GASPARIN v DFC of TJudges:
This appeal from a decision of the Administrative Appeals Tribunal is concerned with the question of derivation of income. When land is sold in circumstances that the proceeds of sale constitute assessable income in the hands of the vendor, is the assessable income derived by the vendor in the year in which a contract for sale becomes unconditional or in the year in which the settlement of the transaction takes place?
The appellant, Francesco Gasparin, has carried on business as a builder and land developer since 1971. He is the taxpayer and the appellant in these proceedings because he was the ultimate beneficiary in a series of three trusts the leader of which had, as a participant in a joint venture, joined in a subdivision of a parcel of land into eighty-eight allotments at Happy Valley to the south of Adelaide.
In about September 1984, Valdarno Pty Ltd, in its capacity as the trustee of the ``Valdarno Trust'', entered into a joint venture agreement with Archer-Boulton Pty Ltd to purchase and subdivide certain residential land at Happy Valley. Shortly thereafter the land was purchased by the joint venturers but a few months later, in January 1985, Archer-Boulton Pty Ltd sold its interest in the land and assigned its interest in the venture to Yancall Pty Ltd. Save for their business relationship, neither Archer-Boulton Pty Ltd nor Yancall Pty Ltd were, at any time, otherwise connected with Valdarno Pty Ltd, the appellant, or any of the companies or trusts in which the appellant was involved.
The ``Valdarno Trust'' was a unit trust and Taroona Pty Ltd, in its capacity as the trustee of ``The Gasparin Investment Trust'', owned all the issued units in the ``Valdarno Trust''. ``The Gasparin Investment Trust'' was a discretionary trust and one of the beneficiaries in its class of beneficiaries was another discretionary trust, ``The Frank Gasparin Family Trust'', of which Crozon Pty Ltd was the trustee. The appellant was one of the class of persons eligible to receive distributions of income and capital pursuant to the terms of both discretionary trusts.
Following upon the acquisition of the land, the joint venturers proceeded with their plans for the establishment and approval of a residential subdivision of the eighty-eight allotments. At the same time, they were active in their attempts to sell the proposed allotments. By the time the plan of subdivision was approved on 25 June 1985, the joint venturers had already entered into contracts of sale with various purchasers in respect of seventy-three of the eighty-eight allotments. Each contract was expressed to be subject to and conditional upon ``the acceptance, deposit and registration of the plan of subdivision in the Land Titles office on or before 30 July 1985''. Each contract further provided that settlement was to be effected within 14 days of the issue of separate certificates of titles for the separate allotments. Separate certificates of title in respect of each of the eighty-eight allotments were issued by the Land Titles office on 27 June. It was common ground that all conditions precedent had been satisfied and that, in every respect, each of the contracts for the sale of the seventy-three allotments had become unconditional prior to 30 June 1985.
By the close of business on 30 June 1985, contracts in respect of nine of the seventy-three allotments had been settled. The remaining sixty-four allotments, the contracts for which
ATC 4481were all settled in the following financial year, were treated by the joint venturers in their books of account for the 1985 financial year as ``closing stock on hand'' for both accounting and income tax purposes. The adjustment to the appellant's assessable income for the 1985 financial year resulted from the respondent's treatment of the contracts of sale for the sixty- four allotments. The respondent formed the opinion that because the contracts had become unconditional in the 1985 year, the sixty-four allotments had been converted from trading stock to ``sales''. Having regard to the terms of the resolutions of the different trusts with respect to the distribution of income in the 1985 financial year, it is common ground that if the arguments of the respondent are correct, then the adjustments made by the respondent to the appellant's assessable income for that year are also correct. The Administrative Appeals Tribunal found in favour of the respondent and the appellant now appeals to this Court from that decision.
The Tribunal concluded: first, that the land was trading stock (this was not in dispute), secondly, that when the contracts of sale became unconditional in the 1985 financial year the allotments ceased to be trading stock and thirdly, that the sale prices of the allotments had to be brought to account as assessable income in the same financial year to balance the reduction of trading stock. Relying upon the decision of the High Court in
J Rowe & Son Pty Ltd v FC of T 71 ATC 4157; (1971) 124 CLR 421, the Tribunal said:
``Stripped of its own peculiar features, this case is, in reality, no different from that of a Department Store which permits account customers 30 days before payment becomes due... Indeed, I am satisfied that on a finding that the land in the instant case ceased to be [the joint venturers'] trading stock on and after 25 June 1985, that is really the end of the applicant's case.''
The appellant complains that this analogy is incorrect. Unlike a sale of goods, where property has passed and a debt has become recoverable, the appellant argued that the issue of ``derivation'' requires the proceeds of the sale of land to be treated differently. The proposition advanced is that income from the sale of land is derived, either when the purchase price for the land becomes a debt owing to the vendor and recoverable by the vendor, or when the purchase price is received by the vendor, whichever first occurs. The case for the appellant rests, therefore, primarily on the assertion that the sale prices of the allotments of land, which are the subject of these proceedings, did not become recoverable debts until the settlement of each transaction.
The question of when a taxpayer derives income is one of law. Accounting evidence may be of assistance to the Court but ultimately it is for the Court to decide. Dixon J. (as he then was) explained it in
Commr of Taxes (SA) v Executor Trustee and Agency Co of South Australia Ltd (Carden's case) (1938) 63 CLR 108 at 151-152 in these words:
``The question whether one method of accounting or another should be employed in assessing taxable income derived from a given pursuit is one the decision of which falls within the province of courts of law possessing jurisdiction to hear appeals from assessments. It is, moreover, a question which must be decided according to legal principles.''
Henderson v FC of T 70 ATC 4016 at 4019; (1968-1970) 119 CLR 612 at 648 per Barwick C.J.)
The courts have discussed the concept of ``derivation of income'' from time to time over the years and in
FC of T v Australian Gas Light Co 83 ATC 4800; (1983) 52 ALR 691, a Full Court of this Court, comprising Bowen C.J., Fisher and Lockhart JJ., acknowledged that ``[m]any tests have been propounded and many expressions adopted by the Courts in attempting to state when income is derived'' (ATC 4804-4805; ALR 697). The Full Court then went on to give several examples, some of which afford a measure of assistance in arriving at a conclusion in this appeal.
For example, the fees of accountants are derived when they have matured into recoverable debts: Henderson v FC of T (supra). Mr Robertson Q.C., counsel for the taxpayer, placed reliance on the use of the word ``recoverable'' as an indicator that the debt must exist (in a legal sense) before there can be a derivation. In summarising the effect of the decision in Rowe's case (supra), the Full Court said that ``[t]he income of a trading business is derived when its stock is sold and a debt created''. After referring to these and other examples the Full Court went on to say:
``As signposts they indicate that invariably something more than provision of goods or services by the taxpayer is required. It is necessary to determine whether the consequence is that a debt has been created or whether the taxpayer is obliged to take further steps before becoming entitled to payment. It may often be possible to reach the proper conclusion by the application of these tests if the circumstances of the taxpayer are unexceptional.''
(ATC 4805; ALR 698)
The circumstances of the two taxpayers in FC of T v Australian Gas Light Co were, however, quite exceptional. Both supplied gas and charged for it on quarterly meter readings, but readings of meters and subsequent accounts were staggered over different days throughout the quarter. As a result, as at 30 June in any year, there were customers who had received and consumed gas but had not paid for it and would not pay for it until they had received an account. The Commissioner argued that the value of the gas that had been consumed as at 30 June should be treated as assessable income of the taxpayers in that financial year. He submitted that the taxpayers had done all that was required of them under their obligation to supply gas and that the property in the gas had passed from the taxpayers to the customers. In rejecting these arguments, the members of the Full Court were influenced by the fact that there were conditions precedent to the making of a demand for payment - the taxpayers first had to read the customers' meters and then had to give each customer due notice of the reading and render an account for the amount due. These factors led the Full Court to conclude:
``The consequence of the exceptional manner in which the taxpayers operate is that as at 30 June in each year their claims against customers for current liabilities for gas supplied had not matured into recoverable debts.''
(ATC 4806; ALR 699)
FC of T v Australian Gas Light Co was distinguished in
Barratt & Ors v FC of T 92 ATC 4275; (1992) 107 ALR 385, a case dealing with the derivation of fees for pathology services. The taxpayers had argued that, because of the provisions of ss 35 and 36 of the Medical Practitioners Act 1938 (NSW), their fees were not recoverable debts when the bills were rendered as the legislation provided that no action or suit for recovery of the fees might be commenced until after the expiration of six months from the rendering of the bill and only then if the patient had not exercised his or her rights to have the bill reviewed.
Gummow J. (with whom Northrop and Drummond JJ. agreed) commenced his consideration of the subject of derivation in these terms:
``No doubt a debt that is presently recoverable by action generally will be an amount `derived' in the relevant sense by the creditor. The creditor will have a present right to receive the amount in question, something both earned and quantified, without the presence of any element of contingency or defeasibility.''
(ATC 4281-4282; ALR 393-394)
His Honour then proceeded to consider the decision in FC of T v Australian Gas Light Co and concluded that it:
``... is an illustration of a statutory regime having the effect that until various conditions precedent are satisfied no debt comes into existence. That being so, it is a short step to decide that there is, at that stage, no derivation of income by the prospective creditor.''
(ATC 4283; ALR 395)
His Honour did not see the provisions of the Medical Practitioners Act as stipulating conditions precedent to the existence of any debt. Rather, he viewed them as ``impediments to enforcement'' (ATC 4283; ALR 396) and concluded that there was, therefore, a derivation as and when bills were rendered.
Difficult though the question of derivation can sometimes be, one matter is certain! It is essential to have regard to the contractual terms that govern the relationship between the relevant parties. In this case, as I have already mentioned, settlement was to be effected within 14 days of the issue of titles. At settlement the vendor was required to deliver to the purchaser an executed memorandum of transfer which (save for the purchaser's acceptance) was to be in registrable form; at settlement it was also necessary for the vendor to give to the purchaser an unencumbered certificate of title for the relevant parcel of land. Contemporaneously with the occurrence of these events, a purchaser then, but only then, became liable to pay the unpaid purchase price.
Ruddenklau v Charlesworth (1925) NZLR 161, Salmond J. laid down a basic principle with respect to a vendor's right to recover the unpaid purchase price of his land. His views were later quoted with approval by Dixon J. (as he then was) in
McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457. Salmond J. said:
``As a general rule, on the failure or refusal of a purchaser to complete an executory contract for the purchase of land the vendor is not entitled to sue for the purchase-money as a debt. He is entitled merely to sue for specific performance or for damages for the loss of his bargain. It is only when the contract has been completed by the execution and acceptance of a conveyance that unpaid purchase money may become a debt and can be recovered accordingly... The sale of land is in this respect similar to the sale of goods. In the case of goods sold and delivered, and of goods bargained and sold, the property in each case having passed to the buyer, the seller's remedy is to sue for the price. But if under any executory contract the buyer wrongfully refuses to accept the goods the seller's only remedy is an action for damages. The general rule, however, that in an executory contract for the sale of land the vendor cannot sue for the price is excluded whenever a contrary intention is shown by the express terms of the contract.''
It was not suggested that there was any such contrary intention in any of the contracts with which this appeal is concerned.
Dixon J. repeated these views in the course of making some general observations in
Automatic Fire Sprinklers Pty Ltd v Watson (1946) 72 CLR 435 at 463-465, a case that was concerned with a contract of employment and a question of wrongful dismissal.
Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245 was a case that dealt with a contract for the sale of a home unit and the liability of the guarantors of a defaulting purchaser. The vendor had sued and obtained an order for specific performance. When the purchaser failed to comply with the order, the vendor sued the guarantors who had guaranteed jointly and severally the performance of the terms and conditions of the contract ``including the payment of all moneys payable'' under it. The relevant contract called for the balance of the purchase price to be paid ``upon settlement'' but settlement had never taken place: there had been no conveyance or any tender of title. Hence, it was held that the balance of the purchase price had not become a debt payable by the purchaser and, as no liability had been incurred by the purchaser, the guarantors were not liable to pay an amount equivalent to the balance of the purchase price. Referring to the views of Dixon J. in McDonald v Dennys Lascelles Ltd, Mason C.J. said:
``The general rule... is that a vendor of land cannot sue for the price before the contract is completed by conveyance, unless the price is expressed to be payable on a fixed day, not being the day fixed for completion. Here the balance of the purchase price was payable `upon settlement'. Settlement has not taken place and there has been no conveyance of the property sold.''
Land will, of course, in appropriate circumstances be brought to account in financial statements as trading stock:
FC of T v St Hubert's Island Pty Ltd 78 ATC 4104; (1978) 138 CLR 210. That was not disputed in the circumstances of this case and it led, Ms Branson Q.C., counsel for the respondent, to submit that what was to be determined was the correct method of treating that trading stock in the books of account and income tax returns of the joint venturers. She referred to and relied upon the remarks of Gummow J. in Barratt's case (supra) at ATC 4282; ALR 394:
``But it is well to bear in mind that what is being sought is a method giving, for each year of income, a substantially correct reflex of the true income of the taxpayers, having regard to what Fullagar J called the truth and reality of the situation:
Ballarat Brewing Co Ltd v FC of T (1951) 9 ATD 254 at 257-258; (1951) 82 CLR 364 at 369.''
On this basis the respondent contended that, as a matter of truth and reality, the allotments of land ceased to be trading stock during the 1985 financial year. In support of this conclusion Ms Branson pointed to the fact that the contracts were then unconditional and the respective parties enjoyed rights of specific performance; she also relied upon the fact that the allotments were at the risk of the individual purchasers, that the beneficial ownership in them had passed to the purchasers, and that the vendor had become a trustee of them for the respective purchasers: see R.M. Stonham, The Law of Vendor and Purchaser (1964) §1139.
Professor Parsons has considered this subject, saying:
``Generally, an accruals basis taxpayer will derive income, in the form of a receivable, when he has realised an item of trading stock. An item is not realised until property has passed and the passing of property will generally be a condition precedent to a claim to receive proceeds. A reference to passing of property attracts the law's distinction between a passing of property in equity and a passing of property in law. Where an equitable title passes in land - the contract of sale being specifically enforceable - there will presumably be a realisation.''
(See R.W. Parsons, Income Taxation in Australia: Principles of Income, Deductibility and Tax Accounting (1985) § 1462)
Ms Branson further pursued her proposition by arguing that the conversion of the contracts to unconditional contracts meant that the vendors of the land had lost their ``dispositive power'' over the land; the term ``dispositive power'' was one used by Dixon J. to explain the unusual circumstances in
Farnsworth v FC of T (1949) 9 ATD 33; (1949) 78 CLR 504. The taxpayer, a fruit grower, had delivered her dried fruit to a packing company in the 1943 financial year where it was graded, processed and packed. That process involved mixing her fruit with other growers' fruit so that it became possible to identify the fruit of any particular grower. Some of the fruit was sold prior to 30 June 1943 and the balance in the following financial year. The taxpayer received some progress payments in the 1943 year and the packing company made an estimate as at 30 June of the net proceeds which it anticipated would subsequently become available for distribution to the taxpayer on the completion of the sale of the fruit. In assessing the taxpayer for the 1943 financial year, the Commissioner included the amount of the estimate as well as the amount actually received by the taxpayer. Dixon J. was satisfied that the dried fruit.had ceased to be ``on hand''. He said:
``The packing house cannot be treated as a mere agent of the taxpayer holding her stock in trade for sale. The taxpayer's dried fruit had been delivered irrevocably to the packing house upon terms, complicated no doubt, which entitled her to a money sum and left her with no dispositive power over the fruit and no power to direct or control the disposal by the packing house of the fruit either alone or in combination with other suppliers.''
(ATD 40; CLR 518)
The apparent difficulty in reconciling the disposal of trading stock against receivables was overcome by Dixon J. in Farnsworth's case by resorting to an assessment on the cash receipts basis. Rich J. was content to hold that when the taxpayer handed over her fruit she ceased to be the owner of it and the fruit ceased to be part of her stock in trade. On the subject of derivation, however, he was of the opinion that income was derived only when the stock was sold and the proceeds were paid to the owner. Although Latham C.J. was also of the opinion that there was no relevant stock-in- trade he emphasised the fact that the estimate given to the taxpayer was merely that - an estimate; it ``was not a debt owed by any person to the taxpayer'' (ATD 37; CLR 513) and, I would add, not a debt recoverable by the taxpayer.
Thus, whilst it may be true to say of a taxpayer that he or she has lost dispositive power over stock in trade, the unusual facts of Farnsworth's case show that such a loss need not be compensated temporally. However it seems to me that the decision in Farnsworth must be placed in a separate category because of its unusual features; it is not often that one can identify a clear disposal of trading stock and yet be unable to identify a matching receivable.
The mandate of Fullagar J. in
Ballarat Brewing Co Ltd v FC of T (1951) 9 ATD 254 at 257-258; (1951) 82 CLR 364 at 369 (to which Gummow J. referred in Barratt's case) to seek out the truth and reality of the situation is exemplified in two further decisions of full courts of this Court. Both show the need to adopt a practical, commonsense view of the situation. The first is
FC of T v Suttons Motors (Chullora) Wholesale Pty Ltd 83 ATC 4304. In that case the taxpayer was a wholesaler of motor vehicles which it acquired on a ``floor plan'' arrangement with a finance company. The taxpayer, although it took possession of the vehicles, controlled their disposal and had a right to acquire title, nevertheless did not take title from the finance company until a particular vehicle was sold to a member of the public. This led the Commissioner to argue that the vehicles could not be treated as trading stock
ATC 4485for the purposes of the Act until the taxpayer had acquired title. In referring to this decision a subsequent Full Court, comprising Bowen C.J. Lockhart and Gummow JJ. said in
All States Frozen Foods Pty Ltd v FC of T 90 ATC 4175 at 4180:
``In his judgment, Bowen C.J. (at p 185) held that the term `acquired' had a wide range of possible applications and was not to be limited to situations where what had been acquired was the legal title or the right there- to. As a commercial and practical matter, the taxpayer was committed to the ultimate sale of the vehicles to consumers, and it would be artificial and strained to suggest that it had not acquired the vehicles. Thus, the Commissioner's submission as to the limited scope of the term `acquired' was rejected. Toohey and Jenkinson JJ. delivered judgments to the same effect.''
The decision in All States Frozen Foods (supra) is another example of the willingness of the courts to look at the truth and reality of the situation. In that case, the taxpayer was an importer of frozen foods. On 30 June 1985, shipping containers of frozen food were en route by sea to the taxpayer in Australia. In all cases the prices had been prepaid and bills of lading had been delivered to the taxpayer before 30 June. This meant that property in the foods had passed to the taxpayer although the foods were not yet in its possession and, in that sense, not yet on hand. Nevertheless, the Full Court had no difficulty in concluding that ``the goods with which this case is concerned were `trading stock on hand' for the purposes of s 28, notwithstanding that they had not been physically delivered into the appellant's store''.
Standing back and reviewing the realities of the situation it seems to me that one is drawn inevitably to the conclusion that this appeal must be dismissed. I am satisfied that Mr Robertson is correct when he maintains that the sale prices of the allotments are not recoverable until the vendor has done all that is required of him at settlement. But I do not believe that the question can be decided on that issue alone.
The allotments of land were undoubtedly ``trading stock''. They had become the subjects of unconditional contracts of sale; specific performance was available to the purchasers who had become the equitable owners of the allotments. Although legal title and possession remained with the vendor, he had lost his ``dispositive power''. Mr Robertson had argued that the expression ``dispositive power'' as used in Farnsworth's case related to a disposal of property, title and possession. I agree that there were such disposals in Farnsworth's case but I do not agree that Farnsworth should be interpreted in a contrary sense to become authority for a proposition that there is not a disposal of trading stock unless all three ``disposals'' are present. A simple example is sufficient to prove the point: a sale of and payment for goods but with a delayed delivery. No one would suggest that the retention of possession of the goods meant that there had been no disposal of the trading stock.
In my opinion those cases where the issue of derivation has been affected by the question of recoverability are explainable because of a practical inability to determine the quantification of the relevant sum of money. Thus, in Farnsworth the packing house was only able to give an estimate of the taxpayer's likely receipt whilst in FC of T v Australian Gas Light Co the taxpayer did not know the amounts that were owing to it and would not know until the meters had been read. On the other hand, Barratt's case is a good example of a case where the debts were ascertainable (as is the case here) but there was a delay in the right to recover (as is the case here albeit for different reasons).
Notwithstanding the gap between contract and settlement and notwithstanding the consequential delay in the right to recover the unpaid purchase price I do not consider those matters are sufficient to sustain the appellant's arguments. The event of unconditional contracts constitutes, in my opinion, a disposal of trading stock and a matching derivation of assessable income.
This appeal must be dismissed. The appellant is to pay the respondent's costs.