AT1999/42 and Commissioner of Taxation
[2001] AATA 132
•21 February 2001
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2001] AATA 132
ADMINISTRATIVE APPEALS TRIBUNAL )
) No AT1999/42
TAXATION DIVISION ) Re A TAXPAYER Applicant
And
COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Deputy President B. H. Burns Date21 February 2001
PlaceCanberra
Decision The decision of the Tribunal is that the decision under review is affirmed.
............(Signed).....................
Deputy President B. H. Burns
CATCHWORDS
INCOME TAX –assessable income – profit from sale of land by company – company director being controlling mind of the company – intention of controlling mind of company at time of acquisition of the land – sole intention at time of acquisition determined to be for sale of land for profit – profits held to be assessable income – penalties – decision affirmed.
Income Tax Assessment Act 1936 ss25(1), 25A(1)
Eisner v Commissioner of Taxation of the Commonwealth (1971) 45 ALJR 110)
AAT Case 7562 (1991) 22 ATR 3559
Westfield Limited v Federal Commissioner of Taxation (1991) 99 ALR 510
REASONS FOR DECISION
21 February 2001 Deputy President B. H. Burns 1. This is an application for review of a decision by the Commissioner of Taxation (“the respondent”) dated 23 April 1996 (T6) which disallowed the applicant’s objection dated 5 July 1993 (T8) to the assessment issued on 4 May 1993 (T9) for the year ending 30 June 1988. That assessment included an assessment for income tax on profits arising from the sale of land in the amount of $424,419.
2. The above application first came before the Tribunal on 24 June 1996 (T2) and at first instance a differently constituted Tribunal affirmed the decision under review on 15 April 1998 (AAT 12,795) save and except for remitting the amount of additional tax so as to reduce the culpability component from 25% to 5% of the tax avoided. Pursuant to section 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 on 20 August 1999 ([1999] FCA 1152) and the matter remitted to the Tribunal to be heard and decided again.
3. The Tribunal received into evidence pursuant to s.37 of the Administrative Appeals Tribunal Act the documents T1-T30 which appear as pages 147-420 in the Appeal Book Parts 1 and 2, together with 8 exhibits, 4 lodged by the applicant (Exhibits A1-A4) and 4 lodged by the respondent (Exhibits R1-R4). In addition, the Tribunal heard evidence from Mr X, a company director, Dr G, a medical practitioner, Mr F, a consultant town planner, Ms X, company director, Mr A, managing director, Mr V, a real estate agent, Mr RF, former manager of a real estate agency and Mr L a solicitor. The applicant was represented by Mr Alexander and the respondent was represented by Mr Erskine, both of counsel.
4. Before the Tribunal is the issue of whether or not the applicant’s profits from the proceeds of sale of various parcels of land constitute assessable income for the purposes of sub-section 25(1) of the Income Tax Assessment Act 1936 (“the Act”). Allied with this, is the issue of whether or not the applicant acquired the said land for the purpose of profit making by sale or for the carrying on or carrying out of any profit making undertaking or scheme within the meaning of these terms by reference to sub-section 25A(1) of the Act.
legislation
5. Sub-section 25(1) of the Act provides:
“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.
…”
6. Sub-section 25A(1) of the Act provides:
“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.
…”
background
7. In the 1980s there existed a group of associated companies (the X group) whose principal business was that of land development. The applicant is a company which was incorporated on 5 February 1985 and is associated with this group of companies. In returns of income lodged with the respondent for the years ending 30 June 1985 to 1991 it stated its business or income-producing activity as “Investment in Real Estate” (T6 – p185 of Appeal Book). Mr X is a director and (it is agreed) the controlling mind of the applicant company. He also controls the X group of companies. Sometime prior to September 1984, Mr X was advised of the availability of certain lots of land for sale (“the A land”) in New South Wales (being Lots 2-8 and Lot 10 as identified on the allotment plan marked ‘A’ in Exhibit A1). At that time, the X group was based outside New South Wales.
8. On 4 September 1984, Mr X and his wife Mrs X, entered into an agreement to enter into a contract to purchase the A land for the sum of $140,000. A draft contract was forwarded to Mr X and Mrs X on 19 December 1984, however that sale did not proceed. On 20 September 1984 a company in the X group entered into a letter of understanding with another company that if it purchased the land, it would sell a part thereof to the other company in exchange for that company withdrawing from negotiations over the land. Prior to Christmas 1984 the other company indicated that it did not want to proceed with the acquisition.
9. The applicant was incorporated on 5 February 1985. Shares in the applicant were transferred to Mr X and a Mr H on 27 February 1985. On 1 July 1985, further shares were issued to Mr X and Mrs X, Ms X (Mr X’s sister), Mr A and Mr V.
10. The applicant entered into a contract for the purchase of the A land in April 1985 with settlement in the amount of $150,000 taking place on 2 September 1985. The applicant entered into a further contract on or about 20 June 1985 for the purchase of adjoining land (“the B land”) (being the lot identified as C adjoining Lot 10 on the allotment plan marked ‘A’ in Exhibit A1). The financing of the purchases included a short term loan of $70,000 made on 30 August 1985 for a period of two months which was subsequently extended until 27 March 1986 (T29 – pg373 of Appeal Book). This loan was secured by way of a mortgage over the A land during this period. The balance of the purchase price was met with funds from one of the companies in the X group and the deposit by another.
11. In December 1985 the A and B land was used as part of the security provided for monies lent to a company in the X group (T29 - p380 of Appeal Book). Between 18 December 1985 and early January 1986 the A and B land was listed for sale with a real estate agency (Exhibit R4) for an amount of $500,000. Mr X and the witness Mr RF were partners in this agency.
12. In July 1986, agreement was reached to sell a portion of the A land to a fast food outlet, being Lots 2,3,4,5 and a sub-divided portion of Lot 10 of the subject land, with the sale taking place in October 1986 for an amount of $250,000. The balance of the A land, inclusive of the B land, was sold in September 1987 for $420,000 to a Mr S, who on-sold that land to another fast food outlet.
evidence
13. Mr X gave evidence that he became aware of the availability of the A land in the second half of 1984 and was interested in purchasing that land in order to construct headquarters for the future of his companies. He said that his intention was to construct the headquarters offices, using as much of the land as possible for current and future expansion, and use any residual land for other long-term investment purposes. He told the Tribunal that the land was suitable for his purposes, being close to a particular central business district and council offices, and being of a zoning class that could be difficult to obtain in that area.
14. As at September 1984, a company in the X group entered into an understanding with a company outside the X group regarding the A land which ultimately never eventuated. In relation to that understanding, Mr X told the Tribunal that as at September 1984 he was quite prepared to share about one half of the subject land with the other company but that circumstances then changed. He stated that in early 1985 he and a Mr H incorporated the applicant company on the advice of their accountant (the witness Mr A), for the purpose of purchasing the A land. He gave evidence that the new company was established because the A land represented a long term strategy distinct from the normal residential trading stock of the X group of companies. The proposed building to house the headquarters would have been of considerable size given the site, and he estimated that it may have cost approximately one and a half to two million dollars to construct.
15. Mr X told the Tribunal that once it was ascertained that the land was too big for his immediate requirements, he commissioned Mr F to analyse what additional uses the balance of the land could be put to. He said that on advice from Mr F, the applicant acquired the B land (for $40,000), due to the fact that the A land was flood prone and to provide proper access to the A land. In his evidence-in-chief Mr X explained that the purpose of short term finance for the purchase of the A land was to acquire the site and then, in time, arrange for design of the building. Once that had been completed and approved, funding for the total development for construction of offices would then be sought. He agreed during cross-examination that as of September 1984, in all likelihood, the only block in the A land suitable for building offices upon would be Lot 10. With regard to exercising the intent to develop, he stated that he had many discussions with fellow directors and consultants within the X group as to possible ways of developing the land.
16. Mr X gave evidence that the A land was listed for sale with a real estate company in the X group on 18 December 1985 purely for the purpose of attempting to ascertain a retail value in order to assist in the provision of further finance. He stated that it was never intended to actually sell the property at that time, and that had that been the intention, he would have listed the land with several commercial agents. In cross-examination, he said that the property was taken off the market in the first week of January 1986 as the financier was satisfied as to the value of the property independent of its being listed, based, in part, on his appraisal of $480,000.
17. Mr X told the Tribunal that in late 1985 he first became aware of the potential break-up of W, (the major competitor to the X group in the region), and that W’s property holdings may become available. He stated that by October 1985 the W problems were in the public domain and he had discussions about the possibility of acquiring their land. By the middle of 1986, arrangements were in place for the X group to take over the offices of W. He told the Tribunal that it took until 1987 before that purchase was finalised.
18. Mr X gave evidence that in late 1985 he became aware of another party’s interest in the A and B street site and stated that by about late 1986 a contract for sale had been entered into with a fast food outlet for a portion of the land, with finalisation of the deal occurring sometime in 1987. According to Mr X, the negotiations continued with the fast food outlet for several months and then, in late 1987, the balance of the A and B land was sold for $400,000 to a Mr S, who then on-sold for $100,000 profit to another fast food outlet.
19. Mr X gave evidence that the applicant was an entirely separate company and that the only association between the companies in his group is that they have common directorships. Six of the companies in his group had direct or indirect landholdings in the same area and, on occasion, letters from the applicant would be sent on the letterhead of another company in the X group. In relation to the inter-company loan on 16 February 1988 (T27 p277 of Appeal Book), he stated that there were a lot of inter-company loans made at the time and that he could not recall each one and could not recall if any of the loans had been repaid.
20. Mr X also stated that it was common practice for one company in the X group to pay the bills of other companies in the group and for according adjustments to be made in the loan accounts, and that a company in the group may well have handled all transactions relating to the sale on behalf of the applicant and paid rates on the A and B land. Mr X ultimately agreed that one company in the X group paid the deposits, one financed the bulk of the purchase price and one funded the rest of the purchase of the A and B land.
21. In cross-examination Mr X told the Tribunal that he had been in business for over 40 years and that for the last 20 years or so the primary focus of his business had been in residential land development. Apart from Australia, he had also carried out land development in America, England and the Bahamas.
22. Mr X was cross-examined about an affidavit he had sworn and about oral evidence he had given in other proceedings in a Supreme Court. The evidence regarding the above in these proceedings is to be found at pp 35-41 of the transcript, and Exhibits R1, R2 and R3, together with the evidence of Mr L the solicitor in these proceedings (transcript pp 256-259). The Tribunal must weigh and form its own conclusions on the evidence placed before it relevant to the issues to be decided by the Tribunal. The above evidence relates to the credibility of Mr X and others in previous proceedings. This Tribunal did not have the advantage of listening to and observing the witnesses in those proceedings. The presiding Judge’s findings with respect to certain affidavits (including one from X), namely, “whether intended to mislead or not they were dishonest” (Exhibit R3), I have found somewhat puzzling in a self evidentiary sense. The Tribunal is mindful that it must be very cautious whether or not, and if so as to what extent, it utilizes any of this evidence when assessing the accuracy and/or credibility of any aspect of the evidence given before it. The end conclusion reached by the Tribunal with respect to the evidence before it concerning the previous proceedings is an acceptance of the evidence given by Mr L and Mr X before this Tribunal on this topic and a finding that neither Mr L or Mr X did anything untoward in the proceedings before the Supreme Court.
23. Before the Tribunal Mr X was cross-examined at length about the relationship between the various companies in the X group and their respective roles. What clearly emerged from this evidence and the other evidence before the Tribunal on this topic is that each played a role, but because of such factors as common directors and the overall controlling influence of Mr X, there were links between them. In that sense they were associated and it is clear that Mr X utilized the companies as he chose fit.
24. In cross-examination Mr X told the Tribunal that the A and B land was the only land the applicant had ever owned. When asked as to what had happened to the proceeds of the sale of the A and B land, and what did the applicant use the proceeds for, Mr X told the Tribunal he would have to check the records. In relation to this topic, Mr X was questioned about certain loans made by the applicant and associated guarantees. Mr X gave evidence that he could not recollect the purpose of a loan from the applicant to a particular company in the X group which, he told the Tribunal, was one of his family companies. The amount of this loan was $167,200 (T27).
25. Mr X was cross-examined about the X group’s commercial developments bearing in mind a headline article in a newspaper on 16 October, 1985 in which it was said that the A and B land was to be developed as “A proposed major serviced apartment – motor inn complex …” (Exhibit A1). Mr X outlined a number of commercial developments undertaken by the X group over the years but indicated that commercial developments, whilst not unknown to the X group, were not its principal business. He described the X group as being all associated and affiliated companies helping each other at different times through various activities and agreed that he was the one in control of the X group and that the companies were just a means of conveyance in a legal sense of that which might be transacted.
26. Mr X denied in evidence that there was any inconsistency between the listing of the A and B land for sale in late 1985-Jan 1986 and the assertion by Mr X that the A and B land (which had been acquired a few months earlier) was intended to be utilized as corporate headquarters for the X group. Mr X gave evidence in cross-examination that by about July, August 1984 it was apparent that the X group’s offices were too small. Mr X said that at this point in time the X group had seven or eight salespeople, two offices with town planners and consultants coming in, and the X group was about to hire permanent staff.
27. The applicant called Dr G who gave evidence before the Tribunal regarding the capability of the witness Mr RF to give evidence before the Tribunal. Dr G’s evidence was not challenged in any way by the respondent.
28. Mr F, consultant town planner, told the Tribunal that during 1984-1986 he had a working relationship with the X group, acting as a consultant in respect of various land holdings.
29. In relation to the A land, Mr F gave evidence that he undertook investigations with the local council as to the range of possible uses for the land, and also investigated access, flooding and servicing as a result of an approach made to him by Mr X in May 1985. He said that he was asked in particular to investigate the potential use of the land for the establishment of office facilities that could be used by the company. In cross-examination he said that he had no reason to believe at that time that Mr X was not being genuine in wanting the land for the purpose of office construction. He considered it to be a genuine inquiry because it made sense that the X group’s headquarters should be in a particular central business district given the level of development activity in that area at the time, and because of the inadequacies he had observed at the X group’s offices.
30. Mr F gave evidence that he recommended the purchase of the B land because of access difficulties, and also pointed out the flooding problems in a letter to Mr X. He further stated that it was not unusual as at 1985 to enter into contracts for sale of land without having prior council approval for the proposed development due to less stringent planning laws at that time. He told the Tribunal that he advised Mr X that to only use the land for office space would be to underdevelop the site, and that he recommended a combination of office space and motel style accommodation.
31. Mr F told the Tribunal that he began working in about 1984 as a consultant for one of the fast food outlets which purchased part of the A and B land. He stated that in about June 1987 this outlet had asked him to advise them if any suitable sites became available in the area, and that he subsequently sent them a letter dated 23 July 1987 (Exhibit A4) detailing the availability of part of the A and B land site. He received a commission from the X group in July 1988 as a result of the introduction of that group to the fast food outlet.
32. Mr V, a real estate agent, told the Tribunal that in the 1980s he worked in property development primarily in sales and marketing, forming an association with the X group in the early to mid 1980s.
33. Mr V gave evidence that in 1984 he and Mr X drove past the A land and had a discussion about it. He told the Tribunal that the X group had to try and re-establish itself in a particular central business district due to the long term involvement in that district, and difficulties with overcrowding at the present site. He said that the X group needed some headquarters in this central business district and that they were looking for property to either buy or put a building on it. Mr V gave evidence that the site seemed ideal because it was a vacant block of land centrally located and just needed rezoning. He further stated that his only involvement was in discussions as to it being a possible office site, and that he could not recall any discussions as to other possible uses. He gave evidence that on his understanding, the flooding problems reduced the size of the available land.
34. Mr V said that he was only aware of the existence of the applicant because he was brought in as a shareholder and director in that company. He told the Tribunal that on his understanding, as acquired from Mr A, he received a dividend from the applicant upon the sale of the A and B land. He gave evidence that whilst he was a director of a company in the X group and the applicant, he was not involved in making any of the decisions, which were left to Mr X. He stated that he could not recall where the funding for the purchase of the A and B land came from.
35. Mr V gave evidence that on his understanding, the A and B land was no longer required for offices because the opportunity arose to take over W’s site.
36. Ms X, company director, is the director of a number of companies in the X group and sister of Mr X. She told the Tribunal that Mr RF contacted Mr X in 1984 to alert him to the availability of the A land. She said that the X group was looking for a site to build corporate headquarters due to overcrowding in the X group’s current premises and the need for a presence in a particular central business district. She gave evidence that because the purchase of land upon which to build offices was a separate venture, the group decided that a separate company was appropriate to own that land.
37. Ms X recalled discussions about the site and proposed joint ventures, given that the site would be too big for offices alone, leading to the letter of understanding with a company outside the X group. She said that further discussions were had by Mr X with other businesses after the understanding with the other company fell through. She said that throughout 1985 discussions continued internally within the group as to how many staff they would need to meet their requirements and how they might be housed.
38. Ms X told the Tribunal that in late 1985 the X group had become aware of the problems W was having, and were trying to negotiate with W regarding its land and corporate headquarters meaning, with respect to the corporate headquarters, that there was no need to take further planning steps with respect to constructing the X group’s offices on the A and B land.
39. Ms X stated that the property was listed for sale in December 1985 because the financier needed additional security and wanted a market valuation. The listing was with the X group’s real estate sales office which needed listings and to be seen in the local market. Ms X further stated that the listing was removed after several weeks because the financier was otherwise satisfied. She further stated that had an offer of $500,000 been made when the land was listed, the X group would have given such an offer serious consideration. She also stated that by December 1985 she did not consider that listing the property would harm their public image, as it was well known by then that there were ongoing negotiations between the X group and W.
40. Ms X gave evidence that she was never involved in the financial affairs of the X group, as that was not her area of expertise. Ms X said that she was the office person – doing the administration of the office.
41. In relation to the first sale of portion of the A and B land to a fast food outlet, she stated that a real estate company who were acquiring properties at the time for the fast food outlet first approached a company in the X group about the possibility of purchasing part of the land. She stated that subsequent to that sale, the X group no longer needed the balance of the land for offices, as they had acquired W’s property.
42. In relation to the sale to the other fast food outlet she stated that Mr F approached the X group, but that a sale had already been made to Mr S who then on-sold to the other fast food outlet.
43. Mr A, managing director, worked as an accountant in the early 1980s, becoming acquainted with the X group through a client Mr V. Mr A stated, with respect to the purpose of the A and B land acquisition, that Mr X was of the view that the X group should have an office of its own, i.e. its own corporate offices, to show to the council and people in the area that the group was committed to the region. He further stated that he gave advice at the time that it was appropriate that another entity should own the A and B land because of the high risk associated with the land subdivision development the other companies in the X group were involved in. He told the Tribunal that the risk associated with the development came from the proposed size of the development and the amount of finance that was needed, bearing in mind the interest rates and state of the economy at the time.
44. Mr A gave evidence that he did not think at the time of purchase that the A Street land was a “winning site” as it had sat vacant for years and years in the middle of “struggle town” (transcript p325). He stated that a company set up by his partner and himself loaned money for the purchase of the A land on a short term basis.
45. Mr A recalled that the purpose of the listing of the A and B land for sale was to try to raise finance in relation to the X group. Mr A gave evidence that the land had been acquired for a good price and that Mr X believed it was worth more and was trying to demonstrate to a financier that it was worth more. Mr A said he had no recollection of an actual market valuation being carried out, and stated that he had no knowledge of how a value of $480,000 was arrived at for the A and B land (T29 - p382 of Appeal Book). He also had no recollection of why the property was removed from its listing in January 1986.
46. Mr A stated that the offer from the fast food outlet in relation to the first sale of portion of the A and B land was accepted because the offices of W had become available. To the best of his recollection, the X group became aware of problems being experienced by W in 1986. He further stated that it was appropriate for a particular company in the X group to acquire the W property, as that company also had interests in land subdivision. By that stage in 1986 circumstances were such that it was no longer such a problem to have the same company structure involved in the ownership as it was in 1985. In particular, the land development was looking promising as at 1986, such that the company in the X group already involved in this development was looking to be a more promising vehicle of ownership.
47. Mr A gave evidence that one of the companies in the X group paid the accounts of the applicant, recording it in a loan account. He further stated that the loan account was eventually consolidated and its activities taken over by another of the X group of companies. He told the Tribunal that he had considerable difficulty in cleaning up the accounts of the X group, and that he came across instances of one company’s bills being paid by the cheque of another, or cheques received by one company being endorsed to pay to another company.
48. Mr A said in evidence that in about September 1986 he became involved with the group on a more full-time basis involving detailed work putting the accounts in shape. On this topic Mr A gave evidence that prior to September 1986 the X group’s accounts were not in a condition, in terms of the amounts of money involved, “that would have made me happy at the time” (transcript p315).
49. As to the management style of Mr X, Mr A told the Tribunal in cross-examination that Mr X “was the chief executive, chairman, controlling shareholder …” (transcript p330) In cross-examination Mr A said that he was not really privy to any discussions about the listing in late 1985 of the A and B land and why it was happening. As to his awareness that the A and B land had been listed, Mr A’s evidence was to the effect that Mr X would run off and do things at certain times and “you would find out about it later” (transcript p331). When questioned as to what happened to the proceeds of the sale of the A and B land, Mr A informed the Tribunal that they probably would have gone into general working capital within the loan accounts amongst the companies “of whoever needed the cash at the time” (transcript p347).
50. Mr RF was the manager of W (a real estate agency) in 1984. He stated that he brought the A land to Mr X’s attention, noting that it had been up for sale for a long time, and that there would be some value in buying it for a transport depot. He told the Tribunal that Mr X told him that the land would be useful for corporate offices. He stated that the property had been for sale for a long time because of flooding problems.
51. Mr RF gave evidence that in July 1985 he became involved as a partner with Mr X in another real estate agency. He acknowledged that on 19 December 1985 he signed on behalf of the agency a sales inspection report and selling agency agreement with the applicant regarding the A and B land (R4). With respect to the listing of the A and B land in December 1985, he could not recall whether the intention of the listing was for financing purposes or to effect a sale.
applicant’s submissions
52. Mr Alexander submitted on behalf of the applicant that on the evidence the conclusions are inescapable that the premises occupied by the X group were inadequate as to size, projected size and location and that there was an intention by the X group of companies between September 1984 and April 1985 to purchase in a particular central business district area for the purpose of constructing a group headquarters. He further submitted that the evidence demonstrated that there was no intention at the time of acquisition to on-sell to any fast food outlet, given the land had been vacant for a long period and that approaches came from the fast food outlets, rather than from the X group. In his submission the evidence indicated that neither of the fast food outlets displayed any interest prior to 1986.
53. Mr Alexander submitted that the purpose of the A and B land acquisition was a mix of office space and long term investment. He further submitted that because of the flooding problems, the land capable of being built upon was reduced in area, and that the dominant purpose of the acquisition of the non-flooding portions of the land was to provide office accommodation for the group. He also submitted that sub-division was not contemplated as at the time of acquisition, illustrated by the specific instructions given to Mr F. In his submission, given that the joint venture with a company outside the X group was abandoned by early 1985, it is not caught by section 25A of the Act.
54. Mr Alexander submitted that there was no bona fide intention to sell the A and B land by the listing in December 1985, but that, whilst it was a rather curious method, the evidence was consistent with Mr X’s evidence that it was listed for valuation purposes. In this regard, Mr Alexander referred to the property being included as security offered to a financier in November 1985 as part of the larger financing of the X group of projects (as approved on 5 December 1985 (T29 pp 380-81 of Appeal Book)). He submitted that it was fanciful to suggest that the listing would have any serious impact upon public perception, given all of the other work that was being done in the area by the X group at the time.
55. Mr Alexander submitted that the various financing arrangements were largely immaterial, as there was nothing remarkable about a company in the X group funding the applicant in various ways, bearing in mind that the applicant was a single purpose holding company. He further submitted that subsequent to the sale of a portion of the A and B land to a fast food outlet, the remaining portion was no longer suitable for the purpose of building offices.
56. In relation to the credit of Mr X, Mr Alexander submitted that there is no substance to the respondent’s attacks in relation to alleged misleading evidence given by Mr X in other proceedings in a Supreme Court or in the initial Tribunal proceedings.
57. In relation to the law, Mr Alexander submitted that the sale of the A and B land was the mere realisation of a capital asset not acquired for the purpose of profit making. He submitted that the only main or dominant purpose for the acquisition was for the purpose of providing group headquarters on portion of the A and B land. The remainder of the land would be utilized for other commercial development purposes, the whole of the land being utilized by what he described as a mixed commercial development. He also submitted that the fact that the applicant’s intention was not ultimately carried out does not of itself render the realised profit as income (Eisner v Commissioner of Taxation of the Commonwealth (1971) 45 ALJR 110) and that the mere awareness that the property might potentially increase in value does not make the ultimately realised profit assessable income (AAT Case 7562 (1991) 22 ATR 3559). He further submitted that the applicant was not involved in the business of the development of commercial property, as the X group was ostensibly a residential land developer (Westfield Limited v Federal Commissioner of Taxation (1991) 99 ALR 510). Accordingly, the profit realised from the sale of the A and B land does not represent profit made in the ordinary course of the applicant’s business.
58. In further written submissions relating to penalties, Mr Alexander asserted that the applicant had made appropriate disclosure, that any delays in assessment were the respondent’s fault, that the respondent was applying ex post facto reasoning and that the respondent kept changing the basis for its decision. He submitted that paragraph 41 of Tax Ruling 2517 sets the appropriate culpability component in contentious cases in the 0-5% range, and that due to the fact no blame could be attached to the taxpayer, the culpability component should be reduced to 0%.
respondent’s submissions
59. The respondent made both oral and written submissions. The Tribunal sees no useful purpose in repeating here the latter submissions which are of course well known to the parties and to the Tribunal.
60. Amongst Mr Erskine’s oral submissions were the following. That the central issue is the taxpayer’s purpose at the time the contracts were exchanged. That it must be kept in mind that there were two sections of land purchased. Mr Erskine submitted that it was clear that Mr X was the controlling mind of the taxpayer and that largely it was his evidence which had to be focused upon and that the Tribunal should not believe Mr X’s evidence that his only purpose was to build a corporate head office on the land. Mr Erskine put to the Tribunal that Mr X was not a creditworthy witness as outlined in paragraph 7 of the respondent’s written submissions and that Mr X’s purpose was inconsistent with events occurring before and after purchase.
61. For the purpose of the second limb of s25A of the Act, Mr Erskine submitted that the acquisition of the subject land was part of the overall profit making scheme of the group and the purchase was clearly a business deal for the profit making purposes of the X group of companies. He submitted that to look at the subject land as being suitable for redevelopment in a commercial way is entirely consistent with the overall business of the X group as a whole. Mr Erskine then drew the Tribunal’s attention to aspects of the applicant’s notice of objection which he submitted made entertaining reading with Mr X’s evidence as to the purpose when acquiring the subject land, namely paragraph 2 of page 210 of the appeal book, paragraph 13 of page 211, paragraph 17 of page 212 and paragraph 21 of page 214.
62. Mr Erskine also submitted that evidence before the Tribunal, apart from that of Mr X, indicated that the X group’s staff numbers were small, at least until early 1985. In this regard, Mr Erskine referred to the evidence of Messrs. V and A.
63. Regarding the intention to buy land for corporate offices for the X group, Mr Erskine submitted that there was never any attempt to find finance for such a project and no work done to develop the proposal with the council and no plan. This was inconsistent with Mr X’s evidence as to the need for corporate offices. Mr Erskine further submitted that the Tribunal could draw the inference that the subject land had the potential for on-selling to other fast food outlets from the fact that Mr X was an experienced property developer and was aware of the presence of such an outlet next to the subject land.
64. The parties both provided written submissions regarding the question of penalties.
THE TRIBUNAL’S FINDINGS REASONS AND DECISION
65. The Tribunal would indicate that it has had regard to the totality of the evidence placed before it together with the submissions of the parties.
66. The Tribunal has had the advantage of carefully observing and listening to the witnesses in the giving of their evidence.
67. The central witness who gave evidence was Mr X. That he was the controlling mind of the applicant and the X group of companies is without doubt and the Tribunal so finds. But one of many examples of this is to be found in the evidence of Mr A where, in reference to Mr X, he said “…it was a waste of time trying to convince him other ways, if he wanted to do something he did it”. (transcript p337). Mr X was subjected to a lengthy and searching cross-examination. His evidence in total was given over a period of two days and occupied some 186 pages of transcript. The Tribunal closely observed and listened to Mr X in the giving of his evidence. The Tribunal has given careful consideration to his evidence and to his demeanour in the giving of it. The Tribunal found Mr X to be an unimpressive witness. He was, in the opinion of the Tribunal, evasive from time to time in the giving of his testimony and frequently did not directly answer the questions asked of him. The Tribunal gained the distinct impression that he tailored his evidence to suit his own ends, namely, of creating the false impression that the dominant purpose at the time of the applicant’s acquisition of the subject land was for the construction of offices by way of corporate headquarters for the X group of companies.
68. Particularly unconvincing was his evidence when outlining the reasons for acquiring the land in question. These included the size and nature of the X group of companies previous headquarters and the need for a higher profile for them in the particular central business district. The impression gained by the Tribunal in the giving of this evidence was that of a person who was prepared to use information which he considered would justify in the minds of others, and in particular this Tribunal, that the purpose in acquiring the land was as he stated it to be and to hide the true purpose.
69. The Tribunal found Mr X to be most unimpressive in the manner of the giving of his evidence in cross-examination with respect to the listing of the A and B land on the one hand and Mr X’s avowed intention to establish corporate headquarters on it on the other. His explanations were unconvincing to say the least, and the Tribunal was left with the distinct impression that his evidence in this regard was the product of utilizing the negotiations with and acquisition of the W group as a means of disguising his true purpose (and consequently that of the applicant) when purchasing the subject land (namely for resale at a profit). Mr X was, in the opinion of the Tribunal, a particularly unconvincing witness with respect to the answers he gave when questioned by the Tribunal regarding his thoughts at the time of first seeing the property in question and thereafter to the sale of it.
70. The Tribunal found the evidence of Mr X regarding the importance of establishing the corporate headquarters of the X group in a particular central business district inconsistent with the newspaper description of the A and B land in a regional newspaper article as “A proposed serviced apartment – motor inn complex …” (Exhibit A1). When cross-examined on this topic about the absence of any reference in the article to corporate headquarters, the Tribunal formed the distinct impression that Mr X’s evidence was evasive from time to time and did not represent the truth of the matter.
71. Mr X denied in cross-examination that he was presented with a golden opportunity regarding this front page article of the above newspaper to announce publicly the proposed establishment of the corporate headquarters in that particular region. Mr X’s reasons for denying this were because of negotiations at the time which may have led to the purchase of a particular building then occupied by a rival developer as its corporate headquarters, and because he asserted in evidence that it may have been in some other newspaper article. Be that as it may, (namely that negotiations of this nature were under way at the time of this article (ie 16 October 1985) and about which the Tribunal has its reservations) Mr X’s evidence that it may have been in another newspaper article was unconvincing to say the least.
72. Mr X was cross-examined about what steps were taken by him to develop the subject land after the signing of the contract to purchase the A and B land until the sale of portion of it to the first fast food outlet. His evidence in this regard was, in the opinion of the Tribunal, designed to create a false impression, namely, that quite a lot was done in this period for the purpose of planning the construction of corporate offices for the X group and the utilization of the surplus land for other activities. When questioned in cross-examination as to when Mr F was commissioned to go and talk to the particular council about developing the A and B land, Mr X initially could not recall when that was but on further questioning admitted that Mr F was never so commissioned.
73. The Tribunal also found Mr X’s answers in cross-examination with respect to non-recognition by Mr X of the A and B land as being suitable for a fast food outlet to be unconvincing to say the least. The Tribunal formed the impression that Mr X tailored his evidence to give support to his assertion that the prime purpose of purchasing the land was for corporate headquarters – ie that he was only looking for suitable land for location of corporate headquarters. The Tribunal was also unimpressed with Mr X’s evidence regarding the reason for short term financing, namely, to enable the time within which to draw up plans and to calculate the finance needed for development of the land on a long term basis. It was like so much of his evidence, again unconvincing.
74. The Tribunal is also of the view that Mr X played down in his evidence having any meaningful experience or necessary skills in the field of commercial development of land. Whilst commercial development of land may not have been his fortè, the Tribunal formed the impression that Mr X would not baulk for a moment in taking on a viable commercial development if Mr X could see a sizeable profit in it. The Tribunal accepts that Mr X has had a great deal of experience, both in this country and overseas, in the developing of land and mainly of a residential nature.
75. In the giving of his evidence the Tribunal formed the impression that Mr X would be very adept in developing land, particularly by way of the subdivision of rural land for sale as residential allotments. Mr X struck the Tribunal in the giving of his evidence as being shrewd and quick to seize an opportunity. In the opinion of the Tribunal Mr X is not a person who lacked the skills and perception to readily see the potential which certain land had, well before others may come to recognize that same potential. In the opinion of the Tribunal Mr X is a businessman with a keen sense and perception regarding the opportunity to make a profit and is well versed in the tax implications which may attend to the buying and selling of land.
76. The evidence of Mr X as to why the subject property was listed for sale for $500,000 in late December 1985 – early January 1986 with the X group’s own real estate company the Tribunal found unconvincing. The reason given was, in effect, to establish a value for project purposes which could be used to convince a particular merchant bank to accept, the object being to get the bank to accept the value Mr X had placed upon it of $480,000 which was substantially higher than that which a commercial valuer had placed upon it, namely $190,000, being the amount which the applicant had paid for it a few months earlier. In his evidence in this regard, Mr X revealed that the subject land was worth more because “had the flood matter mitigation problem been satisfied and the problem overcome, and what proved to be correct later on in the on-sale, which was not contemplated, it was worth more” (transcript p76). Mr X then gave evidence that the merchant bank provided the funds sought because it was “happy to accept the value of the land and to take it on security because our intention … was for them to also fund the construction of the building once we had designed and had everything in place. That merchant bank was going to do our funding.” (transcript p78). The Tribunal formed the opinion that this part of Mr X’s evidence was clearly crafted to falsely support his evidence as to the purpose of the purchase of the land in the first place. The Tribunal is also of the view that the listing of the subject land for sale served the purpose of alerting the market that it was available for sale and at the price of $500,000, irrespective of the reason given by Mr X in evidence and which the Tribunal is not prepared to accept and which further indicates the lengths to which he was prepared to go in order to cloak the true identity of purpose in the acquisition of the land in question. The agent at the relevant time who gave evidence was unable to recall whether the listing was just for valuation purposes or whether it was for the purpose of selling the subject land.
77. In summary, the Tribunal reached the conclusion that Mr X was not a credible witness and rejects his evidence regarding his intentions as to the purpose for acquiring the two parcels of land comprising the A and B land as at the respective times of acquisition.
78. There are a number of other considerations which support the rejection of Mr X’s evidence. The first of which is the paucity of evidence before the Tribunal as to the efforts Mr X made in searching out suitable sites for the re-siting of the corporate headquarters for the X group by way of existing sites suitable for building, renting or the buying of existing buildings. There was also a paucity of evidence as to the available financial resources of the X group as at the acquisition dates to develop the subject land for corporate headquarters. In this regard it is noteworthy that the applicant in its objection referred to the company in the X group (which provided some of the finance to purchase the subject land) as being “under considerable cash flow pressure” (pg 212 of Appeal Book). The absence of any meaningful evidence to show, as at the time of acquisition of the subject land, that the building of corporate headquarters was within the financial capacity of the X group is, in the opinion of the Tribunal, a relevant factor in assessing whether Mr X’s purpose at the relevant time was as he stated it to be in evidence. Noteworthy was the absence in the evidence before the Tribunal of comprehensive inquiries being made as to the suitability of the subject land for corporate headquarters before the buying of the land commenced. If the intention at the relevant time in purchasing the land in question was for the building of corporate headquarters, then this does not sit at all well with the absence of evidence of any meaningful attempt to formulate a detailed plan and to estimate costs of development and building corporate headquarters with some precision before or after the purchase of the property. In evidence Mr X gave some evidence as to his estimation of cost but of a very general nature, not supported by calculations of any kind. Another consideration is the prominent regional newspaper article of 16 October 1985 which did not describe the purpose of acquiring the A and B land in terms compatible with Mr X’s evidence to this Tribunal as to that purpose. Having regard to Mr X’s evidence to the effect that it was a priority of the X group to establish itself and to have a public profile in the region, one would have expected the article to have made mention of the plans for establishing the corporate headquarters in the region, however it was instead described in the article by way of a quote from Mr X in the following terms “A proposed major serviced apartment – motor inn complex …” (Exhibit A1). The reasons given in evidence by Mr X and his sister as to why this was so were, in the opinion of the Tribunal, unconvincing to say the least.
79. At page 382 of the Appeal Book there appears a document entitled “Statement of Affairs” which relates to two of the companies in the X group, including the applicant. This document was prepared in December 1985 in relation to loans being sought by the X group. In relation to the applicant it describes the subject land as “Proposed Motel Site” and gives a market valuation of $480,000. This is clearly inconsistent with Mr X’s evidence regarding his assertion that the land in question was for corporate headquarters for the X group.
80. Another consideration is the complete absence in the applicant’s objection of 5 July 1993 of any reference to the use of any of the subject land for the purposes of corporate headquarters for the X group. There was, however, specific reference to the head office of the X group’s real estate agency being situated on the land as part of the proposed commercial development. It is also noteworthy that the objection stated “… between February 1986 and July 1986 the taxpayer was still considering the construction of a motel and other commercial property for investment purposes” (pg 213 of Appeal Book). A further consideration is the complete absence in the applicant’s objection of the need for corporate headquarters for the X group being able to be met by the purchase of the W group as the reason for the sale of the no longer needed A and B land – instead one finds the following
“21. As a result of the continuing difficulties associated with obtaining Council approvals for its proposed commercial development, and the attractive offer made for the purchase of the land, the taxpayer sold a portion of ……….(the A land) to ……….(the first fast food outlet). Contracts for sale were exchanged on 28 October 1986 and settlement took place in September 1987. The land was sold for a consideration of $250,000.
22. Having sold a large portion of the land to ………. (the first fast food outlet), the remainder of the land was no longer suitable for the intended commercial purposes for which the land was originally acquired by the taxpayer.”
(pg 214 of Appeal Book)
One also finds the following outlined in the objection
“However, some time prior to the sale of land to …………(the first fast food outlet) the taxpayers purpose changed. Whilst these events are now some time ago, it would appear the taxpayer’s intention changed upon becoming aware that……….(the first fast food outlet …) interested in acquiring the land, coupled with the inherent difficulties in obtaining Council’s approval for the proposed development.
It is clear from the abovementioned facts that the acquisition of the land by……….(the fast food outlet) was not contemplated at the time the taxpayer acquired the land. Given the planning difficulties there is also no evidence the taxpayer would have been able to sell…………(the A and B land) in an undeveloped state to a third party (given the flooding problems).”
(pg 215 Appeal Book)
81. The Tribunal now turns to a consideration of the other oral evidence given in support of the applicant (apart from Dr G). Understandably, the passage of time has taken its toll on the memories of all witnesses to a certain extent. With the exception of Ms X, the Tribunal formed the impression that each of the other witnesses did their best to try and recall the events in question. With respect to Ms X, the Tribunal gained the distinct impression that she at times tailored her evidence to portray events from time to time in a light which did not necessarily accord with the truth of the matter. She was at pains to portray events in such a way as to try and assist her brother Mr X. The Tribunal has reservations about accepting her evidence except wherever it might be said to be supported by the collective evidence of the remaining witnesses. Despite the ravages of time and the reservations about Ms X, the Tribunal is prepared to make the following findings.
82. Prior to the purchase of the subject land, the X group of companies occupied offices outside the region where the X group’s activities were centred. These offices were small in size and inadequate as time went by to readily accommodate the staff of the X group. There was a need to establish corporate headquarters for the X group in the region in which they were operating and that need was present at the time of the purchase of the subject land. That need became more pressing as time went by. The Tribunal finds that Mr X, as and from the first siting of the subject land, did from time to time express to others that the land in question was for the purpose of providing corporate headquarters for the X group. This is clear from the evidence of those who were associated in various ways with the X group.
83. The evidence of the solicitor Mr L, as already referred to in these reasons, is accepted by the Tribunal. He was an impressive witness in the opinion of the Tribunal.
84. The Tribunal has formed the firm view, after having given careful consideration to the totality of the evidence before the Tribunal and the views formed by the Tribunal in relation to that evidence, together with the submissions made by the parties, that not only must the evidence of Mr X as to his intentions at the time of acquisition of the subject property be rejected, but that the inescapable and reasonable inference to be drawn is that the sole and only purpose which Mr X (as the controlling mind of the applicant) had at the relevant time, namely, at the time of exchange of contracts of the two parcels of land comprising the A and B land, ie at the time of acquisition of the subject land, was for resale of the subject land at a profit. The subject land was clearly a valuable piece of land with the potential for subdivision and on-sale. Its position in the central business district of the particular region was central and high profile in terms of exposure to the public and passing traffic. Its zoning was advantageous. Located on the same block and immediately adjacent was a national high profile fast food outlet.
85. The Tribunal has no doubt that the potential for the subject land to be sold for a substantial profit immediately came to the mind of Mr X when he was first introduced to it. As indicated, the Tribunal is satisfied that Mr X let it be known that the dominant purpose of the acquisition was to establish corporate headquarters for the X group. Bearing in mind Mr X’s experience as a business man and land developer over many years and the Tribunal’s impression of him when giving his evidence, the Tribunal is of the view that Mr X let the above referred to purpose be known to hide his true and only purpose, ie that of profit-making by sale. Put in other terms, Mr X did not strike the Tribunal as being a person who would have told others that he was acquiring the subject land for the sole purpose of making a profit by sale.
86. The listing of the property for sale in December 1985 served the purpose of alerting the market that the property was for sale. The ultimate sale of the land realized the potential which Mr X had foreseen at the time of acquisition. The Tribunal finds that the property, the subject of these proceedings, was acquired by the applicant for the sole and only purpose of profit-making by sale and that the profits flowing therefrom and as calculated by the respondent fall to be included in the applicant’s assessable income for 1988.
87. The Tribunal now moves to a consideration of penalties. The Tribunal has given consideration to the submissions of the parties in this regard and of course to its views on the evidence before it. The Tribunal’s considered view accords with that of the respondent with respect to the 40% culpability component assessment regarding interest and commission and the 25% component in relation to profits arising from the sale of the subject land. With respect to the former, the applicant has not raised any matter which could justify a remission of additional tax below the 40% which, in the opinion of the Tribunal, is appropriate. As to the latter assessment, this is clearly warranted, bearing in mind the Tribunal’s view of the matter as outlined above. The applicant’s failure to disclose its true purpose in the acquisition of the land can only be said to have been deliberate and there are no factors which the applicant has raised which persuade the Tribunal that the 25% culpability component is other than appropriate.
88. The decision of the Tribunal is that the decision under review is affirmed.
I certify that the 88 preceding paragraphs are a true copy of the reasons for the decision herein of Deputy President B H Burns
Signed: ....................(Signed)..........................
D M Walkley - Personal AssistantDate/s of Hearing 3-5 April 2000 and 26 June 2000
Date of Decision 21 February 2001
Counsel for the Applicant Mr Alexander
Solicitor for the Applicant Colquhoun Murphy
Counsel for the Respondent Mr Erskine
Solicitor for the Respondent Australian Government Solicitor
0