Benwerrin Developments Pty. Ltd. v. Federal Commissioner of Taxation.

Judges:
McGarvie J

Court:
Supreme Court of Victoria

Judgment date: Judgment handed down 10 August 1981.

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McGarvie J.

This is an appeal under sec. 196 of the Income Tax Assessment Act 1936 by a taxpayer, Benwerrin Developments Pty. Ltd. (``Benwerrin''), against the decision of Taxation Board of Review No. 1 upholding the disallowance by the Commissioner of objections by the taxpayer to assessments of income and additional tax in respect of the year ending 30th June, 1972.

The appellant tendered the transcript of proceedings and the exhibits which were before the Board and no additional evidence was placed before me. Both parties asked me to determine this appeal on the findings of fact expressly or implicitly made by the Chairman of the Board and the facts assumed by him in his reasons.

The appeal concerns a transaction with respect to about 12 acres of land (``Lot 87'') at Campbelltown near Sydney, New South Wales. Before the transaction Benwerrin and Bill McWilliam Pty. Ltd. (``B.M.'') were the registered proprietors of Lot 87 under the Real Property Act. At the conclusion of the transaction Benwerrin and B.M. had received $50,000 and had transferred the lot to Bourail Ltd. (``Bourail'') which had become the registered proprietor of it. The taxpayer returned as income a share of the profit made through the receipt of the $50,000. The Commissioner, however, based his assessment of tax on the value of the lot which he treated as being deemed by sec. 36 of the Act to be the price for which it was sold.

So far as is now relevant sec. 36 provides:

``(1)... where -

• (a) a taxpayer disposes by sale... of property being trading stock...;
• (b) that property constitutes or constituted the whole or part of the assets of a business which is or was carried on by the taxpayer; and
• (c) the disposal was not in the ordinary course of carrying on that business,

the value of that property shall be included in the assessable income of the taxpayer, and the person acquiring the property shall be deemed to have purchased it at a price equal to that value.

...

(8) For the purposes of this section...

• (a) the value of any property... shall be -
  • (i) the market value of the property on the day of the disposal...''

On this appeal the question whether sec. 36 applies to the transaction turns solely on whether the taxpayer disposed of the property. If so, it is common ground that the section applies. If the section does apply, there are other issues. I shall mention them later.

The position as at 26th February, 1971, was that the taxpayer and B.M. held Lot 87 and other land as trustees for a syndicate of which they were both members. Three groups of companies, each group consisting of members in partnership with each other, had joined together to form the syndicate. One of the objects of the syndicate was to subdivide and develop the land and share the profits between the groups in agreed proportions. The companies in the syndicate were resident in Australia.

During 1971 the directors of the companies in the syndicate decided to engage in a scheme of tax avoidance in which three companies in what was then New Hebrides, would take an important part. The tax avoidance scheme had been devised or its tax avoiding efficacy confirmed by a Queen's Counsel. Apart from tax avoidance there

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were no commercial reasons for engaging in the scheme. The scheme was duly implemented by a number of steps.

In the first step the taxpayer and B.M. for $500 granted to one of the companies in New Hebrides, Akasaka Ltd. (``Akasaka''), or its nominee, an option to purchase Lot 87 for $50,000. Before that grant the market value of the lot was about $250,000. It was a term of the option that it might be assigned and Akasaka assigned it for $1,000 to Tankau Ltd. (``Tankau''). The company, Bourail, for a payment of $200,000 to Tankau, was then nominated under the option as to the person to exercise it. On about 3rd November, 1971, Bourail exercised the option. Akasaka, Tankau and Bourail were all companies resident in New Hebrides. None of the people with any interest in the companies of the syndicate had any interest in Akasaka, or Bourail. Tankau, however, held what it received under the scheme as trustee under discretionary trusts for the benefit of the families of people interested in the companies of the syndicate. It had made a profit of $199,000.

I have stated those transactions in accordance with the assumptions of fact which the parties requested me to adopt and without regard to evidentiary deficiencies or inconsistencies.

The option required that upon its exercise, the parties enter into a contract in a form which was annexed to the option. Because of delays in receiving authority from the Reserve Bank of Australia, it was not until 10th May, 1972 that the parts of such a contract between the taxpayer and B.M. as vendors and Bourail as purchaser, were exchanged. The contract was completed on 31st May, 1972 when the balance of the purchase price of $50,000 was paid giving credit for the $500 paid for the option. Bourail then received a transfer and became entitled to vacant possession of Lot 87. On 4th July, 1972 Bourail became the registered proprietor of the lot.

It is common ground that at the relevant times, the market value of Lot 87, if considered without regard to any contract relating to it, was $250,000.

The effect of the scheme was that instead of their beneficial interest in Lot 87 worth $250,000, the companies of the syndicate finished up with $50,000 and Tankau finished up with $199,000 held for the benefit of the families of the people interested in the companies in the syndicate. As a resident of New Hebrides, Tankau was not liable to Australian income tax on its profit of $199,000.

Mr. Myers for the appellant first argued that sec. 36 of the Act only applied if there had been a disposal by the taxpayer of its entire freehold interest in Lot 87. He put it that there had here been two separate and distinct dispositions of partial interests in the freehold interest and as neither step amounted to the disposal of the entire freehold interest, sec. 36 did not apply to it. He contended that it was not permissible to look at the transaction as a whole to see whether the combined result of the steps taken was that the taxpayer had disposed of its entire freehold interest.

Mr. Myers argued that the option was a contract to sell the land upon condition that Akasaka or its nominee gave the notice exercising the option. The option he submitted, gave Akasaka or its nominee a contingent equitable interest in the land. He relied on what was said by Gibbs J. in
Laybutt v. Amoco Australia Pty. Ltd. (1974) 132 C.L.R. 57 at pp. 70-76. He also relied on
Rose v. F.C. of T. (1951) 84 C.L.R. 118, as authority for the proposition that although this first step, the grant of the option, disposed of a partial interest in the taxpayer's estate in fee simple in the land, sec. 36 did not apply to such a partial disposal. In his submission, the second step occurred when Bourail exercised the option. He put it that in respect of a nominee, the option amounted to an offer to sell to such nominee as might accept the offer by exercising the option. He referred me to what was said by Burt J. in
Bell Bros. & Stewart v. Sarich (1971) W.A.R. 157 at p. 159. At this stage, he argued, the taxpayer and B.M. as vendors and Bourail as purchaser had become bound to each other in contract. Although the option provided that its exercise should be void unless contracts in the form annexed to it were executed within 21 days of the exercise, Mr. Myers argued that in the circumstances that meant ``voidable'' and neither side had avoided the contract.
Suttor v. Gundowda Pty. Ltd. (1950) 81 C.L.R. 418 at pp. 440-441 was relied on. When the new contract

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was substituted for the existing one by exchange of parts on 10th May, 1972, so the argument went, it did no more than continue in existence the interest in the land which Bourail already had upon exercising the option. Mr. Myers put it that the effect of the exercise of the option was to dispose of the balance of the beneficial interest in the land which the taxpayer and B.M. had retained after they had disposed of the contingent equitable interest by granting the option. At that stage it was said, the whole of the beneficial interest in Lot 87 had been disposed of, but because there had been two separate and distinct steps each disposing of part of that interest, neither step constituted a disposal within sec. 36 nor did the whole transaction.

I do not need to consider either the correctness or the consistency of the submissions as to the legal effect of what occurred in the two separate steps relied on by Mr. Myers. Nor do I have to consider the consequences of the existence or non-existence of authority from the Reserve Bank at various times or the fact that authority was obtained by the provision of false information to that bank. Assuming the correctness of the submissions as to the legal effect of what occurred in the two separate steps, it is my opinion that there was, within the meaning of sec. 36, a disposal of Lot 87.

I accept the submission of Mr. Conti Q.C., who appeared with Mr. Bathurst for the respondent, that in applying sec. 36 there is no warrant for carving up the transaction into its separate steps and asking whether any one of them amounted to a disposal of the entire interest in the property. That approach does not have either reason or reality to commend it. Compare:
W.T. Ramsay Ltd. v. I.R. Commrs. (1981) 1 All E.R. 865. The approach is to look at the whole transaction and ask whether it effected a disposal of the property. In the ordinary meaning of the word ``dispose'' there is no doubt that by the transaction, the taxpayer and B.M. disposed of the land to Bourail. From start to finish it was the intention of the taxpayer and B.M. to dispose of the land. Everything that was done was directed to that end. The complex procedure by which the disposal was effected, was adopted only to avoid tax. The ordinary informed citizen would doubt the good sense of the law if it held that the taxpayer and B.M., having through contracts made in accordance with a pre-arranged plan transferred the entire ownership and possession to a purchaser, had nevertheless achieved this result without disposing of the land. There are authoritative statements in the cases indicating that the word ``dispose'' is used in its ordinary commercial meaning and is a word of wide import capable of covering all forms of alienation.
F.C. of T. v. Wade (1951) 84 C.L.R. 105 at p. 110: see also
Henty House Pty. Ltd. (In Voluntary Liquidation) v. F.C. of T. (1953) 88 C.L.R. 141 at pp. 151-154 and pp. 156-157;
F.C. of T. v. St. Hubert's Island Pty. Ltd. (In Liquidation) 78 ATC 4104; (1977-78) 138 C.L.R. 210 at pp. 232-233;
W.T. Ramsay Ltd. v. I.R. Commrs. (1981) 1 All E.R. 865 at pp. 871-872 and p. 882.

In Rose v. F.C. of T. (1951) 84 C.L.R. 118 a pastoralist entered into partnership with his two sons and brought in trading stock of his pastoral business to be the trading stock of the partnership. It was held that under an earlier form of sec. 36 the pastoralist had not disposed of the trading stock by imparting to his sons equal undivided shares as co-owners with himself. It was held that the section did not apply when the subject of the disposition was an undivided fractional interest in the trading stock and not the entirety of the pastoralist's ownership.

There is nothing in that decision to indicate that sec. 36 does not apply to a transaction in which the intended disposal of the entire ownership is effected by successive dispositions of part of that ownership.

Several alternative dates were advanced as being the day of the disposal of Lot 87, for the purposes of sec. 36(8). Counsel analysed the respective interests of vendor and purchaser at various stages under a contract of sale of land. See:
Austen v. Sheldon (1974) 2 N.S.W.L.R. 661 at pp. 670-677 per Mahoney J. Stonham Vendor and Purchaser pp. 581-585. Voumard Sale of Land 3rd ed. (Wikrama) pp. 92-93. I consider that in the ordinary commercial sense the date of completion, 31st May, 1972 was in this case the day of disposal. On that day, the vendors became entitled to and received the balance of the purchase price, and then held the property free of any vendors' lien as bare trustees for the purchaser. The purchaser at

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that stage was both beneficial owner and entitled to possession. The transfer of the possession is a consideration of importance. Rose v. F.C. of T. (1951) 84 C.L.R. 118 at pp. 123-124. The purchaser was placed in a position to acquire the legal freehold estate in the land by registering the transfer. The word ``sale'' is apt to refer to a completed sale.
The King v. Canadian Pacific Railway Company (1911) A.C. 328 at pp. 333-334. No one has suggested that the date of registration of the transfer, which fell in the next income year, was the day of disposal.

I consider that within the meaning of sec. 36, the taxpayer and B.M. disposed by sale of Lot 87 on 31st May 1972.

The second argument for the appellant was that if there had been a disposal of the lot, its market value on the day of the disposal had to be assessed taking into account that immediately before the disposal the vendors had binding contractual obligations in respect of the property. Mr. Myers put his submission on the basis that the day of disposal was the date on which the option was exercised. He argued that immediately before that, the lot was subject to an option to sell it for $50,000, which was certain to be exercised. A purchaser in the market purchasing the lot subject to the option could not be expected to pay more than $50,000 he contended. I was referred to
Perpetual Executors and Trustees Assoc. of Aust. Ltd. v. F.C. of T. (Thomas' Case No. 2) (1955) 94 C.L.R. 1. In that case a partnership agreement provided that on the death of a partner, surviving partners had options to purchase his interest at a price fixed by a formula which did not take into account the value of the goodwill of the partnership. Although it was certain that the options would be exercised, the Commissioner in assessing estate duty, took into account the value of the goodwill of the partnership in placing a value on the interest of a deceased partner. It was held that the value of the interest of the deceased partner in the partnership could not be regarded as being greater than the price obtainable from the surviving partners. In that case the Court was concerned with the value of the interest to the deceased immediately before his death or to his estate immediately after death. (See at p. 15 per Dixon C.J.) It was concerned with the actual value of the interest to the deceased or his estate. If this case were concerned with the actual value of the lot to the taxpayer and B.M. immediately before the exercise of the option there would be much to be said for the argument of the appellant. However, the obvious purpose of sec. 36 is to adopt another value - the market value of the property. The distinction between these two types of value was recognized by Barton J. in
Spencer v. Commonwealth (1906) 5 C.L.R. 418 at p. 435. In dealing with a case where trading stock is disposed of other than in the ordinary course of business, the section deems the price to be that which would have been received if sold at market value. This is the price which would have been received if the trading stock had been sold in the ordinary way on the trader's ordinary market.
B.S.C. Footwear Ltd. v. Ridgway (1973) A.C. 544 (House of Lords); (1971) Ch. 427 (Court of Appeal).
Orchard v. Simpson (1857) 2 C.B.N.S. 299. The lot would not be regarded as sold on the market in the ordinary way if sold in a way which involved the reduction of its value by the granting of an option at a gross undervalue to a third person before it was offered on the market. It would entirely defeat the purpose of sec. 36 in a case such as the present, if the market value was regarded as the value on the market after the taxpayer and B.M. granted the option at undervalue to Akasaka. I have discussed this question on the assumption that the day of the disposal was the date of the exercise of the option. The same considerations apply where, as I have held, the day of disposal was the date of completion. The fact that before that date the vendors had bound themselves by the contract to sell at an undervalue, does not affect the market value of the lot for the purposes of sec. 36.

The result is that the market value of Lot 87 on the day of its disposal was $250,000.

The third argument of the appellant is put on the assumption that the lot was, by the operation of sec. 36, disposed of for a price of $250,000. The submission is that nevertheless Benwerrin was not liable for additional tax.

In the Income Tax Assessment Act 1936-1972, sec. 226(2) and (3) provided as follows:

``(2) Any taxpayer who omits from his return any assessable income, or includes

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in his return as a deduction for expenditure incurred by him an amount in excess of the expenditure actually incurred by him, shall be liable to pay as additional tax an amount equal to double the difference between the tax properly payable by him and the tax that would be payable if it were assessed upon the basis of the return furnished by him, or the amount of Two dollars, whichever is the greater.

(3) The Commissioner may in any case, for reasons which he thinks sufficient, and either before or after making any assessment, remit the additional tax or any part thereof.''

The first submission is that Benwerrin was not in the circumstances a taxpayer to whom sec. 226(2) applied. The contention is that if there was an omission of assessable income from a return the taxpayer to whom the subsection applied was the syndicate which is known as ``Project Campbelltown No. 1''.

Section 91 provided:

``A partnership shall furnish a return of the income of the partnership, but shall not be liable to pay tax thereon.''

Section 92(1) provided:

``The assessable income of a partner shall include his individual interest in the net income of the partnership of the year of income, and his individual interest in a partnership loss incurred in the year of income shall be an allowable deduction.''

Section 90 included this definition:

```Net income' in relation to a partnership, means the assessable income of the partnership,... less all allowable deductions except''

(certain specified allowable deductions).

There was a similar definition of ``partnership loss''.

The syndicate, Project Campbelltown No. 1 made a partnership return stating the partners to be the Liner Group of Companies (which included the taxpayer), the Hannett Group of Companies and the Bill McWilliam Group. The net income returned was $130,060. The Commissioner, taking the view that the sale price of Lot 87 was to be treated as $250,000 rather than $50,000, added $200,000 to the net income of the syndicate, so that it became $330,060. The Liner Group was entitled to half the income of the syndicate so the Commissioner treated the net income distributed to it as increasing from $65,030 to $165,030.

The Liner Group also furnished a partnership return stating the partners to be seven companies of whom Benwerrin was one. It showed as part of its income, the $65,030 received from Project Campbelltown No. 1. Its net profit was shown as distributed equally between the seven companies. The Commissioner made an unrelated adjustment of $140 in favour of the Liner Group. Adding the sum of $100,000 he increased the profit which should for tax purposes be treated as distributed from the Liner Group to each of the seven companies by $14,266; from $4,313 to $18,579.

Benwerrin made its return, stating its taxable income as $4,313, the share of the net profit received from the Liner Group. The Commissioner assessed Benwerrin to tax on that amount but later gave notice of an amended assessment based on a taxable income of $18,579.

On the basis that Benwerrin had omitted from its return assessable income amounting to $14,266 the Commissioner treated it as liable to additional tax. He remitted this to the extent of three quarters, leaving Benwerrin liable for $2,889 additional tax.

By sec. 91 a partnership although liable to furnish a return is not liable to pay tax. If, as is submitted for the appellant, it is only Project Campbelltown No. 1 which is liable to additional tax, that liability would be limited to $2. The formula in sec. 226(2) for fixing the amount of additional tax could not operate because there is no amount of tax properly payable by the partnership. However, Benwerrin omitted assessable income from its return. It failed to give a full statement of its individual interest in the net income of Project Campbelltown No. 1 (or of what could be regarded in another way as its individual interest in the net income of the Liner Group). Benwerrin was a person deriving income and therefore a taxpayer. See sec. 6(1). It was put that a partner whose return is consistent with the partnership return, is placed in an invidious position if

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through error in the partnership return, he is liable to additional tax. I do not regard this consideration as carrying much weight because a partner has powers and responsibilities in respect of what the partnership does. There is nothing in the words of the Act to indicate that sec. 226(2) does not apply to a partner in the position of Benwerrin. There is nothing in the policy disclosed by the provisions of the Act to indicate a legislative intent that, alone of those liable to pay tax, partners were to be free of additional tax if they omitted to return assessable income from partnership interests. Compare:
Cooper Brookes (Wollongong) Pty. Ltd. v. F.C. of T. 81 ATC 4292 (Full High Court, 5th June, 1981).

The other submission for the appellant regarding additional tax is that in sec. 226(2) the expression ``omits from his return any assessable income'' means in effect ``omits entirely from his return any item of assessable income''. It was put that on that construction Benwerrin in its return stated that its assessable income included its interest in the partnership and so did not fall within the subsection although it understated the amount of the interest. That construction, as Mr. Conti pointed out, would have startling consequences. A person on a salary of $30,000 would escape additional tax if he referred to the item of salary but understated it as $10,000. The meaning of the subsection is indicated by the section which imposes the obligation to make a return. So far as is relevant for present purposes sec. 161 requires a person to furnish to the Commissioner a return ``setting forth a full and complete statement of the total income... derived by him during the year of income''. That indicates that there is an omission in the statement of any assessable income if it is not stated fully and completely. No context was relied on as justifying the reading of additional words into the subsection. I consider that the words in the subsection imposing additional tax in the case of a taxpayer who includes in his return as a deduction for expenditure incurred by him an amount in excess of the expenditure actually incurred by him, confirms the view which I have taken of the construction of the section. I consider that Benwerrin omitted from its return assessable income amounting to $14,266.

In my opinion Benwerrin is liable to additional tax under sec. 226(2). There is no need to decide whether Project Campbelltown No. 1 was also liable to the extent of $2.

The result is that I reject all three arguments advanced for the appellant. These arguments were similar to arguments advanced for the taxpayer to the Board of Review by other legal representatives and unanimously rejected by the Board.

The appeal is dismissed.

I make these orders:

• (1) The appeal is dismissed.
• (2) That the appellant pay the respondent's taxed costs of the appeal.