The Taxpayer and Commissioner of Taxation

[2004] AATA 1395

Administrative

Appeals

Tribunal

 

DECISION AND REASONS FOR DECISION [2004] AATA 1395

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No QT2003/348

TAXATION APPEALS DIVISION		)
Re		THE TAXPAYER

Applicant

And COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Mr R G Kenny, Member

Date24 December 2004

PlaceBrisbane

Decision The Tribunal varies the decision under review by determining that interest in the amount of $777,079 comprises ordinary income of the taxpayer for the financial year ending 30 June 1999.

...................[Sgd].........................

R G Kenny
  Member

CATCHWORDS

Income tax - ordinary income – compulsory acquisition of land – compensation and interest ordered by Land Appeals Court – purchase of retention and additional farms – interest amount able to be ascertained – interest constitutes ordinary income

Income Tax Assessment Act 1997 (Cth)
Acquisition of Land Act 1967 (Qld)
Water Resources Act 1989 (Qld)
Water Act 2000 (Qld)
Harbours Act 1913 (SA)

Allsop v Commissioner of Taxation of the Commonwealth of Australia (1964) 113 CLR 341 Commissioner of Taxation v Northumberland Development Co Pty Ltd (1995) 59 FCR 103 Commissioner of Taxation v CSR Limited (2000) 104 FCR 44

Commissioner of Taxation v Spedley Securities Limited (1988) 88 ATC 4126 Federal Wharf Company Limited v Deputy Federal Commission of Taxation (1930) 44 CLR 24
Haig v Federal Commission of Taxation (1994) 29 ATR 619
McLaurin v Federal Commission of Taxation (1961) 104 CLR 381

Whittaker v Commissioner of Taxation  (1998) 82 FCR 261

REASONS FOR DECISION

24 December 2004 Mr R G Kenny, Member     

Background to Application

1.          To enable the Burdekin River Irrigation Project to proceed, the Queensland Water Resources Commission (the Commission), now known as the Department of Natural Resources and Mines (the DNR), resumed land in accordance with the terms of the Water Resources Act 1989 (Qld) which was subsequently replaced by the Water Act 2000 (Qld). The resumed land included four lots of which the taxpayer was the registered proprietor. A dispute arose between the taxpayer and the Commission in respect of the amount of compensation that he should receive for the resumed land under Part 4 of the Acquisition of Land Act 1967 (Qld).

2.          On 21 August 1997, the Land Appeal Court ordered that the Commission was to pay to the taxpayer a total sum of $4,300,400 as well as interest at the rate of 9.75% per annum on specified sums and over particular periods which were set out in the Order. By the end of 1998, the taxpayer had received a total of $4,662,979 in payments from the DNR as well as four Lots of land which he had valued at $654,500. His income tax return for the year ended 30 June 1999 included $1,025,479 in his assessable income as being the portion of the compensation sum which was calculated to be statutory interest. However, he included a notation that he did not accept that any portion of the compensation proceeds constituted income and he reserved the right to object against an assessment. On 17 September 1999, he sought a private ruling from the Commissioner of Taxation (the respondent) on the matter and, on 3 February 2000, the respondent ruled that the component of compensation which comprised statutory interest was assessable income. 

3.          On 9 May 2000, the respondent issued a notice of assessment in relation to the year ending 30 June 1999 and assessed the taxpayer to tax of $796,163.  This was based on a taxable income which included the amount of $1,025,479 nominated by the taxpayer as interest.  On 23 June 2003, the taxpayer’s objection to that assessment was disallowed by the respondent and, on 22 August 2003, he sought review of that decision by the Administrative Appeals Tribunal (the Tribunal).

Hearing

4.          The taxpayer’s son attended the hearing and gave evidence. He holds his father’s power of attorney and acted on his behalf in the resumption negotiations with the DNR. The taxpayer was represented at the hearing by Mr P Bickford of Counsel and the respondent was represented by Ms K Mellifont of Counsel.  The following material was tendered and taken into evidence:

Exhibit 1the “T” Documents prepared in accordance with section 37 of the Administrative Appeals Tribunal Act 1975 (T1 – T16);

Exhibit 2the Supplementary “T” Documents (S1 – S29);

Exhibit 3a statement, dated 8 June 2004, by the taxpayer;

Exhibit 4a statement by the taxpayer’s son (with annexure A);

Exhibit 5a further statement, dated 10 June 2004, by the taxpayer’s son  (with annexures A – F);

Exhibit 6 a statement, dated 5 November 2004, by Peter Noonan;

Exhibit 7the taxpayer’s Statement of Facts and Contentions; and

Exhibit 8the respondent’s Statement of Facts and Contentions.

Issues and Legislation

5.          The first issue for determination is whether the statutory interest on compensation for the compulsory acquisition of the taxpayer’s land, as awarded by the Land Appeal Court, is ordinary income for the purposes of the Income Tax Assessment Act 1997 (Cth) (the ITAA 97).  In the event that this does constitute ordinary income, the second issue for determination is the amount of that interest.

Background to Payments

6. The amount ordered by the Land Appeal Court to be paid by the DNR to the taxpayer was $4,300,400 less $2,000 legal fees. Interest was not payable on amounts advanced to the taxpayer (see sub-section 28(2) of the Acquisition of Land Act). However, interest was ordered to be paid on the $2,000 legal fees and the Order included the following reference to interest on the compensation payments:

“The constructing authority shall pay to the claimant interest at the rate of 9.75 per cent per annum as follows:

·     on the amount of $4,298,400 from 5 May 1990 to 29 June 1992 when the       first advance of $1,305,979 was paid;

·     on the amount of $2,992,421 from 30 June 1992 until 6 January 1993 when the second advance of $107,000 was paid; and

·     on the amount of $2,885,421 from 7 January 1993 until the day          immediately preceding the date of payment of that sum.”

7. Most of the resumption of the taxpayer’s land was done on 5 May 1990 and further resumptions of smaller portions occurred on 22 September 1990 and 27 April 1991. However, compensation was determined by the Land Appeals Court on the basis that all of the land was resumed on 5 May 1990. Thereafter, he was paid a total of $4,662,979 comprising advance payments made in accordance with section 23 of the Acquisition of Land Act in the amounts of $1,305,979 on 29 June 1992 and $107,000 on 6 January 1993; a further payment of $2,050,000 on 13 October 1997; and a final payment of $1,200,000 on 11 November 1998.

8. Sub-section 12(6) of the Water Resources Act enabled a landowner to make application for retention of a portion of resumed land and to be allocated additional areas of land. These are referred, respectively, to retention farms and additional farms.  The taxpayer was granted one retention farm (being Lot 66) on 19 January 1993 and two additional farms (being Lots 67 and 72) on 27 August 1996. In effect, these were to be purchased by the taxpayer and the means of settling the financial aspects of these arrangements was for an appropriate deduction to be made from the compensation sum. Subsequently, he was also permitted to retain Lot 4 and this decision was made at the time of the final payment of $1,200,000 and formed part of the settlement arrangements in respect of that payment.

9.          Prior to the making of the payment of $2,050,000, noted above, the DNR wrote to the taxpayer on 16 September 1997 advising him that it envisaged that a cheque in that sum would be forwarded to him on or before 13 October 1997. This sum was in settlement of the compensation order of the Land Appeal Court amount less the value of Lots 66, 67 and 72 and it also took into account a water allocation which had been attached to another lot, Lot 8, in the amount of $240,000.  In that letter, the lots were valued at $557,730 (Lot 66), at $536,570 (Lot 67) and at $537,420 (Lot 72). This totalled $1,631,720. With the water allocation, the sum was $1,871,720. The sum offered included interest on outstanding amounts after first deducting the DNR’s value of the three lots and the water allocation ($1,871,720) and then on the amounts as they progressively reduced following the payments of advances on 29 June 1992 and 6 January 1993. The calculation was as follows:

“Land Appeal Court Decision ($4,300,400 less $2,000 legal fees)

$4,298,400

Less retained farms and transferred entitlements

1,871,720
2,426,680

Add Interest

on $2,426,680 from 05.05.90 to 29.06.92 @ 9.75%

on $1,120,701 from 30.06.92 to 06.01.93 @ 9.75% 

on $1,013,701 from 07.01.93 to 13.10.97 @ 9.75%

Add Legal Fees

Add interest on $2,000 from 06.07.92 to 13.10.97 @ 9.75%

510,151
57,178
471,433       2,000
923
3,468,365

Less    Advances ($1,305,97;$107,000)

1,412,979
2,055,386

Less Costs (1 day) say $5,386

5,386

Total net left to pay

$2,050,000

10.        By letter dated 4 October 1997, the taxpayer rejected the respondent’s assessed values for Lots 66, 67 and 72 and he revoked an authority he had given previously to deduct the $240,000 of the compensation monies for payment of a riparian allocation for Lot 8 because a fresh application had been made for this. The allocation had been paid for and a separate water allocation received for that Lot. 

11.        The amount of $2,050,000 did not represent the final amount that the DNR was to pay to the taxpayer. On 13 October 1997, it paid a further $1,200,000 and the letter to his solicitor which accompanied the payment read:

“As you are aware, the two (2) aspects of this matter are (a) compensation payable to your client in accordance with the Land Appeal Court judgment as handed down on 21 August 1997 and (b) the purchase by your client of the three (3) farms to be retained and the water allocations attaching to the three (3) farm entitlements transferred to ….. Lot 8.

As the compensation issue has now been resolved by the handing down of the Land Appeal Court judgment, it would seem prudent to recognise that judgment and to arrange payment as soon as possible.

The over-riding reasoning contained within my letter of 16 September 1997 is, therefore in respect for the Land Appeal Court judgment.  However, as monies are owing by your client in return for retention farms and other items and in accordance with the Burdekin River Irrigation Area Land Development Policy, it is my view that such monies should rightfully be deducted from the compensation payable.

It is acknowledged that the exact amount owing by your client is yet to be determined and there is no suggestion that the offered net amount is not negotiable.  It is seen to be imperative however that we remove the Land Appeal Court issue from the equation.  We can then negotiate the remaining part of the offer when you are in a position to do so.

I have therefore returned to my recent offer and now enclose a cheque for the sum of $2,050,000 which will effectively satisfy the order of the Land Appeal Court.  Any adjustments to the value of the farms and the other items as mentioned, can be made in due course and without the need to revisit the Land Appeal Court judgment, except to adopt the awarded interest rate for application to any monetary variations and to settle the issue on costs.”

12.        The taxpayer continued to query the valuations ascribed by the DNR to Lots 66, 67 and 72 and, in a letter dated 22 September 1998, set out his calculations of the final capital payment still due and owing to the taxpayer.  This table included valuations for the three Lots and acknowledged the third advance of $2,050,000.  The valuations were $195,790 (Lot 66), $219,588 (Lot 67) and $216,387 (Lot 72). The table read:

Date	Deduction	Balance of  Asset Value	Interest Period
5 May 1990	Date of Proclamation of Resumption	$4,292,400	5/5/90 to 29/6/92
29 June 1992	1st Advance Payment – $1,305,979.00	$2,986.421	30/6/92 to 6/1/93
6 Jan 1993	2nd Advance Payment - $107,000.00	$2,879,421	7/1/93 to 19/1/93
19 Jan 1993	Retention Farm Lot 66 – 106.7ha Irrigated 4.0ha x $5300/ha = $21,200.00 Dry Arable 102.7ha x $1700/ha = $174,590.00 $195,790.00	$2,683,631	20/1/93 to 27/8/96
27 Aug 1996	Additional Farm Lot 67 – 102.9ha Irrigated 102.9ha x $2134/ha = $219,588.00	$2,464,043	27/7/96 to 27/8/96
27 Aug 1996	Additional Farm Lot 72 – 101.4ha Irrigated 101.4ha x $2134/ha = $216,387.00	$2,247,656	27/8/96 to 13/10/97
13 Oct 1997	3rd Advance - $2,050,000.00	$197,656	13/10/97 to Final Payment
Final Capital Payment               $197,656.00

13.        The taxpayer’s son then advised the DNR that the total interest payable to the taxpayer was $2,200,000 and that, together with the final capital payment, this meant that the amount of $2,400,000 (rounded) was outstanding. (In the Statement of Facts and Contentions, exhibit 7, the final capital amount of $197,656 was amended to $203,656).

14.        On 22 October 1998, the DNR wrote to the taxpayer’s son and noted his previous letter and his claim which it quantified as comprising $2,269,472 in interest and $197,656 by way of further capital payment.  The DNR acknowledged that a payment of $240,000 had to be made to the taxpayer in respect of the water allocation on Lot 8. The DNR also referred to differing interpretations which may be placed on the calculation of farm values and relevant dates of transfer of ownership but went on to make the following offer:

“You have also previously raised your interest in having Lot 4 on CP 859479 returned to your family.  Accordingly, I am prepared to offer $1.2 million plus titles to this Lot 4 and Lots 66, 67 and 72 as full and final settlement of these matters including the payment for monies withheld for purchase of water allocation.  This offer will remain valid for 14 days from the date of this letter.  If not accepted, the Department will return the $240,000 plus interest and withdraw the additional settlement offer.”

15.        On 11 November 1998, the taxpayer’s son accepted the DNR’s final offer of $1,200,000 along with the transfer of Lot 4.  His letter read:

“I accept your offer ….

I do so with great reluctance since it is not a matter of satisfaction rather an agreement to end the wasted time, effort and legal expense to secure just compensation as promised by the compulsory acquisition process.”

16.        The taxpayer received a total of $4,662,979 in payments from the DNR as well as four Lots of land. In the 1999 taxation return, he advised that an independent valuation of the retention farms and additional farms i.e. those in Lots 66, 67, 72 and also Lot 4 was $654,500.  Previously, in the letter of 22 September 1998, the taxpayer had given values for Lots 66, 67 and 72 in the total amount of $631,765.  Accordingly, the value ascribed by the taxpayer to Lot 4 was $22,735. On the taxpayer’s valuations, the total value of cash and property received by him was $5,317,479.

Evidence of the Taxpayer’s Son

17.        The taxpayer’s son said that no agreement had been reached with the DNR about the valuations of the retention and additional farms. He also said that dates to mark the times of transfer of those farms had not been agreed. He said that his dealings with the DNR were through Peter Noonan and that he had frequent telephone conversations with Mr Noonan about the compensation payments. In relation to the offer of $1,200,000, he said that Mr Noonan told him that it was a final offer and that, if he did not take it, the matter would go to court.  He said his father took his advice to accept it and that, subsequently, the transfer of title in respect of Lots 4, 66, 67 and 72 was completed. The taxpayer’s son said he was unaware of how the calculation of $1,200,000 in the final offer was made by Mr Noonan. He said that the amount of $240,000 in relation to the water allocation for Lot 8 had been added into the final balance of $1,200,000 as well as the value of Lot 4 that his father received. He believed it was a “classic deal sealer” based on a “take it or leave it” approach. The taxpayer’s son said that he was not aware that the DNR made any calculation of the amount comprising the interest component and that, if it did, it had not disclosed this to him.

18.        When asked what he believed the purpose of the interest payments to be, the taxpayer’s son said that the process of calculating compensation amounts had taken so long that capital appreciation needed to be taken into account and he thought that this was one of the roles played by interest.  He said that it was important that his father obtain the most compensation that he could and he did not care whether it was in the form of interest payments or capital amounts. The taxpayer’s son said that he had assisted in drawing up the note on his father’s income tax return for 1999 where the reference to interest was made.  He said that he knew that interest had to be declared and that he had been advised of the penalty regime which could have application in the event that it was not included. The taxpayer’s son said that the inclusion of an amount in respect of interest in the 1999 income tax return was done solely for the purpose of avoiding the risk of dispute about penalty tax and that the taxpayer did not by that return make any admission that any part of the receipt was interest. 

Evidence from the taxpayer

19.        In his statement (exhibit 3), the taxpayer said that he had appointed his son  to handle the disputes with the DNR and with the respondent on his behalf.  He also said that he was aware of the offer made by the DNR on 22 October 1998 and of his son’s letter of acceptance of the offer on 11 November 1998.  He said that he did not know whether the DNR had made any calculation of the amount of any part of the final offer which might be said to represent interest.  He said that, if the DNR did this, it had not disclosed that calculation to him.

Evidence of Peter Noonan

20.        Mr Noonan is currently the Chief Executive Officer of SunWater and he was involved in dealings with the taxpayer’s son in settling the compensation matters in 1997 and 1998.  In January 1997, he was the Executive Director in charge of development projects and, as Executive Director of State Work Projects, had been responsible for making the final settlement arrangements with the taxpayer’s son in 1998. He said that the DNR had been aware that interest was accruing throughout the period of negotiations and that this was one of the many reasons for attempting to bring resolution to it as it had been dragging on for 17 years and needed to be finalised.

21.        Mr Noonan said that there had been no agreement in respect of the valuation of Lots 4, 66, 67 and 72. He also said that, if precise amounts of interest were to be calculated, it would have been necessary to determine the particular dates from which interest accrued for each of the retained and additional farms.  However, he said, in this case, these dates had not been agreed and the final payment was not set on the basis of dates of commencement or on particular values.

22.        Mr Noonan said that there had been many discussions over a long period of time with the taxpayer and that, in the absence of agreement, he told him that the matter would need to be settled on the basis of calculating a single lump sum.  He said that the calculation of $1,200,000 which constituted the final offer did not involve individual calculations of value but was simply a target figure which he thought would result in settlement.  He said there was never any discussion as to the break-up of the $1,200,000.  In relation to the $240,000 concerning water allocations for Lot 8, he said this was to have been deducted from the compensation sum and paid separately but that, in the end, it fell in as part of the overall final payment figure.

23.        Mr Noonan said that, in order for monies to be paid to the taxpayer, there needed to be authorisation by the Executive Council of Queensland and that an Explanatory Memorandum had been prepared as a basis for obtaining that authority for payment of the $1,200,000 finally paid to the taxpayer. While he agreed that these documents had to be accurate, he maintained that the $1,200,000 had not been calculated by any agreed valuations. He had received settlement calculations prepared by members of his staff which provided valuations of Lots 66, 67 and 72 and had requested staff to work out the net payment based upon varying inputs. They drafted schedules of compromise calculations based on differing values being attributed to Lots 66, 67 and 72. Mr Noonan acknowledged that one of these approximated the amount finally offered to the taxpayer but he said that this had not been an agreed outcome based upon valuations that the parties had both accepted. Mr Noonan said that he had calculated the $1,200,000 himself and that he did not have regard to specific interest amounts. 

Consideration

24. Section 6-5 of the ITAA 97 defines income according to ordinary concepts (ordinary income) in the following way:

“(1) Your assessable income includes income according to ordinary concepts, which is called ordinary income.

(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.

(3)       ………..

(4) 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.”

25. In accordance with section 4-10 of the ITAA 97, the taxpayer’s income is worked out by reference to his taxable income for the relevant income year and, in this case, this is the financial year ending 30 June 1999. The notice of assessment issued on 9 May 2000 in relation to that year assessed him on his taxable income which included the amount of $1,025,479 declared in his taxation return as interest. In accordance with the formula in section 4-15 of the ITAA 97, that amount, along with other income and after taking into account deductions, resulted in an assessment of $796,163.

26. Mr Bickford submitted that there was no assessable income which formed part of the compensation sum in this case and raised three grounds for setting the respondent’s decision aside and determining that all monies be treated as a capital sum. These were that the taxpayer was in receipt of a single undissected sum so that there was no means of ascertaining the interest component; that section 28(1B) of the Acquisition of Land Act 1967(Qld) had the effect of deeming interest to be capital; and that the monies should be treated as capital under ordinary concepts. He also submitted that the respondent’s method of calculating the amount of interest was inappropriate.

The first ground: receipt of a single undissected sum

27.        Mr Bickford submitted that, where a sum is received by a taxpayer and the sum contains a mixture of capital and interest, where no agreement was reached regarding the dissection of the capital and the revenue amounts and where a dissection of the sum cannot be calculated with any precision, then any interest is not assessable as income.  He submitted that these were the circumstances in the taxpayer’s case and that there was never any agreement between the parties as to the value of the various lots to be transferred or as to the precise dates when payment of interest on the retained and additional lots was to commence. He referred to the following authorities: McLaurin v Federal Commission of Taxation (1961) 104 CLR 381, Allsop v Commissioner of Taxation of the Commonwealth of Australia (1964) 113 CLR 341 and Commissioner of Taxation v CSR Limited (2000) 104 FCR 44.

28.        Ms Mellifont submitted that the statutory interest on compensation for the compulsory acquisition of the taxpayer’s land was assessable income under the ITAA 97. She submitted that the evidence before the Tribunal clearly differentiated between the capital component of the compensation and the statutory interest accrued and payable on that sum. She submitted that the case was not distinguishable from Federal Wharf Company Limited v Deputy Federal Commission of Taxation (1930) 44 CLR 24 and Haig v Federal Commission of Taxation (1994) 29 ATR 619.

29.        It is not disputed that an amount which is characterised as being of a capital nature is not taxable as ordinary income. In Federal Wharf Company Limited v The Deputy Federal Commissioner of Taxation (above), Rich J rejected the argument that statutory interest payments relating to compensation sums were payments of a capital nature. There, land was compulsorily acquired by a South Australian government agency pursuant to the Harbours Act 1913 (SA). Section 26 of that Act provided that, when property was compulsorily acquired, interest, computed by reference to the time when the property was acquired and when compensation is paid, was to be added to the amount of any compensation to be paid.

30.        His Honour held that the interest component was assessable income and said (at 27-28):

“It is true that sec. 26 says that the interest is to be added to the amount of any compensation to be paid, but this statement manifests no intention that it shall be considered capital. Indeed, for the purposes of the Federal tax it would matter little if it did, for such an intention could not alter its true character. In truth, sec. 26 does little more than express in precise legislative form the rule established by In re Pigott and Great Western Railway Co. (1881) 18 Ch D 146 that an authority compulsorily acquiring land is in the position of a purchaser in the absence of statutory provision to the contrary, and must pay interest upon the compensation as if it were purchase-money, from the date of possession until payment. It is quite clear that interest upon the balance of purchase-money payable upon a sale of real property is income (Hudson's Bay Co. v. Thew (1919) 7 Tax Case 206). The observation made by Rowlatt J. in that case that if the vendors "had collected the money and had been paid it, they would have invested it and got interest," and that "the purchaser has not paid it, and he therefore pays interest instead until he does pay it," is a simple proposition which seems equally applicable to the payment of compensation. In my opinion, the character of the interest payable under sec. 26 is that of recompense for loss of the use of capital during a period of time in which it would earn income. It represents the annual value of capital. It is paid because the owner has been deprived of a capital asset which he had and has not received the fund which is to be substituted for the capital asset. The interest is the flow of that fund. In my opinion it is income.”

31.        While accepting that there was an interest component in the monies received by the taxpayer, Mr Bickford sought to distinguish that decision on the basis that there was no means of identifying the amount which comprised interest. In McLaurin v Federal Commission of Taxation (1961) 104 CLR 381, the High Court held that an amount of compensation of 12,350 pounds constituted a capital sum and overturned a decision to assess a taxpayer to tax on 10,640 pounds of that total. The taxpayer had brought an action to recover 30,000 pounds from the Commissioner for Railways for damage suffered from a fire which had spread from the latter’s land. The taxpayer had supplied a list of particulars of damage but accepted the lesser amount which was based on calculations of a valuer employed by the Commissioner. The details of those valuations had not been revealed to the taxpayer. The High Court described the sum paid as a single undissected amount and said that, in a proper case, a single payment or receipt of a mixed nature may be apportioned amongst the several heads to which it relates and an income or non-income nature attributed to portions of it, accordingly. It also described apportionment as being appropriate where the payment or receipt is in settlement of distinct claims of which some at least are unliquidated or are otherwise ascertainable by calculation. The Court continued:

“It cannot be appropriate where the payment or receipt is in respect of a claim or claims for unliquidated damages only and is made or accepted under a compromise which treats it as a single, undissected amount of damages. In such a case the amount must be considered as a whole.” (at 391)

32.        That principle was followed by the High Court in Allsop v Commissioner of Taxation of the Commonwealth of Australia (1964) 113 CLR 341 and by the Federal Court in Commissioner of Taxation v Spedley Securities Ltd (1988) 88 ATC 4126 and Commissioner of Taxation v CSR Limited (2000) 104 FCR 44. In each of those cases, the relevant taxpayer accepted, by way of compromise, an amount of compensation which related to more than one component but where there was no agreement about the makeup of those components and no means of distinguishing between them.

33.        I accept the evidence of the taxpayer and Mr Noonan that there was no agreement between them about the valuations ascribed to Lots 4, 66, 67 and 72. These values ranged from those given by the taxpayer to those calculated by the DNR in September 1997 and October 1998:

Land	The taxpayer on 22 September 1997	the NSR on 16 September 1997	the NSR compromise on 6 October 1998
Lot 66	$195,790	$557,730	$274,990
Lot 67	$219,588	$536,570	$442,470
Lot 72	$216,387	$537,420	$436,020

34.        There was consensus between the taxpayer’s son and the DNR about the dates for valuing these lots. On 2 February 1997, the taxpayer’s son wrote to the DNR and requested that this be done as at the same date of valuing resumed land and this was accepted by the DNR in its letter dated 13 October 1997. However, there did not appear to be consensus in relation to the dates from which interest would be calculated in respect of each of those properties. In its letter of 16 September 1997, the DNR deducted its valuation amount from the date of resumption of the taxpayer’s land in May 1990 (see para 9 above). In the calculations done to assist Mr Noonan in October 1998, the value of each lot was deducted from a later time: Lot 66 from 19 January 1993 and Lots 67 and 72 from 27 August 1996. Those dates were also used by the taxpayer’s son in his letter of 22 September 1998 (see para 12 above). Clearly, reliance on different dates for reducing the capital amount on which the interest was calculated impacted on the amount of interest arrived at in the various calculations that were done. 

35.        I accept the evidence of Mr Noonan that the final payment amount of $1,200,000 was calculated without reference to precise values and represented an amount which he considered would bring negotiations to an end. Nevertheless, despite the absence of consensus about valuations and dates, two matters were clearly established by the Land Appeal Court: the taxpayer was to be paid $4,300,400 and he was also to be paid interest on the sums outstanding until final payment. Rather than give effect to the Order by the transfer of a single capital sum and a further interest payment, the parties negotiated the transfer of the retention and additional farms. This did not change the overall value of the compensation which the taxpayer was to receive. The components of this were known to both the taxpayer and the DNR. They comprised the four retention and additional farms (Lots 4, 26, 67 and 72), the refund sum of $240,000, a balance of compensation monies to a total of $4,300,400 and interest. What was not known was the relative values of those various components. However, I am satisfied that these were “ascertainable by calculation” in a manner which distinguishes the taxpayer’s situation from that in McLaurin v Federal Commission of Taxation and the other cases referred to by Mr Bickford (above). I am satisfied that this matter falls for decision under the principles set down in Federal Wharf Company Limited v The Deputy Federal Commissioner of Taxation (above).

36.        Rather than a lump sum of $4,300,400, the taxpayer received Lots 4, 66, 67 and 72 along with cash settlements totalling $4,662,979. Some part of that amount represented the difference between the value of the four Lots and the sum ordered by the Court of $4,300,400.  The individual elements of that were not agreed at the time of the final payment by the DNR although both the taxpayer and the DNR had their own versions of what the values of Lots 66, 67 and 72 were. Nevertheless, because of the Court’s decision, the overall value of the compensation payments and the four Lots of land was known. It totalled $4,300,400 and I am satisfied that this is an amount of a capital nature and that none of it can be characterised as interest. 

37.        The respondent adopted the valuations for Lots 4, 66, 67 and 72 which the taxpayer’s son included in the attachment to the taxpayer’s taxation return for the relevant year. The total of this was $654,500. The same valuations for Lots 66, 67 and 72 had been used by him in his negotiations with the DNR. Based on those valuations, the taxpayer received lump sums and property valued at $5,317,479. When the amount ordered by the Court is deducted from that amount, it leaves, ascertainable by calculation, a sum $1,017,079 which is distinguishable from the capital sum of $4,300,400 noted above.

The second ground: sub-section 28(1B) of the Acquisition of Land Act 1967 (Qld)

38. Mr Bickford relied upon the terms of sub-section 28(1B) of the Acquisition of Land Act as authority for the view that the statutory interest payable was part of the compensation sum paid to the taxpayer for the compulsory acquisition of the land.  He referred to the phrase “as if it were part of the compensation in question” and submitted that this distinguished the provision from section 26 of the Harbours Act which was relevant to the decision of Federal Wharf Company Limited v Deputy Federal Commission of Taxation (above). He submitted that the specific wording used in sub-section 28(1B) had the effect of incorporating the statutory interest as part of the compensation award and that this gave it the character of a capital receipt in the hands of the taxpayer rather than income.

39. Ms Mellifont submitted that the provision was directed to achieving enforcement of an award of interest. She referred to sub-section 26(4) of Acquisition of Land Act which provides that compensation awarded shall have the effect of a judgement of the Supreme Court and submitted that sub-section 28(1B) merely facilitated enforcement of the interest component in the award.

40. Section 28 of the Acquisition of Land Act reads:

“28      Interest

(1) Subject to subsection (2), in respect of the period or any part of the period commenced on and including the date on and from which any land is taken and ending on and including the day immediately preceding the date on which payment of compensation is made the Land Court or, upon appeal, the Land Appeal Court may order that interest be paid upon the amount of compensation determined by it.

(1A) Such interest shall be at such rate per centum per annum as the Land Court or, upon appeal, the Land Appeal Court, deeming reasonable, fixes by the order.

(1B) Interest so ordered to be paid shall be payable as if it were part of the compensation in question and shall be added to the amount thereof and be payable by the constructing authority accordingly.

(2) Interest shall not be payable in respect of any amount of compensation advanced under section 23.”

41.        Reference was made to section 26 of the Harbours Act above (see para 29). While sub-section 28(1B) of the Acquisition of Land Act is not expressed in identical terms, I am satisfied that it has the same effect. Referring to the former provision in Federal Wharf Company Limited v Deputy Federal Commission of Taxation (above), Rich J said (at 27):

“It is true that sec. 26 says that the interest is to be added to the amount of any compensation to be paid, but this statement manifests no intention that it shall be considered capital.”

42. I accept Ms Mellifont’s submission that the provision is directed to achieving enforcement of an award of interest and that sub-section 28(1B) serves the purpose of facilitating enforcement of the interest component in an award.

The third ground: ordinary concepts

43.        Mr Bickford submitted that the interest paid should be considered as capital under ordinary concepts. He submitted that the primary purpose of the interest payment was to compensate the taxpayer for the loss or detriment which he had suffered by being kept out of his money during the relevant period and that it was not compensation for having been deprived of the use of the money nor foregone investment opportunity. For this, he relied on Whittaker v Commissioner of Taxation (1998) 82 FCR 261 and Commissioner of Taxation v Northumberland Development Co Pty Ltd (1995) 59 FCR 103. Ms Mellifont submitted that these cases had no application in this matter.

44.        In Whittaker v Commissioner of Taxation, a taxpayer had been awarded damages for personal injury and this included an amount for pre-judgement interest which related to the period from when the cause of action arose to when the judgement took effect. Because of subsequent appeals, payment was delayed and, eventually, an amount of post-judgment interest was also ordered.  The Full Federal court held that the pre-judgement interest constituted a capital receipt and that the post-judgment interest was to be treated as ordinary income. Lockhart J referred to the analysis given by Rich J in Federal Wharf Company Limited v Deputy Federal Commission of Taxation of the purpose of interest payments in the context of compulsory acquisition cases (see above at para 30). Lockhart J made a clear distinction between payments of compensation in such cases and damages for personal injury, saying (at 273):

“Receiving compensation for the compulsory acquisition of a capital asset which would have been put to a revenue use is quite different from compensation for damages for personal injury.  The latter is compensation for not having received damages when they should have been paid, where the plaintiff should not be treated as having invested the judgment monies in such a way as to earn taxable income.  Interest is awarded in cases of this kind because the plaintiff has been deprived of the use of his money, not because he has foregone investment opportunity.”

45.        Given that this matter is concerned with compensation for compulsory acquisition of land, I am satisfied that the principle in Whittaker v Commissioner of Taxation is not relevant to the taxpayer’s case.

46.        In Commissioner of Taxation v Northumberland Development Co Pty Ltd, a taxpayer underwent statutory forfeiture of coal interests and received compensation. This included an increment which was calculated in accordance with a statutory formula. The Commissioner assessed the taxpayer to tax on this incremental amount on the basis that it was in the nature of income. The Full Federal Court held that the taxpayer received a single sum by way of compensation and that the determination of the incremental component was a “step taken in calculation of the compensation awarded” (per Davies J at 109; see also Beaumont J at 116 and Einfeld J at 120-121). It was held that no question of an interest component arose in that case (at 109, 116 and 120). Clearly, that is distinguishable from the taxpayer’s case where there was specific reference in the Order of the Land Appeal Court to both compensation and interest components to be paid.

Method of Calculation

47.        A further submission of Mr Bickford related to the manner of calculating the amount of interest by the respondent.

48.        The respondent relied upon the information provided by the taxpayer in his taxation return to determine the amount of interest which constituted his income. This was $1,025,479. Ms Mellifont conceded that this was based on error by the taxpayer and that the correct amount was $1,017,079. This represented the difference between two amounts. The first of these was the total value of the monies and property received by the taxpayer in the amount of $5,317,479. The second was the amount determined by the Land Appeal Court for compensation under all heads of claim in the amount of $4,300,400. Ms Mellifont submitted that the procedure was an appropriate one because the only description that could be given to the amount that comprised the difference between those two sums was that it constituted interest. Mr Bickford submitted that, as the valuation of the properties had not been the subject of any agreement, it was not appropriate to use them in the calculation process.

49.        The method of calculating the amount of interest was one which the taxpayer’s son utilized in the attachment to the taxpayer's taxation return.  In that attachment, the taxpayer’s son stated that the valuation of the retention and additional funds had been established by independent valuation at $654,500. While I accept that there was no agreement between the taxpayer and the DNR as to the value of those properties, I am satisfied that it is appropriate for the respondent to adopt the values given by the taxpayer’s son in the taxpayer’s taxation return. With one qualification, I am also satisfied that the method of calculating the amount of interest as being $1,017,079 is appropriate in this case. Ms Mellifont submitted that no description other than interest could be given to the difference between the overall value of what the taxpayer received and the amount ordered to be paid by the Land Appeals Court. The qualification that I have relates to the sum of $240,000 which was to be repaid by the DNR to the taxpayer. Initially, this was to be deducted from compensation monies. It related to the purchase of a water allocation on Lot 8. However, an alternative arrangement was made and the DNR retained that amount at the time when it offered the final payment of $1,200,000. Reference has been made above (para14) to Mr Noonan’s letter, dated 22 October 1998, in which that offer was made.  In part, it reads:

“Accordingly, I am prepared to offer $1.2 million plus titles to this Lot 4, Lots 66, 67 and 72 as full and final settlement of these matters including the payment for monies withheld for purchase of water allocation.  This offer will remain valid for 14 days from the date of this letter.  If not accepted, the Department will return the $240,000 plus interest and withdraw the additional settlement offer.”

50. The evidence of Mr. Noonan and the taxpayer’s son was that the final payment included the amount of $240,000. While acceptance of the offer of $1,200,000 by the taxpayer extinguished his right to make a further claim from the DNR for this amount, I am satisfied that it did not remove it from within the final payment of $1,200,000. Further, I am satisfied that this sum of $240,000 cannot be characterized as interest or as income. It was an amount that the DNR was to repay to the taxpayer. When that amount is subtracted from the sum $1,017,079, this leaves the sum of $777,079 which was paid to the taxpayer and which is not of a capital nature. I am satisfied that this constitutes the interest paid to the taxpayer and that this amount is ordinary income in accordance with section 6–5 of the ITAA 97.

Decision

51.        The Tribunal varies the decision under review by determining that interest in the amount of $777,079 comprises ordinary income of the taxpayer for the financial year ending 30 June 1999.

I certify that the 51 preceding paragraphs are a true copy of the reasons for the decision herein of Mr R G Kenny, Member

Signed:         Denise Burton
  Administrative Assistant

Date/s of Hearing  15 November 2004
Date of Decision  24 December 2004
Counsel for the taxpayer          Mr P Bickford
Solicitor for the taxpayer           Gadens Lawyers
Counsel for the Respondent     Ms K Mellifont
Solicitor for the Respondent     ATO Legal Practice