Robert Kirkby and Commissioner of Taxation
[2014] AATA 759
•21 October 2014
[2014] AATA 759
Division TAXATION APPEALS DIVISION File Numbers
2013/6505
2013/6506
2014/28052014/2806
Re
Robert Kirkby
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Deputy President P E Hack SC
Date 21 October 2014 Place Brisbane A. In applications 2014/2805 and 2014/2806 the decisions under review are affirmed.
B. Applications 2013/6505 and 2013/6506 are dismissed pursuant to s 42B(1) of the Administrative Appeals Tribunal Act 1975 (Cth)
...........................[Sgd].......................................
Deputy President P E Hack SC
CATCHWORDS
INCOME TAX – assessment – acquisition and sale of mining tenements – applicant did not declare profits as income – applicant directed how profits were to be dealt with – objection decision affirmed
LEGISLATION
Administrative Appeals Tribunal Act 1975 (Cth) s 42B(1)
Income Tax Assessment Act 1997 (Cth) ss 6-5, 995-1
CASES
Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600
REASONS FOR DECISION
Deputy President P E Hack SC
21 October 2014
Introduction
The applicant, Mr Robert Kirkby, acquired part interests in a number of mining tenements between 2004 and 2006. In the 2007 and 2008 income years the tenements were sold. Following an audit, the respondent, the Commissioner of Taxation, took the view that Mr Kirkby's share of the proceeds of those sales was his assessable income.
He made amended assessments of that assessable income, and the income tax payable thereon, in each of those income years. He imposed substantial penalties on the basis that Mr Kirkby had a tax shortfall that came about because he had been reckless.
Mr Kirkby objected to the amended assessments. He said, and continues to say, that he did not receive any of the proceeds, they all went to a company associated with him (which is now in liquidation) or to one of his co-owners, Mr Terence Byrt. The Commissioner was unmoved. He disallowed the objection. Mr Kirkby's share of the proceeds of sale amounted to income according to ordinary concepts and Mr Kirkby had derived it because he had directed the payment to be made in a particular manner. It did not matter, according to the Commissioner, that the proceeds may not have been paid to Mr Kirkby; it was enough that they were paid as he directed.
Mr Kirkby seeks a review of the Commissioner's objection decisions.
For the reasons that follow I have come to the conclusion that the Commissioner's decisions were correct and ought be affirmed.
Background
The factual background is not in dispute. What follows emerges clearly enough from the documents that are before me.
On 9 August 2004 Mr Kirkby, Mr Byrt[1] and Ms Judy-Anne Galway applied for a mineral exploration permit as tenants in common in approximately one third shares.[2]
The application, given the reference number EPM 14753, was granted on 21 April 2008.[3]
[1]Whose name was spelt "Burt" in this and other permits issued.
[2]Except in the case of application EPM 15117, Mr Kirkby and Ms Galway each held 33.333% shares and Mr Byrt 33.334% share. In the case of the application for EPM15117 each of Mr Kirkby and Ms Galway held 33.2% shares and Mr Byrt a 33.6% share.
[3]Exhibit 1, pages 217 – 219.
Between June 2005 and September 2005 Mr Kirkby, Mr Byrt and Ms Galway applied for four further exploration permits – EPM 15117, granted on 15 May 2006;[4] EPM 15127, granted on 15 May 2006;[5] EPM 15136, granted on 22 July 2009[6] and EPC 1000 (a coal exploration permit) granted on 31 May 2006.[7]
[4]Exhibit 1, pages 204 – 206.
[5]Exhibit 1, pages 214 – 216.
[6]Exhibit 1, pages 211 – 213.
[7]Exhibit 1, pages 207 – 210.
Finally, on 23 May 2006, Mr Kirkby, Mr Byrt and Ms Galway applied for EPM 15628 which was granted on 19 June 2007.[8]
[8]Exhibit 1, pages 220 – 222.
It is necessary, at this juncture, to notice a company associated at least with Mr Kirkby and Mr Byrt: Ansett Resources & Industries Pty Ltd. According to the Commissioner, Mr Kirkby was a director and secretary of this company and held 25% of its ordinary shares. Mr Kirkby appears not to dispute that association. Unfortunately there is no company search of this entity.
There is in the material a document[9] bearing the date 30 October 2006, described as "transfer sale agreement" and executed by each of Mr Kirkby, Mr Byrt and Ms Galway (described in the document as "the Owners"). In its operative parts the document reads:
The Owners of all the EPM’s and EPC’s held in joint partnership hereby agreed to transfer the ownership to Ansett Resources & Industries Pty Ltd, for an amount yet to be agreed upon on the basis of a deferred payment being made in full at some time in the future when the tenements are developed.
The Commissioner contends that this document did not, and could not, constitute an agreement to transfer the interests of the three individuals in those tenements to
Ansett Resources & Industries. I deal with that argument below.
[9]Exhibit 1, page 36.
There is also in the material a document[10] bearing the date 27 March 2007 and described as an "agreement for sale of mining tenements" between Mr Kirkby, Mr Byrt and
[10]Exhibit 1, pages 37 – 53.
Ms Galway as vendors and Ansett Energy Ltd as purchaser. So far as is presently material clause 3 of that agreement provided:
3.1Subject to clause 2 the Vendors shall sell and the Purchaser shall purchase all the Vendor’s right, title and interest in and to the Mining Tenements, free of encumbrances, for the consideration of:
(a)the payment to the Vendors of the Cash Consideration; and
(b)the issue of the Shares as set out in Schedule 2 of this Agreement.
3.2The Vendors direct that the Cash Consideration shall be paid to
Ansett Resources & Industries Pty Ltd ACN 116 913 663.
3.3The Vendors direct that the Shares be issued to the parties and in the manner as set out in Schedule 2 of this Agreement.
The "Mining Tenements" which are the subject matter of the agreement were defined by clause 1.1 of the agreement and Schedule 1 to it in a way that encompasses EPM 15117, EPM 15127, EPM 15136 and EPC 1000. The term "Cash Consideration" was defined by clause 1.1 to mean $281,029. "Shares" were described in clause 1.1 as 24,964,754 ordinary fully paid shares in the capital of Ansett Energy at a deemed issue price of
$0.25 per share. By virtue of clause 3.3 of the agreement and Schedule 2, those shares were to be issued as to 23,964,754 shares to Ansett Resources & Industries and as to the remaining 1,000,000 shares to two persons who Mr Kirkby told me were Mr Byrt's daughters.
On 13 April 2007 Ansett Energy changed its name to RMA Energy Ltd.[11] On
28 May 2007, 34,533,333 ordinary $1 shares in RMA Energy Ltd were issued to Ansett Resources & Industries "in consideration for the transfer of Mineral Tenements pursuant to the Tenement Sale Agreements".[12] It is not clear why the additional shares were issued. A letter from RMA Energy to the Australian Securities Exchange[13] suggests that there was, in addition to the agreement for the acquisition of the tenements held by
Mr Kirkby, Mr Byrt and Ms Galway, an agreement for the sale by Ansett Resources & Industries of other tenements that was also completed on 29 May 2007. In any event, RMA Energy became the registered holder of EPM 15117 and EPM 15127 on
28 February 2008, of EPC 1000 on 12 November 2007 and EPM 15136 on 9 July 2010.
[11]Exhibit 2.
[12]Exhibit 8.
[13]Exhibit 9.
RMA Energy was listed on the Australian Securities Exchange on 30 May 2007.[14]
[14]Exhibit 6.
Next, on 21 September 2007 Mr Byrt and Mr Kirkby, as vendors, executed an agreement[15] for the sale of their interests in EPM 15628 to Bellevue Resources Ltd for a "Purchase Price" of $5,000,000. Clause 2 of that agreement dealt with the payment of that Purchase Price in these terms:
[15]Exhibit 1, pages 71 – 87.
2.2Payment of Purchase Price
(a)The Purchase Price is payable to the Vendors in equal shares as follows:
(i) the Deposit which is:
(A)payable as follows:
(aa)$50,000, which at the date of this Agreement, has been paid on behalf of Bellevue and receipt of which is acknowledged by the Vendors;
(bb) the remainder payable to Byrt, by bank cheque or deposit of cleared funds to the bank nominated by Byrt within
seven (7) days of the Execution Date;
(B)non-refundable, except in the circumstances set out in clause 4.2;
(ii) subject to clause 3(b), the sum of $1,000,000 payable by bank cheque or deposit of cleared funds on the Second Payment Date; and
(iii) the sum of $3,500,000, payable in accordance with clause 2.2(b).
…
(c)Kirkby and Galway appoint Byrt their agent for the receipt of their respective shares of the Purchase Price and direct Bellevue to pay their respective shares of the Purchase Price to Byrt
It seems that agreement was, in some way not explained in the material, superseded by a further agreement of 23 October 2007. Whilst that latter agreement is not reproduced in the material, the Commissioner produced an extract from a prospectus issued by
Bellevue Resources which referred to an agreement dated 23 October 2007 whereby it had agreed to purchase EPM 15628 "from the current registered holders” on these terms:[16]
[16]Exhibit 10.
(a)(Consideration): in consideration for the acquisition for of the Tenement, the Company shall pay to the Vendors a total purchase price of $5,000,000 (Purchase Price), which is payable as follows:
(i)a cash deposit of $500,000 (which the Company has already paid to the Vendors);
(ii)an amount of $650,000, which is to be satisfied (at the Company's election) by either:
(A) payment of cash; or
(B) the issue by the Company of that number of Shares equal to $650,000 divided by the volume weighted average price of Shares in the five trading days prior to the date of issue of those Shares,
within three months of the date upon which the Company's Securities are granted Official Quotation; and
(iii)an amount of $3,850,000, to be paid by the Company out of production profits generated on the Tenement;
The notes to the 2007 annual report of Bellevue Resources contains this reference:[17]
Dependent on the progress of the project, the purchase price of the Running River Tin Project may be up to $5,000,000. An amount of $1,150,000 has been paid in cash and shares as at 30 June 2008.
The Commissioner points to that note as evidencing the fact of payment of an amount of $1,150,000.
[17]Exhibit 7.
It is material to note that in October 2007 the "current registered holders" of EPM 15628 were Mr Kirkby, Mr Byrt and Ms Galway. Ansett Resources & Industries was never the registered holder of that, or of any other, tenement. Bellevue Resources became the registered holder of EPM 15628 on 29 January 2008.
Finally, in or about November 2007 an agreement[18] was made between Ansett Resources & Industries (as seller) and Legend International Holdings Inc whereby Ansett Resources & Industries agreed that it would hold in trust for Legend International Holdings its application for EPM 14753 and transfer the EPM to it for a "purchase price" of $300,000 payable on completion of the agreement. The Commissioner alleges that this amount was paid to Mr Byrt, on behalf of Ansett Resources & Industries on 8 November 2007. Mr Kirkby does not contend any differently.
[18]Exhibit 1, pages 90 – 99.
Mr Kirkby lodged his 2007 income tax return on 19 September 2007. He did not disclose the receipt of income in that return from any of these transactions. The Commissioner assessed the return as lodged and issued a notice of assessment dated
25 September 2007. Mr Kirkby lodged his 2008 return on 21 November 2008. It too was assessed as lodged and a notice of assessment issued on 27 November 2008. In early 2009 the Commissioner commenced an audit of Mr Kirkby’s affairs, particularly his dealings with the mining tenements.
On 28 August 2009 and, according to Mr Kirkby, at the suggestion of one of the Commissioner's officers, Mr Kirkby, Mr Byrt and Ms Galway (described as "the Registered Proprietors") and Ansett Resources & Industries (described as "the Company") executed a document[19] described as "agreement and acknowledgement" which recited the fact of an earlier agreement on about 30 October 2006 for the sale to the Company by the Registered Proprietors of their right, title and interest in the mining tenements. Additionally, the document purported to amount to an acknowledgement that Ansett Resources & Industries had been, from 30 October 2006, "the true and lawful owner of all of the Mining Tenements and interests more particularly described in Schedule A hereunder" There is no Schedule A to the document in the material before me.
[19]Exhibit 1, pages 138 – 141.
On 28 September 2009 the Commissioner made an amended assessment of Mr Kirkby’s taxable income for the 2007 income year.[20] The taxable income was increased by $2,172,060. That sum was calculated on the basis that Mr Kirkby was entitled to a share of the proceeds of the sales to Ansett Energy (now RMA Energy). His share of the proceeds was determined to be $93,950 (33.2% of the cash consideration of $281,029) and 8,313,881 shares which, at 25 cents per share, had a value of $2,078,470. On the same day an assessment of shortfall penalty, calculated on the basis of recklessness, was made.
[20]Exhibit 1, page 142.
Then, on 9 December 2009, having completed his audit into the 2008 income year transactions, the Commissioner made an amended assessment of Mr Kirkby’s taxable income for that year, increasing it by $463,333.[21] On the Commissioner’s argument then, and now, that sum was Mr Kirkby’s share of the proceeds of sale from the
Bellevue Resources purchase i.e. one third of $1,150,000, together with his share of the proceeds of sale from the Legend International Holdings Inc purchase i.e. one third of $300,000. The total of those amounts was $483,333.[22] Again the Commissioner assessed shortfall penalty on the basis of recklessness. That penalty was then increased by 20% because a shortfall penalty had been imposed on Mr Kirkby in a prior accounting period.
[21]Exhibit 1, page 152.
[22]Seemingly as a result of an arithmetic error the notice of amended assessment of 9 December 2009 increased the taxable income by $463,333 rather than $483,333. The error was detected during the objection process and I was informed that a further amended assessment was made at that time although the notice evidencing that further amended assessment is not in the s 37 documents.
The Commissioner’s letter[23] accompanying the notice of amended assessment for the 2008 income year explained that the Commissioner had made the assessments as "alternate assessments" because the facts were not then clear to the Commissioner. I infer that the "primary assessments" attributed the income to Ansett Resources & Industries Pty Ltd having taken the view, at that time, that the "transfer sale agreement" of
30 October 2006 was effective. The letter advised Mr Kirkby that no payment of tax needed then to be made and that the Commissioner intended to collect tax under the primary assessments.
[23]Exhibit 1, page 144.
The Commissioner’s position altered at some time in 2013. On 3 June 2013 Mr Kirkby objected to the amended assessments for the 2007 and 2008 income years. He did not object to the assessments of shortfall penalty. Because of the time that had, by then, elapsed, he ought to have sought an extension of time within which to lodge an objection. He did not do so. His objection was considered and wholly disallowed on
17 October 2013.
In December 2013 Mr Kirkby lodged his application in the Tribunal seeking to review the objection decisions. Those applications form the subject matters of applications 2013/6505 and 2013/6506. Thereafter, the Commissioner realised that no attention had been given to the question of Mr Kirkby needing an extension of time within which to lodge an objection. In order to ensure that the matter was dealt with regularly,
Mr Kirkby’s objection was re-visited by the Commissioner who determined on
17 April 2014 to extend the time within which Mr Kirkby might lodge an objection but disallowed the objection. Mr Kirkby then lodged a fresh application to review the objection decisions made on 17 April 2014. Those applications are the subject matter of applications 2014/2805 and 2014/2806.
Consideration
Whilst the onus is on Mr Kirkby to show that the amended assessments are excessive, and there is no onus on the Commissioner, it is convenient to consider the issues that arise by reference to the logic used by the Commissioner in making those amended assessments. Mr Kirkby did not, in terms, raise any issue other than his assertion that he did not personally receive any of the proceeds of sale. Nonetheless it is as well to ensure that the Commissioner's logic is sound.
The Commissioner's amended assessments are based on six propositions as follows:
(a)Mr Kirkby, Mr Byrt and Ms Galway carried on the business of acquiring and disposing of mining tenements with a view to profit in partnership with one another;
(b)
the "transfer sale agreement" of 30 October 2006 was ineffective with the consequence that there was no disposal of the mining tenements to
Ansett Resources & Industries;
(c)in the two years in issue the partners entered into contracts with third parties to sell the tenements;
(d)each contract allowed Mr Kirkby to direct how his share of the proceeds ought be dealt with;
(e)
in the contract between Ansett Resources & Industries and Legend International, Ansett Resources & Industries acted as agent for Mr Kirkby, Mr Byrt and
Ms Galway, and Mr Kirkby received his share of the proceeds upon receipt by his agent;
(f)the "agreement and acknowledgement" of 28 August 2009 was incapable of altering transactions that had taken place.
I have no difficulty in concluding that Mr Kirkby, Mr Byrt and Ms Galway were carrying on a business together. This was not an isolated venture which might, in some circumstances, be regarded as an affair of capital. They acquired, over a period of about 13 months, six valuable mining tenements which were then disposed of at a considerable profit. Little more is known about the day-to-day affairs of the venture however
Mr Kirkby has not put in issue the fact of carrying on a business nor put on evidence that detracts from the clear impression, from what is known, that they were carrying on a business.
So far as the issue of a partnership is concerned, s 995-1 of the Income Tax Assessment Act 1997 (Cth) (the ITAA 1997) defines partnership in a way that includes "an association of persons…carrying on business as partners or in receipt of ordinary income or statutory income jointly". Moreover, the document of 30 October 2006, although as I conclude ineffective, described as the tenements as being held "in joint partnership". There could be no doubt this was a partnership.
I am then satisfied that the Commissioner's first proposition is made good – Mr Kirkby was carrying on a business acquiring and reselling mining tenements in partnership with Mr Byrt and Ms Galway.
The "transfer sale agreement" was obviously drawn up without the benefit of legal advice. It suffers from a patent defect that deprives it of any force and effect. It is devoid of consideration, an essential element of any concluded agreement not under seal. The Commissioner's submissions referred to this passage from the judgement in
Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd:[24]
It is established by authority, both ancient and modern, that the courts will not lend their aid to the enforcement of an incomplete agreement, being no more than an agreement of the parties to agree that sometime in the future.
The passage is apt given that here the parties "agreement" acknowledges that "the amount [is] yet to be agreed". Consideration is a necessary element of a concluded and enforceable agreement. This is no more than an agreement that contemplates that an agreement about consideration may be made at some time in the future. There is no agreement about consideration nor a mechanism by which it could be objectively determined.
[24](1982) 149 CLR 600, 604.
Additionally, it may be wondered what status the parties gave to the document given that agreements for the sale to Ansett Energy and Bellevue Resources had the individuals, and not Ansett Resources & Industries, as the contracting parties.
I am satisfied that Mr Kirkby retained his interest in the various tenements.
There is no doubt that the parties, including Mr Kirkby, did enter into contracts to dispose of the tenements to Ansett Energy and to Bellevue Resources. The evidence regarding the latter contract is not as good as it might be however the reference in the prospectus to an agreement of 23 October 2007 contemplating initial payments of $1,150,000, the reference in the company's accounts to a payment of $1,150,000 having been made and the fact of transfer of the tenements to Bellevue Resources against the background of the agreement of 21 September 2007, enable an inference to be drawn that Mr Kirkby was a party to a later contract under which $1,150,000 was paid. Mr Kirkby, who bears the onus, has not sought to rebut the inference. In the circumstances, I draw it.
The answer to Mr Kirkby's argument that he received none of the proceeds lies in
s 6-5 of the ITAA 1997. Section 6-5(1) provides that "assessable income" includes "income according to ordinary concepts, which is called ordinary income". And, by virtue of s 6-5(2),
If you are an Australian resident your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
Section 6-5(4) of ITAA 1997 is important in this case. It provides:
In working out whether you have derived an amount of ordinary income and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.
Here, the Commissioner says, Mr Kirkby's share of the proceeds of the various sales were dealt with as he directed (in the case of the sales to Ansett Energy and
Bellevue Resources) or on his behalf (in the case of the sale to Legend International).
Those submissions must be accepted. Each of the Ansett Energy and Bellevue Resources contracts, documents executed by Mr Kirkby, contained explicit terms directing how the proceeds were to be dealt with, clauses 3.2 and 3.3 in the former case and clause 2.2 in the latter. There is no reason to suppose that the proceeds of the two sales were dealt with other than in accordance with those directions. Mr Kirkby does not suggest any and none are apparent on the material.
In the case of the third sale, that of EPM 14753 to Legend International, the other party to the sale was Ansett Resources & Industries. It contracted to hold the application for the mineral exploration permit on trust for Legend International and to transfer the permit to that company upon its grant. Given that Ansett Resources & Industries was not then, nor at any time, the applicant for the permit and that Mr Kirkby, Mr Byrt and Ms Galway were then, and at all times up to the transfer to Legend International, the applicants for, or the holders of, EPM 14753, there is an available inference that the individuals appointed Ansett Resources & Industries to be their agent for the purposes of dealing with Legend International.
Mr Kirkby has not attempted to demonstrate why that inference ought not be drawn or that some other inference arises and should be drawn on the material available. He has not, in that respect, discharged his onus of showing why the amended assessment was excessive.
On the material before me the amended assessments are not shown to be excessive, indeed it seems to me to be plain enough that they were correct given the information made available to the Commissioner. As I have sought to explain, it is of no consequence that Mr Kirkby may not have actually received his share of the proceeds; it is enough that those proceeds were dealt with as he directed or on his behalf and were thus, by operation of s 6-5(4) of the ITAA 1997, derived by him.
It remains to deal with the agreement of 28 August 2009. It is an attempt to rewrite history. It must fail. By that time all of the tenements had been sold and all of the proceeds in issue derived. A later agreement cannot alter what had, by then, taken place whether as a matter of fact or as a matter of tax consequence.
It follows that Mr Kirkby has not discharged his onus of showing that the amended assessments were excessive. The Commissioner's objection decisions of 17 April 2014 (applications 2014/2805 and 2806) will be affirmed. There is no utility in the other applications, 2013/6505 and 6506. Those applications will be dismissed.
I certify that the preceding 39 (thirty -nine) paragraphs are a true copy of the reasons for the decision herein of Deputy President P E Hack SC ...........................[Sgd]...........................................
Associate
Dated 21 October 2014
Date of hearing 7 October 2014 Applicant In person Advocate for the Respondent Mr S Reeve, ATO Legal Practice
0
1
1