CJ Bannon QC
Administrative Appeals Tribunal
C.J. Bannon Q.C. (Deputy President)
These applications for review concern two assessments of tax issued on 23 April 1987, for the taxation year ending 30 June 1986. The applicants are husband and wife, and the applications were, by consent, heard together. The taxpayers duly lodged notices of objection to the assessments. The assessments and the notices of objection were in identical terms.
When the matters came before the Tribunal, I informed the parties that in view of the recent decision of the Federal Court in
Fletcher & Ors v. F.C. of T., 88 ATC 4834. 14 October 1988, the lack of any proper system of pleading in this Tribunal, and the uncertainty arising from the difference between issues raised in objections and in the Commissioner's reasons for disallowing objections on the one hand and the issues argued by the parties in argument on the other hand, I had in mind, in future, requiring some statement of issues to be produced at the commencement of hearing of each taxation matter.
In these applications, any difficulty was overcome by the agreement of the parties that the matters in issue were spelled out in the bundle of correspondence which became Exhibit E. I also granted leave to the objectors to raise the fresh ground of objection foreshadowed in the letter dated 28 November 1988, part of Exhibit E.
As the hearing progressed, it became obvious that the taxpayers had good prospects of making out a case under sec. 26AB(4) of the Income Tax Assessment Act 1936 (Cth) (``the Act''). Ultimately, and properly in my opinion (see Parsons: Income Taxation in Australia para. 2.305), learned senior counsel on behalf of the Commissioner of Taxation (``the Commissioner'') abandoned reliance on sec. 25 and 26AB of the Act to support the assessments, and relied solely upon the provisions of Pt IIIA of the Act, bearing in mind, of course, that the onus of upsetting the assessments lay on the taxpayers.
The taxpayers owned a large block of land on which a motor garage and petrol service station was conducted, together with a branch post office, a banking agency and a store which conducted a newsagency and milk bar. The taxpayers subdivided the land, building a cottage for themselves in about 1977/1978 on one block and remodelling the service station on the other block, at a cost of over $350,000. It was agreed that the subdivision was effected before the coming into force of Pt IIIA of the Act.
A discretionary family trust for the taxpayers and their family was established by deed of 30 June 1980 (Exhibit J). The trustee appointed was a company, the shareholders and directors of which were the taxpayers. The trustee took over the business conducted on the service station site on 30 June 1980, but the land remained registered in the names of the taxpayers as proprietors.
The taxpayers fell into financial difficulties, the business activities not providing sufficient funds to meet the debt to the bank, arising from the remodelling of the service station which was completed in 1985. The taxpayers discussed various proposals to sell or lease the business (e.g. Exhibit M), but eventually settled for a deal with a large petrol company. Negotiations took place through the taxpayers' solicitor. At one stage there was a proposal for selling the goodwill of the business conducted by the trustee company (Exhibit N), but that was not done.
The final arrangements concerning the business were set out in a letter dated 11 February 1986 from the petrol company (Exhibit O). It is clear from that letter that the trustee company received no payment for goodwill of the business. It did receive payment for its shop supplies, fittings and equipment, and also for fuel supplies. The trustee company was to retain the newsagency, later moved elsewhere. The post office and banking agencies had already been removed from the site. The petrol company's incoming tenant was to give the trustee company a monthly lease of the mechanical workshop on the site. Other minor features are not outlined here. Importantly, the letter states that the terms and conditions of the headlease of the property to the petrol company have been finalised, and are set out in previous correspondence.
The negotiation of the headlease was between the solicitors for both parties. The correspondence concerning it became Exhibit L. It provided for a licence agreement to enable the taxpayers to continue to operate the newsagency (Exhibit Q). Most importantly, letters dated 14 January 1986, 19 February 1986 and 13 March 1986 from Messrs Sly & Russell to the taxpayers' solicitor confirm that the petrol company agreed to pay a premium in consideration of the grant of a lease to it of the service station site, in the sum of $200,000. A photostat copy of the lease became Exhibit P. There is no mention of the premium in the lease itself. There is absolutely no reason to regard the $200,000 subsequently paid as other than a true premium. The solicitors involved chose appropriate legal terminology to express the parties' intentions and I am unable to accept the submission made to me on behalf of the taxpayers that the payment included a component for goodwill. It appears to me the opposite is true. Having toyed with the idea of selling goodwill, it was decided to go about the transactions by another path. The cheque for the premium was made out to the family trust company and banked on or about 13 March 1986. In my view, this is of no consequence. The premium was due to the taxpayers, not to their trustee company. This was simply a matter of arrangement between the solicitors. The cheque was used to reduce the loan with the bank, and it is not to the point whether the loan account with the bank was in the name of the trustee company or in the names of the taxpayers, or possibly both.
Mr Eager, solicitor for the taxpayers, then argued that the premium was not caught by Pt IIIA of the Act as a capital gain. He pointed out
ATC 189that Pt IIIA was introduced by Act No. 52 of 1986, assented to on 24 June 1986. Mr Eager submitted the policy of the law is to lean against retrospectivity and in the case of ambiguity to lean against any interpretation imposing tax on the subject. The provisions of Pt IIIA of the Act, principally in issue, are sec. 160L(1); 160N(1), (2) and (6); 160ZO and 160ZS(1). These are set out hereunder:
``160L(1) Subject to this section, this Part applies in respect of every disposal on or after 20 September 1985 of an asset, whether situated in Australia or elsewhere, that -
- (a) immediately before the disposal took place, was owned by -
- (i) a person (not being a person in the capacity of a trustee) who was a resident of Australia; or
- (ii) a person in the capacity of a trustee of a resident trust estate or of a resident unit trust; and
- (b) was acquired by that person on or after 20 September 1985.
160M(1) Subject to this Part, where a change has occurred in the ownership of an asset, the change shall be deemed, for the purposes of this Part, to have effected a disposal of the asset by the person who owned it immediately before the change and an acquisition of the asset by the person who owned it immediately after the change.
(2) A reference in sub-section (1) to a change in the ownership of an asset is a reference to a change that has occurred in any way, including any of the following ways:
- (a) by the execution of an instrument;
- (b) by the entering into of a transaction;
- (c) by the transmission of the asset by operation of law;
- (d) by the delivery of the asset;
- (e) by the doing of any other act or thing;
- (f) by the occurrence of any event.
(6) A disposal of an asset that did not exist (either by itself or as part of another asset) before the disposal, but is created by the disposal, constitutes a disposal of the asset for the purposes of this Part, but the person who so disposes of the asset shall be deemed not to have paid or given any consideration, or incurred any costs or expenditure, referred to in paragraph 160ZH(1)(a), (b), (c) or (d), (2)(a), (b), (c) or (d) or (3)(a), (b), (c) or (d) in respect of the asset.
160ZO(1) Where a net capital gain accrued to a taxpayer in respect of the year of income, the assessable income of the taxpayer of the year of income includes that net capital gain.
(2) A net capital loss that was incurred by a taxpayer in respect of a year of income shall be taken into account in accordance with section 160ZC but is not otherwise allowable to the taxpayer as a deduction under this Act in respect of any year of income.
160ZS(1) For the purposes of this Part, the grant of a lease of property shall not be taken to constitute the disposal of part of the property but shall be deemed to constitute the disposal by the lessor to the lessee of an asset (that is to say, the lease) created by the lessor for a consideration equal to the premium paid or payable for the grant of the lease.''
On behalf of the taxpayers, Mr Eager submitted that sec. 160ZS(1) of the Act was intended to operate prospectively from the date of assent. I am unable to accept that proposition. Section 160ZS, in my view, is an interpretative provision, operating for the purposes of Pt IIIA on all transactions and dealings giving rise to a capital gain which are caught by the legislation. As submitted by senior counsel for the Commissioner, the starting point for consideration in relation to capital gains is sec. 160Z of the Act, and it deals with dispositions of assets during the year of income. Section 160L of the Act makes it plain that Pt IIIA applies in respect of every disposal on or after 20 September 1985. Section 160M(6) treats disposal of an asset created by the disposal as being a disposal of an asset for the purposes of Pt IIIA and sec. 160ZS deals specifically with disposal by the grant of a lease, deeming the grant of the lease to constitute disposal of an asset, namely the lease, for a consideration equal to the premium paid or payable for the grant of the lease.
With some misgiving as to relevance, I allowed Mr Eager to tender the Treasurer's statement of 20 September 1985 as evidence (Exhibit S). Mr Eager claimed that the interpretation I have placed on sec. 160ZS is inconsistent with the Honourable the Treasurer's statement, in which he said the application of capital gains tax would be prospective only from that date. With all respect. I do not see any inconsistency. Section 160ZS, in my view, is a deeming provision for the purposes of Pt IIIA. It is not to the point to claim that the granting of a lease would not constitute a disposition of the property, when sec. 160ZS deems it to be the disposal of a new asset provides the mechanism for quantifying the value of the disposition. Mr Hill Q.C., pointed out that Mr Eager's argument would involve treating other provisions of the Act as having a prospective operation only, which he said was not probable. He referred to sec. 160ZU and 160ZW as examples. Mr Hill referred to other definition sections which he said would be in similar plight to sec. 160ZS if Mr Eager be correct. These include sec. 160N and 160R of the Act. Mr Hill gave other examples as well, but those given suffice, in my opinion, to lead me to prefer the interpretation of sec. 160ZS, which makes it work as and from 20 September 1985 and not only from the date of assent on 24 June 1986.
As I have previously indicated, this is a difficult case. The taxpayer and his wife appeared to me to be hardworking Australian citizens who were in financial difficulties. The legal choice of the designation of the payment of $200,000 has contributed to their problem, coupled with the pressing need to reduce overdraft obligations. It is to be noticed that some attempt at settlement of this matter was made as per letter of 28 November 1988 from Mr Eager to the Australian Government Solicitor, part of Exhibit E. There is no element of tax avoidance in this case, only conflict with a new law.
It is with regret that I reach the conclusion that the objection decisions under review be affirmed, and the objections to the assessments dismissed.
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