McDonald, Ian R v Commissioner of Taxation

[1998] FCA 240

FEDERAL COURT OF AUSTRALIA

TAXATION AND REVENUE - Capital gains - Asset disposed of under a contract - Meaning of “the time of the making of the contract” - Whether contract must be “legally binding and enforceable”.

Income Tax Assessment Act 1936 (Cth) 160U(3)

Kiwi Brands Pty Ltd v Federal Commissioner of Taxation (1997) 148 ALR 605 (Referred)
Elmslie v Federal Commissioner of Taxation (1993) 118 ALR 357 (Referred)
Singh v Ali [1960] AC 167 (Referred)
BTR Plc v Westinghouse Brake and Signal Co (Australia) Ltd (1992) 26 ALD 1 (Applied)

IAN R MCDONALD (First Applicant) LESLEY J MCDONALD (Second Applicant) v COMMISSIONER OF TAXATION (Respondent)
ACT G35 of 1996

FINN J
CANBERRA
25 FEBRUARY 1998

IN THE FEDERAL COURT OF AUSTRALIA
AUSTRALIAN CAPITAL TERRITORY DISTRICT REGISTRY	ACT G35  of   1996

BETWEEN:

IAN R MCDONALD
FIRST APPLICANT

LESLEY J MCDONALD
SECOND APPLICANT

AND:

COMMISSIONER OF TAXATION
RESPONDENT

JUDGE:

FINN J

DATE OF ORDER:

25 FEBRUARY 1998

WHERE MADE:

CANBERRA

THE COURT ORDERS THAT:

1.        The application is allowed.

2.The matter be remitted to the Administrative Appeals Tribunal to be heard and decided again.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
AUSTRALIAN CAPITAL TERRITORY DISTRICT REGISTRY	ACT G35 of 1996

BETWEEN:

IAN R MCDONALD
FIRST APPLICANT

LESLEY J MCDONALD
SECOND APPLICANT

AND:

COMMISSIONER OF TAXATION
RESPONDENT

JUDGE:	FINN J
DATE:	25 FEBRUARY 1998
PLACE:	CANBERRA

REASONS FOR JUDGMENT

This appeal from the Administrative Appeals Tribunal (“the AAT”) raises two questions. The first, the question of law, is whether the AAT in this matter correctly interpreted s 160U(3) of the Income Tax Assessment Act 1936 (Cth), (“the Act”). The second is whether, if an error was made in construing the sub-section, it was an immaterial one and/or the findings made by the AAT make it futile to remit the matter for it to be heard and decided again.

The question of law is a narrow one. Section 160U of the Act prescribes the time at which, for the purposes of Part III A of the Act (“Capital Gains and Losses”), a disposal and acquisition of an asset occurs or is deemed to have occurred. For present purposes it is sufficient to say that the primary test of disposal or acquisition contained in s 160M(1) of the Act applies in its most simple form, ie has a change in ownership of an asset occurred. That change in the present case had its genesis in a contract. For this reason it is the “time” provisions of s 160U(3) that are of importance. That sub-section provides:

“Where the asset was acquired or disposed of under a contract, the time of acquisition or disposal shall be taken to have been the time of the making of the contract.”

The factual setting of the present matter can be noted briefly.

The applicants, Mr and Mrs McDonald acquired the ownership of a property in coastal New South Wales from a Mrs Ransom.  Both the applicant and the respondent Commissioner contend that that acquisition was referable to a contract of sale and purchase.  Where they diverge is that they respectively ascribe the acquisition to different contracts of different dates.  And dates in this matter are all important.

The applicants have asserted that they entered into an oral agreement to purchase the property for $200,000 some days before 13 September 1985 that came “into effect” on that date.  The respondent for its part claimed that in fact a process leading to a formal exchange of contracts on 31 October 1985 took place and it was not until then that there was a contract between the parties, notwithstanding that the contracts exchanged on that date were dated 13 September 1985.

I said the dates were important in this matter.  The announcement of a capital gains tax was made on the evening of the budget of 19 September 1985 and came into effect on the morning of 20 September 1985.

It was the applicants’ case that the property was acquired under a contract entered into before 20 September and was, in consequence, not subject to the capital gains tax regime.  I merely note that the property was subsequently sub-divided and sold in two lots for $195,000 and $405,000 respectively.

The Question of Construction

In placing a construction upon s 160U(3), the Tribunal had this to say:

“The relevant authorities support an interpretation of the phrase ‘the time of the making of the contract’ as meaning the time when a legally binding and enforceable contract comes into existence.  Mr Erskine on behalf of the respondent referred the tribunal to the Administrative Appeals Tribunal decision ATC 13/95 183 at p.187 where Deputy President McMahon said:

‘ ... ‘contract’ should be read to mean ‘an enforceable contract’, that is to say a contract enforceable in accordance with the proper law of the contract.  The section requires that the asset be acquired ‘under a contract’.  If the contract were unenforceable, it would not be the type of contract contemplated by the section ...’ ”

The applicants challenge the requirement that the contract must be “legally binding and enforceable”. The obvious reason for them so doing is that the contract that they propound (if in fact entered into) was not enforceable at the time of its making because, being purely oral, no action could be brought upon it because of the provisions of s 54A of the Conveyancing Act 1919 (NSW). They go on to say hypothetically that it would be surprising that, for the purposes of the sub-section, such an oral contract could be said to be ‘made’ at some later time when, fortuitously, a note or memorandum of it was created thus making the contract enforceable: see eg Popiw v Popiw [1959] VR 197.

As I understood the respondent’s case it was that in the context of the issue the AAT set itself - ie “whether or not the agreement to purchase [the property] came into existence prior to 20 September 1985”:  Reasons para 5 - the use of the language of legally binding and enforceable should not be taken prescriptively;  should not be focussed on too closely.  The Tribunal was simply considering the question was a contract made and if so when.

I accept in substance the applicants’ submission.  I will briefly explain my understanding of the subsection noting at the outset this much of the respondent’s contention.  The Tribunal’s error may well have been an inoperative one when regard is had to the actual factual issues addressed.  This is not to say that an error for that reason was not made.

The premise of the subsection is that the asset in question has actually been disposed of or acquired, ie that, for present purposes, a “change of ownership” has occurred: see s 160M(1). In this sense, the inquiry s 160U(3) mandates is a retrospective one: see Kiwi Brands Pty Ltd v Federal Commissioner of Taxation (1997) 148 ALR 605 at 619.

That inquiry then asks whether disposal or the acquisition was “under a contract”.  There may, in some instances, be a number of consequential contracts such that an issue can arise as to which contract in that sequence the disposition is properly referable:  cf Elmslie v Federal Commissioner of Taxation (1993) 118 ALR 357. But in every case before the subsection can come into play the disposition must be referable to a contract.  To put the matter another way a contract must provide the reason for, and explanation of, the disposition.

For my own part, against the premise of the subsection, I can see no reason for requiring that the contract have any attributes other than those prescribed by the common law for the formation of a contract.  Nor can I see any reason for ascribing a date to the making of such a contract other than the date that would be ascribed to it at common law.

The immediate consequence of this view is that the contract in question may be unenforceable - or even illegal:  see Singh v Ali [1960] AC 167 - at the time of its making. But if it is carried into effect with a consequential disposition of an asset, then s 160U(3) applies to the unenforceable contract so made. I merely note that if such a contract is not carried into effect then, the premise of s 160U(3) not having been satisfied, no question of its application can arise.

I emphasise this matter because it is the case that the contract propounded by the applicants (at least on this appeal), being oral, was not enforceable at the time of its making.

I would, then, conclude that the Tribunal was in error in the construction it placed on the subsection.  This, though, brings into focus the second question which I can paraphrase:  did it matter in the circumstances?

It is of course the case, as Lockhart and Hill JJ indicated in BTR Plc v Westinghouse Brake and Signal Co (Australia) Ltd (1992) 26 ALD 1 at 7 that:

“it will not be enough for an applicant to demonstrate that the tribunal mis-stated the law in the course of its reasons, if that mis-statement could not have affected its decision.  The task of the court on an appeal under s 44(1) is essentially to undertake judicial review of the tribunal’s decision.  An immaterial error of law will not vitiate the decision of the tribunal.”

A Material Error, Remittal and the Fact Finding

Having posited its interpretation of s 160U(3) the Tribunal, after referring to the decision of the High Court in Allen v Carbone (1975) 132 CLR 528 went on to express its conclusions in the following way (Reasons paras 26-27):

“26.     It is clear that consensus between the parties must be reached before a contract comes into existence.  In relation to property contracts, that usually does not come about until the formal exchange of contracts takes place, because complex terms and conditions are generally incorporated in those contracts, as was the case in the contract relating to the sale and purchase of [the property].

27.      The buyer and the seller in this case may have expressed their intention in the conversation referred to by the taxpayer to bring about the agreement of sale on or about 13 September 1985.  However delays occurred which prevented that intention from being realised, and the contract was not exchanged until 31 October 1985.  I find no evidence that there was consensus reached between the buyers and seller prior to 20 September 1985 that the agreement to purchase the property was to have been effective as of 13 September 1985.  I find that the contract did not come into existence until 31 October 1985, the exchange of contracts taking place once agreement on its essential terms and conditions had been reached.”

The applicants’ case is that the question to be answered, having been misconceived, that misconception contrived how the Tribunal approached the evidence before it, ie it was asking itself whether a legally binding and enforceable contract was there.  This, it is claimed, deflected it from properly addressing the question whether the alleged pre-13 September oral contract was made.  The respondent’s case, in contrast, is that the Tribunal never got to the point of considering whether a contract, albeit unenforceable, was made prior to 31 October because it found that it was only on that date that a contractual consensus was first reached by the parties.

Before I express a view on this matter, I should emphasise that the substantial issue I am being asked to consider is whether, notwithstanding the error made in construing the Act, that error could not have affected the Tribunal’s decision in a material way and its findings being so unaffected by that error, it would be futile to remit the matter to it.

I imply no criticism of the Tribunal when I say that it is difficult to discern from its reasons what precisely was the contract being advanced by the applicants.  It may well be that this was because the submissions made on their behalf gave the alleged contract a somewhat chameleon-like quality.  It was variously referred to as:

(i)an oral agreement that came into effect on being reduced to writing by the vendor (as occurred) on 13 September 1985:  Reasons para 21;  paras 11-12;  and

(ii)the contract on the terms exchanged on 31 October but having effect from 13 September 1985;  Reasons para 24 - this, I presume, being a Masters v Cameron (1954) 91 CLR 353 at 360 actual contract of some form.

On this appeal the contract, as I understand it, was said to be the oral pre 13 September contract alone.

It clearly was the case that some part of the detail of the final contracts exchanged was the result of negotiation between the parties subsequent to the vendor’s solicitors forwarding a contract of sale to the applicants on 13 September 1985.  I would note in passing that the covering letter for that contract stated in part:

“Kindly note that no legal liability shall attach to either party until such time as an exchange has been effected.”

And it seems clear insofar as the files and actions of the parties’ respective solicitors were concerned, that the solicitors for their part treated the matter as a routine real property transaction with the contract being formed on exchange.

The matter the subject of negotiation related to the need (a) to make inquiries concerning the existence of an access road to the property;  (b) to ascertain boundaries;  (c) to reach agreement on furniture and fittings;  and (d) to negotiate the amount of the deposit to be given on exchange.  This notwithstanding, the applicants’ case was, apparently, that they would have gone ahead whatever was the outcome of these matters.

The Tribunal did not find Mr McDonald’s evidence altogether satisfactory:  see Reasons para 13;  and it was in part contradicted by, or else not corroborated (where such could reasonably be expected) by, documentary evidence.

It may well be the case that there was a basis in the evidence before the Tribunal that could have led it to the conclusion that no contract, enforceable or otherwise, was entered into until 31 October.

I cannot, however, conclude that the error made may not in fact have affected the Tribunal’s decision.  Little direct attention was given in its Reasons to the alleged terms and intended effect of the contract relied upon by the applicants, as also to the question whether that which was alleged could at law have constituted a contract at all.  It may well have been that, given the setting, the subject matter and the test adopted, the contract that the Tribunal was looking for was a conveyancer’s contract in any event.

It could be that, notwithstanding its error, the Tribunal on reconsidering the matter will nonetheless still determine that there was no contract before 31 October.  My concern, though, is with the different question whether its error could have affected the decision appealed from.  Because I am not satisfied that, when it was searching for a contractual consensus, it may not have had a characteristic contract of sale of real property in mind, or else a contract that would be legally binding and enforceable, I am not satisfied that the decision could not have been affected.  At best I can say I do not know whether it was or was not.

I cannot discountenance the possibility that the facts were marshalled and evaluated through the prism of the test of “contract” adopted.  In these circumstances, the appropriate course is to remit the matter to be heard and decided again.

I should add that, depending upon the precise nature of the contractual arrangements advanced by the applicants, those arrangements themselves, if accepted by the Tribunal, could give rise to an issue of the type considered in Elmslie’s case, above.  I merely note this possibility without further comment.

I certify that this and the preceding seven (7) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Finn.

Associate:

Dated:  25 February 1998

Counsel for the Applicant:	Mr Moore
Solicitor for the Applicant:	Rudi Vandenberg
Counsel for the Respondent:	Mr Erskine
Solicitor for the Respondent:	Australian Government Solicitor
Date of Hearing:	24 February 1998
Date of Judgment:	25 February 1998