FEDERAL COURT OF AUSTRALIA

Brown v Federal Commissioner of Taxation

[2001] FCA 240

Emmett J

13 March 2001 - Sydney

Emmett J.

The proceedings

   This proceeding is an appeal to the court by the applicant, Mr John Joseph Brown (the taxpayer) against an appealable objection decision made by the respondent, the Commissioner of Taxation (the Commissioner) on 9 November 1999. By that decision, the Commissioner disallowed an objection by the taxpayer dated 26 May 1999 to an amended assessment issued by the Commissioner to the taxpayer on 28 March 1996 in respect of the year of income of the taxpayer ended 30 June 1991 (the Tax Year).

  2  The question in the proceeding is whether the value of a home unit situated at Mermaid Beach, Queensland (the Unit) that was transferred to the taxpayer on 11 July 1990 by Ray Development Corporation Pty Ltd (RDC), which the Commissioner assessed at $984,725, was assessable income of the taxpayer for the Tax Year. There are subsidiary issues concerning additional tax and interest imposed by the Commissioner.

  3  Counsel for the Commissioner sought to read in the proceeding affidavits by officers of the Australian Taxation Office (the ATO) being Mr Donald Caldbeck and Mr Graham Thomas Smith. The evidence relates to discussions that took place at a meeting held on 9 October 1995 (the Objected Evidence). The meeting was attended by the Taxpayer and Messrs Caldbeck and Smith. Also in attendance were Mr Phillip Henry and Ms Jenny Nairne from KPMG, the taxpayer's tax accountants, Mr A J Stammers, a solicitor of Blake Dawson Waldron and Mr Achilles Constantinidis, a chartered accountant and business associate of the taxpayer. Also present was Mr John Seberry, Deputy Commissioner of the Parramatta Office of the ATO.

  4  The evidence as to the discussions at the meeting was tendered on behalf of the Commissioner on 2 bases. The first is that statements made by or on behalf of the taxpayer at the meeting were said to constitute admissions by the taxpayer. Secondly, it is said that statements made by the taxpayer at the meeting would be relevant to his state of mind in 1990.

  5  Counsel for the taxpayer objected to evidence concerning the discussions at the meeting on 2 grounds. First, reliance was placed on s 131(1)(a) of the Evidence Act 1995 (Cth). Secondly, the evidence was objected to as being irrelevant. I heard evidence on the voire dire from witnesses called by both the taxpayer and the Commissioner.

  6  In order to put the evidentiary dispute in context, it is necessary to consider the issue in the proceeding in a little more detail. The Commissioner, in his statement of facts, issues and contentions (the Commissioner's Statement), states the facts as follows:

   

1. In early 1990 the applicant arranged a meeting between Mr Brian Ray, a property developer, and a delegation of Japanese businessmen who were looking at purchasing timbered land, for the purpose of constructing cabins and building a golf course on that land.

 

2. On 5 June 1990 the Japanese delegation purchased a property situated in the Tweed Valley called King's Forest from Monacorp Pty Ltd, a company associated with Mr Brian Ray for the amount of $21 million.

 

3. By reason of the introduction referred to in paragraph one above, a company of which Brian Ray was a principal, the Ray Development Corporation Pty Ltd ("RDC") proposed to transfer to the applicant a property known as Unit 4, 79 Albatross Avenue, Mermaid Beach, Queensland (Lot 4 in Building Units Plan No 10077 - County of Ward, Parish of Gilston, Certificate of Title: Volume 7538 Folio 20) (hereinafter the Unit).

 

4. By a letter dated 22 June 1990 RDC provided to the applicant a valuation report of the Unit. The letter advised that the property was valued at $925,000 to which the following additional expenses were to be added:

 (a)  a furniture allowance of $30,000;
 (b)  legal costs of approximately $40,000;
 (c)  costs of re-marbling of the bathrooms of approximately $30,000.

 

5. By a letter dated 10 July 1990, Hopgood and Ganim, the solicitors acting for RDC in respect of the transfer of the Unit confirmed their instructions that "your Company is transferring the above Lot to Mr Brown in consideration of Mr Brown waiving any right to commission on the sale of property situation at Kings Forest Estate to Narui Narin Co Ltd".

 

6. On 11 July 1990 the Unit was transferred to the applicant by a transfer dated 11 July 1990 and executed by RDC for an expressed consideration of $1,000,000.

 

7. By a letter dated 12 July 1990 the applicant appointed David Mausell of Hopgood and Ganim to sign as his solicitor the transfer dated 11 July 1990 transferring the Unit from RDC to himself for an amount of $1,000,000.

 

8. By a letter dated 12 July 1990 Mr Evan Dickson of RDC advised the applicant that the commission payable to him on the sale by Monacorp Pty Ltd of Kings Forest Estate amounted to $1,000,000. According to this letter the commission was to be applied towards the purchase of the unit. The letter also requested the applicant to sign a letter which Mr Dickson had prepared. That letter was signed by the applicant. It said:

   

I refer to the sale of the Kings Forest Estate in northern New South Wales to Nauri Gold Coast Pty Ltd for an amount of 21,000,000 in respect of which Monacorp Pty Ltd owes me $1,000,000 for commission payable for the introduction of the purchasers.

 

I hereby authorise Ray Development Corporation Pty Ltd to distribute the $1,000,000 towards the following:

 

In respect of purchase of Unit 4,

 

79 Albatross Avenue $925,000

 

In respect of furniture allowance $30,000

 

In respect of acquisition costs $40,000

 

In respect of other costs $5,000

 

Total $1,000,000

 

In addition to the above Ray Development Corporation Pty Ltd is to cover the costs of remarbling the bathrooms to an amount of $30,000.

 

9. On 25 May 1992 the applicant lodged his return for the year ended 30 June 1991 but did not include any amount in his assessable income in relation to the receipt of the Unit.

 

10. In an interview conducted by officers of the respondent on 13 December 1994 the applicant initially maintained that the value of the Unit was income for the year ended 30 June 1992 of the Nuboye Partnership which was conducted by the applicant in partnership with Mr Al Constantinidis. The respondent investigated this claim and rejected it.

 

11. On 2 February 1995 the Unit was inspected by a qualified valuer of the Australian Valuation Office and was valued as at the date of transfer (12 July 1990) at $920,000.

 

12. In an interview conducted on 9 October 1995 in the office of the respondent, the applicant, who on that occasion was accompanied by his professional representatives agreed that the value of the Unit should be included in his assessable income for the year ended 30 June 1991. In relation to penalties the applicant said at this interview that he would strongly resist any penalties imposed as he had genuinely believed that the value of the unit was to be included in the partnership return of the Nuboye partnership.

  7  Part of the Objected Evidence is a statement by Mr Caldbeck that he said there was "no way that the ATO could accept the commission payment" as belonging to the partnership. After Mr Smith showed the taxpayer correspondence between the taxpayer and the Commonwealth Bank in 1993, Mr Caldbeck asked the taxpayer whether he agreed "that the commission income was correctly yours and not partnership income". The taxpayer responded "Yes".

  8  Mr Caldbeck says that the taxpayer said that he would accept "the commission" as being included in his income tax return but would argue very strongly if any penalties were imposed. The taxpayer asserted that he genuinely believed that the value of the Unit should have been included in the partnership return. Mr Caldbeck responded that if the taxpayer believed that no penalties should be imposed, he should lodge a submission setting out his reasons and that Mr Caldbeck would consider such submission fully before reaching any decision.

  9  Mr Smith's affidavit is to the effect that, after he showed the Commonwealth Bank correspondence to the taxpayer, Mr Caldbeck asked him whether "you now accept that the value of the Unit was your income and not income of the partnership" and the taxpayer replied "Yes". Mr Smith also says that the Taxpayer said that he would accept inclusion of "the commission" in his income but would not agree to any penalties.

  10  The evidence on the voire dire as to the circumstances in which the meeting of 9 October 1995 was convened was unsatisfactory. The taxpayer said that he asked for the meeting through his accountants. Mr Caldbeck confirmed that the meeting was called by Mr Brown or his accountants. Mr Smith, who was Mr Caldbeck's subordinate, was simply told by Mr Caldbeck that the meeting was to take place.

  11  The Commissioner's Statement asserts that the taxpayer had initially maintained that the value of the Unit was income for the year ended 30 June 1992 (sic) of the Nuboye partnership and that the ATO had investigated that claim and rejected it. Mr Caldbeck said that, as at October 1995, the ATO had sought a submission on the reason why the taxpayer claimed that the value of the Unit was partnership income. He said that the ATO had approached the taxpayer, through his advisers, for a submission on why it should be treated as partnership income. He also said that he had advised the taxpayer's tax accountants, KPMG, that the ATO was preparing to make third party inquiries.

  12  In the Objected Evidence Mr Caldbeck said that the purpose of the meeting "was to discuss the taxation affairs of the [taxpayer] and in particular to discuss the Gold Coast unit received from Brian Ray of Ray Development Corporation Pty Ltd". Mr Caldbeck's affidavit then proceeds to set out the terms of the discussion that took place at the meeting.

  13  Mr Smith said that, prior to the arrival of some of the participants in the meeting, Mr Stammers asked him:

   

What entities and companies are involved in the original sale of the land to the Japanese and what evidence does the Tax Office have about the sale? Also what case are you making out against my client?

  14  Mr Smith replied:

   

The land was owned by Monacorp Pty Ltd who sold it to Nauri Gold Coast Pty Ltd. Ray Development Corporation Pty Ltd owned shares in Monacorp. The Unit was owned by Ray Development Corporation. Mr Brown received a commission on the sale and the value of the Unit has not been declared in Mr Brown's income tax return.

Mr Smith's affidavit then proceeds to set out his recollection of the discussion that then ensued.

Section 131(1)(a) of the Evidence Act 1995 (Cth)

  15  Section 131(1)(a) of the Evidence Act 1995 (Cth) provides as follows:

   

(1) Evidence is not to be adduced of:

 (a)  a communication that is made between persons in dispute … in connection with an attempt to negotiate a settlement of the dispute,  

…

Section 131(1), however, does not apply if [s 131(2)]:
   

 (g)  evidence that has been adduced in the proceeding, or an inference from evidence that has been adduced in the proceeding, is likely to mislead the court unless evidence of the communication or document is adduced to contradict or to qualify that evidence.

  16  As I have said, the evidence concerning the circumstances that led up to the meeting of 9 October 1995 is not satisfactory. The Commissioner contends that the evidence does not support a conclusion that the Commissioner and the taxpayer were in dispute as at 9 October 1995. The taxpayer, on the other hand, contends that there was a dispute as to whether the value of the Unit should be treated as income of the Nuboye Partnership or income of the taxpayer. Further, there was a dispute as to whether any additional tax should be imposed on the taxpayer by reason of his failure to include the value of the Unit in his return for the Tax Year.

  17  There has been no suggestion that the meeting was the result of the exercise of any investigative power by the Commissioner. The meeting was attended by the taxpayer's tax advisers as well as his solicitor. The evidence on the voire dire makes clear that the meeting was requested by the taxpayer or his advisers in response to an invitation by officers of the ATP to make a submission as to why the value of the Unit should be treated as partnership income rather than as income of the taxpayer. That invitation was apparently the result of the assertions made at the meeting of 13 December 1994.

  18  The circumstances in which an interview between officers of the ATO and the taxpayer took place on 13 December 1994 are obscure. However, the evidence on the voire dire indicates clearly that a claim had been made on behalf of the taxpayer that the value of the Unit should not be treated as his income.

  19  In an affidavit by the taxpayer read on the voire dire without objection, the Taxpayer said as follows:

   

2. Prior to the meeting … I had a conversation with Phillip Henry of KPMG in which Mr Henry said to me in words to the following effect:

   

Instead of antagonising the ATO by fighting them, we should meet with them and try to do a deal.

 

…

 

4. I attended the meeting … and participated in it because I wanted to resolve the dispute with the ATO about including the value of the Mermaid Beach Unit, and about the imposition of penalties, in my 1990-91 tax return, on the best possible terms that I could obtain. Communications that I made during the course of the meeting were for the above purposes, namely, to resolve the dispute with the ATO about tax and penalties (if any) payable.

The taxpayer was not cross-examined on those assertions.

  20  The amended assessment which is in issue in the proceeding had not been issued at the time of the meeting on 9 October 1995. That, however, is not decisive. Nor is the fact that there was no proceeding on foot. Under s 131(5)(a) a reference to a dispute is a reference to a dispute of a kind in respect to which relief may be given in an Australian proceeding. Clearly, a dispute as to whether the value of the Unit should be treated as assessable income of the taxpayer is a dispute within s 131.

  21  At the meeting on 9 October 1995, Mr Stammers asked what case was being made out against the taxpayer. Mr Caldbeck understood that the purpose of the meeting was to discuss the taxpayer's taxation affairs. The meeting was not convened by the ATO with a view to ascertaining further information. According to Mr Caldbeck and Mr Smith, the ATO's investigations had, by October 1995, gone a fair way down their path. Both Mr Caldbeck and Mr Smith considered at that stage that it seemed likely that the receipt was income of the taxpayer but neither appears to have formed a final view.

  22  I consider that an inference should be drawn from all of the evidence on the voire dire that the taxpayer and the Commissioner were in dispute as at 9 October 1995. They were in dispute as to whether the value of the Unit was assessable income of the taxpayer in the Tax Year or was evidence of the Nuboye partnership. The fact that the taxpayer voluntarily attended a meeting with officers of the ATO, together with his tax advisers and solicitor, coupled with the unchallenged assertions made by the taxpayer in his affidavit on the voire dire, leads me to the conclusion that the communications that took place at the meeting were made in connection with an attempt to negotiate a settlement of that dispute.

  23  Whatever might have been the intention of the ATO's officers in attending the meeting, the evidence persuades me that the taxpayer's purpose for engaging in the communications that took place at the meeting was to attempt to negotiate a settlement of the dispute between himself and the Commissioner as to whether the value of the Unit should be treated as income of the taxpayer in the Tax Year or as income of the partnership.

  24  I do not consider that the operation of s 131(1) is excluded by s 131(2)(g). The evidence adduced so far in the proceeding consists of affidavit evidence of the taxpayer, the taxpayer's son, Christopher Brown and a written statement by Mr Ray concerning the circumstances that led up to the transfer of the Unit by RDC to the taxpayer in 1990. There is nothing specific in the Objected Evidence that is inconsistent with the evidence contained in those affidavits and the written statement of Mr Ray. If the taxpayer had made statements at the meeting that contradicted statements of fact made in his affidavit, the operation of s 131(2)(g) might be attracted. However, I do not consider that any evidence adduced at this stage, or any inference from the evidence that has been adduced at this stage, is likely to mislead the court, without the Objected Evidence.

  25  Accordingly, I propose to reject the evidence at this stage. It is possible that, as the proceeding continues, circumstances could arise, for example as a result of cross-examination, whereby evidence given could be misleading unless the Objected Evidence is already adduced. If and when such a question arises, I will rule on it.

Relevance

  26  The objection to the relevance of the Objected Evidence is based on observations made by Fullagar J in Hayes v FCT (1956) 96 CLR 47 at 53; 6 AITR 248 at 252-53; 11 ATD 68 at 72. Fullagar J recorded that in that case, in cross-examination of the appellant before a taxation board of review, the Commissioner's representative put to him that, in an interview with one of the Commissioner's officers, he had said that he had obtained legal advice that certain shares given to him were income subject to tax in his hands and that he did not intend to claim exemption. Fullagar J observed that such cross-examination was obviously inadmissible and that it should have been objected to and disallowed, on the basis that neither advice received by a taxpayer nor his own view of the legal position, nor his intention at any given time to contest or not to contest an assessment, could have any possible bearing on the question in issue on an appeal to a taxation board of review.

  27  I would be disposed to reject the Objected Evidence on the ground of irrelevance. The statements attributed to the taxpayer are properly characterised as statements of mixed fact and law. Insofar as there is attributed to him agreement that "the commission income was correctly" his income and not partnership income and a statement that he would accept the value of the Unit as being included in his income, that in itself is no more than evidence as to his then state of mind. Such statements, coupled with other statements made in the course of the meeting, could have a bearing on the taxpayer's state of mind, if that be relevant, in 1990. However at this stage I am not persuaded that it is relevant. In the light of the conclusion that I have reached concerning the application of s 131(1)(a), it is not necessary for me to decide the question at this stage.

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