Case K61
Judges: HP Stevens ChCF Fairleigh QC
JR Harrowell M
Court:
No. 1 Board of Review
J.R. Harrowell (Member): A, a qualified architect in partnership as property owners with his wife, lodged a partnership return of income in respect of the year ended 30 June 1972.
2. A schedule attached to that return referred to a building comprising eight two bedroom units (the property) which had been built by the partnership as an investment and substantially completed by the end of February 1972. At 30 June 1972 the partnership had derived rent from three of the units, the remaining five having been sold.
3. Following an exchange of letters the Taxation Office issued in due course two adjustment sheets which had the effect of increasing the amount to be distributed equally to each partner from $1,032 as returned to $19,159, the difference of $18,127 being the profit resulting from the sale of the five units forming part of the property.
4. This increase in distribution was carried through to the returns of A and his wife, which had the final result of increasing the taxable income of each by $9,063 in terms of sec. 92 of the Act.
5. Each taxpayer lodged an objection against the amended assessments issued in respect of the year ended 30 June 1972 on the grounds that the amount of $9,161, later amended to $9,063, did not constitute assessable income within the meaning of sec. 25 and 26(a) of the Act.
6. Both objections were disallowed and A and his wife each elected to have the decision referred to a Board for review.
7. These references now come before this Board and as the issues are identical they were heard together. The following paragraphs numbered from 8 to 15 contain the facts agreed to by those representing both parties.
8. On 21 October 1969 A paid $500 as a deposit on purchase of the property. The receipt for that sum was endorsed ``subject to Council approval for 8 units being erected on the site contract to be conditional upon same''. At that time the property comprised land and building. This building was later demolished in September 1971 although the partnership tax return stated the demolition commenced on 21 August 1971. Prior to that date the property had been let and the rents returned as income of the partnership up to 21 August 1971.
9. On 3 December 1969 the Council gave its consent for the land to be used for the purpose of a residential flat building.
ATC 602
10. On 27 November 1969 the Council issued its receipt on the lodgment of the partnership's development application for eight flats on the property.
11. The contract of sale was dated 18 December 1969 and was in the names of A and his father-in-law as purchasers. On that day the father-in-law executed a declaration of trust in respect of a one-half interest in the property in favour of his daughter, the wife of A.
12. The contract contained a special condition to the effect that the property was sold subject to A and his wife obtaining the approval of the Council of plans to erect on the property eight two bedroom units. Either party was at liberty to rescind the contract if such plans were not approved within ten weeks of the date of the contract.
13. The representatives for each side agreed at the outset that the title to the property passed to the partnership on 24 April 1970 in spite of the fact that the partnership's 1971 return, tendered in evidence, showed the date to be 8 May 1970.
14. On 4 November 1970 A lodged a building application to erect home units to cost an estimated $50,000. A enclosed with that application two sets of drawings of a proposed block of eight home units.
15. On 14 May 1971 two sets of revised working drawings were sent to the Council by A.
16. Having set out the agreed facts I now go back in time to the facts which emerged in evidence.
17. A is a registered architect. Mr. and Mrs. A were married in 1966. The land on which their home stands was purchased in 1968 at a cost of approximately $5,000 of which $3,000 was provided by the bank and the balance by A. The debt on the land had been paid off by the time building commenced in 1970. Construction was complete by the end of that year, the finance being provided by a building society.
18. Apart from buying a block of land in about 1960, later sold at a loss, A had no other dealings in land up to the 1968 purchase. The loss on 1960 land was never claimed as a tax deduction by A.
19. Prior to the purchase of the property, which is the subject of this reference, Mr. and Mrs. A first drove around looking at various sites. Both in evidence maintained that their intention was to buy a property for investment.
20. The deposit of $500 was paid on the property on 21 October 1969. At that time there was a tenanted house on the land. Their reason for acquiring the property may best be summed up by A's evidence - ``My attitude and my wife's at the time was to actually buy property, take a first mortgage on it as much as we were able and make up the difference ourselves, and rent the property as an investment. That was the intention at that stage.''
21. From the outset their intention was to demolish the small house on the land and then erect a building containing eight units. The receipt acknowledging the deposit of $500 was endorsed to that effect.
22. The land was purchased for $19,000 in the names of A and his father-in-law, the latter being the trustee for his daughter, Mrs. A. The purchase was made in this manner as the father-in-law was a man of property and well regarded in certain lending circles. It was believed that by associating his name with the purchase it would facilitate subsequent borrowing.
23. In referring to her father's involvement Mrs. A under cross-examination said -
``Well (A) was just starting out and my father thought that it would be beneficial for him if he (the father) put his name on the contract, because (the solicitor) knew him for many years and (the solicitor) knew that my father had a lot of good assets and if trouble - if things went bad with the project, (the solicitor) would be really safe with his money because they were on a sort of personal level.''
24. Of the total purchase price $19,000, $16,000 was obtained by means of short term borrowings at rates of interest ranging between 9% and 9.5%. These two mortgages were settled in September 1970 by two fresh mortgages and a small loan of about $2,400 from the father and mother-in-law. Finally in October 1971 these two mortgages were
ATC 603
discharged and their place taken by two mortgages totalling $11,000, the security for these last two mortgages being provided by A's mother-in-law, so leaving the property free of encumbrances. The final interest rate on each mortgage was 9.95%. In addition to the $11,000 advance the same personal loan of approximately $2,400 was made by the father and mother-in-law.25. On 17 April 1970 A received a letter from the Electricity Authority advising that no technical details concerning the proposed usage of electrical equipment on the property had yet been submitted to it. A replied on 28 April 1970 saying that it was intended to commence building in January 1971 for completion by June 1971. He concluded by saying that the required details would be furnished when the detailed drawings and specifications were completed by October 1970.
26. The plans were lodged with the Council on 4 November 1970 and final plans were lodged on 14 May 1971. These final plans did not fully comply with the Council's requirements. Final approval was given on 23 August 1971.
27. In November 1970 A's home was reaching its final stage of completion.
28. In May 1971 when the revised working drawings were lodged with the Council the land was still the subject of two mortgages and these were not settled until October 1971, with the help of the mother-in-law.
29. Between May and October 1971 A met with a solicitor who was well known to the father-in-law. At their first meeting in about June 1971 the solicitor, according to A, assured A ``that when the time came he would be able to organise the funds'', the funds being some $65,000 to $70,000 considered sufficient to construct the $50,000 building and pay off the money borrowed on the land. Later in evidence the solicitor stated that he had given no firm undertaking that finance would be provided. At that time A was basing the partnership plans on obtaining first mortgage money at around 9%.
30. Some six weeks after the June 1971 meeting A again met the solicitor and told him that the partnership was going to demolish the house of the property and begin construction of the eight unit building. He required the solicitor to organise the documents required to raise the expected low interest loan.
31. At around that time, May/September 1971, A had had discussions with his elder brother, a builder. The brother, on his own account, had built an eight unit building in the same street as the subject property, finishing it in July 1971.
32. Acting on the assumption that the loan was forthcoming, later proved to be misplaced, A in September 1971, having appointed his elder brother and younger brother as builders, had them commence construction of the units, having had the house on the land demolished.
33. He then conferred for the third time with his solicitor and told him he had to have the money as the partnership had commenced to build. It was then he realized that he was not to receive the low interest money which he believed had been promised by the solicitor.
34. The solicitor suggested he approach the local branch of the Commonwealth Bank. This was done but without success. A also approached his bankers who recommended their associated finance company, again with no success. These events happened apparently between August and about mid September 1971.
35. On 22 September 1971 A applied for and was granted a loan by his bankers for $6,000 repayable within eight months at an initial rate of interest of 8.25%. This loan was quite inadequate as the total estimated cost was at least $50,000.
36. A was now becoming most concerned, particularly as his brothers had committed themselves to build the units. His elder brother in evidence stated that at the time of commencement he had no indication that the ``promised'' finance was not forthcoming. In fact he would not have commenced the work if he had known that that was so. He and A had not discussed the financial details of the project.
37. In spite of all this the elder brother, on the security of his own home, raised $12,000 for an unstated short term. The bank loan of $6,000 took the project into October 1971 and by that time A received his brother's
ATC 604
loan of $12,000 which took the project into December 1971.38. In mid December, on Mrs. A's evidence, there was a family meeting. At this time Mrs. A had confirmed that she was pregnant. Notwithstanding the pleasure of such news it raised financial complications. Throughout their married life to date Mrs. A had worked and her income contribution was a vital factor in the decision to borrow.
39. Following the family meeting in mid December A, accompanied by his father-in-law, called on an accountant, later to be his accountant, who also managed a private moneylending company. The accountant was well known to the father-in-law.
40. As a result of this meeting an initial loan of $10,000 was made available secured by way of mortgage dated 17 December 1971. The memorandum of mortgage allowed for further advances. Prior to this, on 19 November 1971, the solicitor had lodged a Memorandum of Transfer at the Land Titles Office, by which the father-in-law had transferred the one-half interest into the name of his daughter, Mrs. A (reference para. 22). By this time the bank loan of $6,000 and his brother's loan of $12,000 had been spent on construction.
41. The building by mid December 1971 had almost reached roof level and the roof was shortly to be put on.
42. In discussions with his solicitor and his wife it became obvious to them that not only would the building cost closer to $70,000 than the originally estimated $50,000 but the money borrowed would cost 13 ½ %, not the hoped for 9%. In other words the original plan of investment was no longer an economical proposition. The estimated return of $10,000 per annum, after direct costs, would no longer meet the higher interest charge on the higher cost to build, let alone repay any principal.
43. On 6 January 1971 a circular type letter was sent by A to at least five estate agents. Its opening paragraph read as follows -
``I wish to confirm my verbal advice that although it was my intention to build the above units to let, because of finance arrangements, I consider it necessary to sell 4(four) units.''
44. The letter then lists the eight units with asking price against each with the instruction that any four of that eight may be sold.
45. No evidence was submitted to indicate that any attempt was made to re-finance the project on completion by way of a long term low interest loan. Between mid December 1971 and January 1972 Mr. and Mrs. A were determined to reduce their short term high interest loans. In the words of A, when the solicitor failed to provide the promised low interest loans ``that really rattled me and by December I don't think I was thinking even logically''. Later the solicitor, in evidence, agreed that he had offered to provide finance but he never, at any stage, promised that such finance would be provided. He said he was not in a position to make such a promise.
46. In evidence A maintained that the decision to sell four units was made between mid December 1971 and 6 January 1972. The reason for that decision was that the money now to be borrowed to complete the building was due to be repaid by 17 December 1972 and was subject to interest at 13 ½ % per annum.
47. By 11 January 1972 the partnership had borrowed $20,000 from the finance company. At that point A had no knowledge of what the building would cost to complete. The first advance of $10,000 was made on 17 December 1971 and the second $10,000 was made on 11 January 1972. Between those two dates he, on behalf of the partnership, had taken the decision to sell four units.
48. By the end of February 1972 the building had been substantially completed and by 10 April 1972 the final advance of $1,000 was made by the finance company. The total amount advanced by the finance company by that date was $56,000. Initially A had requested $70,000 from the company to complete the building and repay the $6,000 borrowed from the bank and the $12,000 borrowed from his elder brother and to pay out the mortgages totalling $13,400 on the land. This would indicate but it was never said that the expected cost to complete the building was $38,600.
49. However on the evidence of the accountant, in the role of financier, a different picture emerges. In evidence he tendered notes of his meeting with A and the father-in-law on 13 December 1971. At that
ATC 605
time the house was to roof level. The notes show that at that meeting the value of the building to date was taken to be $35,000 and this figure was added to the amount being asked for $70,000, making a total value of $105,000. This aggregation conflicts with A's evidence as stated in the foregoing paragraph.50. The final cost of the building was $96,927.81 made up as follows -
Cost of site
Including stamp duty and legal costs ........................... $19,680.30
Development costs
Contractors - Labour and materials ............. $31,574.11
- Labour only ...................... 15,398.25
Materials ....................................... 22,603.93
Interest paid ................................... 4,218.14
Fees, Plans, etc. ............................... 1,191.20
Miscellaneous expenses .......................... 2,485.88
----------
77,471.51
Deduct rents received 1.7.1971 to 20.8.1971 .. 224.00 77,247.51
---------- ----------
Total Cost .................................................... $96,927.81
----------
In brief, this total cost was financed in the
following manner -
Site
Sundry Loans
—
secured as to $11,000
on mother-in-law's property $13,400
Building Loans
Bank ......................................... $6,000
Elder brother ................................ 12,000
Finance Co. (131/2% money) ................... 56,000 74,000
------ -------
87,400
Balance - presumably from Mr. and Mrs. A ................... 9,528
-------
$96,928
51. It was claimed that in consequence of the decision to sell four units an application was made by the partnership to convert to Strata Title. This application was approved by the Council principal building inspector on 28 March 1972 and presumably received Council approval at some later date. Evidence submitted in respect of later developments (para. 59) indicated that Strata Title approval was given at the time of issue of the certificate of compliance in each case.
52. On 24 March 1972 the partnership's solicitors confirmed the exchange of contracts on units 1 and 3 on 23 March 1972. Under the contracts the firm had until 23 September 1972 to obtain registration of the Strata Plan.
53. At or about this time, date not known, the decision was taken by A to sell five not four units. The purpose of the sale was to settle the finance company's 13 ½ % loan of $56,000.
54. In due course five units numbered 1, 3, 4, 5 and 6 were sold and payment received by 30 June 1972.
55. The amount of $18,127 which has been treated in the partnership return as being the profit arising on the sale of the five units, and the subject of this reference, is made up as follows -
Mrs. A
56. Whilst the issues before the Board are the same for each partner the facts are not identical as Mrs. A owned property from which she derived rents.
57. In 1966 a property at 49 ``X'' Street, Sydney suburb, was purchased in the name of Mrs. A for $13,400 with a first mortgage of approximately $12,000. At about the same time a second property at 2 ``Y'' Street, Sydney suburb, was also purchased in her name for $6,800 with a first mortgage of $5,500.
58. The 49 ``X'' Street property was sold in 1975. The reason for the sale was tenant trouble. After a run of bad tenants the decision was taken to get rid of it. The 2 ``Y'' Street property is held to this day by Mrs. A. The rents from both properties were returned as income in the returns of Mrs. A.
Subsequent Land Dealings
59. The representative of the Commissioner cross-examined A at length on subsequent development projects involving Mr. and Mrs. A. The relevance of subsequent transactions, except in one circumstance, not involving the partnership was challenged by the taxpayer's representative. His objections were overruled and the evidence was accepted on the basis that the Board would decide what weight, if any, it would give it.
60. Reference has already been made to the situation which existed between mid December 1971 and January 1972. At that time the partners learned that the hoped for loan moneys, at about 9%, would not be forthcoming to finance the construction of the partnership property, the subject of this hearing. Instead they had arranged, through a financier, a large loan at 13 ½ % repayable in twelve months. To say the least, the partners were worried as it was obvious to them that the proposed investment in an eight unit building would not be profitable under the new basis of financing. The decision was taken to sell sufficient units to repay this high cost loan.
61. In February 1972 a salesman who was endeavouring to sell units in the partnership's almost completed building rang A's elder brother, the builder. He rang on a Thursday and told the elder brother that the Council at its meeting to be held on the following Monday night would change the area building code. The effect of the coming change would reduce the number of units one could build on a particular site. This led to an understanding that applications submitted prior to that meeting would be accepted on the basis of the existing, more generous code.
62. The elder brother rang A as he knew he was interested in building a further project and passed this ``inside'' information on to him. A in evidence maintained he knew nothing of the proposed building code change until he received his brother's telephone call. He was shocked that information of that nature could leak out like that only four days before the meeting.
63. On 22, 25 and 28 February 1972 four building applications were lodged with the Council. These properties were subsequently purchased in the following months. In subsequent years an additional four properties were purchased and developed.
64. Of the eight properties subsequently purchased only one was purchased and developed by the partnership of Mr. and Mrs. A. Of the remaining properties five were purchased in the names of various trusts and two by a family company in partnership with a trust. There were three trusts and, for the purpose of this reference, it is sufficient to say that each was a separate family trust, in which Mr. and Mrs. A had directly or indirectly a beneficial interest. Some trusts
ATC 607
were confined only to Mr. and Mrs. A and their children, others also included the wife's mother and father. None were confined only to Mr. and Mrs. A.65. The activities of these business entities may be summarized as follows -
Trust No.1 Property
"
A
"
Property
"
B
"
Development application 22.2.1972 25.2.1972
Purchased site March 1972 September 1972
Nature of development 10 home units 13 home units
Sold by June 1973 by June 1974
Profit $47,102 $95,203
Reason for acquisition Profit-making Profit-making
Trust No.2 Property
"
C
"
Property
"
D
"
Development application 25.2.1972 -
Purchased site July 1972 September 1976
Nature of development 10 home units Home
Sold by March 1976 June 1977
Profit/(Loss) $13,901 ($19,945)
Reason for acquisition Profit-making Profit-making
Trust No. 3 Property
"
E
"
Development application Taken over with
purchase
Purchased site March 1973
Nature of development 4 home units
Sold -
Profit -
Reason for acquisition Investment
Partnership (Family Property
"
F
"
Property
"
G
"
Company/Trust)
Development application 19.3.1973 24.4.1973
Purchased site August 1973 September 1973
Nature of development 8 home units 14 home units
Sold by November 1975 by May 1977
Profit/(Loss) ($11,365) $65,944
Reason for acquisition Profit-making Profit-making
The eight property was purchased by the partnership of Mr. and Mrs. A -
Property
"
H
"
Development application 28.2.1972
Purchased site July 1972
Nature of development 12 home units
Sold by March 1975
Profit $69,989
Reason for acquisition Investment
66. None of the eight development projects were the subject of these references. No evidence was tendered to indicate what action the Commissioner had taken, if any, in regard to them, in the returns of the partnership and the relevant trusts.
67. These projects were tendered as evidence by the representative for the Commissioner as part of the surrounding facts.
68. In the cases before the Board the taxpayers argued that the decision to sell at first four units, finally five units, was due to the high cost of financing the project (13 ½ %) and the rise in costs over the original estimate.
69. In each of the subsequent eight development projects the original estimates were well below final costs. The finance for each except one project was through short term high cost loans from the same finance company which financed the project the
ATC 608
subject of these references. Property ``E'' still held as an investment was financed virtually exclusively from loans by Mr. and Mrs. A, not the finance company.70. In dealing with these subsequent events another fact emerged - A's decision to leave his position in the firm of architects who employed him and to enter project development on a full-time basis.
71. He resigned from the firm of architects on 31 May 1972. He gave notice of that intention on or about 30 April 1972. Prior to April he had given some thought to resigning but had made no firm decision until April 1972.
72. In the course of the hearing he was questioned by the Board for reasons to explain the sudden ``about face''. In mid December 1971 and early January 1972 he learned that low interest loan money was not available and that his wife was pregnant and so would not be in a position to contribute financially as originally planned. In consequence the investment concept was suddenly scrapped and five units were sold to clear the high cost debt. In a matter of weeks he was involved in the lodgment of four development applications influenced by inside information of an impending building code change. By June 1972 he had resigned from the firm of architects and began full-time project building.
73. In explanation A maintained that in the first project, the subject of these references, he had become rattled because he personally was involved in raising the finance from the bank, his brother and the finance company. Following the decision to sell five units his father-in-law became interested in project development and approached A and proposed that he (the father-in-law) would put up the security and the money and A would be responsible for the building side. They would share the outcome on a fifty-fifty basis. A in evidence stated that his father-in-law had not offered to do that before.
74. This case is a complex one and during the hearing many documents were tendered in evidence, particularly by the Commissioner's representative in relation to subsequent development projects.
75. However the issue before this Board is to determine if the taxpayers have discharged the onus of proof that the amount of $18,127 was incorrectly included by the Commissioner in the net income of the partnership for the year ended 30 June 1972 by virtue of the operation of sec. 25(1) or sec. 26(a) of the Act.
76. For the taxpayers the Board heard evidence from A, his wife, his brother, his solicitor and his accountant and financier. I accept their evidence with the usual qualification one must make when dealing with long ago events.
77. Section 190(b) in cases involving these sections of the Act places the burden of proof on the taxpayer. In cases of this nature, the taxpayer must depend a great deal on oral evidence to establish the purpose for acquisition. When this evidence is tested against the factual evidence and oral evidence supporting a contrary view one can be left balancing, as it were, on a knife edge of opinion, equally poised between the Commissioner on the one hand and the taxpayer on the other. Under such circumstances a responsibility is placed on the one who must decide that when testing and evaluating the evidence of the taxpayer care should ``be taken not to treat the evidence of a citizen in a contest with the revenue as prima facie unacceptable''
-
Barwick C.J., Gauci
&
Ors.
v.
F.C. of T.
75 ATC 4257
.
78. In my opinion the taxpayers' case stands or falls on the evidence relating to the events within the two month period of December 1971 and January 1972. It was during that period the decision was taken to sell at least four of the eight units being built to hold as an investment. Did that decision represent a change in direction (favouring the taxpayers) or the maintenance of an original scheme (favouring the Commissioner).
79. I do not believe it possible to consider that important two month period in isolation and to the exclusion of two other important sets of facts. The first, the decision in February 1972 with others to enter the business of development projects. The second, A's decision to leave his architectural position and become a full-time developer.
ATC 609
80. To deal with the last fact first, his resignation from the firm of architects. The formal announcement of his intention to resign was made at the end of April 1972. However in evidence A stated that he had been giving his future a great deal of thought prior to that date. No evidence was adduced to indicate a prior intention to enter the field of development full-time other than the purchase of the properties in February 1972. In my opinion it is not unusual for someone with professional qualifications to be thinking of moving out on his own or to a position giving his qualifications more scope. He stated that he had been working under considerable pressure without ``sufficient authority to carry the pressure''. In addition in December he learned that his wife was pregnant so that I would expect him to be considering his future. In my opinion his decision to resign from the firm of architects has no relevance to the issue before the Board.
81. With regard to A's subsequent building activities I consider that it was important for the Board to have knowledge of them. As stated by the Chairman at the hearing, having heard the facts relating to these transactions it was up to the Board to determine what weight to give them. The evidence relating to the development projects was placed before the Board as part of the surrounding facts, not as material directly relating to the objections.
82. Of the eight projects entered into after the development of the subject property only one was built through the partnership. The rest involved different business entities. The second property developed through the partnership was also claimed to be an investment and was sold in 1975. The view of the Taxation Office on this second transaction was neither made known to the Board nor, in my opinion, did it concern the Board.
83. Of the remaining seven properties six were built as profit-making schemes and the seventh as an investment.
84. The construction of a residential building falls with equal ease either into the category of an investment or into the category of a profit-making scheme. To me it is quite logical that when one wishes to engage in both categories one forms separate entities to keep them apart. In a taxation sense the practical difficulties of keeping these categories separate in the one business entity are obvious. Of course this separation is no guarantee of acceptance by the Commissioner but it should confine the issue to the particular business entity.
85. In regard to at least six of the subsequent development projects I believe their profit-making potential became apparent when the partnership experienced the favourable market reaction to the sale of the five units in February 1972 and onwards.
86. The fact that the six profit-making developments were constructed through different business entities, in my opinion, precludes me from considering whether the subject property was the first of a series of profit-making developments (
Barwick
C.J.,
Fairway Estates Pty. Ltd.
v.
F.C. of T.
70 ATC 4061
at p. 4068
. Rather, for the reasons I have given, I must, in my opinion, decide this issue on the subject property alone.
87. From the evidence I accept that A and his wife meant what they said in testifying that the subject property was purchased as an investment. However the onus rests on them to successfully demonstrate to those who must decide the issue that that was the purpose of the acquisition. This can be quite a task when, as in this case, portion of the subject property was sold almost immediately after its completion. As Barwick C.J. said in Gauci & Ors. (supra): ``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. Unless he does so, sec. 190 will require the confirmation of the assessment.''
88. I do not consider that this case falls within sec. 25(1) as the plan or scheme being considered, in my opinion, was not a plan or scheme to produce an income profit. Any profit resulting from resale was intended to be a capital profit so coming under sec. 26(a) for consideration.
89. The subject property was acquired with a residential building on it which was subsequently demolished. In its place was erected a larger residential building containing eight two bedroom units. The
ATC 610
profit of $18,127 the subject of these references did not arise from the resale of the property acquired itself but from the part resale of that property and the additional structure erected on it. For this reason I would consider these references not under the first limb of sec. 26(a) but under the second limb - ``... from the carrying on or carrying out of any profit-making undertaking or scheme.''90. A and his wife appeared before this Board at least six years after the relevant events took place. In that time they had both been involved in the business of property development. A, the business partner, had gained expertise in this field of activity which I believe he lacked in 1969 when he acquired the subject property.
91. Having studied the facts I believe that in 1969 and up to September 1971 A and his wife did intend to develop the subject property as an investment. He was a qualified architect, he and his wife were both deriving incomes and his elder brother was a builder. In addition his wife's mother and father were people of property providing background financial support.
92. A believed at the time that he could raise low cost long term finance but from the facts that belief was clearly unfounded. This was fully realised by A and his wife in December 1971 when such finance was not forthcoming and the building was obviously to cost more than originally estimated.
93. I accept A and his wife as being truthful and in my opinion an unbusinesslike approach to an investment does not in itself cause it to fall within sec. 26(a). However the onus of proof lies with A and his wife.
94. With hindsight it is now known what the finance and the final building cost. Whilst accepting the intention to acquire the property and to build as an investment I must assume that at the same time there was a spoken or unspoken intention to sell certain units if it became necessary to increase the equity of the partnership in the investment. This line of reasoning attaches two purposes for acquisition.
95. On this point
Menzies
J. had this to say in
Chapman (N.T.)
v.
F.C. of T.
(1967-68) 117 C.L.R. 167
at p. 171
:
``There are in truth two purposes, and it cannot be said that one is dominant and the other servient. In a case where one purpose for acquisition is to sell part of what is bought at a profit to meet or to reduce the cost of the part to be retained, perhaps the only fair course is to attribute to what is proposed, two independent purposes; otherwise it could be that the part to be retained would have to be treated as property acquired for the purpose of profit-making by sale, e.g., if it were to be found that the dominant purpose for the purchase was to obtain a profit by selling part.''
96. In my opinion this line of reasoning is appropriate to the matter now before us and I would apply it.
97. Based on the foregoing facts and reasons I would hold that the taxpayers when acquiring the subject property and erecting on it an eight unit residential building did so for the purpose of selling certain units at a profit to meet or reduce the cost of the units retained as an investment.
98. In determining the number of units to be sold at profit and so falling within the second limb of sec. 26(a) I go to the letter to the estate agents dated 6 January 1972 written at or about the time the decision was taken to sell four units.
99. The Commissioner in assessing each taxpayer treated the profit on the sale of the five properties ($18,127) prior to 30 June 1972 as income. The effect of my decision would be to treat as income the profit arising from the sale of four units.
100. In the absence of information relating to the date each unit was sold I would reduce the net income of the partnership for the year ended 30 June 1972 by $3,625 being one-fifth of $18,127, the profit figure determined by the Commissioner.
101. I would uphold the architect's objection to the extent of reducing the assessable income he derived during the year ended 30 June 1972 by $1,812 in terms of sec. 92 and would amend the amended assessment accordingly.
102. I would uphold the wife's objection to the extent of reducing the assessable
ATC 611
income she derived during the year ended 30 June 1972 by $1,812 in terms of sec. 92 and would amend the amended assessment accordingly.Claims allowed in part
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