CASE 30/93

Members:
KL Beddoe SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 23 July 1993

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KL Beddoe (Senior Member)

The applicant seeks review of objection decisions in respect of the years of income ended 30 June 1989 and 30 June 1990 whereby the applicant's claim that interest received in the relevant years of income was not assessable under sub-section 25(1) of the Income Tax Assessment Act 1936 (``the Act'') was disallowed.

2. Sub-section 25(1) of the Act provides that the assessable income of a taxpayer shall include, in the case of a resident, the gross income derived directly or indirectly from all sources, whether in or out of Australia. In the case of a non-resident it includes the gross income derived directly or indirectly from all sources in Australia. In the present case there was no dispute that the amounts in dispute as assessable income were derived in Australia. It was not suggested and could not be suggested that the amounts in dispute were exempt income.

3. Sub-section 51(1) relevantly provides that outgoings incurred in gaining or producing assessable income shall be allowable deductions except to the extent that they are outgoings of capital, of a capital nature, or of a private or domestic nature.

4. The dispute concerns the treatment of interest which was received on amounts of compensation for property resumed by the New South Wales Government National Parks and Wildlife Service (``NPWS''). The documents filed pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 were before the Tribunal and document T2 Folio 3 sets out the circumstances that form the background to the dispute:

"The taxpayer's sole place of residence was resumed by the National Parks and Wildlife Service (NPWS), by notice in the New South Wales Government Gazette (date deleted - s. 14ZZJ Taxation Administration Act 1953). The resumption was made in accordance with section 42 of the Public Works Act (1912).

Section 101 of the Public Works Act (1912) provides that the owners are entitled to compensation for the loss of their land and the taxpayer instituted proceedings in the NSW Land and Environment Court seeking a determination of the amounts of such compensation. The Court awarded him compensation of $359,500. This amount attracted statutory interest totalling $145,660.39 payable at the rates and as provided for in section 126A of the Public Works Act (1912).

The total entitlement was received by the taxpayer as follows:

     Date of Payment        Nature           Amount
     ---------------        ------           ------
                                             $

     13 July 1987           Compensation     100,800.00
     31 January 1989        Compensation      47,796.66
                            Interest          20,162.99
                            Interest          22,949.26
      7 August 1989         Compensation     210,903.34
                            Interest         102,548.14''
      

The applicant did not carry on a business on the property.

5. In the alternative (Transcript 4) should it be held that the applicant is liable to pay income tax on the interest paid on the compensation, the applicant claims as deductible pursuant to sub-section 51(1) of the Act the amount of $8,018 paid to Alliance Acceptance as interest incurred on a mortgage held over the relevant property during the period from the date of the notice of resumption (deleted - s. 14ZZJ) (Exhibit A) to the execution of the Deed of Release dated 7 August 1989 (T4 Folio 15).

6. Additionally and alternatively (Transcript 4) the applicant claims as deductible pursuant to sub-section 51(1) of the Act the cost of legal

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fees incurred in the relevant years of income in the pursuit of his claim for compensation. The amount incurred in legal fees, $52,947.39, is specified in the Notice of Objection dated 22 January 1991 (T8 Folio 26). The discrete amounts specific to each year are not available to the Tribunal though the applicant stated to the Tribunal that a substantial part of the total amount would have been incurred in the year 1988-1989 when the hearings in the Land and Environment Court took place (Transcript 5).

7. The facts of the matter and the amounts paid to the applicant are not in dispute. What is in contention is the character in law of the interest received and of the deductions claimed.

8. The applicant in sworn evidence to the Tribunal stated that after resumption of the land by notice in the NSW Government Gazette dated (deleted - s. 14ZZJ) (Exhibit A), the applicant claimed compensation on 7 March 1985. He stated that the NSW Government valued the property on 19 September 1986 (Transcript 11) and notified him by letter dated 16 October 1986 (Exhibit B) of the valuation assessed on the property. The letter, which is signed by the Director of National Parks and Wildlife Service, reads in part:

``The claim in respect of the combined interest of yourself and that of the mortgagee, Aliance [sic] Acceptance Co. Limited, in the land described in the schedule hereunder, has been valued at $112,000.00.

If this valuation is acceptable to both yourself and Alliance Acceptance Co. Limited, you might inform me to that effect, in order that I may instruct the State Crown Solicitor to proceed with completion of the matter.

You should note that, before any settlement of the matter can occur, both yourself and the Company will need to reach agreement as to your respective shares in the compensation moneys payable and provide an authority and direction as to payment executed by yourself and the mortgagee.''

9. The applicant further stated to the Tribunal that the land component of the property had been valued at zero (Transcript 11); that the land had been a perpetual lease that should have acquired freehold value since 1951 but that NPWS claimed on the basis of the Public Works Act that they were required to provide no compensation for the land. The applicant explained that it was on this basis that the parties had been in protracted legal dispute resulting in a Court of Appeal decision that the applicant should repay to the NSW Government the amount awarded by the Land and Environment Court to the applicant.

10. The applicant detailed the progress of the dispute and put into evidence an extract from the judgement of Bignold J in the Land and Environment Court (Exhibit C). In summary of Exhibit C, the matter first went before the Land and Environment Court in 1987 where a preliminary matter for determination was the applicability of section 124, (section 124 produced a higher value of the resumed land), or section 125 of the Public Works Act 1912. By an earlier judgement section 124 was determined to be the basis of compensation. Subsequently, in a further judgement, compensation was assessed in the sum of $359,500. This decision was appealed and the Court of Appeal allowed the appeal; set aside the judgement; declared that compensation was to be assessed pursuant to section 125 of the Public Works Act 1912 and remitted the matter to the Land and Environment Court for redetermination of the compensation. The Land and Environment Court, upon remission of the matter, concerned itself with the question of whether further evidence should be permitted to be adduced (Exhibit C p. 1).

11. The applicant stated to the Tribunal that NPWS made a further submission to that Court in October 1991 and that there has been no further decision as to the amount of compensation to which the applicant is entitled.

12. The applicant detailed the basis of the amounts that had been received by him (Transcript 14-15):

    * July 1987                 $100,800 represented an
                                advance payment for the
                                land and buildings;
                                calculated at 90% of the
                                valuation by NPWS.

    The applicant noted Transcript 14] that the
    payment date represented a period of two
    and a half years from the date of resumption
    during which period the NPWS was
    occupier of the


         relevant property
    * 31 January 1989           $47,796.66 together
                                with the previous
                                payment represented the
                                full value of the
                                dwelling and the
                                improvements. These
                                two amounts:
                                  $22,949.26)
                                  $20,162.99)
                                represented interest on
                                the advance payment
                                paid in July 1987.

    * 7 August 1989             $210,903.34
                                compensation;
                                $102,548.14 interest.
      

13. The applicant stated that the amounts of interest were determined in accordance with section 126A of the Public Works Act wherein interest was stipulated to be paid at the rate of 4% per annum; the rate of interest in subsequent years was to be stipulated by the Treasurer. The applicant estimated that the rate for subsequent years was 12.5%. The applicant stated to the Tribunal that it was his belief that he was not entitled to any of the compensation or interest payments (Transcript 18) consequent upon the Court of Appeal decision. The applicant also stated in evidence to the Tribunal that he was in actual receipt of the monies (Transcript 14, 17); that no monies received as a result of the original decision had been repaid by the applicant to the NSW Government (Transcript 30) and that the full amount had been transferred overseas (Transcript 17). There was no evidence put before the Tribunal which contradicted the applicant's statement as to the question of repayment.

14. The applicant also said in evidence that as a prerequisite to the settlement of the matter with the NPWS, the applicant negotiated the amount of interest to be paid to Alliance Acceptance Co. Limited for the intervening period between resumption and release on 7 August 1989. The applicant was inconsistent in his evidence as to when the mortgage of $100,000 and the negotiated interest component of $8,018 were paid out to Alliance Acceptance Co Limited. He stated that the payment occurred at some uncertain time after the Deed of Release (Transcript 17) despite the stipulation by the Director of NPWS (Exhibit B). Later in the hearing it was stated that the payment may even have been prior to the Deed of Release (Transcript 30). No documentation was adduced by the applicant to establish the date for the payment of the mortgage or the interest.

15. Under cross-examination from the respondent, the applicant admitted that while he had received no payment of costs from NPWS pursuant to the order for costs made in favour of the applicant by the Land and Environment Court at the conclusion of the initial determination, nevertheless this order had not been quashed (Transcript 23) in the decision of the Court of Appeal. The applicant stated that he understood the costs to be payable upon finalisation of the proceedings (Transcript 24). He also informed the Tribunal that he had not recovered any of the legal expenses from his legal representatives (Transcript 24).

16. The applicant was unable to identify the exact amount which he had paid in legal fees (Transcript 25) and was evasive when he was asked if he could supply a memorandum of costs and disbursements given by the solicitors; if he could recall when he paid legal fees; whether the amounts were paid before or after the applicant received the compensation; what funds the legal costs were paid from; if he could supply the documentation relating to the legal expenses held by the applicant's accountant (Transcript 24-28). The applicant did agree in reply to a question in cross-examination from the counsel for the respondent (Transcript 27) that it was possible the amount of $52,947 expended in legal fees had been recovered by the solicitors from NPWS.

17. The onus is on the applicant to establish that the subject assessments are excessive. In view of this onus, it is incumbent upon the taxpayer to produce any necessary documentation that will substantiate his claim. The Tribunal notes that in respect of the deduction claimed for legal expenses incurred by the applicant, the applicant produced no documentation that was fundamental to the substantiation of the claim such as a bill of costs from his legal representatives. A document filed in the registry after the hearing is inconclusive in this regard and this has not been taken into account.

18. The respondent submits that the respondent is entitled to treat as assessable income the statutory interest component of the sums paid to the taxpayer as compensation for the resumption of the relevant property. The

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respondent Commissioner further contends that this total sum was a debt owing to the taxpayer from the date of the resumption of the relevant property. It is contended that both the mortgage interest and the legal costs constitute private expenditure and are therefore not deductible under sub-section 51(1) of the Act.

19. In
Federal Wharf Co. Ltd. v D.F.C. of T. (1930) 1 ATD 70; (1930) 44 CLR 24 Rich J was concerned with the issue of interest on compensation payments for property compulsorily acquired. His Honour said at ATD 72-73; CLR 27:

``The true question is, whether sums received pursuant to s. 26 of the Harbors Act, 1913, are of a capital nature, or of an income nature. In considering this question, it is important to observe first that the sum is calculated and payable in respect of time; second, that the time in respect of which it is so calculated commences when the owner is deprived of the actual profitable enjoyment of his property by the entry of the Minister; third, that the period ends with the payment of the compensation which represents the capital of that property; and, fourth, that the interest is calculated upon the sum ascertained to represent the capital value of the property of which the owner has been deprived. It is true that s. 26 says that the interest is to be added to the amount of any compensation to be paid, but this statement manifests no intention that it shall be considered capital, whether as against the revenue or between life-tenant and remainderman, or for the purposes of the internal management of a company. Indeed, for the purposes of the Federal tax it would matter little if it did, for such an intention could not alter its true character. In truth s. 26 does little more than express in precise legislative form the rule established by
In re Piggott and the G.W.R. Company (18 C.D. 146) that an authority compulsorily acquiring land is in the position of a purchaser in the absence of statutory provision to the contrary, and must pay interest upon the compensation as if it were purchase money, from the date of possession until payment. It is quite clear that interest upon the balance of purchase money payable upon a sale of real property is income:
Hudson's Bay Co. v. Thew ([1919] 7 Tax Cas. 206). The observation made by Rowlatt J. at p. 217 in that case, that `If the vendors had collected the money and had been paid it, they would have invested it, and got interest, and that the purchaser has not paid it, and he therefore pays interest until he does pay it,' is a simple proposition which seems equally applicable to the payment of compensation. In my opinion, the character of the interest payable under s. 26 is that of recompense for loss of the use of capital during a period of time in which it would earn income. It represents the annual value of capital. It is paid because the owner has been deprived of a capital asset which he had and has not received the fund which is to be substituted for the capital asset. The interest is the flow of that fund. In my opinion it is income.''

20. This decision of the High Court is unchallenged authoritative precedent on treatment of interest paid on compensation for property compulsorily acquired. It is on all fours with the matter presently before the Tribunal. The test for the analysis of what the interest represents is not a subjective one derived from the state of mind of the taxpayer. Rather the tests applied in Federal Wharf Co. Ltd. as well as the analogous vendor and purchaser situation set out therein by Rich J in his judgement (supra) provide the correct interpretation of the interest component as income. There was evidence before the Tribunal that clearly differentiated between the compensation as a capital sum and statutory interest accrued on that amount (Exhibit C). The Tribunal is bound by this decision and, with respect, agrees with his Honour. Thus the Tribunal finds that the statutory interest paid on the capital amount of compensation is income for the purposes of sub-section 25(1) of the Act.

21. I turn now to the claimed deduction of the interest paid to Alliance Acceptance on the mortgage for the interim period from the date of resumption and the Deed of Release. The funds had been borrowed for the purchase of a private dwelling. The interest incurred in respect of those funds arose out of the mortgage contract formed between the applicant and the mortgagee. The property for which the funds were borrowed was the sole place of residence, a capital asset, for which the taxpayer received compensation. In
Associated Newspapers Ltd v FC of T (1938) 5 ATD 87 at 96; (1938) 61 CLR 337, at 363 Sir Owen Dixon analysed three

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matters to be considered in the characterisation of outgoings as revenue or capital:

``(1) the character of the advantage sought, and in this its lasting qualities may play a part, (2) the manner in which it is to be used, relied upon or enjoyed and in this and under the former head recurrence may play its part and (3) the means adopted to obtain it; that is by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment.''

22. The amount of $8,018 was part of a conventional payment in respect of the mortgage over the subject property and represented a mutually negotiated amount arrived at in view of the compulsory acquisition and the expected payment of compensation both of which made the mortgage otiose. The interest payment was at all relevant times of a domestic and private nature, excluded from deduction under sub-section 51(1). The Tribunal so finds.

23. In respect of the legal expenses incurred in the compensation dispute they were incurred in the preservation of a capital asset, as already dealt with supra. No evidence has been adduced by the taxpayer that would induce the Tribunal to construe the character of the legal expenses as coming within a positive limb of sub-section 51(1) of the Act. As already noted, it is the taxpayer who bears the onus of establishing the assessment as being excessive. In discharging this onus, the taxpayer must substantiate the claim. Relevant documentation has not been put into evidence for the Tribunal's consideration. The claim for legal expenses fails because the outgoings had the character of private or domestic outgoings and were not incurred for the purpose of gaining or producing assessable income.

24. The decisions under review will be affirmed.