CASE 4/99

Members:
BH Burns DP

Tribunal:
Administrative Appeals Tribunal

Decision date: 31 March 1999

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BH Burns (Deputy President)

These applications concern the question of whether Part IIIA of the Income Tax Assessment Act 1936 (``the Act'') relating to capital gains tax

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applies to an asset in the form of real property acquired by the taxpayers in 1985 and disposed of in the financial years ending 30 June 1989 and 1990. Specifically, the question relates to when the property under consideration (``the asset'') was acquired by the taxpayers. If it is found, pursuant to the Act, that the asset was acquired prior to 20 September 1985, the asset will be exempt from the capital gains tax provisions whereas if the acquisition is found to have occurred on or after that date, it will fall subject to Part IIIA of the Act (s 160L).

2. By way of the history of the matter, on 23 August 1993, the Commissioner of Taxation (``the Commissioner'') issued amended assessments for the income years ended 30 June 1989, 1990 and 1991. On 21 October 1993, the taxpayers lodged objections to the relevant assessments which were disallowed by the Commissioner on 22 August 1994. Subsequently, on 4 December 1995, applications for review of the Commissioner's decisions to disallow the objections were made to the Tribunal.

3. Before the Tribunal at first instance, there was some narrowing of the issues in dispute between the parties. The decision to disallow the objection relating to the year ended 30 June 1991 was no longer in dispute and the issues were confined to the years ended 30 June 1989 (``the 1989 year'') and 30 June 1990 (``the 1990 year''). In particular, the dispute was as to whether capital gains of $48,637 should be included in each of the taxpayers' assessable incomes for the 1989 year and whether capital gains of $39,227 should be so included in the 1990 year. Penalties imposed by the respondent were also in dispute.

4. At first instance, a differently constituted Tribunal found that the time of acquisition of the asset was at the time of the making of an enforceable and binding contract which was 31 October 1985 (Re: AT95/25-27 & AT95/28-31 and Commissioner of Taxation, AAT 10911, 6 May 1996 [reported at Case 34/96,
96 ATC 374]). Pursuant to s 44(1) of the Administrative Appeals Tribunal Act 1975, an appeal was taken to the Federal Court on questions of law from the Tribunal's decision. The appeal was allowed by Finn J (25 February 1998, 240/1998) [reported at 98 ATC 4306]. Pursuant to the orders made by Finn J, the matter was remitted to the Tribunal to be heard and decided again.

5. At the re-hearing of the matter, the taxpayers were represented by Mr Moore and the Commissioner was represented by Mr Erskine, both of counsel.

Background facts and legislation

6. Part IIIA of the Act provides for net capital gains to be included in assessable income (s 160ZO). In very general terms, net capital gains are deemed to have accrued where the amount received after disposal of an asset exceeds the indexed cost base to the taxpayer in respect of the asset (s 160Z). Importantly though, assets which were acquired prior to 20 September 1985 are exempt from Part IIIA of the Act by virtue of s 160L(1) which, relevantly, reads as follows:

``Part applies in respect of disposal of assets

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 or not situated anywhere, 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.

...''

7. Throughout these proceedings, there has been much by way of background facts and issues which have been agreed between the parties. It was not in dispute that the subject property, a coastal property in New South Wales comprising a residence on some 40 acres, was an asset for the purposes of the Act. The subject property was originally purchased for $200,000 by the taxpayers from a Mrs. R and an Agreement for Sale of Land (``the written contract'') in relation to the asset was drawn up and dated the 13th September 1985. It was also not in dispute that the property was subdivided into two separate lots, each constituting an asset owned by the taxpayers immediately prior to disposal by them. Further, it was agreed that each asset disposal took place on or after 20 September 1985, namely, the first

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being a parcel of land sold for $195,000 in November 1988 and the second being the remainder of the land and residence which sold for $405,000 in March 1990. The sole issue in dispute between the parties for the purposes of the Act is as to the date of acquisition of the subject property by the taxpayers.

8. Section 160U prescribes the time at which, for the purposes of Part IIIA of the Act, a disposal and acquisition of an asset occurs or is deemed to have occurred. It was agreed that the subject property was acquired by the taxpayers under a contract of sale meaning s 160U(3) is applicable. Relevantly, s 160U provides:

``Time of disposal and acquistion

160U(1) Subject to the provisions of this Part other than this section, where an asset has been acquired or disposed of, the time of acquisition or disposal for the purposes of this Part shall be ascertained in accordance with this section.

160U(2) If the time of acquisition or disposal as ascertained under a subsection of this section is different from the time of acquisition or disposal as ascertained under a subsequent subsection of this section, the time of acquisition or disposal shall be taken to have been the time of acquisition or disposal as ascertained under that subsequent subsection.

160U(3) Where the asset was acquired or disposed of under a contract, the time of acquisition or disposal shall be taken to have been the time of the making of the contract.''

The original decision of the Tribunal

9. The Tribunal, originally constituted, heard evidence from the male taxpayer who spoke on behalf of he and his wife. He gave evidence that he had know Mrs R, the vendor, and her husband since 1978 as customers of his garage. The male taxpayer said that some twelve to eighteen months before he offered to buy the property, he had become aware that the property was on the market as Mr R had died and Mrs R's health was failing. He said that in September 1985, he learned that the asking price was around $250,000 but that there had been no suitable offers. He gave evidence that a conversation took place a few days to a week before 13 September 1985 and he offered to buy the property for $200,000 which Mrs R accepted. The male taxpayer's evidence was that he and his wife intended to live there. He said that although he was aware of the potential for subdivision of the property, he was not aware of the possible introduction of capital gains tax at the time he agreed to purchase the property.

10. According to the male taxpayer, the agreement was that the contract for sale was always intended by the parties to take effect from 13 September 1985 which was the date Mrs R said the written contract would be forwarded to his solicitors. A contract of sale was sent from the vendor's solicitor to the taxpayers' solicitor under cover of letter dated 13 September 1985. Negotiations and correspondence between solicitors then ensued as to four outstanding matters, namely, the establishment of boundaries, the making of further inquiries in relation to an access road into the property, agreement as to furniture and fittings, and the amount of deposit to be paid on exchange of contracts. The male taxpayer gave evidence before the Tribunal that regardless of the outcome of ongoing negotiations as to fittings and furniture, access, boundaries and the like, given the agreed price he would have gone ahead with the purchase of the property. Under cover of letter dated 18 October 1985, the amended contract, signed and dated 13 September 1985, was forwarded from the taxpayers' solicitor to the vendor's solicitor with a cheque for the deposit together with the following instruction:

``... you are to date the original contract the same date of the 13th September 1985.''

The male taxpayer insisted this was consistent with the intention of he and Mrs R that the contract take effect from that date. The vendor's solicitor returned the original contract signed and dated 13 September 1985 under cover of letter dated 31 October 1985. Settlement ensued, and the taxpayers took possession of the property until it was subdivided and sold.

11. The Tribunal at first instance also heard evidence from a Mr. Kovic who gave evidence on behalf of the respondent as to the appropriateness of the penalties imposed.

12. In brief, the taxpayers submitted that they had entered into an oral agreement with Mrs R to purchase the property for $200,000 some days prior to 13 September 1985 that had come into effect on that date. The respondent, on the

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other hand, submitted that the circumstances surrounding the sale constituted a process of negotiation which culminated in the formal exchange of contracts on 31 October 1985 when it could be said that a contract had been concluded.

13. The Tribunal at first instance was not impressed with the evidence of the male taxpayer which it found to be vague, imprecise and inconsistent with the contemporaneous documentation. It preferred to rely on documentation, namely, the solicitors' files which the Tribunal found distinctly lacking in support of the applicants' assertion ``that the contract was to come into effect on the contract being reduced to writing on 13 September 1985.'' On the evidence before it, the Tribunal could find no significance for the date 13 September 1985 other than that this was the date on which, according to the male taxpayer, the vendor agreed to make her part of the contract available to his solicitors. The Tribunal gave weight to the fact that the letter from the vendor's solicitor dated 13 September 1985 stated that ``no legal liability shall attach to either party until such time as an exchange [of contracts] has been affected.'' The Tribunal indicated that this was important in so far as it indicated an intention not to create legal relations which was essential for the formation of a contract. Further, the Tribunal considered that the taxpayers were advised that risk over the property would run from 31 October 1985 and that they took out insurance as from this date, not 13 September.

14. The Tribunal, applying a decision of the Tribunal in Case 13/95,
[95 ATC 183], considered that ``contract'' in the context of s 160U(3) should be read to mean ``an enforceable contract''. The Tribunal, being satisfied that there were ongoing negotiations as to the precise terms of the contract, found that there was not sufficient consensus by 20 September 1985 for there to have been an enforceable contract. Rather, the Tribunal found that it wasn't until exchange was effected on 31 October 1985 that there was sufficient consensus for it to be said that there was an enforceable contract. The Tribunal accordingly found that the taxpayers could not be said to have acquired the property under contract of sale prior to 20 September 1985, and that the assessed capital gains tax was payable by both taxpayers.

Decision of the Federal Court

15. The issue in dispute on appeal was a narrow one. In short, the taxpayers challenged the requirement that a contract for the purposes of s 160U(3) must be ``legally binding and enforceable''. They did so as pursuant to s 54A of the Conveyancing Act 1919 NSW, there could never be said to have been a legally binding and enforceable contract prior to 20 September 1985. Finn J, allowing the appeal, concluded the following on the question of formation of a contract:

``For my own part, against the premise of the subsection, I can see no reason for requiring that the contract have any attributes other than those prescribed by the common law for the formation of a contract. Nor can I see any reason for ascribing a date to the making of such a contract other than the date that would be ascribed to it at common law.

The immediate consequence of this view is that the contract in question may be unenforceable - or even illegal: see
Singh v Ali [1960] AC 167 - at the time of its making. But if it is carried into effect with a consequential disposition of an asset, then s 160U(3) applies to the unenforceable contract so made. I merely note that if such a contract is not carried into effect then, the premise of s 160U(3) not having been satisfied, no question of its application can arise.''

Clearly, Finn J took a different view of the meaning of s 160U(3) of the Act to that taken by the Tribunal at first instance. His Honour then considered whether the error of law on the part of the Tribunal could have affected the outcome of the Tribunal's decision and found that it could. His Honour was wary of ``the possibility that the facts were marshalled and evaluated through the prism of the test of `contract' adopted'', ie. the conveyancer's contract. The matter was thus remitted to be heard and decided again.

Evidence before this Tribunal

16. The Tribunal indicated at the beginning of the re-hearing of the matter that, in the absence of relevant directions from the Federal Court, it would accord to both parties the opportunity to place further evidence before the Tribunal. In addition to the documents ordinarily lodged pursuant to s 37 of the

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Administrative Appeals Tribunal Act 1975, the Tribunal had before it the Federal Court Appeal Book which contained transcript of the original Tribunal hearing together with the other relevant documentary material for the purposes of the original Tribunal decision (Exhibit A1). The Tribunal also had before it the original solicitors' files relating to the conveyancing transaction of the subject property in 1985. In addition to the documentary material placed before it, the Tribunal heard oral evidence from Mr B, solicitor acting on behalf of the taxpayers (purchasers) in the subject transaction, and Mr P, solicitor acting on behalf of Mrs R (now deceased)(the vendor). Neither solicitor was called to give oral evidence at the original Tribunal hearing. On the re-hearing of this matter, the Tribunal heard oral evidence from the male taxpayer who had given evidence on behalf of he and his wife at the original hearing.

17. Mr B gave evidence that as at September 1985, he had acted for the male taxpayer in a number of conveyancing matters and that the male taxpayer was well known to him. Mr B said his firm received initial instructions from the male taxpayer on 12 September 1985. A handwritten note was produced from his file which he claimed was written by one of his secretaries which recorded a conversation with the male taxpayer. The note recorded the following particulars:

``12-9-85

..........[Male Taxpayer]

Private purchase

re - Pur of [subject property]

........................

Vend:.......[Mrs R]

...

Sol:........[Mr P]

...

$200,000-00 purchase price

...''

18. Mr B's evidence was that the next contact his firm had with the male taxpayer was on 18 September 1985. He referred to a second handwritten note on file recording a conversation between the male taxpayer and another of his secretaries regarding the possibility of a deposit of less than 10 per cent being paid. 18 September 1985 was also the date on which a letter from Mr P, solicitor acting for Mrs R, dated 13 September 1985 was received by Mr B which read as follows:

``RE:... [Mrs R] SALE TO... [Taxpayers]

We act for the vendor in the above matter and we are instructed that you act for the purchasers.

We enclose herewith Contract for Sale for your clients' perusal and approval and if approved with a view to an early exchange. Kindly note that no legal liability shall attach to either party until such time as an exchange has been effected.

We have applied for a 149 certificate from Shoalhaven City Council and shall forward the same on to you as soon as it is to hand.''

Mr B gave evidence that until 18 September 1985, he had still yet to speak to the male taxpayer personally. His file was opened on 19 September 1985.

19. Mr B said that pursuant to the second handwritten note recording the male taxpayer's desire to pay less than the usual amount by way of deposit, he wrote to the vendor's solicitors by letter dated 19 September 1985 which read as follows:

``...

Thank you for your letter of the 13th September and the enclosed contract.

Our clients are asking whether your client would be prepared to accept a 5% deposit of $10,000-00 instead of the normal 10%. Of course this would be on the basis that should our clients default the full 10% would be payable as per the contract, our client will be talking to your client direct about this matter but we await to hear from you.''

On 23 September 1985, Mr P wrote back to Mr B indicating that a 5 per cent deposit would be accepted by Mrs R but that a further condition would apply. This letter was received on 26 September 1985.

20. Another document of some moment was a letter from Mr B to Mr P dated 18 October 1985 enclosing a copy of the contract for sale as well as a cheque for the $10,000 deposit. Various modifications had been made to the contract including the additions of a term relating to fixtures and fittings and a special condition relating to access together with alterations reflecting the agreement as to the

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amount of deposit. The contract was signed by Mr B and dated 13 September 1985. Relevantly, at the end of the letter, Mr B wrote:

``We further note negotiations between our respective clients have been proceeding for a considerable period of time and in pursuance of those negotiations we have dated the enclosed copy of the contract the 13th September 1985 and you are to date the original contract the same date of the 13th September 1985.''

When asked why the contract was dated 13 September, Mr B stated that it was in accordance with instructions received from the male taxpayer just prior to writing the letter of 18 October 1985. He then said that the 13 September 1985 was inserted because it was the date that Mr P wrote to him enclosing the contract of sale for signing, which, in his view, was the date of agreement between the parties being the date on which the oral agreement was reduced to writing. Mr B gave evidence that he didn't recall asking the male taxpayer why a date was to be inserted that was in the past. Rather, he said he was satisfied that it was a significant date on file being the date of agreement being the parties.

21. Mr B could not remember having discussions with the male taxpayer about the introduction of capital gains legislation and he denied that any ``back-dating'' of the contract had occurred in this case.

22. Mr B's evidence was at variance with that of the male taxpayer in some significant respects. The male taxpayer said he first spoke to Mr B personally on or around the 12th of September and claimed he would not have left his instructions with a secretary as claimed by Mr B. Regarding the dating of the contract, the male taxpayer denied giving instructions that the contract was to be dated 13 September. Rather, he said that Mr B must have inserted the date on the contract in accordance with his own understanding as to the date of agreement from the initial phone conversation on or around 12 September 1985.

23. Mr P, solicitor for the vendor, was called to give evidence on behalf of the applicants. He stated that he had received instructions by phone from Mrs R on 12 or 13 September indicating that she had agreed to sell the property to the applicants for $200,000, and supplying contact details of the solicitor acting on behalf of the taxpayers.

24. Mr P could not recall the actual conversation he had with Mrs R regarding the issue of the dating of the contract. He said that he recalled receiving instructions from her a few days prior to receipt on 22 October 1985 of Mr B's letter dated 18 October 1985 to the effect that the contract was to be dated 13 September 1985. He said Mr B's instructions therefore came as no surprise to him. Later in his evidence Mr P stated that the impetus for the dating of the contract came initially from Mr B in the course of a phone conversation, and that he confirmed this with Mrs R before agreeing to it. He too said that, having received confirmation that this was the relevant date for the contract, he had no cause to inquire further about it.

25. The male taxpayer gave evidence as to the conversation which he alleges took place between he and Mrs R. He recalled a conversation taking place at his garage a few days prior to the 13 September 1985 in which he expressed his interest in buying the property. He maintains that Mrs R invited him to her home to discuss it further and he did so later that afternoon. He said he told Mrs R that although he knew her asking price was $250,000, he could only afford to pay $200,000. He said that he phoned her that afternoon or the next day and Mrs R agreed to accept his offer of $200,000 and they then arranged to instruct their respective solicitors. Whilst the property was purchased by the male taxpayer and his wife, it was the male taxpayer who acted on behalf of himself and the female taxpayer throughout the entire transaction. The Tribunal draws no inference from the fact that the female taxpayer did not give evidence before the Tribunal at the original hearing or on this occasion.

26. When questioned as to his understanding as to the purchase, the male taxpayer gave evidence to the effect that he was buying a residence on a desirable property in a picturesque environment. He said he assumed the fittings and fixtures would be included as Mrs R was moving to a home where she would not need them. He gave evidence that he was reasonably satisfied about access to the property and that the deposit, although ordinarily 10 per cent, would be something that could be agreed upon later. He said that the negotiations which ensued between the solicitors following the oral agreement between he and Mrs R were largely

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pertaining to peripheral matters which would not have affected his decision to purchase the property.

Submissions

27. On behalf of the applicants, Mr Moore submitted that the date of the making of the contract under which the asset was acquired by the taxpayers was 13 September 1985. He submitted that the evidence of both solicitors should be accepted to the effect that instructions were received from both vendor and the purchasers prior to signing the contract that it was to be dated 13 September 1985 which was the date of the making of the contract. He submitted that on the authority of
Kiwi Brands Pty Ltd v FC of T 97 ATC 4879; [1997] 148 ALR 605 (which was, unbeknownst to Mr Moore, the subject of a successful appeal on 11 December 1998 [reported at 99 ATC 4001]) variations to a contract will not alter the time of the making of the contract, that is, the time at which the original obligation to dispose of the subject matter of the contract was assumed, providing of course that the variations did not expressly or impliedly rescind the original contract. Mr Moore submitted that the contractual terms agreed subsequent to 13 September were terms pertaining to peripheral matters only and, as such, they did not affect the substantive terms of the contract which he submitted were still operative. Accordingly, he submitted that as it could not be said that the oral contract had been rescinded, the time of the making of the oral contract was unaltered by the variations to it. It followed in his submission that as the asset was acquired by the taxpayers on 13 September 1985, the asset was exempt from the capital gains tax provisions and the decisions of the Commissioner should be set aside.

28. On behalf of the respondent it was submitted that the time of the making of the contract was the date of the signing and exchange of the written contract which was 31 October 1985. Mr Erskine submitted that the male taxpayer's evidence could not be relied upon as there was significant variance with contemporaneous documentation as to important factual matters. In particular, he submitted that there was no agreement as between the taxpayers and Mrs R prior to 18 October 1985 as the relevant documentation on the solicitors' files reflects that it was always a proposed contract of purchase with important matters such as the amount of the deposit and lawful access routes still outstanding up to this date. Mr Erskine submitted that in view of this, the date inserted in the contract was a classic case of back-dating, a ruse on the part of the taxpayers to avoid the implications of the capital gains tax legislation. He submitted that the Tribunal should find that the date on the contract is not to be relied upon and that, pursuance to ordinary assumptions in conveyancing transactions, the time of the making of a contract is the time of exchange of written contracts.

29. Mr Erskine also submitted that an essential element of a common law contract was absent from the facts at hand as at 13 September 1985, namely, the intention to create legal relations. This, he said, was evident from Mr P disclaimer in the letter of 13 September 1985 where he wrote ``no legal liability shall attach to either party until such time as an exchange has been effected''. In reply, Mr Moore submitted that the disclaimer could not affect the common law existence of an unenforceable oral contract that had already come into existence. He said that as at 13 September 1985, the common law requirements of a contract had been met, namely that there was agreement that Mrs R would sell the subject property to the taxpayers for $200,000 and that this was sufficient to satisfy the provision in s 160U(3) as defined by Finn J.

30. With respect to the question of penalties, Mr Erskine submitted that penalties should apply to the extent calculated by the Commissioner as the applicants had clearly been culpable in so far as they had, by back- dating the contract, attempted to avoid liability to pay capital gains tax.

The Tribunal's findings

31. The Tribunal would indicate that it has had regard to the totality of the material placed before it together with the submissions of the parties.

32. The Tribunal has had the advantage of carefully observing and listening to the witnesses in the giving of their evidence. Understandably, the passage of time had taken its toll on the memories of each of the witnesses to varying degrees. The Tribunal formed the impression however that Messrs. B and P did their best to accurately relate to the Tribunal the events in question. The Tribunal is prepared to accept their evidence as to the events that they

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say occurred in the course of the preparation of the Agreement for Sale of Land and subsequent settlement aided as they were by reference to their respective files.

33. Having said this, the Tribunal cannot allow one aspect of their evidence to pass without comment. This was the evidence concerning the dating of the written contract, i.e. the insertion, in October 1985, of the 13th September 1985 into the written contract as the date of the making of the written contract against a background of each of the solicitors and the male taxpayer being aware of the introduction of the capital gains tax regime operative as and from 20 September 1985. Regarding this issue the solicitors could be said to have turned a blind eye to the reason why they were being instructed to date the written contract other than with the date of the actual signing and exchange which occurred in late October. As Mr B stated in his answer to a question pertaining to why he didn't feel it necessary to inquire as to the reason why he was being asked to date the contract 13 September 1985, he replied, tellingly, that ``he [ the male taxpayer] might have given me a reason that I wouldn't want to know''. Clearly, on the accepted evidence, the only significance to be attached to 13 September 1985 was that it was a date prior to the commencement of the capital gains tax regime. It was certainly not the date of agreement as to the terms of the written contract and the Tribunal so finds.

34. The Tribunal now turns to the evidence given by the male taxpayer. In so doing the Tribunal would indicate it is mindful that the events in question occurred many years ago, that the vendor of the subject property is deceased and that the male taxpayer has a significant financial interest in the outcome of these proceedings. The Tribunal has given careful consideration to his evidence. The Tribunal found the male taxpayer to be an unimpressive witness. The Tribunal gained the distinct impression that he tailored his evidence to suit his own ends and particularly so with respect to his evidence concerning the events leading up to the signing of the written contract. Particularly unconvincing was his evidence as to the reasons for purchasing the subject property, his denial that he gave instructions to his solicitor Mr. B to write 13 September 1985 on the written contract (despite giving evidence before the previous Tribunal that he had told his solicitor that that could be the date of the contract), his resolve to proceed with the sale irrespective of such matters as the deposit being reduced, the inclusion of fixtures and fittings of the home on the property and the written contract being subject to a confirming search regarding an adjoining reserve road.

35. In this latter regard it is clear that the male taxpayer was not unfamiliar with the buying and selling of property. He struck the Tribunal as being well versed in the art of negotiating and one who possessed the necessary skills to extract the most from a given business situation. The Tribunal is of the view that he did his best to advantage himself in the course of his negotiations with Mrs R as evidenced by the price he offered her, by the amount of the deposit, the inclusion of fixed floor coverings, wall to wall carpets, some curtains, blinds, light fittings, TV mast and antenna in the written contract, and more particularly so with respect to the inclusion of clause 36 in the written contract which reserved to he and his wife the right to rescind the written contract should it be found by search that the reserve road did not extent to the Princes Highway. The Tribunal is in no doubt that the male taxpayer (and inferentially his wife) would not have signed the written contract in October 1985 unless and until all that they needed to have resolved had in fact been resolved to their satisfaction.

36. If not so resolved the Tribunal is confident that in any subsequent litigation the male taxpayer would no doubt have maintained that there was no contract of any form envisaged by the parties until there was an exchange of written contracts and that until that point in time the parties were only in the stage of negotiating - any agreement on any topic was subject to the drawing up, execution and exchange of a contract in writing.

37. The considered view of the Tribunal is that that aptly depicts the situation as between the taxpayers and Mrs. R. The Tribunal rejects the contrary assertions of the male taxpayer implicit or otherwise in the giving of his evidence which might be said to be relevant to the issues before the Tribunal.

38. Having regard to the objective evidence contained in the files of the solicitors for the parties to the transaction in question, together with the accepted evidence of their respective solicitors, the Tribunal makes the following

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findings of fact which include the inferences which necessarily follow from that evidence.

39. Some days prior to 13 September 1985 the male taxpayer (on behalf of himself and his wife) made an oral offer to Mrs R to purchase the subject property for $200,000. Shortly afterwards Mrs R agreed that she would accept the offer and sell her property subject to the drawing up, execution and exchange of a written contract which would embody all the terms and conditions to be agreed upon between her and the taxpayers.

40. Each party was at liberty to withdraw at any time before the drawing up, execution and exchange of a written contract embodying all the terms and conditions agreed to by the parties.

41. What was agreed between the parties prior to 13 September 1985 was never intended by the parties to be a contract but was merely an initial step along the path to establishing a contract if the parties were able to agree upon suitable terms and conditions.

42. In this regard the Tribunal would indicate that until the vendor and purchasers had executed the Agreement for Sale of Land and exchanged contracts they were still in the process of negotiating the terms and conditions of a proposed contract. This is evident from the correspondence which flowed between the parties from time to time. For example:

• 1. The reference in a letter from Mrs. R's solicitor dated 13 September 1985 to the male taxpayer's solicitor namely ``... no liability shall attach to either party until such time as an exchange has been effected''.
• 2. The reference in a letter dated 10 October 1985 from the male taxpayer's solicitor to the male taxpayer which raised a number of matters ``concerning the proposed purchase'' and which concluded with a request that the male taxpayer ``discuss the proposed purchase''.
• 3. A letter dated 18 October 1985 from the male taxpayer's solicitor to Mrs. R's solicitor which stated that ``negotiations between our respective clients have been proceeding for a considerable period of time''.
• 4. Other examples are to be found in the Statement of Issues Facts and Contentions filed by the respondent.

43. The Tribunal would now indicate in the light of the judgment of Finn J on appeal from the initial decision of the Tribunal that this Tribunal has undertaken the task of examining the totality of what has been placed before it with respect to whether the accepted evidence discloses any contract recognised by the common law and the time of the making of any such contract. The Tribunal finds that there was one contract and one only which had the attributes prescribed by the common law and that was the Agreement for Sale of Land referred to throughout these reasons as ``the written contract''. Until the execution and exchange of the written contract there was not a contract and what had taken place prior to that point in time clearly fell into the 3rd class delineated in
Masters & Anor v. Cameron (1954) 91 CLR 353. As to the time of the making of the above contract the Tribunal finds that it was 31 October 1985. This was the first time that there was a meeting of the minds, a consensus reached incorporating an intention to form legal relations. This was the time that the common law would acknowledge that a contract had come into existence between the parties.

44. Having regard to the provisions of s 160U(3) of the Act, the Tribunal further finds that the subject property was acquired under the above contract. It follows that the subject property was acquired at a time which makes it subject to the capital gains tax regime and the Tribunal so finds.

45. As to the question of penalty tax the Tribunal's own assessment of the circumstances is that which coincides with that of the respondent. The dating of the written contract as being 13 September 1985 was at the behest of the male taxpayer. It was not the date of the making of the contract and occurred in the opinion of the Tribunal solely because it might minimise the chances of the subject transaction being subject to the capital gains tax regime and the Tribunal so finds. Whilst acknowledging that the negotiations between the parties commenced prior to the announcement of the introduction of the regime, the Tribunal can find no mitigating circumstances such as to alter the Tribunal's view that the appropriate penalty is that which has been determined by the respondent.

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46. The decision of the Tribunal is that the decisions of the respondent concerning capital gains tax including penalty are affirmed.

47. Liberty to apply is granted should the parties wish to have this Tribunal address the matters raised before the original Tribunal and which appear at paragraphs 35 and 36 of the reasons of the original Tribunal.