Federal Commissioner of Taxation v Whitford Beach pty ltd
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Introduction
The case dated 17th March 1982 took place in the high court of Australia. Whitford Beach was a company founded by a group of fishermen in 1954. They were the original owners of the company shares in the taxpayer. Land that was next to shacks in the same year. This land was in the north of Perth. This land was not to be used for business or any profit-making venture. On 20th December 1967, the shareholders of the company sold the land to three purchasers (Pearson, 1998). The three companies had bought the land to merely have its control and that the taxpayer would cause development of land, subdivide it and then sell it on profit. The initial purchase price for the land was $1,600,000. Expectations were that the land would undergo some development in a span of 3-5 years after which the land was to be subdivided and sold at profit of approximately $7,000,000.
Two of the purchaser company were appointed as general managers on 20th December 1967 after a new clique of articles had been adopted by the taxpayer. The general managers were supposed to ado all they could in their power to develop and partition the land then sell it. The managers then started to look for a water source, finding means of transport, sewage, electricity among other services. These accelerate in 1969 after the Western Australia government started encouraging partition of land in that division. First sales of divided land began in early 1971 and in the following years substantial sums were acquired from the process of sales.
The commissioner evaluated the taxpayer on the profits made from land sales which came up in 1972,1973,1974 and 1975. The big question now is whether these profits were evaluable income of the taxpayer. If it is answered in favor of the commissioner, it will lead to other questions arising such as; if the land was meant for a profit-making scheme in 1967 or in posterior date, or if the land was committed wholly or part by part when development of subdivisions. Parties were in concession that if the first query were to be responded in favor of the commissioner, the federal court was to be given the matter for the auxiliary questions to be answered.
Fact analysis
Significant facts in the Whitford beach party ltd case came up. It is clear that the transactions that took place on 20th December in 1967 were entirely to reconstruct the foundation of the taxpayer (Porcaro & Slegers, 2006). The taxpayer was a company that had land as its only significant asset that had been the shacks of the Whitford Beach, that when partition would be possible, the land was to be allocated amongst shareholders having any extra land dealt with at the company general meeting.
The taxpayer had been clear on the projected activity in connection with the land that included procurement of changes of zoning, development of the particular piece of land and the leading sale of subdivided land over a long period of time (in this case, years). These activities were expected to produce a net return excluding tax exceeding $7,000,000 during the first decade while taking the land in question for subsequent partitioning, development and selling of the land.
The taxpayer’s articles did not contain any evidence for allocating the land amongst the shareholders and identity of the land owner had changed to the three companies that had purchased the shares in the taxpayer’s capital. This was to benefit the three companies later through sales made from the projected subdivision and development of the land in question.The evidence of transactions that took place in 1967 allowed the three companies to proceed with their project. In June 1969, the government of western Australia had interposed and encouraged the fast development and selling of housing pieces of land in the north of Perth (a section that also was inclusive of the land in question). Subdivision of this part of land was later on approved. Within a short period, multiple plots were sold. Evidence showed that amounts spent for land development and other sums obtained from sales were as shown below.
It is however by use of the analysis provided that the main question of this appeal demanded an answer. In my opinion, the profits from land sales would be treated as capital gain.
Legal issues
Wickham J. came to an assumption that the taxpayer was from the first day going on with the business of selling plots and dividing it with an aim of gaining profits(within s.25) and claiming it was not in the borderline case between the capital he used and the income he earned. Since s.26(a) looks at overall profit and s.25(1) addresses gross income, various results may come up in relation to which provision is conventional to a taxpayer. When ascertaining the net profit in association with s.26(a), overall accounting principles instead of the statutory provisions relating to permissible deduction will have to be applied. There might lack a correspondence in operation of s.25(1) and s.26(a)
The distinct and conflicting responses that have been provided to the query as to whether s.26(a) is directed to income or capital gains or both, is brought out providing differing views on what income is to normal application and ideas of humankind and as to the accuracy of Jones V. Leeming. There shall be cases whereby property will have been acquired for the intention of making profits using other means rather than by sale. As long as procurement is a factor in a profit-making scheme, profits will be held by the second limb even though the scheme does not have repetitive properties which are treated as authentication of commercial activity. There is a productive area of operation of the second limb in cases lacking identity between sold property and acquired property.
The majority in federal law supported the taxpayer appeal by considering s.25 and s.26 (a). On the other hand, the high court decided to put into consideration the following things; how s.26 (a) and s.25 were related, finding out if in any case there was a business of land usage and development and lastly, the application of s.26(a).The high court came to a decision that the taxpayer had taken advantage of the capital asset and this is what had contributed to a business of land development. All the transactions done had given rise to assessable income. According to s.26(a) there was supposed to be a profit that had accumulated from the same property and a reason as to why the profits were being made.
Maso, J in Whitford Beach regarded that the taxpayer had not acquired the original half interest with a good reason because it was unsolicited gift which was under will. On the other hand, Gibbs asked if what had been done was with intentions of realizing the assets of the taxpayer or was it a form of business. s.26(a) stated that incase the land owner had used the land to build houses then automatically the land had been used for development. In Scottish Australian mining, it was realized that the taxpayer was initially a coal mining company but later on left the business and subdivided the initially acquired land therefore profits had been sold. The court held that this profit was not part of the assessable income. Taxpayer was a company therefore it was necessary to give the business purpose to the people who controlled the company (Hart 2007).
The events that took place on 20th December ,1967 were held crucial by Gibbs, C.J., likewise Mason J. said that those who owned the company should be given the first priority at the relevant time. Wilson, J. on the other hand held that according to the constitution there was enough changes in the contract between the taxpayer and buyer therefore the high court had to apply the organic theory of the company. According to Gibb, C. J and Mason J. s.26(a) could only operate in the absence of s.25(1) and that the taxpayer’s activity was to carry out land development and make gross income assessable under s.25(I). Otherwise if the taxpayer’s activities would have been to make profits then the net profits would be assessable under s.26(a).
The court had to come to a conclusion of treating s.25(a) and s.26(a) as mutually different in terms of their applications on this case. According to s.25(1) the word income only had one meaning which implied that ordinary income had been used to enter s.25(a) together with all the specific provisions. Unfortunately to calculate the amount of tax to be bought under s.25(1), the complains were to be sent to federal court to be scrutinized and later on considered. From the outcomes Whitford Beach was not favored because s.25 was found not limited to gross receipts.
Thoughtful analysis of the judgement
The main question was whether the selling of land partitions was a business operation or a profit-making scheme. It is obvious that their Honors had no intention of departing from the law whereby a carrying on (undergoing) or carrying out profit making scheme could be regarded as income if only the scheme was to be described as a commercial venture, a trading venture or a business. Nevertheless, words used in s.26(a) in the second limb do not relate to a business operation. According to the judges of the Federal court, the respondent pledged the land to a profit making and for carrying on a magnitude scheme involving developing and subdividing of the land into residential plots.
It was not that easy to get to the appellants exact income without taking into considerations the bonus shares and treating it as trading stock for a business. The taxable income is to be calculated by deducting the allowable deductions from that of the assessable income, following the income tax. The court had to consider an assessment act therefore according to s.26 trading stock at the beginning of the year and at the end of the year should be brough into account. The high court maintained a stand that profit was assessable under s.25 (1) ITAA (36). Since the company had transformed from holding land for domestic use to venturing into a commercial activity to make profits it had turned the development goal into an assessable transaction.
According to taxation ruling TR 92/3, it is not necessary for the sole intention of the tax payer to be profit making but it only needs to be a significant purpose. According to the commissioner the tax payer must have a good purpose before entering transactions, and in a case where he wants to sell a property its important for him to have a purpose as to why he wants to make those profits. However, according to the judgement made by high court in relation to Whitford Beach, we find this not being the case. In TR 92/3, a list of factors is provided by the commissioner which are relevant in considering whether a neutral transaction gives rise to a business operation. The cost that the tax payer had incurred after starting of the business are deductible. They are taken into the stock trading cost, and since there is item balancing each year for stock closure, postponing of the deductions is done effectively until sale.
In a situation where land is an asset for revenue and not trading stock, it is only profit that is assessable. This shows that in the case of Whitford Beach the profit is the one that should have been taxed and calculated under the same principles s.26(a). For an asset that is in trading stock but not regarded so in a tax payers account, taxation is only done in profits of sale since balancing items in conclusion of each business year cancels out deduction until sale. This means that no observable changes were produced in tax accounts during previous years whether deductions were called for or not.
The court was right in its judgement. Although the plan of the project was to develop over the years, there was an initial intention of developing, partitioning and selling of all rural and urban differed land and ongoing process of this particular intention. Transformation of the land from domestic use to commercial/business ventures for profit purposes was the unlawful thing done in this particular case. The taxpayer should therefore pay for the proceeding costs (Young, 2007).
Conclusion
A great deal was done so as the land in question could be subdivided and sold. It had to undergo significant changes that by 20th December 1967, was just but a potentiality to be in range of practical achievement. The business consequent to which the land owner had embarked required some quick and dynamic measures to be undertaken to undo the legal barrier of developing the land in question. The taxpayer had staked the land as capital for the business in a manner that would make the gains of the business assessible income as per s.25 of the act. It is not without significance that the proposal written to National Mutual of 15th November 1967 visualized that a state of rezoning would be that the projected development of the land would be inclusive of house building and taken that this assurance could be met. Some houses were then built (not by the taxpayer). The houses were built by Inchape (W.A.), pty. Ltd., which was appointed by the taxpayer to be in charge of the project.
From one point, it became clear that the whole time, more attention was put on the lands section compared to other sections. The whole project advanced step by step with some operations in the disciplines of some stages overtaking some. There is evidence that, even though the task of development was to cover a very long period (such as a decade) and was to involve a series of steps. From 20th December 1967, there was both an urge to develop (that was very persistent) and partition the land of differed urban and rural land. A final conclusion comes out clearly and evidently that the business that was carried out by the taxpayer was to develop and partition the land by selling partitions to different companies and private investors. This process commenced when the urge to take action emerged.
Development will be done with no doubt on this part of the law. According to Wilson, J., cases that rely on provisions of s.26(a) for their determination should await further clarification. His Honor disregarded this. Whitford Beach is intriguing for the opportunities it opens up. It can be mentioned that some of the activities that were carried out during this period led to development of roads and other services. These services were very relevant to the development of the whole land regardless of the formation that was to be followed. The case is an engine for advancements in the future, preference to the answer of problems existing in the present.
References
Pearson, G. (1998). Back to the beach [Changes in status of trading stock and new capital gains tax provisions]. Taxation in Australia, 33(6), 310.
Young, N. J. (2007). The Historical Significance of the High Court’s Decision in Federal Commissioner of Taxation v the Myer Emporium Ltd. Melb. UL Rev., 31, 266.
Porcaro, A., & Slegers, P. (2006). Bricks and mortar…: emerging issues in the income tax treatment of real property transactions. Taxation in Australia, 41(6), 341.
Hart, G. (2007). The Limited Impact Of Whitfords Beach In Urban Land Development. Revenue Law Journal, 17(1), 6690.
