Jarman, T.L. v Commissioner of Taxation

[1989] FCA 68

.

LIMITED DISTRIBUTION

INCOME TAX - assessable income - whether an aircraft was

acquired for the purpose of profit-makrng by sale - intentlon

at date of acquisition - what was relevant date.

Deemed profit - purchase and sale within	1 2 months - what was
date of purchase.

Income Tax Assessment Act 1 9 3 6 ss 2 6 (a) and 2 6 M

TREVOR LEIGH JARMAN V THE COMMISSIONER OF TAXATION OF THE

COMMONWEALTH OF AUSTRALIA

Melbourne

No. VG 548 of 1987

Woodward J

15 March	1 9 8 9
IN THE FEDERAL COURT	OF AUSTRALIA 1

)

VICTORIA	D STRICT	REGISTRY	1	No. VG 548 of 1987
1

DIVISION	GENERAL	1
BETWEEN:

TREVOR LEIGH JARMAN

Applicant

and

THE COMNISSIONER OF TAXATION

OF THE COMMONWEALTH OF AUSTRALIA

Respondent

MINUTES OF ORDER

COURT: Woodward J

- DATE: 15 March 1989

PLACE: Melbourne

THE COURT ORDERS THAT:

1.   The appeal be dismissed

2.   The applicant pay the respondent’s costs.

- NOTE: Settlement and entry of orders are dealt with in

Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY	NO. VG 548 Of 1987
GENERAL DIVISION

IN THE MATTER of the Income Tax Assessment Act

1936

- and -

IN THE MATTER of an appeal
thereunder agaanst an
assessment of income tax
f o r the year ended 3 0 June

1982

BETWEEN:

TREVOR LEIGH JARMAN

Applicant

- and -

THE COMMISSIONER OF TAXATION

OF THE COMMONWEALTH OF AUSTRALIA

Respondent

COURT: woodward J

-	DATE:	15 March 1989
PLACE: Melbourne	REASONS FOR JUDGMENT

This is an appeal by the applicant, on behalf of

himself and his partners in an insurance broking firm known

as Trevor L. Jarman and Associates, against the disallowance

of an objection to an assessment	of income tax for the year
ended 3 0 June 1982.

The dispute concerns an alleged profit on the sale

of a Cessna aircraft considered by the Commissioner to be assessable income - either because it was a profit “arising from the sale by the taxpayer of any property acquired by him

f o r the purpose of profit-making by sale” (the first limb of

S 26(a) of the Income Tax Assessment Act 1936 (‘the Act’) as it stood at the relevant time), or because it was property

sold “before the expiratron of 12 months from the date on

which [the applicant] purchased the property“	( S 26AAA (2)	of
the Act as it then stood).

The applicant in his notlce of objection claims

that the aircraft was not acquired for the purpose of

profit-making by sale, and was in fact acquired on 13 June

1978 - over three years before its sale, which took place

towards the end of 1981.

In the light of the documentary material before me

and the affidavits and oral evidence	of the applicant,	I make
the following findings of fact.

In about April or May 1978, the applicant (whom I

shall refer to as representing the partnership) decided to

purchase an aircraft for use in his share-broklng business.

After some dlscusslons with a flrm called Flrteway Pty. Ltd.

('Fliteway'),the appllcant agreed to purchase a Cessna

aircraft for the sum of $49,000.00 and paid a $2,000.00

deposit. An rnvoice relating to thls purchase 1s dated the

9th May 1978; the deposit was paid the following day. The

alrcraft was registered in the name of the applicant on the

1st of June 1978. However before that date the applicant had

changed his mind about buying the aircraft outright and

decided to obtain finance for the purchase. After

negotiations with several lending authorities, he entered

into an agreement with the -Commercial Bank	of Australla
('CBA')	and a document was slgned, dated 13th of June 1978.

The document is in the form of a lease agreement and among relevant clauses are the following:

"2. The Lessee agrees:- (a) Subject to

Clause 6 to pay the rent by the instalments

set out in the Schedule together with	any
stamp duty thereon;	....
......

3. The Lessee agrees:- (c) To keep the goods

under the	Lessee's personal control and not to
attempt or	purport to sell, dispose of, or

encumber the same or any interest therein;

......

(g) At the expiratron of the Lease or

upon its sooner determlnation ....	to deliver
up the goods to the bank ....
.....

10.   Nothing contained herein shall confer on

the Lessee any right or property or interest in or to the goods and the Lessee shall be a bailee thereof only."

The schedule to the agreement provided that the

period of lease would be 48 months from the 13th of March

1981. Rent instalments were to be in the sum of 51,077.36

which, together with a small amount of stamp duty, called for

total monthly payments of $1,099.98. These payments were to be made in advance, the first payment to be made on the 13th

day of March 1981. The schedule then provided that the

"Residual Value on termination of Lease" was to be

$13,230.00.

It is clear that the two references in the schedule

to "1981" should both have been "1978".	It was not disputed
before me that the payments did begin	fr6m 13th March 1978

and I am satisfied that the applicant made regular monthly

payments as required	by the agreement from that date onwards.
One argument advanced	by the solicitor for the appllcant was

that this typing error, not having been rectified, rendered

the whole document null and void.

There is no substance in this contention. When the contract is read as a whole, the reference to 1981 raises at
most a question of uncertainty	or ambiguity. In such a case,
the court will	consider the whole document and resolve any

ambiguity or uncertainty by reference to oral evidence or to
the later conduct of the parties (Halrbury's Laws of England
4th Ed V o l 9 para 266). In this case there is no dispute as
to the parties' intentions concerning the starting date of
payments and those intentions have been carried out.

The other argument advanced by the solicitor for

the applicant was that this agreement should not be taken at

face value and was in fact no more than evldence of a loan.

He argued that the intention of the appllcant was to borrow money, not to make over to CBA tltle to the alrcraft whlch he had already agreed to purchase in his own name.

It i s true that there is no evidence before me

(either way) of any fresh agreement being entered into
between Fliteway and CBA for the sale of the arrcraft by
Fliteway to the bank. It is clear however that the bank pard

Fliteway the full amount that was owing to it and, following

that, the applicant's $2,000.00 deposit was refunded to him.

'-towever, more important than this, in my view, is the way in which the transaction has been treated In the

applicant's books of account and taxation returns over the

period when he had the use of the aircraft. Over that three year period, until the aircraft was sold towards the end of 1981, the applicant at all tlmes claimed lease payments on

the aircraft as expenses. Until the last few weeks before

sale, there was no claim for depreciation of the aircraft.

However depreciation was claimed for the short period between

2 October 1981 and 5 November 1981 when the aircraft was

finally sold to a M r Cunningham. What happened on or before

2   October 1981 was that the applicant paid the bank all

moneys that were owing under the lease agreement, including
the sesidual value on termination of the lease provided for

\ t

by that agreement. The actual amount paid was shown in the

\

applicant's	return as $13,914 and the sale price received
from Cunningham was shown as $49,287. This left	a profrt of
$35,373 which was shown	i the balance sheet of the appllcant
as "capital profit".

If, as the applicant's solicitor submitted, he

actually purchased the aircraft in 1978 for $49,000.00, it is

difficult to see why hls records should show any capital

profit of more than a few hundred dollars.

The applicant did not make as much use of the

aircraft as had been intended. The reasons for this are not

important for present purposes. However some use was made of

it by hiring it out from time to time,and any such income was

duly shown in the applicant's books of account. During 1981

the applicant decided to sell the aircraft, and wrote on 17

August 1981 to a firm called Civil Flying Services Pty. Ltd.

("Civil Flying"). He said nothing in the letter to indicate

that the aircraft was the subject of a leasing agreement.

On 4 September 1981 the applicant signed an

'Aircraft Sales Agency Agreement' authorising Civrl Flying to

sell the aircraft on his behalf. However a few days later he

had second thoughts, and wrote to Civil Flying on 10

September 1981 saying,

"Further to my advice to your office,

please delete our aircraft from sale. The

aircraft is to be on line for hire, solely

with Victoria, South Australia and New South
wales. "
A few days later, the applrcant left on a trip to

the United States and, while he was there, he was told by his
wrfe, who had heard from Crvrl Flying, that the alrcraft had

been taken to Queensland by one of that company's staff and

had crash-landed on 24 September 1981 on a property rn

Queensland belongrng to a M C E. Cunningham. However no great

damage had been done to the aircraft, and Cunningham had made

an offer of 549,000.00 for the aircraft if it were repaired.

M C Jarman instructed his wife to accept the proposition. It

turned out later that Civil Flying had already entered into
an agreement wrth Cunnrngham for the sale of the aircraft at

a considerably higher price, which included its commission.

MC Jarman eventually decrded to go through with the

sale, and signed a further 'Aircaft Sales Agency Agreement'

with Civil Flying on 24 October 1981.

The precise financial posrtion as between M C Jarman

and CBA took	a little time to sort out because, at the outset
of	the arrangement between them, the bank had required MC
Jarman to make a deposit of some $8,800.00 - representing 8
months lease payments -	as security for his carryrng out of

his obligations under the lease agreement. MC Jarman had

assumed that, at some time and in some way, this amount would

be brought to account as part of the payments which he was

obliged to make under the agreement. He had therefore

assumed, because he had made some payments	rn advance of his
obligations, that by about August	or September 1981 he had

paid all that the bank required, and was entitled to regard

- \ \

himself as the owner of the aircraft. Included in the

moneys which he believed should be credited to hrm by the

bank in this transaction, was interest on the $ 8 , 8 0 0 . 0 0 of

whrch the bank had had the use for the prevrous three years.

The drfferences between the applicant and the bank were
resolved some time in September 1985 and the bank (whlch had

by now become Westpac Banking Corporation) regarded the lease

as having been finalised on 2 October 1981.

The applicant had apparently signed a tranfer of

the aircraft to Mr Cunningham some days before this because

the records of the Department of Aviation showed that Hr

Cunningham became the holder of the relevant certificate	of
registratron on 25 September 1981.

In these circumstances I have no doubt that the

lease agreement entered into by the applicant with CBA

represented the true nature of the transaction between those parties. The registration of the aircraft in the applicant’s

name, sought at a time when he intended to pay cash for	it,
has no bearing on this issue.	All the applicant’s records
and tax returns from that point onward are consrstant only

with the transaction being one of lease, with an implied

right to negotiate for the purchase of the aircraft, at a

fixed price, at the conclusion of the lease. I am satisfred that the applicant did purchase the aircraft from the bank

for $13,914.00 on 2 October 1981 and did resell	it for
$49,287.00 on S November 1981.	I am further satisfied that

before 2 October the applicant had made up his mind to resell

the aircraft as soon as he was in a position to do so, and

that the aircraft was therefore aquired by him for the

purpose of profit-making by	sale. His persistent refusal,	rn
the witness	box,	to concede that he was conclous of any

surplus of rncome over outgolngs in relation to thls

transactron, was most unconvrncing. It is equally clear that

the aircraft was sold within 12 months of its being acqurred

by the applicant and that the profit arising from the sale of

the aircraft was thus assessable income of the taxpayer

pursuant to section 26- of the Act.

The appeal will be drsmlssed wlth costs.

I certify that this and the

8 preceding pages are a true
and accurate copy of the Reasons
for Judgment herein of

The Hon MC Justice Woodward

1

6- Associate

Dated: 15 March 1989

Solicitor appearing for the Applicants: MC M. Komesaroff

Solicitors for the Applicant:  Morris
Komesaroff

Counsel Re pondents: the for MC P. Almond

Solicitors for the Respondents:	Australian Government Solicitor
Date of hearing:	8 March 1989