L'Estrange v. Federal Commissioner of Taxation.

Judges:
McGarvie J

Court:
Supreme Court of Victoria

Judgment date: Judgment handed down 19 December 1978.

McGarvie J.: This is an appeal under sec. 196 of the Income Tax Assessment Act 1936 from a decision of Taxation Board of Review No. 2, given on 24 August 1972. The taxpayer, being dissatisfied with decisions of the Commissioner of Taxation upon objections lodged by him against amended assessments of income tax in respect of the years ended 30 June 1956 to 30 June 1966 and original assessments for the four next succeeding years, requested in writing that the decisions be referred to a Board of Review for review. The Board of Review upheld some of the taxpayer's objections but overall the decision was adverse to him. Case D47,
72 ATC 272.

By notice of appeal filed on 18 September 1972 the taxpayer appealed to the High Court against the decision of the Board of Review. On 16 May 1973 Menzies J. ordered the Commissioner to give discovery to the taxpayer of reports in writing by officers of the Commissioner upon which the betterment statement the foundation of the assessments in question on the appeal were based and any documents on which such reports were themselves based, and made other orders.
L'Estrange v. F.C. of T. 73 ATC 4061. The notice of appeal was an extensive one, extending over 114 pages and including many grounds raising constitutional issues. On 1 October 1975 Barwick C.J. gave the taxpayer leave to amend the notice of appeal generally and in particular the grounds which raised issues concerning the constitution and subject to the making and filing of those amendments remitted the appeal to the Supreme Court of Victoria under sec. 8 of the Income Tax Assessment Act (No. 3) 1973. The amended notice of appeal was filed in the High Court on 28 June 1976 and filed in the Supreme Court upon remission on 29 June 1976.

It is common ground before me that the decision of the Board of Review involves a number of questions of law.

In the appeal before me Mr. Davies Q.C., who appeared with Mr. Myers for the appellant taxpayer, relied only on three broad grounds which raised three main issues for determination. The first was whether the profit made by the taxpayer upon the sale of seven house properties should be included in his taxable income. The second was whether moneys paid to the taxpayer as instalments of purchase price should be included in his taxable income in cases where the contract of sale was later ``rescinded''. The third was whether a sum of £14,818 ($29,636) alleged by the Commissioner, on the basis of an assets betterment statement, to be income received by the taxpayer from unidentified sources should be included in the taxable income of the taxpayer.

The transcript of the proceedings and the exhibits tendered before the Board of Review were tendered in evidence before me. The reasons for decision and the decision of the Board of Review were also tendered in evidence. In these reasons when I refer to an exhibit which was tendered in evidence before the Board of Review I will place the letters ``BR'' before the letter or number it was given by the Board of Review. As the proceedings before the Board of Review involved many issues besides those raised on this appeal, the parties referred me to the portions of transcript and the exhibits in those proceedings on which they relied before me. On the appeal each party called witnesses.

My function on this appeal appears from
Krew v. F.C. of T. 71 ATC 4213 and
McCormack v. F.C. of T. 77 ATC 4543. There was some debate before me as to the use which it was open to me to make of the findings of fact which the Board of Review made upon the issues which are raised before me. In making my findings I have not relied on the findings made by the Board on those issues. On questions of the credit of witnesses I have not relied on any assessment which the

ATC 4748

Board may have made. On questions of law I have taken into account the views of the Board but have, of course, reached my own conclusions.

The taxpayer is a solicitor who lives in Hawthorn and has since 1942 practised as a sole practitioner in Richmond under the name ``L'Estrange and Kennedy''. Originally, the practice included conveyancing, probate, litigation and industrial law work but since about 1961 or 1962 the work has been mainly conveyancing. He has for a number of years been registered as a tax agent but except for preparing returns for deceased estates he has rarely prepared returns for clients.

On 17 August 1965 a taxation investigator, Mr. Downey, visited Mr. L'Estrange's office and spoke to him. Mr. Downey was not investigating or concerned about the affairs of Mr. L'Estrange. In investigating the affairs of a man whom I shall call ``N.R.'', he found that in land transactions under the name of N.R., Mr. L'Estrange had acted as solicitor. He was seeking from Mr. L'Estrange information about the affairs of N.R. whom he took to be a client of his. It soon appeared that the person using the name N.R. in those transactions was Mr. L'Estrange himself. In this way there commenced an intensive investigation of Mr. L'Estrange's affairs, resulting in the assessments and review which have led to this appeal. It was only the chance circumstance that he had adopted for the land transactions a name the same as the name of a man whose affairs were investigated by the taxation investigators, that brought Mr. L'Estrange's affairs to the attention of the taxation authorities.

Two investigators, Mr. Mason and later Mr. Bluett, thoroughly investigated Mr. L'Estrange's affairs, spending some 150 days in doing so. Following the investigation Mr. L'Estrange was assessed to further tax for the years ended 30 June 1956 to 1966 upon a sum of £64,926 ($129,851). The components of that sum are set out in Exhibit BR5. That exhibit was accepted before me by both parties as quantifying the amounts in issue on this appeal.

Profit sale of seven properties

Mr. Beach Q.C., who appeared with Mr. Burnside for the respondent Commissioner, submitted that the profits arising from the sale by the taxpayer of the seven house properties were to be included in his assessable income:

(1) under sec. 25(1)(a) of the Act as income from a business of buying and selling properties, carried on by the taxpayer; or
(2) under the first limb of sec. 26(a) of the Act as profit arising from the sale by the taxpayer of property acquired by him for the purpose of profit-making by sale; or
(3) under the second limb of sec. 26(a) as profit arising from the carrying on or carrying out of a profit-making undertaking or scheme.

Mr. Davies submitted that the profits fell into none of these categories and were not to be included in the taxpayer's assessable income.

I have decided that the taxpayer was not carrying on a business of buying and selling properties. I will give my reasons for that decision later in these reasons. I have reached the conclusion that the profits arising from the sale of six of the seven properties were profits arising from the sale by the taxpayer of property acquired by him for the purpose of profit-making by sale.

Before the Board of Review there was an issue whether the taxpayer was liable to tax on the profits on the sale of twenty-two house properties and five blocks of vacant land owned by him and another owned by him and his sister. The Board held that the taxpayer had been carrying on a business of buying and selling properties and that profits upon the sales of the properties were income according to ordinary concepts and were assessable to tax under sec. 25(1) of the Act.

Because of decisions made and the course taken earlier by the Commissioner, the Board of Review deleted from the assessments under review the profits from the sales of three of the house properties.

On this appeal the issue was limited to whether the taxpayer was liable to tax on the profits on the sales of seven of the house properties each of which the taxpayer had retained for some two years or more after purchase, before they were sold.

I will outline the evidence relating to the seven house properties.

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No. 251 Church Street, Richmond was purchased on 25 October 1958 at auction for £2,800 payable by a deposit of £750 and instalments of £5 per week for five years when the balance became payable. The house was let under what was called a ``controlled tenancy'' at a rent of £2.5s per week. The description ``controlled tenancy'' was used to refer to a tenancy of prescribed premises under which the amount of rent and the recovery of possession was controlled under Pt. V of the Landlord and Tenant Act 1958. The property was subject to an order from the Richmond Council to renew the water service and Mr. L'Estrange had this done. On 6 May 1959 Mr. L'Estrange wrote to the tenant asking if she would increase the rental because the outgoings were more than the rental. She refused. On 28 May her brother told Mr. L'Estrange that she would increase the rent to £5.10s per week if she got a lease for three years. She was granted a three year lease at £5.10s per week from 11 June 1959. The effect of that lease was that the tenancy ceased to be controlled. Towards the end of the period of the lease, Mr. L'Estrange wrote to the collecting agent stating that he was prepared to allow the tenant to stay on as a weekly tenant at a reasonable increased rental. He enclosed a statement to be given to the tenant which showed his weekly outgoings including repairs to average £1.10s per week and, with the £5 per week payable by him to the vendor, to give total weekly outgoings of £6.10s. On 13 June 1962 the tenant agreed to pay a rent of £6.15s per week. Mr. L'Estrange said that in February 1963 he was informed that the tenant had left the premises. He said that he inspected the premises and found that they needed a good deal of repair work which in his opinion would cost some hundreds of pounds. He said that an estate agent whose premises were opposite the house came to him, said that he had noticed the property was vacant and that he had a purchaser who would buy the place if Mr. L'Estrange would sell. Mr. L'Estrange said that he formed the opinion that if he sold, he would not have to spend the money on repairs and would gain more income from the interest than the net rents he had been receiving. He sold on 2 April 1963 for £4,290 payable by a deposit of £1,000 and the balance by instalments over eight years with interest at 7% per annum. Mr. L'Estrange said in evidence that the thing that most actuated him to purchase the property was the rental income which he would obtain from it. He said that putting money into real estate was a secure investment not liable to fluctuations in value.

No. 82 Lord Street, Richmond was purchased by Mr. L'Estrange on 24 February 1959 for £1,550 payable by a deposit of £300 and the balance at £3.3s per week over seven years. It was let under a controlled tenancy with a rent of 18s.9d per week. In February 1960 the tenant was four months in arrears in payment of rent. Mr. L'Estrange wrote a letter seeking payment of the arrears. As they were not paid, he took ejectment proceedings. The ejectment proceedings were settled on the basis that the tenant signed an agreement in a prescribed form to pay a rental of £3.3s per week and to do certain repairs. The agreement was sent to the Fair Rents Board on 7 April 1960. Under amendments which had come into operation on 1 April 1960 (Act No. 6599) that agreement fixed the rent under the tenancy and, in general, no application to the Fair Rents Board for variation of that rental could be made and no notice to quit could be served for six months. The tenant failed to do the repairs and again fell into arrears with rent. Mr. L'Estrange wrote to the tenant about this. Soon after, he learnt that the tenant had abandoned the premises. He said that he inspected them in November 1960 and found them in a very bad state of repair. He obtained an order for substituted service of a notice to quit and after its expiry took possession of the premises. In the meantime the bath had been stolen from the house and the toilet had been damaged by someone attempting to burn it down. Mr. L'Estrange said that he started to do repairs to the premises but before they were finished, the collecting agent informed him that he had been approached by a buyer. He sold the property to this buyer on 14 February 1961 for £3,400 payable by a deposit of £400 and the balance at £6 per week over seven years with interest at 6½% per annum.

Nos. 1 and 1A College Street, Hawthorn may be considered together. They were adjacent premises on land contained in the one certificate of title. The agent for the owner approached Mr. L'Estrange and asked him if he was interested in purchasing the property. He purchased on 11 December

ATC 4750

1959 for £3,400 payable by a deposit of £500 and the balance at £5.5s per week including interest. Each of the houses was let under a controlled tenancy at a rental of £1.11s.3d per week. Mr. L'Estrange repaired the dividing fence and in October 1960 sought the permission of the Hawthorn Council to have separate titles for the two lots. Permission was granted and separate titles were obtained. On 30 November 1960 he wrote to each tenant asking that the rent be increased to £6.6s per week. They both refused. Mr. L'Estrange applied to the Fair Rents Board and on 17 March 1961 the rent was increased to £4 per week for each property. Mr. L'Estrange said that he was not satisfied with the amount of rental income which was less than the outgoings, so on 3 October 1961 he wrote to each tenant asking if the tenant was interested to purchase the premises at its market price by way of a suitable deposit and weekly payments. At that stage he had spent about £1,000 on repairs to the properties. The tenant of 1 College Street purchased that property on 17 November 1961 for £3,650 payable by a deposit of £200 and instalments of £6.6s per week for eight years with interest at 6½% per annum. The other tenant did not agree to purchase 1A College Street but vacated the premises in February 1962. Mr. L'Estrange said that an agent then approached him. Through the agent he sold No. 1A to a purchaser on 23 March 1962 for £3,400 payable by a deposit of £400 and the balance at £6 per week for eight years with interest at 7% per annum. The interest which was received in the first twelve months after the respective sales of the two properties was slightly less than the annual rental which Mr. L'Estrange had been receiving but more than the amount he had been receiving if allowance was made for his outgoings.

No. 405 Bridge Road, Richmond was purchased by Mr. L'Estrange on 19 January 1960 for £7,000 under a terms contract by which the purchase price was payable by a deposit of £1,000 and instalments of £10 per week for ten years. It was a double fronted brick house which from the outside seemed to be in good order. Whilst speaking to an agent in the vicinity of the property Mr. L'Estrange told him that he thought it would be a good property to buy. The agent said that he acted for the owner and would see if the owner was prepared to sell it and the sale resulted. It was let to a tenant at a rental of £10.10s per week under a tenancy which was not a controlled tenancy. Under the legislation which then applied a declaration could be made in respect of particular premises which had the effect that a tenancy of those premises became a controlled tenancy. On 4 February, soon after the purchase of the property, the vendor's solicitors forwarded to Mr. L'Estrange a letter sent by the Rental Investigation Bureau to the vendor, inviting the vendor to call and discuss with the Bureau the rental of the property. It appears that the tenant had approached the Bureau and that if the rental remained at a level which the Bureau regarded as excessive it could recommend that a declaration be made in respect of the premises. Mr. L'Estrange spoke to an officer of the Bureau and as a result the Bureau took no action in respect of the premises. The rent fell into arrears and Mr. L'Estrange took ejectment proceedings and obtained an order for possession on 6 September 1960. The property was in an area zoned for service industrial purposes and Mr. L'Estrange instructed the agent to let it for use as an office at a rental of £21 per week. The building was a double fronted dwelling house suitable for use as an office by a person such as an accountant or solicitor. Before it could be used for other business purposes it would have needed to have had a shop front built on to it. This would have cost at least £2,000. The agent advertised in the ``Age'' newspaper and by a board on the premises that the property was available for letting but no tenant was found. The property was let as a dwelling house on 13 December 1960 at a rent of £12.12s per week. The tenant fell into arrears with rent. Mr. L'Estrange served a notice to quit, obtained an order for possession and the tenant left the premises on 23 November 1961. Mr. L'Estrange said that in view of the bad tenancy record and the existence of a credit squeeze or its aftermath at the time, he then instructed the agent to sell the property. It was sold on 15 March 1962 for £8,000 payable by a deposit of £1,500 and the balance at £15 for ten years with interest at 7% per annum. The interest payable to Mr. L'Estrange by the purchaser in the first year after the sale was £455. Mr. L'Estrange said that he had purchased the

ATC 4751

property because it would give him a good rental income with possible future increase in value.

No. 35 Glass Street, Richmond was purchased by Mr. L'Estrange in the name N.R. on 15 October 1960 for £2,000 payable by a deposit of £200 and the balance at £5.5s per week. It was a dwelling house let under a controlled tenancy at a rental of £3.3s per week. On 9 March 1961 Mr. L'Estrange applied to the Fair Rents Board for an increased rent. The tenant then agreed to pay £4.4s a week rent from 29 April 1961 and Mr. L'Estrange had certain repairs done to the premises. The new rental agreement was filed with the Fair Rents Board. On 23 May 1962 Mr. L'Estrange sent the following letter to the tenant: -

``Mrs. G. Todd,

35 Glass Street,

RICHMOND.

Dear Madam,

Re 35 Glass St. Richmond

We beg to advise we act for the owner of the above premises and should be glad if you would let us know if you are willing to purchase the same, otherwise it will be necessary for the owner to take ejectment proceedings to obtain vacant possession.

The weekly rental being paid by you amounts to £4.4.0 per week.

However the owner has to pay £5.5.0 per week instalments on the property plus Rates, taxes, insurance which work out as follows:
      Municipal Rates ......... 14. 0. 0
      M.M.B.W. Rates ..........  8. 3. 4
      Insurance ...............  2. 5.10
      Repairs spent in 1961 ... 72.11. 6
      Agents Commission ....... 10.18. 0
          
Yours truly,

L'Estrange & Kennedy''

In June 1962 Mr. L'Estrange served the tenant with a notice to quit on the ground that the tenant could without undue financial hardship purchase or lease other suitable premises at a price or rent based on current property values and on the further ground that the tenant had other adequate and suitable premises available for occupation.

On 10 November 1962 the tenant left the premises without ejectment proceedings being commenced. Mr. L'Estrange said that the property required extensive repairs and he decided to sell it. On 29 January 1963 he sold it for £2,700 payable by a deposit of £100 and the balance at £6 per week for seven years with interest at 7% per annum. This interest in the first year amounted to £182.

No. 17 Dickens Street, Richmond was purchased by Mr. L'Estrange in the name N.R. on 20 October 1960 for £1,850 payable by a deposit of £350 with the balance at £5.5s per week including interest of 6½% per annum for six years. The premises were a dwelling house let under a controlled tenancy at £2 per week. On 10 December 1960 Mr. L'Estrange asked the agent to interview the tenant with a view to increasing the rent to £4.4s per week. This was done but the tenant refused to pay an increased rental. On 11 January 1961 Mr. L'Estrange applied to the Fair Rents Board for an increase in rental and the Board for an increase in rental and the Board increased it to £2.7s.6d per week from 27th March 1961. On 23 May 1962 Mr. L'Estrange sent a solicitor's letter similar to the letter of the same date sent to the tenant of 35 Glass Street, Richmond. It asked whether the tenant was willing to purchase the premises, adding that otherwise it would be necessary for the owner to take ejectment proceedings to obtain vacant possession. The tenant replied that he was not interested in purchasing the property. Mr. L'Estrange served a notice to quit on the tenant on grounds similar to the grounds in the notice to quit served on the tenant of 35 Glass Street, Richmond. He then issued and served on the tenant an ejectment summons. The tenant then said that he would surrender his tenancy and vacate the premises on payment of £250. Mr. L'Estrange paid the tenant that sum on 23 July 1962 and took possession. Mr. L'Estrange then inspected the premises and found them in a very bad state of repair. The floor and walls needed repair. The tenant had roofed over the back yard with packing cases and the removal of this roofing was necessary to make the premises tenantable. Mr. L'Estrange said that he did some of the repairs but regarded the magnitude of the repairs as too much and thought that someone would be interested to buy the place and do the repairs. He sold it on 20 December 1962 for £3,000 payable by a

ATC 4752

deposit of £500 and the balance at £8 per week for six years with interest at 7% per annum.

In considering the application of sec. 26(a) of the Act, the actual purpose of the taxpayer at the times of purchasing the respective properties is a most important consideration. The evidence of the taxpayer as to his purpose in acquiring the properties is evidence to which substantial regard should be paid.
Cox v. Smail (1912) V.L.R. 274 at 278;
Gauci v. F.C. of T. 75 ATC 4257 at p. 4259; (1975) 135 C.L.R. 81 at pp. 85-6. On the other hand, in both of these cases it is recognised that it is proper to test such evidence closely before accepting it. (1912 V.L.R. at p. 283; 75 ATC at p. 4259; 135 C.L.R. at p. 86.) This follows from ordinary practice in assessing evidence as to his state of mind given by a witness who has a clear interest in establishing that he had the state of mind which he says in evidence that he had. In Gauci's case Barwick C.J. gave a reminder that care must be taken not to treat the evidence of a citizen in a contest with the Revenue as prima facie unacceptable (75 ATC at p. 4259; 135 C.L.R. at p. 86).

In his oral evidence before me Mr. L'Estrange said, in effect, that his motivation in purchasing the seven properties was a hope of gaining an increased rental income from the property and an increase in value on a long term basis. He said that in purchasing them, the use he had in mind for them after purchase was to allow them to continue to earn rental income. He said that he did not have resale in mind as any formulated intention at the time when he purchased any of the seven properties. If I accepted that evidence it would be clear that the first limb of sec. 26(a) would not apply to the profit on resale of the seven properties.

There was another purpose referred to by Mr. L'Estrange in his evidence before me. He had not mentioned this in his evidence before the Board of Review as a purpose which he had had at the time of purchase, though he did mention it as a reason for his ultimately selling the properties. In giving detailed evidence of the transactions involving the seven properties he referred, in relation to a number of them, to the fact that during a period after he sold the property, the amount which he received in interest from the purchaser exceeded the net amount which he had received as rent of that property during the equivalent period before the sale. Towards the end of his evidence in-chief when he gave general evidence of his purpose in purchasing the seven properties, he gave the following answer as to what he had in mind at the time of purchase as to the use of the properties after purchase:

``To allow them to continue to earn income, rental income or later on when they were sold to get income from interest.''

(Transcript p. 133.)

Mr. Davies put it that I should accept Mr. L'Estrange evidence as to his purpose. He made alternative submissions as to what I should find to have been his purpose. First he submitted that I should find that at the time of each purchase Mr. L'Estrange had the sole or dominant purpose of retaining the property to earn rental income. Alternatively he submitted that if I found that resale of the property was his dominant purpose, I should find the purpose to have been resale, not for the dominant purpose of making a profit by resale, but for the dominant purpose of earning the interest payable by the purchaser on the balance of purchase price under an instalment contract of sale.

Mr. Beach made detailed submissions upon the credit of Mr. L'Estrange as a witness and contended that I should not accept his evidence as to his purpose.

In his evidence before the Board of Review Mr. L'Estrange said, in effect, that his only purpose in purchasing the dwelling houses which were let to a tenant or were suitable for letting to a tenant was to retain the properties to earn rental income. Those properties, of course, included the seven properties in issue on this appeal. On this appeal he adopted as true and correct the evidence which he gave before the Board of Review.

He gave evidence before the Board of Review and also before me that his reason for using the name N.R. in some of the property transactions was to prevent himself being importuned or pestered by tenants in the area, in respect of tenancy problems. He said that he had had experience of such things as complaints that repairs should be done to the property and requests for deferment of payments of rent. He said that

ATC 4753

this was his only reason for using the name N.R. in the transactions.

Before the Board of Review, Mr. Downey, the taxation investigator who first approached Mr. L'Estrange, gave this evidence about his first conversation with Mr. L'Estrange:

``Question: Did you ask him why he had purchased and sold the properties under the name of `N.R.'?

Answer: He said his reason for buying the properties under the name of `N.R.' was to minimise any enquiries or complaints from the purchasers of the properties. The people who bought them lived in the district, from memory, and he did not want them coming into his office all the time.''

(Board of Review Transcript p. 458.)

Mr. L'Estrange told me that that passage was an accurate account or summary of what was said between him and Mr. Downey on that occasion.

Mr. L'Estrange said that an estate agent Mr. E.G. Williams was the only one who knew that he was buying and selling land in the name N.R. Although Mr. L'Estrange was asked a number of questions about it, he gave no satisfactory explanation in terms of time or method of purchase, area of location or otherwise, to explain why some properties were purchased in his own name and others in the name N.R. Mr. L'Estrange in his income tax returns, while making no mention of the name in which the properties were purchased and sold, returned the rental and interest received in respect of properties with which he dealt under the name N.R., as his income.

Mr. Beach relied on evidence regarding a total amount of £4,776 ($9,552) which had been omitted from Mr. L'Estrange's income tax returns, as reflecting upon the taxpayer's credit as a witness. These were amounts due to Mr. L'Estrange as a solicitor for fees and disbursements due from clients. The amounts were not paid to the office account of his solicitor's practice but were paid directly from his trust account to three of his other bank accounts. In evidence before me Mr. L'Estrange said that he compiled his income tax returns from his office account and because these amounts had not gone into his office account they were just overlooked when compiling his income tax returns. I am not prepared to accept that explanation. The evidence shows that Mr. L'Estrange is a man with a very precise recollection of the details of transactions, who takes a great deal of care to ensure that his financial assets are kept utilised in the most profitable manner available. He also took a great deal of care and went into a substantial amount of detail in the course of preparing his income tax returns. He gave me no explanation for his having paid moneys due to him as a solicitor to accounts other than his office account and said there was no particular reason for his having done so. A solicitor would be likely to remember having taken this unusual course. In some years the amounts involved were relatively large when compared with his net earnings as a solicitor. In the year ended 30 June 1959 Mr. L'Estrange returned the net income from his practice as £2,928. The amount transferred to the bank accounts from his trust account without passing through the office account was £352, an amount in excess of 10% of his income from the practice. In the year ended 30 June 1960 the amount returned as the net income from the practice was £2,771 and the amount of fees and disbursements bypassing the office account was £1,541. This was over a third of the net earnings of the practice. In the following financial years the amounts which bypassed the office account were: 1961 - £797; 1962 - £700; 1963 - £735; and 1964 - £703. I am satisfied that Mr. L'Estrange consciously paid the amounts from the trust account to the bank accounts which he did and omitted them from his income tax returns with the intention of evading income tax which he knew he was liable to pay.

Answers given by Mr. L'Estrange in respect of cheque butts removed from two of his cheque books were relied on by Mr. Beach as reflecting adversely on Mr. L'Estrange credit as a witness. The cheque books have a number of cheque butts missing. The cheque book (Exhibit 3) has had the butts numbered 563, 568, 569, 571 and 579 cut from it. The cheque book (Exhibit 4) has had the butts numbered 309, 310 and 311 cut from it.

The investigation of his affairs by the taxation investigators showed that Mr. L'Estrange had over eighty bank accounts in his own or his business name or in the name

ATC 4754

N.R. Some were savings accounts and some were current accounts. One reason for the large number of bank accounts was Mr. L'Estrange's practice of opening a separate account to receive repayments of instalments by purchasers and repayments of loans by borrowers. In cross-examination before the Board of Review he was asked about payments made out of two accounts which he had opened at the Abbotsford Branch of the A.N.Z. Bank to receive repayments of loans from two borrowers, Di Giannantonio and Papadimas. He said that whichever cheque he used, there would be a butt somewhere; that he could not not recall having any occasion to tear out the butt and that he could not recall butts for particular cheques having been missing.

It appears from Mr. L'Estrange's evidence before me that these two accounts at Abbotsford were of some significance in the investigation. On 19 September 1967 in the course of his investigations the taxation investigator Mr. Bluett telephoned Mr. L'Estrange making enquiries about the two accounts. Mr. L'Estrange had in his income tax return for the year ended 30 June 1965 given full details of the two loans which he had made and repayments of which were being made into the two accounts. Mr. Bluett said that he wanted to track down the sources of the loans. The moneys had been lent by Mr. L'Estrange to the borrowers Di Giannantonio and Papadimas from moneys in bank accounts forming part of what was called before the Board of Review and on this appeal his ``suspense account system''. The Board of Review held the taxpayer liable to tax in earlier years than the years in which the taxpayer had returned the amounts as income, upon a sum of £22,615 which he had paid from his trust account to his suspense account system. There is no appeal against this decision of the Board of Review. The enquiry by Mr. Bluett was the first enquiry which had been made in respect of moneys ultimately found to have been in the suspense account system.

In cross-examination before me Mr. L'Estrange was asked on Friday, 10 February 1978 whether, when the cheque book was handed to the investigators from which the three cheques had come which had been used to close the two accounts at Abbotsford, the butts from those cheques had been removed from it. He said ``No''. He also said that he could not recall being questioned about that by Mr. Bluett and being unable to come up with any explanation as to why the cheque butts had been removed from the cheque book. He agreed that he had been asked before the Board of Review whether the cheque butts had been missing. He said that he could not produce the cheque book from which the cheques were written, as there was not a separate cheque book issued for either account so that he would have to search among all other records to see where the cheque butts were from which the cheques had been taken. He was invited by Mr. Beach to look for the cheque book over the weekend and produce it on Monday.

On Monday, 13 February, Mr. L'Estrange produced the cheque book, Exhibit 3, which has the butts numbered 309, 310 and 311 cut from it. He said that the cheques No. 309 drawn on 7 July 1964 and No. 311 drawn on 17 December 1964 were two of the cheques which had been used to close the Abbotsford accounts. He said that the third cheque used to close the accounts was cheque No. 568, the butt of which has been cut from the other cheque book which he produced (Exhibit 4).

Mr. L'Estrange then said that he was asked during the investigations why the butts had been removed but it was not correct that he was unable to give any explanation. He said that the explanation he then gave, and now gives, is that, as he was drawing the cheques out of an old cheque book not related to the accounts on which he drew the cheques, he removed the cheque butts from the books to ensure that the cheques which he had drawn were not related to the accounts in respect of which the cheque books had originally been issued. He said that he now remembered removing the cheque butts. He said he did not know what had happened to the cheque butts which he had removed; he thought they were either destroyed or put in separate files dealing with the matters. Later he said they had not been destroyed but there was no further explanation as to what had become of them.

At the end of his evidence he answered some questions from me. When asked when it was, after giving his evidence at the Board of Review, that he first recalled removing

ATC 4755

cheque butts, he indicated that he would have seen the butts missing when collecting papers in connection with this appeal. He said that he had always had a recollection of being asked by Mr. Bluett about the missing butt or butts and whenever the matter had arisen he had recollected it. He said that apart from removing cheque butts which were connected with the suspense account system he had never removed any cheque butts from any cheque book. Later, he indicated that he had not, since the hearing before the Board of Review, directed his mind to the question of missing cheque butts until he was asked questions about them the previous Friday during this appeal.

Mr. Beach also relied on the payment by Mr. L'Estrange from his trust account to the suspense account system, of moneys due to him from clients for costs and disbursements, as relevant to his credit. In a similar way Mr. Beach relied on Mr. L'Estrange's transfer by journal entry within his trust account books to an account which in the proceedings has been called the ``trust suspense account'', of other moneys due to him from clients for costs and disbursements. Neither the amounts paid to the bank accounts of the suspense account system nor those transferred by journal entry to the trust suspense account were returned by Mr. L'Estrange as income for the financial year in which they were paid or transferred. In the circumstances I do not treat this evidence as affecting Mr. L'Estrange's credit. The evidence shows that these amounts should have been returned as income in the years in which they were paid or transferred, the Board of Review so held and no appeal against that part of the decision is pursued. The failure to return these amounts would reflect adversely on Mr. L'Estrange's credit only if he knew that they should be returned. Whether he knew would depend on his understanding of the legal position regarding them. Although it would be an untenable view to hold, the history of this litigation indicates that Mr. L'Estrange may well have persuaded himself that he was not legally obliged to return the amounts as income in the years in which they were paid or transferred.

I regard Mr. L'Estrange's explanations of his use of the name N.R. as unsatisfactory and unconvincing. I regard his evidence about the removal of the cheque butts as unsatisfactory to the point of being evasive. I am satisfied that over five years he deliberately omitted from his income tax returns income amounting to £4,776 which he knew he should have included.

In the result I am not prepared in this case to treat Mr. L'Estrange as a witness of reliability. I do not accept his evidence where it conflicts with the inferences which arise from other evidence. In particular, I do not accept his evidence as to his purpose in purchasing six of the seven properties now being considered nor as to his reasons for selling them.

This is a hard conclusion to arrive at when dealing with a man with a long career in an honourable profession. My assessment of his credit should not and does not go beyond the circumstances of the case now before me. There is a great deal before me, in the evidence of his statements to the taxation investigators, his notices of objection, his evidence and submissions before the Board of Review and his original notice of appeal to the High Court, to indicate that Mr. L'Estrange has seen this litigation as a crusade on his part against the taxation authorities. In my view he has allowed this litigation and the transactions which gave rise to it, to become an obsession with him. There is nothing before me to suggest that in dealings or evidence not concerned with his own income tax, he is not a man of reliability.

I turn to consider what inference as to his purpose in purchasing the seven properties is to be drawn from the other evidence.

For reasons which I will mention later, I will consider six of the properties together and defer my consideration of the property at 405 Bridge Road, Richmond.

The evidence given by Mr. L'Estrange as to the circumstances in which he purchased the properties, their condition at various times and the events which occurred before they were sold was not challenged in cross-examination and is to some extent borne out by documentary evidence. No inference arises from other evidence which is inconsistent with this part of the taxpayer's evidence and I accept it.

The various properties were similar in kind and the courses taken by Mr. L'Estrange in

ATC 4756

relation to them between the time that he purchased and the time that he sold them were similar.

The six properties were all let under controlled tenancies at the time Mr. L'Estrange purchased them. It followed from this that each of them had been let for a good number of years. Mr. L'Estrange said that with these properties if you were able to sell with vacant possession you could sell at up to £1,000 more than the price which had been paid for the tenanted property. When Mr. L'Estrange sold the six properties he sold them with vacant possession. The excess of his selling price over the purchase price and the net profit made on the sale after making allowance for his expenditure was:

Property                       Excess of Selling Price       Net Profit
                                  over Purchase Price

251 Church St., Richmond             1,490                       1,265
82 Lord St., Richmond                1,850                       1,706
1 College St., Hawthorn              1,950                       1,343
1A College St., Hawthorn             1,700                       1,036
35 Glass St., Richmond                 700                         562
17 Dickens St., Richmond             1,150                       1,021

Under the law as it then stood, there were two practical and common ways in which the purchaser of a dwelling house let under a controlled tenancy could achieve the result that the premises ceased to be prescribed premises; and if the premises ceased to be prescribed premises, a tenancy of the premises ceased to be a controlled tenancy. The first way was entering a lease in writing for three years or more with the tenant. Landlord and Tenant Act 1958, sec. 48. The second was to obtain vacant possession of the premises and let them to a new tenant under a new lease or tenancy, sec. 47.

The course taken by Mr. L'Estrange in respect of each of the six properties was one which was well adapted to achieve an increase in the rent in the short term and vacant possession in the longer term. Within fifteen months or so of his purchase of each of the properties the rent had been increased. As 1 College Street, Hawthorn was sold to the tenant the taxpayer did not obtain vacant possession of it. Vacant possession of two of the other properties was obtained within approximately twenty-one months of purchase and vacant possession of the other three was obtained within approximately twenty-three, twenty-six and fifty-two months of purchase, respectively. The property of which vacant possession was recovered after fifty-two months was the one in which the tenant entered into the three year lease, 251 Church Street, Richmond. I take the view that, in the case of the four properties purchased by Mr. L'Estrange in his own name, when it came to the knowledge of each of the tenants, as it probably did, that the purchaser was a solicitor, the tenant would have been likely to have started looking for other accommodation. In the case of the two properties purchased by the taxpayer in the name N.R., a similar result would have followed from learning that the owner had solicitors acting for him.

I do not consider that, of itself, the fact that Mr. L'Estrange, soon after the respective purchases, commenced to take steps likely to result, and which did in most cases result in his obtaining vacant possession, throws much light on his purpose in purchasing them. It was notorious that at that stage the controlled rents were well below the rents which could be obtained for premises on the open market. The taxpayer's actions to obtain vacant possession were consistent with his seeking to achieve the result that the premises ceased to be prescribed premises so that he could maximise his rental earnings by letting the properties at rents which were not controlled and which reflected the market rate.

In relation to four of the properties there are indications in the evidence that before the taxpayer obtained vacant possession he contemplated selling them. With 1 and 1A

ATC 4757

College Street, Hawthorn within about ten months of the purchase he obtained permission from the Council to have separate titles for the two lots. While separate titles would also have improved the capital value of the property it would be likely to make it more saleable in separate lots. Then about a year later, he wrote asking each tenant whether he was interested to purchase the lot of which he was tenant. On 23rd May 1962 he wrote letters, purporting to be written on behalf of the owner, to each of the tenants of No. 35 Glass Street, Richmond and No. 17 Dickens Street, Richmond, enquiring whether the tenant was willing to purchase the property and threatening ejectment proceedings otherwise.

I consider it significant that in no case when he had the opportunity to do so, did Mr. L'Estrange re-let the premises or attempt to re-let them.

The effect of Mr. L'Estrange's evidence was that when he obtained vacant possession of four of the properties (251 Church Street, Richmond; 82 Lord Street, Richmond; 35 Glass Street, Richmond and 17 Dickens Street, Richmond) he found that they needed extensive repairs and decided to sell them. With the first two properties mentioned, he or his collecting agent were approached by or on behalf of a purchaser at about the time when he obtained vacant possession and found the need for repairs. The effect of his evidence regarding the other two properties, in College Street, Hawthorn, was that he decided to sell because he was not satisfied with the amount of rental income which he was receiving. He gave no explanation other than the fact that he was approached by an agent, to explain why he sold No. 1A instead of letting it under a new tenancy, when he obtained vacant possession of it. He did make a comparison between what he had been receiving under the controlled tenancy and what he received in interest on sale. I refer to this aspect later.

The essence of Mr. L'Estrange's evidence is that the purpose of earning rental income which he had when he purchased each of the properties, later changed when he discovered the need for repairs or realised the inadequacy of the rental return under a controlled tenancy or received an offer to purchase. After the change, according to his evidence, his purpose was to sell the property.

It is clear from the evidence before me that Mr. L'Estrange was a careful and experienced purchaser and seller of properties such as these. He purchased the six properties over the years 1958 to 1960 and sold them over the years 1961 to 1963. If Mr. L'Estrange's dominant purpose in purchasing the properties was to resell them at a profit, the course which he would be expected to take would be the course which he did take in respect of each of the six properties. If however his dominant purpose in purchasing was to earn rental income, it would import a high degree of coincidence, not likely to occur, if in each case he had misjudged what would be the best utilisation of the asset and had changed his purpose on realising his mistake.

The evidence shows that from the year 1956 to the year 1966, Mr. L'Estrange purchased twenty-six dwelling house properties which were suitable for letting to tenants. In the proceedings they were called the ``rentable properties''. The properties are set out in Exhibit D and items 1 and 5 in Exhibit F. Mr. L'Estrange's evidence was that he had not purchased any of these rentable properties for the purpose of resale. Seven of the properties are the subject of this appeal. The effect of his evidence as to another thirteen of the properties was that, although he had purchased or acquired the property for the purpose of earning rental income, some later circumstance, such as the discovery of the need for repairs or the realisation of the inadequacy of the rental return under a controlled tenancy or the realisation of the interest which could be earned on an instalment sale or the receipt of an offer to purchase, had led him, on obtaining vacant possession, to resell the property without ever attempting to let or re-let it. The following properties fall into this category: 37 Gardiner Street, Richmond; 9 Murray Street, Richmond; 218 Church Street, Richmond; 15 Hopkins Street, Richmond; 4 Surrey Street, Richmond; 6 Hope Street, Richmond; 112 Lord Street, Richmond; 117 Coppin Street, Richmond; 19 Dickens Street, Richmond; 37 Glass Street, Richmond; 93 Baker Street, Richmond; 1 Westbank Terrace, Richmond and 14

ATC 4758

Gardiner Street, Richmond. The first of the thirteen properties was purchased in January 1956 and sold five months later. The first four of the thirteen properties had been purchased and sold before the first of the seven properties the subject of this appeal was purchased by the taxpayer. The effect of the evidence as to another two of the rentable properties was similar, except that after obtaining vacant possession it appears that Mr. L'Estrange let them for a short time before selling them. These were 60 Victoria Road, Auburn and 49 Laity Street, Richmond. The evidence showed that two other rentable properties had not been sold having been purchased in 1956 for use by the taxpayer, respectively as a holiday house (284 Nepean Highway, Seaford) and as a professional office if needed (361 Bridge Road, Richmond). The other two rentable properties have not been sold. One was purchased shortly before the first visit on 17 August 1965 of the taxation investigator (99 Power Street, Hawthorn: purchased 22 May 1965) and the other was purchased after that visit (48 North Street, Richmond: purchased 10 January 1966). In the circumstances in which he was placed, common prudence is likely to have led the taxpayer to retain these last two properties whatever was previously his purpose.

The result is that the evidence shows positively that there was a good reason for the taxpayer retaining each of the four properties last mentioned. According to the evidence of the taxpayer, in relation to each of the remaining twenty-two rentable properties purchased from 1956 to 1966 for the purpose of earning rental income some later discovery, realisation, offer or other circumstance, caused him to change that purpose and sell the property. I am satisfied by the evidence, and my assessment of Mr. L'Estrange in the witness box is, that as a man of business, he is alert and gives careful thought to taking the course which will be most advantageous financially to him. He was purchasing in his own locality and was familiar with the property market there. An improbably high degree of coincidence would be present if, in relation to each of these twenty-two rentable properties, Mr. L'Estrange, having assessed that his best interests would be served by letting the property for rent and having purchased for that purpose, had his purpose diverted by one of the circumstances mentioned in his evidence so that he decided to sell at a profit. If Mr. L'Estrange purchased all or almost all of the twenty-two properties for the purpose of reselling at a profit no coincidence is involved in the fact that he resold them all at a profit.

If one excludes No. 405 Bridge Road, Richmond from these twenty-two rentable properties, there is no basis apparent on the evidence why the six properties now being considered on this appeal would have been purchased with a different purpose from the other fifteen. The only distinction is that the six properties were those which, in broad terms, were held longer before sale than the fifteen. This means that the inference arising from the fact of resale alone was less strong in the cases of the six properties than it was in the cases of the fifteen. Gauci v. F.C. of T. 75 ATC at p. 4260; (1975) 135 C.L.R. 81 at p. 87. It does not of itself give rise to an inference that the six properties were purchased with a different purpose from the purpose of the purchase of the fifteen. The Board of Review decided that the profits on sale of twelve of the fifteen properties were assessable income. Three of the fifteen properties were excluded from assessment because of decisions made and the course taken earlier by the Commissioner. The taxpayer has not on this appeal challenged the decision of the Board in respect of the twelve properties although he has not conceded its correctness.

An important consideration is that if Mr. L'Estrange's assessment at the outset was that it was feasible, practical and financially advantageous to purchase house properties and derive rental income from them his experience would soon have taught him that this was not so. The effect of his evidence is that commercially he learnt nothing from experience and his purpose remained unchanged throughout his purchases.

I place some weight on the answer which Mr. L'Estrange gave in his first conversation with Mr. Downey. When asked why he had purchased and sold properties in the name N.R., he said the reason was to minimise enquiries or complaints from the purchasers of the properties. I consider that that shows a consciousness by Mr. L'Estrange at that

ATC 4759

stage that 17 Dickens Street, Richmond and 35 Glass Street, Richmond were purchased for the purpose of resale. The statement was made at a time when Mr. L'Estrange is likely to have been concentrating more on explaining the use of another name than in giving an explanation which would minimise his liability to tax.

The result is that in relation to each of the six properties the subject of this appeal which I am now considering, I am satisfied that it was purchased by Mr. L'Estrange for the dominant purpose of resale.

I consider that the appeal should succeed in relation to the seventh property, 405 Bridge Road, Richmond. In a number of significant ways it differed from the other six properties the subject of the appeal. At the time of purchase it was let under a tenancy which was not controlled. Although it was a dwelling house it was in an area zoned for service industrial purposes and was suitable for use as an office. When Mr. L'Estrange obtained possession of it in about September 1960, he instructed his agent to let it for use as an office at a rental double the amount which was being paid at the time of purchase. Its availability was advertised but it was not let for office purposes. It was then let for dwelling purposes at a little more than the original rent. The tenant fell into arrears and an order for possession was obtained. In view of the lack of success in earning rental income and the financial conditions resulting from a credit squeeze Mr. L'Estrange decided to sell and did so. The inference which arises from this evidence is that Mr. L'Estrange saw in this property the prospect of buying it as a house let at £10.10s per week and then letting it as a office at £21 per week. On the basis of Mr. L'Estrange's evidence and this inference I find that he did not purchase this property for either the sole or dominant purpose of selling at a profit.

Being satisfied that six of the properties the subject of this appeal were purchased by the taxpayer for the purpose of resale, I consider Mr. Davies' alternative submission in relation to them. The submission is that if I find that resale of the properties was his dominant purpose, I should find the purpose to have been resale for the dominant purpose of earning interest on the balance of purchase price rather than for the dominant purpose of making a profit by resale.

Mr. L'Estrange did not in his evidence before the Board of Review refer to the earning of interest on the balance of purchase price as a purpose which he had when purchasing the properties. He gave very little direct evidence of this before me. Mr. Davies relied mainly on inferences arising from material in the documents to support this alternative submission. There was evidence in respect of some of the six transactions the subject of this appeal, that for a period after sale the taxpayer received more in interest than the net amount which he would have received if the previous controlled tenancy of the property had continued. There was no evidence as to what rental could be obtained if the property were let under a tenancy which was not controlled. Mr. Davies also relied on the fact that, in relation to the whole period and particular years within it, the total amount of interest received from purchasers under instalment contracts was greater than the amount of profit which, on a profit emerging basis (see
F.C. of T. v. Thorogood (1927) 40 C.L.R. 454), was to be treated as received in those years in the instalments paid by the purchasers.

For the Commissioner it was put that as the properties sold on instalment contracts were being purchased on instalment contracts regard had to be paid to the interest which the taxpayer was paying.

The submissions of the parties which were based on annual amounts may be illustrated by reference to two sample years:

                                                             Interest
Year ended         Instalment            Interest paid     received by
30 June             Profits               by Taxpayer        Taxpayer

1961                  950                 1,529.7.8          641.15.1
1964                1,037                 1,621.3.0         3,182.5.0

ATC 4760

Figures extracted from the evidence and placed before me by counsel for the taxpayer indicated that in the financial years 1957 to 1966 the amount received by the taxpayer as interest on outstanding purchase price under instalment contracts was £16,375, which exceeded by £5,033 the amount which he paid on purchase price owed by him under instalment contracts, while the profits received by him on instalment contracts amounted to £13,745.

In my opinion it would be inconsistent with both commercial reality and experience of human nature to conclude that Mr. L'Estrange purchased each of the six properties under instalment contracts and paid interest under those contracts for the dominant purpose of obtaining the interest payable to him by a purchaser to whom he would sell the property under an instalment contract. There is nothing in the evidence to suggest that if Mr. L'Estrange desired to earn interest upon money which he had available, he would have encountered any difficulty in doing so at a satisfactory rate of interest. There is evidence of his lending money over the period. During and after what he referred to as the credit squeeze, there is likely to have been substantial demand for borrowed money. There is nothing to indicate that the rate of interest which the taxpayer received on sale was substantially higher than that which he paid on purchase of the properties. There is nothing in the evidence to suggest that in negotiations for sale the terms as to payment of interest were treated by the taxpayer as a consideration of particular importance to him or that the amount of interest to be received was the main inducement which led him to sell. I infer that the main consideration which led the taxpayer to sell was the price offered and the profit which that price would produce. There is nothing to indicate that the position in this regard was any different in respect of the six properties now being considered than it was in respect of the two rentable properties, 4 Surrey Street, Richmond and 6 Hope Street, Richmond, which the taxpayer sold under cash contracts. No doubt the taxpayer was able to obtain a higher price on resale, through selling for a price to be paid by instalments. In considering what was the taxpayer's purpose in purchasing the properties it would be unreal to leave out of consideration the interest which he had to pay to the vendor on the purchase price and to consider only the interest which he desired to receive on resale.

I reject this alternative submission and find that Mr. L'Estrange's dominant purpose in acquiring each of the six properties now being considered, was that of profit-making by sale.

Earlier I stated that I have decided that the taxpayer was not carrying on a business of buying and selling properties. I now give my reasons for that conclusion. For the Commissioner it was argued that the profits arising from the sales of the seven properties were income according to ordinary usages and concepts, as income from a business of buying and selling properties.

It is important to decide this, because it is established that the transactions of a business cannot be taken separately and treated as falling within sec. 26(a) of the Act.
Investment and Merchant Finance Corporation Ltd. v. F.C. of T. 71 ATC 4140 at pp. 4142 and 4147; (1971) 125 C.L.R. 249 at pp. 255 and 264;
Williams v. F.C. of T. 72 ATC 4157 at pp. 4165-4167; (1972) 128 C.L.R. 645 at pp. 652-5;
F.C. of T. v. St. Hubert's Island Pty. Ltd. (In Liquidation) 78 ATC 4104 at pp. 4114 and 4123; (1978) 52 A.L.J.R. 367 at pp. 374 and 380.

For the Commissioner a number of features of the taxpayer's activities in buying and selling properties over the relevant years were relied on as indicating the existence of a business. The Commissioner relied on the evidence of the large number of dealings extending over the whole period and including properties other than the rentable properties; the regularity of dealings; the systematic and similar courses followed in a large number of the dealings in order to make profit; the engagement of Mr. E.G. Williams as agent in many dealings; the setting up of separate bank accounts to receive the moneys from purchasers and thus keep a record of the transactions; and the extent and degree of organisation of the taxpayer's activities in buying and selling properties. It was put that the taxpayer's activities had gone beyond separate transactions of speculation and had become a business.

ATC 4761

Counsel for the taxpayer relied on a number of features as being indicators which told against the existence of a business. The taxpayer relied on the fact that the dealings, particularly dealings with rentable properties, were dealings with property more commonly bought and sold as investments than as trading stock; the purchases made by the taxpayer included purchases of vacant land, properties for his own use and in one case property jointly purchased by him and his sister; there were no separate offices, accounts, records, notepaper or staff that could be identified as those of a separate business and no bank account that could be treated as the bank account of the alleged business; the activity which the taxpayer primarily relied on for his livelihood and to which he devoted most of his working time was his solicitor's practice; the taxpayer did not present himself to the public or any sector of the public as carrying on a business of buying and selling properties; and that it was inconvenient for accounting purposes to treat as trading stock all the properties purchased. It was put that, if I were to find that a large number of the properties had been purchased for the purpose of profit-making by sale, it would follow that the taxpayer had engaged in a number of separate transactions which had not merged so as to constitute a business. The distinction was stressed between this case of a solicitor buying and selling properties and a case where such buying and selling was done by a company or a partnership or by an individual as part of another business.

Naturally, counsel for both parties contested the existence or extent of and the significance of, each of the features relied on by the opposing party.

The question whether the taxpayer carried on a business of buying and selling properties is to a large extent a question of degree and impression. There are some guidelines to be found from the approaches which have been adopted in other cases and the combinations of features which have or have not been regarded as amounting to a business. Relevant cases for this purpose include:
Graham v. Green (1925) 2 K.B. 37;
Trautwein v. F.C. of T. (No. 2) (1936) 56 C.L.R. 196;
Martin v. F.C. of T. (1953) 90 C.L.R. 470;
Langford v. F.C. of T. (1954) 92 C.L.R. 517;
London Australia Investment Co. Ltd. v. F.C. of T. 77 ATC 4398; Williams v. F.C. of T. 72 ATC 4157; (1972) 128 C.L.R. 645 and F.C. of T. v. St. Hubert's Island Pty. Ltd. (In Liquidation) 78 ATC 4104; (1978) 52 A.L.J.R. 367. Bearing in mind those guidelines it is necessary to look at the combination of the features of the taxpayer's activities in this case to decide whether they amounted to the carrying on of a business.

While I consider that this case is close to the borderline, I have reached the conclusion that the activities of the taxpayer in buying and selling properties did not amount to the carrying on of a business. They were separate speculations in properties. It is not necessary to say more than that I regard the features relied on by the taxpayer as outweighing the features relied on by the Commissioner. Under sec. 26(a) of the Act the profit made on a commercial transaction of buying and selling is part of a taxpayer's assessable income. There is therefore no reason, where the transactions are not part of what would ordinarily be regarded as a business, to treat such a transaction or a series of such transactions as a business for the purposes of the Act, in order to ensure that such profits are assessed to tax.

The result of this part of the appeal is that I find that six of the seven properties were acquired by the taxpayer for the dominant purpose of profit-making by sale. Accordingly the profits arising from the sale of the six properties are to be included in the taxpayer's assessable income under the first limb of sec. 26(a) of the Act.
McClelland v. F.C. of T. 70 ATC 4115 at p. 4123; (1970) 120 C.L.R. 487 at 500. The profit arising from the sale of 405 Bridge Road, Richmond is not to be included in the taxpayer's assessable income.

Forfeited Instalments

The second issue on the appeal depends primarily on questions of law. It relates to some of the rentable properties which were sold by the taxpayer under instalment contracts. Under each of the contracts instalments were received which included a component of price and a component of interest. The interest component was treated as income according to ordinary concepts. In accordance with usual practice, part of the price component was treated, on a profit

ATC 4762

emerging basis, as profit. F.C. of T. v. Thorogood (1927) 40 C.L.R. 454. The part treated as profit was the proportion of the price component which the total profit on the sale bore to the total sale price. Put in another way, it was the proportion of the total profit which the particular price component bore to the total sale price. Case D47, 72 ATC 272 at p. 284. The profits received in instalments in this way were referred to as ``instalment profits''.

Then the purchaser defaulted and the taxpayer exercised a right given by the contract and ``rescinded'' the contract. The contract provided that upon ``rescission'' the deposit and the instalments paid were forfeited to the taxpayer. The argument was put to me by the parties in general terms without reference to the provisions of the actual contracts. I decide the case on the basis on which it was argued.

Upon the ``rescission'' of the contract the parts of the components of price which had not previously been treated as profit, were treated as profit. If the contract had been completed, these parts of the instalments would never have been treated as profits because in accounting terms they represented the value of the property which the taxpayer had agreed to transfer to the purchaser when the purchase price was fully paid. The effect of the ``rescission'' was that the taxpayer was no longer under any obligation to transfer the property and he was entitled to retain all the instalments which he had received. For this reason the parts of the components of price which had not previously been treated as profit were, at this stage, treated as profit. They are to be regarded as in the nature of windfall profits which would not have been received if the purchaser had performed his part of the contract. In argument these profits were referred to as ```rescission' profits''.

The taxpayer did not contest that both the instalment profits and the ``rescission'' profits were profits. The argument related to properties other than the seven properties the subject of the appeal. Mr. Davies conceded, solely for the purposes of this argument, that within the meaning of the first limb of sec. 26(a) of the Act, the properties had been acquired for the purpose of profit-making by sale. It was recognised that if I found that the taxpayer had been carrying on a business of buying and selling properties different considerations would apply.

The essence of Mr. Davies' concise argument was that neither the instalment profits nor the ``rescission'' profits had, within the meaning of the first limb of sec. 26(a), arisen from the sale by the taxpayer of the properties. He submitted that the instalment profits had arisen from the attempted sale of the properties and the ``rescission'' profits had arisen from the ``rescission'' of the contract of sale. For the Commissioner it was submitted that the profits of both types had arisen from the sale by the taxpayer of the properties. It is important to commence with an appreciation of what occurred when a contract was terminated. I assume the right given by the contract to ``rescind'' the contract to have been the right commonly given in contracts of sale of land and which entitles the vendor to discharge the contract insofar as it is executory. Voumard, The Sale of Land in Victoria, 3rd ed. (Wikrama, 1978) p. 416. It follows that the contract insofar as it was executory was discharged but rights which had been unconditionally acquired remained in existence.
McDonald v. Dennys Lascelles Ltd. (1933) 48 C.L.R. 457 at pp. 476-7. While, no doubt, the contract in express terms gave the taxpayer a right to ``rescind'' it, it is, in my view, preferable to speak of the contract as discharged and avoid the ambiguities imported by describing the contract as rescinded.
Westralian Farmers Ltd. v. Commonwealth Agricultural Service Engineers Ltd. (In Liquidation) (1936) 54 C.L.R. 361 at p. 379;
Holland v. Wiltshire (1954) 90 C.L.R. 409 at p. 416. Compare: Cheshire and Fifoot's Law of Contract, 9th ed. (Furmston, 1976) p. 579. The taxpayer's right in law to retain the instalments came from a term of the contract and not from any general principle of law. Voumard, The Sale of Land in Victoria, (above), pp. 421-5. The right of the purchaser to invoke the equitable jurisdiction to grant relief against forfeiture may be disregarded as it was never invoked. One of the acquired rights which remained after the discharge of the contract was the right to treat the instalments as forfeited.

The special characteristics of a contract of sale of land are referred to in Voumard, The Sale of Land in Victoria (above), p.1. The

ATC 4763

authorities show that, with regard to land, a reference to a sale may be a reference either to the making of a contract of sale or to the making and completion of a contract of sale.
Milner v. Staffordshire Congregational Union (Incorporated) (1956) 1 Ch. 275;
Scott v. Wilmore and Randell (1949) V.L.R. 113;
R. v. Canadian Pacific Railway (1911) A.C. 328.

In sec. 26(a) of the Act, which applies to dealings of a commercial nature, it is my opinion that the word ``sale'' in its application to land refers to a contract of sale whether it is completed or not. Otherwise it would follow that the usual method followed since Thorogood's case (1927) 40 C.L.R. 454, of treating part of the profit as emerging through each payment of an instalment of the price, would be inappropriate where the taxpayer was liable to tax under sec. 26(a). It would not be until payment of all instalments and completion of the contract that any profit could be said to arise from the sale.

The words ``arising from'' are words of wide operation.
Government of Gibraltar v. Kenney (1956) 2 Q.B. 410 at pp. 421-2. When the instalment profits were received they were received under the contract and clearly were profits arising from the contract. They were therefore profits arising from the sale by the taxpayer of the property. The fact that the contract from which these profits arose was later discharged does not alter the position. When the contract was discharged the right of the taxpayer to retain the instalment profits which he had received was in no way affected. His, right, acquired under a term of the contract, prevented him from becoming liable in law to refund an equivalent amount to the purchaser.

The ``rescission'' profits were not profits until the discharge of the contract. They were, however, moneys which had been paid to the taxpayer and which he was entitled to use and probably had used as his own. It is true that upon the later discharge of the contract, if there had been no term covering the position, he would have become liable to pay to the purchaser equivalent amounts due to the purchaser upon the failure of the consideration for which the instalments were paid. Voumard, The Sale of Land in Victoria (above), pp. 421-2. The effect of the term in the contract was that when the contract was discharged that liability to the purchaser never arose.

The amounts in question were moneys paid under the contract. On the discharge of the contract they became profits because the taxpayer had acquired a right under a term of the contract that, although the taxpayer was no longer obliged to transfer the land to the purchaser, he was not obliged to refund equivalent amounts of money to the purchaser. In my opinion the ``rescission'' profits were profits arising from the sale by the taxpayer of the property. In this case the taxpayer received under the contract the moneys which subsequently became profits and was protected by a right acquired under the contract from having to refund equivalent amounts. He received the profits by virtue of the operation of the contract. He did not receive them as a result of abandoning the contract. I do not accept the argument to the contrary which was based on
Kratzmann v. F.C. of T. 70 ATC 4043; (1970) 44 A.L.J.R. 293.

The result on this issue is that I hold that both the instalment profits and the ``rescission'' profits are by virtue of the first limb of sec. 26(a) of the Act part of the assessable income of the taxpayer. The appeal therefore fails on this issue.

Income from Unidentified Sources

The third issue on the appeal relates to a sum of £14,818 ($29,636) included by the Commissioner in the taxpayer's amended assessments as taxable income. The inclusion of this sum was confined by the Board of Review.

To support the inclusion of this sum, the Commissioner relies on figures shown in a document headed ``Amended Assets Betterment Statement'' which is included in Exhibit BRA. For each financial year from 1955 to 1966 the document sets out the taxpayer's expenditure, which is calculated by adding together the increase in the taxpayer's net assets and the amounts spent by him otherwise than in increasing net assets. This expenditure is taken as being equal to his receipts, so the figure calculated as the total amount of expenditure is taken as also being the figure which states the total amount of the taxpayer's receipts. From the total amount of the taxpayer's receipts

ATC 4764

obtained in this way, the amount of his capital receipts (less capital losses) is deducted and the balance is treated as income. On this basis, after making a number of adjustments, the document sets out an amount as the taxable income for the year. From this amount of taxable income, the taxable income already assessed for the year is subtracted and the resulting figure is treated as the amount which was omitted from the taxable income previously returned by the taxpayer and assessed by the Commissioner. The amounts shown in this way to have been omitted from the original assessments are the basis for the amended assessments. The total of the omissions shown for the twelve years is £64,926 ($129,851). It will be noted that the amounts stated in dollars in the evidence are not always double the amounts stated in pounds. This is due, no doubt, to the amounts stated in pounds being stated to the nearest pound.

Another document (Exhibit BR5) shows the identified omissions of taxable income which are treated as included in the total amount omitted. The identified omissions are the profits arising from the sale by the taxpayer of properties acquired by him for the purpose of profit-making by sale, amounts paid to the suspense account system and the trust suspense account, amounts due for fees and disbursements which bypassed the office bank account and were paid directly from the trust account to other bank accounts and other amounts of interest and dividends. There is a minor adjustment in respect of deductions. The identified omissions of taxable income are shown as amounting to £50,108 ($100,215) and the balance of the omissions, £14,818 ($29,636), is treated as unidentified omissions of taxable income. The third issue on this appeal concerns this balance treated as unidentified omissions of taxable income. In Exhibit BR5 they are called ``betterment discrepancies''.

At the hearing before the Board of Review the appellant challenged many of the principles upon which the assets betterment statement was based and many of the methods used in its preparation. The Board of Review decided that the assets betterment statement contained no error of principle or formula. The principles on which the assets betterment statement was based and the methods followed in its preparation were explained to me by counsel and witnesses. There was no challenge to the correctness of those principles or methods. While the appellant did not concede the correctness of the figures in the assets betterment statement, there was no evidence or submission before me that any particular figure was wrong.

Apart from the decision of the Board of Review which is the subject of this appeal, and a statement by the Chairman of Board of Review No. 1 in Case C111
(1953) 3 T.B.R.D. 660 at 667-8, the decisions drawn to my attention show little discussion within Australia of the principles on which assets betterment statements are based, or the methods by which they are prepared. It is clear that an assets betterment statement is not an ordinary accounting document. It is a document containing information and calculations which by indirect means calculate the taxable income of a taxpayer, or give an indication of that taxable income. While I refer to the document as an assets betterment statement, I later refer to the inappropriateness of that name as a description of the document. When all the required information is available and accurate, the calculation of the taxable income of the taxpayer in a properly prepared assets betterment statement will precisely equal the taxable income calculated in the conventional manner from properly kept records. Where some of the required information is not available or where it is not clear that it is all available and accurate, the calculation in an assets betterment statement gives an indication of the taxable income of the taxpayer, but may not of itself show the correct amount. In such a case before it can be inferred that the calculation in the assets betterment statement shows the correct taxable income of the taxpayer some further evidence is necessary. In some cases the further evidence may be provided by an express admission by the taxpayer that the information used in the assets betterment statement is complete and correct. In other cases the failure of the taxpayer after receiving a copy of the assets betterment statement to challenge information on which it is based or to provide reliable information which, if the assets betterment statement were incorrect, he could provide, may give

ATC 4765

rise to an inference that the information used in its preparation is complete and correct. This need for further evidence could be satisfied in other ways. Of course, in any case, the reliability of an assets betterment statement will be affected, and may be negated entirely, by errors or inaccuracies in its information, its calculation or the method of its preparation. There is not a universally accepted way of preparing an assets betterment statement, and a number of different methods may properly be followed. In this appeal it is important to bear in mind that the assets betterment statement is nothing more nor less than a piece of evidence to be considered along with other evidence in deciding the issue to which it is relevant.

I will outline the basic structure of the assets betterment statement relied on by the Commissioner in this appeal. The evidence is that this assets betterment statement has been prepared in all respects in the form usually adopted by the officers of the Commissioner. Its approach depends on the fact that money received by a taxpayer in a financial year is by the end of the financial year either represented in net assets or has been expended without being represented in net assets. It is represented in net assets if it has been saved or has been used to obtain or increase an asset. It is also represented in net assets if it has been used to reduce or extinguish a liability. It has been expended without being represented in net assets if it has been given away, or has been used for such things as living expenses. It follows that, in a financial year, the total of the net increase in the taxpayer's assets and the amount expended otherwise than in respect of assets, is equal to his receipts in the year. The deduction from the total amount of receipts in the year, of amounts received otherwise than as income, leaves the amount of income received in the year.

In the assets betterment statement before the court, the basic approach has been to take the amount of the assets of the taxpayer, at the end of each financial year, and subtract his liabilities to obtain his net assets at that time. By comparing the net assets with those of the year before, the amount of increase in net assets is obtained. The increase in net assets is the assets betterment which has given its name to this type of statement, although the calculation of assets betterment is only the first step in a series of calculations made in the statement to arrive at taxable income. To the increase in net assets are added sums expended otherwise than in respect of net assets. These sums include such things as gifts, private expenditure and payments of income tax. It would be quite logical to include in these sums, expenditures which are allowable deductions for income tax purposes. If these were included it would later be necessary to deduct them in order to arrive at the amount of taxable income. Instead of adding them at this stage and later deducting them, the same result has been reached by disregarding them. The total of the increase in the net assets and the sums expended otherwise than in respect of net assets, provides the amount which is treated as being equal to the taxpayer's receipts for the year. In order to find the part of the total receipts, which was income, the amount of capital receipts during the year is subtracted from the total receipts and the amount of capital losses is added. Capital receipts treated in this way include profit on disposal of investments, a Tattersall's prize and the amount of a matured life assurance policy. A loss on disposal of investments is treated as a capital loss. From the amount of income received by the taxpayer during the year there are deducted the amounts by which the taxpayer was entitled to reduce his total income to arrive at his taxable income. These amounts include concessional deductions and exempt dividends. The resulting figure is shown as the taxpayer's taxable income for the financial year.

In calculating the taxpayer's taxable income for each relevant year, adjustments are made to ensure that the only changes in the situation of the taxpayer which are taken into account are changes quantified in money amounts and due to actual receipt or actual expenditure or capital loss. Changes which are no more than conceptual changes due to accounting practices are eliminated. Assets are taken at cost price. Regard is had to the actual sale price of an asset and to actual receipts upon sale. The actual value of an asset is of no significance. The principles behind the various adjustments made in the assets betterment statement and the reasons for the methods of adjustment used, were

ATC 4766

explained to me by the expert witnesses and by counsel with a good deal of patience.

The Commissioner relies on the assets betterment statement in this appeal as evidence which tends to show the taxable income of the taxpayer in the years in question. The Commissioner puts it that the assets betterment statement was prepared from the records of the taxpayer and the records of his bank accounts, and from information and estimates provided by the taxpayer. It is put that the taxpayer has by his conduct admitted the completeness and correctness of the factual information which is contained in the assets betterment statement and on which its calculations are based.

Before the Commissioner could succeed on this issue in the appeal, there must be some evidence before the court that the taxpayer received as taxable income the sum of $29,636 (or some part of it) which had not previously been assessed. Gauci v. F.C. of T. 75 ATC 4257; (1975) 135 C.L.R. 81. If there is some evidence of that, it is my duty to make findings on the facts relevant to this issue. In such a situation there is ordinarily no need to rely on the onus of proof, but if it is necessary to do so, it is the taxpayer who bears the onus of proof. McCormack v. F.C. of T. 77 ATC 4543.

I take the view, for reasons which I mention later, that there is evidence before me, that over the financial years in question the taxpayer received as taxable income the sum of $29,636 in addition to the taxable income previously assessed.

The assets betterment statement was prepared to show the position for each financial year. No submission was put to me of the type rejected in Trautwein v. F.C. of T. (No. 1) (1936) 56 C.L.R. 63, that the appeal should be allowed because although the total amount for the whole period was correct it was probable that the amount allocated to one or more of the years in the period was incorrect.

I find that the structure of the assets betterment statement, the principles applied and the methods used in its preparation are appropriate to calculate the taxpayer's taxable income. This is supported by the evidence and not contested.

I look next at the reliability of the information on which the calculations in the assets betterment statement are based. There are several ways in which wrong information could produce a result which showed an excessive amount of taxable income. If, in a given year, the amount shown for net assets betterment or for other expenditure is too high that would have the effect of increasing taxable income accordingly. If the amount shown for capital receipts or concessional deductions is too low or the amount for capital loss too high that would also have the effect of inflating taxable income. Other errors in amounts used in making adjustments could also operate so as erroneously to increase the taxable income shown by the assets betterment statement.

I am satisfied that Mr. L'Estrange has acted so as to admit the substantial correctness and completeness of the information in the assets betterment statement on which its calculations are based. Trifling differences in amounts were not relied on by either party before the Board of Review or before me.

I accept the evidence of Mr. Bluett that he prepared a handwritten draft of an assets betterment statement and its schedules, took them to Mr. L'Estrange, showed them to him and left them with him for a few days. Except for some information which had come from bank accounts in relation to several of Mr. L'Estrange's accounts, all the information used in the draft assets betterment statement had come from Mr. L'Estrange or from books or documents which he had provided to the taxation investigators. Mr. Bluett saw Mr. L'Estrange again and Mr. L'Estrange said that certain of the figures were wrong. It was only in minor respects that Mr. L'Estrange said that a few of the figures were wrong and to avoid differences on minor matters, Mr. Bluett agreed to modify those figures in the way that Mr. L'Estrange said they should be modified. Having made those modifications Mr. Bluett had the draft typed as an assets betterment statement. On 3 February 1968 Mr. L'Estrange sent a letter to the Commissioner indicating possible sources of errors in the calculations. Before that letter was received Mr. Bluett had the assets betterment statement posted to Mr.

ATC 4767

L'Estrange with a covering letter dated 6 February 1968 which said:

``I am forwarding herewith an Assets Betterment Statement (in duplicate) compiled from your bank passbooks and other relevant information showing the net incomes derived by you during each of the years ended 30 June 1956 to 1966 inclusive. One copy should be retained by you for reference.

You are requested to examine this statement and if considered correct, it should be signed accordingly. If considered incorrect you should indicate the items which are considered to be wrong, and state the extent to which they vary from the amounts, which, in your opinion, should be included. Any evidence available to support your contention should be forwarded.

In either event the statement should be returned with a written explanation of the reasons for the omission of income in the respective years.

Issue of assessments based on the income shown in the Betterment Statement will be deferred for a period of 14 days to afford you an opportunity to make any representations which you consider necessary.''

A few days later Mr. L'Estrange telephoned Mr. Bluett and asked him to call at his office to explain various items in the assets betterment statement. Mr. Bluett agreed to do so and attended on 13 February 1968. Mr. L'Estrange then raised a number of basic objections to the concept and method of the assets betterment statement. He also said that some of the figures should be altered by fairly small amounts. Most of these figures, at least, were altered by Mr. Bluett in the way that Mr. L'Estrange said they should be altered. Mr. Bluett had the amended assets betterment statement typed in the form in Exhibit BRA. Mr. L'Estrange wrote the Commissioner a number of letters during February, March and April 1968. Eventually the amended assets betterment statement together with notices of amended assessments which issued on 17 May 1968, were posted to Mr. L'Estrange. Mr. Bluett said that this was done to bring matters to a head.

Mr. L'Estrange lodged objections which were substantially disallowed by the Commissioner. Mr. L'Estrange then requested that the decisions of the Commissioner be referred to a Board of Review for review. The hearing before the Board of Review extended over twelve sitting days in June and July 1971. At that hearing Mr. L'Estrange appeared in person. Many issues of law and fact were raised before the Board of Review. Mr. L'Estrange maintained that the principles and method of the assets betterment statement were wrong. He had consistently maintained this in correspondence with the Commissioner since the first submission which he made just before he received the amended assets betterment statement.

In preliminary submissions to the Board of Review on procedures to be followed the taxpayer said:

``... there is practically no dispute on the amounts set out in the betterment statement. What is disputed is the structure of the document and that is being objected to.''

(Board of Review Transcript p. 7.)

The transcript of proceedings before the Board of Review at pages 426-443 shows that, because differences as to the correctness of the amounts shown in the assets betterment statement were small, Mr. L'Estrange accepted the amounts shown in the assets betterment statement as being correct.

In his evidence Mr. L'Estrange told the Board of Review that over the relevant period, apart from what was shown in the assets betterment statement, he had not received any money from a non-taxable source, had not paid out any money and had not suffered any losses. He added that the assets betterment statement covered everything, assets, liabilities, income and expenditure (Board of Review Transcript pp. 451-2).

Mr. Davies put it that I should not place weight on what occurred before the Board of Review, because Mr. L'Estrange's case before the Board of Review on this issue, concentrated on questions of law and questions of the validity of the assets betterment statement in concept, principle

ATC 4768

and method. He submitted that the correctness of the figures had not been treated before the Board of Review as other than a peripheral issue and reminded me that Mr. L'Estrange had then appeared in person. I regard the factual foundation of that contention by Mr. Davies as correct. But there was no challenge before me as to the correctness of those amounts. As the taxpayer's case was that there must be an error somewhere in the assets betterment statement, it was obvious that he could not concede the correctness of each individual item in it. Mr. Davies told me that he was not positively raising either by evidence or submission, challenges to particular items in the assets betterment statement or to the validity of its construction.

The original notice of appeal from the decision of the Board of Review was filed in the Registry of the High Court on 18 September 1972. I was told by Mr. Davies that it was drawn by Mr. L'Estrange but that the amended notice of appeal which was filed on 28 June 1976 was drawn by counsel. I infer that at the time of the Board of Review hearing Mr. L'Estrange believed with some confidence that he was entitled to succeed on this issue on the grounds which he advanced before the Board. In August 1972 the Board of Review decided adversely to him on this issue. He would be likely then to have appreciated that there would be a real risk involved in proceeding on this appeal only on the grounds advanced before the Board of Review. It must have become apparent to him at that stage, that if it was possible to challenge the correctness of any of the information in the assets betterment statement, it was desirable to do so on the appeal, in addition to advancing other grounds. By June 1976 he had counsel acting for him in connection with the appeal. It is clear that Mr. L'Estrange has always had a very strong desire to succeed in the review and in this appeal. He spared no energy in preparing his cases. The relevant books and documents were in his possession between the hearing by the Board of Review and the hearing of this appeal. He is the person who would have the best understanding of those books and documents. He has a very good recollection of the details and circumstances of transactions relevant to this appeal, although they occurred long ago.

Mr. L'Estrange's attitude to the assessments the subject of this appeal and to the situation in which he was placed would, in my view, have led him to take all available steps to contest from the outset and to continue to contest, any figures or information in the assets betterment statement which he believed to be substantially incorrect. This observation applies with particular force to the time during which he had counsel retained in connection with this appeal.

There is evidence before me that the calculations in the assets betterment statement are correct although the possibility of error cannot be excluded. There is no challenge by evidence or submission to the correctness of those calculations.

The result is that there is evidence before me that over the relevant period the taxpayer received taxable income of $29,636 in addition to the taxable income returned and originally assessed. Any differences between the figures in the assets betterment statement and the figures which Mr. L'Estrange has put forward in the past and which might vary that amount to some extent upwards or downwards, are not significant and no reliance has been placed on any of them in this appeal by either party.

The evidence from the assets betterment statement and the taxpayer's acceptance of its figures is only part of the evidence on this issue and regard must be had to the whole of the evidence.

Mr. L'Estrange has given sworn evidence that during the relevant years all receipts in relation to his practice which were not paid into his trust account, were paid into his office account. He said that when these moneys were received they were recorded by duplicate receipt and later recorded in the cash book and they were all paid into the bank. He swore that he had not falsified any of his records. His evidence was that he had no income from any source which did not go into a bank account and that all the assets included in the assets betterment statement were acquired by moneys from his bank accounts. He added that there was no item in the assets betterment statement which might represent or be explained by a source of cash that did not go through his bank accounts. He said that he had made available to the

ATC 4769

investigators all the information showing that the assets had been acquired with moneys from his bank accounts. He swore that apart from the income called ``identified omissions'' in Exhibit BR5 he had not had any income over the relevant period which he had not returned as assessable income. He also swore that he had not overclaimed any deductions. Thus in unequivocal terms he swore that he had not derived as income the amount of $29,636 which the assets betterment statement and Exhibit BR5 show as the unidentified omissions of taxable income.

It is convenient at this stage to deal with three arguments advanced by Mr. Davies.

One was based on sec. 48 of the Act which provides:

``In calculating the taxable income of a taxpayer, the total assessable income derived by him during the year of income shall be taken as a basis, and from it there shall be deducted all allowable deductions.''

Mr. Davies submitted that as a matter of law this assets betterment statement was prepared in a manner contrary to the express provisions of sec. 48 of the Act. He did not suggest that the assets betterment statement could not be used to arrive at assessable income. He relied on an answer by Mr. Bluett to a hypothetical question put to him in cross-examination. In the answer Mr. Bluett said that if he had prepared amended assessments after completion of the investigations and completion of the assets betterment statement, he would not have first arrived at assessable income and then deducted allowable deductions; he would have amended the assessments in accordance with the betterment income shown in the statement. What is referred to as the ``betterment income'' in the assets betterment statement is the taxable income arrived at in the way which I have explained. Mr. Bluett added that he believed that the steps required by sec. 48 were carried out through the process of the assets betterment statement. Mr. Davies submitted that Mr. Bluett's approach was erroneous and that the correct approach would have been to add the returned income, the identified omissions and the unidentified omissions, and, treating the total as the assessable income, to deduct from it all allowable deductions. Mr. Davies put it that Mr. Bluett had erroneously thought that as a matter of law an assets betterment statement gives the taxpayer's taxable income.

I consider that there are several answers to this argument. First, whatever process of the mind Mr. Bluett said that he would have followed, there is nothing before me to indicate that the actual or hypothetical process of Mr. Bluett's mind ought to be regarded in this case as the basis on which the Commissioner or Deputy Commissioner is to be treated as having made the assessment. There is evidence to suggest otherwise (Board of Review Transcript p. 268). Second, the approach which Mr. Bluett said he would have adopted would have been an approach which the Commissioner could validly have adopted. In my opinion sec. 48 is a section which, in effect, defines taxable income as the excess of the total assessable income over the allowable deductions. It is a description of the concept of taxable income, not a prescription of a compulsory sequence of mathematical steps to be followed in arriving at it. An assessment would not be invalidated if a Commissioner with an adventurous cast of mind, first subtracted from nought the allowable deductions, then added the total assessable income. So long as the steps taken in an assets betterment statement give a taxable income as described in sec. 48, the taxable income so produced may be used as the basis of an assessment. On the evidence I am satisfied that the steps taken in the assets betterment statement which is before me, will give the taxable income of the taxpayer, as described in sec. 48, so long as its basic information and calculations are correct. I may add that I do not consider that Mr. Bluett's evidence indicated any misunderstanding by him of the law. Third, I accept the submission of Mr. Burnside for the Commissioner that even if it were not open to the Commissioner under sec. 48 to rely on the taxable income shown by the assets betterment statement, he could validly make an assessment in this way under sec. 167.

Mr. Davies next argued that it was not open to the Commissioner to rely on the assets betterment statement to prove taxable income, in a case such as this, where, Mr. Davies contended, all the records are

ATC 4770

available to enable taxable income to be arrived at in the conventional way. I do not accept this as a proposition of law. I have mentioned that an assets betterment statement is nothing more nor less than a piece of evidence. On this issue it is evidence which is relevant and admissible. The weight which an assets betterment statement would carry if the Commissioner relied on it in a case in which all the usual records were available and it was more reliable and convenient to refer to them, would depend on the circumstances of the particular case. Further, in this case, as appears later in these reasons, in relation to the period from 1 July 1955 to 31 April 1961 the usual records were not all available in legible form.

The third of these arguments was one which applied only if I held that the taxpayer's profits on the resale of properties were assessable as income within sec. 25(1) of the Act, rather than as profit under sec. 26(a). As I have held that these profits are assessable under sec. 26(a), it is not necessary for me to deal with this argument.

The resolution of the third issue on the appeal depends upon my findings upon the evidence as to the taxable income of the taxpayer in the relevant years.

The Commissioner relies on the assets betterment statement and the conduct of the taxpayer as showing that taxable income was received which exceeded by $129,951 the taxable income returned by the taxpayer. There is evidence before me which identifies the source of all but $29,636 of this sum. The Commissioner contends that although its sources are unidentified I should find that this sum was taxable income. The taxpayer has sworn that he received no taxable income over the relevant financial years other than that which he returned and the additional income from sources identified by the evidence. Further, he swears that all his receipts of income were properly recorded in his records and accounts, and all these records and accounts were made available to the taxation investigators for examination.

It is convenient to consider separately, the evidence relevant to the period from the financial year ended in 1956 to 31 April 1961 and the period from 1 May 1961 to the financial year ended in 1966. At the time which divides those two periods, there were changes in the accounting system used by Mr. L'Estrange.

First period: 1 July 1955 to 31 April 1961

During the first period Mr. L'Estrange had a bank account called the ``L'Estrange and Kennedy Bank Account'', which was used for a number of purposes. The receipts and payments of his solicitor's office went through this bank account. So did receipts and payments in respect of rents, purchases and sales of properties, purchases and sales of shares, private receipts and expenses and a number of other transactions. He referred to this bank account as his office bank account.

Mr. L'Estrange's evidence was that all receipts of his solicitor's practice which were not paid into his trust account were properly recorded, and paid into the office bank account. An office cash book covering transactions from 1 July 1947 to 30 April 1961 is in evidence. Mr. L'Estrange's evidence was that all moneys received in his practice in cash or by cheque were shown in the receipt and the cash book and were banked in the office bank account. Moneys received by the office account from the trust account were also entered in the receipts side in the cash book. On the disbursements side of the cash book, cash disbursements were entered each day, and payments by cheque were recorded from the cheque butts.

Initially, the investigation and analysis of Mr. L'Estrange's books covering the first period were made by the taxation investigator, Mr. Mason. Later Mr. Bluett took part as well. In particular the investigators analysed deposit slips, bank statements and cheque butts. At an early stage a decision was made by the investigators to prepare an assets betterment statement. I am satisfied that there were two reasons for this. First, it is a common practice for this to be done in order to check the accuracy of the taxpayer's records. Second, difficulties were encountered by the investigators in reading and understanding much of the information written by Mr. L'Estrange on deposit slips and cheque butts because of its illegibility.

There was some dispute about whether the cash book for the first period was made available to the investigators. I do not need to find whether it was examined by the

ATC 4771

investigators. I do find that its existence was disclosed to the investigators and that throughout the whole of the investigation, while there was on occasions a degree of delay and a reluctance to provide them, all documents and records specifically requested by the investigators were eventually made available to the investigators by Mr. L'Estrange.

Mr. Bluett said in cross-examination that in his examination of the credits to the office account he looked for income received, which the taxpayer had not returned as assessable income, and had not found any. He said that all receipts from clients were identified where they were able to be identified, but added that it was not possible to read all the notations on the deposit slips.

Mr. Beach submitted that one possible explanation for the existence of the $29,636 of unidentified omitted income over the period was that money had been received by Mr. L'Estrange as income, but no receipt had been issued for it. Such money, Mr. Beach submitted, would not have been recorded in the office accounts but would have been paid directly into the bank account.

Mr. Davies criticised Mr. Bluett's evidence of inability to read notations from deposit slips, as having been brought to prominence in the hearing before me so as to explain his inability to identify the source of the sum of $29,636 which the Commissioner claimed to be taxable income. This aspect of the evidence did become prominent for the first time on this appeal, although it had been mentioned in the hearing before the Board of Review (see Board of Review Transcript at pp. 547 and 556). It was naturally less prominent before the Board of Review because the existence and availability of the taxpayer's records were not at the centre of any contest at that hearing. The contest regarding the assets betterment statement was concentrated primarily on questions of concept, principle and method.

Mr. Davies placed strong reliance on the submission that even if it were open in law for me to do so, I should place little reliance on the assets betterment statement on which the Commissioner has preferred to base his case instead of basing it upon the conventional records. He put it, in effect, that the Commissioner's way of presenting the case produced an unnecessary degree of uncertainty which would have been dispelled in the taxpayer's favour if all the records had been before me and had been properly analysed. He submitted that it was for the Commissioner not the taxpayer to analyse and explain the taxpayer's records. I mention that while I was told that Mr. L'Estrange had brought the records to court in several suitcases, neither party tendered them in evidence before me.

I see no reason to doubt Mr. Bluett's evidence about the difficulty of reading and understanding many of the entries on the deposit slips, and I accept it. Criticisms were made of Mr. Bluett's credit as a witness but I regard him as a reliable witness. Without an understanding of the illegible entries it would not have been practicable to make a useful analysis of amounts paid into the bank account. As amounts received in respect of transactions unconnected with Mr. L'Estrange's solicitor's practice did not go through the office cash book, but were paid directly into the bank an analysis of the cash book would have been of little assistance.

In the circumstances I do draw an inference from the fact that Mr. L'Estrange has not, since he has had counsel acting for him, taken steps to have evidence placed before me to show that his records show the sources of his receipts and show that during some or all of the relevant years he received no income beyond the income returned and the income from sources identified by the evidence. The facts as to his income and financial affairs are facts peculiarly within his knowledge. He has a good memory for his financial affairs and the deposit slips were written in his handwriting. With his knowledge of his financial affairs and of his handwriting he was likely to have been able to identify and recall the transactions to which the deposits related. There is no evidence that he has tried to do this and failed. He has a strong desire for both personal and economic reasons to succeed in this appeal. If there were evidence before me that for one sample year the records showed that only payments to bank accounts of income receipts were for the amounts returned and that all other payments into bank accounts were of a non-income nature, the evidential weight of the assets betterment

ATC 4772

statement would become a very light one. It is not suggested, in this case, that assets were acquired or increased in any significant way, except by money in or payments from bank accounts. It would also be open to the taxpayer, if he could, to produce evidence from his records to show allowable deductions beyond those taken into account in the assets betterment statement but this has not been done.

For reasons which I have given, in dealing with the first main issue on this appeal, I do not regard as reliable, the evidence of the taxpayer to the effect that he had no income over the period other than what has been returned and what has been identified.

Bearing in mind the evidence as to the reliability of the assets betterment statement and as to the conduct of the taxpayer, my assessment of the reliability of the taxpayer's evidence, the absence of documentary evidence to cast doubt on the correctness of the taxable income shown by the assets betterment statement, and the probabilities of the case, I find that the taxpayer during the first period derived from unidentified sources a taxable income not included in his returns, which was approximately equal to the unidentified omissions shown on Exhibit BR5 for the slightly longer period from 1 July 1955 to 30 June 1961.

Second period: 1 May 1961 to 30 June 1966

From 1 May 1961 Mr. L'Estrange used a new accounting system in which there was a separate bank account used solely for his solicitor's practice. Receipts of the practice were recorded and dealt with in a way similar to that previously followed. Mr. Bluett said that these accounts were well kept and that all income appears to be recorded in them.

Exhibit BR5 shows that for the financial years 1962 to 1966 the amount of omitted income from identified sources was about the same as the total amount of omitted income, in each year except 1963. It is only for 1963 that a significant amount of omitted income, of about £2,000 ($4,000), is shown as having come from unidentified sources.

Mr. Bluett had examined the records relating to the second period and had, in substance, identified the source of all the omissions except the omission of about $4,000 shown in respect of 1963. He was unable to give any explanation for the inability to identify the source of this sum. He pointed out that to have identified all sums but that, was comparatively a very good result upon an assets betterment statement. From the tenor of his evidence I am satisfied that he did not in respect of this period, find that there were deposit slips or other records which he could not read and understand. The effect of his evidence was that notwithstanding his inability to explain the difference between the taxable income shown in the assets betterment statement and that shown by the taxpayer's apparently complete records, the amount shown by the assets betterment statement is to be regarded as more reliable.

The position is that I have before me two lots of evidence which tend to prove different amounts as the taxable income for the second period. There is the evidence based on the assets betterment statement. There is the oral evidence of Mr. L'Estrange that all his income is recorded in the records, and Mr. Bluett's evidence that this appears to be so.

There is nothing to suggest that the records are unreliable or incomplete. I consider that the probabilities are important in making a finding upon this conflict of evidence.

In keeping ordinary records the sources of information are more readily available and the methods used and calculations made are more simple and straightforward than in the case of the preparation of an assets betterment statement. Either the records are wrong to the extent of about $4,000 or the assets betterment statement is wrong to that extent. There is nothing to indicate any falsification in the keeping of the records or the preparation of the assets betterment statement. I regard the risk of error as much higher in the preparation of the complicated assets betterment statement than in the keeping of the relatively straightforward records. Accordingly, for the year 1963 I regard the figures shown in the records as more likely to show the correct taxable income than those shown in the assets betterment statement.

The result is that I find that during this second period the only taxable income which was omitted from the taxpayer's returns was the omitted income from sources which have been identified. On the figures before me in

ATC 4773

the evidence it would be artificial to treat the amount by which the assessment should be reduced as other than the round sum of $4,000. On this issue, the appeal is allowed to the extent of $4,000 but is otherwise dismissed.

I do not wish to leave this part of the case without comment upon the obscurity of the assets betterment statement which is before me, and which is in the form usually used by the Commissioner and his officers. It is clear that Mr. L'Estrange, an experienced solicitor accustomed to dealing with involved documents and with some experience of accounts and figures was baffled by it. His bewilderment gave rise to a deeply held feeling that the Commissioner, in relying on the assets betterment statement, was seeking by invalid means to make good, deficiencies in evidence that the taxpayer had undisclosed taxable income. Mr. L'Estrange came to conclude that the Commissioner was seeking to take advantage of him, and to victimise him.

Upon the evidence I am satisfied that in the circumstances, the method of the assets betterment statement does validly provide evidence that Mr. L'Estrange had taxable income which he did not disclose. I infer that it was not until after he retained counsel in connection with the present appeal that Mr. L'Estrange came to appreciate that the assets betterment statement was capable of having that evidentiary operation. A reading of the transcript leaves a strong impression that the difficulties of understanding what the assets betterment statement was, and how it operated, substantially contributed to the misdirection by Mr. L'Estrange of a great deal of his thought and effort upon this case over more than a decade.

Having received expert guidance for some days from two experienced counsel and their juniors and from two experienced accountants, it has become clear to me that the basic concept of the assets betterment statement is a fairly simple and straightforward one, although the reasons for and the method of making some of the adjustments call for a lot of explanation and thought before they are understood. The form of the assets betterment statement obscures rather than reveals its basic concept. The document gives virtually no indication of the reasons for, or the method of, making adjustments. I can well understand Mr. L'Estrange's difficulty in understanding the nature and operation of the assets betterment statement presented to him. That involves no criticism of Mr. Bluett's explanations to Mr. L'Estrange. A taxpayer alleged by a taxation investigator to have failed to disclose large amounts of income is unlikely to be receptive to the investigator's explanations, however clearly the nature and operation of the complex document is explained.

In the reasons for the decision of the Board of Review which is the subject of this appeal, observations were made about the obscurities and confusions generated by the assets betterment statement. Mr. Donovan, Chairman, and Mr. Todd, Member, in their reasons said:

``Two observations may not be inappropriate at this stage. An assets betterment statement ought not be concerned with anything beyond a comparison of net assets at different points in time. In fact, the description is applied to the whole of a document such as that presently under consideration which goes beyond that stage and shows the steps by which taxable incomes are calculated and compares the incomes so determined with those submitted by a taxpayer in his returns. The second comment is that the term `betterment income' might perhaps have been more felicitously chosen. It means no more than taxable income calculated by means of the assets betterment statement.''

(72 ATC at p. 275.)

Mr. Thompson, Member, after stating his opinion that the argument of the taxpayer upon the assets betterment statement was misconceived, said:

``This is not difficult to understand when one considers the complexity of the factors that had to be taken into account in his case. I think, too, that some of the terminology used by the Commissioner in what has become familiar to the Board as an `Assets Betterment Statement' may tend to give rise to misconceptions in the minds of those whose painful task it is to interpret them. My point may best be illustrated by referring to the documents at folios 1076 to 1084 of Exhibit A, and

ATC 4774
particularly to folio 1076. That folio is headed `Amended Assets Betterment Statement'. If the document went no further than half way down the page to `Increase in Net Assets' the heading would accurately describe its contents, but it proceeds to embody further calculations which culminate in what is described or, I prefer to say, misdescribed as `betterment income'. The figure arrived at is in reality `taxable income', and while to the Commissioner `a rose by any other name may smell as sweet', the term `betterment income' is one unknown to the Income Tax Assessment Act, whereas the term `taxable income' is meaningful and precise. I have the impression that the misdescriptions to which I refer played some part in leading the taxpayer into a labyrinth of misunderstanding. The whole document could, perhaps, better be entitled `Calculations of unassessed taxable income' and the expression `betterment income' be changed to `taxable income'. The word `discrepancy' could then become `unassessed taxable income' and the true purpose of the document would be clearer....

A layman may understandably be puzzled by the mass of figures set out in an `Assets Betterment Statement' and unless the underlying accounting philosophy is understood the process of adding certain items and deducting others can be the source, as in the present case of basic misconceptions.''

(72 ATC at p. 300.)

There is real substance in those criticisms of the form and terminology of the document. In each of the sections headed ``Add'' and ``Deduct'' there are congregated together a large number of items which are added or deducted for entirely different reasons. To look for a common principle which justifies the additions or deductions is to look for something which does not exist.

In my opinion, fairness to taxpayers requires the Commissioner to alter and improve these documents and take steps which would facilitate their understanding by taxpayers. The document would be easier to understand if the document itself and the concepts used in it were given names which were not prone to mislead and which accurately gave some indication of the nature of the document and the concepts. It would be an improvement if the document showed the various processes which had been followed in its construction, so that the intelligent reader could discover why it was that particular items had been treated in the way in which they had. Some consideration could be given to incorporating or attaching an explanation of the nature and operation of the document and of the reasons for making the various adjustments.

While fairness to taxpayers would, of itself, justify alteration and improvement of these documents, there would also be advantage to the Commissioner. A document too obscure for a taxpayer to comprehend, may in some cases prove insufficient to raise an inference that the taxpayer, by his silence or inaction, admits the correctness of the information in the document.

RESULT OF APPEAL: The result of the appeal is:

(a) as to the profit on the sale of the seven properties, the appeal is allowed in respect of No. 405 Bridge Road, Richmond and is otherwise dismissed;
(b) as to the instalments forfeited upon ``rescission'' of contracts, the appeal is dismissed; and
(c) as to the sum of $29,636 (£14,818) assessed by the Commissioner as income received from unidentified sources, the appeal is allowed to the extent of $4,000 (£2,000) and is otherwise dismissed.

As requested by the parties at the hearing, I leave it to them to agree on the precise terms of the order which should be made in view of my decisions, with liberty to apply to me in the event of there being any disagreement between them on those terms.

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