CASE 43/97
Members:P Gerber DP
Tribunal:
Administrative Appeals Tribunal
Dr P Gerber (Deputy President)
In his opening submission, Mr O'Connor QC, who appeared for the taxpayer, assured me that ``we'll finish the case today.'' Three days later...
2. The taxpayer in this case is a company (``T''). It has two shareholder/directors, Mr Rubens (henceforth referred to as ``R'') and his (domestic) partner Ms Velasquez (``V''). For all practical purposes, R makes the day-to-day decisions, V taking no active part in the running of the various businesses the company engages in. ``T'', according to Mr O'Connor, ``has had several lines of business, making a profit however it could.'' In the main, it concentrates on selling second hand vehicles as well as doing them up and then selling them. It also operates a car rental business and hiring out building equipment, such as tools, scaffolding, etc. An associated company, Pronto Pty Ltd, operates a courier service. The shareholders of Pronto Pty Ltd are ``T'' and another company, La Ronde Pty Ltd; each company owning one share. The shareholders of La Ronde are ``T'' and Pronto Pty Ltd. It is said that the business of La Ronde is ``property rental and development and architectural antiques.''
3. In July 1983, that is some fourteen years ago, ``T'' purchased a house property - Mon Repos - at 284 Smith Street, Fremantle for $100,000. It was once owned by a former mayor of Fremantle and, having been converted by ``T'' to what can only be described as ``wedding cake Gothic'' by the addition of turrets, colonnades and battlements, R re-named this historic home Longleat. [The original
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4. In 1989, ``T'' purchased the property next door to Longleat - No 286. Subsequently, the adjoining property, No 290, was acquired by La Ronde Pty Ltd. (There is no ``288''). As Mr O'Connor put it in his opening: ``The taxpayer's overall plan is to amalgamate the three properties to form one development, one venture.''
5. One of the more eccentric features of these references is that the Commissioner, having allowed the taxpayer to deduct the interest on ``T's'' borrowings to acquire Longleat, is disputing the deductibility of the interest on the amounts borrowed year by year to renovate the property. The following interest payments incurred in financing the renovations are in issue:
Year Interest
1988 5,883
1989 26,505
1990 18,424
1991 35,084
1992 33,385
(Because the taxpayer was in a loss situation in the years 1988-1990, I am only concerned with the assessments in the years 1991 and 1992).
6. Since much turns on the company's (ie R's) intention to what use Longleat was to be put, R's evidence needs to be scrutinised with some care. Thus he claimed in his most recent witness statement, dated 28 April 1997 (exh B) that:
``... an accountant told me that most of his wealthy clients had bought properties, rented them to help pay for them, and then, as the properties appreciated in value, their equity was used to purchase other properties. I looked mostly at cheap properties, up to about $60,000.''
7. In his opening, Mr O'Connor told me that the property was purchased with the intention to make a taxable profit howsoever this could be achieved, either by ``doing it up'' and selling it, converting it to offices and letting them or by whatever other means a stray profit might arise. R deposed in his witness statement (exh B):
``I considered that `T' had done very well in obtaining a property which, with a lot of physical effort and finance could be rented; because of this zoning, `T' would not have any problems renting it out after renovation. Alternatively, after development, `T' could sell the property at a profit if some prospective purchaser made an appropriate offer; I expected that the company would be assessed to tax on any profit arising from the sale of the developed property as part of its business.''
8. In paragraph 2 of this witness statement it is said:
``This witness statement supersedes and replaces my earlier witness statement of 12 July 1996.''
9. A considerable amount of time was spent by both sides on the zoning of the property at various times and just what permitted use each zone provided.
10. When Longleat was acquired in 1983, the zoning of the area was ``Town Centre'' pursuant to the City of Fremantle Town Planning Scheme No 1. Various exhibits indicate that this permits what has been referred to as a Residential R100 Use. As I understand the evidence, a R100 Use (high residential zoning), in addition to permitting various residential developments, provides the Council with a discretion to approve various other non- residential uses, subject to the consent of the Town Planning Board. I am prepared to assume this zoning would include the use of Longleat as a gallery/restaurant. In other words, had an application been lodged when ``T'' acquired the property to use it for such a purpose it is most likely that approval would have been granted.
11. In the events that occurred, Mon Repos was put up for auction on 12 March 1983 and passed in when the reserve was not reached. Prior to the auction, the auctioneer (a local estate agent) had written to the Council to seek clarification as to what ``Town Centre'' zoning would permit ``together with the current status of the dwelling.'' A copy of the reply from
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Council was tendered (exh 9) which, after setting out the various uses the relevant zoning permitted (which are set out in the Government Gazette of Western Australia No 5 of 28 January 1976; exh 8), went on to state:``It is further advised that the proposed City of Fremantle Town Planning Scheme No. 3 proposes to zone the property Residential R80 and remove the discretion which is now existing in respect to non-residential uses.
In respect to your request regarding the current status of the dwelling, it is advised that the house has been declared unfit for human habitation... and a work order has been issued... to return the property to a habitable condition.''
12. In March 1984, Smith Street was rezoned ``Residential'', albeit R (who acquired the property from a different agent by private treaty after the auction) claimed that he did not become aware of the rezoning until 1988, when he obtained a valuation from a local agent.
13. Having acquired Longleat, R wrote to the Fremantle City Council on 13 July 1983, claiming:
``Our purpose is to restore and renovate the premises back to it's (sic) original splendour, we also plan on extending to the rear in matching brickwork unifying the two halves top and bottom into one single residence. Details and plans as such will be submitted for council approval in due course.... My major problem at the moment is that I cannot live in the house as it has been rendered unfit for human habitation. To the best of my knowledge the majority of the work order has been carried out and most of the remaining items deal with the back verandah which will be demolished as soon as my plans are approved.... I wish to restore the building and repair the faults at their base, not on the surface. To do this to the best of my capicity (sic) I believe it necessary to live on the premises.... In view of the above factors would it be possible for the Council to lift the order or reach some compromise regarding my occupancy of the building?''
14. If there was a reply from Council, it was not tendered. However, in November 1984, ie nearly 18 months after acquiring Longleat, R submitted some sketch plans to the Council, drawn by Ms Di Wright, setting out the alterations and additions the company proposed to effect (exh L). These plans detail what is clearly and unequivocally intended to be a single residence containing several bedrooms, a sauna and a bar. R claims that these plans were drawn up by Ms Wright without any instructions from him (``She just put them together for the purpose that we had to satisfy the Council... I just said `Look, we'll put an extension on the back and just draw it up like an elaborate residence.''' Tr p 88). These plans were approved by Council in January 1985, conforming with the zoning of the area as ``Residential''. Indeed, any other plans which proposed to convert the premises to offices and/ or a restaurant/gallery, being by now a non- residential use, would have required special approval.
15. All of the above sits uneasily with an earlier sworn witness statement (exh 1), deposed to by R on 12 July 1996, which is claimed to have been ``superseded'' and replaced by his later statement (exh B). Mr O'Connor objected vehemently, albeit unsuccessfully, to Ms Price cross-examining R on his ``superseded'' statement (prepared for the hearing of this matter when it was set down some months earlier and adjourned). In this earlier statement, R deposed:
``Prior to purchase , I had a concept of eventually developing the property to an Art Gallery/Restaurant. This concept was researched through discussions with people in the food industry and a trip to the United States.''
(my emphasis)
16. In evidence it became clear that that it was only after R visited the US in 1984 i.e. after Longleat had been acquired, that the possibility occurred to him of using the property as a gallery/restaurant, or else as a showroom for what was referred to as ``architectural antiques'', a synonym for ornate furnishings and fittings. This inspiration came as a result of R visiting an eatery in the US called Henry V Part II, which was part restaurant, part art gallery. It was after this visit that R decided to ``tizzy up'' Longleat ``to make it look like it had been there for centuries'', and using the place as a venue for selling works of art and ``architectural antiques''. In other words, his earlier statement that the gallery/restaurant concept was one of the options he had considered prior to the purchase of Longleat is clearly wrong and
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causes one to vet R's evidence with some degree of scepticism. His explanation, when this discrepancy was put to him in cross- examination, consists of what one often hears when inconsistent statements are produced in evidence:``These things I generally sign without even reading them or taking any notice of them. I've never written any of them. They only come for discussions. And the accountant, the guy that did this, had had a habit of mixing dates up and things like that.... The accountant wrote them up. He had a habit of mucking things up. He's mucked up a hell of a lot of them, and they're no good. I never placed the importance upon them because I didn't think the Tribunal was the final end of the day''
(Tr p 73)
17. One might be forgiven for thinking that retaining an accountant with a well recognised habit ``of mucking things up'' would give an added incentive to reading any witness statement prepared by such a person.
18. Having decided on the restaurant/gallery concept, what took place thereafter was eloquently put by Mr O'Connor in his opening:
``As part of the renovation, a laundry/garage was erected at the back of the house, and it was intended that at the time of [sic] development was finished, [it] would be a place where weddings could take place. It would become a chapel, so that people could come there, have a wedding ceremony in these attractive surroundings and then have a wedding reception in the place. The plan was to renovate 284 and refurbish all the rooms in very ornate style with all these architectural antiques and the house on 286, next door, would be demolished and a hall would be placed there and that would be the main place for banquets and for eating, but it would also be possible to eat in private rooms in these other rooms situated on 284.''
19. In the events that occurred, Longleat remained pretty much in the derelict state in which it was acquired until 1988, when ``R'' began his renovations and additions, borrowing the money to effect them.
20. R deposed that for some time after Longleat was acquired, the premises were used to store ``T'''s business records as well as providing accommodation for R and V. It is said Longleat ``earned rental income from the directors from and including the 1985 year, but excluding the years 1987-1991.'' An amount of $1,040 was returned in 1992, said to constitute ``rent''. (I have never been able to be certain just where and when R and his partner resided. It is not disputed that R sold his domestic home in Ashfield to the vendor of Longleat in 1983 in order to enable ``T'' to rustle up the purchase price; that after Longleat was acquired, the couple used the top floor as their residence until they were prosecuted and convicted for living on premises ``unfit for human habitation''. It seems that they then moved to the newly erected laundry cum garage, which was built at the back of 284, before moving to No 286. They are currently residing at No 290 (according to the address given in R's witness statement dated 28 April 1997), for which the couple is said to be paying rent, rent which should be paid, not to ``T'', but to La Ronde (although this is not necessarily fatal; cf
FC of T v Total Holdings (Aust) Pty Ltd 79 ATC 4279). It is one of the odd features of this case that it was La Ronde Pty Ltd, which was incorporated in 1984 for the purpose of property rental and development and to trade in architectural antiques, yet it is ``T'', trading in car hire and sales, which is claimed to be engaged in such activities.
21. At an early stage of the hearing, a Mr X was interposed. He is a qualified town planner and former employee of the City of Fremantle now running his own consultancy. He reiterated that Longleat had originally been zoned Town Centre in the City of Fremantle Town Planning Scheme No 1, and that this zoning provided for a range of uses, from flats to businesses, shops and offices. This scheme, as already mentioned, was replaced by the City of Fremantle Town Planning Scheme No 3 on 30 March 1984, resulting in Longleat being re-zoned Residential R80. The witness volunteered that it was ``entirely possible'' that owners effected by a zoning change would be unaware of the change, or of the right to make submissions within three months thereafter concerning the changes because all that is required for notifying the public of zonal changes is publishing such changes in the Government Gazette.
22. X stated that whilst still in the employ of the City of Fremantle, R contacted him ``some time after the No 3 Scheme had been implemented, to discuss the reversing of the
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zoning or other options to enable the development of an Art Gallery/Restaurant.'' Since the witness was employed by the City of Fremantle between November 1993 and May 1995 (cf exh AA), this conversation must have taken place during that period, ie after the taxpayer's affairs were audited by the respondent, an audit which was completed in November 1993. If, as is alleged, R had other contacts with Council members of the City of Fremantle after he became aware of the zonal change, no supporting evidence was provided.23. X advised R about the various options available to him to give effect to his proposal to convert Longleat - still uncompleted - into a restaurant/art gallery. The thrust of his evidence comes to this: It is possible to apply to Council to change the existing zoning. This right is conferred by the Town Planning and Development Act 1928 (WA). It is then open to the Council to consider the merits of the particular case and, if approved, ``all that is required is for the re-zoning process to be followed as per the Town Planning and Development Act.'' The Act also contains a right of objection, either to the Minister for Planning or to the Town Planning Appeal Tribunal if the Council refuses the development application. They also discussed the possible success of such an application under the new Town Planning Scheme. However the latter is very much in the future (and is still not implemented). Significantly, R did none of these things.
24. Mr O'Connor spent a good deal of time asking the witness about the degree of influence various members of Council exercised, presumably to establish the likelihood of R being permitted to open his restaurant/gallery, if and when it is finally completed, in view of the fact that such use falls outside the existing zoning. I have not been persuaded that anything turns on this. Indeed much of the evidence and exhibits appear to me to be of little relevance to the issue I have to decide.
25. When R was recalled, Mr O'Connor established that ``T'' had acquired a building licence towards the end of 1984 and instructed a Ms Wright to draw up the rough sketch plans to return Longleat to a modern single home residence, plans which, as already noted, were approved by Council in January 1985 ``subject to City Building, Health By-laws and Amendments hereon (if any)''. It is common ground that these plans bore little relation to the changes ultimately effected. (``I mean, I suppose it was the sort of thing that we thought having a building licence meant that you could build roughly what you wanted to build obviously, and then you put your plans in and then vary them, which we did at a later date. But we didn't put in the varied plans until it was totally complete.'' Tr p 43).
26. Exhibit U is a valuation R obtained for Longleat from a local real estate agent, dated May 1989. The relevant extract is set out below:
Position:
An extremely well located property being very close to the Fremantle Shopping, Restaurant and Entertainment areas with a delightful outlook over the Fremantle Primary School grounds. With very easy access to the Perth Central Business District.
Improvements:
A substantial 2 storey rendered brick home. Along with a large 2 car garage with studio above.
Accommodation:
Entry Hall
5 Bedrooms
3 Bathrooms
Formal Lounge
Formal Dining
Large Cellar
Upstairs Lounge/Library
2 Balconies
Car Garage
Laundry
Studio
Features:
This property abounds with character features such as a magnificent stair case, superb timberwork, extensive decorative plaster work, leadlight windows, a large Cupola, grand size rooms, ducted air conditioning and particular attention to detail throughout.
General Comments:
As the extensive renovations have not yet been completed, it is obvious that a better price would be obtained by finishing off
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the home which appears to be ``almost there''.Pricing:
In its existing condition recent sales evidence and current market trends would indicate a listing price of between $540,000 and $600,000 and we would endeavour to achieve a sale as close to that figure as possible. However, when this property is completed it will be a unique home that will definitely command a premium price if sold. If the home is finished to the high standard of workmanship that has been put into it so far, it would not be unreasonable to expect a price in excess of $750,000, particularly taking into account the replacement cost.
27. Thus the agent assumed in 1989 that the property was near completion (``the home appears to be `almost there''') and would require a further expenditure of some $150,000 to render it into ``a unique home''. This additional sum appears to have been borrowed by ``T'', looking at the additional interest payments claimed in the 1991 and 1992 tax years. In other words, Longleat should have reached its ``unique home'' status by 1992 at the latest, yet in 1997 the inside still looks to me like a flea market, nothing further having been done to the property since 1991 (Tr p 123).
28. The agent's valuation was not challenged. In other words, even allowing for an upward movement in real property values (as to which no evidence was adduced, apart from evidence that 286 was acquired for $147,000 and 290 - an even smaller block - was purchased in 1993 for $250,000, which, I suspect is probably ``land value'' only. It would therefore appear that the improvements ``T'' effected have significantly enhanced the sale value of Longleat, by what amount I am unable to calculate. Be that as it may, if ``T'' had sold the Longleat ``on the hoof'' so to speak in mid-1989 and obtained a sale price roughly within the range suggested by the agent in exhibit U the company would have been taxed on the profit, the gain being calculated by deducting the holding costs, including the interest paid to effect the improvements.
29. I did obtain a kind of valuation of the three properties as vacant land. Thus R was asked by Mr O'Connor that if the company's proposed scheme were to fail for want of Council approval, what would be the value of the three properties under their present zoning, assuming they were sold as vacant land? R estimated that the combined properties would make up ten blocks, each valued at $180,000. This valuation was not challenged by any of the experts. However, the expert for the Crown considered that, given that Longleat is on the heritage list, it would be ``unlikely'' that Council would agree to an order demolishing the property. This witness estimated that the combined holding would yield between 8 and 9 blocks. However, accepting R's estimate (and he is a second-hand car dealer endowed with all the classic skills attributed to that profession), it would appear that the properties are now worth some $1,800,000 minus the cost of bulldozing the various structures, additions and improvements, ignoring for present purposes that No 290 does not belong to ``T'' but to La Ronde Pty Ltd.
30. Ms Price (AGS), who represented the respondent, began her cross-examination by objecting to those parts of R's affidavit (exh B) which referred to the storage of company records at Longleat and at No 286, on the basis that the claim is for interest on moneys borrowed to turn the premises into a restaurant/ gallery, not a storage facility. Likewise she objected to R's evidence that the premises were used to sell some of the architectural antiques as being irrelevant. Her objection was ill-timed and Mr O'Connor became quite lyrical in his indignation, claiming (correctly) that this objection should have been taken when R gave his evidence-in-chief. I overruled the objection since it goes to the issue I have to decide, satisfied that it involved no denial of procedural fairness since Mr O'Connor, being alerted to the point, was able to deal with it in re- examination.
31. It was put to R that Longleat was acquired as a residence for the directors of ``T'', not an unreasonable proposition in light of R's correspondence with the Council and the plans he put in and the fact that the directors had moved in even before settlement had taken place. However, this suggestion was firmly rejected. What did become clear was that the property was acquired cheaply:
``I basically think that once we bought the house, all we would have had to have done was swept it and we would have made
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money out of it. If you look at the photographs you will see that it was in such a poor state when we first bought the place that our main thing was: where do we start?''(Tr p 67)
32. What transpired in cross-examination was that R happily proceeded to build various extensions and alterations which bear little relation to the plans which had been approved by Council. He claimed that when people from the Council came along and noticed that the alteration did not conform to the approved plans:
``they told the builder that they would have to have some plans for what had actually been built there. Now I know you'd never be able to do it now. I know that, but back in those days things were a bit slack I imagine.''
(Tr p 89)
33. The final question put to the witness by Ms Price related to the requirement to obtain Council approval under the 1984 rezoning for using the premises as a restaurant/gallery. R claimed that he was very confident of obtaining such approval: ``I don't have any negatives whatsoever with that'', even though he had never made any formal approaches to the Council to obtain such approval. When asked by Mr O'Connor in re-examination why he had made no formal application, his reply lacks conviction:
``I didn't think I needed to.... Well, basically, Jones said to me: `When you're ready' - Jones was the Mayor at the time when I found out the zoning had been changed - He said: `When you're ready come and see us' `us' meaning him, and he said `and we will assist you to get the prospect through'.''
34. When the hearing resumed some weeks later, Mr O'Connor established that ``T'' had on a previous occasion made an offer to acquire a hotel in Kalgoorlie but that the deal fell through no fault on the part of ``T''. So be it.
35. It then transpired that the respondent wished to call certain witnesses without having alerted Mr O'Connor of such intent until just before the resumed hearing, let alone providing him (or the Tribunal) with witness statements of the evidence these witnesses intended to give. One such witness was the tax officer who conducted the audit, the other witness was Ms Wright - the draughtswoman. All this on the basis that Ms Price was concerned the matter ``may go to the Federal Court''. Mr O'Connor again became quite lyrical in his indignation, referring darkly to
Browne v Dunn (1894) 6 R 67.
36. I ruled that I would permit the calling of Ms Wright on matters which arose out of the evidence, but was disinclined to permit the calling of the auditor for the purpose of establishing that what R told him was inconsistent with his evidence before me since none of these alleged inconsistencies were put to R in cross-examination. However, mindful of the strong hint of an appeal, and the oft-pleaded denial of natural justice, I indicated that I would let the evidence in subject to Mr O'Connor being supplied with a copy of the auditor's report beforehand and being afforded the opportunity to recall R after having a conference with him to obtain instructions as to any challenge to his client's veracity. Mr O'Connor was still unhappy with my ruling, pointing out that ``it's not done in the Federal Court as you are probably aware'', to which I replied: ``Yes, but then there's no appeal from the Federal Court to the AAT.''
37. In the result, Mr O'Connor having been supplied with witness statements, Ms Price called Ms Wright, the draughtswoman who prepared the various plans. After explaining her method of dealing with clients, she was asked to describe the ideas R conveyed to her for Longleat. She replied: ``To rescue a fairly derelict building and turn it into an asset basically.''
``Ms Price : What sort of asset? - Well, it was to start with a house, you know, a grand residence.
It transpired that she only had a hazy recollection of the events that occurred some twelve years ago, and that the term `grand residence' was hers rather than emanating from R.''
Later the following took place:
``Ms Price : Do you recall R ever mentioning to you that it was his intention to live in these premises? - I think so, I think that was my - I mean basically I had - with any client with a building like that it is my understanding that if not to live in, to sell, for the fact that they've improved so -
Ms Price : Do you have any recollection of him saying to you that he was going to live
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in the premises? - Yes, I have recollection that part of the discussion was his use of the kitchen, so that would be -''
38. Later, the witness was asked again whether she had any recollection that the property was to be used as a residence by R and his partner. She replied: ``Yes. At that stage and this while it was unbuilt and un-started'' (Tr p 133)
39. The witness was then shown the drawings she prepared (exh L). These contained a ``Ladies toilet'' and ``Gents toilet'' on the upper floor and a ``ladies toilet'' and ``gents toilet'' on the ground floor, all stencilled in. Ms Wright was adamant that none of these toilets were part of her original drawings, and that they had been stencilled in subsequently by someone else. In her plans, the ``ladies toilet'' on the first floor was originally a bathroom with an en suite; and the ``gents toilet'' on that floor was a bathroom.
40. The cross-examination of the witness made it clear that what she had drawn up was what she was asked to do, ie to restore the premises as a domestic dwelling. She claimed R was a good client ``because he could get his ideas across to me and because we worked well together... R had an idea of what he wanted.''
41. I then took a hand in the examination of the witness.
``The Deputy President : Do you recall what zoning the property had at the time? - I believe it was residential at the time that I did it.
What is your basis for that recollection? - Just the fact that we designed it as a traditional house with bedrooms and a garage and there were no - in my understanding that part was not zoned commercial at that stage.
And you would be aware of the zoning in that area, would you, in your professional capacity? - Well, in the sense that my brief was to design a house.
But you see, Miss Wright, you are always working backwards. You assume it was residential because you were asked to design a house? - Yes.
Now, that is an assumption you are making? - I didn't go to Council.
So you had no idea what zoning it really had at the time? - No.
You also said that you were asked to design it on the basis that Mr R would live there in his own residence, and your reason for that is because of the kitchen. Is that right? - Yes, basically.
Well, could you just tell me exactly what was there about the kitchen that persuaded you that the house was required for Mr R's personal occupation, or are you working backwards? - Oh, no. It was a feeling that I had that he would live in it.
Yes, but what was that feeling based on? It all seemed to be connected with the kitchen in your evidence? - It must've been in discussions with Mr R and Ms V regarding entertaining, I would say.
Well, did he ever say to you: `I'm going to live in this place?' - It was more that they were going to entertain in this place, I would say.
From that you assumed that he would live there? - Yes, I did. It was because of that. It was more the kitchen, which was part of the conversation that I recall, being an entertainment, focus for entertainment.''
42. I find the evidence of this witness, albeit well-intentioned, too vague to attach any credence to it insofar as it is claimed that R's intention, in acquiring Longleat, was to use the renovated premises as his own residence.
43. The last witness called by the Crown was Y, describing himself as Executive Manager of Development and Community Services of the City of Fremantle since 1995. He is the principle adviser for the City on such issues as planning, building, health and community service.
44. In his witness statement, after giving his qualifications and experience, Mr Y states:
``8. The prior zoning of 284 of R100 (Town Planning Scheme 1) allowed for residential developments of 100 dwellings per hectare. The current zoning of the property of R80 (Town Planning Scheme 3) allows for residential developments of 80 dwellings per hectare. The zoning permits single, attached house, grouped and multiple dwellings.
9. The zoning specifically forbids certain uses, but it allows certain uses to be approved following special consideration from Council. The only such use is as a
ATC 458
shop. A shop is defined in the Town Planning Scheme to include a cafe.10. The original purpose of the Council's discretion to consider a shop in an area ordinarily zoned residential (R80) is to cater for a corner shop.
11. A permitted use or a discretionary use requires the consent of the Council. To obtain this consent a person must apply to the Council and provide the particulars required by the City of Fremantle under Town Planning Scheme No. 3.
12. A professional planning officer under my direction prepares a report concerning each application which would include a recommendation as to whether to approve or to refuse to consent. Before a report is prepared, the ratepayers and residents likely to be affected by the proposed development may be advised of the application so that they can make representations or submissions to the Council.
13. If the Council decides to refuse its consent, using its discretionary powers, the Applicant may appeal to either the Minister for Planning or to the Town Planning Appeal Tribunal. The right is contained within the Town Planning and Development Act.
14. The City of Fremantle Council is desirous of consolidating the business uses within the municipality into those areas zoned commercial. It is my belief that Council may only consider a special consent use if it was a minor use of the land. Council would in all probability not support such a use at all, particularly if it was a major or the sole use of the land.
15. It is my belief that Council would be unlikely to support any changes to use for 284. It is currently close to the commercially zoned part of the municipality. It is also over the road from the local Primary School.
16. A change of zoning to commercial from R80 would require the approval of the Council, public consultation and approval of the Minister for Planning. Such an alteration involves a change to the Town Planning Scheme. If the Council refused to initiate a change to the zoning there is no right of appeal to the Minister.
17. A non-conforming use is a right created when a change of zoning happens that no longer permits a use previously lawfully occurring on a piece of land. The use is permitted to continue. However if the use stops for over six months the right is lost.''
45. Much time was spent with the witness going through the various mechanisms by which it may be possible, notwithstanding the restrictions imposed by the relevant zoning, to obtain permission to use the premises for a purpose other than a ``permitted use''. It seems that the Council retains some residual discretion to permit a user not listed in the Town Planning Scheme, following a 60 day advertising period. These are set out in paragraphs 3.20 to 3.21.1 of the Town Planning Scheme No. 3 (exh 10).
46. The witness was asked if an application were made to Council to use Longleat as a restaurant/gallery, and he and his staff were called upon to make recommendations to Council re this proposal, what factors would he be looking at in relation to that site. The witness replied that his major concern would be the retention of the building, given its heritage listing:
``We would be looking to see the retention of the building and ensure that the primary function of the building, and for that matter, the adjoining sites, would be residential purposes. Having established that point, other uses that may be contemplated would be ancillary to that use. We would see it as residential being the primary function of those dwellings and surrounding sites. We would look at uses that may allow some ancillary sort of things where residential could be a function, and that may include things like bed and breakfast facility. And we would be allowing perhaps a small coffee shop, but always ancillary to the main function of the building. We would not be supportive of a restaurant development or any other - a major gallery facility or any sort of reception facility, because we would be concerned about issues such as car parking; issues such as impact on surrounding residential development.... We would be looking to work with the applicant to see if we can achieve the objectives [of the Town Planning Scheme] that we would be looking for, which are retaining the building because of its heritage value and
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ensuring that it is used for residential, primarily residential purposes.''
47. The witness added that the matter was one ultimately for Council to decide, but that the Council has a strong regard for the professional recommendations of its officers. ``We don't always sway the Council, but it's certainly a matter that they have very high regard for.''
48. Much reliance was placed by the applicant on what was referred to as the ``new'' Town Planning Scheme, said to be one of the mechanisms which would enable ``T'' to obtain consent to proceed with its gallery/restaurant. It will be recalled that X, the applicant's expert, stated that the new plan was still in the planning stage. Y was thoroughly conversant with the present state of this proposed plan. He stated that the new Planning Scheme had been to Council ``last Tuesday'' (ie 3 June 1997), and that it had been one of his tasks to completely redraft the scheme. Since then, some Councillors had asked him to provide them with more information on some aspects of it:
``and that it will go back to Council in July and, if endorsed, it will go to the Minister for Planning and the Minister for consent to advertise. Then will follow a 60 day advertising period; assessment of submissions and procedure to finalise the scheme.''
49. It became clear in evidence that under the new scheme, Longleat would be zoned R80, a zoning which will be even more restrictive than under the zoning it is intended to replace.
50. The following then took place:
``Ms Price : And will R80 carry similar limitations on use as it presently does under Town Planning Scheme 3? - It'll be more restrictive, there won't be such a discretion with respect to shops, where it will allow discretionary uses which could be considered a local shop, which is primarily for the selling of goods for sale that are foodstuffs, toiletries, stationery, or goods of a similar domestic nature intended for day to day consumption, or used by persons living or working in the locality of a shop. So there would be a tightening up of the shop allocation. It is really meant to provide and it will still be an AA discretionary use. So it's something that Council may consider appropriate rather than the broader definition of `shops' that is under the existing City of Fremantle Scheme.
And will the proposed Town Planning Scheme provide a discretionary `other use' provision for R80 zoning? - Yes, it will, although I would state that the `use' table under the proposed scheme is much more extensive than the current `use' table, so the number of [sic] sort of classifications of land is not described in the `use' table will be much smaller.''
51. Despite lengthy and thorough cross- examination of this witness about his ability to express an opinion or the impact of the various Town Planning Schemes - from Nos 1 and 3 to the ``new'' scheme not yet in place, no fresh evidence was adduced that would assist me in reaching my decision. All Mr O'Connor achieved after a forensic tour de force was to establish that the witness thinks ``that it's going to be harder in the future'' (ie under the ``new'' plan) to turn Longleat into a restaurant with or without an art gallery. (Tr p 183). In the end, it was not made clear what weight - if any - I should give to evidence of what might have happened had an application been made for this proposed restaurant/gallery under any of these zonings in the absence of any attempt by the taxpayer to seek approval even at this point in time, and where nothing has been done to the property since 1991 to give effect to the alleged restaurant/gallery intention other than to pencil in some additional toilets. Mr O'Connor did succeed in establishing that these additional toilets had not been approved by Council. Indeed, when Y looked at these amended drawings and the Council's file notes, he observed that this:
``indicates there were quite a bit of discussions between the builder and the surveyors relating to developments that were not in accordance with the 1984 approval, and at one stage Council was looking to prosecute, but that was withdrawn, and I can't find any evidence on the files that indicates that at the end of the day a plan was actually approved.''
52. I might add that Mr O'Connor's attempt to question Y's qualifications (based on X's evidence, which sought to denigrate Y's standing in the profession) did not succeed. Indeed, I was more impressed with Y's expertise than that of X. For good measure, Y was the external examiner for X's Masters
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thesis which, if anything, would suggest that where ``standing'' is concerned the boot is on the other foot.53. After the witness withdrew, R was once again recalled to be questioned on the alterations to the plans. He readily agreed that the alteration to the drawings:
``was done by somebody else after we got this plan back. So this wasn't submitted to the Council. I'm not saying that this was ever submitted to the Council.... Later on, yes, you know, as ideas progressed, we put on other things. They're all there in pencil.... And the Council - I'm not saying the Council has ever seen these things done in pencil because at the end of the day I didn't like them and we didn't proceed with it.''
(Tr pp 203-4)
54. R admitted that the toilets were never built after ``things came to a halt... they're still empty rooms.''
55. In yet further cross-examination of R Ms Price established that according to R, the Council had a complete set of plans which showed the various changes effected. The parties thought I should be provided with these plans and a plan was finally submitted after the conclusion of the hearing, arriving on 7 August 1997 and marked exh 13. It would appear that this plan was lodged with the Council on 8 May 1987, the same day as the second set of plans (which were not approved), all bearing the Council's stamp ``City of Fremantle 08 May 1987 Received''. I have not found this further exhibit any assistance since it is identical with Drawing No 2 (exh L) save that this plan appears to be the original drawing prepared by Ms Wright, whereas exh L contains the superimposed holograph amendments superimposing the various toilets.
56. The final witness was the auditor who conducted an interview with R and the accountant ``who had a habit of mucking things up'' on 26 November 1992. It transpired that the auditor made a few notes (since apparently destroyed), had his lunch and then typed out his report on his computer. The print-out became exhibit 12. It states in part that:
``Mr R advised that prior to acquiring the subject property he was advised by a friend that in order to build up an equity and security in his business it would be wise for him to invest in `bricks and mortar' (ie real estate) as this would assist in the raising of funds for working capital in the future.''
57. The final piece in this jigsaw is exh X, an application by R to the Council, dated August 1993, seeking approval to use the shop and adjoining room of No 290 (ie his current residence) ``as an art selling shop operating during normal office hours and commencing immediately.'' This application, despite the stated anxiety to commence immediately, does not seem to have been proceeded with; there was certainly no sign of an ``art shop'' when I viewed the premises in June 1997.
58. Summarising the evidence, whilst I found R to be a witness who, whilst not deliberately distorting the events or his state of mind, nevertheless provided evidence I found less than wholly reliable. However, one thing emerged clearly - namely that R is what one might call a ``poddyboy'' (a smaller version of what has become known in the West as a ``cowboy''), ie a wheeler-dealer willing to grasp at any straw to make a fast buck. His curriculum vitae makes it clear that - unlike Mrs Steele (of whom later) - he ran a number of businesses simultaneously and was constantly on the look-out for - and actively engaged in - other quirky deals designed to yield his company a profit.
59. On that view of the evidence, do the borrowings to renovate Longleat form part of the company's trading activities rather than constituting an addition to its capital? This is a complex issue and, having been threatened with an appeal, I will summarise the facts and the current law as I understand it in greater detail than is customary.
60. I have no doubt that when R - or rather ``T'' - first purchased Longleat, it was intended to restore the property as a single residence. I am confident that at $100,000, R realised that it offered a potential to make a profit whether Longleat was to be restored as a residence, converted to offices or just swept out and re-sold there and then. It follows that I reject the Crown's main submission that Longleat was acquired as the future residence of R and his partner. I am likewise unimpressed with the art gallery/restaurant version of events. Whilst it is true that the object of a borrowing may change over the term of the loan, so that a taxpayer may legitimately begin by renovating a derelict dwelling in order to sell it at a profit or else to lease as an ``up market'' residence
ATC 461
and subsequently change his mind and convert the premises to an art gallery, such change of intent does not affect the fiscal consequences of the borrowings at any stage of the conversion, as long as the object served by the use of the sum borrowed remains an income generating use.61. However, on the evidence in this case, I am satisfied that there never was and never will be a gallery/restaurant. To come within s 51(1) of the Tax Act more is needed to become a gallery owner than to acquire a condemned dwelling, pencil in some ladies and gents toilets on a rough sketch plan for a domestic dwelling, fill the place higgledy-piggledy with some ``repro'' furniture, an old mummy and other ``architectural antiques'' and announce to the world `` I HAVE A DREAM ''.
62. At the end of the day (or rather three days), I have come to the conclusion what really occurred has been neatly described by the property consultant who was retained by the mortgagee in 1983 to value Longleat for purposes of finance (exh D). This perceptive valuer made two observations, both of which I adopt:
``(i) The present owner is in the process of renovating the property for use as a single residence;
(ii) Full value of the property cannot be obtained until the building is totally renovated but on, conclusion an entrepreneurial profit should be realisable .''
(my emphasis)
63. In other words, I am satisfied the explanation for ``T'' acquiring Longleat is that he wanted to invest in bricks and mortar to build up an equity in his business and was acutely conscious that this property, at $100,000, was a bargain, requiring no more activity on his part than to sweep the place out and comply with the minor repair requirements demanded by Council to substantially enhance its value. Had someone offered R to take Longleat off his hands at a sufficient profit, I have likewise little doubt that he would have sold it and looked for other properties in that price range.
64. On the other hand, it is the Crown's case that Longleat was always intended to be the residence of R and V, and that the idea of resale at a profit surfaced for the first time in R's revised witness statement of 28 April 1997 as a result of the decision in
Steele v FC of T 97 ATC 4239. It is true that the ``personal residence'' intent certainly fits in with all the contemporaneous evidence (statements to the Finance Company, the application for a building licence, the plans drawn by Ms Wright, the relevant zoning, etc). Nevertheless, for the reasons already set out above, I accept that it was at no time in R's contemplation that Longleat was to be converted into his own residence, but rather that he knew that whatever was done with the property he could not go wrong. To the extent that he and his partner did move into the property during part of the time it was being renovated, I find to be purely incidental and relevant only to the extent that it may lead to some kind of apportionment.
65. On the above finding of fact, can the taxpayer succeed? I think not. The expenditure for which deductions were claimed may have been relevant to preserve Longleat as a source of future income, but such expenditure does not become an outgoing incurred in gaining or producing future assessable income merely because ``T''
intends
to use the property some time in the future to produce assessable income. As Brennan J (as he then was) noted in
Inglis v FC of T 80 ATC 4001:
``... If a capital asset is not being used to produce assessable income, though it is intended for use in the future to produce assessable income, expenditure in merely preserving the asset until it is so used is not deductible. Rather, being expenditure upon a capital asset not employed in producing income, it has the character of a capital outgoing.''
(at 4004)
66. It is thus fatal to the taxpayer's claim that it failed to demonstrate any - or any sufficient - connection for purposes of s 51(1) between the outgoings on interest and the future income producing activity from Longleat. Indeed, whatever ``commitment'' may be said to arise on the evidence is so vague as to be dismissed out of hand. To give but one example, R made no attempt at any relevant time to obtain Council approval for his restaurant/gallery project. Instead, he kept adding to and altering Longleat, so that it grew like Topsy.
67. I find that any necessary connection between the outgoing and future income earning activity is not satisfied merely on proof that ``T'' is a company turning over every stone to see whether something may be hidden
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underneath which can, by one means or another, be turned to future profit; (seeFC of T v Brand 95 ATC 4633 per Lee and Lindgren JJ at 4646-4647, and per Tamberlin J at 4649).
68. Not surprisingly, the respondent placed heavy reliance on the decision in Steele (supra) in which, for all practical purposes the majority refused to follow the decision in
Travelodge Papua New Guinea Ltd v Chief Collector of Taxes 85 ATC 4432. Mr O'Connor, acutely conscious that the decision posed a significant obstacle to his client's chances of success, placed heavy reliance on the dissenting decision of Carr J in the hope that his Honour's view will be upheld if the matter proceeds by way of further appeal to the High Court.
69. It is therefore necessary to examine Steele in some detail. It was first heard by this Tribunal in 1992. The Tribunal was specifically requested by both counsel only to make findings of fact and law, and to leave the issue of quantum to the parties. The Tribunal did as requested and its findings were appealed to the Federal Court. The matter came before Sweeney J who found, somewhat surprisingly in view of counsel's request, that the Tribunal had not performed its proper task, ie dealing with the issue of quantum and adjourned the proceedings to enable the parties to reach an agreement on that issue. The parties having failed to agree on quantum, the matter was re- listed for further hearing before this Tribunal (similarly constituted).
70. At the resumed hearing, the Tribunal, having reached a decision (by majority) on quantum, its earlier decision on the law was once again appealed and came before Nicholson J who dismissed the appeal (save on the issue of penalties). Mrs Steele appealed his Honour's decision to the Full Federal Court, which dismissed the appeal (Burchett and Ryan; Carr J dissenting). An application for special leave has since been lodged with the High Court.
71. Since there is some similarity between the facts of this case and the facts in Steele, some of which were not detailed in the recital of the facts made by this Tribunal and which may be critical in distinguishing the two cases. I therefore propose to turn to our unpublished (and confidential) reasons in Steele, and in particular, the business activities of Mrs Steele in light of the observations of Carr J, who would have remitted the matter to this Tribunal:
``... for it to consider [Mrs Steele's] business activities... from the time of acquisition of `Tibradden' to its disposal.... The appellant is entitled to have all of her business activities taken into account as a whole.''
[p 4266]
72. The beginnings of the epic in Steele were neatly summarised by the majority in the Federal Court, who commenced their joint judgment as follows:
``On an inauspicious day in 1980, the appellant Mrs Steele, drove along a main road past a property known as `Tibradden', of 7.4 hectares, in the vicinity of Perth airport, on which horses were grazing. There was a `For Sale' sign on the property, and Mrs Steele conceived the idea of purchasing it for redevelopment as something in the nature of a motel and townhouse complex.''
[p 4240]
73. The Tribunal had found as a fact that for many years before Mrs Steele acquired ``Tibradden'' she had been engaged in several businesses, principally in the catering and hospitality industry. Having disposed of her catering business in 1979, she claimed that she was looking round for an investment which would provide her with an active and interesting occupation. She said that because of her experience associated with the horse racing industry, she was interested in becoming established in a related business in which she could use her catering and accommodation management skills and began to look for such an opportunity. The Tribunal noted:
``It can be said at the outset that if this was indeed Mrs Steele's purpose, her search for such an opportunity can best be described as `desultory'; she makes no enquiries from real estate agents or business brokers, contenting herself with driving round the countryside in search of `For Sale' signs and likely properties.''
74. After making some enquries about sewerage and possible re-zoning, Mrs Steele purchased ``Tibradden'' for $1 million, obtaining some $900,000 by way of vendor finance. It was found as a material fact that ``Tibradden'' was used to stable horses, agist and train them, thereby providing some small change in weekly earnings. Just what income and outgoings were derived and incurred had been a matter of some dispute when the matter was heard by the Tribunal on the second
ATC 463
occasion, an issue on which I dissented, the more charitable view of the majority (Messrs Fayle and Hotop, Members) prevailing.75. The Tribunal found - and this was not challenged on appeal - that Mrs Steele's dominant purpose in acquiring ``Tibradden'' was to build a motel and townhouse complex on the land, albeit pending the commencement of the development, she continued the agistment activities, engaged a trainer to move into the trainers' quarters and arranged for her sister to occupy the manager's residence.
76. It soon became obvious to Mrs Steele that the cost of the development she envisaged (estimated at $10 million) was beyond her resources. She therefore entered into a partnership with a Mr Williams who, at the relevant time, was the managing director of a large construction company. Despite ultimately receiving approval for the proposed development it did not proceed as a result of a falling out between Mr Williams and Mrs Steele and the land was sold.
77. In her return for the income year ended 30 June 1987, Mrs Steele claimed a deduction for losses (consisting mainly of interest incurred on the money borrowed to acquire ``Tibradden''). The deductions having been denied, the matter came before this Tribunal which, after an exhaustive analysis of the case law including the decisions in Travelodge Papua New Guinea case (supra) and
Fletcher & Ors v FC of T 91 ATC 4950 concluded (on the first occasion) that:
``The Travelodge case can have no bearing on the case before us. When `Tibradden' was purchased by Mrs Steele, she could hardly be said to be in business of the building and management of hotel/motels. In any event, any motel development was no more than a fond hope, if only because the zoning of the land did not permit the kind of development contemplated by its purchaser, Mrs Steele having no more than a statement from someone on the Council that `there probably would not be a problem in getting rezoned.'''
78. It was sought to be argued that since ``Tibradden'' derived some small change from agistment, all of the interest was an allowable deduction. I held that the losses were only allowable:
``equal to the amount of Mrs Steele's share of the agistment income found by my colleagues to have been derived in each of those years as just a just and reasonable basis of apportionment in this case.''
79. The Tribunal noted on that occasion that:
``The evidence in the present case indicates that the applicant, in purchasing `Tibradden' had a dual objective, the dominant one of which was capital redevelopment. Therefore, for losses or outgoings to qualify for deduction under s 51(1), dissection or apportionment must occur. The applicant's evidence was that she acquired `Tibradden' as an investment for development. Her evidence makes it clear that she did not have a specific plan in mind as to how this investment might be made profitable; all that she had was an idea, at best, to develop a motel to be managed by herself. Her idea was that what she developed would produce income. Whilst that idea was far from crystallised, the evidence indicates that there was no thought on her part, nor later of her partner Williams, to sell the property for profit.''
80. When Steele came before the Full Federal Court the appellant submitted that although the purchase moneys for the land may have been incurred on capital account, the interest in respect of those moneys were incurred on revenue account.
81. The majority (Burchett and Ryan JJ), in rejecting that submission, noted that in
FC of T v Riverside Road Pty Ltd (in liq) 90 ATC 4567, the Court held:
``Whether interest incurred by a taxpayer will, in a particular case, satisfy the test of deductibility depends upon the facts of a particular case.''
[p 4575]
82. Their Honours went on to point out:
``The primary fact to be determined, when the deductibility of payments of interest pursuant to s 51(1) comes under consideration, is the object served by the use to which the principle sum borrowed has been put during the period to which the payment of interest relates. It needs to be recognized that this object may change over the term of the loan.''
(p 4246)
83. The majority concluded that the use to which the borrowed funds were put was to purchase the land - a capital asset - which,
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although not necessarily conclusive, was on the facts found by the Tribunal fatal to the issue of deductibility.84. The majority recognised that, for purposes of s 51(1), the characterisation of payments of interest on borrowed money is contentious, citing the contrasting observations by Deane and Sheppard JJ in
Ure v FC of T 81 ATC 4100 with the (later) comments of the High Court in Fletcher & Ors v FC of T 91 ATC 4950.
85. Noting that the characterisation of interest will generally be ascertained by reference to the objective circumstances of the use to which the borrowed funds are applied, the majority held:
``... Here, the use to which the borrowed funds were put was the purchase of a capital asset, Tibradden. The fact that it was a capital asset is not in itself, of course, conclusive, or even particularly helpful. The statements in The Texas Company case (1939-1940) 63 CLR 382) and the other cases that have been cited make the deductibility in general of interest payments quite clear where the borrowed funds provide capital (and a fortiori working capital) employed in a business or in income earning activities. But Tibradden was not so used, nor was it available for such use. It was almost vacant land. (We are still leaving aside the agistment activities.) Before Tibradden could become the income- producing property that was proposed, much capital work and expenditure would be required.
When Dixon J, in the often cited passage in The Texas Company at ATD 356; CLR 468-469, spoke of the way the Australian system treats interest on money borrowed to secure capital, he was speaking in the context of current income-gaining activities. He regarded interest payments as part of `the recurrent expenditure which must be incurred to obtain the use of the money', and as like other regular outgoings of the business incurred to obtain the use of capital assets, such as rent or hire. If the matter be looked at in this context, and in this way, as Bowen CJ and Burchett J pointed out in the passage cited from Australian National Hotels (88 ATC 4627 at 4633-4634), interest payments may be seen to secure no enduring advantage. Like rent, they secure merely the use of the capital itself, or of premises representing it, from day to day. But interest paid in relation to the acquisition or creation of a capital asset, which is later to be utilized in income- gaining activities, is in an entirely different position. It is paid so that, when the time comes, an enduring asset (in this case, a motel complex) will be available for use in the intended activity. The fact that, while the capital asset is being created, the payments of interest are recurrent is not enough to change this conclusion. Those payments are not part of the recurrent operations of any existing business activity. Standing alone, the element of recurrence cannot be a controlling factor. Indeed, as Gibbs J pointed out in his dissenting judgment in
Cliff International Inc v FC of T 79 ATC 4059 at 4067: (1978-1979) 142 CLR 140 at 153, Dixon J relegated recurrence, in Associated Newspapers at ATD 95; CLR 362, to the position, not of a test, but of `no more than a consideration the weight of which depends upon the nature of the expenditure.'''pp 4247-4248 (my emphasis)
86. Later, their Honours referred to the decision in
Wharf Properties Ltd v Commrs of Inland Revenue of Hong Kong 97 ATC 4225, citing the advice of their Lordships to Her Majesty as providing ``strong reinforcement'' for their own views.
87. It seems to me that if the majority decision in Steele survives a challenge to the High Court, the reasoning in the Travelodge Papua New Guinea case will no longer be good law, a decision which, although handed down under the New Guinea Tax Act, has been generally accepted as relevant and applicable in this country the sections dealing with deductibility being identical in both countries.
88. Mr O'Connor sought to distinguish the instant case from Steele, noting that: Carr J treated as a material fact the Tribunal's finding that there was no thought on the part of Mrs Steele to sell ``Tibradden'', whereas in Mr O'Connor's words:
``Mr R's evidence that one of the reasons for purchase was to buy and sell at a profit has not been challenged in cross-examination. (Tr p 238).... The taxpayer here did not acquire the property or undertake the renovations at that property for a main
ATC 465
purpose and for a lesser, minor purpose.... `T' did not acquire this property for a dual purpose , rather, at the time of acquisition and at the time of incurring the interest expenditure on the renovations, it was the purpose, when the matter is considered on an overall basis, that `T' would derive somehow a profit which, in the course of carrying on its business, would be assessable income under the provisions of section 25 of the Act.''(Tr p 241)
89. That distinction is, with respect, without substance since I am not persuaded that it is material or relevant that Mrs Steele had no dual purpose, and that when she acquired ``Tibradden'', she had no other intention than to build and operate a motel on the land and at no time contemplated that the land could be resold at a profit. In short, I find that Mr O'Connor's attempt to distinguish this case from Steele on its facts must fail.
90. In the current state of the law, I find that the Travelodge case is inconsistent with the reasoning which found favour with the majority in Steele and with their Lordships advice in Wharf Properties. In the latter case, the taxpayer had purchased and redeveloped an old tramway depot as a commercial complex. It sought - alas unsuccessfully - to deduct the interest incurred during the development period, relying inter alia on the ratio in the Travelodge case. On appeal to the Privy Council, their Lordships specifically rejected the views expressed by two of the judges in the Court of Appeal:
``... [Their Lordships] do not share the doubts of Godfrey JA over whether `on a strict construction' interest on moneys borrowed can ever be expenditure of a capital nature. It seems to their Lordships that there are cases, of which this is one, where it plainly is. Nor do they agree with Ching JA that this decision logically entails that interest paid on a loan to acquire a capital asset will always be capital expenditure. Each payment of interest must be considered in relation to the purpose of the loan during the period for which the interest is paid. Once the asset has been acquired or created and is producing income, the interest is part of the cost of generating that income and therefore on revenue expense .''
(at p 4229) (my underlining)
91. At the conclusion of their advice to Her Majesty, their Lordships specifically rejected the reasoning in the Travelodge case.
92. If the majority decision in Steele (by which I am bound) is the current law, the present claim must fail on my finding that the advantage sought by the payment of interest was the creation of a capital asset. On this finding, the interest paid on the renovations will be deductible from whatever profit is generated if and when the property is sold. In other words, there being no income generated throughout the period of the alterations and additions (I have ignored for present purposes some minor windfall ``rent'' said to have been paid by the directors for the use of the premises as a residence), the claim to deduct the interest comes at a point too soon to be properly allowable. I find no inconsistency in that view with the line of cases, beginning with
Ronpibon Tin NL & Tongkah Compound NL v FC of T (1949) 8 ATD 431 at 435; (1949) 78 CLR 47 at 56, which have consistently determined that the reference to ``the assessable income'' in s 51(1) refers not to the assessablility of the accounting period, but to income generally.
93. Ingeniously Mr O'Connor sought comfort from the fact that ``T'' Pty Ltd was a company, whereas Mrs Steele was an individual. Having regard to the acceptance by the majority in Steele of the ratio in Wharf Properties, a case involving a development company, I have concluded that if such distinction was ever valid, it has not survived the reversal of the Travelodge case.
94. It is the minority view of Carr J on which, not unreasonably, Mr O'Connor placed his greatest reliance. His Honour concluded that since Mrs Steele had embarked on a profit- making undertaking or scheme and, contrary to the Tribunal's finding, had shown a ``commitment'' to the building and sale of 80 townhouses, any profits constitute assessable income, hence the interest incurred during construction constitutes an allowable deduction year by year, even though nothing was ever done with ``Tibradden'' and no income of any consequence was ever derived other than some windfall pocket money from agistment.
95. Alas, until the view of Carr J is accepted by the High Court, it must remain for the present a profound new insight into the application of s 51(1), albeit not the law. Regrettable, it also compels the applicant in this
ATC 466
case to lodge a ``protective'' appeal against my decision.96. As will appear from the above, I have concluded that the claim made by the applicant must fail. However, conscious that my task aim is to reach the preferable and correct decision, the issue of apportionment arises, even though (i) the case was argued on an ``all or nothing'' basis, (ii) apportionment was not pleaded in the objection, and (iii) not advanced before me in the alternative. Nevertheless on similar facts, Lee J in
Ure v FC of T 80 ATC 4264 did not consider any of these ``defects'' to constitute an insurmountable obstacle to apportionment. His decision was upheld on appeal (Ure v FC of T) (supra)).
97. Applied to this case, an apportionment - if any - would be based on the evidence (such as it was) that some $1,040 was said to have been paid to ``T'' by the directors in the 1992 tax year for the use of Longleat as their residence. I might add that Mr O'Connor sought to persuade me that because Longleat was used for some years to store the books of account of ``T'' and La Ronde Pty Ltd, the interest paid on renovations was an allowable deduction.
98. As submissions go, the ``storage'' argument does not lack courage. Thus Mr O'Connor submitted that it was of substantial advantage to ``T'' and its associated companies that they were able to store their records in Longleat, even though ``T'' received no money for acting as bailee for the period the property was being restored. If there is a nexus between the outgoing on renovations and any relevant income earning activity of the taxpayer company, Mr O'Connor failed to alert me to it.
99. The requirement of such nexus was affirmed by the majority in Steele (supra) where their Honours, after citing certain findings of the Tribunal, stated:
``These passages seem intended to invoke the proposition that a sufficient connection, for purposes of s 51(1), between an outlay and the prospect of income requires a degree of commitment to the relevant income producing activity.''
(p 4243)
100. The majority did not regard the Tribunal's conclusion on the law as constituting a novel statement, citing several earlier decisions of the courts as supporting that proposition: Inglis v FC of T (supra) per Brennan J at 4004, per Davies J at 4011;
Softwood Pulp and Paper Ltd v FC of T 76 ATC 4439 at 4450 et seq;
Goodman Fielder Watties Ltd v FC of T 91 ATC 4438 at 4448;
FC of T v Brand 95 ATC 4633 at 4646, 4649.
101. If Mr O'Connor's submission on ``storage'' has any merit, one could argue equally plausibly that a boarding kennel can claim depreciation on its kitchen stove if it can be shown that dogs occasionally crawl into the oven to produce their litter.
102. As to ``rent'', I find that R and V lived in Longleat's laundry/garage in 1992. On that finding, I am prepared to apply the presumption omnia praesumuntur rite esse acta to the accountant who was in the habit of ``mucking things up'', and assume that in that year he debited R's loan account by that amount, there being some dark mutterings to that effect.
103. I would uphold the decision on the objection in the 1991 tax year and vary the decision in 1992 by allowing an amount of $1,040 by way of allowable deduction.
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