STEELE v DFC of T

Judges: Gleeson CJ
Gaudron J
Gummow J
Kirby J

Callinan J

Court:
Full High Court

MEDIA NEUTRAL CITATION: [1999] HCA 7

Judgment date: 4 March 1999

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Callinan J

92. Inclusive of the application for special leave, there have been seven hearings before the Administrative Appeals Tribunal and courts in this matter. It is highly desirable that this case be brought to an end at this point, if that can, with propriety, be done. I am of the opinion that it can be.

93. I agree with the reasons for judgment of the majority (Gleeson CJ, Gaudron and Gummow JJ) except in one respect, and that is

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as to the disposition of the case at this point. Their Honours would allow the appeal and set aside the orders of the Full Court of the Federal Court. In lieu thereof they would order that the appeal to the Full Court of the Federal Court be allowed and the orders of RD Nicholson J (save those regarding penalty) should be set aside. The decision of the Tribunal also, should, according to the majority, be set aside and the matter remitted to the Tribunal for further hearing, leaving it to the Tribunal to decide whether either party should be permitted to lead further evidence on that rehearing. Consequential orders with respect to costs are also proposed by the majority.

94. In this Court the respondent sought to support the decisions against the appellant on the basis that the first limb of s 51(1) of the Income Tax Assessment Act 1936 (Cth) was not satisfied: that is to say, that the losses and outgoings in question were not, or had not been shown to have been, incurred in gaining or producing assessable income (actual or prospective). With respect to this argument the majority in this Court were of the opinion that the resolution of that issue ultimately involved a judgment of fact, even though questions of law might be involved and that accordingly the course proposed by Carr J (who dissented in the Full Court of the Federal Court) of remitting the matter to the Tribunal, was the appropriate course. Their Honours expressed the view that this is not a case where, on the evidence, only one conclusion would be open to the Tribunal. It is as to this last matter that I find myself in respectful disagreement with the majority.

95. There is no doubt that under the Administrative Appeals Tribunal Act 1975 (Cth) the Tribunal had jurisdiction to review the decision of the respondent in this case, and that that review could and would likely involve a review and a determination of factual matters. However, by s 44 of the Act, an appeal from a decision of the Tribunal lies on a question of law only. Sub-section 44(4) empowers the Federal Court to make such order as it thinks appropriate by reason of its decision. The Court may also make orders affirming or setting aside the decision of the Tribunal and an order remitting the case to be heard and decided again, either with, or without the hearing of further evidence by the Tribunal in accordance with the directions of the Court.

96. There has been controversy in Australia since the decision of the High Court in Australian Broadcasting Tribunal v Bond ^[103] (1990) 170 CLR 321. as to the meaning of ``error of law'' when there is a question whether an appropriate factual substratum exists or not to support an ultimate legal conclusion. ^[104] See for example, Aronson and Dyer, Judicial Review of Administrative Action , (1996) at 273-289. What may be accepted is that if there is no evidence at all to support a finding of fact and therefore the ultimate conclusion upon which that finding depends, then error of law will have occurred. Not the same certainty can be expressed about a proposition that if evidence is entirely one way, a Tribunal must make a finding of fact in accordance with that evidence, and reach its decision solely upon the basis of it. It is open to a Tribunal (in what may well be exceptional cases only) to reject such evidence or simply not to be satisfied by it. This is not a case which falls within that latter category. In my opinion, this is a case in which the necessary factual substratum and all necessary findings of fact based upon it have been made.

97. As Burchett and Ryan JJ in the Full Court of the Federal Court said, ^[105] Steele v FC of T (1997) 73 FCR 330 at 334; 97 ATC 4239 at 4241. perusal of the Tribunal's reasons shows the central conclusion to have been that the appellant intended to use the property, as she told a taxation officer, ``to build a motel and operate it by myself''.

98. Their Honours continued: ^[106] (1997) 73 FCR 330 at 334; 97 ATC 4239 at 4241.

``... The ability to recover a small part of the holding charges from agistment fees was merely an incidental advantage. The Tribunal accepted that these two matters constituted dual purposes of the acquisition, the `main or dominant purpose' being `to erect a motel upon the site' and `any activity involving horses [ being] subsidiary to her main purpose'.''

99. Their Honours quoted in somewhat more detail some of the findings of the Tribunal: ^[107] (1997) 73 FCR 330 at 334; 97 ATC 4239 at 4241-4242.

``Her evidence makes it clear that she did not have any specific plan in mind as to how this investment might be made profitable; all that she had was an idea, at best, to develop a motel to be managed by herself. Her idea was that what she developed would produce income under her management.... The idea to develop the investment was not incompatible with the fact that there existed on the property an agistment business which, with virtually no effort on her part, could be continued at least until redevelopment commenced and would

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provide income. The purpose of the applicant in acquiring the property was therefore twofold - to obtain income from `Tibradden' so long as that was convenient (the subsidiary purpose) and to develop the property (the main purpose), an activity which would not of itself amount to a present purpose of gaining assessable income.''

100. This last sentence can only be taken as an explicit finding that the appellant acquired the property in order to obtain income both before and after a redevelopment of it. The purpose was accordingly always a purpose of gaining assessable income. What the Tribunal thought however, was that, as a matter of law, unless the purpose could fairly readily and promptly be translated into effective action then the outgoings incurred would not be able to be treated as deductible outgoings within the meaning of s 51(1). This is apparent from the use of the word ``present'' in the reasons of the Tribunal. The word ``present'' is obviously misplaced in the sentence in which it is used. The sentence cannot be taken literally. In terms, it seeks to equate an activity with a purpose. It is clear that the relevant clause in it was intended to mean, and can only be read as meaning ``an activity which would not presently produce assessable income''. Such a construction is consistent with the approach of the Tribunal to the case generally.

101. In other words the Tribunal, whilst accepting that the appellant's intentions or purpose never changed throughout the period that she held the property seemed to think contemporaneity an essential requirement to deductibility under s 51(1).

102. Nothing that has been held at any level beyond the Tribunal with respect to factual matters is to any different an effect from the findings of the Tribunal that I have quoted and analyzed for their true meaning. RD Nicholson J ^[108] Steele v FC of T (1996) 31 ATR 510 at 518-519; 96 ATC 4131 at 4138. expressed the opinion that because the Tribunal sought to distinguish Travelodge Papua New Guinea Ltd v Chief Collector of Taxes , ^[109] (1985) 16 ATR 867; 85 ATC 4432. implicitly, they must have been of the view that the first limb of s 51(1) had not been satisfied. I do not read the Tribunal's findings in that way. Indeed, inexorably, a conclusion to a contrary effect does and must follow from the factual findings to which I refer in these reasons. They involved express findings with respect to the appellant's purposes. The appellant's intentions were always entirely commercial ones for the purpose of gaining or producing assessable income. As the majority here has also said, there was no suggestion that the appellant ever contemplated using the property for private or domestic purposes. That was never an option. Coupled with the continuing, indeed unaltered intentions of the appellant to develop the property over a period of three and one half years for an income producing complex, were numerous efforts to achieve that end, as the Tribunal has effectively found. Those efforts extended beyond efforts to determine whether to go into such a venture at all. ^[110] Contrast Softwood Pulp and Paper Ltd v FC of T (1976) 7 ATR 101; 76 ATC 4439.

103. Carr J thought that the matter should be remitted to the Tribunal for reasons which his Honour developed in this passage: ^[111] (1997) 73 FCR 330 at 365; 97 ATC 4239 at 4266.

``In my view, the matter should be remitted to the Tribunal for it to consider the appellant's business activities as a whole from the time of acquisition of `Tibradden' to its disposal. In doing so, it should not focus on the horse agistment business for the purposes of contrasting it with the appellant's main objective. The appellant is entitled to have all of her activities taken into account as a whole. In my opinion, an important part of those activities was her purpose and plan to construct 80 townhouses for resale to investors. Any profit so realised would have to have been assessable income. Furthermore, the indications are that income was also to be generated from the management of those townhouses after such sale. The uncontested evidence points to a conclusion that the appellant's intention at all times in entering into the various transactions was to make a profit or gain. Focusing on one or other separate but related business activity can (as I think happened here) result in the total picture being overlooked. An overall view of the business activity is required.'' ^[112] See for example GP International Pipecoaters Pty Ltd v FC of T (1990) 170 CLR 124 at 138; 90 ATC 4413 at 4420.

104. With respect, the fact that a party or parties may have put a particular focus upon a case which turns out to be the inappropriate one is not of itself a reason for the ordering of another hearing of the case. Both parties appear to me to have put forward all relevant factual matters upon which they wished to rely. Findings have been made on the basis of those matters. Now that the respondent might wish to change the focus of the case, is not a reason for

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a fresh hearing of it, when, as here, in my view, the essential facts have been found. It was always the case that the appellant relied on the first limb of s 51(1) and it was for the respondent to meet such a case if it could, at all stages. That the appellant contended that she had presented and made out a case for the application of the first limb of s 51(1) is apparent from Ground 5 of her Notice of Appeal to the Federal Court:

``Further, or alternatively, the Tribunal should have held that the outgoings in question were wholly deductible under the first limb of s 51(1), as being incurred for a dual purpose, both purposes being the gaining or producing of assessable income.''

105. In this Court, the majority, in discussing the relevance of any temporal connexion between an outgoing or an expenditure and the purpose for which it was made says this: ^[113] [ 1999] HCA 7 at [ 44]; 99 ATC 4242 at 4251.

``There are cases where the necessary connection between the incurring of an outgoing and the gaining or producing of assessable income has been denied upon the ground that the outgoing was `entirely preliminary' to the gaining or producing of assessable income <sup>[114]</sup> eg Softwood Pulp and Paper Ltd v FC of T (1976) 7 ATR 101 at 113; 76 ATC 4439 at 4450. or was incurred `too soon' before the commencement of the business or income producing activity. ^[115] FC of T v Maddalena (1971) 45 ALJR 426; 71 ATC 4161; Lodge v FC of T (1972) 128 CLR 171; 72 ATC 4174; cf FC of T v Riverside Road Lodge Pty Ltd (in liq) (1990) 23 FCR 305; 90 ATC 4567. The temporal relationship between the incurring of an outgoing and the actual or projected receipt of income may be one of a number of facts relevant to a judgment as to whether the necessary connection might, in a given case, exist, but contemporaneity is not legally essential, and whether it is factually important may depend upon the circumstances of the particular case.''

106. Softwood Pulp and Paper Ltd v FC of T ^[116] (1976) 7 ATR 101; 76 ATC 4439. upon which the respondent relies, depends upon its own facts which show clearly that the expenses incurred and disallowed by the respondent were incurred at a time before the taxpayer had even taken a decision to enter into the relevant business in Australia. In any event, the Court in that case was able to conclude that the outgoings were of a capital nature. I do not regard that decision as being of any assistance in the resolution of this case. The same may be said of the other cases cited. In FC of T v Maddalena ^[117] (1971) 45 ALJR 426; 71 ATC 4161. the taxpayer failed because the expenses incurred by him as a professional Rugby League footballer in negotiating with a metropolitan club with a view to its engagement of him, and legal expenses associated with that negotiation, were held to have been incurred in getting, and not in doing, work as an employee. Lodge v FC of T ^[118] (1972) 128 CLR 171; 72 ATC 4174. is distinguishable on the ground that the expenditure there was of a private or domestic nature.

107. In FC of T v Riverside Road Lodge Pty Ltd (in liq) ^[119] (1990) 23 FCR 305 at 313-314; 90 ATC 4567 at 4576. the Full Court of the Federal Court discussed Texas Co (Australasia) Ltd v FC of T ^[120] (1940) 63 CLR 382; (1940) 5 ATD 298. and FC of T v Total Holdings (Australia) Pty Ltd . ^[121] (1979) 43 FLR 217; 79 ATC 4279. They then referred to Maddalena and Lodge and a text of Professor RW Parsons ^[122] Income Taxation in Australia: Principles of Income, Deductibility and Tax Accounting , (1985) at 5-37 to 5-48. which they said established that there should be an element of contemporaneity between the expenditure and the commencement of the business or income producing activity. I doubt whether they do establish such a proposition. If they do, they cannot now be taken as correct in view of the decision of the majority here.

108. The finding of the Tribunal to which I have referred, accepts that at all material times, the appellant's intention was to generate income from the property both before and after a redevelopment of it. That finding together with other findings in my opinion establish the factual foundation for the application of s 51(1). These other findings are:

• (i) that even before she bought the property ``Tibradden'', the appellant consulted an architect about the possibility of its redevelopment for various purposes;
• (ii) within seven months of the purchase, the appellant and Williams (the manager of a building company) began ``to take initiatives in relation to possible developments of Tibradden'';
• (iii) in December 1981 (about a year after the purchase), Williams applied to the Local Authority for planning approval in principle for a ``holiday/recreation style motel complete with swimming pool, tennis courts and other sporting facilities'';
• (iv) in January 1982, the appellant entered into an agreement with Williams pursuant to which he was to receive a fee on ``satisfactory completion... of the motel hotel complex'';
• (v) in February 1982 the Local Authority had granted an approval in principle to an amended plan for a holiday complex;
• (vi) various negotiations were undertaken by Williams with respect to the possible

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  development of the site for a Casino, and with potential operators of the complex when it was completed although the appellant says that her ideas were more modest;
• (vii) other attempts were made to interest joint venturers but by March 1984 it became apparent that no project could proceed and that the property would have to be sold, a process which was not completed despite continuing attempts to do so, for about eighteen months.

109. It was not contested by the respondent that the appellant intended to redevelop the property for a motel complex. Indeed, that that was so was part of the respondent's case. This appears from the exchange quoted by the Tribunal:

`` [ Counsel for the respondent: (cross- examining the appellant):] Well, I put to you that your purpose in buying the property, the reason that you bought it, was to build some development or buildings upon it? - Yes.

...

Subject to the qualification [ that you were saying it may have been something more than a hotel; it was a complex involving a motel and other facilities] you accept that you told the taxation officers that you intended to use the property to build a motel and the other buildings set out in the plans that you sent to the Council and to run the motel by yourself? - Yes.''

(Emphasis added)

110. The Tribunal went on to make an explicit finding upon the basis of that exchange:

``We accept that in 1979, [ the appellant], having sold her business, was looking round for an investment which would provide her a good income . However, we reject [ the appellant's] assertion that her equestrian interests played any role in her initial search. Indeed, we are satisfied that when she discovered that Tibradden was on the market, her interests were focused on its commercial possibilities as a motel site, and the fact that the property was presently used for agisting horses was merely fortuitous. We therefore accept as accurate - and accurately reflecting [ the appellant's] intention - the answer she gave to [ the taxation department officer who had investigated her affairs] as to how she intended to use Tibradden, viz: ` my intention was to build a motel and operate it by myself . It was my belief that another motel business in that area would be profitable, given the proximity to the airport and the city'. The fact that Tibradden was used for agistment purposes was thus a lucky coincidence - lucky in the sense that it coincided both with her own interests, as well as contributing, however modestly, to the holding costs whilst the motel plans were being developed. It also provided accommodation and an occupation for [ the appellant's] sister.''

(Emphasis added)

111. The fact that the respondent was conducting his case with a view to establishing that the outgoings were of a capital nature, and that he now seeks to make out a case that the first limb of s 51(1) is not satisfied cannot alter the nature and effect of the ultimate findings of the Tribunal that I have quoted.

112. They lead to this factual and legal conclusion: that the expenditures in question, made over a period which may be viewed as a relatively short one in the relevant industry (of hotel and motel development), were made with one end in view, of gaining or producing assessable income, were made to achieve that end whilst continuing efforts in that regard were being undertaken, and were therefore within the first limb of s 51(1). I do not think that this case is one in which any other conclusion is open.

113. It follows that I would join in all of the orders proposed by the majority save as to the remitter of the matter, in lieu of which I would order that the assessment of the respondent dated 8 May 1989 with respect to the year ended 30 June 1987 be set aside to the extent that the respondent disallowed the appellant's claim to deduct losses of $909,649.00 against her assessable income for that year. The respondent should pay the appellant's costs of the appeal to this Court, of the appeal to the Full Court of the Federal Court and of the proceedings before RD Nicholson J.

ORDER

1. Appeal allowed.

2. Set aside the order of the Full Court of the Federal Court made on 18 March 1997. In lieu thereof, order that the appeal to that Court be allowed.

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3. Set aside the orders of RD Nicholson J made on 29 January 1996, except in so far as they relate to the question of penalty.

4. Set aside the decision of the Administrative Appeals Tribunal made on 4 March 1994.

5. Remit the matter to the Administrative Appeals Tribunal for a rehearing of the appellant's appeal against the disallowance of her objection with or without the hearing of further evidence as the Tribunal may determine.

6. The respondent pay the appellant's costs of the appeal to this Court, of the appeal to the Full Court of the Federal Court, and of the proceedings before RD Nicholson J.