Cole v. Federal Commissioner of Taxation
Judges:Lockhart J
Court:
Federal Court
Lockhart J.
This is an appeal from a decision of the Taxation Appeals Division of the Administrative Appeals Tribunal constituted by Mr J.R. Gibson (Senior Member). The Tribunal affirmed the decisions of the respondent, the Commissioner of Taxation, disallowing the objections of the applicant, Stanley James Cole, to amended assessments to income tax for the years of income ended 30 June 1973 and 1974. The issue before the Tribunal was whether sec. 26(a) of the Income Tax Assessment Act (1936) (``the Act'') as it stood during the relevant years of income, operated to include in the applicant's assessable income the proceeds of sale of certain land previously acquired by him. Though the case was conducted below on the basis that sec. 25 or either of the two limbs of sec. 26(a) may have applied, the only question which the Tribunal found it necessary to decide was the applicability of the first limb of sec. 26(a). The appeal to this Court was conducted by both parties on the basis that the only statutory provision that could have applied was the first limb of sec. 26(a).
Facts
The findings of fact made by the Tribunal were not challenged in argument before this Court, although counsel for Mr Cole submitted that some of those findings were made after taking into account irrelevant considerations which materially affected the decision.
Mr Cole worked as a farmhand in his early years and was later engaged in dairy herd testing. He served in the Australian Armed Services in the Second World War for three years, and some years after the conclusion of hostilities commenced business as a builder. That was preceded by his doing a technical college course in carpentry and joinery and being apprenticed to a builder. He worked as a builder for about six years. In the course of that activity he purchased blocks of land, erected houses thereon and then sold the land and buildings. He later became a qualified valuer and commenced business as a real estate agent and valuer.
The real estate activities with which this case is concerned relate to the city of Tamworth. In about 1966 Mr Cole purchased some land, known as the Warral Road land not very far from the outskirts of Tamworth and in January 1968 lodged an application for approval of subdivision of that land which was granted the same month. After subdivision the land was sold to the Housing Commission in three parcels, the first sale being in March 1969 and the last in December 1971.
In May 1969 Mr Cole purchased a property with an area of over 200 acres from Mr L.R. McRitchie known as McRitchie's land for $51,600 in his own name, in the same general area as the Warral Road land. Ninety percent of the purchase price was provided by way of a mortgage back to the vendor.
In June 1969 Mr Cole purchased from Mr W.C. Smith for $40,000 a property with an area of about 140 acres known as Smith's and two other properties with a total area of about 40 acres known as Green's land all of which adjoins McRitchie's land. A substantial part of the purchase price of Smith's land was provided by way of mortgage back to the vendor. On 9 June 1969 application was made to the local council for approval of a subdivision of part of Green's land of 19 residential lots. The application was approved on 23 July 1969. The first lot was sold by Mr Cole on 4 December 1969 and the remaining lots were sold over a period of about two years thereafter.
In 1969 and 1970 Mr Cole sold 20 acres out of McRitchie's land to a third party. In November 1971, on behalf of the third party and himself, Mr Cole offered to sell to the
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Housing Commission of New South Wales for $1,750 per acre, a portion of McRitchie's land.On 20 January 1972 the family company of Mr Cole, namely, Coledale Estates Pty. Limited (``Coledale'') was incorporated. The shareholders were Mr Cole, his wife and their five children. They were also shareholders in an investment company of Mr Cole's to which Mr Cole transferred his office and home, namely, S.J. Cole Investments Pty. Limited (``Investments''). Mr Cole controlled both companies.
In 1972 Coledale acquired a property known as Altravardy's or Wood's which adjoined McRitchie's and Smith's land. The purchase was financed by the vendor. On 21 October 1972 Coledale lodged with the local council an application to develop about 670 acres as a suburban subdivision of 1300 lots with neighbourhood shopping, educational, sporting and recreational facilities. The land included in the application was Altravardy's, McRitchie's and Smith's.
On 17 January 1973 Smith's and portion of McRitchie's were transferred to Coledale; and it is the profits from those sales which were treated by the Commissioner as assessable income of Mr Cole in the year of income ended 30 June 1973.
On 4 April 1974 Mr Cole sold to the Housing Commission the remaining portion of McRitchie's together with portion of Green's which he had previously offered to it. It is the profits on these sales which were assessed by the Commissioner as part of Mr Cole's assessable income for the year ended 30 June 1974.
A statement of the history of the assessment process is necessary. First, with respect to the year of income ended 30 June 1973, the original assessment of the respondent showed tax payable of $4,406.13 but it was based on the assumption that the relevant profits in dispute were returned as being on capital account. The first of three amended assessments was issued on 27 April 1976. It showed a credit of $298.42 arrived at after allowing a loss to be carried forward which had previously been disallowed. A second amended assessment issued on 6 May 1980 showing tax payable of $124,543.32 and it brought to tax the profits in question here relating to the 1973 year of income. Objection was lodged by Mr Cole and allowed in part. The third assessment was then raised on 30 January 1981 and it showed tax payable of $159,713.03 but that also included tax payable from previous years. It is the second amended assessment which was the subject of the process of review before the Tribunal and appeal to this Court.
As to the 1974 year of income the original assessment for the year ended 30 June 1974 showed tax payable of $8,596. The first amended assessment issued on 6 May 1980 and showed tax payable of $171,233.23. The second amended assessment issued on 30 January 1981 and showed tax payable of $157,780.73.
It is the second amended assessment for the 1973 year and the first amended assessment for the 1974 year with which these appeals are concerned.
Before the Tribunal the case for Mr Cole was essentially based on his own evidence as to intention and purpose, the fact that the greater part of the properties McRitchie's and Smith's had been retained for some 18 years; and that farming and grazing had been carried on upon them. So it was said that the Tribunal should have accepted that the dominant purpose of the purchase of the properties in question in the relevant years was that they be used for farming and grazing.
The case for the Commissioner before the Tribunal was that Mr Cole's credibility was in serious doubt, that he was an enterprising and knowledgeable businessman, had purchased the relevant lands strategically placed near the expanding city of Tamworth and had taken opportunities to develop and resell them. The farming and grazing activities on the land had been minimal and were inconsistent with the claimed intention of developing a viable farming and grazing enterprise.
The Tribunal dealt with the credibility of Mr Cole in para. 33 of its reasons as follows:
``In giving his oral evidence the applicant tended not to give considered answers to questions but, rather, to seize upon some words or phrases in the question as a basis for reiterating that his intention had been to have a family farm on the subject lands. This may well have been because of his anxiety to impress the Tribunal on that matter and because of his anxiety about the
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result of the proceedings. However, making allowance for such difficulties, the evidence of the applicant as to his intention was not convincing. Furthermore, his evidence was not corroborated by evidence from any member of his family or any other person, nor was there any evidence from his former accountant or solicitor.''
The Tribunal held that Mr Cole had failed to satisfy it that his dominant purpose when acquiring the properties (McRitchie's and Smith's) was not profit making by sale and had not discharged the burden imposed upon him by sec. 190(b) of the Act to prove that the assessments were excessive. The Tribunal therefore affirmed the decisions on the objections.
It was submitted to this Court by counsel for Mr Cole that the Tribunal erred in law in reaching its conclusion that the applicant acquired the relevant properties for the purpose of profit making by sale by taking into account [a number of] irrelevant considerations.
The references by the Tribunal to the properties in the following passages are as follows:
"Realty" means Coledale
"Orange" means Altravardy's or
Wood's land
"Green" means McRitchie's land
"Pink" means Smith's land
"Yellow" means Green's land.
(a) The first irrelevant consideration was said to be the statements made in para. 15 of the Tribunal's reasons for decision, namely:
``During 1974 the applicant's wife acquired a parcel of land adjoining the property Yellow. That land was subsequently subdivided and was sold later that year to the Housing Commission. At about that time the applicant had erected a shop on part of the property Green and had sold the land and building thereafter.''
It was submitted that it was Mr Cole's state of mind and purpose that was relevant in this case and not that of his wife; and that any property dealings which she had would not throw any light on Mr Cole's purpose in relation to his property dealings.
It is the relevance, not the accuracy, of the statements of fact made in para. 15 by the Tribunal that is challenged. Mr Cole was cross-examined before the Tribunal about this acquisition by Mrs Cole. No objection was taken by his counsel to the relevant questions. Indeed, it is plain from a perusal of the transcript of the proceedings before the Tribunal (which included not only the evidence, but the opening and final addresses) that counsel for each party relied on the whole history of the business dealings of Mr and Mrs Cole, Coledale and Investments, in particular with respect to property dealings and that no suggestion was made at the hearing before the Tribunal that the evidence which led to the findings of the Tribunal in para. 15 was irrelevant.
Mr Cole said in cross-examination that the land mentioned in para. 15 was purchased in the name of his wife, subdivided and sold to the Housing Commission (the land was bounded by Cosser Street, Bourne Street, Sussex Street and Warral Road). He also said in cross-examination: ``I probably would have organised the sale and organised any finance''. It is not clear whether this is a reference to the purchase by his wife or the later sale by her of the land to the Housing Commission. But whatever it is, the evidence makes it plain, and the contrary is not disputed, that Mr Cole played an active role in the acquisition of this land by Mrs Cole. Whether Mr Cole used any of his funds for the purchase is not clear from the evidence. Mr Cole was fairly vague about his recollection of matters relating to that acquisition.
In view of the land dealings of Mr Cole over a number of years I do not regard it as irrelevant to take into account his involvement in any land acquisitions or sales by his wife. They are part of the background of the matter and matrix of facts which it was proper for the Tribunal to take into consideration. Indeed, the Tribunal, in stating the matters found in para. 15, did so on this very basis. The dealings with the land acquired by Mrs Cole in 1974 were closely related to the dealings of Mr Cole with land acquired by him. I do not regard the Tribunal as having relied upon those matters for any impermissible purpose.
(b) The second irrelevant consideration alleged related to the inclusion by the Tribunal in its reasons of para. 17, namely:
``There were many other dealings in land by the applicant, the family companies, and
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members of the family but those referred to above are dealings which concern or seem relevant to the development of the properties Green and Yellow.''
This objection was in essence a restatement of the objection to para. 15 in so far as it was incorporated in para. 17. As I have already dealt with the former, I need say nothing further about it.
(c) The third ground of objection, based on the taking into account of an irrelevant consideration, relates to para. 11 of the Tribunal's reasons which reads:
``In 1972 Realty acquired for $250,000 the property, Orange, which adjoined Green and Pink. The purchase was financed by the vendor. On 21 October 1972 Realty lodged with the local council an application `to develop approx. 670 acres as a Suburban Subdivision (1300 lots) with neighbourhood shopping, educational, sporting and recreational facilities including golf course, 250 acre lake, ovals, swimming pools etc.'. The land included the properties Green, Orange and Pink.''
Altravardy's was to the west of both McRitchie's and Smith's land. It was argued that, as Altravardy's or Wood's was acquired by Coledale and not by Mr Cole, it was irrelevant for the Tribunal to have mentioned this and that what it appears to have done, is to equate Coledale's interests in real estate with interests of Mr Cole in other real estate.
This argument fails. First, as I read the Tribunal's reasons, it was reciting para. 11 as part of the history of the matter when both parties had conducted the case on the footing that the activities of Mr Cole, Mrs Cole and Coledale, as well as Investments, were all relevant matters to be examined in the case. Ultimately it was Mr Cole's purpose with respect to the acquisition of the land acquired by him that fell to be determined and the Tribunal, it seems to me, approached its task that way.
Secondly, as Mr Cole controlled Coledale, the Tribunal cannot be criticised for taking into account real estate activities of Coledale in 1972 as part of the general description of the activities of Mr Cole at or about that time, part of those activities being what he was doing as the controlling force behind Coledale.
Thirdly, the evidence which is the subject of the conclusions in para. 11 by the Tribunal was brought into the case in Mr Cole's own evidence commencing with his evidence in chief.
(d) The fourth alleged irrelevant consideration relates to para. 26 of the Tribunal's reasons which reads:
``In giving evidence in cross-examination the applicant said that if not forced to sell the property he would retain it for farming and to be handed over to his family. His bank had requested that the land be sold or that an arrangement be made to repay his debt to the bank. He said that his son had ideas about the future of the land and that it was hoped that the bank would be repaid. But, as cross-examination proceeded, it emerged that a proposal for development of the lands of Realty as a tourist resort, with funds provided by an Asian company, had been made public by the applicant from August 1987 and that the applicant had been a spokesman for the project.''
The property referred to in the paragraph is ``Green's land''. It was acquired by Mr Cole in 1969 and transferred to Coledale in 1973. It was submitted by counsel for Mr Cole that para. 26 suggests that what the Tribunal did was to rely on the evidence that emerged in cross-examination before it as to the proposal for the tourist resort as evidence of Mr Cole's intention or purpose at the time of acquisition of the property in 1969. It was submitted that the relevant intention was that which existed at the time of purchase not any subsequently arising purpose and that the statements made in 1987 were therefore irrelevant.
I accept the submission of counsel for the respondent that the only purpose of the evidence referred to in para. 26 was in support of the challenge made by the Commissioner to Mr Cole's credit in his evidence before the Tribunal. Having perused the transcript of the evidence and of the addresses it is clear that counsel for the Commissioner challenged the statements made by Mr Cole that he wanted to keep Green's land for farming and to hand it over to his son and that he would not sell in effect unless forced to do so by his bank. Counsel then put to him what appeared to be the inconsistent approach adopted by Mr Cole in August 1987 when he said publicly that he
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wished to develop this land as a tourist resort. This was used as a ground of attack on Mr Cole's credit before the Tribunal. As I read para. 26 it was used by the Tribunal for this purpose, that is with respect to the credit of Mr Cole. His credit was referred to in more than one passage in the Tribunal's reasons, in particular in para. 28 and 33, from which it is plain that the Tribunal did not find the evidence of Mr Cole ``convincing''. The Tribunal also noted in para. 33 that Mr Cole's evidence ``was not corroborated by evidence from any member of his family, or any other person, nor was there any evidence from his former accountant or solicitor''. In other words, the very people whom one would have expected to see enter the witness box to corroborate the evidence of Mr Cole, going as it did to matters that were peculiarly within his knowledge to a substantial degree, led the Tribunal to not accept Mr Cole as a reliable witness. Counsel for Mr Cole did not challenge the findings of the Tribunal with respect to the credit of Mr Cole, nor could such a challenge have succeeded. The criticism of the Tribunal with respect to para. 26 fails.(e) The final attack made upon the Tribunal's findings on the basis of an alleged irrelevant consideration centred on para. 30 of the Tribunal's reasons which reads:
``In endeavouring to discharge the burden imposed on him by sec. 190(b) of the Income Tax Assessment Act 1936, of showing that the assessments in question were excessive, the applicant was faced with the evidence contained in his return of income for the year ended 30 June 1970, the evidence of his activities as a dealer and developer, particularly of lands in the area where Green and Pink were situated, and the evidence of subsequent sales of parts of those properties and proposals for development of the remainder.''
The criticism of counsel for Mr Cole was that the Tribunal looked at the evidence as to Mr Cole's activities of land purchase, development and sale, not only of lands which were the subject of the relevant assessments, but of other lands which Mr Cole agreed were acquired for the purpose of resale at a profit or otherwise so as to bring to revenue account the proceeds of sale when he sold them later. It was submitted that the Tribunal failed to sever the two kinds of property transactions. I do not read para. 30 as stating what counsel asserts it states. Even if it did, I see nothing impermissible in the Tribunal having looked at the whole of the real estate activities of Mr Cole, including those of Coledale in which he held the controlling interest, and having got the whole picture in mind, then turning to the relevant parts of the picture to answer the questions in issue in these proceedings. Indeed, as I read the transcript of addresses and evidence before the Tribunal, counsel for Mr Cole himself adopted the course of examining the real estate activities of Mr Cole in a global fashion extending beyond the properties which were in contest.
This leads me to another matter which is of general application to the abovementioned submissions of counsel for Mr Cole, namely, that no objection was taken to any of the questions put to Mr Cole in cross-examination which led to the evidence which is now impugned by counsel presently appearing for Mr Cole in this Court (different counsel appeared for Mr Cole before the Tribunal). Indeed, counsel appearing for Mr Cole before the Tribunal relied on much of this evidence as part of the history of the matter in his own conduct of the case before the Tribunal including opening address and final address. It is not open in my opinion for Mr Cole to raise these matters on appeal to this Court.
Even if the Tribunal had taken these matters or any of them into account as irrelevant considerations, which has not been established to my satisfaction, the question would arise whether the decision should be set aside. If irrelevant material has been taken into account in an administrative decision which could have materially affected the decision then this may lead the Court to set aside the decision. I am not persuaded that, even if the matters to which reference has been made were irrelevant, they could be said to be matters which materially influence the decision of the Tribunal. I would not have set aside the decision on this ground: see
Minister for Aboriginal Affairs v. Peko Wallsend Limited (1986) 162 C.L.R. 24 per Mason J. at pp. 40-41.
I then turn to the second head of challenge of counsel for Mr Cole to the Tribunal's decision, namely, the submission that there was no derivation of income by Mr Cole because there was no receipt of income by him. This submission was put with respect to land which was acquired by Mr Cole initially and which he
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transferred to Coledale, namely, McRitchie's and Smith's land.Mr Cole initially acquired McRitchie's land in May 1969 for $51,600. Most of that land was transferred to Coledale on 26 July 1973 for $141,000 and this was said to be a transfer in respect of which there was no income derived by Mr Cole. The Commissioner treated $103,889 of the $141,000 as profit derived by Mr Cole from the sale of McRitchie's land to Coledale and that sum is in dispute.
On 9 June 1969 Mr Cole purchased Smith's land for $40,000 and that was transferred on 17 January 1973 to Coledale for $139,750. The Commissioner treated $87,452 of that sum as being the profit derived by Mr Cole on the sale of Smith's land to Coledale for the 1973 year of income.
Reliance was placed by counsel for Mr Cole upon
Commissioner of Taxes (South Aust.) v. The Executor Trustee and Agency Company of South Australia (Carden's case) (1938) 63 C.L.R. 108 especially per Dixon J. at pp. 154-155 to found the proposition that what was received by Mr Cole from Coledale upon the transfer of the properties did not answer the description of gains that came home to him in a realised or immediately realisable form. It was submitted that the reason for Coledale being formed was to acquire certain of the land from Mr Cole because of his accountant's advice that death duties would be saved. Counsel for Mr Cole pointed to the meagre evidence as to how the transfer of these properties was treated by Mr Cole and by Coledale. He said there was no evidence of cheques being exchanged and bank accounts credited and debited and there was very little evidence as to whether a loan account was raised in the books of Coledale or what happened. Reference was made to
Statham v. F.C. of T. 89 ATC 4070 and to
Brent v. F.C. of T. 71 ATC 4195 especially at pp. 4200-4201. It was submitted that it could not be safely concluded that any profit or income was derived by Mr Cole upon the transfer of properties to Coledale and that nothing was received by him in a relevant sense with respect thereto.
Counsel for the Commissioner argued first, that this point could not be said to fairly arise from the notices of objection against the relevant assessments that were lodged by Mr Cole with the Commissioner in this case. Secondly, it was submitted that the case was conducted before the Tribunal by both parties on the basis that the relevant moneys did constitute income derived by Mr Cole; and thirdly, that the income tax return of Mr Cole for the 1973 year of income treats the transfers of real estate from himself to Coledale as having themselves generated profits in his hands.
The notices of objection plainly do not raise this question squarely, or possibly even at all, although it might be squeezed out of two grounds of objection which are cast in terms of such generality as to admit almost anything: see grounds 17 and 18 in respect of both years of income. The case does appear to have been conducted before the Tribunal on the basis alleged by counsel for the Commissioner.
The evidence is very meagre, but what it shows is that Mr Cole's own balance sheet proceeds on the basis that the relevant properties were sold by him in 1973 to Coledale for their agreed price. Whether cheques were exchanged or not is not clear from the evidence; but what is reasonably clear is that both Mr Cole and Coledale treated the sale as in fact a sale, raising a credit in Mr Cole's loan account with Coledale in respect of the purchase price. In other words, Coledale purchased the relevant land from Mr Cole. Coledale did not have the money so Mr Cole was treated, not as an unpaid vendor, but as a creditor by way of loan account which is consistent with the assumption that both parties treated the land as having been sold by Mr Cole for the agreed price with Coledale becoming a debtor to Mr Cole with respect to the loan moneys representing the amount of the purchase price. I cannot see how in these circumstances Mr Cole can be said to have done other than to have gained the profit and derived the income for income tax purposes.
If it were not correct to draw this conclusion from the evidence then it would follow that Mr Cole simply failed to discharge the onus of proof which the Act casts upon him of proving that the assessment is excessive, with the result that the assessment would stand.
The third argument of counsel for Mr Cole was that Mr Cole had made a full and true disclosure of all the material facts necessary for the assessments so that the Commissioner was barred from making the amended assessments in issue in this case.
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Counsel for Mr Cole relied on Mr Cole's return of income for the 1970 year of income which bore a note in the following terms:
``Note. During the year taxpayer purchased a property known as `Greens' which is being developed for resale purposes. Profits when made will be returned as taxable income.
A block of 2 flats called `Staff Flat' were also purchased. These are for letting purposes.
The land known as Smith, McRitchie is being prepared for farming purposes, pending development and resale at a profit which will be returned as taxable income.''
The next document on which counsel relied was the balance sheet of Mr Cole's affairs as at 30 June 1973 which accompanied the 1973 return of income and disclosed as capital profit:
``Surplus arising on sale of farmlands $175,015.30.''
The balance sheet of Mr Cole accompanying the 1974 return of income contained the statement: ``surplus arising on sale of farmlands $88,346.87.''
Counsel for Mr Cole argued that, when these documents are read together, they constitute full and true disclosure of all the material facts necessary for the assessment. Reliance was placed upon a number of the reported cases including
Foster v. F.C. of T. (1951) 82 C.L.R. 606;
Australasian Jam Co. Pty. Limited v. F.C. of T. (1953) 10 A.T.D. 217;
Austin Distributors Pty. Limited v. F.C. of T. (1964) 13 A.T.D. 429;
W. Thomas & Co. Pty. Limited v. F.C. of T. (1965) 14 A.T.D. 78 and
Watson v. F.C. of T. 84 ATC 4606.
The statement in the note to the 1970 return of income of Mr Cole that the profit when made from the sale of Green's, Smith's and McRitchie's would be returned as taxable income was an assurance which was not honoured. Also Green's was never identified as a farming property. The 1973 and 1974 returns refer simply to the surplus arising on the sale of farmlands and treat it as a capital receipt, statements inconsistent in the balance sheets of Mr Cole for those two years with the promises held out in the 1970 returns. I do not see how an assurance in an earlier return of income that profits when realised from the sale of land will be returned as taxable income which is not honoured, when coupled with the fact that in the later years of income the profits are treated inconsistently with the earlier promise, namely, as a capital receipt, can be relied on to constitute full and true disclosure of all material facts necessary for the assessment. Plainly all the relevant facts were not disclosed in either the 1970 or 1973 or 1974 returns of income or any combination of them.
Further, as was observed by Stephen J. in
A.L. Hamblin Equipment Pty. Limited v. F.C. of T. 74 ATC 4001; (1974) 130 C.L.R. 159 at ATC p. 4011; C.L.R. p. 175:
``where the taxing legislation fixes upon a taxpayer's purpose as decisive of liability to tax, as does sec. 26(a), it appears to me to be inescapable that full disclosure calls for disclosure of the relevant purpose.''
Plainly no such full disclosure was made in this case. The Full High Court allowed in part the appeal from the judgment of Stephen J., but his Honour's observations with respect to sec. 170 were not overruled: see 74 ATC 4310; (1974) 131 C.L.R. 570. See also
Watson v. F.C. of T. 83 ATC 4336 per Kennedy J. at p. 4351. The submissions of counsel for Mr Cole with respect to full and true disclosure fail.
In my opinion it has not been established that the Tribunal fell into error in any relevant respect. The appeals should be dismissed with costs.
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