Case B41

Judges: FE Dubout Ch
G Thompson M

N Dempsey M

Court:
No. 3 Board of Review

Judgment date: 10 July 1970.

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N. Dempsey (Member): This taxpayer, in his return for the year ended 30 June 1967, made a claim for a deduction of $7,152 under sec. 52 of the Act. The claim was disallowed by the Commissioner and taxpayer lodged a notice of objection. The objection was in due course disallowed, whereupon taxpayer requested that the matter be referred to a Board of Review.

2. The circumstances underlying the claim and on which taxpayer relies were that, in the relevant year, he purchased a property at a popular seaside resort for $10,600, which sum he and the vendor agreed should be apportioned $3,600 to land and $7,000 to improvements. Evidence given at the hearing showed that the Valuer-General at the date concerned had placed a value of $3,830 on the land. Legal expenses, stamp duty and other costs incurred on the acquisition apportioned similarly to the apportionment between land and improvements raised the cost of the land to $3,694 and the improvements to $7,182.

3. Taxpayer already owned a fairly large area of land in what might be regarded the less attractive part of the town, and on this land there was a fairly old home with a substandard flat underneath the main dwelling. The main dwelling was rented on a permanent basis and the flat was used by taxpayer and his wife at holiday times. The permanent tenant was a builder by occupation.

4. The claim advanced by taxpayer is that at the time when he purchased the property, details of which have been referred to, he proposed to move the house to the land he already owned and re-erect it there for rental and resale.

5. He subsequently found that due to the age of the house and its condition it could not be moved and he was forced to sell it for demolition, receiving only $30 on the sale. The deduction he seeks to be allowed under sec. 52 is the difference between what he claims to have paid for the improvements $7,182 and the sale consideration $30, a loss of $7,152.

6. In lodging his return for the year ended 30 June 1967, in which the claim for the deduction is made, taxpayer gave the requisite notice under sec. 52 of the Act. However, as the property was purchased and the improvements sold in the same year, little significance can be attached to this as the loss had already been sustained.

7. As is well known, sec. 52 is in effect the counterpart of sec. 26(a). Under the latter section, profits arising from the sale of property acquired for resale at a profit or profit arising from the carrying on or carrying out of a profit-making undertaking or scheme are brought to tax. Conversely, under the former section any losses arising from transactions which, had a profit resulted, would have been taxable under sec. 26(a), are to be allowed as a deduction.

8. The transaction involved in this case is not the sale of property. Accordingly to be covered by the sections concerned, viz. sec. 26(a) or sec. 52, it would have to amount to a profit-making undertaking or scheme.

9. It has long been established that in dealing with cases to which sec. 26(a) might apply, one must make a wide survey and an exact scrutiny of the taxpayer's activities,

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Western Gold Mines (N.L.) v. C. of T. (W.A.) (1938) 59 C.L.R. 729.

10. The remarks of the late Mr. Justice Fullagar in Pascoe v. F.C. of T. (1956) 11 A.T.D. 108, where at p. 111 he said -

``Where a person's purpose or object or other state of mind in relation to a given transaction is in issue, the statements of that person in the witness box provide, in a sense, the `best' evidence, but for obvious reasons, they must, as Cussen J. observed in
Cox v. Smail (1912) V.L.R. 274 at p. 283 , be tested most closely, and received with the greatest caution,''

are also frequently quoted with approval.

11. I think that these case are equally applicable in endeavouring to reach a decision as to whether sec. 52 applies in the circumstances of this case.

12. It is, therefore, proposed to review the happenings and to test the claims in the light of what in fact took place as against what it is claimed was the proposed scheme.

13. Taxpayer certainly did own an area of some 109 perches in the less attractive part of town, the block having a frontage of approximately 150 links to a formed road and a depth of approximately 337 links. The residence and flat on this land were on the area closest to the formed road. He had acquired this land about 1965 and, at a date prior thereto, the vendor who owned the adjoining land had had a resurvey made of both areas with the object of subdividing each area into four separate parcels each serviced by easements of equal width running along the common boundary.

14. The local council would not approve subdivision in this way and required that the easement areas be enlarged and formed into an access road properly constructed with kerbing and channelling. In view of the cost the other party involved was not prepared to proceed and the matter lapsed. In 1967 the area owned by taxpayer was still not subdivided and in fact no further steps were taken by him to ascertain what the local council might require should he wish to subdivide and so be able to dispose of portions separately. This was the situation when he commenced the chain of events leading up to the purchase of the property in 1966/67.

15. He claims that about this time it became evident that certain of his other avenues of income would peter out and he thought it would be advisable to invest in a property at the seaside resort which would provide him with a home and a source of income. His initial idea seems to have centred around a building comprising a flat and a residence.

16. He contacted a local agent and actually signed a contract to buy a property to be put to this purpose but the agent then discovered the place was already sold.

17. He was then introduced to another agent who discussed the benefits of building a block of flats. He showed him such a property, the construction of which he had been personally responsible for and which was showing handsome returns. This property was in a street relatively close to the main shopping area of the resort. Adjoining the block which the agent had developed was the land and dwelling ultimately bought by taxpayer. At this time the property was tenanted by a local businessman.

18. Having paid a deposit on the property taxpayer claims that he then had a discussion with the tenant. The basis of the discussion, he claims, was that the tenant was quite happy to vacate the house and re-occupy it when it was removed to the proposed site on land already owned by taxpayer. The tenant was also agreeable to purchasing the property once the house had been relocated and reinstated.

19. It might here be mentioned that although a price of $10,000 was mentioned as a likely consideration for the relocated house and the land on which it was to be moved, taxpayer had not gone into the likely cost of the project.

20. Taxpayer conceded that in addition to having no firm basis approved for subdivision of the land, he made no inquiries from the local council as to whether they would grant approval to remove the dwelling and allow it to be reinstated in the area described. Further, he made no inquiries locally as to what it might cost to have the work carried out. He did obtain some rough ideas from some associates in a country town over 100 miles away from the resort.

21. Having finalised the purchase, he claims that he then consulted local removalists and they then pointed out to him the many problems involved and, in fact, that the house could not be removed in one operation and that it would have to be done in several sections. The upshot was that he found it

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entirely uneconomical to remove the house. He still had not approached the council on the matter and had no approval of subdivision, nor had he made any application for one.

22. The tenant in the home which he had owned for several years was a builder by trade, and he then discussed with him the economics of pulling down the house and rebuilding it at the proposed site. Again he was advised against this on the score of costs, and again I must point out he had no council approval to subdivide his land to enable him to erect a separate building thereon.

23. It was at this stage that he negotiated to sell the house for demolition and was paid $30 for it. The person who purchased and demolished the house gave evidence as to the condition of the property. Although essentially a demolisher, he had on several occasions personally purchased properties and had them removed to sites approved by the council.

24. In my opinion, this witness was well versed in what type of house could or could not be removed and in the general requirements of the local council in this regard. He expressed a very definite view, to which I am quite prepared to give a deal of weight, that this particular house would not be approved for removal and was only suitable for demolition.

25. To summarise the situation I propose to rephrase a passage from the decision of Fullagar J. in Pascoe's case (supra), adapted to, as I see it, meet the circumstances of this case. Rephrased the passage would read -

``I have now stated the substance of the evidence as far as I think it is necessary to do so. The question is whether the improvements were acquired by taxpayer for the purpose of carrying out or carrying on a profit-making undertaking or scheme by removing them, reinstating them and selling them at a profit. On that issue the burden of proof rests on the appellant taxpayer. The question, therefore, which I have to ask myself is - Am I convinced - not beyond reasonable doubt but as a matter of belief - that taxpayer in making the acquisition was actuated by a dominant purpose of profit-making by sale?''

My answer is that I am not so convinced. My belief is that his scheme was to buy the property, dispose of the improvements to the best advantage and erect on the vacant land a block of flats.

26. As I see it, the fact that he proposed to sell the improvements by one means or another is not at all conclusive. To bring the loss within terms of sec. 52 there must have been an intention to make a profit out of the scheme, i.e., the disposal of the improvements. At the price allocated to them this was nigh impossible to achieve.

27. If one concedes that it were possible to have removed the house and reinstated it, I am still not convinced that it was possible to do so at a profit. A sale price of $10,000 was envisaged. The improvements in situ are supposed to have cost $7,182, the estimated value of the land to which it was proposed to remove them was in the vicinity of $1,500, giving a total of $8,682, which would allow only $1,318 to remove and reinstate the house in its new position. In my opinion this would have been far short of the actual costs and a profit could not have resulted.

28. However, as I previously stated that I was not convinced - not beyond reasonable doubt, but as a matter of belief - that taxpayer was actuated by a dominant purpose of profit-making by sale, I would uphold the decision of the Commissioner to disallow the objection.

Claim disallowed