Annalong Pty. Limited v. Federal Commissioner of Taxation

Judges:
Mason J

Court:
High Court

Judgment date: Judgment handed down 18 September 1972.

Mason J.: This is an appeal from a decision of a Board of Review confirming an assessment of income tax payable by the taxpayer in respect of the year ended 30 June 1966. The parties have agreed that I should determine the appeal by reference to the evidence given before the Board of Review.

The appeal raises the question whether an amount of £36,515, being the profit which the taxpayer made on the sale of certain land at Blackburn in the State of Victoria, should have been included in its assessable income for the year in question, as an amount which fell within the provisions of sec. 26(a) of the Income Tax Assessment Act 1936-1966.

The taxpayer is a company which was incorporated in New South Wales on 5 June 1961. Its initial issued share capital was £2, divided into two shares of £1 each. One share was issued to Sidney Londish, a company director who was interested in shopping centre construction, and the other to a solicitor. They were the sole directors of the company which was, so it seems, under the control of Mr. Londish. It was brought into existence at the behest of Mr. Londish against the possibility that he might have occasion subsequently to place some business opportunity in its way. Until December 1963 no such opportunity presented itself.

Then by a contract dated 24 December 1963 the taxpayer agreed to buy seventeen acres of land at Ringwood from Ronald Harry Pearce, an orchardist, for the sum of £160,000. The land was zoned as to approximately twelve acres for restricted business use and as to the remainder for proposed open public space under an Interim Development Order. The land was situated in an area which was starting to develop.

The terms and conditions of the contract are of importance but, before making reference to them, I shall relate the circumstances in which the taxpayer came to take an interest in the land.

Keith Victor McPherson, who owned and operated six self-service grocery stores in the vicinity of the land, had been concerned for some time before 1963 that commercial developments of the land might have an adverse effect on his business. In 1963 Mr. McPherson knew that Mr. Pearce was minded to sell and that he had received proposals from two large retail companies. It was agreed between Mr. McPherson and Mr. Londish that the taxpayer would undertake the purchase and development of the land and that they would become equal shareholders in the company. It was proposed that the land would be developed


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as a regional shopping centre and that Mr. McPherson would operate the supermarket. It was intended to secure a leading retailer as the major tenant, it being understood that if a leading retailer could be secured finance would be readily forthcoming and the development could be carried out with a relatively small capital outlay on the part of the taxpayer.

The contract of sale provided for the payment of a deposit of £16,000 of which £3,000 was payable forthwith and £13,000 on the giving of vacant possession on 30 June 1964. The balance of the purchase price of £144,000 was to be paid on or before 30 January 1965 and was meantime to be secured by mortgage. Special conditions 5 and 6 of the contract provided as follows -

``5. THE Purchaser will within the period of six (6) weeks from the date of this contract make application to the (Authority) and the Council... for a permit or permits to use that part of the land hereby sold which is at present zoned for restricted business purposes as hereinafter set forth in detail for any one or more of the purposes set forth in column 4 of Section 13 to the Authority's Interim Development Order as modified with provision thereto for off-street parking and other public facilities and will use its best endeavours to obtain such permit or permits including if necessary an appeal to the Minister for Local Government provided however that in the event of such permit or permits not being obtained within the period provided by this contract for possession to be given to the Purchaser, this contract shall be at an end and shall be null and void and of no effect and all monies paid by the Purchaser to the Vendor to the date thereof shall be refunded without deduction.

6. NOTWITHSTANDING the provisions of Special Condition 5 in the event of the Purchaser having reasonable grounds for the believing that both such permits might be issued at the end of a further period of three months from the expiration of the said period provided by the said Clause 5 hereof the Purchaser or its Solicitors may be notice in writing to the Vendor or his Solicitors, given not later than seven days prior to the date provided for the payment of the balance of deposit extend the period referred to in Special Condition 5 by a further period of three months and the time for payment of the balance of deposit and the giving of possession to the Purchaser shall be extended by such further period of three months accordingly.''

The initial deposit of £3,000 was paid with money borrowed by Mr. Londish from one of his private companies.

On 1 February 1964 the taxpayer lodged a development application seeking approval for use of the land for the purposes proposed by Mr. Londish and Mr. McPherson, as contemplated by the contract. The application was conditionally approved on 7 May 1964 subject to certain conditions and the reservation of four acres of the land as open space. Appeals from local residents were lodged against the approval but were disallowed on 7 August 1964 and the permit for development was issued on 16 December 1964. By notice under special condition 6 of the contract the taxpayer extended the time for completion to 30 September 1964.

Meanwhile Mr. McPherson and Mr. Londish endeavoured to secure a major tenant for the proposed shopping centre. Their efforts were unsuccessful. Before this became apparent and as early as 13 April 1964 negotiations took place with Lend Lease Development Ltd. with a view to selling the site (excluding that part which was required for a service station) to that company. An agreement dated 25 June 1964 was made whereby the company acquired from the taxpayer an option to purchase the site (excluding the area required for the service station) for £168,000. On 17 August 1964 the company advised that it did not intend to proceed with the option.

Mr. McPherson went to the United States in June 1964 and returned to Australia on 30 July. Before his departure Mr. Londish expressed his concern that no major retailer had taken an interest in the scheme and


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indicated that he would like to abandon it. However, at about that time steps were taken to alter the shareholding in the taxpayer to conform with the agreement for equal participation reached by Mr. Londish and Mr. McPherson. On 2 June 1964 one issued share was transferred to Londish Holdings Pty. Limited and the other to McPherson Holdings Pty. Limited, each transferee being the family company of the named individual. It was not until 2 April 1965 that the solicitor who was a director resigned his directorship and Mr. McPherson was appointed in his place.

After publicity had been given to the proposals for development of the land the Shell Company of Australia Ltd. negotiated to buy a site for a service station. By November 1964 it was known that a service station site could be sold to this oil company at a price to be negotiated.

After the dismissal on 7 August 1964 of the appeal by local residents against the conditional approval of the development application, the solicitors for the vendor demanded payment of the balance of the deposit. There was no reply to this demand.

In the middle of November Mr. Londish became convinced that the site could not be developed as a regional shopping centre for want of a major retailer. He considered that it could be developed on a smaller scale as a neighbourhood centre, but that to make such a development economically attractive it would be necessary to reduce the purchase price substantially below £160,000.

In order to induce Mr. Pearce to agree to a reduction in price Mr. McPherson told him that the deal was off, following a telephone conversation with Mr. Londish which took place in the presence of Mr. Pearce.

By letter dated 8 December 1964 the vendor's solicitors sought confirmation that the taxpayer did not intend to proceed with the purchase and stated that the vendor was aware of the remedies available to him. That awareness would not have been a source of comfort to him, as he reflected on the circumstances that the balance of the deposit had not been paid, the taxpayer's issued capital was £2, and that the payment of the purchase price was not supported by the personal guarantee of Mr. Londish and Mr. McPherson.

Negotiations then took place between the vendor and the taxpayer which resulted in a contract of sale dated 2 March 1965. This contract made no reference to the previous contract. It provided for the sale and purchase of the land for the sum of £95,000, payable as to the sum of £9,500 by way of deposit, acknowledging that £3,000 had already been paid and that the balance of the deposit was payable on the giving of vacant position on 1 April 1965. The residue of the purchase price was expressed to be payable on or before 30 September 1965, its payment to be secured in the meantime by a mortgage to the vendor. Special conditions 4 and 5 of the contract were as follows -

``4. The Vendor acknowledges that at present the said land is zoned as to 12 acres 3 roods and 10 perches or thereabouts for restricted business use and as to the remainder being 4 acres 1 rood and 12 perches or thereabouts for proposed public open space... under the (Authority) Interim Development Order.

5. The Purchaser undertakes to request the (Authority) to immediately purchase from the Purchaser that part of the said land which is zoned for proposed public open space, and the Purchaser agrees that the amount of compensation sought by and acceptable to it in respect of this purchase shall be calculated by Mr.... or some other valuer nominated by the Vendor. The Purchaser undertakes that an amount equal to the amount of the compensation payable to it by the (Authority) less the amount of the legal expenses incurred by it in connection with the purchase by the (Authority) shall immediately upon receipt of the compensation by it be paid to the Vendor.''

Before this contract was made Mr. McPherson and one Shaw were negotiating on behalf of the taxpayer the resale of the land (excluding the site for the service station) to Lend Lease Development Ltd. By letter dated 30 March 1965 that company


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indicated that it was interested in purchasing the land at a price of £103,000 and on 20 April 1965 it made a formal offer which was accepted by Mr. Londish in writing on 21 April 1965. Ultimately a contract was executed on 31 May 1965 providing for payment of a deposit of 15% of the purchase price and the balance of the £103,000 on or before 30 September. The contract required the purchaser to request the purchase by the statutory authority of that part of the land which was zoned for public open space and to pay the amount of compensation received in respect of it to the taxpayer. The contract was completed.

By a contract dated 7 April 1965 the taxpayer sold the service station site to the Shell Company for £37,500. This contract was also duly completed by payment of the balance of the purchase price £33,750 on or before 30 September 1965.

It is accepted that the profit which was made on the sale of the land under the two contracts made in 1965 was £36,515.

The evidence establishes that when the taxpayer entered into the first contract dated 24 December 1963 its purpose was not to resell the land, but to retain it and develop it as a regional shopping centre. But the evidence establishes with equal certainty that, when the taxpayer entered into the second contract dated 2 March 1965, its purpose was not to retain the land, but to resell it at a profit.

In its return of income the taxpayer included the profit in its assessable income. However, in an amended return it claimed that the profit was not taxable.

Profit made on the sale of property falls within the first limb of sec. 26(a) if the property was acquired for the dominant purpose of profit-making by sale, the purpose being one which actuated the acquisition of the asset (
Evans v. D.F.C. of T. (S.A.) (1936), 55 C.L.R. 80 at p. 99;
Williams v. F.C. of T. 72 ATC 4069, 46 A.L.J.R. 370 at p. 374).

Where a taxpayer buys land under an unconditional and enforceable contract, and subsequently resells it at a profit, it is the taxpayer's intention at or before the making of the contract with respect to the use to which the land is to be put that is, generally speaking, of critical importance. This is because the taxpayer, by virtue of the contract, acquires rights to compel the vendor to vest in him a complete legal and equitable title to the land the subject of the contract. When the contract is completed it may then be said that the property was acquired for the dominant purpose which the taxpayer had in mind at or before the making of the contract.

At the time when the taxpayer entered into the second contract of sale, that of 2 March 1965, its dominant purpose was to sell that part of the land which was not zoned as public open space to Lend Lease Development Ltd. and to the Shell Company of Australia Ltd. at a profit. But for the circumstance that there had been an antecedent contract of sale and that the taxpayer's intention at the time entering into that contract was to retain and develop the land as a regional shopping centre, it could not be disputed that the profit made by the taxpayer on resale fell within the first limb of sec. 26(a).

The question is therefore whether when regard is had to the taxpayer's intention at the time when it entered into the earlier contract, to the events which followed the making of that contract, to the second contract and to the circumstances in which it came into existence, it is proper to conclude that the taxpayer acquired the property for the purpose of profitmaking by sale.

In examining the sequence of events which followed the first contract, it is necessary to keep in mind that the respondent's case has been that the first contract was rescinded, if not by the unilateral act of vendor in consequence of a repudiation by the taxpayer, then by the making of the second contract, or by the oral agreement which should be presumed to have preceded it.

The respondent also submitted that a taxpayer cannot be said to acquire property under a contract which is conditional on the happening of a future event until that event occurs. That may be so, if the contract is so


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expressed. Here, however, the contract was expressed to become null and void if the permit did not issue by the stipulated date. The failure of the permit to issue before 30 September 1964 did nor bring about an automatic termination of the first contract; at best it gave the taxpayer a right to avoid the contract on that account (see
Suttor v. Gundowda Pty. Ltd. (1950), 81 C.L.R 418), a right which he did not exercise.

By virtue of the giving of notice under special condition 6 the time for payment of the balance of the deposit was extended to 30 September 1964. The balance of the deposit was not then paid. Although the non-payment of the deposit would have entitled the vendor to give notice requiring its payment, as a preliminary to rescission, he did not take this step.

Again, the statement made by Mr. McPherson, following his telephone conversation with Mr. Londish in the presence of the vendor, that the contract was off, may have entitled the vendor to treat the contract as at an end, but he refrained from taking this step, although his solicitors sought written confirmation of the taxpayer's attitude. In expressing this view, I have considered and rejected the respondent's submission that the vendor had rescinded by advertising the property for sale. It was not shown that the advertising was undertaken with any purpose in mind other than that of testing the market; nor does it appear that it was communicated to the taxpayer.

I have also considered and rejected the respondent's submission that the first contract was mutually rescinded by an oral agreement preceding the written agreement of 2 March 1965. There being no evidence of that agreement, I do not consider that I would be justified in holding that the parties had agreed to rescind the first contract independently of the making of the second contract.

In my opinion the first contract was on foot immediately before the making of the second contract. But the taxpayer cannot in any sense be described as a willing purchaser under it; in fact, although anxious to buy the land at a reduced price, it did not desire to complete the contract according to its terms. It wished to renegotiate the contract on terms more favourable to it and with that end in view the directors indicated to the vendor that it was repudiating the contract. By reason of its conduct the taxpayer would not have been able to enforce specific performance and it would not have been able to resist rescission had the vendor chosen to exercise its rights in that respect following repudiation by the taxpayer.

The changed circumstances affecting the use to which the taxpayer could profitably put the land, the emergence of Lend Lease Development Ltd. and the Shell Company as willing purchasers of the major part of the land at a lower price than the contract price and the intention expressed by the taxpayer's directors to repudiate the first contract are all consistent with a desire on the part of the taxpayer to bring the first contract to an end and arrive at a new agreement in its place.

In my opinion the second contract impliedly rescinded the first contract. The second contract, that of 2 March 1965, contained the whole of the bargain between the parties; it set forth comprehensively and exclusively the rights and obligations of the parties (see
Tallerman & Co. Pty. Ltd. v. Nathan's Merchandise (Victoria) Pty. Ltd. (1957), 98 C.L.R. 93 at pp. 113, 124, 135, 144;
Morris v. Barron & Co., [1918] A.C. 1). There was not need to supplement it by reference to the earlier contract because, in so far as the content of its provisions were not altered by the new agreement, they were repeated in that agreement.

Moreover, there were substantial alterations in the contractual provisions. The purchase price was reduced from £160,000 to £95,000; the taxpayer became bound to require resumption of that part of the property zoned for public open space and to pay the compensation moneys to the vendor; there was an alteration in the time for completion and in other provisions. The promise to pay the compensation moneys to the vendor is particularly significant for it shows that the taxpayer, although purchasing the land zoned as public open space area, was not intending to make any use of it and was engaging to deal with it as if


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it continued to remain the vendor's property. The contract of 2 March 1965 was therefore a new and independent contract which evinced an intention to rescind impliedly the earlier agreement between the parties.

In argument there was some debate as to whether in the events which had occurred the vendor could be held to have become a trustee of the land for the taxpayer under the contract in accordance with the doctrine enunciated in
Lysaght v. Edwards (1876), 2 Ch. D. 499. For the appellant it was said that a trust came into existence on the making of the contract, whereas the respondent contended that, according to the received doctrine, the trust comes into existence on acceptance of title or payment of the purchase price and not before (although it then relates back to the date of contract) and that here the circumstances necessary to bring it into existence had not occurred. I have some difficulty in seeing how, in the events which occurred, it would be proper to conclude that the taxpayer had become the owner of an equitable estate or interest in the land under the first contract which continued up to the making of the second contract, but even if he had acquired such an estate or interest, that contract was rescinded in circumstances in which a new and independent contract came into existence, constituting a fresh acquisition by the taxpayer.

I am of the opinion therefore the taxpayer acquired the land for the purpose of profit-making by sale and that the profit of £36,515 fell within the first limb of sec. 26(a).

ORDER:

The appeal is dismissed with cost. The assessment is confirmed.


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