North Coast Grazing Pty. Ltd. v. Federal Commissioner of Taxation.

Members:
Rogers J

Tribunal:
Supreme Court of New South Wales

Decision date: Judgment handed down 20 November 1986.

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Rogers J.

The taxpayer appeals against assessments issued in respect of a number of years income which bring it to tax in the sum of $275,607. There was also imposed penalty

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ATC 4847

of $174,359. The assessments in question relate to the years of income ended 30 June 1978 to 1984 inclusive. The assessments seek to bring to tax the surplus over costs realised on the disposal by the taxpayer of a property, Hearns Lake. The Commissioner asserts that the property was acquired by the taxpayer for the purpose of profit-making by sale, or from carrying on or carrying out of a profit-making scheme or undertaking within the terms of sec. 26(a) of the Income Tax Assessment Act, as it stood at the relevant time.

The taxpayer says that its purpose was completely different. It asserts that the properties in question, Hearns Lake and another property which I have included within it, and to which I will refer in a short while, were purchased as a good cattle property, with the ultimate aim of improving it, running cattle on it, and finishing up with a cattle stud. (See transcript pp. 7 and 8.)

In order to determine this conflict of fact it is necessary to look at the intentions of the two persons who stood behind the taxpayer at all relevant times. They were Messrs Newbould and Freeburn. The taxpayer company was incorporated by these two gentlemen on 19 February 1969. Mr Newbould says that he has a long history of involvement with cattle, that he saw this property, that he decided it would be suitable for the purposes for which he says it was purchased and which I have described a minute ago, and that he then set about effecting a purchase. He did not have sufficient finance available, so he imported into the transaction an acquaintance of his from the Nepean Rowing Club, who he thought had access to sufficient funds.

It is true, as Mr Newbould says, that he has had a long involvement with cattle. He was born on 8 February 1924. From about the age of 20 until about 1944 or 1946 he carried on a butcher's business at Silverdale near Warragamba Dam. In association with that business, he owned approximately 250 acres of land and, in addition, leased, according to his affidavit, 2000; according to the oral evidence, 5000 acres of land. On that totality of land he ran up to 150 head of cattle. After parting with the Silverdale land, he purchased 200 acres of land at Agnes Banks, between Penrith and Richmond, where up to 150 head of cattle were grazed. That business was sold in about 1963.

Thereafter he got involved in the sale of caravans. From 1960 he held a real estate agent's licence and carried on a business known as Campsie Real Estate.

In the context of his caravan-selling business he frequently toured the North Coast and became acquainted with a real estate agent there called Seccombe. Mr Seccombe drew his attention, he says, to an unimproved property near Woolgoolga which was called Hearns Lake, in the evidence given before me. This property it will be necessary to describe in a little detail in a moment. However, jumping ahead in the story for a moment, I did mention earlier that there was added to the property available to be sold by the taxpayer, being Hearns Lake, an adjoining property which was referred to in the evidence as the Moller property. That was purchased in about 1971 and according to the taxpayer was purchased because it was necessary to obtain shade for the cattle on the Hearns Lake property, and also to obtain an adequate source of water supply for them.

It is appropriate that I should now address the question of this Hearns Lake property which was, according to Mr Newbould, destined to become a stud cattle property. According to the evidence (pp. 24 et seq.) the average rainfall at Woolgoolga was about 60 inches a year. The feature that he said identified the property as suitable for the raising of cattle was the property nearby called The Banana Bowl. He was asked:

``Q. What about the subject property, what were the features of it that gave you the appearance of rendering it well suited for cattle production? - A. Same as any other property that is suitable for cattle.

Q. You were anxious to establish a cattle raising business, were you? - A. Yes.

Q. So you chose to buy some unfenced land, is that right? - A. It was partly fenced, it was fenced but it wasn't in good order.

Q. To all intents and purposes it lacked fencing? - A. Yes.

Q. And it was very heavily timbered? - A. Yes.

Q. And that is what made it to your mind attractive as a grazing property? - A. Yes, cleared.''

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ATC 4848

I interpose to explain that the submission was that the property was suitable for improvement, and was, by reason of its then state of improvement, suitable for clearing and therefore for future appreciation in value. I find no difficulty in accepting that proposition.

However, the land had some other attractions. It was immediately adjacent to the ocean, a factor Mr Newbould conceded was a neutral matter so far as its utilisation for cattle grazing was concerned. He did not think that the possibility of salt air might affect the pasture, and that only started to worry him when, the property having been cleared, the trees were killed.

So here is this man, experienced with cattle, who did not foresee the problem with the salt air affecting the development of the property, he says.

It is also noteworthy to mention that the property did not have an ample supply of water, notwithstanding an assertion to that effect in the minutes (exhibit O). Mr Newbould examined the property, he says, when he first saw it, and says:

``When I first saw it I thought there was (i.e. sufficient water), but it was full of mud, the dam. I didn't know that till we didn't get any rain for about three or four months.

Q. You are suggesting to us that there was not ample water on the property, yet when you acquired it you reported that there was ample water? - A. Yes, I thought there was ample water.

Q. You are now telling us that it so happened that there was not ample water? - A. No.''

(p. 27.)

I ask myself, rhetorically, is this the action of a man who intends, with his past background of cattle raising, to establish on the property a stud cattle activity?

Contrast that with the evidence that he gave further in cross-examination:

``One of the attractions of the property was that it was on the eastern side of the Pacific Highway, had a frontage to Hearns Lake, with attractive views, and had a proximity to the village of Woolgoolga.''

(p. 44).

Once again, one is tempted to think that these attractions might have more to do with the resale of the land for purposes other than as a stud cattle property.

At p. 48 counsel again addressed the question of inappropriateness of statements in the minutes (exhibit O) and asked:

``Q. And to speak of it as having pasture is not true, is it? - A. Not in the specific sense of pasture.

Q. And to talk about it having pasture growth which was good is not true? - A. Some parts of it, it was true. It was there, but not much of it.''

Further down:

``Q. How many cows and how many calves - how many bull calves, how many heifers, could this property, when developed, have carried? - A. Between 50 and 100 breeders.

Q. Did you make any such calculation at the time of your inspection of the property and prior to its purchase? - A. Not specifically, no.''

He was, he asserted graphically, going to ``fly by the seat of the pocket''.

I am not only not satisfied that Mr Newbould was telling me the truth; I am affirmatively satisfied that he was not telling me the truth. I do not think that he ever had the slightest intention of carrying on a cattle-raising property for any length of time. His intention at all times, in my view, was to resell this property at a profit, as indeed the taxpayer did.

I am most distrustful, as a general matter, of my ability to identify a person in the witness box as a person telling the truth or not, merely from the demeanour of the witness. However, in this case I do take that into account as supporting my conclusion that I cannot accept Mr Newbould in his assertion as to the purpose of the purchase of the property. Everyone of his actions, in my view, goes to deny the truth of the claim that he makes as to the reason for the purchase.

At p. 55 he was asked in re-examination:

``Q. Can you tell us what were the main attractions of Hearns Lake to you at the time the company purchased it? - A. The position on the Pacific Highway was the main attraction.''

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ATC 4849

Counsel for the taxpayer, in a valiant effort to salvage something from the wreck, sought to support the answer with the statement that it would be handy to identify the existence of a cattle stud property with a sign on the highway. Whilst I can admire the effort, I cannot accept the way that that answer is sought to be utilised. If I may say so, seeing that in this case we went to extremes of colloquialism, the answer was ``A dead give-away''.

Whether it was Mr Newbould whose intention is the relevant one, or Mr Freeburn, or both of them, does not seem to me to require resolution. That is because I do not accept Mr Freeburn any more than I accept Mr Newbould. Mr Freeburn was prepared to come along and lie, and he did that repeatedly. I do not customarily use this sort of language in a judgment, but equally I am not accustomed to people determined to come along to hoodwink me, and that is what I think Mr Freeburn was trying to do.

At p. 75 of the transcript, counsel cross-examining Mr Freeburn asked him:

``Q. Have you ever been overseas on business? - A. No.

Q. You are quite sure of that, are you? - A. Quite positive.''

He was then asked whether he had ever been to Hawaii on business; ``No'', he says, ``I have never been to Hawaii on business''.

Counsel for the Commissioner was obviously better prepared for the purposes of cross-examination than Mr Freeburn anticipated. After a while, Mr Freeburn recollected that, yes, he had been to Hawaii, and he there saw a Mr Kelvin, who was apparently an authority on canal development. It emerged (p. 94) that not only did Mr Freeburn go to Hawaii but he took with him aerial photographs and plans, inter alia, of the Hearns Lake property. When he was asked about that, he said, ``From what it says here, I took it (i.e. the photographs and the plans) with the purpose of interesting the party I saw to purchase it or become interested in it''(p. 94).

This is in 1971, before a head of cattle ever got near the pastures of Hearns Lake.

Mr Freeburn held his share in the taxpayer company on trust for another company, Burnley Pty. Ltd. The shareholders in that company were apparently Mr and Mrs Freeburn, and another family company and some persons who held shares on trust for the son of Mr and Mrs Freeburn. The only directors at all relevant time including the present, were Mr and Mrs Freeburn. The shares on issue were under 1,000, albeit of various classes. Then in 1972 there was an issue of shares to Ayer Rajah Estates Pty. Ltd., apparently a Singaporean company. This director/shareholder of the company could not tell me why he exercised his votes as a director to issue to this Singaporean company shares which made that company the owner of nine-tenths of the issued capital. He told me, with a straight face, that he does not know anything about the company, other than the fact that it had shares in Burnley. He said this to me, notwithstanding that his wife, to whom he is happily married, he tells me, and who sat in court throughout the hearing but did not go into the witness box, is a signatory to the cheque account of Ayer Rajah Estates Pty. Ltd. in Australia.

He was asked (p. 84):

``Q. When they (i.e., Ayer Rajah) took up shares in your company what consideration, if any, was received for them taking up those shares? - A. Moneys were borrowed overseas through my solicitor and as a result of those borrowings they took out shares in my company. Now, I can't amplify that any further, I am sorry, because I don't know.''

Mr Freeburn attempted to present himself as a ``dodderer''. He says that he is a good surveyor, but in other matters nobody tells him anything because, he says, he is a dodderer.

Not only was Mrs Freeburn not called, but Mr Ffrench, who was the solicitor involved with the activities of the taxpayer and Burnley Pty. Limited, who might have shed light not only on its inexplicable situation with Ayer Rajah but also on the preparation of the minutes (exhibit O) and who apparently was available was not called. The same applies to the accountant, Mr Green.

It would seem that Mr Freeburn, in addition to the acquisition of the Hearns Lake and the Moller properties, through various family companies has dealt in land to a very substantial extent. I see absolutely no reason in any of the evidence to consider that the dealing in this particular land, Hearns Lake, was any different in any shape or form from the other

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ATC 4850

activities. The fact that Mr Newbould was involved in the transaction tells me nothing. Mr Newbould, in his capacity as a shareholder of the taxpayer, was involved in the acquisition of a considerable number of other lots of land, which are conceded to have been purchased for the purposes of resale at a profit.

I should add, for the sake of completeness, that I do not consider the Moller block to stand in any different position from Hearns Lake. I think that it was all part and parcel of the same transaction and it was acquired because the taxpayer saw an opportunity of purchasing an adjoining block at a very good price. The facts are within a small compass, and mandate a conclusion that the taxpayer's purpose was not that which it seeks to assign to the transaction.

I mentioned earlier that the Commissioner has imposed penalties totalling $174,359. Mr Hill of Queen's Counsel has submitted that the penalties require to be set aside for two reasons: First, because, on its true construction and in the circumstances of the present case, sec. 226(2) of the Act, in the form it was at the relevant time did not permit the imposition of penalty tax. Alternatively he submitted that the Commissioner exercised his discretion wrongly in regard to the remission of the tax.

So far as the contention relation to sec. 226(2) is concerned, it is simplicity itself. The section provided for a penalty to be imposed in relation to any taxpayer who ``omits from his return any assessable income''. Mr Hill submitted that here the taxpayer did not ``omit'' assessable income. What it did was to inaccurately and incorrectly characterise it in the light of the findings which I have made. The taxpayer disclosed the proceeds of the Hearns Lake property but claimed it as a capital profit.

Mr Hill drew attention to what fell from the Full Court of the Federal Court in
F.C. of T. v. Rabinov & Anor 83 ATC 4437. At p. 4440 their Honours, referring to the advice of the Privy Council in Newton's case, said:

``The taxpayer was held liable to additional tax not because of failure to characterise an amount correctly but because of failure to include the amount in the return.''

Mr Hill drew from that support for the converse proposition, that where the defect in the taxpayer's return is a failure in correct characterisation, the section does not apply.

If I may say so without offence, I did not think that Mr Graham was quite ready to meet this submission, and I will reserve my decision on this, giving Mr Graham seven days to put in any written submissions, and Mr Hill seven days to reply. I will at the same time, when I deal with that question, deal with the submissions in regard to the exercise of discretion, and you can address that, too, in your written submissions.

I will reserve my decision on that aspect of the matter.