TAGGET v FC of T

Judges:
Dowsett J
Jessup J
Gordon J

Court:
Full Federal Court, Sydney

MEDIA NEUTRAL CITATION: [2010] FCAFC 109

Judgment date: 1 September 2010

Dowsett, Jessup and Gordon JJ

1. This is an appeal from a judgment of a single Judge of the Court given on 2 February 2010, whereby the appeal of the appellant, Peter Tagget, against the disallowance by the respondent, the Commissioner of Taxation, of the appellant's objection to the Commissioner's assessment of income tax for the year 2005/2006 was dismissed. The contentious aspect of the assessment was the inclusion in the appellant's assessable income of a sum of $1.2 million, being the value, in 2005/2006, of a parcel of land transferred to him in September 2005. The appellant accepted that the benefit which he received (not the land as such, as he submitted) was on revenue account, but contended that the sum of $450,000 only should have been included in his assessable income. That sum was said to represent the value of certain rights which the appellant received in 1998, the exercise of which led to the transfer of the land to him. The primary Judge rejected that proposition, and upheld the Commissioner's assessment.

The facts in outline

2. Our outline of the facts of the case, set out in the paragraphs which follow, is substantially lifted from the reasons of the primary Judge. There was no challenge to his Honour's recital of the facts which formed the background to the proceeding before him.

3. The appellant had been involved in the business of earth moving the whole of his working life. He lived in Tanglewood, New South Wales and had been involved in the Tanglewood Estate since the late 1970s. Tanglewood Estate covered approximately 1,100 acres of land overlooking Casuarina Beach, which is about 5 kms south of Kingston in the Tweed Shire of New South Wales. In the late 1970s, the appellant started working with Tanglewood Valleys Pty Ltd ("Tanglewood Valleys"). Mr Geoff Bell was a director of Tanglewood Valleys and the appellant came to know him well. The appellant, through his involvement with Tanglewood Valleys and Mr Bell, became aware that, in 1982, development consent was given by Tweed Shire Council for the development of part of Tanglewood Estate. The development consent provided for the construction of 44 lots within what was known as the Stage 5 development of Tanglewood Estate.

4. In 1983, the appellant started a business called Peter Tagget Earthmoving. He commenced working with Tanglewood Valleys on earthworks and road building, and became a civil works contractor and adviser to that company. Between 1983 and 1987, the appellant performed a large amount of work - including land clearing and levelling, rubbish removal and landfilling, preparing driveways, laying bitumen, installing water and electricity supply and arranging surveys - in relation to the Stage 5 development. In 1989 the appellant sold the business of Peter Tagget Earthmoving to his brother.

5. In about 1998, the appellant became aware that Tanglewood Valleys was running into financial trouble, and that the developer was not going to proceed with the Stage 5 development. Financiers for the development had entered into possession, and put Tanglewood Estate up for sale. In early 1998, the appellant acquired shares in a company called Hillpalm Pty Ltd ("Hillpalm"), which made an offer to MLC Lifetime Company Limited ("MLC") to acquire the Tanglewood Estate. In March 1998, Hillpalm and MLC entered into a contract for the sale of Tanglewood Estate by MLC to Hillpalm for the sum of $2,200,500. MLC allowed Hillpalm to enter into early possession of the Tanglewood Estate, enabling Hillpalm to progress the development. In the meantime, the appellant commenced negotiations with various parties in an attempt to raise finance for Hillpalm to complete the purchase. Those negotiations were unsuccessful. In July 1998, MLC terminated its contract with Hillpalm and, in August 1998, commenced proceedings against Hillpalm and the appellant for breach of contract.

6. The appellant then entered into negotiations with Joanne Hambrook and Pat Wilson with a view to having them take over Hillpalm. On 2 November 1998, a deed was executed by the appellant, Hillpalm, Joanne Hambrook and David Williams. In the deed, it was recited that Hillpalm intended to acquire "the Land", defined as consisting of "Lots 154, 155 and 156 in Deposited Plan 801121, Lot 74 in Deposited Plan 755701 and Lot 151 in Deposited Plan 630766". It was recited that Hillpalm wished to appoint the appellant to assist with the implementation of "the Project", defined to mean "the planning, development, sub-division, marketing and completion of sale of the Land".

7. Relevant provisions of the deed included the following:

8. Following execution of the deed, all shares in Hillpalm were transferred to a company associated with Ms Hambrook and Mr Williams. The appellant and the other directors of Hillpalm resigned, and Ms Hambrook and Mr Williams were appointed in their place. Hillpalm paid $2,275,000 to MLC, which transferred the Tanglewood Estate to Hillpalm by memorandum of transfer dated 20 November 1998.

9. There was no evidence before the primary Judge that Hillpalm ever achieved gross sales of $3.2 million; nor that the plan of subdivision in respect of the Stage 5 development was ever approved by the council; nor that the Linen Plan of Survey for Stage 5 was ever sealed. So far as the evidence revealed, Lot 157 was never excised from the area of the development as a whole. Neither was a written agreement, of the kind contemplated by cl 2 of the deed of November 1998, ever entered into between the appellant and Hillpalm. But it appears that he did perform some work for Hillpalm. According to him, the work included conducting negotiations for machine hire, the contracting of required labour and supervising the construction of an outdoor arena in what was known as the Equestrian Centre. He also supervised the drainage and fixing of certain damaged levy banks, and assisted in fixing a soil problem by developing a management plan, as to which it was necessary for him to liaise with the council and various environmental scientists.

10. In June 1999, the appellant wrote to Hillpalm, claiming that it owed him $66,010 by way of unpaid remuneration and reimbursement with respect to the work that he was said to have done on the development. He noted that he had not received the agreement contemplated by cl 2 of the deed of November 1998, and proposed certain expedients by way of settlement of his claim, including "That you will register and transfer the subdivision of Lot 157 to me forthwith". The primary Judge observed that it was not clear how Hillpalm responded to this letter as such, but in March 2000 Ms Hambrook wrote to the appellant complaining about various matters, including the appellant's performance and activities on site. She said that Hillpalm was "in the process of reviewing it's [sic] development scheme", and that "all further preparatory works on site be suspended pending formulation of a revised plan of development which will comply with Council requirements". Ms Hambrook added that "the advice of Council and the Company's Planning and Engineering Consultants cast considerable doubt over the feasibility of Stage 5 in it's [sic] current approved format". She said that Stage 5 could not be "considered as an independent proposal and must be reviewed in the context of the overall Development Scheme".

11. Ms Hambrook's letter then stated:

"In the meantime, and so there is no misunderstanding, the Company wishes to clarify:-

  • 1. Your services on site are no longer required and all on site development works will be suspended pending formulation of a revised development scheme.
  • 2. Hillpalm does not intend to formalise any appointment with you in terms of the management of the project, either in terms contemplated by clause 2 of the Deed of Agreement or otherwise. In these circumstances the Company cannot consent to a licence to occupy lot 157 which was only ever to be considered in the event that the parties were able to reach agreement in respect of your project management role.
  • 3. Hillpalm does not intend to cause a Transfer of lot 157 other than strictly in accordance with the terms contemplated by the Deed of Agreement and at all times subject to performance of your express and implied obligations under that agreement."

12. The appellant's solicitor responded to this letter with what the primary Judge described as a request for further particulars of Hillpalm's complaints. In her reply, Ms Hambrook declined to elaborate further, merely denying that Hillpalm was in breach of the deed of November 1998 and indicating that any proceedings commenced by the appellant would be defended.

13. In November 2000, the appellant commenced proceedings in the District Court of New South Wales, claiming the liquidated sum of $122,610 in respect of work done and materials supplied by him at the request of Hillpalm between November 1998 and March 2000. By a later amendment, the appellant enlarged his claim to $750,000, which included that liquidated sum. Most of the total amount claimed was for general damages for alleged breaches of the deed of November 1998. Those alleged breaches included that Hillpalm -

The defence filed by Hillpalm denied that it had breached the deed. It also asserted that the appellant's entitlement to be paid the liquidated sum was conditional upon him having been appointed under cl 2, something which Hillpalm denied had occurred.

14. On 11 March 2004, the appellant and Hillpalm executed a deed of release. The recitals to this deed stated that the parties had previously entered into the deed of November 1998, and referred to the District Court proceedings. The recitals continued:

"It is the parties [sic] intention by this Deed to resolve any claims that they might have against the other and to substitute the rights and obligations created by this Deed for any other rights or obligations that the parties might otherwise have had against each other whether dealt with in the proceedings or otherwise."

15. Clauses 1 and 2 of the deed of release provided:

16. In August 2004, judgment in the District Court proceeding was entered by consent in favour of Hillpalm, with no order as to costs.

17. On 20 September 2005, Lot 1 in Deposited Plan 1084992 was transferred from Hillpalm to the appellant. This was expressed to be "pursuant to the Deed of Agreement between Hillpalm and [the appellant]". The transfer was registered on 18 October 2005. Lot 1 was not the same as the originally-proposed Lot 157. The appellant's evidence was that he still ended up with about 11.2 hectares, but that the western boundary for Lot 1 was located about 40 or 50 metres away from where it was originally shown for Lot 157 in the drawing attached to the deed of November 1998. The Commissioner was content to ignore the distinction between the two parcels of land, and his Honour did likewise.

18. It was common ground that the value of the proposed Lot 157 in November 1998 was $450,000, and that the value Lot 1 in DP 1084992 in October 2005 was $1.2 million, the latter of which was based on a special purpose financial report by Grant & Brady, Chartered Accountants, prepared for the appellant in respect of the financial year ended 30 June 2006.

The appellant's case before the primary judge

19. Before the primary Judge, it was submitted on behalf of the appellant that the land which he received in September 2005 was never part of his ordinary income. This submission was based on three propositions. First, what the appellant received under the deed of November 1998 was a contractual right either to acquire Lot 157 when the relevant conditions were satisfied (for nominal consideration), or to receive compensation in the event that Lot 157 never came into existence. Secondly, these contractual rights were choses in action that could have been turned to pecuniary account by the appellant and were, therefore, ordinary income derived by him, upon entry into the deed. Thirdly, the receipt of Lot 1 by the appellant in September 2005 was the result of the exercise by him of the contractual right acquired in November 1998, and was not income.

20. The appellant relied upon
Abbott v Philbin [1961] AC 352, in which the House of Lords held that share options granted to an employee constituted "perquisites or profits" received by him, and thus assessable income under the Income Tax Act 1952 (UK). The monetary value of the options in the year of grant was, therefore, part of that income. By majority, the House of Lords held that the taxpayer ought not to have been assessed on the value of the options in the (later) year in which he exercised them. The primary Judge noted that Abbott v Philbin had been followed in Australia, specifically in
Donaldson v Federal Commissioner of Taxation (1974) 3 ALR 516 and in
Federal Commissioner of Taxation v McArdle (1988) 19 ATR 1901. Each of these cases involved options granted to a taxpayer in the position of an employee of the grantor. In each case, it was held that the value of the options, at grant, ought to be included within the taxpayer's assessable income under what was then s 26(e) of the Income Tax Assessment Act 1936 (Cth) ("the 1936 Act").

21. The primary Judge accepted that the appellant's rights under the deed of November 1998 were legal choses in action which the appellant could have turned to pecuniary account. However, his Honour did not accept that it necessarily followed that those choses in action represented ordinary income of the appellant. His Honour said:

"A distinction needs to be drawn between an agreement which confers a right upon a person to obtain property or money and an agreement in which property or money is actually vested in him or her. Each of the cases I have referred to was concerned with a situation in which the taxpayer was granted share options by his employer. Moreover, the grant of the options was not conditional or contingent in any respect. Of course, the options may not have been exercisable unless certain conditions were fulfilled; Mr Donaldson, for example, could not exercise his options until he had completed specified periods of further service. But that is quite different to saying that the grant of the options was conditional upon Mr Donaldson completing the specified periods of further service. If Mr Donaldson's employer had promised to grant him options on condition that he completed a period of further service then I do not consider that promise would have been a benefit to which s 26(e) would have applied - at least not until Mr Donaldson had completed his period of further service."

Relying upon Parsons, Income Taxation in Australia (1985), at paras 2.15 and 11.59, the primary Judge noted that there was a difference between a contractual right to an issue of options, which would not involve a derivation of income, and the actual issue of options, which would involve a derivation of income. His Honour referred also to what had been said by Gummow J (with the assent of Northrop and Drummond JJ) in
Barratt v Commissioner of Taxation (1992) 36 FCR 222, 231: "… where the right of the taxpayer is contingent, there will be no derivation before the contingency is satisfied"; and to what had been said by Dixon J in
Commissioner of Taxes (SA) v Executor Trustee and Agency Co of South Australia Ltd (1938) 63 CLR 108, 155, that the question was whether the rights in question had "come in" or "come home" to the taxpayer in a realised or immediately realisable form. The primary Judge held that, in November 1998, the rights in contention in the present case had not come home to the appellant.

22. The primary Judge also looked at the matter from the perspective of a situation in which, for reasons beyond the control of Hillpalm, approval was not obtained to create a separate title to Lot 157, and that, therefore, cl 3.3 of the deed of November 1998 was brought into operation. Assuming that this might, or at least could, have happened some years after entry into the deed, his Honour expressed the view that compensation "would have to be based upon a valuation as at the date cl 3.3 was engaged as opposed to a valuation as at the date of the Deed". The significance of this circumstance, according to his Honour, was that "at the date of the Deed the value of [the appellant's] entitlement to either land or compensation was quite uncertain".

Applicable legislation

23. The issues before the primary Judge, and those which arise on appeal, fall to be determined under the legislation as it applied to the 2005/2006 taxation year. As stated by the primary Judge, the relevant provisions are s 6-5 of the Income Tax Assessment Act 1997 (Cth) ("the 1997 Act") and ss 21 and 21A of the 1936 Act.

24. Section 6-5 of the 1997 Act relevantly provides as follows:

25. Sections 21 and 21A of the 1936 Act, to the extent presently relevant, contain the following provisions:

The appellant's case on appeal

26. The question arising on appeal is whether the primary Judge was in error to have held that the parcel of land transferred to the appellant in 2005 was ordinary income derived by him within the meaning of s 6-5(2) of the 1997 Act, that that land was consideration within the meaning of s 21(1) of the 1936 Act, and that the money value of that consideration was $1.2 million (the value of the land itself in 2005).

27. Both before the primary Judge and again on appeal, certain things were common ground. First, the benefit which the appellant received, and which is relevant for the present case, was received by him as remuneration for management and other services provided, or to be provided, by him to Hillpalm in connection with the development of Tanglewood Estate. As such, that benefit was on revenue account. Secondly, the appellant returned his income on a cash accounting basis. The Commissioner accepted the appropriateness of that method, and the present case has been conducted by reference to it. Thirdly, the taxation year in which the benefit received by the appellant was properly brought into his assessable income was 2005/2006.

28. The appellant's case was that that benefit should have been brought into his assessable income at the value it had in 1998/1999. He so submitted because, by the deed of November 1998, he was granted valuable rights which could immediately have been turned to pecuniary benefit. At all times thereafter until September 2005, he held those rights. In that month, he exercised those rights, obtaining in return for them a transfer of title to the parcel of land in question. This, it was said, put him in a position analogous to that occupied by the taxpayer in Abbott, such that the increase in the value of the land over the seven years which followed was "adventitious", and formed no part of the appellant's ordinary income.

29. Counsel for the appellant explained his client's case in the following terms:

"[I]t is important to understand that we are dealing with the accrual of a right in 1998. If we had been an accrual taxpayer we would have had to bring this entitlement to account in 1998. We are not an accrual taxpayer; we're a cash based taxpayer. So we accrued this right in 1998. It's a right which … would have to be valued, but that's not a difficulty. … In 2006 it's brought to account by the transfer of the land. The question for your Honours to decide is that if it's brought to account in 2006, do you value it at 2006 or do you value it on the basis it would have been valued if it had been on an accruals basis in 1998? The answer to that is there cannot be a difference in the value of income based upon whether it's cash or accrual."

Although there is a certain plausible symmetry about this sequence of propositions, in our view the reasoning involved does not withstand examination.

30. The appellant's case is not analogous to Abbott. There, the House of Lords held that the value of the perquisite received by the taxpayer should be taken in the year when the options were granted because it was in that year that the options were income. The options were unconditional, and could be exercised at any time without any further voluntary act of the grantor. In the present case, the exercise of the rights which the appellant received under the deed of November 1998 was conditioned upon certain stages having been reached in the development, and commercial exploitation, of Tanglewood Estate. As pointed out on behalf of the Commissioner, as it happened, the appellant was never in a position unilaterally to call for the transfer of Lot 157. What matters for present purposes is that, in November 1998, he was not in a position to have done so. He was in the position of a person to whom conditional executory promises had been made, under which he would be remunerated for services rendered. Whether he would ever receive the contemplated remuneration was, in 1998, entirely a matter for the future.

31. At base, there were only two questions which arose before the primary Judge: in what year was the relevant item of income derived within the meaning of s 6-5(2) of the 1997 Act, and what was the amount of income so derived. A taxpayer who files returns on a cash receipts basis is assessed on the cash received by him or her in the year of assessment because it is the receipt of the cash which constitutes a derivation of income for the purposes of s 6-5(2) of the 1997 Act: see
Federal Commissioner of Taxation v Dunn (1989) 85 ALR 244, 252 and Barratt at 224-225. In the case of such a taxpayer, it will not be to the point that the right to receive the income accrued in an earlier year. Neither will it make a difference that, in some earlier year, a promise to pay the money may have been made by reference to subsequently occurring events.

32. When the item received on revenue account is property other than money, recourse is necessary to the valuation provisions of the legislation to which we have referred. Section 21(1) of the 1936 Act looks to the occasion upon which the consideration "is paid or given", and requires the money value of the consideration to be determined. Be it granted that the land received by the appellant was so received by way of consideration for services performed by him many years previously, the land was "paid or given" in 2005, and the money value of it should be determined as at that time.

33. We would not consider it satisfactory to decide the present appeal by resort to a high-level formula, not drawn from the legislation, that "there cannot be a difference in the value of income based upon whether it's cash or accrual". The question will always be, and will only be, what is the income derived by the taxpayer in the year concerned? If the taxpayer returns his or her income on a cash receipts basis, the answer will be that his or her income is made up of what he or she actually received - in money or kind - in that year. The sum that might previously have been accrued will be neither here nor there, for the reason that that sum would not, in the case of such a taxpayer, have been derived as income in the earlier year. So there might well be a difference between what was accrued and what was received: it will be the latter sum that is properly returned as income by such a taxpayer.s

34. For the above reasons, the appeal must be dismissed with costs.

 

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