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Case W59

Members:
IR Thompson DP

Tribunal:
Administrative Appeals Tribunal

Decision date: 15 June 1989.

I.R. Thompson (Deputy President)

These proceedings relate to assessments of assessable income of the taxpayer and the tax payable thereon in respect of each of the taxation years from 1981 to 1986 inclusive. The taxpayer objected to the assessments. The Commissioner did not allow the objections in full and the taxpayer requested that the objection decisions be referred to the Administrative Appeals Tribunal pursuant to sec. 187 of the Income Tax Assessment Act 1936 (``the Assessment Act''). The issues in respect of all the years are essentially the same; consequently, the references have all been heard together and this statement of the reasons for the decisions in respect of them relates to all of them.

2. The taxpayer was represented by Mr N. Rosenbaum of counsel; the respondent was represented by Mr T. Ginnane of counsel. After the hearing had proceeded for three-and-a-half days, it was adjourned in order that the Tribunal might make findings of fact on two questions:

  • (1) whether receipts from the sale of land by the taxpayer in each of the six taxation years were to be included in his assessable income for that year;
  • (2) if the answer to (1) in respect of any of the years was in the affirmative, when he had committed his land to his business of subdividing, developing and selling the land.

In due course I gave an interim decision to the effect that the receipts were to be included in the taxpayer's assessable income for each of those years and that he had committed his land to the business in October 1977. The hearing was then resumed and concluded.

3. When I gave the interim decision I stated in writing the reasons for finding the facts which underlay it. It is unnecessary now to add to that statement so far as those facts are concerned. Accordingly, I adopt it and incorporate it into this statement of the reasons for the final decision as part of this statement. Omitting the introductory one-and-a-half paragraphs, it was in the following terms:

"... Oral evidence was given by the taxpayer, by Mr M, a real estate valuer, Mr O, a real estate agent, and Mr S, who is the Shire Engineer of the X Shire Council. Mr M and Mr O were called by Mr Rosenbaum; Mr S was called by Mr Ginnane. In addition to the few documents lodged pursuant to sec. 37 of the Administrative Appeals Tribunal Act 1975 (`the AAT Act') as modified by sec. 14ZG of the Taxation Administration Act 1953 (`the T documents'), a large number were tendered in evidence in the course of the hearing.

Most of the relevant primary facts in this case are not in dispute. Some are disclosed by the documents; others were related by the witnesses. Where there was disagreement between witnesses, I shall refer to it. Otherwise the following statement of the primary facts is based on evidence which was not contested.

4. The taxpayer is now aged 78 years. From 1953 until 1971 he owned a farm of 476 acres on which he conducted farming operations. The farm had belonged to his father from 1924; the taxpayer's family had been involved with it since 1904. He bought it from his father in 1953. In the 1960s the State Rivers and Water Supply Commission bought 26 acres of the land, which it inundated to form, together with other land which was inundated, a lake with an area of several square miles. Until 1971 the taxpayer's only business was that of farming. Late in the 1960s he decided that, as he had no sons to take over the farm from him, he should sell most of it and keep only a few acres for his own purposes.

5. He sought the help of Mr O in finding a purchaser for the farm. He realised that the part of the farm which was immediately adjacent to the lake would have a higher value than the rest of it if the planning authorities would re-zone it for residential use instead of rural. He, therefore, sought a higher price per acre for the whole of the farm than the price per acre for land not adjacent to the lake would have commanded if sold on its own. Mr O became aware that a large company was looking for land on which to establish a plantation of poplar trees. He approached the management of the company and initially was told that the land was not suitable for poplar trees. However, he persuaded the company to examine the soil; when it had done so it decided that it was suitable for poplar trees. The company did not wish to buy the land which immediately abutted the lake. It is not entirely clear whether that was because that land was not suitable for poplar trees or because it did not wish to pay the higher price per acre which the taxpayer was seeking if the whole of the farm was sold

ATC 541

together. In any event, the company bought approximately 360 acres; it did not buy the 90 or so acres nearest to the lake. The land was formally subdivided accordingly, without any change in its zoning.

6. After the company had bought the 360 acres, the taxpayer wished to sell the rest of the land except for the small part which he wished to keep for his own purposes. However, he asked Mr O to concentrate on trying to sell separately 35 acres immediately abutting the lake. The price which he asked Mr O to obtain for them was $520,000; he clearly envisaged that the purchaser would subdivide the land into small residential blocks. Mr O was able to attract enquiries from three land developers; all of them said that they might be interested in buying the land if planning permission for its re-zoning were obtained by the taxpayer. Mr O was not able to find any purchaser willing to buy it at or near the price wanted by the taxpayer without that planning permission having been first obtained. He invited tenders for the purchase of the 35 acres. He gave evidence that there was a reserve price. He said that some people made enquiries about the property and the price but none submitted a tender.

7. In February 1975 Mr O submitted to the X Shire Council an application for planning permission for re-zoning the 35 acres. There was a substantial difference in the accounts given by the taxpayer and Mr O of the circumstances in which the application was submitted and the plan which accompanied it came into existence. The taxpayer said that some considerable time before it was submitted he had decided to make the application and that he had done so on advice from the surveyor, Mr R, who had done the survey work required for the subdivision of the land in 1971. He said that Mr O had thought that the idea of obtaining planning permission was all right but that the taxpayer was essentially a farmer and was too old to learn how to subdivide the land. He said that he had nevertheless decided at that stage to subdivide it in order to get a decent price. He said that the plan had been prepared by Mr R and that he or Mr O had presented it to the Shire Council.

8. Mr O gave evidence that early in 1971 he had got wind of a plan by the X Shire Council to acquire the land, compulsorily if necessary, for public use. He said that one of the developers who had made enquiries about the land had had a mock-up plan for a residential subdivision prepared by Mr R for costing purposes. He had found that the subdivision would cost too much and had decided not to proceed any further. Mr O knew of the mock-up plan and obtained permission from the developer for a copy of it to be made by Mr R for submission to the Shire Council in support of an application for planning permission. He said that he had made the application on the taxpayer's behalf urgently to forestall any action being taken by the Shire Council to proceed with any plan to acquire the land for public purposes, and that it was not made as the result of any longstanding decision to make it. He said that, when the application was made, the taxpayer had been aware of the reason.

9. As Mr O, and not the taxpayer, made the application for planning permission, I accept his evidence as to the circumstances in which it was made in preference to those of the taxpayer. However, to the extent that the taxpayer's intentions in those early years in respect of the development of the land are a matter of some importance in these proceedings, Mr O's version is rather more favourable to him than his own. It shows that by early 1975 the taxpayer was still concerned to sell the 35 acres to a developer to develop rather than to subdivide it into small residential blocks himself.

10. In 1976 the Shire Council was prepared to grant planning permission and proposed to change the zoning of the land to `Reserved Living'. However, the State Rivers and Water Supply Commission objected. At that stage a new plan was prepared for the taxpayer by Mr R; while based on the plan originally submitted, it differed from it. It was intended to meet the objections raised by the State Rivers and Water Supply Commission. In December 1976 the Commission set out conditions which had to be met before the plan could be sealed. They included stringent requirements relating to water supply and sewerage, both of which would be expensive to comply with. Mr O then contacted those developers who had expressed interest on the basis of planning permission being obtained by the taxpayer. They all told him that they had decided that, at the price asked by the taxpayer, they were not interested as the cost of the development of the land would be too high, particularly because of the

ATC 542

conditions in respect of water and sewerage imposed by the State Rivers and Water Supply Commission. It was work which had to be done in the initial stages of the development and could not be delayed wholly or in part; that meant outlaying a large capital sum a considerable time before the developer would receive any return by way of sales of the residential blocks.

11. At that stage, according to both Mr O and the taxpayer, the taxpayer had only three options. He could sell the land to a developer at a very much lower price than he wanted; he could subdivide it himself; or he could retain it and not develop it. The third option was not practical because, although the taxpayer considered pumping water from the lake to irrigate some of the land, it would almost certainly not have been worthwhile to use the 90 acres for farming purposes. The taxpayer considered that he would get a better price for the land by developing it himself than by selling it to a developer at a lower price than he wanted. Mr O gave evidence that he thought that a price of about $350,000 would have been more realistic in terms of attracting a developer to buy the 35 acres. He conceded that enquiries had been received from developers who were willing to consider buying the land for about the price wanted by the taxpayer if he obtained planning permission for re-zoning. But, he said, they had all told him eventually that the subdivision would cost too much for them to be willing to buy the land at that price.

12. During the period from 1971 to 1976 all of Mr O's efforts were directed towards trying to find a developer to buy the 35 acres. The taxpayer had given him general instructions to find a buyer for the rest of the land, apart from the few acres which he himself wished to retain; but some of it did not abut on the lake and was, therefore, not as attractive to a developer as the land which did. It was too small for normal farming purposes; so Mr O gave little attention to trying to find a buyer for it and he concentrated on trying to find a developer to buy the 35 acres.

13. I am satisfied from the evidence of the taxpayer and Mr O that the taxpayer had decided by not later than the end of 1976 to develop the land himself by subdividing it into residential blocks in order, as the taxpayer put it, `to obtain the top dollar'. On the advice of Mr O he had changed his solicitor; he had previously used the services of a solicitor who was also the solicitor of the X Shire Council. Mr O had given the advice because he considered that there might be a conflict of interests if the same solicitor acted for the taxpayer and the Shire Council in respect of an application to subdivide the land.

14. Having decided to subdivide the land into residential blocks himself, the taxpayer sought the advice of Mr R and his new solicitor. Negotiations were conducted with a company which was developing some land nearby to share the cost of external water supply and sewerage works required for both developments. At about that time the new solicitor had suggested to the taxpayer that for probate reasons he should incorporate a company and transfer to it the title to his land. A company was incorporated but for some reason the land was not transferred. Nevertheless, the agreement with the other company for the joint water and sewerage works was drawn up in the name of the company and contained a recital that the company was the owner of the land. It is not clear whether the agreement in that form was finally executed by the company; if it was, it was an aberration. I am satisfied that the land remained the property of the taxpayer and that it was he who developed it by subdivision and who in his own name sold the residential blocks to their purchasers.

15. In May 1977 the taxpayer sought finance from CC, a finance company, to enable him to pay for the external water supply and sewerage works to be carried out and for Stage 1 of the subdivision to proceed. He obtained that finance and by June 1979 work had been commenced on constructing 6 km of water main from the nearby country town to the farm, on external sewerage works, including a pump station, on earth works, on a storm water drain and on road works to construct a sealed, kerbed and guttered road from the main road through Stages 1, 2 and 3 of the development. The State Electricity Commission had commenced the work required to bring a supply of power to the land where the development of Stage 1 was taking place.

16. The surveyor/planner for the 6 km water main was Mr R; he was the surveyor/engineer for the other work. He was paid by the taxpayer. The work on both the water main and all the other works on site was carried out by W

ATC 543

and B, a division of E Ltd.; the taxpayer contracted with that company for the work to be done and he himself paid the company for the work which it did.

17. The plan submitted in 1976 had provided for the development to be carried out in six stages. It was approved by the X Shire Council subject to further approval being obtained in respect of each stage before work on that stage was undertaken. It included the 35 acres which the taxpayer had wished to sell to a developer and some of the land which he had intended to keep for himself. He gave evidence that the original farm homestead was in the middle of where the road through the development was to run. When he was paid by the company which bought the 360 acres in 1971, he built a new house on the part of the land which he intended to retain for himself. One of his two daughters was spastic and severely crippled. He said that he had wished to retain part of the land for her sake. He had built the new house in such a way that her room was in the same position in relation to the main living area as her room in the old farm house had been. However, she had died in 1975; thereafter he had lost his desire to retain the land or the new house. The land on which the new house had been built was incorporated into Stage 5A of the development plan as submitted in 1976.

18. Mr S gave evidence that, although a plan may be approved for subdivision to be carried out in stages, the Shire Council did not normally compel the person concerned to proceed with the subdivision at all or by stages. As the plan was his, he usually wished to carry out the subdivision by the stages he had shown in it but that was not compulsory. Mr S gave evidence also that a number of different plans had to be submitted in connection with the development of any land. The first was a general plan to support an application for planning permission. Planning permission was required where the zoning of the land had to be changed for the development to take place. Second, a set of detailed plans of the subdivision was then required before it could proceed; if it was to be by stages, the plan could be for a stage at a time. Third, plans which Mr S referred to as construction plans were required. They enabled the Shire Council and its staff to ensure that all the work to be done in subdividing the land accorded with the requirements of the Local Government Act and regulations made under it, and that the work was actually done in accordance with those plans. He gave evidence that, when the subdivision work was being carried out on the taxpayer's land, either he personally or a member of his staff went there quite frequently to check the work. He said that, although he had become Shire Engineer only in January 1981 after the death of his predecessor, his predecessor would have been involved in giving advice to the Shire Council on the various plans submitted by the taxpayer in respect of the development.

19. The taxpayer gave evidence that the previous Shire Engineer had told him in about 1976 that he was obliged to carry out the subdivision by stages. Mr S gave evidence that, while that was possible, it was most unlikely. The taxpayer undoubtedly had discussions with the previous Shire Engineer. I consider it most unlikely that the Shire Engineer told him that he must carry out the subdivision in stages but, as they would almost certainly have discussed the plan in terms of stages, the taxpayer may possibly have erroneously believed that doing the work by stages, and not all at once, was obligatory.

20. Mr S gave evidence, which I accept, that the application for development of Stage 1, accompanied by the detailed plans for it, was submitted to the Shire Council on 2 November 1976; the permit, No. 82, was issued on 28 April 1977. On 5 May 1977 the Council wrote approving the design for the sewerage rising main. On 27 June 1979 the Shire Council sealed the plan with endorsements pursuant to subsec. (3) of sec. 569E of the Local Government Act 1958 (Vic.). By 17 December 1979 the work was substantially complete. That is evidenced by a letter written by the Shire Secretary on 17 December 1979.

21. Stage 1 consisted of 26 blocks. The taxpayer did not engage the services of Mr O as sole agent to sell those blocks. Instead he gave a general instruction to a number of estate agents in the area to act on his behalf in selling them. He also placed an advertisement in The Age in June 1980. He did not erect a site office on the land for the purpose of selling the blocks and he did not have coloured brochures printed. He had a plan of the blocks printed on a single sheet of white paper. Prospective purchasers were invited to `ring' a phone number, which was that of the taxpayer's home. He displayed

ATC 544

a large hand-painted version of the plan on a wooden cart on the land. He gave evidence that at weekends people came to view the blocks and, if they were interested in purchasing, he took their particulars and sent them to his solicitor to proceed with the sales. The first block was sold on 29 April 1980. The plan for subdivision had been approved by the Titles Office on 21 December 1979, so that the blocks could have been sold at any time from then onwards. In the event it took until the middle of 1981 for most of the 26 blocks to be sold. Mr O gave evidence, which I accept, that the reason for the slow sales was that the prices which the taxpayer was asking were too high.

22. In August 1977 a progressive mortgage advance of $250,000 had been approved by CC, to enable the taxpayer to complete Stage 1 and to assist with Stage 2, which was for the development of a further 35 blocks, and general amenities relating to all the stages which were to be developed. In December 1979 a further progressive advance of $240,000 had been approved to enable the first two stages to be completed. Because of the high cost of the external sewerage and water supply work which, while it was required for the whole development, had to be completed before any blocks in Stage 1 could be sold, and because of the slow sale of the Stage 1 blocks, by the middle of 1981 the taxpayer was indebted to CC to the extent of about $200,000. He sought additional funds from the Corporation for the completion of Stage 2 but his application was declined. It was suggested to him that he should sell the rest of his land to a developer and not proceed further with the subdivision himself. He was not willing to adopt that course. In June 1981 he commissioned Mr M to carry out a feasibility study and valuation report on Stage 2. He then sought finance from the National Bank of Australia. He had been a customer of the bank for some years and his surviving daughter was employed by it. It decided to make the necessary finance available to him.

23. It is not clear on what date the taxpayer submitted his detailed plans for Stage 2 to the Shire Council but permission to proceed with Stage 2 was granted by the Council on 11 August 1981. The taxpayer had had a disagreement with Mr R and for Stage 2 he employed Messrs G & V as surveyors/planners. He again contracted with W and B for the execution of the work for Stage 2. The State Electricity Commission did the necessary work for power to be supplied to the blocks in Stage 2. By February 1982 the construction work had been completed and in April 1982 the first of the blocks in Stage 2 was sold.

24. Mr M gave evidence that, when he prepared his feasibility study, he was particularly concerned about the need for a proper marketing strategy for sale of the Stage 2 blocks. He said, however, that the taxpayer had not done anything to implement such a strategy. He had not engaged the services of any agent to market the blocks: nor had he engaged in the scale of advertising which Mr M considered appropriate, although he did place some advertisements in the national and local press inviting enquiries to be made to himself. In spite of that the blocks in Stage 2 were sold very quickly. Some purchasers bought through estate agents. The rest of the blocks were sold by the taxpayer personally. He still had no site office as such on the land but he used a room in his house as an office where he kept simple books relating to sales and where presumably he dealt with prospective purchasers. By the end of June 1982 the income from sales of Stage 2 blocks was such that he had been able to discharge his financial obligations to CC. From then on the development was self-financing.

25. In September 1982 the Shire Council gave permission for Stage 3 to proceed and construction work on that stage was commenced in that month. Again, the taxpayer employed as surveyors/planners Messrs G & V and contracted with W and B for all the work, other than the installation of power supply, that was required to be carried out. Again the State Electricity Commission installed the power supply. The taxpayer himself again paid Messrs G & V, W and B and the State Electricity Commission for their work. There were 25 blocks in Stage 3 of the subdivision. The first block was sold in January 1983; the blocks were marketed by the taxpayer in the same manner as the Stage 2 blocks. Again, they were sold quickly.

26. In March 1983 the Shire Council gave approval for the commencement of Stage 4. Work on that stage was carried out at the same time as work on a small public recreational reserve with a toilet block and the construction of a sea-wall along the whole of the frontage of

ATC 545

the land in the subdivision on to the lake. The taxpayer employed the same surveyors/planners and the same site contractors as before. He also paid an electrician to do work in connection with the toilet block and he again paid the State Electricity Commission to supply power to the blocks in Stage 4. The construction work on Stage 4 was completed in March 1984; however, the plan of subdivision of the 47 lots in that stage had been approved by the Titles Office in September 1983 and the first sale of a Stage 4 block took place in November 1983. The blocks were sold in the same way as the Stages 2 and 3 blocks.

27. In 1984 the taxpayer made representations to the State Rivers and Water Supply Commission regarding the manner in which the sea wall should be constructed. He proposed a method which was simpler and cheaper than that originally required by the Commission. He persuaded the Commission to accept his suggestion; the work was thereafter carried out accordingly.

28. In about September 1984 the Shire Council approved plans for the subdivision of Stages 5 and 5A; in November 1984 construction was commenced on Stages 5 and 5A and also on the earthworks for Stages 6 and 7 and the road works for Stage 7. For Stages 5, 5A, 6 and 7 the taxpayer employed a different surveyor/planner, C and Associates Pty. Ltd. He employed the same site contractors as before for the work commenced in November 1984; again the State Electricity Commission installed the power supply. He paid all of them himself. In November 1984 plans for Stages 6 and 7 were approved by the Shire Council. In February 1985 the Titles Office approved the plan of subdivision for Stages 5 and 5A, which together comprised 31 blocks. The first sale of a Stage 5 block took place in January 1985 and the first sale of a Stage 5A block in May 1985. By November 1985 construction work on Stage 7 had commenced with the same surveyor/planner and site contractor. In December 1985 the Titles Office approved the plan of subdivision for Stage 7, which contained 21 lots, and in June 1986 construction work on that stage was complete. The plan of subdivision for Stage 6 is currently at the Titles Office awaiting approval. No construction work has been done on Stage 6, which is for the subdivision of land most of which does not abut the lake. The blocks in Stage 7 also do not abut the lake; Stage 7 was developed before Stage 6 because the access road to the earlier stages passed through the Stage 7 land.

29. On the basis of the primary facts set out above I find as fact that by the end of 1976 the taxpayer had firmly decided to subdivide the land himself into residential blocks. He no longer had any intention of selling the land to another person to develop. I find also that shortly after he had obtained approval from CC for a progressive mortgage advance of $250,000 and then entered into the agreement for the external water supply and sewerage work to be undertaken, he committed the whole of the land to his development of it. His subsequent conduct over the years satisfies me that that intention and commitment never wavered thereafter.

30. When the taxpayer had sold the 360 acres, he necessarily had to reduce his farming business greatly. Questioned by Mr Ginnane about his income tax returns for 1978 and later, he accepted that during the 1978 tax year he had had 15 head of cattle and that after that he had had no cattle and income from farming had been very small. He gave evidence that after 1978 it derived solely from agisting on the land livestock of other persons. The subdivision is now nearly complete; on a visit to the land by the Tribunal I saw no sign of farming still being conducted on any part of it. Clearly the taxpayer had to reduce progressively his already insignificant farming activities as the subdivision progressed stage by stage.

31. As to the taxpayer's personal involvement with the subdivision of the land, he was the sole decision-maker in respect of all matters of consequence in relation to it; he obtained professional advice but, except for the submission of the original planning application early in 1975, he chose for himself and directed the course of action to be followed. Thus at all times he fixed the price to be asked for the land. He sought and obtained finance and subsequently, having been refused further finance by that lender, he personally sought and obtained it from another source. He controlled the marketing of blocks after subdivision; he dealt personally with many prospective purchasers when they came to inspect the land. On many occasions over the years he dealt directly with the X Shire Council and its officers about the subdivision of the land and

ATC 546

their requirements in relation to it. He similarly dealt personally with the State Rivers and Water Supply Commission; he personally proposed to it the cheaper way of building the sea wall and convinced it to accept his proposal. In addition to his management role, at times in the course of the development he did work on the land himself to save the cost of employing a labourer. For instance, he personally cut and cleared the bullrushes growing in the lake adjacent to the land.

32. The amount spent by the taxpayer in each of the tax years on subdivision of the land and the amounts which he received from the sale of the blocks after subdivision in each of the taxation years are not in dispute. The figures are set out on p. 16 of the T documents in respect of the 1981, 1982, 1983, 1984 and 1985 taxation years and at p. 3 of the T documents in respect of the 1986 taxation year. There is no need for me to set them out in this statement of reasons. However, it should be noted that the subdivisional costs incurred in the 1981 tax year were only $235,599. That amount appears to relate entirely to Stage 1 and not to the external sewerage and water supply costs. In the report of a real estate valuer, Mr PM, prepared in September 1977, the amount which it was expected that the taxpayer would have to pay on his share of the cost of the external works on sewerage and water supply was $74,200. The total cost of Stage 1, including those external works, was expected to be $301,330. It seems likely that the external sewerage and water supply costs were incurred before the 1981 tax year.

33. I turn now to questions of law. The taxpayer says that the money received by him on the sale of blocks after subdivision was a receipt of capital and was not assessable income. He does not assert that the cost of the subdivision is deductible from his gross income if the proceeds of the sale of the blocks were capital and not income. The respondent says that the proceeds of the sale of the blocks were assessable income either under sec. 25(1) or 26(a) of the Assessment Act in the tax years 1981, 1982 and 1983, or sec. 25A(1) for the later tax years, or both. Section 25(1) at all material times was as follows:

  • `25(1) The assessable income of a taxpayer shall include -
    • (a) where the taxpayer is a resident - the gross income derived directly or indirectly from all sources whether in or out of Australia; and
    • (b) where the taxpayer is a non-resident -
      • the gross income derived directly or indirectly from all sources in Australia,

    which is not exempt income.'

34. Section 26(a) read:

  • `26 The assessable income of a taxpayer shall include -
    • (a) profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme;'

35. Section 26(a) was repealed in 1984 and replaced by sec. 25A(1), which at all relevant times thereafter has read as follows:

  • `25A(1) The assessable income of a taxpayer shall include profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme.

As will be seen, sec. 25A(1) is in precisely the same terms as sec. 26(a).

36. Income, as referred to in sec. 25(1) of the Assessment Act, is those receipts of the taxpayer which are not receipts of capital or the mere realisation of capital assets. So far as sec. 25 is concerned, therefore, the question which the Tribunal has to decide is whether the receipts from the sale of the blocks arose from a mere realisation of a capital asset, that is to say the taxpayer's land, or whether they were more than that and resulted from his carrying on a business of developing the land by subdivision and selling the land as subdivided.

37. So far as sec. 26(a) (and sec. 25A(1)) is concerned, Mr Ginnane conceded at the commencement of the hearing that the property sold by the taxpayer had not been acquired by him for the purpose of profit-making by sale. I am satisfied that that concession was properly made. The question which the Tribunal has to decide is whether the money received on the

ATC 547

sale of the blocks after subdivision, when the cost of the development is deducted from it, was profit arising from the carrying on or carrying out of a profit-making undertaking or scheme. In the past doubts have been expressed whether such a profit is not already income for the purposes of sec. 25(1), being the result of a business having been carried on. However, Parliament must be assumed to have intended that the second limb of sec. 26(a) should not be otiose (see e.g.
Burnside v. F.C. of T. 77 ATC 4588; (1977) 138 C.L.R. 23 per Mason J. at ATC p. 4,594; C.L.R. p. 37) and that, while in many instances the receipt of money in the course of carrying on a business is clearly income under sec. 25(1) and represents profit arising from the carrying on or carrying out of a profit-making scheme, Parliament intended the second limb of sec. 26(a) to apply to profit-making undertakings or schemes devised for the purpose of realisation of capital assets.

38. In
F.C. of T. v. Bidencope 78 ATC 4222 at p. 4227; (1978) 140 C.L.R. 533 at p. 543 Barwick C.J. said of the second limb of sec. 26(a):

  • `It seems to me that when an attempt is made to utilise the second limb of sec. 26(a), a very close examination is required of the facts and a very clear analysis of their significance. It would be unsatisfactory to resort to the description of ``scheme, plan or undertaking'' on insufficient examination and analysis.
  • It is quite clear that to come within the second limb of sec. 26(a), the scheme or undertaking must be the taxpayer's scheme. Here, the only activity on the part of the taxpayer alone was, on the one hand, to become a shareholder of each company, to transfer his land to the company and, on the other hand, to accept a transfer of the debts for a price which he paid. It seems to me not proper to regard the purchase of the `loss companies' as solely his plan or undertaking, or part of his plan or undertaking. It was, as I have said, an arrangement made for and thus by all three shareholders.
  • The finding of the trial Judge that the shares were purchased solely for the purpose of protecting the shareholders from the creditors and other shareholders in the acquired companies seems to me to negative any possibility that the acquisition of the debts was by way of a separate business transaction on the part of the taxpayer. If it were only incidental to the acquisition of the shares in the ``loss companies'', and if that acquisition amounted to a scheme, it was not the taxpayer's scheme.'

In the present case, if there was a scheme or undertaking, there is no doubt that it was the taxpayer's.

39. In
Steinberg v. F.C. of T. 75 ATC 4221 at p. 4242; (1975) 134 C.L.R. 640 at p. 713 Stephen J. observed that the critical question was whether there existed any scheme and, if so, whether the profits in question arose from its carrying on or carrying out. Barwick C.J. at ATC p. 4228; C.L.R. p. 687 expressed the view that the second limb of sec. 26(a) was `closely related to the first limb' and referred to the decision of the Privy Council in
McClelland v. F.C. of T. 70 ATC 4115; (1970) 120 C.L.R. 487. He said that the concept underlying the subsection was that:

  • `in an Act confined to the taxation of income there are some circumstances in which what are isolated and not repetitive transactions, which in other circumstances would yield a capital gain, can properly be regarded as producing income. One such circumstance is the acquisition of property by the taxpayer with the purpose of its resale at a profit in what is in truth a commercial dealing: that is the first limb of the section. The second limb, in my opinion, is founded upon the same notion but provides for the case where the property acquired is not itself the subject of resale but is intended at the time it is acquired to be the vehicle for making a capital gain, again in the course of an isolated or single though perhaps complex transaction in the nature of a commercial dealing.'

40. However, in
Macmine Pty. Ltd. v. F.C. of T. 79 ATC 4133 at p. 4154; (1979) 53 A.L.J.R. 362 at p. 377 Jacobs J. took a different view. He said:

  • `In respect of the second limb of sec. 26(a) it may be said that it is concerned with the well known difference between enlargement of capital by steps taken to preserve and enhance and thereafter realize the capital asset and obtaining detachable profit by a scheme or undertaking in which the original

    ATC 548

    capital asset is simply the vehicle for the profit-making activity.'

41. In
Official Receiver in Bankruptcy (Trustee, Estate of William Fox, known as Rankin, Deceased) v. F.C. of T. (Fox's case) (1956) 96 C.L.R. 370 at p. 387 the High Court of Australia said:

  • `But let it be supposed that by some means it could be ascertained that the land as it came to the hands of the official receiver possessed a quite definite value which could be and was in fact fixed and that an account made up on that foundation disclosed a clear profit. On that assumption it is difficult to resist the conclusion that the activities of the official receiver producing the result would fall within s.26(a). It may be conceded that for the purpose of that provision the ``profit-making undertaking or scheme'' must be one pursued by the taxpayer, that is to say by the official receiver. But there can be little doubt that in embarking, in pursuance of the resolution of creditors, upon the course of strengthening the title to the land, persuading the Southport Town Council to continue the agreement and allow him to fulfil it, causing the work to be completed under contract and causing the sub-divisional sales to be made through commission agents, the official receiver was adopting a set plan with a view of securing from the ultimate sale of the land a much greater net return than otherwise could be expected. These activities were planned, organised and coherent. True it is that they formed only the final stages of a plan conceived by Rankin and carried partly into execution by him. But given the basal facts that land of a definite value was thus made to yield net proceeds considerably in excess of what otherwise could be obtained, it seems too difficult to deny that the official receiver adopted and pursued an undertaking or scheme that from his point of view satisfied the description ``profit-making'' and that he carried it out.'

42. In
Elsey v. F.C. of T. 69 ATC 4115 at p. 4132 Windeyer J. said:

  • `The two branches of sec. 26(a) reflect different economic concepts. They are expressed as alternatives. Sometimes they may overlap, and one be involved in the other. Sometimes they may be equally descriptive of a profit arising in a particular state of facts. But that is not this case. It does not follow that a profit falling within the description of the second branch of sec. 26(a), when that is applicable and the first branch is not, is to be calculated as if the first branch were applicable.'

In that case more land was acquired than was needed for carrying out a commercial project which the purchaser had in mind. When it became apparent to the taxpayer that that had occurred, he set about selling that additional land. It was in that context that his Honour was concerned with the second limb of sec. 26(a).

43. In
The Scottish Australian Mining Co. Ltd. v. F.C. of T. (1950) 81 C.L.R. 188 Williams J. said simply that for profits on the sales to be taxable it must be either because the taxpayer was carrying on the business of selling land or because in selling the land he was carrying on or carrying out a profit-making undertaking or scheme so that the profits were assessable under the second limb of sec. 26(a). He did not, however, discuss the relationship between those sections but addressed his mind simply to the question whether the sale of the land had been the mere realisation of a capital asset and came to the conclusion that it had.

44. In
F.C. of T. v. N.F. Williams 72 ATC 4188; (1972) 127 C.L.R. 226, although there was little discussion of the second limb of sec. 26(a), Gibbs J. (as he was then) said at ATC p. 4194; C.L.R. p. 249:

  • `An owner of land who holds it until the price of land has risen and then sub-divides and sells it is not thereby engaging in an adventure in the nature of trade, or carrying out a profit-making scheme. The situation is not altered by the fact that the landowner seeks and acts upon the advice of an expert as to the best method of sub-division and sale or by the fact that he carries out work such as grading, levelling, road-building and the provision of reticulation for water and power to enable the land to be sold to its best advantage. The proceeds resulting from the mere realisation of a capital asset are not income either in accordance with ordinary concepts or within the second limb of sec. 26(a), even though the realisation is carried out in an enterprising way so as to secure the best price...'

    ATC 549

45. However, further down on the same page [ATC p. 4195; C.L.R. p. 249] he noted that:

  • `It has often been said that the line between realisation, on the one hand, and the carrying on or carrying out of a business or a profit-making scheme, on the other, is difficult to draw and that the decision of each case must depend upon its own facts.'

46. In
F.C. of T. v. Whitfords Beach Pty. Ltd. 82 ATC 4031; (1982) 150 C.L.R. 355 Mason J. (as he then was) at ATC p. 4047; C.L.R. pp. 383-384 said:

  • `The principal, if not the essential, question under the second limb of sec. 26(a), as under sec. 25(1), is whether more is involved than the mere realization of an asset. As Deane J. noted in his dissenting judgment in the Federal Court, we must not overlook the importance and the scope of the word ``mere''. To bring this case within the second limb the Commissioner does not need to show that the respondent was carrying on a business. As we have seen, it is enough to answer the statutory description that there was a profit-making undertaking or scheme which exhibited the characteristics of a business deal, even though it did not amount to the carrying on of a business. If what has happened amounted to no more than the mere realization of an asset then it was not a profit-making undertaking or scheme.'

47. At ATC p. 4037; C.L.R. p. 367 Gibbs C.J. said:

  • `It is implicit in what I have said that I consider that the second limb of sec. 26(a) includes profits which would not otherwise have fallen within sec. 25, because they could not be described as income in the ordinary sense. I have discussed that question in F.C. of T. v. Bidencope, at ATC p. 4226; C.L.R. pp. 551-552, and adhere to what I there said in relation to this aspect of the matter. However, I should make it clear that I regard it as established that profit yielded by the mere realization of a capital asset not acquired for the purpose of profit-making by sale would not be either assessable income within sec. 25(1) or the profit arising from the carrying on or carrying out of a profit-making undertaking or scheme within sec. 26(a); see
    Hobart Bridge Co. Ltd. v. F.C. of T. (1951) 82 C.L.R. 372 at pp. 383-384;
    White v. F.C. of T. at p. 219, F.C. of T. v. N.F. Williams at ATC p. 4194; C.L.R. p. 249. If the second limb of sec. 26(a) had the effect of including such profits in assessable income, the first limb would be entirely nugatory.'

48. 
Allied Pastoral Holdings Pty. Ltd. v. F.C. of T. 83 ATC 4015 was a case heard by a single Judge of the Supreme Court of New South Wales. His Honour did not discuss the provisions of the second limb of sec. 26(a) but observed simply that in the Whitfords Beach case it was acknowledged that profits yielded by the mere realisation of a capital asset not acquired for the purpose of profit-making by sale would not be assessable income within either sec. 25(1) or the second limb of sec. 26(a).

49. Finally, in
Crow v. F.C. of T. 88 ATC 4620 [at p. 4627] Lockhart J. said that in his view the second limb of sec. 26(a) might be applicable `where there is evidence of system, organisation and of profit-making purpose sufficient to establish ``a profit-making undertaking or scheme'', although such evidence is not sufficient to establish the carrying on of a business giving rise to income for the purposes of sec. 25(1) of the Act'.

50. In Case V65,
88 ATC 498 Deputy President Gerber observed at p. 501 that the state of the law relating to the relationship, if any, between sec. 25(1) and 26(a) was uncertain. When the matter was taken on appeal to the Federal Court in
Statham & Anor v. F.C. of T. 89 ATC 4070 the Full Court did not discuss that relationship but contented itself with observing at p. 4075:

  • `It is well established by the reported cases, including those mentioned above, that the mere realisation of an asset at a profit does not necessarily render the profit taxable. The profit must arise from the carrying on of a business or a profit-making undertaking or scheme. The mere magnitude of the realisation does not convert it into such a business, undertaking or scheme; but the scale of the realisation activities is a relevant matter to be taken into account in determining the nature of the realisation, i.e. in determining whether the facts establish a mere realisation of a capital asset or a business or profit-making undertaking or scheme.'

    ATC 550

51. The cases to which the Court referred were The Scottish Australian Mining Co. Ltd. v. F.C. of T.; F.C. of T. v. N.F. Williams; Burnside v. F.C. of T.; F.C. of T. v. Whitfords Beach Pty. Ltd.; Allied Pastoral Holdings Pty. Ltd. v. F.C. of T.;
Mount Louisa Grazing Co. Pty. Ltd. v. F.C. of T. 86 ATC 4933.

52. In all those cases the Commissioner had argued that although the taxpayer had sold what had originally been a capital asset, he had done so in the course of carrying on a business so that the price received on the sale of the asset was assessable income for the purpose of sec. 25(1). In each case the answer to the question whether that was so or not was held to depend on whether what the taxpayer had done had gone beyond the mere realisation of the capital asset. The courts have consistently held that it does not necessarily go beyond that simply because it involves doing things to the capital asset to enhance its value. In The Scottish Australian Mining case land which had been purchased in 1863 for the purpose of carrying on coal mining operations was no longer required for that purpose after the mining operations had ceased in 1924. Thereafter, the mining company sold it in parcels at a considerable profit for residential and other purposes for which it had subdivided the land and after it had constructed roads, a railway station and made sites available for schools and churches and areas available for parks. The activities of the company in thus enhancing the value of the land before sale were considerable. Nevertheless, Williams J. held that the sale of the land had been no more than the mere realisation of a capital asset.

53. In the Whitfords Beach case Mason J. at ATC p. 4048; C.L.R. p. 385 and Wilson J. at ATC p. 4056; C.L.R. p. 398 had some difficulty with the decision of Williams J. in The Scottish Australian Mining case on the facts; Mason J. said that he would have `been inclined to the view that the taxpayer had ceased to carry out its mining business and that it had commenced to carry on the business of land development'. Wilson J. noted that Williams J. had been `clearly impressed by the fact that the cessation of mining on the Lambton lands had not changed the essential character of the company. It was still a mining company, not one formed for the purpose of dealing in land'. However, neither of their Honours doubted the soundness of the test which Williams J. had applied, namely whether the activities of the taxpayer had gone beyond those appropriate to the mere realisation of a capital asset. Clearly, views might vary on how that question should be answered in any particular case; but one relevant consideration would be the scale of the activities undertaken. Thus in the Whitfords Beach case Mason J. at ATC p. 4047; C.L.R. p. 385 considered that the activities undertaken amounted `to development and improvement of the land to such a marked degree that it is impossible to say that it is mere realization of an asset'.

54. In the passage from Statham's case set out above the Federal Court also treated the scale of the activities undertaken as a relevant consideration. At pp. 4076-4077 it discussed the scale and the nature of the activities undertaken by the taxpayers in that case. It said at p. 4076:

  • We agree with the submission made on behalf of the applicants that the way in which the subdivision and sale of the land progressed was simple and had few of the hallmarks of a business enterprise. The following matters are significant:
    • (a) the owners were at first content to sell the land as one parcel, but were unable to do so;
    • (b) no moneys were borrowed by them, although a guarantee was provided to the Kingaroy Shire Council by way of bank guarantee;
    • (c) only very limited clearing and earthworks were involved;
    • (d) the owners relied upon the Kingaroy Shire Council to itself carry out roadworks, kerbing, electricity and sewerage works which were required to be done;
    • (e) the owners did not erect buildings on the land; not even, for example, a site office;
    • (f) they had no business organisation, no manager, no office, no secretary, and no letterhead;
    • (g) Dr Bickerton maintained his medical practice;
    • (h) the owners did not advertise the land for sale;

      ATC 551

    • (i) apart from the Kingaroy Shire Council's activities, the owners did not engage any contractors, although they did obtain some professional advice;
    • (j) the books kept in relation to the sales of land were kept by Mrs Bickerton; and
    • (k) the land was sold simply by listing it with local real estate agents.

    The matters which have been listed above strongly suggest to us that the owners were not conducting a business or engaging in a profit-making undertaking or scheme.'

55. The Court then referred to submissions by counsel for the Commissioner that the land subdivided had originally been zoned as rural land and that a substantial sum of money had had to be spent by way of subdivisional costs, with the taxpayers willing to risk up to $950,000. Counsel for the Commissioner had also pointed to the fact that the activity was engaged in over a long period of time and that the subdivision was quite a large one by local standards. At p. 4077 the Court stated that in its opinion those considerations did not `have the effect of pushing a mere realisation of assets over the line into the region of a business venture or a profit-making undertaking or scheme'. It noted that, in relation to finance, the taxpayers had merely had to provide a bond and that there was no evidence that they had engaged in some holding exercise carefully releasing allotments for sale, as one might expect to occur in a business or scheme. The total number of lots involved in the subdivision had amounted to 105 and the subdivision had been organised `entirely on a part-time basis'. The Court consequently came to the conclusion that the realisation of the land did not result in income being earned for the purpose of sec. 25(1) and that it was not a case in which profit had arisen from the carrying on or carrying out of a profit-making undertaking or scheme. What had occurred was `the mere realisation, by the most advantageous means, of the asset which the owners had on their hands when they abandoned the intention of farming the subject property'.

56. I have set out above my findings of fact in relation to the activities in which the taxpayer engaged in relation to the development and subdivision of his land and its sale as residential blocks. The question which remains to be answered is whether in his particular circumstances those activities constituted only the most advantageous realisation of his capital asset, his land, or whether the nature of the activities and their scale were such that he is to be taken to have been conducting a business or carrying on or carrying out a profit-making undertaking or scheme. Mr Rosenbaum took the Tribunal through those activities step by step, submitting that none of the things the taxpayer did was evidence of his carrying on any business or being engaged in a profit-making undertaking or scheme. Taken as a whole, Mr Rosenbaum asserted, his activities merely constituted an enterprising enhancement of a capital asset and its realisation; although they had extended over many years, that had been unavoidable and did not indicate that the scale of them was so large as to go beyond the mere realisation of a capital asset, nor was it evidence of a planned marketing strategy. He emphasised that the only land which the taxpayer subdivided, developed and sold was land which had been part of one farm owned and farmed by him, and by his father before him, for many years.

57. Mr Ginnane, on the other hand, submitted that the taxpayer was carrying on the business of subdividing the land and selling the residential blocks or that at the least he was engaged in a profit-making undertaking or scheme. He referred to the scale of the activities involved; in addition to the planning of the development and negotiation of the required approval of it, the works included major external sewerage and water supply work and road, drainage, sewerage, water and electricity supply work on the land. The taxpayer borrowed money for the subdivision to be undertaken. His personal involvement in the planning of the subdivision, the development work and the sale of the blocks after the subdivision was very great. Finally, Mr Ginnane submitted, there had been an element of speculation and risk-taking.

58. Mr Rosenbaum referred to the matters which the Federal Court considered significant in Statham and submitted that, although there were major differences between the facts in that case and those in the present case, many were comparable, so that in these proceedings the Tribunal should come to a conclusion similar to that of the Federal Court in Statham. Mr Ginnane emphasised the differences between the facts of the two cases but also pointed out

ATC 552

that the decision in every case must depend on the totality of all its own facts.

59. Having given careful consideration to all the facts in their full context I have come to the conclusion that the taxpayer's activities between 1975 and 1986 were such that the subdivision, development and sale of the land which took place during that period constituted more than the mere realisation of a capital asset. I find that in the 1981, 1982, 1983, 1984, 1985 and 1986 tax years he was carrying on the business of subdividing, developing and selling the land. If I had not made that finding, I should have found that in each of those years he was engaged in a profit-making undertaking or scheme.

60. In coming to the conclusion which I have reached I have taken into account in the taxpayer's favour the fact that he has never subdivided, developed and sold any land which was not part of his farm. I regard as of neutral effect that his intention in subdividing and developing the part of his land adjacent to the lake was to enhance its value so that, in his words, he could get `the top dollar' for it. What has caused me to decide that his activities extended beyond what can be accepted as being directed to and constituting the mere realisation of a capital asset, albeit with its value enhanced, is their extent. In particular I regard as significant the degree of his personal involvement in the planning, in the negotiations with the Shire Council and the State Rivers and Water Supply Commission, in obtaining finance, in the employment of contractors, in the marketing of the blocks and in their actual sale. The subdivision and development was substantial. The land has been subdivided into over 180 small blocks. The development has turned farmland which had been unserviced by water supply or sewerage and without a made road into fully serviced residential blocks with a sealed road and drainage. The taxpayer not only obtained finance but he risked it.

61. It remains to be decided when the taxpayer's land was ventured in or committed to his business (F.C. of T. v. N.F. Williams 72 ATC 4188 at p. 4190; (1972) 127 C.L.R. 226 at pp. 241-242). Mr Rosenbaum pointed out that the work on any stage of the subdivision could not start until all the required plans, including the construction plans, had been approved, and that the taxpayer was not obliged to undertake any stage of the subdivision. He submitted that the land to be subdivided at each stage was committed to the business only when the plans for that stage had all been approved and the work was commenced. I do not accept that that was so. Although the taxpayer was under no obligation to undertake any stage of the subdivision, he had decided in 1975 to undertake all the stages. Before any stage could be completed he had to spend a large amount on the external sewerage and water supply works. It would not have been worthwhile to spend that unless most, if not all, of the stages of the subdivision were to be undertaken in due course. In October 1977 he entered into the agreement with the developer of adjacent land for the cost of that work to be shared between them. From then on he could not change his mind about proceeding with the subdivision without suffering a substantial loss. I find that that was when he committed the land to his business."

4. When the hearing was resumed counsel agreed that the value of the land in October 1977 was $512,000. That was less than the value on a date in 1979 which the respondent had used as the basis for calculating the amount of the taxpayer's income in each of the taxation years. Mr Ginnane informed the Tribunal that the effect of applying the original value of $512,000 was that the taxpayer's assessable income in each of the taxation years was increased by the following amounts: 

      1981 -- $9,443;
      1982 -- $13,320;
      1983 -- $15,064;
      1984 -- $15,313;
      1985 -- $16,134;
      1986 -- $5,810.

Subsequently the applicant's solicitors informed the Tribunal by letter that they accepted that those amounts were correct and that they and the respondent had agreed that the tax payable thereon (including, where applicable, the Medicare levy) in each of the taxation years was:

      1981 -- $5,665.80;
      1982 -- $7,992.00;
      1983 -- $9,038.40;
      1984 -- $9,187.80;
      1985 -- $9,680.40;
      1986 -- $3,544.10.

5. The question was then raised what decision the Tribunal should make and in

ATC 553

particular what its powers were. Generally, it has power to exercise all the powers and discretions conferred on the original decision-maker by the statute under which the decision was made (Administrative Appeals Tribunal Act 1975, sec. 43(1)). In this case the powers of the Tribunal have to be ascertained by reference to the powers of the respondent when considering an objection and making a decision in respect of it under sec. 186 of the Assessment Act. Those powers were considered by the Full Court of the Federal Court in
Fletcher & Ors v. F.C. of T. 88 ATC 4834; (1988) 84 A.L.R. 295; the Court decided that the Tribunal could exercise the discretion conferred upon the Commissioner by sec. 177F(1), that is to say to make a determination that an amount of a tax benefit be included in or deducted from a taxpayer's assessable income, as appropriate, and to take such action as was considered necessary to give effect to that determination. Moreover, the following passage at ATC p. 4845; A.L.R. p. 306, which is part of the ratio decidendi, is directly pertinent to the question of the extent of the Tribunal's powers in the present proceedings:

``Section 185 provides for the making of an objection by a `taxpayer dissatisfied with any assessment'. Thereafter, by virtue of sec. 186, the Commissioner incurs a duty to consider the objection, to disallow it or to allow it either wholly or in part, and to notify the taxpayer of his decision. In considering the objection, the question for the Commissioner is the correctness of the original decision, that question being considered in the light of the terms of the objection but taking account of all the information then available to the Commissioner regarding the amount of the taxable income of the taxpayer and the amount of the tax payable thereon. It may well happen, for example, that, between the date of the original assessment and the date of determination of an objection, new information comes to the Commissioner or that there is some change in the relevant law. Subject to the limitations imposed by sec. 170 of the Act, these are matters properly to be taken into consideration by the Commissioner, in any case, in determining whether to issue an amended assessment. As the issue of an amended assessment is a possible result of the consideration by the Commissioner of an objection to an assessment, it must be appropriate for the Commissioner to take account of such matters in determining an objection to an assessment.''

6. Section 170(2) and (3) are as follows:

``170(2) Where a taxpayer has not made to the Commissioner a full and true disclosure of all the material facts necessary for his assessment, and there has been an avoidance of tax, the Commissioner may -

  • (a) where he is of opinion that the avoidance of tax is due to fraud or evasion - at any time; and
  • (b) in any other case - within 6 years from the date upon which the tax became due and payable under the assessment,

amend the assessment by making such alternations therein or additions thereto as he thinks necessary to correct the assessment.

170(3) Where a taxpayer has made to the Commissioner a full and true disclosure of all the material facts necessary for his assessment, and an assessment is made after that disclosure, no amendment of the assessment increasing the liability of the taxpayer in any particular shall be made after the expiration of 3 years from the date upon which the tax became due and payable under that assessment.''

7. The taxpayer's income tax returns for each of the six taxation years were tendered in evidence at the hearing. That for the 1981 taxation year did not disclose the income from the sale of his land. It was disclosed in January 1983 when he lodged his return for the 1982 taxation year. In his returns for the 1982, 1983, 1984, 1985 and 1986 taxation years he made a full and true disclosure of all the material facts.

8. In respect of the 1981 taxation year an assessment was issued on 23 November 1981; that was over a year before the full and true disclosure of all the material facts was made in January 1983. An amended assessment was made on 10 February 1986, well within the time limit set by sec. 170(2). The six-year period had not expired on 28 October 1986 when the respondent made the objection decision under review. So he had then power to amend the assessment further.

9. In respect of the 1982 taxation year an assessment was issued on 7 January 1983; the

ATC 554

due date upon which the tax became payable under that assessment was 7 April 1983. An amended assessment was issued on 10 February 1986, within the three-year period set by sec. 170(3). However, that period had expired before 28 October 1986 when the objection decision was made. So on that date the respondent had no power to amend further the assessment in respect of the 1982 objection year.

10. The first assessment made in respect of each of the 1983, 1984 and 1985 taxation years was made on 10 February 1986. So, in respect of each of those years, on 28 October 1986, when the respondent made his objection decisions, he had power under sec. 170(3) to amend the assessment. An assessment in respect of the 1986 taxation year was issued on 9 February 1987. The respondent's objection decision was made on 24 February 1988; on that date he had power to amend the assessment.

11. By virtue of sec. 43(1) of the Administrative Appeals Tribunal Act 1975, the Tribunal has the same powers as those which the respondent had when he made the objection decisions; so it has power to vary the objection decisions in respect of the 1981, 1983, 1984, 1985 and 1986 taxation years by amending the assessments issued in respect of those years. I have, therefore, varied them in accordance with the findings of fact which I have made. However, as the Tribunal has no power to vary the objection decision in respect of the 1982 taxation year by further amending the assessment in respect of that year, I have affirmed it.

12. In respect of the 1981 taxation year, but not in respect of any of the other taxation years, the respondent included in the taxpayer's assessment an amount of additional tax. There is no doubt that the taxpayer was liable under sec. 226(2) of the Assessment Act, as in force in 1981 when he lodged his return for the 1981 taxation year, to pay as additional tax an amount equal to double the difference between the tax properly payable by him and the tax payable if assessed upon the basis of the return furnished by him. The Commissioner had power to remit the whole or part of that amount and in fact remitted all of it except $13,506. That amount was just under 20% of the difference between the tax as subsequently assessed in the amended assessment and the tax that would have been payable if it had been assessed upon the basis of the return furnished by the taxpayer. (As the amount of the tax now payable is slightly more than was assessed then, the amount of the difference is slightly greater and the amount of the additional tax not remitted is a slightly smaller percentage of that amount.)

13. In 1986, when the decision to remit the additional tax was made, the Administrative Appeals Tribunal had already taken over from the Taxation Boards of Review the review of objection decisions. Section 193 of the Assessment Act then, as now, provided as follows:

``193(2) Notwithstanding section 25 of the Administrative Appeals Tribunal Act 1975, the Tribunal does not have power to review decisions of the Commissioner relating to the remission of additional tax payable by a taxpayer except decisions relating to the remission of additional tax under Part VII where the additional tax payable, after the making by the Commissioner of the decision, exceed -

  • (a) in the case of additional tax payable under section 222 by reason of the refusal or failure to furnish a return, or any information, relating to a year of income - the amount calculated, in respect of the period commencing on the last day allowed for furnishing the return or information and ending on the day on which the return or information is furnished or the day on which the assessment of the additional tax is made, whichever first happens, at the rate of 20% per annum of the tax properly payable by the taxpayer in respect of the year of income;
  • (b) in the case of additional tax payable under section 223 by reason of the making of a statement -
    • (i) if the statement relates to only one year of income - the amount calculated, in respect of the period commencing on the day that is the prescribed day in relation to the taxpayer in relation to the year of income and ending on the day on which the assessment of the additional tax is made, at the rate of 20% per annum of the amount of

      ATC 555

      relevant affected tax in relation to the taxpayer in relation to the year of income; or
    • (ii) if the statement relates to 2 or more years of income - the sum of the amounts calculated in relation to each of those years of income, in respect of the period commencing on the day that is the prescribed day in relation to the taxpayer in relation to the year of income and ending on the day on which the assessment of the additional tax is made, at the rate of 20% per annum of the amount of relevant affected tax in relation to the taxpayer in relation to the year of income;
  • (c) in the case of additional tax payable under section 224, 225 or 226 in relation to a year of income - the amount calculated, in respect of the period commencing on the day that is the prescribed day in relation to the taxpayer in relation to the year of income and ending on the day on which the assessment of additional tax is made, at the rate of 20% per annum of the amount of relevant affected tax in relation to the taxpayer in relation to the year of income; or
  • (d) if the amount calculated in accordance with paragraph (a), (b) or (c) is less than $20 - $20.''

14. The effect of that provision is expressly to deny the Tribunal power to review decisions of the Commissioner relating to the remission of additional tax except in the circumstances stated in it. Section 222 of the Assessment Act, referred to in para. (a), relates to penalties for failure to furnish a return. Sections 224, 225 and 226, referred to in para. (c), relate respectively to penalty tax payable where certain anti-avoidance provisions apply, penalty tax payable where Div. 13 of Pt III applies and penalty tax payable where Pt IVA applies. The taxpayer is not liable to pay additional tax under any of those sections. At the time when he made his return in respect of the 1981 taxation year liability arose under sec. 226(2); similar liability now exists under sec. 223(1). However, even if the additional tax which the taxpayer is liable to pay is treated as though it were payable under sec. 223, the amount, when calculated in respect of the period commencing on the prescribed day, 31 August 1981, and ending on the day on which the assessment of the additional tax was made, 28 October 1986, is at a rate of less than 4% per annum. Consequently, this is not a case falling within any of the exceptions provided for in sec. 193(2) and the Tribunal has no power to review the decision of the Commissioner relating to the remission of additional tax.

Decision (Re Ref. No. VT.87/2154): 1. The objection decisions under review are varied by amending the assessments of the taxpayer's taxable income and the tax payable thereon made in respect of the taxation years which ended respectively on 30 June 1981, 30 June 1983, 30 June 1984 and 30 June 1985 by increasing the amounts of the taxable income and the tax payable thereon to the following amounts: 

      Year           Taxable Income       Tax Payable
                           $                   $
      1981              138,796            74,744.10
      1983              320,051           182,737.27
      1984              395,564           227,829.58
      1985              445,096           257,452.16

2. The objection decision in respect of the taxation year which ended on 30 June 1982 is affirmed.

Decision (Re Ref. No. VT.88/622): The objection decision under review is varied by amending the assessment of the taxpayer's taxable income and the tax payable thereon made in respect of the taxation year which ended on 30 June 1986 by increasing the amount of the taxable income to $331,260 and by increasing the tax payable thereon to $189,160.35.


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