Case K61

Judges:
HP Stevens Ch
CF Fairleigh QC
JR Harrowell M

Court:
No. 1 Board of Review

Judgment date: 23 October 1978.

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H.P. Stevens (Chairman): The question for decision in these references is whether, in arriving at the net income of a ``partnership'' of A and his wife, the profit derived upon the sale of five units (out of a block of eight units built) has been correctly included as assessable income in terms of sec. 25(1) and/or sec. 26(a).

2. A commenced work as an office boy in an architect's office, completed his university examinations at the end of 1961, became a registered architect in 1962 and from April 1962 to May 1972 was employed as an architect in relation to, inter alia, ``low rise home units and high rise home units''. In 1966 he married a girl whose father had extensive interests in property and, in 1967, two properties were bought in his wife's name - one costing $13,400 financed by a first mortgage of $12,000 and the second costing $6,800 with a first mortgage of $5,500. In evidence A said this was the beginning of a plan ``to buy houses or property, take out first mortgages, rent the property as an investment and the rents would pay the interest and hopefully show a profit''. In September 1968 land was acquired for the erection of a family home and, in 1969, the land upon which the block of home units at issue was ultimately erected was located and steps for its acquisition commenced. A said that such acquisition had been ``on my mind for quite some time because of my profession'' - it ``may have been a year'' before he placed a deposit on the site.

3. In the return of income of the partnership of A and his wife for the year ended 30 June 1972 (dated 27 February 1973) lodged by the taxpayers' present accountant

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ATC 588

(also a financier) reference was made to the block of home units - a project ``conceived and undertaken as an investment and not as a profit making undertaking or scheme'' - and it was stated that ``erection was substantially completed at the end of February, 1972 at which time, because of difficulties re finance, we determined to sell five units and let the remaining three''. In a reply of 5 October 1973 the taxpayers' accountant said the reason for the sale -

``was the realisation by the partners that, because of the much greater capital investment than had been envisaged, they would have virtually the whole of their capital tied up in the block of eight flats and could not beneficially finance the holding of the entire block. They therefore determined to `Strata Plan' the block, sell five units and hold the remaining three units as an investment.''

This same reply referred also to the building finance being ``provided by... at an interest rate of 1-1/8 per month (13 ½ % per annum) and bank overdraft, it being intended to refinance the project on the completion of erection''. The explanations tendered were not accepted by the Commissioner and, in due course, the matter was referred to the Board.

4. My colleague Mr. Harrowell has in his reasons referred to the evidence placed before the Board and I adopt his statement thereof with some additions in relation to particular aspects of the case. These additions and/or amplifications follow.

5. Initially it should be recorded that the land in question was acquired around about the same time as A's brother (a builder) bought a block in the same street and upon which he commenced in about October/November 1970 to build a block of eight home units for sale (building completed about June 1971). The taxpayers' ``project'' was the subject of discussion between the brothers early in 1971 or ``it may have been the year before but we were going to build it because (A) was working in the architect's office at the time, and he wouldn't be in a position to build it''. Also that A when referred to an impression that towards the later part of 1968, 1969 and 1970, there seemed to be a large number of units going up (in the area in which the land in question was situated) said: ``I think what happened is that the rash, to use that word, of units would have hit that area about that time''.

6. Despite the statement that it was intended to refinance on completion of erection (para. 3) there was no oral evidence supporting such an intention, rather the reverse. The accountant (wearing his money-lender's hat) did not know of such an intention - his notes at the time of being approached for a loan make no reference thereto - although (wearing his subsequent tax agent's or taxpayer's accountant hat) indicated he would have been told that later when preparing the return or reply (para. 3). The accountant when asked whether it was ``not an uncommon practice to get finance at a higher rate as you loan it and once it is finished to refinance it at a lower rate on a first mortgage basis'' answered -

``I think it would be most usual that that be done. A higher rate is normally paid during the development. When it is completed obviously it is a more attractive security to other lenders, not to finance company lenders.''

Despite this ``most usual'' position A said he had not made inquiries on such a basis - even though he admitted he knew the loan from the accountant ``wasn't long term''.

7. A said he relied on his solicitor to obtain finance and that he ``wanted long term finance''. However his solicitor, who obtained short term loans for the acquisition of the land, said ``that was what was requested at the time'' and, although on 3 June 1971 finance ``on a long term'' basis was requested, he indicated ``when I say long term, two and three year term finance'' and when asked ``was this type of finance (A) was after, two and three year terms'' answered ``Yes, that sort of stuff''.

8. Opinions may differ as to what constitutes ``long term'' finance but I do not accept that what the solicitor was ``requested'' to obtain (and I accept the evidence of the solicitor) was, in the circumstances of an alleged intention to hold a block of eight units as an ``investment'', long term finance and, since A agreed that the accountant's loan was not long term, I can find only that there never was any attempt to obtain ``long term'' finance.

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9. With reference to the explanation that ``they therefore determined to `Strata Plan' the block'' (para. 3) it is standard practice to ``Strata Plan'' a block when it reaches completion (it cannot be done beforehand) and, as the Council files tendered in evidence show, to apply therefor at the same time as applying for a certificate of compliance in respect of the building. This is the natural time to apply, for a certificate of compliance in respect of the building. This is the natural time to apply, for a certificate of compliance is a condition precedent to a ``Strata Plan''. Also as the file in respect of Property E (para. 65 Mr. Harrowell's reasons) shows this was the subject of a ``Strata Plan'' upon completion despite the claim that it was built for ``investment'' and, as at the date of hearing, was still completely held - in addition see evidence set out in para. 14 re duplex. It follows that I do not accept the explanation given.

10. Insofar as the ``much greater capital investment than had been envisaged'' (para. 3) is concerned the facts are that Council estimated in November 1970 that the building would cost $54,000 (this being costs of building only as distinct from such costs plus interest and other holding charges). At this stage the plans were for a box shaped structure. These plans were revised later to a more complex shaped structure yet, despite this and the elapse of time (as Year Books show building costs were increasing in the meantime), the estimated cost in May 1971 was given as $50,000 - Council finally approved the ``revised amended revised plan 18/8/71'' on either 23 or 25 August 1971. It is not surprising that, when completed in February 1972, the building cost was more than the original estimate of $50,000 (or Council's November 1970 figure of $54,000). A was an experienced architect (project manager) and I cannot accept that the ``increase'' came as a complete surprise to him although it may have been more than he had expected. It should also be mentioned that Mrs. A, when the land was acquired, did not discuss with A ``the costs involved in such a project''.

11. The explanation of ``virtually the whole of their capital'' being tied up in the units (para. 3) was not supported by evidence. No details of the overall financial position of A and his wife at any stage were given but, as Mr. Harrowell (para. 50 his reasons) has calculated, they only contributed $9,528 to the cost of the land and building (a mere $5,310 when interest paid is excluded) whilst moneys were tied up in the properties of Mrs. A and the land and family home (completed end 1970). In the circumstances it is, to say the least, doubtful whether the explanation is correct.

12. It will be apparent from para. 8-11 that the explanations given are, in my view, not completely valid and, to the extent they reflect the case advanced before the Board, the same result follows. The reason why it was explained ``at which time'', i.e. end of February 1972, when A deposed it had been decided in the Christmas 1971 period to sell sufficient units to pay off all borrowings is also difficult to appreciate.

13. Although A said it was not until February 1972 that he thought that, if he could get a couple of these through, i.e. the February 1972 Development Applications referred to in para. 63 of Mr. Harrowell's reasons, he ``could use that as my job and move out of the architect's office'', the solicitor (who said his association with A ceased mid December 1971) deposed that ``on a number of occasions he told me he was not getting anywhere and intended one day going out on his own''. In relation to these February 1972 Development Applications A said that later on in February ``I came into discussions with my father-in-law, the decision to buy another site, and to build a block of units to sell'' and that, after the ``leak'', we rushed and put deposits on three other sites and put three development applications in - even though ``I had no idea how they'd all be financed. I really didn't expect them all to be approved but they were and the other possibility was that you could sell one of the sites off if you couldn't handle it and quite possibly either recover your money or make a profit on that'' - note one of these sites was property H which was said to have been acquired as an ``investment'' but which was, in fact, sold (see next paragraph).

14. The four properties involved were A, B, C and H as per para. 65 Mr. Harrowell. The respective Development Applications were signed by A as director of W (a company incorporated on 14 February 1972), as director of H (a non-existent company), and in his own right for the last two

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properties. Properties A and B were developed by Trust No. 1 (the accountant being the settlor and the beneficiaries the families of A and his father-in-law) set up 23 March 1972, property C by Trust No. 2 (settlor Mrs. A's mother, beneficiaries Mr. and Mrs. A and family) set up 26 February 1974 and property H by the partnership of the taxpayer and his wife. In chronological sequence the dates of commencement and completion of building for the eight sites referred to by Mr. Harrowell and the subject property were: -

Property       Commenced        Completed        Stated Reason       Whether

                                                      For           Presently

                                                  Development         Held

Subject    September 1971      February 1972      Investment           No

property

  A          July 1972         December 1972/       Sale               No

                                January 1973

  B          February/           August/            Sale               No

            March 1973        September 1973

  H       September 1973       March 1974           Investment         No

  E       Before end 1973     Before end 1975       Investment        Yes

  C        April 1974         June/July 1975        Sale              No

  F       August 1974          April 1975           Sale              No

  G      June/July 1975      March/April 1976       Sale              No

  D*     After September     Before June 1977       Sale*             No

             1976
      

• ^* Unlike other projects this was a single house and A was not ``real sure'' whether it was built for sale or not although the resulting loss was claimed as a deduction.

All properties, except for E, appear to have been financed by the accountant at high short term interest rates. Property E acquired March 1973 was developed by Trust No. 3 (settlor Mrs. A's mother, beneficiaries Mr. and Mrs. A and family) set up 26 April 1974 and was financed by loans from Mr. and Mrs. A - A said it would be retained as an investment ``as long as I can manage it''. Property H was said to have been sold because of a severe liquidity crisis and an ``inability to arrange satisfactory long term finance''. In addition to the properties A to H referred to above there were other properties. Firstly, a duplex purchased by A (apparently on behalf of Trust No. 2) and one S for $76,000 in February 1977 - S and his family live in one and the other is rented by the Trust. It was said ``we intend to keep it indefinitely. It's in a very good position and it was bought with the intention of doing just that, renovating it, strata-ing it and keeping it.'' Secondly the partnership of A and his wife were involved in a joint venture (referred to in 1973 balance sheet) on the north coast where ``we were going to build units'' but, after finally obtaining approval, was abandoned ``because of our financial situation'' - half property now sold off. There was also some land they were interested in down south (reference in 1974 return of income) but A could not ``recall what our real intentions were. We never even got off the ground with the one on the south coast.'' Finally the 1974 return of the Trust No. 1 claimed expenses in respect of projects abandoned in relation to three other sites.

15. It will be noted that, although only one subsequent property was developed in the names of A and his wife, A was the driving force, that two of the trusts involved were not set up until some considerable period after the acquisition of the properties they developed and that the partnership of A and his wife was involved in joint ventures that did not come to fruition so far as actual development was concerned.

16. The final matter I wish to refer to is the alleged sudden change in A from a panicky investor to a keen speculator anxious to make the greatest possible use of the ``leaked'' information concerning a zoning change. I find this hard to accept particularly in the absence of evidence from A's father-in-law with whom A discussed a lot of things

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and to whom he went in about September/October 1971 concerning finance difficulties (the father-in-law being a party to the contract of purchase). A said he did not tell his wife as much about his difficulties ``as what I normally would do'' because she was ``expecting'' but Mrs. A said ``we discussed it - we discussed it a lot'', that there was a big discussion and that there was ``a family conference actually'' at her parents' place. She also said, in relation to the contract of purchase, that A ``was just starting out and my father thought that it would be beneficial for him if he put his name on the contract'' - that way the solicitor would know ``if things went bad with the project'' he would be ``really safe with his money''. In the circumstances A's father-in-law was not an uninterested party and his evidence would have been most useful to the Board. As a party to the contract of purchase and having regard to Mrs. A's statement of the reason for his so being, he undoubtedly would have been in a position to corroborate (or otherwise) the statements of A and I find it difficult (in the absence of any explanation) to resist the view that his evidence would not have assisted the taxpayers' case.

17. Turning now to the question at issue the taxpayers' representative submitted the evidence showed the project was conceived as an investment and that it was only abandoned when they were unable to obtain finance at the rate of interest needed for it to be an economic proposition. This was in the Christmas 1971 period and the subsequent decision to sell five units (and presumably the other three sold later and not a present issue before the Board) did not render the profits made thereon assessable either in terms of sec. 25(1) or 26(a). He also submitted that the operative period to be looked at is 21 October 1969 to 6 January 1972 and that ``events subsequent to that (period) are totally irrelevant''. He said ``all evidence has been brought before the Board. There has been no evidence that I am aware of that has been held back from this hearing'' and that the taxpayers had discharged the onus of proof placed on them.

18. The Commissioner's representative said it was relevant to look at the other transactions - as part of a wide survey and exact scrutiny (
Western Gold Mines N.L. v. C. of T. W.A. (1938) 59 C.L.R. 729 ;
Smithfield Pastoral Co. Pty. Ltd. v. F.C. of T. 14 A.T.D. 170 ) - and that, where a person's purpose is in question, oral evidence of that person is not conclusive (
Pascoe v. F.C. of T. (1956) 30 A.L.J.R. 402 ; 11 A.T.D. 108 ;
Jacob v. F.C. of T. 71 ATC 4192 ). He submitted the profits were assessable in terms of the second limb of sec. 26(a) referring to
Steinberg v. F.C. of T. 75 ATC 4221 , concerning the necessity for a plan at time of acquisition (although the scheme not be fully conceived in all details at that time). After detailing the evidence and commenting on the failure to call the named informant re the ``leak'' and A's father-in-law, he submitted the taxpayers' ``actions speak very much more loudly than words'' (
McIntyre v. F.C. of T. (1964) 13 A.T.D. 444 ). It was also submitted in the alternative that at least five flats ``were never intended to be retained'' and cited
Chapman v. F.C. of T. (1968) 117 C.L.R. 167 as authority for the assessment of the profits thereon. In addition he said the same evidence supported a finding under the first limb of sec. 26(a) (reference to
Moruben Gardens Pty. Ltd. v. F.C. of T. 72 ATC 4147 ). It was further submitted that the provisions of sec. 25(1) were satisfied in that the transaction was the first stage in a business of home unit development and was also the means of acquiring capital for the expansion of those operations.

19. Reference was made to
Gauci v. F.C. of T. 75 ATC 4257 and the Commissioner's representative said that the present references were certainly a case where the appropriate presumption arose. He said the taxpayers' evidence was unacceptable and that, in the circumstances, the onus had not been discharged and the assessments should be confirmed.

20. In reply the taxpayers' representative said there was no presumption that property is acquired for resale at a profit, that the calling of the named informant and A's father-in-law would not have assisted the Board and that the Commissioner's case ``appears to rest on inference rather than fact'' whereas ``the facts and the evidence clearly support the taxpayers' case''.

21. It will be clear from my comments in para. 16 that I do not accept evidence from A's father-in-law would have been of no

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assistance to the Board and it is unnecessary to say anything further concerning that submission in reply. Examination and cross-examination of the named informant would have put a concrete (or otherwise) basis to the sudden flurry of activity in February 1972 - Council's records which could have established the date of resolution were not sought to be produced - and assisted in an appreciation of the reliability of the evidence given. Even where there is no suggestion of untruthfulness by any witness, yet, as Mr. Justice Hoare said in
Bartlett Estates Pty. Ltd. v. F.C. of T. 78 ATC 4527 at p. 4528 (a case dealing with land transactions) in relation to persons he accepted ``as witnesses of truth'' -

``After a long passage of time one's memory is likely to be inaccurate unless there were contemporaneous documents which refresh one's memory, and also not infrequently a perfectly honest witness is likely to inaccurately purport to remember details which accord with one's wishes.''

On the remaining submission in reply it is sufficient to say that, although there is no presumption, nevertheless, if property is sold within ``a time proximate to its acquisition'' (and this I regard, where development such as here is involved, as the date of completion of the building), the requisite purpose may be inferred which stands unless it is overcome by the taxpayers' evidence. The present property was without doubt sold within ``a time proximate'' and the issue, stated one way, is whether the purpose thereby inferred has been displaced.

22. Insofar as the submission that the evidence adduced (after objection) in relation to other transactions was ``totally irrelevant'' is concerned, I do not accept that it is irrelevant to know, when weighing the evidence in relation to one particular transaction, what other transactions (both previous and subsequent) the taxpayers have been involved in and their nature. In my view it is relevant to a proper evaluation of the evidence given in relation to the property concerned. Particularly is this so when one of the contentions involved is that the transaction is caught by the provisions of sec. 25(1). Whether such details will be, in the ultimate, of real assistance one cannot precisely tell at the point of time at which it is first sought to adduce the evidence, but that does not mean that they are inadmissible - see Seminars on Evidence - The relationship between relevance and admissibility in the law of evidence - pp. 53-89.

23. Once admitted such evidence needs to be applied carefully (see para. 13 of Mr. Fairleigh's reasons) and different persons may gain varying amounts of assistance (or lack thereof) from such evidence. This depends to some extent upon the ready acceptance or otherwise of the testimony in relation to the transaction at issue. If the other transactions are of an entirely different nature and the reasons therefor are consistent with the transaction under consideration being of the nature claimed, then positive assistance has been gained from that evidence in that the acceptability of the nature claimed for the transaction at issue has been enhanced. If, on the other hand, there has been any inconsistency, it is necessary to evaluate the total evidence to ascertain the actual situation and this certainly constitutes positive assistance. It should be emphasized (perhaps unnecessarily) that a series of subsequent transactions for admitted profit-making will not, ipso facto, turn an earlier ``investment'' into a taxable one - it is only if the evidence relating to that ``investment'' is unacceptable to a tribunal that it could be held that it was in truth of the same nature as the subsequent transactions.

24. It was also said that as the subsequent transactions concerned parties other than the taxpayer they should be ignored. However, I do not consider this valid. If the evidence establishes, for example, that ``investment'' activities are conducted by the taxpayer alone and profit-making activities with others, then the latter activities do not necessarily taint the former. However, if there is doubt concerning the ``investment'' activities, the fact that a taxpayer has, in other modes, engaged in profit-making is not an irrelevant factor. Particularly where, as is apparent in the present case, properties are acquired and the party who ultimately develops them does not come into existence until a later date (see para. 14-15).

25. In relation to the present case I have not excluded the other transactions referred

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to in evidence. From the preceding paragraphs it will be appreciated that I have been unable to accept many of the explanations given (para. 12) and doubt that A (who intended one day going out on his own (para. 13) and acquired land at about the same time as his brother (a builder) in an area hit about that time by a ``rash'' of units (para. 5)) suddenly changed from a panicky investor to a keen speculator (para. 16) apparently acquiring properties and later deciding the party to develop them (para. 14-15). In this situation I do not feel that I can legitimately ignore the other transactions but must, rather, regard them as part of the total evidence to be evaluated.

26. After giving the matter the most earnest consideration I am unable to find, on the balance of probabilities, that there was no profit-making purpose involved in the project and must, therefore, reject the main submission on behalf of the taxpayers (para. 17). The lack of any attempt to obtain ``long term'' finance is perhaps explainable on the basis that there might never have been a sufficient equity (when interest excluded a contribution of only $5,310 in relation to property cost ex interest of $92,710) to enable this to be obtained, but this does not assist me to find a genuine ``investment'' purpose for it is obvious this situation existed (and would continue to exist) right from the time of acquisition of the property in question.

27. With reference to the Commissioner's submission that the profits are caught by the provisions of sec. 25(1) I am unable to be sufficiently satisfied that the transaction was the first step in a business of home unit development. There may have been hopes or anticipations but, even allowing for my doubts about A's sudden change of attitude, I do not feel the total evidence enables me to make the necessary finding in relation to that section. I have certain doubts which might have been resolved one way or the other by evidence from A's father-in-law but, in the absence of such evidence, it would be wrong to translate these into a positive finding when they could be consistent with an opposite view.

28. In relation to the Commissioner's sec. 26(a) submissions (para. 18) and those dealing with the onus of proof (para. 19) it is my view that they should be upheld. On the balance of probabilities I have been unable to find that there was not the requisite purpose of profit-making (para. 26) and this applies in relation to the units as a whole and to the five units with which we are here concerned (strictly only a finding respecting the five is here necessary). In this regard I incline to the second limb of sec. 26(a) (although I would not, as presently advised, be prepared to exclude in the case, as here, of a development of units to be sold by way of strata title, the operation of the first limb of sec. 26(a)) as being the most applicable limb of the section. Having so found it is strictly unnecessary to consider the onus of proof submission - however I add that, if I had not been able to make a positive finding I would consider the onus had not been discharged.

29. For the above reasons I would uphold the Commissioner's decisions on the objections and confirm the assessments of A and his wife for the year ended 30 June 1972.