CASE 32/94
Members:P Gerber DP
Tribunal:
Administrative Appeals Tribunal
Dr P Gerber (Deputy President)
These applications are for the review of the respondent's decisions to disallow the objections of the applicants (hereafter the first applicant is referred to as T, and the second applicant as ST) against amended assessments in respect of the 1990 year of income which issued on 15 July 1993. In accordance with the parties' agreement, these applications were heard together with the result in ST's application simply following the result of T's application. With this in mind, and the fact that T was the only witness, these reasons will predominantly refer to T and the background to his application.
2. These matters proceeded on a Statement of Agreed Facts (``Agreed Facts'') which states:
``1) In 1988, [T] and [ST] lived in the [location] of [capital city].
2) In the latter half of that year, they took the decision to sell their home.
3) On 12 October 1988, a valuer advised that he considered the market value of the property to be $340,000.
4) This valuation was exclusive of chattels considered to have had a value of $25,000 at the time.
5) The property was listed for sale in December 1988 with one known offer being rejected.
6) The property was listed for auction on 16 December 1989.
7) On 9 January 1990, a contract was signed for the sale of the property to [Mr & Mrs D ] for $315,000 but subject to [the D s] selling [their] residence within 60 days.
8) On 24 February 1990, a contract was signed for the sale of the property to [Mr & Mrs C ] for $326,000 with a $50,000 deposit being payable but this arrangement was subject to the [ D s] agreement not proceeding.
9) Clause (9) of the [ C s] contract provided for deposit forfeiture if agreement not completed.
10) The deposit was paid on 6 March 1990.
11) Solicitors' letter dated 7 August 1990 advises that [ C s] cannot complete and
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accept a forfeiture of the $50,000 deposit paid earlier.12) Solicitors' letter dated 4 September 1990 confirms that the contract for sale was terminated 15 August 1990.
13) On 8 September 1990, a new contract is signed for the sale of the property to [ D s] for $276,000.
14) [Mr D ] structured his negotiations knowing that a $50,000 deposit had already been forfeited.
15) On 31 October 1990, [T and ST] finally received $15,000 following settlement of claim for $18,157.89 damages and expenses against [ C s].
16) In the final analysis, [T and ST] `lost' $39,000 (excluding expenses) between [ D s]' original offer of $315,000 and [their] later purchase price of $276,000.''
3. On 5 May 1993, the respondent issued T with a Notice of Amended Assessment in respect of the 1991 year of income, increasing his taxable income for that year by $26,902. Of that amount, some $24,708 was included as a ``Capital Gain''. The adjustment sheet which accompanied that Notice ``explained'' that inclusion as:
Capital Gain -- Forfeited $50,000
Deposit less $584 legal
expenses on settlement
Assessable Capital Gain $49,416
Distribution of Capital Gain
T $24,708
ST $24,708
No ``additional tax for incorrect return'' was imposed by the respondent on the $24,708 ``capital gain'' component of the abovementioned adjustments.
4. T objected against the Notice of Amended Assessment of 5 May 1993 in respect of the 1991 year of income by letter dated 17 May 1993. He stated:
``I object in that the Commissioner is in error in including, as assessable income an amount of $24,708, which he has determined is a Taxable Capital Gain.
It is submitted that the said $24,708 falls outside of the taxable provisions of the Tax Assessment Act 1936 in that it was an integral part of the proceeds of the sale of my principal place of residence owned conjointly by myself and [ST], and which was constructed and occupied by us prior to September, 1985.
It is submitted that the Commissioner's determination is wrong both in fact and law and is outside the intentions of the Act as stated by the Minister when the Capital Gains Tax Bill was presented to Parliament.
I enclose herewith a booklet which I have prepared (on behalf of myself and the said [ST] my co-owner of the subject property at [address]). This booklet gives full details and background of the transaction involved.
...''
5. By letter dated 6 July 1993, the respondent advised T:
``Your objection dated 17 May 1993 to the amended assessment sent to you on 5 May 1993 for the year ended 30 June 1991 has been considered in the Appeals and Review branch of this office.
The decision is that the objection will be allowed but only because the capital gain in question was found to have been taxed in the wrong year, not because we think it should not have been taxed at all.
Amended assessments taking it out of the year ended 30 June 1991 and putting it in the year ended 30 June 1990 will be processed shortly. You will notice a slight reduction in the tax we are asking you to pay.
There is no doubt in our minds that a taxable capital gain arose out of the deposit forfeited by [the Cs]. While we appreciate the problems you encountered in trying to sell the property, it's final sale has to be seen as unrelated to the question of the taxability of the forfeited deposit.
The views of the Tax office on such deposits have been well publicised in recent Determinations, copies of which are enclosed for your information.
Should you still dispute the assessability of the capital gain, you will have to go through the objection process again with regard to the new amended assessment soon to be sent to you for the year ended 30 June 1990.''
6. In furtherance of that letter, on 15 July 1993, the respondent issued to T (i) a further
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Notice of Amended Assessment in respect of the 1991 year of income decreasing T's taxable income in that year by $24,708, and (ii) a Notice of Amended Assessment in respect of the 1990 year of income increasing T's taxable income by the same amount.7. By letter dated 28 July 1993, T objected against the Notice of Amended Assessment issued on 15 July 1993 in respect of the 1990 year of income, stating:
``...
I object in that the Commissioner is in error in including, as assessable income an amount of $24,708.00 which he has determined is a Taxable Capital Gain.
It is submitted that the said $24,708 falls outside of the taxable provisions of the Tax Assessment Act 1936 in that it was an integral part of the proceeds of the sale of my principal place of residence owned conjointly by myself and [ST], and which was constructed and occupied by us prior to September, 1985.
It is submitted that the Commissioner's determination is, in our case, being incorrectly and unfairly interpreted.
This determination - Number 52 dated 26/3/92, a copy of which you kindly forwarded to me, applies justifiably to incidents where a forfeited deposit results in a capital gain. The example cited is rightfully on this premise.
ie `THE SALE DOES NOT GO AHEAD - THE TAXPAYER HAS A CAPITAL GAIN'
As will be seen from careful examination of the details supplied to you and enumerated (and substantiated) in the booklet, the facts vary from the example given.
In our case:
`THE SALE DID GO AHEAD (TO A PREVIOUSLY INTERESTED PURCHASER) BUT AT A PRICE MUCH REDUCED BY THE DEDUCTION OF THE AMOUNT OF THE DEPOSIT FORFEITED'.
We, as Taxpayers, did not therefore make a capital gain
I refer you to the booklet which I prepared (on behalf of myself and the said [ST] my co-owner of the subject property at [address]) which was lodged together with my letter of 17 May, 1993. This booklet gave full details and background of the transaction involved.
...''
8. By letter dated 15 September 1993, the respondent advised T that that objection was disallowed, adding:
``There is not a lot we can add to what has already been said except perhaps to say that you seem to miss the point when we say `the sale did not go ahead'.
In referring to this, we are talking of the sale to [the Cs], the last link in that chain being the letter from your solicitor dated 4 September 1990.
We understand what happened later but that has no bearing on the taxability of the deposit forfeited by [the Cs].
...''
9. Being dissatisfied with that decision, T applied to this Tribunal.
10. At the hearing of these applications, T represented himself and ST, and the respondent was represented by one of his officers.
11. As part of T's case, T gave oral evidence. The respondent did not call any witnesses, but did tender (i) the ``booklet'' (exhibit 1) referred to in paragraph 4 above which was enclosed with T's letter to the respondent of 17 May 1993, and (ii) an extract of the Explanatory Memorandum to the Income Tax Assessment Amendment (Capital Gains) Bill 1986 (exhibit 2). The ``section 37 documents'' became exhibit A.
12. The reasons given in the respondent's ``section 37 documents'' for the objection decision of 15 September 1993 (exh A, T3, pp 4 & 5) are:
``Section 160ZZC(12) was specifically introduced into the [Income Tax Assessment] Act [1936] to ensure that money forfeited by a party to a prospective sale is treated as a capital gain in the hands of the person who received the benefit of the deposit. The explanatory memorandum (No. 52 of 1986) is clear on this point.
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The views of the ATO are expressed in Capital Gains Determination CGT 52 and Taxation Determination TD92/116.
The last link in the chain of events that led to the deposit being forfeited and taxed was the solicitors' letter confirming that the contract had been terminated. At that point in time, [T] and [ST] had both their house and $50,000.
The subsequent sale to the third party represents an entirely new chain of events no matter how closely related.''
13. More facts emerge from T's evidence and a perusal of the documents.
14. T and ST had held the subject property as joint tenants, with their purchase of the property and construction of the residence on that property both being ``pre capital gains'', i.e. well before 20 September 1985. It was the ``principal residence'' of both of them from the time the residence was built to approximately ``August of the year prior to the settlement'' [i.e. 1989].
15. The contract of sale of the subject property dated 9 January 1990 which T and ST had with the Ds (referred to in paragraph 7 of the Agreed Facts) included the following clauses:
``4. The following matters are conditions precedent to the completion of the contract:
- ...
- (c) The signing of a contract within 60 days of this date by the Purchaser [Ds] for the sale of his property situated at [address] to a person ready willing and able to perform that contract at a price acceptable to the Purchaser provided that such property shall not be offered for sale at a price exceeding $315,000.00.
...
14. The Vendor [T and ST] reserves the right to continue marketing the property & should a person be ready willing and able to perform a contract at a price acceptable to the Vendor. The Vendor shall give the Purchasers 48 hours notice to remove the condition detailed in clause 4(c) hereof. Should the Purchaser be unwilling or unable to remove that condition within the time specified this Contract shall be deemed null and void and at an end and the Vendors shall be free to offer the property to another Purchaser.''
T was able to inform the Tribunal that the mechanism in clause 14 of that contract was activated, that contract was ``cancelled'' (there was no question of the deposit under that contract being forfeited because it was not payable until satisfaction of clause 4(c)), and the contract of sale dated 24 February 1990 which T and ST had with the Cs (referred to in paragraph 8 of the Agreed Facts) was entered into instead.
16. The contract of sale dated 8 September 1990 which T and ST had with the Ds (referred to in paragraph 13 of the Agreed Facts) was completed on 21 September 1990.
17. The claim by T and ST against the Cs (referred to in paragraph 15 of the Agreed Facts), which was in addition to the forfeiture of deposit which had already occurred, was that allegedly:
``By reason of the Cs] failure to complete
the agreement of 24 February 1990] and the
subsequent termination of it T and ST] have
incurred expense, loss and damage in the
amount of $18,157.89 with ongoing interest.
PARTICULARS OF LOSS
-------------------
(a) Interest on $276,000.00 at
21.5% p.a. from 1st July, 1990
to 14th August, 1990 $7,478.46
Less Payments made
----
by the [Cs]
21.06.90 500.00
05.07.90 1,000.00
19.07.90 1,000.00
03.08.90 500.00 3,000.00
-------- --------
4,478.46
--------
(b) Interest paid by [T and ST]
to their mortgage -- Westpac
Bank @ $125.14 per day for the
period 15.08.90 to 21.09.90 4,505.04
(c) [name of real estate agent]
sales commission and auction
fees on sale of property 6,180.00
(d) name of solicitors] legal
costs 1,500.00
(e) Reimbursement of Rates
paid by vendors for the period
1st July, 1990 to 30th
(The damage was allegedly caused by the Cs during the brief period they had been allowed by T and ST to enter into possession of the subject property prior to settlement in return for the payment of rent.)
18. As noted in paragraph 12 above, the respondent considers that sub-s 160ZZC(12) of the Income Tax Assessment Act 1936 (``the Act'') applies in the circumstances of this case such that, as a result of the forfeiture of deposit, a net capital gain is included in T's assessable income for the 1990 year. That sub-section provides:
``Where a deposit of money or other consideration, being a deposit that was made in respect of a prospective purchase or other transaction that is cancelled or otherwise abandoned, is forfeited-
- (a) the deposit shall be deemed to have been paid or given as consideration in respect of the grant by the person who received the benefit of the forfeiture of an option that bound the grantor to dispose of an asset and was not exercised; and
- (b) any costs that the person who received the benefit of the forfeiture incurred in connection with the prospective purchase or other transaction shall be deemed to be amounts of expenditure incurred by that person in respect of the grant of the option.''
19. However, before considering the application of that sub-section, it is necessary to have regard to sub-s 160L(1) which provided at the relevant time:
``Subject to this section, this Part [Part IIIA - Capital Gains and Capital Losses] applies in respect of every disposal on or after 20 September 1985 of an asset, whether situated in Australia or elsewhere, that-
- (a) immediately before the disposal took place, was owned by-
- (i) a person (not being a person in the capacity of a trustee) who was a resident of Australia; or
- (ii) a person in the capacity of a trustee of a resident trust estate or of a resident unit trust; and
- (b) was acquired by that person on or after 20 September 1985.''
20. Firstly, what is the relevant ``asset''? At the relevant time s 160A provided:
``In this Part, unless the contrary intention appears, `asset' means any form of property and includes-
- (a) an option, a debt, a chose in action, any other right, goodwill and any other form of incorporeal property;
- (b) currency of a foreign country; and
- (c) any form of property created or constructed, or otherwise coming to be owned without being acquired,
but does not include a motor vehicle of a kind mentioned in paragraph 82AF(2)(a).''
Dicta of the Federal Court in
FC of T v Cooling 90 ATC 4472 (see for example per Hill J at 4486), and in
Hepples v FC of T 90 ATC 4497 (see for example per Lockhart J at 4503-4, and per Gummow J at 4512-4), and by various Justices of the High Court,
Hepples v FC of T 91 ATC 4808 (see for example per Brennan J at 4812-3, per Toohey J at 4827, and per McHugh J at 4840 & 4841), would suggest that an ``asset'' as defined in s 160A (at the relevant time) must be a form of property. Thus, notwithstanding that ``an option'' is specifically included in the definition of ``asset'', it must nevertheless be of a proprietary nature to come within that definition in s 160A. However, comments by Brennan J in Hepples at 4812, and by Hill J in Cooling at 4489-4490, satisfy me that any option deemed to have been granted by sub-s 160ZZC(12) in the circumstances of this case is an ``asset'' as defined in s 160A.
21. Was there a disposal of that asset (the option) on or after 20 September 1985? Pursuant to the operation of paragraph (a) of sub-s 160ZZC(12), the $50,000 deposit paid by the Cs forfeited to the benefit of T and ST is
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deemed to have been paid or given as consideration in respect of the grant by T and ST of an option that bound them to dispose of an asset that was not exercised. This leads in turn to sub-s 160ZZC(3) which provides:``Subject to subsections (3A), (3AA) and (3AB) [which are not applicable] and to the following provisions of this section as to treating the grant of an option as part of a larger transaction, where an option has been granted-
- (a) the grant of the option shall be deemed to have constituted a disposal of the option at the time when the grant took effect; and
- (b) the option shall be deemed to have been owned by the grantor immediately before the disposal took place.''
The result of the operation of paragraph (a) of sub-s 160ZZC(3) here is that the option is deemed to have been disposed of at the time when the deemed grant of that option took effect.
22. The real question now arises: When did the deemed grant take effect? In Taxation Determination TD92/116 (a copy of which was enclosed with the respondent's letter of 6 July 1993 to T (see paragraph 5 above)) the respondent expresses the opinion that:
``The grant of the deemed option is taken to have occurred when the prospective purchase or other transaction was entered into (or made), and not when the cancellation or termination of the prospective purchase or other transaction took place. The grant of the deemed option, in effect, substitutes for the prospective purchase or other transaction in the circumstances outlined in subsection 160ZZC(12).''
23. However, I have come to the conclusion that the respondent's determination is wrong. Whilst sub-s 160ZZC(12) does not clearly express the time at which the deemed grant of the option takes effect, I am unable to discern anything in that sub-section which suggests that the date the prospective purchase was entered into is the point in time at which the deemed grant takes effect. On the respondent's argument, a taxpayer would be required to return a capital gain in a year in which, (i) the deposit may not as yet have been forfeited (and conceivably does not look at that stage like ever being forfeited), and/or (ii) the deposit may not yet be payable. Although it is the usual situation that the deposit under a contract for the sale of land is payable at the time of entering into the contract, it is not invariably so. Indeed, the first contract T and ST entered into with D which came to an end is an example of this. There the deposit was not payable until satisfaction of clause 4(c) of that contract, which made the contract conditional upon D selling his existing home within a certain time period.
24. Having regard to the terms of sub-s 160ZZC(12) in the context in which it appears, I consider that the time when the deemed grant of the option takes effect for the purposes of sub-s 160ZZC(3) is the time of the forfeiture of the deposit. Indeed, sub-s 160ZZC(12) is predicated upon that forfeiture having taken place. If Parliament had, indeed, intended that there be a ``backwards deeming'' similar to that of, for example, sub-s 160U(3), it would not have been difficult to convey such an intention. I am unable to discern such intention.
25. I am further satisfied that sub-s 160U(3) itself does not apply in such a situation to allow the ``backwards deeming'' contended for by the respondent. Sub-section 160U(1) provides:
``Subject to the provisions of this Part other than this section, where an asset has been acquired or disposed of, the time of acquisition or disposal for the purposes of this Part shall be ascertained in accordance with this section.''
Firstly, I am satisfied that s 160ZZC(3)(a), by deeming a disposal of the deemed option ``at the time when the grant took effect'', deals specifically with the disposal timing issue, and thus, on this aspect, leaves no room for the operation of the more general provision of s 160U. Secondly, even if I am wrong on that aspect, I am satisfied that sub-s 160U(3), which provides:
"Where the asset was acquired or disposed of under a contract, the time of acquisition or disposal shall be taken to have been the time of the making of the contract.",
is not applicable because the relevant asset, the deemed option, was not disposed of ``under a contract'', but by the deeming operation of sub- s 160ZZC(3).
26. As a result, I have concluded that the deemed option was disposed of on 15 August 1990, that is in the 1991 rather than 1990 year
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of income. The significance of this is dealt with later in these reasons.27. Having concluded that the disposal of the asset (the option) occurred after 20 September 1985, it is necessary to consider whether the remaining elements of sub-s 160L(1) are satisfied such that Part IIIA is applicable in the circumstances. The deeming effect of paragraph (b) of sub-s 160ZZC(3) is to satisfy the requirement in paragraph (a) of sub-s 160L(1) that ``immediately before the disposal took place, [the option] was owned by a person... who was resident of Australia [T and ST]''. It remains to determine whether the option was acquired by T and ST on or after 20 September 1985, and if so, when.
28. Neither sub-ss 160ZZC(3) nor (12) deal with this point. However, I am satisfied that the answer is to be found in sub-s 160U(6) which provided at the relevant time:
``Where the asset was created by a person otherwise than pursuant to a contract under which the person created the asset for another person, the asset shall be taken to have been acquired by the first-mentioned person-
- (a) if the asset did not exist (either by itself or as part of another asset) before the disposal - immediately before the asset was disposed of; or
- (b) in any other case - at the time of commencement of work on, or of work that resulted in, the creation of the asset.''
Considering that s 160ZZC(12)(a) deems the grant of an option by the person receiving the benefit of the deposit forfeiture, it is, I consider, appropriate to speak of that option as having been created by the deemed grantor (otherwise than pursuant to a contract under which the deemed grantor created the option for another person). Further, clearly the option ``did not exist (either by itself or as part of another asset) before the disposal''. As a result, I am satisfied that, by the operation of s 160U(6)(a), the deemed option is taken to have been acquired by T and ST immediately before its deemed disposal, that is on 15 August 1990.
29. Since the elements of sub-s 160L(1) are satisfied, Part IIIA is applicable in the circumstances. But what is the result?
30. Having determined that the deemed option was disposed of in the 1991 rather than 1990 year of income, it follows, in accordance with the combined operation of sub-s 160Z(1), s 160ZC and s 160ZO, that the respondent's objection decision must be set aside and the applicants' objections allowed in full. However, due to the likelihood that the respondent will seek to amend the applicants' assessments in respect of the 1991 year of income as a consequence of this decision, I will make some further comments in the hope that this may resolve the matter without further costly disputes.
31. In relation to the applicants' submission that the ``principal residence'' exemption in s 160ZZQ applied so as to exempt the capital gain which accrued to them as a result of the deemed disposal of the deemed option, I would simply refer to sub-s 160ZZQ(12) which provides:
"Subject to subsection (21) [which is not applicable], where-
(a) a dwelling owned by a taxpayer, being a natural person other than-
(i) a person who acquired the dwelling as a beneficiary in the estate of a deceased person; or
(ii) a person in the capacity of a trustee,
is disposed of; and
(b) the dwelling was, throughout the relevant period, the sole or principal residence of the taxpayer,
a capital gain shall not be deemed to have accrued to the taxpayer, and a capital loss shall not be deemed to have been incurred by the taxpayer, as the case requires, in respect of the disposal of the dwelling.",
and confirm that I agree with the respondent's opinion as expressed in his CGT Determination 52 that ``[t]he principal residence exemption does not exempt monies received from a forfeited deposit, because in these cases, the asset disposed of is not the sole or principal residence'', it is the deemed option under sub-s 160ZZC(12).
32. In calculating the amount of the capital gain to include in each applicant's assessable income, the respondent allowed only some $584 legal expenses as the cost base of the deemed option. However, sub-s 160ZZC(6) provides:
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``Notwithstanding section 160ZH, the cost base to a taxpayer of an option granted by the taxpayer comprises the amounts of expenditure incurred by the taxpayer in respect of the grant of the option and does not include any other amounts, and the indexed cost base and the reduced cost base shall be ascertained accordingly.''
Section 160ZZC(12)(b) then links in with sub-s 160ZZC(6) by providing that:
``any costs that the person who received the benefit of the forfeiture incurred in connection with the prospective purchase or other transaction shall be deemed to be amounts of expenditure incurred by that person in respect of the grant of the option.''
It seems to me that whilst such terms as ``costs'' and ``incurred'' have some restrictive effect on what may be included in the cost base of the option, the expression ``in connection with the prospective purchase'' is one of quite wide import. It might well be that more of the various amounts which make up the $18,000 odd claimed by T and ST against the Cs should form part of the cost base of the deemed option. Indeed, at the hearing, the respondent's officer indicated that he was prepared to allow some $3158 as the cost base.
33. For the above reasons, the Tribunal sets aside the objection decisions under review and allows the applicants' objections in full.
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