Case R36

Judges:
HP Stevens Ch
BR Pape M
TJ McCarthy M

Court:
No. 1 Board of Review

Judgment date: 16 April 1984.

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H.P. Stevens (Chairman)

The main issue in these references relates to whether or not a $25,946 profit on the sale of land is correctly assessable to the taxpayer company in terms of sec. 25(1) or 26(a) of the Act for the year ended 30 June 1973. Other claims relate to the year ended 30 June 1978 viz.

• (a) overseas travelling expenses $3,564;
• (b) depreciation Bedford Adventura $2,289;
• (c) depreciation Mercedes Benz $357;
• (d) motor vehicle expenses $2,364; and
• (e) sec. 80 losses 1977 re -

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  • (i) overseas travelling expenses $853.
  • (ii) investment allowance Bedford Adventura $3,659.

1973 Issue

2. As will be seen two individuals A and B became the shareholder/directors of the taxpayer company which was incorporated on 12 March 1973 and initially there were three requests for reference set down for hearing jointly before the Board. Insofar as the sale of land was concerned the taxpayer company was assessed on the $25,946 ``profit'' whilst A and B were assessed in equal shares on the ``distribution'' from the company. At the hearing the references of A were withdrawn whilst no evidence was offered in those of B (both being formally decided in the Commissioner's favour by virtue of sec. 190(b) so that only the references of the company proceeded to a full hearing. B gave evidence in the course of this hearing but A did not (although he was the one who attended a conference with an accountant and gave instructions to a solicitor).

3. It will further become apparent that as at the date the company was incorporated there had been a change of plan (one S withdrawing) and the land was in the course of being resold to other parties. Accordingly it was counsel's submission for the taxpayer company that it could never have been the beneficial owner of the property so that any profit (if assessable at all) was not taxable in the hands of the taxpayer. For the Commissioner it was contended there had been a conveyance by direction to the taxpayer and that the question was when the ``legal title was transferred to the company was it the intention that the company become both the legal and equitable owner?''.

4. B was a bricklayer/builder and in about 1970 he was helping a friend C finish units. B and C subsequently agreed to buy and build units on land designated as blocks No. 114 and 116. Development plans were lodged with Council in mid 1971 together with permission from the current owners Mr. and Mrs. W (block 114) and Mr. and Mrs. S (block 116) and these were approved by Council. However it was decided not to proceed and it would appear that Mr. and Mrs. S subsequently acquired block 114. Later B was working with A and S and discussions took place with the idea of the adjoining block 118 being added to blocks 114 and 116 and A, B and S erecting units on the combined area. A meeting subsequently was held with their accountant J and instructions were given to a solicitor D.

5. Evidence was given by D and his files (which were tendered) indicate he had a preliminary talk in July 1972 and wrote to J on 24 July 1972 in the following terms:

``Re:... Pty. Limited and

... Services Pty. Limited

During the past week I had discussions with (A) concerning the purchase by himself and (S) and a third partner of land in... for the purposes of erecting home units. Evidently two of the blocks are already in (S's) name and ownership and the remaining block is to be purchased by the partners.

I advised him generally concerning the purchase and indicated that for the purposes of approval of plans by the local Council all three blocks have to be held in common ownership and compiled into one consolidated Title before even a plan would be approved. This creates several problems and as you can well realize and in any event I deem it advisable that a company own the land in the event of the decease of any one of the partners. This would have a drastic effect on building construction should it happen when there was a partly completed building under way.

I envisage that the holding company will be in the nature of a trust company on behalf of each of the partners or their own family companies or whatever arrangement they personally desire. I would suggest that this company be incorporated in the A.C.T. which avoids certain problems concerning transfer of the initial two blocks to the company and result into problems concerning payment of additional New South Wales stamp duty should there be an inadequacy of consideration. The company could then be registered in New South Wales as a foreign company and all dealings and meetings would of course be held in the A.C.T. and Minutes kept on the main register.

The writer is away during this week and will return the following weekend. We suggested to (A) that a full scale discussion be had to carefully consider their positions and that the whole framework of the affair be set up in the light of these discussions. As far as (A) is

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concerned I would advise him to have a family trust company or a trust deed prepared so that he may bring his children into this affair. This will mitigate tax considerably and also if there was even a family company it would postpone payment of personal income tax for another twelve months. If there are two companies of course a postponement of up to twenty two months could be arranged. This has a drastic effect of course on provisional tax payable by the parties involved.

As soon as I come back I will speak to you personally to first of all get your opinion and thought on the matter.''

On the same day D wrote to another firm of solicitors advising, inter alia, that he had received instructions to act for A in connection with the purchase of block 118 and asked that the contract be forwarded to him and that it ``contain a novation clause in favour of a company to be formed''. The contract was forwarded to D the same day (purchase price $25,000 clear to vendor).

6. A three hour conference with J, S and A (D could not recall B being present and I find he was not took place on 15 August 1972 and on 22 August 1972 D wrote to A as follows:

``Re: Purchase from ...

We refer to discussions had with yourself, your partner and your accountants on 15th instant when we conferred generally concerning the above purchase and the project you had in mind.

Mr. (J) undertook to write to Mr. (B) and advise him of the procedures which would be adopted in connection with your proposal to construct flats in...

As regards our part we have written to our Sydney agents requesting that they ascertain whether the name `... Investments Pty. Limited' is available as a company name. This company would own all the land to be held by the partnership. We will advise you as soon as this information is to hand.

Contracts have been exchanged in the matter and we hold the Vendor's original in our possession. This will be stamped at a later date, however at the present time we will hold it pending advices concerning the company name.

We have paid the deposit of $2,500 herein and your account has been debited accordingly. We understand that Mr. (B) is to be contacted with a view to lodging certain monies which will provide the balance of purchase monies in connection with this matter.

All necessary enquiries and searches have been forwarded and we await replies.''

7. Insofar as the contract is concerned D wrote to the other firm of solicitors on 16 August 1972 enclosing counterpart executed by A and deposit. This letter also advised that it had not been ascertained whether the proposed company name was available and suggested that part of the special condition ``could be left blank until official confirmation is received''. This suggestion was accepted with the vendor's executed counterpart being forwarded on 18 August 1972 ``by way of exchange''. By letter of 22 September 1972 D wrote to the other solicitors advising, inter alia, that ``we are prepared to settle if you are prepared to authorize us to insert the Purchaser's name in the Transfer document''. On 26 September 1972 D wrote to A advising, inter alia:

``We refer to conversations with you last week when we indicated that the Vendor was becoming somewhat anxious concerning settlement, and we advised that we proceed to settle the purchase as soon as possible.

We have used every effort to expedite approval of a company name through the office in Sydney; however, we are informed that this is impossible but we expect a reply this week.

The Vendor's Solicitors have agreed to hand over the documents to us in blank, and we may complete them in any manner we see fit. We cannot argue with this for the Vendor is being most reasonable and, accordingly, it would be appreciated if you would collect together the balance of purchase moneys amounting to approximately $22,500. Stamp Duty on the Contract will amount to approximately $344.00 and rate adjustments to approximately $50.00. Accordingly, please add the lastmentioned disbursements to the amounts of the balance and let us have cheque for this amount at your earliest convenience.''

Settlement took place on 29 September 1972 and D advised A on 4 October 1972 that ``Title deeds and documents are held by us in the file pending completion of'' a company name.

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8. Difficulties were experienced in having the proposed company name approved and on 18 September 1972 it was suggested that another name be tried - (S.A.B.) Investments Pty. Ltd. - and on 17 October 1972 it was advised that a variation (A.S.B.) Investments Pty. Ltd. had been reserved for two months. On 6 November 1972 D advised the other solicitors of the name ``which our clients will insert as the Purchaser of the land''. The contract was forwarded to Sydney firm on 27 February 1973 for stamping ``at your early convenience'' - as finally stamped it bore the date 28 December 1972 inserted by hand but who inserted this and when or why is unknown. The date of stamping is also unknown but on 13 March 1973 D wrote to the Sydney firm enclosing Transfer and Certificate of Title and asking ``if you will have the Transfer marked and then lodge all documents for registration''. The Transfer originally dated 29 September 1972 was altered to show 14 March 1973 and was registered on 30 April 1973.

9. By letter of 18 June 1973 D wrote to the secretary of the taxpayer referring to the settlement, to amounts still outstanding and concluded:

``No doubt the Company will require to apportion between its beneficiaries the monies paid into this office in addition to the balance aforesaid owing to us.''

The total involved was $25,780.64 but the manner in which this was financed is unknown. B borrowed an amount of $17,652.66 from a financier on 17 October 1972 and drew a cheque for $12,771 on 23 October 1972 paying it to I.L. Pty. Ltd. (apparently an A and S company). As this was after settlement it would seem A either personally or through I.L. Pty. Ltd. provided the finance required.

10. Before returning to the evidence of B it might be as well to deal with the incorporation of the taxpayer company. As indicated in D's letter set out in para. 5 it was envisaged it would be ``in the nature of a trust company on behalf of each of the partners'' and, despite the withdrawal of S thereby frustrating the overall plan, it would seem that this concept was carried through. Thus the first objects in its Memorandum of Association dated 27 February (D and a clerk the subscribers for one share each) were:

``2 The objects for which the Company is established are:

(a) To undertake and execute any trusts the undertaking whereof may seem desirable and either gratuitously or otherwise.

(b) To execute declarations of trust and exercise all or any of the rights and duties conferred and imposed by the holding of lands and buildings of any tenure or description, any estate right or title thereto or therein and shares stocks debentures debenture stocks units notes bonds obligations script script guarantees policies of Insurance and securities (whether secured by any charge or not) issued or guaranteed by any Company constituted or carrying on business in the Commonwealth of Australia or in any other country or by any Government Commission, Commissioner, public body, or Authority Supreme municipal local or otherwise whether within the said Commonwealth or elsewhere.

(c) To contract associate or co-operate with or assist any person or body Corporate as trustee or custodian trustee of or concerned in any other capacity with any trust or fund and to enter into any trust or other deed instrument guarantee or declaration and to vary amend revoke the same by deed instrument or otherwise.

(d) To undertake any office of trust or confidence and to perform and discharge the duties and functions incidental thereto.''

On 19 June 1973 D wrote to the secretary of the taxpayer (using A's address) advising, inter alia, that only two shares have been issued (to the subscribers to the Memorandum and Articles) that the directors were A and B with D as secretary, that the registered office was c/- D's firm and enclosing a memorandum of costs in respect of incorporation. On 27 February 1974 D wrote to the secretary (no address) advising that he had spoken to ``you both concerning the future of this Company after transactions were completed regarding sale of'' the land, that the statutory obligations had not been complied with and that no accountant had been nominated ``to look after the Company''. A apparently desired his accountant to prepare the necessary returns and the necessary details were supplied by or enclosed with a letter of 19 March 1974. It would seem the registered office

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was not changed until much later for by letter of 29 June 1976 a firm of accountants (H and Z) advised that on 4 December 1975 it had been changed to their address and requested that the statutory records of the company be made available for collection.

11. I have set out the above details for a minute book was tendered in relation to a first directors' meeting of 12 March 1973. This meeting purported, inter alia, to transfer the subscribers' shares to A and B and to appoint J as the company's accountant - D was shown as being present by invitation. In view of D's letters above I am of the view this minute reflects a post facto reconstruction of what should have taken place if (contrary to my view) the meeting had been held. This minute also went on to state:

``It was RESOLVED that the Company acquire the block of land situated at 118... N.S.W. for the sum of $25.000 from Mr...., to be held by the Company as Trustee for Mr. (B) and Mr. (A) as tenants in common in equal shares and that the Contract/Agreement of Sale bearing the date of 28th December, 1972 be ratified, and that Mr. (A) declares that he has no beneficial interest in the land as evidenced by Special Condition Clause No. 1. Necessary funds to implement this Resolution have been and shall be provided by the beneficiaries Mr. (A) and Mr. (B) as tenants in common in equal shares.

It was RESOLVED that pursuant to instructions received from the beneficiaries Mr. (A) and Mr. (B), the Company is directed and authorised to enter into a contract for the sale of the land held in trust for the gross sale price of $55,000 to Mr.... and... as tenants in common.''

and this was relied on to support the claims made. In my view the meeting was not held and support must be found elsewhere.

12. It might also be convenient to deal with this sale for $55,000 gross before returning to the evidence of B. In this regard D's files indicate he received a letter dated 24 February 1973 from a firm of estate agents advising details of a sale by Mr. and Mrs. S and the ``taxpayer company'' of blocks, 114, 116 and 118 for $120,000. When the land was placed in the agents' hands for sale is not known. On 27 February 1973 another firm of solicitors wrote to D on behalf of the purchasers asking for a draft agreement for sale. D replied to this on 7 March 1973 with the heading Re S and A.S.B. Investments Pty. Ltd. and asked for some details before preparing a contract document. When a draft contract was prepared is unknown but at some date prior to 7 May 1973 an exchange took place - the contract between Mr. and Mrs. S and the taxpayer company dated 2 May 1973 gives the consideration as $120,000 but a special condition states that Mr. and Mrs. S are to receive $65,000 net with the taxpayer to receive the balance but to bear all costs etc. Settlement apparently took place on 8 June 1973 and a net $52,034 was the taxpayer company's entitlement. Such was never paid the taxpayer by D but rather $26,017 each was accounted for by D to A and B directly. Thus B received $20,000 on 12 June 1973 and by letter of 18 June 1973 a further $5.462 calculated as hereunder:

                                      $         $

      Your one half share

        balance                              26,017

      Less Paid to you on

        account                    20,000

      1/2 Share of costs on

        purchase of land

      1/2 share of costs on

        sale of land                  505

      1/2 share of costs on

        Incorporation of

        Company

      Costs re Blackacre               50    20,555

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                                              5,462

                                             ------
      

The covering letter from D to B stated:

``We enclose herewith for your information and records comprehensive settlement statement and dealing with firstly purchase of land in... by... Investments Pty. Ltd., secondly incorporation of Company and thirdly in respect of sale of the property where you were a joint Vendor with Mr. and Mrs. S.

These settlement statements are self-explanatory and as a result there is the sum of $5,462 payable to you. Our trust account cheque for this amount is enclosed. Should you have any query whatsoever do not hesitate to communicate with our Mr. (D). Also attached you will see a photostat copy of letter from the Agents which sets out the commission which they charged, on the sale which was at scale.

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Pursuant to the contract you will recollect that Mr. and Mrs. S were to receive $65,000 nett and that your family and the (A) family were to share the commission among yourselves.

We have notified the Proper Authorities of the sale and future accounts should now be forwarded to the Purchasers. May we take this opportunity of thanking you for the favour of your instructions.''

13. Returning now to B's evidence he deposed that there was a meeting in his home on 11 September 1972 when A, B and S were present and in respect of which his wife took notes. These were tendered and were as follows:

``Meeting at...

A.C.T. of Proposed Directors of...

Investments Pty. Ltd.

      Those present  (B)

                     (S)

                     (A)
          

Agenda to be discussed

(1) Outcome of Obn meeting

(2) Finance

(3) Building programme

(A) We discussed the formation of a company with Mr. (J) and (D) and they suggested to form a Family Trust Company for the three of us. (S) and I have discussed this proposal and have agreed on it.

(B) I received a letter from Mr. (J) some time ago and he outlined the same proposal which I go along with. Concerning the $15,000 to be held in the trust account of (D) I will sell one of houses and should have the money very shortly.

(B) A couple of weeks ago I had a discussion with Mr.... of... Finance Co. and I showed him the plans for the flats, and asked him about the necessary finance. He was very impressed with the whole project and told me there would be no problem in lending the money and to call in and see him again as soon as the plans are approved.

(S) John, did you make any estimate to what the whole project will cost?

(B) Yes, I worked out that it will cost us approx. $3,000 - $3,500 per flat which comes to $216,000 - $252,000 approx.

(A) This $15,000 each that we're lodging with (D) is going to be more than 10% of the money we're going to borrow from..., plus we have $55,000 invested in the land, which makes an even better proposition for the finance company to lend us money.

(B) I can be involved in the building full time and will take my bricklaying gang to do the brickwork which should save us a lot of money.

(S) We will do the ceilings and insulation in the roof ourselves and the rest we'll have to call tenders and give contract work.

(B) Well, that's all we have to discuss for the time being, we'll wait till the plans are approved and the Company name registered and then I'll draw proper plans in the Companys name and we'll take it from there on.''

14. If such meeting as recorded took place it is difficult to understand why B consulted an independent firm of solicitors with that firm writing to D on 16 October 1972, inter alia, in the following terms:

``We advise that we act for Mr. (B) and he has lodged with us a letter dated the 18th August last addressed to him by (J), Public Accountants,... concerning the proposed formation of a company for the purchase and development of land in... Road,... We note the suggestion that the Company be called `... Investments Pty. Limited' and that Mr. (A) and our client each lodge the sum of $15,000 with you to be held in trust as a matter of good faith. With regard to Mr. (S) we understand that he was providing the land in lieu of a cash payment of $15,000.

We understand that progress in the matter has been made since the date of the aforesaid letter and our client now desires us to ascertain from you details of the general proposal and act for him as necessary in connection therewith.''

D's files do not contain a copy of any reply to this request. On balance I am of the view the meeting did not take place and support for the claim must be found elsewhere.

15. The matter has been further clouded by accounts prepared by an accountant at a later date purporting to show, inter alia, a Capital Reserve of $25,946 in certain balance sheets but then subsequently amended in further accounts prepared to nil. The accountant H (of the firm H and Z para. 10 above) was not called to give

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evidence and it is difficult to reconcile the situation. As it is apparent no accounts were initially prepared in relation to the company - arising only it seems out of an investigation into the affairs of B - I do not think any reliance can be placed on those ultimately prepared and amended and an answer must be sought in the more contemporaneous material available.

16. Looking at the matter en globo I think the files of D provide the best evidence as to what was the framework of the original intentions, although they do not flesh out that framework. I accept that the taxpayer company was to ``be in the nature of a trust company'' but this leaves a lot unsaid. A ``trust'' company can operate as the trustee under a Trust Deed (either ordinary or unit trust), or it can operate in its own right with its shareholders being individual family trusts or it can simply be the passive holder as nominee for various parties. It would only be if the second situation applied that such a company could be assessable in its own right (of course it could be assessable as trustee if in other situations the ``beneficiaries'' were not presently entitled).

17. D in his letter of 18 June 1973 (para. 9) referred to the company apportioning ``between its beneficiaries the moneys paid into this office'' (thereby indicating a trustee situation) whilst, in the letter of same date to B (para. 12), he uses phrases such as ``where you were a joint Vendor'' which would suggest a nominee situation. Unfortunately D was not questioned re these letters. However none of the correspondence seems to suggest the existence of the second situation referred to in the preceding paragraph and I am prepared to accept, on the balance of probabilities that there was no acquisition by the company in its own right. Accordingly I would answer the question posed by counsel for the Commissioner (para. 3 above) in the negative.

Other Issues

18. The taxpayer company remained inactive until the year ended 30 June 1976. A ceased to be a shareholder/director (precise date unknown) with his place taken by one I and it was resolved in December 1975 to acquire a lease of land for the purpose of building retail shops and offices thereon. The 1977 return indicates the premises were completed during that year and resolutions in May and June 1977 show that a settlement was granted a lease of the first floor of the building (with option re ground floor when available) and that B and I Nominees Pty. Ltd. Trustee be appointed management agents for and collector of rents from tenants of the building.

19. In the 1977 return of income deductions were claimed in respect of overseas travelling expenses for B of $853. The trip was to span 27 June 1977 to 17 February 1978, to embrace U.K., Europe and U.S.A. and was in order ``to buy Bedford Adventura, to study and bring up to date on latest concepts and designs in building of multi-shop and office complexes, and management of Amusement centres''. A deduction was also claimed in relation to Investment allowance being 40% cost Bedford Adventura viz. $3,659. The 1978 return claimed a further $3,564 in respect of the overseas trip of B together with $2,678 depreciation ($389 allowed) on the Bedford, depreciation of $357 on a Mercedes Benz and $2,364 motor vehicle expenses. In respect of these various claims counsel for the taxpayer said he did not wish to address the Board thereon - when asked if they were still open he indicated they were but he did ``not wish to occupy the Board's time addressing you on them''.

20. With respect to the overseas trip B, his wife and their two children made the trip. The Bedford was acquired in the U.K. on their arrival to provide accommodation for the family on the trip - being shipped to U.S.A. for that purpose also and then brought to Australia (date of arrival unknown). A schedule purported to allocate the total expenditure between private, taxpayer company and the settlement (which conducted an amusement parlour in the premises it leased from the taxpayer - the taxpayer not being directly concerned with such activities) but, on the evidence, I am unable to accept it. Indeed having regard to the evidence as a whole I am unable to regard the trip as anything other than a family holiday albeit B did look at developments when such were run into. Even if I could accept some business purpose not even the total expenditure was established let alone an appropriate basis of apportionment thereof. It follows I would uphold the disallowance of the claimed amounts of $853 and $3,564.

21. Insofar as the investment allowance is concerned the evidence shows clearly that it was used overseas for the purpose of accommodating B and his family and

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accordingly it just as clearly does not meet the requirement that a unit be ``for use by the taxpayer wholly and exclusively (i) in Australia''. On that ground alone the claim has been correctly disallowed.

22. The claim for motor vehicle expenses relates to the use of the Bedford and in my view it stands or falls on the same basis as the other overseas travelling expenses. Depreciation on the Bedford is in the same category and I can see no reason to depart from the figure allowed by the Commissioner.

23. Turning to the final item this relates to depreciation on a Mercedes Benz. The evidence shows that I went overseas sometime in 1978, that he purchased the vehicle overseas and that in order to meet Customs requirements it was not shipped to Australia until 1979 or 1980. No evidence was led as to I's activities overseas and I am of the view that the requirements of sec. 54(1) have not been satisfied.

24. Overall it follows that I would reject each and every one of the claims under this heading.

Conclusion

25. For the reasons set out above I would:

• (a) reverse the Commissioner's decision on the taxpayer's objection to its assessment for the year ended 30 June 1973 (assessment to be adjusted to excise the amount of $25,946); and
• (b) uphold the Commissioner's decision on the taxpayer's objection to its assessment for the year ended 30 June 1978 and confirm the assessment for that year dated 21 December 1978.