Junior Farms Ltd v Commissioner of Inland Revenue HC Auckland CIV-2009-404-2870
[2011] NZHC 781
•22 July 2011
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2009-404-2870
BETWEEN JUNIOR FARMS LTD Plaintiff
ANDCOMMISSIONER OF INLAND REVENUE
Defendant
Hearing: 11 and 12 July 2011
Counsel: S P Bryers for Plaintiff
M Deligiannis and H Lee for Defendant
Judgment: 22 July 2011
JUDGMENT OF BREWER J
This judgment was delivered by me on 22 July 2011 at 4:00 pm pursuant to Rule 11.5 High Court Rules.
Registrar/Deputy Registrar
SOLICITORS
Martelli McKegg (Auckland) for Plaintiff
Crown Law (Wellington) for Defendant
COUNSEL Stephen P Bryers
JUNIOR FARMS LTD V COMMISSIONER OF INLAND REVENUE HC AK CIV-2009-404-2870 22 July
2011
Introduction
[1] The defendant has adjusted the income tax payable by the plaintiff for the year ended 30 June 2002 by adding $989,967.18. The plaintiff, for its first cause of action, seeks a declaration to the effect that no adjustment should have been made.
Background
[2] Mr Plumley is a retired dairy farmer. He is aged 86 years. He is the sole director and shareholder of the plaintiff, a company which he caused to be incorporated in 1964 and which was the vehicle for his dairy farming business.
[3] In 1964 the plaintiff purchased farmland on Ormiston Road, East Tamaki. It
was used for the purposes of the plaintiff’s dairy farming business.
[4] The years passed. Auckland grew. The character of the area surrounding the land changed. The responsible local authority, Manukau City Council, decided to re- zone the land so that a portion fronting Ormiston Road became Industrial 1 (light industrial) (“the industrial land”) and the balance became designated for flood management purposes (“the flood plain”).
[5] This was the position in 1994. However, the titles for the land remained unchanged and did not divide the land according to whether it was industrial land or flood plain.
[6] In 1994 Mr Plumley was approached by a real estate agent who had a buyer interested in purchasing the land. Initially it was agreed that the buyer would pay
$4,591,700 for the whole of the land. But eventually two agreements were signed to the following effect:
(a) In one the plaintiff sold to the buyer the whole of the land together with buildings, plant and livestock for $2,681,000. This agreement was later dated 9 November 1994 (“the first agreement”).
(b)n the other, the buyer sold back to the plaintiff 14 ha more or less of the land (being the flood plain as marked on an attached plan) for
$100. This agreement was later dated 10 November 1994 (“the second agreement”).
[7] At about the time of the signing of these agreements Mr Plumley obtained from the buyer a letter (“the side letter”) addressing or clarifying certain aspects of or relating to the agreements.
The defendant’s case
[8] The defendant’s case is simple. It is that the second agreement by which the buyer transferred title to the flood plain to the plaintiff for $100 must be given effect on its face. So too must a subsequent agreement by which the Manukau City Council paid the plaintiff $3,000,000 for the same land. That means that the plaintiff made a profit on the sale of the flood plain of $2,999,900. That profit is taxable. The amount of tax to be paid on the profit is $989,967.18.
[9] The defendant says, and the plaintiff accepts, that at the time it signed the agreement to purchase the flood plain for $100 it intended to sell the flood plain to the Manukau City Council for a sum greater than $100.
[10] Section CD1 of the Income Tax Act 1994 provides:
CD1 Land Transactions
(1) Any amount derived from the sale or other disposition of any land, being an amount to which this section applies, is gross income.
(2) For the purposes of subsection (1), the gross income of any person includes the following amounts—
(a) any amount derived from the sale or other disposition of any land if the land was acquired for the purpose or intention, or for purposes or intentions including the purpose or intention, of selling or otherwise disposing of it:
[11] The defendant relies upon this section of the Income Tax Act 1994 to provide the statutory basis for its case. The defendant submits that the conveyance of the
flood plain to the plaintiff under the second agreement meant that the plaintiff acquired the land within the meaning of s CD1.
[12] The defendant submits as follows:1
16. The issue is whether there has been “acquisition” for the purposes of
s CD(1)(2)(a).
17.The meaning of “acquired” is not defined in the Act. The ordinary meaning of “acquired” is a broad concept that covers both ownership and bare possession. When considering the meaning of “acquired” in the context of earlier similar provisions, the Courts have held that the term is wide and covers a variety of methods of acquisition that includes passive acquisitions.2
18. The Oxford English Dictionary3 gives the following definitions:
18.1Acquire 1. To gain, obtain, or get as one’s own, to gain the ownership of (by one’s own exertions or qualities); 2. To receive, or get as one’s own (without reference to the manner), to come into possession of.
18.2 Acquired 1. Gained or obtained by one’s own exertion;
gained, in contradistinction to innate or inherited.
[13] And, further:
28. The Commissioner’s submission is that s CD1 has wide application.
Unlike surrounding provisions that deal with land disposal, the section does not have a time limit. There is also no requirement for
a taxpayer to have a business purpose or for any acquisition to have
a business overlay. There are other specific provisions within the sub-part that deal with business dealings.
29.Section CD1(2)(a) will apply to any taxpayer who engages in any land transaction that is a profit-making venture, if the land was acquired with the intent or purpose of selling or otherwise disposing of it.
30.In response to Junior Farms main argument, the Commissioner’s position on the facts of this case is that Junior Farms entered into two separate agreements with Hampton on two separate days. The Commissioner’s position is based on and supportive by the factual findings of Heath J in Junior Farms’ other legal action.4
1 Synopsis of defendant’s opening submissions, dated 8 July 2011.
2 Beetham v Commissioner of Inland Revenue [1973] 1 NZLR 575 (HC) at 581; Halliwell v
Commissioner of Inland Revenue (1991) 13 NZTC 8,197 (HC) at 8,202.
3 Oxford English Dictionary (2nd ed, Clarendon Press, Oxford, 2004).
4 Judgment of Heath J dated [15] September 2004.
[14] It is, of course, for the plaintiff to demonstrate that the defendant’s
assessment of tax is wrong.5
The plaintiff ’s case
[15] The plaintiff submits that s CD1(2) has no application to the amount received by the plaintiff from the sale of the flood plain to the Manukau City Council because:
(a) The buyer never acquired any beneficial interest in the flood plain. It acquired only legal title to the flood plain and retained it on trust for the plaintiff while it carried out the subdivision.
(b)It follows that the plaintiff never disposed of its equitable interest in the flood plain to the buyer.
(c) The second agreement pursuant to which the buyer transferred the flood plain to the plaintiff for $100 conveyed only the legal title and not the beneficial ownership (the equitable title) of the flood plain.
(d)The plaintiff did not, therefore, acquire the land by operation of the second agreement.
[16] On this analysis, the land that was sold to the Manukau City Council was acquired by the plaintiff in 1964. It was not acquired at that time for the purpose or intention of selling or otherwise disposing of it.
The agreements
[17] This case turns on the construction of the agreements between the parties.6
The issue is whether there were two separate contracts (as contended by the
5 Tax Administration Act 1994, s 149A(2)(b).
6 Interpretation is governed by the principles in Vector Gas Ltd v Bay of Plenty Energy Ltd [2010]
2 NZLR 444 (SC).
defendant) or whether the agreements entered into between the plaintiff and the buyer constituted a single transaction (as contended by the plaintiff).
[18] Having considered the submissions and materials placed before me by counsel, I am in no doubt that the agreements and the side letter document a single transaction and must be read together.7 My findings are as follows:
(a) Mr Plumley, for the plaintiff, signed the agreements on the same day (although the particular date is not clear). Someone else dated them later.
(b)That transaction was the sale of the industrial land to the buyer with the retention by the plaintiff of the flood plain.
(c) The sale price of the industrial land was $2,681,000.
(d)Legal title to both the industrial land and the flood plain was transferred to the buyer.
(e) The buyer had the task of completing the subdivision.
(f) Title to the flood plain land was to be transferred to the plaintiff following the subdivision. The $100 consideration was a nominal amount. The parties had previously agreed that the flood plain land was worth approximately $1,910,700.
(g) The agreements were provided to Mr Plumley by the real estate agent.
Mr Plumley did not receive legal advice in respect of them. Having obtained the side letter to confirm matters about which he had concerns, he accepted that the agreements would achieve the overall
purpose of the transaction.
7 Ramsay (W T) Ltd v Inland Revenue Commissioners [1982] AC 300 (HL); Mills v Dowdall
[1983] NZLR 154 (CA); Inland Revenue Commissioners v McGuckian [1997] 1 WLR 991 (HL).
(h)The sale of the industrial land was settled on 15 December 1994 pursuant to the first agreement.
(i)The buyer subdivided the land and conveyed title to the flood plain to the plaintiff upon the payment of $100 in or about January 1999 pursuant to the second agreement.
(j)By the time Mr Plumley signed the agreements in November 1994, he anticipated that the Manukau City Council would purchase the flood plain from the plaintiff once the subdivision of the land had been completed. That is what happened. On 6 November 2001 the plaintiff transferred title to the flood plain to the Manukau City Council for a gross price of $3,000,000.
[19] Having heard Mr Plumley and having looked at the overall commercial context, I have concluded that the second agreement is simply a vehicle for giving effect to one part of the single transaction to which I have referred in [18] above. It is a clumsy vehicle. If a competent lawyer had been instructed to achieve the desired result then there would have been a single agreement which would have recorded that all that the plaintiff was selling was the industrial land. It would have detailed the mechanisms by which the land was to be subdivided and the resulting title to the flood plain conveyed to the plaintiff. Counsel for the plaintiff and for the defendant agree that this could have been done simply, and had it been done there would be no income tax payable on the sale of the flood plain to the Manukau City Council.
[20] It seems clear to me that the parties never intended that the plaintiff would dispose of the flood plain under the contract. Legal title in the flood plain was conveyed only for the specific purpose of subdividing the properties. The buyer did not have beneficial ownership of the flood plain and was not free to dispose of the
legal title.8 The plaintiff maintained possession of the flood plain and continued to
farm it up until the sale to the Manukau City Council. I am satisfied that the
8 In fact, the buyer did that, without informing Mr Plumley, on terms which in relation to the subdivision and re-conveyance of the flood plain mirrored the buyer’s agreement with Mr Plumley. In my view the buyer acted in breach of its agreement with the plaintiff, but that is relevant only to history.
agreements created a constructive trust over the legal title to the flood plain in favour of the plaintiff, which retained beneficial ownership of it.9
[21] Since on my construction of the agreements there was no disposal of the legal or equitable titles to the flood plain by the plaintiff, counsels’ submissions focussing on whether s CD1 must be applied to the second agreement on its face fall away. There being no disposal to the buyer, there can be no (re)acquisition under s CD1.
[22] In my view, s CD1 uses “acquire” in the normal English sense as defined by the Oxford English Dictionary quoted above. To acquire land means that a taxpayer has to gain, obtain or get the ownership of land. If that is done with the purpose or intention of selling or otherwise disposing of it, then any amount derived thereby is gross income.
[23] In this case the plaintiff did not gain, obtain or get the ownership of the flood plain by entering into the second agreement; i.e. it did not acquire it thereby. The plaintiff acquired the flood plain in 1964 and did not part with beneficial ownership of it until it sold the flood plain land to the Manukau City Council. The second agreement was merely the device chosen by the parties to ensure that once the subdivision of the land was completed, separate title to the flood plain would be conveyed to the plaintiff.
[24] I do not see this analysis as requiring a purposive interpretation of s CD1, although I would hold that the law requires such an approach to fiscal statutes. I see the issue here to be simply whether giving the wording of s CD1 its natural meaning it applies to the factual situation as I have found it to be. I conclude that it does not.
Issue estoppel
[25] The second issue is whether the plaintiff is entitled to raise against the defendant the interpretation of the first agreement, the second agreement and the side
letter which I have found persuasive. The defendant pleads issue estoppel. This
9 Bevin v Smith [1994] 3 NZLR 648 (CA) at 659.
arises from a decision of Heath J10 adjudicating a dispute which arose between the buyer and the plaintiff in relation to the industrial land. Put shortly, when the land was surveyed the area of the industrial land was greater than the plaintiff had anticipated. The dispute was whether, and to what extent, the plaintiff should be compensated by the buyer for the additional area.
[26] The defendant was not a party to that proceeding. The defendant submits:11
Although there is no direct relationship between the Commissioner in this proceeding and the defendants in the other action, it is submitted that the proper approach is to look beyond that fact because there must be finality to the matters being litigated with regard to the sale of property under the Hampton agreements. It is submitted, therefore, the policy in the doctrine of estoppel on finality to litigation, be the prevailing consideration.
[27] On this basis, the defendant submits that the plaintiff should “be precluded from raising the issues relating to trust or equitable interest of the flood plain area”.12
[28] The Court of Appeal in Joseph Lynch Land Co Ltd v Lynch addressed the ambit of issue estoppel:13
Issue estoppel is concerned with the prior resolution of issues rather than causes of action. … [I]ssue estoppel precludes a party from contending the contrary of any precise point which, having once been distinctly put in issue, has been solemnly and with certainty determined against him.
[29] An issue estoppel can only be founded on the determinations which are fundamental to the earlier decision and without which it cannot stand.14
[30] No issue estoppel arises in this case. The issues that Heath J had to decide are not the issues I have to decide. Heath J was concerned (relevantly) with the construction of the first agreement, the second agreement and the side letter in the context of the compensation the buyer was obliged to pay the plaintiff under the first
agreement.
10 Junior Farms Ltd v Cavendish Real Estate Ltd (No 2) HC Auckland CP240-SD99, 15 September
2004.
11 Defendant’s closing submissions, dated 12 July 2011, para 66.
12 Ibid, para 72.
13 Joseph Lynch Land Co Ltd v Lynch [1995] 1 NZLR 37 (CA) at 41.
14 Talyancich v Index Developments Ltd [1992] 3 NZLR 28 (CA); Oranga Holdings Ltd v Duke
(1995) 8 PRNZ 500 (HC).
[31] Heath J was not called upon to decide whether, looking at the transaction as a whole, the plaintiff had retained beneficial entitlement to the flood plain. In any event, Heath J’s findings on the underlying facts relevant to this case do not differ from mine in any material respect.
Conclusion
[32] The plaintiff’s application is granted. I make a declaration that the contract between the plaintiff and the buyer disposed only of the industrial land, not the flood plain. Therefore s CD1 of the Income Tax Act does not apply to their transaction. It follows that the adjustment to the plaintiff’s income tax is invalid.
[33] The application is not subject to issue estoppel.
[34] Costs are awarded to the plaintiff on a 2B basis.
Brewer J
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