Case S24
Judges:KP Brady Ch
JE Stewart M
DJ Trowse M
Court:
No. 2 Board of Review
K.P. Brady (Chairman), J.E. Stewart and D.J. Trowse (Members)
The matter in issue in these references concerns the assessability to income tax of profits made by the taxpayer on the sale of various lots of land stemming from the implementation of a town planning scheme over his land and the adjoining land of other property owners. The references relate to the years of income ended 30 June 1977, 1978 and 1979, and by consent between the parties, were heard together. The taxpayer died in 1981.
2. The taxpayer and his family migrated to Australia from Holland in 1951. He was then 40 years of age. He purchased some two hectares (or five acres) of land at N, which is situated approximately 15 kilometres from the capital city of P, and conducted there a poultry farm operation. In the following year he erected on part of his land a residence which we were told he brought out from Holland. He and his wife had five children and the family lived there until 1973.
3. It seems that the taxpayer was involved in a bad car accident in 1969 and thereafter he could not work, and received the invalid pension. As a result, it seems that the farm operation came to an end, and in a schedule, forming part of the taxpayer's 1978 taxation return, the Commissioner was advised that his last return was lodged in 1968 as he had been a pensioner since that time, and was not in receipt of any taxable income.
4. In 1973 the taxpayer effected a partial subdivision of the two hectares, whereby he sold a fifth-hectare of his land together with the family home constructed thereon. Out of the sale proceeds he repaid mortgage funds borrowed from the bank, and took his family on a trip back to Holland. Upon their return to Australia, the taxpayer built another house for his family on part of the remaining 1 4/5ths hectares, and for ease of identification in the narrative that follows, we shall call that part of the land, B1.
5. It seems that about that same time, i.e. 1974, the local Shire was considering the implementation of a planning scheme for the general area in which the taxpayer's land was located, involving the development of some 300 hectares (or 750 acres). Meetings were held by the Shire to acquaint landowners of its proposals, and in due course a formal scheme was drawn up and approved by the appropriate governmental authority, and was gazetted on 5 March 1976. The basis of the scheme, so far as owners of subject land were concerned, was that their land was resumed by the Shire, and in exchange they were offered alternative lots of land zoned for residential purposes (called ``replacement lots'') and cash to a value equalling that of their previous land holding. If they rejected the offer, they could make a claim for compensation under the Public Works Act.
6. An expert witness, the deputy city planner for the Shire, gave evidence for the taxpayer and described the purpose of the scheme in the following terms:
``The purpose of the scheme is for the council to act as the land developer and main co-ordinator of a number of individual private land holdings. Usually it is put together at the request of either the land
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owners or from council approaches to the land owners, or a combination of both. Often individual land owners do not have the resources or the expertise to put together subdivision proposals for their own land, either through lack of experience or because the individual land holdings would not make it economically viable, but putting a number of them together would. This is really what happened in this case.''
7. Accordingly, in a letter from the Shire dated 21 October 1976, the taxpayer received an offer to exchange his old broad acre lot for six separate residential lots, which we have designated A1-A6 and having the following values:
$
Lot A1 9,690
A2 9,747
A3 9,120
A4 9,690
A5 9,348
A6 9,006
The above values total $56,601 and, as the taxpayer's 1 4/5ths hectares were calculated by the Valuer-General's Office to have a value of $57,870, the shortfall of $1,269 was paid by the Shire to the taxpayer in cash. The taxpayer notified his acceptance of the Shire's offer on 2 November 1976. It might be well to interpolate here that the above six residential lots formed almost in their entirety a portion of the 1 4/5ths hectares, perhaps amounting to one-quarter of that land area, although some of the new lots crossed the former boundary lines to form part of the adjoining land. The significant fact is that, once the 1 4/5ths hectares were resumed, they lost their identity as a separate lot.
8. The scheme was subsequently amended, which amendment was gazetted on 25 March 1977, to permit the sale of land which was not passed over to the previous owners, and landowners such as the taxpayer who had accepted the ``replacement lots'' were given the opportunity to purchase the new lots, called ``additional lots''. Accordingly, a further offer was made to the taxpayer under date of 29 November 1976, for him to purchase five further lots, which we have designated B1-B5, at the following values:
$
Lot B1 11,950
B2 10,234
$
Lot B3 11,602
B4 10,918
B5 10,804
-------
$55,508
-------
The taxpayer accepted the above offer on 2 December 1976.
9. Two points of an explanatory nature should perhaps be made at this juncture. As Lot B1 was the lot on which the taxpayer had built the second family home (see para. 4), it seems that the Shire erred in offering it as an ``additional lot'' instead of a ``replacement lot'', and we were informed by an officer of the Valuer-General's Office who gave evidence for the taxpayer that it was not unusual for an offer by a shire to landowners under a development scheme to precede the date of the gazettal notice.
10. It seems that the taxpayer put the above lots, both ``replacement lots'' and ``additional lots'', up for sale soon after the various titles to the blocks were made available to him. It seems further that he determined the sale reserve prices from prices obtained at the first auction of the subdivisional land held on 27 November 1976. Blocks which were excluded from sale by him were Lot B1, on which the new family home was built, and Lots B2 and B5, which he had agreed to sell some years back to two of his three sons and of which further mention will be made shortly. Of the ``replacement lots'', it was agreed between the parties before us that four lots, A1, A2, A3 and A6, were sold within 12 months of the taxpayer's acceptance of the Shire's offer, i.e. they were sold on various dates during the calendar year 1977. It was further agreed that Lot A4 was sold on 12 March 1978, and Lot A5 was sold on 29 April 1979. In regard to the two ``additional lots'' which were put on the market, i.e. Lot B3 and Lot B4, both were sold in early 1977 within two months of the taxpayer's acceptance of the Shire's offer.
11. It seems appropriate at this stage to furnish further details of the sales of land made to the taxpayer's two sons, A and B. That arrangement went back in time to 1973-74 when the taxpayer was requiring funds to build the family's second home. Each of the two sons offered to make available to their father the sum of $3,000, and it was further agreed that each payment would be by way of a deposit for
ATC 259
the purchase of a block of land forming part of the father's 1 4/5ths hectares. The consideration for A's block was agreed at $8,000 and that of B's $7,000, which amounts were considered to be their then approximate values based in large measure upon sales of similar land in the adjoining suburb of D. (The differential in price as between the two sons seemingly acknowledged past financial assistance offered to the parents by B.) It seems to have been appreciated by the sons that the identity of the block which each agreed to buy would need to await the completion of the subdivision.12. Following upon the taxpayer's acceptance of the ``additional blocks'', which included the blocks earmarked for the sons, formal contracts of sale under date of 7 February 1977, were executed by the father as vendor and by A and B (and their respective wives jointly) as purchasers. It seems that the sale prices as agreed by the parties were not accepted by the State Taxation Department in levying duty on the transfers, and the two blocks were in fact revalued at $19,000 and $18,750 respectively. Upon A and B appealing against the amounts of the imposts, the values of both blocks were reduced to $10,000 per block.
13. The sales of the blocks made by the taxpayer produced excellent profits. The ``replacement lots'' were sold for a total value of $128,200 as compared with their ``cost'' of $56,601, and the two ``additional lots'', Lots B3 and B4, which were put on the market were sold for $38,800 as compared with their purchase price of $22,520. Additionally, the taxpayer passed over to his two sons considerable potential profits on the lots sold to them; also, it seems clear that his own residence would have appreciated markedly in value as a direct result of the subdivision.
14. Mention of the profits derived by the taxpayer necessitates some comment of the values adopted by the Shire on the various lots, as those values represented the subdivisional land's cost to the taxpayer. As early as September 1974, it seems that the Shire requested ``before'' and ``after'' values from the Valuer-General's Office for the land covered by the scheme. (It seems that ``before'' value is the estimated market value of proposed subdivisional land as broad acres whilst ``after'' value is the estimated market value of the subject land in its final developed form, i.e. after all roadworks and earthworks, etc. have been carried out.) Values prepared as at 1 September 1974, were supplied by the Chief Valuer in response to the Shire's request, but those were not used by the Shire as the basis of its two offers to landowners, due apparently to a discernible rise in land values in P, and more particularly in the general area of N, during the time that the scheme was being prepared.
15. On 11 February 1976, a request was made by the Shire of the Valuer-General's Office to provide ``new increased values'' of the subject land and the response given by the Chief Valuer a month later was to increase the values previously supplied by 15%. The values as adjusted were considered to be the values of the subject land as at the date of gazettal of the scheme, i.e. 5 March 1976, and were said to be based on sales of comparable land in the neighbouring area. Similarly, the value of $57,870 placed on the taxpayer's 1 4/5ths hectares lot was deemed to be its value as broad acres as at gazettal date. Accordingly, the above ``after'' values became the basis for the receipt by the taxpayer of Lots A1-A6 inclusive and for Lots B1-B5 inclusive, although, in the case of the latter lots, the Shire saw fit to further increase their value as exchange lots by imposing a levy of $1,000 per lot to cover costs associated with its administration of the scheme.
16. Evidence given by a valuer from the Valuer-General's Office was to the effect that an increase by way of a flat percentage was unusual, and evidence given by two other expert witnesses, who were associated with selling the subdivisional land, stated that the values were far too low; certainly it is clear that they approximated only half the sales prices obtained less than 12 months later.
17. It seems that the above transactions first came to the Commissioner's notice upon lodgment of the taxpayer's 1978 return. In a schedule attached to that return, details were given of the various sales, with the exception of Lot A5 which was not sold until April 1979. The profits made on the sales of Lots A1-A4 inclusive and on Lot A6 were said to be capital gains, and thus free of tax. As regards the ``additional lots'', the comment was made in the schedule that Lot B1 was not sold but was used by the taxpayer to build his own home on it. Also, a loss was shown as being incurred on the sale of Lots B2-B5 inclusive, and it is clear
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that this was due to the low prices agreed between the taxpayer and his two sons for the two lots sold to them. The Commissioner did not accept the treatment accorded to the profits by the taxpayer, and in issuing an assessment for the 1977-78 year he treated as assessable income the profit of $14,901 made on the sales of Lots B3 and B4; also, he disallowed the losses on the sales of Lots B2 and B5 to the two sons, on the basis that they were not at arm's length.18. Turning now to the ``replacement lots'', it seems that those subsequently came under the further scrutiny of the Commissioner, for approximately a year later he issued a further amended assessment wherein he taxed the profit of $21,009 made on the sales of Lots A3 and A4, comprising $9,310 and $11,699 respectively. Concurrently with that assessment, he raised an assessment under sec. 167 in respect of the 1976-77 year of income, and assessed the profits of $33,291 derived on the sales of Lots A1, A2 and A6. Also, he raised another sec. 167 assessment for the 1978-79 year whereby he taxed the profit of $10,519 made on the sale of Lot A5. In further amended assessments which issued on 17 January 1984, the profits made on Lots A1 and A2, and totalling $22,425, were transferred out of 1976-77 taxable income to that of 1977-78.
19. The taxpayer, and more recently the Public Trustee in his capacity as executor of the taxpayer's estate, objected against the Commissioner's various actions in increasing the taxpayer's assessable income, and, following upon the Commissioner's disallowance of the objections, the matter has come before this Board for review.
20. At the hearing, both the taxpayer and the Commissioner were represented by counsel.
21. The reg. 35 statement which was forwarded to the Board reflected the Commissioner's contention that, of the profits made on the eight blocks sold publicly, an amount of $57,502, reflecting the profits made on Lots A1-A3 inclusive, Lot A6, Lot B3 and Lot B4, was assessable under sec. 26AAA, or in the alternative under sec. 26(a) (now included in the Assessment Act as sec. 25A(1)). As regards the profit of $22,218 made on Lots A4 and A5 (which it will be recalled were sold more than 12 months after the taxpayer accepted the Shire's offer), it was the Commissioner's view that they were assessable under sec. 26(a).
22. At the hearing, counsel for the Commissioner informed us that his submissions, in so far as they bore upon sec. 26(a), were concerned only with the first limb, i.e. his arguments would be based on the proposition that the property which gave rise to the profits was acquired by the taxpayer ``for the purpose of profit-making by sale''; in other words, he did not consider that at any relevant time the taxpayer was carrying on any profit-making undertaking or scheme. The issues before us were further narrowed when counsel for the taxpayer informed us that he would not be proceeding with his client's claim for deduction of the losses alleged to have been made on those ``additional lots'' which were sold to the taxpayer's two sons.
23. In contending that the profits on the land sales constituted assessable income of the taxpayer, the Commissioner based his case in the first instance on the applicability of sec. 26AAA, due no doubt to the irrelevancy under that section of the taxpayer's purpose in acquiring the land.
24. Section 26AAA was introduced by Act No. 165 of 1973 and came into effect on 11 December 1973. The charging provision is to be found in sec. 26AAA(2), which is in the following terms:
``Where -
- (a) a taxpayer has purchased property after 21 August 1973 and before the commencement of this section or purchases property after the commencement of this section; and
- (b) the taxpayer has, whether before or after the commencement of this section, sold the property or an interest in the property before the expiration of the period of 12 months from the date on which he purchased the property,
then, subject to this section, the assessable income of the taxpayer includes any profit arising from the sale of the property or interest.''
Thus the section provides for the inclusion in assessable income of a profit made within a specified time. Not being concerned with the purpose for which a property was acquired, it is
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immaterial whether it was acquired for sale at a profit or otherwise (seeF.C. of T. v. Werchon & Anor 82 ATC 4332 at p. 4336).
25. The word ``property'' has a wide meaning in ordinary parlance, and sec. 26AAA(1)(a) extends it further by stating that:
``a reference to property generally or to a particular kind of property includes a reference to an estate or interest in property or in that kind of property, as the case may be.''
The section applies to all kinds of property other than some specific exemptions which are set out in subsec. (5) and need not concern us here. Land is obviously a unit of property, and in fact subsec. (8), which is detailed shortly, contains specific provisions relating to land; accordingly, land comes within the ambit of the section.
26. Extended meanings to the notion of ``purchase'' are given in subsec. (1)(d) and (1)(e) and a further extension is given to it, also to what constitutes a sale, in subsec. (1)(f) which states:
``if property is transferred from a person or persons to another person or persons in exchange for other property or without consideration, the transfer shall be deemed to constitute the sale of the property by the first-mentioned person or persons and the purchase of the property by the second-mentioned person or persons.''
27. Relevant also to the case before us is the deeming provision contained in subsec. (1)(g) which states:
``if land is sold to or purchased by a person in pursuance of a contract, the date on which the contract was made shall be deemed to have been the date on which the land was so sold or purchased.''
In the instant case, it would seem that the Shire, in its capacity as the transferor of replacement Lots A1-A6, should be regarded as ``a person'' for the purposes of the subsection (see
Hirst v. West Riding Union Banking Co. Ltd. (1901) 2 K.B. 560 at p. 563, also
Durban Turf Club v. I.R. Commrs (1949) 16 S.Af. T.C. 196 at p. 204).
28. Accordingly, through the operation of sec. 26AAA(1)(f) we consider that the taxpayer purchased ``the replacement lots'', and through the operation of sec. 26AAA(1)(g) we consider that the purchase was made upon the taxpayer's acceptance of the Shire's offer on 2 November 1976. Also, it is our view that the taxpayer, in accepting the Shire's offer to take those lots in exchange for his old lot, purchased them at the values detailed in the Shire's letter of offer dated 21 October 1976. We do not accept the argument advanced by the taxpayer's counsel that the only function of those values was to preserve landowners' equities when the apportionment was made by the Shire of the new lots. In the circumstances that appertained in the instant case, those values became the base figures against which future accretions in the lots' values could be measured. In that connection, it is well to recall that the replacement land which the taxpayer acquired from the Shire was residential lots and, whilst they were carved in large part out of the old broad acre lot, they were not identical with it; also, their character as fully-serviced residential blocks, with sewerage and underground power, was markedly different from the land in its pre-subdivisional form as broad acres. The fact that the new replacement lots involved no outlay on the taxpayer's part is not a bar to seeing the values at which he accepted them as their cost.
29. We examined the various authorities cited by the taxpayer's counsel to support his argument that there was no cost to the taxpayer in his acceptance of ``the replacement lots'' and therefore there could be no profit; however, we found them far from conclusive of the contentions he advanced and, indeed, all the decisions in the cases he cited depended very much upon their own facts. (We interpose here that an objection was raised before us by the Commissioner's counsel that it was not open to his opponent to use that argument, viz. that there was no cost involved to the taxpayer, as the issue was not raised in the taxpayer's notice of objection. At the hearing, we deferred consideration of the matter; however, in the circumstances that surround the case, the major one being the death of the taxpayer, we have overruled that objection, and now so advise.)
30. We consider, too, that the fact that the taxpayer acquired the six ``replacement lots'' in circumstances where he had little choice but to accept them is no bar to the operation of subsec. (1)(f); we believe that the decision of the Supreme Court of Tasmania in
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Brettingham-Moore v. F.C. of T. 81 ATC 4658, following upon dicta expressed in
Henty House Pty. Ltd. (in vol. liq.) v. F.C. of T. (1953) 88 C.L.R. 141 at p. 155, and
Coburg Investment Co. Pty. Ltd. v. F.C. of T. (1960) 12 A.T.D. 242 at pp. 248 and 249, puts that view beyond challenge.
31. We consider that the application of sec. 26AAA to the profits made on the sale of the two ``additional lots'', B3 and B4 (those having been sold within 12 months of their purchase) is even more clear cut than with ``the replacement lots''. It will be recalled that those lots were ``purchased'' in the generally accepted sense of the word on 2 December 1976, and at values which the taxpayer agreed to when he affixed his signature to the terms of the offer. Within two months of that date he sold them at prices which produced a profit of $14,901. As was the case with the profits on ``the replacement lots'', we consider that sec. 26AAA(2) operates so as to increase the taxpayer's assessable income by the profit so derived.
32. Were it not for the application of sec. 26AAA, we do not consider that the profits made on the sale of four of ``the replacement lots'', A1, A2, A3 and A6, would have been assessable. In other words, we do not believe that the Commissioner's alternative basis for taxing those profits by the implementation of sec. 26(a) is valid. Accordingly, we consider that the profits of $22,218 derived on the sales of Lots A4 and A5, which were made subsequent to 12 months after their acquisition, do not attract tax. For it is our view that those lots, as with the other ``replacement lots'' were not acquired by the taxpayer ``for the purpose of profit-making by sale''. True it is that he sold them and made profits upon their sale, but we consider that he did not acquire them for that purpose. In fact, we do not believe that he had any specific purpose in mind at the time he acquired them; he simply took them as a result of the Shire's resumption of his original broad acres.
33. It was the evidence of a number of witnesses called by the taxpayer's representative that the taxpayer, having acquired those lots, sold them as quickly as possible simply because he did not want them. It seems understandable to us that such was in fact the case, for it is well to recall that he was then a pensioner of some 66 years of age, and doubtless would have experienced great difficulty in paying the holding charges such as rates associated with continuing to own the new lots. The delay in selling Lots A4 and A5 did not spring from a desire to obtain the best possible price but arose through features inherent in the lots which rendered them less attractive than the other many excellent blocks that were carved out of the original 300 hectares and put up for auction in late 1976 and throughout 1977.
34. In making his submissions, counsel for the Commissioner contended that the taxpayer could have accepted cash from the Shire instead of taking the ``replacement lots''; the fact that he preferred to take the lots lent support to the proposition (so the argument ran) that he intended to make a profit out of the scheme so far as it affected him. However, we do not consider that the facts support that argument. From a reading of the text of the scheme which was adduced in evidence (see Exhibit K), it seems to us that cash was offered by the Shire only to adjust the value of the new lots with the value of the land which it, the Shire, was resuming. The terms of the transferee's acceptance which the Shire appended to its letter of offer lend support, we consider, to that view; the words of acceptance were detailed as follows:
``I/We accept the above offer on the conditions as here set out and as enumerated in this letter of offer, but desire to forgo lot/lots in order to avoid a cash settlement to the Shire of... for the difference and the Shire of... is to pay to me any adjusted balance due. The lot/lots which I/we desire to reject are No/s.... valued at $...
Signed.....''
In the taxpayer's case a payment of $1,269 was required to be made by the Shire to him to equate the two values; the situation could just as easily have arisen that a payment was required by the taxpayer. We confess that we found the relevant clauses of the scheme's text somewhat obscure in regard to the matter, but we find some comfort for our view in the fact that no landowner ever did take cash instead of land.
35. In our belief, the taxpayer did not take the replacement land, as the Commissioner's counsel contended, ``because he wanted to make a profit out of it''. He simply took the
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land, we consider, because he had no other practical alternative. He was a passive recipient, no greatly different to the taxpayer inF.C. of T. v. Miranda, 76 ATC 4180, where it was held that rights to new shares accrued simply by virtue of the shareholding and therefore profits derived on their sale (under the then prevailing law) were not assessable in the hands of the taxpayer. Accordingly, we hold that sec. 26(a) has no application to the profits made on the sales of Lots A4 and A5.
36. Because of the view we take that the profits made on the sales of ``the additional lots'', B3 and B4, are assessable under sec. 26AAA, it is not necessary for us to consider whether sec. 26(a) would have applied had those lots been sold outside the statutory period of 12 months. For completeness, however, we would state our view that the section would have so applied because, unlike the situation with ``the replacement lots'', the taxpayer exercised a choice in electing to purchase ``the additional lots'' and it seems to us that it is that action which reflects a strong indication on his part to make profits out of them - why else would he have bought them? For, contrary to what the taxpayer's counsel submitted, his client did not simply accept the ``additional lots'' as part of the exchange of the original broad acres lot. It is true that his entitlement to purchase them stemmed from his acceptance of ``the replacement lots'', but his participation in the Shire's scheme did not depend upon the exercise of that entitlement; he would equally have been a participant had he not purchased them. Of relevance, too, in this context is the fact that the taxpayer, at the date of purchase, had knowledge of the very attractive prices obtained by other lot owners at the auction held on 27 November 1976; in fact, the evidence was that he attended that auction and determined the sales prices of his own land based on the sales experience obtained at that auction. The conclusion is therefore inescapable that he purchased them for the purpose of making profits from them.
37. For the reasons given above, we uphold the Commissioner's decisions on the objections to the extent that all of the profits derived on the sales of ``the replacement lots'' are assessable under sec. 26AAA, save those two lots which were sold outside the 12 months statutory period which we hold to be non-assessable both under sec. 26AAA and 26(a). We also hold that the profits made on the two ``additional lots'' which were sold on the open market are likewise assessable under sec. 26AAA. Accordingly, on the lot descriptions that we have used, the profits on Lots A1, A2, A3 and A6, totalling $42,601, are assessable, also the profits on Lots B3 and B4 amounting to $14,901. As previously indicated, we regard the profits on Lots A4 and A5 as being free of tax.
Claims allowed in part
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