Case: Federal Commissioner of Taxation v St Hubert's Island Pty Ltd [1978] HCA 10 ; (1978) 138 CLR 210
Outcome: applied
The second ("the lack of marketability") contention involves some examination of case law relating to land and in particular the decisions of the High Court in Federal Commissioner of Taxation v St Hubert's Island Pty Ltd [1978] HCA 10 ; (1978) 138 CLR 210 and of Rogers J in Barina Corporation Ltd v Federal Commissioner of Taxation (1985) 4 NSWLR 96. 33 Later in these reasons I find that the Bulletin Place property was held for the purpose of development, strata subdivision and sale of subdivided lots. In light of this finding the question the 1997 Act requires to be answered is whether the envisioned sale of the subdivided lots would be in the ordinary course of business. For reasons I give below, I am satisfied that this "one venture": cf Federal Commissioner of Taxation v St Hubert's Island Pty Ltd (in liq) , above, at 237-238, of holding the Bulletin Place property for the purpose I have found, necessarily entailed that the envisioned sale of lots would occur in the ordinary course of a business of developing, etc the Bulletin Place property. That business was functioning in the 1998 tax year, as will later become apparent when I indicate the business activity that was engaged in in that period, for the purpose of effectuating the property's development, strata subdivision and sales of lots. 34 To anticipate what I have to say below, I reject R &amp; D Holdings' contention that, for the Bulletin Place land to be trading stock, it must first be shown that the Hallinn Trust carried on a business of trading in land in the sense of buying and selling land with some regularity or system. That contention is not supported by the language of s 70-10 and is inconsistent with the decision in St Hubert's Island (see esp per Jacobs J at 237-238 quoted below). 35 R &amp; D Holdings' submission is that, as the relevant business for which property is held for sale involves trading in subdivided land, an unsubdivided parcel will not be trading stock because it lacks marketability and there can be no market value. 36 To answer this submission it is necessary to refer in a little detail to case law on the definition of trading stock under the 1936 Act for such guidance as it provides in construing the 1997 Act . 37 Both sides accept that the seminal decision on whether land can be trading stock was the St Hubert's Island case, above. In that case the taxpayer company bought the whole of one small island and part of another for the purpose of developing and subdividing them and selling the allotments for residential purposes. It was incorporated with this purpose in mind. It procured an alteration in the land's zoning to permit the desired development. Substantial development works were carried out when the company was put into voluntary liquidation. The development works had not then been completed nor had places of subdivision been approved for any of the land. The liquidator was authorised to transfer and did transfer the land in specie to the sole contributory of the company who was then assessed for tax on the basis that the transfer was a disposal of trading stock to which s 36(1) of the 1936 Act applied. That issue was ultimately determined favourably to the Commissioner of Taxation in the High Court by a majority of three to two. 38 The issues of present relevance addressed by the Court were (1) whether the land in question was capable of being trading stock for the purposes of the 1936 Act and (2) whether it was trading stock in the business carried on by the taxpayer. The latter of these was raised by the express requirements of s 36(1) which dealt specifically with the question of disposal of trading stock. 39 Of the majority judges, Mason J noted that (i) it had become generally accepted that land may become trading stock according to the common understanding of this expression; and (ii) accountants and commercial men have recognised that raw materials used for the purpose of manufacture and partly manufactured goods could constitute trading stock. His Honour went on (at 228-229): "... as the definition of 'trading stock' contained in s 6(1) is not an exclusive definition, it requires us to give effect to the ordinary, and in this case that happens to be the commercial, meaning of the expression, notwithstanding that in part at least it is a meaning which may have derived from or may have been influenced by accounting principle or practice. If trading stock according to its ordinary meaning denotes land as well as goods and commodities, it must follow that land may form part of the trading stock of a business before it has been converted into the condition in which it is intended to be sold. Just as raw materials and partly manufactured goods form part of the trading stock of a manufacturer, so also virgin land which has been acquired by a land developer for the purpose of improvement, subdivision and sale in the form of allotments will form part of his trading stock. ... Once it is accepted that land acquired for the purpose of improvement and development as a preliminary to sale in allotments in its improved form constitutes part of the trading stock of the land developer's business, notwithstanding that the land as acquired differed in condition from the land as intended to be sold, the issue in the present case is whether the land in question was acquired by the respondent taxpayer for its business as a land developer, that is, for improvement and development as a preliminary to sale in subdivided allotments. That substantial work remained to be undertaken in connexion with the land before it would achieve the condition in which it was intended to be sold as an immaterial consideration. It is enough that the respondent was carrying on the business of a land developer and that it acquired the land in the course of carrying on that business. The facts as outlined by the primary judge make it plain that the land was acquired by the respondent taxpayer for this very purpose." 40 His Honour later described (at 230-231) the developmental activity undertaken by the taxpayer and then commented (at 231): "The features to which I have referred stamp the enterprise with the characteristics of a business which had as its object the making of a profit from the ultimate disposition of the land in subdivided form. The land was acquired in 1960 in a series of transactions as the first step in a substantial business undertaking which was to endure for some years. Indeed, it was a long way from completion in 1972 though it is fair to say that the respondent encountered some difficulties which may not have been foreseen. The land was not acquired as an investment and its development for subdivision and sale was not simply the realization of a capital asset. In these circumstances it is impossible to treat the proposed enterprise as one which lacked the characteristics of a business and to say that it constituted no more than an isolated transaction capable on yielding assessable income under s 26(a) rather than s 25(1)." 41 The second majority judgment, that of Jacobs J, considered (at 234) land could be trading stock but that, for the purposes of s 36(1) of the 1936 Act , the property "must be an asset of a business of trading in that stock". His Honour went on (at 235): "Once it is concluded that land may be trading stock, then I can see no reason to limit the application of the words to land which is in the condition in which it is intended that it should be sold. I am inclined to the view that land acquired or purchased for purposes of sale falls within the words of the definition whether or not the land is in the condition in which it is proposed that it shall be sold. The definition does not say otherwise. But whether this be so or not, the definition is by way of extension, not limitation, of the ordinary meaning of the words 'trading stock'; and undeveloped and unsubdivided land acquired for the purpose of development, subdivision and sale is a stock of land in which the person acquiring it may be said to trade or to propose to trade. It may therefore properly be described as trading stock not only when the processes of development and subdivision have been carried out but also when it is acquired for the purpose of carrying out those processes upon it. Whether or not it will be held to be trading stock depends on whether the person carried on or had previously carried on the business of trading in that land." 42 Whether there was such a business in that case was answered thus (at 237): "Here there was what I think should be treated as a 'one-off' purchase of an area of land with an intention thereafter, as one continuous course of activity of which the purchase was the commencing act, to improve, develop, subdivide and sell in subdivided lots the area of land so purchased. Did the taxpayer thereby carry on the business of trading in that land? I have come to the conclusion that it did, and that the land became the trading stock of that business even though at the relevant time none of the land had been sold. The fact that none of the land had then been sold did not change the character of the business carried on or the character of the stock, the land, held as an asset with which it was intended to trade. A contrary conclusion would appear to me to involve the proposition that a person can only carry on the business of trading if he does or intends to do repeated acts both of buying and of selling in the course of the business. Ordinarily to carry on the business of trading in a thing does involve repeated acts of buying and selling ... However, although this repetition of both buying and selling is a usual feature of trading I do not think that it is an essential feature." Acknowledging that a "one venture" can be a "trading operation", Jacobs J concluded (at 238): "Once it is recognized that land may be trading stock then an acquisition of land for the purpose of resale, after development improvement and subdivision, in subdivided lots, and a continued activity in fulfilment of that intention brought into existence a trading operation. The company was carrying on the business of trading so long as it was pursuing its activities with an intention to sell off the land in subdivided lots and the land was its trading stock so long as the intention continued." 43 Justice Murphy agreed with both Mason J and Jacobs J. 44 For the minority Stephen J, while accepting that land could be trading stock, concluded that the land in question was not trading stock because, at the time of its purchase it did not possess the character of being substantially in the state in which the taxpayer intended to trade in it. It was devoid of the characteristics of subdivided land. The emphasis on the time of purchase was necessary in his Honour's view because of the language of the s 6(1) definition of "trading stock". 45 Finally, Aicken J in dissent also accepted that land or interests in land could constitute trading stock but rejected that the taxpayer's land was such for the following reasons (at 246): "In my opinion items of property (including land) can only be regarded as trading stock in circumstances in which the business in which they are employed involves some continuity or repetition of both buying and selling, so that one is able to say in a real sense that the stock is being turned over by a process of buying and selling. A single purchase of land, however substantial in area, made, not as part of a continuing business of trading in land, but none the less with a view to its subdivision and development into a residential area, individual allotments in which will be sold, does not seem to me to have the qualities required for answering the description of trading stock ..." 46 The significance of this case for present purposes is that it is authority for the propositions that (i) land acquired for the purpose of development, subdivision (or strata division) and sale by allotment (or lots) can constitute trading stock of a business having that purpose irrespective of whether the land has been so developed and subdivided; and (ii) that business will be carried on for so long as the taxpayer engaged in the effectuation of the purpose of development, etc of the land. The emphasis in St Hubert's Island on the need to have the relevant intention of sale at the time of acquisition of the property in question is, though, without significance for s 70-10 purposes which as I have earlier noted links the intention or purpose of sale with the purpose (or purposes) for which the property is held . 47 Despite St Hubert's Island , R &amp; D Holdings seeks to draw comfort from the following observations made in the five judge joint judgment in John v Federal Commissioner of Taxation [1989] HCA 5 ; (1989) 166 CLR 417 at 429: "The Act defines 'trading stock' in s 6(1) as including 'anything produced, manufactured, acquired or purchased for purposes of manufacture, sale or exchange, and also includes live stock'. The definition looks to the nature of goods that may constitute trading stock and posits that they will constitute trading stock if acquired for any of the specified purposes, including sale. It presupposes that the person by whom they are produced, manufactured, acquired or purchased is or will be engaged in trade in those goods. But it does not render an inquiry into whether or not the person is or will be engaged in that trade irrelevant. A single transaction does not render a person a trader, although, of course, a single transaction may constitute an adventure in the nature of trade. Nor, we think, is a single item acquired for the purpose of manufacture, sale or exchange an item of trading stock, unless the purchaser is or will be engaged in trading goods of that nature. Thus it is relevant to inquire whether the person who acquires an item claimed to be trading stock is a trader in the sense that he is engaged or will be engaged in trading goods of the nature of the item acquired." 48 The issue in John , insofar as presently relevant, was whether shares acquired by a partnership which carried on the business of trading in shares were trading stock within s 6(1) of the 1936 Act . They were found to be such. This context is important in considering whether their Honours were intending in any way to cast doubt upon the majority judgments in St Hubert's Island . In my respectful view, the above should not be taken as intended to address the quite particular and distinctive issues raised in cases of single venture land development and subdivision for purposes of sale by lots. The judgments of Mason J (who participated in the joint judgment in John ) and of Jacobs J in St Hubert contain a particular and detailed course of reasoning to bring what I will call single venture land subdivision cases within the scope of s 6(1). The observations in John as generalisations are, with respect, uncontroversial, but as generalisations suited to the general context exemplified in John . If they were intended to undermine St Hubert's Island in any way, I am of the view this would have been done explicitly, given the particular attention given to land in that case. In saying this I would draw particular attention to the comments of Jacobs J in St Hubert's Island quoted earlier rejecting the alleged need for repeated acts of buying and selling to establish "trading". 49 Though in this case, as in St Hubert's Island , the land together with such transformation as it underwent through development etc was stock in trade, the respective businesses carried on involved a purpose of sale of the transformed property, i.e. in the present matter the sale by lots of a strata subdivided building. 79 In the event then, I am satisfied that as at 30 June 1998 the Bulletin Place property was held for the purposes of sale in the ordinary course of business of the Hallinn Trust. That business was the development, strata subdivision and sale of subdivided lots of the Bulletin Place property: cf St Hubert's Island ; this being one of a number of business activities of the Hallinn Trust. 80 It may well have been the case that this particular business activity was abandoned not particularly long after 30 June 1998: see Mr Bobb's 13 August 1998 note referred to above. It is not necessary for me to decide whether and when this occurred for the purposes of this application. 81 The Bulletin Place property was held for the purpose of strata subdivision and sale of the subdivided lots. As such it was trading stock as defined in the 1997 Act as at 30 June 1998. The election to value it as strata subdivided at market value invoked the operations of ss 70- 45 and 70- 35 of that Act. The resultant net income of the Hallinn Trust calculated for the purposes of s 95 of the 1936 Act was included in the assessable income of R &amp; D Holdings. As the respondent does not contest that as at 30 June 1998 the market value of the land at 30 June 1998 was in the order of $29 million, the assessment for the 1998 tax year should be adjusted accordingly.