Case U137

Members:
P Gerber SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 22 June 1987.

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Dr P. Gerber (Senior Member)

Many years ago, in the Dreamtime, long before Oasis of Mullins had been discovered (
F.C. of T. v. Mullins 81 ATC 4643), the motel Marie Celeste was bought and sold, all within 12 months. There was a substantial profit. All the parties were companies and the party presently before me is the nominated person of the representative class of vendor shareholders of the company which bought and sold the motel within the proscribed period (hereinafter referred to as "the taxpayer"). Since the water diviners had not yet quivered over the underground waters of sec. 26AAA(5)(a) and (b), none of the companies had bothered to make any apportionment between land and chattels in the purchase price. The motel was simply acquired as a going concern and onsold to developers for land value only (the Marie Celeste was, in fact, immediately demolished, and the chattels - which had been specifically excluded from the sale - were abandoned in situ by the taxpayer and became res nullius). It is now sought, proleptically, to take advantage of Mullins and to exclude the profit on sale by a number of strategems, some more ingenious than others.

2. The relevant sections of the Income Tax Assessment Act 1936 which arise for consideration in this matter are:

"26AAA(2) Where -

• (a) a taxpayer has purchased property after 21 August 1973 and before the commencement of this section or purchases property after the commencement of this section; and
• (b) the taxpayer has, whether before or after the commencement of this section, sold the property or an interest in the property before the expiration of the period of 12 months from the date on which he purchased the property,

then, subject to this section, the assessable income of the taxpayer includes any profit arising from the sale of the property or interest.

...

(5) Sub-section (2) does not apply in relation to a sale by a taxpayer of property if -

• (a) the property was included in the assets of a business carried on by the taxpayer and, as a result of the sale, an amount will be included in the assessable income of the taxpayer of the year of income under a provision of this Act other than this section;
• (b) section 54 applied in relation to the property and, as a result of the sale, section 59 applies in relation to the property;

...

54(1) Depreciation during the year of income of any property, being plant or articles owned by a taxpayer and used by him during that year for the purpose of producing assessable income, and of any property being plant or articles owned by the taxpayer which has been installed ready for use for that purpose and is during that year held in reserve by him shall, subject to this Act, be an allowable deduction.

...

59(1) Where any property of a taxpayer, in respect of which depreciation has been allowed or is allowable under this or the

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ATC 796

previous Act, is disposed of, lost or destroyed at any time in the year of income, the depreciated value of the property at that time, less the amount of any consideration receivable in respect of the disposal, loss or destruction, shall be an allowable deduction

..."

3. Firstly, it was submitted on behalf of the applicant, the motel had been acquired and sold "on the hoof" so to speak, including all depreciated items of plant and equipment, so that an amount, representing recoupment of allowable depreciation in respect of these items, constituted assessable income, hence sec. 26AAA(5)(a) operated to exclude the application of sec. 26AAA(2). The second argument is a variant of the first. Some items of plant, such as sinks, oil heater, pool filter and neon signs, were fixtures which passed with the land, and, having been the subject of depreciation, the recoupment once again constituted assessable income, thus introducing sec. 26AAA(5)(a) and excluding the application of sec. 26AAA(2). Thirdly, it was submitted that because an amount of $574 was received as consideration for waiving strict compliance with the agreed date of settlement (final payment was tendered three days late), once again sec. 26AAA(5)(a) comes to the taxpayer's rescue. The fourth point relates to quantum.

4. Dealing with the first argument, much time was taken up in argument and several witnesses were called to enlighten me on the value, inter alia, of geriatric motel mattresses, elderly refrigerators and other memorabilia of the trade. It was sought to establish by this evidence that these items must have been disposed of for a consideration that exceeded their depreciated value. It was a brave attempt, but it must fail, if only because the Act has placed the onus of proof squarely on the taxpayer. It was clear from the outset that the taxpayer faced a substantial evidentiary hurdle. In the first place, it proved impossible to establish what the depreciated value of any item was. No attempt having been made to place a value on these items when the motel was bought, the taxpayer sought to overcome this deficiency by seeking details of the opening depreciated values of the various items from the respondent. The latter refused to supply the information on the ground that, since it could only be obtained by recourse to the tax returns of the two vendor companies, such disclosure was prevented by sec. 16 of the Income Tax Assessment Act in the absence of the companies' consent, which had been refused. The application was renewed before me. The point is a novel one. Neither party was able to refer me to any precedent. In the result, and after much soul-searching, I directed that: (i) the respondent inspect the relevant company returns; (ii) one of its officers be made available to inform the Tribunal and the parties of the opening values of all the depreciated items of plant and fixtures in the motel at the time of acquisition; and (iii) this evidence would not be subject to cross-examination. I concluded that the purchaser of the motel was entitled to this information, if only because the taxpayer was deemed to have acquired the items of plant at a cost equal to their depreciated value and that this knowledge was - or should be - common to both vendor and purchaser and in no relevant sense protected by confidentiality. Alas, good deeds are made in heaven and grow downwards into time and corruption. An officer of the respondent was called and deposed that a search had been instituted, which revealed that neither vendor company had lodged a return in the relevant year. Out of an abundance of caution, the Commissioner extended his search to all capital cities except Perth. He did not dredge the bottom of the harbour. On the evidence, I am satisfied that there are no relevant tax returns in Perth. The taxpayer is thus unable to adduce the opening value of any of the items of plant, or to demonstrate that they had been disposed of for a consideration that exceeded their opening value. This threshold question was made no easier by virtue of the fact that none of the chattels had been "disposed of, lost or destroyed" (they had, in fact, been abandoned) [cf. sec. 59(1)]. Whether, in the circumstances, the failure to demonstrate a "disposal" is of itself fatal to this part of the argument need not be considered since I have concluded that the taxpayer fails on the preliminary evidentiary threshold.

5. Turning to the fixtures, despite Mr Robb's persuasive argument, I have not been convinced that any different consequences flow from the fact that some fixtures passed with the land. Although I was particeps criminis to the decision in Mullins at first instance, it is difficult to escape the conclusion that the result

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ATC 797

is eccentric. If a taxpayer falls neatly within the four corners of the exclusionary provisions of sec. 26AAA(5), as did pigfarmer Mullins with his fences, so be it. No doubt everyone other than the Commissioner of Taxation will wish him God speed. But it does not follow that every taxpayer, who thinks he can perceive a "fence" dimly in the distance, can seek the aid of an appellate Tribunal to give him a lift up over the stile. In the instant case, this taxpayer could have identified its "fences" at the time of the acquisition of the motel. This was not done. I have leant over backwards in an attempt to compensate for this deficiency by directing a limited investigation into the tax returns of the vendor companies. However, I draw the line at making any presumptions in this taxpayer's favour. If it cannot show an opening value for the motel's fixtures, it fails in limine. In short, when the Marie Celeste disappeared with all forms on deck, the presumption omnia praesumuntur rite esse acta went down with her. May they rest in peace.

6. It was put to me in address that, in the alternative, sec. 26AAA(5)(b) applied to exclude subsec. (2). To reach that conclusion involves the finding that the majority decision in Mullins is inconsistent with the ratio in
Ferling v. F.C. of T. (1965-1966) 115 C.L.R. 603, viz. that sec. 54 and 59 of the Tax Act apply not just to the fixtures, but to the whole area of the land to which they are affixed, with the result that sec. 26AAA(5)(b) would apply in this case to exclude the application of sec. 26AAA(2). I firmly declined to take this slippery path in Case U39,
87 ATC 302, preferring to follow Mullins, a decision of the Federal Court, and one which can hardly be regarded as having been decided per incuriam since Ferling was carefully analysed by McGregor J. (dissenting), albeit not referred to by the majority. For the same reasons I advanced in Case U39, I must again decline to "overrule" Mullins in this case.

7. Again, much time and ingenuity was taken up on the "interest" argument. It is with no disrespect to counsel that I have concluded that the argument is wholly devoid of merit. Whilst the interest component attributable to the late payment of the purchase price constitutes assessable income in the hands of the seller, it does not result from the sale, but from the late payment; it is thus a classic example of a causa sine qua non. The taxpayer's argument, if correct, would make nonsense of sec. 26AAA(5)(a), the effect of which could be avoided by the simple device of providing for a nominal amount of interest, payable between the date of receipt of the deposit and the due date of the balance.

8. On the issue of quantum, much effort was expended on seeking to show that the gain on the sale was something less than the amount as returned and used as the basis of assessment by the respondent. An accountant (who did not prepare the return) was called and taken through the various documents, much like an expert witness engaged on a tracing exercise. At the conclusion of the evidence. I am satisfied that, on the probabilities, the gain as shown on the profit and loss statement was overstated. On the other hand, I am unable to calculate the exact amount by which the gain, as returned, exceeds the gain on which tax is properly payable.

9. In the result, the taxpayer fails on the substantive issue. However, having concluded that the gain on the sale was probably inflated, the issue of quantum is remitted to the Commissioner in the fond hope that - third time lucky - the appropriate profit can be calculated.

10. I grant liberty to either party to apply in relation to the implementation of this decision.

Decision:

(a) that to the extent that the objection decision under review determined that the sum of $22,991 resulting from profit on sale constituted assessable income in the year of income ended 30 June 1980, the Tribunal being satisfied that that amount is overstated, sets aside that part of the decision and remits the matter to the respondent for reconsideration in accordance with the direction that the respondent recalculate the profit on sale if possible, with liberty to apply; and

(b) that otherwise the objection decision under review is affirmed.