matter after, purchase. In evidence Mr. Steinberg gave some
evidence as to estimates but
it was of a very general nature and was not
supported by calculations of any kind. Nor did he engage any expert other
than the surveyor
who prepared a subdivision plan. Subdivision of the land
was equally consistent with the existence of an intention to sell the land
in
lots. (at p677)
120. Finally there is the absence of evidence which shows that the
development of which Mr. Steinberg spoke was one which was within
the
financial capacity of the group who became owners of the land. Mr. Steinberg
says that the land at Innaloo was sold so that
the proceeds could be devoted
to the development at Wanneroo but it seems that the money was not so
employed. Subsequently it was
claimed that little could be done with the land
because the family had got into some difficulty with land which it had
acquired at
Kelmscott. (at p677)
121. However that may be, as in the two other cases I am not satisfied that
the shares, and later the land, was acquired for the
purpose of development
and leasing as Mr. Steinberg has claimed. In coming to that conclusion I am
mindful that there should not
be imputed to Mr. Steinberg before he purchased
the land the expert knowledge which is now available as to the suitability of
the
land for farming and agricultural purposes. Nevertheless the proposed use
to which the land was to be put was so unusual that it
is of significance than
he made no inquiries with respect to its suitability for the purpose and as to
the likelihood of attracting
tenants. The absence of evidence as to the
financial capacity of the vendors to carry out such a scheme, the failure to
design such
a scheme after the land had been acquired, taken in conjunction
with Mr. Steinberg's refusal to admit that he considered the possibility
of
profitable resale, although the document handed to him by Mr. Rawle made it
clear that the Golden West company had been incorporated
to deal in land and
that the land had potential for subdivision and sale, combine to create such
doubt in my mind that I am unable
to accept what Mr. Steinberg said on the
matter. (at p677)
122. Once Mr. Steinberg's evidence is rejected the inference is inescapable
that the shares in the company were purchased thereby
enabling the purchasers
to acquire the land for the exclusive or dominant purpose of profit-making by
sale. The profit made on sale
accordingly falls within the first part of s.
26(a). (at p677)
123. For the appellants it was argued that there was no identity between the
property acquired and the property sold. This submission
was based, not on
the circumstance that one-half of the land only was sold, but on the fact that
what was initially acquired was
shares. The submission overlooks the
subsequent acquisition by the shareholders of interests in the land by virtue
of their shares,
those interests being the subject of the sale to the Overseas
Telecommunications Commission. As I have remarked, Mr. Steinberg said
that
the shares were purchased to enable the purchasers to acquire the land. The
land was none the less acquired, albeit in an uncommon
way, by means of a
distribution in specie by a liquidator. (at p678)
124. It was also submitted that it was not possible to arrive at a profit
figure because the land was acquired at a date subsequent
to the purchase of
the shares when it might reasonably be thought to have had a different and
enhanced value. But in this instance
the relevant figure is what it cost the
individual to acquire his interest in the land. The cost to the individual
was the amount
which he expended in the purchase of the shares together with
any other expenses incurred in obtaining a title to the land. It is
not
disputed that if this be the proper basis of arriving at the individual's
profit, the amount of profit on which Mr. Steinberg
was assessed to tax was
correctly ascertained. (at p678)
125. In my opinion this appeal should also be dismissed. (at p678)
Additional Tax.
126. In three appeals (No. 1 of 1972 by Morris Steinberg, No. 3 of 1972 by the trustee of the Judith Steinberg No. 2 Trust and No. 4 of 1972 by Malcolm David Steinberg) there was a challenge to the imposition by the respondent of penalties by way of additional tax. The penalties amounted to $1,504, $119 and $1,025, respectively. The basis on which they were imposed was not explored as during the course of argument the respondent undertook to remit them, that undertaking being accepted by the appellants.
ORDER
Appeals dismissed with costs.A.P. Webb Q.C. (with him C.K.G. Rowe), for the appellants. In relation to the Rockingham land, there is no basis upon which either Morris or Malcolm Steinberg can be treated as assessable on the profits under s. 26(a) for substantially the same reasons as in Hobart Bridge Co. Ltd. v. Federal Commissioner of Taxation [1951] HCA 33; (1951) 82 CLR 372 , because it was never intended that a profit would be made out of a sale of the shares. The company was the vehicle to hold the land. (He referred to Eisner v. Federal Commissioner of Taxation (1971) 45 ALJR 110; 2 ATR 3; (1971) ATC 4022 ; Smithfield Pastoral Co. Pty. Ltd. v. Federal Commissioner of Taxation (1966) 14 ATD 170 and Raynbird v. Federal Commissioner of Taxation (1972) 3 ATR 183; (1972) ATC 4100 .) Any scheme there might have been was not a profit-making scheme within s. 26(a), but was a scheme under which there might have been either dividends or a bonus distribution to the shareholders. The shares which were sold were not sold by the persons to whom they were issued. No profit in an income sense either under s. 26(a) or s. 25 can emerge from the realization of an asset by a shareholder who receives it in a distribution in liquidation. The second limb of s. 26(a) cannot operate in relation to the sale of the shares and of the land because the blueprint is destroyed by the discretionary gift made by the trustee. The persons who acquired property consequent upon that discretionary gift did so with no purposive motive - see Federal Commissioner of Taxation v. Williams [1972] HCA 31; (1972) 127 CLR 226, at p 248 .
J.L. Toohey Q.C. (with him E.M. Collins), for the respondent. The Innaloo land transaction was essentially a commercial transaction, the purpose of the acquisition being one of ultimate sale of the property. If the land was bought because of its commercial potential in the belief that it would prove profitable either by sale or retention, the profit would still have been assessable: Buckland v. Federal Commissioner of Taxation (1960) 34 ALJR 60; (1960) ALR 600; 12 ATD 166 and to Raynbird v. Federal Commissioner of Taxation (1972) 3 ATR 183; (1972) ATC 4100 . The Wanneroo land was acquired by the purchase of the shares in the company for the express purpose of acquiring the land, the purpose being implemented by the resolution to wind up the company and distribute its assets in specie. The cost was the amount expended in the purchase of the shares and any other expense incurred in obtaining title. There was clearly a scheme to acquire land and resell it at a profit (Premier Automatic Ticket Issuers Ltd. v. Federal Commissioner of Taxation [1933] HCA 51; (1933) 50 CLR 268, at p 298 ). Section 25 applies because there was in fact a sale effected as part of a scheme designed to produce profit by getting hold of the land and selling it. If there is insufficient evidence to come within the first limb of s. 26(a) there is clearly a scheme within the second limb.
A.P. Webb Q.C., in reply.
Cur. adv. vult.
Solicitors for appellants, Downing and Downing.
Solicitor for respondent, R.B. Hutchison, Crown Solicitor for the
Commonwealth.
G.A.K. (at p680)
1975, October 10.
The following written judgments were delivered:-fully set out in the reasons for judgment of my brother Mason, who found for the Commissioner in the proceedings before him [1973] HCA 11; (1975) 134 CLR 640 at p 644 et seq . The appeals concern various transactions but can conveniently be said to directly or indirectly involve three parcels of land respectively at Innaloo, Wanneroo and Rockingham in the vicinity of Perth in Western Australia. My brother Mason found the first two parcels to have been purchased for the purpose of resale at a profit within the scope of the first limb of s. 26(a) of the Income Tax Assessment Act 1936, as amended ("the Act"), and the last mentioned parcel to have been the subject of a scheme within the second limb of that section. (at p680)
BARWICK C.J. The facts out of which this appeal arises are to be found
2. The appellants are Morris Steinberg in respect of the Wanneroo land and
also in respect of the Rockingham land; the Trustee of
Judith Steinberg No. 2
Trust in respect of the transactions with the Innaloo land and in respect of
the Rockingham land; and Malcolm
David Steinberg in respect of the Rockingham
land. (at p680)
The Innaloo Land.
3. The Innaloo land was acquired in 1960 by a partnership, Murray's
Furnishing Stores, of which Morris Steinberg was throughout
a member. It was
sold in March 1965 at a considerable profit upon its purchase price. Because
of the limited terms of the taxpayer's
objection, no point arises in the
appeal upon the changes in the membership of the partnership which took place
between 1960 and
1965. (at p680)
4. There was ample material established in the course of the hearing of the
appeal to justify the inference that the land was purchased
for the purpose of
reselling it at a profit. Mr. Steinberg gave evidence that the purpose for
which the land was purchased was otherwise:
but he was not believed. (at
p680)
5. Having fully examined the transcript of the evidence given before my
brother Mason, I would not be prepared to disturb any findings
of fact made by
his Honour which depend to any extent on the credibility of Mr. Morris
Steinberg. Notwithstanding the analysis of
the evidence made by counsel for
the appellant, I cannot take the view that it was erroneous not to accept the
evidence of Mr. Morris
Steinberg or to find any fact consequential on
disbelief of that evidence. Unless the evidence of Mr. Morris Steinberg as to
the
purpose for which the Innaloo land was purchased were believed, there is
no reason, in my opinion, to differ from his Honour's conclusion
that the land
was bought by the partnership for the purpose of resale at a profit.
Accordingly, in my opinion, the appeal of the
Trustee of Judith Steinberg No.
2 Trust, which is in respect of its share of that profit, was properly
dismissed. I would dismiss
his appeal to this Court. (at p681)
The Wanneroo Land.
6. In June 1965 Mr. and Mrs. Morris Steinberg acquired by purchase one half
of the issued capital of Golden West Land Development
Co. Pty. Ltd. ("the
company"). The company's only substantial asset was an area of land (720
acres) for which subdivisional approval
had been given by the appropriate
local governmental authority. The approved lots were each of ten acres. This
was the Wanneroo
land. The remainder of the share capital of the company was
acquired by brothers of Morris Steinberg and their wives. It may be
accepted
that the reason the shares were acquired was the desire of the Steinberg
brothers and their wives to control the disposition
of the land which the
company owned. It may also be accepted that their intention at the time of the
acquisition of the shares was,
in due course, to place the company in
liquidation and to procure a distribution in specie of its assets. Mr. Morris
Steinberg, in
the only relevant evidence given, said that the intention of the
shareholders when they had possession of the land was to lease the
ten acre
lots to tenant farmers for agricultural purposes. But his evidence was not
accepted in this respect. I accept his Honour's
disbelief of this evidence
and approach the case on that footing. (at p681)
7. In October 1965, the company went into voluntary liquidation whereupon the
assets of the company, principally the Wanneroo land,
were distributed in
specie to the shareholders as was permitted by the amended articles of the
company. (at p681)
8. In the early part of 1966 the Overseas Telecommunications Commission
informed Mr. Morris Steinberg that the Commission desired
to purchase one half
of the Wanneroo land for the purpose of the erection of a radio transmitting
station and that, if necessary,
the Commission would compulsorily acquire the
land in pursuance of powers in that behalf at its disposal. Subsequently, the
six
Steinbergs, under the persuasion of the likelihood of compulsory
acquisition, sold one half of the Wanneroo land to the Overseas
Telecommunications Commission for a total sum of $172,957, which was $25,343
in excess of the purchase price paid for the shares
in the company. (at p682)
9. At the time of the hearing of the appeal by my brother Mason, the
remaining half of the Wanneroo land was unsold and in the ownership
of the six
Steinbergs. His Honour found that the share of Mr. Morris Steinberg in the
excess of $25,343 of the sale price to the
Overseas Telecommunications
Commission over the price paid for his shares in the company was liable to tax
as profit made on the
resale of property acquired for that purpose within the
scope of the first limb of s. 26(a) of the Act. (at p682)
10. There are some aspects of this part of s. 26(a) which are now settled.
In the first place, there must be an identity between
that which is acquired
and that which is sold; secondly, the purpose of resale to gain a profit, i.e.
an excess sale price over cost
of acquisition, must be present at the time of
the acquisition: it must be the taxpayer who acquires with the stated purpose
and
who, in pursuance of it, subsequently sells. (at p682)
11. It must be remembered that the Act is an Act with respect to taxation
upon income. It is not in its general provisions an Act
to tax capital gains.
It respects and maintains the radical distinction between income and capital
gain. However, s. 26(a) departs
to a limited extent from the general pattern
of the Act. It treats the product of a transaction falling within its terms
as income
of the taxpayer. It does so because of the particular purpose for
which property is acquired. It is thus appropriate that a transaction
to come
within the ambit of the section should be of a commercial character: to wear
an aspect of dealing. The outturn of a transaction
of that sort is readily
treated as income and not as capital gain because of the purpose of the
acquisition. (at p682)
12. Further, there are certain principles to be borne in mind which are quite
basic in the application of a law of taxation. First,
the legal effect of
transactions which are not pretended or illusory must be regarded and allowed
to be effective: secondly, the
separate identity of an incorporated company
from that of its shareholders must be respected. I mention these matters
specifically
because of their importance in the resolution of the present
appeals, both those with respect to the Wanneroo land with which I am
presently dealing, and those with respect to the Rockingham land with which I
have yet to deal. (at p683)
13. It is to my mind apparent that the appellant, Morris Steinberg, did not
acquire by purchase any part of the Wanneroo land.
It cannot properly be
said, in my opinion, as a matter of law that the purchase of shares in an
incorporated company in order to
gain control of its assets is an acquisition
of those assets: or that the money expended on the purchase of the shares is
a price
paid for the assets of the company. These propositions are true
whether or not the shareholding acquired is the total number, or
a majority of
the number, or only some of the shares of the company. There is, in my
opinion, no doctrine of economic equivalence
to be used in the administration
of the Act. In relation to the first limb of s. 26(a), there is no identity
between the shares
acquired and the assets of the company subsequently sold.
Nor, in my opinion, is it right to conclude that the taxpayer acquired
the
land at the time he acquired the shares because he shared with others an
intention to place the company in liquidation so as
to secure, by a
distribution in specie of the company's assets, a part of such lands. But to
say that the taxpayer had these motives
and intentions is to deny that he had
any purpose of reselling the shares which he did acquire by purchase. (at
p683)
14. For these reasons alone, I am unable to share my brother Mason's opinion
that Mr. Morris Steinberg's share of the gains from
the disposition of one
half of the Wanneroo land falls within the scope of the first limb of s.
26(a). (at p683)
15. But it was argued for the respondent that the distribution by the
liquidator of the assets of the company could be regarded
as an acquisition by
the taxpayer of an interest in the land. Whilst the receipt of the interest
in the land may be regarded as
an acquisition of that interest, it is not, in
my opinion, a purchase nor is there a price paid for the acquisition. Nothing
said
or decided in Archibald Howie Pty. Ltd. v. Commissioner of Stamp Duties
(N.S.W.) [1948] HCA 28; (1948) 77 CLR 143 is, in my opinion,
to the contrary.
There, what
was received in distribution upon a reduction of capital was
held to have been
received for a bona
fide consideration
in money or money's worth, which is a
different case to the present. (at
p683)
16. But in case it may be thought, contrary to my own opinion, that the
taxpayer should be regarded as having acquired by purchase
such part of the
Wanneroo land as he received on the distribution by the liquidator of the
company's assets, there are some observations
I would wish to make. (at p683)
17. Firstly, it is incorrect, in my opinion, to treat the price paid for the
shares as the price paid for that part of or interest
in the land which
ultimately came to the taxpayer, as a basis for determining a profit made upon
the disposal of that land. Further,
if the value of the land at the time of
the liquidator's distribution is regarded as relevantly the cost of the land
to the taxpayer
- which, in my opinion, it should not - not only is there no
evidence of it in the case but also that value is unlikely to be substantially
different from the price paid by the Overseas Telecommunications Commission
soon after the distribution by the liquidator, that price
being more likely
than not to be below than above the market. (at p684)
18. In the second place, there was, in my opinion, no evidence that the
purpose of acquiring the land, if its receipt in distribution
were a relevant
acquisition, was its resale thereby to gain a profit. I accept my brother
Mason's refusal to accept Mr. Morris Steinberg's
evidence of what was his
purpose in relation to the land and of his denial that that purpose was resale
at a profit. But disbelief
does not afford evidence of the contrary of what
is disbelieved, leaving on one side a doubtful case of a situation of two
mutually
exclusive possibilities, which the facts of this case certainly do
not raise. See Jack v. Smail [1905] HCA 25; (1905) 2 CLR 684,
at p 698 ; Scott
Fell v. Lloyd
[1911] HCA 34; (1911) 13 CLR 230, at p 241 ; Lee v. Russell (1961) WALR 103, at p 109 . The
appellant,
Morris Steinberg, made no
relevant admissions.
(at p684)
19. Now, whilst it rests on the taxpayer to show that the assessment is
excessive, if the facts established before the court cannot
support an
inference of acquisition with the required purpose, the assessment cannot be
supported under the first limb of s. 26(a).
In the case of the Innaloo land,
its sale was sufficiently proximate to its acquisition, plus the undoubted
activities of the taxpayer
with respect to it meantime, to support such an
inference and warranted his Honour's conclusions. But in the case of the
Wanneroo
land, all that can be pointed to on the established facts is that one
half of the land was sold, in the circumstances in which it
was sold, to the
Overseas Telecommunications Commission. Of course, if the purpose to purchase
for resale at a profit is otherwise
made out, a sale under threat of
compulsory acquisition will be a relevant sale and the gain made thereby
properly brought to tax.
But where there is no evidence of the relevant
purpose, no inference of its existence at the time of acquisition should, in
my opinion,
be drawn from the fact of a compulsory sale. No doubt the sale of
the thing acquired reasonably soon after its acquisition would
afford evidence
that the thing was acquired for the purpose of resale in order to make a gain.
That inference is made because of
evidentiary value of the voluntary act of
sale. But the sale to the Overseas Telecommunications Commission was not of
such a voluntary
kind as to warrant the inference that if land was the thing
acquired it was acquired for the purpose of resale. Consequently, in
my
opinion, there was no material in the proved and accepted facts which would
support the inference that the appellant taxpayer
acquired his interest in the
land, if that is what he did, with the purpose of its resale to gain a profit.
Section 190 places upon
the taxpayer the obligation in an appeal against an
assessment to show that the assessment is excessive. This is not limited
simply
to the amount of the assessment but extends to its propriety.
Assessment does not consist merely in the nomination of a sum of tax
to be
paid, as contained in the notice of assessment. It is the process of the
application by the Commissioner of the appropriate
provisions of the Act to
the taxpayer's return or to such further or different facts as the
Commissioner has ascertained. The Commissioner
is provided with officers
highly skilled and experienced in the administration of the Act and in the
discovery and elucidation of
facts. Further, they are able to express and
record both the facts upon which the assessment is made and the particular
application
of the Act to them which yields the amount of tax expressed in the
notice of assessment. The Commissioner is, of course, entitled
to place his
ultimate assessment, i.e. ultimate at the time of the issue of the notice of
assessment, upon alternative applications
of the Act. But if he does so, that
or those alternatives may be expected to be recorded in the files of the
Commissioner. Thus,
if those files are before the court on appeal, as they
should be, the basis of the Commissioner's assessment will appear. It is
that
assessment which is under attack on the taxpayer's appeal and which the Act
says the taxpayer must show to be excessive. (at
p685)
20. It should also be said that, if asked by the taxpayer, the Commissioner
should inform him of the basis of the assessment in
cases in which the
adjustment sheet served with the notice of assessment does not do so. Just as
in other litigation, there must
be issues in an appeal against assessment
under the Act to which both parties are confined. As matters presently stand,
the relevant
file of the Commissioner and the objection of the taxpayer should
be the source of those issues. It should not be the case that
by reason of s.
190 the appellant taxpayer must negative all possible bases upon which, having
regard to the material adduced before
the appellate tribunal, the statement of
liability to tax in the notice of assessment might be based. So to use that
section is,
as I have said before, to make that section a scourge for the
citizen rather than a reasonable protection for the revenue. It is
high time
that rules of court provided for the determination of the issues in income tax
appeals and expressly confining both Commissioner
and taxpayer to them in an
appeal which is to be resolved by an adversary process and in which the
contest should not be unequal.
(at p686)
21. Applying these considerations, however looked at, in my opinion, it ought
not to be held that the appellant taxpayer acquired
any part of the Wanneroo
land for resale at a profit. (at p686)
22. But, though my brother Mason did not so find, the respondent seeks to
maintain the assessment upon the second limb of the section.
(at p686)
23. Because the Act by s. 190 places the onus upon the appellant taxpayer of
showing that the Commissioner's assessment is excessive,
there are expressions
to be found in cases decided upon the first limb of s. 26(a) to the effect
that there is a presumption which
the taxpayer must overcome by the evidence
accepted by the Court on this appeal. But, in my opinion, there is no
presumption that
property is acquired for profit-making by resale. The
presence of s. 26(a) in the Act does not mean that property cannot be acquired
as an investment, as a hedge against the loss of value in the currency; or
that the only investment advantage of the acquired property
which is outside
the reach of s. 26(a) is the income it will produce. The retention of
property in the hope or expectation that
its value will increase is a
justifiable form of investment. That the increased value may only be realized
by sale does not deny
that the purpose of its acquisition was investment or
establish that the purpose of its acquisition was to use it as a subject of
trade by reselling it at a profit. No doubt in borderline cases, the
distinction may tend to become blurred but it is none the less
a valid
distinction and capable of resolution by the court. (at p686)
24. When the facts relating to the acquisition of the property are evidenced
before the court, the question is whether on those
facts the necessary
inference of purpose can be drawn. The evidencing of the facts and the
inability to draw that inference from
them, in my opinion, satisfies in this
case the onus existing on the taxpayer. If, as I have said, those facts,
including those the
Commissioner establishes, do not warrant the inference of
the requisite purpose, assessment based on the first limb of s. 26(a) cannot
be supported. The taxpayer will have discharged the onus on him whether or
not the court accepts his evidence of some purpose of
acquisition outside the
scope of s. 26(a). Reference is made in argument to such cases as Pascoe v.
Commissioner of Taxation (1956)
30 ALJ 402; 11 ATD 108 and Jacob v.
Commissioner of Taxation (1971) 45 ALJR 568; 2 ATR 608; (1971) ATC 4192 ,
where expressions
as to onus of proof are to be found. But in those cases the
acquired property had been sold after a brief interval of time from
the date
of its acquisition. That fact clearly warranted a prima facie inference of
the requisite purpose and did call for the displacement
of that inference by
the appellant taxpayer. These cases do not really proceed upon the footing
that there is a presumption that
property is acquired for the purpose of
resale at a profit, so as to satisfy the first limb of s. 26(a). (at p687)
25. I turn then to consider whether the assessment could be supported on the
second limb of s. 26(a). It is quite clear to my mind
that this limb of s.
26(a) is closely related to the first limb of the section. Indeed, the Privy
Council in McClelland v. Federal
Commissioner of Taxation (1970) 120 CLR 487
thought that in relation to the facts of that case the second limb was
but
another
way
of expressing the same ideas as the first. The concept underlying
the sub-section is that in an Act confined to
the taxation
of
income there are
some circumstances in which what are isolated and not repetitive transactions,
which in other circumstances
would
yield a capital gain, can properly be
regarded as producing income. One such circumstance is the acquisition of
property by
the
taxpayer with the purpose of its resale at a profit in what is
in truth a commercial dealing: that is the first limb of the
section.
The
second limb, in my opinion, is founded upon the same notion but provides for
the case where the property acquired is
not itself
the subject of resale but
is intended at the time it is acquired to be the vehicle for making a capital
gain, again in
the course
of an isolated or single though perhaps complex
transaction in the nature of a commercial dealing. For there to be a
scheme
there
must be a plan: it must be the taxpayer's plan and it must exist, in my
opinion, at the time of the acquisition of
the property:
indeed, that
acquisition, in my opinion, must be itself part of the scheme and the property
acquired the intended vehicle
for carrying
the scheme into execution. Whilst
it need not be fully conceived in all its details at the time of acquisition
it must
exist as
a scheme which in principle embraces all the details yet to
be worked out. It must, of course, be a profit-making scheme,
that is
to say,
a scheme to make a capital profit, one which would not fall within s. 25. If
it were merely a scheme to make an
income profit,
then it will fall within s.
25. Section 26(a), it seems to me, is aimed at transactions which will not
fall within
s. 25 and which
apart from s. 26(a) would escape s. 25 because the
gain would not be an income gain. (at p688)
26. It will not be sufficient, it seems to me, that the scheme is a scheme to
resell that which was purchased at a profit. That,
it seems to me, is simply
another statement of the first limb of s. 26(a). As I have already indicated,
it seems to me that the
scheme must be a scheme to use that which was acquired
as a means of producing a capital gain, not by resale at a profit of that
which was acquired. It is because such a scheme does exist at the time of
acquisition that the subsequent gain, though by realization
of a capital
asset, can properly be regarded as income. If no scheme for the use of the
property has been formulated at least in
definitive principle at the time of
the acquisition, the acquired property becomes a capital asset of the
taxpayer. Subsequent realization
to the best advantage ought not to bring any
increase in its worth to tax. Indeed, that position is well authenticated in
the decided
cases. The realization of an asset in an enterprising way and in
order to obtain the maximum advantage therefrom does not make the
proceeds
liable to income tax. It follows, in my opinion, that a scheme of realization
of an asset not contemplated at the time
of its acquisition but subsequently
conceived and formulated, is not a scheme within the scope of the second limb
of the section.
Anything in the decided cases which would suggest that it may
be such a scheme ought not, in my opinion, to be followed. I am unable,
with
great respect, to accept the views expressed by Sir Victor Windeyer in
Buckland v. Commissioner of Taxation (1960) 34 ALJR,
esp at p 62; (1960) ALR,
at pp 603-604; 12 ATD, at p 169 . The scheme, if there be one, must be more
specific than an intention
to turn to profitable account what is acquired. Of
course, a scheme, entertained at the point of acquisition, may contemplate
alternatives
in its execution and, having determined the principles of the
scheme, leave details for later decision. But, with due respect to
what Sir
Owen Dixon said in Premier Automatic Ticket Issuers Ltd. v. Federal
Commissioner of Taxation [1933] HCA 51; (1933) 50 CLR
268 , there must
be an identifiable
specific scheme existing at the date of the acquisition of the property which
is to be used to
execute the scheme
to make a profit. That case, it seems to
me, was really a case of income derived in carrying
on a business by
use of
the patent
rights which had been acquired rather than a case falling within s.
26(a). (at p689)
27. Now, to apply these principles to the present case, it is necessary to
observe the facts which remain as proved facts after
Mr. Morris Steinberg's
evidence has been rejected. He made no relevant admissions, that is to say,
relevant to the use of the Wanneroo
land entertained when the shares were
acquired: nor, on the alternative view, when the interest in the land was
acquired. There
are many uses to which land or an interest in land may be put
in order to profit by its possession. The mere fact of its acquisition
does
not itself dominate any particular purpose to which the land is to be put:
nor itself raise an inference that it is to be resold
at a profit. It seems
to me, so far as the Wanneroo land is concerned, that all that is relevantly
known is that the shares in the
company were acquired with a view to gaining
possession of that land by means of a liquidation and a distribution in specie
of its
assets. I have already indicated that I do not think that any relevant
inference can be drawn from what was in truth a compulsory
sale of part of the
land to the Overseas Telecommunications Commission. Granted that there was a
plan which would qualify as relevantly
a scheme at the time the shares were
acquired, a scheme which involved taking the various steps to obtain
possession of the Wanneroo
lands or of an interest in them, there is, in my
opinion, no basis on which an inference can be drawn as to the particular use
to
which it was part of that scheme to put the Wanneroo lands. Of course, if
it were possible to draw an inference that a part of the
scheme was their
realization by sale at a profit, I would be able to conclude that there was,
at the time of the acquisition of the
shares, a scheme to use those shares as
a means of making a capital gain by the sale of the Wanneroo lands. However,
as I am unable
to infer any particular purpose or end to which the Wanneroo
lands were to be put when in the possession of the taxpayer, I am unable
to
conclude that there was a scheme within the meaning of the second limb of s.
26(a). In my opinion, the appeal as to the Wanneroo
land ought to be allowed
and the assessment set aside: the case does not fall within either limb of s.
26(a). (at p689)
The Rockingham Land.
28. Mr. and Mrs. Morris Steinberg took up the whole of the issued capital in
a company known as Malgor Pty. Ltd. ("Malgor"), which
I am prepared to accept
was formed at the instance of Mr. Morris Steinberg to acquire the Rockingham
land. Again, I accept the finding
of my brother Mason that the evidence of Mr.
Morris Steinberg as to what it was then intended to do with the Rockingham
land is not
acceptable. We are thus left with no material as to the purpose
for which the company acquired this land: for I do not see that
any relevant
inference can be drawn from the other evidence in the case. Subsequently, Mr.
Morris Steinberg intended to give five
hundred shares in this company to his
son, Malcolm. The accountant's method of implementing his instructions from
Mr. Morris Steinberg
would make it appear that the gift was of money and the
money was applied by Mr. Malcolm Steinberg in taking up the shares. But,
whichever view is taken of the matter, that is to say, whether the gift to Mr.
Malcolm Steinberg be regarded as a gift of shares
or a gift of money so that
Mr. Malcolm Steinberg acquired the shares by a cash subscription, there is no
evidence, in my opinion,
that the purposes which Morris Steinberg may have had
in forming Malgor were communicated to, adopted and acted upon by Malcolm
Steinberg
as purposes of his own. I think it quite insufficient in matters of
this kind that one should act upon suspicion. No doubt one
may readily
suspect that in family matters there may be free communication between the
members of the family on matters of business.
On the other hand, many men
play their cards very close to their chest and do not even discuss their
affairs with their wives, let
alone their sons, notwithstanding the
involvement of those members of the family in those affairs. Each of these
appellants is to
be treated, in my opinion, as an individual and not treated
as if wholly involved in all the planning and purposes of Mr. Morris
Steinberg. There is no suggestion that the gift, whether it be of money or of
shares, by Mr. Morris Steinberg to Mr. Malcolm Steinberg
was other than an
outright gift and that he did not hold the shares beneficially. (at p690)
29. After the acquisition by the company of the Rockingham land, a
partnership was formed by Mr. Morris Steinberg and his wife and
a trustee of
eighteen discretionary trusts. The Malgor shares of Mr. and Mrs. Steinberg,
but not those of Mr. Malcolm Steinberg,
were transferred to this partnership
known as "M.J.S. Investments". This transaction was part of an arrangement
advised by an accountant
to minimize income tax and estate duty. (at p690)
30. Later, in July 1964, sufficient shares were sold to a Mr. Markham to
constitute him a moiety shareholder in the issued capital
of Malgor. This
transaction was not in contemplation at any time prior to its actual
occurrence. The reasons for it were unconnected
with the formation of Malgor
or the purchase of the Rockingham land, or with the subscription by Mr. and
Mrs. Morris Steinberg for
shares in Malgor. Because of changes in the law,
the advantage sought to be obtained by the creation of the eighteen
discretionary
trusts disappeared: in consequence, the trusts were terminated.
But, clearly, neither the formation nor termination of these trusts
was in
contemplation at the time of the subscription for the shares or in connexion
with the acquisition by Malgor of the Rockingham
land. In the result, so far
as presently relevant, the issued capital of Malgor came to be held as to one
moiety by M.J.S. Investments
and Malcolm Steinberg and as to the balance by
Mr. Markham. (at p691)
31. Some two years after this situation had arisen, Malgor went into
voluntary liquidation and its assets, principally the Rockingham
land, were
distributed in specie amongst the shareholders. Thereafter Mr. Markham
endeavoured on his own account to sell his interest
in the Rockingham land but
succeeded only on the basis that his purchaser could acquire the interests of
M.J.S. Investments and Malcolm
Steinberg in that land. Accordingly, both
sales eventuated. My brother Mason decided that the amount paid by Mr.
Markham for the
shares in Malgor less the amount subscribed for them and the
amount received on the sale of the Rockingham land less the purchase
price
therefor were assessable under the second limb of s. 26(a), the relevant
scheme having in his Honour's view been made in 1960.
(at p691)
32. It is, in my opinion, plain that the shares in Malgor were not acquired
by subscription for the purpose of their resale. To
my mind, it is undeniable
on the evidence that the transaction with Mr. Markham was not in contemplation
at the time the shares were
taken up: nor was any sale of them then in mind.
Rather, they were to be used as part of the control of the Rockingham land.
(at
p691)
33. Further, assuming that there was material to establish the purpose of
Malgor in acquiring that land, there was no sale of it
by Malgor. Thus, in my
opinion, no case under the first limb of s. 26(a) could be supported. (at
p691)
34. It was submitted that the distribution in specie of the assets of Malgor
was an acquisition of the Rockingham land or of an
interest therein of the
partnership M.J.S. Investments. But, as I have already indicated in connexion
with the Wanneroo land, this
receipt of the interest in the Rockingham land
should not be regarded as a relevant acquisition, i.e. an acquisition at a
price or
cost. In any case, the value of that interest at the date of the
distribution in specie is not evidenced and may not have been significantly
different from the price obtained when the land as a whole was sold by the two
contracts of sale, one in which Mr. Markham was vendor
and that in which
M.J.S. Investments and Malcolm Steinberg were vendors. There is, in my
opinion, no basis in the evidence for concluding
that the land was received by
the taxpayers from the liquidator of Malgor with a view to its resale at a
profit. The sales to which
I have referred were some three years after the
liquidator's distribution in specie and were the result of the initiative and
efforts
of Mr. Markham rather than of Mr. and Mrs. Morris Steinberg and Mr.
Malcolm Steinberg. I do not think the necessary inference of
the purpose
attending the receipt of the interest in the land from the liquidator can be
drawn. (at p692)
35. I turn then to the submission that there was a scheme within the second
limb of s. 26(a). I have already indicated my views
as to the essentials of
such a scheme. In relation to the facts relating to the Rockingham land, the
relevant date at which, consistently
with the views I have expressed, the
scheme should exist is the date of the subscription for the shares in Malgor.
But I cannot find
any evidence in the transcript that any definite scheme then
existed for the use of those shares in order to produce a capital profit.
Doubtless, whilst no credence is given to Mr. Morris Steinberg's evidence as
to his proposals for the use of the Rockingham land,
it might be concluded
that there was an intention in some fashion to obtain and to turn to profit
the ownership and possession of
that land. But that must be true of every
acquisition of an asset which is not intended for consumption in one form or
another.
Such an intention is insufficient, in my opinion, in connexion with
either limb of s. 26(a). (at p692)
36. Thus, in this case, as in the case of the Wanneroo lands, even if there
were a scheme at the time of the subscription of the
shares to employ them to
obtain possession of the Rockingham lands or of an interest therein, it is not
possible, in my opinion,
to conclude that as part of that scheme, the
Rockingham lands were to be sold at a profit in a commercial transaction.
That they
were to be employed in some fashion may be accepted. But some of
the ways in which the land might have been used would not result
in a capital
gain by its sale in a commercial transaction, but perhaps only an income gain,
by its use, of a different and, presumably,
of a lesser amount. (at p692)
37. In addition, there were in connexion with the events following the
subscription for the shares, several fortuitous events, such
as the creation
and termination of the discretionary trusts and the sale of the shares to
Markham, which could not properly be referable
to any plan existing at the
time of the subscription for the shares but which played their part in the
subsequent outturn of the
transaction. As I have earlier indicated, if there
were not a relevant scheme on foot at the time of the subscription for the
shares,
they become capital assets and available for realisation to the best
advantage. That a plan or scheme of realization or of employment
was
subsequently devised would not, in my opinion, bring the proceeds of the
realization to tax within s. 26(a). (at p693)
38. For these reasons, I would dismiss the appeal in connexion with the
Innaloo lands and allow the appeals which concern the Wanneroo
and Rockingham
lands. (at p693)
GIBBS J. The facts of these five appeals are fully set out in the judgment
of Mason J. I shall restate some of them, for ease
of narration, but only in
outline. (at p693)
2. The appeal by the trustee of Judith Steinberg No. 2 Trust must clearly
fail so far as it relates to the assessment to income
tax on the share of the
profit derived from the sale of the land at Innaloo. On this aspect of the
case I need add nothing to what
is said in the judgments of the other members
of the Court. (at p693)
3. However, the other appeals raise more difficult questions. I shall turn
first to the appeal by Morris Steinberg against the
order dismissing his
appeal against the inclusion in his assessment to tax for the year ended 30th
June 1966 of $7,752 which was
said to be his share of the profit emerging from
the sale of about 384 acres of land at Wanneroo, about twelve miles from
Perth.
That land formed part of a larger tract of about 720 acres that had
been owned by a company, Golden West Land Development Co. Pty.
Ltd. ("Golden
West"). In July 1965 all the issued shares in that company were acquired by a
syndicate consisting of Morris Steinberg,
his wife Judith, and his two
brothers and their respective wives. Morris Steinberg acquired 6,803 shares
and his wife 6,802 - between
them they held one-half of the issued shares. The
company was put into liquidation in October 1965 and the land was thereafter
distributed
in specie, so that Morris Steinberg became entitled to an interest
of 6,803/27,210 in it. On 21st June 1966 the area of about 384
acres was sold
to the Overseas Telecommunications Commission, which had, earlier in that
year, told Morris Steinberg that it wished
to acquire that area and would, if
necessary, do so compulsorily. The acquisition of the land by the Commission
was not contemplated
when the shares were bought or the distribution in specie
was made. (at p694)
4. It was admitted that the purchasers bought the shares in Golden West as a
means of acquiring the land at Wanneroo which was its
principal asset. Morris
Steinberg gave evidence that the land was acquired for the purpose of building
cottages on ten-acre lots
and letting the land to tenants who, it was said,
might wish to engage in market gardening. The reasons given by Mason J. for
rejecting
this evidence were completely convincing. (at p694)
5. The question that then arises, however, is whether it was right to
conclude, as his Honour did, that the shares in the company
Engineering Union,
Australian Section were bought to enable the purchasers to acquire the land
for the main or dominant purpose of
profit-making by sale. The fact that a
witness is disbelieved does not prove the opposite of what he asserted: Scott
Fell v. Lloyd
[1911] HCA 34; (1911) 13 CLR 230, at p 241 ; Hobbs v. Tinling (C.T.) & Co. Ltd.
(1929) 2 KB 1, at p 21 . It has sometimes been
said that where
the story of a
witness is disbelieved, the result is simply that there is no evidence on the
subject (Jack v. Smail
[1905] HCA 25; (1906) 2 CLR
684, at p 698 ; Malzy v. Eichholz (1916) 2
KB 308, at p 321 ; Ex parte Bear; Re Jones (1945) 46 SR (NSW)
126, at p
128 ),
but although
this is no doubt true in many cases it is not correct as a
universal proposition. There may be circumstances
in which an inference
can
be drawn from the fact that the witness has told a false story, for example,
that the truth would be harmful
to him; and it is
no doubt for this reason
that false statements by an accused person may sometimes be regarded as
corroboration
of other evidence
given in a criminal case: Eade v. The King
[1924] HCA 9; (1924) 34 CLR 154, at p 158 ; Tripodi v. The Queen [1961]
HCA 22; (1961) 104 CLR 1 .
Moreover, if the
truth must lie between two alternative states of fact,
disbelief in evidence that one
of the
state of facts exists may support the
existence of the alternative state of facts: Lee v. Russell (1961) WAR 103,
at p 109
. In
the present case, Morris Steinberg had,
between 1956 and 1969,
been a member of no less than thirteen syndicates which had
been formed
for
the purpose of acquiring land
and reselling it at a profit. The Wanneroo
land, when purchased, was not put to any
use; it is
true that the owners were
virtually
compelled to sell some of it quite soon after it was acquired, but
over 300 acres
were, at the
date of the trial, still retained,
and no
suggestion was made of any intention to use them for any purpose except
letting
as ten-acre
lots. In these circumstances,
the fact that Morris
Steinberg told a false story as to the purpose for which the land
was intended
to be used assisted the conclusion,
to which the other evidence pointed, that
the true purpose of acquiring it - a purpose
which
Morris Steinberg did not
wish to reveal
because it would harm his case - was to resell it at a profit.
The conclusion which
Mason
J. reached on this issue was, in my opinion,
correct. (at p695)
6. It then becomes necessary to consider whether the profit that arose on the
sale of the land was profit arising from the sale
by the taxpayer of property
acquired by him for the purpose of profit-making by sale, within the first
limb of s. 26(a) of the Income Tax Assessment Act (Cth), as amended ("the
Act"). To satisfy this provision, it is necessary that the property, whose
sale yielded a profit, should
be the same property as that which was acquired
for the purpose of profit-making by sale and that the taxpayer must have been
the
person who both acquired and sold the property. The section does not
require that the acquisition should have been effected by any
particular
method - it is not limited - for example, for acquisition by purchase. It is
the purpose, not the mode, of the acquisition
that is specified in s. 26(a).
Because the acquisition must have been for the purpose stated, it follows that
if the taxpayer was
a passive recipient of the property
- for example, if he acquired it as the result of a bequest (McClelland v.
Federal Commissioner of Taxation (1970)
120 CLR 487,
at p 493 ) or as an
unsolicited gift (Federal Commissioner of Taxation v. Williams [1972] HCA 31; (1972) 127 CLR
226
) - it will, generally speaking,
be impossible to say that it was acquired
for the purpose of profit-making by
sale. In the present
case, Morris
Steinberg gained
a profit from the sale of an interest in land, and although
he first acquired
shares, there can in
my opinion be no doubt that later,
when
the company transferred the land in specie to the shareholders, he acquired
the interest
in the land whose sale yielded the
profit. Since the shares were
bought to enable the purchasers to obtain their interests
in the
land, with
the main or dominant purpose
of selling the land at a profit, it is right to
hold that the acquisition of the land
was
for the purpose of profit-making by
sale.
(at p695)
7. There was no evidence as to the value of the land when the distribution
was made to the shareholders. It is apparent either
that the purchasers of
the shares in Golden West obtained a considerable bargain, or that there was a
steep rise in the value of
the land between July 1965 and June 1966; whether
there was such a rise and, if so, whether it occurred before or after the
distribution,
does not appear. The Commissioner, in assessing the profit,
calculated the difference between the amount obtained on the sale of
the land
and the amount paid to acquire the shares. The submission that is was
erroneous, because the land was acquired at a date
subsequent to the purchase
of the shares when it might reasonably be thought to have had a different and
enhanced value, was rejected
by Mason J. I am doubtful whether this
submission was open to the taxpayer, since the grounds stated in his objection
do not appear
to cover it. I respectfully agree that it would be most
desirable that rules should be made requiring the Commissioner and the
taxpayer
to define the issues to be litigated on taxation appeals, but no such
rules have been made, and we are bound to apply s. 190(a) of
the Act which
limits the taxpayer to the grounds stated in his objection. However, I need
not take up time with a discussion of
the meaning and effect of the grounds
stated in the notice of objection lodged on behalf of Morris Steinberg,
because I have in any
case reached the conclusion that Mason J. was correct in
the view that he formed. His Honour said:
"In this instance the relevant figure is what it cost the individual
to acquire his interest in the land. The cost to the
individual was the amount which he expended in the purchase
of the shares together with any other expense incurred
in obtaining a title to the land."
It is true that the price paid for the shares could not accurately be
described as the price of the land, for it is clear that the
purchasers did
not, simply by acquiring their shares in Golden West, acquire the land which
was an asset of that company. It is
true also that since the distribution in
specie was made in satisfaction of the rights of the shareholders, the
"consideration" for
the acquisition by the shareholders of the land from the
company would be the full value of the land at the time of distribution:
Archibald Howie Pty. Ltd. v. Commissioner of Stamp Duties (N.S.W.) [1948] HCA 28; (1948) 77
CLR 143 ; Davis Investments Pty. Ltd.
v. Commissioner
of Stamp Duties (N.S.W.)
[1958] HCA 22; (1958) 100 CLR 392, at pp 407-408 . In applying the provisions of s. 26(a),
it is not permissible to ignore
or gloss over the legal
effect of the
transactions actually carried out: Hobart Bridge Co. Ltd.
v. Federal
Commissioner of Taxation
[1951] HCA 33; (1951) 82 CLR 372, at pp 385-386 . However, s. 26(a)
speaks of the "profit arising
from the sale" - it does not refer to the price
of the property, or the consideration paid for it. The profit arising from the
sale
will be the net pecuniary gain resulting from
the acquisition and resale
of the property, and will be represented by the excess of
the amount received
on the sale over the amount
outlayed in acquiring the asset plus the expenses
incurred in getting it ready for
sale and selling it. It is not uncommon for
the
cost of the acquisition of property to be incurred before the property is
acquired.
For example, on a sale the price may be paid
before the property
passes. In the circumstances of the present case, where the shares
were
bought to enable the land to be acquired,
the cost of the shares and of the
winding up of the company and distribution of the
assets can rightly be
regarded as the amount
actually outlayed for the purpose of, and in the
process of, acquiring the land, although
the acquisition was effected not
directly,
but by a number of steps. In my opinion, therefore, Mason J. was
right for the reasons
which he gave. It should be added that if
he had been
wrong, and if it had been necessary to ascertain the price by comparing the
amount obtained for the land with its value
at the date of distribution (plus
of course expenses of sale), the taxpayer has produced
no evidence to show
that the price paid
for the shares in July did not represent the value of the
land in or about the following
October when the land was distributed, and
has
not discharged the burden cast on him by s. 190(b) of the Act in proving that
the
assessment is excessive. This would not have
precluded the Court from
remitting the matter to the Commissioner if it had appeared
that he had
assessed on an erroneous principle
but, as I have said, that is not the case.
(at p697)
8. For these reasons, in my opinion the appeal by Morris Steinberg relating
to the Wanneroo land should fail. It is of course unnecessary,
on the view
that I take, to consider the alternative argument that the second limb of s.
26(a) supports the assessment. (at p697)
9. The remaining appeals concern the sale of shares in Malgor Pty. Ltd.
("Malgor") and the sale of land at Rockingham. Malgor was
formed on 7th
November 1960 to purchase the Rockingham land; its initial shareholders were
Morris Steinberg and Judith Steinberg.
Mason J. rejected the evidence of
Morris Steinberg that the land was bought as a grazing property and held that
it was acquired
pursuant to a plan or scheme which had the making of a profit
as the end in view. This finding was in my opinion correct - I would
add
nothing to what Stephen J. has said as to the facts relevant to this question,
although I shall add a few observations as to
the nature of a scheme within
the meaning of s. 26(a) of the Act. On 25th March 1963 new shares in Malgor
were issued - some to
Morris Steinberg and to Judith Steinberg, but in
addition 500 'C' class shares to their son Malcolm. The shares were issued to
Malcolm
because his father wished to make a gift to him of some of his shares,
but because of the manner in which the instructions given
by Morris Steinberg
were put into effect, the gift technically was not of the shares but of the
moneys paid in respect of them.
On 1st July 1963, Morris Steinberg and Judith
Steinberg sold their shares to M.J.S. Investments, a partnership which had
been formed
on 1st June 1963 between Morris Steinberg, Judith Steinberg and
Mr. Rhine as the trustee of eighteen trusts (including Judith Steinberg
No. 2
Trust). This action was taken on the advice of Mr. Rhine for the purpose of
reducing Morris Steinberg's liability to income
tax and estate duty.
According to the agreement setting up M.J.S. Investments, Morris Steinberg and
Judith Steinberg both held 'A'
units in the partnership which conferred on
them controlling voting powers but only limited rights to share in the profits
and in
the distribution of assets on a winding up. Early in 1964, Morris
Steinberg was short of funds and to raise money he eventually
arranged with
one Markham that the latter would buy half of the share capital in Malgor.
Pursuant to this arrangement, on 31st July
1964 each shareholder in Malgor
transferred to Mr. Markham one-half of his or her holding in that company.
The Commissioner has assessed
to tax for the year ended 30th June 1965 the
share of the trustee of Judith Steinberg No. 2 Trust in the profit derived by
M.J.S.
Investments on the sale of the shares in Malgor beneficially owned by
M.J.S. Investments and the profit made by Malcolm Steinberg
on the sale of his
shares in Malgor and these assessments are the subject of two of the appeals.
In July 1965, because of changes
in the income tax law, the eighteen trusts
were terminated and their assets, namely the units in the partnership, were
distributed
under the powers contained in the trust instruments to various of
the beneficiaries named therein, including Morris Steinberg and
Malcolm
Steinberg. Subsequently, Malgor was wound up and it was resolved that the
liquidator should divide among the members shares
in the land in accordance
with their respective shareholdings. In consequence of this resolution
undivided interests were, on 3rd
March 1967, transferred to Morris Steinberg,
Judith Steinberg and Malcolm Steinberg - Malcolm's interest was 250/2,200.
The interests
acquired by Morris Steinberg and Judith Steinberg belonged
beneficially to M.J.S. Investments (to which their shares had, as I have
said,
been sold) and those interests were divided amongst the various beneficiaries
so that a further interest of 68/792 was transferred
to Malcolm and an
interest of 85/792 to Morris Steinberg. Finally the interests of the members
of the Steinberg family in the Rockingham
land was sold on 3rd November 1969.
The inclusion in the assessments of Morris Steinberg and Malcolm Steinberg for
the year ended
30th June 1970 of the profit said to result from the sale of
these interests forms the subject of the other appeals. (at p699)
10. The principal submission made on behalf of the Commissioner, and accepted
by Mason J., was that the four assessments under appeal
were rightly made
under the second limb of s. 26(a). I adhere to the views that I have
previously expressed as to the effect of
that provision: see XCO Pty. Ltd. v.
Federal Commissioner of Taxation [1971] HCA 37; (1971) 124 CLR 343, at pp 349-350 ; Federal
Commissioner of
Taxation v. Williams (1972) 127 CLR, at pp 250-251 , where
earlier authorities
are cited. A profit-making scheme
within s. 26(a)
is a
plan, design or programme of action devised and put into effect for the
purpose
of making a profit. It must
be a scheme carried
out by the taxpayer
himself or on his behalf. It appears that it should - at least
where the
transaction is
one of acquisition and
resale - exhibit features which give it
the character of a business deal. The mere
realization of a capital
asset,
albeit in an
enterprising way, would not amount to the carrying out of a
profit-making scheme. (at
p699)
11. In the present case, Morris Steinberg devised and carried into effect a
profit-making scheme when in 1960 he arranged for Malgor
to be incorporated
and to purchase the Rockingham land. These things were done in accordance with
a plan devised for the purpose
of making a profit, and what was done had the
character of a business deal. It cannot be said with certainty whether the
purpose
of the scheme was to make a profit from the sale of the shares or from
the sale of the land, but that is immaterial: if the scheme
had the requisite
purpose it was a profit-making scheme notwithstanding that the exact manner in
which the profit was to be made
had not been finally decided. On the findings
of Mason J. it must be concluded that it was part of Morris Steinberg's plan
that
the Rockingham land should appreciate in value yielding a profit for
himself or his family, although how or when he may not have
foreseen. I am in
agreement with the view expressed by Mason J. that "it is not an essential
element of a profit-making scheme in
s. 26(a) that every step which culminates
in the making of a profit should be planned or foreseen before the scheme is
put into operation".
Schemes may be precise or vague; every detail may be
arranged in advance, or the working out of the plan may be left for decision
in the light of circumstances as they arise. It is no objection to a plan that
it allows room for manoeuvre. When property is bought
with the purpose of
making a profit in the easiest or most advantageous way that may present
itself, and the taxpayer adopts "one
of the many alternatives" that his plan
leaves open, thereby returning himself a profit, he will rightly be said to be
carrying out
a profit-making scheme: cf. Premier Automatic Ticket Issuers
Ltd. v. Federal Commissioner of Taxation [1933] HCA 51; (1933) 50
CLR 268, at p 300
;
Buckland v. Commissioner of Taxation (1960) 34 ALJR, at p 62; (1960) ALR, at
pp 602-603; 12 ATD, at
p 169 . (at
p700)
12. A question of some difficulty is whether the scheme was abandoned when in
1963 Morris Steinberg sold his shares in Malgor to
M.J.S. Investments. The
partnership was formed and the trusts were created with the intention of
diminishing Morris Steinberg's
liability to income tax and for estate planning
purposes, and not for the purposes of the profit-making scheme. However, that
does
not mean that the scheme ceased to be carried out - it was still intended
to make the profit for which the scheme had been brought
into being, although
after the events of 1963 Morris Steinberg personally stood to benefit less,
and his family more, from any profit
that might be made. The profit-making
scheme was not abandoned in 1963; the arrangements made in 1963, and varied in
1965, affected
the possible destination of the profits made by carrying out
the scheme but did not bring the scheme to an end. Morris Steinberg
controlled all the relevant events that occurred; his original plan was to
make a profit in the way that might appear most advantageous
and he put this
plan into execution in such a way that in the end he did gain a profit from
the sale of his own interest in the land.
In my opinion, Mason J. was right
in concluding that the eventual sale in 1969 by Morris Steinberg of his
interest in the land was
something done in carrying out the scheme made in
1960, notwithstanding the intervening events. The assessment of Morris
Steinberg
to tax was rightly made. (at p700)
13. However, the position of the other appellants is materially different.
In 1960 Malcolm Steinberg had no shares in Malgor and
Judith Steinberg No. 2
Trust was not then in existence - it is clear that at that time neither
Malcolm Steinberg nor Mr. Rhine, who
subsequently became the trustee, was a
party to the scheme. Mason J. found that Malcolm Steinberg was at all times
aware of his
father's intentions with respect to the land and that Mr. Rhine
also was aware of those intentions. He further found that subsequently
they
participated in the events which occurred, culminating in the sale of the
land, and concluded that they became parties to the
scheme and executed it so
far as it was necessary for them to do so. Although I accept as correct the
findings of ultimate fact
made by Mason J., I am, with respect, unable to
accept his conclusion that Malcolm Steinberg and the trustee of Judith
Steinberg
No. 2 Trust derived a profit from the carrying out of a
profit-making scheme. I have already pointed out that the scheme to which
s.
26(a) refers must be the scheme of the taxpayer. The income of a taxpayer is
not assessable within s. 26(a) simply because he
has profited from another's
scheme. The question then is whether Malcolm Steinberg and the trustee of
Judith Steinberg No. 2 Trust
at some time in or after 1963 became parties to
the scheme originated by Morris Steinberg so that thereafter the scheme was
executed
on their behalf as well as on behalf of Morris Steinberg. Before
attempting to decide that question, it is convenient to point out
that the
profit made by these taxpayers is not assessable within the first limb of s.
26(a). Malcolm Steinberg acquired his shares
through the bounty of his father,
even if, technically, the gift was of money rather than of shares. There is
nothing to suggest
that the gift was solicited or conditional. McClelland v.
Federal Commissioner of Taxation (1970) 120 CLR 487 and
Federal Commissioner
of Taxation v. Williams [1972] HCA 31; (1972) 127 CLR 226 provide sufficient authority for
the view that the
shares were not acquired by Malcolm
Steinberg for the
purpose
of profit-making by sale. The same of course is true of the
acquisition
of the interest in land which
was transferred to Malcolm
Steinberg
because he was a shareholder in Malgor. The other property now
in question
comprises the shares
which came to belong beneficially
to M.J.S. Investments
(from the sale of which the trustee of Judith
Steinberg No. 2 Trust derived
a
benefit), and the interests in
land (one of which was transferred to Malcolm
Steinberg) which can
be regarded as the fruit of those
shares. M.J.S.
Investments
acquired its shares in Malgor because it was thought convenient
for
income tax planning and estate duty
purposes that the property
of Morris
Steinberg and Judith Steinberg should be sold to the partnership
and that
trusts should be created.
The transfers of the
land made to the beneficiaries
(including Malcolm Steinberg) when the trusts
were terminated were made
because
changes in the law
made it no longer convenient to preserve the trusts
for the purposes of income
tax and estate duty planning. It
is clear that the
reasons for the issue of shares to Malcolm Steinberg and the sale of the
shares
to M.J.S. Investments and the transfer
of the interests
in the
Rockingham land to the beneficiaries were unconnected with the purpose
of
making a profit from the Malgor
shares or the Rockingham
land. The shares
acquired by Malcolm Steinberg and by M.J.S. Investments
and the land acquired
by Malcolm
Steinberg were not acquired
for the purpose of profit-making by
sale, even if it was envisaged or
intended that sooner or later the
shares or
land might be sold
at a profit. These circumstances not only render the first
limb of
s. 26(a) inapplicable but are of
importance in deciding whether
the
second limb applies. I agree with the observation of Menzies
J. in Federal
Commissioner of Taxation
v. Williams (1972) 127 CLR,
at p 245 , that there may
be "cases where a person ventures what
has been received by gift in the
carrying
on or carrying out of
a profit-making undertaking or scheme". The
present is however not
such a case. All that was done by Malcolm
Steinberg
and by the
trustee was to realize assets that they had acquired for purposes
other than profit-making. To do that is not
to carry out a profit-making
scheme within s. 26(a): McClelland v. Federal Commissioner
of Taxation (1970)
120 CLR 487 . Their
actions accorded with the
intentions of Morris Steinberg,
as they knew, but
this was not enough to make them parties to his scheme.
It
is of crucial importance
that they did not acquire the property in question
for the purpose of profit-making, or to effectuate
the scheme originated by
Morris
Steinberg; having acquired their property for
reasons unconnected with
the scheme, they did no more
than take advantage of the opportunities
that
offered to realize it to the
best advantage. (No doubt Morris Steinberg also
acquired
the interest in the land, which he ultimately
sold, when the trustee
divided
the land among the beneficiaries, but from the beginning
his purpose
had been to profit, in one way
or another, from the increase
in value of the
land.) (at p702)
14. For these reasons, I hold that the profit that arose on the sale by
Malcolm Steinberg of his shares in Malgor, the profit derived
by the trustee
of Judith Steinberg No. 2 Trust from the sale of the shares in Malgor and the
profit that arose on the sale by Malcolm
Steinberg of his interest in the land
were not assessable within s. 26(a). (at p703)
15. It was contended on behalf of the Commissioner that the profit which
arose to Malcolm Steinberg and the trustee of Judith Steinberg
No. 2 Trust was
income according to ordinary concepts. In the circumstances that I have
mentioned, and having regard to the decision
in McClelland v. Federal
Commissioner of Taxation (1970) 120 CLR 487 , this argument cannot succeed.
(at p703)
16. For these reasons, I would dismiss the two appeals by Morris Steinberg
and would dismiss the appeal by the trustee of Judith
Steinberg No. 2 Trust in
so far as that appeal relates to the appellant's share of profit derived from
the sale of the land at Innaloo.
However, I would allow the two appeals by
Malcolm Steinberg, and would allow the appeal by the trustee of Judith
Steinberg No. 2
Trust in so far as it relates to the appellant's share of the
profit derived from the sale of the shares in Malgor. (at p703)
STEPHEN J. These five appeals are from the dismissal by Mason J. of
taxpayers' appeals against the Commissioner's disallowance
of objections to
their assessments to income tax. (at p703)
2. A full examination of the complex facts involved in these five appeals had necessarily to be undertaken both at first instance and again by this Court on appeal; the narration of those facts in succinct form appears in the reasons for judgment of the learned trial judge, which have already been reported (1975) 134 CLR 640 at pp 644 et seq . Three distinct transactions are involved in these five appeals, which were heard together, and for appellate purposes it will suffice if the facts critical to each are shortly stated as each transaction is dealt with. (at p703)
The Innaloo Land.
3. The first transaction concerns a dealing with some seven and
three-quarter acres of land at Innaloo near Perth, in Western Australia.
Mr.
Morris Steinberg first displayed interest in the purchase of this land in
December 1959, which he said he hoped to use as the
site for a hotel and
shopping centre. As a result of transactions the details of which remain
obscure Mr. Steinberg and his two
brothers, as members of a partnership styled
Murray's Furnishing Stores, had, by February 1960, acquired portion of this
land together
with what may be described as a right of first refusal, for a
term of three years, in respect of the balance. Some six weeks later
the
Steinbergs, in March 1960, were requested to and did grant to a third party,
Waikiki Motel Ltd., which was seeking a site for
a hotel in the locality, an
option to purchase the greater part of the land which they had bought; this
option was not exercised
and six months later, in September 1960, the partners
granted to that company a further option to purchase and to take an assignment
of their right of first refusal. This option expired unexercised in October
1961 and in November 1961 the Steinbergs caused an application
to be made for
re-zoning of the land so that it might be used as the site of a hotel,
shopping centre and service station. Approval
in principle to re-zoning as a
hotel-motel site, subject to certain conditions, was received in December 1961
but further details
were called for by the local authority before it would
consider the application for additional re-zoning necessary for the two other
proposed commercial uses. On 12th January 1962 the authority's conditions
were accepted subject to certain qualifications including
its willingness to
consider an application for a service station; no further mention was made of
the proposed shopping centre. Then
three days later, on 15th January 1962,
the entire site, less half an acre for a service station, was offered for sale
to a brewery,
which was informed of the authority's approval in principle and
of the Steinbergs' qualified acceptance of the associated conditions.
However
the brewery rejected this offer and nothing further occurred relevant to the
land until mid 1963 when steps, ultimately unsuccessful,
were taken to promote
the land as a site for a shopping centre. Finally, in March 1965, the whole
site was sold for $100,400. (at
p704)
4. By that time the partnership of Murray's Furnishing Stores no longer
consisted of the three Steinberg brothers; in 1963 Mr. Morris
Steinberg had
reorganized his assets and business interests upon the advice of his
accountant with a view to tax consequences and
estate planning, so that when
the Innaloo land was finally sold in 1965 a share of the proceeds of sale came
to the hands of the
trustee of a trust established by Mr. Steinberg's wife; it
was to the inclusion in the assessable income of that trust of part of
that
share of proceeds that the objection was taken which forms the subject of this
appeal. (at p704)
5. The Commissioner justifies his assessment by reference to both limbs of s.
26(a) of the Income Tax Assessment Act. In view of
the restricted terms of
the taxpayer's notice of objection no point arises concerning the
consequences, if any, of changes
in partnership
membership between the dates
of acquisition and final sale of this land. The only question is whether,
when the land
was first acquired
in 1960, it was acquired for the purpose of
profit-making by sale. (at p705)
6. Before his Honour the taxpayer relied very largely upon the evidence of
Mr. Morris Steinberg to show that resale at a profit
was not the sole or
dominant purpose in acquiring the Innaloo land; however Mason J. found his
evidence to be open to such serious
doubt that he was not prepared to accept
it on this aspect. His Honour gave quite detailed reasons for this conclusion
and nothing
that was said by appellant's counsel on this appeal led me to
doubt its correctness in any way. My own subsequent reading of the
transcript
of evidence and exhibits has but confirmed me in this view. His Honour having
formed this view of the evidence which
he heard from Mr. Steinberg, a view
which was clearly open to him, it necessarily followed that he should dismiss
the taxpayer's
appeal and in my view the appellant cannot now succeed in this
present appeal. (at p705)
7. The purpose of acquisition of the land advanced on behalf of the appellant
was its retention and use as a site for a hotel-motel,
shopping centre and
service station and not its resale at a profit. Yet the light cast upon
intention by the steps taken in relation
to the land after its acquisition, to
some of which I have briefly referred, suggests the contrary; some of those
steps were, at
best, equivocal and others of them strongly suggest the
possession at the time of acquisition of a positive intention to turn the
land
to account by its profitable resale. In such a situation an appellate court,
being in any event slow to form an impression
different from that gained by
the trial judge when based upon oral testimony which he alone has heard and
the effect of which it
can only gain from the written word, will be all the
less disposed to interfere with the decision at first instance. Here I find
no ground for doing so. I would accordingly dismiss this appeal relating to
the Innaloo land. (at p705)
The Wanneroo Land.
8. A second appeal, relating to land at Wanneroo, involves a different
taxpayer, in this instance Mr. Morris Steinberg himself.
Wanneroo lies a few
miles to the north of Perth and there, in 1964, Golden West Land Development
Co. Pty. Ltd. owned some 720 acres
which had been approved for subdivision
into ten-acre lots and which it offered to sell to Mr. Steinberg. He did not
accept this
offer but did, in September 1964, take on behalf of Malgor Pty.
Ltd., a company which he had caused to be incorporated some years
earlier, an
option to purchase not the Wanneroo land but instead the issued capital of the
Golden West company. This option, although
later extended in term, was never
exercised by Malgor Pty. Ltd. It was the three Steinberg brothers, their
wives and a son of Morris
Steinberg who, in July 1965, became the purchasers
of the issued capital of Golden West for a total purchase price of $147,614.
It
is conceded that they did this as a means of acquiring the Wanneroo land
which was then, it seems, the only substantial asset of
that company. Morris
Steinberg and his wife together acquired half the issued capital; their son
did not in fact continue as a purchaser,
instead his small entitlement was
added to the shares bought by the other four Steinberg shareholders. Then, in
October 1965, Golden
West went into voluntary liquidation, and the liquidator
later distributed in specie to its six members its interest in the Wanneroo
land, its articles of association having been amended so as to permit of the
adoption of such a course. Soon afterwards, in the
first half of 1966, the
Overseas Telecommunications Commission told Mr. Steinberg that it wished to
acquire half the Wanneroo land
for a radio transmitting station and that it
would, if necessary, have recourse to compulsory acquisition. Accordingly, in
June
1966, the six Steinbergs sold that half of the land to the Commission for
$172,957. It is on his share of the profit disclosed by
that sale price when
compared with the initial cost of the shares in Golden West that Mr. Morris
Steinberg has been assessed to tax,
the Commissioner relying upon ss. 25 and
26(a) of the Act. The taxpayer's present appeal is against the dismissal by
Mason J. of
the taxpayer's original appeal against the Commissioner's
disallowance of his objection to that assessment. (at p706)
9. Two distinct arguments were put on behalf of the taxpayer; first, it was
said that the intention with which the shares in Golden
West were acquired
was, through them, to acquire the Wanneroo land but not so as to profit by its
sale; rather it was intended to
subdivide that land into ten acre residential
farmlets, erect improvements on them and lease them to tenant farmers.
Secondly, it
was said that in any event neither limb of s. 26(a) can have any
application; the first limb was inapplicable because, although the
taxpayer
did sell his interest in the Wanneroo land in 1966, he was never a purchaser
of that land, which only came to him on a distribution
of assets in specie in
a liquidation; moreover there was no assessable profit which arose from the
sale of any property acquired
by him for the purpose of profit-making by sale.
The second limb of s. 26(a), it is said, was also inapplicable because, even
if
it be thought, contrary to the taxpayer's primary submission, that the
transaction was intended to conclude in sales of the land
in subdivision, this
constituting a profit-making undertaking or scheme, nevertheless that scheme
was interrupted by the forced sale
to the Commission; there was thus no profit
which arose from the carrying on or carrying out of the scheme. In the course
of the
hearing of this appeal the taxpayer's second argument came to be
somewhat further developed, as will appear when I come to consider
it in more
detail. (at p707)
10. In considering the first argument it is to be noted that it was again Mr.
Morris Steinberg whose evidence was largely relied
upon as establishing what
was the purpose with which the shares, and through them the lands, were
acquired. Once again Mason J.,
after criticizing aspects of this witness's
evidence, concluded that he was not satisfied that the purpose of acquisition
was that
of development and letting out on lease to tenant farmers, as Mr.
Steinberg had testified. His Honour pointed to a considerable
number of
aspects which made such a purpose improbable and in consequence specifically
rejected Mr. Steinberg's evidence of intention.
(at p707)
11. Fundamental to the question of intention was acceptance of the view that
the land was acquired for the purpose of subdividing
it into about sixty-eight
ten-acre lots, each to have a small cottage built on it and then to be let to
a working tenant farmer.
According to the taxpayer this concept did not occur
to him until after he had obtained an option over the land in favour of Malgor
Pty. Ltd., a company in which he and his family then held only a one half
interest, the remainder of its shares being held by interests
associated with
a Mr. Markham who was a very experienced dealer in real estate and the
organizer of numerous syndicates for the purchase
and resale of land in and
near Perth. There is nothing in the evidence to negate, and much which
supports, the view that at this
stage the contemplated purpose was to resell
the land either before or after its subdivision. (at p707)
12. Mr. Steinberg asserted that later, before actually buying the shares in
Golden West, this novel idea of leasing to tenant farmers
first occurred to
him; he made no inquiries whatever concerning its feasibility, although he had
not previously heard of it being
attempted, nor did he take any steps to have
the land's suitability for farming assessed. There was no investigation to
determine
whether there was any demand for tenancies of this nature or whether
it would be possible to find over sixty tenant farmers prepared
to undertake
market gardening as tenants on ten acre lots on which they would reside. The
capital cost of such a venture, according
to his own generalized and somewhat
tentative estimates, was considerably in excess of half a million dollars and
his financial resources
and those of his relatives, even with the aid of
substantial loan moneys, appeared to be quite inadequate for the purpose. (at
p708)
13. With these considerations in mind and having formed the view that Mr.
Steinberg was an astute and able businessman already experienced
in land
purchase and development it is perhaps not surprising that his Honour was not
satisfied that Mr. Steinberg in fact acquired
the Golden West shares with a
view to developing the Wanneroo land in the manner stated by him but rather
concluded that the shares
were purchased so as to enable the purchaser to
acquire that land for the purpose of profit-making by sale. (at p708)
14. I turn now to the taxpayer's second argument, that s. 26(a) has in any
event no application even if Mr. Steinberg's evidence
of purpose be rejected.
(at p708)
15. In my view the Commissioner cannot rely upon the first limb of s. 26(a)
to support his present assessment. The profit included
in the taxpayer's
assessable income is, broadly speaking, the difference between the price paid
for half the Golden West shares and
the price later realized on the sale of
half the Wanneroo land. Implicit in this is the view that the cost of the land
to the taxpayer
was the cost to him of the shares, yet this is not the case;
the taxpayer got no land when he bought the shares but only those rights
to
which a shareholder is entitled. Those rights include a right, on a winding
up, to an aliquot share of the surplus of assets
over liabilities, which might
in this instance be satisfied by a distribution of assets in specie; but only
in that loose sense had
he any interest in the company's land. As was pointed
out by Gibbs J. in Ord Forrest Pty. Ltd. v. Federal Commissioner of Taxation
(1974) 130 CLR 124, at p 148 , a shareholder obtains no rights of property in
the assets of the company in which he
holds shares.
The fact that the
taxpayer bought the shares so as to acquire the land does not, in my view, in
any way affect this
position; it
does not entitle the Commissioner to apply to
the land the price paid for the shares. (at p708)
16. What then was the price, if any, paid for the land from which a "profit"
may properly be calculated? In Archibald Howie Pty.
Ltd. v. Commissioner of
Stamp Duties (N.S.W.) [1948] HCA 28; (1948) 77 CLR 143, at p 153 Dixon J. described a
distribution in specie
to shareholders
as properly to be regarded as "the
acquisition
of assets for a consideration." It is that consideration which
may,
for the purposes
of the first limb of s. 26(a), be regarded
as the cost
of the land so as to form the starting point in any calculation
of profit;
it
alone represents the cost to the taxpayer
of the property which he
subsequently sold. Unfortunately there is no evidence
of the
money value of
that consideration, being the
value of Mr. Steinberg's entitlement as a
contributory in the winding up of Golden
West
and which was satisfied by the
distribution
to him of an interest as tenant in common in the Wanneroo land.
Indeed the date
of the
distribution in specie, which I regard as
the relevant
date, does not clearly appear; the liquidation occurred in November
1965,
the
shares having been bought for $147,614
only some four months earlier. If that
price, in what was a transaction at arm's
length,
in any way accurately
reflected the then
value of the Wanneroo land it increased very much in the
ensuing months since on
13th May
of the following year a price of $172,957
for
only half the land was agreed to between Mr. Steinberg and the Overseas
Telecommunications
Commission. (at p709)
17. Were it necessary for the Commissioner to rely upon the first limb of s.
26(a) the appropriate course would be to remit the
matter to him for
reassessment, since apart from this question of the basis of calculation of
profit I would otherwise regard the
first limb of s. 26(a) as applicable;
there was here a relevant acquisition by the taxpayer of the interest in land
which he later
sold, it occurred when the distribution in specie was made.
The taxpayer was no mere passive recipient of the land; the entire
transaction,
beginning with the Golden West shares, was, on the contrary,
initiated by him so that he and others might each acquire an interest
in the
Wanneroo land with the purpose of its resale at a profit. (at p709)
18. The same objection to the Commissioner's basis of calculation of profit
does not, I think, apply to the second limb of s. 26(a),
which I regard as
applicable in the circumstances of this case. There was here a profit-making
scheme and it commenced with the purchase
of the shares in July 1965 for a
price of $147,614; the profit from the scheme may then properly be calculated
using that price as
the starting point. (at p709)
19. The profit-making scheme was to purchase the issued capital of Golden
West, to alter its articles, to secure its voluntary liquidation
followed by
the distribution in specie to shareholders of its valuable asset, the Wanneroo
land and, last of all, to sell that asset
in subdivision. There was here no
question of a mere realization of an asset in an enterprising way, as is
referred to in Federal
Commissioner of Taxation v. Becker [1952] HCA 77; (1952) 87 CLR 456,
at p 460 , per Fullagar J. and subsequent cases. The scheme
began with the
acquisition of one asset, continued
with its translation into a different
asset and was to have concluded with the
profitable disposal
of that latter
asset. There was
the "carrying into execution of a plan or venture which does
not involve repetition
or system" (per
Dixon J. in Premier Automatic
Ticket
Issuers Ltd. v. Federal Commissioner of Taxation [1933] HCA 51; (1933) 50 CLR
268, at p 298 )
and that plan
or venture had all the aspects of a "business deal" (McClelland
v. Federal Commissioner
of Taxation
(1970) 120 CLR 487 ). (at p710)
20. If this be so it is, I think, nothing to the point that the intervention
of the Overseas Telecommunications Commission resulted
in a premature
conclusion to the scheme so far as half the land was concerned; this only
meant that sooner rather than later a purchaser
appeared on the scene prepared
to buy at a handsome profit and without any need to incur full costs of
subdivision - cf. Hobart Bridge
Co. Ltd. v. Federal Commissioner of Taxation
[1951] HCA 33; (1951) 82 CLR 372, at p 382 . (at p710)
21. It is, therefore, the second limb of s. 26(a) which I regard as
justifying the Commissioner's assessment both in respect of
the liability of
the taxpayer's profit to assessment in his hands and in respect of the quantum
of that profit. (at p710)
22. In the circumstances it is unnecessary to consider the Commissioner's
stated reliance upon s. 25 of the Act. (at p710)
23. I would dismiss this appeal. (at p710)
The Rockingham Land.
24. The third transaction is relevant to the three remaining appeals, one by
Mr. Morris Steinberg, and two by his son Malcolm David
Steinberg and also
affects the appeal by the trustee of the Judith Steinberg No. 2 Trust, whose
assessment to tax in respect of profits
on the sale of the Innaloo land I have
already dealt with. It relates to the assessability of profits upon sales of
shares in Malgor
Pty. Ltd. to Mr. Markham and upon the sale of land at
Rockingham, a few miles to the south of Perth, to Rockingham Park Pty. Ltd.
(at p710)
25. As previously, there is first a question whether or not this Rockingham
land, bought by Malgor Pty. Ltd., was bought for the
purpose of resale at a
profit. It was Mr. Morris Steinberg who procured Malgor's incorporation in
November 1960; he and his wife
were its only two original shareholders and he
was its chairman of directors. Shortly before its incorporation he had
obtained,
and had exercised, an option to purchase the Rockingham land,
consisting of 1,267 acres of rather poor grazing land, at a price of
$15 per
acre and after its incorporation it became the buyer of the land. In 1963
four hundred shares in its capital were issued
to his son Malcolm David
Steinberg, paid for by his father; later, in July 1963, Morris Steinberg and
his wife sold to a partnership,
M.J.S. Investments, all their shares in Malgor
Pty. Ltd. as part of the tax and estate planning proposals to which I have
earlier
referred. The members of this partnership were Mr. and Mrs. Steinberg
and the trustee of each of eighteen family deeds of trust.
Then, in July
1964, shares in that company were sold to Mr. Markham so that he came to hold
one half of its issued capital, the
remainder being retained by M.J.S.
Investments and Malcolm David Steinberg. This was the transaction which has
given rise to two
of the four appeals presently in issue. (at p711)
26. Then in August 1966 Malgor Pty. Ltd. went into voluntary liquidation and
in a resultant distribution in specie Morris and Malcolm
David Steinberg in
March 1967 each acquired an interest as tenant in common in the Rockingham
land, apparently the company's only
substantial asset. I ignore for the
present, but will later have to return briefly to a consideration of, possible
consequences
of Morris Steinberg's disposal of his shares in Malgor Pty. Ltd.,
which resulted in his former shareholding being held by him on
behalf of the
M.J.S. Investments partnership; suffice it to say that thereafter efforts were
made by Mr. Markham to sell the Rockingham
land which was ultimately sold in
two separate contracts the first being a sale of the Markham group's interest
in the land, the
second a sale of the Steinberg group's interest, only sold in
November 1969. It is with the proceeds of this sale that the two other
appeals, by Morris Steinberg and his son, are concerned. (at p711)
27. Mason J. held that the profits made on the sale of the shares in Malgor
Pty. Ltd. and on the subsequent sale of interests in
the Rockingham land were
profits arising from the carrying out of a profit-making scheme initiated in
early 1960 and were assessable
accordingly under the second limb of s. 26(a).
(at p711)
28. Counsel for the Commissioner supported his Honour's conclusion and, by
way of alternative submission, also contended that the
circumstance could be
viewed as involving a scheme beginning only when it was decided to sell half
of the issued capital in Malgor
Pty. Ltd. to the Markham interests or, as a
further alternative, beginning later still when it was decided that Malgor
Pty. Ltd.
should be placed in liquidation. (at p712)
29. For the taxpayers it was contended that no relevant scheme existed but
that the purchase of the Rockingham land was undertaken
as an investment in a
grazing property. Alternatively it is said that in any event the shares in
Malgor Pty. Ltd. were not sold
to Mr. Markham by the persons to whom they were
originally issued but by the M.J.S. Investments partnership, something which
no scheme
ever contemplated but which was brought about by the adoption of tax
and estate planning advice given to Morris Steinberg which resulted
in the
substitution of that partnership as shareholder in Malgor Pty. Ltd. in place
of Morris Steinberg and his wife. In essence
the taxpayers rely upon the fact
that the profits which were derived arose in an unforeseen way and hence not
pursuant to any scheme.
(at p712)
30. Before considering the taxpayer's alternative submission I should say
that I agree with the conclusion of Mason J. concerning
Mr. Morris Steinberg's
purpose in buying the Rockingham land and should state briefly my reasons for
doing so. (at p712)
31. Mr. Steinberg said that he bought the land, having Malgor Pty. Ltd.
incorporated so that it might become the purchaser, as a
farming proposition
with a view to his retirement, having in mind making it "quite a show place".
This evidence Mason J. rejected,
pointing to a number of considerations which
led him to that view. Those considerations are indeed powerful and his Honour
was not
only entitled to take the view he did but could, in my view, scarcely
take any other. It is enough to refer to the improbable version
given by Mr.
Steinberg of what was, according to him, his sudden and wholly unpremeditated
entry into grazing activities on a somewhat
unpromising property without any
prior advice and having neither inspected nor, indeed, made any inquiries at
all concerning any
other grazing properties available for purchase. When this
is combined with the failure, after its purchase, to use the land for
grazing,
with Mr. Steinberg's considerable past experience in the purchase of land for
profit-making by resale, and with his statement
at the statutory meeting of
Malgor Pty. Ltd. that no definite land development had yet been embarked upon
but that a number of propositions
were being considered, the conclusion may
readily be reached that Mr. Steinberg's purpose in acquiring the land was
other than what
he said it was. (at p712)
32. I turn now to the question of whether in these circumstances s. 26(a) is
applicable to the four receipts of profits involved
in this transaction and
which the Commissioner has assessed to tax. (at p713)
33. The applicability of the first limb of s. 26(a) may be dealt with quite
shortly; there was no evidence to suggest that the shares
in Malgor Pty. Ltd.
were acquired with any view to their resale, indeed the evidence is, rather,
to the contrary. It was only the
need for funds and the lack of success
experienced in securing those funds from other sources that led to their sale.
Profits on
their sale by Malcolm David Steinberg and by the trustee of the
Judith Steinberg No. 2 Trust cannot in my view be assessed to tax
in reliance
on the first limb of s. 26(a). Profits made by Morris Steinberg and his son
on the sale of their interests as tenants
in common in the Rockingham land
are, on the other hand, in my view assessable under the first limb for reasons
similar to those
I have discussed in the case of the Wanneroo land; the
receipt of the interests in the Rockingham land on the making of the
distribution
in specie was an acquisition within s. 26(a) and there has been
no evidence to displace the inference that it was accompanied by
an intention
to make a profit by the sale of what was distributed. Mason J. inferred that
this had been Mr. Morris Steinberg's intention
in relation to the Rockingham
land from the outset and I agree, with respect, in his conclusion regarding
Malcolm's role from the
time he became a party to the transaction; the son's
evidence is in no way inconsistent with his being an informed and ready
associate
of his father in relation to all that was thereafter done and
intended concerning the Rockingham land. (at p713)
34. However, in my view, as was the case in relation to the Wanneroo land,
any reliance upon s. 26(a) must involve a remission to
the Commissioner for
re-assessment because there is no material before this Court concerning the
value of the respective interests
in the land as at the date of their
distribution in specie and it is at that date and not earlier that, for profit
calculation purposes,
the cost of the land is to be ascertained. (at p713)
35. I turn therefore to the second limb of s. 26(a); the critical question
here is whether there existed any scheme and, if so,
whether the profits in
question arose from its carrying on or carrying out. (at p713)
36. That there was initially a profit-making scheme is, I think, clear and
his Honour has so found. It consisted in part of the
purchase of the
Rockingham land and the incorporation of Malgor Pty. Ltd. so that it might
become the purchaser of that land. Whether
or not the scheme included any
precise plan of the manner in which the land and its subdivisional potential
should ultimately be
turned to profit does not emerge from the evidence. Nor
was it likely to when the taxpayers' case involved a denial that the initial
acquisition was with a view to resale at a profit. Once this evidence is
rejected there may then remain circumstances from which
valid inferences may
be drawn concerning the purpose with which acts were done but it is unlikely
that they will permit of inferences
concerning those details of a scheme which
have never been given effect to because the march of events has caused the
scheme to be
prematurely abandoned or substantially altered. (at p714)
37. Before considering what is the consequence of this absence of evidence
about any details of the scheme I should state my understanding
of certain
characteristics of the concept of a scheme for the purposes of s. 26(a). (at
p714)
38. Once it is determined that a scheme exists the effect of supervening
events which cause a departure from the original scheme
will vary depending
upon the view taken of those events. If they be seen as involving an
abandonment of the scheme as a whole, as
in Kratzmann v. Federal Commissioner
of Taxation (1970) 44 ALJR 293, at p 294; 1 ATR, at p 830; (1970) ATC, at p
4045 , without the
substitution of some new scheme, Eisner v. Federal
Commissioner of Taxation (1971) 45 ALJR 110; 2 ATR 3; (1971) ATC 4022 ,
profits
made subsequent to its abandonment will not be assessable under s.
26(a). If, instead, a scheme in an amended form is thereafter
carried out
which can be seen to be a different scheme from the original scheme the date
of inception of the new scheme will be the
starting point for the calculation
of profit, so that if the acquisition and resale of land is in question the
value of the land
at the date of inception of the new scheme will be the
relevant starting figure. Again not every change in the planned details will
involve the adoption of a new scheme, this will always be a question of fact
and will be much affected by the degree to which the
original scheme was
precise in its details. An imprecise scheme, the details of which have not
been worked out in advance, will
more readily take in its stride unexpected
events without becoming a different scheme. (at p714)
39. It is true that an undertaking or scheme must involve a "programme or
plan of action" (Clowes v. Federal Commissioner of Taxation,
per Kitto J.
[1954] HCA 10; (1954) 91 CLR 209, at p 225 , and XCO Pty. Ltd. v. Federal Commissioner of
Taxation, per Gibbs J. [1971]
HCA 37; (1971) 124 CLR 343,
at p 349 ); it presupposes, as
Windeyer J. has said, activities which are "co-ordinated by plan and purpose"
(Investment and Merchant
Finance Corporation Ltd. v. Federal Commissioner of
Taxation [1970] HCA 1; (1970) 120 CLR 177, at p 189
). However, as emerges from the
judgment
of Windeyer J. in Buckland v. Federal Commissioner of Taxation
(1960)
34 ALJR, at p 62;
(1960) ALR, at pp 602-603; 12 ATD, at p 169
, it may involve
no more than a settled purpose on the part
of those concerned "to turn
their
purchase to profitable account as best
they could when they got possession,
depending on how the
undertaking then developed",
although it must necessarily
have as its object
the making of a profit (XCO Case (1971) 124 CLR, at
p 350
). It may involve alternative
plans, different routes to the desired
profitable
end, the selection of one route rather than
another being left for
determination
by future events (Elsey v. Federal Commissioner
of Taxation
[1969] HCA 48; (1969) 121 CLR 99, at p 114 ). It is clear from what
was said by Dixon J. in
the Premier Automatic Ticket Issuers Case
(1933) 50
CLR, at p 300 , that a
venture involving an acquisition
of property with a view to "any profitable
dealing with the property",
it
being proposed that advantage be taken of
whichever of
a large number of possible modes of future profitable disposal
happens
to
prove most expedient, may constitute a scheme, despite
the absence
of any particular planned mode of dealing. (at p715)
40. It may be that the original scheme in this instance was quite precise in
its terms; if so, the sale of half the shares in Malgor
Pty. Ltd. to the
Markham interests could hardly have been anticipated by it, it also probably
did not contemplate any winding up
and distribution in specie. However the
scheme may equally well have been entirely imprecise in character, no
particular steps being
worked out by which profit was to be gained from an
increase in the value of the Rockingham land; it may have consisted of no more
than a scheme whereby a company to be formed, with the Steinbergs as
shareholders, would acquire the land and retain it while it
appreciated in
value, that being followed by a realization of the land by whatever means and
with whatever intermediate steps might
then appear expedient. (at p715)
41. Even were there evidence that the scheme was fully pre-determined from
the beginning this would not, I think, mean that what
in fact happened
involved an abandonment of the scheme so that, as in Kratzmann's Case (1970)
44 ALJR 293; 1 ATR 827; (1970) ATC
4043 , profits which subsequently arose did
not arise from the carrying on or carrying out of a profit-making scheme.
Only rarely,
I think, can it be said of a scheme for the acquisition of assets
for profit-making simply by their resale (of which Kratzmann's
Case was not an
instance) that a frustration of the planned mode of disposal, followed
nevertheless by a profitable disposal, results
in there being no scheme
capable of attracting s. 26(a) but only in a realization of a capital asset.
Here the original object, a
profitable sale of the land, was pursued and
attained, although the mode of doing so may have been changed so as to
accommodate to
changing circumstances. Were the scheme thus shown to have been
fully predetermined from the beginning, the most that could be said
is that
changes made to the scheme resulted in the substitution of a new scheme for
the original one, the starting point for calculation
of profit therefore being
the value of the land at the date of initiation of the new scheme. In fact
there is no evidence that the
scheme was other than of the simplest sort,
devoid of any details of how, precisely, the profit would be realized. It
follows that
the fact that the profit was in fact realized in part from the
unanticipated sale of half the issue capital of Malgor Pty. Ltd. and
in part
from the sale of land which came to the shareholders by way of a distribution
in specie not perhaps originally contemplated
does not of itself show the
Commissioner's assessment to have been in error. (at p716)
42. In the case of the two appeals by Malcolm David Steinberg and of the
appeal by the trustee of Judith Steinberg No. 2 Trust,
the respective
taxpayers clearly enough did not become participants in the scheme until 1963,
long after its inception. Mason J.
held that both these taxpayers were at all
times aware of the intentions of Mr. Morris Steinberg, the originator of the
scheme; by
their entry, albeit belated, into the scheme as participants with
full knowledge of it, what had previously been done by the original
participants was adopted by them and they took the benefit of the scheme which
they found already on foot. No doubt, as Dixon C.J.
observed in Clowes' Case
(1954) 91 CLR, at p 217 , s. 26(a) must be understood as speaking of a scheme
carried on or carried out
"by the taxpayer or on his behalf" and it will not
apply to the case of a taxpayer, who, as in Clowes' Case [1954] HCA 10; (1954)
91 CLR 209 ,
derives
a receipt from another who has in turn obtained it by the carrying out
of such a scheme (per Gibbs J.,
XCO Case
(1971) 124 CLR, at
p 349 ). However
neither Malcolm David Steinberg nor the trustee can, in my view, call this
principle
in aid,
even for the purpose
of having their profits calculated from
a starting point in 1963 rather than from the earlier inception
of the
scheme.
They stand
in the same position as do the original participants in the scheme
in relation to the calculation of quantum
of
profit. (at p717)
43. The position of the fourth appellant, Mr. Morris Steinberg, is in one
sense unique. Until the formation of the M.J.S. Investments
partnership he
was a major shareholder in Malgor Pty. Ltd.; when, on its formation, that
partnership acquired nearly all the issued
capital of that company, he
retained, as a member of the partnership, only a quite small beneficial
interest in its capital. Then,
when it was found that amendments to tax
legislation made it no longer attractive to retain in existence the eighteen
trusts which,
through their preponderating interest in the partnership, were
entitled to most of the half of the capital of Malgor Pty. Ltd. which
had not
been sold to Markham interests, the "liquidation" of the trusts restored to
Mr. Steinberg a substantial interest in Malgor
Pty. Ltd. It was by means of
this interest that, on the distribution in specie, he acquired his interest as
tenant in common in
the Rockingham land, on the profit from the sale of which
he has been assessed. Thus through his own actions his interest in Malgor
Pty. Ltd. and in the land which he caused it to buy had waned and waxed again
during the currency of the scheme. I do not regard
this as in any way
affecting the application of s. 26(a); all that happened was brought about by
the taxpayer and the ultimate profit
he received was in every sense a profit
from the carrying out of the profit-making scheme, a scheme of whose inherent
flexibility
he took advantage from time to time so that he could ultimately
derive his profit without ever having to abandon the scheme of which
he was
the author. (at p717)
44. It follows that it has not, in my view, been shown that the Commissioner
was in error in assessing to tax as profits from the
carrying out of a
profit-making scheme both the profits from sale of interests in the land and
also the profits from sale of shares
in Malgor Pty. Ltd. I would accordingly
dismiss each of the four appeals concerned with this Rockingham land. (at
p717)
ORDER
Appeals No. 4 and 5 of 1973 dismissed with costs.
Appeal No. 6 of 1973 in relation to the sale of land at Innaloo dismissed
with costs.
Appeal No. 6 of 1973 in relation to the sale of the shares in Malgor Pty.
Ltd. allowed with costs.
Order of Mason J. varied accordingly. No order of cost of appeal to Mason
J.
Matter be remitted to the Commissioner to reassess in accordance with the
reasons of this Court.
Appeals No. 7 and 8 of 1973 allowed with costs.
Orders of Mason J. set aside and in lieu thereof order that appeals be allowed with costs.
Matter be remitted to the Commissioner to reassess in accordance with the
reasons of this Court.
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