Case K35

Members: MB Hogan Ch

P Gerber M
GW Beck M

Tribunal:
No. 3 Board of Review

Decision date: 21 June 1978.

Dr. P. Gerber (Member):

References B. 113-117/1977

These three references were initially heard separately, but were subsequently, by consent, consolidated, and the evidence in each has been adopted in the others. The taxpayers are three companies, B & C Investments, B Investments and C Investments.

2. In historical perspective, I propose to start in May, 1965, with the incorporation of B & C Constructions Pty. Ltd., which became the successor of B & C Constructions, a partnership of two brothers, B and C, engaged in building contracting. In October, 1965, B & C Investments was incorporated as one of many companies which was strewn liberally across the hearing. As one of the brothers remarked: ``We had an abundance of companies''. It appears the brothers were talked into forming these companies by an enterprising accountant, who begat companies with biblical profligacy (``I think, after he talked us into a few, he could see the dollar signs and said - `Have some more for good measure' - His suggestion was that he would find the use for it. I am afraid it took him many years to find a use for it.''). B was to add later:

``He suggested that in time we would want personal assets. By personal I mean we would want to have our independent directions in life, and for that we should have a proprietary limited company each. I didn't understand the full implications of it then, but I can understand it now, having learnt a little bit about differential rates in taxation for proprietary limited companies. So his advice was probably good, but I still cannot understand why he wanted all these companies at that time. That's my best explanation on all companies, I'm afraid. There was absolutely no need for C Investments at

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that time. There was absolutely no need for B Investments at that time.''

In essence, B Investments and C Investments were two companies trading in partnership as the alter ego for B and C, whilst the major shareholders and directors of B & C Investments were B and C.

3. Meanwhile, in August, 1965, B & C Constructions Pty. Ltd. entered into a financial agreement with Norseman Development Co. Pty. Ltd., the substance of which was that Norseman, being desirous of erecting fifteen home units on certain land it owned, agreed with B & C Constructions to enter into a scheme by which the latter bound itself to building said units (henceforth referred to as ``Norseman Towers'') at cost, ``together with one third of the net profit before any allowance for income tax of the sale of the said units.'' (It should be pointed out that B, who was the younger of the two, had just finished his apprenticeship as a carpenter and was then 22 years of age. C, though not technically qualified, was nonetheless a competent tradesman. The two brothers had, prior to the Norseman contract, successfully constructed a block of nine home units, and, by the time they had entered in the Norseman enterprise, had reached a level of expertise which enabled them to draw up a financial plan for the Norseman project.)

4. Soon after commencing Norseman Towers, the two brothers were approached by one S, who ``had been watching the project progress and liked what he saw'' and invited them to tender for yet another set of units - Garden Towers - which S and some other investors contemplated having built. ``We were naturally keen and eager and jumped at the chance''. I shall return to Garden Towers in detail later, since some units in that building were subsequently sold by B Investments and C Investments and the profits included by the Commissioner in his assessments.

5. To return to the Norseman project. The original agreement contemplated that B & C Investments would receive its cost, together with a third of the profit of the sale of the units. However, during the construction of Norseman Towers, Norseman Development encountered financial difficulties, and one of its cheques for progress payments paid to B & C Constructions Pty. Ltd. was dishonoured. This difficulty was somehow resolved, by means not altogether clear to me, which I attribute to the mysteries of banking, which I have never been able to fully comprehend. For the sake of completeness, I set out B's evidence verbatim:

``... About half way through the job they were very slow making progress payments. We refused to carry on working and in fact stopped at one stage.

At this stage we were given a cheque drawn on the X Bank at Y, which was dishonoured. I saw the manager (Mr. Smith) and discussed it with him and he said there were `complications', and he informed me that Norseman was receiving bridging finance from the X Bank and that there were some problems with the documentation and/or other things, and I believe it was other things. And until this was resolved no further money could be drawn on the account.

Being in quite a quandary, I had lengthy discussions with him to see whether we could do anything about it. The manager suggested that it may be to our advantage to consider banking with their bank. At the time we were experiencing difficulties with our bank because when we went into business we commenced with a capital of £ 980 which came straight out of my savings account. My brother contributed a `ute'. It seems rather ridiculous now but that's what we started with. And if it hadn't been for the help of Mrs. Fairy, who was well aware of our circumstances, I don't think we'd have got very far; and by a very friendly banker called Mr. Rex, at the Z Bank. Because as soon as we started, he said: `Well, you've taken the punt, I'll give you a hand, I'll give you an unsecured overdraft of £ 2,500', which was rather incredible but it was true.

This allowed us to carry on. Some months later, when we started on Norseman, and the account wasn't going so well, he called me in and he said, `I knew you couldn't manage on this. We're giving you £ 5,000'. This was really terrific. No security. When the money trouble came up at Norseman however, Mr. Rex was replaced by another manager. I don't remember his name, and I don't particularly want to, because he just bounced the next cheque that came in and said: `You're not getting another cent'. This was all at the same time.

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It was at this time that Mr. Smith of the X Bank - because we had now gone into Garden Towers - suggested to me that if we came to them he would arrange for a $20,000 overdraft, unsecured, that on the condition that when we were completed that we would lodge titles of the units which we were to receive in Garden Towers as security. We were quite happy to accept that and shifted, well, within the day I would say, and you know, this allowed us to carry on.''

6. The financial irritations encountered during the construction of Norseman Towers were to prove a major problem on completion. The units proved difficult to sell, and when the final payment became due, several units remained unsold. The position thus was that Norseman Developments owed B & C Constructions Pty. Ltd. some $22,000 or $23,000:

``We pressed for this, and pressed for this right through until about October or November of 1966. This was six months after the building was finished.

They came up with a hair-brained scheme - they still hadn't sold any more units, they'd sold nothing for months - that perhaps we should take a couple of units in lieu of payment. We weren't particularly interested in that. I'm speaking as a building contractor. I wanted money. The idea sort of grew a little bit - at this stage if I may go back - to protect our investment. After I was married in April 1966, I suggested to them, as the building was now finished and all this money was outstanding, that they should let me reside there. My reasons to them were that I could assist them in sales and generally be a caretaker for them. My real reason, and I think my dominant reason, was that once I was in there, they weren't going to get me out unless I got some dough, and they agreed to this, and I moved in there, I think, in about June, 1966, into unit No. 13, Norseman Towers.... B & C Investments, kept telling the other half, `Go on, we'll finance you. Take them, take them. Do something, and we'll get some dough'. Because the arrangement that they asked for was, `We'll make a cheque swap. You take the two units and pay for them and we will pay you out what we owe you.' There were rumours that they were going to go broke, so at the continued urgings of B & C Investments - because they were hoping to get some dough, rather than lose it - and with the promise of full funding for the purchase of the units, and looking around the area and talking to a local agent in particular, it was felt that, well, perhaps we might be able to make a go of it.

I must always contend that it was a bit of a half-hearted go.''

7. In the result, B & C Constructions Pty. Ltd. became the owner of units 8 and 13 in Norseman Towers. I shall let the objection to the assessment tell the continuing Norseman saga -

``It was the intention of taxpayer when purchasing units nos. 8 and 13 in Norseman Towers that taxpayer would retain such units as an investment and would let them. In furtherance of this intention, taxpayer expended money on furnishing units nos. 8 and 13 in Norseman Towers. The taxpayer was successful in letting unit no. 8 to members of the public but because unit no. 13 could not be let due to it being on the third storey of the building and there was no lift, this unit was occupied by B, a Director of the taxpayer.

The taxpayer continued to let unit 8 at Norseman Towers for approximately six months, at the expiration of which time the taxpayer decided to sell the unit no. 8. The reasons for the taxpayer's decision to sell were that B & C Constructions Pty. Ltd. had not been able to maintain the profits it had anticipated on projects completed, nor had it been able to secure new contracts, and therefore was unable to continue the loans it had made. The lettings of units in Norseman Towers were not as successful as the taxpayer had been advised by a local real estate agent. The first tenant of unit 8 caused damage to the unit and its furnishings, the taxpayer, which had agreed to purchase units in Garden Towers at..., preferred to consolidate its investments in that area which was the original area selected. Creditors of the taxpayer were seeking repayment of advances made to the taxpayer, thus requiring the taxpayer to realise on investments to meet its obligation.

In or about the month of June, 1967, the

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taxpayer received an offer for the purchase of unit no. 8 at Norseman Towers and for the reasons aforesaid the taxpayer sold the said unit.''

8. The above needs some explanation in that the company which ultimately became the owner of the units was B & C Investments, not B & C Constructions Pty. Ltd. This came about - in the words of B: -

``... It would appear that although what I said was the intention of what should have happened, the cheque swap initially was done strictly between B & C Constructions Pty. Ltd. and Norseman. It was several months later that a cheque swap was done. By that I mean funds loaned, and a repayment to B & C Constructions Pty. Limited. I don't know the reason in particular, but I suggest that it had something to do with the titles were not available, that perhaps on legal advice to what I originally thought had happened, something got in the way of this and it is obvious from the cashbook, if you call paying the money, the acquisition was not made until the beginning of April, 1966. We did acquire the units in December, because I checked the rental income and there was rental income received in the month of January for December rentals.

Chairman: I just want to get this clear: What happened? In December the cheques passed only between B & C Constructions and Norseman?

B: It would appear that way Sir, yes.

Chairman: From your cash book anyway. And it is some months later, round about March/April that the loan and the other...?

B: Yes, Sir, but it was always the intention that the units be acquired by B & C Investments. I think there was some legal problem, what it was I don't know. As often happens, you want to do something, and when you get to your solicitor and accountant, you don't finish up doing that at all.''

9. Both brothers gave oral evidence. I was particularly impressed with the testimony of the younger brother, B, who, on the whole, gave his evidence convincingly and had superb powers of recall. As I see the issue in relation to units 8 and 13 of Norseman Towers, it turns solely on credibility. If one accepts the evidence put forward by the witnesses (as I do), the acquisition of these units was virtually forced on them (or rather on the company which they controlled) by the circumstances outlined above. I fail to see how an acquisition in these circumstances can attract the provision of either limb of sec. 26(a). For good measure, the acquisition was seen by B as a good investment:

``I know I'm one and the same person talking to themselves, but it is blasted hard not to convince yourself in the end that it is good, particularly when you look like dropping 22 or 23 grand out of the other pocket. And this is why we eventually went into Norseman Towers. It has proved in retrospect it was a folly, but at the time I think I convinced myself that we could make a go of it. I don't think B & C Constructions Pty. Ltd., if I can honestly look in retrospect, was capable of making the finance available because already then, there were signs that the building industry wasn't going so well, but I think to be honest, to say in B & C Constructions Pty. Ltd.'s behalf, their excuse was, `better an associated company owing us the money than missing out on the lot.' And I think it was under this decision that the funding promise was made.''

10. I hold that the profit made from the sale of units 8 and 13 of Norseman Towers is not assessable income for the years in which it has been included, or at all.

11. I now turn to Garden Towers. This construction was the brain child of three gentlemen, Bill, Ted and Pat. One of these (Bill) had approached B during the early construction of Norseman Towers and invited the company to tender for an architect designed block of twenty-one home units. The first relevant document tendered was the initial meeting of directors of Pisa Pty. Ltd., held - according to the document - on the 29th October, 1965. At this meeting, Bill, Ted, Pat and B were appointed as directors, and one ordinary share was allotted each to Bill, Ted, Pat and B & C Investments.

12. The next exhibit was an agreement between Bill, Pat, Ted and B in the following terms: -

Dated this Seventeenth day of February, 1966.''

13. The subsequent exhibit was a copy of the minutes of Pisa Pty. Ltd. Those present adopted the minutes of the earlier meeting of the 29th October, 1965. The Chairman reported -

``That Croesus Finance Pty. Ltd. had agreed to lend and advance to the company the sum of $140,000 upon the security of a Bill of Mortgage, supported by the guarantees of Bill, Ted, Pat, B and C. The meeting, having had before it and considered the terms of a Bill of Mortgage submitted by Croesus Finance Pty. Ltd., resolved that the terms and conditions be accepted and that the loan of $140,000 be made to the company by Croesus Finance Pty. Ltd. be accepted upon the terms and conditions put forth in such Bill of Mortgage.''

14. These documents, however, require further explanation. It appears from the evidence that the quotation the brothers gave for the construction of Norseman Towers was too high, and they were requested to see if they could reduce it.

```Surely yous can do better than this.' So we did some sketching and some more pricing and came up with a block of 26 home units, which consisted of six floors of four units and a top storey of two penthouses. After some further discussion they told us that they felt they didn't have sufficient funds to go on with it, that what their intention was was to build this building, sell off some units to recover any borrowed funds they might require, and keep the balance to reside in or to rent to the public as an investment. We considered this matter and it appeared to be an excellent idea to us, particularly, you know, we would get a building to build, which was terrific - hopefully make some profit. We had some profits coming out of other projects which we could then invest and turn into a long term investment to receive income.''

15. It will be seen that the documents referred to in para. 11 to 14 above involve only Bill, Ted, Pat and B, not B & C Investments.

16. I am satisfied that the many companies in this reference, which surfaced during the hearing, have neither the effect of introducing sec. 26(a), nor involve ``income'' as understood in sec. 25(1) merely because, on one view, they can be seen as additional or extraneous links in a complex chain. Stripped of their heavy corporate veils, we are, in essence, dealing with B and C. Counsel for the Commissioner submitted that there was here a ``scheme'', which formed part of an overall plan, in which the associated companies, by using a system of inter-company loans, channelled profits into the taxpayer company in the hope that that company would not be taxed on those profits. I am satisfied that if there was such a scheme, it had not yet emerged. I shall deal more fully with this submission in the References of B Investments and C Investments.

17. In the result, each of the four participants, that is, Bill, Ted, Pat and B & C Investments (i.e, B and C) each contributed

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$50,000; B & C Constructions Pty. Ltd. built the units, and it was expected that B & C Investments would receive five units, which it was their alleged intention to furnish and let. B & C Investments formally acquired five units on the 7th February, 1967 at a meeting of Directors, being units 1, 11, 12, 13 and 17

``... in consideration of the moneys advanced by the shareholders by way of loan to the company and in accordance with the terms of the Agreement dated 7th February, 1966.''

18. The units were completed towards the end of April, 1967. B deposed:

``We immediately furnished the units. To my best recollection we cancelled the part of the furniture on unit no. 17. What happened was - the furniture came in dribs and drabs and took a little while - and it was about that time I was going through all my costs and doing a few budgets of what we had and what we were going to get, and I could see disaster. We were a long way in the red. We had at this stage run out of work. To my knowledge we did not have a single contract to go on with. We got four in a matter of 3 or 4 months, and got nothing for another 15 months.

So June 1967, I think most people will recall that was the year of the big cyclones on the coast, I don't know whether that dampened everyone's spirits, but it certainly dampened our pockets by a long way because we couldn't get anybody to do anything any more. The best we could achieve was to build a house after that.... It's not a hard luck story but the point is, we didn't get any contracts for about 15 months, and that is documented in our cash book. There was just nothing...

So from some success, we fell off rather badly. And it became obvious to me that by the time the building was finished and perhaps even a bit before, there was going to be a critical fund shortage.''

(p. 149 of tr.)

19. B & C Investments managed to increase its overdraft. Nevertheless, its liquidity was such that it was still unable fully to furnish the units allotted to it. One unit (no. 17) remained wholly unfurnished, and was sold - pursuant to an offer from a local agent - on the 31st July, 1967. I am satisfied that in the circumstances deposed to, the profit from the sale of this unit is not assessable income. I accept that this unit, as well as the others in dispute in this reference, were acquired for purposes of investment. If independent confirmation of the `investment' intent were needed, it is supplied by the fact that one E had become the manager of the block of units, having bought the management rights on the understanding that he would get the letting rights of the ``investor units''. Although E was not called as a witness, this was not challenged in cross-examination. It is a reasonable inference that E would not have undertaken such an ``investment'' if it had been intended to sell the remaining units to owner/occupiers.

20. The next unit to be sold was no. 13. This sale took place on 19th August, 1967.

21. It was around this time that the company's liquidity problems were such that it obtained a ``loan'' of $20,000, secured by way of first mortgage, over unit 11. For reasons no one could explain, this mortgage contained a ``hidden'' option agreement. B deposed:

``I do not know how it happened, but it did happen that the mortgage document somehow prepared by the mortgagee's solicitor and our solicitor in conjunction - and I was astounded that it was there - contained an option for him at his discretion to purchase the unit. Really, I must honestly say that I've signed the document, I realise that, but we certainly didn't finish up with a straight out mortgage as I thought we did. The mortgagee gave notice and took the unit over.''

The option agreement could not be in clearer terms. It provided that in consideration of the loan, ``the company hereby gives and grants an option to purchase unit no. 11 in Garden Towers, furnished, on a walk-in-walk-out basis for the sum of $22,700, exercisable at any time prior to the fifteenth day of September, 1968 by notice in writing.'' In the event, the mortgagee exercised his option at the end of the time stipulated, and thus became the owner of the said unit.

22. Pausing here, I find this evidence astonishing. The option agreement was signed by both brothers. B and C struck me as astute businessmen who would be unlikely to sign any document without perusing it. However, this evidence was not challenged in cross-examination, and in the circumstances, I am not prepared to hold that it colours the

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remainder of B's evidence. The whole scheme appears to me to have been carefully worked out by the mortgagee's solicitors, who were obviously keenly alive to the fact that a mortgagee is not allowed at the time of the loan to enter into a contract for the purchase of the mortgaged property. To overcome this difficulty, the mortgage was dated 31st August, 1967, and the option the 1st September, 1967, i.e. one day later. If the signing of these documents in fact took place contemporaneously, it may well be that this arrangement is contrary to a well known principle of equity of long standing and void, a principle which appears to have had its origin in the desire of Courts of Chancery to protect embarrassed land owners from imposition and oppression (cf.
Vernon v. Bethell (1761) 2 Eden, 113 ).

23. Unit 1 was let to C, and unit 12 let to the public:

``I would say that once our financial situation was overcome, it went off the market. It was certainly not sold as the record indicates. So we had from September, 1967 that this unit was not sold. It just sat there, so I would suggest it went off the market. I cannot recall giving any instruction either way, but we just let it sit there anyway and didn't do much about it until my brother decided, when he finally decided to go overseas after all sorts of dramas, it was agreed to wind that company up and to split all our affairs.''

In the result, these two remaining units were sold in April, 1971. The Board was treated to two versions, one each by B and C respectively, as to the reasons why the two brothers decided to ``split up'', the various disagreements between them, the blame each attached to the other, etc. Whilst this may be fertile source material for a Strindberg, Ibsen or Dr. Freud, I can see little point in chronicling the details of this family feud other than to state, having heard both versions, I accept that B and C each ``wanted out''. In any event, the reasons advanced for sale are merely of secondary importance, becoming activated only when the reasons advanced for acquisition are in question. Having in the main accepted the evidence of B and C, I must hold that the units were acquired for purposes of investment, and therefore do not attract the impost imposed by sec. 26(a). Being at that time a singular, isolated and unprecedent[ed] transaction, the profit is not likewise assessable pursuant to sec. 25(1). The Commissioner points to no other section of the Act by which he can bring to tax any part of the gain which the taxpayer received for the units sold. I would therefore excise the amounts of -

24. In parenthesis, I wish to add that the Board was treated to one gratuitous piece of ``evidence'' by the irrepressible B. I can do no better than to quote it verbatim: -

``Sir, I don't know exactly when it was, but I was informed that one of the parties in Leaning Towers (a subsequent high rise built by the brothers) had claimed a capital gain on the sale of his units and that there was somebody on the Coast investigating into his affairs, and seeing he had a look at his, he may as well have a look at ours. A gentleman by the name of Mr. K - I don't recall his first name - from the Taxation Department saw me. I think it would have been 1971, but perhaps a little bit earlier, but I believe it was about 1971. He went through all our affairs. I had fairly lengthy discussions with him, and explained it all to him. He was mainly interested in us now building Leaning Towers and buying more land to do more, but I tried to convince him that this was the new endeavour, and that was the old one that he was looking at and, sure, we were speculating now, but, you know, we had our reasons in the first place in the other one. And I think I reasonably convinced the man because I learnt subsequently that all the other people were taxed to the best of my knowledge, and we weren't. And it just sat there for several years, and then to the best of my knowledge somebody else picked the file up, read the back pages as in the same manner the hearing started, I'm afraid to say, and said, `once a speculator always a speculator' and

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we got taxed.... The other people rang me up and they said `What happened to you?' And I said - `Well, you know, I told the man everything, and he went through all our affairs. He spent a considerable amount of time there and I told him the facts and I think he believes me and I don't expect to hear any more from him.''

25. The above was not challenged by the Commissioner. I must therefore presume that the story, which took three days to unfold, was in essence the same story this witness gave to the Commissioner's investigator several years earlier, and was supported by whatever documentary evidence B was able to provide. Pious hope is rarely an effective substitute for evidence.

26. It appears to me that sec. 190(b), which places the burden of proving that an assessment is excessive upon the taxpayer must be read in conjunction with sec. 193(1), which provides that a Board of Review is in the same position as the Commissioner himself (cf.
Shell Co. of Australia Ltd. v. F.C. of T. (1931) A.C. 275, 298 ). The combined effect of these two provisions is that the Commissioner should not withhold from a Board the relevant material upon which he made his assessment and at the same time assert that the onus is on the taxpayer to displace that assessment. For the Commissioner to play Blind Man's Bluff with a taxpayer is one thing, to make the Board a party to it is quite another. The forensic disadvantage in which a taxpayer-appellant is already placed is compounded by the fact that even when the Commissioner calls no evidence, the latter invariably addresses last. If this practice is grounded in historic precedent, it is time it were reviewed. If it is based upon the procedure adopted in proceedings commenced by way of motion, I can see no rhyme nor reason to follow this procedure in reference to a Board of Review.

27. In the result, the only evidence placed before the Board consists of sworn testimony asserting that the units - the subject of this reference - were acquired for purposes of investment. I see no reason for disbelieving this evidence and, in the absence of any other evidence, my decision must be in accordance with the conclusion stated at the end of para. 23 hereof.

Reference B. 120/1977.

In issue in this reference is whether the sale of unit 34 in Leaning Towers, yielding a profit of $8,089 is assessable income.

2. This is a companion case of a trilogy of references B.110-111, B.113-117, and B.120 all of 1977 in the sense that all these references were heard together and the dramatis personae are, for all relevant purposes, identical. I shall therefore use the same names and initials as used in B.113-117/1977 without repeating the background history, save and insofar as further evidence is relevant to the outcome of this reference.

3. The taxpayer in this reference is B Investments controlled by B.

4. In quick narrative B and C - or rather their companies B Investments and C Investments - acquired land adjacent to Garden Towers in September, 1967 as nominees for Woodwind Pty. Ltd., a company yet to be incorporated. B deposed that the same ``Bill'', representing the investors in Garden Towers referred to in the earlier reference approached him and

``We discussed buying the land to build some units with a view of retaining these to renting them as a future investment. As the land appeared to be a good proposition and everything else, we went into this. The Leaning Towers part only came about quite some time after quite a few changes in the circumstances, which resulted in buying extra land and additional people coming in.''

(The ``extra land'' referred to above is the land the subject of reference B.82-83/1977, which was acquired in February, 1968.) It was agreed that each of four participants would venture $50,000 apiece, one of the participants being B Investments and C Investments conjointly. The agreement entered into was in terms identical to the agreement entered into in relation to the earlier erection of Garden Towers, i.e.:

5. In due course, B Investments and C Investments were allotted units 1, 5, 23, 29 and 34, i.e. the two brothers - or rather their companies - received 5 units, i.e. 2 ½ each. Unit 29, having been labelled the ``Joint Unit'', was duly sold in the 1969/70 tax year. The Commissioner treated the gain from the sale of this conjointly owned unit as income. Since no formal objection was lodged against the inclusion of half the profit in the amended assessments of B Investments and C Investments in the relevant year, the matter is not before us. In fairness to the taxpayers, it should be noted that whilst they ``objected'' to the assessment, the failure to lodge an objection was due to a mechanical defect.

6. Pausing here, it will have become apparent that, whilst the scheme in Leaning Towers is the same as the one used in Garden Towers, the puppets are different, albeit having their strings pulled by the same puppeteers. It is common ground that subsequent to the Leaning Towers venture, the two brothers, after having dismantled their associations, came together again after an interval of time, and continued the same modus operandi, i.e. building units through a reconstituted construction company and taking those units remaining after payment of loans, into their respective investment companies, to be sold off to any buyer agreeable to pay the asking price. As B put it:

``We have incorporated further companies, and others have been wound up, in voluntary liquidation. This was solely done because of changing affairs, the changing circumstances, and the things we later did.

Question: Did you have any particular policy as to when and how your companies should be wound up? Did you make any decision as to when you would wind them up, and why?

Answer: No, no. This happened because of the circumstances that occurred.''

7. I have little doubt that where one mind and one will controls and directs a series of transactions, albeit through various companies, and over a period of time, a Board of Review is entitled, as a matter of law, when dealing with one isolated transaction, to make a wide sweep in search of a pattern - if there is one - and to determine when that pattern commenced. It is common ground that when B and C reconstituted themselves into a partnership through their respective companies, they were then in the business of building and selling. Both readily conceded that the profits that they made from their subsequent ventures - which differed little if at all from the scheme now under review - were assessable income, and were disclosed as such. However, both B and C assert that the Leaning Towers venture pre-dated this scheme.

8. To test this assertion, I propose to weigh the evidence for and against the taxpayer's contention: -

  • ``... it was about that time (i.e. April, 1967) I was going through all my costs and doing a few budgets of what we had and what we were going to get, and I could see disaster. We were a long way in the red. We had, at this stage, run out of work. To my knowledge we did not have a single contract to go on with. We get four in a matter of three or four months, and got nothing for another 15 months.
  • So June 1967, I think most people will recall that was the year of the big cyclones on the coast. I don't know whether that dampened everyone's spirits, but it certainly dampened our pockets by a long way because we couldn't get anybody to do anything any more. The best we could achieve was to build a house after that.... It's not a hard luck story but the point is we didn't get any contracts for about 15 months and that is documented in our cash book. There was just nothing.... So from some success, we fell off rather badly. And it became obvious to me that by the time the building was finished and perhaps even a bit before, there was going to be a critical fund shortage.''

(p. 149 of tr.).

  • ``I think it was a bit emotional (about unit 34) to be honest Sir. Well, I just didn't want to have much to do with it.''

9. I find this case one of extraordinary complexity, since its resolution ultimately depends on the correct view of just what the majority of the High Court decided in Gauci's case , 75 ATC 4257. Applied to the present facts, we have, on the one hand, sworn testimony that the impugned property was acquired for purposes of investment, and on the other, a chronology of events which, to my mind, make that explanation implausible. Am I entitled to draw the inference that the property was therefore acquired for purposes of selling it sooner or later at an enhanced capital value?

10. In Gauci's case supra, Barwick C.J. highlighted the error into which the trial judge had fallen when he decided the issue on his own view of the ``probability or improbability'' of the taxpayer's state of knowledge. His Honour went on to point out that -

``There is no presumption that property is acquired for resale at a profit. No doubt sec. 190 of the Act requires the appellant to show that the assessment is excessive, but the relevant facts being known, if there is no material upon which it can be properly concluded that the property is acquired with the relevant purpose, the assessment is thereby shown to be excessive. As I have said there is no presumption of purpose to aid the assessment. In particular, sec. 190 does not raise any such presumption.''

(at p. 4260)

11. Jacobs J., concurring, added:

``Before sec. 190 could operate there must have been something in the evidence from which an inference could have been drawn of an intention on their part to re-sell at a profit.''

(at p. 4262)

12. Speaking for myself, and with the utmost respect, I find the term ``presumption'' rarely helpful. At its simplest connotation, ``presumption'' is a probable inference which common sense draws from the surrounding circumstances. It can range from slight probability to the highest moral certainty. A ``presumption'', strictly speaking, pre-supposes a previously known and ascertained connection between the presumed fact from which the inference is drawn. Used in this sense, I find it difficult to apply to a situation which depends upon its ultimate resolution on the existence or otherwise of a state of mind at a particular point in time. In this sense, of course, there can never be a ``presumption'' of such a purpose. As was said many years ago in a different context ``the introduction of the maxim or statement that a man is presumed to intend the reasonable consequences of his act is seldom helpful and always dangerous.'' (
Stapleton v. The Queen (1952) 86 C.L.R. 358, 365 .)

13. Is it a ``presumption'' of the kind, which, for example, presumes lawful marriage from the fact that a man and woman have been proved to have lived together as man and wife (
Aronegary v. Sombonade , 6 App. Cas. 364 )? This kind of presumption can only be rebutted by the clearest evidence by him who asserts the contrary. To apply ``presumption'' in this sense to a sec. 26(a) situation would be to shift the onus to the Commissioner and give no effect whatever to sec. 190(b). True it is that Barwick C.J. added:

``As I have said, there is no presumption of purpose to aid the assessment. In particular, sec. 190 does not raise any such presumption.''

( supra at p. 4260).

However, I take this to be limited to the context of the facts in Gauci's case. That this was his Honour's intention is, to my mind borne out by his Honour's observation that ``if, on the other hand, the acquired property is resold within what may fairly be described as a time proximate to its acquisition, the requisite purpose may be inferred. Thereafter, the taxpayer must overcome the prima facie inference there drawn.'' (at p. 4260). This clearly suggests that a statutory ``inference'' can indeed arise in cases where there is proximity between acquisition and resale, and that it is for the taxpayer to rebut it. This, at first glance, appears to be in clear conflict with his Honour's earlier statement that ``there is no presumption that property is acquired to be resold at a profit'', unless one assumes that the learned Chief Justice was applying his mind to the particular facts of that case; viz. acquisition followed by resumption (six years later), with unrebutted evidence of a non-statutory purpose.

14. It is against this background that his Honour's statement that ``disbelief does not amount to positive evidence of the opposite of

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what is disbelieved'' must be seen. In other words, where there is a compulsory sale (thus involving no presumption of a sec. 26(a) purpose), mere disbelief of the taxpayer as to his stated purpose in acquiring the property cannot give rise to a sec. 26(a) purpose. A similar and more detailed exposition is to be found in the judgment of Gibbs J. in
Steinberg v. F.C. of T. 75 ATC 4221, 4231-2 .

15. As I understand the current law, it can be summarised as follows: -

16. What, then, must a taxpayer, assessed on sec. 26(a) establish? It is trite law to say that he must prove the assessment is excessive. Whether called ``objector'' or ``appellant'', he is saddled with the prima facie evidence which arises from an assessment raised under sec. 166, which has quantified the taxable income, or, in the case of a default assessment (sec. 167), the amount which the Commissioner has decreed to be the amount ``upon which in his judgment income tax ought to be levied''. Unless and until a taxpayer moves, the assessment stands as conclusive determination of his liability to tax (sec. 177(1)), ``except in proceeding on appeal against the assessment''. A reference to a Board of Review is not an ``appeal''. I am not persuaded that the onus of proof is different, depending on whether a taxpayer elects to appeal to a Supreme Court or refer his reference to a Board of Review. It is therefore not for the Commissioner to prove the existence of certain facts as a pre-requisite to the exercise of his power to amend (sec. 170). It follows that there is no threshold question going to the Commissioner's power. It likewise follows that one who challenges an assessment carries the onus of proving its defect. On this view sec. 190(b) may even be seen as surplusage. However, whether out of abundance of caution or otherwise, sec. 190(b) reinforces the evidentiary position by placing the burden - the onus probandi - on the taxpayer to establish that his liability is less than the amount upon which the Commissioner has assessed him.

What, then, is it that the appellant must negate? In my view, he must establish, in the case of an assessment, to what extent the assessment is excessive; in the case of an amended assessment, that the amendment falls outside the powers of the Commissioner to amend (sec. 170(2)). A taxpayer can do the latter in one of four ways: -

17. Applied to the present reference, I simply find myself at the end of the taxpayer's case in the position where I am not persuaded on the probabilities that the main or dominant purpose of entering into the Leaning Towers venture was other than to carry on a profit-making scheme of trading in strata title units. The proceeds are thus ``income'' falling into the second limb of sec. 26(a). I am satisfied that B gave his evidence with complete honesty, and has totally convinced himself that his intentions in 1967 were such as to defy the various tentacles of the Income Tax Assessment Act. However, an intention is a state of mind, wispy, fleeting and ephemeral; its reconstruction was not assisted by the inordinate delay involved in bringing this reference to trial. Insofar as it was capable of being confirmed, it can only be tested against contemporaneous events. It is, to my mind, a reasonable approach to find out what a person's stated intention was by having a look at what he did. In this case, I find that the one does not support the other.

18.I would confirm the amended assessment.

References B. 110-111/1977

This is the last of the three companion cases B. 113-117/1977, B.120/1977 and B.10-111/1977 - and involving C Investments and its allotted units in Leaning Towers - nos. 5 and 23. The latter unit was sold on 29th June, 1970, the former on 21st August, 1970. The building itself, it will be recalled, was finished, and the respective units allocated to the partners in the venture in July, 1969. The above two units were left unoccupied for a period of 12 months before being sold.

2. C, who gave evidence, deposed as to the reasons for the acquisition in much the same terms as his brother B; viz., ``investment''. He however deposed that during the construction of Leaning Towers, he became disenchanted with the partnership:

``Well I'm afraid it's a bit of a long story, this one. You may have heard (I'm going to have to shoot my brother down a little bit on this one) yesterday where my brother explained some of his matrimonial problems. Well, at some time during the construction of this building my brother suffered to some extent what we call in the family `the seven year itch', and it wasn't just matrimonial problems, but there was a lot of problems between my partner and myself, which finally resolved itself in the withdrawing virtually all my interest in B & C Investments, and in fact - leaving the country. I formed a new company with which I intended to go into business.

This all took some time. At the stage then I made serious endeavours to buy a cruising boat; in general for a period of about some 6 months or so my wife and I were seriously thinking of leaving the Coast, including B & C Investments, for good. We did stay away for some 15-odd months in which we travelled extensively overseas and I think perhaps some time during our absence that my brother and I saw things eye to eye a bit more and we finally got back into business again.

3. At that stage, and I can substantiate this with a number of things, I did make serious efforts to settle all my relationships with my partner, and of course I intended to go overseas.

At first I was going to buy a cruising yacht, then go cruising for a number of years with my family, but I decided in the end to, I think the word is `liquidate' most of my assets. And, whilst this was going on, I could see no gain, or no incentive by keeping properties here at all. I did take a lot of steps to get out of business in general.''

(p. 88 of tr.)

The above was also advanced as the reason for not furnishing the units and leaving them unoccupied for twelve months.

3.Having concluded the ``investment'' reason adverse to the taxpayer in reference B.120/1977, I should add that I find nothing in

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the evidence in this reference which would lend greater credence to it. The reasons advanced for the sale of the units, the subject of this reference if anything confirm my view that it was the intention to sell them at a profit at the time of acquisition. When C was asked by Mr. Thompson, of learned counsel for the Commissioner, whether he was waiting for the market to rise in order to get a better price, C replied with refreshing candour:

``Well, there was nothing wrong with getting a better price, Sir.''

He added with some asperity that he could hardly be expected to sell the units for less to satisfy the Commissioner.

4. The fact that C Investments did not let those two units between the time of taking possession and sale I attribute to the fact that the two brothers discovered that letting was not altogether an unmixed blessing. One unit in Norseman Towers, let to a policeman, had a door bashed in and some furniture slashed. Whether this was an ``occupational'' hazard attributable to letting as such, or to the nature of the tenant's employment was not made clear. Another unit in the same building required re-painting after a letting of only three weeks. It may well be that C decided that ``once bitten, twice shy''. There was certainly no other plausible explanation forthcoming.

5. The fact that both units were sold within twelve months of acquisition has been explained for reasons which I unreservedly accept.

6. I have already stated my reasons in the B Investment reference (B.120/1977) as to what I regard as the correct approach to assessments raised pursuant to sec. 26(a). I do not propose to repeat them here.

7. Some observers have maintained that as a result of Gauci's case (75 ATC 4257), sec. 26(a), whilst not officially certified as dead, has nevertheless been already suitably laid out - like sec. 260, a grotesque caricature of legislative drafting - awaiting decent burial. Others, notably Professor Bart, have urged caution on the basis that Gauci's case ``was decided by a majority of two to one in a bench of the High Court consisting of three judges. It may well be that the decision will not survive closer scrutiny by a full bench'' (51 A.L.J. 42, 43). The latter comment was prompted by a decision of mine on sec. 26(a) (76 ATC 346) from which I have since, on more mature reflection, resiled in part in that I do not now regard Gauci as having decided any general principles of law, but rather was intended to be confined to the particular facts of that case; viz. acquisition followed many years later by a compulsory resumption, with no evidence of the existence of the statutory purpose at the time of the original acquisition. It is with respect, an unexceptionable decision on its facts.

8. I find that where the absence of a sec. 26(a) purpose is central to the success of an appeal; (i) such purpose cannot be presumed unless it is established on the balance of probabilities; (ii) a ``probable presumption'' alone is not sufficient for a tribunal to rely upon; and (iii) such ``presumption'' can never by itself be the foundation of a finding adverse to the taxpayer.

9. Translated to the facts of this reference, I am satisfied on the probabilities that C Investments dominant purpose of acquiring units in the Garden Towers venture was to hold them for sale at a profit. The explanation advanced for the retention of two units, unfurnished, for twelve months has left me unpersuaded. When the whole story is unfolded (and C is really a weaker echo of B), the concept of these two brothers going into the investment business at that time and in their circumstances - is not just a folie a deux, it is unacceptable. I am satisfied that C gave his evidence to the best of his recollection. However, as Barwick C.J. pointed out in Gauci's case (supra) ``Of course, the recollection of a person as to a past state of mind is apt to be distorted consciously or unconsciously and at all times unreliable''. (p. 4295) I would only add this, that nothing is more apt to give rise to unconscious distortion than a gain threatened by tax.

10. I would uphold the Commissioner's decision on the amended assessments dated 22nd August, 1975.

 

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