Case L57

Judges: HP Stevens Ch

CF Fairleigh QC
JR Harrowell M

Court:
No. 1 Board of Review

Judgment date: 26 September 1979.

---

C.F. Fairleigh Q.C. (Member): (a) For the year ended 30 June 1972 the partnership return of $130,060 as distributable net income of three joint venturers (entitled in the proportions of 2:1:1) engaged in the development of approximately 30 acres of land for sale as residential allotments was adjusted by the Commissioner (in reliance upon sec. 36 of the Income Tax Assessment Act) to $330,060 being an increase from $50,000 to $250,000 in the value of a parcel of that land (approximately 12 acres) which had been sold in globo by the joint venturers in that year.

• (b) Consequently the Commissioner adjusted from $30,053 (returned as $30,193) to $130,053 the partnership return of distributable net income of a group of seven proprietary companies which were entitled in equal shares to onehalf of those sale proceeds, as being the major joint venturer.
• (c) As a further consequence the Commissioner adjusted the taxpayer's return of taxable income (it being one of those seven) from $4,313 to $18,579 (i.e., subject to a minor immaterial matter, an increase of $14,266 as one-seventh of the aforesaid increase of $100,000).
• (d) The notice of amended assessment which thereupon issued to the taxpayer includes a penalty, additional tax, of $2,889.

2. Contemporaneously with the issue of that notice of amended assessment of primary tax the Commissioner issued to the taxpayer a notice of additional tax, Div. 7, with respect to an undistributed amount of $2,794.

3. The taxpayer objected to the amended assessment of primary tax and to the penalty. The Commissioner decided to disallow the objection. That decision was referred to a Board for review.

4. The taxpayer objected to the assessment of Div. 7 tax. The notice of objection sets out that if the result of the decisions on the objections is that the taxpayer has to make a sufficient distribution in order to avoid additional tax under Div. 7, then the Commissioner should in accordance with sec. 105AA determine a further period in which the taxpayer may declare a dividend in order to make a sufficient distribution. The Commissioner decided to disallow the objection (and did no more than that). That decision was referred to a Board for review. It is to be noted that the objection set out that the notice of Div. 7 tax was issued after the prescribed time in relation to that year and it was not possible to ascertain a sufficient distribution within the prescribed period and such period should be extended; further in the event of the Commissioner determining a further period and the company declaring a dividend so as to make a distribution by way of dividend the undistributed amount would be reduced to nil or reduced so as to make the assessment excessive.

5. During his final address Mr. Raphael, solicitor (and then conducting the case in the absence of the taxpayer's counsel, Mr. Graham Hill, on the last day of the hearing), agreed with the observation that there are difficulties in suggesting (and accordingly he

---

ATC 450

did not make any such submission) that a Board of Review has any power in respect of sec. 105AA. This subject has been dealt with in para. 44 to 48 of Case K57,
78 ATC 551 at p. 571. The Board has no power (no ``jurisdiction'') in the present case to consider a claim under sec. 105AA.

6. The Commissioner's reasons as set out in the reg. 35(1) notice rely on (i) the subject property being trading stock of a partnership; (ii) the value of the said 12 acres upon sale being $250,000 by virtue of sec. 36(1) and 36(8); (iii) the individual interest of the taxpayer company being as assessed in the amended assessment; (iv) $2,794 being correctly treated as the undistributed amount in relation to the year of income as the taxpayer was not deemed in accordance with sec. 105AA to have made a sufficient distribution during the prescribed period ending on 30 April 1973; (v) the circumstances not warranting the determination of a further period; (vi) the taxpayer omitting from its return for 1972 assessable income and so becoming liable under sec. 226(2) to pay additional tax of which the Commissioner under sec. 226(3) remitted three-quarters and the circumstances not warranting any further remission. (The adjustment sheet for primary tax sets out that the deemed distribution in terms of sec. 106 is reduced to nil.)

7. I adopt the chronological statement of events as set out by the Chairman, Mr. H.P. Stevens. However there are some conclusions of fact to be drawn from those events (not specifically found by the Chairman) and there are questions of law which flow from those conclusions.

8. I accept that in 1971 the intentions of the directors of the respective Australian companies were (i) that taxpayer and a proprietary company in the E group as the registered proprietors of the subject land should grant for the consideration of $500 an option to a company incorporated (or to be incorporated) in New Hebrides to purchase by itself or by its nominee an estate in fee simple in the said 12 acres of land (stage 2 of the residential development) at a price of $50,000 on a deposit of $5,000 payable on exercise of the option within a limited period of time, viz., 5 p.m. on 31 January 1972; (ii) that the option should first be nominated (perhaps meaning assigned) to a second New Hebrides company for the consideration of $1,000; and (iii) that the option should next be nominated (perhaps meaning assigned) by that second New Hebrides company to a third New Hebrides company for the consideration of $200,000 whereby upon the vendors receiving $50,000 that third company would become the registered proprietor of an estate in fee simple in the said 12 acres (upon being registered in New South Wales, quaere as a foreign company).

9. Notwithstanding the intentions of those directors what occurred is as follows:

• (a) On 26 October 1971 the taxpayer and the said proprietary company in the E group entered into a deed for a consideration of $500 (later paid) granting to a New Hebrides company an option to purchase for $50,000 the fee simple of the said parcel of 12 acres. The option was capable of being exercised before 5 p.m. on 31 January 1972 by that New Hebrides company or its ``nominee''. The deed provided that upon exercise of the option the $500 was to become part of a deposit of $5,000 to be then paid pursuant to the provisions of a standard printed form of contract which was attached to the deed. That contract required completion within six weeks from its date.
• (b)
  • (i) By letter bearing date 2 November 1971 another New Hebrides company ostensibly or purportedly exercised the option. (Those adverbs are introduced because at that date that other company had not been ``nominated'' by the grantee of the option as the one to exercise the option; furthermore the option was not unequivocally exercised according to its terms whereby a contract would be made with a deposit of $5,000 payable; the solicitors for that other company entered into negotiations with the taxpayer's solicitors with a proposal for a waiver of the requirement to pay a deposit of $5,000 and to have a contract to pay a deposit of $500 with the outstanding balance being $49,500; and this was the arrangement made by the respective solicitors on behalf of vendors and purchaser.) There is no direct evidence of the date when that letter was posted or delivered to the addressee.

    ---

    ATC 451

  • (ii) By document bearing date 3 November 1971 the first New Hebrides company nominated that other New Hebrides company to exercise the option. There is no direct evidence of the date when that document was posted or delivered to the addressee.
• (c) On 10 May 1972 the taxpayer and the said proprietary company in the E group as vendors and that other New Hebrides company as purchaser entered into and exchanged contracts for the sale of an estate in fee simple in the parcel of 12 acres for the price of $50,000 upon a deposit of $5,000 (of which only the said $500 was paid as part deposit) and with the balance payable on completion (a six week period); and by overriding arrangement that purchaser to be permitted to leave the $4,500 of the deposit unpaid until settlement.
• (d) Settlement of the contract took place on 31 May 1972.
• (e) That other New Hebrides company became the registered proprietor of an estate in fee simple in the land (at that time 61 residential allotments) on 4 July 1972. (At all presently material earlier times the registered proprietors of that land were the taxpayer as to three undivided one-fourth shares and the company in the E group as to the remaining share as tenants in common.)

10. There were statements from the bar table and from the witness box as to that transaction involving three New Hebrides companies as in para. 8 hereof and not two only as set out in para. 9 hereof. But no one has deposed to being present when any additional (interposed) New Hebrides company did any act or executed any document which would involve it in the transaction and no such documents have been produced; nor did any witness say that he ever saw any such documents. The taxpayer has failed to prove that the aforesaid intentions as in para. 8 hereof were carried out except to the extent shown in para. 9 hereof. However, as is clear from the discussion set out in para. 15 to 34 hereof, this subject is not of any great importance in an overall view of the matter.

11.

• (a) It is best to say once more (
  vide Nixon v. F.C. of T. 79 ATC 4377 ) that the taxpayer does not have a heavy onus of proof. It is only the ordinary civil standard as in
  Briginshaw v. Briginshaw (1938) 60 C.L.R. 336 per Dixon J., as he then was, at p. 360 et seq. If a taxpayer puts into evidence all documents which he might reasonably be required to put into evidence and has as witnesses all persons whom he might reasonably be required to call, thereupon at the end of the day onus does not play much part in the matter as it is simply the question of the right conclusion to draw from the whole of the evidence (
  Martin v. F.C. of T. (1953) 90 C.L.R. 470 ; 10 A.T.D. 226 ).
• (b) In
  Macmine Pty. Ltd. v. F.C. of T. 79 ATC 4133 at p. 4157; (1979) 53 A.L.J.R. 362 Murphy J. used the principle of
  General Motors-Holden's Pty. Ltd. v. Bowling (1977) 51 A.L.J.R. 235 in respect of statutory onus as applicable for sec. 190(b) of the Income Tax Assessment Act, viz., that the party with the benefit of the statutory onus is entitled to succeed if the evidence is consistent with a hypothesis of the existence of circumstances disentitling the other party and that hypothesis has not been displaced by such other party which has the burden of proof. See further
  Northern Engineering Pty. Ltd. v. F.C. of T. 79 ATC 4238 at p. 4242 ; and
  F.C. of T. v. Cooper Brookes (Wollongong) Pty. Ltd. 79 ATC 4398 . Those factors have special significance where as here the memory of the directors who controlled the taxpayer (cf.
  Tesco Supermarkets Pty. Ltd. v. Nattrass (1972) A.C. 153 at p. 170 ) was highly selective and their answers during cross-examination were guarded and at times equivocal (cf.
  Point Cook Pastoral Co. Pty. Ltd. v. F.C. of T. 79 ATC 4419 ).

12. Before setting out a commentary on the points of law contained in the address of the taxpayer's solicitor it is necessary to say that there is a distinction, as obvious as it is fundamental, between agreeing to do something and actually doing that thing; and more particularly between agreeing or contracting to sell property and the sale of that property, even though at times equity looks on that as done which ought to be done. Furthermore, no matter in what way an option is regarded (
Laybutt v. Amoco Australia Pty. Ltd. (1974) 132 C.L.R. 57 ;
Suttor v. Gundowda Pty. Ltd. (1950) 81 C.L.R. 418

---

ATC 452

;
C. of T. v. Camphin (1937) 57 C.L.R. 127 ;
Perpetual Executors & Trustees Association of Australia Ltd. v. F.C. of T. (Thomas' case No. 2) (1955) 94 C.L.R. 1 ) it cannot be suggested that the grant of an option to buy property (even though it may entitle the grantee to caveat the title) is a sale of that property; and it is only a disposition by sale which is of present relevance. To avoid the inconvenience of a cross-reference I repeat here paragraphs from Case K47,
78 ATC 432 at pp. 439-440; (the only additional references to be given thereon are
Johnson v. Agnew (1979) 1 All E.R. 883 ; and Hals. 3rd ed. vol. 36 p. 335 para. 495 on specific performance; and
Harrison (H.M. Inspector of Taxes) v. Nairn Williamson Ltd. (1977) 51 T.C. 135 on ``disposal'' and ``acquisition''):

• The critical question as to the date when a vendor disposes of land and a purchaser acquires the land from him can be considered in relation to a cumulative table as hereunder which for convenience is restricted to a sale of Torrens title freehold land for cash (i.e., without a mortgage back to the vendor) where there is neither (i) any memorandum in writing sufficient to satisfy the Statute of Frauds nor (ii) an act of part performance, prior to the parties exchanging counterparts of the contract:
• (a) The purchaser does not have any enforceable right in respect of the land until the exchange of contracts. (It matters not that it shows a lack of commercial morality if the vendor relies on the Statute of Frauds: Charlick v. Foley Bros. Ltd. (1916) 21 C.L.R. 249);
• (b) When contracts have been exchanged the purchaser has sufficient equity in the land to sustain an action for specific performance, i.e., the purchaser has an equitable interest in the land. If this be called an equitable estate in the land, it is inchoate or conditional for at this point of time the vendor has not proved his title to the land and the purchaser has not accepted the vendor's title. It will often be prudent for the purchaser to now caveat the title to delay the registration of unregistered adverse interests until, if need be, priority in equity is known. The vendor is also able to sue for specific performance (a doubtful advantage as a practical matter) and so each party is committed at this juncture to proceed subject to proof of the vendor's title in proper time;
• (c) When there is acceptance of the vendor's title then the purchaser has the equitable estate in the land. Yet the purchaser's equitable estate is defeasible whilst the balance of purchase money remains outstanding;
• (d) When the purchaser has paid the balance of purchase money, the purchaser is the absolute owner of the land in equity and the vendor is a bare trustee for the purchaser. Nonetheless the purchaser who has not lodged a caveat has not taken all necessary steps to ensure priority of registration of the transfer to him;
• (e) When the purchaser's transfer is produced in the Titles Office for entry on the certificate of title to the land, the priority of the order of registration of unregistered dealings is prima facie established. (There are exceptions in respect of fraud, etc.);
• (f) When the purchaser's transfer is entered upon the certificate of title to the land then the purchaser's equitable estate is merged in the purchaser's legal estate in fee simple in the land.
• (Some of the inadequacies of the Torrens system are discussed in articles by Mr. T.B.F. Ruoff in 26 A.L.J. 118, 162, 194 and 228.)
• The earliest date at which there has been a disposal of land is that in (b) and the latest date is that in (d) (an accumulation of (b), (c) and (d)). The circumstances set out in (e) and (f) are concerned with perfecting a title to land and are not directed to an acquisition by one party and a disposal by another (cf.
  Hooker Town Developments Ltd. v. Jilba Pty. Ltd. (1974) 48 A.L.J.R. 213 ;
  Nev Ham Nominees v. Commr. of Stamp Duties (N.S.W.) 78 ATC 4095 at p. 4098 ;
  D.K.L.R. Holding Co. (No. 2) Pty. Ltd. v. Commr. of Stamp Duties (N.S.W.) 78 ATC 4147 at p. 4155 ).

13. For present purposes I add that as sec. 36 is dealing with a disposal of trading stock the material date is not earlier than in para. (b) of the above table and is dependent upon the contractual arrangement. A taxpayer in the business of subdividing and

---

ATC 453

selling land may make the return of income on the basis that land contracted to be sold is from the date of the contract no longer held as stock to be traded: see
Perrott v. D.F.C. of T. (N.S.W.) (1925) 40 C.L.R. 450 and
F.C. of T. v. Thorogood (1927) 40 C.L.R. 454 ; and for chattels see
J. Rowe & Son Pty. Ltd. v. F.C. of T. 71 ATC 4157 ; (1971) 124 C.L.R. 421 . I am bound to reject the solicitor's submission that consequent upon a contract of sale being entered into (or an option being granted) there can be ``a hiatus in beneficial ownership''. When a contract for sale is entered into there is an agreement for the disposal of the land (here conditional as set out in the standard form of contract, and for the conditions of an ``open contract'' see Halsbury 3rd ed. vol. 34 p. 228 para. 382, and p. 271 para. 443) whereby the property is no longer available for general trading. The trader in land has agreed to dispose of the property when the contract for sale in the present form is entered into although a settlement pursuant to the contract is not an inevitable consequence. The date of the contract for sale is not the date of disposal and is not the date for ascertainment of value under sec. 36(1); the date for both such purposes is the date of settlement, i.e., 31 May 1972.

14. The following paragraphs to and including 34 hereof set out a commentary on the points of law contained in the address of the solicitor for the taxpayer; with the exception of those based on the extraneous subject of trusts, and also those based on sec. 36A of the Act, as the Commissioner's counsel placed no reliance on sec. 36A. The taxpayer's solicitor regarded sec. 36A as ``an integral part of'' his case, notwithstanding the attitude of the Commissioner. However, in my understanding of the issues, any reference to sec. 36A only decorates or illustrates the argument. The taxpayer's several points of law are set out in the opening sentence of each such paragraph, then the comments follow in each such paragraph.

15. The option was ``effectively'' granted on or about 26 October 1971. Not so, because the Banking (Foreign Exchange) Regulations prohibit a person, company, etc., except with the authority of the Reserve Bank of Australia entering into any agreement so that a right (whether actual or contingent) to receive a payment is created. Clause 8 of the option agreement contains as an express ``condition precedent to the granting'' of the option (as well as to the exercise of the option) that consent and approval required from any governmental statutory or other authority be first had and obtained. The Reserve Bank was not fully and properly informed of the intentions as set out in para. 8 hereof nor even of a proposal carried out as in para. 9 hereof. The disclosure on 10 September 1971 to the Reserve Bank (para. 18 of the Chairman's reasons) withheld material matters which could have a bearing on the Bank's decision. It was deliberately false to inform the Bank (para. 19 of the Chairman's reasons) that ``both the option and the proposed contract considerations are considered to be fair market value arrived at by arm's length negotiations between the parties.'' I do not see this situation as altered ex post facto by sec. 5 of the Banking Act 1974 (cf.
Talga Ltd. & Ors. v. M.B.C. International & Ors. (1976) 133 C.L.R. 622 ;
Yango Pastoral Co. Pty. Ltd. & Ors. v. First Chicago Australia Ltd. & Ors. (1978) 53 A.L.J.R. 1 ).

16. The exercise of the option was ``effected'' by a party who is a nominee. Not so, as the purported exercise was a day (at least) before the grantee appointed anyone to exercise the option (para. 9(b) hereof). This brings to mind the remark by Buckley J. in
Daulia Ltd. v. Four Millbank Nominees Ltd. & Anor. (1978) 2 W.L.R. 621 at p. 635E : ``I am unable to understand how, outside the private world of the White Queen, a document written at a time when ex hypothesi no contract exists can acknowledge the existence of a contract made at a later date.'' Furthermore, the owner of property by granting an option to a named person or the nominee of that person does not bring himself into direct contractual relationship with anyone but that named person (
Alfred Grant Pty. Ltd. v. MacDonald (1960) Qd. R. 465 ;
Bell Bros. Pty. Ltd. v. Sarich (1971) W.A.R. 157 ) although the conveyance pursuant to the contract may have to be made to the nominated person. Estoppel is no answer as we are not concerned with a hypothetical situation of an action for specific performance where vendor or purchaser is reluctant to meet the demand of the other.

---

ATC 454

17. The contract arising from the option was ``varied'', but it was still the same contract. This is not so; there was not a compliance with cl. 5 of the option (execution of a contract for sale within 21 days of exercise of the option) and so the exercise of the option expressly became null and void. It is not a matter of waiving provisions or agreeing to variations as to time or payment, but of novation or even of a new contract. The express provisions of cl. 5 of the option make inapplicable Suttor v. Gundowda Pty. Ltd. (1950) 81 C.L.R. 418. The novation, or fresh contract, whichever way it be viewed, required prior approval under the Banking (Foreign Exchange) Regulations.

18. The grant of an option creates rights in the nature of property, i.e., a contingent equitable interest in land sufficient to support a caveat on the title. This submission is in accord with the judgment of Gibbs J. in Laybutt (supra). The grant of an option does not however give a foundation for an action of specific performance prior to a proper and timely exercise of the option. The taxpayer's solicitor accepts (as set out in a letter of 23 August 1979) that the purchaser who sues for specific performance does not thereby waive the right to investigation of the vendor's title with a view to deciding whether or not the purchase money will be tendered (or paid into court) as performance on his part. The title to the property (even in equity) does not pass to the purchaser before the purchaser accepts the title. (There may be acceptance of title and a transfer with a vendor's lien for unpaid purchase money.)

19. Regulation 8(1)(c) of the Banking (Foreign Exchange) Regulations to be within the rule making power conferred by the Banking Act must be confined to residents of Australia. (The main case cited for the proposition of restrictive power is
T.M. Duche & Sons (U.K.) Ltd. v. Walworth Industries (Aust.) Pty. Ltd. (1962) S.R. (N.S.W.) 165 .) An unconditional contract did not arise upon exercise of the option as that would be contrary to the provisions of cl. 5 of the option document; and the standard Law Society/Real Estate Institute form of contract is subject to general printed conditions and in the present instance to one typed special condition. The submission is not accepted that the Reserve Bank ``Having saddled themselves with approving the grant of an option, they may well not have understood that a contract is formed when an option is exercised, but having given such consent, any subsequent condition is nugatory.'' It is not an escape provision that the second so-called nominee (as well as the first) was a ``resident'' of New Hebrides. The taxpayer, and the company in the E group as vendors were contracting directly ( vide para. 9 hereof) with the ultimate purchaser (the socalled nominee) and that contract gave those vendors the right to receive a payment (Banking (Foreign Exchange) Regulations, reg. 8). Thus although the proposition in the first sentence hereof may be unexceptionable (or at least this is not the occasion to follow it through) the ``resident of Australia'' requirement is present for the contract of 10 May 1972, as for the option and for the inchoate contract which arose on the purported exercise of the option.

20. The ``place of acceptance'' of the offer is the place where the contract was entered into. The offer which was contained in the option document was not accepted by the grantee or by any nominee in accordance with the provisions thereof (para. 9(b) hereof). The contract of 10 May 1972 (the presently most material document) was made by exchange of counterparts, and that took place in Australia.

21. Reserve Bank approval was not necessary for the exercise of the option. Some comments hereon have been made in para. 19 hereof; and once again it is mentioned that by express provision the exercise of the option became null and void because of a default.

22. As at 10 May 1972 the land was totally encumbered by an enforceable contract pursuant to which the nominee had an equitable interest wholly enforceable by the seeking of a decree for specific performance. Phrases such as ``totally encumbered'' and ``wholly enforceable'' may be questioned, but leaving that aside, a sufficient answer is set out in para. 12 and 13 hereof.

23. Once an option is granted there is a diminution in the value of the land; the option is an inseparable incident of the property and therefore affects its value. Not so; there is nothing in law or equity to

---

ATC 455

prevent the owner of the land from granting an option to one person for a limited period to purchase the land for $X and during the currency of that option entering into a contract with another person (prudently expressly subject to a condition that the contract is null and void if the outstanding option is duly and properly exercised) for the sale of the property at $X plus $Y. A department store may take a lay-by of $10 from a customer for the purchase of an article for $100 to be paid for within two months. If the customer fulfils that arrangement thereupon the customer gets possession of the article as owner (cf. Sale of Goods Act (N.S.W.) 1923 sec. 23). If the customer pays no more than the $10, the customer never becomes the owner, and (later) the article is in the store available for purchase at current retail market price which may have no relationship to $100; and compare the position where the buyer uses a credit card and immediately takes possession of the article as owner. The case relied on ( Thomas' case No. 2 ) is concerned with the value of the deceased's interest under a partnership deed which contained an option in favour of continuing partners where it was conceded that there was a practical certainty that the option would be exercised.

24. When an option is ``exercised'' an actual contract is formed which in the present case is subject to conditions subsequent. Not so in present case; if the option had been duly and properly exercised by the grantee (and assuming compliance with the Banking (Foreign Exchange) Regulations) the rights of the parties under the option would merge (as in ``Words and Phrases Legally Defined'') in the contract whereby the land would not become the absolute property of the purchaser until the purchaser.

(i) accepted the title of the vendor and as free from encumbrance (i.e., released from the Bank's mortgage) and

(ii) paid the purchase price in accordance with the contract. The solicitor said that this submission goes to value. Rather, it goes to price. If the landowner grants an option for $X, whether for reasons of generosity or to obtain a possible tax advantage or otherwise, then $X is the price of the land in the transaction but the value may be $X plus $Y; and if the option fails for some reason (as indeed it did in the instance case) a subsequent sale of the land at a higher price may be more in accord with land value at the earlier point of time than was the option price for the land at that point of time. So also with the converse where the market value of the land is $X and an option is granted for the sale of the land at $X plus $Y; the latter is simply the price and that option does not increase the value from $X to $X plus $Y.

25. Neither sec. 36, nor sec. 36A, applies to a case where the taxpayer contracts to sell the land which has ceased to be trading stock whether or not the option is subsisting; sec. 36 applies only to cases where there is a transfer of ownership of the trading stock itself. To speak of selling land which has ceased to be trading stock begs the question - compare the example of the article held by the storekeeper subject to a lay-by as mentioned in para. 23 hereof. The parcel of 12 acres was undeniably trading stock which at material times could be marketed as 61 separate allotments. The grant of the option took that parcel of land out of the market pro tem, and when the exercise of the option became null and void, in accordance with its express terms, that parcel of land forthwith again became stock-in-trade of the vendors. That parcel of land was trading stock when it became the subject of the contract of sale of 10 May 1972.

26. After the purchaser has paid the purchase price the vendor is a bare trustee for the purchaser; when the land is then transferred to the purchaser there is not a dispositive act of trading stock but rather of the bare legal estate. This subject is sufficiently dealt with in para. 12 and 13 hereof.

27. Section 36 does not apply at the time of the disposition of the bare legal title to trading stock. True enough if there has been an earlier disposition of beneficial ownership. But the grant of the option did not make the grantee the beneficial owner of the 12 acres. If a person grants an option to someone to buy his home that person does not thereby cease to be owner of his home either in law or in equity. At the point of time when the option is exercised that person does not cease to be the owner of his home either in law or in equity. The obligations of the

---

ATC 456

owner from the time when a contract for sale is entered into are set out in para. 12 and 13 hereof.

28. The land ceased to be trading stock when the contract was entered into. Not so; although that land was no longer available for general trading as it was committed to the purchaser pursuant to that contract. Thus from 10 May 1972 the land was held by the vendor group as stock-in-trade, but not for general trading. The land became the beneficial property of that purchaser on 31 May 1972 whereupon it ceased to be stock-in-trade of the vendor group; although the purchasers did not receive the legal title until 4 July 1972.

29. Once the land ceases to be trading stock the owner can dispose of the equitable interest at any time ( scil. without being caught by sec. 36). In the light of what has already been set out, e.g., as in para. 28 hereof, this point is not pertinent to the issue and need not be debated.

30. Once the owner has signed and exchanged a contract to sell the land, the land no longer forms part of the circulating assets of his business. Not so; the contract is an agreement to dispose of the land (see para. 12 and 13 hereof).

31. Section 92 does not include any part of the deemed assessable income in the assessable income of the taxpayer because sec. 90 requires the calculation of net income and included is the value of property calculated by reference to sec. 36(8); in relation to a partner sec. 92 includes in his assessable income his individual interest in the net income; and interest there means a legally enforceable interest, i.e., a right that can be sued for as being legally enforceable. This is a wide ranging submission. With the hope that brevity does not result in obscurity, the points to be noted are: taxpayer is defined in sec. 6(1) to mean a person deriving income; by sec. 90 a partnership has assessable income and is required by sec. 91 to furnish a return of the income, but is not liable to pay tax on its income; by sec. 92 the assessable income of a partner includes his individual interest (meaning share) in the net income of the partnership. Thus a partnership is a taxpayer which may have assessable income without being liable to pay tax on its income; and the proportionate amount of assessable income is included in the respective assessable income of the partners.

32. Section 92 cannot be said to include any part of a deemed assessable income of that partnership in the assessable income of the taxpayer; sec. 92 is intended to equate income from partnership concepts with assessable income and this fact emerges from a comparison with Div. 6; there is a very real problem under Div. 6 in that there are three kinds of income, viz., income for accounting law purposes, income for trust law purposes, and income which is the creature of the Act itself. It is income which is the creature of the Act itself that is of present significance, and the implication of what is set out in para. I hereof is this; Three joint venturers with a factual composite assessable income (without being liable to pay tax thereon) of $130,060 find (because they sold trading stock, an asset of their business of land sales, at an undervalue and not in the ordinary course of carrying on that business) that such assessable income is increased to $330,060 by a notional receipt of $200,000 and thereupon the actual distributable net income is ipso facto increased by a notional $200,000 whereby the major of those joint venturers (which is a partnership of seven proprietary companies) notionally receives $100,000 (without being liable to pay tax thereon) and thereupon the actual distributable net income of the partnership of seven companies is also notionally augmented by $100,000 whereby each of the seven companies finds that it is assessed for tax on an amount of $14,266 which it has not received and which was never factually available for distribution to it. It is to be observed that the expression ``the taxpayer'' in sec. 36 does not apply to the present appellant for it alone did not make the sale (that was made by the joint registered proprietors para. 9(c) hereof on behalf of all equitable owners, a multitude of companies and perhaps trusts) and it did not have any trading stock but only an interest as derivative partner in the trading stock. There is cause to doubt that sec. 36 is applicable in an assessment of the taxable income of this taxpayer. However this subject has not been discussed by either party and I have decided not to pursue it. The taxpayer's solicitor cited
Rose v. F.C. of T. (1951) 84 C.L.R. 118 but only with respect to a different point.

---

ATC 457

Pastoral and Development Pty. Ltd. v. F.C. of T. 71 ATC 4177 ; (1971) 124 C.L.R. 453 is also concerned with a different point; and I am satisfied that the value of the 12 acres at the material date was at least $250,000.

33. If sec. 226(2) can be construed so as to include a partner, and that is disputed, the taxpayer in fact included in its return of income its share of the income in the line of partnership, albeit at a figure which did not include the deemed value ( scil. excess over $50,000) but it did not in any relevant sense omit anything; even if it should be held that income as lodged is something different from assessable income because the section is concerned to deal with a failure to disclose income and not with a disclosure of income at a wrong figure because of a calculation which has been made. Taking the last point first, if there is an error of the type called ``anachronic'' in Point Cook Pastoral Co. (supra) it may be an innocent error, and it may be one of calculation and that goes to reduction or expunction of a penalty (so far as within jurisdiction). I see no reason why sec. 226(2) should be construed so as to exclude a partner. Yet the point which troubles me follows on from my comments in para. 32 hereof. It takes a tortuous course (leaving aside sec. 260) to show omitted income of $14,266 when it was not derived by the taxpayer. Because I have supported the Commissioner's mode of carrying through the notional receipt of $200,000 by the three joint venturers to the partnership of seven companies, and thence to the taxpayer for an ultimate amount of $14,266, the consequence, as I see it, is that the Commissioner was empowered to impose additional tax pursuant to sec. 226.

34. The Board should regard it as reasonable to reduce the penalty because when the members of partnership called for a valuation of the 12 acres they believed that the appropriate date for the valuation was 14 September 1971. The valuation was totally demolished during cross-examination of the valuer and not merely because the valuation was made as at a date too early in point of time. The members of the partnership (to adopt that expression) were intent on carrying out a tax avoidance scheme which had been devised by eminent counsel. There is not one application of penalties for those who engage legal advisers to assist them in their schemes, and another for those who rely on their own adroitness. It is never a defence to a breach of the law that the action taken was pursuant to a barrister's advice (cf.
Olsen v. Grain Sorghum Marketing Board , ex parte Olsen (1962) Qd. R. 580 where counsel's advice was based on a decision of the Full Court and after his advice had been adopted the High Court reversed the Full Court; see also
Reg. v. Arrowsmith (1975) 1 Q.B. 678 at pp. 690-691 ). It is always to be remembered that counsel's advice is subject to the hazard that the material briefed to him may not be accord with the facts as they emerge in evidence. There is no evidence before the Board which would justify an interference with the penalty as set by the Commissioner.

35. I would uphold the Commissioner's decision on the objection to the amended assessment of primary tax and also his decision on the objection to the assessment of Div. 7 tax, and in each instance I would confirm those assessments.