Case: Commissioner of Taxation v The Myer Emporium Ltd [1987] HCA 18 ; (1987) 163 CLR 199
Outcome: applied
Although s 26(a) ITAA 1936 specifically deemed, as income, profit arising from the sale by the taxpayer of any property acquired for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme, it is clear that the acquisition of a property for profit-making by sale of that property can, of itself, give rise to assessable income within the ordinary usage of the word ( Commissioner of Taxation v The Myer Emporium Ltd [1987] HCA 18 ; (1987) 163 CLR 199; and note the useful discussion of the history of this principle by Davies J in McCurry v Commissioner of Taxation , unreported Federal Court of Australia, 15 May 1998). 23 The characterisation of activity as either capital or income was subject to some review by the High Court in Myer Emporium [1987] HCA 18 ; 163 CLR 199, where the Court in a unanimous judgment held that it was perfectly possible for an isolated business operation or commercial transaction, entered into otherwise than in the ordinary course of the carrying on of the taxpayer's business, to nonetheless constitute income in accordance with the ordinary meaning of the word, provided that the taxpayer entered into the transaction with the intention or purpose of making a relevant profit or gain from the transaction (at 209-210, 211, 220). 24 Although the Court considered the well-known proposition that mere realisation of a capital asset does not produce a gain which is assessable income, as the Court said at 213: The proposition ... requires some elaboration. First, the emphasis is on the adjective "mere"... Secondly, profits made on a realization or change of investments may constitute income if the investments were initially acquired as part of a business with the intention or purpose that they be realized subsequently in order to capture the profit arising from their expected increase in value... It is one thing if the decision to sell an asset is taken after its acquisition, there having been no intention or purpose at the time of acquisition of acquiring for the purpose of profit-making by sale. Then, if the asset be not a revenue asset on other grounds, the profit made is capital because it proceeds from a mere realization. But it is quite another thing if the decision to sell is taken by way of implementation of an intention or purpose, existing at the time of acquisition, of profit-making by sale, at least in the context of carrying on a business or carrying out a business operation or commercial transaction. 25 Their Honours said later in the judgment: The periodicity, regularity and recurrence of a receipt has been considered to be a hallmark of its character as income in accordance with the ordinary concepts and usages of mankind... For present purposes it is sufficient for us to say...that, valuable though these considerations may be in categorizing receipts as income or capital in conventional situations, their significance is diminished when the receipt in question is generated in the course of carrying on a business, especially if it should transpire that the receipt is generated as a profit component of a profit-making scheme. (at 215) 26 Although the High Court in Myer Emporium [1987] HCA 18 ; 163 CLR 199 found that receipts from sale of capital assets generated as profit components of profit-making schemes were capable of constituting income, equally clearly the decision is not authority for the proposition that all gains made by business entities are assessable income. As pointed out by the Full Court of the Federal Court in Commissioner of Taxation (Cth) v Spedley Securities Ltd (1988) 19 ATR 938 at 942, such a proposition would be contrary to authority, to the Act itself, and to basic concepts concerning the distinction between capital and income (note similar comments by the Hill J in Cooling 22 FCR at 55 and again by Hill J (with whom the other members of the Court concurred) in Westfield 28 FCR at 342). Nature of purpose 27 In determining whether a sale receipt is generated as a profit component of a profit-making scheme, and therefore income in accordance with ordinary usages, it is only necessary that the intention or purpose of profit-making by sale was one aspect of a profit-making scheme in existence at the time of the acquisition of the asset (or, as was the case in Whitford's Beach [1982] HCA 8 ; 150 CLR 355, coming into existence during the course of the taxpayer's ownership of the asset and remaining in existence at the time of the sale): Westfield 28 FCR at 343-344. It is not necessary that the intention or purpose of profit-making by sale be the sole or dominant purpose of the taxpayer entering into the profit-making scheme: Cooling 22 FCR at 56-57 (cf Myer Emporium [1987] HCA 18 ; 163 CLR 199 where the motivating purpose of the transaction was for Myer to obtain working capital to enable it to diversify; and Moana Sand 88 ATC 4897 where the dominant purpose of the taxpayer in acquiring the land was not resale of the land at a profit). However the Full Court of the Federal Court in a number of cases has indicated that the purpose of profit-making must be a "not insignificant" aspect of the taxpayer's activities: Cooling 22 FCR at 57, Selleck v Commissioner of Taxation [1997] 799 FCA (20 August 1997). 34 In my view the submissions of the applicant that the Tribunal erred in law in its findings respect of this issue cannot be supported. I form this view for the following reasons: 1. Senior Member McCabe stated the law correctly when he referred to "the well-established rule that the proceeds from the 'mere realisation' of a capital asset will not give rise to income according to ordinary concepts and any loss incurred on the disposal of the asset will not lead to a loss that can be offset against other income of the taxpayer". This is clearly supported by the body of case law to which I referred earlier in this judgment, beginning with California Copper (1904) 5 TC 159. 2. The applicant in its submissions contended that the Senior Member erred in making the inquiry as to whether the land was trading stock or whether the gross proceeds were on revenue account. However: &#8226; I note from the Statement of Facts, Issues and Contentions filed by the applicant in the Tribunal that the applicant had contended that the loss incurred by the applicant on the sale of the land in the year ended 30 June 1993 was a revenue loss by reason either of the trading stock provisions or as a loss on a profit-making undertaking or scheme. Further, the evidence showed that LGHH, in its letter of 14 July 1994 to the ATO on behalf of the applicant, described the land as "trading stock". In light of this it is to be expected that the Senior Member would address the issue whether the land was trading stock or the gross proceeds were on revenue account (paras 30-31). &#8226; In any event, in my view it is clear from reading para 30 of the Reasons for Decision that the Senior Member, in referring to the situation "if the asset was more like trading stock", was giving an example of a scenario where the proceeds of sale of capital assets such as real property can properly be characterised as income rather than capital. The Senior Member did not base his decision that the loss in this case was not in the nature of revenue, solely on this principle. 3. The applicant submitted that the Tribunal erred in that it did not refer to what the applicant defined as the relevant inquiry in the circumstances, namely whether the asset was acquired with a purpose or intention of profit-making by sale. The applicant submitted further that, in failing to direct itself as to the proper test of whether land was acquired as part of a profit-making undertaking, the Tribunal also failed to direct itself as to whether one of the purposes of its acquisition, rather than the purpose, was profit-making by sale. However, in my view the Senior Member made it clear that he had applied the test of whether the applicant had acquired the land with a profit-making purpose, but that in doing so as a finding of fact he was not satisfied that the applicant had had that purpose at all , ie as either "the" purpose or one of a number of purposes be they significant or otherwise. Rather, the Tribunal considered the range of purposes of acquisition of the land and the characterisation of the applicant's business activity as submitted by the applicant, and on the facts found against the applicant. This is apparent from the Reasons for Decision, including: &#8226; At para 31, where the Senior Member specifically acknowledged: "The applicant says this was a profit-making venture... The company acquired the land with a view to developing it or on-selling the property to another entity. The company investigated various development options before completing a sale and then distributed a portion of the proceeds to the foreign businessman". &#8226; At para 32, where the Senior Member specifically stated: "I am not persuaded by that characterisation of the company's business activity. The taxpayer was a shelf company until it contracted to purchase a parcel of land from a foreign businessman who was a client of one of the company's directors. The correspondence between the businessman's solicitors and the FIRB make it clear the property was acquired by the businessman to construct accommodation. As it happened, that was the only use to which the property was ever put... The taxpayer did investigate whether the property could be sub-divided or on-sold for the purposes of development, but I do not think the evidence establishes that was the purpose for which the land was acquired." 4. Although the applicant submitted that the findings of the Tribunal in para 32 of its Reasons for Decisions namely that the applicant had considered sub-division or on-sale for the purposes of development as one option and that steps were taken to achieve that purpose required the Tribunal to conclude that the loss on sale of the applicant's land was deductible under s 51(1), I do not so find. Rather, in my view: &#8226; The finding of the Tribunal in the circumstances of this case that the proceeds from the sale of the land were on capital account rather than income is consistent with the legal principles as articulated by Dixon J in Sun Newspapers [1938] HCA 72 ; 61 CLR 337. The land was purchased by Mr Iwasaki, transferred to the applicant, and used for the purposes of constructing student accommodation which in turn generated income. It bore all the hallmarks of a capital asset. The fact that the applicant was a corporate entity does not mean that any disposal of asset is on revenue account ( Myer Emporium [1987] HCA 18 ; 163 CLR 199). &#8226; In any event, as found by the Tribunal, Mr Iwasaki was the directing mind and will of the applicant between 1991 when the land was transferred to the applicant, and 1993 when Mr Iwasaki relinquished any claim he may have had as to the beneficial ownership of shares in the applicant following the sale of the land. Accordingly, during that period, the purpose of Mr Iwasaki with respect to the land was the relevant purpose (cf Whitfords Beach [1961] HCA 25 ; 105 CLR 355; Austin RP and Ramsay IM, Ford's Principles of Corporations Law (13th ed, Butterworths, 2007) Ch 16; Lipton P and Herzberg A, Understanding Company Law (13th ed, Law Book Co, 2006) at pp 103-108). That purpose as found by the Tribunal was bi-fold, namely that the land was a capital asset to be used for constructing student accommodation, and the applicant was to hold the land on Mr Iwasaki's behalf as part of the re-ordering of Mr Iwasaki's affairs. As found by the Tribunal, other than consideration of the option of development of the land, neither Mr Iwasaki nor the applicant at the relevant time held the land for the purpose of resale consistent with a profit-making scheme (cf Hill J in Westfield 28 FCR at 344-345). Further, as found by the Tribunal at para 32, there was no change of purpose of the applicant with respect to the land, as evinced, for example, by steps towards further development of the property, so as to result in the applicant acquiring a profit-making purpose akin to the situation in Whitford's Beach [1982] HCA 8 ; 150 CLR 355. &#8226; Notwithstanding the submissions of the applicant, in my view the law is not that, in the absence of a clear intention of a taxpayer in acquiring the property that it be used for a profit-making purpose, any subsequent consideration by the taxpayer of exploitation of a capital asset (for example by the possible options of either subdivision or on-selling) results in the immediate creation of a profit-making scheme and the resultant characterisation of profits or losses made in respect of subsequent dealings with that asset as revenue. A bare claim that this was the intention of the taxpayer is insufficient to manifest that intention in the absence of evidence of that intention, for example, by steps to progress those options. The surrounding circumstances must be taken into account in ascertaining the true intention of the taxpayer, and also characterising the receipts in the hands of the taxpayer. To find otherwise would potentially sanction any manifestation of intention of the taxpayer to convert a capital asset to the revenue account (or vice versa), however meagre or fleeting such manifestation of intention. By analogy I note comments of the High Court in GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation [1990] HCA 25 ; (1990) 170 CLR 124 at 142 where their Honours said: ... it cannot be accepted that an intention on the part of a payer and a payee or either of them that a receipt be applied to recoup capital expenditure by the payee determines the character of a receipt when the circumstances show that the payment is received in consideration of the performance of a contract, the performance of which is the business of the recipient or which is performed in the ordinary course of the business of the recipient.