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TMI Blog1970 (11) TMI 106X X X X Extracts X X X X X X X X Extracts X X X X ..... e income. At the hearing of this objection before a single judge of the High Court of Australia (Windeyer J.) she won her case. The assessment was set aside and the respondent ordered to pay costs. Upon his appealing to the Full Court (Barwick C. J., Kitto, Menzies and Owen JJ.) the appellant lost (Barwick C. J. dissenting) and was herself ordered to pay the respondent's costs. Subsequently special leave was granted to the appellant to appeal to the Board. The detailed narrative begins with the will and codicil thereto of Henry John Spaven who died on September 27, 1958. He gave his residuary estate to his trustees (who were also his executors) upon trust to sell, with power to postpone the sale ; to set aside out of the proceeds of sale two sums of £15,000 and £10,000, in which he gave a life interest to a Miss Hoult and a Mrs. Burns respectively : and subject thereto the capital and income of the residue was given to the appellant and her brother as " tenants-in-common in equal shares. " The appellant and her brotherReginald Spaven-were respectively the niece and nephew of the testator. Pursuant to this last provision the appellant and her brother were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her option to buy for £40,000 her brother's half-share in the whole of portions 4, 5 and 6. The sale went through as planned. Out of the deposit of £50,000 the appellant paid her brother £40,000, lodged the balance of £10,000 with the executors as required, and was left with the balance of the purchase price plus the sole ownership of portions 4 and 6 which were duly transferred to her by the executors with her brother's assent. The respondent estimated that the appellant had made a profit of £56,951 from the foregoing transaction : and in August, 1966, made an adjusted assessment to income tax upon her in respect of this profit for the year ended June 30, 1963. He declined a request by her solicitors to state how he arrived at his figure, but did so at the trial before Windeyer J., who was critical of the computation. The results of the trial and of the subsequent appeal have already been narrated. The question obviously suggests itself-why did the appellant have to sell land worth £150,000 simply in order to get £40,000 to pay her brother ? The answer is that the appellant was advised that in order to get a good price for porti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an asset, and its resale at a profit, yields to the seller a profit in the nature of income or, instead, an accretion to capital. Judicial decisions, whether in the Commonwealth, or in the United Kingdom, yield no touchstone by which all cases may be easily resolved. In the United Kingdom the test is whether the transaction is " an adventure in the nature of trade "-see the definition of trade in section 526 of the Income Tax Act, 1952. Although there is no similar provision in the Australian Income Tax Act, the respondent invokes the same test in his argument that the profit accruing to the appellant was income according to ordinary concepts " because [she] was engaged in an adventure in the nature of trade " (see paragraph 5 of his reasons). But his primary contention is that the appellant is liable under the express provision of section 26(a) and this contention their Lordships now examine. The first question is whether the appellant acquired property for the purpose of profit-making by sale. Windeyer J. held that she had not.She had, he said, acquired an undivided share in the land by the bounty of the testator. " This was given to her. It was not acq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bounty of the testator. On that footing it would be quite inappropriate to say of the appellant that she acquired land through the bounty of the testator " for the purpose of profitmaking by sale. " This may well explain why there is no separate mention in the majority judgment in the High Court of any argument based on the first limb of section 26 though your Lordships were assured that one was advanced. The second limb of the section poses the question whether the appellant derived profit from the " carrying on or carrying out of any profit-making undertaking or scheme. " Kitto J. rested his affirmative answer on these grounds : (i) The appellant purchased her brother's half-interest in the Rockingham land for the purpose of enabling her to sell the fee simple in those lands. (ii) She had no other purpose than to sell the entirety of those lands, part of them immediately and the rest at a future time. (iii) She wished to do this in a way which would bring in the best price. (iv) These premises involve the conclusion that the plan the appellant adopted was a plan for the making of profit. (v) This profit answered the description of profit in the secon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... helped to tip the scales in favour of the respondent was the further fact which Kitto J. describes as " a process which involved bringing both that " (i.e., the brother's) " halfinterest and her own to an end by uniting them in her own hands, etc. " The process thus described, if spelt out in more detail, comes to this : the appellant found herself in a position where, desiring to retain the land, she had a prospective tenant in common with herself who desired to sell. To avoid becoming tenant-in-common with a stranger she decided to try and acquire her brother's interest. She accordingly obtained the option. When she exercised it she became in equity the owner of the fee simple, owing her brother £40,000 . At this point as Barwick C. J. points out she made a profit in the sense that the fee simple was much more valuable than the sum of the former interests in common : but this profit, being unrealised appreciation, was not a taxable profit in her hands. She then had to pay her brother, and to enable her to do so she had to sell part of the land. Do these facts disclose a " profit-making undertaking or scheme " within the meaning of sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant set about selling sufficient land in an enterprising way. But in argument the Solicitor-General on behalf of the respondent rightly admitted that this was inconclusive. What he strongly relied upon was the prior purchase of the brother's interest and its inclusion in the sale. Their Lordships take the view that the facts bring out clearly that this was simply a means to an end, i.e., the retention of the more valuable land. The final contention of the respondent is that the profit which arose to the appellant is income according to ordinary concepts, since it arose from an adventure in the nature of trade. Whilst this claim is quite independent of section 26(a) it seems to their Lordships to introduce no new element into the problem such as would lead to some different conclusion. The whole of the facts have still to be considered ; the same criteria have to be applied ; the question to be asked and answered is still whether the facts reveal a mere realisation of capital, albeit in an enterprising way, or whether they justify a finding that the appellant went beyond this and engaged in a trade of dealing in land albeit on one occasion only. To this question their Lor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hough the Official Receiver's duty was to realise the estate for the benefit of creditors he had adopted a set plan to do so and the profit was assessable under section 26(a). It was also held, however, that the basis of computation of the profit adopted by the commissioner was wrong, and the report does not indicate whether his victory was a pyrrhic one or not. But although he succeeded in principle, the facts are so different from the present case that the decision does not really help. The other case is Iswera v. Inland Revenue Commissioners [1965] 1 W. L. R. 663 (P. C.).. This was an appeal heard by the Board from a decision of the Supreme Court of Ceylon. The appellant, wishing to live near a school which her daughters were attending, bought a site of 2 1/2 acres in the locality. It was more than she wanted but the vendor would sell only the whole. The appellant divided the land into 12 lots selling 9 to sub-purchasers, reconveying one to the vendor, and keeping one for herself. She made a profit and was assessed to Ceylon income tax upon it as being profit from an adventure in the nature of trade. The Board of Review in Ceylon on appeal to them by the appellant found tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's claim that this profit was assessable to income tax was rejected. There was a supplementary finding by the commissioners that the transaction was not a concern in the nature of trade. In the course of his judgment in the Court of Appeal Lawrence L.J. had said: "It seems to me in the case of an isolated transaction of purchase and re-sale of property there is really no middle course open. It is either an adventure in the nature of trade, or else it is simply a case of sale and resale of property." This passage in the judgment of Lawrence L.J. was cited with approval by Lord Buckmaster at page 421, Lord Dunedin at page 422, and Lord Thankerton at pages 427-428. Lord Warrington said, at page 425: "Here we have a case of the acquisition of an item of property and a profit made by the transfer thereof to another. In this I can find nothing but a profit arising from an accretion in value of the item of property in question and the realisation of such enhanced value. There is in this nothing in the nature of revenue or incomes. The fact that the parties intended from the first to make a profit if they could does not in my opinion affect the question we have to det ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missioner of Taxation [1954] 91 C.L.R. 209, 231. Dixon J. had also said in the same judgment, in relation to section 26(a), "It is not easy to say whether the expression 'profit-making by sale' refers to a sole purpose or a dominant or main purpose, or includes any one of a number of purposes." But I think it can now be taken as settled by later cases that the "purpose" referred to in the phrase in section 26(a) "for the purpose of profit-making by sale" is the dominant or main purpose; Evans v. Deputy Federal Commissioner of Taxation for South Australia [1936] 55 C.L.R. 80, 99, per Rich, Dixon and Evatt JJ.; ("The purpose of which it speaks is the dominant purpose actuating the acquisition of the assets-the use to which they are to be put"); Buckland v. Federal Commissioner of Taxation [1960] 12 A.T.D. 166, 169, per Windeyer J.: "When a person buys property, as a commercial money-making transaction and not for his personal use or enjoyment, the purpose he has in view is the use to which he intends to put the property to achieve this end. He may intend either to sell it at a profit, or to keep it as a revenueproducing asset. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferred to her the ownership in fee simple of the entirety of the laud. That is what she acquired. Did she acquire it for the purpose of profit-making by sale? In my opinion the answer is in the affirmative. The evidence and the findings of the judges show that she acquired the ownership of the land for the purpose of selling it at a profit. She was going to sell portion 5 of the land immediately to the purchasers in pursuance of the contract, which gave her a large profit, and her intention was to keep the rest of the land (portions 4 and 6) while its market value would greatly increase and eventually she would sell it at a very large profit. Subject to a question to be considered in a moment, it seems to me that this transaction does fall within the first part of section 26(a) and also within the second part which refers to "profit arising...from the carrying out of any profit-making...scheme." The question remaining to be considered is whether the profits of this that this transaction, though prima facie within section 26(a), are to be excluded as being "proceeds of a mere realisation or change of investment or from an enhancement of capital." (Premier Auto ..... 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