Williams Property Developments Limited v. Commr. of I.R. (N.Z.).
Judges:Jeffries J
Court:
Supreme Court of New Zealand
Jeffries J.: Williams Property Developments Limited (throughout referred to as ``the appellant'') is appealing against a decision of the Taxation Review Authority in favour of the Commissioner of Inland Revenue (throughout referred to as ``the respondent'') delivered on 27 March 1975. The manner in which this appeal comes about will emerge from the following outline of the appellant and the facts.
The appellant commenced life as Abel Properties Limited with incorporation in 1960. It then was a subsidiary in a group of companies bearing the surname of the founder Mr. A.D.P. Williams. No doubt in line with group policy it changed its name to the above. Although Mr. Williams, in evidence before the Authority, said that the companies in the group over which he had control were ``virtually all brothers and sisters in the one family'' the facts do not reveal an equality of treatment of the siblings. At least a big brother of the appellant was Williams Parking Centre Limited (later it substituted ``City'' for ``Parking'' and throughout referred to as ``Williams Centre'') which was the principal owner and developer of land in the city of Wellington situated between Lambton Quay and lying upwards and southwards to Boulcott Street on the west side of Plimmer Steps, an established landmark in the city. The appellant is concerned with property development but it has not in fact been extensive, or really independent of a fraternal company. A schedule of transactions in land was produced before the Authority and since incorporation there have only been nine which is indicative of the limited extent of its trading. A marked feature of its purchases is that they were to oblige a fraternal company rather than independent trading. It has only statutory officers and no employees. It is in reality a ``shell'' company. One of its nine purchases is the land in question in this case as I shall shortly outline.
Williams Centre built a parking building with frontage on Boulcott Street and an entrance off Gilmer Terrace which is a blind street off Boulcott Street. Williams Centre had sufficient land remaining to contemplate the erection of a high rise hotel, but abandoned that scheme in favour of a similarly constructed office and retail complex. A precise figure representing the area of land owned by Williams Centre at this site was not given, but it was in the vicinity of 40 acres. After the parking building was completed but before the office block was commenced, in August 1967 No. 4 Gilmer Terrace (throughout referred to as ``the said land'') reached the market. The said land adjoined on one boundary at its rear the land already owned by Williams Centre and was far too valuable to that company and its proposals to allow it to pass to another. The purchase price paid then was $48,000 and Williams Centre apparently did not have the cash and was prevented by an existing debenture trust deed
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from placing second mortgages on after acquired property. The appellant stepped in and took title as registered proprietor. At the time of purchase there was erected on the said land a two storey concrete block of flats containing five units. This building was demolished and in October/November 1970 the said land was transferred to Williams Centre at its then book value and was utilised in the office and retail complex. This exercise was repeated in 1968 with No. 2 Gilmer Terrace to the point where the appellant took an option to purchase but relinquished the option in favour of another Williams company and Williams Centre ultimately purchased it and also incorporated that land in the new complex. I accept in the appellant's favour that there was more than an element of fortune in the said land coming on to the market when it did, especially as No. 2 Gilmer Terrace had yet to be purchased, but for the reasons I will outline hereafter its final resting place could never seriously have been in question.In 1973 the respondent had occasion to examine the accounting records of the appellant and associated companies in the group. In the course of that examination the respondent's inspectors discovered that a recent valuation of the said land placed its value at $82,808 in excess of the purchase price paid by Williams Centre to the appellant upon purchase. For the year ended 31 March 1971 the appellant returned a loss of $46,987. The respondent acting on the authority of sec. 102(3) of the Land and Income Tax Act 1954 transmogrified that loss into a taxable income of $36,832 yielding $8,212.31 income tax in the following manner:
Loss as returned $46,987
Less: Assessed profit on
sale of the said
property $82,808
Sundry other losses
disallowed (not in
dispute) $1.101
-------
$83,819
-------
Assessable Income *$36,832
-------
Income Tax $8,212.31
- * I have taken the calculation from the Authority's decision and it will be noted there is an arithmetical error which can be corrected later.
The appellant through its tax consultant protested, and took its case to the Taxation Review Authority. Before that tribunal and in this Court the issue is whether the land transferred by the appellant was ``trading stock'' within the meaning of the definition contained in sec. 102(3) of the Act which stated as follows: -
``For the purposes of this section the term `trading stock' includes anything produced or manufactured, and anything acquired or purchased for purposes of manufacture, sale, or exchange; and also includes livestock; and also includes any other real or personal property where the business of the person by whom it is sold or disposed of comprises dealing in such property or the property was acquired by him for the purpose of sale or other disposal.''
The words I have emphasised comprise the two limbs of the subsection which the respondent invoked. The Taxation Review Authority in a lengthy decision in which the evidence given at the three day hearing (not exclusively connected with this case) was carefully scrutinised found that the respondent was justified in his assessment as ``... the property was acquired... for the purpose of sale or other disposal.'' being the second limb of the subsection. In view of that finding it did not make a further finding on the ``dealing'' limb and I am now invited by both counsel to do that in this judgment.
The appellant has brought the appeal to this Court by way of Case Stated pursuant to sec. 43 of the Inland Revenue Department Act 1974. Because the thrust of the case before the Authority, and subsequently its decision, related to the second limb of the subsection I will adopt a course which sometimes finds favour in the law, but not capriciously, of disposing of the second first.
Counsel for the appellant and respondent raised matters of fundamental approach concerning, respectively, the onus of proof, and the extent to which an appellate Court should disturb a finding of fact in a lower Court, or tribunal.
I deal first with the appellant's point on the onus of proof. Mr. Patterson argued that an inference founded on the second limb of sec.
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102(3) of the Act can only stand if the facts established before the Court can support a finding that the purpose of the acquisition was to resell. Where, and he submitted it applied to this case, there is no direct evidence of a reselling purpose, the matter depends on inference. There is no presumption, requiring rebuttal by the taxpayer, that the property is acquired for the purpose of sale. There is no onus on the taxpayer to convince the Court that its purpose in acquiring a particular property was not to sell it. The relevant section at the time was sec. 20 of the Inland Revenue Department Amendment Act 1960 (now sec. 36 of the Inland Revenue Department Act 1974 and unchanged) which stated as follows: -``On the hearing and determination of any objection, the objector shall be limited to the grounds stated in his objection, and, subject to the provisions of subsection (2) of section 234 of the Land and Income Tax Act 1954, the burden of proof shall be on the objector.''
Notwithstanding the apparently unambiguous language of the statute Mr. Patterson submitted there is a new appraisal by the Courts which began with a dissenting judgment of Barwick C.J. in
Steinberg v. F.C. of T. 75 ATC 4221 at p. 4227, which stated:
``When the facts relating to the acquisition of the property are evidenced before the Court, the question is whether on those facts the necessary inference of purpose can be drawn. The evidencing of the facts and the inability to draw that inference from them, in my opinion, satisfies in this case the onus existing on the taxpayer. If, as I have said, those facts, including those the Commissioner establishes, do not warrant the inference of the requisite purpose, assessment based on the first limb of sec. 26(a) cannot be supported. The taxpayer will have discharged the onus on him whether or not the Court accepts his evidence of some purpose of acquisition outside the scope of sec. 26(a).''
Section 26(a) is the Australian equivalent of sec. 102(3), and sec. 190(b) is their equivalent of our sec. 36 of the Inland Revenue Act 1974 which although not in precisely the same statutory language is very much the same in intent. It seems to me that the learned Chief Justice moves the emphasis from the plain words of the statute, first, to the evidence, and then to the less definite area of inferences. Within two months of Steinberg's decision the High Court returned to the point in
Gauci and others v. F.C. of T. 75 ATC 4257 and only the Chief Justice was common to both Courts. In Gauci by a majority the appeals were allowed, and the view of Chief Justice Barwick on the onus of proof prevailed. With respect to that particular decision of the High Court I think the New Zealand Courts might follow the wrong lodestar by adopting the majority in Gauci. For myself I respectfully accept without qualification the following extract from the minority judgment of Mason J. at p. 4261 in that case as setting out the true position: -
``The Act does not place any onus on the Commissioner to show that the assessments were correctly made. Nor is there any statutory requirement that the assessments should be sustained or supported by evidence. The implication of such a requirement would be inconsistent with sec. 190(b) for it is a consequence of that provision that unless the appellant shows by evidence that the assessment is incorrect, it will prevail.
I am unable to discern any basis for declining to give effect to sec. 190(b), according to its terms. Nor, for that matter, does it seem to me that the provision, understood according to its terms, operates unjustly in cases which turn on sec. 26(a). There is nothing inherently unfair in a provision which places the onus on a taxpayer to prove his case when the purpose for which an asset was acquired depends so much on his intentions and on circumstances of which he, rather than the Commissioner, has comprehensive knowledge.
In Steinberg v. F.C. of T. 75 ATC 4221, at p. 4226, Barwick C.J., who held that the profits on the disposition of the land at Wanneroo did not fall within sec. 26(a), expressed the view that no inference can be drawn as to the existence of a sec. 26(a) purpose when the subsequent disposition is pursuant to a compulsory acquisition and that in the absence of evidence of such a purpose there is no foundation for an assessement based on the subsection. The Chief Justice was alone in expressing this view and in my opinion it should not be
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applied in circumstances where the evidence as to the taxpayer's intentions is equivocal.The crux of the matter is that when in a sec. 26(a) case an appellant seeks to overcome the onus created by sec. 190(b) by adducing evidence as to his intentions with a view to establishing the purpose of the acquisition was not a sec. 26(a) purpose and that evidence is not accepted, he has not discharged the onus which he bears. At best, from the appellant's viewpoint, the evidence stands in a situation in which it is equivocal, neither establishing a sec. 26(a) purpose nor denying the existence of such a purpose. At worst, the judge may, in the circumstances, be able to infer the existence of a sec. 26(a) purpose. In either event the appellant fails to discharge the onus and his appeal fails.''
The second preliminary point was raised by Mr. Mathieson for the respondent and he submitted that before the Inland Revenue Department Act 1974 appeals were governed by sec. 28 of the Inland Revenue Department Amendment Act 1960 which allowed only an appeal on a question of law. With an appeal permitted on fact in certain instances, of which this case is one, what scope does this Court have to review findings of fact? Apparently there is no reported case in New Zealand concerned with taxation settling this point. For myself I think it is similar to a civil appeal to this Court from the Magistrate's Court on questions of fact. Questions of fact in such a case are to be determined in the manner outlined in
Benmax v. Austin Motor Co. Ltd. [1955] A.C. 370. I adopt the valuable distinction of Viscount Simonds L.C. ``.... between the perception and evaluation of a fact''. Lord Reid in the same case expressed his view in the following words from p. 375: -
``[T]he trial judge has seen and heard the witnesses, whereas the appeal court is denied that advantage and only has before it a written transcript of their evidence. No one would seek to minimize the advantage enjoyed by the trial judge in determining any question whether a witness is or is not trying to tell what he believes to be the truth, and it is only in rare cases that an appeal court could be satisfied that the trial judge has reached a wrong decision about the credibility of a witness. But the advantage of seeing and hearing a witness goes beyond that: the trial judge may be led to a conclusion about the reliability of a witness's memory or his powers of observation by material not available to an appeal court. Evidence may read well in print but may be rightly discounted by the trial judge or, on the other hand, he may rightly attach importance to evidence which reads badly in print.''
I go back to Gauci's case (supra) and another extract from the judgment of Mason J. which seems to imply the application of the Benmax case. After referring to the findings of the lower Court there on credibility of witnesses the learned Judge at p. 4261 said: -
``These findings must be accepted as correct, involving as they did, an assessment of the appellants' credibility. They constitute a defect in the appellants' case which is in my view fatal to their success.''
I have already stated that the Authority decided the issue before it on the second limb of sec. 102(3) known as the ``purpose'' test. Before the Authority the appellant called two witnesses namely Graeme John Bringans the General Manager and a director of the Williams Group, and the founder of the group Arthur Denis Pitt Williams. Both witnesses confirmed that Williams Centre could not purchase the said land in 1967 because of a term in a debenture trust deed given by that company prohibiting second mortgages on after acquired property hence the purchase by the appellant. This particular fact appeared to be the central reason why the Authority dismissed the objection. He said,
``The express purpose of the purchase... was to sell or dispose of it to the Parking Centre (Williams Centre) at some time when it was convenient to do so. This finding is supported by the option later taken by the Objector... and the subsequent surrender of that option to enable the Parking Centre finally to take a transfer of that land as well.''
With that finding by the Authority which is really an evaluation of the primary facts I see no grounds for disagreement, except, perhaps, with the choice of the word ``express'', but that does not alter the result. I think there are other
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factors which support that overall finding and I name the following:- 1. The appellant is a ``slave'' company with no true independence or life of its own, and functioning only at the bidding of others for the purposes of others. In those circumstances at the time of purchase it is likely the ultimate destination of the said land was pre-ordained.
- 2. Williams Centre owned about 40 acres adjoining the said land when it was purchased and that results in a kind of commercial inevitability that it would take title ultimately.
- 3. Although the Authority does not make a specific finding on credibility nevertheless to make the finding above quoted he must have rejected the evidence of Mr. Bringans that at the time of purchase no purpose had been decided upon other than to use as a long term investment. For the appeal to succeed his evidence would have to be accepted and that I cannot do because it would involve overruling the Authority on credibility.
As stated earlier both parties have asked me to make a further finding on the first limb which is the ``dealing'' one. I will do so, but briefly. The principal submission of the appellant was that it was not involved in dealing in property at the time the said land was sold. I cannot accept that submission. At one time it was intended to use the appellant as the main developer in the group, but this was abandoned and the reason not given. Nevertheless it continued to trade in properties albeit very sluggishly. To my mind its circulating assets were property. I agree that the objects clause of the Memorandum of Association may not necessarily be final in every case but considerable weight must be given to it when the transactions in property truly reflect some of its stated objects. The raison d'être of the appellant was property development and I concede that a distinction might validly be drawn between a ``developer'' and a ``dealer'', but nevertheless a review of the appellant's activities reveal it as a dealer. A decision had earlier been made that it would not be the main developer in the group and I cannot think of a description that better fits the activities of the appellant than that the business was dealing in property. A further submission was made that if it was found that the business was dealing then the particular transaction was not in the course of any business of dealing in property generally. That submission I also reject. There was nothing which took this particular transaction out of the general theme of the appellant's activities.
The question for determination by this Court is whether the determination of the Authority that the said property was trading stock of the appellant for the purpose of sec. 102 of the Act was erroneous in law or in fact? The Court's answer is no, and the appeal is dismissed.
I allow the respondent $250 costs.
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