Case T104

Members:
PM Roach SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 10 December 1986.

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P.M. Roach (Senior Member)

During the 1970s the State of Tasmania realigned sections of the Midlands Highway which extends from Hobart to Launceston. One section of the realigned road traversed farming lands owned by ACO, a company controlled by a substantial primary producer. ACO was the applicant on this reference. On 18 August 1978 ACO and the State Minister administering the Lands Resumption Act (Tasmania) agreed for the sale of portion of ACO's land to the Crown for a price of $43,000. By that agreement ACO consented to the lands (and a related easement) being vested at the option of the Minister in Her Majesty the Queen by registration of a notification under sec. 13 of the Lands Resumption Act 1957. By the agreement the Minister undertook on behalf of the Crown to deal with such matters as fencing; provision of stock routes; and limited access roads. In addition it was expressly provided:

``7. The Minister hereby agrees to pay the scale legal costs and one valuation fee incurred by the Vendor Company in the performance in its part of this Agreement.

8. The Minister hereby agrees to pay interest on the compensation at the rate of 5% per annum from 17th July 1974 to 30th November 1976 and thereafter to the date of settlement at the statutory rate.''

(Prior to its amendment in 1976 the Lands Resumption Act had provided that compensation under the Act would bear interest at the rate of 5% per annum. By an amendment of 1976 the rate was changed to ``the long term bond rate'' which at all material times thereafter was 7.6%.)

2. On 3 October 1978 settlement was effected pursuant to the agreement when there was paid to ACO by the Crown $56,732.39 made up as follows:

                                                              ``$
      Agreed compensation                                   43,000.00
      Settled vendor's costs                                 1,850.00
      Valuation fees payable to                                782.50
      Interest on $43,000 from 17/7/74 to 30/11/76
        at 5% (2 years 136 days)                             5,101.10
      Interest on $43,000 from 1/12/76 to 2/10/78
        at 7.6% (1 year 305 days)                            5,998.79
                                                           ----------
               Total                                       $56,732.39
                                                           ----------''
        

3. The company in its return of income for the year ended 30 June 1979 calculated a nil taxable income but the Commissioner assessed ACO as having a taxable income of $11,099 treating ``interest received'' as assessable income. The Commissioner also imposed a liability for additional tax for an incorrect return in the sum of $893. ACO objected. At the hearing it was acknowledged that the Tribunal had no power to review the additional tax imposed although it was also agreed that the imposition of additional tax would be set aside automatically if the assessment of increased taxable income was itself set aside.

4. The history of the matter explains the making of the agreement as to the payment of interest. In 1974 the Crown requested permission to enter upon the lands of ACO in order to construct the road within an identified part of ACO's land and thereby realign the highway. The Crown expected to become owner of those lands in due course and that it would use its powers of compulsory acquisition pursuant to the Lands Resumption Act should that be necessary. That acquisition could have been instituted at any time with the issue of a notice to treat but the Crown preferred not to do so. Conversely ACO, in common with most affected landowners, preferred to consent to the

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ATC 1186

Crown's entry rather than precipitate more formal action. That being so on 17 July 1974 an officer of the company in his capacity as a director of the company gave permission to the Director of Public Works to enter upon the lands of ACO. That permission was conferred in the following terms:

``Dear Sir,

I/We (Name of Director) in response to your request for permission to enter upon land owned by me/us at K for the purpose of road construction which land you propose to acquire from me/us, I/We the owner(s) undersigned hereby grant permission for you to so enter and construct expressly reserving however, all rights accruing to me/us for damage already accrued and all rights whatsoever under and by virtue of the Lands Resumption Act 1957 as amended or any other Act.

Interest on the compensation will be paid at the rate of 5% per annum from the date stated below.''

The document was signed by the Director. His signature was witnessed and the address, date and plan number were also identified.

5. During the years following there were negotiations in the course of which both sides reviewed their positions from time to time particularly in the light of changed perceptions of significant factors such as the detrimental effect roadworks had on the surface water system; the restrictions arising from limited access roads particularly as affecting possible future development; changing land values; and so on. At a late stage questions in fact arose as to whether the issue of a notice to treat only after road construction had been completed would entitle the landowner to be compensated on the basis that the land value was to be determined only after taking into account the ``value'' of the newly constructed roadworks.

6. All of these issues were resolved upon the parties entering into the agreement of August 1978. The question for determination by the Tribunal is whether the amount agreed to be paid and which was paid as ``interest'' constitutes assessable income.

7. In my view it does. For ACO it was contended that the ``permission'' of 1974 gave rise to no contractual entitlements in ACO to interest in any particular sum or at all. I accept that. In my view ``permission'' did not oblige the Crown to construct the highway or to acquire the lands in question pursuant to the Lands Resumption Act or otherwise. In my view the ``permission'' is of significance only in so far as it tends to explain what later happened. I am satisfied that what later happened was that the agreement entered into accurately reflected the intentions of the parties at the time it was entered into. Further in its turn it was a fulfilment of expectations broadly held since 1974. In its final form the agreement was that the land would be sold by ACO to the Crown for $43,000; that ACO would be compensated for costs incurred in relation to securing the services of solicitors and a valuer to the extent provided by the agreement; that the Crown would provide for such matters as boundary fencing and stock routes; and that, as foreshadowed in 1974, the occupation of the relevant land and its use by the Crown since that time pursuant to the permission to the exclusion (so far as effective) of ACO would be compensated for by the payment of interest. For the applicant it was contended that one should have regard to the ``substance'' of the matter and that upon doing so it would become clear that the moneys received constituted a lump sum received as compensation for the loss of a capital asset. One can well understand that that might have been the case but upon the evidence it was not so. The bargain between the parties which found expression in the agreement of August 1978 did not provide for the payment of a single undissected lump sum in full satisfaction of all claims by ACO. It provided for the payment of a particular price for the land and it provided for the payment of interest in relation to the period during which the Crown had been entitled to enter upon and occupy the lands in question.

8. If any authority were needed to provide support for that conclusion it would be sufficiently provided by the decision of Rich J., in
Federal Wharf Co. Ltd. v. D.F.C. of T. (1930) 44 C.L.R. 24 at p. 28. Although, as was correctly pointed out by counsel for ACO the particular circumstances giving rise to the payment of interest in that case could be distinguished, none the less there was no distinction in principle. I adapt the words of his Honour to the circumstances of this case and say:

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ATC 1187

``In my opinion, the character of the interest payable... is that of recompense for loss of the use of the land being capital during a period of time in which it would earn income. It represents the annual value of capital. It is paid because the owner has been deprived of the use of a capital asset which he had and has not received the fund which is to be substituted for the capital asset. The interest is the flow of that fund. In my opinion it is income.''

9. I affirm the determination of the Commissioner upon the objection.

Claim disallowed