JUDGMENT

ASSESSABLE INCOME: Capital - Income - real Estate - investments-profit-making by sale of real Estate - whether profit made on sale of real Estate was capital or income - application of the California Copper Syndicate Principle. The Full Court of the Federal Court of Australia has held, inter alia, that

1. the determination whether the profit made on the sale of a taxpayer's properties was capital or income was to be made in accordance with the rest stated in Californian Copper Syndicate (Ltd and reduced) v. Harris [1904] 5 TC 159;

2. although most investors in real estate consider the possibility of resale if the return does not come up to expectations, they nevertheless do not carry on a business of buying and selling these assets unless their activities are in real estate, involving substantial sums and volume. In these circumstances, the question is more complex and depends upon the facts of the case; and

3. the test in the Californian Copper case requires the Court to consider the nature of the company, the character of the assets realised, the nature of the business carried on by the taxpayer, the circumstances of the particular realisation and whether the taxpayer carries on another business. In his judgement, the member of the Full Court who delivered that Court's principal judgment observed, inter alia:

1. Whether profit realised on the sale by a taxpayer of one of its investments is capital or income is answered by applying the test enunciated by the Lord Justice-Clerk (the Right Honourable J H A MacDonald) in Californian Copper Syndicate (Ltd and reduced) v. Harris [1904] 5 TC 159 in a passage which has been often cited with approval, though described by Barwick CJ in London Australia (CLR at 112) as a "truism" which has given it "a delphic significance". The principle was stated in Colonial Mutual Life Assurance Society Ltd. v. Federal Commissioner of Taxation [1946] 73 CLR 604 in the joint judgement of Latham CJ, Dixon and Williams JJ at 614 in these terms: Prima facie the depreciation in or accretion to the capital value of a security between the date of purchase and that of realisation is a loss of or accretion to capital and is therefore a capital loss or gain and does not form part of the assessable income: Lomax v. Peter Dixon & Sons Ltd. [1943] KB 671. But in the words of the Lord Justice-Clerk in Californian Copper Syndicate v. Harris [1904] 5 TC 159 at 166 which has been so often quoted,

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. Gibbs J cited this passage from the High Court's judgment in Colonial Mutual in London Australia and went on to say (CLR at 116; ALR at 209):

Their Honours went on to point out that not all of the proceeds of a business carried on by a taxpayer are income for the purpose of the Act; they will be so only if they are income 'in accordance with the ordinary usages and concepts of mankind, except in so far as the Act states or indicates an intention the receipts which are not income in ordinary parlance are to be treated as income' (73 CLR at 615). However, it is in my opinion established by this and many other cases in which Californian Copper Syndicate v. Harris has been applied that if the sale in question is a business operation, carried out in the course of the business of profit-making, the profit arising on the sale will be of an income character. To apply the criterion it is necessary 'to make both a wide survey and an exact scrutiny of the taxpayer's activities': Western Goldmines NL v. Deputy Commissioner of Taxation (WA) [1938] 59 CLR 729 at p. 740

Whether the Belmont properties were acquired on the capital account of the taxpayer for the purpose of adding to its profit-making structure as the means of producing rental income rather

than as