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Case L57

Members:
HP Stevens Ch
CF Fairleigh QC
JR Harrowell M

Tribunal:
No. 1 Board of Review

Decision date: 26 September 1979.

H.P. Stevens (Chairman): The issues in this reference relate to the ``grant'' of an option by an Australian syndicate in respect of subdivisional land, the ``exercise'' of that option by a non-resident and the Commissioner's action in increasing the stated sale price of $50,000 to $250,000 and including the additional $200,000 in the assessable income of the syndicate. The issues concern the proper application of sec. 36, 36A, 92, 105AA and 226(2).

2. In its return of income the taxpayer company gave as the nature of its business ``Land Development'' and, during the relevant periods, its major shareholder/director was one A who was also associated with individuals B and C. At relevant times the taxpayer was a member of a group of companies - the D group - whilst companies associated with B and C formed respectively the E and F groups. The D, E and F groups of companies ultimately became the members of the Australian syndicate referred to above. Other parties to the transaction concerned were three New Hebridian companies - G, H and J respectively - a firm of Vila solicitors (of whom K was a member), a firm of Australian solicitors (of which L was a member) and M, another director of the taxpayer company. For ease of reference the respective parties (apart from the taxpayer) are set out hereunder:

  • A - an individual, a major shareholder/director of the taxpayer and closely with both D - a group of companies of which the taxpayer was a member - and the syndicate's operations.
  • B - another individual associated with the E group of companies.
  • C - another individual associated with the F group of companies. 
      D -       groups of companies associated

      E -       with A, B and C respectively

      F -       and members of the syndicate

                      in question.

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      G - first Vila }      associated

             company }      with grant

      H - second Vila}      and

             company }      exercise

      J - third Vila }      of option

            company  }      referred to.
  • K - member of firm of Vila solicitors.
  • L - member of firm of Australian solicitors.
  • M - another director of the taxpayer and also closely involved in the syndicate's operations.

3. Evidence before the Board was given by A, L, M, a valuer, an officer of the Council for the area in which the land was situated and officers of the body responsible for the provision of water and sewerage services to the land concerned. Voluminous documentary evidence was also tendered and, from the total evidence, it is possible to draw up a chronological sequence of events. It is proposed in the following paragraphs to broadly follow this sequence, leaving, as far as possible, comments on the oral evidence given until the full sequence has been completed. However it should be said at the outset that, in certain areas, the overall evidence adduced was rather imprecise. The areas concerned will become apparent from a reading of what follows but they mainly involved the situation in relation to the negotiations, etc., that took place in Vila. In this regard, although reference was made consistently to K and (at the request of the taxpayer's solicitors) a notice in terms of reg. 39 had been signed by me, he was not called as a witness and an explanation therefor was not proffered.

4. As indicated in para. 2, A and B were associated. They had been friendly for a number of years and ``had done a number of ventures together in building houses and small things''. As a result, when the opportunity arose in 1968 to acquire two adjoining parcels of land in an area outside of Sydney the subject of extensive developmental activity, A asked B ``whether he wanted to take part in it and his answer was yes.'' This land was accordingly acquired in the joint names of the taxpayer and one of the E group - a certificate of title of 27 April 1970 showing the owners as being the taxpayer as to a three-quarter share and the E group company as to a one-quarter share. One parcel comprised approximately 26 acres and the other approximately 5 acres. On 18 April 1968 an application was made to the relevant Council in respect of a plan for a proposed subdivision of the total area into 154 residential blocks - a receipt for the applicable fees $154.50 being dated 1 May 1968. On 26 September 1968 another application was made, the number of blocks being reduced to 145. This application was considered by the Council on 15 October 1968 and it was resolved to grant Interim Development Consent. An application was then made on 23 October 1968 to the M.W.S. & D.B. for a certificate under sec. 34B of the Metropolitan Water Sewerage and Drainage Act 1924. By letter of 21 March 1969 the M.W.S. & D.B. advised of their requirements including a non-refundable contribution of $44,902 in respect of water and $121,685 in respect of sewerage - this covering the whole 145 lots.

5. On 24 February 1970 the Council was asked, inter alia, to approve of the overall subdivision being done in stages ``owing to the high cost of the 34B Certificate from the Water Board''. This was approved by the Council. In line with the request the total area of land was in fact developed in two stages - see later.

6. As also indicated in para. 2, A and C were associated, having been doing joint ventures ``in other subdivisions''. C (or one of his companies) had purchased land ``which was the subject of a court case in equity''. Apparently following some discussions the taxpayer group ``offered to give him a 25% interest in'' their land ``which was a going concern, for a 50% interest'' in his land. As a result an agreement dated 1 May 1970 was entered into. This agreement was between D, E and F and the objects of the syndicate comprised by the three groups was to, inter alia, subdivide and develop the said land and the capital (and profit shares) was to be in the proportions D 50%, E and F 25% each. Under the agreement a bank account was to be opened for the syndicate styled in a certain manner whilst the taxpayer and the E company (in whose names the land was registered) ``(hereinafter called `the trustee') shall in its own name ostensibly as principal but in reality as trustee and agent for and with the sanction of the Syndicate enter into all contracts and agreements for the purchase mortgage development subdivision management letting advertisement and sale of the said land and for the said land's profitable use... The trustee agrees to hold the said land in trust for the Syndicate and

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for the effectuation of all or any of the objects of the same''.

7. In the syndicate's accounts as at 30 June 1970 the cost of the land was shown as $89,448.69 whilst the only item of expenditure to that date was in respect of roadwork (11 June 1970) $3,000. Further expenditure on roadwork is recorded commencing on 7 July 1970 and, by 19 March 1971, a further total of $122,000 is recorded as having been spent, i.e., total to that date of $125,000 on road construction/roadwork. Of this total $17,000 only was subsequent to 8 December 1970.

8. The linen plan for Stage 1 of the subdivision was submitted to the Council in November 1970 (covering 86 lots - 84 for sale) with the unsubdivided area as lot 87. This was a necessary step in the final approval by the Council and the issue of a new Certificate of Title. The linen was signed by the Council Clerk on 21 December 1970 and a Certificate of Title for lot 87 issued on 26 February 1971. Lot 87 was Stage 2 of the subdivision being the subject of subdivision plans (61 lots for sale) bearing surveyor's date 11 March 1971 (see later).

9. During the course of the case much attention was given to the dates when road construction began and finished in respect of both Stages 1 and 2. In relation to Stage 1 the evidence of a Council officer was that, unless there is a bonding (which did not take place in this instance), a linen plan is not approved until roadwork applicable to that plan is completed. M gave evidence, inter alia, to the effect that the syndicate had liberal terms from its contractors so that there could be a delay between work being done and being paid for. Having regard to this evidence, the amounts referred to in para. 7 and the approval of the linen on 21 December 1970 it seems clear the roadworks applicable to Stage 1 were completed by 21 December 1970. This view is supported by the Lands Department aerial photo of the area bearing date 6 July 1970 which clearly shows as at that date the roads applicable to Stage 1 as having been at least formed. The same photo shows adjoining land with roads formed, sealed and kerbed and guttered.

10. Sometime after the syndicate's bank account was opened an application was apparently made for accommodation and for a Bank Guarantee of $110,000 in relation to the requirements of the M.W.S. & D.B. The actual dates of application and approval were not given in evidence (the report in para. 15 infra would indicate prior to 15 September 1970) but on 11 December 1970 the bank issued a guarantee to the M.W.S. & D.B. for $110,000 ``towards the costs of reticulation of water and sewerage works at Subdivision...'' The syndicate's accounts record a payment of $46,602 to the M.W.S. & D.B. on the same day. Following these events the M.W.S. & D.B. issued a Certificate under sec. 34B of its Act on 16 December 1970 in relation to 145 lots. Thus the amounts of $110,000 and $46,602 relate to the subdivision as a whole and not to individual stages thereof (note comparability of initial amounts in para. 4).

11. After the issue of the sec. 34B certificate the M.W.S. & D.B. drafted its plans in relation to the subdivision as a whole and obviously had to know the syndicate's proposed Stage 2 subdivisional plan. These overall plans bear the draftsman's date as 11.2.71 but this would not be the final date of approval (see para. 17). Work in accordance with these plans did not commence until some months later (see para. 16).

12. In April 1971 A went overseas (24 April - 2 May 1971) and, inter alia, spent approximately four days in Port Vila. According to L's letter of 15 February 1972 to the Reserve Bank A had some discussions and ``during such discussions he disclosed to some of the people with whom he had been dealing certain facts and figures in relation to the'' syndicate's land - these were not disclosed to the Board. ``Certain preliminary negotiations were effected there and then but at the time (A) departed Port Vila for his return, nothing concrete had been settled and no written agreement entered into.''

13. By letter dated 4 June 1971 G wrote to the secretaries of the taxpayer and the E group company in the following terms concerning lot 87:

``We refer to our recent discussions with your company concerning the abovementioned site and advise that my Board of Directors have considered the proposition favourably and instructed me to request from your company a draft option over the subject site.

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We confirm that the option consideration is to be \ca\A500.00 and the term for a period of 3 calendar months with the right to extend on payment of an additional $100.00 for an extra 1 calendar month period. The exercise price is to be \ca\A50,000.00.''

14. During the year ended 30 June 1971 the syndicate sold 38 lots in Stage 1 for $220,750 with a cost of sales of $137,291.27. The balance in the syndicate's accounts as at 30 June 1971 comprised land unsold at developed cost $221,500. The gross figure of $358,791.27 (before being reduced by the cost of sales $137,291.27) was comprised basically of the following items: 

      Cost of land    $85,174.25

      Roadworks       125,000.00

      M.W.S. 
&
 D.B.    46,602.00

      Electricity       6,510.00

      Surveyors         8,400.00

      Water Pipe        2,588.00    $274,274.25

                       ----------   -----------

These amounts, together with some journal entries of 30 June 1971 (including one for $69,309.00 ``accrued development costs''), made up the figure of $358,791.27. No evidence was given concerning the amount of $69,309 as to what items it covered and when the payments applicable to them were made.

15. Two pages of a report by a bank officer dated 5 July 1971 were tendered as an Exhibit - A, in answer to the question ``Having read those documents do you agree that they contain a correct account of what you then told the bank manager'', said ``It would have been correct at that time''. This report, inter alia, states:

``Disposal of the 80 lots comprising stage 1 of the development has not been achieved within the time initially planned, mainly from slow-down in sales which was implemented at customer's direction to off-set a heavy taxation commitment for financial year ended 30 June 1971. Customers are not completely satisfied with the performance of agents handling sale of the lots and have had discussions with well known and active selling agents,..., with the view to employing them to accelerate sales in the current financial year''

(there was in fact no change in agents).

``Reason for guarantee by Bank not cancelling by 31 May 1971, as programmed..., is due to delay by Water Board in preparing necessary plans. Director (A) advised us that plans for reticulation of water and sewerage were now in his possession, having been received from the Water Board about 2 weeks ago. Reticulation of water works is to be commenced in about 4 weeks time and will take approx. ¾ weeks to complete. Reticulation of sewerage will be undertaken immediately after costing has been finalised and approval obtained from the Water Board for the contractors,..., to carry out the work. It is anticipated that the work will commence early August next and will take 4/6 weeks to complete, depending on weather conditions encountered. On this basis, Bank Guarantee $110,000 - outstanding should be cancelled towards the end of October, latest.

Details of estimated expenditure required to complete both stages of the subdivisional project at..., as advised by (A), are as follows: 

Roadworks                                                   $21,000

Electricity                                                  13,000

Survey                                                        6,000

Reticulation of water works                                  20,000

Reticulation of sewerage works                               80,000

                                                           --------

                                                           $140,000

                                                           --------

Which will be financed as under: -

Present balance of account say ...                          $17,000

Add Proceeds sale of 7 lots, settlements

to take place over the next month                            35,000

                                                            --------

                                                             52,000

Proposed loan being sought through solicitors

(of which L member)                                          60,000

                                                           --------

                                                           $112,000

                                                           --------

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Short fall of $28,000 - to be covered by proceeds from sale of further blocks to be sold and/or financial assistance from (C)...''

``Director (A) has requested release of supporting security No. 4(a) in S/S dated 15 August 1970, which will be used as security for borrowing to be obtained from solicitors....

We have been told by Director (A) that it is planned to have all lots sold and settled before the end of October next,* which will substantially reduce their commitment for Land Tax. It is expected that on completion of the project, an amount of $470,000 - will be available for distribution to the joint venture companies and we have been informed that the parties have agreed to lodging $150,000 - at `Call' & /or on I.B.T.D. with us for a period not less than 3 months and possibly us to 12 months.''

  • * A later in his evidence qualified his earlier statement re the correctness of the above in that ``I am not sure which October he is referring to''.

It will be noted that, despite what is set out in para. 12-13, it appears no mention of this was made to the bank.

16. Insofar as the actual water and sewerage work referred to in the above report is concerned the evidence establishes that on 8 July 1971 the taxpayer (A the signatory) offered to construct and, by agreement of 13 August 1971, entered into a contract with the M.W.S. & D.B. to construct the sewerage works to serve the whole subdivision (Stages 1 and 2). It also establishes that the sewer was the subject of two (2) different work orders - the first being commenced on 30 August 1971 and completed on 29 October 1971 with the second being commenced on 30 October 1971 and being completed on 18 November 1971. The water construction work commenced on 5 October 1971 and was completed on 19 November 1971.

17. As for Stage 1 (para. 9) much attention was given to the date when road construction applicable to Stage 2 was completed. The evidence of the officers from the Water Board was that plans for sewerage works would not be released to the construction section unless the roadworks were completed (or at least formed and kerb and guttering in place) without a specific notation being placed on the plans to the effect roadworks had not been completed that the present plans had no such notion and bore the initials of the officer responsible for inspections to ascertain the position concerning roadworks and were dated 12 August 1971. In the circumstances it is considered the roadworks applicable to Stage 2 were completed by that date - the expenditure on roadworks subsequent to March 1971 is recorded as having been paid in November 1971 and January 1972 (total $22,821) but, in view of the credit position, this is not regarded as leading to a different conclusion.

18. By letter of 10 September 1971 the Australian solicitors of which L is a member wrote to the Reserve Bank referring to negotiations for sale of lot 87 to G, to the request for an option to purchase expiring on 31 January 1972 for a consideration of \ca\A500 and requested ``approval for them to enter into the proposed Option Agreement and in due course subject to the exercise of the Option, the Contract for Sale, draft copy of which is annexed to the Option Agreement''. The enclosed draft Option granted to G or its ``nominee an option to purchase... the... property for the sum of Fifty thousand dollars (\ca\A50,000.00) upon'' certain terms and conditions. Clauses 5, 7 and 8 were in the following terms:

``5. In the event of exercise of this Option by you within the time herein limited you or your nominee will execute a Contract for Sale in the form of the draft hereunder annexed marked with the letter `A' and exchange same with our Solicitors (L) within 21 days of the date of the exercise of this option PROVIDED ALWAYS that in the event of your not having effected such exchange of Contracts within that period THEN notwithstanding that you have already exercised this Option, such exercise shall immediately become null and void and you shall be placed in the same position as if you had not exercised the Option within the time herein limited.

7. The Option hereby granted may be assigned by you.

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8. It is a condition precedent to the exercise of the Option hereby granted that any consents or approvals required from any Governmental, Statutory or other Authorities to the granting of this Option or for the sale of the land described in the Contract be first had and obtained.''

The enclosed draft contract of sale was one in the normal terms requiring a deposit of $5,000 with the only special condition stating:

``This Contract is subject to the obtaining of such consents or approvals from any Governmental, Statutory or other Authorities as are necessary PROVIDED ALWAYS that in the event of such consents or approvals not having been obtained within a reasonable time, then either party shall be at liberty to rescind this Contract and the provisions of Clause 19 hereof shall apply.''

19. In support of the application the letter of 10 September 1971 stated, inter alia, that ``both the Option and proposed Contract considerations are considered to be fair market value arrived at by arms length negotiations between the parties'', ``the Vendor Companies and their shareholders have no direct or indirect interest in (G)'' and ``we understand that the Option consideration, Contract deposit, and balance purchase moneys are to be remitted direct from the New Hebrides''.

20. By letter of 14 September 1971 approval was granted with it being stated:

``The above authority is given on condition the option fee amounting to $A500 is brought to Australia from the New Hebrides or other equivalent source and we are furnished with bank confirmation (date, amount and origin) of the receipt of the funds into the Australian banking system.

Should (G) or its nominee wish to exercise the relative option, kindly arrange for your clients to approach us for authority as required by the Banking (Foreign Exchange) Regulations for them to enter into the relative Contract of Sale with the New Hebrides company.''

21. Since at the time (and also during the conduct of this case) the date of approval - 14 September 1971 - was regarded as being of some significance it should be recorded that the syndicate's accounts show that the only actual expenditure in the period 1 July 1971 to 14 September 1971 was $36,390.08 in respect of water. It will be noted this amount was less than the amount accrued as at 30 June 1971 (para. 14, $69,309) whilst, as per para. 16, sewer work commenced on 30 August 1971 and, as per para. 17, the roadworks for Stage 2 had been completed by 12 August 1971 although not paid for until November 1971 and January 1972.

22. L, by letter of 25 October 1971, advised the Reserve Bank that the option fee of \ca\A500 had been received from Port Vila but the Reserve Bank replied on 26 October 1971 reminding the Australian solicitors they required bank confirmation (date, amount and origin) and requesting such confirmation. The Option to G was apparently executed on 26 October 1971 but the document was not placed before the Board (merely the draft as per para. 18).

23. The apparent date of execution, 26 October 1971, has also been regarded as having particular significance and an analysis of the syndicate's accounts show that, in the period 1 July 1971 to 25 October 1971, the only payments made totalled $77,898.29 in respect of water/sewer. This does not allow for accrued costs in respect of the water/sewer and roadworks completed to that date (no relevant details being available).

24. By letter of 2 November 1971 K, acting for his firm, wrote to the Australian solicitors advising that ``we act for (J) and understand that you act for (the syndicate trustee)'' and referring to two documents. The first was a letter from J dated 2 November 1971 indicating it had been nominated by G ``as its nominee under the'' option agreement, enclosing ``a Certificate of our nomination given under seal by (G)'' and hereby giving notice ``that the option is exercised''. The second was a Certificate of Nomination of J by G dated 3 November 1971. K's letter continued requesting ``that your client companies forthwith proceed to obtain approval of the Exchange Control authorities for the companies to enter into the Contract envisaged by the Option'' and referring to the requirements of Clause 5 of the Option, i.e., the necessity to exchange

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contracts ``within 21 days of the date of exercise of option, time being of the essence''. The final portion of the letter said:

``Our client company has requested us to indicate at this stage that notwithstanding the provision of the draft Contract annexed to the Option to Purchase it would prefer that exchange of Contracts proceed on the basis of a deposit of $500.00 only being paid (viz. $500.00 option fee already paid by (G)). If this is the case, would would (sic) have no objection to Clause 1 of the Contract disclosing that the Contract deposit is in fact $5,000.00 such that at the time of exchange of Contracts our client company would be in technical breach of Contract provided in no way same involves a breach of any Reserve Bank regulation.

We feel that this would be desirable so that the full balance purchase moneys could be remitted to Australia in one parcel.''

25. Following the receipt of the above letter L wrote to the Reserve Bank on 8 November 1971 enclosing photo copies of the Certificates of Nomination, J's letter of 2 November 1971 and K's letter of 2 November 1971 and a copy of the draft contract ``this day forwarded to the Solicitors for (J)'' and requested ``that authority be granted for our client companies to enter into the said Contract''. Reference was also made to the final portion of K's letter referred to above. By reply of 22 November 1971 the bank requested the supply of certain additional information/documentation ``to assist our consideration of the matters now placed before us''. This included:

  • (i) an independent professional valuation of lot 87 as at the date the relative option was granted, i.e., about 14 September 1971;
  • (ii) statutory declarations from the individual shareholders of both the taxpayer and the E group company of no interest (direct or indirect) in G or J or any other ``company(ies)/trust(s)/entity(ies) outside Australia including any funds accruing to such company(ies)/trust(s)/entity(ies), or in any side agreements which would have a like effect'';
  • (iii) statutory declaration stating full names and addresses of shareholders in G and J and, if any held as nominee or trustee, relevant particulars; and
  • (iv) full and precise details of circumstances relating to entering into negotiations under which option given.

26. On 22 November 1971 K wrote to the Australian solicitors referring to ``your letter of 8th instant'' (not before Board) and enclosing ``executed Contract of Sale''. Between 1 July 1971 and 21 November 1971 actual expenditure of $133,408.29 had been made whilst there were unpaid amounts accrued in respect of the water/sewer completed 19 November 1971 (para. 16) and the Stage 2 roads (para. 17).

27. During the period 26 November - 4 December 1971 A and M were in Port Vila - according to the Australian solicitor's letter to the Reserve Bank of 15 February 1972 ``our client companies became disturbed'' (following receipt of the letter of 22 November 1971) ``at the delays which would be occasioned by supplying you with the information requested in that letter, such that (A) again visited Port Vila from the 26th November to the 4th December 1971 in an effort to keep the matter on foot''. In evidence M said it was whilst there that he, for the first time, saw the contract of sale and was amazed that there was no provision for reimbursement of the development expenditure incurred by the syndicate in relation to Stage 2 (i.e., lot 87) - as para. 21, 23 and 26 show, whichever date is taken (14 September, 26 October or 22 November 1971), the syndicate had outlaid, or was in the process of outlaying, substantial amounts in developing an area it was selling for only $50,000. M said that he then negotiated with K a verbal agreement whereby the syndicate would be later reimbursed for their expenditure in relation to the development of lot 87. K told him of a Q.C.'s opinion in relation to a tax avoidance scheme, that G and J were part of it and that he (K) could arrange reimbursement.

27A. By letter dated 21 December 1971 the Australian solicitors wrote to the Port Vila firm acknowledging receipt of the ``executed Contract for exchange'' and advising ``that we have not as yet effected an exchange of Contracts because of certain

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formalities which need to be attended to at the Reserve Bank of Australia. Although the Contract is subject to the obtaining of the requisite consents and approvals, we feel that it would be unwise to attend to exchange of Contracts until the Bank's consent to the transaction has been obtained''. Enclosed was a copy of the Reserve Bank's letter of 22 November 1971 and assistance was requested in obtaining the required material from the shareholders of G and J - apparently a copy was not taken on 26 November 1971.

28. An examination of the syndicate's accounts indicates that the last payment made in respect of the overall development was on 8 February 1972 at which date the balance of the Work in Progress Account (including land costs) stood at $393,810.09 (the accrued figure of $69,309 not yet being reversed). By journal entry of 30 June 1972 an amount of $10,000 was added for ``Estimate of amount owing re Electrical Work'' but it would seem clear that by February 1972 the subdivision of 145 lots as a whole had been completed.

29. It will be recalled that the Reserve Bank wished, inter alia, an independent valuation (para. 25) and M requested a firm of valuers (not one specializing or located in the area concerned) to value lot 87 as at 14 September 1971. This valuation was made in December 1971 and, on a broad acres basis, yielded a figure of $50,200. Photographs attached to the valuer's report show land with not a hint of roadworks despite all roads and water and sewerage works having been completed prior to December 1971. The valuer's evidence will be referred to later.

30. On 7 December 1971 the linen plan in relation to the subdivision of lot 87 (see para. 8) was submitted to the Council for their approval. It was signed by the Council Clerk on 15 February 1972 and collected by hand the same day.

31. The Australian solicitors wrote to the Reserve Bank on 15 February 1972 enclosing the valuation (para. 29) and various Statutory Declarations but none in respect of the shareholders in G and J and referring to A's visit in April 1971 and November/December 1971. To this the Reserve Bank replied reiterating the need for the statutory declarations from the shareholders of G and J. These were supplied by letter of 26 April 1972 and the Reserve Bank approval was given on 9 May 1972 subject to the balance of the purchase moneys $49,500 being promptly remitted and confirmation of receipt being furnished. Following this contracts were exchanged on 10 May 1972 - they were in the same form as the draft contracts (deposit $5,000) with no reference to the reimbursement of moneys outlaid by the syndicate in respect of lot 87.

32. It would appear that following a transfer of $A50,916.70 of 24 May 1972 the contract was settled on 31 May 1972 - a copy of the Certificate of Title issued on 26 February 1971 indicating the entering of a transfer instrument of 31 May 1972 on 4 July 1972 (J then becoming the registered proprietor).

33. During the year ended 30 June 1972 all remaining lots of Stage 1 (except for one) were sold for $289,070 and with $50,000 for lot 87 total sales of $339,070 were recorded. The cost of sales applicable to this total figure was $180,683.42 (the portion applicable to lot 87 not being separately shown) and, after the transfer of an amount of $142,080 by Journal entry of 30 June 1972, the balance as at 30 June 1972 was $4,000 (i.e., for the one unsold lot). The Journal entry for the $142,080 figure was in respect of a transfer to Sundry Debtors on account of ``Portion of development costs not applicable to this project - due for reimbursement''. No details as to how this figure - the costs of Stage 2 - was arrived at were given to the Board.

34. By instrument given on 22 June 1972 L and an accountant were jointly appointed ``the true and lawful attorney of (J)'' with ``full power and without any limitations whatsoever to do all'' required ``acts deeds and things with the company's property or affairs''. L acted in relation to the sale of the subdivision by J and his evidence indicates that the first contract of sale was exchanged in August 1972 and the last in June 1973. The total gross proceeds of sale were apparently $467,860 whilst the following expenses were incurred: 

      Land costs and acquisition

          expenses                  $250,900.17

      Development Costs             $142,080.00

      Agent's Selling Commission     $22,922.00

      Project Management Fees         $2,241.00

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No details were given as to how the gross proceeds of $467,860 were dealt with. In relation to the $142,080 this was met by three payments, viz.:

      24 July 1972          $40,000

      13 October 1972       $40,000

      18 December 1972      $62,080

all to a member of the F group - X Constructions Pty. Ltd. The journal entries in the syndicate's accounts on account of ``Disbursements of proceeds from (J) via (X Constructions P/L)'' were for $23,652, $40,000 and $62,080 respectively.

35. In a letter of 24 August 1972 to the Reserve Bank L advised that the first $40,000 had been disbursed ``on account of roadworks and subdivision expenses in respect of the subdivision of the land purchased by'' J and that there would be further amounts remitted on this account ``and we shall await receipt of your written consent before attending to the disbursement of such funds from our trust account''. It was also advised that, when consent was sought for purchasers to contract with J, ``consent for remission of the sale proceeds to the account of (J) with a Bank in the New Hebrides'' would be sought. Approval was sought for the disbursement of the second $40,000 whilst, by letter of 12 December 1972, approval was sought to disburse net sale proceeds of $68,342.99 by making, interalia, the third payment of $62,080 to X Constructions P/L - the necessary authority was given on 15 December 1972.

36. Despite a statement by counsel that ``in due course I will tender the accounts of (J)'' such accounts were never tendered. The figures available (as per para. 34) indicate J would have made a profit of $49,717 for the year ended 30 June 1973 (unless there were other expenses not listed in the above paragraph). In the same year the syndicate returned a loss of $450 - the last lot being sold for $7,000 - whilst the statement of assets and liabilities as at 30 June 1973 revealed a deficiency arising because of ``Accrued Development Expenses - Underground Electricity $7,270'' - apparently part of the $10,000 (para. 28) still unpaid.

37. An interested reader will probably have observed that there has been no reference made to the second Port Vila Company H whilst the Land Cost (as per para. 34) of $250,900.17 does not tie up with an option amount of $500 and a balance of purchase moneys of $49,500. The explanation is simple in that what has been set out above comes basically from the documentary evidence and there is nowhere to be found in the explanations to the Reserve Bank any reference to H. No documentation in relation to H was produced to the Board and its existence and role comes from the evidence of A and M. In the final sentence of para. 27 reference was made to a tax avoidance scheme and it is in this that H has its place.

38. Broadly speaking the scheme called for three Port Vila companies in two of which (G and J) the members of the syndicate were to have no interest. However, in the other company H, the families of the individuals concerned would, via discretionary trust, be interested. Following the grant of an option for $500 to G this would then be nominated by G to H at a figure (around $1,000) allowing G some profit. H would then nominate to J for $200,000 and J exercise the option to acquire lot 87 for $50,000 - the $200,000 when added to the $50,000 plus costs explains the $250,900.17 in the preceding paragraph. As indicated above no documentation concerning H was produced to the Board and it has not been established (certainly not corroborated) that the option was ever assigned or nominated to it, assigned (or nominated) by it to J and H paid by J the $200,000 required. It might be, if a full explanation were given, that any payment to H was made by J out of the proceeds of sale remitted to it (whatever they might have been). However, whilst the documentation only establishes that G nominated J, I am prepared to assume for the purposes of argument in the present case that H did exist and did play the role it was intended to in the tax avoidance scheme devised. Also for the purposes of argument I accept A's evidence to the effect that H advanced the $200,000 to a company in Hong Kong (which was not listed on the stock exchange there), the amount then on lent to a company in Singapore and, with both the Hong Kong and Singapore companies in liquidation, the $200,000 ``lost''.

ATC 440

39. Turning now to the evidence given by the individual witnesses not referred to in preceding paragraphs, it is convenient to deal firstly with that of the valuer whose instructions were ``to value the land on broad acres as an aggregate basis''. He was unaware that the land in question was the subject of Council approval for subdivision or that the syndicate owned the adjoining land and understood his instructions to mean ``on an acreage basis what it would be worth per acre without any subdivision approved or proposed''. Although he said he inspected the property he had no recollection of any roadwork either on the land he inspected or of any ``roads abutting that particular block of land'' nor of any pipes having been laid. It seems clear the valuer was not put in possession of all the pertinent facts relating to lot 87 and, since he agreed that, if he had known all the details concerning the ownership of the adjoining land and the subdivisional approval, he would have adopted an entirely different basis of valuation, I find it unnecessary to say more than that I do not accept his valuation as a proper valuation of lot 87 as at 14 September 1971. Although I do not consider it necessary to adopt the suggestion of senior counsel for the Commissioner to the effect that the valuer looked at the wrong land, I must admit some difficulty in reconciling his evidence with the findings earlier set out in relation to road formation and the carrying out of water and sewerage works (all completed before his visit).

40. Insofar as the witnesses A and M are concerned it is abundantly clear that they were both very experienced people in relation to subdivisions - generally and with particular reference to the area in which lot 87 was situated. As at June 1971 M was interested in about five subdivisions in the area whilst, in answer to a question re statements in the bank report of 5 July 1971, M said ``We had so many properties all over the place and I had about 20 of my own at that time, I cannot recall''. This lack of ability of recall was not infrequent and, during the second day A was in the witness box, my colleague Mr. Harrowell understandably remarked ``I am beginning to wonder whether the taxpayer does have a witness who knows what went on in this period of time''. I am of the clear opinion that there has not been a complete frankness in relation to the transaction at issue by A and M - general statements were made whilst specific statements initially made were altered when it became apparent they could not stand scrutiny - although the evidence of M (given three months after the crossexamination of A) was given in a more open manner than that of A.

41. Apart from a lack of particularity concerning the Port Vila negotiations, etc., there was, in my view, an obvious attempt to obscure the fact that substantial expenditure had been incurred in respect of the development of Stage 2 before the transaction in question took place. In opening, reference was made to the preliminaries, to the obtaining of Reserve Bank approval and to the exchange of contracts following that approval and it was then said:

``The property then of course became the property of (J) and the land was subsequently developed and sold by (J), which made a profit on it, lodged tax returns and so on.''

and, in chief, A when asked ``what the activities of the syndicate were from its commencement on 1 May 1970 until, let us say, September 1971'' answered:

``The development of stage one of the property which we just looked at''

(a reference to the Certificates of Title just tendered).

42. An examination of the exhibits in relation to the Reserve Bank applications leads to the conclusion that it was kept in ignorance of the true facts (ignoring for present purposes the non-disclosure of the existence of H) concerning the state of the land in question with the accountants even writing to L on 13 November 1972 to ``confirm that the amount still owing by (J) to (X) Constructions Pty. Limited in respect of road works and other development expenses on the...Subdivision stands at this day at $62,080.00''. It is difficult to accept this letter as other than a facade since there is no evidence anything was owing by J to X Constructions Pty. Ltd. - rather as the syndicate's accounts show (para. 28) the expenditure had already been paid by 30 June 1972 and the $62,080 was a ``reimbursement'' of this expenditure.

ATC 441

43. It is not for me to conjecture as to why this apparent policy of concealment (or non-revealment) was adopted - although one could hazard a guess that the Q.C.'s scheme was one in respect of land in a true broad acre category (whereas the present land was not) and it was sought to overcome that situation by not revealing the true position in relation to the present land - but merely to indicate it has failed in the light of the evidence available from other sources (not the least being the syndicate's own records) and reflects on the credibility of A and M.

44. I do not propose to examine the further evidence of A and M in detail but merely to indicate some particular aspects:

  • (a) A said re the ``feasibility study'' provided to K in Vila that the authorship could be divided ``between (M) and myself''. On the other hand M said he did not take part in the preparation of any such study although he indicated, with reference to figures required for the syndicate's bank, that ``we would have worked together on the submission to the bank''.
  • (b) M did not know A had been to Vila prior to November 1971, although A was said to have been in contact with him (M also overseas not returning until early June 1971) re the April/May 1971 trip of A, and knew nothing of the steps to be taken before the G option was granted.
  • (c) M did not see any paperwork or the contract until in Vila in November/December 1971 and was ``amazed'' there was no clause in the contract covering reimbursement of expenditure incurred re Stage 2.
  • (d) M did not know J was willing to pay $200,000 for the option and then exercise it and remarked ``We would have sold direct to (J) had we known of their existence''. M gave as ``one of the reasons we went to Vila was to see if we could sell (J) something else''.
  • (e) Whilst in Vila M arranged for reimbursement with K - ``I said to him, we cannot hold up those road works any longer'' - yet he later said he understood A had made an arrangement previously with K and still later indicated that, before Vila, there had been no discussion with A concerning reimbursement. In his evidence A said he did not personally make any arrangements for reimbursement but thought that ``our accountants made that arrangement'' - the accountant not being called as a witness.
  • (f) M agreed the whole object of the exercise ``was to make a profit in Vila for the benefit of your families which would not be taxable in Australia'' - this rather conflicts with selling direct to J as per (d) above - and also agreed ``that apart from tax planning considerations there was no commercial reasons for the joint venture to grant this option'' - A agreed with this latter proposition whilst he also said that he had discussions in April 1971 in Vila ``with a group of legal people there on ways and means of reducing our taxation liability on subdivisional land''.
  • (g) M said when they went to Vila in November/December 1971 he ``had my holiday first'' before seeing K - hardly the action of a party going ``in an effort to keep the matter on foot'' (para. 27).
  • (h) When asked as to whether K was able to make the reimbursement arrangement on the spot M said ``(K) explained to me how (J) was part of our group''. This response evoked the following exchange:
  • ``Our group means his group? - Well, no, the Vila companies, the...
  • Yes, but the our does not refer to you and (A)? - Yes, it does.
  • I see. I beg your pardon. Perhaps you ought to tell us what (K) said? - (K) explained to me, I cannot remember any of the details, but I have...
  • The substance, as best you recollect it? - It was just that we had a Queen's Counsel opinion and that there were 3 companies involved and (J) was one of them.''
  • (i) M did not know that some $140,000 was subsequently reimbursed by J.
  • (j) M did not remember whether arrangement for reimbursement was to cover interest and could not say whether any interest on moneys outlaid was received.

    ATC 442

  • (k) M was not aware that it was towards the end of 1972 before J reimbursed the last of the expenditure concerned and said ``but it does not surprise me''.
  • (l) M agreed it is a great advantage to a subdivider ``to get substantial interest free loans while the subdivision is being brought to sale and sold off''.
  • (m) M agreed that J would have to make a profit on the deal ``if it was going to be an arm's length buyer'' but later, after admitting the $200,000 figure came as a surprise to him, said he had doubts that J would still make a profit as ``I felt that anything over $100,000 would just not be a commercial proposition''.

45. L's evidence was to the effect that his firm acted for the taxpayer as a client, also acted as agent for the Port Vila solicitors on completion of the contract of sale to J and for the resale of the land after subdivision. After the sale to J he received instructions from K and was given co-power of attorney. Other details given by L have been incorporated in the sequence of events set out earlier and his evidence calls for no further comment.

46. The evidence of the officers from the Council and the M.W.S. & D.B. have been incorporated in the earlier paragraphs and it is unnecessary to do more than say they were not shaken in cross-examination and I accept them as witnesses of truth. M agreed in cross-examination with the substance of the later evidence of the Council officer concerning the non-release of a linen prior to completion of roadwork but, since he did not so agree with the subsequent evidence of the M.W.S. & D.B. officers, it follows I have preferred their evidence to that of M.

47. Before dealing with the issues arising it might be convenient to summarize the evidentiary situation using a very broad brush approach with the reservation that I should not be taken as indicating my acceptance that the evidence necessarily establishes for example the existence of H, the validity of the option and the exercise thereof. It is that a syndicate, which had acquired land for subdivisional purposes and which had taken the necessary steps in relation to subdivision of the land as a whole decided, for cost purposes, to undertake the work in two stages. After the roadworks for Stage 1 had been completed and after expenditure in relation to both the subdivision as a whole and Stage 2 specifically had been incurred, the syndicate became aware of a tax saving scheme involving the use of three companies in the New Hebrides. Sometime after becoming so aware and, after more expenditure had been incurred, an option was ``granted'' in relation to the land subject of Stage 2 to the first Vila company which ``nominated'' a second Vila company which in turn ``nominated'' the third Vila company - which third company ``exercised'' the option and completed contracts. Although the exercise price was $50,000 in fact the syndicate and the individuals' family trust (shareholders in second company) received $250,000 plus a ``reimbursement'' of $142,080 development expenditure by the syndicate on Stage 2.

48. It is the Commissioner's view that, in terms of sec. 36(1) and (8), the amount to be included as the sale proceeds in the syndicate's hands in respect of Stage 2 land is $250,000 and not the $50,000 option exercise price. It is also his view that, to the extent of $200,000, there was an ``omission'' of income and the taxpayer is subject to the provisions of sec. 226(2). On the other hand the taxpayer's view is that sec. 36 does not apply with the result that the $200,000 should be excluded.

49. A number of arguments were advanced on behalf of the taxpayer in relation to the assessability of the amount of $200,000 and the share of the taxpayer thereof and I propose to initially set those out, followed by the Commissioner's contentions on the same aspect and my conclusions thereon. The aspects of sec. 226(2) and 105AA will be left until the prime issues have been covered. The particular submissions on behalf of the taxpayer are set out in the following portion of its representative's address:

``The first basic submission I propose to make is that the option is validly granted and was validly exercised, so that if either sec. 36 or 36A applied to the disposal of the land, the only value to be found at the time of its disposal was its market value, that is to say, $50,000.

ATC 443

Secondly, and I would emphasize I will be elaborating in considerable detail on this ground, neither the entering into of the contract by (J) to purchase the land nor the transfer pursuant to that contract was an event which caused sec. 36(1) to apply either by force of itself or by force of sec. 36A.

Thirdly, even if, contrary to my submissions, sec. 36(1) with or without 36A deems there to include the market value of the land, sec. 92 does not include any part of the deemed assessable income in the assessable income of the taxpayer.''

50. In elaboration of the first basic submission it was contended:

  • (i) the option was effectively granted as a matter of fact on or about 26 October 1971 after Reserve Bank approval granted;
  • (ii) the exercise by J subject to cl. 8 of the option was a proper exercise - even if purported to be exercised on 2 November 1971 and J not nominated until 3 November 1971 - reference being made to -
    Bell Bros. & Stewart v. Sarich (1971) W.A.R. 157 In
    re Bridgewater's Settlement, Partridge v. Ward (1910) 2 Ch. 342 ;
    Butterworth v. Kingsway Motors (1954) 2 All E.R. 694 ;
    Jorden v. Money (1854) 5 H.L. Cases 185 ;
  • (iii) at the highest the request for a change in the $5,000 deposit to $500 constituted a variation and not a novation
    Leeman v. Stocks (1951) 1 All E.R. 1043 ;
  • (iv) accepting that not a strict compliance, this merely gave the vendor the right to rescind (
    Brien v. Dwyer 53 A.L.J.R. 123 ) but it did not and, therefore, contract was merely varied;
  • (v) the failure to carry out the terms of cl. 5 of the option merely makes the contract voidable not void -
    Suttor v. Gundowda Pty. Ltd. (1950) 81 C.L.R. 418 ;
  • (vi) the Reserve Bank misconstrued its powers under the Banking (Foreign Exchange) Regulations when in approving the option it advised authority would also be required to enter into a subsequent contract of sale as reg. 8 only applies where rights accrue to non-residents
    Unit Construction Co. Ltd. v. Bullock (1959) 3 All E.R. 831 ;
    T.M. Duche & Sons (U.K.) Ltd. v. Walworth Industries (1962) S.R. (N.S.W.) 163 . The option had created such rights and therefore there was nothing further required;
  • (vii) the option itself was a conditional contract for the sale of land -
    Laybutt v. Amoco Aust. Pty. Ltd. (1974) 132 C.L.R. 57 ;
    Macmine Pty. Ltd. v. F.C. of T. 79 ATC 4133 ;
  • (viii) as an alternative the exercise of the option was the contract and, as this when exercise put in post in Vila -
    Henthorn v. Fraser (1892) 2 Ch. 27 ;
    Bresson v. Squires (1974) 2 N.S.W.L.R. 460 - and, at worst, formed on 3 November 1971;
  • (ix) as at 10 May 1972 there was an enforceable contract which could be made the subject of an application for specific performance; and
  • (x) since the land was subject of an option, the value of the land was affected so that its value is, in effect, the same as if it is certain the option will be exercised. i.e., not more than $50,000 -
    Thomas (No.2) Perpetual Executors v. F.C. of T. (1955) 94 C.L.R. 1 ;
    Hooker Town Developments v. Jilba 48 A.L.J.R. 213 ;
    C. of T. (Qld.) v. Camphin (1937) 57 C.L.R. 127 .

51. With reference to the second submission it was contended that -

  • (a) section 36(1) applies only to a transfer of trading stock (
    Rose v. F.C. of T. (1951) 84 C.L.R. 118 ) ;
  • (b) a contract of sale operates to confer on the purchaser an equitable interest in the property (
    Lysaght v. Edwards (1876) 2 Ch. 499 );
  • (c) at the time the contract is formed the vendor is trustee for purchaser with a lien for the purchase price (corrected to when title accepted by purchaser)
    Chang v. Registrar of Titles 50 A.L.J.R. 404 ;
  • (d) at the time of transfer - vendor bare trustee (after price paid) - so that not a disposition of trading stock itself - merely a transfer of bare legal estate and sec. 36(1) does not apply;

    ATC 444

  • (e) section 36A does not apply in that, although land conceded to be trading stock before the grant of the option, it ceased to be trading stock at either date of grant or date of exercise (
    Westraders v. F.C. of T. 79 ATC 4089 );
  • (f) section 36(1) refers to is or was trading stock but sec. 36A only to trading stock;
  • (g) section 36A only applicable if trading stock at time contract became specifically enforceable;
  • (h) vendors ceased to regard it as trading stock when option exercised by J (it was said this could be adduced from what had been put before the Board and I should say that I do not adduce this as a matter of fact);
  • (i) section 28 is trading stock provision and when right to specific performance comes into existence the land is no longer part of circulating assets (
    Carden's case (1938) 63 C.L.R. 108 );
  • (j) when trading stock sec. 25 brings in amount as assessable income and no warrant for sec. 36 or 36A application
    Wood Preservation v. Prior (1968) 1 All E.R. 364 .

It was indicated that the concept that the granting of an option takes an item out of the trading stock category was not seriously pressed.

52. The third argument accepts the application of sec. 36(1) or 36A and, as an alternative, contends that although sec. 90 requires the calculation of the net income of a partnership (and it was admitted this includes a value determined under sec. 36(8)), sec. 92 only requires a partner to return his individual interest in the net income and this does not include the sec. 36(8) amount. Reference was made to:

In
re Mellor's Agreement (1947) Ch. 615 ;
Commr. of Stamp Duties (N.S.W.) v. Bradhurst (1950) 81 C.L.R. 221 ;
Canny Gabriel Castle Jackson Advertising Pty. Ltd. v. Volume Sales (Finance) Pty. Ltd. (1974) 131 C.L.R. 321 ;
Sharp v. Union Trustee Co. (1944) 69 C.L.R. 539 ;
F.C. of T. v. Everett 78 ATC 4595 .

It was said that there are three kinds of income:

  • Income for accounting purposes
  • Income for trust law purposes
  • Income for taxation purposes (net income)

and that, just as sec. 97 relates the trust law concept of income to the net income concept, so sec. 92 does the same in relation to partnerships. As a result no part of a deemed amount can be assessable income of the taxpayer.

53. It will be noted there were no arguments presented to the effect that, if none of the above three submissions were accepted, then the transaction was not ``not in the ordinary course of carrying on'' the syndicate's business and the market value of lot 87 on the relevant date was not the figure of $250,000 determined by the Commissioner.

54. For the Commissioner it was submitted that sec. 36(1) was the relevant provision - sec. 36A was not relied upon - and that the four requirements of that section were satisfied, viz.:

  • (i) a disposal of property;
  • (ii) that property being trading stock;
  • (iii) that property constituting or constituted the whole or part of the assets of a business; and
  • (iv) the disposal was not in the ordinary course of carrying on that business.

In relation to the separate requirements he argued re a disposal that neither the grant of an option nor the exercise of an option nor the exchange of contracts pursuant to that exercise was a relevant disposition. What the section referred to was the ultimate completion of a contract - here the date being 31 May 1972. Section 36 looks to completed rather than executory contracts: Rose v. F.C. of T. ( supra );
F.C. of T. v. Wade (1951) 84 C.L.R. 105 ;
F.C. of T. v. St. Hubert's Island Pty. Ltd. 78 ATC 4104 .

He also submitted the Reserve Bank had authority to require its approval to both the option and the subsequent contract and there was no valid contract until that was obtained - it could not be enforced by J if no approval - T.M. Duche & Sons (U.K.) Ltd. v. Walworth Industries (supra). In addition he said the terms of the option had clearly not been complied with so that the earliest possible disposition would be the exchange of contracts on 10 May 1972.

ATC 445

55. In relation to (ii) above it was submitted that, in the light of F.C. of T. v. St. Hubert's Island Pty. Ltd. (supra), the land was clearly trading stock of the syndicate as at the relevant date. Also it was, re (iii), clear that the syndicate's business was still being carried on at 31 May 1972 and to a much later date.

56. It was said in relation to (iv) above, after reference to
Pastoral & Development Pty. Ltd. v. F.C. of T. 71 ATC 4177 at p. 4181; (1970-1971) 124 C.L.R. 453 at p. 462 , that this raised a question of fact which should be answered adversely to the taxpayer. In this regard he catalogued various aspects of the evidence which led, in his opinion, to that conclusion but, in view of para. 53 above, I refrain from referring thereto.

57. On the subject of the determination of value in terms of sec. 36(8) - the criteria of sec. 36(1) having been satisfied - it was submitted the onus of showing the figure of $250,000 was incorrect had not been discharged. Once again, in view of para. 53 above, I refrain from setting out the evidence on which this submission was based. I do however refer to the submission in reply to the taxpayer's contention contained in item (x) of para. 50 above. Senior counsel said to adopt the taxpayer's contention would be to desert the language of sec. 36 - the property to be valued is the trading stock and the value is to be its market value. He, inter alia, said:

``It is not surprising the section should speak of market value because the whole purpose is to bring in transactions which have not taken place in the ordinary course of carrying on business; and because extraordinary transactions are being dealt with by the section it is not surprising that an objective test of values - mainly market value - is taken which cannot be effected, in our submission, by any transactions of the taxpayer. They may be transactions, of course, which have contributed to a conclusion that it was not in the ordinary course of business so what you lose with the left hand on the taxpayer's business you win with the right hand. You grant an option so the disposal was not in the ordinary course of business; and you value the property on the other hand. Once you have a finding that it is an extraordinary transaction then the criterion of value has to be fixed as market value independently of any extraordinary transaction by the taxpayer and that is why market value was taken rather than the value to the taxpayer.''

58. With respect to the provisions of sec. 90 and 92 senior counsel, inter alia, referred to the fact that the Income Tax Act ``recognized the general law principle that a partnership is not a legal entity and provides for the distribution of shares of that assessable income to the individual partners'' and submitted that, although the word ``interest'' can have in some contexts (particularly death duty legislation) a different meaning, in sec. 92 it merely means the equivalent to ``share'' and the interest of a partner is to be simply found by looking at the partnership agreement.

59. Turning now to the issues raised by the above opposing submissions I should initially record that, despite the contents of para. 53 above, I have given full consideration to the questions of whether the transaction in question was one not in the ordinary course of business of the syndicate and whether the figure of $250,000 has been shown to be incorrect. It is my opinion that both questions should be answered in favour of the Commissioner's contentions. In view of para. 53 I do not propose to set out detailed reasons for reaching the appropriate conclusions but merely to make a brief comment. On the first point I think the evidence as a whole (and particularly that catalogued in the transcript at pp. 361-367) leads irresistibly to the conclusion that it was not in the ordinary course of business. With regard to the second, the taxpayer's valuer's evidence was completely demolished and nothing subsequently erected to stand in its place to support a valuation of less than $250,000 - in these circumstances, there is no need to rely in any way at all on the position in relation to nearby undeveloped land the subject of a dealing in June 1972 by, inter alia, A and M and I have not done so (otherwise the details applicable thereto would have been set out).

60. Insofar as the first basic submission on behalf of the taxpayer is concerned (para. 49-50) I do not propose to enter upon a discussion of all the technicalities involved as to whether the option was properly exercised.

ATC 446

whether the Reserve Bank misconstrued its powers, whether there was a variation as distinct from a novation, whether the contract was voidable, whether specific performance could be obtained (and the effect of seeking specific performance) and the like. I propose to assume that there was a valid option granted which was properly exercised and consider whether this has the effect on value contended for by the taxpayer's representative.

61. The case of Thomas (No. 2) (supra) concerned an entirely different Act and a completely different set of circumstances. It is one thing to say that the value of a deceased's interest in a partnership for estate duty purposes is affected by option clauses contained in the partnership agreement itself but it is another to say, in relation to sec. 36(1), that the grant of an option (in the circumstances of the present case) yields the same result. I do not think it can.

62. As I understand the submission it is that, since the grant of an option does not constitute a disposal ``by sale, gift or otherwise of the property being trading stock'', then, when such a disposal does take place, a determination of the market value of that property should take into account the option previously granted. If this submission be correct there exists a rather large loophole in sec. 36. However I am unable to accept the submission.

63. It seems clear that, where there is a disposal by way of a contract of sale in the required circumstances, sec. 36(1) and (8) operate on the basis that, in determining the market value of the property on the day of disposal, the contract of sale and the figure specified therein are to be disregarded. Now, if the actual contract of sale is to be put to one side, why should any regard be paid to the option which preceded the contract? In fact is there any option left to which regard can be had? On the evidence it is quite apparent that the matter was to finally proceed by way of a properly executed contract of sale and, once this was brought into existence, the option rights were not to have a separate existence but were to merge into the contract of sale rights. It follows, in my view, that, unlike Thomas' case (No.2) (supra), there is here no existing option to be taken into account.

64. Although I have dealt with this submission on the basis of the option not constituting a disposal I should add that, if the contrary were the position, sec. 36(1) and (8) clearly require the putting to one side for determination of market value purposes whatever it is that effects the disposal. If a contract of sale, then the contract is ignored and, if it is an option, then it is the option that is to be disregarded. As both the option and the contract of sale are within the same income year there is no problem of an amount, on the above basis, being included in the wrong tax year and also no difficulty in holding that the evidence does not establish $250,000 as an unreasonable figure at an earlier date than that adopted by the Commissioner.

65. The same remarks as previously made would also apply in my view if the option were a conditional contract of sale creating, in the words of Gibbs J. in Laybutt v. Amoco Australia Pty. Ltd. (supra) at p. 76, ``a contingent equitable interest in the land'' which was replaced by an actual interest when the contract of sale came into existence.

66. Turning now to the second submission (para. 51) insofar as it involves sec. 36 it is that, since a contract of sale of land confers upon the purchaser an equitable interest in the property, then, when the land is transferred there is no disposal of trading stock but only of the bare legal estate. I do not agree with this submission. Section 36(1) and (8), as already indicated, apply, inter alia, where there is a disposal by sale and it is a normal incident of such a disposal (for land and other property) that there be a formal contract of sale. If the submission be correct then the section could never operate where a disposal, not in the ordinary course of carying on business, is made by contract of sale. However, in my view, the decision in Rose's case (supra), dealing with a case where only an interest in property was being transferred to the person's two sons, does not carry with it the implication that the same result flows where what is to be transferred is the entirety of the ownership of the property concerned. I find support for this conclusion in the case of F.C. of T. v. St. Hubert's Island Pty. Ltd. (supra).

ATC 447

67. In that case a somewhat similar submission was made. It was dealt with in the following terms by Mason J. at pp. 4115-4116:

``The respondent then submitted that sec. 36(1) has not application to a disposition of the bare legal estate in property, that it cannot apply to a disposition of the legal estate in property the beneficial interest in which is already held by the transferee. In support of this submission the respondent relied on the observations of Lord Diplock, with whom the other members of the House of Lords agreed, in
Ayerst (Inspector of Taxes) v. C. & K. (Constructions) Ltd. (1976) A.C. 167 , at pp. 176-180 . There it was held that when a company was ordered to be wound up under the Companies Act 1948 (U.K.) the effect was to divest it of `the beneficial ownership' of its assets within the meaning of sec. 17(6) of the Finance Act 1954 (U.K.) since it could not use them for its own benefit. See also
Shaw Savill and Albion Company Ltd. v. Commr. of I.R. (1956) N.Z.L.R. 211 : cf.
Franklin's Selfserve Pty. Ltd. v. F.C. of T. 70 ATC 4079 at pp. 4089-4090; (1970) 125 C.L.R. 52 , at pp. 70-71 , where Menzies J. held that a company which owns shares beneficially in another company does not cease upon its liquidation to own those shares beneficially. It is unnecessary to examine this apparent conflict of opinion in order to resolve the issue which arises on the respondent's submission. It is sufficient for me to say that the language of sec. 36(1) is wide enough to embrace a transfer, executed by a liquidator on behalf of a company in the course of voluntary winding up, of its assets to a sole shareholder in satisfaction of its rights as a shareholder and creditor, even on the assumption which I am prepared to make that the company cannot be regarded as the beneficial owner of those assets.''

Jacobs and Murphy JJ. agreed.

68. If sec. 36(1) is applicable then there is not a situation within sec. 36A and I do not propose to deal with the second submission as it affects that section. I might add that, apart from the aspect of a contract of sale on its execution operating to reduce the vendor's interest so that from that date the vendor and purchaser both had interests within sec. 36A, I would find some difficulty in accepting that something that is before the execution of a contract of sale trading stock should, simply upon execution, cease to be trading stock. This, if correct, would cause some difficulties in relation to the trading stock provisions where a contract lapses, etc., raising such issues as to whether there has been in the year of lapse an acquisition of trading stock and, if so, at what cost.

69. The final submission to be considered under this section is that set out in para. 52. Restated it is that if, contrary to the earlier submissions, sec. ``36(1), with or without 36A, deems there to include the market value of the land, 92 does not include any part of the deemed assessable income in the assessable income of the taxpayer''.

70. Whilst the analysis made in relation to the position pertaining to trust estates was in order I did not quite follow how it was said to lead to the same result for partnerships. In relation to trusts there is the situation that not all beneficiaries are presently entitled whilst there is, or can be, the interests of remaindermen to be considered. Thus it is not surprising that a current beneficiary's share of the net income of a trust estate should not always be the same as the application of a particular proportion to that net income would yield. Also, in terms of Div. 6, a trustee is assessable on that part of the net income of the trust estate that is not included in the assessable income of the beneficiary. However there is a fundamentally different legal position in respect of partnerships with each partner having an interest in each and every part of the partnership assets and with no remaindermen situations. Thus there is no necessity for a provision in Div. 5 to deal with the residues that can arise under Div. 6. Nor for the term ``individual interest in the net income of the partnership'' in sec. 92(1) to mean anything other than the prescribed proportion as set out in the particular partnership agreement concerned.

71. Even if the terms in Div. 5 and 6 were the same the context would support a different meaning but, of course, the terms are not the same. As indicated above, sec. 92(1) uses the term ``individual interest''

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whilst sec. 97(1) refers to beneficiaries ``presently entitled to a share of the income of a trust estate'' - although sec. 97(2) does use the term ``individual interest'' in relation to the exempt income of the trust estate.

72. Reference was made to the case of F.C. of T. v. Everett (supra) and to the remarks of the members of the Federal Court whose judgment is under appeal to the High Court (heard but decision not yet given). I refrain from referring thereto except to mention that the position there is more complicated than here in that a trust of a share in a partnership was involved and the beneficiary of that trust was not to be regarded, for the purposes of the Act, as a partner in the relevant partnership - thus Div. 6 as well as Div. 5 was involved with Everett being assessable in particular circumstances, e.g., per Bowen C.J. at p. 4600:

``If it is greater, then it is clear that there is a part of the net income of the partnership for tax purposes to which Mrs. Everett is not entitled under the assignment and on which she should not be taxed but upon which Mr. Everett should be taxed.''

Having regard to his Honour's previous remarks Mrs. Everett's share is calculated under Div. 6 with Mr. Everett being assessed on the requisite amount under the same Division. There is no suggestion that without Div. 6 the same result would follow.

73. Finally on this aspect it should be remarked that, as I understand the submission re sec. 92(1), it would, if correct, apply to all situations where the net income differs from the partnership law income. Thus, if claimed repairs were disallowed as capital expenditure, depreciation claims reduced and the like, there would equally, as for the present case, be an amount not assessable either in the hands of the partners or anyone else. The submission, therefore, has wide application.

74. Turning now to the submissions made in relation to sec. 226(2), the taxpayer's representative argued that -

  • (a) the partnership was the ``taxpayer'' who omitted sec. 36 income and therefore the maximum penalty sec. 226 imposed was $2;
  • (b) if the taxpayer company was the ``taxpayer'' referred to in sec. 226 then there had been no deliberate omission because it had returned what it considered to be its share of the partnership income;
  • (c) the section dealt ``with a failure to disclose income and not with a disclosure of income at the wrong figure'' - although it was conceded ``I am unable to find any authority on this point'';
  • (d) the section was ``directed to those wilful persons who deliberately do not include an amount of income or do not disclose those facts sufficiently to enable you to ascertain income''; and
  • (e) if the section were held applicable, then the Board should ``consider in reducing the penalty'' the fact that when a valuation was called for it was ``believed that the appropriate valuation date was 14 September''.

On the other hand senior counsel for the Commissioner said sec. 226 clearly applied (referring to Case 19,
12 T.B.R.D. 128 and Case 10,
14 T.B.R.D. 68 ) and submitted that as three-quarters of the additional tax statutorily imposed had already been remitted by the Commissioner no case had been made out for any further abatement.

75. I do not intend to deal individually with the arguments (a) to (e) set out above. I accept the general submissions on behalf of the Commissioner and merely comment in relation to points (d) and (e) that nothing was disclosed in either the syndicate's or taxpayer's return concerning the Vila transaction and the valuer was not placed in possession of all the particulars he required to make a proper valuation as at 14 September.

76. The final issue relates to sec. 105AA in respect of which no submission was made in the taxpayer's representative's address. Senior counsel for the Commissioner similarly made no submission merely leaving it ``to the board to do what it considers fair and reasonable in the context of the Act and in the light of its decision on the rest of the reference''. In reply the taxpayer's representative said:

``If the Board sees its way as a matter of law to extend the time under sec. 105AA, and having found that conclusion, which

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I am prepared to concede may well not be within the Board's powers, I would urge you in the circumstances of this case to extend the time.''

77. In the objection against the Div. 7 assessment, issued on the same date as the amended primary assessment including the amount at issue, it was claimed that, if the amount at issue was properly assessable ``the Commissioner should in accordance with the provisions of Section 105AA determine a further period in which the Company may declare a dividend in order to make a sufficient distribution''. There is no indication that, apart from the particular ground of objection referred to, any formal request in terms of sec. 105AA was made to the Commissioner and refused by him. In the circumstances I am prepared to extend the views expressed by me in Case K57,
78 ATC 551 at p. 564 and hold that the Board does not have the jurisdiction to consider the claim in the present case.

78. For the above reasons I would uphold the Commissioner's decisions on the objections and confirm the assessments, both primary and Div. 7, for the year ended 30 June 1972.

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