Doyle and Commissioner of Taxation (Taxation)
[2020] AATA 345
•5 February 2020
Doyle and Commissioner of Taxation (Taxation) [2020] AATA 345 (5 February 2020)
Division:TAXATION & COMMERCIAL DIVISION
File Numbers: 2016/4354-5
Re:Craig Doyle
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Senior Member Theodore Tavoularis
Date:5 February 2020
Place:Brisbane
The decisions under review are affirmed.
.....................…....[sgd]...............................................
Senior Member Theodore Tavoularis
CATCHWORDS
TAX AND COMMERCIAL – characterisation of net proceeds – whether proceeds of sale are capital in nature - capital gains – land acquired by a trust - sale of land – ordinary course of business – advice on structuring affairs - shortfall interest charges – administrative penalty - decisions under review affirmed
LEGISLATION
Income Tax Assessment Act 1997 (Cth)
Taxation Administration Act 1953 (Cth)CASES
Admin Exploration Pty Ltd (in Liq) v FCT (1972) 3 ATR 424
Alan and Anor Asphalt v FCT (2011) 195 FCR 416
FCT v Bidencope (1978) 140 CLR 533
Federal Commissioner of Taxation v Myer Emporium (1987) 163 CLR 199
Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81
Kratzmann v FCT (1970) 1 ATR 827
McCurry v Federal Commissioner of Taxation (1998) 39 ATR 121
Moana Sands Pty Ltd v Federal Commissioner of Taxation (1988) 19 ATR 1853
Repatriation Commission v Smith (1987) 74 ALR 537
Steinberg v FCT (1975) 134 CLR 640
Walstern v Commissioner of Taxation [2003] FCA 1428REASONS FOR DECISION
Senior Member Theodore Tavoularis
5 February 2020
INTRODUCTION
This matter concerns the characterisation, for taxation purposes, of the profits made when three parcels of land were sold. The Applicant contends that the profits from each sale are capital gains while the Respondent contends that the profits are income. If they had been capital gains they would have attracted concessional taxation treatment.
For reasons that follow, I am of the view that the reviewable decisions should be affirmed. As will be demonstrated in these Reasons, the Applicant has failed to discharge the onus upon him to prove that:
(a)the net proceeds of sale of the three land parcels were capital gains and not income;
(b)the shortfall interest charges should not have been imposed or should have been further remitted; and
(c)the administrative penalty from the 2008 financial year should not have been imposed or should have been further remitted.
SUMMARY OF THE ISSUES
Section 6.5 of the Income Tax Assessment Act 1997 (Cth) (ITAA) stipulates that assessable income includes income according to ordinary concepts, which is called “ordinary income”.
The net proceeds will be income if they were obtained in the ordinary course of business, or as part of a transaction entered into for the purpose of making a profit or financial gain.
Between 1993 and 2001, the Applicant engaged in property development with respect to residential property. He purchased land, developed it and sold it in residential lots.[1] He did this through various entities controlled by him that were part of what is collectively known as the Doyle Group. From 2004, the Doyle Group purchased, developed and sold industrial land. The land parcels relevant to this application were situated at Bromelton, Mackay and Brendale, in Queensland.
[1] Exhibit 1, Volume 2, Second Witness Statement of Craig Doyle, page 2.
At all relevant times, the Applicant was:
(a)the controlling mind and director of the entities comprising the Doyle Group;
(b)the sole director and shareholder of South East Queensland National Rail Centre Bromelton Pty Ltd (Bromelton Trustee) as trustee for the South East Queensland National Rail Centre Bromelton Trust (Bromelton Trust);
(c)the sole director and shareholder of Mackay Industrial Land Pty Ltd (Mackay Trustee) as trustee for the Mackay Industrial Trust (Mackay Trust); and
(d)the sole director and shareholder of Brendale Industrial Pty Ltd (Brendale Trustee) as trustee for the Brendale Industrial Trust (Brendale Trust).[2]
[2] Exhibit 1, Volume 2, Second Witness Statement of Craig Doyle, page 1.
The Craig Doyle Property Trust was the sole unit holder in the Bromelton, Mackay and Brendale trusts. The Applicant had an entitlement to distributions from the Craig Doyle Property Trust.
The character (income or capital) of the profits from the sale of the parcels of land at Bromelton by the Bromelton Trust, Mackay by the Mackay Trust, and Brendale by the Brendale Trust impacted the Applicant’s assessable income, including whether deductions were available.
The Applicant treated the profits from the sales of the Mackay and Brendale properties as capital gains in the 2008 financial year. He treated the profit from the sale of the Bromelton property as capital gain in the 2009 financial year. However, on 17 March 2015, the Commissioner issued amended assessments with respect to the Applicant, treating the profits as income on the basis that the each of the sales had been made either:
(a)in the ordinary course of the business of the Doyle Group or of the trust that owned the property; or
(b)as part of an isolated transaction that was entered into with a purpose that included developing the property to sell for profit.
The amended assessments increased the Applicant’s assessable income and resulted in the imposition of administrative penalties and shortfall interest charges.
On 15 May 2015 the Applicant lodged an objection to the assessments.[3]
[3] Exhibit 5.2, T Documents, T50 to T52, pages 1455 to 1476.
On 22 June 2016, the Commissioner of Taxation (the Commissioner):
(a)confirmed the Applicant’s taxable income for the 2008 financial year should be increased from $141,484 to $12,357,752 (an increase of $12,216,268);[4]
(b)confirmed the Applicant’s taxable income for the 2009 financial year should be increased from $120,645 to $1,122,993 (an increase of $1,102,348);[5]
(c)reduced the shortfall interest charge for the 2008 financial year from $1,683,447.39 to $1,087,260.86;[6]
(d)reduced the shortfall interest charge for the 2009 financial year from $136,298.30 to $80,963.53;[7] and
(e)Reduced the administrative penalty charge from 1,420,034.70 to $284,005.95 (being 5%).[8]
[4] Exhibit 5.2, T Documents, T2, page 31.
[5] Exhibit 5.2, T Documents, T2, page 34.
[6] Exhibit 5.2, T Documents, T53.
[7] Exhibit 5.2, T Documents, T53.
[8] Exhibit 5.2, T Documents, T53.
On 19 August 2016 the Applicant applied for review of the Objection Decision pursuant to s.14ZZ(1)(a)(i) of the TAA.[9] He contends that, at the time he contracted to purchase each property, he intended to develop and lease it long-term, thereby building an asset base for the Doyle Group.
[9] Exhibit 5.2, T Documents, T1.
The Applicant asks the Tribunal to decide that:
(a)the profits from the sale of the Bromelton, Mackay and Brendale properties were capital gains and should have been assessed as such, rather than as income, by the Respondent;
(b)the shortfall interest charges should be remitted in full; and
(c)the administrative penalty for the 2008 financial year should be remitted in full.
Section 14ZZ(1)(a)(i) and 14ZQ of the TAA provide that a person who is dissatisfied with the Commissioner's objection decision may apply to the Tribunal for review of the decision if the decision is not an ineligible income tax remission decision.[10] I am satisfied that none of the objection decisions that the Applicant wishes the Tribunal to review are ineligible income tax remission decisions.
[10] Defined in s14ZS of the TAA.
Section 280-170 of schedule 1 to the TAA provides that a person may object, in the manner set out in Part IVC, against a decision of the Commissioner not to remit an amount of shortfall interest charge if the amount of the charge that was not remitted is more than 20% of the additional amount. The shortfall interest charges have already been partly remitted. Neither charge is more than 20% of the additional amount. Accordingly, the Applicant has no objection right in respect of the charges.
DETERMINING WHETHER PROCEEDS OF SALE ARE CAPITAL IN NATURE
A financial gain will be income if it arises in the ordinary course of the taxpayer’s business. It may also be income if it arises from an isolated business operation or commercial transaction entered into otherwise than in the ordinary course of carrying on the taxpayer’s business but with the intention or purpose of making a profit or gain. Whether it does depends on the circumstances of the case, and generally if the circumstances give rise to an inference that the taxpayer’s purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income.[11]
[11] Federal Commissioner of Taxation v Myer Emporium (1987) 163 CLR 199 at 211.
If the decision to sell an asset is taken after its acquisition, there having been no such intention at the time of acquisition, the profit will be capital because it proceeds from a mere realisation (unless the asset is a revenue asset for other reasons). However:
[I]t is quite another thing if the decision to sell is taken by way of an implementation of an intention or purpose, existing at the time of acquisition, or profit-making by sale, at least in the context of carrying on a business or carrying out a business operation or commercial transaction.[12]
[12] Ibid.
Federal Commissioner of Taxation v Myer Emporium (Myer)[13] concerned a fixed term loan that was made with the intention of selling the right to the interest under the loan to a third party in exchange for a lump sum payment. The lump sum payment was held to be income because the intention in making the loan was to sell the right to interest for a lump sum (and because converting the right to future interest income to a lump sum did not strip it of its character as income). With respect to the nature of the transaction the High Court, in a unanimous judgment, observed:
Because the business is carried on with a view to profit, a gain made in the ordinary course of carrying on the business is invested with the profit-making purpose, thereby stamping the profit with the character of income. But a gain made otherwise than in the ordinary course of carrying on a business which nevertheless arises from a transaction entered into by the taxpayer with the intention or purpose of making a profit or gain may well constitute income. Whether it does depends very much on the circumstances of the case. Generally speaking, however, it may be said that if the circumstances are such as to give rise to the inference that the taxpayer’s intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer’s business. Nor does the fact that a profit or gain is made as the result of an isolated venture or a ‘one-off’ transaction preclude it from being properly characterised as income.[14]
And later:
The transactions in question here were entered into by Myer in the course of its business. The transactions, more particularly the assignment, were novel in the sense that it was the first time that Myer had entered into such an arrangement. But this fact does not take them out of the course of the carrying on of Myer’s profit-making business.[15]
[13] (1987) 163 CLR 199.
[14] Ibid at 209 and 210.
[15] Ibid at 216.
The Applicant controlled each of the Trustee companies and the Doyle Group as a whole. He describes himself as the “controlling mind of the Doyle Group”.[16] As will become apparent, he took a hands-on approach to managing these entities, personally dealing with the Doyle Group’s legal advisers, finance provider, investors (and potential investors) and other entities that conducted business with the Doyle Group. Accordingly, the Applicant’s intention with respect to each property is the intention of the Trustee company, and his intention may be inferred from the actions of the Doyle Group and his own words and actions.
[16] Exhibit 1, Volume 2, Second Witness Statement of Craig Doyle, paragraph 8.
The Applicant contends, and the Respondent does not dispute, that for the purposes of determining the Applicant’s intention at the time of acquisition, the time a property is acquired is when the contract to purchase that property was entered into. I respectfully agree. The Applicant’s intention at the relevant time may be gleaned not only from evidence of representations and conduct leading up to, and contemporaneous to, the acquisition of each property. It could potentially be gleaned from the representations and conduct of the Applicant and the Doyle Group after acquisition of each property.
The Applicant submits that an intention to sell the property must be the sole or dominant purpose for the net proceeds to take the character of income, relying on McCurry v Federal Commissioner of Taxation[17] in support of this proposition. That case involved two brothers who purchased land, constructed three units on the land, advertised the units for sale, lived in the units with relatives, and ultimately sold the units for a profit. Davies J held that the character of the proceeds was income on the basis that “it is the main or dominant purpose of the scheme which is important”.[18] However, this statement was based on the case of Admin Exploration Pty Ltd (in Liq) v FCT,[19] a single Judge decision of the High Court that pre-dated the decision in Myer and was concerned with the interpretation of the first limb of the old s26(a) of the ITAA which provides:
The assessable income of the taxpayer shall include - (a) profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit –making by sale.
[17] (1998) 39 ATR 121.
[18] Ibid at 125.
[19] (1972) 3 ATR 424.
In Admin Exploration Mason J stated:
[I]t is accepted that the first part of sec. 26(a) is not satisfied if the taxpayer shows that the acquisition of the property was not actuated by the sole or dominant purpose of profit-making by sale.[20]
[20] Ibid page 4259.
The second limb of the old 26(a) read “or from the carrying on or carrying out of any profit–making undertaking or scheme” and in relation to this limb His Honour said:
[T]here is no reference to ‘purpose' in the second part of sec. 26(a), but it is firmly established that it has no application to what is the mere realisation of a capital asset…[21]
[21] Ibid.
It is noteworthy that His Honour considered the lack of a reference to “purpose” in the second limb to be significant, and that he decided the second limb did not apply where the character of the asset in question had already been determined to be capital in nature. What is clear is that His Honour did not consider the second limb to pose the same test as the first limb.
In Moana Sands Pty Ltd v Federal Commissioner of Taxation[22] the taxpayer had acquired beachfront land with the twofold purpose of working and/or selling the surplus sand and holding the land until it became appropriate to sell it at a profit. The land was ultimately resumed by the government which paid compensation for it. In a joint judgment, the Full Federal Court held that an intention to sell need only be a purpose and need not be the sole or dominant purpose. In that regard their Honours observed:
In the course of the argument, there was discussion whether, notwithstanding the language of the second limb of s26 (a) there was the need for the taxpayer to have the dominant purpose of profit-making by sale before the second limb would apply.[23]
[22] (1988) 19 ATR 1853, decided after the High Court decided Myer.
[23] Ibid at 1857.
Their Honours agreed with the analysis of Gibbs J (as he was then) in FCT v Bidencope[24] in the following passage (which I have abridged):
Schemes are various, and it is not necessarily possible to say that one purpose of a scheme is predominant; many schemes are designed to secure a number of purposes. If a scheme is designed to secure a profit, it is a profit-making scheme, although it has other purposes as well…The present is of course not a case in which property was acquired for resale, but once it is established that profit arose from the carrying on of a scheme, it is enough that the making of a profit of that kind was one of the purposes of the scheme… [Referring to a previous case] The facts of that case distinguish it from the present, but the decision did not depend on the acceptance of the view that the purpose of profit-making must be the dominant purpose of the scheme if it is to fall within the second limb of s26(a) In the present case, one of the purposes of the scheme was to make a profit, and it can rightly be described as a profit-making scheme.
[24] (1978) 140 CLR 533.
In reaching their decision on that issue, their Honours also took into account the (then) recent High Court decision in Myer.
To my mind, the requirement that the acquisition of a property be actuated by the sole or dominant purpose of making a profit by sale for the proceeds to be characterised as income is an unduly narrow test, having its origins in only one of the limbs of the old s26(a) of the ITAA. I am satisfied that correct test is the one applied in Moana Sands which is whether the property was acquired as part of a profit-making scheme that included, as one of its purposes, profit making by sale.
The Respondent submits that it is not necessary to show that the Applicant had decided in advance which exact means he would use to realise a profit; and it is sufficient that the trusts acquired the properties with a purpose of making a profit by whichever means would prove most suitable and a profit was later obtained by a means that implemented the initial profit-making purpose. An illustration is found in Steinberg v FCT[25] where Gibbs J (as he then was) said:[26]
I am in agreement with the view expressed by Mason J that ‘it is not an essential element of a profit-making scheme in s26(a) that every step which culminates in the making of a profit should be planned or foreseen before the scheme is put into operation’. Schemes may be precise or vague; every detail may be arranged in advance, or the working out of the plan may be left for decision in the light of circumstances as they may arise. It is no objection to a plan that allows room for manoeuvre. When property is bought with the purpose of making a profit in the easiest and most advantageous way that may present itself, and the taxpayer adopts ‘one of the many alternatives’ that his plan leaves open, thereby returning himself a profit, he will rightly be said to be carrying out a profit-making scheme.
[25] (1975) 134 CLR 640.
[26] Ibid at 699 and 700.
I respectfully accept the Respondent’s submission, and therefore it is incumbent on the Applicant to prove that profit by way of sale was not one of the ways he had in mind that he could realise a financial gain from each property at the time the relevant trusts acquired each property.
This is to be distinguished from a scenario whereby a profit is realised by a means that was not intended such as in the matter of Kratzmann v FCT[27] in which the profit from the sale of a property was held not to have arisen from a profit-making scheme but after the taxpayer’s profit-making scheme had been abandoned, and therefore it was not held to be income. The facts (described in Moana Sands) were that the taxpayer had acquired land to carry out a profit-making scheme that involved borrowing money to erect a building, selling units in the building to repay loans and the cost of the project, and keeping the surplus. For financial reasons he gave up the idea and sold the land at a profit.[28]
[27] (1970) 1 ATR 827.
[28] Moana Sands Pty Ltd v Federal Commissioner of Taxation (1988) 19 ATR 1853 at 1861.
THE ONUS AND STANDARD OF PROOF
Under s14ZZK(b) of the TAA the Applicant bears the onus of proving that an objection decision is incorrect.
The relevant standard of proof is the civil standard, specifically, the balance of probabilities. In essence, this requires the Applicant to establish it is more likely than not that the Respondent’s assessments for the two years of income were incorrect. The Full Court of the Federal Court has instructively differentiated between actual “probabilities” compared to “mere possibilities”: “There is… a distinction of substance to be drawn between the probabilities on the one hand and mere possibilities, even if they are real as distinct from fanciful, on the other...”.[29]
[29] Repatriation Commission v Smith (1987) 74 ALR 537 at 538 per Beaumont J, with whom Northrop and Spender JJ agreed.
As noted by the High Court in Gauci v Federal Commissioner of Taxation[30] there is no “…onus on the Commissioner to show that the assessments were correctly made. Nor is there any statutory requirement that the assessments should be sustained or supported by evidence. …unless the appellant shows by evidence that the assessment is incorrect, it [the assessment] will prevail.”
[30] (1975) 135 CLR 81 at 89, per Mason J.
THE BROMELTON PROPERTY – SWAN CREEK INDUSTRIAL ESTATE
In November 2004, Craig Doyle Developments Pty Ltd contracted to purchase two lots (Lots 991 and 1) at Bromelton in Queensland,[31] which contract was subsequently rescinded so the land could be purchased by a Doyle Group Trust.[32] For the purposes of establishing the time that the Bromelton property was acquired, which is necessary to the determination of the intended purpose of the property at the time of acquisition, I disregard this contract. The relevant intention is that of the Bromelton Trustee when the Bromelton Trust contracted to purchase the property.
[31] Exhibit 5.2, Supplementary T Documents, ST4.
[32] Exhibit 1, Volume 2, Second Witness Statement of Craig Doyle, Annexure CDC-3.
On 11 March 2005, the Doyle Group’s legal advisers noted that it was anticipated that Queensland Rail (QR) and Australand Holdings Ltd (Australand) would each invest in the Bromelton development by acquiring 25% of the units in the Bromelton Trust and a 25% share in the Bromelton Trustee.[33]
[33] Exhibit 1, Volume 2, Second Witness Statement of Craig Doyle, Annexure CDC-5.
On 8 April 2005, the Bromelton Trust was established.[34]
[34] Exhibit 5.2, T Documents, T56, page 1554.
On 30 May 2006, the Doyle Group prepared a draft Masterplan for land sales only for discussion purposes.[35] It predicted returns on sales in three stages over a six year period.
[35] Exhibit 5.2, T Documents, T93.
At some time prior to 20 June 2005, the Doyle Group applied to Capital Finance Australia Limited (CFAL) for finance. The CFAL summary of terms and conditions states that the loan was to acquire Lots 1 and 992, and that “The loan will be repaid from the sale/refinance of security properties”.[36]
[36] Exhibit 5.2, T Documents, T96, page 2148.
On 28 June 2006, the Doyle Group prepared a draft feasibility study based on land sales in three stages over a period of “5 years + approvals”.[37]
[37] Exhibit 5.2, T Documents, T94, page 2134.
Between around 29 June 2005 and 2 August 2005, the Bromelton Trust contracted to purchase Lot 991 for $6,523,000, Lot 1 for $3,477,000[38] and Lots 992 and 121 for $1,900,000.[39]
[38] Exhibit 5.2, T Documents, T73, and T82, page 1974 (the contract to purchase Lot 1 is inferred from a condition in the contract to purchase Lot 991 that settlement was dependent on Lot 1 settling and the fact that the Bromelton Trust subsequently sold Lot 1).
[39] Exhibit 5.2, T Documents, T90, pages 2075, 2078 and 2080.
Between 28 July 2005 and 2 August 2005, the contracts for the purchase of Lots 991, 992 and 121 settled.[40]
[40] Ibid.
It appears that at some point, Australand was no longer being considered as a potential investor, and that the Applicant proposed to QR that QR and the Doyle Group jointly own and develop the property, and that QR lease part of it.[41]
[41] Exhibit 1, Volume 4, Statement of Ian Wilson.
On 2 November 2005, the Doyle Group sent an email to its legal advisers stating:
As discussed, please find attached the draft feasibility for the Bromelton project (“Option 3” indicates it is the combination of land sales, D&C and ground leases) which shows the lots to be sold/retained etc and likely values of these.[42]
[42] Exhibit 1, Volume 2, Second Witness Statement of Craig Doyle, attachment CDC-14.
On 23 December 2005 the Bromelton Trust contracted to purchase Lot 2.[43]
[43] Exhibit 5.2, T Documents, T76.
The funding for all of the purchases was provided by CFAL, a short term lender that charged high interest.[44] The loan facility was secured by other properties owned by the Doyle Group and was guaranteed by entities in the Doyle Group.[45]
[44] Exhibit 1, Volume 2, Second Witness Statement of Craig Doyle, paragraph 42.
[45] For example, Exhibit 5.2, T Documents, T95, page 2139.
On 8 February 2006 in a meeting between the Doyle Group and QR, it was put forward that the land allocated to the rail facility would be leased to QR and that other parts of the property may be leased or sold. It was agreed that as decisions of the joint venture must be unanimous, QR was not to vote against prospective deals that would enable a competitor to take a position within the development as a tenant or purchaser.[46] It was noted that the Applicant had made unsecured loans to the Bromelton Trust for the purpose of progressing a development application. It was further noted that QR would assume liability for principal and interest to CFAL and the Applicant would remain an unsecured creditor and a priority “as to payments following sales”.[47]
[46] Exhibit 5.2, T Documents, T106, page 2235.
[47] Ibid, page 2236.
In press releases issued on 11 April 2006, the Doyle Group represented that the Swan Creek Industrial Precinct would be developed and “will be purpose-built to provide owners and tenants with direct access to standard gauge rail”.[48] This statement was repeated in an article in the local newspaper, the Beaudesert Times, on 3 May 2006.[49]
[48] Exhibit 5.2, Further Supplementary T Documents, ST41, page 4733.
[49] Exhibit 5.2, Supplementary T Documents, ST6, page 4154.
On 30 May 2006, the Doyle Group prepared a feasibility study that provided for revenue being derived from land sales only.[50]
[50] Exhibit 5.2, T Documents, T93, page 2131.
On 27 June 2006, CFAL extended and increased the loan facility provided to the Bromelton Trust to $8,700,000 repayable in full by 30 June 2007.[51]
[51] Exhibit 5.2, T Documents, T97, page 2158.
On 28 June 2006 the Doyle Group prepared a feasibility study[52] that provided for revenue to be derived from:
·stage 1: 30% D & C with the remainder to be leased; and
·stages 2 and 3: 40% D & C with the remainder to be sold as freehold;
[52] Exhibit 5.2, T Documents, T92, page 2128.
On 20 July 2006 the contract to purchase Lot 1 settled.[53] Between 27 September and 27 November 2006, the Bromelton Trust purchased Lot 990.[54]
[53] Exhibit 5.2, T Documents, T90, page 2081.
[54] Exhibit 5.2, T Documents, T77, page 1877, Contract; T78, page 1895, Settlement Statement.
On 14 December 2006 the loan facility was again increased and extended, with $11,800,000 repayable in full by 30 September 2007.[55] The CFAL internal assessment stated that the “funding will be repaid from either the sale or refinance of the security property”.[56]
[55] Exhibit 5.2, T Documents, T99, page 2179.
[56] Exhibit 5.2, Supplementary T Documents, ST28, page 4541.
On 26 March 2007 the Bromelton Trust lodged a development application to reconfigure the property.[57]
[57] Exhibit 5.2, T Documents, T90.
The Doyle Group prepared a March – May 2007 “Commercial & Industrial Quarterly Project Report” which recorded that QR was still considering the offer to be involved as a joint venture partner, and referred to the feasibility studies of 30 May 2006 (based on sales only) and 28 June 2006 (based on sales and lease).[58]
[58] Exhibit 5.2, T Documents, T189.
At a time prior to 13 August 2007, the Doyle Group entered into negotiations with Industrial Commercial Property Solutions (ICPS), a subsidiary of Mirvac, for the purchase of five named properties (which included the Bromelton, Mackay and Brendale properties). This is apparent from an ICPS memorandum, dated 13 August 2007, which noted that prices had been “set in advance by Doyle”. The price for the Bromelton property was $85,000,000.[59]
[59] Exhibit 5.2, T Documents, T186, page 3489.
On 23 August 2007, the Bromelton Trust entered into a Put and Call option agreement with ICPS for the purchase of the Bromelton property[60] for $85,000,000, conditional upon development approval being obtained by 30 September 2008.[61]
[60] Lots 1, 2, 121, 990, 991 and 992.
[61] Exhibit 5.2, T Documents, T91, page 2088.
A CFAL internal assessment of a request from the Bromelton Trust for additional funds to purchase Lot 2, dated 21 September 2007, states that “Funding will be repaid via a sale of the site (probably to Mirvac)”[62] and “prospects are only getting better for the subject locality and the Doyle Group in general”.[63]
[62] Exhibit 5.2, Supplementary T Documents, ST10, p4426.
[63] Exhibit 5.2, Supplementary T Documents, ST10, p4429.
On 25 September 2007 the loan facility was replaced by a new facility of $26,250,000 repayable in full by 30 September 2008.[64]
[64] Exhibit 5.2, T Documents, T100, page 2189.
On 28 September 2007 the contract for the purchase of Lot 2 settled.[65]
[65] Exhibit 5.2, T Documents T80, page 1936.
On 30 June 2008 the Put and Call option was terminated and a Put and Call option was granted to Mirvac ID (Bromelton) JV and Nahkeel SPV Pty Ltd for $70,000,000 with a $7,000,000 deposit payable upon execution of the agreement.[66] The Doyle Group agreed with CFAL that around $3,000,000 of this deposit would to be applied to reducing the CFAL debt.[67]
[66] Exhibit 5.2, Supplementary T Documents, ST12, p4439.
[67] Exhibit 5.2, Supplementary T Documents, ST16, p4463.
On 7 August 2008, CFAL increased the loan facility to $29,250,000 to “pay outstanding creditors and for working capital purposes” repayable in full by 30 September 2008.[68]
[68] Exhibit 5.2, Supplementary T Documents, ST15, p4450.
A CFAL internal memorandum dated 30 November 2008, noted an increase to the loan facility of $895,000 to cover interest on the loan i.e. capitalise the interest, and to extend the date for repayment to 30 March 2009. CFAL noted that the Doyle Group was “very well-positioned”. It also noted that Mirvac had already settled the acquisition of two other sites as part of their “portfolio agreement” with the Doyle Group (being the Brendale and Mackay industrial sites in October 2007) and that the sale of the Bromelton site had become unconditional.[69] That request was granted on 22 December 2008.[70]
[69] Exhibit 5.2, Supplementary T Documents, ST17.
[70] Exhibit 5.2, T Documents, T102, page 2209.
On 31 March 2009, the Bromelton Trust entered into a contract to sell the Bromelton property to Fast Track Bromelton Pty Ltd (formerly Mirvac ID Bromelton) JV and Nahkeel SPV Pty Ltd for $70,000,000, not conditional upon development approval being obtained.[71] While the contract was unconditional, the Doyle Group was aware that the buyer was two “special purpose vehicles (shelf companies)” without a corporate guarantee behind them.[72] The parties agreed to reduce the purchase price to $45,000,000 with Mirvac and Nahkeel to provide corporate undertakings to cover the purchase price.[73] On 21 May 2009 the contract was rescinded and a new contract entered into for $45,405,600.[74] This contract settled on 21 July 2009.[75]
[71] Exhibit 5.2, T Documents, T84, page 1993 to 2003; T85, page 2004 to 2016.
[72] ST18 – stated in an email from Matthew Lyons of the Doyle Group to Greg Ramsay of CFAL on 21 April 2009.
[73] Ibid.
[74] Exhibit 5.2, T Documents, T86, page 2017 to 2045.
[75] Exhibit 5.2, T Documents, T87, page 2046.
Development approval was not obtained before the contract settled.
In its tax return for the 2009 financial year the Bromelton Trust returned a net capital gain of $8,856,398.[76]
[76] Exhibit 5.2, T Documents, T34, page 1231 to 1243.
THE MACKAY PROPERTY
On 25 May 2005 the Doyle Group obtained a market assessment of property in Mackay, from Core Economics, that included information about demand in general and about sale price per square meter of industrial land.[77]
[77] Exhibit 5.2, T Documents, T117, page 2394.
On 22 June 2005 the Mackay Trust was established.[78]
[78] Exhibit 5.2, T Documents, T57, page 1591.
On 19 July 2005 the Mackay Trust contracted to purchase land on Boundary Road, Mackay, described as Lot 30 and part of Lot 1 for $5,850,000. The contract was subject to a 45 day due diligence period.[79]
[79] Exhibit 5.2, T Documents, T108, page 2257.
Within the due diligence period:
(a)on 1 August 2005, property agents provided the Doyle Group with sales data for industrial land in Mackay;[80]
(b)on 15 August 2005 the Doyle Group prepared a site plan for the Mackay property depicting a subdivision into 56 lots;[81] and
(c)on 23 August 2005 a feasibility study was prepared depicting 56 lots with contemplated revenue of $31,740,259 from the sale of those lots.[82]
[80] Exhibit 5.2, T Documents, T141, page 2880.
[81] Exhibit 5.2, T Documents, T121, page 2416.
[82] Exhibit 5.2, T Documents, T132, page 2812.
In late September 2005 the Doyle Group:
(a)obtained an infrastructure assessment (21 September 2005);[83]
(b)prepared a further site plan depicting subdivision into 60 lots (22 September 2005);[84] and
(c)prepared a feasibility study on the basis of the sale of 60 lots (29 September 2005).[85]
[83] Exhibit 5.2, T Documents, T122, page 2417.
[84] Exhibit 5.2, T Documents, T123, page 2425.
[85] Exhibit 5.2, T Documents, T133, page 2814.
Between 30 September and 5 October 2005, the Mackay Trust contracted to buy 29 and 31 Boundary Road, Paget for $330,000 and $350,000 respectively, subject to obtaining development approval.[86] These parcels of land adjoined Lots 1 and 30 and were required for access.[87]
[86] Exhibit 5.2, T Documents, T109 and T110.
[87] Transcript page 26, lines 20 to 22.
On 22 December 2005 the Doyle Group lodged a development application to reconfigure the property into 60 lots.[88]
[88] Exhibit 5.2, T Documents, T124.
In February 2006, property agents forwarded letters of offer for some of the planned 60 lots at the proposed development.[89]
[89] Exhibit 5.2, T Documents, T144, page 2892.
In April 2006, the Doyle Group issued a press release in relation to the Mackay property that said it would “offer land for sale and also arrange design-construct projects for clients on a leaseback basis”[90] and in May 2006 this statement appeared in an article in the local Mackay newspaper, the Daily Mercury.[91]
[90] Exhibit 5.2, Supplementary T Documents, ST42, page 4735.
[91] Exhibit 5.2, T Documents, T146, page 2901.
In June 2006, the Doyle Group prepared a “Development Portfolio Overview”. The document stated, in relation to the Mackay property, that the Doyle Group “will offer land for sale and also arrange design-construct projects on a leaseback basis for clients”.[92]
[92] Exhibit 5.2, Supplementary T Documents, ST5.
In late June 2006, the Doyle Group prepared a feasibility study on the basis of revenue being derived from land sales and D&C in the ratio of approximately 50:50, in three stages over six years.[93]
[93] Exhibit 5.2, T Documents, T134.
On 31 January 2007 the contract to purchase Lot 29 settled.[94]
[94] Exhibit 5.2, T Documents, T112, page 2335.
The Doyle Group prepared a feasibility study, dated 31 January 2007, identifying that revenue would be derived from sales of land. It projected a cumulative net profit of $18,000,080 based on 60 lots.[95]
[95] Exhibit 5.2, T Documents, T135, page 2823.
This feasibility study was provided to CFAL on 6 February 2007 after it requested a “rough feasibility” for the Mackay property.[96] It was also referred to in the Doyle Group “Commercial & Industrial Quarterly Project Report” for the period March – May 2007.[97]
[96] Exhibit 5.2, T Documents, T135, page 2821.
[97] Exhibit 5.2, T Documents, T189, page 3496.
On 5 March 2007, CFAL granted the Mackay Trust a loan facility of $500,000 to purchase Lot 31.[98]
[98] Exhibit 5.2, T Documents, T138, page 2837.
On 14 June 2007, the Doyle Group prepared a feasibility study that provided for all revenue to be by sale of land,[99] and provided it to Savills (a property valuer) for the purposes of preparing a valuation for CFAL.[100] An updated feasibility study was prepared on 20 June 2007 which projected a cumulative net profit of $18,843,000 based on the sale of 39 lots.[101] On 21 June 2007 this updated feasibility study was provided to Savills for valuation purposes.[102]
[99] Exhibit 5.2, T Documents, T136, page 2829.
[100] Exhibit 5.2, T Documents, T137, page 2926.
[101] Exhibit 5.2, T Documents, T137, page 2833.
[102] Exhibit 5.2, T Documents, T130, page 2622.
A CFAL internal memorandum, dated 16 July 2007, recommended extending the $500,000 loan facility to $6,500,000 to assist with acquiring the Mackay property. The memorandum provided that the loan was to be repaid from:
“construction funding for the proposed industrial subdivision”
and that:
“…the Borrower has already received an unsolicited enquiry from BlueScope Steel in respect to acquiring lots within the completed development… A significant level of presales is not expected to pose a problem for the Borrower”.[103]
[103] Exhibit 5.2, T Documents, T139.
I note here that I have inferred from the totality of the evidence that none of the trusts had any assets except for the properties that they acquired using CFAL funding. This is explicitly acknowledged in relation to the Mackay property by the CFAL internal memorandum which states “Mackay Industrial Land is a SPV[104] established for this acquisition and accordingly has no financials”.[105]
[104] Short for Special Purpose Vehicle (normally a shelf company)
[105] Exhibit 5.2, T Documents, T139, page 2855.
On 20 July 2007, CFAL increased its facility to $7,610,000 to be repaid six months from the date of the initial advance. The finance was secured over the Mackay property and secured with a fixed and floating charge over all assets and undertakings of the Mackay Trust and guaranteed by other entities within the Doyle Group.[106]
[106] Exhibit 5.2, T Documents, T140, page 2865.
On 27 July 2007, Mackay City Council approved reconfiguration into 39 lots.[107]
[107] Exhibit 5.2, T Documents, T130, page 2771.
On 31 July 2007 the contracts to purchase Lots 30 and 1 settled for $6,710,000.[108]
[108] Exhibit 5.2, T Documents, T113, page 2336 (described as Lot 32 – this is explained in the Deed of Variation at T111, page 2292)
An ICPS memorandum dated 13 August 2007 states that ICPS had been negotiating with the Doyle Group in relation to the purchase of five named properties (which included the Bromelton, Mackay and Brendale properties) and that the prices had been “set in advance by Doyle”. The price for the Mackay property was $25,000,000.[109]
[109] Exhibit 5.2, T Documents, T186, page 3489.
On 23 August 2007, the Mackay Trust granted ICPS a call option for the Mackay property,[110] and on 1 October it contracted to sell the property to MWID (Mackay) Pty Ltd (a Mirvac entity) for $29,250,000.[111] That contract settled on 31 October 2007,[112] three months after the Mackay Trust had purchased the property.
[110] Exhibit 5.2, T Documents, T114, page 2341.
[111] Exhibit 5.2, T Documents, T115, page 2380.
[112] Exhibit 5.2, T Documents, T116, page 2390.
In its tax return for the 2008 financial year the Mackay Trust returned a net capital gain of $10,602,618.[113]
[113] Exhibit 5.2, T Documents, T32, page 1215.
THE BRENDALE PROPERTY
On 19 June 2006 the Brendale Trust was established. The following day it contracted to purchase 133 South Pine Road, Brendale, Queensland for $8,010,000.[114]
[114] Exhibit 5.2, T Documents, T149, page 2942.
On 26 June 2006 the Doyle Group prepared an “Acquisition Proposal” for 133 South Pine Road, Brendale.[115] It referred to a long-term, recurring income stream secured by blue-chip national tenants, and to the option of disposing of the investment on an individual basis in the future. It enclosed a feasibility study showing revenue derived in lump sums from D&C and it calculated an overall “return on sales”. It also noted that there were existing tenants on the site and the current annual income was $100,000pa.
[115] Exhibit 5.2, T Documents, T155, page 3030.
On 12 September 2006 Knight Frank was appointed as agent for selling and leasing the property,[116] and proceeded to advertise the development. One of the advertisements they prepared contained the slogans:
Plenty of room to grow your business
For sale or lease
A plan to grow your businessDesign & Construct a purpose built facility[117][116] Exhibit 5.2, T Documents, T156, page 3066.
[117] Exhibit 5.2, T Documents, T157, page 3076.
Another advertised “Design & Construct”, and yet another advertised “For sale or lease, New Office/Warehouse/Manufacturing Facilities”.[118]
[118] Exhibit 5.2, T Documents, T157, pages 3077 and 3080.
An undated Knight Frank “Information Memorandum”[119] stated that they were seeking pre-commitments and that “the following base parameters will be required to secure this opportunity”. It went on to stipulate a lease term of 10 years. It did not refer to sales.
[119] Exhibit 1, Volume 2, Second Witness Statement of Craig Doyle, attachment CDC-16.
On 5 October 2006, the Doyle Group asked Savills to conduct a valuation of the property. The request enclosed three feasibility studies that each provided for a staged five year project, with revenue to be derived from D&C in a lump sum, and calculated an overall “return on sales”.[120] Savills valued the property at $10,000,000.[121]
[120] Exhibit 5.2, T Documents, T169, page 3416.
[121] Exhibit 5.2, T Documents, T158, page 3104.
On 22 November 2006, Knight Frank provided the Doyle Group with an update identifying that interest had been received from some entities, including a named company that was “looking to buy or lease”.[122]
[122] Exhibit 5.2, T Documents, T170, page 3430.
On 23 November 2006 the Doyle Group received an offer from Evans Harch to purchase the property for $10,500,000.[123]
[123] Exhibit 5.2, T Documents, T171, page 3432.
On 5 December 2006, the Doyle Group prepared a feasibility study contemplating revenue derived from the sale of land only, predicting revenue of $16,527,940.[124]
[124] Exhibit 5.2, T Documents, T162, page 3339.
On 12 December 2006, the Doyle Group received a further offer from Evans Harch to purchase the property for $11,500,000.[125] The following day the offer was accepted by Doyle Group manager, Chris Matheson, subject to terms.[126] However, the contract did not proceed and it is not clear why.
[125] Exhibit 5.2, T Documents, T174, page 3436.
[126] Exhibit 5.2, T Documents, T175, page 3437.
At some time before 19 December 2006, the Doyle Group sought funding from CFAL of $8,000,000 to complete the purchase of the Brendale property. An internal CFAL recommendation noted that the Doyle Group had been approached to sell the site for $11,500,000 and settlement was expected in July 2007.[127]
[127] Exhibit 5.2, T Documents, T164, page 3350.
On 20 December 2006, the contract for the Brendale Trust to purchase the property settled.[128]
[128] Exhibit 5.2, T Documents, T151, page 2967.
The Doyle Group prepared a feasibility study, dated 28 January 2007 and revised on 31 January 2007, on the basis of land sales only, projecting revenue of $17,526,000.[129]
[129] Exhibit 5.2, T Documents, T163, page 3342.
On 9 March 2007, the Applicant on behalf of the Brendale Trust appointed McGees Property as agent to sell the property. The “reserve or listing price” was set at $12,000,000.[130]
[130] Exhibit 5.2, T Documents, T159, page 3141.
In April 2007 the Applicant submitted development applications to reconfigure and change the zoning of the property.[131]
[131] Exhibit 5.2, T Documents, T160, page 3148.
The Doyle Group’s “Commercial & Industrial Quarterly Project Report” for the period March to May 2007 stated that site works were expected to commence in late 2007, and it noted that “The cul-de-sac Masterplan provides flexibility to sell D&C or hold long-term”.[132]
[132] Exhibit 5.2, T Documents, T189, page 3496.
The marketing section of the report stated that 10,000 leaflets had been distributed in the greater Brisbane area and attached a leaflet (referred to above) that included “For sale or Lease” and “Design & Construct a purpose built facility”.[133] The report listed fifteen businesses that had shown interest in the site although it was not specified whether they had shown interest in buying or leasing. The report further noted “Knight Frank currently marketing the site. Discussions with Jones Lang LaSalle”.
[133] Exhibit 5.2, T Documents, T189, pages 3501 and 3502.
The report contained the feasibility study of 31 January 2007 – that was prepared on the basis of land sales.
On 4 May 2007, Jones Lang LaSalle wrote a letter to the Doyle Group “further to our recent discussions” that included their assessment of achievable values for rental and sales for the property.[134]
[134] Exhibit 5.2, T Documents, T177, page 3442.
On 21 May 2007, Knight Frank advised the Doyle Group that it had a number of purchasers and tenants who had shown interest in the site.[135]
[135] Exhibit 5.2, T Documents, T178, page 3449.
An ICPS memorandum dated 13 August 2007 stated that ICPS had been negotiating with the Doyle Group in relation to the purchase of five named properties (which included the Bromelton, Mackay and Brendale properties) and that the prices had been “set in advance by Mr Doyle”. The price of the Brendale property was $18,000,000.[136]
[136] Exhibit 5.2, T Documents, T166, page 3370.
An internal CFAL memorandum, dated, 20 August 2007, identified that the loan facility was due to expire that day, however the property had been sold to Mirvac for $11,750,000 with settlement to occur on 31 October 2007, and it recommended an extension of the facility to 20 November 2007.
On 23 August 2007, the Brendale Trust granted ICPS a call option to purchase the property.[137] On 1 October 2007, it entered into a contract of sale for $11,750,000[138] and on 31 October 2007 the contract settled.[139] This is the same day that the contract to sell the Mackay property settled.
[137] Exhibit 5.2, T Documents, T152, page 2968.
[138] Exhibit 5.2, T Documents, T153, page 3008.
[139] Exhibit 5.2, T Documents, T154, page 3028.
In its tax return for the 2008 financial year the Brendale Trust returned a net capital gain of $1,613,650.[140]
COMMON ELEMENTS GLEANED FROM THE OBJECTIVE EVIDENCE
[140] Exhibit 5.2, T Documents, T33, page 1224.
There are common elements in the Doyle Group’s dealings in relation to the three parcels of land. They are:
(a)land was acquired by a unit trust that had been specially created for that purpose. The trust had no assets other than the purchased property, and required short-term, high-interest finance to fund the purchase and development of the property;
(b)CFAL lent the money on the basis that it would be repaid by way of re-financing or sale of the subject property;
(c)development applications were made to reconfigure and/or re-zone the land;
(d)each project was publicised and marketed as an industrial development that would offer lots for lease or sale;
(e)there was never any designation of certain lots to be held long-term or ratio of lots that were to be kept for long-term lease;
(f)long-term re-financing was not secured, or it appears even sought, in the period between acquisition and sale;
(g)no investors were secured;
(h)no tenants were secured;
(i)there was never any physical development or construction of the land; and
(j)the land parcel was sold, in its entirety, for profit.
DISCUSSION
The Applicant has sought to explain away much of the contemporaneous documentary evidence that tends to show that selling the properties for profit was a serious option from the time each property was acquired. This calls for an analysis of his evidence in the context of the objective facts.
The Motorway and Parkinson Projects
The Applicant’s evidence is that the Doyle Group was established in 1993 when it undertook its first sub-division of residential land. The Group bought land, developed it and sub-divided it into residential lots, then sold those lots.[141]
[141] Exhibit 5.2, Supplementary T Documents, ST5, page 4126; Exhibit 1, Volume 2, Second Witness Statement of Craig Doyle, paragraph 6.
Around 2001, the Applicant wanted the Doyle Group to build an asset base in long-term industrial land holdings by developing industrial lots, and acquiring high value “blue chip” tenants who would provide an income stream, thereby increasing the value of that industrial land so that members of the Doyle Group could leverage borrowing against that land and seek cash injections from commercial third parties and thus be able to use the additional borrowing capacity to become involved in the acquisition of agricultural land over the longer term.[142]
[142] Exhibit 1, Volume 2, Second Witness Statement of Craig Doyle, paragraph 8.
The Doyle Group became involved in a joint venture with Australand to develop industrial land at Larapinta, Queensland. Motorway Business Park Pty Ltd (Motorway), part of the Doyle Group, purchased the land and Australand provided funding to develop it. The Applicant intended to hold and lease the land on a long-term basis.
121.Mr John Thomas, who was a senior manager at Australand between 2003 and 2008, provided a statement in this matter. His evidence was unchallenged and I accept it. He says that the Doyle Group needed Australand’s financial assistance for the development. Specifically he says:
Mr Doyle told me at the negotiation stage that he required a balance sheet the size that Australand could provide, and the associated funding available through a joint venture with Australand…
Mr Doyle had told me at this stage that it was his intention to hold the land long-term and develop his own portfolio of industrial land he could find other ventures in a similar way that Australand was doing.
In or around mid-2004 Woolworths offered to purchase the land at above market value, Australand wanted to accept the offer, and as the smaller partner in the joint venture, the Applicant agreed.[143] Mr Thomas corroborates this. The profits from the sale were accounted for as revenue.[144]
[143] Exhibit 1, Volume 2, Second Witness Statement of Craig Doyle, paragraphs 12 to 15.
[144] Transcript page 107, lines 31 to 32.
The Applicant claims that Australand had told him that when they had an intention to hold land long-term they used a “wholesale trust”. Describing the sale of Motorway, the Applicant said “So Motorway Business Park got completely sold and was taxed on revenue account because I set up, and it was set up incorrectly”.[145]
[145] Transcript page 20, lines 11 to 14.
In 2004 to 2005 another Doyle Group entity, Treton Pty Ltd (Treton), purchased land at Parkinson for industrial development. The Applicant says that in negotiations in relation to a joint venture with Australand, it was agreed that some parts of the project were to be held as long-term assets and some parts were to be developed for the purposes of sale.[146] This is consistent with a file note of a meeting between the Applicant, his lawyers and an Australand representative, dated 6 April 2005, that refers to “trading stock” being kept in Treton for “JV purposes” with respect to the Parkinson land. [147]
[146] Exhibit 1, Volume 2, Second Witness Statement of Craig Doyle, paragraphs 29 and 30.
[147] Exhibit 1, Volume 2, Second Witness Statement of Craig Doyle, attachment CDC-7.
Ultimately this did not transpire. Coles Myer Limited (Coles Myer) was interested in leasing part of the Parkinson land for a cold storage facility, however it was reluctant to do business with the Doyle Group given the private nature of the group and the heavy cross-collateralisation of the group’s assets to its finance provider. In 2005, under pressure from Australand who did not want the Coles Myer deal jeopardised, the Applicant agreed to relinquish the title to the Parkinson land.[148]
[148] Exhibit 1, Volume 2, Second Witness Statement of Craig Doyle, paragraphs 9 and 10.
Again, the Doyle Group had needed financial assistance from Australand for this project. Mr Thomas’s evidence is:
… Doyle had effectively taken the risk associated with acquisition that Australand would not otherwise be willing to take, and in return Australand would:
(a) provide the additional capital funding uplift to allow for the development of the land;(b) attract “blue-chip”, long-term tenants to the project.[149]
[149] Exhibit 1, Volume 4, Witness Statement of John Thomas, paragraph 18.
The Applicant’s evidence about the Doyle Group’s involvement with Motorway and the Parkinson project is corroborated by Mr Thomas’s evidence, and I therefore accept it.
Advice on Structuring Affairs
The Applicant claims that, wanting to use a model similar to Australand, he sought legal advice about structuring his affairs to allow for, among other things:
·long-term acquisition and cash flow;
·the potential to allow external parties to inject funds into the Doyle Group without unnecessary complexity or adverse commercial consequences;
·favourable taxation treatment (within the law);
·the ability to diversify the Doyle Group’s income through trust structures to the extent that it was commercially beneficial to do so; and
·the ability to borrow against industrial assets held by the Doyle Group to branch into agricultural acquisition.
He was advised that long-term acquisitions should be held in a “unit trust” structure and that this would allow him, in the event of an unexpected sale, to “utilise capital gains tax relief that would not otherwise be available in a non-trust corporate structure”.[150]
[150] Exhibit 1, Volume 2, Second Witness Statement of Craig Doyle, paragraph 21.
Mr Christopher Davis, Principal at McInnes Wilson Lawyers, provided a statement in this matter. His evidence corroborates the Applicant’s evidence regarding the advice he sought and was given.[151] Mr Davis’s evidence is unchallenged and I accept it.
[151] Exhibit 1, Volume 4, Witness Statement of Christopher Davis, paragraphs 5 and 6.
Mr Ross Vile of Vincents Chartered Accountants provided a statement in this matter. His evidence is unchallenged and I accept it. He states that around June 2005, he was approached by the Doyle Group’s legal advisers for advice on, among other things, strategies to be directed to long-term asset acquisition and cash flow. He says that from numerous discussions he was involved in with the Applicant, he understood the Doyle Group’s modus operandi was that where real property was purchased with the intention of holding it long-term, it was purchased in a trust in order to take advantage of capital gains tax benefits.
The Applicant has produced a memorandum from his legal advisers, dated 8 April 2005, advising that:
(a)with respect to the development and sale of lots held by Treton, transferring the land to another structure would give rise to significant capital gains tax and stamp duty consequences;
(b)the land that was intended to be held long-term could be transferred to a unit trust on the basis of its unimproved value (to minimise capital gains tax and stamp duty); and
(c)in relation to the land to be held long-term, “holding the land in a unit trust provides obvious benefits for Australand and Craig Doyle in terms of taxation”.[152]
[152] Exhibit 1, Volume 2, Second Witness Statement of Craig Doyle, attachment CDC-8.
The applicant claims that he was told by his legal advisers that if property was not to be held long-term, the trust structure gave no practical benefit. However, he did not point to any detriment that would flow from using the structure for property that was not to be held long-term, and neither has Mr Davis nor Mr Vile. Nor can the Applicant recall receiving any advice to that effect.[153]
[153] Transcript page 108, lines 13 to 15.
The Applicant’s evidence about the advice that he sought and received is consistent with the Mr Davis’s evidence and the contemporaneous documentary evidence, and I accept it.
Use of Trusts
The Applicant claims that he set up trusts for the Bromelton, the Mackay and the Brendale properties following his lawyer’s advice, and that where he intended to purchase land and sell it for profit he did not use a trust. The conclusion the Applicant wishes the Tribunal to draw was that his use of trusts to hold those properties proves that he acquired them with the singular intention of holding them long-term. I am not prepared to draw such a long bow given the evidence that holding property long-term was not the only goal the Applicant expressed to his lawyers when seeking advice on the appropriate structure (he also wanted a structure that would allow cash injections from third parties and the diversification of the Doyle Group income without commercial detriment) and the fact that his lawyers did not advise that any detriment would flow from using a trust to hold property only in the short-term. Further, the Applicant knew from his recent experience with Motorway that where land is intended to be leased long-term, sometimes a very good offer to purchase can arise.
I accept that the use of the trust structure indicates the Applicant acquired the properties with the intention of having the option to hold the property long-term, but I do not accept that it necessarily indicates that holding the property long-term was the Applicant’s only intention, particularly in light of other evidence such as the email on 2 November 2005 from the Doyle Group to its legal advisers referring to an option in a feasibility study that was a “combination of land sales, D&C and group leases” about which the Applicant said, when giving evidence “That’s right, and it keeps going back to the same thing, it’s good commercial sense, you’ve got to spread your risk.”[154]
[154] Transcript page 78, lines 30 and 31.
Indeed the Applicant’s own evidence does not support his contention that his use of trusts proves he solely intended to hold the properties long-term. In the hearing the Applicant said:
The trusts - you know, we made it very clear that the trusts were worded, of course they could be sold. It’s no secret. There is no - the lawyers allowed for all options to whatever action had to be taken when it had to be taken. Now, the pressure referred to resulted in I had to sell, and that’s what happened. If the structures weren’t done correctly that would have stopped that process and I would have been in a pretty bad situation. I took my adviser’s advice, they documented accordingly and that’s where we are.[155]
[155] Transcript page 129, line 47 to page 130, line 7.
I further note that, with respect to the land at Parkinson, the reasons given by his legal advisers for not transferring trading stock (land that was intended to be sold) from Treton to a trust was that it would have given rise to adverse tax consequences, not that a trust was otherwise inappropriate for land that was to be held short-term.
In relation to land that was to be held and leased long-term, the applicant’s legal advisers proposed that a separate management company be put in place to “undertake all the property services required in negotiating with tenants, negotiating with banks finance etc”.[156] However, the Applicant did not produce any evidence that this had been done.
[156] Exhibit 1, Volume 2, Second Witness Statement of Craig Doyle, attachment CDC-3, page 2.
The Respondent contends that the ordinary business of the Doyle Group, and the trusts that owned each parcel of land, included the acquisition of industrial land for development for sale or lease. Inherent in this is that each trust carried on business in a manner whereby flexibility was retained to permit the realisation of profit by whichever of those methods was advantageous in the circumstances.
The Applicant submits that the business of the Doyle Group did not include the acquisition, development and sale of industrial land, but rather the acquisition of industrial land for long-term lease. However, he has failed to prove this on the balance of probabilities and thus failed to discharge the onus of proof incumbent upon him.
The first, and most obvious, problem for the Applicant is that from 2004 the Doyle Group acquired four parcels of land (in Parkinson, Bromelton, Mackay and Brendale), commenced the process of redeveloping them to create industrial lots, and sold each parcel in its entirety for profit. This is indicative – although not conclusively so – that the business of the Doyle Group included doing exactly that.
Second, there is a clear sequence of events that explains how the Doyle Group came to add this facet of property development to its property development business. The Doyle Group started in residential property developments that were largely intended for sale. In 2001, it entered industrial property development. The Motorway Business Park was intended for long-term lease, but was ultimately sold. The Parkinson project followed. The Doyle Group agreed with Australand that some of the Parkinson property would be held for long-term lease and some would be developed for sale. This is recorded in a file note dated 6 April 2005, which pre-dates the acquisition, by the relevant trusts, of the Bromelton, Mackay and Brendale properties. The Doyle Group ultimately sold the entire Parkinson property. The sale of the Motorway and Parkinson properties were not what the Doyle Group initially intended, however both outcomes were profitable.
Third, while the Doyle Group went on to acquire the Bromelton, Mackay and Brendale properties with the stated intention of leasing them long-term, at the time of acquiring each property it obtained data and prepared reports relating to the financial viability of selling them. I have rejected the Applicant’s claims that this was done to give comfort to CFAL and that the option of selling was considered a mere exit strategy.
Finally, in June 2006 the Doyle Group represented itself to a potential investor to be in the business of industrial and commercial property development for purchasers and tenants. It prepared a document for Colonial First State entitled:
DOYLE GROUP Development Portfolio Overview June 2006
Prepared for: Colonial First StateJune 2006[214][214] Exhibit 5.2, Supplementary T Documents, ST1.
Under the heading “Who We Are” appears:
The People – Commercial & Industrial
Craig Doyle, Managing Director
...Mr Doyle has established developments in Commercial and Industrial, Residential, Rural and more recently the Design & Construct of purpose built facilities.[215][215] Ibid, page 3817.
The Development Portfolio Overview contains descriptions of several commercial and industrial projects and includes the following:
(a)with respect to the Motorway Business Park, “The estate features five (5) stages, of which 98% has been pre-sold to both owner occupiers and investors”;[216]
(b)with respect to the Parkinson Business Park, “The estate has been designed to target the owner-occupier/investor market, comprising eight (8) stages…”;[217]
(c)with respect to the Archerfield Business Centre, “The estate is targeted to the owner-occupier market…The entire estate has been pre--sold and has achieved record sale rates…”;[218] and
(d)with respect to the Mackay Business Park, “The Paget Industrial Estate will offer land for sale and also arrange design-construct projects on a leaseback basis for clients”.[219]
(Note: the Development Portfolio Overview did not describe the Bromelton project as being for sale or lease but talked about demand in general. The Brendale project was not included in the document – this could be because its purchase, on 20 June 2006, post-dated the preparation of the document)
[216] Ibid, page 3820.
[217] Ibid, page 3823.
[218] Ibid, page 3832.
[219] Ibid, page 3835.
The Applicant gave evidence that he wanted to attract superannuation funds as investors in his industrial projects and he named AMP and Colonial Mutual.[220] This is significant because it is reasonable to infer that a document provided to a potential investor would be accurate. The Applicant confirmed this when giving evidence as follows:
[220] Transcript page 109, lines 45 to 48.
Q:No, it’s simply telling Colonial First State this is what we do?
A:That’s right
Q:This is the nature of our business?
A:This is what we - yes, this is what we’ve done in the past and what we’re doing
in the future.Q:Sure. And so that’s why you state here, fourth bullet point:
‘The Paget industrial estate will offer land for sale and also arrange design construct projects on a leaseback basis for clients’
Q:So that’s true and correct?
A:Yes, that’s consistent with everything we discussed yesterday.[221]
[221] Transcript page 116, lines 6 to 18.
Considering all of this, I find that from 6 April 2005 at the latest,[222] the ordinary business of the Doyle Group included the acquisition and development of land for industrial use with a view to deriving profit by selling and/or leasing it, whichever proved more advantageous in the circumstances. As each trust was the vehicle by which this facet of the Doyle Group’s business was carried out with respect to the property it acquired, it follows that its ordinary business was the same.
[222] The date of the file note recording that some of the Parkinson land was intended for sale.
Profit-making Scheme
The objective evidence is that the Doyle Group purchased the three properties, set about obtaining development approvals to create industrial lots, represented to the public and specific parties that the lots would be offered for sale or lease, and ultimately sold each property in its entirety at a profit. The Applicant has sought to explain away much of the evidence that tends to prove an intention to realise a profit by way of sale. I have not accepted his explanations for the reasons I have given.
In rejecting the Applicant’s explanations, I am mindful that he made representations to some individuals that he intended the properties for long-term lease and that there are references in some contemporaneous documents to land only being intended for long-term lease, for example, one of the Knight Frank marketing leaflets for the Brendale property. I accept that the Applicant aspired to build an impressive portfolio of industrial property. However, the weight of the documentary evidence (excluding the feasibility studies that were only used to obtain finance) and the media/marketing activity indicates a flexible approach whereby profit would be realised by way of sale and/or lease.
Considering the totality of the evidence I find that, at the time each property was acquired by its respective trust, the Applicant’s purpose was to develop the property and put it to a commercially advantageous use, which could have been selling, leasing or a combination of both, depending on factors such as whether investors could be secured. Accordingly, each property was acquired as part of a profit-making scheme that included, as one of its purposes, profit making by sale.
FINDINGS IN RELATION TO THE CHARACTER OF THE NET PROCEEDS
My findings in relation to each sale are as follows:
(a)each sale arose in the ordinary course of the business of the Doyle Group and of the trust that owned the property; and
(b)while it is unnecessary to make the following determination given my first finding, each sale arose as part of a transaction that was entered into with a purpose that included developing the land to sell as industrial lots for profit.
Therefore, the net proceeds of each sale were income, not capital, in nature. The quantification of the net proceeds for income tax purposes is not in issue.
THE ADMINISTRATIVE PENATLY
Section 284–75(2), schedule 1 to the TAA provides that a taxpayer who adopts a position in respect of income tax law that is not reasonably arguable is liable to an administrative penalty.
A position is reasonably arguable:
“[I]f it would be concluded in the circumstances, having regard to relevant authorities, that what is argued for is about as likely to be correct as incorrect, or is more likely to be correct than incorrect”[223]
[223] Section 284–15(1), schedule 1 to the TAA.
The test whether a position is “reasonably arguable” is an objective one that asks whether the taxpayer’s position, although incorrect, is “about as likely as not correct” when regard is had to those authorities. The taxpayer’s position need not be more likely to be right than wrong. Rather, the question is whether the taxpayer’s argument can objectively be said to be one that (while wrong) could be argued on rational grounds to be right. The taxpayer’s position will not be reasonably arguable if it is founded upon an unreasonable view of, or disregard for the facts.[224] Further, while the absence of reasonable care will mean that a position is not reasonably arguable, the mere presence of reasonable care is not sufficient. A comparison between the taxpayer’s argument and the correct position must be one that is finely balanced where reasonable minds could differ.[225]
[224] Alan and Anor Asphalt v FCT (2011) 195 FCR 416.
[225] Walstern v Commissioner of Taxation [2003] FCA 1428 per Hill J at [108].
Each property was acquired for a combined purpose and the net proceeds resulted from the carrying out of one of those purposes. The authorities are clear that, on those facts, the net proceeds are income. I do not therefore accept that this is a finely balanced matter where reasonable minds may differ. I am not satisfied that the Applicant’s position was reasonably arguable, therefore the Applicant is liable to an administrative penalty.
While reliance on professional advice does not make a position reasonably arguable it can justify a reduction in penalty. The evidence is that the Applicant relied on legal advice with respect to structuring his business but I am not satisfied that he received, or relied on, legal advice that the net proceeds of each sale were capital. In any event, the penalty has already been reduced to 5%. I am not satisfied that any further reduction is justified.
DECISION
I affirm the decisions under review.
I certify that the preceding 219 (two-hundred and nineteen) paragraphs are a true copy of the reasons for the decision herein of Senior Member Theodore Tavoularis
.............................[sgd]..............................................
Associate
Dated: 5 February 2020
Date of hearing: 4, 5 and 6 June 2018 Counsel for the Applicant: Mr M Cooke Solicitors for the Applicant: McInnes Wilson Lawyers Counsel for the Respondent Ms M Brennan QC
Mr M LyonsSolicitors for the Respondent Australian Government Solicitor
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