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    Federal Court of Australia
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    Lockhart(1), Gummow(2) and Hill(3) JJ.
    #DATE 20:3:1991

    Counsel and Solicitors R.J. Ellicott QC and
    for Applicant: R.F. Edmonds instructed by
    Freehill Hollingdale and Page

    Counsel and Solicitors D.M. Bennett QC and P. Reeves
    for Respondent: instructed by the Australian
    Government Solicitor
    The court orders that:
    1. The appeal be allowed.
    2. The orders of Sheppard J made on 29 August 1990 be set
    3. In lieu thereof there be substituted the following orders;
    (a) the respondent’s objection decision be set aside;
    (b) the appellant’s objection be allowed;
    (c) the assessment be remitted to the respondent for
    amendment in accordance with the reasons of the court.
    4. The respondent pay the appellant’s costs of this appeal and
    of the proceedings before Sheppard J.

    Note: Settlement and entry of orders is dealt with in Order 36 of the Federal
    Court Rules.
    I have had the benefit of reading the reasons for judgment of Hill J. in
    draft form. I agree with his Honour’s reasons and the orders which he
    I have had the advantage of reading the reasons for judgment prepared by
    Hill J.

    2. I agree with the orders proposed by his Honour. I do so for the reasons
    given by his Honour.
    The appellant, Westfield Limited, appeals against the judgment of a judge of
    this court (Sheppard J), in respect of an objection to an assessment of income
    tax by the respondent Commissioner of Taxation, for the year of income ending
    30 June 1983. At issue in the appeal is whether a profit of $267,906, derived
    by the appellant from the sale of land at Mount Gravatt in Queensland, was
    income in ordinary concepts, as the Commissioner contends, or was of a capital
    nature and accordingly not assessable income, as the appellant submits.
    The facts:

    2. The appellant is a company, the main activity of which, at relevant times,
    was the design, construction, letting and management of shopping centres.
    Additionally, the appellant designed and sometimes built hotels and office
    buildings. Where the appellant itself designed and constructed shopping
    centres on land owned by it, those shopping centres had usually been held by
    it as long term investments. Sometimes, however, the appellant, after building
    the shopping centre, would sell and lease back the centres as part of a
    financing arrangement. Sometimes the appellant was one of a number of joint
    venturers which would own and operate the shopping centres, and sometimes the
    appellant did not own any part of the shopping centres which it designed and

    3. In 1978 there was a reconstruction of the Westfield group of companies, in
    which there was established a publicly listed unit trust known as the
    Westfield Property Trust. At this date, the appellant, or companies
    associated with it, had built and then owned seven major shopping centres in
    New South Wales, Victoria and Queensland. It also managed three shopping
    centres built by it for financial institutions, and leased back from them
    under long term leases. It, or companies associated with it, owned as well,
    an office and motel complex in Sydney which it had built. In the 1978
    reconstruction, the appellant sold to the Westfield Property Trust, six of the
    shopping centres. After that date, save for the land the subject of the
    appeal, the appellant had never directly owned any land. The evidence does
    not make it clear what happened to the seventh centre.

    4. There was no suggestion that, in the years immediately preceding 1981, the
    appellant carried on a business of buying and selling land, or that it, or
    companies associated with it had, in that time, ever acquired land for the
    purpose of resale at a profit. Rather, the appellant only bought land for
    future development, in the manner which I have indicated.

    5. The appellant’s association with the Mount Gravatt land began in the early
    1970’s, when Mr Saunders, its Deputy Chairman, perceived the likelihood of
    growth occurring in and around Mount Gravatt, a Brisbane suburb, approximately
    15 kilometres south of the city. At that time, Logan Road, which ran through
    Mount Gravatt, was the main thoroughfare from Brisbane to the Gold Coast and
    further south. At that time also, there was, near the intersection of Logan
    Road and Kessels Road, a shopping centre, known as “Garden City”, which was
    owned and operated by D J’s Properties Limited, a company associated with
    David Jones Limited. South east of Garden City, along the south western side
    of Logan Road, were a number of allotments, some vacant, some used for
    commercial and light industrial purposes. On the opposite side of Logan Road
    was the Greenleaves Nursery, which ran through to another street, Newnham
    Road, which intersected with Logan Road.

    6. It was Mr Saunder’s view that Garden City would become too small a
    shopping centre for the area. He believed that another shopping centre
    constructed adjacent to it would be a profitable venture, as would an overall
    development of a larger shopping centre complex incorporating Garden City.
    Accordingly, on 8 May 1978, an option was secured over one of the blocks of
    land adjacent to Garden city, belonging to the Seganfreddo family, opposite
    the Greenleaves Nursery (the Seganfreddo’s option). That land is the subject
    of the sale, which generated to the appellant a profit. The option was to
    remain in force until 31 October 1978, and provided for a purchase price of
    $450,000, free of commission. Around the same time, the appellant secured
    options to purchase some of the other allotments laying between Garden City
    and the Seganfreddo land, which options were expressed to expire on dates
    prior to the end of 1978.

    7. On 17 August 1978, the appellant applied to the Brisbane City Council for
    the rezoning of the land over which it held options. The application was
    preceded by discussions between executives of the appellant and executives of
    D J’s Properties, in which it appeared that the proposed new shopping centre
    was to be linked by a covered walkway to Garden City, and that provision was
    to be made for the integration of vehicular movements in the two car parks.
    The council required a detailed traffic report and the appellant secured an
    extension of the Seganfreddo’s option until 3 November 1979. The report was
    obtained in due course and discussions held with council representatives.
    While this was happening, the Seganfreddo’s option was extended further until
    May 1980, and in certain events, until 3 November 1981.

    8. Council was concerned with access roads and suggested that the problem
    could be overcome if the appellant were to acquire the Greenleaves Nursery
    land and a link road were to be constructed through that land to Newnham Road.
    As a result, negotiations commenced with the owners of the nursery, but
    ultimately broke down as the price being asked was, in Mr Saunder’s view,
    excessive. On 30 January, 1980, the appellant notified the council that it
    could not meet the council’s conditions and that it had abandoned the
    application for rezoning. It also notified owners of land, over which it held
    options, that it had abandoned its plans for the development.

    9. Approximately three months later the appellant learnt that a competitor,
    not regarded favourably by Mr Saunders, Hersfield, associated with Mr George
    Herscu, had become interested in doing the same thing, and was attempting to
    secure options over land adjacent to Garden City. Mr Saunders, his Honour
    found, was concerned that if Hersfield were successful in securing these
    options, that company could capitalise upon the work that the appellant had
    done in the preceding two years, in seeking to have the land rezoned.
    Accordingly, he decided to secure another option over the Seganfreddo’s land.
    Thus in April 1980, a further option was granted to the appellant, for a
    consideration of $100,000, to purchase the land for $450,000, the
    consideration for the option being applied in the event of exercise in part
    payment of the purchase price. The option was to expire on 22 April 1981.
    That option was exercised on 16 April 1981 and a contract for the sale of the
    land to the appellant was ultimately completed.

    10. Some time before the option was exercised, the Garden City shopping
    centre was sold to the Australian Mutual Provident Society (AMP). Mr
    Saunders, in his evidence, was uncertain whether he knew of this at the time,
    but believed he did not. However, on the day the option was exercised there
    was, as his Honour pointed out, reference in a letter from the head office of
    AMP to its Brisbane office, to a meeting between an officer of the appellant
    and a representative of AMP, in which the appellant proposed that it would
    carry out project management, design construction and leasing of a completed
    shopping centre. The reference to leasing was not correct, as AMP was bound
    to deal with an agent who had these rights for a long term.

    11. Negotiations between the appellant and AMP continued over a long period
    of time. Early, the appellant made it plain that it would be prepared to sell
    the land it had acquired to AMP, but that the sale might depend upon
    arrangements being entered into between AMP and the appellant for the design
    and building of the centre. AMP indicated that it would be prepared to buy
    the land at a reasonable price, in line with the prices to be paid to other
    owners from whom the AMP had taken options. By November 1982, it became clear
    that the project would proceed and that the appellant would design and
    construct the centre. Valuations of the land were obtained “to provide the
    parties with an indication of the price which should be paid” for the
    Seganfreddo’s land, and eventually a contract of sale was entered into on 2
    December 1982 for the sale of the land to AMP for $735,000, a price in line
    with the prices paid by AMP to adjoining owners, and considerably less than
    one of the valuations obtained, which was in excess of $735,000. As his
    Honour observed, Mr Saunders could have held out for a higher price, but did
    not do so because he wanted to secure the design and construction of the
    shopping centre for the appellant.

    12. Summarising the history of the matter, his Honour, who had formed a
    favourable impression of Mr Saunders in the witness box, said:
    “There can be no doubt but that he saw the
    potential of the land adjacent to the Garden
    City shopping centre from the early 1970’s.
    Until 1980 he thought that the applicant would
    be able to go ahead on its own account. For a
    short time he abandoned the project when he
    could not purchase the nursery land for a
    reasonable price. He became interested again
    when Hersfield came into the picture. He wanted
    to keep it out. He then secured the Seganfreddo
    land first by option and then by purchase. He
    could not then foresee precisely how the matter
    would turn out but he knew that the Seganfreddo
    land was a powerful card in his hands.
    But to take the view that he had purchased that
    land merely to await the day when someone would
    be forced to buy from him is to oversimplify the
    matter. His company was primarily a developer
    of shopping centres.”

    13. His Honour found that the appellant had never given up its intention of
    having a hand in the designing and construction of the centre, if that course
    were at all possible. His Honour said:
    “He (ie Mr Saunders) acquired the Seganfreddo
    land with the short term object of keeping a
    competitor out; but his ultimate goal was to
    play a significant part in the eventual
    development which he was sure would take place.
    The whole of his negotiations with the AMP were
    on that basis. There are statements in
    memoranda and letters which indicate that he was
    not interested in the sale of the land unless
    the applicant were retained as the developer and
    builder … He did not hold out for a top price
    let alone an excessive one. Once he had secured
    the agreement of the AMP that the applicant
    could design and build the shopping centre, the
    sale of the land was very much a collateral or
    consequential matter. He sold for a reasonable
    price and no more.”

    14. His Honour held that the land had not been acquired with the dominant
    purpose of profit-making by sale, and that accordingly, the profit was not
    assessable income within the first limb of s.26(a). There was no challenge to
    this finding. His Honour also found that, at the time of acquisition of the
    land, there was no intention necessarily to sell it. His Honour said:
    “At that time, notwithstanding the incipient
    negotiations with the AMP, the applicant’s
    preference was itself to develop the land along
    with other parcels of land adjacent to it which
    it still hoped to obtain.”

    15. His Honour said that he had not taken anything from the coincidence of
    the date of the exercise of the option and the date of the letter from AMP’s
    head office, relating to the negotiations with the appellant. Rather, his
    Honour accepted evidence that the Seganfreddo family were not prepared further
    to extend the option and that the date of exercise of the option was
    indicative of nothing other than the care of the solicitor of the appellant to
    ensure that the option was exercised within time. In particular, his Honour
    was of the view that the appellant would have exercised the option, regardless
    of whether there was some interest by AMP in the concept of a shopping centre.
    His Honour said:
    “If it had not gone ahead, it is plain that the
    applicant would have retained the land in the
    hope that eventually it would be able to
    construct the shopping centre on its own land or
    that someone would wish to construct a shopping
    centre and retain the applicant to be, not only
    the designer and builder, but also the lessor of
    the shops under some form of lease back arrangement.”
    His Honour’s conclusions

    16. In these circumstances, his Honour was of the view that the resultant
    profit was assessable. After a consideration of what had been said by the
    High Court in Federal Commissioner of Taxation v Myer Emporium (1987) 163 CLR
    199, and by the full court of this court in Jennings Industries Limited v
    Federal Commissioner of Taxation (1984) 2 FCR 273, his Honour said:
    “… it seems to me, however, that the whole of
    the transaction, including the sale of the land,
    was one carried out in the ordinary course of
    the applicant’s business and was part of an
    overall profit making venture. I do not feel
    able to separate out the sale of the land from
    the totality of the transaction. The sale of
    the land was a necessary step in the carrying
    out of the entirety of what was involved. …
    The evidence establishes, as I have said, that
    the applicant intended, when it acquired the
    land, to use it in a way which, although not
    then precisely foreseen, would achieve for it
    participation in the development of it and other
    adjacent land into a shopping centre whether
    integrated with Garden City or not. It did not
    envisage sale as a necessary consequence. But
    it was certainly a possibility. As events
    turned out the land was sold and the sale
    yielded a profit which was realised in the 1983
    year of income. In my opinion, it must follow
    that the amount of the profit was properly
    included in the applicant’s assessable income.
    I think this conclusion is required by both the
    Jennings Industries and the Myer cases.”
    The respondent’s notice of contention

    17. By its notice of contention, the respondent claimed that his Honour had
    erred in failing to make the following findings of fact:
    “2. The appellant was aware at the time of
    exercise of the Seganfreddo option on 16
    April 1981 that:-
    (a) The AMP Society was interested in
    the subject area at Mount Gravatt;
    (b) The AMP Society was acquiring
    options to purchase land in the
    subject area;
    (c) The AMP Society was likely to extend
    its existing centre in the subject area;
    (d) There was a real possibility that a
    deal of the type which was
    ultimately done with the AMP Society
    might be done if the Seganfreddo
    option were exercised.
    3. The possibility referred to in
    paragraphs…2(d) above was one of the
    purposes of the appellant in exercising
    the option.”

    18. Particular emphasis was placed in submissions upon the coincidence of the
    exercise of the option and the negotiations with AMP. A status report written
    on 25 March 1981, and showing on its face that it was to be circulated to Mr
    Saunders, referred to the fact that Mr Seganfreddo had told the writer that
    AMP had recently made direct approaches to him. The internal letter from AMP
    head office to its Brisbane office, to which reference has already been made,
    refers to the possibility of an arrangement being entered into at Mt Gravatt.
    The letter says:
    “Broadly Westfield propose that they would carry
    out project management, design, construction,
    and leasing together with, if necessary, opening
    promotions, and hand over the keys of the
    completed Centre..”

    19. The acquisition of the Garden City site by AMP, according to evidence
    given by a Mr Boyes, who was General Manager of the appellant in 1981, opened
    up the possibility of the appellant “working in” with AMP, an opportunity it
    had looked for. Mr Boyes said:
    “Westfield’s modus operandi at the time was to
    work in association with institutions like T and G
    Society and the State Superannuation Board with
    whom we had developed and then retained an
    interest in shopping centres. At that time we
    had not done such an arrangement with the AMP
    even though they were the biggest institution of
    that type in Australia. So that encouraged us
    to look forward to opportunities to work for
    them – or towards some scheme or arrangement
    with them – us having land we believed was
    critical to any extension of Garden City …”

    20. His Honour, however, accepted that Mr Saunders was aware of AMP’s
    interest in a development of the centre, and of its ownership of the Garden
    City land, but nevertheless formed the view that the appellant did not have a
    purpose of sale at the time of exercise of the option. His Honour did so,
    after hearing the evidence of Mr Saunders and observing him in the witness
    box. Mr Saunders, in his evidence, agreed that as at the time of exercise of
    the option, he did not know exactly how the development would take place, he
    knew only that it would. It was frankly acknowledged by Mr Saunders that the
    Seganfreddo’s land was critical to any overall development of the whole site.
    It was a strategic land holding. However, Mr Saunders, in a passage critical
    to his Honour’s finding, said:
    “To be honest we put in a lot of effort and we
    were hoping that one day we will be able to go
    on with the shopping centre because we need
    deals with Myers, K-Mart, Target. First of all
    our reputation was involved because we could not
    deliver. Secondly, we would not do business with
    Hirshfield (sic) and thirdly, we were hoping
    that one day the people would come to (their)
    senses and they will ask not too ridiculous
    prices … We were hoping that one day we would
    be able to do the shopping centre and it is the
    best shopping centre in Brisbane and we realised
    that and that is why we were doing it..”

    21. Mr Saunders denied that if a buyer had come along after the exercise of
    the option, and had offered a high enough price, he would have considered that
    offer on its commercial merits. It would have been a different matter if they
    had offered a shopping centre contract. He said:
    “If somebody else would have come along and
    would offer us five times as much as we paid for
    the land we would not sell it…we did not buy
    the land to cash in on the land.”

    22. In the light of this evidence, it was clearly open to his Honour to find
    as he did. His Honour had the advantage of seeing the witnesses in the
    witness box. We did not. To find, as inferentially the respondents would
    have us find, that the appellant had a purpose of selling at a profit, would,
    notwithstanding the submissions to the contrary, necessarily involve the
    rejection of Mr Saunder’s evidence to the contrary. As pointed out by Lord
    Sumner in SS Hontestroom v SS Sagaporack (1927) AC 37 at 47, in a passage
    cited recently with approval in the High Court by McHugh J, with whom the rest
    of the court agreed (Abalos v Australian Postal Commission (1990) 65 ALJR 11
    at 16):
    “… not to have seen the witnesses puts
    appellate judges in a permanent position of
    disadvantage as against the trial judge, and,
    unless it can be shown that he has failed to use
    or has palpably misused his advantage, the
    higher Court ought not to take the
    responsibility of reversing conclusions so
    arrived at, merely on the result of their own
    comparisons and criticisms of the witnesses and
    of their own view of the probabilities of the
    case. The course of the trial and the whole
    substance of the judgment must be looked at, and
    the matter does not depend on the question
    whether a witness has been cross-examined to
    credit or has been pronounced by the judge in
    terms to be unworthy of it. If his estimate of
    the man forms any substantial part of his
    reasons for his judgment the trial judge’s
    conclusions of fact should, as I understand the
    decisions, be left alone.”
    See too, Warren v Coombes (1979) 142 CLR 531 at 537-552.

    23. Additionally, the respondent relied on a letter of 19 October 1981,
    written by an agent acting for a named developer to Mr Lowy, a director of the
    appellant, concerning the concept of a comprehensive redevelopment of the
    whole site, including the Garden City Shopping Centre. The letter said in
    “The aggregation of the entire parcel could be
    achieved either by one owner developer, or
    alternatively by two or more developers
    participating in a joint venture project. Our
    developer client has indicated to us that he
    would be very happy to co-operate in such a
    project. He would be prepared to aggregate the
    balance of the land which remains in multiple
    ownership, or to purchase from you, land you do
    not require once planning approval has been negotiated.”

    24. The nature of the proposal would hardly have been surprising to Mr
    Saunders. He had held a concept for the development of the whole site for
    some years. However, Mr Saunder’s reaction to the letter is unknown, save
    that there is no evidence of a response to the letter. The matter was not
    explored in cross-examination, and adds nothing to the case of the appellant.

    25. It may be accepted that the evidence makes it clear that AMP was, as at
    16 April 1981, interested in a development of the Mount Gravatt land, and that
    it was acquiring options to purchase land in the area. The evidence does not,
    however, go so far as to demonstrate that a development of the whole site by
    AMP was likely, and indeed negotiations to this end continued over a lengthy
    time before a decision was made. While there was a real likelihood that AMP
    would participate in some form of development of the overall site, the form
    that participation would take, like the form of the appellant’s participation,
    was uncertain, or at least, unknown to the appellant and Mr Saunders. There
    was, of course, a possibility, as at the date of exercise of the option, that
    the appellant might sell the land to AMP, but that was but one of the
    possibilities open to it. It was the appellant’s preference at that time, as
    his Honour found, to itself develop the land. The evidence in fact shows that
    some seven months after the appellant acquired the land, instructions were
    given to an agent to endeavour to reassemble the various parcels of land, over
    which it had originally held options, under its own control.

    26. Sale of the land, especially at a profit, was not a purpose of the
    appellant, it was, as his Honour found, but a possibility.

    27. Accordingly, the respondent’s submissions on its notice of contention can
    not be accepted.
    The substantial issue in the appeal

    28. At the heart of the appeal is the question whether, in the circumstances
    found by his Honour, the profit made by the appellant constituted assessable
    income. The starting point of its resolution is, as both parties agreed, the
    well known discussion of the Lord Justice-Clerk, in Californian Copper
    Syndicate v Harris (1904) 5 TC 159 at 165-166:
    “It is quite a well settled principle in dealing
    with questions of assessment of Income Tax, that
    where the owner of an ordinary investment
    chooses to realise it, and obtains a greater
    price for it than he originally acquired it at,
    the enhanced price is not profit in the sense of
    Schedule D of the Income Tax Act of 1842
    assessable to Income Tax. But it is equally
    well established that enhanced values obtained
    from realisation or conversion of securities may
    be so assessable, where what is done is not
    merely a realisation or change of investment,
    but an act done in what is truly the carrying
    on, or carrying out, of a business.”

    29. Later in the judgment (at 166), his Lordship defined the line which
    separates the two classes of case, by reference to the following question:
    “Is the sum of gain that has been made a mere
    enhancement of value by realising a security, or
    is it a gain made in an operation of business in
    carrying out a scheme for profit-making?”

    30. In applying what was said by the Lord Justice-Clerk, it is necessary to
    “a wide survey and an exact scrutiny of the
    taxpayer’s activities”.
    (Western Gold Mines N.L. v Commissioner of Taxation (W.A.) (1938) 59 CLR 729
    at 740, cited with approval by Gibbs J in London Australia Investment Company
    Limited v The Commissioner of Taxation (1976-7) 138 CLR 106 at 116.)

    31. The test in Californian Copper was applied in more recent times by the
    High Court in Federal Commissioner of Taxation v Myer Emporium Limited (1987)
    163 CLR 199 and GP International Pipecoaters Pty Limited v Commissioner of
    Taxation (1990) 64 ALJR 392. In appreciating what was said in Myer, it is
    important to recall that an argument for the taxpayer was that the transaction
    there involved, of selling land, receiving a mortgage back at interest for a
    long term, and then assigning the income arising under the mortgage for a lump
    sum, was not income in ordinary concepts, because it was an extraordinary
    transaction and outside the scope of the taxpayer’s business. It was in
    answering this argument, that the judgment of the court in Myer said (at
    “Although it is well settled that a profit or
    gain made in the ordinary course of carrying on
    a business constitutes income, it does not
    follow that a profit or gain made in a
    transaction entered into otherwise than in the
    ordinary course of carrying on the taxpayer’s
    business is not income. Because a business is
    carried on with a view to profit, a gain made in
    the ordinary course of carrying on the business
    is invested with the profit-making purpose,
    thereby stamping the profit with the character
    of income. But a gain made otherwise than in
    the ordinary course of carrying on the business
    which nevertheless arises from a transaction
    entered into by the taxpayer with the intention
    or purpose of making a profit or gain may well
    constitute income. Whether it does depends very
    much on the circumstances of the case. Generally
    speaking, however, it may be said that if the
    circumstances are such as to give rise to the
    inference that the taxpayer’s intention or
    purpose in entering into the transaction was to
    make a profit or gain, the profit or gain will
    be income, notwithstanding that the transaction
    was extraordinary judged by reference to the
    ordinary course of the taxpayer’s business. Nor
    does the fact that a profit or gain is made as
    the result of an insolated venture or a ‘one
    off’ transaction preclude it from being properly
    characterised as income: Federal Commissioner of
    Taxation v Whitfords Beach Pty Ltd. The
    authorities establish that a profit or gain so
    made will constitute income if the property
    generating the profit or gain was acquired in a
    business operation or commercial transaction for
    the purpose of profit-making by the means giving
    rise to the profit”.

    32. The judgment, not only in this passage, but in several later passages (at
    211-213), emphasises that where a transaction occurs outside the scope of
    ordinary business activities, it will be necessary to find, not merely that
    the transaction is “commercial” but also that there was, at the time it was
    entered into, the intention or purpose of making a relevant profit.

    33. What was said in Myer has been applied in a number of cases in this court
    since. Among them are Moana Sand Pty Limited v Federal Commissioner of
    Taxation (1988) 88 ATC 4897, and Federal Commissioner of Taxation v Cooling
    (1990) 22 FCR 42. It does not, however, follow from the judgment in Myer, or
    for that matter, from the judgments in any later cases, that every profit made
    by a taxpayer in the course of his business activity will be of an income
    nature. To so express the proposition is to express it too widely, and to
    eliminate the distinction between an income and a capital profit. A taxpayer
    carrying on a business might sell its headquarters in order to move to larger
    premises and make a profit over historical cost. The transaction of sale may
    be one which arises in the ordinary course of the taxpayer’s business, but
    that profit will not ordinarily be income, particularly where, at the time of
    acquisition of the site, there was no intention or purpose of profit-making by
    sale when the premises became too small. The profit in Cooling, the receipt of
    a leasing incentive payment, was one intended to be made at the time the
    transaction with the lessor was entered into, just as the profit in Myer was
    one which underlay the whole transaction.

    34. When in Myer the High Court spoke of profits made in the ordinary course
    of business, their Honours were not speaking in a temporal sense. Rather, as
    the judgment of the full court of this court in Federal Commissioner of
    Taxation v Spedley Securities Limited (1988) 88 ATC 4126 at 4130 points out,
    it is necessary that the purpose of profit-making must exist in relation to
    the particular operation. In a case where the transaction, which gives rise
    to the profit, is itself a part of the ordinary business (eg a profit on the
    sale of shares made by a share trader), the identification of the business
    activity itself will stamp the transaction as one having a profit-making
    purpose. Similarly, where the transaction is an ordinary incident of the
    business activity of the taxpayer, albeit not directly its main business
    activity, the same can be said. The profit-making purpose can be inferred
    from the association of the transaction of purchase and sale with that
    business activity. The cases on profits and losses of insurance companies and
    banks are examples: Colonial Mutual Life Assurance Society Ltd v Federal
    Commissioner of Taxation (1946) 73 CLR 604; Australasian Catholic Assurance Co
    Ltd v Federal Commissioner of Taxation (1959) 100 CLR 502; Chamber of
    Manufactures Insurance Ltd v Federal Commissioner of Taxation (1984) 2 FCR
    455; Federal Commissioner of Taxation v Employers’ Mutual Indemnity
    Association Ltd (1990) 90 ATC 4787; Federal Commissioner of Taxation v
    Equitable Life and General Insurance Co. Ltd. (1990) 93 ALR 609; Punjab
    Co-operative Bank Ltd., Amritsar v Income Tax Commissioners, Lahore (1940) AC
    1055; Union Bank of Australia Ltd v Commissioner of Taxation (NZ) (1920) NZLR
    649; Commissioner of Taxation v Commercial Banking Co. of Sydney Ltd (1927) 27
    SR (NSW) 231.

    35. In London Australia (supra), Gibbs J held that the sale of shares by the
    taxpayer in that case was a normal operation in the course of the business
    operations, it was a part of the very business itself. That holding depended
    upon a finding of fact by the judge below, that it was an integral part of the
    taxpayer’s business to deal in shares, in the sense that switching of
    investments was necessary, or at least desirable, if the policy of growth
    potential adopted by the taxpayer was to be adhered to. Jacobs J, on the
    other hand, spoke (at 128) of the necessity that profit-making by sale (the
    manner of realisation there involved) needed to be a purpose, albeit not a
    dominant one, where the acquisition and disposal of property is part of a
    business of so doing. The facts of that case indicated the necessary purpose,
    intention or expectation.

    36. As to whether there was any real inconsistency between the judgments of
    Gibbs and Jacobs JJ., see CMI Services Pty Limited v Federal Commissioner of
    Taxation (1990) 94 ALR 153 at 160-63. When one comes to identify the business
    activity of the appellant, that activity does not involve the appellant in
    reselling land at all, other than on a sale and lease back financing basis,
    where, presumably, no profit would be expected to arise. It can not be said,
    in the present case, that resale of land was part of the ordinary business
    activity at all, or, for that matter, a necessary incident of that business
    activity. That business activity was relevantly the construction of shopping
    centres, their leasing or management, either on the appellant’s own land, on
    the land of others, or on joint venture land.

    37. Sheppard J, in his judgment, described what his Honour referred to as the
    “whole of the transaction”, by which his Honour probably meant the transaction
    of purchase and sale, as being:
    “… one carried out in the ordinary course of
    the applicant’s business and was part of an
    overall profit making venture.”

    38. If, by this, his Honour intended to suggest that the transaction was one
    done in the ordinary course of business, his Honour fell into error, by
    viewing the matter temporally, contrary to the warning in Spedley. It can
    hardly be assumed that his Honour was suggesting that the business of the
    appellant was concerned with resale of land at a profit, because this would
    have been contrary to his Honour’s own findings of fact.

    39. Once it is clear that the activity of buying and selling, which generated
    the profit, was not an activity in the ordinary course of business, or, for
    that matter, an ordinary incident of some other business activity, the profit
    in question will only form part of the assessable income of the appellant, by
    virtue of its being income in accordance with the ordinary concepts of
    mankind, if the appellant had a purpose of profit-making at the time of
    acquisition. What is meant by “profit-making” in this context?

    40. Sheppard J was of the opinion that there was, in the relevant sense, an
    overall scheme of “profit-making”. The scheme of profit-making was said to be
    a scheme to achieve participation in the development of a shopping centre.
    However, in my opinion, that is not enough in the circumstances of this case.
    First, the obtaining of the contract to construct and manage the centre is
    not, of itself, relevantly a scheme of profit-making, it is scheme for
    deriving assessable income, which income is derived from the performance of
    the work under the building and management contracts. Second, where a
    transaction falls outside the ordinary scope of the business, so as not to be
    a part of that business, there must exist, in my opinion, a purpose of
    profit-making by the very means by which the profit was in fact made. So much
    is implicit in the decision of the High Court in Myer. There may be a case,
    the present is not one, where the evidence establishes that the taxpayer has
    the purpose or intention of making a profit by turning an asset to account,
    although the means to be adopted to generate that profit have not been
    determined: cf Steinberg v Federal Commissioner of Taxation (1972-75) 134 CLR
    640. Steinberg was a case decided under the second limb of the then s.26(a)
    of the Act. The taxpayer had, having obtained an option to purchase some land
    (The Rockingham land), caused a company to be incorporated, the shareholders
    of which included his family and himself, intending to turn the land to
    account in the most advantageous way, in particular, either by selling the
    shares in the company, or liquidating the companies, distributing the assets
    in specie, and then selling those assets. It was the latter course that was
    taken. The court by majority held, affirming Mason J at first instance, that
    it was not necessary to fall within the second limb, that every step which
    culminates in the making of a profit should be planned or foreseen. In the
    words of Mason J (at 670):
    “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.”

    41. To the same effect, is the judgment of Gibbs J (at 699-700) and of
    Stephen J (at 704-705).

    42. While a profit-making scheme may lack specificity of detail, the mode of
    achieving that profit must be one contemplated by the taxpayer as at least one
    of the alternatives by which the profit could be realised. Such was the case
    in Steinberg. But, even if that go too far, it is difficult to conceive of a
    case where a taxpayer would be said to have made a profit from the carrying
    on, or carrying out, of a profit-making scheme, where, in the case of a scheme
    involving the acquisition and resale of land, there was, at the time of
    acquisition, no purpose of resale of land, but only the possibility (present,
    one may observe in the case of every acquisition of land) that the land may be
    resold. The same may be said to be the case where s.25(1) of the Act is
    involved. As the court observed in Myer, in the passage already set out, the
    property, which generates the gain, must be acquired in an operation of
    business or commercial transaction:
    “… for the purpose of profit-making by the
    means giving rise to the profit” (emphasis added).

    43. The decision of the full court of this court in Jennings Industries Ltd v
    Federal Commissioner of Taxation (supra), upon which his Honour also relied,
    requires no different answer. In Jennings, the taxpayer had acquired half the
    shares in a company, pursuant to an arrangement under which it was to
    construct a building to be owned by that company. A profit was ultimately
    realised on the sale of the shares, and was found to be income in ordinary
    concepts. The taxpayer lost at first instance because it had failed to
    satisfy the onus of proof. A number of hypotheses were equally open, as to
    the taxpayer’s purpose, and the evidence had failed to reveal that any
    particular one of these was incorrect. Included as one of the hypotheses, was
    the possibility that the share acquisition was for the purpose of
    profit-making by sale. On appeal, the court expressed reluctance to consider
    the evidence for itself, but in fact did so. It concluded that the taxpayer
    always expected and intended to profit by the realisation of its interest in
    the project. In other words, there existed from the outset a purpose of
    profit-making, in the usual sense of the word, and the taxpayer had not shown
    that it had no positive intention that it would realise its interest in the
    project by a sale of the shares. Subsequent comments by the court should be
    understood in this context. The profit was a step taken by the taxpayer in the
    course of its ordinary business.

    44. I am of the view that the appeal should be allowed. The orders I would
    propose are as follows:
    1. The appeal be allowed.
    2. The orders of Sheppard J be set aside and in lieu thereof, there
    be substituted an order that the respondent’s objection decision
    be set aside, that the appellant’s objection be allowed, and that
    the assessment be remitted to the respondent for amendment in
    accordance with the reasons of the court.
    3. The respondent pay the appellant’s costs of this appeal and of the
    proceedings before Sheppard J.


    Church of The Holy Smokers
    [email protected]

    Profile photo of mish_mashmish_mash
    Join Date: 2006
    Post Count: 1

    1) how to start off making yourself known as a bird-dogger
    2) are we currently experiencing a ‘gloom’ or ‘doom’ time in your opinion?
    3) are you going ot write anymore books?

    cheers [exhappy]

    Profile photo of hihopeshihopes
    Join Date: 2005
    Post Count: 19

    Hi Steve,

    Looks like you have heaps to consider for the newsletter!!

    I would like to put my vote in for assett protection. As I gain more IP’s this is becoming more important to me. The thing I would value would to make it as simple to understand as possible.

    I am currently looking at trust structures and my mind is boggling.


    Profile photo of jess14jess14
    Join Date: 2006
    Post Count: 1

    Hi Steve,

    I agree with one of the posts earlier about advice to young people starting out. I am 20 and enjoy investing but because I am a student, I work part time, don’t earn a large income and have little in savings. What is the best way for us to get started and taken seriously?

    That brings me to the second thing I would like to see – information about finding finance. What is the best way for someone in my situation – little savings, no assets and a relatively small income to finance property investments? What resources are out there that we can use?

    Finally, I would like to hear what strategies you used to purchase properties in a sellers market where houses are selling quickly. I live in Perth and there seems to be a situation happening over here where any properties that would be good investments (and it seems even those that wouldn’t be!!) are selling straight away. How would you recommend people get their hands on good investment properties before someone else does?!

    Thanks and all the best to everyone with their investing!!!

    Profile photo of Tanya-leeTanya-lee
    Join Date: 2006
    Post Count: 9

    Hey Steve ,

    I would love your advice on how I can get involved in the RESULTS program ?…. I have just had a phone conversation with a member who is already involved and I would love to know if I am in a position to qualify ??.

    Any info would be good as I am in the middle of thinking that it is nearly time to go back to WORK if I can not get any RESULTS from the real estate world ??? sad I know , but I am at a loss where to go from my current position …. so in the words of a desperate man …… HELP !!!![blush2]

    Profile photo of jose_wjose_w
    Join Date: 2006
    Post Count: 1

    Like jess14’s post earlier, i am a young person keen to start investing. She brought up some relevant points which i would also like to see addressed, or else to be directed towards reasonable advice.

    The first was reguarding starting out, how to buy your first property when you are just out of a degree, have very little savings and not a huge income. How do you get started, and be in a situation where people will take you seriously.

    Secondly, it is difficult to find companies and individuals that you can trust for financial, legal and tax advice. With no experience in doing this, should i find a financial adviser to give me direction, or an accountant to deal with my tax situation, and when do lawyers come into it?

    Thirdly, probably my biggest dilemma is finding the right property. It makes sense to take up the government offer of the First Home Owners Grant, which will require i live in whatever property i buy. Ideally i would want to find a property that can be positively geared at some stage (because it will be a temporary residence), but one that i will be happy to live in for a while as well – so location is important. However, the locations i would choose to buy a place to live are unlikely to be priced to enable positive gearing, but after owning it for a year or so, maybe there is a way. Can you give any advice when searching for this first property?

    Lastly, and more specifically, if there are any Adelaide people in this forum, i wonder they could provide any tips of good areas to consider investing in.

    Many thanks…. J

    Profile photo of tetelestitetelesti
    Join Date: 2006
    Post Count: 2

    Hello, Steve
    I have read your books with keen interest and have not been able to get my feet wet yet but have just stumbled accross something that I am interested in and need a some input on. A hotel is for sale 350 km from Perth for $150 00. The Rent including GST is $21,774 per annum and reviews may be done anfer the 9the of October annaully.The normal outgoings that are payable by the landlord is water rates (not consumption) for the amount of $730. Net income:$19 000pa.
    I am not sure that I will be able to manage it effectively, because it is too far from home base. It appears structurally sound. What do you think? andrea[strum]

    Profile photo of chuck7chuck7
    Join Date: 2006
    Post Count: 1

    Hi Steve,
    Some issues I would like to know about are, firnding the right finance in country areas, finding the right cash flow properties where to look for properties when you are in the field?

    Profile photo of SqueakSqueak
    Join Date: 2006
    Post Count: 2

    I would love some info on ‘Value adding’ to property. Whats worth it and whats not. I have an ip with a double carport, and am wondering if it would be worth making it into a double garage.(my tenants seem to have nice cars) . I was wondering if it would add to the value of my property relative to the cost, and how much extra should I get (rental) because of it. Is there a calculation for this or something?. Also, when doing my bookwork, which heading should it go under?
    Many thanks Steve, to you and all your crew.

    Profile photo of mtofingamtofinga
    Join Date: 2004
    Post Count: 1

    Hi Steve,

    Could you please help me in finding a good accountant here Melbourne? My husband and I are going to buy properties and would like to know where to get a good accountant around our areas.

    Thanks, Annia

    Profile photo of duttonsduttons
    Join Date: 2006
    Post Count: 1

    trying to enter the market. I am a volunteer with a Chrstian ministry organisation so have continual finance just not always secure enough for a bank.

    should I try and own my own home before buying an investment?

    great computer programs for tracking property expenses once I do invest.

    Profile photo of HutchHutch
    Join Date: 2004
    Post Count: 137

    Hi mtofinga
    Good Accountant,
    Mark Unwin
    email; [email protected]

    Profile photo of siggisiggi
    Join Date: 2006
    Post Count: 1

    Having three defaults(paid) makes it almost impossible for me to refinance. with mainstream. I am as bit scared to approach non conforming lenders ,anyone had the same experience and could give me some advice.
    Equity and servicability are fine.

    Profile photo of connor74connor74
    Join Date: 2006
    Post Count: 14

    Hi Steve
    Contact to write an article for you about being a Landlord! They have great articles that Landlords have written about all the issues associated with a rental property!


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