BATCHELOR v FC of T

Members:
R Deutsch DP

Tribunal:
Adminstrative Appeals Tribunal, Sydney

MEDIA NEUTRAL CITATION: [2013] AATA 93

Decision date: 22 February 2013

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Professor R Deutsch (Deputy President)

THE RELEVANT FACTS

1. On or about 20 June 1999, an agreement referred to as the 'Cresthaven Village Partnership Agreement' ('the Agreement') was entered into by:

• • G D K Retirement Nominees (Cresthaven) Pty Limited ('Cresthaven');
• • G D K Financial Solutions Pty Limited ('GDK');
• • TPC Retirement Nominees (No1) Pty Limited ('TPC No 1');
• • TPC Retirement Nominees (No2) ('TPC No2');
• • Myra Nominees (No 1) Pty Limited ('Myra');
• • ICGAS Nominees Pty Limited ('ICGAS').

2. The last four mentioned entities collectively formed the Cresthaven Village Partnership ('the Partnership'); Cresthaven was appointed to act as bare nominee for the Partnership and GDK was appointed to manage the Partnership's business, which was defined in the Agreement to mean: 'the business of the Partnership, including the acquisition, development and management of retirement village facilities'.

3. The Applicant held an interest in the business and assets of the Partnership through TPC No 2.

4. On 25 June 1999, Cresthaven entered into a contract ('the Contract') with Prime Life (Mount Evelyn) Pty Ltd ('Primelife') for the purchase and development of a property to be known as the Cresthaven Retirement Village in Mount Evelyn, Victoria ('the Property').

5. As a result of the entry into that contract a deposit of $6.5 million ('the Deposit') was paid by Cresthaven pursuant to the contract of sale.

6. The Applicant's share of the Deposit was $55,500.

7. On 19 November 1999, the Applicant claimed a deduction of $284,674 for a partnership loss distribution. The deduction represented the Applicant's total investment in the Partnership, including her share of the Deposit paid by Cresthaven for the Property.

8. On 15 December 2003, the Respondent issued a notice of amended assessment disallowing the claimed deduction other than in respect of the Deposit amount of $55,500.

9. The decision of the Commissioner to disallow the deductions other than in respect of the Deposit amount was upheld by the Full Federal Court in a test case,
Commissioner of Taxation v Malouf (2009) 174 FCR 581.

10. In 2004 two separate proceedings were initiated.

11. First, the Australian Securities and Investments Commission ('ASIC') commenced proceedings in the Federal Court of Australia against a number of entities, including Primelife, and a number of its associated entities, Cresthaven and GDK, for alleged contraventions of the Corporations Act 2001 in relation to an unregistered managed investment scheme relating to the property and business of the Partnership.

12. Secondly, proceedings were initiated in the Supreme Court of Victoria by Cresthaven against, inter alia, Primelife for an alleged repudiation of the contract.

13. On 2 February 2006, a Deed of Settlement was entered into between the parties to the Supreme Court proceedings. The Settlement Deed relevantly required Primelife Corporation Limited to pay to the Partnership an amount of $7.2 million, being $6.5 million as a return of the Deposit and $700,000 in respect of interest on the Deposit.

14. On 17 February 2006, the Federal Court in the ASIC proceedings declared that the scheme identified by ASIC was an unregistered managed investment scheme and ordered that it be wound up. In final orders made by Goldberg J in the ASIC proceedings certain monies were to be transferred, with the end result being that the Applicant, as a member of one of the partnerships, received a sum of $47,927.

15. That amount of $47,927 was not returned as assessable income by the Applicant in her tax return for the relevant year.

16. On 27 June 2011, the Respondent issued a notice of amended assessment to the Applicant for the 2007 income year, pursuant to which an amount of $47,927 was included as assessable income of the Applicant.

17. A notice of objection was lodged on 11 July 2011 and that objection was disallowed in full on 8 December 2011.

ISSUES

18. Stated simply the issue in this matter is whether the amount of $47,927 received by the Applicant constituted assessable income of the Applicant in the 2007 income year.

19. There are three possible arguments for including that amount as assessable income:

• • the amount of $47,927 was income according to ordinary concepts under s 6-5 of the Income Tax Assessment Act 1997 ('the 1997 Act');
• • the amount of $47,927 was an assessable recoupment under s 20-20(2) of the 1997 Act;
• • the amount of $47,927 was an assessable capital gain under Chapter 3 of the 1997 Act.

The First Argument - the amount of $47,927 was income according to ordinary concepts under s 6-5 of the 1997 Act?

20. At all relevant times s 6-5(1) of the 1997 Act has provided:

Your assessable income includes income according to ordinary concepts, which is called ordinary income .

21. In relation to the concept of ordinary income, the 1997 Act provides no real guidance as to what ordinary income is to include, and so one is left to analyse the matter by reference to a number of Tribunal and Court decisions.

22. Over the years there have been many such decisions, and they have led to a number of principles which are applied in the context of determining whether an amount is to be included as ordinary income. There are five such principles in particular that have relevance in the context of this case:

Principle 1: Character in the hands of the recipient

23. Whether a receipt is income or capital is determined by the character of the receipt in the hands of the taxpayer:
Scott v Federal Commissioner of Taxation (1966) 117 CLR 514 at 526;
GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124 at 136-7;
Federal Commissioner of Taxation v Montgomery (1999) 198 CLR 639 at 671 per Gaudron, Gummow, Kirby and Hayne JJ. How a payment may have been treated had it been derived by another person is not relevant (see
Federal Coke Co. Pty Ltd v Federal Commissioner of Taxation (1997) 77 ATC 4255).

Principle 2: There must be a gain

24. This principle asserts that in order for something to have the character of income there must be a gain by the taxpayer who derived it.

25. The concept of a gain seems to underpin the notion of income in most contexts, but it is challenged in some cases where an amount gives rise to income even though arguably there is no gain.

26. So, for example, a taxpayer who purchases a series of periodical receipts in exchange for the payment of a lump-sum amount was historically treated as deriving income as to the whole of those receipts, even though it was clear that they did not all represent gains but merely reflected a change in the form in which the cash asset was held. The consequence of that logic has been substantially corrected by legislative decree.

27. There are other areas of the law where the concept of gain has been watered down in this context. For example, in relation to royalty receipts where the gain requirement has been significantly watered down - a flow of royalties relating to a capital asset such as an item of intellectual property is fully assessable, even though it does not necessarily represent a gain in its entirety.

28. Nonetheless, beyond such isolated exceptions, the gain principle still stands as a basic pillar of income tax law.

29. This principle is also reflected in a series of propositions which were developed by the late Professor Ross Parsons in his detailed and incisive work 'Income Taxation in Australia' see especially Proposition 4 at page 36. According to Parsons, the notion of no gain/no income is also the fundamental basis of other common law ideas, such as the principle of mutuality and the principle that there can be no gain if an item is derived by the taxpayer as a contribution to capital.

Principle 3: Gains derived periodically

30. This principle is to the effect that a gain which is one of a number derived periodically would ordinarily have the character of income.

31. Importantly however, this principle does not support the negative - i.e. that a gain which is not derived periodically does not have the character of income.

Principle 4: Carrying on a business

32. A profit or gain made by a taxpayer in the course of carrying on its business is income according to ordinary concepts:
Commissioner of Taxation v Myer Emporium Pty Ltd (1987) 163 CLR 199 at 209. In seeking to determine whether a gain is one made in the course of carrying on a business, it will usually be necessary to examine in detail both the scope and nature of the business in issue and, in so doing, undertake 'a wide survey and an exact scrutiny of the taxpayer's activities':
London Australia Investment Co v Commissioner of Taxation (1977) 138 CLR 106 at 116;
Warner Music Australia Pty Ltd v Commissioner of Taxation (1996) 70 FCR 197 at 210 citing
Western Gold Mines NL v C of T (WA) (1938) 59 CLR 729 at 740.

33. Included within this class of income are gains which arise from an isolated transaction, which may have arisen otherwise than in the ordinary course of the carrying on of the taxpayer's business. This inclusion emerges from the Myer Emporium case where it was said at 211:

A receipt may constitute income, if it arises from an isolated business operation or commercial transaction entered into otherwise than in the ordinary course of the carrying on of the taxpayer's business, so long as the taxpayer entered into the transaction with the intention or purpose of making a relevant profit or gain from the transaction.

Thus, all that is required is that the taxpayer entered into the transaction with the intention of or purpose of making a relevant profit or gain from the transaction. In that case, even if the transaction is not part of the ordinary course of the taxpayer's business, it may nonetheless be income if it is an unusual incident of the taxpayer's business.

Principle 5: Reimbursement of deductible expenditure

34. There is no general principle of Australian tax law to the effect that amounts received by way of reimbursement or compensation for deductible expenses are assessable. The receipt must be otherwise income, according to ordinary concepts, to be assessable, and an amount is not income simply because it is a recoupment of a deductible expense:
Federal Commissioner of Taxation v Rowe (1997) 187 CLR 266.

35. To put it another way, the fact that a compensation payment, or part of it, is in effect a reimbursement of deductible expenditure is not a factor that it is determinative when considering assessability of the payment as ordinary income: see Montgomery at 691.

Application of the key principles to the current facts

36. What is clear from principle 1 is that the character of the receipt of the sum of $47,927 needs to be judged by reference to the circumstances of the recipient. In this particular matter the recipient of that sum was the Partnership and, via it, the Applicant.

37. Looking at the payment purely from the perspective of the Partnership, the Partnership was in a business which was defined in the Agreement to include the 'acquisition, development and management of retirement village facilities'. It is clear in the circumstances that the Deposit paid by Cresthaven on behalf of the Partnership, and pursuant to the Contract, was within the scope and nature of the Partnership's business considered in the light of that definition in the Agreement. The payment was intended to affect a return of that Deposit and the Deposit had been paid as part of the on-going business activities of the Partnership. Thus, the payment in question would seem to fall within the 'income from business' classification which is the subject of principle 4 outlined above.

38. In the Warner Music case the taxpayer incurred liabilities to sales tax and additional tax which were legitimately deducted by the taxpayer in the year in which they were incurred. Subsequently, the liability of the taxpayer in respect of the sales tax and the additional tax was partially relieved. A question arose as to whether the refund of that portion, which was so relieved, was assessable to the taxpayer.

39. Hill J held that the relief of liability constituted income under ordinary concepts and, in reaching that conclusion, relied on the fact that the incurring of the liability to sales tax was within the scope and nature of the taxpayer's business.

40. He commented in particular along the following lines at p 210:

Where the ordinary activities of the taxpayer are, as was at all relevant times the case with Warner, the sale of items in circumstances attracting sales tax, it is clear that the liability to sales tax will be an ordinary incident of that taxpayers income-producing activities. Thus, as and when the liability to sales tax arises, Warner would clearly be entitled to a deduction for the sales tax liability incurred by it.

Later he added at p 211:

Although unusual, a gain made by a taxpayer by virtue of being relieved from a liability to pay sales tax is, in my view, properly to be regarded as an incident of the taxpayer's business of selling goods. Even if this is not a correct analysis and it is right to describe the gain to Warner as abnormal, this description does not require the conclusion that Warner should succeed in the present appeal. Whether or not the gain itself was ordinary or abnormal, it was so intimately connected with Warner's business of selling goods, cassettes and the like, that it must be treated as being an incident of that business, even if not an ordinary incident of that business. As such it is common to use the words of the full Court in Myer, 'stamped' with the character of income.

41. A similar approach was applied in
Integrated Insurance Planning Pty Ltd & Anor v Commissioner of Taxation 2004 ATC 4054, where it was held that certain waivers of debt obligations were seen as being sufficiently connected with the continuing business of the taxpayer in favour of whom the waivers have been made. Accordingly the waivers were an incident of the business carried on and consequently have the character of income.

42. Thus, principle 4 above is to the effect that as an ordinary incident of the taxpayer's business or as what might be described as an unusual incident of the taxpayer's business, the full amount of the receipt should be included as assessable income.

43. This does not mean that every amount received in the course of a business must always be regarded as assessable income. It is possible that a transaction might simply give rise to the realisation of a capital asset which is on capital account and therefore not subject to tax as ordinary income.

44. However, merely because an amount is received as an unusual one-off payment, as it was in this case, does not detract from that amount being included in assessable income, merely because of the one-off nature of that payment.

45. In particular, principle 3 outlined above is a positive principle supporting the view that periodicity per se is suggestive of income, but it does not support the negative proposition that the lack of periodicity points to a lack of income.

46. In other words, in this case the fact that the payment is a one-off payment made to the partnership does not in any way detract from the possibility that that payment is itself assessable income. Indeed principle 4 outlined above would lend support to the view that an unusual one-off payment of this nature can be assessable income if it is a gain derived either as part of the ordinary business of the taxpayer or is a gain derived from an isolated business operation or commercial transaction outside the ordinary course of the taxpayer's business where the requisite profit making intention is present:
Commissioner of Taxation v Myer Emporium (1987) 163 CLR 199.

47. The most critical principle in the context of this matter is principle 2 outlined above, which (when read together with principle 1) asserts that in order for something to have the character of income there must be a gain by the taxpayer who derived it.

48. Clearly that principle is undermined to some extent by aspects of tax law - so, for example, I have indicated earlier that periodic receipts received in exchange for the payment of a lump-sum amount have historically been treated as giving rise to assessable income as to the whole of those receipts, even though it was clear that there were no gains for a large part of them. However, even in that context there has been some attempt to reverse that outcome by statutory intervention.

49. The principle has been found to be decisive in a number of cases.

50. Thus, in
Hochstrasser (Inspector of Taxes) v Mayes;
Jennings v Kinder (Inspector of Taxes) (1960) 38 TC 673 the taxpayer was employed by a company which compensated employees for any loss incurred on the sale of their home when they were transferred from one place of business of the company to another. The taxpayer incurred a loss (as contemplated) on the sale of his house when he was transferred to a new place of employment. In consequence of that loss the taxpayer was paid £350, the question arose as to whether the receipt of that £350 was income of the taxpayer.

51. Lord Denning specifically held that the amount of £350 was not income because the taxpayer did not make a gain and the making of a gain was a critical component of the notion of income. The other members of the House of Lords came to the same conclusion but for a different reason, namely that the payment was not income because there was an insufficient nexus with the taxpayer's employment.

52. More recently, and closer to home, Hill J sitting as a single member of the Federal Court reached a similar conclusion on materially different facts in
Lees & Lynch Pty Ltd v Federal Commissioner of Taxation 97 ATC 4407. In that case the taxpayer received $40,000 from its landlord as part reimbursement of costs incurred in fitting out premises it leased. The work which the taxpayer undertook produced no gain to the taxpayer, as the value of the work at the expiration of the lease would be no more than scrap value. The taxpayer was held not to be assessable on the $40,000 receipt.

53. Considering the circumstances that are presented here, and when properly analysed and based on the facts of the matter, it is difficult to characterise the monies received by the partnership (whether they be described as: a refund of the Deposit; or, the settlement of a litigation claim) as anything remotely like a gain or profit to the partnership's business. At most, it constituted in one way or another, a compensatory amount equal to the amount which the partnership had previously expended in the form of the Deposit. In those terms it is difficult to conceive of this amount being, to any extent, a profit or gain as those words are used in the principles outlined above.

54. The circumstances in Warner Music and Integrated Insurance Planning were different. The relieving of the obligation to pay sales tax in Warner Music and the debt waiver in Integrated Insurance Planning were instances where liabilities of the taxpayers in question were extinguished. That extinguishment gave rise to very real gains to the taxpayer. Hill J in Warner Music explicitly recognises the making of a gain when he comments at 210 that:

In my view, it is unarguable that Warner made a gain when the sales tax liabilities to which it remained subject until the 1991 income tax year were released.

55. By contrast, in this matter, no such liability extinguishment occurred. Rather, an asset (being the rights under the contract) was substituted by a cash refund to the taxpayer. Viewed in that way there is no gain here - there is merely a cash receipt in substitution for the taxpayer's rights under the contract which gives rise to no gain as such.

56. Thus, it is this principle calling for an amount to represent a gain to the taxpayer before it can give rise to assessable income that is most telling and critical in the context of the current matter. In my view, this case is factually distinguishable in that an element of gain is lacking. The taxpayer here has merely expended an amount as a deposit on the purchase of an asset and a portion of that expended amount has been refunded to the taxpayer. That does not amount to a gain in any real sense.

57. Accordingly, I take the view that the amount of $47,927 is not assessable as ordinary income to the Partnership or the Applicant.

The Second Argument - the amount of $47,927 was an assessable recoupment under s 20-20 (2) of the 1997 Act?

58. This argument only arises if the first argument is resolved against the Respondent. This is made particularly clear by s 20-20(1), which provides that an amount is not an assessable recoupment to the extent that it is ordinary income, or it is statutory income because of a provision outside this subdivision. Thus, if the amount in question is ordinary income it is excluded from being treated as an assessable recoupment under s 20-20(1).

59. Sub-section 20-20(2) provides as follows:

• (2) An amount you have received as a recoupment of a loss or outgoing is an assessable recoupment if:
  • (a) you received the amount by way of insurance or indemnity; and
  • (b) you can deduct an amount for the loss or outgoing for the current year, or you have deducted or can deduct an amount for it for an earlier year, under any provision of this Act.

60. Sub-section 20-25(1) explains recoupment as follows:

• (1) Recoupment of a loss or outgoing includes:
  • (a) any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described; and
  • (b) a grant in respect of the loss or outgoing.

61. In order for sub-section 20-20(2) to apply, three conditions must be satisfied:

• • the Applicant must receive an amount as recoupment of a loss or outgoing;
• • the Applicant must receive the amount by way of insurance or indemnity;
• • the Applicant must have deducted or could have deducted an amount for the loss or outgoing for an earlier income year under any provision of the 1997 Act.

Condition 1 - the Applicant must receive an amount as recoupment of a loss or outgoing

62. first matter raised above appears to be easily satisfied, having regard to the broad definition of 'recoupment of a loss or outgoing' which covers any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery. While counsel for the Applicant sought to draw a careful distinction between a refund of the Deposit and payments pursuant to rights contained in the contract, that distinction appears to be of little relevance in relation to this aspect of subs 20-20(2). At the very least this would appear to be some kind of recovery, whether it be classed as a payment pursuant to rights contained in the contract or as a refund of the deposit.

Condition 2 - the Applicant must receive the amount by way of insurance or indemnity

63. More problematic is the question as to whether the amount in question has been received 'by way of insurance or indemnity' as that term is used in subs 20-20(2)(a).

64. Quite clearly this is not a payment by way of insurance.

65. The question as to whether it is a payment by way of indemnity is complicated by virtue of the fact that indemnity is not defined in the 1997 Act. It must therefore bear its ordinary meaning assessed, albeit, in light of the purpose and context of the provision in which the word appears, namely: s 20-20.

66. The Macquarie Dictionary defines 'indemnity' as including:

• (i) protection against damage or loss; and
• (ii) compensation for damage or loss sustained; …

67. The Oxford English Dictionary similarly defines 'indemnity' as:

• (i) protection against hurt, damage or loss; and
• (ii) compensation for loss or damage incurred; …

68. These definitions are remarkably similar to one another. I make the following observations in regard to them and the use of the word 'indemnity' in the context of s 20-20.

69. First, nothing in the definitions requires there to be a contract or deed of indemnity. They simply refer to protection or compensation without specifying the mode by which that protection or compensation is provided. Case law would also support this broad view of this aspect of the meaning of indemnity - see for example Kitto J in
Federal Commissioner of Taxation v Wade (1951) 84 CLR 105 where the learned judge, in construing s 26(j) of the 1997 Act, commented at p 115 that "[t]he words 'by way of indemnity' describe the character of the receipt, and in my opinion they may be satisfied as well by a receipt pursuant to a statutory right as by a receipt under a contract."

70. Secondly, it is clear from these definitions that a payment made by way of damages can be regarded as payments by way of indemnity, and this view is clearly supported by the circumstances of a number of the decided cases:
Goldsbrough Mort & Co Ltd v Federal Commissioner of Taxation (1976) 12 ALR 533 and Wade.

71. Thirdly, I note that the word 'indemnity' as used in s 20-20 is preceded by the words 'by way of'. That phrase in my view provides some, albeit limited, colour to the breadth of the meaning of the word 'indemnity', and arguably widens the scope that might otherwise apply. Thus, if the phrase 'as insurance or indemnity' rather than 'by way of insurance or indemnity' had been used, the scope would, in my view, have been narrowed.

72. Finally, and perhaps most controversially, the definitions do not in and of themselves in any way restrict the notion of indemnity to obligations to make good what might happen in the future, rather than making good losses that have already occurred. Rather they speak generally of protecting or compensating for losses irrespective of when those said losses arose. It is even possible to argue that the use of the past tense in the words 'sustained' and 'incurred' suggest that these ordinary English dictionary definitions support the view that an 'indemnity' can cover losses that were sustained or incurred before the indemnity came into existence. It must be conceded, however, that the use of those words may not be used in those dictionary definitions to convey a temporal connotation.

73. In regard to this critical point, there has been some conflicting case law commentary. The conflict is largely the result of two cases which have looked in detail at the meaning of 'indemnity'.

74. The first is the decision of Walters J sitting as a single judge of the Supreme Court of South Australia in Goldsborough Mort where he concluded at p 540 that:

In my view, the language of section 26 (j) of the Income Tax Assessment Act 1936 (ITAA 1936) (the section the subject of discussion in that case) 'may be treated as contemplating an indemnification in respect of loss already incurred.

75. This view was supported, according to his Honour, by a number of cases including
Robert v Collier's Bulk Liquid Transport Pty Ltd (1959) VR 280 at 283;
Melbourne Saw Manufacturing Co. Pty Ltd v Melbourne and Metropolitan Board of Works (1970) VR 394 at 399 and Wade.

76. The second and contrasting decision is that of David Hunt J sitting as a single judge of the Supreme Court of New South Wales in
Commercial Banking Co of Sydney Ltd v Federal Commissioner of Taxation 70 FLR 433. That case suggests that the concepts of indemnity and indemnify are focused on obligations to make good what might happen in the future, rather than making good losses that have already occurred. Indeed David Hunt J in that case commented at p 444 that:

It is indeed difficult to comprehend the notion of an indemnity in respect of a loss which has already been incurred. It does not, with respect, seem to me to be a normal use of the word "indemnify", which in my view contemplates an obligation to make good, or to compensate for, a loss which may happen in the future whether by contract or otherwise.

77. As a result he later concluded at p 445 that:

It follows, in my judgement (and with the greatest respect to Walters J), that the decision in the Goldsborough Mort case is wrong, and I decline to follow it. In my view, there has in the present case been no amount received by the taxpayer "by way of indemnity", and section 26(j) does not apply.

78. The Tribunal is faced in this matter with a dilemma - there are two cases directly on point as to the issue of the meaning of 'indemnity', and both decisions are of equal weight being decisions of single judges of two State Supreme Courts.

79. French J (as he then was) in
Federal Commissioner of Taxation v Salenger (1988) 19 FCR 378 dealt with the question whether the Tribunal is bound to follow the decision of a Supreme Court and said at p 387 and 388 that:

I should add, with the greatest of respect to the tribunal, that it is difficult to see how it is open to a senior member to form the view that a decision of the Supreme Court of a State which is on the very point before the tribunal is incorrect and not to be followed. In the special case of conflicting decisions of superior courts, the tribunal may have to decide which to follow, but that occasion does not arise here. Ordinarily, senior members of the tribunal should apply the law as stated by the judges of this court or by judges of the Supreme Courts of the States.

80. This matter, it seems, falls squarely within the special case contemplated by French J and, accordingly, it is a matter for this Tribunal to decide which Supreme Court decision should be followed.

81. Having regard in particular to:

• • the very broad dictionary definitions, which in no way constrain the meaning of the word indemnity in the manner suggested in the Commercial Banking case, and
• • the fact that the receipt need only be 'by way of' indemnity,

I adopt the views of Walters J in Goldsborough Mort in preference to those of David Hunt J in the Commercial Banking case.

82. Accordingly, I conclude that the Applicant received the amount of $47,927 by way of indemnity.

Condition 3 - the Applicant must have deducted or could have deducted an amount for the loss or outgoing for an earlier income year under any provision of the 1997 Act

83. Finally, I simply note that the amount in question was deducted in an earlier year.

Conclusion on the Second Argument

84. The amount in question here was an assessable recoupment for the purposes of s 20-20 and, accordingly, the assessable recoupment is included as part of the Applicant's assessable income under subs 20-35(1) of the 1997 Act.

The Third Argument - the amount of $47,927 was an assessable capital gain under Chapter 3 of the 1997 Act?

85. If I am correct on the First Argument and am wrong on the Second Argument (i.e. the amount is not assessable as recouped expenditure under s 20-20), it is necessary for me to determine whether the amount of $47,927 was an assessable capital gain.

86. The manner in which this issue arose before the Tribunal was unusual, in that the Respondent did not seek to assert that the Applicant's share of the Deposit, upon its return to her, constituted an assessable capital gain. The Applicant however chose to raise this issue and did so essentially by:

• • conceding that damages receipts can give rise to capital gains as per Taxation Ruling TR 95/35; and
• • arguing that the amount received in respect of the 'disposal' of the relevant asset would be equal to the cost base of the asset and therefore no capital gain would arise.

87. This is consistent with the analysis conducted in
Rabelais Pty Ltd v Cameron 95 ATC 4552 in which Hodgson J said that at p 4553:

It is submitted, the damages provided for in a judgement such as this could perhaps be regarded as consideration on disposal of an asset within Part IIIA of the Act, the relevant asset being the cause of action. However, it seems to me that any capital gain for the purposes of that part would have to be calculated by deducting, from the amount of the damages, the cost base, being relevantly, it is submitted, the net asset lost by the plaintiff as part of the production of the cause of action.

In this case, as in most cases, I think the whole of the capital component of the damages would reflect the net value of whatever asset the plaintiff has lost in producing the cause of action; so that the cost base would be no less than the capital component of the damages awarded.

88. The Applicant then sought to determine the amount of any capital gain that might arise as a result of the refunded Deposit using the following logic:

• Step 1 -

  the cost of acquiring the Property was an outgoing on capital account as opposed to one on revenue account;

• Step 2 -

  upon entry into the Contract and payment of the Deposit, the Applicant (through the Purchaser) acquired a bundle of rights which included the immediate right to a refund of an amount equal to the Deposit paid in the event that the Purchaser brought the Contract to an end as a result of irredeemable default by the Vendor. It was this which was the relevant CGT asset which the Applicant (through the Purchaser) acquired;

• Step 3 -

  the cost base of this CGT asset included the amount of money given, being the amount of the Deposit paid - see in particular s 11-25(2)(a) of the 1997 Act.

• Step 4 -

  the source of the Applicant's right to a refund of the Deposit exclusively arose under the contract, with the failure to build the proposed retirement village constituting a repudiation of the Contract by the Vendor which gave rise to the right to receive;

• Step 5 -

  CGT Event C2 (see s 104-105 of the 1997 Act) occurs when the relevant intangible asset (being the bundle of rights under the Contract, including the right to refund the Deposit) came to an end. It was after this and in consequence of the contract being brought to an end that the Vendors refunded the Deposit monies.

89. The problem with the analysis is step 3 is that it overlooks the important qualification provided by s 110-45(2) of the 1997 Act, which relevantly provides that:

• (2) Expenditure (except expenditure excluded by subsection (1B)) does not form part of the cost base to the extent that you have deducted or can deduct it for an income year, except so far as:
  • (a) the deduction has been reversed by an amount being included in your assessable income for an income year by a provision of this Act (outside this Part and Part 3-3 and Division 243) …

90. In other words, as the Applicant's share of the Deposit was both deductible and deducted, to that extent it cannot form part of the cost base unless the deduction is reversed by, for example, an inclusion in assessable income by virtue of s 20-20 of the 1997 Act. This issue is being considered here on the premise that neither s 6-5 nor s 20-20 applies. If that is the case, the cost base will be zero and the whole of the receipt of $47,927 will be an assessable capital gain.

91. For the sake of completeness I note that s 110-45 was amended in 2000, but the previous version of the section, while differently drafted, would give rise to the same outcome as the difference is not material to the circumstances of this matter.

92. Finally, I merely comment that there is in this matter the potential for there to be a gain under the capital gains tax provisions in circumstances where there is no gain to the taxpayer in regard to s 6-5 being ordinary income. This conclusion is dictated by the statutory direction in s 110-45 that the cost base is to be reduced for capital gains tax purposes by an amount equal to the amount that was previously deducted. No such mechanism creating a gain in such circumstances operates in regard to ordinary income.

OVERLAP ISSUES

93. Clearly there are a number of issues that arise here in relation to the overlap of the three potential taxing provisions.

94. On the conclusion which I have reached, that the amount of $47,927 is not assessable income on ordinary principles under s 6-5 but is assessable income under s 20-20, the amount of the capital gain that would otherwise be included is reduced effectively to zero by the inclusion in the cost base of the full amount (see s 110-45(2)).

95. If I had found that the amount was to be included as assessable income under s 6-5, s 20-20 would not apply, and the whole of the amount would be then included as a capital gain but would be reduced under s 118-20 to the extent that an amount has been included as assessable income under s 6-5.

96. If I am correct on the application of s 6-5 but incorrect on the application of s 20-20 (i.e. it is assessable under neither) the full amount will be included as a capital gain with no reduction.

DECISION

97. The objection decision is varied by including the amount of $47,927 in the taxpayer's assessable income under s 20-20 of the 1997 Act.