Gauci and Ors. v. Federal Commissioner of Taxation.

Judges:
Lavan J

Court:
Supreme Court of Western Australia

Judgment date: Judgment received 9 July 1975.

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Lavan J.: These are appeals from decisions of the Commissioner of Taxation disallowing objections to assessments of income tax; they have been forwarded to this Court at the request of the appellants pursuant to sec. 187 of the Income Tax Assessment Act 1936-1973.

The appeals of Edwin and Eleanor Gauci relate to amended income tax assessments in respect of the year of income ending 30th June 1969.

The appeals of Gwendolyn Masi relate to an amended income tax assessment in respect of

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the year of income ending 30th June 1969 and to an assessment in respect of the year of income ending 30th June 1970.

All of the appeals arise out of related facts and with the consent of the parties have been heard together. The main question is whether profit made by the taxpayers when land owned by them in Kwinana was resumed was assessable income.

Edwin and Eleanor Gauci are husband and wife and Gwendolyn Masi is their daughter. On or about 4th September 1962 Mr. and Mrs. Gauci purchased as joint tenants a freehold property known as Lot 386 Richardson Street, Kwinana, for the sum of $1,200. On or about 26th September 1962 Mrs. Masi (then Gwendolyn Gauci) purchased a freehold property known as Lot 395 Beach Street, Kwinana, for the sum of $1,400. The two lots were in close proximity to each other, each comprised six acres and at the time of their purchase both had been gazetted as being within the general industrial zone of the Shire of Kwinana.

In November 1968 both lots were compulsorily acquired by the Metropolitan Region Planning Authority for the purpose of the Metropolitan Town Planning Scheme Improvement Plan No. 3 - Kwinana. The purpose of that plan was to enable consolidated sites to be available for industrial purposes generally, and more specifically for the proposed Kwinana Nickel Refinery.

In respect of Lot 386 Richardson Street, Mr. and Mrs. Gauci during the year ending 30th June 1969 received by way of compensation the sum of $43,711.88. In respect of Lot 395 Beach Street, Mrs. Masi received by way of compensation the sum of $44,500; of this $20,000 was received during the year ending 30th June 1969 and $24,500 was received during the year ending 30th June 1970.

Both Mr. and Mrs. Gauci submitted returns of taxable income for the year ending 30th June 1969 and were assessed thereon. Subsequently amended assessments were issued which included tax levied upon the amounts respectively received by them for compensation.

Mrs. Masi also submitted a return of taxable income for the year ending 30th June 1969 and was assessed thereon. She too received an amended assessment which included tax upon that portion of compensation received by her during that year of income.

In respect of the year of income ending on 30th June 1970 Mrs. Masi failed to lodge a return and pursuant to sec. 167 of the Act the Commissioner made an assessment based on the compensation received by her during that year of income.

The respondent contends that the compensation received by the taxpayers on the resumption of their land was income according to sec. 25(1) of the Income Tax Assessment Act and that there was a profit which was properly included in the assessable income of each appellant by force of both limbs of sec. 26(a) of the Act being a profit arising from the sale of land acquired for the purpose of profit-making by sale or from the carrying out of a profit-making scheme.

The appellants make two submissions: First that the profits made on the resumption of the land were receipts of capital and were not income assessable under sec. 25(1) of the Act; and second that the lands were not acquired in either of the circumstances contemplated by sec. 26(a) and accordingly the profits gained on their resumption were not assessable under that provision.

In brief Mr. and Mrs. Gauci claim that they acquired Lot 386 Richardson Street in order that on Mr. Gauci's retirement they could establish their home there and Mr. Gauci could indulge his hobby of raising poultry. Mrs. Masi claims that she acquired Lot 395 Beach Street so that upon her marriage she and her husband could build their house on the site and so live in close proximity to her parents. It is accordingly important to examine the background against which the two lots in question were purchased.

The appellant Edwin Gauci was born in Alexandria in Egypt. In 1942 he entered the service of the Ottoman Bank, initially in its office in Alexandria where he was in charge of the insurance department. Following the Suez crisis in 1956 he was re-posted first to England, then to Baghdad and finally in 1958 to Nairobi where he was officer in charge of the accounts department and later controller of the branch. Both Mr. and Mrs. Gauci had relatives residing in Australia and when in 1962 Mr. Gauci became entitled to three months' leave he and his wife and children visited Mrs. Gauci's sister

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in Western Australia. During their stay it was decided that upon Mr. Gauci's retirement from the bank, which was expected in 1973, the family would take up permanent residence in Western Australia.

Mr. Gauci stated in evidence that he had for some years been actively engaged in the breeding and exhibiting of poultry - mainly for pleasure - and that during his holiday in Western Australia he had investigated the possibility of acquiring vacant land which would not only be suitable as a site for his future home but would enable him to pursue his hobby. In company with his daughter Gwendolyn and a land agent named Graham he had inspected several properties which were unsuitable, but finally he had been shown by Graham a six acre lot in Richardson Street, Kwinana, priced at $1,200 which he considered to be not only reasonably priced but a suitable site for a poultry farm. A deposit was thereupon paid and shortly afterwards upon payment of the balance of the purchase price the land - Lot 386 - was transferred into the joint names of himself and Mrs. Gauci.

Almost simultaneously with the purchase of the Kwinana land Mr. and Mrs. Gauci bought two additional vacant lots. The first lot - Lot 174 Jubilee Street, Cannington - was purchased on 18th September 1962 for $300 and the other - Lot 275 Jubilee Street, Cannington - was purchased on 10th October 1972 for $550; both of these lots are still owned by the purchasers. According to Mr. Gauci his sole object in purchasing these lots was to provide a source of funds for the future development of the Kwinana land. The moneys necessary to complete the various purchases made by Mr. and Mrs. Gauci were transferred from Mr. Gauci's account with the Ottoman Bank in London.

Shortly afterwards, Mrs. Masi - then Gwendolyn Gauci - purchased a vacant lot - Lot 395 - in Beach Street, Kwinana, for the sum of $1,400. On 26th September a deposit of $140 was paid and on 16th October 1962 a contract of sale for the purchase of the lot on terms was executed by Gwendolyn Gauci as purchaser and Mr. Gauci as guarantor. In due course the purchase was completed and the land transferred to the purchaser who personally paid the whole of the purchase price.

Late in October 1962 Mr. and Mrs. Gauci and their family returned to Nairobi where Mr. Gauci resumed his duties with the bank. In their absence Mr. Graham gratuitously performed such small services as were required to be performed in relation to the Kwinana lots; he also kept Mr. Gauci informed of increasing land prices in the Kwinana area. No attempt was made by the appellants to sell the land. In 1964 on becoming aware that the Ottoman Bank was offering loans at an attractive rate of interest in order to enable expatriate staff members to purchase or build a home, Mr. Gauci sought Mr. Graham's advice regarding the purchase of a suitable residence but although suggestions were offered the matter was not pursued.

When Mr. Gauci returned to Nairobi he planned to return to Western Australia in 1964 when his next leave fell due but at the request of the bank he agreed to defer this leave until the following year. However in January 1965 without warning Mr. Gauci was retrenched by the bank and as soon thereafter as was possible he and his family left Nairobi and returned to Western Australia where they took up permanent residence.

Upon his return to Western Australia, as he had a dependent family it was necessary for Mr. Gauci to obtain employment and as his younger daughter was only 13 years of age, to obtain accommodation in close proximity to a suitable school. For a time he was in employment but relinquished this in favour of purchasing a business which he now conducts in partnership with Mrs. Gauci. He also purchased in Melville a home which he has since occupied. Mrs. Masi married in 1969 and now lives with her husband in Booragoon, a suburb several miles distant from her parents' home.

Shortly after their return the appellants commenced to receive written offers for the purchase of their Kwinana lots. Although these offers were ignored, a number at least were retained by Mr. Gauci and produced in evidence.

In July 1968 the Department of Public Works offered to purchase the lots, and in November 1968 they were resumed.

It is the appellants who by virtue of sec. 190 carry the burden of establishing that the assessments are excessive. Mr. Adams on

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behalf of the appellants submitted that having regard to the appellants' account of the circumstances in which they acquired the land there was no evidence upon which the respondent could properly rely in order to justify the inclusion of the profits gained by the taxpayers as assessable income; accordingly he claimed that on the authority of
Elsey v. F.C. of T. 69 ATC 4115; (1969) 121 C.L.R. 99 the onus of proving that the assessments should be upheld fell on the respondent. I do not consider this submission to be well founded; as will appear, in my opinion there was ample evidence which if accepted justified the assessment.

The appellants do not deny that by reason of the resumption of their land they have made substantial profits; nor do they deny that such a resumption was a ``sale'' for the purposes of sec. 26(a) of the Act. Thus if they are to discharge their burden of proof they must satisfy the Court that the lots in question were not acquired in circumstances which would render any profit gained assessable income pursuant to sec. 25(1) or 26(a), and if they do not do so they must fail.

Although Mr. Kennedy on behalf of the Commissioner made it clear that the assessments were based mainly upon the provisions of sec. 26(a) he also contended that the respondent also relied on the provisions of sec. 25(1). In my opinion, in no instance is the profit gained by the appellants assessable income as contemplated by sec. 25. Whether or not income is assessable under that section ``must be determined in accordance with ordinary concepts and usages... except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of such receipts'' - per Jordan C.J. in
Scott v. C. of T. (N.S.W.) (1935) 35 S.R. (N.S.W.) 215 at p. 219.

In my opinion the sums received by the appellants do not meet these criteria and if they are to form part of their taxable incomes they must do so by virtue of sec. 26(a).

Whether or not sec. 26(a) is applicable to any particular transaction is a question of law but ``in the end the question whether a case falls under the operation of sec. 26(a) must be determined as a question of fact.''
Official Receiver in Bankruptcy v. F.C. of T. (1956) 96 C.L.R. 370 at pp. 387-8.

As to the required standard of persuasion I was referred by Mr. Kennedy to the statement of Fullagar J. in
Pascoe v. F.C. of T. (1956) 11 A.T.D. 108 that ``when a person's purpose or object or other state of mind in relation to a given transaction is in issue, the statements of that person in the witness box provide, in a sense, the `best' evidence, but for obvious reasons they must... be tested most closely and received with the greatest caution''. This dictum was followed by Gibbs J. in
Jacob v. F.C. of T. 71 ATC 4192; (1971) 45 A.L.J.R. 568 and I have no hesitation in adopting it.

In
Buckland v. F.C. of T. (1960) 12 A.T.D. 166, Windeyer J. at p. 169 stated: ``In relation to sec. 26(a) it is the main or dominant purpose of acquisition that is significant''. See also the statement by Gibbs J. to similar effect in Jacob v. F.C. of T. (supra) at p. 4193 and p. 569.

The sole purpose advanced by each of the appellants for acquiring the land has been stated and each disclaims having at any time had the intention of disposing of the land had it not been for its compulsory acquisition.

Mr. Gauci stated in evidence that in acquiring the Kwinana land he was not concerned with seeking an investment and was prompted entirely by the intention that when he retired in 1973 he would have a building site which answered his requirements. When consulting Mr. Graham he had informed him merely that he was looking for vacant land and had not referred to the purpose to which it was to be put; neither when being shown the Kwinana land had he questioned Graham concerning the potential of the area. The fact that to his knowledge there was established within two miles of the site an extensive oil refinery and that not far distant was a new township in course of erection did not, he stated, arouse any suspicion that there might be limitations on the purposes to which the land might be put. He was not concerned that a portion of the land appeared to be arid, that there was no road in the vicinity and that neither water nor electricity was available in the area; the fact that there was a cleared block not far distant which was watered by a windmill and which was being utilised for the agistment of cattle satisfied him without further inquiry that the land was suitable for his purposes. It was not until some three or

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four years later that he had learned that at the time he had acquired the land it could not legally have been utilised as a poultry farm. Even when he ultimately learned that the land had been marked for industrial development neither he nor his daughter had wavered in their intention to erect dwellings on their respective lots. Neither had he considered selling the land which he had purchased in Cannington nor a vacant lot which he later acquired at a seaside resort but which he had not developed. His intention at the time when the resumption of the Kwinana land had first been mooted was, he stated, to dispose of his home in Melville and his business and establish his home on Lot 386 Richardson Street.

Mrs. Masi gave evidence that in company with her father and Mr. Graham she had gone to Kwinana on the occasion when Lot 386 Richardson Street had been purchased and confirmed that on that occasion her father had expressed the opinion that the site would be suitable for a poultry farm. She stated that shortly afterwards she became interested in purchasing a lot for herself; she was nineteen years of age at the time and was looking forward to when she would be married; it was her wish when that happened to live in the same locality as her parents. With her father and Mr. Graham she returned to Kwinana where she inspected and bought Lot 395 Beach Street. The block was flat and covered with scrub but it was in close proximity to the lot acquired by her parents. According to Mrs. Masi she had no knowledge or any reason to suspect that the land was within an industrial area until in or about 1966, when she commenced receiving offers for the land from various agents. These offers she had ignored as at the time it was still her sole intention to build a residence on the block.

To support their appeals the appellants called as a witness Mr. Graham. It was apparent from his evidence that he had acted not only as agent for the vendors but that, both at that time and subsequently, he was regarded by the appellants as a friend and adviser. Mr. Graham had not always been a land agent. Prior to his retirement in 1957 at the age of 65 he had held a number of responsible positions in the State Public Service including that of Chairman of the Loan Committee and Administrative Officer in charge of War Service Homes. As such he was required to negotiate with local governing bodies and became aware of their zoning restrictions. On his retirement he went into business on his own account as a land agent in Fremantle in which, as the witness agreed, his previously acquired knowledge was of great use. In August 1968 Mr. Gauci called on him in answer to an advertisement offering for sale land in Kwinana and expressed his interest in inspecting it with a view to purchase. According to the witness he may have been aware that the land in Kwinana was about to be zoned for industrial purposes but he really took little notice of the fact. According to the witness he drove Mr. Gauci and his daughter to Kwinana where they were shown Lot 386 Richardson Street; there was no road leading to it and it was not serviced in any way. A part of the land had at one time been cleared and on this grass was growing but the remainder was dry and dusty. As Mr. Gauci had not indicated the purpose for which the land was required the witness had not made any inquiries as to the local zoning by-laws; the fact that there was no building activity in the vicinity had not raised his suspicions that the area might have been zoned for industrial purposes. After Mr. Gauci had inspected the land he had agreed to buy it stating, ``This would be suitable for a poultry farm''. Subsequently the witness had been instrumental in selling Lot 395 Beach Street to Gwendolyn Gauci.

For the respondent, Mr. Watson-Bates, an investigator of the Taxation Department, gave evidence that in the course of his inquiries into the appellants' assessability for taxation he had interviewed Mr. Graham and had been told by him that Mr. Gauci had come to him seeking ``bargain investment land'' and that he was ``a tough businessman with a sharp eye for a bargain''.

On a consideration of Mr. Graham's evidence I am satisfied that some discussion took place between him and Mr. Gauci regarding the potential of land in Kwinana. In so finding I am not suggesting that Mr. Graham consciously gave false evidence but his recollection of conversations and events was so hazy that I regard his evidence of them as being quite unreliable. This uncertainty which was particularly noticeable in his evidence regarding his interviews with Mr. Watson-Bates leads me to the conclusion that where there is a conflict in the testimony of the two men the evidence of Mr. Watson-Bates is to be preferred.

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There are a number of undisputed facts which provide assistance in determining the inferences to be drawn from the evidence as to the appellants' predominating purpose in acquiring the Kwinana land. The first of these relates to the nature of the land itself.

As to the Kwinana area generally an aerial photograph taken on 13th January 1961 was tendered in evidence. This photograph discloses that at that time a very substantial portion of the total area was covered in natural vegetation and was undeveloped and uninhabited. Separating the coastal strip from the hinterland was the main Fremantle-Rockingham Road. Within the coastal strip was an industrial area and clearly shown on the photograph are two large industrial complexes identified respectively as the B.H.P. steel rolling mill and the B.P. oil refinery, the latter being distinguished by the presence of a large number of oil storage tanks. Also within the coastal strip and between 1½ and 2 miles due east of the refinery was the subdivision in which the appellants' lots were situated. There can be no doubt that to a person travelling from Fremantle to the appellants' land both the steel rolling mill and the oil refinery would have been clearly visible from the road. Both Mr. Gauci and Mrs. Masi acknowledge that they were aware of the refinery but both disclaim any knowledge of the rolling mill. Also appearing in the photograph and situated several miles east of the appellants' land is the satellite town of Medina which was at the time in course of construction and which was designed for the accommodation of workers engaged in the Kwinana industrial area. Mr Gauci and Mrs. Masi when inspecting the district visited the townsite but insist that it held no significance for them.

It is apparent that in 1962 the lots acquired by the appellants were situated in a most unattractive locality, remote from any other habitation, flat, dusty, largely covered by low scrub and completely unconnected to any of the services which would attract a prospective home builder. The nearest development of any consequence was industrial and even making allowance for the appellants' claim that they were looking forward eleven years, nothing at the time appeared to indicate any likelihood that the land would be suitable for residential purposes. All of the lots in the subdivision comprised six acres. By virtue of by-laws made by the Shire of Kwinana (then the Kwinana Road Board) pursuant to the Town Planning Development Act which were gazetted on 3rd February 1956 the area was classified as a ``general industrial'' zone which restricted its use to a number of purposes of an industrial but not of a residential or rural nature. Hence when the appellants purchased their respective lots the very purposes for which they claim to have acquired the land were forbidden. It appears to be not without significance that on no occasion after acquiring the land did any of the appellants revisit it.

In my opinion for the purposes of these appeals Mr. and Mrs. Gauci must be regarded in relation to the Kwinana land as holding their respective interests in the same right. Although the funds necessary for the acquisition of the land were provided by Mr. Gauci this was consistent with a regular practice whereby all property acquired by them was jointly owned and I am satisfied that the question of a gift of an undivided half interest in the land does not arise. Similarly I am satisfied that a common intention must be implied in relation to the purpose for which the land was acquired. It is claimed that in acquiring the land Mr. and Mrs. Gauci were prompted by one intention only. That I am unable to accept. Mr. Gauci is a man of considerable business experience who I do not doubt possesses the qualities attributed to him by Mr. Graham. I am unable to accept that his interest in Kwinana was not inspired to a considerable degree by his awareness of its potential as an industrial area. In Buckland v. F.C. of T. (1960-61) 34 A.L.J.R. 60 at p. 62 Windeyer J. pointed out that although in acquiring property ``there may be present two purposes, one primary and dominant and the other secondary and subordinate which are not incompatible and both may be accomplished, it is the main or dominant purpose which is significant''. See also Elsey v. F.C. of T. 69 ATC 4115; (1969) 121 C.L.R. 99. Even if I were able to accept the improbable claim that Mr. and Mrs. Gauci had an intention to reside in Kwinana there would be no doubt in my mind that that purpose was subordinate to the intention that in the fullness of time they would profit considerably by the resale of the property.

I have also come to the same conclusion in relation to the appeal of Mrs. Masi. At the time when she acquired the Kwinana land she was a single woman and as previously stated, 19 years of age; she claimed no commercial

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experience and had resided in Western Australia for a mere two months. She was about to return to Nairobi and all things being equal, she would have remained there for the following eleven years. I am unable to come to any other conclusion than that in purchasing the property she was guided by her father's advice and acted upon his judgment. I am unable to accept her evidence that her intention in acquiring the Kwinana land was to establish her home there; in her case the evidence points clearly to a finding that the appellant acquired the land ``for the purpose of profit-making by sale''.

Having made such findings it follows that the assessment must be upheld under the first limb of sec. 26(a). In order to bring the transactions within the ambit of the second limb would require a finding in each case that the purchase and resale exhibited features giving it the character of a business deal or constituted an adventure in the nature of trade.
McClelland v. F.C. of T. 70 ATC 4115; (1970) 120 C.L.R. 487;
Eisner v. F.C. of T. 71 ATC 4022; (1971) 45 A.L.J.R. 110. In my opinion the evidence does not support such a finding.

Although objections were raised to the method of calculating the assessments, at the request of counsel I make no finding in this regard. Otherwise the assessments will be upheld and the appeals dismissed.