Makrylos v Commissioner of Taxation
[2023] FCA 971
•17 August 2023
FEDERAL COURT OF AUSTRALIA
Makrylos v Commissioner of Taxation [2023] FCA 971
File number: NTD 15 of 2021 Judgment of: CHARLESWORTH J Date of judgment: 17 August 2023 Catchwords: TAXATION – appeal from objection decision – tax payer alleging real property first held as trading stock years after its acquisition – Commissioner for Taxation assessing the tax payer’s liability to pay tax on the basis that the Property was held as trading stock from the date that it was acquired – amended assessments – onus upon tax payer to show that the amended assessments were excessive – onus on the tax payer to show what the assessments should have been – tax payer basing his factual case on two alternate dates – tax payer not proving that case to the requisite standard – tax payer not having valuation evidence sufficient to prove any other alternate case – no obligation on the Court to make a finding of any alternate date on which the requisite purpose first arose – tax payer’s liability could in any event arise by reason of the Property being acquired as part of a profit making scheme whether or not it met the description of trading stock – appeal from objection decision dismissed Legislation: Income Tax Assessment Act 1936 (Cth) ss 6, 36
Income Tax Assessment Act 1997 (Cth) ss 6-5, 8-1, 70-10, 70-15, 70-25, 70-30, 70-35
Tax Administration Act 1953 (Cth) ss 14ZZ, 14ZZO
Tax Law Improvement Act 1997 (Cth)
Planning Act 1999 (NT) s 13
Cases cited: Antlers Pty Ltd v Federal Commissioner of Taxation (1997) 35 ATR 64
Browne v Dunn (1893) 6 R 67
Commissioner of Taxation (Cth) v St Hubert’s Island Pty Ltd (1978) 138 CLR 210
Evans v Federal Commissioner of Taxation (1989) 20 ATR 922
Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199
Federal Commissioner of Taxation v Whitfords Beach Pty Ltd (1982) 150 CLR 355
Spriggs v Commissioner of Taxation (2009) 239 CLR 1
Westfield Ltd v Commissioner of Taxation (1991) 28 FCR 333
Division: General Division Registry: Northern Territory National Practice Area: Taxation Date of last submissions: Applicant: 29 September 2022
Respondent: 13 October 2022Date of hearing: 18, 19, 20 July and 14, 15 September 2022 Number of paragraphs: 329 Counsel for the Applicant: Mr AT Broadfoot KC with Mr SM Gordon Solicitor for the Applicant: HWL Ebsworth Lawyers Counsel for the Respondent: Mr LJS Molesworth Solicitor for the Respondent: MinterEllison ORDERS
NTD 15 of 2021 BETWEEN: MICHAEL MAKRYLOS
Applicant
AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Respondent
ORDER MADE BY:
CHARLESWORTH J
DATE OF ORDER:
17 AUGUST 2023
THE COURT ORDERS THAT:
1.The originating application is dismissed.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
CHARLESWORTH J:
INTRODUCTION
On 30 June 2006, the appellant, Mr Michael Makrylos signed a contract for the purchase of 7060 square metres of land situated at 125 Dick Ward Drive in the Darwin suburb of Coconut Grove (Property). The purchase price was $825,000.00. Settlement on the sale occurred on 17 August 2006. The land was later rezoned, subdivided, developed and sold pursuant to a joint venture agreement between Mr Makrylos and corporate entities associated with him. In the financial years ending 30 June 2013 (FY 2013) and 30 June 2014 (FY 2014), 15 of the 16 developed parcels sold for a total of $11,995,000.00.
A tax payer’s liability to pay tax on “assessable income” arises under the Income Tax Assessment Act 1997 (Cth) (ITAA). Mr Makrylos lodged tax returns for FY 2013 and FY 2014 claiming his assessable income to be $93,473 and $59,775 respectively and his resultant tax liabilities to be $22,532.01 and $10,973.87. The tax returns treated the Property as Mr Makrylos’ main residence for a period of time after its acquisition, and from 18 May 2011 as trading stock held in the course of a business. He first received assessments that accorded with those returns.
The Commissioner of Taxation caused an audit to be conducted in relation to the Property. The audits concluded that Mr Makrylos held the Property as trading stock from the date of its acquisition on 17 August 2006 (Acquisition Date). That had significant consequences for calculating the expenses that Mr Makrylos could claim in each of the financial years, as well as the value of the Property for income tax purposes. The Commissioner issued an Amended Assessment for FY 2013 and FY 2014 and a Shortfall Penalty Notice based on that conclusion. The effect of the Amended Assessments is that Mr Makrylos has a personal tax liability of $1,353,656.50 and $487,008.25 for the respective financial years.
Mr Makrylos lodged a notice of objection dated 27 June 2018 with respect to both financial years, together with a letter dated 18 June 2019 specifying additional objection grounds. Consistent with the position asserted in his tax returns, the basis of Mr Makrylos’ objection was that he did not commence to hold the Property as trading stock until on or about 18 May 2011, with the result that his assessed tax payable should be calculated by reference to (among other things) the value of the Property as at that date.
On 27 May 2021, the Commissioner allowed the objection in relation to FY 2013 only in part and otherwise disallowed the objection (Objection Decision).
Mr Makrylos brings this appeal from the Objection Decision under s 14ZZ of the Tax Administration Act 1953 (Cth) (TAA). The appeal should be dismissed for the reasons given below.
LEGAL FRAMEWORK
A tax payer’s assessable income includes “income according to ordinary concepts, which is called ordinary income”: ITAA, s 6-5(1).
Trading stock
Section 8-1 of the ITAA is contained in Div 8 of Pt 1-3. It provides:
(1)You can deduct from your assessable income any loss or outgoing to the extent that:
(a)it is incurred in gaining or producing your assessable income; or
(b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.
(2)However, you cannot deduct a loss or outgoing under this section to the extent that:
(a) it is a loss or outgoing of capital, or of a capital nature; or
(b) it is a loss or outgoing of a private or domestic nature; or
…
Tax payers may also deduct from their assessable income an amount that a provision of the ITAA (outside of Div 8) allows.
The phrase “trading stock” is relevantly defined in s 70-10(1) of the ITAA to include “anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business”.
For the purposes of s 8-1, an outgoing incurred in connection with acquiring an item of “trading stock” is not an outgoing of capital or of a capital nature: ITAA, s 70-25.
Section 70-15 specifies the income year in which to deduct an outgoing in connection with an item of trading stock, as follows:
…
(2)If the item becomes part of your trading stock on hand before or during the income year in which you incur the outgoing, deduct it in that income year.
(3) Otherwise, deduct the outgoing in the first income year:
(a)during which the item becomes part of your trading stock on hand; or
(b)for which an amount is included in your assessable income in connection with the disposal of that item.
Section 70-35 determines the amount that may be deductible pursuant to s 8-1:
(1) If you carry on a business, you compare:
(a)the value of all your trading stock on hand at the start of the income year; and
(b)the value of all your trading stock on hand at the end of the income year.
(2)Your assessable income includes any excess of the value at the end of the income year over the value at the start of the income year.
(3)On the other hand, you can deduct any excess of the value at the start of the income year over the value at the end of the income year.
Section 70-30(1) provides:
(1)If you start holding as trading stock an item you already own, but do not hold as trading stock, you are treated as if:
(a)just before it became trading stock, you had sold the item to someone else (at arm’s length) for whichever of these amounts you elect:
•its cost (as worked out under subsection (3) or (4));
•its market value just before it became trading stock; and
(b) you had immediately bought it back for the same amount.
The ITAA came into force on 1 July 1997. It embodies amendments made to the Income Tax Assessment Act 1936 (Cth) (1936 ITAA) by the Tax Law Improvement Act 1997 (Cth). Section 6 of the 1936 ITAA defined “trading stock” to include “anything produced, manufactured, acquired, or purchased for purposes of manufacture, sale or exchange, and also includes live stock”. In Commissioner of Taxation (Cth) v St Hubert’s Island Pty Ltd (1978) 138 CLR 210 the High Court concluded that the old definition was capable of including land.
The tax consequences of the disposal of trading stock was then provided for in s 36(1) of the 1936 ITAA. It provided:
(1) Subject to this section, where-
(a)a taxpayer disposes by sale, gift, or otherwise of property being trading stock, standing or growing crop, crop-stools, or trees which have been planted and tended for the purpose of sale;
(b)that property constitutes or constituted the whole or part of the assets of a business which is or was carried on by the taxpayer; and
(c)the disposal was not in the ordinary course of carrying on that business,
the value of that property shall be included in the assessable income of the taxpayer, and the person acquiring that property shall be deemed to have purchased it at a price equal to that value.
The provisions of the 1936 ITAA differ in important respects from the provisions of the ITAA now under consideration, not only in its definition of trading stock but in the tax consequences of its disposal. Before the enactment of the ITAA as now in force, the focus was on the purpose for which the relevant item was acquired. The provisions as now in force contemplate that an item may be held as trading stock for the first time on a date following its acquisition.
An item owned by a person will not meet the description of “trading stock” until the purpose for holding the item arises. If that purpose arises at a time after the item is acquired, its deemed value at the time is to be assessed in accordance with s 70-30(1) of the ITAA. The time at which the requisite purpose arises in connection with the item is also significant for the purposes of s 8-1, which specifies when deductions may be claimed for expenses incurred in connection with its acquisition: ITAA, s 8-1. So much appears to be accepted by Mr Makrylos in the preparation of his tax returns. His case on the objection and on this appeal is that he did not hold the Property as trading stock until nearly five years following its acquisition (on his primary case).
The amendment to the definition of “trading stock” in 1997 makes it necessary to approach earlier authorities dealing with the concept with some caution. Authorities such as St Hubert’s Island are relevant for some propositions but not for others. To the extent that the earlier authorities focus on the state of mind of the tax payer at the time of the acquisition of the subject property, they are inapplicable to a case to be decided under the amended definition.
The word “purposes” in s 70-10(1) refers to the subjective state of mind of the tax payer. It is the reason that the tax payer holds the thing in question. For a thing to be trading stock, the reason for holding the thing must involve not only an intention (relevantly for present purposes) to sell the thing, but an intention to sell the thing in the “ordinary course of a business”. Whether something falls within the definition of “trading stock” at a particular time therefore depends in part on the tax payer’s future intentions as to what is be done with the thing. As discussed below, that intention may be formed without the tax payer having in contemplation the price at which the thing may be sold, to whom it may be sold, or precisely when it may be sold. Moreover, for the thing to be “trading stock” the tax payer need not have in his contemplation, details as to the terms of the sale nor of the particular form that the thing might take at the time of the sale. I will elaborate on those observations after determining the factual issues on Mr Makrylos’ case.
ISSUES ARISING ON THE APPEAL
The Objection Decision is in the nature of an assessment of Mr Makrylos’ taxable income. Section 14ZZO of the TAA applies to such an appeal. It provides that the appellant has the burden of proving not only that the assessment is excessive or otherwise incorrect, but also “what the assessment should have been”. It will not be sufficient for Mr Makrylos to merely establish that the Amended Assessments are affected by an error.
The tax returns submitted by Mr Makrylos claimed deductions on the basis that the Property converted to trading stock on 18 May 2011 and therefore had a deemed value as at that date, calculated in accordance with s 70-35(1) of the ITAA.
By the Objection Decision, the Commissioner concluded that the Property was held as trading stock from the Acquisition Date. That conclusion had the consequence that fewer deductions could be claimed in the FY 2013 and FY 2014 than those claimed by Mr Makrylos.
On appeal, Mr Makrylos maintains the primary position that the date on which the Property first came to be held as trading stock was 18 May 2011. In the alternative, he alleges that the Property was first held as trading stock “some time in April 2010”. The significance he places on those dates will be explained later in these reasons.
There is evidence before the Court sufficient to prove the value of the Property at each of the two dates for which Mr Makrylos contends. The Commissioner does not dispute those valuations. The effect of the valuation evidence is that if Mr Makrylos were to establish that he first held the Property as trading stock either on 18 May 2011 or in April 2010, then he would be in a position to show that the assessments made by the Objection Decision were excessive. He could also fulfil the additional requirement to show what the assessments “should have been”. In that event, the appeal would be allowed.
Counsel for Mr Makrylos submitted that in the event that the Court make a finding that the Property was first held as trading stock after the Acquisition Date but before April 2010, then Mr Makrylos should be afforded the opportunity to prepare and adduce valuation evidence to establish what the assessments should have been, with the benefit of the Court’s reasons supplying the relevant date. I reject that submission. As the tax payer, it is for Mr Makrylos to give a truthful account to the Commissioner and for that matter, a truthful account to this Court of his own state of mind. On an appeal under the TAA, the Court’s task is to determine whether Mr Makrylos has discharged his burden of proof on the particular case he has put forward. Mr Makrylos’ case must be confined to the arguments that had been put forward at the time of the Objection Decision: TAA, s 14ZZO.
If Mr Makrylos does not succeed in the proof of that case, it would be unnecessary for the Court to determine when the Property was first held as trading stock. To do so would be to conduct an inquiry unmoored from the facts alleged by the tax payer once those allegations were rejected on the evidence, so as to find the next favourable case theory for him.
Given the test on this appeal, it will not be sufficient for Mr Makrylos to show that the Commissioner was wrong to identify the Acquisition Date as the date from which he first held the Property as trading stock.
Evidence of Mr Makrylos’ state of mind as at the Acquisition Date will nonetheless be relevant in assessing the evidence as a whole so as to determine whether or not his case has been established to the requisite standard of proof. On his own case, his subjective purpose for holding the Property changed. It will be necessary to consider whether his evidence and submissions about his state of mind as at the Acquisition Date should be accepted so as to properly consider whether there was any such change of purpose and, if so, whether it occurred at the time he alleges. None of that places any burden on the Commissioner to prove that the Property was first held as trading stock on the Acquisition Date.
Mr Makrylos’ state of mind as at the Acquisition Date will be relevant on an alternate case put forward by the Commissioner which does not depend on the characterisation of the Property as trading stock. It is convenient to defer my explanation and resolution of that alternate case until the conclusion of these reasons.
Even if the Court had the discretion to do so, I would not exercise it in Mr Makrylos’ favour. That is because I am not satisfied that he has presented a truthful account to the Commissioner or to the Court itself.
EVIDENCE
Mr Makrylos relied on the affidavits of the following deponents:
(1)Mr Makrylos’ (first affidavit sworn on 5 October 2021 and second affidavit sworn on 20 May 2022);
(2)Ms Gina Panagopoulos (sworn 15 October 2021);
(3)Mr Joe Librio (sworn 14 October 2021);
(4)Mr Anthony Jensen (affirmed 15 October 2021);
(5)Mr Jeremy O’Donoghue (sworn 14 October 2021);
(6)Mr Kevin Dodd (affirmed 15 October 2021;
(7)Ms Colette Pascoe (sworn 13 October 2021); and
(8)Ms June D’Rozario (affirmed 15 October 2021).
The affidavits are to be read subject to rulings.
MR MAKRYLOS AND THE MAKRYLOS GROUP
There are references in the submissions and the documentary evidence to a group of entities known as the Makrylos Group. I will at times use the same name to broadly refer to one or more corporate entities or trust structures of which Mr Makrylos is a director or in which he has a financial interest. The business affairs of the Makrylos Group are messy and opaque in the sense that invoices are issued to companies within the Makrylos Group for services that, at least according to Mr Makrylos were provided to other entities or to him personally. In addition, payments were made from accounts held in the various companies’ names in circumstances where, at least according to Mr Makrylos, the expense is a personal one.
As explained below, the evidence shows that the personal financial affairs of Mr Makrylos as an individual tax payer are intermingled with those of the companies in the Makrylos Group. Mr Makrylos sought to make use of that intermingling to explain away inferences that might otherwise be drawn from the objective records.
The affidavit and documentary evidence otherwise support the following preliminary findings of background fact, much of which is uncontroversial.
Mr Makrylos confirmed in evidence that he is an experienced property developer.
A document prepared on his behalf states the following facts, which I accept to be true:
Since 1982, The Makrylos Group have designed and constructed more than 600 properties within the Darwin region, worth in excess of $400 million. Notable developments include the Brinkin Forest Estate in 1992 the LaGrande Residence in 1996, Sovereign Estate in 2000, Aspect residence in 2005 and Waterline in 2007. …
The “Sovereign Estate” development project is a medium density residential development situated in close proximity to the Property under consideration in this proceeding.
Mr Makrylos is married to Ms Panagopoulos. They each alleged in their evidence that Ms Panagopoulos was responsible for bookkeeping for the Makrylos Group.
Between 1986 and 2006, Mr Makrylos and his wife lived for periods of time on two properties connected with developments undertaken by companies within the Makrylos Group, one of them was situated within Sovereign Estate.
Between 1983 and 1984, Mr Makrylos purchased land in and around Darwin for the purposes of development, either alone or in partnership with his brothers, with the land held in the personal names of one or other of them. He owned about nine properties during that period. He told the Court that he experienced financial difficulties in the late 1980s and early 1990s resulting in the forced sale of a home unit he then owned to avoid recovery action on a mortgage. He says that he then started using corporate vehicles to conduct land development activities. He said that he became more educated about his business affairs when “Ernst & Young came into town”.
From the mid 1990s property development was undertaken by a number of entities promoted and controlled by Mr Makrylos including:
(1)Kara Developments Pty Ltd of which Mr Makrylos has been the sole director since its incorporation on 26 September 1996.
(2)Kalhmera Pty Ltd as trustee for the Makrylos Family Trust, of which Mr Makrylos has been the sole director since its incorporation on 8 September 2004.
(3)BKN Trading Corporation Pty Ltd, of which Mr Makrylos has been a director since 18 May 1995.
In cross-examination Mr Makrylos confirmed (correctly) that the Makrylos Group is not a legal entity, but rather a business name used for advertising purposes. He confirmed his understanding that the companies were separate legal entities. His evidence in cross-examination on the topic of the Makrylos Group included the following:
COUNSEL: But when you do use the Makrylos Group ‘is doing a subdivision’, for instance, it’s your group of companies that you control?
MR MAKRYLOS: Makrylos Group – no, Makrylos Group is more like ‘hey, that’s Michael Makrylos doing the development’.
…
COUNSEL: … and that group of companies, that’s the group with you in control which you run your development business through?
MR MAKRYLOS: That basically is Michael Makrylos.
As discussed below, the development of the Property in 2013 and 2014 was undertaken pursuant to a joint venture agreement between Mr Makrylos and Kalhmera as trustee of a Family Trust.
CHRONOLOGY BASED ON DOCUMENTS
Before turning to Mr Makrylos’ version of events, it is convenient to describe the documents upon which the Commissioner relies. They will be referred to through these reasons by the abbreviated names given below. They evidence dealings with the Property from its original purchase, to its subdivision, development and ultimate sale. The documents are not to be considered in isolation. However, they do create a framework for better understanding the affidavit evidence adduced by Mr Makrylos and the cross-examination of the witnesses.
Real estate brochure
A real estate brochure shows that the Property was advertised for sale by auction on 14 June 2006 by the vendor’s agent, LJ Hooker. It did not sell on that day. The brochure describes the Property as 7060 square metres or 1.75 acres with improvements of two demountable buildings, a shed and a carport.
First Qantec Report
By letter dated 27 June 2006 (before Mr Makrylos executed the contract for the sale of the property), Ms Collette Pascoe of consulting engineering firm Qantec McWilliam prepared a report addressed to Kara Developments Pty Ltd, marked to Mr Makrylos in his capacity as director (First Qantec Report) titled “PROPOSED HOUSING SUBDIVISION, LOT 9327, DICK WARD DRIVE, NIGHTCLIFF MINIMUM BUILDING FLOOR LEVEL FOR CYCLONE/SURGE FLOODING”. It refers to a request for advice concerning minimum floor levels for the site. It sets out advice in respect of that topic by reference to Planning Scheme Amendment 06/001 relating to “Site characteristics for Residential Subdivision”. It states that the author was provided with contour level information relating to the site and surrounding area. It refers to enclosures including “Extract from 1:2500 photogrammetric detail plan showing contour levels”, although that enclosure is not included in evidence. It goes on to specify the minimum proposed floor level “for any housing to be built on the subdivision lots”.
On 3 July 2006, Qantec issued a tax invoice to Kara Developments describing Kara Developments as the “Customer”. It contains a project description “Kara Dev P/L – Subdivision Lot 9327 Nightcliff”. A “job number” on the invoice matches a reference number on the First Qantec Report. Kara Developments paid the invoice, and the payment is recorded in its general ledgers.
Contract for sale
On 30 June 2006, Mr Makrylos executed a contract to purchase the Property.
The contract shows that the purchaser was originally named “Kalhmera Pty Ltd ACN as trustee for the Makrylos Family Trust” on the cover and execution pages. Those references appear crossed out and replaced with Mr Makrylos’ name.
The contract is not subject to any conditions relating to the grant of a subdivision or development approvals, nor is it expressed to be subject to finance.
The contract permitted the vendor to remain in possession of the property until 31 January 2007.
Earl James Concept Plan
On 4 July 2006, Mr Makrylos met with Mr Kevin Dodd of Earl James & Associates, a surveying and planning services firm. Mr Makrylos gave Mr Dodd a hand drawn sketch depicting the property divided into eight subdivided lots around a cul de sac (Makrylos Sketch). An 800sqm allotment in the top right of the sketch is marked “MM House”.
By 7 July 2006 (some five weeks before settlement on the sale), Mr Dodd had prepared a digitised version of Mr Makrylos’ hand drawn sketch. The digitised version includes the Property location and has the title “Sanctuary Estate – Concept Plan”. It names Kara Developments as the client. I will refer to that document as the “Earl James Concept Plan”.
In 2016 Earl James provided documents and information to the Commissioner, confirming that it had been instructed to “prepare a subdivision concept plan” based on Mr Makrylos’ design and confirming that it had issued an invoice for the work. The general ledger for Kara Developments shows that it paid Earl James’ invoice from its accounts.
Settlement on the sale of the Property
Settlement on the sale of the Property occurred on the Acquisition Date, 17 August 2006. Accounting records show that the balance owing on the purchase price was paid by Kalhmera ($600,000.00) and Kara Developments ($178,880.82).
Five days later, Kara Developments paid rates and outgoings associated with the Property in the amount of $2,090.79.
Second Qantec Report
On 22 November 2006 the Northern Territory Minister for Planning and Lands amended the NT Planning Scheme (amendment number PSA 06/0001).
On 30 January 2007, Earl James (at Mr Makrylos’ request) forwarded the Earl James Concept Plan to Ms Pascoe of Qantec.
On 4 February 2007, Ms Pascoe provided a further report on the minimum building floor level referring to the amended planning scheme (Second Qantec Report). Like the First Qantec Report, it is addressed to Kara Developments and refers in its heading to a “PROPOSED HOUSING SUBDIVISION”. The report refers to options for floor levels of housing to be at certain levels “if this is set as a requirement for residential subdivision of the lot”. The options include filling a part of the site, or raising the floor levels of the habitable levels to be developed on the lots.
Librio Sketches
Mr Makrylos engaged interior designer Mr Joe Librio of Librio Associates Pty Ltd to prepare floor plan sketches for ten dwellings on the Property based on the Earl James Concept Plan.
Mr Librio prepared a sketch in April 2007. I will refer to it as the “April Librio Sketch”. It depicts eight allotments around a cul de sac, with floor plans for 10 dwellings within the allotment boundaries. The dwellings have between two and four bedrooms. Among other things, the diagram depicts a central cul de sac exiting to the street, fencing, patios, carports, trees and some set back measurements. No elevations for the dwellings are depicted.
On 28 May 2007, Librio Associates issued an invoice to “Kara Pty Ltd” for “various projects”, including three items relating to “Dickward [sic] Drive” undertaken between 10 April to 4 May 2007. That invoice was paid by BKN Trading.
Also in evidence is a single page sketch depicting a cul de sac with only one of the eight allotments, that being in rear right hand corner of the Property. I will refer to it as the Undated Librio Sketch. Within the allotment is a sketched floor plan for a four bedroom house situated close to the right and rear boundaries of the Property and with a driveway opening to the cul de sac. The floor plan layout appears to be substantially the same as that depicted on the April Librio Sketch.
Ms D’Rozario Letter
On 22 February 2007, Mr Makrylos and Ms Panagopoulos met with Ms June D’Rozario, a consulting town planner. By letter dated 9 May 2007 addressed to “Gina Makrylos” and commencing “Dear Gina and Michael”, Ms D’Rozario thanked them for requesting her services. The letter continues:
PLANNING SERVICES-PROPOSED DEVELOPMENT OF LOT 9327 TOWN OF NIGHTCLIFF – DICK WARD DRIVE
Thank you for requesting my service in this matter.
I understand from our meeting on 22 February 2007 that you wish to development Lot 9327 as a residential estate.
As you know, Lot 9327 is zoned RR (Rural Residential), in which the minimum lot size is 4,000m2. To develop the land as depicted in the concept plan you showed me, it will be necessary to consider either applying for an Exceptional Development Permit (EDP), or to rezoning the land.
I have assumed that you wish to subdivide and develop the subdivided lots, rather than to develop the land as one residential complex and unit title the individual dwellings. If this assumption is correct, I do not think that an application for EDP is appropriate because the ultimate development would involve both subdivision and the construction of houses.
Consequently, it will be necessary to rezone the land to undertake the proposed development.
I suggest that the application should be to rezone Lots 1, 2, 7 and 8 on Earl James’ subdivision concept to MD (Multiple dwelling residential), and the remainder of the lots on that plan to SD (Single dwelling residential). I am suggesting that the MD zone be applied to Lots 7 and 8, and that these two lots be in one parcel, because Lot 8 is too small to qualify as a lot within the SD zone.
Decisions on rezoning land are made by the Minister for Planning and Infrastructure. It would be necessary to outline in detail how the land is to be developed because speculative applications are most unlikely to succeed. I suggest that a development plan showing how the land would be subdivided and developed for houses would be necessary as part of the application documents. Earl James’ subdivision plan, with some amendments, could be a suitable base, as can Joe Librio’s design layout.
The letter goes on to explain the process of the Minister’s decision making. The letter records that Ms D’Rozario had been asked for a fee proposal. The proposed fees are said in the letter to be unlikely to exceed $14,915.00, not including prescribed fees for a rezoning application. The work to be performed is then summarised. The letter concludes:
If you would like me to work on this project, please let me know by 8 June 2007. This will allow time to complete the actions required to lodge the application before 1 July, when the new prescribed fee will come into effect.
I hope I have given you the information you require. Please contact me if you would like clarification on anything in this letter.
Clouston Landscape Plan
On 18 May 2007, Mr Tony Cox of the landscaping firm Clouston Associates provided a detailed landscaping “master plan” depicting a cul de sac named “Coconut Court” and containing the words “Makrylos Group” (Clouston Landscape Plan). An invoice dated 21 May 2007 for that work was addressed to Kalhmera.
Fist Rezoning Application
On 12 June 2007 Ms D’Rozario lodged planning application PA2007/0448, being an application under s 13(1) of the Planning Act 1999 (NT) to amend the Northern Territory Planning Scheme (First Rezoning Application). The application is expressed to be made on behalf of Mr Makrylos as the registered owner of the Property. The purpose of the application was to achieve the rezoning of the Property from Rural Residential “to a zone that would enable the land to be developed as an integrated residential estate of 10 dwellings”, including six single dwellings on individual lots and four multiple dwellings.
The application states:
The proposed development would be an integrated estate, designed and constructed to a single design theme. The design and construction of the dwellings, access road, landscaping and services will be undertaken as one coherent whole, to maintain the development concept. The lots resulting from the subdivision will not be sold as vacant sites. The residential product will be delivered to buyers as complete packages consisting of land, house, landscaping, fencing, all utilities, and the estate’s common design features of local access road, streetscapes and boundary fences. The owner has previously developed Sovereign Estate in Coconut Grove in the same manner.
The application goes on to mount arguments about the pattern of development in the land surrounding the Property, the design features of the dwellings themselves, the design and dimensions of the cul de sac and the general merits of the rezoning proposal. Enclosures include a survey plan of the surrounding area, aerial photograph, the April Librio Sketch and the Earl James Concept Plan.
2008 invoices
On 21 July 2008, Darwin Forklift Hire issued an invoice to Kara Developments to move trees from a nursery to the Property.
On 6 November 2008, Complete Crane Hire issued an invoice to Mr Makrylos “of BKN Trading Corp” for crane hire at the Property.
Mr Makrylos does not dispute that those invoices were paid by Kara Developments or a related entity.
First Rezoning Application accepted
By letter dated 17 January 2008 the Minister for Planning and Lands notified Mr Makrylos that the First Rezoning Application warranted further consideration and requested further information.
In December 2008 the First Rezoning Application was considered by the Darwin City Council. The Council informed the Minister that climate impacts of the proposal should be considered.
The First Rezoning Application was accepted on 18 November 2009, and Development Permit DP09/0930 was issued. It authorised the Property to be developed for the purpose of creating a subdivision of eight lots, two of which were for multiple dwellings, consistent with the proposal in Ms D’Rozario’s advice given in May 2007.
First Planning Application
On 31 August 2009 a development application was lodged in relation to the Property naming “Makrylos Group” as the “Owner” (First Planning Application). It sought approval for the subdivision of the Property into eight parcels. It also named “Makrylos Group” and an Australian Company Number (ACN 110 883 237) as the applicant, together with naming Mr Makrylos. The ACN number is that of Kalhmera. The contact details include an email containing the name “Gina”. The application contains an 11 page Planning Report authored by Ms D’Rozario bearing a logo for “Makrylos Group of Companies” and titled “Coconut Grove Subdivision” dated August 2009. It commences with the words “This report has been prepared for The Makrylos Group”. It goes on to name the past development projects of the Makrylos Group in terms extracted earlier in these reasons.
The report describes a proposed development in detail, stating its purpose as enabling “the concurrent re-development of an underutilised site within close proximity of shops, services and facilities for the purpose of 6 ground-level homes and 4 ground-level duplex style dwellings”. Indicative floor plans and elevations were attached. The report refers to the earlier amendment to the planning scheme authorising its specific use for residential subdivision and goes on to address the amended requirements of the scheme. The merits include that it would “contribute to the range of housing stock in the locality” and provide “housing choice through a range and mix of dwelling types and size”. The attached plans include the April Librio Sketch and the Earl James Concept Plan. In each of them, the parcel of land depicted at a top corner of the page contains a floor plan for a four bedroom dwelling that appears to be no different in size than the dwellings depicted on other larger allotments. The floor plan for that house is similar to those of the other allotments and is the same as that shown in the Undated Librio Sketch and the April Librio Sketch.
Change to setback requirements
On 2 December 2009 the planning scheme was amended to alter the permissible setback for residential buildings.
2010 valuation report
On 23 April 2010, Mr Makrylos obtained a valuation report relating to the Property. The author of the report:
(1)states that he has been instructed by Mr Makrylos to assess the market value of the Property for stamp duty purposes only;
(2)notes that the owner of the Property had prepared conceptual plans for the development of 16 freestanding villas on the site;
(3)states that the valuation was subject to development approval to construct 16 ground level villas for the site, “consistent with the concept plans supplied to us”;
(4)assesses the value of the Property at $5,000,000.00;
(5)states that with consent the land can be developed as a residential subdivision with a maximum of eight lots, however the author understood that the owner was seeking “to create a community title type development with 16 separate occupancy areas, to be developed with 16 freestanding villas”.
Attached to the valuer’s report is a concept plan depicting the site occupied by 16 dwellings, together with a “typical villa floor plan”. The concept plan is marked “for Michael Makrylos”.
Second Rezoning Application
On 29 April 2010, Ms D’Rozario lodged planning application PA2010/0417, naming Mr Makrylos as the proponent of the application and as the owner of the Property (Second Rezoning Application). It sought an amendment to the planning scheme so as to substitute the existing permission to subdivide into eight lots with permission to “enable the land to be developed as an integrated residential estate containing 16 multiple dwellings”. The proposed dwelling was to be as depicted in attached drawings prepared by Kowalski Architects.
The “main driver” for the proposal is said to be “worsening conditions for home buyers” due to rising land prices. The application asserts that modifying the estate envisaged by the earlier permit to a 16 dwelling complex would reduce the cost of the land component for each dwelling and “result in a more affordable product”.
It appears from planning application PA2011/0192 (discussed below) that the Second Rezoning Application was granted in February 2011. The grant meant that the Property fell within Town Planning Zone SD33 (Specific Use) permitting its development to accommodate 16 residential dwellings.
Undated Joint Venture Agreement
There is in evidence an undated and unsigned joint venture agreement prepared by Clayton Utz Lawyers. It relates to a development of the Property referred to as “the Project” and is said by Mr Makrylos to have been entered into “in or around April 2010”. I will refer to it as the “Undated JVA” without drawing any conclusion at this stage as to when it was prepared or entered into. The parties are Mr Makrylos and Kalhmera. The background recitals state that Kalhmera intends to carry out the Project on the Property. Clause 2 contains a condition precedent that Kalhmera obtain “the Development Permit”. The expression “Development Permit” is defined to mean “the development permit and any variations issued in respect of the Project by the Development Consent Authority”. Clause 3 obliges the parties to use their best endeavours to ensure that the Project is conducted successfully. Clause 4 states that Mr Makrylos’ sole contribution to the Property (financial or otherwise) was the Property, which the parties agreed had the “Land Value”. The definition of Land Value contains the words “$[insert]” and so appears to be incomplete. Clause 5 provides that the sale proceeds from the Project are to be applied first in “repayment to Makrylos for the amount of the Land Value”.
Cardno Ullman & Nolan Report
On 23 July 2010, Cardno Ullman & Nolan Geotechnic Pty Ltd produced a report on a geotechnical investigation of “proposed courtyard villas” on the Property, addressed to Kara Developments (described elsewhere in the report as “client”) and marked to the attention of Mr Makrylos. The report concerns the engineering requirements for the design of footings.
Second Planning Application
On 23 March 2011, planning application PA2011/0192 was lodged by Mr Steven Conn, naming “Mr Makrylos Kalhmera Pty Ltd” as the applicant and Kalhmera as the “Landowner”. It refers to the Property being situated in Town Plan Zone “SD33 (Specific Use)”. The planning report contains a name and logo for Kalhmera. It annexes detailed architectural floor plans, elevations and site layout diagrams bearing the name and logo “Makrylos Group”.
Development permit issued
On 18 May 2011 the Development Consent Authority issued development permit DP11/0306 approving the land to be developed for the purpose of constructing 16 single storey dwellings on the Property.
Events after 18 May 2011
On 4 September 2012, planning application PA12/0645 was lodged by a surveyor naming Mr Makrylos as the applicant to create 16 unit titles. That application was approved on 4 October 2012.
Construction of the units took place between 2011 and 2012 and settlement on the sale of the units took place on various dates throughout FY 2013 and FY 2014.
A different joint venture agreement
In evidence is a document titled “Development Joint Venture Agreement” naming Kalhmera and Mr Makrylos as parties, prepared by HWL Ebsworth Lawyers. It is unsigned. It bears the year 2013 but is otherwise undated. The agreement establishes and defines a “Venture” for the development of the Property. The venturers are Mr Makrylos and Kalhmera. The “Land Value” is defined in the agreement as $5,150,000.00.
Clause 9 provides for the proceeds of the sale of the developed Property to be applied in certain priorities, relevantly including payment of the Land Value to Mr Makrylos and the remainder to Kalhmera. The agreement expressly excludes the creation of any estate or interests in the Property in favour of any of the other venturers.
MR MAKRYLOS’ CASE
It is Mr Makrylos’ case that as at the Acquisition Date he intended to construct his primary family dwelling on the Property and that that intention persisted for some years. He asserts that he did not hold the Property as “trading stock” until the date upon which he became legally obliged to commit the Property to the joint venture upon the fulfilment of the condition precedent in the applicable joint venture agreement. He alleges that occurred when Development Permit DP11/0306 was issued on 18 May 2011.
Mr Makrylos’ alternate case is that he first held the Property as trading stock in April 2010 when (he alleges) the Undated JVA was entered into.
It is convenient to now summarise the affidavit evidence-in-chief, beginning with Mr Makrylos as deponent. My summaries of evidence will refer to the key documents by the abbreviations given to them earlier in these reasons.
Affidavits of Mr Makrylos
What follows is a summary of the facts asserted by Mr Makrylos in his first affidavit sworn on 15 October 2021:
(1)In 1997 he began living at a property owned by his sister at 21 Makryllos Circuit in Tiwi. He married Ms Panagopoulos in the following year and they then resided together at Makryllos Circuit.
(2)Between 1998 and 2006 he and Ms Panagopoulos lived for some periods in properties under development by Kara Developments, but they primarily lived at Makryllos Circuit. The living arrangements at Makryllos Circuit were not ideal because other family members were residing there from time to time.
(3)Prior to 14 June 2006 he met real estate agent Mr Jeremy O’Donoghue at an open home inspection and advised Mr O’Donoghue that he was looking to purchase a family home. Mr O’Donoghue was the selling agent for the Property. After the Property passed in at auction on 14 June 2006, Mr O’Donoghue contacted him to ask whether he would be interested in purchasing the Property for the vendor’s asking price of $825,000.00.
(4)In that conversation, Mr O’Donoghue informed him that the Property could not be developed because it was located in a storm surge area. He told Mr O’Donoghue that would not be a concern for him because he wanted to build a family home there.
(5)The Property interested him because of its convenient location and because he would be able to build a large family home with a caretaker’s residence which would be suitable for him and his wife and to accommodate visitors.
(6)He obtained the First Qantec Report because he considered it prudent to confirm, before purchase, the minimum building floor levels for the family home and caretaker’s residence were suitable for a surge/flood prone area. He was intending to construct both the house and the caretaker’s residence on the site, which he understood at that time would have required subdivision into two allotments. The reference in the report to “subdivision lots” is a reference to those two allotments.
(7)He entered into an unconditional contract to purchase the Property on 30 June 2006. If he had been considering the development of the Property he would have made the contract “subject to rezoning”. The contract was unconditional because his intention when entering the contract was to build a family home, not to subdivide it for business purposes.
(8)After signing the contract and paying the deposit, he noticed that the purchaser details named Kalhmera as the purchaser. He had not advised Mr O’Donoghue that Kalhmera was to be the purchaser.
(9)The same conveyancer was acting for numerous buyers who were then purchasing properties from Kalhmera in another development known as Waterline.
(10)Improvements on the Property at the time of purchase included demountable buildings with a roof over one of them, a shed, carport, sewerage, electricity and water. The demountables were clean and air conditioned and the services were working. It was his intention to occupy the demountables from the time of purchase as his main residence until construction began on the larger dwelling as a long term residence.
(11)On 30 June 2006 he prepared a hand drawn plan of the family home which he intended to construct (Large Home Plan). His intention was to build a two storey house “in a garden sanctuary–themed setting on a large block”. He undertook a preliminary cost assessment, which “confirmed the possibility of overcapitalising by building such a large home in this location on the Property and may have been beyond my budget”.
(12)He then considered another more affordable option of building a smaller house. He decided that the best place to construct a smaller house would be near the right hand corner of the Property. That location would reduce the home’s exposure to traffic noise and an easement on neighbouring properties meant that structures near that boundary could not be erected, so ensuring privacy for the family home. Some of the existing adjoining neighbourhood houses had small setbacks to 1.5m, which he also wanted.
(13)Whilst he did not have any plans at that time to build anything other than a family home, he thought the location of the Property was sensible as it “maximised the balanced land area for future use”.
(14)He then met with a planner employed by the Department of Infrastructure, Planning and Logistics concerning his intention to build a smaller home. The date of the meeting is not specified. He was informed during that conversation that the current zoning of the Property meant that the home would need to be set back five metres from the side and rear boundaries (which he viewed as a waste of land). He was informed that the Property would need to be rezoned to a classification that allowed for smaller setbacks, and it would be beneficial if he prepared a plan showing “where the road enters the site and that demonstrated the potential future use of the entire property”, not just the area where he intended to construct the family home.
(15)As a result of that conversation he prepared a hand drawn sketch (being the Makrylos Sketch given to Earl James on 4 July 2006 referred to earlier in these reasons).
(16)He also met with a member of the Darwin City Council’s technical staff, who advised him that the Council would only permit a left in/left out driveway for the Property. The date of that meeting is not specified.
(17)During 2006 he was engaged with work on the Waterline development where he came to know a town planning consultant, Mr Anthony Jensen. He discussed with Mr Jensen his draft design for “a two-storey home” for the Property” and he told Mr Jensen that it was intended to be his family home. They discussed the inclusion of the caretaker’s residence and a shed on the Property. He sought Mr Jensen’s view about whether he would obtain approvals for the plan. The plan shown to Mr Jensen is the Large Home Plan depicting the large family home and caretaker’s residence. Mr Jensen told him that because the Property was zoned rural residential it could not have more than one dwelling on it, he would therefore need a development permit to allow for the construction of the caretaker’s residence to be built there and there would be no certainty of obtaining the permit. The date of the meeting with Mr Jensen is not specified.
(18)On or about 4 July 2006 he provided the Makrylos Sketch (depicting the eight allotments on the Property) to Mr Dodd of Earl James to draw up the Earl James Concept Plan in order to enable him to “design a smaller house within those boundaries”. He needed an accurate dimension of the block to proceed with the house design. Earl James had previously done work for Kara Developments. Whilst the plan refers to Kara Developments as the client, the work was done for him personally and not for the company.
(19)Following settlement on the sale of the Property the vendors were permitted to remain in occupation under the terms of the contract. The vendors vacated the Property in December 2006. He and Ms Panagopoulos then lived at the Property between December 2006 and 26 April 2007 with their dog.
(20)He knew Mr Librio from previous work. Between December 2006 and January 2007 he took the Earl James Concept Plan to Mr Librio and asked him to prepare a floor plan design of a smaller house for him. The house could be designed at that time because the Earl James Concept Plan had accurate boundary dimensions. Mr Librio prepared a sketch for the smaller home. The sketch annexed to the affidavit is the Undated Librio Sketch.
(21)In January 2007 he asked Ms Pascoe of Qantec to prepare the Second Qantec Report relating to the Earl James Concept Plan. The Second Qantec Report was provided to him on 4 February 2007.
(22)He ceased residing at the Property on 26 April 2007 when he and Ms Panagopoulos moved back into Makryllos Circuit for a number of reasons. Ms Panagopoulos was concerned about security at the Property because of “a number of incidents of trespassers and break-ins that occurred” while they were living there. Ms Panagopoulos felt unsafe and did not like moving between the bedroom in one demountable and the bathroom in another. The Property had become infested with toads and they were concerned for the welfare of their dog. The issues had caused arguments between them. It had been their intention to commence construction of the family home on the Property as soon as possible and to live in the demountables for only a short period.
(23)On 22 February 2007, he and Ms Panagopoulos attended a meeting with Ms D’Rozario. He explained to Ms D’Rozario that he wanted to build a family home on the Property. He discussed the setback issue and the benefit of the subdivision to accommodate it. He supplied her with the Earl James Concept Plan and a typical house design. Ms D’Rozario suggested that they prepare a development plan showing the actual housing designs situated on the subdivided blocks. As a result of that discussion, Ms D’Rozario and he decided that the best way to deal with this setback issue to construct the family home was to apply to subdivide the Property.
(24)Following that meeting, he instructed Mr Librio to prepare a floor plan layout for dwellings. From his discussions with Ms D’Rozario he understood a design layout for all the proposed subdivided blocks would be required for any application to allow a subdivision. The affidavit annexes a document identical to the April Librio Sketch, with the allotment in the rear right corner highlighted and the words “MM House” added in block letter handwriting, with an arrow pointing to the highlighted allotment.
(25)He received Ms D’Rozario’s letter of advice dated 7 May 2007. As a result of that advice he understood he would have to submit a detailed subdivision proposal for any rezoning application even though at that stage he was only interested in building his own house and dealing with the setback issue. He instructed Ms D’Rozario to proceed with the First Rezoning Application, which she then lodged on 8 June 2007.
(26)During 2008 he and Ms Panagopoulos were still looking forward to constructing their home on the Property. In that regard he:
(a)gave instructions to his accountant on 27 March 2008 “to update various ASIC records for businesses with the Property’s address”;
(b)included the Property’s address on his 2007 income tax return on 6 May 2008;
(c)hired a forklift in July 2008 to move trees they had purchased for the property with a view to establishing the garden before building the house (being the forklift subject to the invoice referred to at [72] above); and
(d)hired a crane on 5 November 2008 to load a container on the Property with building materials for the house with the anticipation of starting construction on it (the invoice for which is referred to at [73] above).
(27)During the course of 2009 he and Ms Panagopoulos came to the view that it was unlikely that they would proceed with the plan to build their home on the Property. They felt that they could not manage the stress and costs involved in building their home on the Property as they were at the same time, trying to manage the stress of the IVF process. They decided that it would be better for them to live at Makryllos Circuit while continuing in the IVF program. They came to an arrangement with Mr Makrylos’ sister for Kara Developments to build a new house on the Makryllos Circuit site pursuant to an arrangement involving the Makrylos Family Trust. Under that arrangement, he and Ms Panagopoulos had an option to purchase that property should circumstances change or the sister otherwise decide to sell that property.
(28)The First Rezoning Application was allowed on 9 July 2009. Following that approval he engaged Mr Jensen to prepare an application to obtain a development permit to subdivide the Property in line with the new planning zone permission. That application was submitted on 31 August 2009 and was approved on 18 November 2009, including provision for two metre setbacks. By that time, he had made the decision not to proceed with the plan to build his own home on the Property and was “looking at taking steps to realise the Property to its best advantage”.
(29)He entered into the Undated JVA in or around April 2010.
(30)He obtained a property valuation from Herron Todd White on 23 April 2010 and Ms D’Rozario lodged the Second Rezoning Application on 29 April 2010 to increase the number of allowable dwellings from 10 to 16. That application was approved on 16 March 2011, and the planning application for the development approval was then lodged on 23 March 2011.
(31)Between April 2011 and April 2013, he and Ms Panagopoulos lived in a unit at Lyons whilst the new home at Makryllos Circuit was under construction. A planning application relating to that two storey construction is annexed to the affidavit and has a lodgment date of 23 December 2010. An attached floor plan is dated August 2010.
(32)The Undated JVA became unconditional on 18 May 2011 when the Second Rezoning Application was allowed, at which time he became “committed to the development of the Property”.
(33)He entered into the later joint venture agreement because at the time that he entered into the Undated JVA the sale price for each house was estimated to be higher, but there had been a downturn in the market in 2013.
(34)He lodged his income tax returns for FY 2013 and FY 2014 on the basis that he acquired the Property for the purpose of constructing his family home. Later the purpose for which he originally acquired it changed and he commenced holding the Property as trading stock on 18 May 2011. He elected to apply the market value of the Property as at 18 May 2011 as its acquisition cost. He claimed a “main residence exemption” from any capital gain arising from “a CGT Event” occurring at the time that he commenced to hold the Property as trading stock.
It emerged in the evidence (and was otherwise not disputed) that a main residence exemption may be claimed in the event of a capital gain made upon the sale of an asset used as a main residence for a prescribed period of time.
As to Mr Makrylos’ evidence that he would not have purchased the Property for the purposes of development without having the purchase contract made subject to rezoning, the parties have agreed the following facts:
(1)An application to rezone, and an application to subdivide the Property, could have been allowed or could have been refused.
(2)Subdivision of the Property was not necessary in order to enable a caretaker’s residence; although a Development Permit would have been required as this use was defined in the Darwin Town Plan as a use requiring consent.
In his second affidavit sworn on 20 May 2022, Mr Makrylos deposed:
(1)He wanted to explain some further matters to clarify his communications and dealings with consultants and others in 2006 and 2007.
(2)A reason for wanting to have a caretaker’s residence on a separate title was to enable him to secure finance using the second title as security and so avoid mortgaging the site of the family home.
(3)The First Qantec Report deals with building regulations of a kind that are not required to be assessed as part of a rezoning application. He obtained it because he wanted to be sure about the permitted floor levels for the construction of his house.
(4)As a result of his discussions with Mr Jensen, he knew that a separate caretaker’s house could be built on the Property without rezoning or subdividing, but he was still interested in creating the separate lot to use as security for the finance. He did not intend to build the caretaker’s residence immediately because he did not have the funds, but he considered that he would need the extra accommodation for family and wanted to keep open the option of later building it on a separate title.
(5)He signed the contract for the purchase of the Property on a Friday.
(6)The large family home he originally designed was in the style of a “Queenslander”. He reviewed the costs of that building “over the weekend” after signing the contract and decided then that it was too expensive and overcapitalising. An example of the excess cost was the construction of a boundary fence around the home in the middle of the Property, which would be necessary for security.
(7)The rear right corner of the Property was the best location for a single storey residence because it caught the prevailing breezes and was away from traffic noise. He wanted the smallest possible setback because that boundary had the benefit of stormwater easement on adjacent land.
(8)His conversation with the town planner took place on Monday, 3 July 2006. During that meeting he drew a sketch at the counter showing two lots with caretaker’s residence on the smaller lot. He was told by the town planner that a subdivision with the small and large lots would not be permitted. He spoke to the Darwin City Council on the same day in relation to the driveway.
(9)He marked the Makrylos Sketch depicting the eight allotments with the initials MM on the allotment in the rear right corner.
(10)The plan prepared by Earl James would be used to obtain a reduced set back “whether by waiver or rezoning application”.
(11)He was overseas between 9 July 2006 and August 2006. When he returned he visited the area around the Property and saw that neighbouring houses had smaller setbacks than those he was seeking to achieve and it was then that he concluded the preferable option would be to apply for a waiver to reduce the setbacks, instead of submitting a rezoning application which was more costly and time consuming.
(12)In his first affidavit he had omitted to mention discussions he had with a government planner about the waiver.
(13)As an experienced developer, if it had been his intention to develop and subdivide the Property when he purchased it he would have sought to have the contract made conditional on a successful rezoning application, he would not have bought the Property in his own name and he would have proceeded with a rezoning application without delay after the purchase.
(14)From this discussion with the town planner he knew that there were two options available for him to reduce the house setback. The first was to apply for a waiver to reduce the permitted setback in current rural residential zone, but that option did not allow him to have a separate title for a caretaker’s residence. The second was to rezone the Property so as to place it into a zone that permitted smaller setbacks “such as the SU (Specific Use) zone that eventually was applied for”.
(15)He did not proceed immediately with preparations to build the home on the Property because he was committed to the Waterline development until the end of January 2007, and that is why he consented to the vendors remaining in possession.
(16)In late January 2007 he had a second conversation with a duty planner “when I went to apply for a waiver of the 5 metre setback”. He took with him the Earl James Concept Plan and the Undated Librio Sketch. He was informed that the planning scheme was about to be amended such that from 1 February 2007 setbacks for rural residential properties were going to be 10 metres. He was told that it was very unlikely that he would obtain a two metre setback because it was too great a deviation.
(17)The 10 metre setback requirement was subsequently revised again to return to a five metre setback requirement. He would have accepted a five metre setback and proceeded with the construction of the dwelling, but a 10 metre setback was not acceptable because it greatly reduced the amount of usable area that his family could enjoy. To illustrate the point he prepared two drawings to demonstrate the difference in land usage between a two metre and a 10 metre setback.
(18)It was the discussion with the town planner and the imposition of the 10 metre setback that sent him on the path of applying for a rezoning. The only way to get the reduced setback for the home was to apply to rezone the property, even though he wanted to build his home on the Property together with a caretaker’s residence.
(19)The Second Qantec Report was obtained to address the storm surge requirements as against a rezoning proposal in the Earl James Concept Plan, which included “secondary storm surge” issues which were not dealt with in the First Qantec Report.
(20)He asked Ms D’Rozario to assist with the application for rezoning on 22 February 2007 because Mr Jensen was not then available to assist.
It is convenient to defer my summary and consideration of Mr Makrylos’ oral evidence in cross-examination and re-examination until after the evidence of the other witnesses is set out.
Ms Panagopoulos
In her affidavit (sworn 15 October 2021), Ms Panagopoulos deposed that:
(1)She moved into Makryllos Circuit in December 1998 after marrying Mr Makrylos, and thereafter they also lived for short periods in some properties “that were part of developments done by Michael through one of his property development companies”.
(2)Living at Makryllos Circuit was not ideal because the house belonged to Mr Makrylos’ sister and other family members were there from time to time. She and Mr Makrylos were looking forward to owning their own home and having privacy and financial security.
(3)She and Mr Makrylos actively started looking for a family home in 2006. She thought that the Property was an ideal location for a family home because it was large and conveniently located and she was looking for a site that could accommodate children and a visiting family.
(4)Their intention was to live in the demountables on the Property until the family home was built. They “very initially” intended to build a tropical two storey house with a large garden “but that proved to be too expensive and we subsequently planned for the construction of a smaller house”.
(5)She and Mr Makrylos moved into the Property after the vendors moved out. They brought their personal possessions and their dog. They remained there until about 26 April 2007 when they moved back to Makryllos Circuit. The reasons for moving from the Property included that she felt unsafe living there and it was inconvenient moving between the demountables including to use the bathroom. At that time, they were keen to start the process for the new family home to be built there.
(6)She attended the meeting with Ms D’Rozario, in February 2007. She recalled there was going to be a delay before construction could commence because of issues relating to zoning and setback requirements.
(7)Mr Makrylos oversaw the process to obtain the approvals. Initially she was not concerned with the delay because building the family home how and where they wanted was “an important long term family project”.
(8)She was still looking forward to the construction of the family home on the Property during 2008. She and Mr Makrylos took steps to establish a garden on the Property in the middle of 2008.
(9)During the course of 2009 she experienced health issues and was experiencing stress undergoing IVF procedures, which took her interest away from the plan to build the family home on the Property. It became important to focus on her health rather than “worry about the stress and costs involved with the long drawn out process of building a home on the Property”. As a result she and Mr Makrylos decided to abandon the plan to build their family home on the Property “and to live in the Makryllos Circuit [sic] for the foreseeable future focusing on our attempt to start a family through my IVF program”.
(10)Having made that decision they came to an arrangement with Mr Makrylos’ sister to “have a new house constructed on Makryllos Circuit”.
(11)She and Mr Makrylos continued to reside at Makryllos Circuit until April 2011. When the new house at Makryllos Circuit was constructed in around April 2013, she and Mr Makrylos moved in there.
Ms Panagopoulos gave additional oral evidence-in-chief to the effect that the Large Home Plan was prepared by Mr Makrylos and herself “in conjunction” just after they first inspected the site, and that it took them two to three days. She confirmed that she commenced living in the Property in December 2006 but said she could not be precise about the date on which she moved out.
Ms Panagopoulos denied that she moved out of the Property because the electricity had been disconnected. She denied that electricity was disconnected when she was living there.
Ms Panagopoulos said that Mr Makrylos paid all of the invoices for the business by cheque and that she was not at the time a signatory to the company’s accounts. She confirmed that she performed the bookkeeping for the business:
COUNSEL: For personal expenses of both of yours, where would that – where would those expenses normally be paid from?
MS PANAGOPOULOS ---It’s a difficult one because we use the company cheques for personal accounts, and then our accountant allocates accordingly. So we go to the dentist. Michael writes a cheque out of the Kara cheque account, you know, for example. That’s what we do. That’s what we still do sometimes, so, you know, we – but Michael never had credit cards back then, so that was anything. He used to go to the doctor – the GP. He would use his cheque account – Kara cheque account or Kalimera [sic], or whatever he had at the time.
Ms Panagopoulos said that Mr Makrylos received invoices, paid them by cheque and provided her with the cheque buts and she would “type them in”. She continued:
So I would have typed it in. He wouldn’t have – he didn’t put details. He just put the name of the company. And we’ve used some of these contractors or professionals we’ve used on other projects, so I just assumed they were for those projects.
Ms Panagopoulos agreed that under that system there was no way for her to know what was a private expense relating to the Property:
COUNSEL: But in terms of this house, 125 Dick Ward Drive, there are a whole lot of expenses which were incurred: paying Earl Jones & Associates, Elton Consulting, Librio, Quantec [sic], McWilliams, June D’Rozario & Associates. All of those expenses were paid by cheque by Michael; is that right?
MS PANAGOPOULOS: ---Yes, that’s correct.
COUNSEL: And all of them would have been recognised by the companies as expenses?
MS PANAGOPOULOS: ---Because I saw the cheque butt that just said the company name, unfortunately.
COUNSEL: Sure, sure?
MS PANAGOPOULOS: ---And I just – and we’ve used those companies on other projects. So, look, during the audit I’ve seen other mistakes that I’ve made and they – you know, that suited the ATO because we didn’t claim on some other things and, you know, like, it’s me, unfortunately. I’m---
Ms Panagopoulos could not recall precisely how long it was between the preparation of the Large Home Plan and the change of intention to construct a smaller house.
When questioned about the events between the preparation of the Large Home Plan and the preparation of the Earl James Concept Plan Ms Panagopoulos claimed not to remember exact dates, but confirmed that as at 30 June 2006 the plan was still to build the larger house.
As to the plans for the smaller house:
COUNSEL: … Other than that sketch that you were involved with, the one dated 30 June 2006, were there ever any other plans at all drawn up in relation to a single house?
MS PANAGOPOULOS: ---I – after we decided to build that house, the smaller house at the back, I did – look, I did – I’m a woman. I sketch. I did do little sketches here and there before I went and saw Joe.
COUNSEL: Right. But there weren’t any other formal designs drawn up ever again for a house, a single house, after the 30 June 2006 one?
MS PANAGOPOULOS: ---Joe Librio drew one up and that was the other one.
COUNSEL: We discussed that with your husband yesterday and that’s described as just a typical house?
MS PANAGOPOULOS: ---No, that’s – no. Who - - -
COUNSEL: That was specifically drawn for the purpose of your own family house?
MS PANAGOPOULOS: ---Correct.
It was put to Ms Panagopoulos that the smaller floor plan she referred to looked like the other houses in the same subdivision. She responded:
No. Look, I will explain a little. That site – and I – and looking at the rest of the houses, it’s – it has got other features in it that the other houses don’t have, and I will explain to you. There’s four living spaces in this house that we’ve designed. The – it’s the living, the dining, the kitchen and the family room. They’re all surrounded by glass and that’s what I wanted. I wanted them to be surrounded by glass, so when I’m standing in my kitchen I want to be able to look through that family room and look out. You know, I would like to have a family. That’s what we bought the site for, so we can – I can see my children playing. I can see them out, you know, well, play – like, you know, cubby house, sandpit. I could actually see if you were driving up that driveway. The other houses don’t have that glass all around each – each space, or the living spaces. And to get that tropical feel, we were going to have louvres everywhere and we were going to have high-set louvres to sort of to have that hot air flow out of the high-set louvre and in sort of the louvres to bring the cool air. So it was that tropical – a low-rise, tropical design. We couldn’t do the high-rise, so we decided to do a low-rise tropical, and that’s what we’re aiming for. But I wanted to be sitting in my kitchen looking out.
Apart from the floor plan depicted in the April Librio Sketch, she could point to no other drawings to evidence the preparation of any plans other than saying that she did a few of her own sketches. She said that she told Mr Librio that she wanted a “tropical feel” but could not say what detail she had provided to him. She referred to the features of the proposed house, including “the tennis court, the shed, you know, the caretaker’s residence which we were, you know, subdividing out”. When asked whether she had briefed Mr Librio about all of the things she wanted for the house design she responded:
When I went, I had a few little sketches, so I don’t know if I actually said to him, you know, but I had some sketches that I – we was trying to get. But I definitely wanted that tropical feel, so I told him that, I remember that much.
Ms Panagopoulos said she could not recall exactly what she said to Mr Librio at the time. She agreed that there were no other sketches that she was able to locate in respect of the family home.
Ms Panagopoulos said that she would have been involved in the construction of the home to a degree of detail including the plumbing, choice of tiles, placement of power points to control the project as that was her “style”.
Ms Panagopoulos denied knowledge about how the new house situated at Makryllos Circuit was to be paid for.
Ms Panagopoulos said she specifically recalled telling Ms D’Rozario that she wanted to build a family home on the Property. She said that Ms D’Rozario was told that the application for subdivision was being made for the purpose of decreasing the boundary setbacks for the family home. She could not explain why Ms D’Rozario did not refer to that in her letter of advice.
Ms Panagopoulos said that the payment of expenses relating to the Property by the Makrylos Group was a result of her mistake because she only had cheque butts and didn’t have details, and because the consultants used had also been engaged for other business dealings. She volunteered evidence about missing a deduction that could have been made to the benefit of the companies.
In re-examination, Ms Panagopoulos said that the features of the Property she wanted were not depicted on the April Librio Sketch because:
MS PANAGOPOULOS: … to get the setback reduction we couldn’t show that. We had to show standard blocks. I think, apparently, that’s what the town planner told Michael. …
COUNSEL: Yes?
MS PANAGOPOULOS: ---You have to show standard blocks to get those reductions in the setbacks. We couldn’t show the tennis court.
COUNSEL: Okay. And why are there other houses on the diagram, to your knowledge?
MS PANAGOPOULOS: ---Look, from what my understanding is, June when we went and saw her she said it’s – she said it would be beneficial to help us get an approval, possible approval, for this rezoning application if we showed the full – like, showed houses so the neighbours know the impact.
COUNSEL: Yes?
MS PANAGOPOULOS: ---And, you know, how much landscaping there is, so people know. The neighbours have a chance to understand what’s going to be there.
COUNSEL: And was it intended or not intended to build the other houses at the time of putting in the rezoning application?
MS PANAGOPOULOS: ---No.
COUNSEL: No?
MS PANAGOPOULOS: ---It wasn’t intended, no. It was just our house - - -
COUNSEL: And can I just ask you this?
MS PANAGOPOULOS: --- - - - and the caretaker’s.
Ms Panagopoulos said that once rezoning and subdivision was achieved, there was no obligation to build in accordance with the plans.
Mr Librio
In his affidavit, Mr Librio confirmed that he was a qualified interior designer. He said that “Kara Pty Ltd” was a company that Librio Associates had performed work for in the past. He deposed that between 19 April 2007 and 26 April 2007 Mr Makrylos engaged him to prepare an interior sketch, identified as the April Librio Sketch referred to at [63] of these reasons. He said that he could not recall any discussions he had with Mr Makrylos with respect to the preparation of the April Librio Sketch. He made no reference to having any meeting or discussion or other communication with Ms Panagopoulos.
Mr Librio also exhibited to his affidavit the Undated Librio Sketch. He confirmed that he had drawn the Undated Librio Sketch but could not recall why or when he had done so or any discussion he had with Mr Makrylos about it.
In cross-examination Mr Librio agreed that what he had done was prepare a “concept plan” for the Property. He said that work was done “for Kara”. He confirmed that the invoice issued for the work included work for multiple items in addition to work relating to the Property. He agreed with the proposition that Mr Makrylos did not say that the work with respect to the Property was a private project. He confirmed he had no recollection of preparing the Undated Librio Sketch. Mr Librio denied that he had marked the April Librio Sketch with the words “MM House”. Mr Librio said that after preparing the April Librio Sketch he had no further involvement in the project.
In re-examination, Mr Librio said he had no recollection of any discussion he had with Mr Makrylos about the preparation of the sketches.
Ms Pascoe
Ms Pascoe is a consulting engineer. During 2006 – 2007 she was an employee of Qantec. One of Qantec’s clients at that time was Kara Developments. She deposed in her affidavit sworn 13 October 2021 that:
(1)She met with Mr Makrylos “sometime prior to 27 June 2006” to discuss the minimum building floor levels for the Property. During the meeting, Mr Makrylos provided her with a contour and detail plan of a kind that was publicly available.
(2)She provided Mr Makrylos with the First Qantec Report concerning the minimum building level for cyclone surge/flooding for the Property. In preparing the First Qantec Report she considered the Primary Storm Surge Area, but not the Secondary Storm Surge Area as those terms are defined in the relevant planning scheme. She provided the invoice for the First Qantec Report on 3 July 2006.
(3)Both the First Qantec Report and the invoice were addressed to Kara Developments and marked to the attention of Mr Makrylos because those were the client details Qantec had used “for Michael” and she assumed that the client details were to be the same in this case.
(4)She could not recall any discussions that she had with Mr Makrylos about a proposed subdivision and was unable to provide any information about what the “proposed subdivision” referred to in the First Qantec Report involved.
(5)On 30 January 2007 she received the Earl James Concept Plan showing a proposed eight lot subdivision of the Property.
(6)On 4 February 2007, she provided the Second Qantec Report which considered both the Primary Storm Surge Area and the Secondary Storm Surge Area. Despite reviewing her historical files, she cannot recall why the First Qantec Report did not deal with the Secondary Storm Surge Area.
In cross-examination Ms Pascoe confirmed that the instructions she received on 27 June 2006 were in connection with a potential subdivision being considered for the Property although she did not discuss the details of the subdivision with Mr Makrylos. She confirmed her recollection that Mr Makrylos told her he was interested in acquiring the Property for the purpose of subdivision. She was uncertain whether there was discussion about the job being done for Kara Developments and said that she may have assumed it. She recalled that there was a discussion “in terms of dwellings possibly across the site with regard to the floor level that would be required”, but she could not recall the number of lots discussed. She did not recall there being any discussion about the use of the Property for the construction of a family home.
In relation to the Second Qantec Report, she said that she had received an email from other consultants and contacted Mr Makrylos to ask what it was about. She said her instructions were to prepare an updated report with the subdivision layout, applying the floor levels to each lot if necessary. She explained that the Primary Storm Surge Area related to a 100 year flood event and the Secondary Storm Surge Area related to a 1000 year flood event. She confirmed she could not say why the Secondary Storm Surge Area was not dealt with in the First Qantec Report.
The cross-examination concluded with this exchange:
COUNSEL: … You weren’t told there had been any change in the intention of what Mr Makrylos wanted to do with the site?
MS PASCOE: I don’t recall any such discussion. And from the reports, it wouldn’t be obvious to me now, looking back, that there was any change to the intention for the subdivision.
Mr O’Donoghue
Mr O’Donoghue conducts a real estate business based in Darwin. Between 2001 and 2008 he worked as a real estate agent for LJ Hooker. He deposed in his affidavit sworn 14 October 2021 that:
(1)On a date not specified, he met with Mr Makrylos at an open home inspection. Mr Makrylos advised him at that time that he was looking to purchase a house for his family.
(2)He was appointed as the vendor’s agent for the Property. He knew the vendors to be experienced property developers. The vendor advised him that it was not possible to develop the Property.
(3)The Property was passed in at auction on 14 June 2006. Neither Mr Makrylos nor anyone representing Mr Makrylos attended.
(4)After the auction, he contacted Mr Makrylos to ask whether he would be interested in purchasing the Property. During the conversation he advised Mr Makrylos it was his understanding that it would not be possible to develop the Property. During the same conversation Mr Makrylos said that the inability to develop the Property was not a concern for him because he wanted to build a family home there.
(5)Following the sale, he attended the Property at Mr Makrylos’ invitation “several times in early 2007” to discuss a potential engagement as selling agent for the Waterline development. During those visits Mr Makrylos told him about his plans to construct a family home on the Property. Their discussions took place in a canopied area outside of the demountables. He observed that the demountables appeared to have furniture inside them, there were several cars in the shed and there were several pallets of tiles there, which he assumed were for use in the Waterline development. On one occasion Ms Panagopoulos was there and prepared coffee.
In cross-examination, Mr O’Donoghue confirmed that the contract for the sale of the Property was prepared by the vendor’s conveyancer. He could not say who changed the name of the purchaser.
Mr O’Donoghue said that he remembered the discussion with Mr Makrylos about building the family home. He recalled that “it was always going to be big and huge and it was this home for him and Gina and, you know, their forever home”.
When confronted with the inconsistency between his affidavit and oral evidence Mr Makrylos complained that Counsel was trying get him on one sentence. He then reverted to a narrative that attempted to accommodate both scenarios. He then said that it was his intention to create a “two lot subdivision” which he did not tell Ms D’Rozario about. He did not accept that the intention to create two lots was inconsistent with what Ms D’Rozario had been told. It is plainly inconsistent.
Mr Makrylos gave oral evidence on this topic in a manner that was highly evasive and that varied according to the challenges that arose in the questions. In the circumstances described Mr Makrylos’ evidence on this topic is wholly unreliable.
As mentioned earlier in these reasons, the stated purpose of the First Rezoning Application as eventually filed was to achieve the rezoning of the Property “to a zone that would enable the land to be developed as an integrated residential estate of 10 dwellings” on eight allotments. The design and construction of the dwellings was to be undertaken “as one coherent whole”. I am satisfied that Ms D’Rozario included all of the representations of intention in the First Rezoning Application on the instructions of Mr Makrylos.
Ms D’Rozario acknowledged that she had at some point been told that there was an intention to build a family home on the Property, but that intention was understood by her as one involving Mr Makrylos owning one of the houses in the completed multi-dwelling project. As I have said, it formed no part of Mr Makrylos’ case on this appeal that he intended to live in a completed home in close proximity to other houses in a multi-dwelling subdivision.
Even if at some point it was said that Mr Makrylos would live on the Property, I am satisfied that Ms D’Rozario was oblivious to any intention on his part to obtain rezoning for the purpose of achieving a reduced setback for a family home without proceeding with any other part of the project as represented to the authorities in the First Rezoning Application made on his instructions.
Ms Panagopoulos’ evidence does little to assist Mr Makrylos’ case on this topic. In her affidavit she made a bare reference to having attended the meeting with Ms D’Rozario but did not include any evidence as to what was said to Ms D’Rozario. In cross-examination she said that she specially recalled telling Ms D’Rozario that she wanted to build a family home on the Property. As I have said, that is consistent with Ms D’Rozario’s evidence of having been told that at “some point”.
Ms Panagopoulos then responded to a question that Ms D’Rozario “knew why she was putting together a planning application for a subdivision of eight lots?” with the answer “that’s right. It’s for – to – to decrease the – the – the side boundary – the boundary and setbacks for our house”. However, Ms Panagopoulos did not say how Ms D’Rozario came to have that knowledge and the issue was not pursued in cross-examination.
I consider Ms D’Rozario’s letter of advice to be the most reliable contemporaneous record of the things said in the meeting. I am not satisfied that Ms D’Rozario was made aware that the First Rezoning Application was made for the purpose only of achieving reduced set backs for the family home, nor am I satisfied that she was made aware that there was no actual intention to proceed with the construction of multiple dwellings on the Property if the First Rezoning Application were to be granted. Accordingly, I find that the statement of Ms D’Rozario of an intention to build a family home on the Property is of little forensic value to Mr Makrylos in proving the particular factual case he presented on this appeal.
Other observations of the evidence of Ms Panagopoulos
Considered in context, the question of whether Mr Makrylos and Ms Panagopoulos resided at the Property for a period of 14 weeks until 26 April 2007 is of little significance in and of itself. What is in issue is Mr Makrylos’ asserted reason for residing there. Mr Makrylos ultimately claimed a main residence tax exemption with respect to the Property. He had previously claimed that exemption in relation to another property that formed part of a residential development of the Makrylos Group. He did not claim to be ignorant of the tax benefits that might be achieved by residing on land that might later be sold with a gain.
Ms Panagopoulos’ affidavit evidence was consistent with Mr Makrylos’ evidence as to the fact of their residence on the Property and the reasons for it. In her affidavit, she deposed to moving out of the property on 26 April 2007. That is the same date on which the power supply to Property was cut off because of a faulty meter, and yet neither Mr Makrylos nor Ms Panagopoulos mentioned the cutting of the power supply at all. It is significant that in cross-examination Ms Panagopoulos could not recall the date upon which she vacated the Property, notwithstanding the precision about the timing in her affidavit. I do not accept that she had a true recollection of the date at the time that she made her affidavit. That affects my assessment of her reliability as a witness more generally.
As I have mentioned earlier, Ms Panagopoulos was not a convincing witness in cross-examination in respect of topics of significance. I was particularly unimpressed with her vague responses with respect to the design of the family home. She was slow to acknowledge that no documents existed to evidence any design process. I am equally unconvinced by her evidence about having made bookkeeping mistakes with respect to the payment of expenses referrable to the Property by corporate entities.
Considered in the context of the evidence as a whole, Ms Panagopoulos’ assertion about there being a continued intention to build a family home on the Property, persisting for a period of some three years, is an assertion unsupported by corroboration from sources other than herself and Mr Makrylos. Given the issues I have identified, I do not consider her evidence to be sufficiently compelling to overcome the innumerable difficulties in Mr Makrylos’ own account or the inference that naturally arises from the contemporaneous records of the companies and the consultants.
The final envisaged development
Mr Makrylos acknowledged that by reason of his discussion with Mr Jensen he was aware that it was not necessary to subdivide the Property in order to construct the family home and caretaker’s residence there, and that all that was required was a development permit. He claimed that he nonetheless wished to pursue the subdivision so that the caretaker’s residence could be situated on a separate title for the purpose of securing finance. His motivations for pursuing the rezoning and subdivision were also related to his desire to construct a family home two metres from the rear corner boundaries so as to make the best use of the land. It is that motivation that is said to explain the considerable efforts and expense he went to with respect to the First Rezoning Application and the First Planning Application. As I have said, those documents contain clear statements of an intention of the Makrylos Group to construct multiple dwellings on the Property. If Mr Makrylos’ evidence is to be believed, the planning applications contained false statements of intention and of the identity of the intended developer.
It was said by both Mr Makrylos and Ms Panagopoulos that if the First Planning Application was allowed they had no intention at all to develop the Property in accordance with the development described in it. They stated that they had no legal obligation to do so and that if they did not do so, then the approval would merely lapse. Assuming that to be a truthful statement of their understanding of the law, there is curious lacuna in the evidence that remains unexplained and that renders their account incoherent and unconvincing.
It has not been explained how allowing the development approvals to lapse could translate into an entitlement to build a family home on the Property with two metre setbacks and a caretaker’s residence elsewhere on the Property on a different title (whether for the purposes of securing finance or otherwise) and no other dwelling.
The subdivision applied for involved the creation of separate titles all entered from a large road in the shape of a cul de sac, the size and shape of the allotments affected by the cul de sac itself. It has not been explained how the family home situated at the rear of the property on a separate title to (at least) the caretaker’s residence could be entered other than by way of that newly created cul de sac. If the approvals were to expire, there is no coherent account given of what the final division or development of the Property would be, both in terms the creation of new titles (if any) and the situation of buildings on them.
The case theory is one in which considerable expense and delay was occasioned by obtaining the approvals when at the end of the day there was no intention to build in accordance with the approvals at all. Acceptance of the theory would mean that Mr Makrylos has caused development applications to be made that contain statements of intent that are untrue. On the other hand, if the statements of intent are true, then the development would involve Mr Makrylos’ family home being among multiple other houses on the same land around a cul de sac which cannot be reconciled with other aspects of his evidence about his alleged intended use of the land.
In the result, it is not necessary to make any finding as to what the actual intention was at any time, at least in respect of the trading stock issue. It is sufficient to find that the unsatisfactory nature of the case presented on the appeal is such that I cannot be satisfied on the balance of probabilities of a coherent state of affairs capable of explaining away the clear inferences that arise from the independent and contemporaneous documentary record.
In addition, to the extent that Mr Makrylos and Ms Panagopoulos suggested that they would be entitled to (and intended to) let any approvals “expire” without in fact constructing the multiple dwellings, that particular intention was not disclosed to any of the consultants at any time. Their evidence that they had no intention to proceed with the multi-dwelling subdivision emerged in each case in re-examination. In the case of Ms Panagopoulos it emerged in response to a question so obviously leading that I place little weight on her response in any event.
In the final analysis, it is not her understanding and intent that matters.
I am prepared to accept that an approval to subdivide and develop land need not be acted upon. I am also prepared to accept that if not acted upon, such an approval may expire.
I do not accept Mr Makrylos’ assertion that it was ever within his contemplation to let any approval of the First Planning Application to expire. On Mr Makrylos’ own case the First Planning Application was pursued at considerable expense so as to achieve his purposes of having a smaller setback as well as a separate title for the caretaker’s residence. It was not explained how either of those things could be achieved if approval of the First Planning Application were left to expire.
Mr Makrylos’ attempts to distance himself from the statements of intent contained in the First Rezoning Application and the First Planning Application were wholly unconvincing in any event. The weight of the evidence is that the consultants did precisely what Mr Makrylos had instructed them to do and that his instructions aligned with his actual intentions which in turn reflect his purpose for holding the Property. To the extent that those documents are inconsistent with Mr Makrylos’ testimony, and his prior out of court verbal statements, the documentary records are the more reliable source of evidence with respect to his state of mind.
I have not overlooked that an intention to build a family home on the Property (as asserted in the out of court verbal statements) is not inconsistent with an intention to build the home on a newly created allotment (namely lot 3), nor is it inconsistent with an intention to create and develop the remaining lots within a residential development around a cul de sac. From the Acquisition Date that inference may well be open. However, it is not for the Court to say how the evidence might support such an alternate case when it was not a case that Mr Makrylos sought to run. Throughout this proceeding he has maintained that until April 2010 the only dwellings he intended to construct on the Property were a family home and (at a later time) a caretaker’s residence. I reject that case. It is unnecessary to postulate what further alternative case could have been run by him based on a different universe of facts.
The ordinary course of a business
On this topic it is to be borne in mind that Mr Makrylos is the relevant tax payer. He is a different entity to each of the companies referred to in these reasons and his tax liabilities are separate and discrete.
For Mr Makrylos it was submitted that he was not carrying on a business in his personal capacity until he committed the Property to the joint venture. On his primary case, he did not commence his “property development business involving the property” until he was legally obliged to commit the Property to the joint venture, which obligation occurred when a condition precedent to the performance of his obligation arose under the joint venture agreement. That date is 18 May 2011, when the Second Planning Application was granted. Alternatively, Mr Makrylos argues that he did not commence the business until the joint venture agreement became binding upon him, notwithstanding the condition precedent to performance. He alleges that date is April 2010.
Mr Makrylos denies that he carried on a property development business in his personal capacity at all. He submits that it would be wrong to conflate the property development activities of companies in the Makrylos Group with his own personal activities. He submits that signing a contract for the purchase of land for the construction of a family home does not constitute the carrying on of a business.
Mr Makrylos’ case nonetheless embraces the concept that he held the property as trading stock, that is, for the purpose of sale in the ordinary course of a business. The essence of his submission is that any business carried on by him personally was defined by the joint venture and so could not commence until a joint venture agreement came into effect.
In Evans v Federal Commissioner of Taxation (1989) 20 ATR 922, Hill J said (at 939):
The question of whether a particular activity constitutes a business is often a difficult one, involving as it does questions of fact and degree. Although both parties referred me to comments made in decided cases, each of the cases depends upon its own facts and in the ultimate is unhelpful in the resolution of some other and different fact situation.
There is no one factor that is decisive of whether a particular activity constitutes a business. As Jessell MR said in the famous dictum in Eriksen v Last (1881) 8 QBD 414 at 416:
There is not, I think, any principle of law which lays down what carrying on trade is. There are a multitude of things which together make up the carrying on of trade.
Profit motive (but see cf. IRC v Incorporated Council of Law Reporting (1888) 22 QBD 279), scale of activity, whether ordinary commercial principles are applied characteristic of the line of business in which the venture is carried on (IRC v Livingston (1926) 11 TC 538), repetition and a permanent character, continuity (Hope v Bathurst City Council (1980) 144 CLR 1 at 9; 12 ATR 231 at 236; Ferguson v FCT (1979) 9 ATR 873 at 876; 79 ATC 4261 at 4262), and system (Newton v Pyke (1908) 25 TLR 127) are all indicia to be considered as a whole, although in the absence of any one will not necessarily result in the conclusion that no business is carried on.
The High Court approved that statement in Spriggs v Commissioner of Taxation (2009) 239 CLR 1 (at [59]):
The existence of a business is a matter of fact and degree. It will depend on a number of indicia, which must be considered in combination and as a whole. No one factor is necessarily determinative. Relevant factors include, but are not limited to, the existence of a profit-making purpose, the scale of activities, the commercial character of the transactions, and whether the activities are systematic and organised, often described as whether the activities are carried out in a business-like manner.
(footnotes omitted)
As a question of law, it is correct to say that the signing of a contract for the purchase of land for a family home does not constitute the carrying on of a business. However, as question of fact, Mr Makrylos has not proven to the requisite standard that he purchased the Property for a family home.
In addition, I am not satisfied that the business of property development undertaken by the “Makrylos Group” is a business conducted only by the corporate entities identified in these reasons. The evidence supports a conclusion that Mr Makrylos personally is a participant among a group of entities whose affairs are so integrated that the business of property development cannot be said to be owned and operated by any one of them in isolation from the other. He has not shown that the Property was held in his own name for reasons independent of the property development business conducted by the “Makrylos Group”. The facts of the present case are that Mr Makrylos ventured real property legally held in his own name into a joint venture, and that its ultimate sale was undertaken in the ordinary course of a property development business. The relevant question is when the purpose for holding the Property for that future purpose first arose. As discussed below, on the proper construction of the definition of the expression “trading stock”, that purpose may arise without the person having certainty as to the terms on which the thing might be sold, to whom, on what terms, and the form it might take at the time of its sale.
If I am wrong in that conclusion, I am not satisfied that the business operated pursuant to a joint venture first commenced operating in April 2010, when Mr Makrylos claims the contract prepared by Clayton Utz came into existence. Four things may be said about that aspect of the appeal.
First, I am not satisfied that the document prepared by Clayton Utz came into existence when Mr Makrylos asserted that it did. The only evidence of the date of the preparation of the agreement is Mr Makrylos’ own testimony. I have earlier made findings that Mr Makrylos made false and self-serving declarations so as to create an appearance of facts existing at a point in time which did not in fact exist. Given that and other factors affecting his credibility, I do not accept his evidence as to when the document was created can be relied upon. In addition, Mr Makrylos acknowledged that the later joint venture agreement dated 2011 was not drawn up until 2013, after 12 of the 16 houses in the development were sold, although he also professed ignorance as to the retrospective timing. The document itself indicates that it was prepared in 2013.
Second, in re-examination Mr Makrylos was taken to the Undated JVA. He volunteered a remark that he had not seen it in years. When asked whether he could tell the Court whether the agreement was signed, he said “No”. He then said it was signed, but he could not find the signed version. When asked when it was signed he said “[s]ome time back then, 2008 or 2010, or whatever”. In light of that shifting evidence I am not satisfied that a joint venture came into existence for the first time in 2010.
Third, the conduct of Mr Makrylos is consistent with him causing the companies to take steps (or participate in the taking of steps) to obtain approvals for the subdivision and the development of a property held in his name, including by spruiking the credentials of the Makrylos Group and the development business in the rezoning and planning applications. As I have mentioned, the cumulative effect of the documents is that the companies were participating in a project for the subdivision and development of the Property including by engaging consultants, paying for their services and representing themselves as the applicant developer. All of that is evidence of a common purpose among the entities of the Makrylos Group to achieve the very thing that ultimately occurred: the creation of a multi-dwelling subdivision in which Mr Makrylos ventured land legally held in his name. The cooperation between Mr Makrylos and the companies is further evidenced by the companies extending loan monies to him for the payment of a significant amount as the balance of the purchase price. In cross-examination Mr Makrylos said that he had repaid the money, but there is no evidence as to when that occurred and on what terms. I have not accepted that Mr Makrylos’ personal financial affairs became intermingled with those of the companies by human error or misunderstanding. Rather, I find that the business carried on by the Makrylos Group was a business carried on not only by the corporate entities but also by Mr Makrylos personally in an ongoing commercial enterprise involving the development of property or, at the least, the development of the Property forming the subject matter of this proceeding. The date upon which a written agreement came into existence is of little significance against the facts I have found.
Fourth, the Undated JVA refers to there being a development application already on foot. That provides further evidence that the development application was itself a business activity of the Makrylos Group and not something for the benefit of Mr Makrylos personally.
Fifth, the activities leading to the ultimate development and subdivision of the Property proceeded as a continuing project consistent at first with the land division depicted in the Makrylos Sketch of 4 July 2006 and later amended to reflect a change in planning requirements making a 16 dwelling project possible. The Second Planning Application adopted referred to the earlier approval and referred to a change in intent by the same developers.
Any one of these features is sufficient to reject this aspect of Mr Makrylos’ case on the facts.
The definition “trading stock” bears repeating:
anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business
The phrase “held for the purposes of a sale” is not to be equated with “held in the ordinary course of a business”. A person may hold land for the purpose of a sale intended to occur some time in the future. The item held will be trading stock if the sale in the person’s contemplation is a sale that is to occur in the ordinary course of a business at an undetermined date in the future. The particular business envisaged may change, without altering the purpose for which the item is held. I find that Mr Makrylos held the Property for that purpose well before April 2010. His evidence that he signed that agreement “[s]ome time back then, 2008 or 2010, or whatever” is so vague that I am not satisfied to the requisite standard that the date that the requisite purpose was first formed is April 2010.
Even if the purpose first arose in 2008, Mr Makrylos’ appeal must be dismissed because there is insufficient valuation evidence to show that the assessments are excessive or to show what they should have been.
Condition precedent
For similar reasons, the submission that the requisite purpose could not come into existence until Mr Makrylos became legally obliged to sell the land (that is, on 18 May 2011) may be shortly rejected both on the facts and the law.
On the facts, Mr Makrylos held the land for the defined purpose well before he was contractually obliged to proceed with its sale.
As a question of law, an item may be held for the purpose of sale in the ordinary course of a business whether or not the person has in their contemplation the form that the item may take when it is sold, to whom it will be sold, at what price and on what conditions.
PROFIT MAKING SCHEME
In the circumstances I have described it is unnecessary to consider the Commissioner’s alternate case that the Amended Assessments would be the same even if Mr Makrylos could show that the “trading stock” definition was not satisfied.
The Commissioner contends that because Mr Makrylos acquired the Property as part of a profit making scheme, he would only have been entitled to a deduction pursuant to s 8-1 of the ITAA for outgoings in the nature of acquisition costs in the financial year of the acquisition and not in either FY 2013 or FY 2014.
Unlike the purpose referred to in the “trading stock” definition, for a profit making scheme to arise, it is necessary that the tax payer to have an intention to derive a profit from the relevant property at the time of its acquisition: Federal Commissioner of Taxation v Whitfords Beach Pty Ltd (1982) 150 CLR 355; Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199; Westfield Ltd v Commissioner of Taxation (1991) 28 FCR 333; Antlers Pty Ltd v Federal Commissioner of Taxation (1997) 35 ATR 64; Evans.
If it were necessary to determine the question I would conclude on the whole of the evidence that Mr Makrylos entered into the contract for the sale of the Property with the purpose of developing it in a multi-dwelling subdivision and selling the units within the development with a view to gaining a profit in a commercial venture.
It may be unnecessary to go so far, given that the onus remains at all times on Mr Makrylos to show what the assessment ought to have been. The onus necessarily requires him to prove facts that would necessarily result in a different and lower tax assessment. Many of the observations I have made about the deficiencies in Mr Makrylos’ “trading stock case” apply equally to the present question, albeit that the focus of the inquiry is on Mr Makrylos’ state of mind at the time that he entered into the contract to purchase the Property.
I place significant weight on the statements made to Ms Pascoe (which preceded the contract and disclosed the motivation for the purpose) and the Makrylos Sketch. The Makrylos Sketch came into existence in close proximity to the signing of the contract and is highly informative of Mr Makrylos’ state of mind attending the acquisition. It is possible that Mr Makrylos at some time considered the construction of a large family home on the Property, however, Mr Makrylos has not established that that consideration persisted at the time that the contract for the purchase of the Property was signed. His evidence is too unreliable to enable a conclusion to be drawn about when the Large Home Plan was drawn. Mr Jensen’s recollection of when he saw the Large Home Plan is uncertain, although he did say he thought his discussion with Mr Makrylos occurred in June 2007. That does not assist Mr Makrylos’ case on the present issue. Given the concerns I have about the reliability of Ms Panagopoulos’ evidence I do not consider that her affidavit or oral testimony should be given weight.
Accordingly, if I am wrong in my conclusion that Mr Makrylos has failed to establish that he first held the Property as trading stock on the two alternative dates alleged by him, I would nonetheless conclude that he has failed to establish that the Amended Assessments were excessive, and that he has also failed to establish what the Amended Assessments should have been.
CONCLUSION
Before concluding I record here that Counsel for Mr Makrylos made submissions about factual findings that should not be made because of asserted failures on the part of Counsel for the Commissioner to comply with the rule in Browne v Dunn (1893) 6 R 67.
To the extent that the submissions involved a criticism of the cross-examination of Mr Makrylos and Ms Panagopoulos I reject it. The Objection Decision involved an outright rejection of the facts asserted by Mr Makrylos which necessarily involved a rejection of the assertions that he had made about this purpose for holding the Property. The whole of Mr Makrylos’ factual case was put into dispute in the initiating documents in this proceeding and Mr Makrylos was well aware of the documents the Commissioner intended to tender at the hearing. Counsel for the Commissioner was under no obligation to conclude each topic of cross-examination with a challenge to the veracity or reliability of what emerged.
For the most part, my reasons are based on my assessment of the relative reliability of the evidence of the various witnesses and documentary records. In the instances where I have found that Mr Makrylos has lied am satisfied that he was on notice that the veracity of his account would be called into question.
I have concluded that the evidence of Ms Panagopoulos was unsatisfactory in several respects and so was insufficient to corroborate Mr Makrylos’ account in important respects. I have preferred the evidence of other witnesses to that of Ms Panagopoulos where they bore on the same topic and I have otherwise found that her testimony does not overcome the overwhelming inferences to be drawn from the contemporaneous documentary record. Counsel for the Commissioner was under no obligation to point out to Ms Panagopoulos that her evidence was unreliable, nor to point out how it might be assessed against other evidence before the Court.
There will be an order dismissing the appeal.
The parties should be heard as to costs.
I certify that the preceding three hundred and twenty-nine (329) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Charlesworth. Associate:
Dated: 17 August 2023
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