V.N. Roberts v. Federal Commissioner of Taxation.

Judges:
Green CJ

Court:
Supreme Court of Tasmania

Judgment date: Judgment handed down 24 July 1981.

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Green C.J.

These are appeals by each taxpayer against the disallowance by the respondent of the taxpayers' objections to the respondent's assessments of the taxpayers' taxable income for the years ended 30 June 1974, 1975 and 1976. In essence, the taxpayers are objecting to the profits made on the sale of land known as McGann's land being included as part of their taxable incomes. By consent, all the appeals were heard at the same time.

The subject land consisted of 7 acres 3 roods and 26 3/10 perches and was purchased for $17,500 by the taxpayers from the trustees of the will of W.J. McGann, deceased, by contract of sale dated 18 November 1968. The land was subsequently subdivided and lots were sold during the three years the subject of these appeals. The respondent claims that the profits arising from those sales come within the first limb of sec. 26(a) of the Income Tax Assessment Act

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1936. The essential issue is therefore whether the taxpayers acquired the McGann land for the purpose of profit-making by sale.

By virtue of sec. 190(b) of the Act the burden of proving that the assessments were excessive lies upon the taxpayers and thus, in this case, the appellants bear the onus of showing, in accordance with the civil burden of proof, that the land was not acquired for the main or dominant purpose of profit making by sale: see the judgment of Mason J. in
Gauci and Masi v. F.C. of T. 75 ATC 4257 at p. 4261; (1975) 135 C.L.R. 81 at p. 89 and the judgments of Gibbs, Stephen and Murphy JJ. in
Macmine Pty. Ltd. v. F.C. of T. 79 ATC 4133; (1979) 24 A.L.R. 217 and in
McCormack v. F.C. of T. 79 ATC 4111; (1979) 23 A.L.R. 583. The purpose or purposes with which I am concerned are those which the appellants had at or before 18 November 1968.

For most of his adult life the first appellant was a market gardener, initially as an employee of his parents and then in partnership with his brother and his mother and, finally, in partnership with his wife who is the second appellant.

In April 1968 the appellants were farming about 28 acres of land at Bagdad and about 17½ acres situated about 14 miles away in the Glenorchy area in the vicinity of the subject land of which about 7½ acres were leasehold and the remaining 10 acres freehold. During the year a lease of about three acres of the Glenorchy land determined and in about September 1968 the appellants purchased about 32 acres at Rokeby, which the appellants immediately started developing as a market garden. In November 1968 the appellants purchased the McGann land which was being used and had for many years been used as a market garden.

The pieces of land owned or leased by the appellants, in Glenorchy, including the McGann land, were all situated fairly close to each other in a suburban area which was used for industrial, residential and gardening purposes.

In December 1969 the appellants offered to sell the McGann land to a building and developing company in response to a newspaper advertisement, but the offer was refused. In 1971 the appellants decided to subdivide the land themselves. Construction of the subdivision commenced in 1972 and during 1974, 1975 and 1976 the sales the subject of these appeals took place.

The appellants gave evidence that their purpose in purchasing the McGann land was to use it as a market garden. The first appellant conceded that when he was considering the purchase of the McGann land the possibility that at some time in the future it could be resold at a profit was present in his mind, but he stressed that he only regarded that as a possible contingency which might occur at some indefinite time in the future and that it was ``not a major issue'' and ``was not the uppermost thought in our mind''.

The respondent concedes and I hold that if the appellants' primary purpose in purchasing the land was to use it as a market garden, the proceeds of sale would not be taxable notwithstanding that at the time of purchase the appellants realised that sometime in the future the land would probably appreciate in value. However, the respondent's case is that although the appellants did in fact use the land as a market garden for some years, their dominant purpose in buying it was profit-making by sale. Although in so doing I do not overlook the fact that the appellants carry the burden of proof, I find it convenient to examine first the reasons which the respondent advances in support of that submission.

The respondent relies upon a letter which the first appellant wrote to the Glenorchy City Council and the fact that at or shortly after the purchase of the McGann land the first appellant instructed a draftsman, Mr. Kean, to draw rough sketch plans showing how the subject land could be subdivided. The letter read:

``Town Clerk

8/10/71

City Council

Glenorchy 7010

Dear Sir,

The proposed Subdivision Clydesdale Avenue.

It appears likely the proposed subdivision will commence early in the New Year. One or two items will of necessity have to be clarified.

• (1) Open space payment - already

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  this is in your hands in my letter dated 26/8/71.
• (2) Because of the proposed road (H/level) and subsequent difficulties encountered by such, your recent plan of the subdivision (drawn by your draughtsman) is reduced to thirty blocks as against a minimum of 38 (thirty-eight) in the original proposal at the time of purchase or soon after.

Would you give early consideration to both (1) and (2) keeping in mind the designing of the area as part compensation of (2). Could you give us cost of designing etc.

We understand the proposed H/L roadway has been reduced to 66', as 50' is the standard requirement. Does your Council propose meeting the cost of the extra 16'.

Your early consideration and reply will expedite the proposals in hand.

Yours faithfully

V.N. Roberts''

I find, and I record that the respondent did not submit otherwise, that the words ``the original proposal at the time of purchase or soon after'' appearing in that letter referred to the Kean plans. The critical issue therefore is not what meaning can be given to those words, but what was the appellants' purpose in having the Kean plans drawn, what was the date when the plans were prepared and, perhaps more significantly, what was the date when the first appellant gave instructions for their preparation. Mr. Kean could not give precise evidence of the date, but I accept that although he had had some general familiarity with the area before he prepared the plans, he associated in his mind the preparation of the plans with the particular knowledge of the area he had gained from visits he made to his sister's house which overlooked McGann's land. I find that Mr. Kean's sister did not occupy the house before mid March 1969 at the earliest and that it was probably later. I find that the plans were drawn no later than a month after Mr. Roberts gave instructions for their preparation. I find therefore that those instructions were given no earlier than February 1969 and probably later, and certainly not ``at the time of purchase''.

The appellants gave evidence that the Kean plans were not drawn up with a view to subdividing or selling the land, but because of advice which they believed had been given in 1952 to the appellant's mother by Sir Reginald Wright, an eminent practitioner of this Court, to the effect that it was prudent for an owner of land in a built up area to have a subdivision plan prepared against the possibility of the land being compulsorily acquired by a public authority. It is not necessary to make any findings as to whether advice in those terms was actually given - the material finding which I do make is that the appellants believed that such advice had been given. However, counsel for the respondent submitted on two grounds that I should not be satisfied that the preparation of the Kean plans was motivated by that advice. First, because if it had been, the first appellant would have remembered that that was the reason when the respondent's investigating officers confronted him with the letter he wrote to the Glenorchy City Council or, at least, he would have remembered it sooner than he did and, secondly, because when he did remember the explanation he did not inform the respondent's officers. I am not persuaded that on those grounds I should reject the first appellant's explanation of why the plans were drawn up. When he was interviewed by the respondent's officers the first appellant was in an unrelaxing situation which would have been likely to inhibit his recall, he was not confronted with the Kean plans but with a document which only contained an indirect reference to them and which was therefore less likely to jog his memory than would the plans themselves and he was being suddenly asked to recall what his state of mind had been six years earlier. I am not persuaded that the period of two days which the appellants said elapsed between the interview and the time when they recalled the Kean plans and Sir Reginald's advice was in the circumstances suspiciously long. I do not accept the submission that if the appellants did belatedly recall those matters, as they claimed, the probabilities are that they would have immediately informed the respondent's officers. I find that after the second interview which the respondent's officers had with the first appellant he was angry and resentful and that at the conclusion of that interview he was told that his taxation liability would

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be reassessed. I do not find it improbable that the appellants would have thereafter regarded themselves to be in an adversary relationship with the respondent and been reluctant to volunteer anything to his officers.

In considering what conclusions should be drawn from the preparation of the Kean plans it should also be emphasised that in fact the next step taken by the appellants was not to subdivide the land but was an attempt to sell the whole piece of land and that in the end the only use in fact made of the plans was in the first appellant's negotiations with the Glenorchy City Council.

I find that the Kean plans were drawn for the reason given by the appellants and that they were not drawn and were not, and could not have been used for the purpose of enabling the land to be subdivided. I am not satisfied that I can draw any conclusions as to the appellants' state of mind when they entered into the contract to purchase from the fact that they gave instructions for the Kean plans to be drawn.

The respondent's main basis for claiming that the appellants purchased the land for the purpose of profit-making by sale was that within a little more than a year of their entering into the contract to purchase the land the appellants were actively trying to sell it and that within two or three years after that they were subdividing the land.

The first appellant gave evidence that the appellants changed their minds about the use to which they wished to put McGann's land because the unexpected resignation of two employees, Mr. Thoen and Mr. Rolle, made it impossible, or at least very difficult, for the appellants to continue running all their market gardens.

I find that Mr. Rolle was employed by the appellants as the manager of their properties at Rokeby and Glenorchy and Mr. Thoen was employed as the manager of their Bagdad property. They were experienced and skilled gardeners upon whom the appellants relied heavily. On about Sunday 3 August 1969 Mr. Rolle gave one month's notice of his intention to resign and on Monday 4 August Mr. Thoen did the same. I find that these resignations were quite unexpected to the appellants and made it very difficult for them to continue their market gardening business. The difficulties were increased because the resignations took effect at the beginning of what was the busiest part of the year for market gardeners. I find that the appellants decided to remedy the situation by immediately selling the Bagdad property as a going concern, but that their attempts to do so were unsuccessful. The appellants employed a Mr. Nunn to run the Bagdad property, but he did not have the experience that Mr. Rolle and Mr. Thoen had and he could not work as effectively as they had without supervision. The appellants were not able to find any other satisfactory replacements for Mr. Rolle and Mr. Thoen.

Counsel for the respondent submitted that I should reject the appellants' explanation for their decision to sell McGann's land, but I am not persuaded that I should. I found the way in which each gave his or her account of the dilemma that they felt that they were in to be convincing, the explanation itself was not inherently unlikely and, in a number of important aspects, the facts which formed the foundation for that explanation were corroborated by independent evidence. In particular, there is no doubt that the appellants did attempt to sell the Bagdad property and there could be no suggestion that that attempt was made for any reason other than the resignations of Thoen and Rolle. I find it difficult to accept that I should find that it was inherently unlikely that the appellants' decision to sell the McGann land was reached for the same reason.

I am not persuaded that I can draw any inferences as to the appellants' purpose or state of mind when they purchased the McGann land from their dealings with that land from December 1969 onwards.

Counsel for the respondent submitted that I should find that at the time of purchase the first appellant knew that the construction of a road through the subject land was proposed and that it is therefore unlikely that he would have purchased the land for the purpose of market gardening. I am not satisfied that prior to the purchase of the land the first appellant had anything more than a vague awareness that at some indefinite time in the future the construction of a high level road was planned somewhere in the area. I am not satisfied that at the time of purchase, the proposal, as it was

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understood by the first appellant, was sufficiently concrete or specific to lead to the conclusion that it was improbable that he would have purchased the land for the purpose of market gardening. I am not satisfied that prior to the purchase the second appellant had any knowledge of the proposal. I accept that during 1969 both appellants became aware that the implementation of a specific proposal was imminent, but their state of mind then is not material.

I do not accept the suggestion that the price paid for the McGann land was higher than one would have expected had the appellants' only purpose been to use it for market gardening. I do not have sufficient materials before me to make any assessment of what would have been a reasonable price to pay for the purchase of the land as a market garden. I accept that the appellants paid about three times more per acre for the McGann land than they had paid for the Rokeby land, but I do not have enough evidence to enable me to properly compare the two pieces of land as market gardens. However, I do find that the Rokeby land had never before been used for market gardening and required a substantial expenditure of time and money in order to bring it into production whereas the McGann land was already in production, was situated closer to the markets and had some value as a depot serving the other Glenorchy gardens. I am not able to draw any inference as to the appellants' purpose in purchasing the McGann land from the price which they paid for it.

In addition to the foregoing, for the following reasons I am persuaded that the McGann land was not acquired for the main or dominant purpose of profit-making by sale:

(a) Although concessions about some important matters were only made by the appellants with reluctance and after being pressed in cross-examination, I nevertheless formed a favourable impression of their honesty.

(b) Both appellants gave evidence on oath that their purpose in purchasing the land was to use it as a market garden.

(c) The appellants were market gardeners, the McGann land had in fact to the appellants' knowledge been successfully used as a market garden and they in fact did use it as such after purchase.

(d) The appellants had never before been involved in the subdivision of land or the buying and selling of land for profit, but had been involved in the business of market gardening for many years.

(e) I find that before the purchase of the McGann land the second appellant had, and expressed, fears for her husband's safety because she considered that it would be dangerous for him to use a tractor on the land. That state of mind would have been inconsistent with an intention to use the land for a purpose other than market gardening.

(f) Apart from ascertaining the government valuation, prior to the purchase of the land neither appellant took any of the steps which one would have expected them to have taken had they been intending to purchase the land with a view to reselling at a profit, such as obtaining the advice of a valuer or some other expert, drawing sketch plans, or investigating the feasibility and the financial implications of a subdivision of the land. In contrast, because of their familiarity with the land as a market garden and because of their expertise, I find that it would not have been necessary for them to make such a close investigation had their intention been to purchase the land as a market garden.

I have in these reasons largely concentrated - as did counsel at the hearing - upon the first appellant's state of mind, but I am persuaded that the second appellant's state of mind did not differ in any material respect from that of her husband. I record that counsel for the respondent did not invite me to find otherwise.

During the trial a question arose as to the admissibility of a document which I have marked ``K'' and which was tendered by the appellants to rebut what was said to be an allegation of recent invention. I do not need to rule upon that question as I have not found it necessary to have regard to that document in making my findings.

In each case I order that the appeal be allowed and that the assessment be remitted to the respondent to be reassessed in accordance with the judgment of this Court.