Gardiner and Commissioner of Taxation
[2000] AATA 257
•3 April 2000
DECISION AND REASONS FOR DECISION [2000] AATA 257
ADMINISTRATIVE APPEALS TRIBUNAL )
) No VT1998/109
TAXATION APPEALS DIVISION )
Re JANE ROBYN GARDINER
Applicant
And COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Mr B. H. Pascoe, Senior Member
Date3 April 2000
PlaceMelbourne
Decision The Tribunal sets aside the decision under review and in its stead allows the objection of the applicant against the assessment of income tax for the year ended 30 June 1988 to the extent of finding that a profit on sale of land of $262,198 did not constitute assessable income. The Tribunal certifies that proceedings have terminated in a manner favourable to the applicant.
........(Sgd) B. H. Pascoe...........
Senior Member
CATCHWORDS
INCOME TAX – capital gain – whether asset acquired prior to 20 September 1985 – date of contract
Income Tax Assessment Act 1936
McDonald v Commissioner of Taxation 98 ATC 4306
Masters v Cameron (1954) 91 CLR 353
Godecke v Kirwan (1973) 129 CLR 629
Von Hatzfeldt-Wildenburg v Alexander (1912) 1 Ch 284
Eccles v Bryant (1948) Ch 93
REASONS FOR DECISION
3 April 2000 Mr B. H. Pascoe, Senior Member
This is an application to review a decision of the respondent to disallow an objection against an assessment of income tax based on the applicant's income for the year ended 30 June 1988. The assessment was issued in June 1992 and included $262,198 as a capital gain on the sale of real estate. The applicant's objection argued that the relevant real estate was acquired prior to 20 September 1985 and the subsequent profit on sale was not taxable.
At the hearing, the applicant was represented by Mr T. Murphy of counsel and the respondent by Mr P. Sest of counsel. Evidence was given by Mr. J. Boyall, a solicitor who acted for the applicant from August 1995 and Mr B. Delany, a real estate agent who acted in the sale and purchase of the relevant property.
The basic facts of this case and the issues involved were not in dispute and the facts can be summarised as follows:
On 16 July 1985, real estate agents prepared a Contract Note in relation to a property at Sorrento in which the applicant was described as purchaser. The purchase price was expressed to be $510,000 with a deposit of $210,000 payable as to $10,000 said to have been paid to the agent, $41,000 on 1 August 1985 and the balance on 15 December 1985. The residue of the purchase price was expressed to be payable on 15 June 1988.
On 17 July 1985 the vendor's solicitors wrote to the real estate agent advising that the vendor was prepared to accept an offer on the following terms:
1. Purchase price $535,000.
2.Deposit $250,000 payable on either 15 December 1985 or 1 February 1986 of which $10,000 offered to be accepted and $42,5000 payable 1 August 1985.
3.Residue payable after 2 years from date of contract.
4.Items included in sale to be fixed floor coverings, curtains, blinds, light fittings, kitchen equipment and such other items of furniture nominated by the vendor.
By covering letter of 23 July 1985 the following letter, addressed to the vendor, was sent by the applicant's solicitors to the vendor's solicitors:
"Dear Madam
RE: PROPOSED PURCHASE OF PROPERTY KNOWN AS 3269-3273 NEPEAN HIGHWAY, SORRENTO
I, Jane Gardiner, hereby offer to purchase the whole of the property contained in Certificate of Title Volume 8245 Folio 544 and Volume 8698 Folio 874 being property known as 3269-3273 Nepean Highway, Sorrento from Mrs Wilhelmina Marie Sinn of The Anchorage, Sorrento, for the sum of $560,250 upon the following terms and conditions:
1(a) Deposit of $20,000 herewith;
(b) $40,000 upon exchange of contracts;(c)$240,250 on possession being the 15th December 1985 or later by mutual agreement;
(d)Balance at the expiration of 2 years from the 15th of December 1985 or the date of possession interest free.
2.The purchase price is to include the following chattels, namely curtains, electric light fittings, floor coverings and furniture which does not have sentimental value to the vendor (for example two chairs and a couch in the drawing room).
3.The right to substitute a purchaser for the tenderer Jane Gardiner upon execution of an identical Contract of Sale by the substituted purchaser and a Guarantee if required by the Vendor.
4.The offer to purchase is made subject to the Contract of Sale being the standard contract published by the Law Institute of Victoria, the Real Estate and Stock Institute of Victoria, the Real Estate Agents Association of Victoria, and the Victorian Stock Agents' Association.
Yours truly"
A cheque for $20,000 payable to the estate agents accompanied the letter.
On 24 July 1985, the vendor's solicitors wrote to the purchaser's solicitors as follows:
"Dear Sirs
Re: Wilhelmina Marie Sinn to Jane Gardiner
Property: 3269-3273 Nepean Highway, Sorrento
This confirms Mr Molomby's telephone call with Mr Levy yesterday following receipt of your letter of 23 July.
Our client has accepted your client's offer subject to the following comments as to the furniture included in the sale –1. Some items of furniture etc belong to members of the Vendor's family.
2.The items of 'sentimental value to the Vendor' will be identified as soon as possible.
3.The items included in the sale will be listed and you will be advised as soon as possible.
The cheque for $20,000.00 has been forwarded to Kay & Burton.
Yours faithfully"On 31 July 1985, the vendor's solicitors wrote to the purchaser's solicitors setting out a list of furniture to be included in the "proposed sale" and advising that they were completing preparation of the contract.
On 1 August 1985 the vendor's solicitors wrote in the following terms:
"Dear Sirs
Re: Sinn to Gardiner
Property: 3269-3273 Nepean Highway, Sorrento
Further to our letter of 31 July 1985 and subject to our client's approval we enclose Contract of Sale for signature by your client.
As discussed we are obtaining signatures of the Section 32 Statement and this will be forwarded to you as soon as possible.
Please let us know when you are ready to exchange parts.
Yours faithfully"On 1 August 1985 the applicant's solicitors wrote to the vendor's solicitors enclosing requisitions on title.
On 5 August 1985 the applicant's solicitors wrote to the applicant advising her in relation to the form of contract received.
On 8 August 1985 the vendor's solicitors wrote to the applicant's solicitors enclosing a signed Section 32 Statement and answers to the requisitions. It advised that two items of furniture belonging to members of the vendor's family were to be deleted and that the date of possession and payment of the residue of the deposit was to be altered to 1 February 1986.
During August and early September discussions and correspondence took place regarding the possible substitution of two companies as purchasers.
On 5 September 1985 newly appointed solicitors for the applicant wrote to the vendor's solicitors asking whether or not contracts had been signed and exchanged.
On 8 October 1985 there was a telephone conversation between a solicitor for the vendor and the newly appointed solicitor for the applicant in which it was intimated that the vendor was concerned about the delay in exchanging formal contracts and was contemplating whether the property could be put back on the market if contracts were not exchanged by the end of that week.
On 9 October 1985 formal Contracts of Sale were exchanged and a cheque for $40,000 delivered. The Contracts of Sale were in the form published by the Law Institute of Victoria, the Real Estate and Stock Institute of Victoria, the Real Estate Agents Association of Victoria and the Victorian Stock Agents' Association of Victoria.
On or about 10 October 1985, the applicant lodged a caveat over the property.
On 3 February 1986 the applicant took possession of the property.
On or about 13 February 1986 the applicant filed a Notice of Acquisition with various authorities showing the interest having been acquired under a contract dated 24 July 1985.
On 3 February 1986 the applicant paid the vendor the residue of the purchase price.
On 31 January 1988 the applicant sold the property at public auction for $990,000.
It is appropriate to note that the applicant, Mrs Gardiner, did not give evidence before the Tribunal. It was clear that she is suffering from a severe illness and the Tribunal draws no inference from the fact that she did not appear.
The primary purpose for the appearance of Mr Boyall was to place in evidence a number of documents from his file. Mr Delany gave evidence that he knew both parties to the transaction but, not surprisingly, was unable to recollect the facts and circumstances of the particular sale. He stated that his understanding was that, within the real estate industry, it was considered that parties were not bound until there had been an exchange of signed and dated contracts. He believed it unusual for both parties to engage solicitors to formally make and accept offers. In his experience, it was not uncommon for parties not to execute a formal contract of sale but to be bound by a contract note prepared by the real estate agent.
The relevant legislation with which this matter is concerned is section 160U(3) of the Income Tax Assessment Act 1936 ("the Act") which provides:
"Where the asset was acquired or disposed of under a contract, the time of acquisition or disposal shall be taken to have been the time of the making of the contract."
Section 160L of the Act provides that Part IIIA of the Act applies to a disposal of an asset that was acquired on or after 20 September 1985. Consequently, the question in issue here is whether the time of the making of the contract was prior to 20 September 1985.
It was submitted for the applicant that the contract was constituted by the offer of the applicant dated 23 July 1985 which was accepted by the vendor on 24 July 1985. It was said that the contract satisfied the requirements of section 126 of the Instruments Act that it be in writing and contained all the elements necessary for an enforceable contract. Mr Murphy submitted that both parties intended to be bound from that date of acceptance and, contrary to usual practice, had retained solicitors to make and accept the offer and had recognised 24 July 1985 as the date of purchase and sale by specifying that date in the subsequent formal document exchanged on 9 October 1985. He argued that it was not the point that the offer was expressed to be made subject to the Contract of Sale being the standard Contract published by the Law Institute of Victoria, the Real Estate and Stock Institute of Victoria, the Real Estates Agents Association Victoria and the Victorian Stock Agents' Association because it was clear that the intention of the parties was to make a concluded bargain then and there. Alternatively, by identifying the document so precisely, they had agreed upon its terms. In any event, it was said, the contentious issues did not affect the sale of the land. The first issue related to the nomination of a different purchaser. This was provided for in the offer and accepted by the vendor. There was in fact no nomination but, had there been, the agreement with the substituted purchaser would have then come into effect. Until then the applicant would have remained liable under the contract of 24 July 1985. The second issue related to the furniture; these were different assets to the land. The third issue related to the delay in the signing of the formal agreements. This was said to be irrelevant as the applicant was bound by the July Agreement.
It was submitted for the respondent that the contract was made on the execution and exchange of contracts on 9 October 1985 and not by prior "conditional" correspondence of 23 and 24 July 1985. It was said that the July correspondence contained conditions precedent to the formation of a contract being the entry into and exchange of the prescribed contract of sale, the right of substitution and the requirement for exchange of contracts. It was argued that the appropriate construction was that the objective intention of the parties was to form a contract on the execution and exchange of the prescribed Contract of Sale which did not occur until 9 October 1985. It was submitted, further, that there were amendments and introduction of special terms and conditions to the Contract of Sale when finally executed and amendment to an essential term being the date of possession. The express acknowledgment by the purchaser as to the absence of any legally binding agreement prior to receipt of prescribed documentation under the Sale of Land Act1962 and the Estate Agents Act 1980 with the Section 32 Statement being prepared subsequently to the July correspondence was said to be further evidence that no binding contract was entered into in July.
In the case of McDonald v Commissioner of Taxation 98 ATC 4306, the Federal Court considered an appeal from a decision of this Tribunal (AAT 10911, 6 May 1996) in which a similar question arose. There, the applicants asserted that they entered into an oral agreement to purchase a property some days before 13 September 1985 that came "into effect" on that date. The respondent asserted that there was no contract until the formal signing and exchange of contracts on 31 October 1985 notwithstanding that such contracts were dated 13 September 1985. The Tribunal, at first instance, considered that "contract" in the context of section 160U(3) should be read to mean "an enforceable contract". It then found that it was not until exchange was effected on 31 October 1985 that there was sufficient consensus for it to be said that there was an enforceable contract. The applicants appealed to the Federal Court and challenged the Tribunal's view that a contract for the purposes of section 160U(3) must be "legally binding and enforceable". Finn J, in allowing the appeal, said:
"For my own part, against the premise of the subsection, I can see no reason for requiring that the contract have any attributes other than those prescribed by the common law for the formation of a contract. Nor can I see any reason for ascribing a date to the making of such a contract other than the date that would be ascribed to it at common law.
The immediate consequence of this view is that the contract in question may be unenforceable – or even illegal: see Singh v Ali [1960] AC 167 – at the time of its making. But if it is carried into effect with a consequential disposition of an asset, then s160U(3) applies to the unenforceable contract so made. I merely note that if such a contract is not carried into effect then, the premise of s160U(3) not having been satisfied, no question of its application can arise."
His Honour remitted the matter to be heard and decided again as he was wary of "the possibility that the facts were marshalled and evaluated through the prism of the test of contract" adopted by the Tribunal. In the decision ([1999] AATA 202) following a re-hearing, where the Tribunal found the principal taxpayer to be "an unimpressive witness" and gained the impression that he "tailored his evidence to suit his own ends", the Tribunal stated (at paragraph 43):
"43. The Tribunal would now indicate in the light of the judgment of Finn J on appeal from the initial decision of the Tribunal that this Tribunal has undertaken the task of examining the totality of what has been placed before it with respect to whether the accepted evidence discloses any contract recognised by the common law and the time of the making of any such contract. The Tribunal finds that there was one contract and one only which had the attributes prescribed by the common law and that as the Agreement for Sale of Land referred to throughout these reasons as "the written contract". Until the execution and exchange of the written contract there was not a contract and what had taken place prior to that point in time clearly fell into the 3rd class delineated in Masters and Another v. Cameron (1954) 91 CLR 353. As to the time of the making of the above contract the Tribunal finds that it was 31 October 1985. This was the first time that there was a meeting of the minds, a consensus reached incorporating an intention to form legal relations. This was the time that the common law would acknowledge that a contract had come into existence between the parties."
The reference by the Tribunal to "the 3rd class" of contract referred to by the Hight Court in Masters v Cameron (supra) was a reference to a categorisation by their Honours of cases involving whether or not a contract existed falling into three classes. These are summarised in Voumard - The Sale of Land in Victoria Fourth Edition at pages 81 and 82):
"(1)those in which the parties intend to be bound immediately by terms to which they have agreed, but at the same time propose to have those terms restated in a form which will be fuller or more precise, but not different in effect. Here there is a contract binding the parties to perform the agreed terms whether the formal document does or does not come into existence and also binding them to join (if they have so agreed) in settling and signing the formal document;
(2)those in which the parties have finally agreed upon all the terms of the bargain and intend no departure from or addition thereto, but yet have made performance of one or more of the terms conditional upon the execution of a formal document. Here there is a contract which binds the parties to join in bringing the formal contract into existence and then carry it into execution;
(3)those in which the parties do not intend to make a concluded bargain at all unless and until they execute a formal contract. Here there is no enforceable contract. What has been agreed on must be regarded merely as the intended basis for a future contract and not as constituting a contract. Where a 'deposit' is paid in connection with a transaction of this nature the prima facie, but not necessary, inference, is that it is to constitute a deposit upon the making of a contract, but that in the meantime it should not become the property of the intending vendor."
The learned authors of this book go on to say (at page 82):
"Even though there may thus be a binding contract where a further formal agreement is intended, if an offer is made expressly subject to the signing of a formal contract, or if it can be gathered from the terms expressed, or even from the absence of terms necessary to or even usual in a binding contract, that the future document is to contain provisions material to an agreement fairly and fully expressing the intentions of the parties, then it cannot be concluded that the offer, if accepted, is intended by the parties to be the final expression of their agreement. These principles, however, would not ordinarily apply where there is a mere reference to the execution in the future of a formal contract between parties who are otherwise agreed upon the matter that amount in law to the essential element of a concluded bargain. Such a formal contract may be required simply as a record, or even a more detailed record of their agreement, whether for the purpose of satisfying the Statute of Frauds or otherwise."
In Godecke v Kirwan (1973) 129 CLR 629, the High Court held that an "offer and acceptance" document was a valid and binding contract capable of being enforced by specific performance. The terms were not too uncertain to constitute a binding contract and did not indicate that the parties did not intend that they should be bound in any way unless and until a formal contract had been executed. In this case Walsh J quoted with approval the decision of Parker J in Von Hatzfeldt-Wildenburg v Alexander (1912) 1 Ch 284 at pages 288-289 where His Honour said:
"It appears to be well settled by the authorities that if the documents or letters relied on as constituting a contract contemplate the execution of a further contract between the parties, it is a question of construction whether the execution of the further contract is a condition or term of the bargain or whether it is a mere expression of the desire of the parties as to the manner in which the transaction already agreed to will in fact go through. In the former case there is no enforceable contract either because the condition is unfulfilled or because the law does not recognize a contract to enter into a contract. In the latter case there is a binding contract and the reference to the more formal document may be ignored."
Walsh J (at page 639) added a third possibility where he said:
"It may be a term of a concluded agreement and may place upon the parties an obligation, capable of being specifically enforced by the court, to sign a further contract in accordance with the agreement which they have already made."
In this case the letter of offer of 23 July 1985 appeared to contain the essential matters to establish a contract. It set out the details of the property to be purchased, the consideration, the amounts to be paid, the timing of the payments and the date of possession. The acceptance letter of 24 July 1985 did not vary any of those matters but indicated that some items of furniture presently within the property were not owned by the vendor and not capable of being included in the sale. The respondent made much of Clause 4 of the letter of offer. It was said that terminology creates a very strong assumption that no binding contract was intended until execution and exchange of formal contracts. It is of note that the clause referred to used the words "the offer to purchase is made subject to the Contract of Sale being the Standard Contract published by …" etc. Mr Murphy submitted that these words simply identified the form of contract which would restate the agreed terms of sale and I accept that submission. In my view it is of relevance that the contract executed and exchanged on 9 October 1985 did not vary any of the essential matters set out in the letter of offer. The only change was to date of possession which became 1 February 1986 but it is noted that Clause 1(c) of the letter of offer nominated the dated of possession as 15 December 1985 "or later by mutual agreement". In my view this clause results in the matter falling within the second class of case set out in Masters v Cameron (supra).
The respondent's argument that Clause 1(b) of the offer of 23 July 1985 made it conditional upon the exchange of contracts can be disposed of relatively briefly. It is clear that this clause is dealing solely with the timing of the payment of $40,000. The clause sets out the times at which the three payments of $20,000, $40,000 and $240,250 are to be made. I am unable to see that it can be read as leading to a presumption that the parties intended to defer binding obligations until the exchange of contracts. Mr Sest relied on the decision in Eccles v Bryant (1948) Ch 93 as authority for exchange of contracts being a "crucial and vital fact which brings the contract into existence" (per Lord Greene at page 99). However, that case should be read against a finding of fact that a letter from the vendor's solicitors contained no offer, the solicitor had no authority to make an offer and the letter was not treated as an offer by the other side. Here, there was an authorised and specific letter of offer which was treated as such and accepted by the vendor.
The right of substitution in Clause 3 of the letter of offer was said by the respondent to be a further reason to find that there was an intention to be bound only by the Contract of Sale referred to In Clause 4. It was said that, in order to execute an "identical Contract of Sale by the substituted purchaser" there must be in existence a Contract of Sale naming the applicant as purchaser and that the words "Contract of Sale" must bear the same meaning as in Clause 4. The legal position and identity of any substituted purchaser is a matter between the original named purchaser and the substitute. It may be that, at all times the original named purchaser was acting as a nominee or bare trustee for the substitute. It may be that the substitute will hold the property as trustee for the original named purchaser. It may be that the substitute acquires from the original named purchaser all of the rights and equity of that purchaser with or without valuable consideration. In my view, such right of substitution does not change the date of the original contract. In the first and second scenarios mentioned above, any substitution does not change the beneficial ownership of the rights and equity of the original named purchaser. In the third case, the date of the contract under which the substitute is bound is the date on which such substitute acquires the rights and equity of the original named purchaser. In any event, in my view, no substitution was exercised and the right of substitution does not provide any weight to the question of whether a binding contract existed prior to 20 September 1985.
I accept that the precise identity of all the chattels to be included in the sale had not been established at 24 July 1985. Nevertheless, I am satisfied that the descriptions contained in the letter of offer and accepted were sufficient to enable the goods purchased to be identified. In any event, if it can be said that the purchaser and vendor were bound as to the price, the question can be only one relating to the allocation of that purchase price between the real estate and the chattels.
Mr Sest submitted that correspondence and discussions after 24 July 1985 indicated that the parties, particularly the vendor, did not regard themselves as bound at that date. In particular, he referred to the message of 8 October 1985 where it was suggested that the vendor contemplated whether the property could be put back onto the market. The reports of the vendor's views are third hand and I take it as no more than the vendor questioning whether she was legally able to sell the property otherwise than to the applicant if formal contracts were not exchanged within a short period of time.
On balance, I am satisfied, having heard the detailed submissions and considered the evidence including all the documents, that the formal correspondence of offer of 23 July 1985 and acceptance of 24 July 1985 constituted a contract for the acquisition of the relevant property by the applicant. Such contract was carried into effect with the consequential purchase and disposition of the relevant asset and section 160U(3) applies to that contract of 24 July 1985. It follows that the resulting profit on sale did not come within the provisions of Part IIIA of the Act and the decision under review should be set aside.
The applicant sought review of the decision to impose additional tax for late lodgement of the return of income for the year ended 30 June 1988. The additional tax represented a late lodgement penalty of 20% per annum for the period 1 November 1988 to 28 June 1989 and a per annum penalty at 14.026% from 2 March 1990 to 6 March 1992. As the excision of the capital gain from the assessable income of the applicant in that year will result in a nil taxable income, the consequent additional tax will necessarily reduce to nil. Consequently, it is not necessary to consider whether any remission is justified. Suffice it to say that no satisfactory explanation was given for the late lodgement, no evidence of any request for extension of time was provided and the return was lodged after a demand by the respondent. Mr Murphy sought to compare the late lodgement of the return with some delays by the respondent relative to these proceedings. However, I am unable to compare the two events and consider it unlikely that the Tribunal would have exercised its discretion to remit any part of the additional tax if any remained after the decision on the major issue of the quantum of assessable income of the relevant year. This is assuming that the Tribunal would have power to review the additional tax which arises only if the additional tax exceeds 20% per annum from the last date for lodging the relevant return. The respondent has taken this as 31 October 1988 whereas it is likely that the correct date is some later date.
I certify that the eighteen (18) preceding paragraphs are a true copy of the reasons for the decision herein of
Mr B. H. Pascoe, Senior Member
Signed: .......Lou Coffey………............................
Personal AssistantDate/s of Hearing 3 March 2000
Date of Decision 3 April 2000
Counsel for the Applicant Mr T. Murphy
Solicitor for the Applicant Dunhill Madden Butler
Counsel for the Respondent Mr P. Sest
Solicitor for the Respondent Australian Government Solicitor
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