Case J18

Members: JL Burke Ch
RE O'Neill M

CF Fairleigh QC

Tribunal:
No. 1 Board of Review

Decision date: 13 April 1977.

C.F. Fairleigh Q.C. (Member): The taxpayer, an accountant, attached to his return of income for the year ended 30 June 1969, a note to the following effect:

The Commissioner sought further particulars thereof and the taxpayer replied by letter. The Commissioner by an amended assessment adjusted the income as returned for the preceding year, i.e., the year ended 30 June 1968, by including as assessable income $8,500 received by the taxpayer from X during that year. The taxpayer objected thereto and the Commissioner decided to disallow the objection. That decision was referred to a Board for review. Quantum is not in issue.

2. It has to be said at the outset (i) that the only property which the taxpayer had for sale at the relevant time was his equitable interest in land under an executory contract and (ii) that the taxpayer sold one-half thereof and sold nothing else. It is necessary to stress this because the taxpayer presented his case in conformity with the aforesaid note and the Commissioner responded without any deviation from it. The two elementary points which have to be mentioned are that there cannot be a sale of an interest in a non-existent partnership, and that the potential which land may have for redevelopment and sale at an enhanced price is not something which is capable of being sold independently of the land itself (cf.
Hall v. Busst (1960) 104 C.L.R. 206 at p. 212 where there was an attempt to arrive at the price of land by a summation of the value of the land with some improvements plus value of other improvements taken at cost less depreciation). One can leave aside as totally inappropriate in the circumstances of the present case any suggestion of a donative intention. Thereupon all that is left is (a) the proposition as first mentioned in this paragraph, more particularly, the sale for $14,000 (being $10,000 plus half the deposit which had been paid) of a half interest in the land held under an executory contract with that sale being made on the condition that the parties thereto become equal partners in a venture for the development and resale of the land in smaller units; or (b) an agreement in effect that such half interest is sold for $4,000 and the purchaser is to pay a further $10,000 which goes into the proposed partnership but the purchaser gets no credit for it in the partnership accounts and the $10,000 is to be regarded as a contribution of capital for the sole benefit of the vendor (i.e., the taxpayer). In my view sec. 260 of the Income Tax Assessment Act 1936 strikes at (b) and the consequence is to reveal a transaction as in (a). It is of no importance that sec. 260 was not raised during the progress of the case (
Peate v. F.C. of T. (1962) 111 C.L.R. 443 at p. 458 per Menzies J.,
Patcorp Investment Ltd. & Ors. v. F.C. of T. 76 ATC 4225 at p. 4243 per Jacobs J.). It can also be said at this point that there was no suggestion in cross-examination that the taxpayer did not tell the truth and so he must be taken to be a truthful witness (vide
Browne v. Dunne (1894) 7 C. & P. 408 per Lord Herschell L.C. and Lord Halsbury). However it is one thing to say that a witness is a witness of truth and it is another to say that his evidence is trustworthy (cf. Griffith C.J. in
Scott Fell v. Lloyd (1911) 13 C.L.R. 230 at pp. 243-244 ). In my opinion (and also see para. 6 hereof) the taxpayer was hopelessly confused as to the character which the law would give to the transaction entered into by him and so he was not capable of giving an intelligent answer to relevant questions. So much so that it would have been futile to put to him the ultimate question whether what occurred is, in effect, a sale of an interest in land for $14,000 on a condition that the owners be in partnership as above. The evidence did not descend to details of discussions between the taxpayer and X. Of course, the way in which I view the matter leads to a different resultant profit, but the notice of objection does not go to quantum; and accounts drawn up on the basis of the case presented by the taxpayer reflect the misconceptions thereof.

3. The substance of the taxpayer's notice of objection is that the sum in issue was a receipt of a capital nature and that the profit is not within the purview of sec. 25(1) or of either limb of sec. 26(a) of the Act. In his said letter (amplified later as I have hereunder set out in brackets) the taxpayer said that after he entered into the contract to purchase the terrace houses and before settlement of the contract X agreed to a 50% interest in the venture for $10,000 intended to be a ``capital payment'' by X ``for his purchase of an interest''; the $10,000 was paid over a period of some months (first payment of $5,000 on 21 March 1968 and $8,500 before 30 June 1968); the conveyance was in the names of the taxpayer and X as tenants-in-common in equal shares (a proposed deed of trust on the basis that the taxpayer and his wife (vide para. 7 hereof) would be the proprietors was not executed); the deposit of $8,000 paid on 3 January 1968 upon exchange of contracts was supplied solely by the taxpayer (from moneys borrowed by him); the whole of the purchase price of $80,000 was advanced by a finance company (with the taxpayer and X being liable

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therefor whereby the deposit of $8,000 became paid by them - as between themselves - in equal shares).

4. The taxpayer tendered documents as exhibits, submitted a statement of agreed facts and gave oral evidence. Where there is any conflict between the agreed facts and the oral evidence the latter prevails as a party, or his counsel, may resile from such an agreement (with certain presently irrelevant exceptions) and evidence on oath necessarily carries greater weight than the facts as agreed. The statement of agreed facts also contains some propositions of law and these have to be severed and regarded only as submissions which the Board may accept or reject.

5. Due to the passage of time there are lacunae in the history of the matter and so I propose to set out only those further facts, including inferences from proven facts, which I regard as the essence of the matter:

6. As X is a solicitor it can be assumed that he obtained receipts for moneys paid by him to the taxpayer. None of the receipts has been produced and no secondary evidence was given as to the contents. X was not called as a witness. It would be consonant with the approach of Gibbs J. in
Jacob v. F.C. of T. 71 ATC 4192 ; (1971) 45 A.L.J.R. 568 to hold that the taxpayer has thereby failed to discharge the onus of proof; and I see nothing in
Steinberg & Ors. v. F.C. of T. 75 ATC 4221 ; (1975) 50 A.L.J.R. 43 ; or in
Gauci & Ors. v. F.C. of T. 75 ATC 4257 ; (1975) 50 A.L.J.R. 359 which runs counter to this approach to the present case. It is not established by evidence

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whether or not the first receipt or any receipt contains sufficient particulars to constitute it a memorandum for the purpose of the ``Statute of Frauds''. If one assumes the parties to such a transaction are men of commercial morality then it can be said that if the receipt is insufficient for that purpose then such a defence would not be raised (
Charlick v. Foley Bros. Ltd. (1916) 21 C.L.R. 249 ). A further assumption from the fact that X is a solicitor is that he would ensure that the receipts satisfied the requirements of the statute. It makes no difference to the solution which I see to the present problem whether the material date is that of the first receipt (March 1968) or months later but the probability is that the material date is in March 1968. If the receipt set out in one form of words or another that the payment was made for the assignment of a half share under the contract of 3 January 1968 that fact alone would be sufficient to determine the present issue against the taxpayer. So far as the deposit is concerned the evidence suggests, without actually proving, that the taxpayer's assumption of responsibility (though not liability) for one-half thereof did not arise from the unauthorized alteration of the contract (liability could not arise as against the vendor as the deposit was paid on 3 January 1968). As the contract was altered in a material respect without the concurrence of the vendor or by his authority this might have enabled the vendor, upon becoming aware of it, to treat the contract as no longer in existence (Halsbury 4th Ed. Vol. 12 ``Deeds and Other Instruments - Alteration and Cancellation'' para. 1453 et seq.), rather than rely on his own unaltered counterpart of the document.

7. The proposed deed of trust (para. 3 hereof) was drawn up between the taxpayer and his wife of the one part as ``proposed registered proprietors'' and X of the other part as ``beneficiary''. It contains recitals as follows (with emphasis added):

The second recital is fatal to the case put forward by the taxpayer as it highlights that there was not, nor could there be in the present circumstances (vide para. 2 hereof) a transaction as claimed by the taxpayer in his return of income for the year in issue (vide para. 1 hereof). There is nothing in the habendum of the proposed deed that need be mentioned except to say that it provides on the sale of the property for the proceeds ``and any profit or loss...to be distributed'' in equal shares, one half to the proposed registered proprietors and the other to X with mention of some specific outgoings; the only significance that I see these to have is that X is assured (if he becomes the solicitor engaged in the intended transactions) of receiving full professional costs.

8. The taxpayer has furnished to the Board a statutory declaration by the person who introduced X to the taxpayer and that person says therein that he was present at the initial discussions between the taxpayer and X and yet that person does not set out those discussions nor any part thereof. Inevitably this recalls the comment of the Privy Council in
Fisher v. Tully (1878) 3 App. Cas. 627 at p. 636 in respect of an affidavit ``... he abstains from stating particular facts. The conclusion is irresistible that he purposely refrained from doing so, finding himself unable to go beyond the loose statements already made in... his affidavit''. Accordingly, looked at on a factual basis that declaration does not advance the taxpayer's case to any appreciable extent. That person has declared that X ``quite clearly understood'' -

Perhaps X did understand that this is what the taxpayer hoped would be the construction which a court would place upon the transaction. Yet that takes one back to the two elementary points which are discussed in para. 2 hereof.

9. For several reasons which I have indicated above it would not be inappropriate to hold that the taxpayer fails in limine before one gets to the substance of the case. However I shall proceed further with the discussion as it may save an appellate court some time if an appeal ensues.

10. It can be said at this juncture that the relevant and material evidence is against an assessment based on sec. 25(1) of the Act. This is not the classic first limb sec. 26(a) type of transaction where it is common ground that the property which has been sold and yielded the profit is the property which was bought and the issue (by virtue of sec. 190(b)) is the applicability of the concept of the statutory purpose of acquisition for the purpose of profit-making by sale, so that the evidence is directed to proving solely that such was not the purpose. In the present case it is necessary to consider each of the two limbs of sec. 26(a). Furthermore it is here necessary as sometimes occurs (e.g.
Delta Properties Pty. Ltd. v. Brisbane City Council (1955) 95 C.L.R. 11 at p. 24 ) to decide the case on a basis which has not been argued or even considered by the parties or by their advisers; see also
F.C. of T. v. West Australian Trustee Executor & Agency Co. Ltd. (1929) 43 C.L.R. 20 at p. 23 per Dixon J. (as he then was) and
Texas Co. (Australasia) Ltd. v. F.C. of T. (1939-1940) 63 C.L.R. 382 at p. 475 per Latham C.J. as to the duties of a Board of Review; it may be noted that the Court left unanswered in
Rowdell Pty. Ltd. v. F.C. of T. (1962-1963) 111 C.L.R. 106 a question as to the competency of a Board where the Commissioner did not argue in support of a certain assessment.

11. One of the paragraphs in the agreed statement of facts is as follows:

Whilst I do not wish to be overly critical of the draftsman of that statement I think it must be said that some propositions of law contained in it are wrong, because the essence of the arrangement between the taxpayer and X was that X would receive a half interest in the land as the initial step in the arrangement and the purpose and intention as in 5(c) hereof would then be the joint purpose and intention of the taxpayer and X.

12. Counsel for the taxpayer suggested that there are substantial differences between what was proposed and intended by the taxpayer at the outset and what is proposed and intended by one who buys a large parcel of unimproved land and proposes to subdivide it into allotments onto an existing road frontage; and counsel said that in the latter case there would have to be services taken to the land but not so with the taxpayer's proposal. I do not regard the distinction as valid. Consequent upon the ``land boom'' towards the end of the last century it was necessary in some States to enact statutes bearing such titles as ``The Prevention of Undue Land Subdivision'' because land was being subdivided and sold without any urban amenities. Again in the ``land boom'' some 20 years ago several local authorities found it necessary to put an end to similar subdivisions by interim development orders which prohibited subdivision and resale where some ``services'' were not available for the land, though this may still occur for rural land. Furthermore it is probable that in carrying out extensive repairs and it may be in reconstruction of these terraced houses ``services'' would have to be disconnected and possibly relocated before reconnexion.

13. As a matter of law I would hold that on 3 January 1968 the purpose of the taxpayer was not within the first limb of sec. 26(a) of the Act because the proposal was to buy a single parcel (of Old System land) and to carry out the development as mentioned previously and to sell in a series of sales small portions surveyed off (and under the Torrens system) with party walls and easements appurtenant

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thereto. I do not place any significance on the conversion to Torrens system title because in substance the Real Property Act only simplifies conveyancing and gives assurance against claims based on unregistered adverse interests. The relevance of the restoration of the terraced houses depends on matters of fact and the facts here are skimpy and so I leave that question aside. As to the requirement for the application of the first limb of sec. 26(a) that the property acquired and the property sold must be essentially the same see
McClelland v. F.C. of T. (1968) 118 C.L.R. 353 ; 14 A.T.D. 529 per Windeyer J.;
Cowan & Ors. v. F.C. of T. 72 ATC 4121 (1973) V.R. 402 per Gowans J.;
A.L. Hamblin Equipment Pty. Ltd. v. F.C. of T.: A.L. Hamblin Constructions Pty. Ltd. v. F.C. of T. 74 ATC 4310 ; (1974) 48 A.L.J.R. 529 ; in which the decision of Walsh J. in
McGuiness v. F.C. of T. 72 ATC 4023 ; (1972) 46 A.L.J.R. 279 is, at least impliedly, regarded as incorrect. I would distinguish
Moruben Gardens Pty. Ltd. v. F.C. of T. 72 ATC 4147 ; (1972) 46 A.L.J.R. 559 as to essential identity.

14. I would hold also that in January 1968 the purpose of the taxpayer (and similarly the purpose of the taxpayer and X in March 1968) was the carrying on or carrying out of a profit-making undertaking or scheme. In my opinion the land purchased by the taxpayer by contract on 3 January 1968 was property acquired by him for the purpose set out in the second limb of sec. 26(a). I would hold on the evidence that in March 1968 the taxpayer abandoned his proposal as a sole undertaking, i.e., as a sole entrepreneur, but he did not abandon the undertaking itself. In March 1968 X acquired property (i.e., a tenancy-in-common in the equitable estate in the land) for the purpose set out in the second limb of sec. 26(a). The taxpayer did not acquire any land or any interest in land in March 1968, rather he suffered a diminution of his interest in land. All that the taxpayer obtained in March 1968 was money plus an assurance that X (who paid the money and acquired a moiety in the equitable estate in land) would join with the taxpayer in the development and resale of the land in small portions as aforesaid. I accept that in January 1968 the taxpayer did not contemplate that he might sell a moiety in the land which he held under the executory contract. Because the taxpayer did not abandon the profit-making scheme and only reduced his risks and envisaged profits by the sale to X in March 1968 of a moiety in the land (and sold nothing else) and obtained only an assurance that there would be a partnership as aforesaid, I would hold that the taxpayer cannot bring his case within the principle of
Kratzmann v. F.C. of T. 70 ATC 4043 ; (1970) 44 A.L.J.R. 293 . In my opinion the profit ($8,500 as agreed) which arose in the months March to June inclusive 1968 was a profit made in the carrying on or carrying out by the taxpayer of the aforesaid profit-making undertaking or scheme.

15. I would uphold the Commissioner's decision on the objection and confirm the amended assessment.

Claim disallowed

 

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