DE MARCO v CHIEF COMMISSIONER OF STATE REVENUE (NSW)

Judges: McColl JA
Basten JA

Gzell J

Court:
Supreme Court of New South Wales, Court of Appeal

MEDIA NEUTRAL CITATION: [2013] NSWCA 86

Judgment date: 31 January 2013

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Gzell J

Introduction

85. The Appellants owned land in Arcadia within Hornsby Shire, New South Wales upon which they lived in mobile homes and then in a caravan. They had not received approval to do so from Hornsby Shire Council.

86. The Chief Commissioner of State Revenue (Chief Commissioner) raised assessments to land tax under the Land Tax Management Act 1956 (Land Tax Act) for the land tax years 2004 to 2008. The Appellants objected, claiming entitlement to the principal place of residence exemption from land tax. The Chief Commissioner disallowed their

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objection and they sought review of that decision in the Administrative Decisions Tribunal (ADT).

87. Judicial Member Hole confirmed the Chief Commissioner ' s decision. The Appellants ' appeal to an Appeal Panel of the ADT was also dismissed. The Appellants appeal to this Court on a question of law under the Administrative Decisions Tribunal Act 1997 (ADT Act), s 119(1).

88. The Appellants ceased to live on their land in December 2002 when their caravan was destroyed by a bushfire. They have not resumed occupation. By December 2002 they had lived on the land for a continuous period of at least six months.

Legislation

89. Section 7 of the Land Tax Act provided that land tax was to be levied and paid on the taxable value of all land situated in New South Wales which was owned by taxpayers, other than land which was exempt from taxation under the Act. Section 9(1) provided that land tax was payable by the owner of land on a taxable value of all the land owned by that owner which was not exempt from taxation under the Act. Section 8 provided that land tax should be charged on land as owned at midnight on the thirty-first day of December immediately preceding the year for which the land tax was levied. The land tax year was the period of twelve months commencing on the first day of January.

90. The Land Tax Act, s 10(1)(r) defined the principal place of residence exemption upon which the Appellants relied. It was in the following terms in the land tax years 2004 to 2008:

" 10 Land exempted from tax

• (1) Except where otherwise expressly provided in this Act the following lands shall, subject to sections10B, 10D, 10E, 10G, and 10P, be exempted from taxation under this Act:
• …
• (r) land that is exempt from taxation under the principal place of residence exemption, as provided for by Sch 1A. "

Sections 10B, 10D, 10E, 10G and 10P do not apply to the case before the Court.

91. Clause 1(1) in Sch 1A (Schedule) of the Land Tax Act defined the principal place of residence exemption by reference to cl 2. Clauses 2 and 3 were in the following terms as at 31 December 2003:

• " 2 Principal place of residence exemption
  • (1) Land used and occupied by the owner as the principal place of residence of the owner of the land, and for no other purpose, is exempt from taxation under this Act, in respect of the year commencing 1 January 2004 or any succeeding year, if:
    • (a) the land has a land value in respect of the year of less than the premium tax threshold, and
    • (b) the land is:
      • (i) a parcel of residential land, or
      • (ii) a lot under the Strata Schemes (Leasehold Development) Act 1986.
  • (2) Land is not used and occupied as the principal place of residence of a person unless:
    • (a) the land, and no other land, has been continuously used and occupied by the person for residential purposes and for no other purposes since 1 July in the year preceding the tax year in which land tax is levied, or
    • (b) in any other case, the Chief Commissioner is satisfied that the land is used and occupied by the person as the person ' s principal place of residence.
  • (3) If the owner of land is entitled to the exemption conferred by this clause, no other person is liable to be assessed for taxation under this Act in respect of the land during the period of the owner ' s entitlement to the exemption.
  • (4) The exemption conferred by this clause is referred to as the principal place of residence exemption.
• 3 Residential land - meaning
  • (1) In this Schedule, residential land means land that is used and occupied for residential purposes and for no other purpose, that use and occupation being use and occupation of a building or

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    buildings designed, constructed or adapted for residential purposes, other than a building or buildings:
    • (a) comprised of lots within a strata plan or residential units, or
    • (b) containing (out of the total of all rooms in the building or buildings) occupancies other than that of the owner, or
    • (c) from any part of which income is derived.
  • (2) Land does not cease to be used and occupied as provided by subclause (1) by reason of there being on that land any building or improvement that is used or occupied for a purpose ancillary to the purposes for which the building is, or the buildings are, designed, constructed or adapted. "

92. For the 2005 to 2008 land tax years the land value provision in cl 2(1)(a) was deleted.

93. For the 2007 and 2008 land tax years cl 2(5) subjected the principal place of residence exemption to restrictions in Pt 4of the Schedule which do not, however, apply to the case before the Court.

94. The exemption in cl 2 of the Schedule was not available to the Appellants in the land tax years 2004 to 2008 because they did not then use and occupy their land. But Pt 3 of the Schedule contains a series of concessions that enable the principal place of residence exemption to be claimed. This appeal is concerned with the concession in cl 8. For present purposes it relevantly provided as follows as at 31 December 2003:

• " 8 Concession for absences from former residence
  • (1) If the Chief Commissioner is satisfied that:
    • (a) a person is the owner of land ( the former residence ) that has been used and occupied by the person as his or her principal place of residence for a continuous period of at least 6 months, and
    • (b) the person uses and occupies other land (whether or not in New South Wales), that is not owned by the person, as his or her principal place of residence,

      the person is taken, for the purpose of the principal place of residence exemption, to continue to use and occupy the former residence as his or her principal place of residence.

  • (2) The maximum period for which a person may be taken, under this clause, to continue to use and occupy a former residence as a principal place of residence is 6 years starting at the end of the last period (of at least 6months) during which the former residence was used and occupied by the person as a principal place of residence (not including any period for which the person may be taken, under clause 7 or this clause, to have used and occupied the former residence as a principal place of residence).
  • (3) If the principal place of residence exemption applies to the former residence of a person by operation of this clause, the exemption is revoked if the person is the owner of the former residence at the end of the 6-year period referred to in subclause (2) and fails:
    • (a) to resume actual use and occupation of the residence as a principal place of residence by the end of that period, and
    • (b) to continue that use and occupation for at least 6 months.
  • (4) The effect of the revocation is that the principal place of residence exemption is taken not to have applied to the former residence in respect of any tax year to which, but for the revocation, it would have applied. Land tax liability is to be assessed or reassessed accordingly.

95. For the 2006 to 2008 land tax years cl 8(3) provided that the exemption ceased to have effect rather than being revoked and cl 8(4) was repealed.

96. Nothing now turns on the Appeal Panel ' s interpretation of cl 8(3)(a) of the Schedule because the Chief Commissioner accepts that insofar as the Appeal Panel may have held that the application for review was bound to fail due to a lack of compliance with cl 8(3)(a), it erred

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in law. The Chief Commissioner also accepts that at the end of the six year period, in this case in December 2008, the principal place of residence exemption, if otherwise applicable, would have ceased to have effect from and after that period.

Appellants ' case

97. The Appellants ' case is simply stated. On 31 December preceding each of the land tax years in question, the subject land had been used and occupied by them as their principal place of residence for a continuous period of at least six months.

98. From December 2002 they used and occupied other land not owned by them as their principal place of residence.

99. In consequence, pursuant to cl 8(1) of the Schedule, they were to be taken to have continued to use and occupy their land as their principal place of residence.

100. And as they had not used their land for any other purpose, their land was exempt from taxation in terms of cl 2(1)(a) of the Schedule and the Chief Commissioner ' s assessments should be revoked.

The Chief Commissioner ' s case

101. The Chief Commissioner submitted that cl 8(1) of the Schedule required a person ' s use and occupation of land not to be unlawful.

102. The Local Government Act 1993 (Government Act), s 68(1) provided that a person might install a manufactured home, moveable dwelling or associated structure on land only with the prior approval of the Council of the relevant area.

103. The Chief Commissioner argued that the Appellants ' failure to obtain Hornsby Shire Council ' s approval to the installation of the mobile homes and the caravan on their land made their use and occupation of the land unlawful.

104. A requirement of lawfulness is not specified in cl 2, cl 3 or cl 8 of the Schedule. The Chief Commissioner argued that the requirement was to be implied.

105. Judicial Member Hole and the Appeal Panel came to that conclusion. The Judicial Member relied on an earlier ADT decision of
Reuman v Chief Commissioner of State Revenue [ 2004 ] NSWADT 96 at [ 20 ] :

" Is the structure capable of being described as a residence or as a dwelling house? To be a residence it must be capable of being or resided in, that is a person must be able to live there. To be able to live in the structure, it would be necessary to satisfy the requests of the State and local governments in respect of a structure that is to be lived in as a residence. This would include provision of bathroom facilities in these circumstances … "

106. The Appeal Panel had regard to the decision in Reuman and also to
Pearse v Chief Commissioner of State Revenue [ 2007 ] NSWADT 14 at [ 40 ] :

" In this case the use of the construction, being the sandstone cottage, as a residence was specifically precluded by the local council. For the applicant to live there and to claim it as his principal place of residence it would have been necessary to satisfy the requirements of the local council to do so. This requirement is as referred to in Reuman . "

The authorities

107. It was submitted that support for the reading of the phrase used and occupied in cl 2, cl 3 and cl 8 of the Schedule as lawfully used and occupied was supported by the decision of Handley JA in
Steedman v Baulkham Hills Shire Council(No 2) (1993) 31 NSWLR 562 .

108. That was a case in which the appellants owned land in the Council ' s area that was used for an extractive industry. They sought a declaration in the Land and Environment Court, contested by the Council, that their land enjoyed existing use rights.

109. Before the Environmental Planning and Assessment Act 1979 (Assessment Act) commenced, existing use rights in environmental planning instruments of the Council were repealed so that the environmental planning instruments that prohibited uses of land without consent, including use for an extractive industry, operated without qualification. The appellants did not have consent to their use of the land.

110. In each of the land tax years 2004 to 2008 an environmental planning instrument was defined to mean a State environmental planning policy, a regional environmental plan, or a local

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environmental plan, and except where otherwise expressly provided by the Assessment Act it included a deemed environmental planning instrument. An environmental planning instrument is now defined to mean an environmental planning instrument (including a SEPP or LEP but not including a DCP) made, or taken to have been made, and in force. A SEPP is a State environmental planning policy. A LEP is a local environmental plan and a DCP is a development control plan.

111. The Assessment Act provided existing use rights in s 109(1). On the second appeal to this Court, the construction of that section, amongst other matters, was in issue. It provided:

" Nothing in an environmental planning instrument operates so as to require consent to be obtained under this Act for the continuance of a use of a building, work or land for a lawful purpose for which it was being used immediately before the coming into force of the instrument or so as to prevent continuance of that use except with consent under this Act being obtained. "

112. The appellants argued that at the commencement of the relevant environmental planning instrument, the Shire of Baulkham Hills Interim Development Order No 118 (1977 instrument), their land was being used for a lawful purpose within s 109(1) of the Assessment Act because an extractive industry use was not absolutely prohibited but was potentially lawful if Council consent was obtained.

113. At 580 Handley JA dismissed this submission. His Honour said:

" The appellants ' construction of s 109(1) involves either reading into the section before or after the words " … for a lawful purpose " words such as " actually or potentially " which are not there or else giving the words " lawful purpose " a wide and special meaning. In my opinion there is no warrant for either construction. There is no reason to suppose that parliament intended to reward illegality in this way … . "

114. His Honour went on to say, in passages relied upon by the Chief Commissioner:

" If s 109(1) had merely referred to a " use of … land for a purpose " with no express requirement that such purpose be lawful the prima facie construction would have been that only lawful purposes were referred to: see
Vumbaca v Baulkham Hills Shire Council (1979) 141 CLR 614 at 620, 630 and the cases there cited. It would not matter for this purpose whether the illegality was absolute or qualified. It would be a remarkable result if an express instead of implied requirement that the use be for a lawful purpose should result in a different construction.

The appellants ' submissions, if correct, would have the result that s 109 operated to legalise all existing contraventions of planning laws which were capable of being regularised by the grant of consent and continued to operate to regularise such contraventions whenever a new environmental planning instrument came into force. There is nothing to suggest that the section was intended to create a potentially large class of deemed unconditional consents in this way. Very clear language would be required to produce such a result. The words of Owen J in
Grozier v Tate (1946) 64 WN (NSW) 1 at 3 are in point. His Honour said:

' … . The subsection is … designed to save rights, not to perpetuate wrongdoing … the Legislature will be presumed, in the absence of some indication to the contrary not to have intended that wrong-doers should benefit by their wrongdoing. '

In my opinion therefore the appellants ' argument based on s 109(1) fails. On the assumption that the use of the land for an extractive industry immediately before the commencement of the 1977 instrument was unlawful because no consent had been obtained, the section does not assist the appellants. "

115. In Vumbaca at 620 Stephen J referred to a suggested basic assumption of planning law, irrelevant to the case in point, that illegal user is not regarded as giving rise to rights that are given to users. His Honour said that the authorities said to establish the basic

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assumption, including Grozier , are concerned with a prohibition upon particular uses coupled with an exception in favour of the continuation of any such uses as antedate the prohibition.

116. Similarly, in Vumbaca at 630 Mason, Aickin and Wilson JJ, with whom Barwick CJ agreed, said they were unable to derive any assistance from such cases including Grozier as they were concerned with a situation where a planning scheme that had prohibited a certain use was repealed by a later scheme which itself prohibited the same use.

117. The context in which Steedman was decided involved the application of a provision of the Assessment Act to the uses of land within a Council area under environmental planning instruments the general administration of which lay with the Council of the area, where that Council was a party to the litigation.

118. That is a very different context from this case. Under the Taxation Administration Act 1996 (Administration Act), s 61the Chief Commissioner has the general administration of that Act and other State taxation laws. He may do all such things as are necessary or convenient to give effect to the Administration Act and the other taxation laws. Taxation laws are defined in s 4 of the Administration Act to include the Land Tax Act. As one would expect, taxation laws do not include the Government Act, the Assessment Act or LEPs or DCPs and Hornsby Shire Council is not a party in the case before this Court.

119. If the phrase used and occupied in cl 2, cl 3 and cl 8 of the Schedule is to be construed as lawfully used and occupied, the Chief Commissioner will be burdened with matters within the general administration of Councils of areas throughout New South Wales under the Government Act, arising under the Assessment Act and environmental planning instruments and DCPs made thereunder.

120. Most of the other cases upon which the Chief Commissioner relies do not take the matter further than Steedman . They, too, involve the interpretation of environmental planning instruments upon the underlying principle that they will not be interpreted to enable a person to benefit from his or her own wrong, with the Council of the area responsible for their compliance being a party to the litigation.
Allen v Bega Valley Shire Council (1994) 85 LGERA 364 ,
The Firm(Australia) Pty Ltd v South Sydney Council [ 1999 ] NSWLEC 5 ,
Stephen Bowers Architects Pty Ltd v Waverley Council [ 2003 ] NSWLEC 16 ; (2003) 125 LGERA 292 and
Wollongong City Council v Vic Vellar Nominees Pty Ltd [ 2010 ] NSWLEC 266 , (2010) 178 LGERA 445 fall into this category.

121.
Braunack v Goers (1979) 23 SASR 1 also falls into this category. The respondent owner of land was charged by complaint with contravention of a section of planning legislation that no person should change the existing use to which land was lawfully being put without the consent of the District Council of Tanunda.

122.
Thompson v Groote Eylandt Mining Co Ltd [ 2003 ] NTCA 05 , (2003) 173 FLR 72 stands outside this category of case. It was a workmen ' s compensation claim. The appellant was employed by the respondent and was injured while working with a subcontractor. If he was a worker within the meaning of the relevant statute he was entitled to an award of damages.

123. Worker was defined to mean a natural person who under a contract or agreement of any kind performed work or a service of any kind for another person and who was a PAYE taxpayer. That term was defined to mean that the employer made deductions from money paid to the worker in accordance with the Income Tax Assessment Act 1936(Cth) (Income Tax Act).

124. With his wages cheque, the appellant received a slip indicating that tax at 20 % had been deducted from his wages. He was ignorant of the fact that this rate was much lower than that required for PAYE deductions. The respondent did not deduct at the appropriate PAYE rate. It was submitted that for this reason the appellant did not fall within the definition of worker.

125. At 80 [ 31 ] Mildren J, with whom Martin CJ and Thomas J agreed, referred to the rule of construction expressed in the maxim nullus commodum capere potest de injuria sua propria : no man can take advantage of his own wrong. At 81 - 82 [ 35 ] his Honour said:

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" Applying those principles to this case, it would be quite wrong to so construe the definition of " PAYE taxpayer " as to permit the employer to take advantage of his own wrong in circumstances such as the present where the appellant is totally innocent of any wrongdoing. It is inconceivable that the legislature intended the definition to bring about that result. There is nothing in the minister ' s Second Reading Speech to indicate that it was intended to permit employers to take advantage of their own wrong. The purpose of the amendment was to prevent abuse, not create it. Whilst I accept that the concept of an objective test is a feature of this definition, the language of the definition is not so intractable as to preclude the operation of this rule; nor has the legislature clearly expressed an intention that this rule is not to prevail. If a literal interpretation were to be adhered to, the result would also be unjust, would not promote the purposes of either the amending Act or the Act as a whole, and would undermine and weaken the Act ' s provisions designed to strengthen worker ' s entitlements and prevent employers from avoiding the Act ' s provisions to which I have already referred. I would conclude that the words ' employer makes deductions ' in the definition of ' PAYE taxpayer ' includes those employers who are required by law to make such deductions, but who do not do so without the knowledge or authority of the worker. "

126. This was a case in which the canon of construction that legislation should not be construed so as to enable a person to benefit from his or her own wrong was applied appropriately to a single incident. The Commissioner of Taxation(Taxation Commissioner), who has the general administration of the PAYE provisions in the Income Tax Act, was not a party and is not bound by the decision.

127. It was not a case like the present that will burden the Chief Commissioner with the examination of facts in relation to claims for principal place of residence exemptions and with the need to make determinations as to whether the claims should be allowed or rejected in terms of relevant environmental planning instruments or DCPs if cl 2, cl 3 and cl 8 of the Schedule are to be interpreted as the Chief Commissioner submits. Those tasks lie outside the scope of the Chief Commissioner ' s general administration.

128.
Deputy Commissioner of Taxation v Craddock [ 2006 ] VSC 408 , (2006) 204 FLR 274 also stands outside that category of case that involves the interpretation of environmental planning instruments upon the underlying principle that they will not be interpreted to enable a person to benefit from his or her own wrong.

129. It involved those provisions of the Income Tax Act that enabled the Taxation Commissioner to commence proceedings against the directors of a company to recover monetary penalties based on the Taxation Commissioner ' s estimate of amounts of tax withheld by the company from the salaries of its employees but not remitted.

130. Section 222APE of the Income Tax Act provided that the Taxation Commissioner was not entitled to recover such a penalty until the end of 14 days after he had given the person a penalty notice that, amongst other things, set out the details of the unpaid amount of the estimate.

131. The Taxation Commissioner sent the directors a penalty notice containing his estimate of the amount of tax withheld by the company but not remitted.

132. After receiving further information, the Taxation Commissioner reduced the amount of his estimate but did not issue a fresh penalty notice. One of the issues raised by the directors was that the Commissioner was obliged under s222APE of the Income Tax Act to issue a fresh penalty notice specifying the reduced amount.

133. Section 222AKA(1) of the Income Tax Act provided, amongst other things, that if the amount of an estimate was reduced, provisions including s 222APE had effect, and were taken always to have had effect, as if the original amount of the estimate had been the reduced amount.

134. In rejecting the directors ' submission Cavanough J said at 288-289 [ 45 ] :

" The Craddocks ' interpretation of the relevant provisions is rendered all the more unlikely when one takes into account the

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sections of the Act just mentioned which provide for automatic reductions of estimates. These reductions occur by virtue of action taken by the company, rather than by virtue of a discretionary exercise of power on the part of the Commissioner. There is no provision for the Commissioner to confirm these automatic reductions by notice to the company or otherwise. Yet, on the Craddocks ' argument, the Commissioner would be obliged to send an elaborate notice under s 222APE to the directors referring to the reduced amount of the estimate, and to hold off from recovery action for a further period of 14 days each time such a reduction occurred. Moreover, the opportunity to achieve a remittal of all penalties would arise again on each occasion. This would enable the directors to take advantage of their own wrong, contrary to a longstanding rule of construction of statutes. "

Reference was made to Thompson .

135. Craddock is distinguishable from the case before this Court in that the Taxation Commissioner, who has the general administration of the Income Tax Act under s 8, was a party to the proceedings. In this Court Hornsby Shire Council had the responsibility for enforcing in its area the requirement in s 68(1) of the Government Act, but it is not a party to the proceedings. And the enforcement of s 68(1) is beyond the scope of the Chief Commissioner ' s general administration.

136. Similar considerations arise with respect to
Marana Holdings Pty Ltd v Commissioner of Taxation [ 2004 ] FCAFC 307 , (2004) 141 FCR 299 . Further, the decision placed less weight upon the principle that legislation will not be interpreted to enable a person to profit from his or her own wrong. Discussion of the 1999 amendment that added the additional requirement that the premises be capable of being occupied as a residence centred upon the interpretation of passages from the explanatory memorandum that accompanied the amending bill.

137. A New Tax System (Goods and Services Tax) Act 1999 (Cth) (GST Act), s 40-65 provided that a sale of real property was input taxed but only to the extent that it was residential premises to be used predominantly for residential accommodation. But the sale was not input taxed to the extent that the residential premises were new residential premises other than those used for residential accommodation before 1998.

138. Residential premises were defined in s 195-1 of the GST Act as land or a building occupied, or intended to be and capable of being occupied, as a residence. New residential premises were defined, relevantly, as residential premises that had not previously been sold as residential premises.

139. The appellants purchased a motel and obtained Council approval to use the premises as residential apartments and an application for division into strata title lots was lodged. The former rooms were renovated into apartments. When strata title conversion was approved one completed apartment, being one strata title lot with an associated parking space, was sold. The Taxation Commissioner regarded the sale as a taxable supply.

140. The appellants argued that it should be input taxed. At 313 [ 63 ] the Court concluded as follows:

" As far as we can see, there is no evidence concerning the physical suitability as at the date of sale by Hajuku to Tarfex, of the premises for use as a residence, as to whether they were then capable of being so occupied or as to whether such use would have then been lawful. As it was apparently necessary to modify the premises, obtain council permission for the change of use and convert the title to strata title, it seems likely that they were neither intended to be, nor capable of being occupied as a residence as at the date of sale. In any event the onus of establishing these matters was upon the appellants, and they seem not to have sought to discharge it. We conclude that the premises were not occupied as residential premises at the date of sale by Hajuku to Tarfex,and that they were not then intended to be, and capable of being so occupied. It follows that the premises were ' new residential premises ' as at the date of sale to Ms Wells. "

141. In this category is the final case relied upon by the Chief Commissioner,
Vidler v Federal Commissioner of Taxation [ 2010 ] FCAFC 59 , (2010) 183 FCR 440 .

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142. Like Marana the appellant submitted that a sale, in this case of vacant land, should be input taxed. The canon of construction that legislation should not be construed so as to enable a person to profit from his or her own wrong was not the basis of the decision. Consideration was given to the same passages in the explanatory memorandum to the1999 bill as had been a focus in Marana .

143. In Marana and Vidler the Taxation Commissioner was a party. In the case before this Court Hornsby Shire Council is not.

144. In contrast to the cases upon which the Chief Commissioner relies was the rejection of unlawfulness as a relevant consideration in determining whether business expenses incurred in the conduct of illegal activity were deductible under s 51(1) of the Income Tax Act in
Commissioner of Taxation v La Rosa [ 2003 ] FCAFC 125 , (2003) 129 FCR 494 .

145. Section 51(1) of the Income Tax Act provided that all losses and outgoings to the extent to which they were incurred in gaining or producing the assessable income, or were necessarily incurred in carrying on a business for the purpose of gaining or producing such income, should be allowable deductions except to the extent to which they were losses or outgoings of capital, or of a capital, private or domestic nature, or were incurred in relation to the gaining or production of exempt income.

146. In La Rosa at 498 [ 15 ] Hely J, with whom Carr and Merkel JJ agreed, summarised the findings of the Administrative Appeals Tribunal (AAT) thus:

" The AAT made the following factual findings:

• (a) the taxpayer was carrying on a business of dealing in drugs;
• (b) the sum of $ 220,000 belonged to the taxpayer. It was the accumulated proceeds from drug dealings accumulated for use in the business;
• (c) the sum of $ 220,000 had been buried in the taxpayer ' s backyard and dug up for an intended drug deal in May1995;
• (d) the sum of $ 220,000 was stolen from the taxpayer during the intended drug purchase by unknown persons;
• (e) the money was lost during activities directly connected with the carrying on of the taxpayer ' s illicit drug dealing business; and
• (f) the money was lost during operations to acquire trading stock. "

147. The AAT held that the money had been properly included in the taxpayer ' s assessable income and he was allowed a deduction for the loss under s 51(1) of the Income Tax Act. The primary judge dismissed the appeal. The Full Court of the Federal Court did likewise.

148. The Taxation Commissioner argued that there was an overriding, but unexpressed, principle flowing from public policy considerations that denied a deduction to the respondent.

149. Having analysed the cases that held that fines and penalties were not deductible, Hely J said it was too late to change that rule and he stated the Taxation Commissioner ' s public policy point at 505-506, [ 46 ] :

" Nonetheless the authorities deny entitlement to a deduction for expenditure of that type, and whatever the logic of the distinction, it is now too late (at least at the level of this Court) to change the rule which the Courts have adopted in that respect. But none of these authorities supports the more general proposition for which the Commissioner contends that expenditure (other than fines and penalties) which has the requisite nexus with the business operations should nonetheless not be deductible because those operations are unlawful and involve breaches of the criminal law. "

150. In rejecting the public policy point at 508 [ 55 ] Hely J limited taxation laws to the gathering of tax leaving punishment for criminal activities to the criminal law:

" But the purpose of the ITAA is to tax taxable income, not to punish wrongdoing. The language of ss 17, 25, 48and 51 of the ITAA is indifferent as to whether the income, loss or outgoing in question has its source in lawful or unlawful activity. Tax is imposed upon taxable income, not upon

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assessable income. There should not be a higher burden of taxation imposed on those whose business activities are unlawful than that imposed in relation to lawful business activities. Punishment of those who engage in unlawful activities is imposed by the criminal law, and not by laws in relation to income tax. "

151. I prefer this approach to that advocated by the Chief Commissioner. It limits the Taxation Commissioner ' s field of general administration to taxation laws and does not burden him with decisions as to whether or not a taxpayer is in breach of the criminal law.

152. By analogy, in this case the Chief Commissioner ' s general administration of the Land Tax Act and other State taxation laws should not be expanded to require him to determine whether the use and occupation of land is lawful. That is the function of Councils of areas within New South Wales.

Internal indications

153. There are some indications in the Land Tax Act that support the approach of limiting the Chief Commissioner ' s functions to his general administration of the Land Tax Act and other State taxation laws.

154. Another principal place of residence concession is found in cl 6 of the Schedule. It was in the following terms in the2004 and 2005 land tax years:

• " 6 Concession for unoccupied land intended to be owner ' s principal place of residence
  • (1) If the Chief Commissioner is satisfied that the owner of unoccupied land intends to use and occupy the land solely as his or her principal place of residence, the owner is taken, for the purposes of the principal place of residence exemption, to use and occupy that land as his or her principal place of residence.
  • (2) This clause does not apply unless the Chief Commissioner is satisfied that:
    • (a) the land is unoccupied because the owner intends to carry out, or is carrying out, building or other works necessary to facilitate his or her intended use and occupation of the land as a principal place of residence, and
    • (b) if those building or other works have physically commenced on the land, no income has been derived from the use and occupation of the land since that commencement, and
    • (c) the intended use and occupation of the land is not unlawful.
  • (3) This clause applies in respect of the assessment of a person ' s ownership of land only in the period of:
    • (a) 2 tax years immediately following the year in which the person became owner of the land, or
    • (b) if the land is used and occupied for residential purposes by a person other than the owner at any time after the person became owner, 2 tax years immediately following the tax year in which the building or other works necessary to facilitate the owner ' s intended use and occupation of the land are physically commenced on the land.
  • (4) The Chief Commissioner may extend the period in which this clause applies if satisfied that:
    • (a) there is a delay in the completion or, in a case referred to in subclause (3)(b), the commencement of the building or other works necessary to facilitate the owner ' s intended use and occupation of the land, and
    • (b) the delay is due primarily to reasons beyond the control of the owner.
  • (5) If the principal place of residence exemption applies by operation of this clause to land not actually used and occupied by a person as his or her principal place of residence on a taxing date, that exemption is revoked if the person fails to actually use and occupy the land as his or her principal place of residence by the end of the period in which this clause applies in respect of the assessment of the person ' s ownership of the land and to continue to so use and occupy the land for at least 6 months.
  • (6) The effect of the revocation is that the principal place of residence exemption is taken not to have applied to the land in

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    respect of any tax year to which, but for the revocation, it would have applied. Land tax liability is to be assessed or reassessed accordingly.
  • (7) This clause does not apply in respect of land owned by a person if:
    • (a) the person or any member of the person ' s family (within the meaning of cl 12) is entitled to have his or her actual use and occupation of other land taken into account under s 9C or under this Schedule, or
    • (b) the person or any joint owner of the land owns outside New South Wales that is the principal place of residence of the person or joint owner, or
    • (c) the land, or the land if combined with any adjoining land of which the person is an owner, is capable of having more than 2 residences or residential units lawfully built on it.
  • (8) For the purposes of this clause:

    unoccupied land means land that is not being used or occupied for any purpose. "

155. For the 2006 to 2008 land tax years the changes to cl 6 of the Schedule were:

Clause 6(1) was re-worded as follows:

• " (1) An owner of unoccupied land is entitled to claim the land as his or her principal place of residence, if the owner intends to use and occupy the land solely as his or her principal place of residence. In such a case, the owner is taken, for the purpose of the principal place of residence exemption, to use and occupy the unoccupied land as his or her principal place of residence. "

The Chief Commissioner ' s satisfaction was omitted from cl 6(2).

The Chief Commissioner ' s satisfaction in cl 6(4) was changed to the owner ' s demonstration.

Clause 6(7)(b) was re-worded as follows:

• " (b) the person owns land outside New South Wales that is the principal place of residence of the person or a member of that person ' s family (within the meaning of clause 12). "

156. The requirement in cl 6(2)(c) of the Schedule that the intended use and occupation not be unlawful and the absence of that specific requirement in cl 2, cl 3 and cl 8 militates against an implication of that requirement in those clauses.

157. It was submitted on the Chief Commissioner ' s behalf that it was not necessary to specify the requirement in cl 2, cl 3and cl 8 of the Schedule as the legislature could be presumed to have assumed that the requirement was implied in those provisions. That is drawing too long a bow.

158. The suggestion that use and occupation be qualified by the implication of the words lawful or not unlawful creates some awkwardness of expression in cl 6 of the Schedule. Clause 6(1) speaks of the intention of the owner to use and occupy the land solely as a principal place of residence. Why should this be read as the intention of the owner to lawfully use and occupy the land when a specific requirement of lawfulness is contained in cl 6(2) but not elsewhere in cl 6?

159. Clause 6(7)(a) of the Schedule requires a consideration of actual use and occupation. One would think that that requirement is indifferent to whether the use and occupation is lawful or unlawful. To imply lawfulness of that use and occupation seems rather to defeat the purpose of the provision.

160. And to imply lawfulness in the definition of unoccupied land in cl 6(8) of the Schedule produces the clumsy definition:

" unoccupied land means land that is not being lawfully used or occupied for any purpose. "

161. To limit the definition in this fashion appears to me to be contrary to the intended meaning of the term. It is the lack of any use or occupation to which the definition is directed which requires no consideration of lawfulness or unlawfulness.

Resolution

162. In their reasons for judgment at [ 70 ] the Appeal Panel said:

" Again, though, the logic that an actual occupation (as required by cl 8) be a lawful one is sensibly imported into the definition of ' principal place of residence ' . "

163.

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ATC 14809

In my view the Appeal Panel erred in construing cl 8(1) of the Schedule by importing the requirement that the use and occupation of the land be a lawful one. Ground 1 of the Further Amended Notice of Appeal filed on 7 September 2012has been made out and the appeal should be allowed.

164. But that is not a complete answer to the Chief Commissioner ' s assessments because the definition of residential land in cl 3(1) of the Schedule requires the use and occupation of a building.

165. That matter was not addressed before the Appeal Panel or at first instance. Ms Burnett of counsel who appeared for the Chief Commissioner before Judicial Member Hole and the Appeal Panel said in her reply before the Appeal Panel, having referred to Reuman and Pearse :

" [ T ] he respondent would firstly of course defend the correctness of those decisions and argue that that interpretation promotes the objective purpose of the legislation and is generally consistent but in that event there might then be a need to go into the other arm of that argument that was put below being about whether the caravan and mobile home occupations which took place in a couple of different periods and some absences in between and had differing levels of connections with council services whether they themselves are capable of amounting to residential land within cl 3. Because there hadn ' t been any indication that that legal issue was put, the respondent hasn ' t prepared evidence going to that building aspect of the case, but I just wanted to flag that. "

166. It seems to me, unfortunately, that the matter must go back for this issue to be determined. Section 120(2) of the ADT Act provides:

" The orders that may be made by the Supreme Court on appeal include (but are not limited to):

• (a) An order affirming or setting aside the decision of the Appeal Panel, and
• (b) an order remitting the case to be heard and decided again by the Appeal Panel (either with or without the hearing of further evidence) in accordance with the directions of the Supreme Court. "

167. This Court is not limited to remitting the matter to the Appeal Panel. In my view it is appropriate that it be remitted to the Revenue Division of the ADT. This would preserve any appeal rights of a dissatisfied party.

168. I propose the following orders:

• (1) Appeal allowed.
• (2) Orders 3 and 4 of the Administrative Decisions Tribunal Appeal Panel made on 15 April 2011 set aside.
• (3) Decision of the Chief Commissioner of State Revenue of 12 November 2008 set aside.
• (4) Case remitted to the Revenue Division of the Administrative Decisions Tribunal for determination of the question whether the Appellants ' use and occupation of the land for the land tax years 2004 to 2008 satisfied the definition of residential land in clause 3 of Schedule 1A to the Land Tax Management Act 1956.
• (5) Direct that the parties, if they wish, may adduce further evidence subject to due objection.
• (6) Respondent to pay the Appellants ' costs of the appeal.