FEDERAL COURT OF AUSTRALIA INCOME TAX - Assessable income - Sales of subdivided land originally acquired and used for farming - whether proceeds derived from carrying on of a business or represented the mere realization of a capital asset Income Tax Assessment Act 1936 (Cth), ss 25(1), 25A(1) Californian Copper Syndicate (Limited and Reduced) v Harris (1905) 5 TC 159, referred to Hudson's Bay Co v Stevens (1909) 5 TC 424, referred to Commissioner of Taxes v Melbourne Trust Limited[1914] AC 1001, distinguished C.H. Rand v The Alberni Land Co Ltd (1920) 7 TC 629, applied Ruhamah Property Co Ltd v Federal Commissioner of Taxation (1928) 41 CLR 148, referred to Scottish Australian Mining Co Ltd v Federal Commissioner of Taxation (1950) 81 CLR 188, applied Official Receiver v. Federal Commissioner of Taxation (Fox's Case) (1956) 96 CLR 370, distinguished McClelland v Federal Commissioner of Taxation (1970) 120 CLR 487, applied Federal Commissioner of Taxation v Whitfords Beach Pty Ltd (1982) 150 CLR 355, distinguished Crow v Federal Commissioner of Taxation (1988) 19 ATR 1565, distinguished Roberts v Federal Commissioner of Taxation [1981] ATC 4,421, applied Stevenson v Commissioner of Taxation (1991) 29 FCR 282, distinguished Federal Commissioner of Taxation v Williams (1972) 127 CLR 226, applied Steele v Federal Commissioner of Taxation (1997) 97 ATC 4,239, referred to GEORGE CASIMATY v COMMISSIONER OF TAXATION TG 3, 4, 5, 6 and 7 of 1995 RYAN J MELBOURNE (HEARD IN HOBART) 10 DECEMBER 1997 IN THE FEDERAL COURT OF AUSTRALIA TASMANIA DISTRICT REGISTRY TG 3 of 1995 BETWEEN: GEORGE CASIMATY Applicant AND: COMMISSIONER OF TAXATION Respondent JUDGE: RYAN J DATE OF ORDER: 10 december 1997 WHERE MADE: MELBOURNE (heard in hobart) minutes of order THE COURT ORDERS: 1. That the appeal against the objection decision made 21 December 1994 be allowed and the amended assessment referred to therein be remitted to the respondent to be reassessed in accordance with the reasons for judgment published this day. 2. That the respondent pay the applicant's costs of the appeal, including any reserved costs, such costs to be taxed in default of agreement. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA TASMANIA DISTRICT REGISTRY TG 4 of 1995 BETWEEN: GEORGE CASIMATY Applicant AND: COMMISSIONER OF TAXATION Respondent JUDGE: RYAN J DATE OF ORDER: 10 december 1997 WHERE MADE: MELBOURNE (heard in hobart) minutes of order THE COURT ORDERS: 1. That the appeal against the objection decision made 21 December 1994 be allowed and the amended assessment referred to therein be remitted to the respondent to be reassessed in accordance with the reasons for judgment published this day. 2. That the respondent pay the applicant's costs of the appeal, including any reserved costs, such costs to be taxed in default of agreement. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA TASMANIA DISTRICT REGISTRY TG 5 of 1995 BETWEEN: GEORGE CASIMATY Applicant AND: COMMISSIONER OF TAXATION Respondent JUDGE: RYAN J DATE OF ORDER: 10 december 1997 WHERE MADE: MELBOURNE (heard in hobart) minutes of order THE COURT ORDERS: 1. That the appeal against the objection decision made 21 December 1994 be allowed and the amended assessment referred to therein be remitted to the respondent to be reassessed in accordance with the reasons for judgment published this day. 2. That the respondent pay the applicant's costs of the appeal, including any reserved costs, such costs to be taxed in default of agreement. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA TASMANIA DISTRICT REGISTRY TG 6 of 1995 BETWEEN: GEORGE CASIMATY Applicant AND: COMMISSIONER OF TAXATION Respondent JUDGE: RYAN J DATE OF ORDER: 10 december 1997 WHERE MADE: MELBOURNE (heard in hobart) minutes of order THE COURT ORDERS: 1. That the appeal against the objection decision made 21 December 1994 be allowed and the amended assessment referred to therein be remitted to the respondent to be reassessed in accordance with the reasons for judgment published this day. 2. That the respondent pay the applicant's costs of the appeal, including any reserved costs, such costs to be taxed in default of agreement. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA TASMANIA DISTRICT REGISTRY TG 7 of 1995 BETWEEN: GEORGE CASIMATY Applicant AND: COMMISSIONER OF TAXATION Respondent JUDGE: RYAN J DATE OF ORDER: 10 december 1997 WHERE MADE: MELBOURNE (heard in hobart) minutes of order THE COURT ORDERS: 1. That the appeal against the objection decision made 21 December 1994 be allowed and the amended assessment referred to therein be remitted to the respondent to be reassessed in accordance with the reasons for judgment published this day. 2. That the respondent pay the applicant's costs of the appeal, including any reserved costs, such costs to be taxed in default of agreement. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA TASMANIA DISTRICT REGISTRY TG 3, 4, 5, 6 and 7 of 1995 BETWEEN: GEORGE CASIMATY Applicant AND: COMMISSIONER OF TAXATION Respondent JUDGE: RYAN J DATE: 10 december 1997 PLACE: MELBOURNE (heard in hobart) REASONS FOR JUDGMENT There are before the Court five applications for a review of decisions of the Deputy Commissioner of Taxation made on 21 December 1994 disallowing objections of the applicant to amended assessments of tax for the income years ending 1987, 1988, 1989, 1990 and 1991 on the basis that successive subdivisions of the applicant's farming property occurred in the course of carrying on a business. By each application the applicant seeks the amended assessment to be set aside by allowing the objection lodged or, in the alternative, that the decision be varied to the extent of excising from his taxable income some portion less than the whole of the taxable income assessed. The issues for determination are whether the subdivision and sale of various portions of the taxpayer's former farming property were undertaken as part of the conduct of a business with the result that the profits are assessable under s 25(1) of the Income Tax Assessment Act 1936 ("the Act") or whether the proceeds are assessable under the second limb of s 25A of the Act. Background Facts George Casimaty, who was born on 7 September 1932, has always described himself as a farmer. In August 1955 he purchased a property known as "Acton View", comprising 988 acres from his father who, by instalments, forgave any obligation to make payment on account of the purchase price. In January 1956 he purchased a further 40 acres adjoining "Acton View" on which he erected a homestead. In January of the following year the applicant married. The applicant intended to, and did, carry on in partnership with his wife all his business activities except for a fencing business which they carried on in partnership with their son, Gregory. The applicant remained the sole registered proprietor of "Acton View" except for the forty acres comprising the homestead and its curtilage which were owned by himself and his wife as joint tenants. When "Acton View" was acquired by the applicant, it was generally run down apart from the portion used for dairying. From 1955 until 1961 the applicant conducted the dairy operation as a sharefarmer with H. H. Kelly. After Kelly retired in 1961, the applicant and his wife carried on the dairy operation on their own account until 1965. At the same time they undertook cropping and ran some sheep and beef cattle on the rest of the property. In 1963 the applicant investigated the possibility of selling the property but learned that the return would barely suffice to clear the debts of himself and his wife. In 1965 compulsory pasteurisation was introduced which prevented the partners from selling to their biggest customer, and made the dairying uneconomical. Accordingly, they disposed of all their dairying equipment and dairy cattle. Until 1964 "Acton View" had not been encumbered by a mortgage. In 1965 a loan of $26,000 secured by a first mortgage on the property was obtained from a trustee company for $26,000. The applicant's bank took a second mortgage over the property to secure an overdraft which the applicant and his wife had customarily used to finance their farming operations. In 1968 the borrowings securing the first mortgage were increased to $54,000 and in the next year to $58,000. The first mortgage was discharged during the 1989 year of income. After the partners ceased their dairying activities, they concentrated on raising beef and sheep for sale to abattoirs and supplemented that activity with wool growing and some cropping. As well, the taxpayer and his wife continued the fencing business in partnership with their son. From 1967 to 1969 the farm suffered badly from drought and substantial losses were incurred causing severe financial hardship. In about 1972 or 1973 representations were made with a view to persuading the State Housing Department to purchase the whole property. These proved unavailing. The applicant also enquired of a Mr Robert Swan whether it was advisable to sell the whole property. However, Mr Swan indicated that the market for rural land was depressed and it was decided to continue farming. The First Subdivision Although he encountered significant difficulties, some of which stemmed from his ill-health, the applicant persisted in his efforts to make the farm viable. However, after the failure to sell the property in 1972 or 1973, it became apparent to him that the property could not sustain, in the long term, the interest payments necessary to service the existing mortgages. Thus, as he saw it, he had no alternative but to sell off portions of the property from time to time to reduce recurrent farm debts and lighten the load of servicing the loans. Accordingly, the subdivision of three allotments allowed by the Clarence Council was undertaken. The sealed three lot plan was registered with the Recorder of Titles on 10 June 1975. Sales of the allotments were concluded in the years ended 30 June 1975 and 1976 but the financial relief afforded by the proceeds from those sales was limited and temporary. The Second Subdivision Application was next made and approved for a further, ten lot, subdivision on Acton Road. The conditions to which approval had been subject were complied with and the sealed plan was registered on 12 May 1977. The ten lots were gradually sold off during the five years between 30 June 1977 and 30 June 1981. The applicant deposes that the only works carried out to prepare the land for sale were the construction of an internal road, Opus Drive; the provision of water services, farm fencing all boundaries and the extension of the water main from Seven Mile Beach Road to the area of the subdivision. Carry forward losses During 1983 all the beef cattle remaining on the property were sold allowing sheep numbers to be increased somewhat. By June 1983 the farming and fencing operations which had been carried on by the partnership had become unprofitable as a result of which substantial carry forward losses became available to each partner should he or she subsequently generate assessable income. The applicant has deposed that: ... Acting on the view that I was doing nothing more than selling off portions of the property which had been given me by my father I did not bring the land sales into the affairs of the partnership and no attempt was made to use up the "carry forward losses" available to either my wife or myself. Third "Saxon Drive - First Stage" subdivision To overcome continuing financial difficulties, the applicant sought approval to subdivide a further segment of "Acton View". The sealed plan for the "Saxon Drive" subdivision was registered on 31 May 1983. It comprised nine allotments. The only works carried out to prepare the land for sale were farm fencing on all boundaries, extension of the water main, the making of water connections; construction of road entrances and construction of the access road. The applicant gave one lot to his daughter and the remaining eight were sold during years ended 30 June 1984 and 30 June 1985. Fourth "Saxon Drive - Second Stage" subdivision A further extension of Saxon Drive was approved with another ten lots giving on to it and a sealed plan was registered on 12 January 1987. The only works carried out to prepare the land in that subdivision for sale were the same as those undertaken for the previous subdivision. The ten lots in the second stage of Saxon Drive were sold in the period from 1987 to 1989. Completion of some of those sales before 30 June 1988 enabled the applicant to discharge all of the then current mortgages secured on "Acton View". Fifth "Saxon Drive - Third Stage" subdivision Approval was obtained for a fifth subdivision comprising another thirteen lots giving on to a further extension to Saxon Drive and the sealed plan was registered on 21 November 1988. The works carried out were the same as those undertaken for the third and fourth subdivisions together with the drainage of a creek which ran through the area of the fifth subdivision. The carrying out of that drainage work was imposed by Council as a condition of its approval of the fifth subdivision. Sixth subdivision At or about the time of the fifth subdivision, the taxpayer obtained approval for the creation of a separate single lot subdivision of approximately two hectares. That single lot created access for farming purposes from Saxon Drive to the balance of "Acton View"and was transferred by way of gift to the taxpayer's son, Gregory. Road proposal In November 1991, Clarence Council approved in principle the construction of a "through" road on the east of Saxon Drive bisecting "Acton View" from Acton Road in the north to Seven Mile Beach Road in the south. The construction of that through road would have permitted the creation of a further nine allotments having an average area of about five hectares each on the east of the proposed through road. Although some preliminary works were carried out on the alignment of that through road, it has never been constructed and no plan of subdivisions of the land to its east has ever been registered. Seventh subdivision In 1992 the Council approved a further subdivision of another sixteen allotments off Acton Road (Kelson Place); a single allotment with access to Saxon Drive; and three allotments on the Seven Mile Beach Road boundary, each of which had a frontage to that road. The sealed plan was registered on 16 November 1992. The works carried out to prepare for sale the land comprised in the seventh subdivision were fencing on all boundaries, extension of the water main, the making of a water connection to each lot, construction of road entrances and construction of the access road. Sales commenced in 1992 but as at 14 June 1996 seven lots remained unsold. Eighth Subdivision In December 1993 approval was secured for an eighth subdivision comprising a further nineteen allotments. As at 14 June 1996, three of the lots on that eighth subdivision remained unsold. In September 1995 the Council gave its approval for the future subdivision of seventeen allotments but no substantial development works had been undertaken by the time when the present proceedings were instituted. A sketch plan indicating the area occupied by each of the eight subdivisions completed to December 1993 and the area retained as broad acres by the applicant is appended as a Schedule to these reasons. Deterioration of the applicant's health In 1959 the applicant suffered a slipped disc, but the adverse effects of that condition were brought under control and now recur only periodically. From the early 1970s, the applicant has suffered from diabetes for which he has required constant medication. As a result, his capacity for heavy physical work has been significantly reduced, necessitating the employment of hired labour to carry out work in connection with the conduct of the farm and the performance of fencing contracts which the applicant had previously carried out himself. By 1976 his condition had deteriorated to a point where admission to hospital was required for about ten days at a time. As well, the applicant at some point contracted arsenic poisoning which compelled him eventually to undergo abdominal surgery, further reducing his capacity for strenuous physical work. Moreover, the applicant has deposed that: 49. Over the past 25 years there has been a steady deterioration attributable to those conditions which has effected my wrists and legs. Ultimately leg ulcers led to the collapse of my left foot. That in turn brought on amputation below the left knee in August 1993. In consequence of these matters my life expectation is quite limited and my only means of financial support now is to realise what remains of the property received by me from my father in 1955. ... 76. By 1991 my medical problems were dominant. In 1985 I had been sent to specialists at the Royal Prince Alfred Hospital in Sydney because the acute and constant pain which had been in both hands had by then extended to my abdomen. Carpal tunnel surgery on both hands in 1986 did not provide any relief. By 1987 National Worksafe Australia referred me to Dr. Cullen at the Royal Prince Alfred Hospital, Sydney. A hernia and general exploratory operation followed in 1987 after which I was able to resume light work in October of that year. At about this time I also had eyesight problems and underwent laser treatment which is still subject to a periodic follow up. 77. Until about 1991 I still had hopes that I might one day be able to sell "Acton View" and move to a better irrigated property. Once I accepted that I would never again be able to engage in heavy physical work I gave up those hopes. 78. In August 1991 I was admitted to the Royal Hobart Hospital for stabilisation and assessment of neuropathy - the diagnosis suspected by Royal Prince Alfred Hospital physicians. In December of that year I was hospitalised for 38 days during which time my left big toe was amputated. While hospitalised I had a slight stroke. ... 86 I was further hospitalised in the Royal Hobart Hospital for 13 days from 1st March 1992; 6 days from 1st June 1992; 25 days from 14th September 1992; 11 days from 15th March 1993; 17 days from 11th May 1993; and 32 days from 18th June 1993. All 23 hyperbaric chamber treatments failed to produce any positive result and a below knee amputation of the left leg was carried out in St. Helen's Hospital Hobart in August 1993. 87. A period of massive mental and physical adjustment to the amputation and prosthesis followed in association with the Rehabilitation Centre. Developmental work The applicant has deposed, and I accept, that at no time did he do any more in preparing the allotments for sale than was required by the Council apart from slashing and clearing scrub, filling in some creeks and waterholes and pushing up levy banks on creeklines to improve the presentation of certain allotments. His developmental activities never extended to the proposal or creation of public facilities. The Applicant's Intentions Before obtaining approval for the first subdivision, the applicant had considered purchasing an adjoining property to enlarge the farm but lacked the financial resources to do so. He has deposed that he has never sought to acquire any land or any interest in land for any subdivisional purposes. The applicant has further deposed that: 102. With the exception of allotments given to my children, all sales have been negotiated through our stock and station agents, Roberts Ltd (formerly Roberts Stewart Ltd). My only role was to assist with inspections when requested to do so. I maintained no sales facilities on site. I kept no records of enquirers or possible purchasers and I conducted no private dealings. With the possible exception of persons previously known to me, I did not have any practice of passing on the names of enquirers to the agents. 103. I have never joined with any other land owner or any other person (other than Roberts Ltd) in organising or planning sales of any of my land or the purchase or sale of any of their land. 104. All work in designing subdivisions and securing approval for them was work carried out for me by professional surveyors and engineers working in association with my solicitors. All works of construction were carried out to designs and standards prepared by consulting engineers on my behalf and the works were carried out under their supervision. 105. Since I left school in 1949 my principal interest and activity has been farming and so far as my health has permitted has been concentrated on successfully farming "Acton View" or so much as has remained to me of it. Under cross examination, the applicant agreed that the purpose of the subdivision of his property was to alleviate his burden of debt. He acknowledged that the costs of the subdivisions were less than the proceeds of sale of the resultant lots. Some of the proceeds of sale of earlier subdivisions were used to finance later subdivisions. The Legal Principles For the taxpayer it was submitted that the subdivision and sale of parts of "Acton View" represented the realisation of capital assets and not the conduct of a business to generate income. In Californian Copper Syndicate (Limited and Reduced) v Harris (1905) 5 TC 159 a company which had been formed for the purpose of acquiring and reselling mining properties, after acquiring and working various properties, resold the whole of its property to a second company, receiving payment in fully paid shares in the purchaser. The Court of Exchequer (Scotland) held that the profit represented by the difference between the price of acquiring the properties and the value of the shares in the second company was assessable to income tax. The Lord Justice Clerk observed, at 165: 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. The simplest case is that of a person or association of persons buying and selling lands or securities speculatively, in order to make gain, dealing in such investments as a business, and thereby seeking to make profits. There are many companies which in their very inception are formed for such a purpose, and in these cases it is not doubtful that, where they make a gain by a realisation, the gain they make is liable to be assessed for Income Tax. What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being - 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? An early illustration of a case on the other side of the line identified by the Lord Justice Clerk is afforded by Hudson's Bay Co v Stevens (1909) 5 TC 424 where the appellant, a company incorporated by Royal Charter in 1670, owned large tracts of land in Rupert's Land, North America. In 1869 that land and the accompanying rights of government were surrendered to the Crown in exchange for a money payment and the right to take up, within fifty years, a twentieth share of certain land within the territory as it was settled from time to time. The lands granted to the company upon its exercise of that right were sold by it as the occasion arose and the proceeds from those sales were applied partly in payment of dividends and partly in reduction of capital. It was held by the Court of Appeal that the proceeds were not profits or gains derived from carrying on a business of dealing in land and were not assessable to income tax. Cozens-Hardy M.R. concluded, at 436: The real question is whether this money can be regarded as profits or gains derived by the Company from carrying on a trade or business. In my opinion it cannot. The Company are doing no more than an ordinary landowner does who is minded to sell from time to time, as purchasers offer, portions suitable for building of an estate which has devolved upon him from his ancestors. I am unable to attach any weight to the circumstance that large sales are made every year. This is not a case where land is from time to time purchased with a view to resale; the Company are only getting rid by sale as fast as they reasonably can of land which they acquired as part of a consideration for the surrender of their Charter. In the same case Farwell LJ drew the distinction in these terms, at 437: It is clear, therefore, that a man who sells his land, or pictures, or jewels, is not chargeable with income tax on the purchase-money or on the difference between the amount that he gave and the amount that he received for them. But if instead of dealing with his property as owner he embarks on a trade in which he uses that property for the purposes of his trade, then he becomes liable to pay, not on the excess of sale prices over purchase prices, but on the annual profits or gains arising from such trade, in ascertaining which those prices will no doubt come into consideration. At the same page, his Lordship suggested: A landowner in England may establish a game farm on part of his estate and make profits thereby which would be liable to income tax, and he may also sell parts of his estate for building purposes, but his trade as a game farmer does not bring his sales as a landowner within the Income Tax Acts; and I see no difference in this respect between his position and that of the Company. Again, a landowner may lay out part of his estate with roads and sewers and sell it in lots for building, but he does this as owner, not as a land speculator. This Company is not a Company incorporated under the Companies' Acts or the Companies' Clauses Act for the purpose of dealing in land, but it is a Corporation by Royal Charter and has, therefore, all the powers of an individual except so far as the Charter expressly limits them. It would be different if a landowner, an individual, entered into the business of buying and developing and selling land; but the case of the owner, whether of land, or pictures, or jewels, selling his own property, although he may have expended money on them in getting them up for sale, is entirely different; he sells as owner, not as trader. For the present applicant it was argued that he similarly laid out parts of "Acton View" with roads and water reticulation to create smaller lots but did so as owner of the property originally acquired and used for farming purposes, not as a land speculator or developer. In Commissioner of Taxes v Melbourne Trust Limited[1914] AC 1001 the respondent company was formed to take over, nurse, develop and realize the assets of three other companies which had taken over and partially realized and distributed the assets of three Australian banks in liquidation. From time to time it sold off the assets at prices which showed a surplus over the purchase price ascribed to them at the time of their acquisition. This passage is to be found in the opinion of the Privy Council at 1009: It is common ground that a company, if a trading company and making profit, is assessable to income tax for that profit. The argument for the respondents can be stated in a single sentence. They say they were not a trading company but a realization company; that the realization was truly for the benefit of the original creditors of the three banks; that all shareholders in the company are either such original creditors or the assignees of such original creditors. If that is the true view of the situation their Lordships do not doubt that the argument must prevail. If the liquidator of one of the banks had made an estimate of the various assets held by him for realization, and then on realization had obtained more than that estimate, such surplus would not have been profit assessable to income tax. Their Lordships cannot, however, come to the conclusion that that is the true view of the situation. It is not necessary to decide the question as it might have arisen in the case of the original three assets companies. At least at the inception of the present company it seems to their Lordships that all concerned were satisfied to discharge their old claims by accepting shares in a new venture, and that that new venture must then be looked at to see if profits assessable to income tax have been earned. The position may be tested in more ways than one. Were it a case of liquidation, then the directors of the company would hold for the creditors of the old insolvent banks. They do not do so. They hold for the shareholders of the company; and the shareholders of the company comprise persons who never were creditors of the banks, but who acquired their shares in open market. Again, if it was liquidation, the right of each participant creditor, or creditor's assignee, would be strictly limited to the assets of the bank of which he was a creditor or represented a creditor. If, for example, the Melbourne Bank assets on realization turned out well, and the Federal Bank assets badly, the creditors of the one would benefit, and those of the other suffer. But as it is it is not so. Each shareholder has in respect of each share an equal interest in the proceeds of the massed assets which were originally assets of the three banks but now are assets of the company. Holding, then, that the shareholders of this company are shareholders in an ordinary venture, the only question that remains is whether the surpluses realized represent profits. Their Lordships think that the principle is correctly stated in the Scottish case quoted, California Copper Syndicate v Harris 6 F. 894; 5 Tax Cases, 159. The source of the distinction developed in later cases between an entrepreneur and a landowner who realizes the land in an enterprising way can be traced to the judgment of Rowlatt J in C.H. Rand v The Alberni Land Co Ltd (1920) 7 TC 629 where the respondent company was incorporated to acquire, manage and develop, with a view to ultimate sale, certain lands in British Columbia which were held on trust for various persons interested therein as owners, joint owners or trustees. Shares were allotted to those beneficiaries but not by reference to the value of the lands acquired from them. Working capital was raised by the issue to ordinary shareholders and deferred shares were issued to other persons for services rendered in enhancing the value of the lands. It was held that the surplus arising from the sale of parts of the lands was not the profits of a trade or business and that the function of the company was merely to realize the capital value of the respective interests in the lands held on trust. His Lordship observed at 638: Now the Company proceeded in a very enterprising way undoubtedly. It cleared the land and formed roads. It sold parts of it and kept some of the money and put it back into the land, and so on, and it gave a share in its capital to certain people who were instrumental in bringing a railway there. Undoubtedly it has done very well. Under those circumstances the Attorney-General and the Revenue contend that it has gone beyond the stage of merely realising the property, and has embarked upon a business in land, which it has not in the real sense bought, but in land which came to it. The Commissioners have held that that is not so, and I am not prepared to differ from the Commissioners. I very much doubt, after what Lord Justice Farwell said, whether it is not a question of fact, and only appealable in the sense of the question whether there is any evidence of it or not. It is a Case which is not very far from the line, but I think it is on the right side of the line. If this had been an individual he need not have had a company. He might have done all these things, and, if he had been a prudent or a public spirited man, he would have done all these things. If a land-owner, finding his property appreciating in value, sells part of it, and uses part of his money still further to develop the remaining parts, and so on, he is not carrying on a trade or business; he is only properly developing and realising his land. If that is to make him liable to Income Tax as well as to greater death duties, I am afraid it will have a result compared with which the result of the Increment Land Duty will be negligible, because nobody would do it. I do not believe a land-owner would be liable for a moment, and I do not think that the Company is liable. I feel the force of what is said, that they were very enterprising. They did more than a lazy or a too conservative land-owner would do. They were enterprising, but I do not think they did more, as Mr. Romer put it, than act as the machinery by which the development and progressive sale could be carried out, and by which alone, practically speaking, it could be carried out, when the lands were subject to a trust of this kind. Commissioner of Taxes v Melbourne Trust was distinguished as not involving: ... a question of liquidating or realising the old assets. That was done and the liquidation was finished in that sense when the people took their shares. Then the new company, this fourth company, started on a new career of business. That is how they looked at the facts, as I understand it, and that went a long way to enable them to reach their decision, and they said, that being so, these people simply carried on a business of acquiring these assets and selling them again. I think that in this Case the Company has done no more than provide the machinery by which the private landowners were enabled, under the peculiar circumstances of their divided title, to properly realise the capital of the property which they held in the lands in question, and that it is not income or the proceeds of trade... The same learned judge had occasion in The Alabama Coal, Iron, Land and Colonization Co Ltd v Mylam (1936) 11 TC 232 to distinguish the Hudson Bay Case and his own decision in the Alberni Land Co Case. He held that where the State of Alabama had defaulted under a loan and had transferred certain lands to trustees for the benefit of such bondholders as surrendered their bonds within ten years, a company incorporated to put into marketable form the interests of the bondholders who had surrendered their bonds and to develop and realize the trust lands was a vehicle whereby money was put up to buy new lands so as to develop and nurse the property. That feature was held, at 254, to make the case a different one from the Alberni Case "because there it was a completely domestic shareholding and domestic capital to the family, except in so far as two got some shares for making a railway". In order to see clearly that the Hudson's Bay Case does not apply, his Lordship suggested (ibid) that "there must be something in the nature of buying at any rate, and not merely selling, which is mere turning your property into money". In Ruhamah Property Co Ltd v Federal Commissioner of Taxation (1928) 41 CLR 148 the owner of certain property, desiring to make additional provision for his family, transferred the property by way of gift to a company in which he and the members of his family held shares. The company collected the rents and profits from the land and paid for repairs to it. After the founder's death, it sold the property. In the joint judgment of four members of the High Court it was observed, at 154: ... we do not think that it follows either necessarily or at all that a sale in such circumstances is a business operation carrying out a scheme of profit-making. A man has capacity to sell his property, but he may be realizing it and changing his form of investment and not engaging in a profit-making scheme. So it is with a company with power to sell: it may be realizing its property and changing the form of investment and not engaging in any profit-making scheme. Much must depend upon whether the company has taken the property into its trade and traded in it: whether it conducted a trading concern as opposed to a mere realization (cf. Alabama Co.'s Case (1926) 11 Tax Cas., at pp. 253-255). The nature of the company, the character of its assets, the nature of the business carried on by it and the particular sale or realization are all relevant to the issue. For another illustration of realization of a capital asset, this time surplus stocks of wool, see Commissioner of Taxes v British Australian Wool Realization Association [1931] AC 224. By contrast in Premier Automatic Ticket Issuers Ltd v Federal Commissioner of Taxation (1933) 50 CLR 268 the taxpayer company agreed to give another company patent rights which the first company had acquired from the inventors of a ticket-issuing machine. The second company sold to an English company the British patent rights to, amongst other things, the ticket-issuing machine and from the proceeds of sale paid Ł10,000 to the taxpayer in accordance with the original agreement. The Ł10,000 was held to be income in the hands of the taxpayer because the original agreement had been entered into pursuant to the taxpayer's profit-making business. Dixon J observed, at 300: ... the plan or purpose which up to November 1922 the taxpayer was pursuing, however inactive may have been that pursuit, includes the disposal of its interests piecemeal, or in any other fashion. It made the agreement of 16th November 1922 in fulfilment of the plan or end it was independently pursuing. Thereafter, its chief purpose was to await and distribute the profits which might arise under that agreement. But, in making the agreement, the taxpayer was, I think, carrying into execution one of the many alternatives of its scheme of profit-making. The patents were not to be its goodwill out of which it was to make its profits, but the taxpayer was to make money by retailing the patents if it could. The fact that in the end it entered into an anomalous agreement by which it surrendered to another company its right of retailing the patents may obscure, but, in my opinion, cannot alter the result. Profits made on realization by an insurance company of parts of a portfolio of shares acquired principally to generate dividend income were held assessable to income tax in Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation (1946) 73 CLR 604. That result was reached by viewing profits made on the sale of shares as arising from carrying out a profit-making scheme within what was then s 26(a) of the Income Tax Assessment Act. In the joint judgment of Latham CJ, Dixon and Williams JJ it was pointed out, at 619: But an insurance company, whether a mutual insurance company or not, is undoubtedly carrying on an insurance business and the investment of its funds is as much a part of that business as the collection of the premiums. The purpose of investing the funds of the appellant is to obtain the most effective yield of income. The diminution or increase in the capital value of the investment between the date of purchase and that of maturity, and the apportionment and deduction or addition over the intervening period of that diminution from or increase to the interest actually payable on the investment is a material ingredient in the ascertainment of this yield. In Konstam, Law of Income Tax, 8th ed. (1940), p. 126, it is stated that "the buying and selling of investments is a necessity of insurance business; and where an insurance company in the course of its trade realizes an investment at a larger price than was paid for it, the difference is to be reckoned among its profits; conversely any loss is to be deducted." This view is in line with that of the Privy Council in the case of a bank in Punjab Co-operative Bank Ltd., Amritsar v. Commissioner of Income-Tax, Lahore (1940) A.C. 1055, at pp. 1072, 1073. In our opinion there is no substantial distinction between the business of an insurance company and that of a bank in this respect. The acquisition of an investment with a view to producing the most effective interest yield is an acquisition with a view to producing a yield of a composite character, the effective yield comprising the actual interest less any diminution or plus any increase in the capital value of the securities. Such an acquisition and subsequent realization is a normal step in carrying on the insurance business, or in other words an act done in what is truly the carrying on of the business of the society. The Colonial Mutual Life Case was explained by one of the authors of the joint judgment, Williams J, in Scottish Australian Mining Co Ltd v Federal Commissioner of Taxation (1950) 81 CLR 188 at 194 on the basis that the former s 26(a) required a finding that the purchase had been made with the intention of selling at a profit. In Scottish Australian Mining the taxpayer company purchased between 1863 and 1865 a large area of land near Newcastle known as the Lambton Freehold Estate. It carried out coal mining operations on the land and, in 1864, set aside 45 acres for miners' homes. The findings of fact made by his Honour included this passage, at 173: After 1924 the appellant commenced to push the sale of the land and incurred considerable expenditure in sub-dividing and making the land attractive to purchasers. It constructed roads. It built a railway station for Ł5,000. It granted land to public institutions such as schools and churches, and set aside land for parks. It sold a large area of land in the sub-division to the Newcastle hospital. The company did not part with the land entirely for it reserved the mining rights from the sale of the surface land and leased these rights to tributors who paid royalties. But it did not itself carry on any mining operations on the land after 1924. It had, however, acquired two other coal mines, one known as Lambton B in 1887 and the other known as Burwood in 1894 and carried on operations in these mines until they were sold at a capital loss of Ł116,000 to Broken Hill Pty. Ltd. in 1932. Since 1932 the only revenue derived by the company, apart from the profits on the sale of land in the Lambton Freehold Estate, has been royalties from its tributors and some interest and rents. The profits from the sales of the Lambton estate have been considerable. The purchase money on most of these sales has been payable by instalments and the method of bookkeeping adopted by the appellant has been to hold the instalments in a suspense account and only to bring the profit into the profit and loss account when the purchase money has been paid in full. On the basis of those findings, his Honour was led to conclude, at 195: It is impossible, I think, to hold that the appellant was engaged in such a business or profit-making undertaking or scheme prior to 1924. The crucial question is therefore whether the facts justify the conclusion that the appellant embarked on such a business or undertaking or scheme in 1924. The facts would, in my opinion, have to be very strong indeed before a court could be induced to hold that a company which had not purchased or otherwise acquired land for the purpose of profit-making by sale was engaged in the business of selling land and not merely realizing it when all that the company had done was to take the necessary steps to realize the land to the best advantage, especially land which had been acquired and used for a different purpose which it was no longer businesslike to carry out. The plain facts of the present case are that the appellant purchased the Lambton lands for the purpose of carrying on the business of coal mining and carried on that business on the land until it was no longer businesslike to do so. It then had the land on its hands and it was land which because of its locality and size could only be sold to advantage in sub-division. A sale in sub-division inevitably requires the building of roads. If it is advantageous to the sale of the land as a whole to set aside part of the land for parks and other amenities, this does not convert the transaction from one of mere realization into a business. It is simply part of the process of realizing a capital asset. The facts are, in my opinion, such that the appellant is entitled to rely on the principles laid down in Hudson's Bay Co. Ltd. v. Stevens (1909) 5 Tax. Cas. 424 and Rand v. Alberni Land Co. Ltd. (1920) 7 Tax Cas. 629. In one sense, the present case is even more strongly in favour of the taxpayer in that he did not purchase "Acton View" but acquired it substantially by gift from his father. However, that fact of itself is not conclusive of the question. A good illustration of the difficulty of drawing the line even in respect of land passing by will is afforded by McClelland v Federal Commissioner of Taxation (1970) 120 CLR 487. In that case the taxpayer acquired a half interest under the will of her uncle in land in Western Australia. The other half-interest passed to her brother who wished the land to be sold. The taxpayer, believing that it would appreciate in value, desired to retain the land unsold and, to that end, agreed to buy her brother's interest for Ł40,000. To finance that purchase she subdivided the land into three portions and sold off one portion for Ł150,000. From the deposit of Ł50,000 on that sale, she paid Ł40,000 to her brother and applied the balance to providing security for payment of certain legacies. She was assessed to tax on a "profit" of Ł56,951 which the Commissioner considered she had made on the transaction. A majority of the High Court (Barwick CJ dissenting) allowed an appeal from Windeyer J and upheld the assessment. However, on appeal to the Privy Council it was held by a bare majority of the Board (Lord MacDermott and Lord Pearson dissenting) that the assessment should be set aside. This passage occurs in the reasons of the majority, at 495: It is fair to say that the learned Judge did not rest his conclusion in favour of the respondent solely on his assumption regarding the intentions of the appellant. Nor could he have done so consistently with a considerable body of judicial authority, to the effect that a landowner may develop and realize his land without making a profit which partakes of the character of income: even though he goes about the realization in an enterprising way so as to secure the best price. Looking at Australian authorities alone one need only instance Scottish Australian Mining Co. Ltd. v. Federal Commissioner of Taxation (1950) 81 C.L.R. 188 and White v. Federal Commissioner of Taxation (1968) 120 C.L.R. 191, at pp. 219, 220. What clearly 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) "half-interest and her own to an end by uniting them in her own hands etc.". After rehearsing some aspects of the facts, their Lordships continued (ibid): Do these facts disclose a "profit-making undertaking or scheme" within the meaning of s. 26(a)? It is clear in the first place that not all such undertakings or schemes are caught by the section. Otherwise every successful wager would be within it. So also would the purchase of investments bought by a private investor as a hedge against inflation and sold - perhaps long afterwards - at more than the purchase price. The participator in a lottery would also be liable if he drew the winning ticket. The undertaking or scheme, if it is to fall within s. 26(a), must be a scheme producing assessable income, not a capital gain. What criterion is to be applied to determine whether a single transaction produces assessable income rather than a capital accretion? It seems to their Lordships that an "undertaking or scheme" to produce this result must - at any rate where the transaction is one of acquisition and resale - exhibit features which give it the character of a business deal. It is true that the word "business" does not appear in the section; but given the premise that the profit produced has to be income in its character their Lordships think the notion of business is implicit in the words "undertaking or scheme". In Federal Commissioner of Taxation v Whitfords Beach Pty Ltd (1982) 150 CLR 355 a company had been formed in 1954 to acquire a tract of land to preserve access for members of the company to fishing shacks which they occupied on an adjoining beachfront. The intention was to subdivide the land when that became permissible and distribute a parcel of land to each member at a value corresponding to his shareholding. In 1967 all shares in the company were sold to three development companies which changed the articles of the landholding company and from 1970 began to develop and subdivide the land and sell off the lots. The landholding company was assessed to tax on the very considerable surpluses generated by these activities. The High Court reversing a judgment of a Full Court of this Court upheld the assessments. In the course of his judgment in that case, Mason J acknowledged that merely because a sale of land is preceded by a subdivision does not preclude it from being the realization of a capital asset. However, his Honour was careful to point out that the surrounding circumstances of a subdivision may carry it across the line into the business of land development. His Honour concluded, at 385: In this respect I do not agree with the proposition which appears to be founded on remarks in some of the judgments that sale of land which has been subdivided is necessarily no more than the realization of an asset merely because it is an enterprising way of realizing the asset to the best advantage. That may be so in the case where an area of land is merely divided into several allotments. But it is not so in a case such as the present where the planned subdivision takes place on a massive scale, involving the laying out and construction of roads, the provision of parklands, services and other improvements. All this amounts to development and improvement of the land to such a marked degree that it is impossible to say that it is mere realization of an asset. We need to bear in mind that the subdivision of broad acres into marketable residential allotments involves much more in the way of planning, development and improvement than was formerly the case. Like Wilson J., I have difficulty with the decision of Williams J. in Scottish Australian Mining Co. Ltd. v. Federal Commissioner of Taxation (1950) 81 C.L.R. 188. The taxpayer there, after giving up its mining business in 1924, devoted itself to the subdivision of its land. This entailed the construction of roads, the building of a railway station, the granting of land to public institutions such as schools and churches and the setting aside of land for parks. I should have been inclined to the view that the taxpayer had ceased to carry out its mining business and that it had commenced to carry on the business of land development. This conclusion would have been more consistent with the later decision of this Court in Official Receiver v. Federal Commissioner of Taxation (Fox's Case) (1956) 96 C.L.R. 370 and White v. Federal Commissioner of Taxation (1968) 120 C.L.R. 191. In Fox (in which no mention was made of Scottish Australian) the activities were less extensive, though they did involve land subdivision and improvement (reclamation). The only difference between Scottish Australian and Fox seems to lie in the circumstance that there was a new taxpayer in Fox. He was a new taxpayer whose function it was to get in the bankrupt's assets so that a distribution among creditors could take place. From what I have said it will be seen that it is my opinion that what the respondent did amounted to more than realization of an asset and constituted the carrying on of the business of land development. Accordingly, the gross income is assessable under s. 25(1). In my respectful view, the task involved in characterizing dealings with land of the kind engaged in by the present taxpayer for the purpose of deciding whether any part of the proceeds from those dealings is income within the meaning of s 25(1) of the Income Tax Assessment Act 1936 ("the Act") has been correctly described by Lockhart J in Crow v Federal Commissioner of Taxation (1988) 19 ATR 1565 at 1573 where his Honour observed: It is well established that profits obtained from the realisation of property are to be treated on revenue account and as assessable to tax "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": Californian Copper Syndicate v Harris (1904) 5 TC 159 at 166; FCT v Whitfords Beach Pty Ltd (1982) 150 CLR 355; 12 ATR 692. Whether or not a business is carried on by a taxpayer is, of course, a question of fact; but the reported cases are of assistance in pointing to certain factors which can provide a useful guide. Continuity and repetition of transactions pointing to a systematic course of conduct are important factors: Martin v FCT (1953) 90 CLR 470; 5 AITR 548. There is a greater scope for the characterisation of a series of acts as being within the scope of carrying on a business where the acts are motivated by the desire for or expectation of profit, although a particular commercial transaction may form part of a business in the absence of the attainment or expectation of profit in that transaction: Investment and Merchant Finance Corp Ltd v FCT (1971) 125 CLR 249, per Barwick CJ at 255; (1971) 2 ATR 361 at 363. A series of repeated transactions of the same kind is often an incident of carrying on a business: FCT v St Hubert's Island Pty Ltd (in liq) (1978) 138 CLR 210 per Jacobs J at 237; 8 ATR 452 at 468. Where a realisation of property is motivated by factors other than those normally to be expected in a business context, the court will be less ready to find that the realisation had the nature of a business transaction. However, where the taxpayer asserts that an asset was purchased for his own use and enjoyment with no purpose of resale, and that resale occurred because of the receipt of an offer to purchase which was too tempting to refuse, "the fact that there was a quick resale naturally leads one to scrutinise the evidence that it was not envisaged from the first very carefully": Turner v Last (Inspector of Taxes) (1965) 42 TC 517, per Cross J at 522-3. In that case the court upheld the taxpayer's assessment to tax of profits on the sale of farming land despite the taxpayer's contention that the whole of the land had been purchased with the intention of farming, on the ground that the inference that the taxpayer in fact intended to resell the land at a profit could reasonably be drawn from evidence that the taxpayer's financial position before the purchase would not allow him to hold the land indefinitely, that the land had a development potential and that the taxpayer had bought the land for more than its agricultural value. It is neither necessary nor correct that each individual transaction be analysed for the purpose of determining whether a business is carried on. One must look to the overall affairs of the person concerned and to the system, if any, employed. In that case, the taxpayer had been a builder but purchased in 1962 a farm property ("Waterloo Farm") of 390 acres. Shortly afterwards, he took a lease with an option to purchase of another property ("the Clifton land") of 556 acres about five kilometres away from Waterloo Farm. In 1968, he obtained approval of a plan of subdivision of part of the Clifton land and sold off various portions of that land between 1968 and 1980 after which none of it remained in his ownership. In the meantime, the taxpayer had purchased another property of 62 acres ("the Cremorne property") which adjoined Waterloo Farm. He subdivided and sold off about half of the Cremorne property, consolidating and retaining the rest with Waterloo Farm. In 1972, the taxpayer acquired yet another property ("Rokeby") part of which was sold off under threat of compulsory acquisition, to the Tasmanian Housing Department. In 1973, another property ("Acton Park") adjoining Rokeby was acquired, subdivided and sold off in its entirety between 1978 and 1981 and, in 1975, the taxpayer exercised an option to purchase part of another tract of land at Mount Rumney which he also subdivided and sold off during 1981. Between 1968 and 1981 his subdivisional activities had generated a net surplus of $388,228 whereas his farming activities and the conduct of successive hotels over the same period had resulted in substantial net losses. His Honour concluded that the taxpayer's subdivisional activities amounted to carrying on the business of land development so that the profits thereby derived were income for the purposes of s 25(1) of the Act. In the present case, although there was a series of repeated transactions in the sense of successive subdivisions, associated works and subsequent sales of allotments, that series did not embrace the acquisition of separate parcels of land as it did in Crow's Case. Another point of distinction is that noted by Lockhart J in the same case, also at 1573, in these terms: In this case the purchase of the various properties and the subsequent subdivision and sale of parcels of land involved transactions which were repetitive and systematic and had the characteristics of a continuing business of land development. The decision in Scottish Australian Mining Co Ltd v FCT (1950) 81 CLR 188; 4 AITR 443, whatever its status following the observations of Gibbs CJ on the one hand and Mason and Wilson JJ on the other in the Whitfords Beach case, supra, does not assist the taxpayer on the present facts, being distinguishable by the period in which the property in question in that case had been operated as a mine prior to its subsequent subdivision and sale over an extended period. In the present case, the subject land was acquired in a single parcel many years before the subdivisional sales and, as I have already noted, by way of gift from the taxpayer's father. No other finding is possible than that he acquired it for the purpose of conducting farming operations on it and had no intention at that time of subdividing it for resale into smaller allotments. In that respect, the circumstances are very similar to those in Roberts v Federal Commissioner of Taxation [1981] ATC 4,421. In that case, the appellant taxpayers had conducted market gardens on three or four separate parcels of land, including one of slightly over seven acres in Glenorchy ("the McGann land"). In response to a newspaper advertisement they had offered in 1969 to sell the McGann land to a building and development company but, when that offer was refused, they decided to subdivide the land themselves. The resultant sales of allotments took place between 1974 and 1976. The taxpayers gave evidence, which Green CJ accepted, that their decision to sell the McGann land had been prompted by the resignation of two employees who had each managed separate parts of the market gardening venture and for whom they had been unable to find satisfactory replacements. In upholding the taxpayers' appeal against their assessment to tax, his Honour, at 4,425, took account of the following matters each of which has a parallel in the circumstances of the present taxpayer: (c) The appellants were market gardeners, the McGann land had in fact to the appellants' knowledge been successfully used as a market garden and they in fact did use it as such after purchase. (d) The appellants had never before been involved in the subdivision of land or the buying and selling of land for profit, but had been involved in the business of market gardening for many years. Roberts Case is to be contrasted in those respects with Abeles v Federal Commissioner of Taxation [1991] ATC 4,756 to which I was referred by Mr Abbott of Counsel for the Commissioner. There the taxpayers were brothers who had been born in the United States and in 1970 had purchased a ten acre property in a rural area on the outskirts of Perth. In conjunction with three other groups of owners of other adjoining land, they created 225 allotments of which the brothers owned 38. Thirty-seven of those lots were sold in 1976-1977 and the remaining one in the 1986 tax year. O'Loughlin J rejected the taxpayers' evidence that they had originally acquired the land for residential purposes and held that the profits realized from the subdivision had been derived in the conduct of a business enterprise and were, accordingly, assessable under either s 25(1) or s 26(a) of the Act. However, apart from the fact that they both involve subdivisions, there are few, if any, similarities between Abeles Case and the present case. Mr Abbott also relied heavily on Stevenson v Commissioner of Taxation (1991) 29 FCR 282 which Mr Roach of Counsel for the taxpayer acknowledged to be the case most closely resembling the present in which proceeds from the sale of subdivisional lots have been held assessable under either s 25(1) or s 26(a). In Stevenson the taxpayer owned and worked a farm of about 446 acres which had been in his family since 1904. One portion of 26 acres was sold to the State Rivers and Water Supply Commission before 1965. Another 360 acres were sold in 1971 to a company for use as a poplar plantation. The remaining 90 acres bordered Lake Mulwala and, by the time when the taxpayer was almost 70, he had decided to sell 35 acres retaining the balance of about 55 acres around the homestead for himself and his family. He later decided to reduce to only a few acres the area to be retained. Approval of a subdivision was conditional on the provision of water and sewerage reticulation. After attempts to sell the land as a whole had failed to elicit an offer remotely approaching what the taxpayer regarded as an acceptable price, he decided to fulfil the conditions himself and created a subdivision of more than 180 blocks. The expenses of complying with the conditions for subdivision were considerable and the taxpayer had been compelled to borrow extensively to defray those expenses. The subdivisional work was carried out in eight stages and blocks were sold off as each of the earlier stages was completed. The taxpayer's objections to assessments of tax in respect of the proceeds of those sales were heard by the Administrative Appeals Tribunal ("the Tribunal"). The Tribunal's findings as reproduced by Jenkinson J, included these passages: 29. On the basis of the primary facts set out above I find as fact that by the end of 1976 the taxpayer had firmly decided to subdivide the land himself into residential blocks. He no longer had any intention of selling the land to another person to develop. I find also that shortly after he had obtained approval from CC [a finance company] for a progressive mortgage advance of $250,000 and then entered into the agreement for the external water supply and sewerage work to be undertaken, he committed the whole of the land to his development of it. His subsequent conduct over the years satisfies me that that intention and commitment never wavered thereafter. 59. Having given careful consideration to all the facts in their full context I have come to the conclusion that the taxpayer's activities between 1975 and 1986 were such that the subdivision, developing and sale of the land which took place during that period constituted more than the mere realisation of a capital asset. I find that in the 1981, 1982, 1983, 1984, 1985 and 1986 tax years he was carrying on the business of subdividing, developing and selling the land. If I had not made that finding, I should have found that in each of those years he was engaged in a profit-making undertaking or scheme. 60. In coming to the conclusion which I have reached I have taken into account in the taxpayer's favour the fact that he has never subdivided, developed and sold any land which was not part of his farm. I regard as of neutral effect that his intention in subdividing and developing the part of his land adjacent to the lake was to enhance its value so that, in his words, he could get "the top dollar" for it. What has caused me to decide that his activities extended beyond what can be accepted as being directed to and constituting the mere realisation of a capital asset, albeit with its value enhanced, is their extent. In particular I regard as significant the degree of his personal involvement in the planning, in the negotiations with the Shire Council and the State Rivers and Water Supply Commission, in obtaining finance, in the employment of contractors, in the marketing of the blocks and in their actual sale. The subdivision and development was substantial. The land has been subdivided into over 180 small blocks. The development has turned farmland which had been unserviced by water supply or sewerage and without a made road into fully serviced residential blocks with a sealed road and drainage. The taxpayer not only obtained finance but he risked it. In declining to find that the Tribunal had erred in law in reaching those conclusions, Jenkinson J referred to the passage from the judgment of Mason J in Whitfords Beach which I have already quoted and continued, at 292: It may be that those observations confess part and avoid part of the submission. It is, I think, difficult to discriminate between mere realisation and the conduct of a business by reference directly to the magnitude of the physical activity or the physical effect of the activity, although Mason J does seem to regard the degree of development and improvement of the land as critical. The magnitude of a substantial subdivisional enterprise does, however, commonly entail such a degree of systematic organisation, planning, management and repetition of purposeful profit-making activity that the carrying on of a business may be more clearly discerned than in a case "where an area of land is merely divided into several allotments". However that may be, I respectfully accept the observations I have quoted and conclude that no error of law is to be detected in what the Deputy President said about the extent of the activities undertaken in this case. An examination of the reasoning in Stevenson's Case confirms that whether the subdivisional activity is sufficiently extensive and systematic to amount to the conduct of a business is, as Lockhart J observed in Crow's Case a question of fact. Jenkinson J was not required to resolve that question of fact for himself. He was concerned only to ensure that the Tribunal had not committed any error of law in arriving at the conclusion which it did. His Honour did not distil from the authorities a principle of law that a subdivision involving a hundred or more lots, the construction of roads and the reticulation of water to each lot could never amount to a mere realization of a capital asset. Any such principle would run counter to the views expressed by all but one member of the High Court in Federal Commissioner of Taxation v Williams (1972) 127 CLR 226 where Gibbs J observed, at 249: As owner of land who holds it until the price of land has risen and then subdivides and sells it is not thereby engaging in an adventure in the nature of trade, or carrying out a profit-making scheme. The situation is not altered by the fact that the landowner seeks and acts upon the advice of an expert as to the best method of subdivision and sale or by the fact that he carries out work such as grading, levelling, road building and the provision of reticulation for water and power to enable the land to be sold to its best advantage. The proceeds resulting from the mere realization of a capital asset are not income either in accordance with ordinary concepts or within the second limb of s. 26(a), even though the realization is carried out in an enterprising way so as to secure the best price. In my view, the approach which has to be taken to the question of fact raised by cases of this kind has been illuminated by the following passage, at 330, from the dissenting judgment of Deane J in this Court in Whitfords Beach (1979) 44 FLR 312 which was approved on appeal by the Full High Court (150 CLR 355): The determination of the question whether the proceeds of sale of an asset should properly be seen as representing profits made in the ordinary course of what is in truth a business will not infrequently require precise definition both of the relevant business and of those activities which are comprehended within its ordinary course. The borderline case will commonly be a case which involves a mixture of facts and events both within and outside the ordinary course of the particular business. In such a case, the question whether any part of the proceeds of the particular sale should properly be seen as representing profits made within the ordinary course of the particular business will involve evaluation of competing factual considerations for which no rigid guidelines can be laid down. A receipt can constitute the proceeds of sale of an item sold in the course of a business of the vendor and yet be capital. A receipt can be the proceeds of sale of something acquired quite out of the ordinary course of a business and yet, in whole or in part, be income as representing gross profits made in the ordinary course of that business. Thus a goldsmith who sells in his shop his patrimony of a single gold bar does not necessarily receive the proceeds of sale as income merely because he takes advantage of his shop to sell his capital asset more advantageously. On the other hand, the master goldsmith who labours to turn such a gold bar into finely wrought brooches which he displays and sells with his other gold wares, could not be said to receive the whole of the proceeds of sale of those particular brooches as capital merely because the gold from which they had been fashioned had not been acquired by him for the purposes of his business but had been received as a gift from his father. The project builder who acquires a parcel of land as a capital asset and sells it unimproved will not necessarily receive the proceeds of sale as income merely because he uses the selling facilities of his business to sell that single parcel of land. On the other hand, if he subdivides the land into a dozen blocks upon each of which he erects a residence, the profit resulting from the proceeds of sale of the improved lots (after making allowance for the value of the land) will be profit made in the ordinary course of his business as a project builder notwithstanding that the land was acquired as a capital asset for some quite different purpose. Where a person who carries on a business sells an asset which had been held as a capital asset, one must, in each case, ask the question whether the asset was devoted to the particular business to such an extent that it can properly be said that the proceeds of sales represent profits made in the ordinary course of that business. In a case where the asset has been divided and the divided parts improved in the course of a business of dividing and improving such assets, it would be rare that one could say that the profits from sale of the individual improved items (after making allowance for the value of the original asset) represented part of the proceeds of mere realization of a capital asset as distinct from profits made in the ordinary course of that business. Where the activities of dividing and improving are of sufficient scale and scope, the fact that no prior independent business existed will not prevent those activities themselves constituting a business of which the profits arising on sale are the ordinary proceeds. In its essential respects, this case presents the obverse of the coin recently minted in Steele v Federal Commissioner of Taxation (1997) 97 ATC 4,239 where this Court was concerned with the deductibility of interest on money borrowed to acquire a property used for the agistment of horses with a view to its eventual development as a motel. After its acquisition, the taxpayer derived a modest income from the property by continuing to use it for agistment purposes. In the majority judgment of Burchett J and myself, it was acknowledged that the object or purpose with which a principal sum has been borrowed or an asset has been acquired may change after the original borrowing or acquisition. After referring to Ure v Federal Commissioner of Taxation 81 ATC 4,100, the joint judgment continued, at 4,247: The effect of a change of purpose, referred to by Deane and Sheppard JJ, was also mentioned by Toohey J in FC of T v Ilbery 81 ATC 4661 at 4668; (1981) 38 ALR 172 at 181, where he said (with the agreement of Northrop and Sheppard JJ) that deductible interest in respect of a borrowing to acquire income-producing property would cease to be deductible upon a change of the use of the property to a use for private purposes. There is no reason why the principle should not work the other way too. Not infrequently, the change of use will have been contemplated from the inception of the loan, and confining its purposes to the one use would be quite artificial. The problem of the characterization of payments of interest in respect of borrowed money, for the purposes of s 51(1), came before the High Court in Fletcher & Ors v FC of T 91 ATC 4950; (1991) 173 CLR 1. In a joint judgment of all justices it was said (at ATC 4958; CLR 19): "In the present case, the outgoings of interest in the tax years were incurred in the borrowing of money. The funds borrowed did not constitute assessable income. To the extent that the outgoings of interest incurred in the borrowing can properly be characterised as of a kind referred to in the first limb of s. 51(1), they must draw their character from the use of the borrowed funds." By contrast with such statements as that of Deane and Sheppard JJ in Ure, cited above, this statement is unequivocally concerned with how the borrowed funds are used. It does not look to intention or subjective purpose. But that is not to say that subjective purpose is irrelevant. The rule is rather that it may be taken into account (as it was in Fletcher itself) where the objective facts do not yield a clear answer; but the characterization of interest "will generally be ascertained by reference to the objective circumstances of the use to which the borrowed funds are put" FC of T v Roberts 92 ATC 4380 at 4388; (1992) 37 FCR 246 at 257, per Hill J (with whom, relevantly, Jenkinson and O'Loughlin JJ agreed); and see FC of T v Janmor Nominees Pty Ltd 87 ATC 4813; (1987) 15 FCR 348; Crawford v FC of T 93 ATC 5234 at 5241; Madigan v FC of T 96 ATC 4640 at 4644; Brian Reilly Freighters (NSW) Pty Ltd v FC of T 96 ATC 5122 at 5129. The issue under consideration in the present case turns on the true application of this test. Here, the use to which the borrowed funds were put was the purchase of a capital asset, Tibradden. The fact that it was a capital asset is not in itself, of course, conclusive, or even particularly helpful. The statements in The Texas Company and the other cases that have been cited make the deductibility in general of interest payments quite clear where the borrowed funds provide capital (and a fortiori working capital) employed in a business or in income earning activities. But Tibradden was not so used, nor was it available for such use. It was almost vacant land. (We are still leaving aside the agistment activities.) Before Tibradden could become the income-producing property that was proposed, much capital work and expenditure would be required. For another example of an identifiable change in the purpose with which land was held, see White v Federal Commissioner of Taxation (1968) 120 CLR 191 where it was found as a fact that after 1956 the taxpayer had decided to maintain the relevant land exclusively for the growth of standing timber and not to develop it as a pastoral property. Accordingly, proceeds from the sale of timber thereafter were held to be income according to ordinary concepts. Conclusion Taking the approach suggested by the authorities canvassed above, I have been led to resolve the question of fact in this case in favour of the taxpayer. In coming to that conclusion, I have been influenced primarily by the indisputable fact that he acquired and continued to hold "Acton View" for use as a residence and the conduct of the business of a primary producer. Apart from the activities necessarily undertaken to obtain approval from time to time for subdivision of parts of the property, there is nothing to suggest a change in the purpose or object with which "Acton View" was held. In this respect, the present is to be contrasted with those cases in which particular circumstances provided an occasion for imputing to the landholder a change of purpose. In Whitsford Beach those circumstances were the passing of control of the landholding company from the owners of the fishing shacks to the three development companies. In Official Receiver v Federal Commissioner of Taxation (Fox's Case) the critical circumstance was that control of the land passed to the Official Receiver who sought the instructions of the creditors as to whether he should dispose of the land in its undeveloped state or undertake its extensive development to increase the return to the creditors. In the Melbourne Trust Case one critical consideration was the formation of the realization company as a distinct entity with shareholders unrelated to the failed banks or their creditors. Nor did the present taxpayer acquire other land to be added to the original "stock" represented by "Acton View". Had he done so, that would have facilitated the imputation of an intention to carry on a business of land development as occurred, for example, in Crow v Federal Commissioner of Taxation. See also the Melbourne Trust Case where a second critical factor was the pooling of land which had belonged separately to each of the failed banks. It is also significant that, although the taxpayer had previously always carried on his business activities of farming and fencing in partnership with his wife and his son respectively, he made no attempt to bring "Acton View" into account as a partnership asset. Nor did he seek to claim as a business expense the interest on moneys borrowed to defray the subdivisional costs. A related consideration is the fact that the development and subdivision of "Acton View" was undertaken piecemeal in response to the exigencies of increasing debt and deteriorating health. No coherent plan was conceived at the outset for the subdivision of the whole property, even in stages, to maximise the return from the aggregate of the individual lots. Even at the date of the last of the assessments to which these proceedings are related, an area considerably over one-third of the whole of the original property had not been subdivided. Nor did the taxpayer undertake any works on, or development of, the land beyond what was necessary to secure the approval by the municipal authorities of the successive plans of subdivision and enhance the presentation of individual allotments for sale as vacant blocks. Had he constructed dwelling houses, internal fencing or other improvements, it would have been easier to impute to him an intention to carry on a business of land development and improvement. Similarly, had he set up his own sales organization or advertised or conducted sales himself instead of entrusting those activities entirely to his traditional agents, Roberts Ltd, the inference would have been more strongly available that he had gone into the business of selling farmlets or rural residential allotments. That inference was drawn by the Tribunal in Stevenson's Case where the taxpayer, at least from stage 2 of his development, personally dealt with prospective purchasers as well as "multi-listing" the blocks with a variety of agents. Accordingly, I find that the sales from 1977 of lots on the second and subsequent subdivisions occurred as part of the mere realization of a capital asset of the taxpayer. The proceeds from those sales did not amount to income upon the application of the ordinary principles embodied in s 25(1) of the Act. Moreover, it follows from my conclusion that "Acton View" had been acquired by the taxpayer for the purpose of primary production that no "profit" from those sales is assessable in accordance with the first limb of s 25A(1). Nor does the second limb of that sub-section have any application because the sales did not occur in the course of carrying on or carrying out any profit-making undertaking or scheme. To adapt the analogy suggested by Deane J in this Court in Whitfords Beach (1979) 44 FLR 312 at 330 this is not even a case of selling by a goldsmith in his shop of his patrimony of a gold bar. The taxpayer, as I have found, never conducted a business of a land developer or vendor to which any part of "Acton View" was devoted. I shall order that each appeal be allowed and that each assessment be remitted to the Commissioner to be reassessed in accordance with these reasons. The respondent should pay the applicant's costs of each appeal. I certify that this and the preceding twenty-eight (28) pages are a true copy of the Reasons for Judgment of the Honourable Justice Ryan. Associate: Dated: 10 December 1997 Appearances in TG 3, 4, 5, 6 and 7 of 1995 Counsel for the Applicant: Mr P Roach Solicitor for the Applicant: Piet Schouten & Co Counsel for the Respondent: Mr A Abbott Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 15, 16 and 17 July 1996 Date of Judgment: 10 December 1997