westfield - 25a revisited

8/6/2019 Westfield - 25A Revisited

http://slidepdf.com/reader/full/westfield-25a-revisited 1/6

THE WESTFIELD LTD. CASE —

SECTION 25A REVISITED?

PROFESSOR L. J. NETHERCOTT

Since the decision in Federal Commissioner of Taxation v. Myer

Emporium Ltd.,1 there has been some concern as to how wide that

decision should be taken in terms of the operation of s. 25(1) of the

Income Tax Assessment Act. In particular, there has been some

concern over that part of the judgment which stated:2

"[A] gain made otherwise than in the ordinary course of carrying

on the business which nevertheless arises from a transaction

entered into by the taxpayer with the intention or purpose of

making a profit or gain may well constitute income . . . Generally

speaking, however, it may be said that if the circumstances are

such as to give rise to the inference that the taxpayer's intention

or purpose in entering into the transaction was to make a profit ora gain, the profit or gain will be income, notwithstanding that the

transaction was extraordinary, judged by reference to the ordinary

course of the taxpayer's business."

There are precedents such as Australasian C atholic Assurance Co. Ltd.

v. Federal Commissioner of Taxation3

and more recently, Federal

Commissioner of Taxation v. Employers' Mutual Indemnity Associ-

ation Ltd.4

and Federal Commissioner of Taxation v. Equitable Life

and General Insurance Co. Ltd.,5 which indicate that capital profits

may be assessable under s. 25(1) where the realisation of capital assetsis a normal incident of day to day operations. For example, in London

Australia Investment Co. Ltd. v. Federal Com missioner of Taxation6

it

was held that the sale of shares by the taxpayer was a normal part of

the firm's business operations and, as such, the profits arising from the

sale were assessable under s. 25(1). This view is certainly supported by

the decision in Californian Copper Syndicate v. Harris, where it was

stated:7

"[E]nhanced values obtained from realisation or conversion of

securities may be so assessable, where what is done is not merely a

1(1987) 163 C.L.R. 199.

2(1987) 163 C.L.R. 199 at pp. 209-210.

3(1959) 100 C.L.R. 502.

4[1990] A.T.C. 4787.

5[1990] A.T.C. 4438.

6(1977) 138 C.L.R. 106.

7(1904) 5 Tax Cas. 159 at p. 166.

157



158 AUST RAL IAN TAX REVIEW SEPTEMBER

realisation or change of investment, but an act done in what istruly the carrying on, or carrying out of a business."

The difficulty for the taxpayer arises in determining how far theHigh Court decision in relation to the Myer Emporium Ltd. extends.Where a taxpayer realises an asset not in the ordinary course ofbusiness, but nevertheless makes a profit on the disposal, is it likelythat that profit will be caught under the provisions of s. 25(1)?

This question was examined recently in the Full Court of theFederal Court in Westfield Ltd. v. Federal Commissioner of Taxation.

8

Although it was a Full Court which heard the appeal, the judgment by

Hill J. was the only one presented, the other two judges, Lockhart andGummow JJ., agreeing with his views. Briefly the facts of the casewere as follows: Westfield, whose main business activity was thedesign, letting and management of shopping centres, purchased anoption in 1978 to buy some land near the Garden City shoppingcomplex in a suburb of Brisbane. By reason of development difficulties,the initial option on the land lapsed. However, when Westfielddiscovered that a competitor was looking to acquire some land in thearea, they secured another option on the land. This option was

exercised in April 1981 when the land was purchased for $450,000. Atthe time the land was purchased, Westfield had been havingdiscussions with an insurance company as to the possibility ofdeveloping the land as a shopping complex, whereby Westfield wouldcarry out the project management design, construction and leasing ofthe complex. In December 1982, the land was sold to the insurancecompany for $750,000, giving rise to a profit.

As the Commissioner of Taxation held that the profit on the sale ofthe land was assessable, the taxpayer appealed to the Federal Court. In

the Federal Court, in Westfield Ltd. v. Federal Commissioner ofTaxation,

9 Shepherd J. held in favour of the Commissioner on thebasis that the sale of the land by Westfield to the insurance companywas a transaction which was carried out in the ordinary course of thetaxpayer's business and was part of an overall profit-making venture.Even though Shepherd J. held that the profit on the sale of the landwas not assessable under s. 25A(I), he held that when the taxpayeracquired the land there was an intention to use it in a way whichwould achieve participation in the development of the land into a

shopping centre. Although Westfield did not envisage a sale as anecessary consequence, a sale was a possibility, and, as eventstranspired, the land was in fact sold for a profit. Consequently,Shepherd J. held that the decisions in Federal Commissioner of

8[1991] A.T.C. 4234.

9[1990] A.T.C. 4801.



1991 THE WESTFIELD LTD. CASE — SECTION 25A REVISITED? 159

Taxation v. Myer Emporium Ltd.10

and Jennings Industries Ltd. v.Federal Commissioner of Taxation

urequired that the profit be

included as income under s. 25(1).

In view of the decision at first instance in favour of theCommissioner, Westfield Ltd. appealed to the Full Court of theFederal Court

12contending in particular that the Court did not pay

sufficient attention to the fact that the main purpose of the taxpayeracquiring the land was to enable it to develop it as a shopping centrewith the insurance company. Consequently there was not a profit-making purpose relating to the sale of the land. In this regard animportant aspect of the case was the determination of the taxpayer'sobjectives or purpose in acquiring the land. Certainly the evidencegiven by Mr. Saunders, the deputy chairman of directors of WestfieldLtd., indicated that if somebody had offered five times as much asWestfield Ltd. had paid for the land it would not have sold it — it didnot buy the land to cash in on it.

In establishing the reasons which lay behind the purchase of theshopping centre, the objective evidence was supportive of the view thatthe insurance company was interested in the development of the land.

On this point, an internal letter from the insurance company's headoffice to its Brisbane office revealed that at that time Westfield Ltd.had proposed that it would carry out project management design andconstruction and testing together of the centre on the land.

Notwithstanding the objective evidence which indicated thatWestfield Ltd. was interested in developing the land as a shoppingcentre, the important question which Hill J. raised was whether "whatwas done is not merely a realisation or change of investment, but anact done in what is truly the carrying on, or carrying out, of a

business".,3

In order to answer this question Hill J. stated that it was necessaryto undertake a wide survey and scrutiny of the taxpayer's activities.However he observed that if a profit is to be brought to account asincome, where the transaction occurs outside the scope of ordinarybusiness activities "it will be necessary to find, not merely that thetransaction is 'commercial', but also that there was, at the time it wasentered into, the intention or purpose of making a relevant profit".I4

In this respect Hill J. observed that it does not follow that every

profit made in the course of a business activity will be of an incomenature. An example of this would be where a taxpayer moved its

10(1987) 163 C.L.R. 199.

11[1984] A.T.C. 4288.

12[1991] A.T.C. 4234.

13[1991] A.T.C. 4234 at p. 4241.

14 [1991] A.T.C. 4234 at p. 4241 .



160 AUSTRA LIAN TAX REVIEW SEPTEMBER

premises and made a profit on the sale of its former office. Eventhough there was a profit on the sale it would not be brought to

account as assessable income under s. 25(1), where, at the time ofacquisition of the office, there was no intention or purpose of profit-making by sale. Hill J. commented that simply because the taxpayer iscarrying on a business to make a profit, such actions should not have atemporal sense of bringing to account profits made on other unusualtransactions such as that caused by a sale of former office premises. Aswas stated in Federal Commissioner of Taxation v. Spedley SecuritiesLtd., it is necessary that the "purpose of profit making must exist inrelation to the particular operation".15

Where the profit arises from a regular activity which is an ordinarypart of the taxpayer's business, there is no difficulty in bringing thatprofit to account as assessable income. However, in the case ofWestfield Ltd., its business activity was that of the design, constructionand management of shopping centres; the buying and reselling of landwas not an ordinary part of their business activity.

Hill J. observed that whilst Shepherd J. stated that the transactionentered into was "one carried out in the ordinary course of the

applicant's business and was part of an overall profit makingventure"16 the judge had viewed the transaction temporally and thiswas incorrect. On this issue, Hill J. stated that if the facts indicate thatthe buying and selling of the land was not done in the ordinary courseof business, the profit will only be assessable if the taxpayer had apurpose of profit making at the time of acquisition.

17

On this basis although Westfield had an overall scheme of profit-making through the design, construction and management of shoppingcentres, Hill J. commented this was not enough to render the proceeds

assessable. This was so because the obtaining of the contract toconstruct and manage the shopping centre was not a scheme of profit-making; rather it was a scheme to derive income from the building andmanagement contracts. Consequently, where a transaction was outsidethe ordinary scope of business, it was necessary that there should havebeen a profit-making purpose by the means by which the profit was infact made.

It is on this basis that the decision in Steinberg v. FederalCommissioner of Taxation

18can be differentiated, as in that case the

taxpayer, who had obtained an option to purchase some land,incorporated a company to hold the land with the intention of selling

15[1991] A.T.C. 4126 at p. 4130.

16Westfield Ltd. v. Federal Comm issioner of Taxation [1991] A.T.C. 4801 atp. 4808.

17[1991] A.T.C. 4234 at p. 4243.

18(1975) 134 C.L.R. 640.



1991 THE WESTFIELD LTD. CASE — SECTION 25A REVISITED? 161

the shares in the company, by a process of a liquidation or by adistribution of the assets in specie. Similarly, in Jennings Industries

Ltd. v. Federal Commissioner of Taxation,19 where the taxpayer hadacquired fifty per cent of the shares in a company, with the intentionthat it would construct a building for the company, it was held that theprofit arising from the sale of the shares was income under s. 25(1).This was because the taxpayer had always intended to make a profitby the realisation of its interest in the project. However, the position ofWestfield Ltd. can be differentiated from the facts of these two earliercases, because at the time of acquisition there was only a possibilitythat the land would be sold, and even if that was the case, the purposewas not to make a profit but rather to obtain a design, constructionand management contract with the insurance company for theshopping complex. Therefore, s. 25(1) could not apply to bring theprofit to account as assessable income.

In conclusion it should be noted that the decision in the WestfieldLtd. case

20is significant for a number of reasons.

First, the decision clarifies the principle established in the MyerEmporium Ltd. case "that a profit or gain so made will constitute

income if the property generating the profit or gain was acquired in abusiness operation or commercial transaction for the purpose of profit-making by the means giving rise to profit".

21

If s. 25(1) is to apply, it is necessary to find not only that thetransaction is commercial, but also that the taxpayer had, at the timethe transaction was entered into, the intention or purpose of making aprofit.

Secondly, the decision is also significant since it seems to raise a defacto equivalent of the first limb of s. 25A(I) within the scope of

s. 25(1). This is because the comments by Hill J. indicate that where atransaction is outside the scope of the taxpayer's ordinary businessactivities there is a need to determine whether, in respect of theparticular transaction, there was an intention or purpose of making aprofit at the time when the transaction was entered into.

Thirdly, if the views expressed by Hill J. are correct, they may meanthat gains indicated by him and arising from the disposition ofproperty, which may be taxed under the capital gains tax provisions,may also be taxed within the scope of s. 25(1), albeit in a mannersimilar to the now superseded s. 25A(I). This, of course, means thatfor assets acquired after 19th September 1985 the taxpayer loses thebenefit of indexation.

19 [1984] A.T.C. 4288.20

[1991] A.T.C. 4234.21

(1987) 163 C.L.R. 199 at p. 210 (emphasis added).



162 AUSTRALIAN TAX REVIEW SEPTEMBER

It is for these reasons that the decision of the Full Court of theFederal Court is significant. Perhaps, however, the matters discussed

in this article will be clarified if they are dealt with by the High Courton some future occasion.

westfield - 25a revisited

Documents