Section 26(a)
23.74. An attempt was made in 1930 to achieve a greater degree of certainty in this area by the enactment of provisions now represented by section 26 (a) which includes as assessable income of the taxpayer:
‘(a) profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme.’
― 431 ―
This enactment has proved to be unpredictable in its application and a most potent source of disagreement and litigation between taxpayers and the Commissioner. Until recently its first limb had been thought to involve a subjective test: what was the taxpayer's dominant purpose at the moment of acquiring the asset? The second limb, however, had been thought to involve an objective test as to whether or not the taxpayer was ‘carrying on or carrying out a profit-making undertaking or scheme.’ The second limb thus involved an examination of whether or not the undertaking or scheme was essentially of a business nature, whereas the first limb simply involved an inquiry as to the purpose of the taxpayer at the time of acquisition of the asset. These long-held interpretations of the somewhat differing requirements of the two limbs of the section have now been shown to be incorrect by a recent decision of the High Court. It appears that the first limb as well as the second limb requires that some ‘business purpose’ be shown before the section will have any application. The section is thus considerably narrower in scope than had been thought, and in the Committee's view this narrowing of the section means that it now adds nothing to the determination of income for the purposes of the Act. In other words its operation is merely declaratory, adding no more to the section than section 25 has already provided. Furthermore, the High Court's decision has placed further constraints on the operation of section 26 (a) by requiring that there be a complete identity between the property acquired and the property disposed of. This means that the section may have no operation in cases such as the exercise of an option and subsequent profitable resale. The Committee can see no good reason for retaining the section and recommends that to avoid any further uncertainty it be repealed.