ANTLERS PTY LTD (IN LIQ) v FC of TJudges:
The question in this case is whether profit derived by the applicant, Antlers Pty Limited (In Liquidation), from the sale of land at Doonside in the western suburbs of Sydney forms part of its assessable income, either as income according to ordinary concepts under s. 25(1) of the Income Tax Assessment Act 1936 (``the Act'') or as profit arising from the sale of the land on the basis that it was acquired by it for the purpose of profit-making by sale, or from the carrying on or carrying out of a profit- making undertaking or scheme under s. 25A(1) of the Act.
By notice of assessment dated 30 November 1992 the respondent, Commissioner of Taxation, made a default assessment pursuant to s. 167 of the Act of the taxable income of the applicant for the year of income ended 30 June 1991 in the sum of $35,000. The adjustment sheet accompanying the notice of assessment described that sum as representing ``the Option Fee received from Mobil Oil''. The applicant agreed to grant an option to a company in the Mobil group to purchase the property with which this case is concerned, the price for the option being $35,000.
The applicant objected against the assessment. The respondent disallowed the objection in full and the applicant appealed to this Court against the respondent's decision in matter number NG 640 of 1995. The applicant prosecuted that appeal until the final day of the hearing (Friday, 7 February 1997); when its counsel informed the Court that it no longer did so and consented to the appeal being dismissed with costs. I discussed the question of costs with counsel for both parties; it is common ground that, although some costs have been incurred by the respondent before the hearing of the appeal commenced, those costs have not added to the costs of the hearing which commenced on Monday, 3 February 1997. I say this for the benefit of the taxing officer.
The only live issue between the parties and the issue which occupied virtually the whole of the time of the hearing concerned appeal NG 641 of 1995 which arises from the respondent's assessment of the amount of the applicant's taxable income for the year ended 30 June 1992 in the sum of $1,411,663, also determined by him pursuant to s. 167 of the Act. The adjustment sheet which accompanied the notice of assessment states the total sale price of the relevant property and deducts from it various expenses and outgoings, to arrive at the taxable income of $1,411,663.
Many of the basic facts are not in dispute; but there are issues of fact which turn upon the credibility or reliability of witnesses called by the applicant. Ultimately, like many cases under s. 25A and its predecessor (s. 26(a)), the questions turn on the Court's analysis of the objective facts and its assessment of the witnesses.
I shall turn first to the uncontentious facts. The evidence is not clear about the dates of some events and inconsistent with other evidence about the dates of others. In these cases I shall state the date which appears to me to be most likely. The applicant was incorporated as a shelf company on 26 May 1971 by Mr Kevin Seggie who was the solicitor of the Portelli family. There are two issued shares in the capital of the applicant which were transferred by the subscribers before 27 October 1971 to Mrs Vera Mary Kavich and her brother, Mr Frank Portelli. They were appointed directors of the applicant also before that date. Mr Seggie became the secretary of the company on 27 May 1971.
A company, Ardoch Pty Limited (``Ardoch''), was incorporated for the purpose of buying and selling land. Mr Seggie became a director and secretary of Ardoch on 3 August 1971. Mrs Kavich is recorded as having been appointed a director of Ardoch on 6 July 1972. She and Mr Portelli became shareholders of Ardoch. Mrs Kavich was a shareholder in
ATC 4203Ardoch, apparently as trustee for certain members of her family. Another company, Argenta Pty Limited, (``Argenta'') was incorporated for the same purpose as Ardoch. Mr Seggie became a director and the secretary of Argenta on 3 August 1971. Some of her children became shareholders of Argenta. Artillery Pty Limited (``Artillery'') was incorporated for the same purpose as Ardoch and Argenta. Mrs Kavich and Mr Portelli became shareholders of Artillery.
The Portelli family includes Mrs Kavich, Mr Frank Portelli and Mrs Carmel Portelli (their mother). Mrs Carmel Portelli was one of the original landholders in the Blacktown/Prospect/ Box Hill area including Doonside.
Before the purchase of the land with which this case is concerned Mrs Kavich had become a full time land investor, having previously worked as a real estate sales person for several years. She acquired a knowledge of the land in the Blacktown/Doonside area.
Mrs Kavich engaged in a considerable number of transactions of purchase and selling of land including the purchase of land with which this case is concerned. She claims that, except for land purchased through the vehicle of the applicant, the other land was purchased and sold for development and resale or otherwise for resale at a profit; but she maintains that the land purchased by the applicant was purchased as a long term investment for the benefit of her children and the children of Mr Frank Portelli. Mr Portelli in substance corroborates Mrs Kavich's evidence on this question.
In July 1970 Mrs Kavich entered into a contract to purchase a property at Blacktown Road, Prospect for $14,000. She claims that this property was acquired on trust for her 6 children.
In about April 1971 Mrs Kavich noticed four adjoining properties in Karuah Street, Doonside (Lots 78, 51, 52 and 53). The property (Lot 51) which is the subject of this case was one of them. Each was about 2 acres in area and most had a residence erected thereon but in poor condition. She spoke to her brother, Frank Portelli, about them and he indicated that he would like to join with her in the purchase.
Mrs Kavich first approached a Mrs Szedlak who was the owner of Lot 78 Hillend Road, Doonside, one of the four adjoining properties. They negotiated a price and Mrs Kavich prepared a short written agreement which was signed by Mrs Szedlak. Mrs Kavich then took the agreement to her solicitor, Mr Seggie.
The purchase by the applicant of Lot 78 Karuah Street was completed on about 27 January 1972. The purchase price was $25,000 and it was lent by Mrs Kavich's mother, Mrs Carmel Portelli. Mrs Szedlak continued to live in the home for a few months and did not pay rent. When she left, a tenant for the property was found by Mrs Kavich.
At about this time Mrs Kavich was negotiating to purchase the other three lots at Doonside by the applicant. Contracts were exchanged for the purchase by the applicant of Lot 53 on 4 April 1972 and the purchase was completed on 13 September 1972. The property is described as ``vacant land'' and the purchase price was $30,000. This property was acquired by vendor finance from George Camilleri.
Contracts were exchanged for the purchase of Lot 52 by the applicant on 9 June 1992, the purchase price was $36,500. This purchase was completed on 26 October 1972.
Mrs Kavich obtained a valuation from a firm of valuers of Lot 52 on 17 July 1972 which described the property as:
``particularly well favoured by the Development Control Plan having a theoretical possibility of 19¾ residential blocks of the minimum 6,000 square feet area in addition to approximately half a block of open space...''
In the meantime, on 1 April 1972, a Mr Pacey of Forge Real Estate had obtained an option (for $500) for Forge Corporation (a company which appears to have owned or controlled Forge Real Estate) to purchase Lot 51 Karuah Street, Doonside from its then owner, a Mr Williams. On 14 June 1972 Forge Corporation obtained a development consent from the Blacktown Council concerning Lot 51 permitting subdivision into two blocks.
In about August 1972 Mrs Kavich (or possibly the applicant, it is not entirely clear from the evidence who it was) purchased the option from Forge Corporation to purchase Lot 51 for $8,000. In October 1972 Mrs Kavich obtained a valuation from a firm of valuers of Lot 51 which described it in these terms:
``The land is ripe for subdivision and it is considered that the improvements add no value for this purpose...
We are informed that Approval in Principle has been obtained from Blacktown Municipal Council for the excision of nine (9) Residential Lots along existing Road Frontage. We are further informed that the subject land together with adjoining parcels is under firm contract to Antlers Pty Limited. In these circumstances the subject land can be subdivided in accordance with Council's Development Control Plan as and when desired. The prior Excision of existing frontage lots will improve cash-flow of Development Project.''
The contract for the purchase by the applicant of Lot 51 is dated 25 October 1972. Contracts were exchanged on 27 October 1972. The contract states that the purchase price is $33,430 and it includes special conditions, two of which are important for present purposes. Special Condition 1 provides that the vendor shall be entitled to retain possession of Lot 51 rent free for up to six months from the date of completion. Special Condition 2 provides that the vendor is entitled until he gives vacant possession of the property ``to remove the house or any part - or parts of its contents erected'' on it without any cost to the vendor.
It appears that settlement of the purchase of Lot 51 was completed on 15 December 1972, although the evidence is not entirely clear on this point.
Mrs Kavich arranged a loan of $58,500 from Dominion Mining Pty Limited towards the purchase price of Lots 51 and 52. Mr Frank Portelli appears to have contributed $10,000 from his savings. Mrs Kavich put in the balance from her own money and money she had borrowed from her husband and her mother. Mortgages were executed and settled in favour of Dominion Mining.
After the acquisition of the respective lots in Doonside and until 21 August 1978 the applicant rented out the four Doonside properties from time to time. The houses were in poor condition and the tenants often failed to pay rental.
In late 1977 or 1978 Mr Paul Baiada (a relative of Mrs Kavich) who then held a mortgage as mortgagee over Lots 51 and 52 told Mrs Kavich that he was considering selling Lot 51 or Lot 52 or both to discharge the indebtedness of the applicant to him. Mrs Kavich agreed; but later on Mr Baiada said that he thought the Housing Commission could be interested in buying the land. Mrs Kavich spoke to a man at the Housing Commission who in due course said that the Commission was not interested in purchasing the properties. That appears to have been the first occasion on which Mrs Kavich took some steps towards the sale of any of the Doonside lots.
A bankruptcy notice was issued against Mrs Kavich by Mercantile Credits Limited, a creditor, on 7 October 1975. A petition seeking to sequestrate her estate was presented on 12 May 1976. A sequestration order was made against her estate on the petition of Mercantile Credits Limited on 28 February 1978. Mrs Kavich was discharged from bankruptcy on 1 March 1981 by operation of the Bankruptcy Act 1966.
The applicant got into financial difficulties and it was wound up by the Supreme Court of New South Wales on 21 August 1978 on the petition of Mr and Mrs Pace who were the vendors of Lot 52 to the applicant. The debt was for betterment tax payable by the vendors which the applicant had agreed to pay as a condition of the contract for sale.
It appears that on 3 April 1984 the registration of the applicant was cancelled and it was dissolved pursuant to s. 459(4) of the Companies (New South Wales) Code. By order of the Supreme Court of New South Wales made on 14 July 1986 the applicant was reinstated (that is restored to the Register of Corporations) and it also appears that the earlier cancellation of the registration of the applicant was in error.
In 1983 and 1984 real estate agents expressed interest to the Blacktown Council in purchasing the four Doonside lots because of their subdivision potential and because rates on the lots were unpaid.
In 1986 application was made by Mrs Kavich to the Supreme Court for a stay of the winding up of the applicant. Mrs Kavich swore that all debts formerly owed by the applicant had been paid and satisfied by her and that the company did not have any liabilities whatever.
The stay of the winding up was ordered by the Supreme Court on 23 November 1987. The orders of the Supreme Court were as follows:
``1. The winding up of the company be terminated on 1 December 1987.
2. Costs of the motion to form part of the costs, charges and expenses of the winding up.
3. A meeting of the members of the company be convened by one day's notice in writing by the applicant to be held on 30 November 1987 to elect directors to take office upon termination of the winding up.''
The meeting directed by the Court was not convened and no meeting of members to appoint directors was convened until July 1993.
Certain aspects of the history of the applicant were recited by the Full Court of this Court in
McAusland v DFC of T (1994) 12 ACLC 78; (1994) 47 FCR 369. It was held in McAusland that, as the sole condition precedent of holding a meeting to elect new directors had not been satisfied, the Supreme Court order terminating the winding up did not operate, so that the winding up of the applicant had not been terminated. (I add that some of the dates of relevant events were referred to by the Full Court; but sometimes the evidence before me differs from the material that must have been before the Court in McAusland. In those cases I have adopted the evidence in the case before me; but nothing turns on this.)
In 1987 the local Council demolished the buildings on Lots 51, 52 and 53. The applicant was in liquidation and was charged by the Council for the demolition costs.
By 1987 the Council had rezoned part of Lot 51 as commercial. On 24 August 1990 and on 30 September 1991 the applicant granted options to purchase Lot 51.
On 26 March 1992 contracts were exchanged for the sale by the applicant to Permale Pty Limited of Lot 51 for the price of $1,495,000. The contract contained a Special Condition 7.1 stating that the purchaser agreed that on settlement it would authorize the deposit to be released to and to pay the balance of purchase monies to Paul Kavich, a son of Mrs Kavich. The sale was completed on 1 May 1992.
The proceeds of sale were used towards the discharge of Mrs Kavich's debts in her former bankruptcy and certain of the balance was in effect frozen by being placed in the hands of the applicant's liquidator.
Evidence was given by the following witnesses called by the applicant:-
- • Mrs Kavich.
- • Mr Frank Portelli.
- • Mr Kevin Seggie, solicitor who acted for the applicant, Mrs Kavich and members of the Portelli family.
- • Mr Roger Learmont, a licensed real estate agent who had discussions with Mrs Kavich in 1972 concerning the applicant's prospective purchase of Lot 51. Mr Learmont was then employed as a real estate manager by Forge Corporation Pty Limited.
- • Mrs Christine Gilan, one of the daughters of Mrs Kavich.
- • Mrs Carmel Law, also a daughter of Mrs Kavich.
- • Mr Bevan Asher, a surveyor.
- • Mr John Muirhead who until retirement in 1990 was an employee in the Australian Taxation Office.
- • Mr Paul Baiada. He swore an affidavit which was read but later withdrawn without opposition from the respondent.
All the above witnesses swore affidavits and they were cross-examined with the exception of Mr Muirhead and Mr Asher (also, of course Mr Baiada).
Affidavits were read on behalf of the respondent by Mr Joseph Monks and Mr Joe Ostrouska who were at relevant times officers of the Australian Taxation Office. Neither was cross-examined.
Evidence of the witnesses
Mrs Kavich gave evidence that the sole purpose of acquiring Lot 51 and the other Doonside Lots (52, 53 and 78) was as a long term investment for her family. At the time of her purchase in 1971 she had seven children. She said that, having been involved in real estate, she knew that real property was a ``solid long term investment''. In particular, she had been looking for ``rent producing property'' to obtain the income to help pay the loans needed to acquire it. She preferred to purchase in the Doonside area because she and her husband intended raising their children there. Also, they thought their children would raise their families there. She said that she never had any intention of ever moving away from the area (she does
ATC 4206still reside there) and that the family is very important to her and her husband.
Mrs Kavich said that the reason for Mr Seggie arranging for the acquisition of three other companies for her in addition to the applicant (Argenta, Ardoch and Artillery) was that she wanted to keep them separate from the applicant because the applicant was for her long term investments as distinct from the other three companies which were acquired specifically for the purpose of buying and selling land for profit.
Mr Frank Portelli said that his sister, Mrs Kavich, was the person who took care of all the relevant business of the applicant. He has not much knowledge of companies, she did have knowledge and she did the work. He signed the documents which she gave to him for signature. He said that when Mrs Kavich came to see him in 1971 about the purchase of land at Doonside he told her that he was prepared to lend $10,000 from his savings; and his sister told him that it was an investment and that she was going to rent out the houses on the lots to pay for the costs of the land and then give it to her children. He said that as he was ``putting money up'' so that they should purchase the property as partners, each of their respective children could share in it too; she agreed. He said that two or three years after the land had been purchased a developer wanted to buy it but Mrs Kavich would not sell it because he and his sister wished to keep the land as partners and to pass it on one day to their children.
Mrs Christine Gilan is a daughter of Mrs Kavich. She was 11 years of age in 1971 and gave evidence that Mrs Kavich told her that the land at Doonside, which included Lot 51, was purchased for future investment for the children of Mrs Kavich. She said that some time after the Doonside land was purchased, in about 1975, her mother said to her again that she had bought the Doonside properties for her children. Mrs Gilan was taken by her mother to look at the land.
Mrs Carmel Law is another daughter of Mrs Kavich. She gave evidence to substantially the same effect as her sister, Mrs Gilan.
Evidence was given by Mr Roger Learmont, the licensed real estate agent who was employed as a real estate manager by Forge Corporation from 1972 to 1984, a company which carried on business in the western suburbs of Sydney during the 1970s and 1980s as a land sales company. In the 1970s it or companies associated with it owned or had options to purchase land in the Doonside area including Lot 51. He said that during 1972 he met Mrs Kavich. The subject of Lot 51 Karuah Street, Doonside arose in conversation. Mr Learmont said that the Forge Corporation had the option to purchase it and could sell it to Mrs Kavich, who replied that a company had been set up to buy the property. When asked by Mr Learmont what would become of the land, Mrs Kavich replied: ``We will hang on to it and rent it'', to which he said: ``You might be better off by developing it. We can help you subdivide it and sell off separate lots''. She replied ``No. That's not why we are buying it.''
At that time Forge held a development consent permitting the subdivision of Lot 51 into two blocks; one containing the house and the other the residue. It is unclear whether Mr Learmont mentioned the fact that the development consent was held or not. At one stage in his evidence he said that he did not tell Mrs Kavich about it; but at another stage he said he could not recall if he did or not.
Mr Seggie gave evidence of conversations when first approached by Mrs Kavich in about May 1971. He said that Mrs Kavich told him that her properties were to be kept as a very good investment for her children and the children of her brother Frank Portelli. He said that it was his firm recollection of what was said to him by Mrs Kavich and Mr Portelli that they intended to keep the properties for long term investment for themselves and their families; and that, although the applicant was beset by financial problems, several offers to purchase the Doonside properties had been made which had been rejected by Mrs Kavich.
Mr BL Asher gave evidence. At relevant times he acted for the Hooker Corporation and provided surveys, civil and project management services for the residential sub-division of Hooker's land adjoining Lot 51. Mr Asher is a solicitor and a surveyor. He was asked, when he was providing professional services for the Hooker Corporation, to explore the possibility of maximizing the Hooker sub-division of land adjoining Lot 51 by utilizing part of the land identified as the Karuah land. He put various alternatives to the owners of the Karuah land (Mrs Kavich in particular). He met her, but the approaches to purchase the land and develop it were refused by her.
Mr John Muirhead gave evidence. He is a former employee of the Australian Taxation Office, he retired in 1990 and set up his own business as a taxation agent. He was a witness for the applicant. He gave evidence that in September 1991 he accompanied Mrs Kavich to an interview at the Parramatta office of the Taxation Office with Mr Monks and Mr Ostrouska. He said that Mr Ostrouska asked Mrs Kavich how long she had had the land and what was her intention in purchasing it; to which she replied: ``We purchased the properties about twenty years ago in 1972 to provide for our children. They had rented dwellings on them and we rented them out.'' She also said that the money for the purchase had been borrowed from members of her family and some from previous vendors.
Principles to apply
The general principles governing s. 26(a) (now s. 25A) were considered by me in
Warriewood Valley Pty Ltd v FC of T 93 ATC 4653 so I need not repeat what I said there at 4661-4662. In one of the cases there referred to,
FC of T v Whitfords Beach Pty Ltd 82 ATC 4031; (1981-1982) 150 CLR 355, it was held by Gibbs CJ and Mason J that the first limb of s. 26(a) does not apply to profits derived from carrying on a business which are assessable under s. 25(1). Gibbs CJ held at ATC 4034; CLR 362 that the first limb can only have been intended to treat as income profits arising from the acquisition and sale of property acquired by the taxpayer for the purpose of profit making by sale, notwithstanding that the profits did not arise in the carrying on or carrying out of a business, that is to say notwithstanding that the profits would ordinarily be regarded as a capital gain. It must be borne in mind that s. 26(a) looks to net profit and 25(1) deals with gross income. Mason J. observed in Whitfords Beach at ATC 4046; CLR 382 that different consequences may follow according to which provision is found to apply to a taxpayer. Mason J said at ATC 4046; CLR 382 and 383 that in his view s. 26(a) only operates when s. 25(1) does not do so and he referred to
Investment & Merchant Finance Corporation Ltd v FC of T 71 ATC 4140 at 4142 and 4147; (1971) 125 CLR 249 at 255 and 264 and
Steinberg v FC of T 75 ATC 4221 at 4228; (1975) 134 CLR 640 at 688; also
FC of T v St Hubert's Island Pty Ltd 78 ATC 4104 at 4114; (1977-1978) 138 CLR 210 at 229-230 and
FC of T v Bidencope 78 ATC 4222 at 4234; (1978) 140 CLR 533 at 555. His Honour said that the rationale of s. 26(a) is to supplement s. 25(1) which continues to operate as the principal statutory provision on the revenue side.
FC of T v The Myer Emporium Ltd 87 ATC 4363; (1986-1987) 163 CLR 199 is authority for the proposition that the profit arising from an isolated commercial or business transaction will constitute income if the taxpayer's purpose or intention in entering into the transaction was to make a profit, notwithstanding that the transaction was not part of the taxpayer's daily business activities. See also
Moana Sand Pty Limited v FC of T 88 ATC 4897;
Henry Jones (IXL) Ltd v FC of T 91 ATC 4663; (1991) 31 FCR 64.
The taxpayer's purpose or intention is usually ascertained from an objective consideration of the circumstances of the case but his subjective purpose or intention is also of course relevant and may sometimes be the determining factor.
It is the intention of the taxpayer that is relevant for s. 25A purposes; it may be gleaned not by mere declarations of intention, but also by examining all the relevant circumstances, especially the conduct of the taxpayer in order to discern or ascertain his intention or purpose.
The purpose in the case of a company is the purpose of those who direct its affairs: Whitfords Beach.
The objects clauses must be considered when determining the nature and character of a particular transaction; but they are not decisive of the question, being only one circumstance to be considered:
Ruhamah Property Co Ltd v Federal Commissioner of Taxation (1928) 41 CLR 148 at 151-152.
Cases involving s. 25A and its predecessor s. 26(a) present special difficulties because they frequently turn on issues of credibility of witnesses and reliability of their recollection. The determination of the taxpayer's purpose in acquiring the relevant property involves an analysis of his state of mind at the time of purchase and his declarations of intention. However, it is important to examine carefully, not only the taxpayer's declarations of intention, but also the objective facts, especially as they existed at the time of purchase, in order to glean the taxpayer's purpose.
The objective facts (namely, the facts which are independent of Mrs Kavich's statements of intention to buy Lot 51 as a long term investment for her family) point to a conclusion contrary to the evidence of Mrs Kavich. Mrs Kavich was involved in real estate transactions for a fair period of time. As mentioned earlier, sometime in the 1960s she was involved in selling real estate, in particular in the Blacktown and Doonside areas. She continued to make her living out of selling real estate during the years 1970 to 1973 which are the relevant years. She was involved in the acquisition of some fourteen parcels of land between 1971 and 1973 either personally or by the interposition of companies. She established the four companies Artillery, Argenta, Ardoch and the applicant. All but the applicant were admitted by her to be incorporated for the purpose of acquiring real estate and selling it for profit. All four companies were related in various ways. Mrs Kavich was the person principally involved in their affairs. Also, monies were transferred between the companies, including payments made by the applicant on behalf of the other companies. The applicant facilitated the acquisition of land by Ardoch; and by 1976 the applicant had acquired all of the shares of Artillery.
Mrs Kavich's case was that Lot 51 was acquired for the purpose of producing rental income for the applicant; and it is clear from her evidence that her case was that rental income was an extremely important aspect to her of the business of the applicant. I shall recite but one extract from her oral evidence in the course of cross- examination, where she was asked the following questions and gave the following answers:
So this is what attracted you to these properties was it, as an ideal investment?
Well it was part of the attraction.
Yes, what other part was there?
Because they were adjoining blocks of land (a reference to the four adjoining properties in Karuah Street).
And they would be ideal for a long term investment.
Why was that?
Because they were a rental proposition.
What, the houses?
I see. Each of the blocks was about 2 acres, was not it?
So it was the house part of it was the ideal investment for a rental proposition, is that right?
So it was the house that attracted you was it, on each of the blocks?
Is that right?
Are you sure?
You had to think a while, are you sure or not sure?
I am sure.
You are sure?
Never in any doubt?
You said to yourself, did you: Lot 51 has a dwelling and it would make an ideal rental investment proposition, is that right?
I didn't think of it that way, no.
Which way did you think of it?
Well, the land was available for sale so I purchased the - we were intending to purchase as a future investment for the children, my brother and myself, and the rent would help with the outgoings.
Yes, the rent from what?
From the houses on the properties.
So it was attractive to you the fact that you would receive rental from renting out the dwellings on each of the properties, was it?
That was important to you, was it?
Yes it was.
The blocks of land themselves were not attractive to you without the house on them, would not they have been attractive?
Because with income coming in, future income would help pay the outgoings.
What, you say, do you, that if Lot 51 had not had a house on it you would not have been interested in it?
Is that so?
Are you sure?
I said yes.''
The contract for the purchase of Lot 51 was signed on 25 October 1972 and the mortgage to the finance company was signed on 23 October 1972, and the mortgage provides for payment of mortgage monies in instalments, the final payment to be made on 23 October 1973. Hence it is a short term, in essence a bridging finance, mortgage. Similarly, with respect to Lot 52.
Furthermore, the contract for purchase of Lot 51 entitled the seller to remain in possession of the house rent free for six months after completion which took place in December 1992. Thus during the subsistence of the mortgage there would be virtually no income at all from Lot 51, but there were substantial monthly outgoings with the requirement that the mortgage be repaid at the end of the 12 month period.
Moreover, when buying blocks of land through the intermediary of the various companies and in her own name, Mrs Kavich was also borrowing heavily to finance the acquisition of the properties. They were all heavily geared. Within a very short space of time after purchase of Lot 51 the applicant was
ATC 4210unable to afford to pay rates or to repay the mortgages. There was a very substantial difference between receipts from rent and the outgoings in the case of the Doonside properties including Lot 51, the outgoings being considerably greater. Nor was Mrs Kavich's own income substantial; varying between a gross income of $7,000 and $15,000 over relevant years (though the evidence concerning these figures is neither precise nor clear).
The four blocks of land at Doonside, including Lot 51, are adjacent to each other; each has an area of about 2 acres, so there are in effect about 8 acres. The purchase of adjacent blocks to create a large area when the land itself is ripe for subdivision clearly supports the conclusion that they were purchased for the purpose of selling at a profit after subdivision. Indeed, Lot 51 was the last of the four blocks to be purchased. Also, Lot 55 Karuah Street was purchased by Argenta, and it is not disputed that it was bought for the purpose of profit making by sale.
In my opinion, this evidence supports the respondent's case that Lot 51 was purchased by the applicant for the purpose of profit-making by sale and negates Mrs Kavich's statements of intention to the contrary.
The reports and valuations of the two real estate advisers questioned earlier concerning Lots 51 and 52 say in substance that those lots were ripe for subdivision, as were all four lots of the land at Doonside. These reports were obtained by Mrs Kavich before Lots 51 and 52 were purchased by the applicant. The applicant therefore knew fully when it purchased Lot 51 that it was part of a larger segment of land, namely the four Doonside lots, which were potentially capable of subdivision into a substantial number of blocks.
Another piece of evidence bears on the question of the applicant's purpose in buying Lot 51. Counsel for the respondent produced to Mrs Kavich when she was being cross- examined a business card of the applicant describing its activities as ``Land Purchasers and Developers''. Mrs Kavich was surprised when she saw the card; she had obviously forgotten about it. She said that it did not accurately describe the applicant's business. The fact is that, although the date on which the cards were printed and used is not entirely clear from the evidence (1971 or 1973), it is documentary evidence against Mrs Kavich's story that the applicant was formed purely as a long term investment company for the benefit of her family, and not as a land development company, whereas the other three companies which she arranged to be formed were land purchase and development companies.
Counsel for the respondent relied upon the objects of the applicant as set out in its memorandum of association to support the argument that it was a company formed to trade in land. I do not accept this argument because, although the objects when read as a whole, are perhaps more consistent with the conclusion that the company was formed to be a land developer, nevertheless the capacity of the applicant to purchase land as a long term investment is consistent with certain of the objects. It must be borne in mind also that it was a shelf company that was acquired by Mrs Kavich and her brother shortly after the incorporation of the company. I note, however, that the same memorandum of association was used in relation to the other three companies, all of which were admittedly engaged in profit making by activities in relation to land.
I turn to the witnesses for the applicant.
It is clear from the evidence of Mr Portelli that he was uncertain about a number of matters fundamental to the businesses of the four companies, including even the number of properties acquired by the applicant.
In evidence is a declaration of trust dated 11 November 1977 between the applicant as trustee and certain children of Mrs Kavich and Carmel Portelli as beneficiaries. The document states that the applicant as trustee holds the four lots of land at Karuah, including Lot 51, upon trust for the beneficiaries. It was signed by Mr Portelli as a director of the applicant after it was given to him by Mrs Kavich to sign. He said in cross-examination that he signed the document because he thought it was in his interests to do so. He had been having trouble with his wife (there were in due course Family Court proceedings) and Mrs Kavich said it would stop her from getting his half interest in the properties which would instead go to the children.
A second declaration of trust exists, also dated 11 November 1977, between the applicant as trustee and certain of Mrs Kavich's children and Carmel Portelli as beneficiaries. Mrs Kavich's son, Antony, has been deleted from this document as a beneficiary and her
ATC 4211son, Paul, substituted. This was apparently done at a time after Antony had become bankrupt. Mr Portelli said that he signed this document for the same reason as he signed the first one and again at the instance of Mrs Kavich who told him that the first document was:
``not good enough so she got another one, I don't know.
Was not good enough for what?
For what the purpose of my wife not getting the share in Antlers.''
Mrs Kavich was also asked to explain these two trust deeds. Her explanation was fundamentally different to that of Mr Portelli as to the facts surrounding the execution of those documents and the reasons for their execution. As to the first of the documents, namely, the one describing her son Antony Kavich as a beneficiary, she said that it was created to be put into the hands of the liquidator of the applicant in order to deceive him into believing that there had been a declaration of trust by the company in November 1977.
As to the second of the trust documents, she said that she created it a little while after the other one. The purpose of creating it was to take away the alleged asset from her son Antony to Paul ``because Tony was going broke and he was having marital problems'' in 1984. She admitted that she created this document for the purpose of deceiving others.
As to the trust documents, Carmel Portelli is not only the name of Mr Portelli's daughter, but also of Mrs Kavich's mother. These two documents were created for purposes quite foreign to the terms of the document themselves and were designed to deceive. The better view is that the first of the documents naming Antony Kavich as a beneficiary was created at or about the time at which it was stamped, namely 1985; and the other one was produced later on after Antony Kavich became bankrupt in 1990 it would appear for the purpose of keeping interests he may be alleged to have had in the four lots out of his bankrupt estate.
Mrs Kavich also admitted in cross- examination that in a letter written by the applicant to the Land Tax Office on 18 January 1978 (signed by her), a false statement was made, that Lots 51, 52, 53 and 78 were used for primary production as at 31 December 1973. She said in evidence that this was not correct; Lots 52, 53 and 78 were used for primary production, but not Lot 51. She described the error as an oversight.
I accept that Mrs Kavich was very protective of her family and she loved having a strong family unit about her. She has not had an easy life bringing up a large family and for much of the time she and her husband were estranged and later divorced. She has no doubt fought hard to keep the family going and prospering. Nevertheless, I am unable to accept Mrs Kavich and Mr Portelli as truthful or reliable witnesses, and I will only accept their evidence if there is strong corroboration.
The evidence of Mrs Kavich's two daughters supports the view that Mrs Kavich did not intend to develop or resell the property in the short term and that she did regard the property as something to hold onto for a period, when it might ultimately be sold to benefit her children.
It must be borne in mind that Mrs Kavich's two daughters were very young in 1971-1972; and they would in my view have had no particular reason to remember with any degree of accuracy what their mother told them more than twenty years ago about the Doonside land.
I do not suggest that Mrs Kavich's two daughters were untruthful in giving their evidence by affidavit and orally, but bearing in mind the objective facts to which I have made reference and the fact that the conversations were more than twenty years ago, I am not persuaded that I can accept the evidence of Mrs Gilan and Mrs Law as reliable.
I treat Mr Learmont's evidence in substantially the same way as I have dealt with the evidence of Mrs Kavich's daughters and I make the same finding with respect to his evidence as I did in the case of Mrs Gilan and Mrs Law. Also, Mr Learmont's evidence concerned statements made to him by Mrs Kavich. For reasons given earlier I am not disposed to hold that what she may have told him was true.
Mr Seggie's evidence also supports the applicant's case about its purpose in purchasing Lot 51 and the other Doonside blocks.
Mr Seggie swore in his affidavit in these proceedings dated 23 January 1996 that he acted for the applicant on Mrs Kavich's instructions on the conveyancing matters
ATC 4212associated with all four lots at Doonside during 1972 and for the purchase of another property by the applicant at about that time. This is incorrect as he admitted in oral evidence under cross-examination that he only acted for the applicant in respect of Lots 53 and 78.
He was cross-examined also about the insertion of a clause in the contract for the sale of Lot 51 in 1992, namely, special condition 7.1 which said that the deposit and balance of the purchase monies were to be paid to Paul Kavich, Mrs Kavich's son. Mr Seggie said that, although he does not particularly remember whether it was the solicitor for the purchaser who drew that condition, his recollection is probably that that is what did happen. I find this evidence unsatisfactory and no explanation was offered as to why the purchaser of the land (a company independent of the parties to this proceeding) would have the slightest interest in framing a special condition to that effect.
I do not accept the evidence of Mr Seggie about the conversation he had on critical matters relating to the purchase of Lot 51 by the applicant unless it is corroborated by other clear evidence. I find that his evidence is unreliable, especially with the passage of some more than 20 years since the happening of relevant events surrounding the purchase of Lot 51.
Mr Muirhead's evidence was by affidavit. He was not cross-examined. The essence of his evidence was mentioned earlier. In summary he says that in September 1991 Mrs Kavich said to him and to other officers of the Australian Taxation Office that her intention in purchasing Lot 51 and it seems the other three lots at Doonside was: ``To provide for our children. They had rented dwellings on them and we rented them out.''
Assuming Mrs Kavich did make those statements in Mr Muirhead's presence, they do not take her case very far. They are very general and are not necessarily inconsistent with the land having been purchased for the purpose of profit making by sale. However it is a piece of evidence which I place in the whole of the material for the purpose of drawing the conclusion whether s. 25A applies or not.
Also it must be remembered that all Mr Muirhead did was to relate a statement made by Mrs Kavich which I find contrary to the objective evidence.
Even if the statements made by Mrs Kavich truly reflected her state of mind (and let me assume therefore the state of mind of the applicant because she was its guiding force) namely, the statements attributed to her by her two daughters, Mr Portelli, Mr Learmont, Mr Seggie and Mr Muirhead; they all involve the holding of land ripe for subdivision for a period of time which was not defined except certainly beyond the short term, and nevertheless assumes that at some time in the future the properties will be subdivided and sold and the proceeds applied to the benefit of the families of Mrs Kavich and Mr Portelli. In short, it was always assumed that at some future date the properties would be subdivided and sold.
The strongest point in favour of the applicant's case is that Lot 51 was held by it from 1972 until 1992, some twenty years, before it was sold. But what happened in the meantime must be examined.
The applicant was wound up on 20 August 1978 and remained in liquidation until the order was made by the Supreme Court of New South Wales staying the winding up in November 1987. However, as noted earlier, the applicant in fact remained in liquidation thereafter because it did not comply with the relevant condition on which the stay was granted by the Supreme Court. So from 1978 to at least 1987 the applicant was in liquidation and its affairs were under the control of the liquidator. From 1972 to 1978 the directors of the applicant controlled its affairs and that meant in particular Mrs Kavich as the person who ran the affairs of the applicant. Lot 51 was not sold during that period of approximately six years and Mrs Kavich appears to have refused an offer to sell it during that time.
In my opinion the true state of mind of Mrs Kavich (and of the applicant) was that at the time of the purchase of Lot 51 the applicant did not intend to turn it over quickly by developing and selling off lots, but to wait until the right moment in the future when the real estate market had become more buoyant and then when the time was right to engage in subdivision and resale. It strains credulity to an unacceptable limit to think that the applicant did not have in mind turning Lot 51 to account with all its subdivisional potential by development and resale of the lots.
Taking all the evidence into consideration, both oral and documentary, I am satisfied that
ATC 4213the applicant purchased Lot 51 for the purpose of profit making by sale. Section 25A therefore operates to include the profit made on the sale of Lot 51 in 1992 as part of the assessable income of the applicant for the 1992 year of income.
The case was conducted before me as a s. 25A case, in particular the first limb. Little was said about s. 25(1) so I do not propose to consider the application of that section.
The Court orders that both appeals are dismissed and that the respondent's objection decisions under challenge in this case are upheld.
The applicant must pay the costs of the respondent of the appeals including reserved costs, if any.
THE COURT ORDERS THAT:
1. The appeals be dismissed.
2. The respondent's objection decisions be confirmed.
3. The applicant pay the respondent's costs of the appeals including reserved costs, if any.