TAXING LAND SALES.

Dominion, Volume 4, Issue 999, 14 December 1910, Page 6

TAXING LAND SALES.

? IMPORTANT CASES. SUB-DIVISION OF ESTATES. . ..THE.GRADUATED TAXES. ' . .. ,TJi6 Wo; separate, though similar, cases pfVtlui Estate .Company, Ltd., 4 ; and Marainanga . Estato'.. .Company; I ."Ltd;;: against the Commissioner of; Taxes 'were . further;, hejird by , -Mr. Justice :■■ ■ Cooper the Supreme Court'yesterday. 1: '.The Marainanga Estate Company, Ltd.; ;claitn'ed,.a refund of ,£2518 income ' tax .Y paid undir protest on-profits arising from - : tho,sale of land.' The company, was forrn- ;, ed 'in. 1906 to' ,take oyer tho. interests 'of a ..... part'nersliip comprising J. S.■ Handyside, of A'-iitio, sheep-farmer, and John' Roberts, &M.G., of. Dunedin, merchant and ; shoep-fartuer, . Hugh ' Handyside, ' Adam .'. Holland, James Henry Holland, and Thomas James iScougall.. Roberts, -. and • owning leasehold and freehold lands in tho province of, Wellington, having an : 'uggregite area of 30,355 acres.' The corn- ., . pany was-registered .under the Companies 'y. Act of .1900, with' a' capital' of £160,000. Tho only shareholders besides tho original 'parties; were: James Alexander Roberts, . Louisa Jane Roberts/ ■ Alexander. Fowler . Roberts, and Catherine Emily Roberts, , • sacli o| whom held one share. The consideration for tho transfer of the lands ' to tho company was 716 13s. 4d., by ■ tho issue, of shares to. the nominal value of that sum. Further, the company paid B suni of' £iO,OOO, owing by the partner- ■' ship/ .a' mortgage' over the lands. The . price'of the lands was based upon the ■ land; tax : -Value, which then stood at £121,000. In 1907 legislation was introduced under which the land tax payable by those interested in the company was V. largely increased.'- It wnsthen decided to ■ sell-'' the' land. - The . total sum produced . by ,the sales up ..to June 30, 1908,' was £50,360 10s. over and above the price fixed in . the agreement. -Upon this ~.amount tho" sum of £2518 was paid in taxation under protest. It was alleged by : tho Commissioner, of Taxes that tho land . . was' held By the' company with a view ■ 'to profit, by resale. The profit of £50,360 10s: was made by the comiJav ; from , a transaction in ;real # estate, and ! .' Bucli dealing was comprised in the ordinary business of the company, which had - -accordingly been. duly assessed for grad- . -. ualed income tax on the amount of the profit. ' "• ,'llr. J. : Hosking, K.C.', with' him Mr. . ,-Blair, -appeared for the plaintiff,, and Mr. t J; W; Salmond" (Solicitor-General), with -. bim ; Mr. iV.Neavc, for tho defendant.

Canine Comparisons. !:■': William Maurice' Tyers,' Inspector of :.- ; U Ihe Land . and-.lncome- Tax department, i- ■ riving,evidence, Yesterday,- morning, . said fe::"-tfiat' tHe Maiaiaaiga Estato -was assessed fc&w; V'fdr'• graduated' land tax: as on March: 31, s ■ 1907, at J8553 155.. Gd., or an unimproved. . ' Value., of, JC74-,835. Under the old system tHe graduated tax, would, have. been. .£389 p J .vlssi 43;;. the. increase, due' to the Act,of.' 1997 being JSIGi os. 2d. ' ' V ! c . Evidence, as to what' Mr. John. Roberts. Jiad to pay on other properties -.was'ob-' * v .: r r --jected to., and disallowed. . Ilis Honour (to Mr. Hosking): I sup-f/'j-.v': :-poSe i'ou suggest, that as the. Legislature <'. an 'increase of 33 .per cent., f-.i ' and then another, of' 25 per cent., there wis'.nothing. to prevent - it going on as K - Mr. .Lloyd-George- says he is. going on in ; ' England to take tlio whole value. :•. ... (ftX:'-- llr.vHoskihg':, We (the company) . were' f' .-'.r afraid'-the -puppy would ; . grow^.into a'dog. . and :would ..bite. !'.• Mr.. Salmoh'd: Alid, we wish to show. !" ; '.v that ;tho\; alleged*'dog is >a very .harmless t-':: puppy. ;• • Sir. Hosking: He gave! a pretty good j bite to begin with. ■ . "Ordinary Business." . -v--"'" Mr. iHoskingv in- moving Tor judgment, Rv said that. Section' ,'v7l. of jthe' Land,; and f Act, • 1908,7 treated' .of. :. .income* on ' tax. had. to■ be paid, jYv/'.'v.' and I 'include'd income from, ibusi--pl' vv ;' nes£ : K Section' Subsection (c)„ snowedthat -income from, business, meant profits ... ; -~ from tho purchase, sale, ■■ or. other, .disp6sit.ion.' of real property-, if 'the. taxpay\er's:~brdinary{ business comprised dealing, in^suchVproperty,' but' - hot., v 'clearly designated the. business of jvV a ' land : jobber, and that "was. what Subij . ; 1 ' section: (c) was, intended to get at. '.Other* '.'sections-showed that the. jobber in shares f : , : was intended to be dealt with on .tho i:: < same lines as the. jobber in -land. Section . 2 showed -.that; the "business" of. a corn- ' pany was its business. as set out in its. fe : , memorandum of- association, but the set!;i, '■{ , tinfe out .of 'a; business in the, mem'orant;-':' ,dum. was , not sufficient, it was necessary.r'- to: go. further and'show that .the ordinary r : business of tho company was. land-job-birig; That..was'a very necessary limitai': ; ; tion, 'because 1 every- owner- of land was hf likely to sell tho whole or a portion of . his property at'some time or. other. That !,- : contingency had to be faced, but if the I, v cqntentfohs' of'.'-tfce- -otter side, were cdr- ! .: ; Tect;. no. company being, the owner of land could • become -the "vendor tof such land h,':': ■ ■without'b'eing. subject ;to taxation on any !: profits it might.make.."He submitted, on' the .contrary, that the-free disposition of it' ' 'land '.:was left: unaffected, by the Land !end Income "Assessment',Act, .1908. The ' .sales made by the. company were made i by 'it -in the character of an owner , of - Jland gettiflg. rid of;his property and not r: 'in . the -character, of: a company , that. "bought' land for the purpose' of. selling ty; : - ■: it at" a'■profit. . The ;broad question was TV- .. whether'the company's ordinary business 'comprised/that of land-jobbing. To f,!- ■ answer • that, they- must ask- what busij,'" -- nels the: company was formed'to do, and whether its ordinary . business. was, in p ' fact; land-jobbing. l In'.tliat cdnnection he . 6ubniitted_: (1) . That the c6mpany:was nbt . formed- with a capacity of .being or he-, L;': V coming a.land-jobber;. that its.opera".tions did not constitute, it a land-jobber;-p. .. (3) '.'that ' the salient ..fact' to . consider iin'r der bath-those Heads, was that thero was [ . . no buj'ing by the company in tho cor- • xcct sense of the term. ,

■ Not a Speculative Company. The-memorandum. of. association showed ,'. that the company-was formed to carry on' . the'^business'.of. sheepfarming, and' had power' to purchase and adopt tho agreements which were before the Court. These were ■ the Tear arid dominant objects of. the company. There was-, 110' clause to show' that there was an unlimited power to purchase land in all parts of the DoIts business Was expressly limited .to .station property in the Northland, and other land was only to bo acquired for the purposes of. the business of .the, company. In. this'respect the company, differed widely from the Miramar • Land Company (which was the subject of a-previous-, judgment'by his Honour), as • tho,express object 'of- that company was to acquire certain land'and sell it agaih, : arid which also, had general powers of dealing in laud.; In tho case of the Wellington Harbour Ferries. Company, also, the buying and selling of land was part of the. ordinary business of the .com- . pany. • \ " His ■ Honour: The Miramar-Company. ..was,a purely speculative company, and its main object was to speculate in that ■- block.' This; company is on an entirely , different-basis. Its-primary object was to .carry on the station. Its object was not- speculation. ; Mr. Salmond: That is not suggested. "Mr. Hosking further combated in advance tho anticipated argument that-the ..company, when it decided to sell, became a .laiid-jobbing company. He contended that when tho company in August, . . 1907, sold tho estate, that was practically an act.for the purpose of liquidating tho company and. putting an end-to its. corporate existence. The money rtceived was not .applied, to-the purchase of other land, but, was, distributed among the shareholders, and the stock and implements were ; . disposed of in . March, 1908, when the purchasers of the niajor portion came to ' . take possession. The case was clearly one in: which the'tax ought not to be pay- • able." , ' THE WHITEROCK LEASE. SIMILAR CLAIM. The" Court .then-returned to tho.Whiterock case. " . v i; The. statement of claim in this case set ' forth, that the capital of the company was £35,000, )G. D. Greenwood. holding 51,998*' j2l shares, and' George Humphries ■ and ,W. Smale one each'. Bv the sale of ' the Whiterock . property • the ' company, made' a profit of £52,001. The Tax Department, claimed that tho company - was !ial)le to pay iripome tax upon this'profit.

aiid assessed tho amount."at -£2650. This sum'the 1 -company.'-had. paid under protest.. t . TMio case state's.'oil behalf of the Commissioner 'of Taxes was .that,in; January, 1005;'Jlr. Greenwood; of Aiuberley,- sheepfarmer, agreed, to purchase from Helen Nicholls •10,008. acres-of ■ -freehold (the estate'"above-mentioned)! near' .Loburn; Canterbury,;'for £75,000. Of this 6"u'm £25,000 represented payment for stock. When' lie purchased the estate! Greenwood owiifcd another" • freehold estate . having an unimproved value of £72,000/ and, in order to cvn'do payment of graduated tax - on tho. aggregate value of his estates, lid determined to . form ; a ' private company for' the purposo of .taking - 'a'- transfer' of . the Whiterock'estate 'to that company instead of-to himself .-personally. Of the purchase money,"£2s,o(lo (lor tho stock), and £5000 oil account of'tho price of tlio land were paid.; The balance was secured by a mdrtgago on the land and stock. In April, .1906, .the- company purchased another piece ;of land adjoining ' the Wliiterock Estate, and comprising SSB acres, from Albert Edward Tiitton, for £2792. Until March 14, 1908, the lands so acquired were used for the purposes of a sheep station. .On that date tho combined estate was cut into eight lots, and sold at a ■ profit of £52,061. The gronnds'-of' defence wero: similar to those in the Marainanga. case. Evidence in the Wliiterock case had been heard on the . previous day, , and argument had. been deferred by arrangement; Mr. C. P.' Skerrett, K.C.', and Mr. Beswick (Christchurch) appeared for the plaintiff -company, .and Mr. J. W. Sal- , niond (Solicitor-General), with him Mr. T. Neave, appeared for the Commissionerof Taxes. ■ > " ■

"The Sole Object of the Company." Mr. Skerrett asked his Honour, to find that Mr: Greenwood bought the'Whiterock Estato as a permanent investment and to carry it on as a sheep station, and not with a, view to resale. He formed a private company for the purpose of enabling him to hold- it as a permanent investment in the form of a sheep farm, without incurring ■. additional- - graduated land. tax. This was the sole object of the company. The. company, until the sale, carried on the sheepfarming business, and Mr. Greenwood's son' lived oil the place and took an active part in tho management: The purchaso of other land from Mr. Tutton was. irrelevant and insignificant, as. that land was merely bought to improve tho ■ Wliiterock property as a sheep station. The Act of 1907 frustrated the object, for which the company - was formed (holding' Wliiterock as a sheep station .without rendering - Mr. Greenwood liablo" to' additional graduated land, tax).. Tlie Solicitor-General apparently suggested that the additional taxation was an insufficient reason for the sale. - Surely that was a matter for -the owner: to decide for himself. There might bo various, reasons which would cause an owner. to .dispose, of his business. .- The fact ■ that a ? not paying might be one.' The possibility of earning greater interest on liis money in sortie other form of business, might be; another., There might be personal or family reasons of a hundred • and.'one l kinds, .; A-person might desire to jn.veSt his. .wealth..elsewhere than in New Zealand in, consequence.;of ',the largely increased imposition of death duties, or in fear, of the. trend' .'of. legislation. Could there be -any doubt that it/was the legislation* of .1907 that induced-the principal shareholder in . this caso'. to sell ? He had invested part of the. proceeds of the salo in Queensland and the Argentine. ; the Amount -of Taxation. Iri'-rigard .to'the .'amount "of the'taxa- . tion,-' Mr. Skerrett f.said that in the year £l m* • e > r - Greenwood paid on the leviotdale and Whiterock Estates land, tax to the amount of £529 ,odd. In .-.the'year following the;sale, the gross tax- ! atioh was £1562 odd, to'which was added £<S3-as; absentee tax,, making a total of £2346 paid in' land taxation that year, find if the ainount. claimed in this action was not refunded there would be an additional £2050, making a total of £4995 paid in land tax in one year. That was equa ; tq;ono-fourth of the. income from the W hiterock Estate. There was a certainty of, an increase of 25 per. cent two years later.•• 1 ■ ■>" > Mr. Salmond pointed out. that the taxation mentioned by Mr. Skerrett was the :taxation on Whiterock and Teviotdalo taken together, while' the income mentioned was that from Whiterock alone.

1 .. The Motive of the Sale. Mr. Skerrett said that was so. Th© income from the other .property had not been stated,. . Proceeding,.; Mr.- Skerrett-pointed: out that Mr. Greenwood-bought the land before the company "was formed,.and that "•tj l he formed the.company lie fixed' its purposes, and- he- was a sheepfarmer and wanted the , property; for sheepfarming and as a permanent ■ investment. , The length of time the land'was held by the owner before the transfer to tho com-' pany was quite, immaterial. The intention of the owner of the' land and promoter of.the company was.the important question- The main purpose of the company, as shown bj; tile articles of association, was to. acquire the Whiterock Estate, and carry ,on a sheepfarming business thereon. There was no power in.the articles of association .tojjuy. other land. It was. true that the articles of association gave the. company-power to sell, but that was: no .-more than- what w ; as necessary and legitimate to enable the company to wind up" or" to reduce its business.; The'company was not a land, company, nor could it speculate or traffic in land.' If these'contentions were incorrect any company that sold 'out in wliole or m part would be - liable to pay taxation on any profit made in so doing. The only point- decided in "the Miramar s -case was that a company formed to buy .and sell land was liable to taxation , 011 profits, even if those profits vwere made on a single transaction, and'that the only transaction made by the company. If a business was ■to be treated as a land-jobbing business, :it .must be. .shown that' it bought land in ;order to sell it at a profit—sold it-to/make a profit. 1 The motive of the sale in this case was simply to wind up the business. ' Mr. Beswick elaborated some of the point 3 iriado : by. Mr. Skerrett. \ THE CROWN'S REPLY. ON BOTH CASES. Mr.. Salmond then replied on both cases. He said that the question whether.'the buying and selling of. land was part of the business of a company was divisible into two—(1) What was meant by the "ordinary business" of an incorporated company? and (2) what was meant by. dealing in land? .tjnder tlio first of these questions, he submitted that there was an essential 'difference between an incorporated company and ail individual. If in the present cases the taxpayers had been individuals it could not have been contended that any tax was payable. Unfortunately for themselves/ they chose to form themselves • into incorporated companies, and'with the benefits they obtained thereby they also got certain disadvantages, one of which was' that they came within the authority of the Miramar decision. "

Was There Hardship? Incidentally, Mr. .Greenwood, in the Whiterock case, could hardly complain of this, becausc he formed the company for the express purpose'of avoiding land tax. He could therefore .scarcely grumble if the result , was that he had to pay income tax. In the Marainanga ease, however, it might be reckoned ft hardship that turning a firm into an incorporated company should result in increasing its taxation. An Essential Difference. There was an essential. difference between an individual and an incorporated company as to what constituted ordinary business. In the case of an individual "business" connoted continuity, an habitual act, or a continuing practice. A single act, adventure, or speculation could not possibly constitute the business of an individual, nor could casual and intermittent. acts constitute.,liis business. The business of a company,' however, included, the purposes for which it existed, and the company carried on business when it fulfilled the functions for which it was created, and it mado.no diiTerenco whether it. was created'lor one particular transaction' or to carry on business for all time; „ .Were that not so, they would have to admit, that -a company formed for pro-fit-making purposes might have no business at "all;, and: be untaxable. He submitted that when a. company came into existence for,.the., purpose...of. buying a single piece of land,'and re-selling it at a profit, .whether, in one block or in subdivisions,' .that, company's business was . dealing in'land,; ana,.the profit was' tax-

able. was, the veal .meaning of the ill ram fir case.-' ■ lid was- not aware. that companies were formed for speculating at large.. ; • ' His Honour: I think it makes, no difference whether, a company speculates in one block of land or twenty. The question is whether speculation in land is its main.object; or one of its main objects. "Objects" and "Powers." Mr. Salmond. agreed with that stiiteriientr, and, further admitted that a distinction was to bo .drawn between the objects of a, company and its ancillary powers', though these were often described as "objects" in the. articles of association.' Some companies had it expressly stated that' one of Hheir "objects" was to borrow money. What was really meant-was the power to borrow. But if on a proper construction oi' tho articles it appeared that the sale of land was one of tlie objects of the company, it followed that profits.on its sales of land, were taxable. Further, it was a question of fact whether there were not purposes outside tho memorandum of association. It could be no defence to say that the company ■ was trading outside its memorandum. : AVhat was.. apparently. a mere ancillary power to sell land, might become in the course of the operations of the company its main-purposed N Dealing, in land (he also submitted) might be comprised in a man's ordinary business, even though it .was overshadowed by some more important part of his business. In the course of a review of the articles of association of tho ATaraihanga Company, Air. Salmond suggested that the company had two alternative objects —to run the place as a sheep station, or to cut it up and sell it. . The Solicitor-General had not concluded his argument when the Court adjourned until 11J.30 this morning.