Case J18

Judges:
JL Burke Ch
RE O'Neill M
CF Fairleigh QC

Court:
No. 1 Board of Review

Judgment date: 13 April 1977.

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J.L. Burke (Chairman): The taxpayer is a chartered accountant and during the year of income under review, namely, that ended 30 June 1968, had interests in private companies carrying on the business, inter alia, of purchasing and selling real estate. In his return of income for the year of income ended 30 June 1969 the taxpayer attached a statement in the following terms:

``Joint Venture - (Taxpayer) and S.

I entered into a Contract for the purchase of 20 (sic) Terrace houses in the suburb of... The purchase price was $80,000.00. The whole of the purchase price was raised by way of First Mortgage.

S paid me the sum of $10,000.00 for a 50% share of the profits arising from the re-sale of the properties.''

The sum of $10,000 had been paid to the taxpayer in varying amounts over the period 21 March 1968 to 9 January 1969, $8,500 having been paid up to 30 June 1968.

2. After making written inquiries of the taxpayer the Commissioner amended the taxpayer's assessment for the year ended 30 June 1968 to include as assessable income the said amount of $8,500 and the disallowance of the taxpayer's objection to the amended assessment brings the matter before the Board. The Commissioner supports his assessment under sec. 26(a) or alternatively sec. 25(1) of the Assessment Act.

3. Towards the end of 1967 one B, with whom the taxpayer had had previous real estate dealings on a profit-sharing basis, brought to the taxpayer's notice a parcel of real estate available for purchase at $80,000. The property comprised 21 terrace houses in

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an inner city suburb and the intention of the taxpayer at the outset was that the title to the houses would be converted from Old System to individual Torrens Titles, that restoration would be carried out and the houses sold in individual or multiple lots. It was acknowledged at the hearing that coversion to Torrens Title alone would have increased the value of the property from $80,000 to about $120,000.

4. On 3 January 1968 contracts for the purchase of the property were exchanged and the taxpayer out of his own resources paid the deposit of $8,000 called for in the contract. At the point of exchange the purchasers named in the contract were the taxpayer and his wife and in a draft deed of trust (infra) she also was named as one of the proposed registered proprietors. However before settlement her name was removed from the contract in circumstances which will be outlined hereafter, she contributed no capital to the venture and did not share to any extent in the profit thereof. The contract may be regarded therefore as one in which at the outset the taxpayer had the sole beneficial interest.

5. Although he had a letter of intent from a finance house agreeing to advance him the total purchase price on the properties of $80,000 the taxpayer, after exchanging contracts, went somewhat cold on the venture. He and his companies were encountering liquidity problems, there was the question of servicing the $80,000 loan after settlement (this did not take place until October 1968) and the cost of restoration had to be faced up to. Having failed in two attempts to off-load the properties the taxpayer confided his troubles to B and asked him if he could find someone who would be interested in buying an interest in the venture. B responded by introducing S, a solicitor, who agreed to pay the taxpayer $10,000 as consideration for the right to receive a one-half share in the net profit arising on resale of the properties.

6. After S had agreed to join the venture a draft deed of trust was drawn up between the taxpayer and his wife (described therein as ``proposed Registered Proprietors'') and S (described as ``the Beneficiary''). After reciting that the proposed registered proprietors had contracted to purchase the subject property in their own names but for and on behalf of themselves and the beneficiary as tenants in common the deed went on to provide:

``1. The said proposed registered proprietors do hereby acknowledge as follows:

• (a) That they will hold the property more particularly described in the schedule hereto of which they are the proposed registered proprietors in trust for themselves and the beneficiary in fee simple, as tenants in common.
• (b) That the proposed registered proprietors undertake upon demand to transfer to themselves and the beneficiary in fee simple as tenants in common the land and hereditaments referred to in the schedule hereto.

2. On the sale of the said property the proceeds of sale and any profit or loss in respect of same are to be distributed in equal one half shares between the said proposed Registered Proprietors and the said Beneficiary.

3. In calculating the profit or loss in respect to the purchase and sale of the withinmentioned property the following payments shall be taken into account in ascertaining the profit or loss:

• Interest on money advanced, cost on renovating, stamp duty, legal expenses, repairs, agreements to vacate, together with all other right and proper charges against the venture.''

7. The draft deed of trust was not executed and, as an alternate method of securing S's interest in the venture, his name was substituted on the contract for that of the taxpayer's wife (although contracts had already been exchanged) and the conveyance of the subject property was taken in the names of the taxpayer and S as tenants in common.

8. After purchase the title to the property was converted to Torrens, the houses were renovated, 17 were sold and four were transferred to S subject to the existing mortgage. The profit on the venture after the sale of all but four of the houses was $27,464 (taxpayer's share $13,732) and a summary of the cash position at that stage showed that S was indebted to the taxpayer to the extent of $3,941. The taxpayer sued to recover this amount and on 25 August 1971 in terms of a consent award S undertook to pay $2,000 (inclusive of costs) in settlement of the claim.

9. In his personal return of income for the

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year ended 30 June 1969 the taxpayer included an amount of $12,191 as his share of profits in the joint venture to that date and recorded in his balance sheet the amount of $10,000 received from S as ``Capital introduced''. The balance sheet entry was explained by the note which is reproduced in para. 1 of these reasons.

10. It is clear from the material before us including the 1969 joint venture return that the amount of $10,000 was not taken into account in calculating the individual profit due to the joint venturers on the undertaking.

11. Mr. Raphael, for the taxpayer, submitted that the amount of $10,000 of which the sums totalling $8,500 were part represented a capital receipt being the proceeds of the sale of a contingent right to future profits. His submission was that the amount of $10,000 was not income according to ordinary usages and concepts (sec. 25(1)) and did not fall within either limb of sec. 26(a).

12. There is no doubt that when the taxpayer exchanged contracts on 3 January 1968 he was taking the first step in a profit-making undertaking or scheme the profits arising from which would properly fall for assessment under the second limb of sec. 26(a). On one view of the matter therefore it could be said that the amounts totalling $10,000 should be taken into account in calculating the taxpayer's share of profit from the scheme.

13. The other view, and the one I adopt, is that the scheme was originally conceived as a sole venture and, before settlement of the purchase of the properties, was converted into a joint venture on the introduction of S to the scheme. On this approach the sum of $10,000 stood, so far as the taxpayer was concerned, dehors the venture proper; it was an amount received as consideration for the taxpayer's grant to S of the right to a one-half share in the profits of the venture which had been put on foot, but only just, by the exchange of contracts.

14. When the taxpayer was obliged, for financial reasons, to abandon his original concept of a sole venture, he, in effect, made available to S part of the prospective fruits expected to flow from his entrepreneurial enterprise in securing, at a very reasonable cost, the 21 cottages ripe for redevelopment and resale and in arranging mortgage finance to cover the whole of the purchase price. The reward of $10,000 which he received arose out of what was, ab initio, essentially a business deal and bears the character of income in the taxpayer's hands. The amounts totalling $8,500 accordingly represent assessable income under sec. 25(1) and have correctly been taken into account in the calculation of taxable income for the year ended 30 June 1968.

15. For the foregoing reasons I would uphold the Commissioner's decision on the objection and confirm the assessment the subject of review.