CASE 15/97

Members:
GL McDonald DP
DL Elsum M
WG McLean M

Tribunal:
Administrative Appeals Tribunal

Decision date: 13 March 1997

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GL McDonald (Deputy President), DL Elsum and WG McLean (Members)

This is an application to the Tribunal for review of a decision of the Deputy Commissioner of Taxation made on 10 November 1995 to disallow an objection dated 9 February 1995 against an amended assessment issued on 15 December 1994 in respect of the applicant's tax return for the financial year ended 30 June 1988. In the amended assessment the respondent included in the applicant's taxable income an amount of $707,622, being a net distribution of a profit from the R Family Trust.

2. At the hearing the applicant was represented by Mr P.K. Searle, of counsel, and the respondent was represented by Mr T. Murphy, of counsel. Mr R provided a statement with annexures and gave oral evidence. The respondent called Mr M. Phillips, a real estate agent whose firm had been involved in the negotiations for the sale and purchase of some of the several properties referred to in these proceedings. As well as the applicant's witness statement and the documents provided for the purposes of compliance of s. 37(1) of the Administrative Appeals Tribunal Act 1975 (the ``T'' documents), the Tribunal had before it a copy of a signed minute said to be a meeting of the directors of the R Family Security Trust held on 24 June 1988 and a contract note dated 13 August 1994 relating to the sale and purchase of Lot B X Street.

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3. The following provisions of the Income Tax Assessment Act 1936 (``the Act'') are relevant:

``25(1) The assessable income of a taxpayer shall include-

• (a) where the taxpayer is a resident - the gross income derived directly or indirectly from all sources whether in or out of Australia; and
• (b) where the taxpayer is a non- resident- the gross income derived directly or indirectly from all sources in Australia,

which is not exempt income, an amount to which section 26AC or 26AD applies or an eligible termination payment within the meaning of Subdivision AA."

" 25A(1) The assessable income of a taxpayer shall include profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit- making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme."

" 97(1) Where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate-

• (a) the assessable income of the beneficiary shall include-
  • (i) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; and
  • (ii) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia; and
• (b) the exempt income of the beneficiary shall include-
  • (i) so much of the individual interest of the beneficiary in the exempt income of the trust estate as is attributable to a period when the beneficiary was a resident; and
  • (ii) so much of the individual interest of the beneficiary in the exempt income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia,

except to the extent to which the exempt income to which that individual interest relates was taken into account in calculating the net income of the trust estate.''

4. The applicant is an engineer. He operates a business through his company IR Pty Ltd. He is chairman of the company. The company is the Trustee of his family trust (R Family Trust). In his witness statement he describes how he operates his business as follows:

``I learned that one way to make money in the building game was to bring together the lessee or occupier of the completed development, the seller of the land and the end purchaser or financier, with IR Pty Ltd as trustee for the R Family Trust undertaking building and project management tasks.''

5. Some background facts in this case are not in dispute. Early in 1981 the applicant was negotiating with Mr S, the manager, Southern District, D Pty Ltd. Mr S wanted to establish a new head office for D Pty Ltd. D Pty Ltd required 30,000 to 40,000 square feet of office space and parking for approximately 100 cars. In accordance with the policy outlined in paragraph 3 herein, the first step was to identify a suitable site. There were several possible sites available in the environs of Melbourne. A property facing a main street in Box Hill was suggested. That property was constituted by a number of contiguous lots, owned by S Pty Ltd and a subsidiary or associated company (together referred to as ``S Pty Ltd''). In order to construct a building in conformance with D Pty Ltd's requirements it was necessary to have the various lots constituting the property facing a main street in Box Hill rezoned, from light industrial, reserve light industrial/resident (``C'') to office zone. In order to achieve the rezoning required the applicant was requested by the town planner at the Box Hill City Council to conduct a survey of surrounding property owners, to see whether they would object to the rezoning. That survey covered properties in the adjoining street, X Street.

6. The applicant carried out the survey by visiting the properties. The surrounding owners, with the exception of the owner of Lot D X Street, either agreed to the proposal or were not able, because they could not apparently

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understand English, to communicate with the applicant in relation to the proposed rezoning. The resident who opposed the rezoning was an owner/occupier and did so, according to the applicant, on the basis that the Council had earlier refused her permission to build flats on her site and in the absence of the Council agreeing to her proposition she was not prepared to support the applicant's proposal. In order to overcome any opposition the applicant offered to purchase Lot D X Street for a price of $60,000. The owner apparently accepted that offer.

7. D Pty Ltd then accepted the applicant's proposition to develop the office building on the site facing a main road. There upon the applicant sought the consent of the Minister for Planning and the Planning Department to commence the rezoning process in the latter half of 1981, and entered into negotiations with S Pty Ltd for the purchase of the site. A contract nominating the purchaser as being IR Pty Ltd and/or its nominee was entered into. The contract was expressed to be conditional upon the rezoning occurring and building permits for the construction of an office block issuing. Included amongst the lots purchased was property at Lot A X Street. That property was also owned by S Pty Ltd, and was contiguous and to the rear of the properties owned by S Pty Ltd at this location. It was a residence apparently purchased with a view to provide future access to the property situated on a main road should rezoning occur. Initially the applicant told the Tribunal that it came as a bolt out of the blue to him when he learnt that the property in X Street was also to be included amongst those properties which he was purchasing from S Pty Ltd. Upon his attention being drawn to the letter from his then solicitors, of 17 June 1981 (annexure 9 to exh A), he agreed that he must have been notified about it at an early stage of the negotiations. The property at Lot A X Street was not the subject of the rezoning application lodged by the applicant for the D Pty Ltd site, and did not form part of the proposed office redevelopment. The property, which the applicant described as being in a run down state, was a residential property and was tenanted. The applicant said that, after it was acquired, he proposed to continue the tenancy. Annexure 15 to the applicant's witness statement is a tenancy agreement for the rent of Lot A X Street, dated 15 December 1981 for an amount of $60 per week for a period of 12 months with a right of review.

8. In the meantime, the applicant had arranged for the properties situated on a main road to be transferred to the ultimate owner who would be the landlord for D Pty Ltd. The property at Lot A X Street was to be retained in the name of IR Pty Ltd.

9. In December 1981 the rezoning permit was issued for the lots facing the main road in Box Hill and early in 1982 a different body was nominated to be the ultimate owner of the property from that originally proposed.

10. By letter dated 20 May 1982 (annexure 19 to the applicant's statement), the applicant received a letter from the Box Hill City Engineer relating to Lot A X Street. That property, along with Lot D X Street, formed part of that area which had been classified by the Council as an ``Investigation Area'' and in order to preserve a ready ability to extend the business area no permit for the building of flat or unit developments had been issued within such an area. It is plain from the policy adopted by the Council, which the letter notes as operating since 1976, that the area was at least contemplated as being required for future commercial development. The letter notified the applicant that the Council was proposing a statutory planning scheme, which would be available for public comment but which in the meantime would remain confidential. The letter emphasises that the decision made by the Council at that time was only to enable the scheme to be drawn up, and that a final decision on whether or not the land should be rezoned would be made after public exposure of the proposed changes and in light of comments made by both members of the public and other statutory authorities.

11. Settlement of Lot D X Street took placed on 15 October 1982 and in January 1993 the property was rented for $100 a week. The initial tenant was replaced by another tenant whom the applicant said remained for two to three years. Annexure 20 to the Applicant's statement (exhibit A), is an agreement for the rent of Lot D X Street with the first tenant. The applicant says he received the rent on behalf of IR Pty Ltd (exh A, para 25). The rental agreement does not mention who the owner is, and the rent is expressed to be payable to Mr R. There is no mention of the trust as being the owner.

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However there seems no doubt that the property was owned by or on behalf of the trust, and the Tribunal is satisfied that the actions carried out by Mr R on behalf of IR Pty Ltd were carried out in his capacity as Chairman of that company whilst the company was acting as trustee for the trust.

12. There was subsequent correspondence from the City of Box Hill concerning the investigation area. On 13 December 1983 the Box Hill Town Planner wrote to all X Street residents confirming the Council's request to have the land constituting the investigation area rezoned for office specialised industry.

13. In approximately August 1984 the applicant claimed to have received a request from an unrelated third party (a Mr G on behalf of G Pty Ltd) who already owned the property at Lot B X Street to exchange Lot C X Street for Lot A X Street. By this means each would have two contiguous lots which was the minimum requirement under the proposed planning scheme to allow office development to proceed. While the party who approached the applicant could have purchased Lot C, it was apparently understood that the Council would not have approved a development which left Lot A, which would have been left as a single isolated, undeveloped site. The applicant consented to the exchange on condition that it would cost him nothing. As annexure T26 to the applicant's statement shows Lot A X Street was contracted for sale on or about 13 August 1984 for $155,000 and paragraph 35 of his statement establishes that the transfer occurred on 19 April 1985. At the same time Lot C was purchased for $155,000 and placed into the applicant's name. Mr R told the Tribunal that he was pleased to acquire Lot C, which was in much better condition and for which he could charge a higher rent than was the case for Lot A.

14. The rezoning of the investigation land as carried out in accordance with the Council's proposal was completed on 13 November 1984. The applicant continued to receive rent from both Lot C and Lot D X Street properties. The applicant said that he use to collect the rent from each property by attending once a month and that the rent was paid in cash. He said that he had spent the cash. He also said that he could not be sure that the rent was returned as income of the trust, expressing the view that it would be inconsistent if it was not. Subsequently, planning permission was given for the developer who had purchased Lot A X Street, to develop the properties at Lot A to Lot B X Street as an office development.

15. The applicant states in paragraph 39 of his statement:

``Neither Lot C nor Lot D X Street were acquired with the intention of resale at a profit. My business philosophy is that I am not a seller and I try to hold on to things. However, in 1987 an offer was made for those properties which was too good to refuse. The offer was made by Mr B of [a real estate firm] who approached me and said he had a buyer and asked if I wanted to sell.''

On or about 8 May 1987 the properties were sold for $950,000.

16. T-8 and T-9 are the tax returns for Mr R and the R Family Trust respectively for the year ending 30 June 1988. While each of them are signed by Mr R neither of them is dated. Each bears a stamp from the Australian Taxation Office (``ATO'')with the date 9 May 1988. There is some uncertainty about the accuracy of that date stamp. It seems unlikely that the tax returns would be submitted prior to the end of the financial year and the Tribunal is satisfied that the date stamp from the ATO does not accurately represent the date on which the tax returns were filed. Contained amongst the supporting documentation filed with the tax return for the year ending 30 June 1988 on behalf of the R Family Trust is a document headed IR Pty Ltd. ``Minutes of the meeting of Directors held at the Registered office on 22 August 1988''. The minutes note that the directors are meeting in their capacity as trustees of the ``R Family Security Trust''. There are several other documents which also refer to the R Family Trust as being the ``R Family Security Trust''. Mr R told the Tribunal that the R Family Trust and the R Family Security Trust were one and the same entity. The Tribunal is satisfied that this is the case. The minute records a distribution of income as follows (T9, p. 23):

  ``The Second R Family Trust      $47,000
    IR                             $18,330
                                   -------
                                   $65,330''
                                   -------
      

The minutes note there was no other business discussed. The minute is unsigned although

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there is provision for signature by the Chairman.

17. Amongst the discoverable documents of the applicant under a similar heading and similarly constructed is a second minute of the meeting of Directors of the R Family Trust dated 24 June 1988 (exh 1). It records that the net income of the trust is to be distributed in the following way-

``The Second R Family Trust $47,000 and the remainder to IR''

Again there was no other item of business discussed and, on this occasion, the document is signed. Mr R acknowledged the signature appearing as being his signature. The latter minute was not returned with the trust tax return for the 1988 year. It is a matter of some importance to the determination of this case as to which of the abovementioned two minutes should be taken as representing how and when the trust income was distributed.

18. Contained in T-9 is the trading profit and loss statement for the period ending 30 June 1988 for the R Family Trust. It shows income from sales as being $574,037. The Tribunal accepts that figure as representing amounts obtained by the trust in the conducting of its business as outlined in paragraph 3 herein. Under the heading of ``other expenses'', which the Tribunal accepts should read ``other income'', three items are recorded the second of which is ``capital gain on disposal of fixed assets $863,935''. The latter figure records the profit from the sale of Lots C and D X Street. The total profit for the year for the trust is listed at $901,265 the balance sheet of the trust as at 30 June 1988, also set out in T-9, shows a distribution to beneficiaries of $37,330 and a transfer of the balance of the $901,265 (being $863,935) to capital profits reserve. As will be readily seen the distribution as set out in the balance sheet for 30 June 1988 of $37,330 does not accord with the distribution said to be affected as the result of the determination reached at the trustee's meeting of 22 August 1988. It is curious that the minutes of that meeting dated 22 August 1988 should be included in the tax return for the applicant for the year ending 30 June 1988 when the two do not seem to bear any correlation.

19. The applicant maintained that distribution could not occur until the end of the financial year (i.e. for the year ending 30 June distribution could not occur until on or after 1 July 1988), and that any purported distribution occurring prior to that date would neither accord with the terms of the trust deed (set out as annexure 1 to exh A), nor would it give rise to a ``present entitlement'' to income in the 1988 income tax year and consequently the applicant cannot be a beneficiary liable to pay tax under the provisions of s. 97(1) of the Act.

20. The trust deed is set out at Document 1 of the applicant's witness statement (exh A) and is dated 19 July 1995. A supplemental deed dated 8 August 1985 is not of any relevance to these proceedings. Clause 3(i) provides:

``3(i) THE Trustee shall in each accounting period... pay apply or set aside the whole or such part (if any) as it shall think fit of the net income of the Trust Fund of that accounting period to or for the benefit of... the Income Beneficiaries... in such manner as the Trustee in its absolute discretion and without being bound to assign any reason therefor shall think fit; any amounts set aside for any Income Beneficiary as aforesaid shall not form part of the Trust Fund as defined in Clause 1 (3) hereof but shall upon setting aside be thenceforth held by the Trustee as a separate trust fund on trust for such beneficiary absolutely....''

The word income is defined in clause 1(a) as follows:

```income' shall include any amounts which the Trustee shall in its absolute discretion determine to form income of the Trust Fund whether or not:-

• (a) such amounts constitute income for the purposes of the Income Tax Assessment Act (or any other legislation relating to taxation of any form) or not;
• (b) such amounts arise from investments or personal exertion;
• (c) such amounts constitute gains of a capital nature (which have accrued actually or notionally) for the purposes of any legislation relating to taxation of any form.''

The ``accounting period'' is defined in Clause 1(7) to be the twelve month period ending 30 June in each year. The ``income beneficiaries'' are nominated in the Schedule as the applicant, his wife and children. The trust deed provides that failure by the trustee to distribute the net income of the trust results in that income being held on behalf of the ``corpus beneficiaries''

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living as at 30th June for the year in which there is no distribution. The ``corpus beneficiaries'' are nominated in the Schedule to be the children of Mr and Mrs R. The latter category is stipulated and Mr R is not nominated as a corpus beneficiary. It follows, and the respondent accepts, that in accordance with the trust deed if no distribution of income was made by the trustee for the period ending 30 June 1988 then since Mr R was not a corpus beneficiary the assessment in as far as it relates to such a distribution would fail.

21. In his evidence to the Tribunal Mr R felt it was more likely than not that the minute of 24 June 1988 reflected the correct version, although he had no real recollection of the circumstances in which either minute arose. Having regard to the fact that the minute of 24 June 1988 is signed and, according to the evidence of Mr R is more likely to reflect the accurate position with respect to the trustees decision as to distribution of the income of the trust, the Tribunal accepts it as accurately reflecting the trustee's decision. Mr Searle argued that under the terms of the trust, and in law, if that minute was found by the Tribunal to record the decision of the trustee as to distribution, then it was ineffectual and should be disregarded. He pointed to the definition of ``accounting period'' contained in the trust deed and to general accounting principles to support an argument that no present entitlement could arise in the income of the trust until after the expiration of the financial year. The Tribunal is unable to accept this proposition. Clause 3(i) of the trust deed (quoted in paragraph 20 herein) provides that the trustee is to reach a determination in each accounting period and, upon the trustee reaching a decision of the amount determined, that sum is to be set aside as part of a separate trust. The Tribunal is satisfied that it was not only within the power of the trustee to determine the distribution prior to 30 June 1988 but that the trustee was obliged to do so in that period. Accordingly such a determination was competent.

22. Having reached that conclusion, the next question is whether or not the profit arising from the sale of Lot C and Lot D X Street is assessable income under the provisions of s. 25 and/or s. 26(a) of the Act. The applicant claims that the acquisitions of Lot C and Lot D X Street were undertaken without any intention of development or resale and for the purposes of receiving long term rental. Further, the applicant maintains that the sale did not arise in the ordinary course of the trust business nor as an incident of that business and that each of Lot C and Lot D X Street was not bought for purposes including resale.

23. On the other hand the respondent claims that the profit is assessable as income under s. 25 under ordinary concepts because it

``Arose in the ordinary course of the trust business.

Arose as an incident of the trust business.

Alternatively each block was bought for purposes which included the purpose of sale.

Alternatively number C [X Street] was purchased for the purpose of sale and number D [X Street] was committed to an income producing activity when number C was purchased.''

Alternatively the respondent claims that the profit is assessable under the provisions of s. 26(a) of the Act.

Consideration

24. In the leading case of
FC of T v The Myer Emporium Ltd 87 ATC 4363; (1986-1987) 163 CLR 199, the High Court held that a profit or gain arising from an isolated commercial or business transaction will be regarded as income if the intention or purpose of the taxpayer, in entering into the transaction, was to make a profit, even though the relevant transaction was not part of the taxpayer's normal daily business activities. It is clear, however, that the decision of the High Court does not stand for the proposition that every profit or gain that is made will be regarded as assessable income. The important issue is whether the taxpayer had a purpose or intention to make profit in respect of the particular operation or transaction:
Westfield Ltd v FC of T 91 ATC 4234; (1991) 99 ALR 510. The Tribunal is satisfied, having regard to Mr R's evidence, that such an intention was present when the relevant transactions were entered into.

25. Having listened carefully to Mr R's evidence, the Tribunal is satisfied that Lot A X Street was acquired as part of the purchase of the properties bought from S Pty Ltd. It was incidentally acquired as part of the property needed by the trust for purposes of the development to be carried out on the behalf of D Pty Ltd. It was not suggested that Lot A X

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Street was purchased as part of a plan embarked on behalf of the trust to acquire rental properties either as part of, or in order, to commence the development of a portfolio of rental properties. The commendable frankness with which the applicant gave evidence leaves the Tribunal satisfied that the business conducted by the trust is that of a ``deal maker'', and that the property at Lot A arose as part of that deal making.

26. The trust acquired the property at Lot D X Street to ensure that there was no opposition to the development of the D Pty Ltd complex. There was no evidence to suggest - nor did Mr R attempt to suggest - that the purchase of Lot D X Street was carried out as part of the trust development of a rental property portfolio. The purchase was perceived by him as being necessary in order to achieve the major objective, viz, approval for the rezoning of the D Pty Ltd development site by the removal of a property owner who had a right to object and who would be likely to object to the rezoning. The Tribunal is satisfied the purchase arose as part of the trust's major business activity.

27. Prior to the time of purchase and arising out of his need to undertake the purchase, Mr R was aware that Lot D X Street formed part of the Box Hill investigation area, and that that area may at some stage be subject to rezoning, and also that rezoning would considerably enhance the value of the property. By virtue of the letters from the Box Hill City Council commencing on 20 May 1982 (see exh A, doc 19) Mr R was aware that the Box Hill Council was moving in favour of rezoning of the investigation area properties to become part of the Box Hill business area. The Tribunal is satisfied that the applicant was approached by Mr G to exchange number Lot A for Lot C X Street, so that Mr G would have contiguous land (he already owned Lot B X Street) required before there could be approval for redevelopment. The Tribunal accepts that Mr G could not purchase Lot C X Street and redevelop it with Lot B X Street, because to do so would leave Lot A X Street isolated and unavailable for development because it, apparently, does not abut any other adjoining lot other than Lot B X Street. The exchange carried out, at no cost to the applicant, also gave the applicant a site which could, once rezoning occurred, be redeveloped. The exchange was subject to that rezoning occurring. The Tribunal is satisfied that the exchange should be viewed as part of the ``deal making'' aspect of the trust's business. The fact that Lot C X Street led to a higher rent being paid than was the case with Lot A is, in the Tribunal's view, an insignificant factor, and it is clear from Mr R's evidence that the receipt of rent was not considered the main stay of the trust's business activity - to the extent that he could not positively recall whether or not the rent, which he collected in cash, was returned in the trust's income tax returns for the relevant year. Certainly there was no evidence produced by the applicant to indicate the income earned as the result of rental received was returned as part of the trust's income. It follows that the Tribunal is satisfied that the applicant's acquisition of both Lot D and Lot C X Street arose as an incident to the trust's deal making business, and not as part of a strategy of the trust to acquire property for long term rental investment purposes. In reaching its decision the Tribunal has considered that, during the period in which the properties were owned by the trust (approximately three years), no attempt had been made to market them. That consideration, in the view of the Tribunal, relates to the time at which the trust determines is the most appropriate to consider disposal, rather than it relating to a decision on the part of the trust to retain the properties for long term rental investment purposes. Accordingly, the profit from the sale of the properties is taxable as income under the provisions of s. 25(1) of the Act.

28. It follows from the conclusions reached by the Tribunal that, under the provisions of s. 97 of the Act, the whole of the net income of the trust estate, in excess of $47,000, is assessable to Mr R. Since the Tribunal has found that the net income of the trust estate is the same as the trust income, and that it is assessable under the provisions of s. 25(1). The issue of apportionment, addressed by the Federal Court in
Davis & Anor v FC of T 89 ATC 4377, particularly at 4403 per Hill J, does not arise for consideration.

29. The Tribunal notes that no culpability penalty has been imposed, and believes this to be correct.

30. Accordingly, the decision under review is affirmed.