Commissioner of Taxation v Byrne Hotels Qld Pty Ltd
[2011] FCAFC 127
•11 October 2011
FEDERAL COURT OF AUSTRALIA
Commissioner of Taxation v Byrne Hotels Qld Pty Ltd [2011] FCAFC 127
Citation: Commissioner of Taxation v Byrne Hotels Qld Pty Ltd [2011] FCAFC 127 Appeal from: The Taxpayer and Commissioner of Taxation [2010] AATA 455 Parties: COMMISSIONER OF TAXATION v BYRNE HOTELS QLD PTY LTD File number: QUD 280 of 2010 Judges: DOWSETT, BENNETT AND GREENWOOD JJ Date of judgment: 11 October 2011 Catchwords: TAXATION – capital gains tax – whether business eligible for capital gains tax concessions in Division 152 of Income Tax Assessment Act 1997 (Cth) – whether the maximum net asset value test in s 152-15 of the Act is satisfied – meaning of “liabilities” in s 152-20(1) of the Act – whether real estate commission and legal fees were “liabilities” for purposes of s 152-20(1) “just before” the CGT event Words & phrases: “just before”; “liabilities” Legislation: Income Tax Assessment Act 1997 (Cth) ss 104-10, 108-5, 152-1, 152-10, 152-15, 152-20, 152-20(1), 152-205, 152-410 Cases cited: Crimmins v Stevedoring Industry Finance Committee (1999) 200 CLR 1 cited
Walters v Babergh District Council (1983) 82 LGR (Eng) 235 - cited
McDowell v Baker (1979) 144 CLR 413 cited
Legal Services Commissioner v Baker (No 2) [2006] QCA 146 – cited
Keppel v Wheeler [1927] 1 KB 577) – cited
Georgieff v Athans (1981) 26 SASR 412 - cited
Havas v Cornish & Co Pty Ltd [1985] 2 Qd R 353 - cited
Fitzgerald v Metcalfe [1917] NZLR 486 – cited
Wardley Australia Ltd and Anor v State of Western Australia (1992) 175 CLR 514 - citedOther references: Macquarie Concise Dictionary (5th ed, Macquarie Dictionary Publishers Pty Ltd, 2009)
Land Contracts in Queensland, 3rd Edition, 2011, The Federation Press, Christensen, Dixon, Duncan and JonesThe Law of Agency, 3rd Edition, 1991, Butterworths, Kerr, Bowstead & Reynolds on Agency, 19th Edition, Sweet & Maxwell
Date of hearing: 28 February 2011 Place: Brisbane Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 135 Counsel for the Appellant: Mr B O'Donnell QC and Ms M Brennan Solicitor for the Appellant: ATO Legal Services Branch Counsel for the Respondent: Mr FL Harrison QC and Mr DW Marks Solicitor for the Respondent: McCullough Robertson
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
QUD 280 of 2010
ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: BYRNE HOTELS QLD PTY LTD
Respondent
JUDGES:
DOWSETT, BENNETT AND GREENWOOD JJ
DATE OF ORDER:
11 OCTOBER 2011
WHERE MADE:
BRISBANE
THE COURT ORDERS THAT:
1.The appeal be allowed in part.
2.The matter be remitted to the Administrative Appeals Tribunal to be determined according to law and in accordance with these reasons.
3.The parties are directed to file written submissions as to the disposition of the costs of and incidental to the appeal within 21 days.
4.The question of the costs of and incidental to the appeal will be determined on the papers.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
QUD 280 of 2010
ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: BYRNE HOTELS QLD PTY LTD
Respondent
JUDGES:
DOWSETT, BENNETT AND GREENWOOD JJ
DATE:
11 OCTOBER 2011
PLACE:
BRISBANE
REASONS FOR JUDGMENT
DOWSETT J
I agree with the orders proposed by Greenwood J and with his Honour’s reasons.
I certify that the preceding one (1) numbered paragraph is a true copy of the Reasons for Judgment herein of the Honourable Justice Dowsett. Associate:
Dated: 11 October 2011
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
QUD 280 of 2010
ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: BYRNE HOTELS QLD PTY LTD
Respondent
JUDGES:
DOWSETT, BENNETT AND GREENWOOD JJ
DATE:
11 OCTOBER 2011
PLACE:
BRISBANE
REASONS FOR JUDGMENT
BENNETT J:
By contracts of sale dated 24 October 2003, the respondent (Byrne Hotels) contracted to sell its Glenmore Tavern business (the Business) and a related entity of Byrne Hotels, Halgalemo Pty Ltd (Halgalemo), contracted to sell the land upon which the Business operated (the Land). When Byrne Hotels lodged its income tax return for the year ended 30 June 2004, it did not disclose the capital gain of $4,125,955 resulting from the sale of the Business. Byrne Hotels took the view that it satisfied the maximum net asset value test (MNAV test) in s 152-15 of the Income Tax Assessment Act 1997 (Cth) (the Act) because its net asset value “just before” the sale of the Business was $4,245,428, which was less than the $5,000,000 limit imposed by the MNAV test at the time. Accordingly, Byrne Hotels claimed a 50% reduction in the capital gain on the sale of the Business pursuant to Subdivision 152-C of the Act and disregarded the balance of the capital gain from the sale of the Business pursuant to the small business rollover concessions in Subdivision 152-E of the Act.
Following an investigation into the matter, the appellant (the Commissioner) concluded that Byrne Hotels’ net asset value “just before” the sale of the Business was $5,469,252, that is, an amount exceeding $5,000,000. On 10 March 2009 the Commissioner issued a notice of amended assessment to Byrne Hotels increasing its taxable income by $4,125,955, the amount of the capital gain. On 13 May 2009 the Commissioner made an assessment of shortfall penalty based upon the conclusion that Byrne Hotels had failed to take reasonable care and was thus liable for the imposition of penalty at the rate of 25%. Byrne Hotels objected to the amended assessment and the assessment of penalty on 30 April 2009. The Commissioner disallowed this objection on 25 September 2009. Byrne Hotels then appealed to the Administrative Appeals Tribunal (the Tribunal). On 18 June 2010, the Tribunal set aside the Commissioner’s objection decision on the grounds that Byrne Hotels satisfied the MNAV test because its net asset value “just before” the sale of the Business did not exceed $5,000,000. The Commissioner now appeals from the Tribunal decision.
The amount of the capital gain arising from the sale of the Business is not in dispute. The issue for determination before the Court is whether Byrne Hotels satisfied the MNAV test “just before” the contract for the sale of the Business was entered into. The appeal turns on the characterisation of the real estate commission and legal fees incurred by Byrne Hotels on the sale of the Business, as well as the real estate commission incurred by Halgalemo on the sale of the Land.
The Commissioner, in his written submissions, raised an arithmetic error on the part of the Tribunal. The Commissioner did not press that error as a question of law and did not seek to have the matter remitted to the Tribunal on that issue alone.
Prior to the hearing, Byrne Hotels made written submissions on matters that the Tribunal found unnecessary to determine in light of its findings. At the hearing, the Commissioner was of the view that these matters related to findings of fact that were more appropriate to be made by the Tribunal than the Court. In any event, the Commissioner said he was not in a position to respond to these matters. The Court indicated that it would proceed with respect to the balance of the appeal and then consider the possibility of asking for written submissions on these matters. I am of the view that it is not appropriate for the Court to determine these issues on appeal.
THE ACT AS AT 24 OCTOBER 2003
As stated in s 152-1, Division 152 of the Act allows for the reduction of capital gains by various concessions ‘to help small business’. The basic conditions for relief under Division 152 are contained in Subdivision 152-A. Section 152-10 of the Act relevantly provides:
(1)A *capital gain… you make may be reduced or disregarded under this Division if the following basic conditions are satisfied for the gain:
(a)a *CGT event happens in relation to a *CGT asset of yours in an income year;
…
(b) the event would (apart from this Division) have resulted in the gain;
(c) you satisfy the [MNAV] test (see section 152-15);
(d) the CGT asset satisfies the active asset test (see section 152-35).
…
The Commissioner accepts that, as a result of the sale of the Business, Byrne Hotels satisfies paragraphs (a), (b) and (d) of s 152-10. The issue before the Court is whether Byrne Hotels satisfies the MNAV test as required by paragraph (c). The MNAV test is set out in s 152-15, which relevantly provides:
You satisfy the [MNAV] test if, just before the *CGT event:
(a) the sum of the following amounts does not exceed $5,000,000:
(i) the *net value of the CGT assets of yours;
(ii)the net value of the CGT assets of any entities *connected with you;
(iii)the net value of the CGT assets of any *small business CGT affiliates of yours or entities connected with your small business CGT affiliates (not counting any assets already counted under subparagraph (ii))…
[emphasis added]
The relevant concessions in this case, those being the small business 50% reduction and the small business roll-over, are set out in Subdivisions 152-C and 152-E respectively. Section 152-205 requires the basic conditions in Subdivision 152-A to be satisfied for the taxpayer to obtain the concession in Subdivision 152-C, while s 152-410 requires the basic conditions in Subdivision 152-A to be satisfied for the taxpayer to obtain the concession in Subdivision 152-E. It follows that Byrne Hotels will not be eligible to obtain the concessions in Subdivisions 152-C and 152-E unless it can satisfy the MNAV test.
Section 995-1 stipulates that “net value of the CGT assets” of an entity has the meaning given by s 152-20. Section 152-20(1) provides:
The net value of the CGT assets of an entity is the amount (if any) by which the sum of the market values of those assets exceeds the sum of the liabilities of the entity that are related to the assets.
[emphasis added]
Subsections 152-20(2), (3) and (4) provide further guidance on working out the CGT assets of an entity, although these subsections are not directly relevant in the present case.
Section 108-5 of the Act defines the meaning of “CGT asset”. It relevantly provides:
(1) A CGT asset is:
(a) any kind of property; or
(b) a legal or equitable right that is not property.
(2) To avoid doubt, these are CGT assets:
(a) part of, or an interest in, an asset referred to in subsection (1);
(b) goodwill or an interest in it;
(c) an interest in an asset of a partnership;
(d) an interest in a partnership that is not covered by paragraph (c).
Note 1: Examples of CGT assets are:
·land and buildings;
·shares in a company and units in a unit trust;
·options;
·debts owed to you;
·a right to enforce a contractual obligation;
·foreign currency…
[original emphasis]
It is worth noting that the examples in s 108-5 form part of the Act (see s 950-100).
The Act does not define “liability”, “CGT liability” or what is meant by the expression ‘the liabilities of the entity that are related to the assets’.
The parties accept that the sale of the Business involves the disposal of a CGT asset, which is classified by s 104-10 as CGT event A1. Section 104-10(3)(a) stipulates that, where there is a contract for the disposal of the CGT asset, the time of CGT event A1 is when that contract is entered into.
THE TRIBUNAL DECISION
The Tribunal outlined the ownership structure of Byrne Hotels at [9]–[10]. The Tribunal noted that:
·Byrne Hotels was the proprietor of the Business.
·Halgalemo was the owner of the Land.
·Shares in Byrne Hotels were held by various related entities, as well as by Mr Michael Byrne, who was a director of Byrne Hotels.
·The other directors of Byrne Hotels were Ms Barbara Byrne (the wife of Mr Michael Byrne) and Mr Justin Byrne (the son of Mr Michael Byrne and Ms Barbara Byrne).
The Tribunal noted at [11] that it was common ground that Mr Michael Byrne and Ms Barbara Byrne were entities “connected with” Byrne Hotels and that the net value of their CGT assets was to be taken into account in determining whether Byrne Hotels satisfied the MNAV test.
The Tribunal then outlined the events involving the sale of the Business and the Land (at [12]–[13]). In summary:
·On 14 July 2003 Mr Michael Byrne executed a document on behalf of Byrne Hotels governing the appointment of Jones Lang LaSalle Hotels (Qld) Pty Ltd (the real estate agent).
·In the following months, Byrne Hotels was persuaded to sell the Business and the Land, the latter via Halgalemo.
·Byrne Hotels retained accountants to compile financial reports required by the potential purchaser of the Business and the Land. In early October 2003, Byrne Hotels engaged Deacons (the solicitors) to act for it in connection with the sales of the Business and the Land.
·The contracts to sell the Business and the Land were both executed on 24 October 2003.
·Following execution of the contracts, Byrne Hotels paid $23,450 to its accountants in relation to the sales and $15,606.88 to the solicitors in respect of fees and disbursements in connection with the sales.
·The sales were completed in January 2004.
·On completion of the sales, Byrne Hotels paid commission of $353,125 to the real estate agent.
The Tribunal stated at [14] that the only aspect of Byrne Hotels’ entitlement to the concessions in Subdivisions 152-C and 152-E of the Act in issue was whether it satisfied the MNAV test.
The Tribunal then outlined at [14]–[15] the history of the dispute between Byrne Hotels and the Commissioner (see [2]–[3] above).
The Tribunal used the following table to illustrate the differences between Byrne Hotels’ and the Commissioner’s assessments of the net value of the CGT assets of Byrne Hotels:
Entity Byrne Hotels Commissioner Difference Byrne Hotels $4,176,118 $4,417,612 $241,494 Related entity of Byrne Hotels $43,983 $43,983 $0 Halgalemo $25,427 $187,927 $162,500 Mr Michael Byrne $0 $483,221 $483,221 Ms Barbara Byrne $0 $263,787 $263,787 Mr Justin Byrne $0 $72,722 $72,722 Totals $4,245,528 $5,469,252 $1,223,724
The Tribunal observed at [18] that there were five issues for determination:
A.Whether the costs of the sales, those being the solicitors’ fees, the accountant’s fees and the real estate agent’s commission, were liabilities for the purposes of the MNAV test.
B.Whether Mr Justin Byrne was a small business CGT affiliate of Byrne Hotels.
C.Whether the assets of Mr Michael Byrne, Ms Barbara Byrne and Mr Justin Byrne were CGT assets for the purposes of the MNAV test.
D.Whether, as argued in the alternative by Byrne Hotels, the value of the assets of Mr Michael Byrne, Ms Barbara Byrne and Mr Justin Byrne comprising inter-entity loans should be valued at a value discounted to take into account the net asset value of the debtor entity, rather than at the face value of the loans.
E.Whether Byrne Hotels failed to take reasonable care in providing information to the Commissioner.
In relation to issue A, the Tribunal found that each of the outgoings in issue was to be regarded as a liability of Byrne Hotels or an entity connected with it, that is, Halgalemo (at [49]). In relation to issue B, the Tribunal found that Mr Justin Byrne was not a small business CGT affiliate of Byrne Hotels (at [55]).
The Tribunal said that its conclusions on issues A and B were sufficient to satisfy it that, even if issue C were determined in favour of the Commissioner, the net value of the CGT assets of Byrne Hotels did not exceed $5,000,000 “just before” the CGT event. Accordingly, the Tribunal stated at [61] that it did not propose to determine issue C. Although observing that issue D did not strictly arise for consideration, the Tribunal determined the issue in favour of the Commissioner (at [62]). The Tribunal noted at [64] that issue E did not arise for consideration given its earlier findings.
On appeal the Commissioner challenges the Tribunal’s findings with respect to issue A but not with respect to issue B. It is therefore only necessary to consider the Tribunal’s reasoning with respect to issue A.
The Tribunal’s findings with respect to liabilities
The Tribunal observed that the starting point for an analysis of what constitutes “liabilities” under s 152-20(1) of the Act was the Act itself. The Tribunal said that the purpose of Division 152 of the Act was described in s 152-1 of the Act. After quoting part of s 152-1, the Tribunal stated that the evident purpose of this part of the Division is to ascertain what is (and what is not) a “small business”. This was, the Tribunal said, a classification that the legislature made dependent on the net market value of the entity and those closely associated with it “just before” the CGT event. The Tribunal observed that by focusing the timing of the enquiry in this manner, the legislature evidently intended to bring into account the sale price of the asset, the disposal of which created the CGT event. The Tribunal said that ‘in those circumstances, it seems counter-intuitive, to say the least, that costs as closely connected to the sale as commission and conveyancing costs, should be ignored in determining whether the entity’s net asset value exceeded $5m’ (at [21]).
The Tribunal rejected the submission by Byrne Hotels that the provision for the timing of CGT event A1 in s 104-10(3) of the Act was not an aid in determining when the event actually occurred and, as such, the liabilities to pay commission and other fees connected with the sale were not to be determined upon entry into the contracts for the sale of the Business and the Land, but rather just before the settlement of these contracts on 19 January 2004. The Tribunal said that such an approach was contrary to the plain wording of the Act, which requires determination of the net value of the CGT assets ‘just before the CGT event’. The Tribunal accepted that there is no CGT event unless the actual disposal of the asset takes place on completion of the sale, but stated that ‘the language of the [Act] falsifies that reasoning and has the effect that entry into a contract is taken to be the disposal where an executory contract is ultimately completed’ (at [24]).
The Tribunal then turned to consider the width of the expression “liabilities” in the context of the MNAV test and s 152-20(1) of the Act. The Tribunal referred to various authorities, including Crimmins v Stevedoring Industry Finance Committee (1999) 200 CLR 1, in which Gleeson CJ observed at [8] that ‘depending upon the context, the meaning of “liability” can include a contingent or potential liability’. The Tribunal also noted the statement of Gaudron J at [15]:
There is no difficulty in speaking of the existence of a liability or obligation that is not presently enforceable… At least that is so if there is or was some foundation for the liability or obligation in question.
After reviewing the authorities, the Tribunal said that, in the absence of words of limitation or expansion, the width of the expression “liabilities” is to be determined, at least in part, by reference to the evident purpose of the provision to be construed and can be given a wide scope if that is required by the purpose of the provision. The Tribunal expressed this to be such a case. The Tribunal stated (at [32]):
It would make no sense to exclude liabilities that are inextricably connected to the sale where it is the disposal of the asset that creates the CGT event and determines the market value of the asset which in turns allows the extent of the capital gain to be ascertained. That connection provides “the foundation for the liability or obligation” spoken of by Gaudron J in Crimmins.
The Tribunal observed that the timing provision for CGT event A1 in s 104-10(3) of the Act does not alter the basic principle that CGT event A1 cannot occur without a change of ownership. The Tribunal accepted that where CGT event A1 occurs by virtue of the disposal of the asset, s 104-10(3) operates to identify the time of the event (at [33]). That section, the Tribunal said, does not alter the reality that the disposal of the asset occurs on completion of the contract and that the execution of the contract does not in itself amount to a disposal of the asset (at [34]). The Tribunal stated that it would be ‘entirely artificial’ to interpret s 104-10(3) as requiring only liabilities actually incurred at the time of the execution of the contract to be regarded for the purposes of determining the net value of CGT assets, in circumstances where there cannot be a CGT event, in fact, prior to completion of the contract.
Adopting the language of Woolf J in Walters v Babergh District Council (1983) 82 LGR (Eng) 235, the Tribunal said that it had a “fair choice”. The Tribunal concluded at [35]:
Having that choice, I have no hesitation in choosing an interpretation which makes, in my view, sense of this part of Division 152. The interpretation that I prefer is one that includes within the scope of liabilities those that are an integral part of the sale, that is, liabilities incurred, or to be incurred, in the completion of the contract.
The Tribunal then turned to consider the precise nature of the liabilities in issue in the case. The Tribunal later noted that the Commissioner does not dispute that these liabilities were “related” to the CGT assets of Byrne Hotels or Halgalemo (at [49]).
Accountancy fees
The Tribunal found that the accountancy fees of $23,450 were a liability of Byrne Hotels “just before” the execution of the contract of sale for the Business (at [38], [49]).
The solicitors’ fees
The Tribunal noted the breakdown of the solicitors’ fees of $15,606.88 (at [39]). In summary:
·There were three invoices: an invoice dated 28 October 2003 for $4,108.48, an invoice dated 28 November 2003 for $8,049.53 and an invoice dated 17 December 2003 for $3,448.47.
·The time sheets in evidence showed that all of the work represented by the 28 October 2003 invoice was done prior to 24 October 2003, part of the work represented by the 24 November 2003 invoice was done prior to 24 October 2003 and part was done on or after that date, while all of the work represented by the 17 December 2003 invoice was done on or after 24 October 2003.
The Tribunal rejected the Commissioner’s contention that, in the absence of a written legal services agreement, the Tribunal ought to conclude that the solicitors’ retainer was indivisible and that the fees under the retainer were due and payable on completion of the task for which the retainer was made, that is, bringing the contracts of sale to completion (at [41]). The Tribunal relied on Legal Services Commissioner v Baker (No 2) [2006] QCA 146, in which McPherson JA pointed out that the right of a solicitor to recover costs and fees for work done before termination of the retainer or contract rests in restitution. The Tribunal also noted that the invoices were issued on a periodic basis with an endorsement that the amount of the invoice was payable within seven days of the date of the account. The Tribunal inferred from this that the retainer was not an entire contract but one under which the solicitors were entitled to charge and recover on the basis of work done. As a result, the Tribunal considered the legal fees without regard to any notion of an entire agreement (at [44]).
In relation to the solicitors’ fees for work done up to 24 October 2003, the Tribunal found that the fees incurred to that date were liabilities that existed “just before” the CGT event. The Tribunal relied on the same reasoning it adopted for its consideration of the accounting fees, which was that, “just before” the execution of the contract of sale for the Business, the work had been performed and all that remained to be done was for an invoice to be prepared and sent for the fees payable; even if the date for payment had not yet arrived, the obligation to pay had been incurred prior to 24 October 2003 (at [38]).
As to the balance of the fees, that is, the fees for work done in connection with the sale of the Business after the making of the contract, the Tribunal again observed that it makes no sense of Division 152 to interpret “liabilities” in a manner that would exclude an outgoing, even one arising after the CGT event, where the outgoing would not have been incurred ‘but for’ the event that brings about the capital gain. The Tribunal concluded that, as it was necessary for Byrne Hotels to incur legal fees on or after the execution of the contracts in order to complete the contracts, there was no doubt that the solicitors’ fees were closely connected to the sales of the Business and the Land. Without incurring these fees, the Tribunal said, the contracts would not have been completed and the capital gain would not have arisen (at [45]).
The Tribunal found at [49] that the whole of the solicitors’ fees were to be regarded as “liabilities” for the purposes of s 152-20(1) of the Act.
Real estate agent’s commission
The Tribunal noted that the commission payable by Byrne Hotels was $190,625, while the commission payable by Halgalemo was the balance, $162,500. The Tribunal stated at [46] that it did not regard the position with respect to these balances as being different.
The Tribunal turned to consider the construction of the contract between Byrne Hotels and the real estate agent to determine when the real estate agent acquired the right to commission. At [46], the Tribunal reproduced the relevant clause from the agreement between Byrne Hotels and the real estate agent:
2.1 [Byrne Hotels] agrees to pay the [real estate agent] commission as specified in the Appointment if a Contract of Sale of the Property is entered into with a buyer, whether within the Term or after the Term, where the [real estate agent] is the effective cause of the sale within the Term, provided that:
(1) the Contract of Sale of the Property is completed; or
(2)[Byrne Hotels] defaults under the Contract of Sale and that Contract is terminated by reason of or following that default; or
(3)the Contract of Sale is not complete and the whole or part of the deposit paid is liable to be forfeited; or
(4)the Contract of Sale is terminated by mutual agreement of [Byrne Hotels] and the buyer.
The Tribunal classified the liability to pay commission as a “contingent liability” on the basis that, although Byrne Hotels was liable to pay commission upon the entry of the contracts for sale, that liability was contingent upon fulfilment of one of the four listed contingencies. The Tribunal noted that this liability arose from the same event that constitutes the CGT event and that the contingency was fulfilled by the event. However, the Tribunal observed that, in one critical sense, the liability in question was distinguishable from a contingent liability. If the contingency is not fulfilled then, the Tribunal said, there is no need to consider the issue of the liability; it is only where the sale of the Business is completed that it becomes necessary to consider the true nature of the liability (at [47]).
The Tribunal concluded (at [48]):
[O]n the proper construction of the expression, the “liabilities” in s 152-20 of the [Act] extend to liabilities that may not have crystallised “just before” the CGT event but which crystallise as part of completion of the sale. Put slightly different, whilst the “just before” element defines the time of the test it is proper and necessary to have regard to subsequent events to ascertain the liabilities that were an integral and necessary part of the CGT event.
The Tribunal found that the whole of the real estate agent’s commission was to be regarded as a liability of Byrne Hotels or Halgalemo (at [49]).
THE ISSUES ON APPEAL
The Commissioner contends that the following outgoings were not “liabilities” for the purposes of s 152-20(1) of the Act and ought not to be included in the calculation of Byrne Hotel’s net asset value for the purposes of the MNAV test:
·The real estate agent’s commission of $353,125.
·The solicitors’ fees of $8,049.53 for the invoice dated 28 November 2003.
·The solicitors’ fees of $3,448.87 for the invoice dated 17 December 2003.
If the Court were to find that these items were “liabilities”, it is not disputed that they were “related to” the CGT assets and would be included in the calculation under s 152-20(1).
The Commissioner does not challenge the Tribunal’s findings with respect to the accounting fees of $23,450 or the legal fees of $4108.48 for the invoice dated 28 October 2003.
It is not in dispute that, as a result of the timing provision in s 104-10(3)(a) of the Act, CGT event A1 occurred on 24 October 2003, that is, the date of the execution of the contract for the sale of the Business. The parties agree that the MNAV test is to be assessed “just before” the execution of this contract.
CONSIDERATION
The parties seem to agree that, as has been stated in a number of cases, the question of what is meant by the term “liabilities” and whether it includes what might be termed contingent or conditional liabilities depends on the context of the Act in which the term is used. For example, as Gleeson CJ stated in Crimmins at [8] and as referred to by the Tribunal, the term “liability” can include a contingent liability depending upon the context (see also McHugh J at [137] and McDowell v Baker (1979) 144 CLR 413 at 428 per Aickin J).
The Commissioner’s contention on appeal is that the only liabilities that may be taken into account for the purposes of s 152-20(1) of the Act are obligations incurred as at a time immediately before the CGT event. The Commissioner contends that contingent liabilities do not fall into that category. In summary, the Commissioner submits:
·The requirement for the MNAV test to be assessed “just before” the CGT event requires a snapshot at a moment in time. This is deliberately pitched before the CGT event. The evident intention of the legislation is that the impact of the CGT event on the taxpayer’s net CGT asset value is not to be taken into account. This means that liabilities that come into existence after the CGT event are not to be taken into account.
·A contingent liability is not a liability at all, but rather a conditional legal obligation.
·The simplicity of the wording in s 152-20(1) suggests that a simple analysis was intended by the legislature, which would be reflected in excluding contingent liabilities, the analysis of which will often be complicated and involve estimation and judgment.
·The Commissioner’s construction promotes certainty in the application of the MNAV test. Inclusion of contingent liabilities would lessen the taxpayer’s confidence in its own calculation.
·If the term “liabilities” in s 152-20(1) is read as including contingent liabilities, then “assets” would also need to be read as including contingent assets. This would add further complexity to the MNAV test.
Byrne Hotels, on the other hand, submits that contingent liabilities can be taken into account. It would, Byrne Hotels says, be contrary to the intention of the Act if, because of inchoate, potential or accruing liabilities associated with the sale of the Business, the concessions in Division 152 were denied when, as a result of the sale of the Business, the Business was in reality worth much less than $5,000,000 because these liabilities had not matured into a presently payable debt before the contract was entered into. Byrne Hotels points out that s 152-20(1) uses the expression “liabilities”, as opposed to “debts that are presently payable” or even “debts”.
When, for the purposes of construing the meaning to be given to “liabilities” in
s 152-20(1), the Commissioner’s attention was drawn to the fact that the definition of a CGT asset includes a ‘legal or equitable right that is not property’ (s 108-5(1)(b) of the Act) and that the examples of what constitutes a CGT asset in note 1 of s 108-5 include ‘a right to enforce a contractual obligation’, the Commissioner submitted that, if these rights are classified as contingent assets, they should not be included in the net asset value calculation in s 152-20(1). The Commissioner was unable to advance a reason why the clear words of the statute should be so construed. It is plain that if a contingent asset is within the breadth of the definition of CGT asset in s 108-5 of the Act, it will be included in the net asset value calculation.
The Commissioner submits in the alternative that even if the Court takes the view that the net value of the CGT assets includes contingent assets, contingent liabilities are, nevertheless, to be excluded from the net asset value calculation. The Commissioner points out that s 152-20(1) states that the calculation involves determining the “market values” of the CGT assets but says nothing about the market values of the liabilities that relate to those assets. The Commissioner contends that as a result of s 108-5, assets have a different definition to liabilities in the context of s 152-20(1). The legislature has not, the Commissioner says, defined liabilities in similarly expansive terms. The Commissioner also points to difficulties of valuation arising from the estimation and judgment that would be required by the inclusion of contingent liabilities.
In my view, the Commissioner has advanced no sufficient basis to deny the words of s 108-5 their clear meaning. There is no logical reason, in the context of Division 152, for there to be a mismatch between assets and liabilities. If contingent assets can be included in the net CGT asset value calculation in s 152-20(1) on the basis that they meet the definition of CGT assets in s 108-5, then contingent liabilities should also be included in that calculation, provided that they are related to the CGT assets and can be classified as “any kind of property” or “legal or equitable obligations that are not property”. This would include obligations existing at the relevant time under a contract which can be enforced by the other party or parties to a contract.
The Tribunal did not find that, in general, the term “liabilities” as used in s 152-20(1) includes contingent liabilities. It did, however, state at [35] that ‘whatever the width of the expression may be it must surely extend to a contingent liability where the contingency is the happening of the event that produces the capital gain’.
The Tribunal also observed that it seems counter-intuitive that costs closely connected with the CGT event should be ignored in the MNAV test. Byrne Hotels supports this reasoning; it contends that irrespective of the deeming provision as to the “time of the event” in s 104-10(3), there is no policy reason for excluding liabilities which:
·related to the CGT asset at the time of the CGT event;
·could be valued “just before” the CGT event; and
·had crystallised “just before” the CGT event.
Section 152-15 requires that the MNAV test be assessed “just before” the CGT event. This means that, for the purposes of s 152-20(1), the taxpayer is required to calculate liabilities that are related to the CGT assets “just before” the CGT event. The section is deliberately aimed at a “moment in time”. The wording of “just before” indicates that the legislature intended to exclude from the MNAV test the effects of the CGT event arising on or after the CGT event. The test is whether a particular obligation, as at the “just before” time, is a liability. That is, whether at that time the obligation involves any kind of property or a legal or equitable obligation that is not property. If a contingent liability fits that definition, it is to be accounted for. If, however, as at the “just before” time, an obligation cannot be classified as a liability, irrespective of whether a liability arising only as a consequence of the CGT event is subsequently incurred, it cannot be accounted for under s 152-20(1).
The Tribunal’s reasoning that it ‘makes no sense of Division 152 to interpret ‘liabilities’ in a manner that would exclude an outgoing, even one after the CGT event, that would not have been incurred but for the event that brings about the capital gain’ is misconceived. The notion that liabilities that are connected with the particular CGT event that gives rise to the MNAV test are different from other liabilities is one that flows through much of the Tribunal’s reasoning. The Tribunal erred in this respect. The Tribunal’s interpretation is contrary to the “just before” timing stipulated by the Act. There is no basis in s 152-20(1) for treating liabilities that are closely connected with the CGT event any differently from other liabilities that do not relate to the CGT event.
I now turn to consider the fees in dispute.
The Real Estate Agent Commission
The issue for determination is whether the real estate agent’s commission of $353,125 is a liability for the purposes of the MNAV test.
The Tribunal concluded that the real estate agent’s commission could be included in the calculation under s 152-20(1). Although the Tribunal recognised that this liability may not have “crystallised” as at the “just before” time, the Tribunal found that it crystallised as part of the completion of the sales of the Business and the Land (at [48]). As I have stated above, the Tribunal applied the wrong test in making this determination. It now needs to be determined whether the Tribunal reached the wrong outcome.
Byrne Hotels says that although the commission only became payable on completion of the contracts of sale, its liability to pay commission arose out of its execution of the contract governing the appointment of the real estate agent. Byrne Hotels submits that as at the time “just before” the CGT event, which would be ‘a time when one party has already signed the contract and the other party has picked up his pen and is about to sign’, there was no real uncertainty that the contracts of sale would be entered into and that there would be a CGT event.
I accept that the “just before” time would, in this instance, be the time that Byrne Hotels contends for. However, I should point out that, although there was no evidence before the Tribunal concerning which of the contracts for the sale of the Business and the sale of the Land was executed first, this would, in any event, be irrelevant. As the sales of the Business and the Land were clearly interrelated, I would regard the “just before” time as being immediately prior to the execution of the first of these contracts.
As at that time, the fact remains that Byrne Hotels and Halgalemo, as vendors of the Business and the Land respectively, had not executed contracts of sale for the Business and the Land. As at that time, Byrne Hotels and Halgalemo had the ultimate authority to decide whether or not to execute the contract of sale of the Business with the purchaser and thereby to trigger CGT event A1. There was nothing in the terms of the contract between the real estate agent and Byrne Hotels which required Byrne Hotels to accept an offer and execute the offer with the prospective purchaser. As at the “just before” time and based on the term governing the real estate agent’s entitlement to receive commission (see [40] above), there was no existing contractual obligation under which the real estate agent could enforce the payment of the commission against Byrne Hotels. The real estate agent could not have enforced a right to payment of the commission if the contracts of sale for the Business and Land had not been executed; for example, by Byrne Hotels “changing its mind at the last minute” or by either party to the sale of the Business discovering a “last minute problem” with its terms. Accordingly, as at the “just before” time, Byrne Hotels did not have a legal or equitable obligation to the real estate agent. The fact that Byrne Hotels and Halgalemo may have a legal or equitable obligation immediately after execution of the contracts for the sale of the Business and Land is not to the point. All that can be said is that as at the “just before” time:
·Byrne Hotels had entered into a contractual arrangement with the real estate agent by which it was contractually exposed, depending on further contingencies eventuating, to paying commission should it execute a contract to sell the Business and Halgalemo execute a contract to sell the Land;
·the contractual arrangement had yet to give rise to a liability; and
·the contractual arrangement might give rise to a liability in the future.
As at the “just before” time, Byrne Hotels was not, by virtue of its contractual arrangement with the real estate agent, subject to an obligation that could be classified as a liability for the purposes of s 152-20(1).
The solicitors’ fees
It is necessary to split the consideration of the solicitors’ fees into fees for work done prior to and following the “just before” time. For this purpose, I take the relevant time to be the very moment when the first of the contracts of sale for the Business or for the Land was executed, which means that work done on the date of 24 October 2003 prior to the execution of the contracts would be considered as having been done prior to the “just before” time.
Work done prior to the “just before” time
The invoice for $8,049.53 dated 28 November 2003 relates to work done from 24 October 2003 to 17 November 2003. Part of this invoice relates to work done prior to the “just before” time. Of course, this work was only invoiced after that time.
The Tribunal found that the costs incurred prior to the “just before” time were liabilities that existed as at that time because all of the work had been performed and all that remained to be done was for an invoice to be prepared and sent for the fees payable (at [45] and see [38]).
The Commissioner submits that as at the “just before” time, there was no liability for Byrne Hotels to pay fees for work done prior to that time, in the absence of any evidence of an agreement between Byrne Hotels and the solicitors to this effect. The Commissioner says that this work constitutes nothing more than the solicitors’ unbilled work in progress and that there was no obligation on Byrne Hotels to pay for this work as at the relevant time. However, on the bases that the invoices were issued on a periodic basis and that the amount of the invoice was payable within 7 days, the Tribunal drew the inference that the retainer was not an entire contract but one under which the solicitors had an entitlement to charge and recover on the basis of work done. I agree with the Tribunal. The only event or contingency that needed to occur for the fees to become due and payable was for Byrne Hotels to be sent an invoice. Even though an invoice had not been sent, Byrne Hotels already had an existing obligation to pay the solicitors’ fees for the work done prior to the “just before” time. This is a liability for the purposes of s 152-20(1).
As the invoice dated 28 November 2003 does not indicate what amount of the $8,049.53 relates to work done prior to the “just before” time, this will need to be dealt with by the Tribunal on remitter. It may require further evidence or some form of apportionment.
Work done after the “just before” time
Part of the invoice for $8049.53 dated 28 November 2003 and the whole of the invoice of $3,448.87 dated 17 December 2003 relates to work done after the “just before” time.
The Tribunal determined at [45] that the solicitors’ fees for work done after the execution of the contract of sale for the Business were a liability for the purposes of s 152-20(1) because these fees were ‘closely connected to’ the sales of the Business and the Land and it was necessary for Byrne Hotels to incur these fees in order to complete the contracts for those sales. Once again, the Tribunal applied the wrong test in making this determination. Accordingly, it needs to be determined whether the Tribunal reached the wrong outcome.
Byrne Hotels points out that although the work was done after the “just before” time, the solicitors were retained on 13 October 2003. Byrne Hotels submits that as at the “just before” time there was a potential liability, even though this liability had not matured into a presently payable debt.
However, as at the “just before” time, Byrne Hotels had no existing legal or equitable obligation to pay fees to its solicitors for work which had not yet been performed. There was no existing contractual obligation that the solicitors could enforce against Byrne Hotels to ensure payment of such fees. It follows that the solicitors’ fees for the invoice dated 28 November 2003, which relate to work done on or after the CGT event, together with the solicitors’ fees for the invoice dated 17 December 2003, are not “liabilities” for the purposes of s 152-20(1).
As an aside, it is not the case that the accountancy fees, the solicitors’ fees and the real estate agent commission are disregarded for the purposes of assessing the net capital gain following the sale of the Business. They are taken into account in determining the cost base of the asset for the purposes of calculating the amount of the capital gain (see the interaction of ss 104-10(4), 110-25(3), 110-35(2) of the Act).
CONCLUSION
I am of the view that the real estate agent’s commission and part of the solicitors’ fees were wrongly included by the Tribunal as “liabilities” for the purposes of s 152-20(1).
As a result, issue C, which is whether the assets of Mr Michael Byrne, Ms Barbara Byrne and Mr Justin Byrne were CGT assets for the purposes of the MNAV test, needs to be considered to determine whether Byrne Hotels satisfies the MNAV test.
It seems that the Tribunal has already dealt with issue D at [62] of its reasons.
In the circumstances, it is appropriate to remit the matter to the Tribunal to deal with issue C, as well as any outstanding matters of calculation.
I certify that the preceding seventy‑seven (77) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Bennett Associate:
Dated: 11 October 2011
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
QUD 280 of 2010
ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: BYRNE HOTELS QLD PTY LTD
Respondent
JUDGES:
DOWSETT, BENNETT AND GREENWOOD JJ
DATE:
11 OCTOBER 2011
PLACE:
BRISBANE
GREENWOOD J
I have had the benefit of reading the reasons for judgment of Justice Bennett in draft. I broadly agree with her Honour’s reasons and the proposed orders but for the conclusion her Honour has reached in relation to the treatment of the commission ultimately paid by the taxpayer to the agents, Jones Lang LaSalle Hotels (Qld) Pty Ltd (“Jones Lang”), in providing the service and introducing the buyer to the taxpayer as vendor of the hotel business (the Glenmore Tavern) conducted on the tavern land and the vendor of the tavern land (freehold), Halgalemo Pty Ltd (“Halgalemo”) as trustee for the Glenmore Tavern Unit Trust.
Justice Bennett has set out in her reasons for judgment the sequence of statutory provisions governing the determination of the questions in issue. I do not propose to repeat those provisions in these reasons except to the extent necessary in explaining the view I have reached concerning the approach to the treatment of the commission paid to Jones Lang and the relevance of the arrangements made between the taxpayer and Jones Lang in the context of the particular statutory provisions.
Division 152 of the Income Tax Assessment Act 1997 (Cth) (“the Act”) addresses the topic of “Small business relief” which is effected by four small business concessions contained within Division 152. The two concessions immediately relevant to the transactions in issue in these proceedings concern the basis upon which a taxpayer might be entitled to a 50% reduction in a capital gain arising out of a CGT event (for present purposes, a disposal) of a CGT asset of the taxpayer in an income year, and the basis upon which a taxpayer might be entitled to a deferral of the making of a capital gain arising out of a CGT event, consequent upon the acquisition of replacement assets. The second concession relating to the “roll‑over” provisions, like the 50% reduction concession, was relied upon by the taxpayer in the formulation of the taxpayer’s return for the year ending 30 June 2004. The Commissioner contends that neither concession is available to the taxpayer because the critical qualifying condition enabling reliance upon the concessions is not satisfied.
Subdivision 152‑A, by s 152‑10, provides that one of the basic conditions for reducing or disregarding a capital gain arising on the disposal of a CGT asset is that the maximum net value of relevant assets not exceed $5M. A taxpayer satisfies the maximum net asset value test if, just before the CGT event, the sum of the following amounts does not exceed the $5M limit, namely, the net value of the taxpayer’s CGT assets; the net value of the CGT assets of any entities connected with the taxpayer; and, the net value of the CGT assets of any small business CGT affiliates of the taxpayer or entities connected with the taxpayer’s small business CGT affiliates (s 152‑15(a)).
Each of these amounts (to be aggregated in determining whether the maximum cap is exceeded) is determined by having regard to the “net value of the CGT assets” of the relevant addressee (under s 152‑15(a)(i), (ii) or (iii)) and that phrase is explained in this way at s 152‑20(1): “The net value of the CGT assets of an entity is the amount (if any) by which the sum of the market values of those assets exceeds the sum of the liabilities of the entity that are related to the assets”. The integers involve identifying the “market values” of “CGT assets” and the sum of the excess of those values having regard to the “liabilities” of the entity that are “related to” the CGT assets. The sum of the s 152‑15(a) net CGT asset values must be struck at a moment in time described in s 152‑15 as “just before the CGT event”. It follows that in determining a “liability of the entity” for the purposes of determining the “net value of the CGT assets” of an entity, it is necessary to establish whether the contended liability was a liability of the entity just before the CGT event.
A “CGT asset” is defined by s 108‑5(1), with an elaboration of the notion of “CGT assets”, at s 108‑5(2) so as to “avoid doubt”. The notion of a “liability” or “the liabilities of the entity” is not defined either within Division 152 or by s 995‑1 of the Act.
A taxpayer makes a disposal of a CGT asset if a change of ownership occurs from the taxpayer to another entity whether by reason of some act or event or by operation of law although a change of ownership is not taken to have occurred if the taxpayer ceases to be the legal owner of the asset but continues to be its beneficial owner or merely because of a change of trustee (s 104‑10 of the Act). The time of the event of disposal is when the taxpayer enters into a contract “for the disposal” or, if there is no contract, the time when the “change of ownership” occurs (s 104‑10(3)).
The taxpayer is Byrne Hotels Qld Pty Ltd. Michael Byrne and his wife, Barbara Byrne, are directors of the company. Their son, Justin Byrne, is also a director. On 24 October 2003, the taxpayer contracted to sell a tavern business undertaking (the Glenmore Tavern business), and a related or connected entity Halgalemo as trustee for the Glenmore Tavern Unit Trust, contracted to sell the tavern land to the same buyer. As to the sale of the business undertaking, the taxpayer sold the undertaking for $5,875,000. The book value of the business was $1,507,551 resulting in a capital gain of $4,367,449. The taxpayer calculated a capital gain for the purposes of the Act of $4,125,955 having regard to the agent’s commission it paid of $190,625 and legal and accounting fees relating to the sale of $50,869.
It is common ground between the parties that the capital gain arising upon the CGT disposal event is $4,125,955.
The taxpayer lodged an income tax return for the 2004 income year recording a capital gains tax event and a net capital gain of zero dollars. In so doing, the taxpayer asserted an entitlement to the 50% reduction concession under subdivision 152‑C and an entitlement to the small business roll‑over concession under subdivision 152‑E of the Act. The taxpayer contended that those two business concessions were available to it as the aggregation of the net value of the CGT assets of the taxpayer and the net value of the CGT assets of entities connected with the taxpayer (and affiliates) did not exceed $5M.
The taxpayer contended that the sum of the net values of the relevant CGT assets to be taken into account in determining whether the taxpayer has satisfied the maximum asset value test, just before the CGT event, is $4,245,528.
That value was said to arise on this footing: the net asset value (in each case, at the relevant date) of the tavern business is $4,176,118 (s 152‑15(a)(i)); the net value of the CGT asset consisting of the Glenmore Tavern Unit Trust (as an entity connected with the taxpayer – s 152‑15(a)(ii)) is $25,427; the net value of a company called Daxwood Pty Ltd (as an entity connected with the taxpayer – s 152‑15(a)(ii)) is $43,983.
However, the Commissioner contends that the net asset value of the relevant assets just before the CGT event amounts to $5,469,252.
That value was said to arise on this footing.
First, the taxpayer in determining the net asset value of the tavern business as $4,176,118 had taken into account as “liabilities” of the taxpayer related to that asset (agent’s commission of $190,625 and legal and accounting fees of $50,869) which, in the Commissioner’s view, were not “liabilities” of the taxpayer “just before the CGT event” in question. Although those expenditures are properly taken into account in determining the measure of the capital gain arising on disposal of the CGT asset, they are not, it is said by the Commissioner, liabilities of the taxpayer immediately before the CGT event and ought not to be taken into account in determining the net value of the CGT asset disposed of by the taxpayer, for the purposes of the calculation of the maximum net asset value sum under s 152‑15 of the Act.
Therefore, the Commissioner contends that the net value of the taxpayer’s CGT asset in the form of the tavern business is properly regarded as $4,417,612 at the relevant date because those contended “liabilities” of the entity must be excluded.
Secondly, as to the net asset value of the Glenmore Tavern Unit Trust, the Commissioner contends that the taxpayer in calculating that net asset value as $25,427 had improperly taken into account a contended liability to Jones Lang of $162,500 with the result that the true net value of the Glenmore Tavern Unit Trust as an entity connected with the taxpayer, is $187,927, because the so‑called liability at the relevant date must be excluded.
Thirdly, the Commissioner contended before the Administrative Appeals Tribunal that Justin Byrne is a small business CGT affiliate of the taxpayer for the purposes of s 152‑25 of the Act and the net value of the CGT assets of Justin Byrne is $72,722 at the relevant date and should be included in the amount of the maximum net asset value sum.
Fourthly, the Commissioner contends that the net value of the assets of the directors is to be taken into account as they are “entities” (s 960‑100 of the Act) “connected with” the taxpayer. It was common ground before the Tribunal that the net value of Michael Byrne’s assets is $483,221 and the net value of Barbara Byrne’s assets is $263,787, at the relevant date. The taxpayer contends that these assets of the directors are to be disregarded by operation of s 152‑20(4) of the Act in calculating the net value of the CGT assets of each director, as these “assets” were “not used or held ready for use in the carrying on of a business” by the taxpayer or an entity connected with the taxpayer. They simply represent the amounts due to each director on the loan accounts with the taxpayer.
These adjustments made by the Commissioner amount to $1,223,724 with the result that, in the Commissioner’s view, the sum of the net values of the CGT assets to be brought to account under the maximum net asset value test is $5,469,252. Since the taxpayer failed to satisfy the test, each of the concessions relied upon by the taxpayer were disallowed with the result that on 10 March 2009 the Commissioner issued a Notice of Amended Assessment to the taxpayer increasing its taxable income for the year ending 30 June 2004 by the amount of the capital gain of $4,125,955. On 13 May 2009, the Commissioner made an assessment of shortfall penalty at the rate of 25%.
The Tribunal determined that the agent’s commission ($190,625) and legal and accounting fees ($50,869), were “liabilities of the taxpayer” related to the tavern undertaking, properly brought to account in determining the net value of the CGT asset at the relevant moment in time, “just before” the CGT event; so too was the proportion of the agent’s commission paid by the trustee of the unit trust found to be a liability of the trustee of the unit trust and properly brought to account in calculating the net value of the unit trust as an entity “connected with” the taxpayer; and, Justin Byrne could not be regarded as a “small business CGT affiliate” of the taxpayer.
The Tribunal did not determine the issue in contest as to whether the assets of the husband and wife directors are to be disregarded by operation of s 152‑20(4) of the Act having regard to the relevant factual matters.
There is no appeal under s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) (the “AAT Act”) on any question of law in respect of the finding concerning Justin Byrne. The appeal concerns questions of law in relation to the first two matters mentioned at [99] of these reasons as determined by the Tribunal and the appeal, as an exercise of original jurisdiction, is determined by the Full Court by reason of s 44(3) of the AAT Act.
The commission fees of the real estate agent Jones Lang
The Tribunal observes at [12] that in about July 2003 Michael Byrne was contacted by a real estate agent enquiring whether the taxpayer was interested in selling the tavern. Michael Byrne was not particularly interested in doing so but agreed to execute a contract appointing the agent to act on behalf of the taxpayer in the sale of the business and the tavern land.
On 14 July 2003, Michael Byrne executed on behalf of the taxpayer a document entitled “Appointment of Real Estate Agent (Sales and Purchases)” in the form of “PAMD 22(a)” (as required by the Property Agents and Motor Dealers Act 2000 (Qld)). The document was executed by the agent on 16 July 2003.
Under the contract, Jones Lang was appointed to “perform the … services” of “Sale of: F/hold, business, land & chattels” (Appeal Book (AB, Part B, Vol 4, p 668)). As to how those services would be performed and the conditions attaching to performance of the services, the contract recites: “Property to be sold by private treaty negotiations as per clause B in the items schedule & clauses 2, 3, 4, 5, 7, 8, 9, 10 &12 as contained in the Terms & Conditions of the REIQ schedule attached” (AB, Vol 4, p 669).
The appointment is described as a “single appointment” commencing as determined at item F of the schedule, that is, the later date of signing, 16 July 2003 (point 4.3, AB, Vol 4, p 669; item F, AB, Vol 4, p 673). The agent was appointed as an “exclusive agent” with the period of the agency commencing on 1 July 2003 and ending on 31 October 2003 consisting, obviously enough, of a period of four months in all (AB, Vol 4, p 669).
As to an exclusive agency, the contract says this at AB, Vol 4, p 669:
When You Must Pay the Agent
The table below shows when you will have to pay the agent, if the property is sold during the term of the Agent’s appointment.
Exclusive Agency
You must pay the agent if:
PYou sell
PAnother agent sells
PAgent sells
The contract provides that the total commission payable to the agent is 2.5% up to $11M; 5% of an amount over $11M and up to $12M; and, 7.5% of an amount over $12M (although there is also a plainly mistaken second reference to $11M in the final part of the Commission clause in the Annexure). As to when the commission becomes payable, the contract says this at AB, Vol 4, p 670 at point 6.2:
When Payable
Upon settlement
Refer clause 2.1 of the Terms & Conditions.
Clause 2 of the Terms & Conditions is in these terms (AB, Vol 4, p 676):
2. Entitlement to Commission
2.1The Client agrees to pay the Agent commission as specified in the Appointment if a Contract of Sale of the Property is entered into with a buyer, whether within the Term or after the Term, where the Relevant Person is the effective cause of the sale within the Term, provided that:
(1) the Contract of Sale of the Property is completed; or
(2)the Client defaults under the Contract of Sale and that Contract is terminated by reason of or following the default; or
(3)the Contract of Sale is not completed and the whole or part of the deposit paid is liable to be forfeited; or
(4)the Contract of Sale is terminated by mutual agreement of the Client and the buyer.
2.2For the purposes of clause 2.1 a Relevant Person is, where the Appointment is for:
(1) an Exclusive Agency, any person (including the Client); or
(2) …
(3)an Open Listing [the period after 31 October 2003 until determined by the taxpayer], the Agent only.
Section 128 of the Property Agents and Motor Dealers Act 2000 (Qld) (“PAMD Act”) sets out the activities a licensed agent is entitled to perform as an agent for others for reward. The activity a licensed real estate agent might perform is described at s 133 of the PAMD Act as a “service” and the appointment by a “client” (s 133(1)) might be either an appointment for the performance of a particular service described under s 133(2) as a “single appointment” or a number of services over a period. In this case, Jones Lang was appointed to perform a particular service described in the contract as a “single appointment” as set out at [104] of these reasons. The appointment of the real estate agent might be a sole agency or an exclusive agency or an open listing. In this case Jones Lang was appointed as an exclusive agent for the term and thereafter the appointment operated as an open listing until determined by the client. Under s 19(2) of the PAMD Act a selling agent [Jones Lang] appointed as an exclusive agent is entitled “on the sale of particular property and in accordance with the terms of an agreement with the seller of the property, to receive an agreed commission or other reward, whether or not the selling agent is the effective cause of the sale”.
The terms “sole agency” and “open listing” are defined at s 19(3) and s 16 of the PAMD Act although it is not necessary to set out the elements of those terms as Jones Lang acted as an exclusive agent at all material times.
Section 154 of the PAMD Act provides for a code of conduct for real estate agents to be prescribed by regulation and by Property Agents and Motor Dealers (Real Estate Agency Practice Code of Conduct), Regulation 2001 (Qld), a code of conduct was prescribed.
By 16 July 2003, a contract was made between Jones Lang and the taxpayer that commenced on that date (although the term of the contract relates back to a commencement date, of 1 July 2003) by which Jones Lang was appointed as an exclusive agent for the performance of the single service of the sale of the freehold, business, land and chattels comprising the land and business undertaking for the Glenmore Tavern. The taxpayer as principal and client, and Jones Lang as agent, assumed a body of legally enforceable rights and obligations to one and the other at that date. The agent was bound to perform the contract in accordance with its terms and in accordance with the instructions of the vendor. The agent was required to exercise due care and skill in the performance of the agency agreement and comply with the code of conduct.
Those obligations included an obligation to ensure that all offers for the property were communicated to the seller in a timely fashion (Keppel v Wheeler [1927] 1 KB 577); an obligation to ensure that all information relevant to the price of the property and the obligations of a buyer were advised to the seller (Georgieff v Athans (1981) 26 SASR 412; Havas v Cornish & Co Pty Ltd [1985] 2 Qd R 353); an obligation to ensure that all prospective buyers are contacted within a reasonable time of inspecting the property to ascertain their interest; an obligation to ensure that any prospective buyer has the capacity and ability to complete the contract (Fitzgerald v Metcalfe [1917] NZLR 486); and, an obligation to ensure that appropriate investigations are undertaken to advise the seller of factors influencing the market value of the property. As to the rights, duties and obligations owed by the agent to the client and correspondingly the client to the agent in the context of a contract of the kind made between the taxpayer and Jones Lang in connection with the sale of land and a business related to land, see generally the discussion in Land Contracts in Queensland, 3rd Edition, 2011, The Federation Press, Christensen, Dixon, Duncan and Jones at Chapters 2.8, 2.9 and 2.10. See also The Law of Agency, 3rd Edition, 1991, Butterworths, Kerr, Chapter 8; Bowstead & Reynolds on Agency, 19th Edition, Sweet & Maxwell, Chapters 6 and 7.
The principal assumed an obligation to do all things necessary to assist the agent in the discharge of the agent’s duties in the performance of the exclusive single service.
At 16 July 2003, these rights, obligations and duties were presently subsisting legal obligations between the taxpayer and the agent.
One aspect of those rights and obligations concerned the agent’s entitlement to commission by reference to point 6.2 of the contract and clause 2. Under clause 2, the taxpayer agreed to pay Jones Lang commission at the commission rate set out in Annexure A if a contract of sale was entered into with a buyer within the term of the exclusive agency or, after the term, where the relevant person (which by clause 2.2(1) is defined to mean any person including the client) is the effective cause within the term, of the sale, provided that either the contract of sale is completed; or the client defaults under the contract and the contract is terminated by reason of (or following) the default; or the contract of sale is not completed and the entirety or a part of the deposit paid under the contract is liable to be forfeited to the vendor; or the contract of sale is terminated by mutual agreement between the client and the buyer.
It follows that by July 2003, the agent had a presently identifiable contractual entitlement to be paid, in the future, an amount calculated as a commission fee under the formula in the contract for the performance of the single exclusive service to the client, notwithstanding that the effective cause of the sale of the land and business (whether within or beyond the term of the agent’s exclusive contract) was, within the exclusive term, either Jones Lang or Michael Byrne or Justin Byrne or anybody else, subject to, one of four completion events occurring: settlement; vendor default and consequent termination of the contract by the buyer; non‑settlement and the deposit (in whole or in part) liable to forfeiture; and, mutual termination.
Jones Lang introduced MGW Hotels Pty Ltd (“MGW”) to the taxpayer during the term. On 3 October 2003, the agent advised the taxpayer that all outstanding issues raised by the buyer had been resolved and that Board approval had been obtained enabling MGW to proceed to contract (AB, Vol 4, p 680). The agent advised the taxpayer to engage solicitors to prepare the contracts. On 24 October 2003, the taxpayer entered into a contract with MGW for the sale and purchase of the Glenmore Tavern business (“the business contract”) (AB, Vol 2, p 180) conditional upon completion of the land sale contract between Halgalemo and MGW, consent to the transfer of the hotel liquor licence, and consent to the issue of a gaming machine licence (AB , Vol 2, p 187).
On 24 October 2003, MGW entered into a contract with Halgalemo as trustee of the Glenmore Tavern Unit Trust for the sale of the land and buildings ($6,500,000) conditional upon completion of the business contract. By clause 28 of the business contract and clause 19 of the land contract, the taxpayer and Halgalemo respectively acknowledged that each party was responsible for paying the Jones Lang commission, as agreed. Both contracts settled on 19 January 2004.
On 15 January 2004, Jones Lang issued a tax invoice for the amount of the commission on the sale of the business, land and buildings in a total amount of $353,125 plus GST payable upon settlement on 19 January 2004 (AB, Vol 3, p 609). Of that commission fee, $190,625 was paid by the taxpayer and $162,500 was paid by Halgalemo in respect of the land and buildings contract.
Just before entering into the contracts on 24 October 2003, the taxpayer found itself in a position where it had entered into a contract with Jones Lang which by 24 October 2003 had been on foot for almost four months with a bundle of activities having been performed by Jones Lang in providing the single service in discharging contractual duties and obligations to the taxpayer; Jones Lang had found a buyer ready, willing and Board authorised to buy; the taxpayer was ready and willing to sell and had, immediately before picking up the pen to sign the sale contracts, decided to sell; Jones Lang was the effective cause, within the term, of a contract of sale that occurred, as it turned out, also within the term, although Jones Lang was entitled to be paid the agreed commission even if the contract of sale had been made outside the term of the exclusive agency.
Jones Lang’s entitlement to be paid its agreed commission fee was, of course, dependent upon the taxpayer entering into a contract of sale and in that sense the contingency had not fallen in. However, immediately before the signing of the contract, all terms, plainly enough, had been agreed with MGW; the document was in final form ready to be signed; nothing remained to be done by Jones Lang as a matter of any performance of its duties or obligations to perfect its entitlement to the agreed commission. The only contingent thing to be done was the formality of the signing by Michael Byrne to reduce to writing the sale already agreed to be made. Just before the CGT event, a liability resided in the taxpayer arising out of the pre‑existing contract with Jones Lang, subject only to the translation of the decision already made to sell the land and business (on the terms agreed with MGW), into the act of execution of the contracts. Just before the CGT event the obligation was not “truly contingent” in the sense of being “uncertain as both a theoretical and a practical matter”. It was in the nature of a “primary obligation” (see the distinction drawn in the context of a contingent liability with respect to a guarantee by Deane J in Wardley Australia Ltd and Anor v State of Western Australia (1992) 175 CLR 514 at 541, although, of course, the discussion by Deane J is in the context of the question of loss or damage suffered under s 82 of the Trade Practices Act 1974 (Cth). Nevertheless, in the context of the source of the State’s liability under the contract of guarantee and indemnity, his Honour observed the distinction between an obligation which is characterised as “truly contingent” in the sense that the liability is uncertain as both a theoretical and a practical matter, as compared with a liability which arises out of something in the nature of a primary obligation.
The source of the contingent liability is to be found in the performance of the bundle of rights and obligations by which the agent identified and found the buyer, MGW, and became the effective cause of the sale, together with the corresponding obligation of the principal to enable the agent to have the benefit of the exclusive contract. The contractual obligation as between the taxpayer and the agent gave rise to benefits and burdens.
The obligation to pay the agreed commission or, put differently, discharge the burden of the contract, was a provisional obligation. However, it is important to recognise that just before the CGT disposal event occurred by entering into the written instruments with MGW thus giving legal effect to the decision to sell on the terms of the contracts, the obligation had arisen subject to the formal step of signing. The further provisional aspect of the obligation was the contingency of the post‑CGT events of either completion or client default under the contract of sale and consequent termination by the buyer, or non‑completion of the contract in circumstances where the deposit (either in whole or in part) is liable to forfeiture, or mutual agreement between the parties to the contract to bring it to an end.
Just before the CGT disposal event, the taxpayer was a ready and willing seller and the buyer was a ready and willing buyer, intending to complete the transaction by settlement of each contract. It is true that one of the four provisional events had to fall in as a subsequent provisional event qualifying the obligation cast upon the taxpayer arising out of the contract with Jones Lang. Although the liability of the entity was, just before the CGT disposal event, a contingent one, the four events subsequent operated as a qualification on the obligation rather than matters which, properly construed, give rise to a conclusion about the nature of the relationship between the agent and the taxpayer such that no obligation concerning the benefits and burdens of the contract, subsisted.
The source of the obligation is to be found in the mutual bundle of rights and obligations cast upon the parties by their exclusive agency contract, out of which the obligation to pay the agreed commission arose. The entity, just before the CGT event, was burdened with that obligation, according to its terms. It is important to remember that in determining whether the maximum net asset value test is satisfied, regard is to be had to the net value of the CGT asset of the taxpayer entity (apart from the other aggregation considerations in s 152‑15) and the burden cast upon the entity by the obligations arising under the contract with Jones Lang was a contingent burden which properly falls within the notion of a “liability” in determining the net value.
Neither the term “liability” nor the phrase “the liabilities of the entity” is defined by the Act and each term must bear its broad understanding so as to include contingent liabilities comprising the kind of burdens arising out of performance over a reasonably lengthy time of a contract pre‑dating the CGT disposal event. The Commissioner does not contend that the contract with the agent is unrelated to the taxpayer’s assets the subject of the disposal event.
Properly construed, a liability (albeit contingent in the ways discussed) had arisen in the entity by the moment in time described in the Act as “just before the CGT event” and the liability, calculated by reference to the formula in the annexure to the contract, is to be brought to account in the calculation of the net value of the CGT asset of the taxpayer entity for the purpose of determining satisfaction (or otherwise) of the maximum net asset value test under the Act.
The Commissioner contended that the net asset value of the relevant CGT assets just before the CGT event was $5,469,252. Since the taxpayer correctly excluded from the calculation the agent’s commission fee paid by the taxpayer and the proportion of the fee paid by the trustee of the unit trust as an entity connected with the taxpayer, the Commissioner’s assessment of the net asset value should be reduced by the amount of the agent’s fees of (in the aggregate) $353,125 which reduces the amount of the relevant net asset values to $5,116,127. The Commissioner makes no appeal from the Tribunal’s finding as to the issue concerning Justin Byrne’s net asset value and therefore the maximum net asset value calculation must be further reduced by $72,722 to $5,043,405.
In calculating the sum of the net asset values for the purposes of s 152‑15, the taxpayer took into account the liabilities described as the legal and accounting fees totalling $50,869 (AB, Vol 3, p 359). The Tribunal determined that the taxpayer correctly took into account those liabilities which had the effect of reducing, in the view of the Tribunal, the net asset value calculation by a further sum of $50,869 resulting in a net asset value calculation of the CGT assets of $4,992,536 which brought the sum of the net values of the CGT assets below the maximum cap of $5M. Thus, in the opinion of the Tribunal, it was not necessary to deal with the issue of the net asset values of the assets of the husband and wife directors and whether, on the facts, those assets were to be disregarded by operation of s 152‑20(4).
However, the position before the Tribunal was that the taxpayer relied upon one tax invoice for accounting fees dated 31 October 2003 in an amount of $23,450 plus GST in respect of work done for the period up until 31 October 2003. The Tribunal treated that invoice as a liability of the entity and no challenge is made to that proposition.
As to the legal fees, the taxpayer relied upon three tax invoices for legal fees before the Tribunal namely invoice 418262 dated 28 October 2003 for $4,108.48 (excluding GST) with time sheets for the period 13 October 2003 to 17 October 2003 (AB, Vol 3, p 471 and Vol 4, p 652 to p 655); invoice 429108 dated 28 November 2003 for $8,049.53 (excluding GST) with time sheets for the period 20 October 2003 to 17 November 2003 (AB, Vol 3, p 472; Vol 4, p 656 to p 662); and, invoice 432959 dated 17 December 2003 for $3,448.87 (excluding GST) with time sheets for the period 24 October 2003 to 12 December 2003 (AB, Vol 3, p 473; Vol 4, p 663 to p 667). Those three invoices for legal fees total $15,606.88. The total of the three invoices plus the invoice relating to accounting fees is $39,056.88 rather than $50,869.
As to the legal fees, the Tribunal correctly treated the invoice of 28 October 2003 for $4,108.48 as a liability of the entity, as the liability for legal fees was a periodic liability and the invoice of 28 October 2003 represents work done prior to the CGT disposal event. The entirety of that invoice ought to be treated as a liability of the entity. The invoice dated 28 November 2003 relates to the period from 20 October 2003 to 17 November 2003 and therefore includes work done on 20, 21, 22 and 23 October 2003. It may be that a significant proportion of that invoice represents the value of work done in those four days. The apportionment on the facts needs to be undertaken by the Tribunal rather than the Full Court. The invoice dated 17 December 2003 relates to work done entirely after the CGT disposal event and none of that invoice represents a liability of the entity just before the CGT disposal event because the work itself was all undertaken after 24 October 2003 as opposed to being merely invoiced after this date.
It follows that taking account of the matters as described at [129], the maximum net asset value calculation is $5,043,405. If that sum is further reduced by the amount of the accounting fee of $23,450, the correct calculation becomes $5,019,955. If that sum is further reduced by the invoice for legal fees of 28 October 2003 ($4,108.48), the maximum net asset value calculation becomes $5,015,846.52. The invoice of 17 December 2003 is excluded entirely. A proportion of the invoice of 28 November 2003 must be brought to account as a liability of the entity. However, even if an assumption is made that the entirety of that invoice is to be treated as a liability of the entity ($8,049.53), the net maximum asset value calculation would result in an amount, on that basis, of $5,007,796.99 which remains above the maximum net asset cap of $5M.
It follows that the Tribunal must determine the question in relation to the net asset values of the husband and wife directors and whether those asset values are to be disregarded having regard to the operation of s 152‑20(4) and undertake the apportionment, on the facts, of the invoice for legal fees of 28 October 2003 for the period 20 October 2003 to 17 November 2003. Accordingly, the matter is to be remitted to the Tribunal to be determined according to law. The parties will be directed to file further submissions on costs.
I certify that the preceding fifty‑seven (57) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Greenwood. Associate:
Dated: 11 October 2011
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