SUPREME COURT OF NEW ZEALAND PALMERSTON NORTH REGISTRY

PRICE v INLAND REVENUE COMMISSIONER (NZ)

QUILLIAM J

19 June 1979 -

Quilliam J This is a case stated pursuant to s 32 of the Land and Income Tax Act 1954 in respect of an assessment of tax under the Property Speculation Tax Act 1973 on the profit made by the objector on the sale of motels in Palmerston North.

The objector was formerly a farmer but in the middle of 1973 he sold his farm. He decided to invest the proceeds of sale in the purchase of a motel business and on 14 May 1973 he signed a contract for the purchase of the Boulevard Motels in Palmerston North. The purchase price was $76,000. After having signed the contract he discussed the purchase with his accountant who suggested he would have been wiser to have used his money in the erection of a building in Feilding which could have incorporated a home for himself, some motel units and some shops. The objector came from the Feilding district and also owned a second-hand dealer's business in that town. The accountant told him there was an unsatisfied demand for motel accommodation in Feilding.

On 14 June 1973 the clearing sale of the objector's farm stock was held. He told his auctioneers at that time that he had bought the motels in Palmerston North but because of the advice he had received from his accountant now regretted having done so. The auctioneers told him he could always resell the motels in order to build a property in Feilding but warned him he would first have to obtain a clearance from the Inland Revenue Department.

Settlement of the motel purchase was effected on 1 July and the objector went into occupation of the premises and started to operate the business. Almost immediately he put the property on the market at a price of $96,000. The only prospective purchaser brought to the property was a Mrs Owen who indicated she was prepared to purchase at a price of $91,000. The objector wrote on 11 October to the Commissioner saying that he had owned the motels for three months, had had an offer to purchase them, and wished to accept that offer in order to build a house and motels at Feilding. He inquired whether he would be liable for property speculation tax on the profit arising out of the sale. On 18 October the Commissioner replied saying, "On the information given in your letter the sale of your motel would be exempt from property speculation tax under s 19(1)." Accordingly, on 23 October, the objector signed a contract to sell to Mrs Owen for $91,000 and settlement was duly effected in terms of the contract on 1 December.

As soon as he had his contract signed the objector instructed an architect in Feilding to apply on his behalf to the Feilding Borough Council for consent to erect a building on a piece of railway leasehold land over which he held an option. The contract with Mrs Owen contains a recognition of the objector's intention in the form of a clause which made the contract conditional upon his "being granted permission from the Feilding Borough Council to build a motel and shop complex on a section situated in the Feilding Borough for which the vendor shall apply for departure from the District Scheme". The architect hastily prepared a sketch plan and presented it for approval to the Borough Council on 1 November. Settlement of the sale of the motels was due on 1 December but by that date the decision of the Borough Council had not been given. The objector waived the condition in the contract and settled without reference to it. His evidence, which I see no reason to doubt, was that he was confident the application to the Borough Council was little more than a formality and it did not occur to him that consent would be withheld. However, on 17 December, the Borough Council refused its consent and so the objector was not able to put his intentions into effect.

There the matter rested until 29 June 1976 when the Commissioner wrote to the objector referring to the previous letter of 18 October 1973 and saying: "Since this time, additional information has come to hand which has given me cause to review the ruling given. I am now of the opinion that Property Speculation Tax is payable, and, on the basis of the addition to your Capital Account in the year of sale, this is assessed at $13,500. Penalty interest at 5% of $675 has accrued making total payable of $14,175."

What had aroused the Commissioner's interest was some evidence given by the objector in proceedings in the Supreme Court before Wild CJ on 2 May 1975 in an action brought against him by Mrs Owen alleging misrepresentation in respect of the contract of sale. In the course of that evidence the objector had acknowledged that he had put the motel business on the market almost immediately after he bought it. The evidence given on that occasion was not in itself of direct application to the present proceedings and was, of course, given in respect of a different matter altogether. In any event I heard the evidence of the objector and was able to make my own findings of fact which I have already set out. The question then is whether this is a case coming within the exemption provisions of s 19(1) of the Property Speculation Tax Act.

Section 19(1) is as follows:-

"(1) Subject to this section, where, in relation to the disposition of land by any person, the Commissioner is satisfied that:-

(a) The land was acquired and occupied, or intended to be occupied, by that person primarily and principally for the purpose of or directly related to the carrying on by him of a bona fide business; and

(b) The land was not acquired by that person for the purpose or intention, or for purposes or intentions including the purpose or intention, of realising any profit from the disposition of the land; and

(c) Taking into account the nature of and the manner in which that business was carried on by that person and the circumstances surrounding the disposition of the land, the principal reason for the disposition of the land was not the realisation of any profit from that disposition; and

(d) The disposition of the land was due to circumstances which had arisen since the date of acquisition of the land by that person, -

any profit derived by that person from that disposition shall be exempt from property speculation tax."

It is, of course, necessary for the objector to establish each of the requirements of the subsection and I now deal with them in order.

It was common ground that the requirements of para (a) had been met and I need make no further reference to that.

With regard to para (b) it was contended for the Commissioner that at least one of the purposes or intentions of the objector in acquiring the land was that of realizing a profit from its disposition. I am unable to agree with that. There is no evidence to suggest that, when the objector sold his farm and made a decision to buy the motels, he had any purpose or intention in mind other than to occupy the motels and carry them on as a business. It is true that he put them on the market at a substantially increased price almost as soon as he became the owner of them, but I can see nothing to indicate that he acquired them in order to do that or with that thought in mind.

Paragraph (c) requires a consideration of the reason for the objector disposing of the land. This is to be determined upon the basis of "the nature of and the manner in which that business was carried on" and also "the circumstances surrounding the disposition of the land". As to the former, there seems no doubt that the business was carried on by the objector during the five months of his occupancy in a normal manner. His evidence was he found the business to have been somewhat run down and he set to work to build it up. I do understand it to be challenged that he was able to achieve some measure of success in this. So far as the circumstances of disposition are concerned, the principal argument for the Commissioner was that it was the prospect of a substantial profit on resale which prompted the objector to sell. The objector conceded readily that the price he found he was able to obtain was an undeniable attraction to him, but his case was that he wanted to sell in any event in order to pursue his alternative plan of building in Feilding. I think the evidence establishes clearly that this was so. Before he had taken possession he was regretting what he had done and hoped to be able to resell. He put a price of $96,000 on the property but he had calculated that if he could sell for $84,000 he would have been able to recoup all his expenditure on the venture. He was prepared, if necessary, to sell for $84,000 but not unnaturally he hoped for more. It is of some interest to observe that he accepted the first offer made to him although that offer was $5000 less than his asking price. There is no indication that he considered holding on for a higher price. On 18 October 1973 the Commissioner was prepared to accept that a resale at a profit in order to be able to build a home and motels at Feilding was a sufficient justification for granting exemption under s 19(1). That decision was made without the Commissioner being aware of the extent of the profit which might be involved. The actual size of the profit is accordingly not to be regarded as determinative. In the result what the objector did was what he told the Commissioner he proposed to do, namely, to sell in order to build in Feilding.

It was argued further for the Commissioner that the erection of a building in Feilding was never really a serious proposal and was not the real reason for selling. This argument was based mainly on the fact that although the contract to sell to Mrs Owen was made subject to permission to build being granted by the Feilding Borough Council, that condition was waived by the objector. It was said that the prospective profit on sale was the deciding factor. I do not, however, think that is correct. Before the contract to sell was made the objector had acquired an option over land in Feilding and had consulted his architect. He then incurred the expense of having the architect prepare sketch plans and of applying for approval. On the advice of his architect (whom he also believed to be architect to the Borough Council and thus in a position to know) he thought that approval would be granted as of course. It turned out the refusal was in some way related to the proximity of the land to the railway line with a consequent noise problem, but this refusal was altogether unexpected. There is no evidence to suggest that the objector is wrong when he says he thought the approval of the Borough Council was a formality, and I think I should accept his evidence on it. That being the case the condition is not a matter which should suggest that the disposition of the motels was for any reason other than that given by the objector. I accordingly consider that the requirements of para (c) were satisfied.

Paragraph (d) concerns whether the disposition was due to circumstances which had arisen since the date of acquisition. The expression "date of acquisition" is defined in s 2 as being, except as otherwise provided in the Act, the date on which possession of the land is given and taken. There is, however, a qualification of that definition in s 19(3) which is as follows:-

"(3) For the purposes of paragraph (d) of sub section (1) of this section, in any case where a person has entered into a binding contract to acquire land, the date of acquisition of the land by that person shall be deemed to be the date on which that person entered into the binding contract."

The question, therefore, is whether the disposition was due to circumstances which had arisen since the date of the contract to purchase, namely, 14 May 1973. I think there can be no doubt that it was. On 14 May the objector's only intention was to operate the motels in a normal way. His attention had not then been diverted to the alternative possibility of building in Feilding. Once that was suggested to him by his accountant some time in June he realized the advantages of such a course. Those advantages included the likelihood of a better return of revenue because of the shortage of motel accommodation in Feilding, the establishment of shops as well as motels in the same building, and the consolidation in one town of all the objector's business interests. He already had a second-hand dealer's business there and this could be operated in conjunction with the proposed venture. This suggestion of the accountant was thus the circumstance which arose and which prompted the objector to think of the disposition of the motels. It arose after the date of acquisition. The requirements of para (d) were therefore also satisfied.

In the result I consider the Commissioner's original decision that the sale of the motels ought to be exempt was a correct one and that a closer examination of the surrounding circumstances does not lead to the conclusion that that decision should be changed. I accordingly answer in the affirmative the question asked in the case stated.

The objector is entitled to his costs which I fix at $150 and disbursements.