Gray, A.H. & C.J. v Commissioner of Taxation
[1989] FCA 333
•30 JUNE 1989
Re: ALLEN HUGH GRAY and CAROL JEAN GRAY
And: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
No. G8 of 1989
FED No. 333
Taxation
24 FCR 37
COURT
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Davies(1), Sheppard(2) and Einfeld(1) JJ.
CATCHWORDS
Taxation - Capital Gains - whether a premium received on the grant of a lease occurring after 20 September 1985 is taxable if the leased property was acquired prior to 20 September 1985 - retrospectivity.
Income Tax Assessment Act 1936 (Cth) - ss.160A, 160C, 160L(1), 160M, 160U and 160ZS
HEARING
SYDNEY
#DATE 30:6:1989
Counsel for the Applicant: Mr J. Eager
Solicitors for the Applicant: Mr J. Eager
Counsel for the Respondent: Mr K.R. Handley QC with Mr A.H. Slater
Solicitor for the Respondent: Australian Government Solicitor
ORDER
The application be dismissed.
NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
JUDGE1
This is an appeal from a decision of the Administrative Appeals Tribunal which affirmed decisions disallowing objections lodged by the applicants, Mr A.H. Gray and Mrs C.J. Gray against assessments of income tax issued in relation to their incomes for the year ended 30 June 1986.
In March 1986, Mr and Mrs Gray, who had owned for many years a property on which a service station was situated, leased that property to a petrol company for a consideration which included the payment of a premium of $200,000. That premium was received by Mr and Mrs Gray on the execution of the lease.
The issue debated in this appeal is whether the capital gains tax legislation which was introduced as Part IIIA of the Income Tax Assessment Act 1936 (Cth)("the Act") by the Income Tax Assessment Amendment (Capital Gains) Act 1986, assented to on 24 June 1986, caught this transaction, which not only occurred prior to the enactment of the legislation but took place in relation to property which had been held for many years prior to 20 September 1985. It had been announced that the legislation would only apply to assets acquired after that date.
To consider the issue it is necessary to turn to some of the principal features of the legislation. The Act has a wide operation. The term "asset" is defined in s.160A which provides:-
"In this Part, unless the contrary intention appears, 'asset' means any form of property and includes -
(a) an option, a debt, a chose in action, any other right, goodwill and any other form of incorporeal property;
(b) currency of a foreign country; and
(c) any form of property created or constructed, or otherwise coming to be owned without being acquired, but does not include a motor vehicle of a kind mentioned in paragraph 82AF(2)(a)."
Note paragraph (c) which refers to "property created". The basic operation of the Act is set out in s.160L(1) which provides:-
"Subject to this section, this Part applies in respect of every disposal on or after 20 September 1985 of an asset, whether situated in Australia or elsewhere, that -
(a) immediately before the disposal took place, was owned by -
(i) a person (not being a person in the capacity of a trustee) who was a resident of Australia; or
(ii) a person in the capacity of a trustee of a resident trust estate or of a resident unit trust; and
(b) was acquired by that person on or after 20 September 1985."
Section 160M expands in greater detail the concepts of "acquisition" and "disposition". We need refer only to the following provisions:-
"160M(1) Subject to this Part, where a change has occurred in the ownership of an asset, the change shall be deemed, for the purposes of this Part, to have effected a disposal of the asset by the person who owned it immediately before the change and an acquisition of the asset by the person who owned it immediately after the change.
...
160M(5) For the purposes of this Part -
(a) an issue or allotment of shares in a company constitutes an acquisition of the shares by the person to whom they were issued or allotted but does not constitute a disposal of the shares by the company;
(aa) an issue of units in a unit trust by the trustee of the unit trust constitutes an acquisition of the units by the person to whom they were issued but does not constitute a disposal of the units by the trustee of the unit trust;
(b) the construction of an asset by or for a person constitutes the acquisition of the asset by the person; and
(c) the creation of an asset by or for a person constitutes the acquisition of the asset by the person.
160M(6) A disposal of an asset that did not exist (either by itself or as part of another asset) before the disposal, but is created by the disposal, constitutes a disposal of the asset for the purposes of this Part, but the person who so disposes of the asset shall be deemed not to have paid or given any consideration, or incurred any costs or expenditure, referred to in paragraph 160ZH(1)(a), (b), (c) or (d), (2)(a), (b), (c) or (d) or (3)(a), (b), (c) or (d) in respect of the asset."
Whether s.160M(6) applies to the circumstances with which we are concerned, having regard to the special provisions of s.160ZS to which we shall shortly turn, need not concern us. We have set out the subsection merely to indicate a relevant concept of disposition.
Section 160U deals with the time of disposal and acquisition and provides inter alia:-
"160U(6) Where the asset was created by a person ... the asset shall be taken to have been acquired by the first-mentioned person -
(a) if the asset did not exist (either by itself or as part of another asset) before the disposal - immediately before the asset was disposed of; or
(b) in any other case - at the time of commencement of work on, or of work that resulted in, the creation of the asset."
Section 160C(2) provides:-
"A reference in this Part to a taxpayer, in relation to an asset that has been acquired, is a reference to the person who owned the asset immediately after the acquisition took place."
The crucial provision in this present appeal is s.160ZS which provides:-
"160ZS(1) For the purposes of this Part, the grant of a lease of property shall not be taken to constitute the disposal of part of the property but shall be deemed to constitute the disposal by the lessor to the lessee of an asset (that is to say, the lease) created by the lessor for a consideration equal to the premium paid or payable for the grant of the lease.
(2) Notwithstanding section 160ZH, the cost base to a taxpayer of a lease of property granted by the taxpayer comprises the amounts of expenditure incurred by the taxpayer in respect of the grant of the lease and does not include any other amounts, and the indexed cost base and the reduced cost base shall be ascertained accordingly."
The Act thus deals with leases differently from the way in which s.106 and Schedule 3 of the Capital Gains Tax Act 1979 (UK) treats them. Section 2(1) of that Schedule provides that, where a premium is paid for a lease of land, "there is a part disposal of the freehold or other asset out of which the lease is granted." Section 160ZS, by contrast, treats a premium as a capital sum derived from the holding and use or exploitation of a capital asset, though those terms are not used.
The lease which was created in March 1986 was an asset for the purposes of the legislation. Section 160ZS requires that the grant of the lease be deemed to constitute the disposal by the lessors, Mr and Mrs Gray, to the lessee, the petrol company, of the asset being the lease for a consideration equal to the premium paid or payable. The cost base of the lease is that specified by s.160ZS(2).
The lease being deemed to be created by the lessors, s.160M(5) then applied. That sub-section has the effect that, for the purposes of Part IIIA, the creation of the asset by Mr and Mrs Gray constituted the acquisition of the asset by them. By virtue of s.160U(6) the lease is taken to have been acquired by Mr and Mrs Gray immediately before the asset was disposed of. By virtue of s.160C(2) Mr and Mrs Gray are deemed to have owned the asset disposed of.
The Tribunal therefore held that s.160L(1) operated, for there had been a disposal by Mr and Mrs Gray after 20 September 1985 of an asset that was acquired by and was owned by them after 20 September 1985.
Mr J. Eager, solicitor for Mr and Mrs Gray, presented a detailed and carefully researched submission to the contrary. He referred to the fact that, had Mr and Mrs Gray sold the property itself after 20 September 1985, they would not have been assessable to tax on any capital gain, for the property had been acquired before that date. Mr Eager submitted that the grant of the lease was in fact a disposal in part of the property. He submitted, moreover, that when making his announcement of the proposed reform of the Australian taxation system, the Treasurer in September 1985 announced that the capital gains tax would be in every sense prospective and that it would apply only to gains on assets purchased or acquired after the announcement.
The submission has much to commend it. However the Act specifically provides that the grant of a lease shall not be considered as the part disposal of property but, on the contrary, deals with the receipt of a premium on the grant of a lease as if the premium was a capital sum derived from the exploitation of property held at the time the lease was granted and the premium paid. The legislation thus specifically rejects Mr Eager's approach. It would be wrong to read the Act in light of concepts drawn from property law. The Act has made its own choice as to how the receipt of a premium on the grant of a lease shall be dealt with. To the extent that the Act conflicts with the Treasurer's public announcement of the intended reach of the capital gains tax, the legislation as passed must be taken to express Parliament's intention in this regard.
Mr Eager pointed to the fact that s.160ZS refers to "disposition" and not to "acquisition". Certainly this section does not use the word "acquisition"; but it deems the grant of a lease to be the disposal by the lessor of an asset of the lease that has been created by the lessor. The reference to the creation of an asset is sufficient to incorporate s.160M(5) which provides that the creation of an asset by a person constitutes the acquisition of the asset by that person. It was not necessary to repeat that provision in s.160ZS.
Mr Eager referred by analogy to s.160ZZG, which we need not set out. The reference in that section to "acquisition" appears because the provision deals with the cost base of the asset disposed of. Although the more complex terms of s.160ZS(2) could have referred to "acquisition", it was not necessary for the subsection to do so.
Division 5 of Part IIIA, which deals with leases, does not provide an entire code, but must be read in the light of, and together with, the other provisions of the Part. Division 5 cannot be read on its own as if it imposed capital gains tax upon leases and therefore specified or implied the date upon which the capital gains upon leases commenced. The liability to tax is not specified in Division 5 but in s.160L, in Division 2. Division 5, and s.160ZS in particular, merely state how leases are to be treated in the light of the other provisions of the legislation.
We reject the view put by Mr Eager that s.160ZS is to be read as operating with respect to leases granted on and from 24 June 1986 and that leases granted prior to that date are to be dealt with as if they were part dispositions of property. It is inconsistent with the structure and terms of the Act and highly improbable that Parliament had any such intention.
Likewise, we reject the alternative view put by Mr Eager that Parliament had in mind that capital gains tax would not apply to premiums received on leases granted over property acquired prior to 20 September 1985. The Act prescribes that the grant of a lease will not be looked upon as the part disposition of property. It places the grant of a lease for a premium in a like position to the creation of other new assets. It treats the capital gain on the creation of the new asset on or after 20 September 1985 as an assessable gain. The presumption against retrospectivity does not require one to ignore the express terms of the Act.
For these reasons we would dismiss the appeal. In this event, the respondent does not seek costs.
JUDGE2
In this matter I have had the advantage of reading the judgment to be delivered by Davies and Einfeld JJ. I agree in their conclusion that the appeal should be dismissed and with their reasons therefor.
The appeal involves the consideration of a number of provisions of Part IIIA of the Income Tax Assessment Act 1936 which deals with capital gains and capital losses. The sections which apply and which, when read together, lead to the conclusion that the appeal must fail commence with s. 160L which, so far as relevant, provides that Part IIIA of the Act applies in respect of every disposal of an asset on or after 20 September 1985 which, immediately before the disposal, was owned by a resident of Australia and was acquired by that person on or after 20 September 1985. Section 160Z provides, so far as relevant, that where an asset has been disposed of during the year of income, a capital gain equal to the excess of the consideration in respect of the disposal over the "indexed cost base" to the taxpayer in respect of the asset shall be deemed to have accrued to the taxpayer during the year of income. It is unnecessary to refer to the meaning of "indexed cost base".
There are then the provisions of s. 160M which deal with the question of what constitutes a disposal or acquisition. Paragraph 160M(5)(c) of the Act provides that, for the purposes of Part IIIA of the Act, the creation of an asset constitutes the acquisition of the asset by the person creating it.
Division 5 of Part IIIA contains a number of provisions dealing with leases. Subsection 160ZS(1), so far as it is relevant, provides that, for the purposes of Part IIIA, the grant of a lease of property shall not be taken to constitute the disposal of part of the property but shall be deemed to constitute the disposal by the lessor to the lessee of an asset (that is to say, the lease) created by the lessor for a consideration equal to the premium paid or payable for the grant of the lease. The subsection deals with the disposal, that is, the granting of the lease, rather than the acquisition thereof. But, for present purposes, the important words of it are "constitute the disposal by the lessor to the lessee of an asset ... created by the lessor". The words "asset ... created by the lessor" take one back to para. 160M(5)(c) which uses the expression "creation of an asset", and constitutes such creation the acquisition of the asset by the person creating it, in this case the lessors, that is, the applicants.
The lease was granted on 19 March 1986 in consideration of there being paid to the lessors by the lessee a premium of $200,000. The lease was thus granted after 19 September 1985, but before Part IIIA of the Act came into force on 24 June 1986. Both the acquisition of the lease and the disposal of it occurred in March 1986 in the interregnum between 20 September 1985 and 24 June 1986. But the transaction is caught by the Act because it was entered into after the date specified in s. 160L, namely, 20 September 1985.
I have said what I have, not unmindful of submissions made by the solicitor for the applicants that legislation, especially legislation of this kind, is not readily given retrospective effect. Where, however, Parliament has expressed its intention that an Act is to operate from a point of time earlier than the date when the Act comes into force, the courts must give effect to the words of the statute.
In support of his argument, the applicants' solicitor relied on s. 15AB of the Acts Interpretation Act 1901. Subsection (2) thereof authorizes the Court to consider, inter alia, the speech made to a House of Parliament by a Minister on the occasion of the moving by that Minister that the Bill containing the provision in question be read a second time and any relevant material, inter alia, in the proceedings of the House of Representatives or in any official record of debates in Parliament or either House. The purpose for which such material may be considered, which is provided for in subsec. (1), includes the purpose of determining the meaning of a provision when it is ambiguous or obscure or where the ordinary meaning conveyed by the text of the provision, taking into account its context in the Act and the purpose or object underlying the Act, leads to a result that is manifestly absurd or unreasonable.
The material which we were asked to take into account comprises part of a statement made by the Treasurer on 19 September 1985 on the reform of the Australian taxation system and the Treasurer's second reading speech made when the Bill (the Income Tax Assessment (Capital Gains) Bill) was introduced into the House of Representatives on 22 May 1986 (Hansard, House of Representatives, 22 May 1986, pp 3801 et seq.). In the statement made on 19 September 1985, the Treasurer said that the capital gains tax would apply only to real gains made on assets acquired after midnight on that day (pp 41, 43). In his second reading speech made on 22 May 1986 the Treasurer said (p 3802) that the design of the capital gains tax introduced by the Bill followed that announced in his 19 September 1985 statement on tax reform, as expanded upon in press releases issued by him on 28 November 1985 and 20 March 1986. The statement that the tax would apply only to capital gains realized on assets acquired after 19 September 1985 was reiterated.
I agree with submissions made by the applicants' solicitor that there is not revealed in these statements any intention to affect any asset which was owned prior to 20 September 1985. Generally speaking, that is indeed what the Act itself provides. If the premises, the subject of the lease here, had been sold, as distinct from leased, and a gain had resulted, no capital gains tax would have been payable. But what Parliament has done, by reason of the provisions of ss. 160M and 160ZS to which reference has been made, has been to bring about a situation whereby the grant of a lease is treated, not only as the disposal of an asset, but the acquisition of an asset as well. That is not something which anyone reading the Treasurer's statement of 19 September 1985 would have discerned. In passing I should mention that the provisions of subsecs. 160U (3) and (6) of the Act are such as to bring to tax gains made on the grant, on or after 20 September 1985, of other interests in land held before that date, for instance, an easement or a profit a prendre.
Regrettably, the material relied upon by the applicants does not assist them. In my opinion the language of the statute is clear and unambiguous. Furthermore, the consequence of giving its words there ordinary meaning, does not lead to a result which is manifestly absurd or unreasonable. To some the result may seem extremely unfair, but that is not a relevant consideration.
This case, as the Tribunal said in its decision and counsel for the Commissioner said in his written outline of submissions, is unfortunate. It perhaps highlights the problems which can arise in relation to legislation of certain kinds being enacted in the way adopted in this case. Part IIIA of the Act is an extremely complex piece of legislation. It contains ss. 160A to 160ZZU inclusive, 98 sections in all, many of them having a multiplicity of subsections and paragraphs. It is no criticism of anyone to say that no statement of the kind made on 19 September 1985 could possibly inform all taxpayers of the entirety of the many ramifications of the legislation. I have not had available to me the two press statements which were issued subsequently. I assume that they do not bear on the matter; otherwise it may have been expected that the Commissioner would have produced them to us.
With the aid of hindsight, it can now be said that there were some circumstances in which persons dealing with property which they had acquired prior to 20 September 1985, on or after that date but before 24 June 1986, when Part IIIA came into force, did so at their peril. Two such persons were the applicants here. The amount upon which capital gains tax was assessed was $193,748 after there was deducted from the sum of $200,000 certain expenses incurred by the applicants. They had owned the premises for many years. It appears to me that there was no indication to them in what was said before the Bill was introduced into the House that they ran the risk of incurring capital gains tax if they dealt with their property otherwise than by way of sale. Yet they are caught by the accumulation of the provisions of the Act to which I have referred and, as a consequence, have suffered a financial set-back of substantial magnitude.
In the result, however, I agree that the appeal must be dismissed. Understandably, the Commissioner does not seek an order for costs so that none should be made.
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