Case V154

Members:
RA Balmford SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 11 October 1988.

R.A. Balmford (Senior Member)

Introduction

This is an application for review of a decision of the respondent, made on 3 August 1982, disallowing an objection by the applicant, Z Pty. Ltd., made on or about 23 July 1981, to the assessment of its taxable income for the year ended 30 June 1980. The applicant requested on 24 August 1982 that the decision on the objection be referred to a Board of Review. The respondent complied with that request on 30 January 1986. By virtue of sec. 223(1) of the Taxation Boards of Review (Transfer of Jurisdiction) Act 1986 (``the Transfer of Jurisdiction Act'') and subsec. 189(2) of the Income Tax Assessment Act 1936 (``the Assessment Act'') that referral of the decision on the applicant's objection is deemed to constitute the making by the applicant of an application to this Tribunal for review of the decision.

2. The Tribunal had before it the documents lodged by the respondent pursuant to sec. 37 of the Administrative Appeals Tribunal Act 1975 (``the AAT Act'') as modified by sec. 14ZG of the Taxation Administration Act 1953 (``the Administration Act'') and numbered T1 to T8, together with extensive documentary material lodged by the parties at the hearing. Evidence was given by Dr J, a medical practitioner who was at the relevant time a director of Z Pty. Ltd., Mr H, an accountant, and Mr E, a farm hand, all of whom were called by the applicant, and Mr R, a taxation officer, Mr O, a surveyor, Mr A, a builder and land developer, and Mr B, a valuer, all of whom were called by the respondent. The applicant was represented at the hearing by Mr Pagone of counsel and the respondent by Mrs Moshinsky of counsel.

The grounds of objection

3. The applicant's objection, dated 23 July 1981, was contained in a letter (document T4) written by a firm of accountants who at the time acted for the applicant. Omitting formal parts, it reads as follows:

``We have been notified by the directors of the above Company that they wish to object against the assessment as raised.

An adjustment sheet issued bringing in profit on sale of land of $220,183 as part of taxable income. The land in question has been part of a farming property which was purchased during the financial year ended 30th June, 1968. The property at that stage was zoned for rural purposes and has been operated for primary production purposes since that date.

Under Section 26 of the Income Tax Assessment Act, there was no intention whatsoever of using this property for any other purpose other than primary production. Moreover the only reason that the land has been sub-divided recently was to provide liquidity for farming purposes. It should also be noted that during this period the property has been zoned for rate purposes as land being used for rural or farming purposes only.

It is common knowledge that over recent years primary producers have suffered very much due to the vagaries of flood, drought and low prices for livestock. These in turn have caused liquidity problems.

Since the above reasons present evidence to show that the assessment is incorrect, we ask that the necessary amendment be made as soon as possible.

In the meantime we request that no payment of tax be sought, as in actual fact there are carry forward losses as well as those for the year ended 30th June, 1980. It is also requested that this letter be regarded as a formal objection against the assessment.''

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4. A preliminary conference pursuant to sec. 34 of the Administrative Appeals Tribunal Act 1975 was held on 30 March 1988. On 28 June the applicant served on the respondent and lodged with the Tribunal a document headed Clarification of Grounds of Objection (``the clarification''). The first two paragraphs of that document read:

``A. That neither the amount of $220,183 nor any part thereof being profit on sale of land at (Redcreek) is assessable income pursuant to section 25(1), section 26(a), section 26AAA, or any provision of the Income Tax Assessment Act 1936 (as amended) (`the Act')

B. That pursuant to section 80 of the Act an amount of $131,523 or such other amount as is proper was deductible in the year of income in respect of carry forward losses.''

The clarification then listed a number of ``grounds upon which reliance is placed in respect of claim A above'' and a number of ``grounds upon which reliance is claimed in respect of claim B above''.

5. Mrs Moshinsky submitted at the outset that the applicant, by lodging the clarification, was seeking not to clarify, but to extend, the grounds stated in its objection. The Commissioner would not oppose the extension of grounds in respect of claim A, but would oppose the inclusion of claim B as a ground of objection.

6. Mr Pagone sought, but failed, to persuade the Tribunal either that claim B had been included in the applicant's objection (document T4) or that, on other grounds, it was not necessary for him to apply for an extension of the grounds of his client's objection.

7. Having failed in those endeavours, Mr Pagone formally applied, on behalf of his client, for the clarification and document T4 jointly to become the applicant's objection. In response to that application, the Tribunal ordered, pursuant to sec. 190(a) of the Assessment Act, that the grounds of the applicant's objection should include the matters set out in both those documents. The Tribunal indicated that reasons for that order would be given with its reasons for decision on the substantive application. It is convenient to treat the question as though it had, from the outset, arisen as a result of the formal application by Mr Pagone.

8. The relevant provisions of the Assessment Act are:

``6(1) In this Act, unless the contrary intention appears -

  • `assessment' means -
    • (a) the ascertainment of the amount of taxable income and of the tax payable thereon; or...

    `Tribunal' means the Administrative Appeals Tribunal;

185(1) A taxpayer dissatisfied with any assessment under this Act may, within 60 days after service of the notice of assessment, lodge with the Commissioner an objection in writing against the assessment stating fully and in detail the grounds on which he relies.

(2) Where an assessment has been amended in any particular, the right of a taxpayer to object against the amended assessment is limited to a right to object against alterations or additions in respect of, or matters relating to, that particular.

(3)...

186 The Commissioner shall consider the objection, and may either disallow it, or allow it either wholly or in part, and shall serve the taxpayer by post or otherwise with written notice of his decision.

187 A taxpayer who is dissatisfied with a decision under section 186 on an objection by the taxpayer may, within 60 days after service on the taxpayer of notice of the decision, lodge with the Commissioner, in writing, either -

  • (a) a request to refer the decision to the Tribunal; or
  • (b) a request to refer the decision to the Federal Court.

(1) Where a taxpayer duly lodges, or is to be treated as having duly lodged, a request under section 187, the Commissioner shall comply with the request.

(2) The referral of a decision on an objection to the Tribunal shall, for the purposes of the Administrative Appeals Tribunal Act 1975, be deemed to constitute the making by the taxpayer of an application to the Tribunal for review of the decision.

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190 In proceedings under this Part on a review by the Tribunal or on appeal to a court -

  • (a) the taxpayer shall, unless the Tribunal or court otherwise orders, be limited to the grounds stated in his objection; and (emphasis added)
  • (b) the burden of proving that the assessment is excessive shall lie upon the taxpayer.''

9. The passage emphasised in sec. 190(a) was inserted in the section (with another amendment not here significant) by sec. 81 of the Transfer of Jurisdiction Act, with effect from 1 July 1986. The Tribunal has considered on several occasions the effect of sec. 190(a) as so amended. It does not appear that the question has yet been considered by the Federal Court.

10. The first decision on the point appears to be Case U47,
87 ATC 326. In that case the Tribunal, constituted by Mr Roach, Senior Member, allowed the amendment of the grounds stated in the objection, and said at para. 17 [at p. 331]:

``As the Commissioner's representative advised that the Commissioner was not taken by surprise and would not be inhibited in the presentation of his case; and as I considered the amendment necessary to enable justice to be done, I have allowed the amendment.''

11. In Case U159,
87 ATC 930, a Tribunal constituted by Mr Trowse, Member, also allowed an amendment, saying, at para. 14 [at p. 933]:

``On this same issue, the question finally emerged as to whether, bearing in mind the absence of any specific reference to sec. 59 in the objection, the applicant should be permitted to rely upon that section in the presentation of his case. In considering this matter, it is notable that the Commissioner had referred to that section in his regulation 35 statement, the purpose of which is to indicate the reasons for the disallowance of the applicant's claim, and that his representative at the hearing had come prepared to make submissions on this issue. It should be appreciated that sec. 190 of the Assessment Act was amended by sec. 81 of the Taxation Boards of Review (Transfer of Jurisdiction) Act and that in terms of that amendment this Tribunal has a discretion to extend the grounds of objection. The purpose of that change is to ensure that justice prevails as between the parties, and in my view such discretion should generally be exercised in favour of taxpayers unless it can be demonstrated that the Commissioner will be prejudiced by that decision. In this reference, it is apparent that the Commissioner has suffered no disadvantage in the presentation of his case and I am not able to perceive any reason for the denial of the applicant's request. On that basis I have allowed the extension.''

12. With respect, I am in full agreement with the principles stated by both Tribunals, in more detail by Mr Trowse, as to the basis upon which the discretion conferred by the amendment of sec. 190(a) should be exercised.

13. In the present case, Mrs Moshinsky did not suggest that the respondent would be in any way disadvantaged in the presentation of his case by the extension of the grounds of the applicant's objection. From at least 28 June 1988, the date of service of the clarification, which was over a month before the commencement of the hearing of this matter, the respondent had been aware of the issues therein raised. I am satisfied that the granting of the application for amendment of the grounds of objection would enable justice to be done between the parties.

14. However, Mrs Moshinsky relied on Case V49,
88 ATC 381, in which the Tribunal, again constituted by Mr Roach, considered that it did not have power to extend the applicant's grounds of objection. After setting out the applicant's request for an amendment of his grounds of objection, and pointing out that it had been raised only at the hearing, and thus if had been granted, it would have been necessary to adjourn the hearing to enable the respondent's representative to prepare, the Tribunal continued (at pp. 386-387):

``However, there is an insuperable obstacle. For 50 years prior to 1 July 1986, the procedural rules for the conduct of tax litigation were so harsh that taxpayers were always strictly bound to the grounds of their objection as cast in the strictly limited period of 60 days following service of the disputed notice of assessment. Once those

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60 days had passed there could neither be any extension of time to permit the raising of new issues nor any relief from the provision strictly binding a taxpayer to the grounds of his objection. From 1 July 1986 relief from both of those rules came to be available. Firstly, power was conferred upon the Tribunal to extend time for objecting (and also the time for requesting reference for independent review). Secondly, because it is now provided that the applicant will not be held to the grounds of his objection if `... the Tribunal otherwise determines...' (sec. 190). However, even then, the Parliament acted in such a way as to ensure that in some instances the claims which had occasioned so much injustice in the past would continue to operate and, as here, could occasion injustice. It was provided by sec. 221 of the Taxation Boards of Review (Transfer of Jurisdiction) Act 1986 that the power to extend time
  • `does not apply in relation to an assessment, decision or determination if the period within which, apart from the amendments made by this Act, an objection or request, as the case may be, of the kind mentioned in that section could have been lodged with the Commissioner in relation to the assessment, decision or determination had ended before that day.'

As a result, the Tribunal has no power which would authorise an extension of time to permit a fresh objection to be lodged to place this matter in issue. Even if it had that power, that would require that the objection be cast up and presented to the Commissioner so that he might consider it, because it would only be after the Commissioner had considered and disallowed such an objection, that a request for reference for independent review by this Tribunal could be made. Of course, such an extension of time would not be necessary if the Tribunal could simply exercise power which would have the effect of permitting the applicant to amend his objections to raise entirely new issues and then to permit amendment of the `grounds of objection' in order that he might be provided with the relief he seeks. However, the view I have of that matter is that the first power does not exist. The power which the Tribunal has to amend is not a power to enable the scope of the relief sought to be enlarged but only the amendment of grounds upon which relief which has been sought should be allowed.''

15. In Case V102,
88 ATC 657, which was unreported at the date of the hearing, the Tribunal, again constituted by Mr Roach, after referring to Case V49, went on to say (at pp. 663-664):

``The Act makes provision for taxpayers to challenge assessments raised by the Commissioner. To do so it is necessary that they should object in writing. The objection should identify what is objected to: in this instance stated to be the non-allowance of a deduction for $17,135 in respect of `repairs'; and why: the specification of grounds of objection. In that way the Act provides the Commissioner with an opportunity to reconsider his assessment and it obliges him to determine whether to `disallow it, or allow it either wholly or in part...' (sec. 186). If dissatisfied with the Commissioner's decision on the objection, the applicant may request an independent review before this Tribunal of the Commissioner's decision on the objection, the applicant may request an independent review before this Tribunal of the Commissioner's decision upon the objection. The Tribunal does not have power to review anything else. Alternatively, the applicant may request that his objection be treated as an appeal and forwarded to the Court (sec. 187(1)). Prior to 30 June 1986 the taxpayer was `limited to the grounds stated in his objection'. Since that date the Tribunal or the Court, as the case may be, has a discretion not to so limit the applicant `to the grounds stated in his objection'. In my view, bearing in mind that the object of the assessment and of the review and appeal process is, so far as the law allows, to achieve a correct assessment of taxable income, there is much to be said for the liberal exercise of the discretion not to restrict applicants `to the grounds of their objection'. But, on the other hand, the power to relieve should not be so exercised as to defeat the structure of the review process.

In my view it is a prerequisite to the exercise of the power to review that the Commissioner must have had an opportunity to consider the issue sought to be raised. In this instance, there was nothing in

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the objection to suggest to the Commissioner that the applicant was contending that the Commissioner should have allowed a deduction by way of investment allowance. On the material before me, that proposition was only first advanced by the solicitor for the applicant when he assumed responsibility for the matter. (He was not the person who had drawn the notice of objection.) In those circumstances, I am of opinion that there is no power in this Tribunal to grant relief in relation to any matter of investment allowance. No such relief was explicitly sought in the objection and no such claim to relief was implicit in the issues which were raised.''

16. If those decisions are correct, I have no jurisdiction to extend the grounds of objection in the manner requested by the applicant. Having considered the matter. I have formed the view that those decisions are not correct. I say this, bearing in mind the need for consistency in decisions of the Tribunal, and the considerable respect which is due to decisions of the learned Senior Member. It is appropriate, having reached this conclusion, that I set out my reasons therefor at some length.

17. The Tribunal's jurisdiction to review decisions made under the Assessment Act arises by virtue of subsec. 25(1) of the AAT Act. Subsection 25(3) and para. 25(6)(b) are also relevant. Those provisions read:

``25(1) An enactment may provide that applications may be made to the Tribunal -

  • (a) for review of decisions made in the exercise of powers conferred by that enactment; or
  • (b) for review of decisions made in the exercise of powers conferred, or that may be conferred, by another enactment having effect under that enactment.

(3) Where an enactment makes provision in accordance with sub-section (1), that enactment -

  • (a) shall specify the person or persons to whose decisions the provision applies;
  • (b) may be expressed to apply to all decisions of a person, or to a class of such decisions; and
  • (c) may specify conditions subject to which applications may be made.

(6) Where an enactment provides for applications to the Tribunal -

  • (a)...
  • (b) that enactment may also include provisions adding to, excluding or modifying the operation of any of the provisions of sections 21, 21A, 22, 27, 29, 32, 33 and 35 or of sub-section 41(1) or 43(1) or (2) in relation to such applications, and those sections and sub-sections have effect subject to any provisions so included.''

18. Part IVB of the Administration Act is headed ``Review of Decisions by Administrative Appeals Tribunal''. Section 14ZC provides in effect, so far as relevant;

``The provisions of [the AAT Act] apply in relation to the review of objection decisions... subject to the modifications set out in sections 14ZD to 14ZK, inclusive.''

By virtue of the definition of ``objection decision'' in sec. 14ZB of the Administration Act, that expression refers to (inter multa alia) a decision of the respondent on an objection under sec. 185 of the Assessment Act.

19. Sections 14ZD to 14ZK of the Administration Act exclude or modify the operation, in relation to applications for review of objection decisions. of sec. 27, 28, 29, 30, 35, 37, 38, 41, 43, 44A of the AAT Act. The effect of those exclusions and modifications is considerable. When it passed the Transfer of Jurisdiction Act, Parliament conferred on the Tribunal the power to hear and determine applications for review of objection decisions on the basis of the AAT Act as, for that purpose, amended by those provisions. It must be assumed that in so doing, Parliament intended the hearing and determination of those applications for review to be otherwise performed (subject to specific statutory provisions such as both paragraphs of sec. 190 of the Assessment Act) in accordance with the procedures and practices which, since its establishment in 1975, the Tribunal has developed in connection with applications arising under a large number of other enactments.

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20. It is appropriate to refer to the well-known decision of the Full Court of the Federal Court in
Drake v. Minister for Immigration and Ethnic Affairs (1979) 2 A.L.D. 60. At pp. 68-70 Bowen C.J. and Deane J. said:

``The function of the Tribunal is, as we have said, an administrative one. It is to review the administrative decision that is under attack before it. In that review, the Tribunal is not restricted to consideration of the questions which are relevant to a judicial determination of whether a discretionary power allowed by statute has been validly exercised. Except in a case where only one decision can lawfully be made, it is not ordinarily part of the function of a court either to determine what decision should be made in the exercise of an administrative discretion in a given case or, where a decision has been lawfully made in pursuance of a permissible policy, to adjudicate upon the merits of the decision or the propriety of the policy. That is primarily an administrative rather than a judicial function. It is the function which has been entrusted to the Tribunal.

The question for the determination of the Tribunal is not whether the decision which the decision-maker made was the correct or preferable one on the material before him. The question for the determination of the Tribunal is whether that decision was the correct or preferable one on the material before the Tribunal. The Act offers little general guidance on the criteria and rules which the Tribunal is to apply in the performance of its task of reviewing administrative decisions which are subjected to its surveillance. Even in a case such as the present where the legislation under which the relevant decision was made fails to specify the particular criteria or considerations which are relevant to the decision, the Tribunal is not, however, at large. In its proceedings, it is obliged to act judicially, that is to say, with judicial fairness and detachment. In its review of an administrative decision, it is subject to the general constraints to which the administrative officer whose decision is under review was subject, namely, that the relevant power must not be exercised for a purpose other than that for which it exists (
Water Conservation & Irrigation Commission v. Browning (1947) 74 C.L.R. 492 at 496, 498, 499-500, 504), that regard must be had to the relevant considerations, and that matters `absolutely apart from the matters which by law ought to be taken into consideration' must be ignored:
R v. Cotham [1898] 1 Q.B. 802 at 806;
Randall v. Northcote Corp. (1910) 11 C.L.R. 100 at 109-110;
Shrimpton v. Commonwealth (1945) 69 C.L.R. 613 at 620;
R v. Anderson; Ex parte Ipec-Air Pty. Ltd. (1965) 113 C.L.R. 177 at 189; [1965] A.L.R. 1067 at 1071.''

and Smithers J. said at p. 77:

``It might be thought that it would be open to the Administrative Appeals Tribunal not to decide for itself whether a decision made by an administrator was the right decision which ought to have been made in the circumstances but rather to satisfy itself that the decision of the administrator was one which an administrator acting reasonably might have made. But to do this would be to review the reasons for the decision rather than the decision itself. It is the actual decision which by virtue of s. 25(1) and (4) of the Administrative Appeals Tribunal Act the Tribunal is authorised and required to review. The duty of the Tribunal is to satisfy itself whether a decision in respect of which an application for review is duly instituted is a decision which in its view, was objectively, the right one to be made. Merely to examine whether the administrator acted reasonably in relation to the facts, either as accepted by him or as found by the Tribunal may not reveal this.''

21. Also relevant to the attitude to be adopted in these matters is the following discussion of the meaning of ``decision'' in the AAT Act by Deane J., with whom Fisher J. agreed, in
Director-General of Social Security v. Chaney (1980) High Ct & Fed. Ct Practice ¶65-034 at p. 96, 280; (1980) 3 A.L.D 161 at pp. 178-179:

``Section 3(3) of the [AAT] Act defines a reference in the Act to a `decision' as including a reference to a litany of activities of both a positive and negative nature culminating in `doing or refusing to do any other act or thing'. The provisions of sec. 3(3) would seem more apposite to define a reference to the substantive `decision' of the

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original decision maker than to confine the scope of a reference to a `decision' of the Tribunal upon review. Subject to that qualification, the specific activities mentioned in the definition in sec. 3(3), which are in the nature of effective action rather than intermediate `decision' on the path to such action, provide some indication that a reference to `decision' in the Act is, prima facie, a reference to the ultimate or operative determination rather than a reference to an adjudication or determination of issues arising in the course of making such an ultimate or operative determination. The indication which sec. 3(3) provides to that effect is, however, slight.''

After referring to that passage, Lockhart J. in
Director-General of Social Security v. Hales (1983) 5 ALN N162 at N163-164 said:

``The Administrative Appeals Tribunal has jurisdiction to review decisions made in the exercise of the powers conferred by particular statutes not by the Administrative Appeals Tribunal Act itself. Those statutes are many and diverse. They include the Social Services Act 1947, the Migration Act 1958, the Compensation (Commonwealth Government Employees) Act 1971, the Repatriation Act 1920, the Customs Act 1901, and the Insurance Act 1973. Each of the statutes conferring jurisdiction on the Administrative Appeals Tribunal covers a wide range of decisions.

The definition of `decision' in sub-section 3(3) seeks to embrace them all by its ambulatory character. One cannot therefore look to the definition in sub-section 3(3) to determine definitively the meaning of the word `decision'. It must take its colour and content from the enactment which is the source of the decision itself. No narrow or pedantic approach is called for in determining whether a decision falls within the scope of review by the Administrative Appeals Tribunal. The multiplicity of statutes which continue to grow and to confer jurisdiction on the Administrative Appeals Tribunal, and the manifold and diverse circumstances which attract the power of the decision-maker, all call for a liberal approach to the definition of the word `decision', although it is important to bear in mind the warning of the late Professor de Smith in his work Judicial Review of Administrative Action 4th ed. 1980 at 3: `Judicial review of administrative action is inevitably sporadic and peripheral. The administrative process is not, and cannot be, a succession of justiciable controversies. Public authorities are set up to govern and administer, and if their every act or decision were to be reviewable on unrestricted grounds by an independent judicial body the business of administration could be brought to a standstill. The prospect of judicial relief cannot be held out to every person whose interests may be adversely affected by administrative action.'.''

22. I would also refer to the following passage from the decision of Wilcox J. in
Commonwealth of Australia v. Ford (1986) 65 A.L.R. 323 at pp. 329-330:

``It is difficult not to feel critical of the course taken by the Commonwealth in the present case. The purpose of administrative review is to provide a relatively speedy, informal and inexpensive method of reviewing administrative decisions of public officers which touch upon private interests. The process of review ought not to be complicated or delayed by technicalities. By the time that the matter first came before the tribunal the Commonwealth had known for 12 months of Ms Ford's new employment. It had received several medical reports relating to her fitness for work. The officers concerned were in a position to form a view as to whether her claim of partial incapacity was justified. If, upon the material before them, the relevant officers had reached the conclusion that the claim of partial incapacity was not well founded, the claim could - and should - have been resisted on the merits. A formal determination of no partial incapacity could have been made if this had been thought administratively desirable. Nothing was to be gained by taking a technical point based upon the lack of a relevant determination to that date. The only effect of that point being upheld would be to force Ms Ford to re-commence proceedings in the tribunal and to wait an additional few months for the claim to be resolved.

If, on the other hand, the officers had been satisfied that Ms Ford was entitled to compensation for partial incapacity, the

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proper course - both in fairness to the claimant and to minimise expense to the Commonwealth - was to arrange for a consent order to that effect by the tribunal. This could have been done at any time; being preceded if thought necessary by a new formal determination.''

23. It is against the background of judicial pronouncements of that kind as to the nature of administrative review before this Tribunal, and the manner of its performance, that the issue before me should be considered. It will be observed that those pronouncements were made in connection with applications for review made under three different enactments conferring jurisdiction on the Tribunal; the Migration Act 1971 (Drake), the Social Security Act 1947 (Chaney and Hales) and the Compensation (Commonwealth Government Employees) Act 1971 (Ford). In the absence of statutory prescription, or directions as to specific matters of practice, the jurisdiction of the Tribunal to hear and determine applications for review is exercised according to the same principles under every enactment which confers jurisdiction upon it.

24. Paragraph 29(1)(c) of the AAT Act requires that an application to the Tribunal for a review of a decision shall set out a statement of the reasons for the application. Form 1 of the forms in Sch. 1 to the Administrative Appeals Tribunal Regulations (S.R. No. 141 of 1976 as amended) is prescribed by reg. 5(1) as the prescribed form for the purposes of para. 29(1)(b) of the AAT Act; i.e. for the making of an application for review. That form includes a paragraph for completion by the applicant beginning ``The reasons for this application are...''. However, in the hearing of an application for review, and in the Tribunal's reasons for decision, that paragraph of the application for review is rarely, if ever, referred to.

25. In
Re Greenham and Minister for Capital Territory (1979) 2 A.L.D. 137 at pp. 141-142 the Tribunal, presided over by Mr Hall, Senior Member (as he then was) said:

``It is not just the reasons for the decision which are under review, however important to the Tribunal's deliberations those reasons may be. In reaching its decision, the Tribunal is not restricted to the material that was before the decision-maker any more than the decision-maker himself is so restricted. The decision-maker may adduce evidence that was not available to him when he made his decision and he may, in the light of that evidence, or upon re-consideration of the decision, even abandon or modify the reasons upon which he originally relied.

The absence of a hearing before the decision-maker and the Tribunal's powers to gather evidence make it unthinkable that the Tribunal should be limited to the material before the decision-maker; see
Builders Licensing Board (N.S.W.) v. Sperway Constructions (Sydney) Pty. Ltd. (1976) 51 A.L.J.R. 260 at 262, 264 and
Sagnata Ltd. v. Norwich Corporation [1971] 2 Q.B. 614 at 636 and 640.

Far less, in our view, are the reasons set out by an applicant in the application for review the primary focus of the Tribunal's consideration. True it is that those reasons may form an important part of the Tribunal's consideration, but the scope of the review function exercisable by the Tribunal is no more limited on the one hand by the statement of reasons of the decision-maker than it is on the other by the statement of reasons lodged by an applicant. It is the decision itself which falls for review in the light of the reasons advanced by the decision-maker and the applicant, together with any other facts, circumstances or considerations which are relevant to the decision under review and which emerge during the Tribunal's consideration of that decision.

The function of this Tribunal is administrative review. In contrast with judicial proceedings, pleadings and the rules of evidence form no part of the procedures of the Tribunal: see s. 33 of the Act. Were it otherwise, one of the important objectives of administrative review in allowing access to the Tribunal by an unrepresented citizen whose `interests are affected' by the decision under review might be endangered or frustrated. Some applicants may lack the requisite ability or the knowledge to be able to express in precise terms the reasons for their dissatisfaction with a particular decision. But they are not, on that account, to be denied the opportunity of presenting their case to the Tribunal. Neither should this Tribunal be inhibited in its review

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functions by any inadequacy in the expression of the reasons for review or any lack of understanding by an applicant of the relevant issues.

...

Unless, in relation to a particular jurisdiction, there is an express limitation either upon the grounds which an applicant may raise or the grounds which the Tribunal may consider, we do not consider that the Tribunal is precluded from considering any matter which is relevant to the decision under review. It will be a matter for the Tribunal to determine in each case whether, in the light of the whole of the evidence before it, it is appropriate that the decision should be reviewed.''

26. Those passages were expressly approved by the Tribunal, constituted by Mr Todd, Senior Member (as he then was) in
Re Metherall and Minister for Capital Territory (1979) 2 A.L.D. 246. The principle there enunciated has been consistently applied, in decisions of the Tribunal, under a large variety of enactments up to the present. The decisions in Greenham and Metherall are rarely, if ever, cited; no doubt because the principle thereby established has become so fundamental a part of the approach of the Tribunal to the hearing and determination of applications for review that the citation of authority therefor is regarded as superfluous. Indeed, it is rarely, if ever, seen as necessary to refer to the principle that the Tribunal is in no way limited by the reasons set out by the applicant in the application for review. In hearing and determining an application for review, the Tribunal, subject to the requirements of the legislation applicable to the particular case, does not artificially restrict the matters which it may take into account.

27. In conferring upon the Tribunal jurisdiction to review objection decisions under the Assessment Act, Parliament must be taken to have been aware of this principle, essential as it has been to the manner in which the Tribunal has carried out its functions throughout its existence.

28. The amendment to sec. 190(a) referred to in para. 8 (supra), empowering the Tribunal (or the Federal Court in the case of an objection decision referred to that Court) to extend the grounds stated in the applicant's objection, gives to the Tribunal or Court, as the case may be, a complete and unfettered discretion.

29. That discretion must be exercised according to the well-known principles enunciated by Kitto J. in
The Queen v. Anderson; Ex parte Ipec-Air Pty. Limited (1965) 113 C.L.R. 177 at p. 189:

``It is a general principle of law, applied many times in this Court and not questioned by anyone in the present case, that a discretion allowed by statute to the holder of an office is intended to be exercised according to the rules of reason and justice, not according to private opinion; according to law, and not humour, and within those limits within which an honest man, competent to discharge the duties of his office, ought to confine himself:
Sharp v. Wakefield [1891] A.C. 173 at p. 179.''

and by Dixon C.J. in
Klein v. Domus Pty. Ltd. (1963) 109 C.L.R. 467 at p. 473:

``We have invariably said that wherever the legislature has given a discretion of that kind you must look at the scope and purpose of the provision and at what is its real object. If it appears that the dominating, actuating reason for the decision is outside the scope of the purpose of the enactment, that vitiates the supposed exercise of the discretion. But within that very general statement of the purpose of the enactment, the real object of the legislature in such cases is to leave scope for the judicial or other officer who is investigating the facts and considering the general purpose of the enactment to give effect to his view of the justice of the case.''

The purpose of the provision in question, i.e. sec. 190(a) as amended, appears clearly from the extracts from Cases U47 and U159 which are set out in para. 10 and 11 (supra), and with which, as I have said, I am in full agreement.

30. Both counsel, in argument, referred the Tribunal to the explanatory memorandum which was circulated with the Bill which became the Transfer of Jurisdiction Act, thereby seeking to rely on subsec. 15AB(1) of the Acts Interpretation Act 1901. However, that material did not, in my view, have the effect required if para. 15AB(1)(a) is to permit consideration of extrinsic materials; and the provision in no way meets the requirements of

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para. 15AB(1)(b). Accordingly I have not given consideration to that material.

31. An examination of the provisions of Div. 2 of Pt V of the Assessment Act, relating to reviews and appeals, the relevant portions of which are set out in para. 8 (supra) leads to the conclusion that the discretion to extend grounds is wider than appears from the decisions in Cases V49 and V102.

32. Let the word ``item'' be used to describe the amount of assessable income shown in the taxpayer's return as derived from a single source such as, for example, dividends in a single company; salary from a specific employer; rents from a particular block of flats; or sales of lambs. The decisions in Cases V49 and V102 assume that if the taxpayer, in his objection, has objected to the inclusion in his taxable income of all or part of a particular item, and has set out the grounds on which he relies in respect of that objection, sec. 190(a) allows the Tribunal or Court as the case may be to extend the grounds on which he may rely in respect of his objection to that item, but that the section does not allow him to extend the grounds of his objection to refer to another item in the assessment.

33. ``Assessment'' is defined in subsec. 6(1) of the Assessment Act (subject to any contrary intention, which does not appear in any relevant context and omitting the reference to Pt VII tax, which is not here relevant) as ``the ascertainment of the amount of taxable income and of the tax payable thereon''. That definition describes two functions, the ascertainment of the amount of taxable income, and the ascertainment of the tax payable thereon. It happens that the present application concerns only the first function, the ascertainment of the amount of taxable income. But the two functions are defined as one single process. The only reference to a breakdown into parts of an assessment appears in subsec. 185(2), which refers to an assessment which ``has been amended in any particular''. The word ``particular'' is extremely wide and general, consistent with the origin of the respondent's power to amend an assessment, which derives from sec. 170 of the Assessment Act. It does not specify the nature of a ``particular'' or the criteria by which a ``particular'' may be defined.

34. Section 185 of the Assessment Act provides that ``A taxpayer dissatisfied with any assessment'' (that is, with the one, single, undivided process) may lodge ``an objection in writing against the assessment''; (again, one single undivided objection), and must state the grounds on which he relies. Section 186 requires the Commissioner to consider the objection and empowers him to ``either disallow it, or allow it either wholly or in part''. Section 186 thus assumes the possibility of the objection having separable parts; but the word ``part'' like the word ``particular'' is wide and general, and does not specify the manner in which the objection may be divided into parts or the criteria by which a ``part'' may be defined.

35. Section 190(a) refers to ``the grounds stated in his objection'': the objection is still one and indivisible; and to ``the burden of proving that the assessment is excessive''; the assessment is still one and indivisible.

36. In my view the word ``ground'', appearing as ``grounds'' in sec. 190(a), should not be read down to include the meaning which I have notionally given, in para. 32 (supra), to the word ``item''. To so read down that word is inconsistent with the whole attitude manifest in the provisions to which I have referred, that an ``assessment'' and an ``objection'' are not to be artificially subdivided, although an assessment may be amended in a ``particular'' and an objection allowed in ``part''. I consider that the power conferred on the Tribunal or the court by sec. 190(a) is a power to permit the taxpayer to extend the grounds of objection to the assessment so that they may include any matter which could have been included in the original objection (leaving on one side questions arising from changes in the law since the date of that original objection, with which I am not here concerned). That power is, of course, to be exercised according to the principles to which I have referred in para. 29 (supra).

37. It is, of course, fundamental that the respondent's representative should be in a position to respond, at the hearing of the matter, to all issues, whether of fact or law, which are raised by the applicant. If a new issue is raised at the hearing, justice may well require an adjournment to enable preparation of a response. However, the procedures of the Tribunal are designed to ensure, as far as possible, that both parties are aware well before the hearing of the matters to be raised, and that neither party is there taken by surprise. (It may

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be noted that in the present case, the clarification was served on the respondent after the holding of a preliminary conference, and more than one month before the hearing.) Further, the adding of a ground of objection which relates to a fresh ``item'' is not, from the point of view of the person preparing a response, necessarily significantly different from the raising of a new issue in respect of an ``item'' as to which an objection has already been made. The additional preparation required will not necessarily be greater in the former case than in the latter.

38. Thus, I do not agree with Mr Roach that an additional ground of objection which relates to a fresh ``item'' is ``a fresh objection'' and accordingly out of time; and if not out of time, in any case requiring consideration and disallowance by the respondent before reference to the Tribunal.

39. In a very recent decision, Re Cranswick and Repatriation Commission (No. 4522, decided on 29 July 1988) Deputy President Layton was concerned with a question as to whether the Tribunal had jurisdiction, under the Veterans' Entitlements Act 1986 (``the Entitlements Act''), to consider whether the applicant's condition of osteoarthritis of the right hip was war-caused, when that condition had not been reviewed by the Veterans' Review Board (``VRB''), which had considered only his psychiatric condition. The jurisdiction of the Tribunal in respect of disability pensions under the Entitlements Act is (to describe it briefly and imprecisely) a jurisdiction to review decisions of the Repatriation Commission which have been reviewed by the VRB (sec. 175 of the Entitlements Act). Thus there is a prescribed system of review of the primary decision before an application for review of that decision may be brought to the Tribunal under the Entitlements Act. That system of review is analogous to the requirement of consideration and disallowance of an objection by the respondent before an application may be brought to the Tribunal under the Assessment Act.

40. Deputy President Layton, after referring to the passage from Hales which is cited in para. 21 (supra), went on to say (and I think it is appropriate that I here quote at considerable length from her reasons for decision):

``The question which arises is whether the decision made by the Commission as to the two conditions of nervous disorder and osteoarthritis has, in fact, been reviewed by the Veterans' Review Board, given that the Board only referred to the nervous disorder in its evaluation of the applicant. In resolving this issue, it is beneficial to consider Court and Tribunal decisions made under various Acts involving similar problems of jurisdiction.

In
Re Repatriation Commission and Delkou (1986) 9 A.L.D. 358, an applicant sought review of an application made for increase in pension for an anxiety state. The applicant had previously lodged a claim for a back condition which had been rejected as war-caused and was the subject of a pending review before the Veterans' Review Board. The Tribunal decided that, in considering the applicant's application for an increase in pension due to an anxiety state which involved consideration of the Intermediate and Special rates of pension, it was necessary to have regard to the applicant's back condition. This was because of complex inter-action of the back condition and the anxiety state and also because the Tribunal was required to assess the incapacitating effects of his war-caused conditions separately from other incapacitating conditions.

The Tribunal did not review liability issues relating to the back condition and the facts which presented themselves were different from the facts in this case.

The Tribunal in Re Geaghan and Repatriation Commission S.85/165 (Decision 3101) considered the question of jurisdiction in relation to an application for increase in pension having regard to the applicant's accepted war-caused disabilities of anxiety neurosis and chronic bepharo conjunctivitis. At the review hearing, the applicant sought to have a condition of `macular degeneration' of his eye considered, notwithstanding that this had been the subject of a separate claim which had been rejected by the Repatriation Commission and had not yet been reviewed by the Veterans' Review Board. Having regard to the fact that the applicant was seeking a Special rate of pension, the Tribunal decided that evidence could be adduced as to the macular degeneration but not as to liability and whether or not it was

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war-caused. Again, the fact situation can be distinguished from the present case in that there was a separate claim and application.

Turning now to the jurisdiction of the Compensation (Commonwealth Government Employees) Act 1971. In the recent decision in Re Schueler and Australian National Railways Commission S.87/58 (Decision 4358) the Tribunal decided that as the Commissioner for Employees' Compensation was required under the Act to consider all aspects of the liability of the Commonwealth to pay compensation including all types of compensation, and as the Commissioner had failed to address fully certain aspects, the Administrative Appeals Tribunal could exercise its jurisdiction to review those aspects not addressed by the Commissioner.

There is some similarity between the Compensation (Commonwealth Government Employees) Act (supra), the Repatriation Act (supra) and the Veterans' Entitlements Act (supra) in that the relevant primary decision-makers are required to determine not only liability to pay either compensation or a pension but also the rate of such pension and the date of payment. However the Compensation (Commonwealth Government Employees) Act (supra) is different from the Repatriation Act (supra) and the Veterans' Entitlements Act (supra) in that pursuant to the Compensation (Commonwealth Government Employees) Act (supra) there is no intermediate step, namely, review by a secondary body (the Veterans' Review Board), which must be taken before this Tribunal has jurisdiction.

There is some similarity between the secondary review process of the Repatriation jurisdiction and the review process incorporated in the Social Security Act 1947. The Social Security Act (supra) gives jurisdiction to the Administrative Appeals Tribunal only if the delegate of the Secretary, Department of Social Security affirms, varies or revokes a decision of an officer, which decision has been reviewed by the Social Security Appeals Tribunal (SSAT). However, there is no appeal decision of the SSAT but only of the subsequent decision of the delegate, and furthermore there are no statutory duties for the SSAT provided in the Social Security Act (supra).

There have been a number of decisions of this Tribunal pursuant to the Social Security Act (supra) which determine whether or not a decision sought to be reviewed before this Tribunal had been appropriately reviewed by the SSAT. The decisions reached by this Tribunal appear to be at variance. In the decision in Re Khabbaz and Secretary, Department of Social Security S.85/29 (Decision 2698), the Tribunal decided that as the SSAT had only reviewed one of the two decisions made by an officer of the Department, pursuant to separate sections of the Act on separate days, this Tribunal only had jurisdiction to review the one decision reviewed by the SSAT. In reaching that conclusion, the Tribunal was dealing with a very different fact situation from that which arose in
Re Hurrell and Director-General of Social Security (1984) 7 A.L.D. 33. In that case, the SSAT had considered the decision of the officer under review to be a decision to suspend or cancel the applicant's Unemployment Benefit because of non-return of a Form 19(b) (Tribunal emphasis). The Administrative Appeals Tribunal on hearing the review considered that it was not reviewing a decision to suspend or cancel the applicant's Unemployment Benefit because of a non-return of a Form 19(b); it was reviewing a decision which had led to Unemployment Benefit cheques ceasing to be posted to Mr Hurrell's post box address and not merely restricted to consideration of whether or not there had been a non-return of a Form 19(b). The Tribunal, in my view, was correct in concluding it had jurisdiction to extend beyond the reasons considered by the SSAT, as the primary decision was the suspension or cancellation of the applicant's Unemployment Benefit and not the reasons for that cancellation, which were merely incidental.''

Other cases to which Deputy President Layton there refers were determined according to principles not of relevance here.

41. Many other enactments conferring jurisdiction on the Tribunal pursuant to sec. 25 of the AAT Act, beside those referred to by Deputy President Layton in Cranswick, include a specific requirement for initial review of a

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decision as a prerequisite for review by the Tribunal. That requirement may be for internal review within the respondent department or instrumentality, as in the Freedom of Information Act 1982 and the Superannuation Act 1976; for review by a specialist tribunal, as in the Social Security Act 1947 and the Veterans' Entitlements Act 1986; or for a combination of both, as in the Student Assistance Act 1973. Questions will arise, as in the examples cited by Deputy President Layton in Cranswick, as to what is comprised in the ``decision'' which has been the subject of that initial review, and will be determined, in each case, by reference to the Act in question and the facts of that case. But, given that the Assessment Act, with which I am here concerned, treats the objection and the assessment each as one and indivisible, I do not consider that the ``objection decision'' (as defined) can, for the purpose of review by this Tribunal, be divided in the manner suggested in Cases V49 and V102.

42. The problem, as I see it, is encapsulated in the second paragraph of the extract from Case V102 cited in para. 15 (supra). It has not been held, in matters coming before the Tribunal under other enactments providing for internal, or specialist tribunal, review, that, as the Tribunal there said, ``it is a prerequisite to the exercise of the power to review that the (respondent) must have had an opportunity to consider the issue sought to be raised''.

43. The power of the Tribunal is a power to review a ``decision'' (sec. 25 AAT Act) and not an ``issue''. The ``objection decision'' (as defined) is the decision under review. That decision is a single decision by the respondent to disallow, in whole or part, a single objection. The respondent must consider the objection and make that decision before the Tribunal has jurisdiction in the matter. The grounds on which review is then sought from the Tribunal may relate to a number of different issues, all relevant to the objection decision. But it is not a prerequisite to the jurisdiction of the Tribunal that the respondent should have considered each of those issues.

44. Mr Pagone submitted, in my view rightly, that the considerations relevant to the exercise of the power in sec. 188 to extend the time for the lodging of an objection, or for the lodging of a request for referral, were not relevant to the question of whether to extend the grounds of objection: the purpose of the provision is different, and different considerations apply. He emphasised that the amendment to sec. 190(a) allows persons objecting to assessments to concentrate on the real issues and not waste time and other resources on the prolix objections which were seen as necessary prior to that amendment. It is clear that that result would be substantially negated if the amendment is narrowly interpreted.

45. Mrs Moshinsky submitted that, if sec. 190(a) is to be interpreted so as to permit the extension of grounds sought by the applicant, then it would be open to a taxpayer to include no grounds at all in his original notice of objection. However, that is not the situation with which I am concerned, and a decision in a particular case is not to be governed by an argument from an extreme of that kind. I express no view as to the requirements in that regard of subsec. 185(1) of the Assessment Act.

46. Having set out at length the reasons for the order described in para. 7, I now turn to consider the substantive issues before me.

The substantive issues

A. The profit on sale of land

Introduction

47. Annexed to the applicant's income tax return for the year ending 30 June 1980 was a profit and loss statement in respect of land described as Lots 1, 2, 3 and 5, G Road; and Lots 6 and 7, M Road (hereinafter together referred to as ``Blackacre''); and Lot 1, M Road (``Whiteacre'') in a district which will be referred to as ``Redcreek''. The statement showed a capital profit on the sale of the land amounting to $220,183. An adjustment sheet issued by the respondent on 1 July 1981 showed that amount as added to the applicant's taxable income. An objection was lodged, in the terms set out in para. 3 above, against the assessment as calculated by reference to that adjustment.

48. The principal submission of Mrs Moshinsky, for the respondent, was that Blackacre and Whiteacre were acquired by Z Pty. Ltd. for the dominant purpose of profit-making by sale. In the alternative, they were ventured in 1976 into a profit-making scheme. On either ground, she submitted, the

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profit arising from the sale formed part of the company's assessable income by virtue of sec. 26(a) of the Assessment Act which was in force at the relevant time and read:

``26 The assessable income of a taxpayer shall include -

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

She also sought to rely on subsec. 25(1) of the Assessment Act, on the basis that the company was carrying on an investment business, and the land was part of its trading stock, and the profit on sale was thus income according to ordinary concepts and usages. Subsection 25(1) read at the relevant time, so far as relevant:

``25(1) The assessable income of a taxpayer shall include -

  • (a) where the taxpayer is a resident - the gross income derived directly or indirectly from all sources whether in or out of Australia;
  • ...

which is not exempt income.''

49. Mr Pagone submitted that the sale of the land was a mere realisation of a capital item: that it was not acquired with the dominant purpose of profit-making by sale: that there was no carrying out of a profit-making undertaking or scheme: and that the land was not trading stock.

The evidence

50. Having considered all of the evidence before me, I make the following findings of fact.

  • ``My Lords, a corporation is an abstraction. It has no mind of its own any more than it has a body of its own; its active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation... For if Mr Lennard was the directing mind of the company, then his action must, unless a corporation is not to be liable at all, have been an action which was the action of the company itself within the meaning of section 502... It must be upon the true construction of that section in such a case as the present one that the fault or privity is the fault or privity of somebody who is not merely a servant or agent for whom the company is liable upon the footing respondeat superior, but somebody for whom the company is liable because his action is the very action of the company itself.''
  • ``Some confusion has arisen regarding the concept of the proposed corridor and non-urban zoning, particularly in connection with the expectation that all parts of all corridor zones would as a matter of course become available for

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    urban purposes at some future stage. The 1971 Report made it quite clear that this was not the Board's intention, although it is believed that the basic concept has been of considerable value in establishing the intended image of permanent non-urban areas.
  • In the current situation of changing attitudes of Governments and the public, it is considered that the basic concept of the corridor zone is sound and that it should be retained, but with different emphasis. It should not be given particular recognition as a potential area for future urban development but rather should be regarded as a non-urban zone set aside to provide an option for longer term decision making.
  • It is considered that this strategy will make for better understanding of its purpose, while still providing opportunities for later determinations following assessments of the effectiveness of current government efforts to slow down the growth rate of Australia's major urban areas.
  • The technique recommended for defining sections of the corridors intended for future development is to declare certain portions of the corridor zones, now considered potentially suitable for future development, as Investigation Areas, execute joint studies within these areas, to determine the implications of development within such areas, and prepare outline plans for appropriate portions which should then be included within deferred development zones in the Planning Scheme.
  • Declaration of such areas under Section 4 of the Development Areas Act 1973 would enable the Government or its agency to acquire land wherever it wishes to encourage or contain development in the future, and the basis for land purchase provided by this legislation should act as a constraint on land price increases, which might otherwise arise through concentration of development potential in the areas. In addition, the declaration of the areas would enable the Government to make policy decisions on them after community debate.''

51. Some of the evidence before me needs further discussion. Dr J said that when he began purchasing land at Redcreek he ``thought it would be nice to have a farm''. He said that it had been a dream of his since he was in his thirties to have a farm, as well as carrying on his profession. He had bought the land at Redcreek with that intention, and had farmed it. Asked whether he intended to sell at a profit he said ``No. It never entered my head at that stage''. Additional purchases had been made in order to enlarge the farm. He had not sought advice about the viability of farming in the Redcreek area, but he understood that it was a good area to run stock. He had had ideas of living on the Redcreek property, and had enjoyed going there to stay from time to time; there was a ``lovely old home'' there. He had had ``vague ideas'' of leaving the farm to his granddaughter, who was brought up by Dr J, and who has, in the event, married a farmer. He sold some of the land, after he had owned it for a number of years, because of lack of money to carry it on. He was getting old, and ``knew that the land would have to be sold sooner or later... Things were going bad and I had to sell''.

52. Dr J did not accept the suggestion put to him in cross-examination that the land was not good farming land. Nor did he accept the suggestion that he bought land in the Redcreek district because its proximity to Melbourne made it likely to have subdivisional value in the future. It was put to him that he had been aware of changes over time in the requirements for subdivision of land in that district, and also of proposals made by the MMBW as to the future development of land in the vicinity. He said that he was not generally aware of these matters and emphasised that he had relied throughout on the advice of his accountant, Mr H, and his solicitor, Mr F.

53. Mr H said that Dr J had a cash flow problem in 1974-1975, partly because he tended to buy properties and tell his advisers later, and he had substantial borrowings. At that time Mr H had advised him that he should sell some property because of his liquidity problem. He had suggested that Dr J sell some of his farm property in order to have an easier life. After he gave up medical practice, farming had been Dr J's full time occupation: he had been engaged in it for the last 15 years. He had sold city properties which Mr H had advised him to retain, because in Mr H's view they would have shown better capital growth than farms.

54. Mr H said that he was not aware of the changes in the potential zoning of the Redcreek area which were publicised in 1971 and 1974. Asked whether he had advised Dr J to look for more suitable farming property further out, he said that Dr J was a man who made up his mind in a hurry: he had bought the property at Greencreek, 400 acres with 200 milkers, on the spur of the moment in 1966.

55. Mr E described various vicissitudes of farming Dr J's land: years of low rainfall or excessive rainfall, and the effects of the construction of State Electricity Commission pylons across the land. He said he saw Dr J almost every week: he had originally told Mr E that he wanted to retire to the old house on the farm in which Mr E then lived: it was a pleasant house with a lovely view. He understood that Dr J used also to visit the farm at Greencreek.

56. During his first seven years working for Dr J, Mr E said he dealt directly with Dr J and was paid directly by him. He ran the Redcreek property under the general direction of the farm manager at Greencreek. When Mr A became farm manager difficulties arose; it is not necessary to set out in detail Mr E's evidence on this point. Mr E dealt quite often through Mr H. When Mr A was farm manager, a lot of money was spent on the property: this was the only period when that was done.

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57. Mr E said that the northern part of the land formerly owned by Dr J (which includes Blackacre and possibly Whiteacre) was good for lambs and also for cropping: the southern part was more stony and mainly used for grazing; it was ideal grazing land. A farmer in the Redcreek district needed a lot of land, so as to be able to move stock around and keep feed up to them.

58. Mr R investigated this matter for the respondent between December 1981 and June 1982. He paid one visit to the Redcreek property, of about one hour. He did not go on to the land itself, but inspected it from the road. He has some family connections with farming, and he appeared to have a low opinion of land in the district as farming land, and of the manner in which Dr J's land was being farmed. On his visit he did see sheep being handled in the yards. He thought the country was ``pretty open and windswept'', but regarded one portion of the farm, which was a low hill, as attractive for subdivision because of the view which it provided. He understood that previous owners had left the district because of the problems, such as shooters, dogs and cats, which come with increasing urbanisation. In cross-examination he said that there was no doubt in his mind that there was no doubt in his mind that the dominant intention when the land was acquired was profit-making by sale. He had not spoken to Dr J, to Mr H, to Mr A or to Mr E. He had spoken to ``fewer than 1000 but more than 40'' people in the course of the investigation. He drew a distinction between a ``real farmer'' whose sole livelihood is the farm, and a ``Collins Street farmer'' whose principal livelihood is elsewhere.

59. Mr O had prepared all of the plans of subdivision to which reference has been made. He said that he met Dr J about half a dozen times between 1976 and the mid-1980s. He was interested in what was going on; he was very intelligent and ``he knew land''. He took quite an interest in the progress of the plans of subdivision with the local Shire Council. He told Mr O that he had a contact in the Board of Works. Mr O considered that Dr J would have known about the proposals for changes in the zoning, which affected the potential of the district: ``a lot of other farmers would have known, because a lot of subdivisions took place at that particular time''.

60. Asked in cross-examination about subdivisions he had prepared in the Redcreek district for other clients, Mr O said that the land had ``stayed dormant for quite a while'' and then been used for activities to do with horses. Some people had bought two allotments and continued farming. He agreed, in effect, that some people will prepare plans of subdivision on the basis of existing zoning requirements, without intending to sell at that time, in case in future the requirements become more stringent.

61. Mr A said that when he became farm manager in 1978 his duty was to run the farm as profitably as he could and to subdivide it into 30-acre lots, or whatever was permitted. The farm was run profitably. In his view the farming activities were going well when he left in 1981. Dr J's whole idea was to cut the land up to the best advantage. He was concerned with the administration of the auction of Blackacre, Whiteacre, and other lots on the Redcreek property which took place on 26 May 1979. He took all his instructions from Dr J, who was aware of the zoning requirements and had personally been to see both the Shire and the Board of Works about the sales. In the time of the Whitlam Government it was believed that there was to be a satellite city in the district.

62. Mr B is a senior and experienced valuer of rural property with qualifications in agricultural science as well as valuation. He had inspected the farm land at Redcreek from the roadside. It was ideally suited to sheep, although difficult to manage because broken up by roads. There could be problems arising from dogs straying from properties on smaller allotments. It was within commuter range of Melbourne, and in due course it was likely to be consumed for higher urban use, rural residence or farmlets.

The first limb of sec. 26(a)

63. The question which arises under the first limb of sec. 26(a) is whether, as a matter of fact, the dominant purpose of Dr J, as the directing mind and will of Z Pty. Ltd., in the acquisition by that company of Blackacre and Whiteacre, was, at the time of that acquisition profit-making by sale. (
Eisner v. F.C. of T. 71 ATC 4022.) If the applicant is to discharge the burden of proving that the assessment is excessive, in terms of sec. 190(b) of the Assessment Act, I must be satisfied, on the

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balance of probabilities, that that was not the case. (See the well-known line of High Court decisions culminating in
McCormack v. F.C. of T. 79 ATC 4111; (1979) 143 C.L.R. 284 and
Macmine Pty. Ltd. v. F.C. of T. 79 ATC 4133.)

64. The evidence of Dr J on that subject is set out in para. 51 and 52 (supra). In evaluating that evidence, in the light of the other material before me, I would refer to the observations of Gibbs J. (as he then was) in McCormack v. F.C. of T. (supra) at ATC p. 4121; C.L.R. pp. 301-302:

``In a case arising under sec. 26(a) the taxpayer is usually the person best able to give evidence as to the purpose for which the property in question was bought. Although evidence given by a taxpayer as to the purpose with which he acquired property must, for obvious reasons, `be tested most closely, and received with the greatest caution' (
Pascoe v. F.C. of T. (1956) 30 A.L.J. 402 at p. 403 citing
Cox v. Smail [1912] V.L.R. 274 at p. 283). I completely agree with Barwick C.J. in
Gauci v. F.C. of T. 75 ATC 4257 at pp. 4259-4260; (1975) 135 C.L.R. 81 at p. 86, that it would be wrong for a judge to regard the evidence of a taxpayer as prima facie unacceptable. The taxpayer's evidence must of course be considered on its merits, in the light of the circumstances of the case, without any prepossession, favourable or unfavourable. If the taxpayer gives evidence that the property in question was not acquired by him for the purpose of profit-making by sale, and that evidence is accepted, he of course succeeds. In some cases the taxpayer may establish that the case does not fall within sec. 26(a), even though he does not give evidence but is disbelieved.... Nevertheless, if the proper inference to be drawn from the evidence is that the taxpayer bought the property for a purpose other than that of profit-making by sale, the appeal will succeed.... When I speak of purpose I mean, of course, the main or dominant purpose actuating the acquisition.''

65. Mr Pagone submitted that, on all the evidence, Dr J's dominant purpose when Blackacre and Whiteacre were purchased was to acquire more farming property, and to do so in such a way as to avoid probate duty.

66. The evidence pointed to by Mrs Moshinsky as indicating that Dr J's dominant purpose at the time of the acquisition was profit-making by sale is as follows:

67. In summary, Mrs Moshinsky submitted that the applicant had bought Blackacre and Whiteacre in an area where it and Dr J already had property, some of which was subdivided, at a time when the area had significant development potential. After the 1974 Board of

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Works report, that potential was significantly less, and the necessary preliminaries to the sale of the land were then undertaken. The only possible conclusion was that the dominant purpose of the acquisition of the land was profit-making by sale.

68. There are, however, other considerations to set out against those listed by Mrs Moshinsky. I have already referred to the sworn evidence of Dr J, and the manner in which that evidence should be regarded. The evidence which he gave was limited by his age and state of health, and there were matters put to him as to which he said he had no recollection. As Mrs Moshinsky pointed out, his memory was excellent as to his intention to purchase the land for a farm, but defective as to many other matters, and I take this into account.

69. Further, receiving the evidence of Dr J with the caution directed by Gibbs J., I find it improbable that the thought of selling the land at a profit ``never entered (his) head'' when he bought it. However, my concern is with his dominant purpose at the time, not with any other purpose which may have been present to his mind. I find it even less probable that any person of normal intelligence, who owned and farmed land in Redcreek between 1967 and 1974, would have been unaware of the publication of the three Board of Works Reports, and of their implications for land values in the district. The same applies to Mr H, whether as an investor in land in that district, or as an adviser to Dr J. However, to say that is not to say that there is a necessary inference that anyone who bought land in that district in 1970 (Blackacre) or 1973 (Whiteacre) and sold it in 1979 must have bought with the dominant intention of resale at a profit. Further, the text of the reports makes clear that the proposed development in the district would not have eventuated for a number of years. At the time of the purchases in question, Dr J was no longer young, and might be thought to be looking to short-term rather than long-term investments. His initial purchases in the Redcreek district, it should be noted, were made some years before the publication of the first of those reports, and cannot have been affected by it. By January 1967 he had purchased almost 2000 acres of land at Redcreek. After 1974 he and Z Pty. Ltd. continued to purchase land for the farm, including a parcel of over 1000 acres in 1978.

70. As to Mrs Moshinsky's point (i), the other purchases and sales in question were not of farming land. The fact that Z Pty. Ltd. bought and sold properties in Melbourne and in country towns may indicate that Dr J was a man of means with substantial investments, but is not inconsistent with his stated desire to have a farm, nor with his having a dominant purpose, in purchasing Blackacre and Whiteacre, to use them as part of a farm.

71. Nor are Mrs Moshinsky's points (ii) and (iii) above, in my view, inconsistent with that stated dominant purpose of Dr J. The Redcreek area is, on the evidence of Mr E and Mr B, both of whom may be assumed to know more about the matter than Mr R, good land for sheep (and on Mr E's evidence, for other agricultural purposes). Its proximity to Melbourne rendered it convenient of access for a professional man wishing to farm it and visit it regularly, and the initial purchase from his advisers may indicate no more than that he was too busy to enter into an elaborate and extensive search for farming land, but was prepared to take what was offered to him, given that it was good land, conveniently situated.

72. Mrs Moshinsky's points (iv) and (v) are similarly explicable on other grounds, and do not necessarily point to a dominant intention of resale at a profit. As to her point (vi), the first land at Redcreek was acquired in 1964 and no sales took place until 1979; Blackacre was held for nine years, and Whiteacre for six, and all of the land was farmed from the respective times when it was acquired. The necessary preliminaries for the sale of Blackacre at a profit (bringing the land under the operation of the Transfer of Land Act 1958 and arranging for the preparation, approval and regulation of plans of subdivision) appear to have been initiated in 1976, six years after its purchase. I note that Whiteacre was a saleable parcel as it stood, and no such preliminaries were required. The evidence of Mr H was that Dr J had cash flow problems in 1974-1975; Dr J's own evidence was that he sold because of lack of money, and because he was getting old and things were going bad. In 1980 Dr J was 78 years old.

73. Mrs Moshinsky's point (vii) is considered in para. 69 (supra). As to point

ATC 997

(viii), I do not consider that statement to be established on the evidence: that of Mr E in particular and of Mr H (subject to what is said below) all indicates a close interest in the farm by Dr J. As to point (ix), the applicant did not rely seriously on the suggestion of a liquidity crisis: and several of the lots comprising Blackacre were in fact sold for cash. I do not consider the classification in the returns, referred to in point (x), as significant either way. Dr J's statement in 1988 that he would have had to sell the land sooner or later ``because things were going bad'' does not, in my view, derogate from his statement as to his intention in 1970 and 1973.

74. The evidence of Mr H needs to be treated with some caution, in view of his stated lack of awareness of the Board of Works reports, which is considered in para. 69 above. Mr E appears to be still in the employ of Dr J, but I see no reason to disbelieve any of his evidence. What he said as to Dr J's intention with regard to retiring on the farm I accept as evidence of the making of a prior statement generally consistent with the evidence of Dr J at the hearing and rendered relevant by the matters referred to in para. 68 (supra). Mr Ryan's opinion on the matter seems to me to have been affected by his view of the distinction between a ``Collins Street farmer'' and a ``real farmer'', which is not of relevance to the issue before me, and of the suitability of the land for farming, and the manner in which it was farmed, matters which I have already considered. It should be noted that the low hill to which he referred is not situated on either Blackacre or Whiteacre. I note that he spoke to ``more than 40'' people in the course of the investigation. Given that there were four of the witnesses to whom he did not speak (see para. 58 (supra)) the only witnesses who could possibly have been among those ``more than 40'' (although I have no evidence as to whether they were or not) were Mr O and Mr B. It is perhaps surprising that more witnesses were not called by the respondent.

75. The evidence of Mr O and Mr B I have found to be of assistance and have no reason not to accept [it]. I note in particular Mr O's reference to Dr J in the context of ``a lot of other farmers'' (para. 59 (supra)) indicating his view of Dr J's role in relation to the land, as well as of the probability of Dr J's knowledge of the planning proposals.

76. In view of the pending litigation between Mr A and Dr J, and the terms in which Dr J described their relationship (which I have not thought it necessary to set out) Mr A's evidence, particularly in relation to Dr J's intention, must inevitably be treated with caution. Mrs Moshinsky drew to my attention, and I take into account, the inferences which could be drawn from the applicant's failure to call Mr F.

77. The question before me is not easy to resolve. It turns on the dominant purpose of Dr J, as the directing mind and will of Z Pty. Ltd., in the acquisition by that company of Blackacre and Whiteacre in 1970 and 1973 respectively, a matter within the knowledge only of Dr J. It has been well said that, ``lentent dun home ne serr trie, car le Diable and conusance de lentent de home'' (``The thought of a man is not triable, for the devil himself knows not the thought of man'') (Sir Thomas Brian, Chief Justice of the Common Pleas, Y.B. 17 Ed. IV 1 (1477)). On the basis of the facts as found, and considering the oral evidence with the several degrees of caution which I have described, I find, on the balance of probabilities, that while the prospect of ultimate resale was, I am confident, present to the mind of Dr J, his dominant purpose at those times was to incorporate those properties into the existing, operating farm, on land owned partly by himself and partly by Z Pty. Ltd., and to use them as part of that farm.

The second of sec. 26(a)

78. Mrs Moshinsky submitted that, if Blackacre and Whiteacre were not purchased with the dominant purpose of resale at a profit, they were, in 1976, ventured into a profit-making undertaking or scheme.

79. The submission of Mr Pagone in reply was that the sale of Blackacre and Whiteacre was a mere realisation of capital. In support of that submission he referred to authorities, including
The Scottish & Australian Mining Co. v. F.C. of T. (1950) 81 C.L.R. 188;
F.C. of T. v. N.F. Williams 72 ATC 4069; 72 ATC 4188; (1972) 127 C.L.R. 226;
F.C. of T. v. Whitfords Beach Pty. Ltd. 82 ATC 4031; (1982) 150 C.L.R. 355 and
F.C. of T. v. The Myer Emporium Ltd. 87 ATC 4363.

80. Having considered the matter in the light of those authorities, I accept the submission of Mr Pagone. It should be noted that Whiteacre

ATC 998

was merely sold as a single separate parcel, in the state in which it had been acquired; nothing at all was done to it prior to the sale. Blackacre was bought under the Transfer of Land Act 1958 and subdivided, but I find that that activity did not amount to the carrying on or carrying out of a profit-making undertaking or scheme. As Gibbs J. (as he then was) said in Williams (supra) at ATC pp. 4194-4195; C.L.R. p. 249:

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

Subsection 25(1)

81. The final submission of Mrs Moshinsky was that the company was carrying on an investment business, the land was part of its trading stock, and the profit on sale was thus income according to ordinary concepts and usages. As I have formed the view that the land was not purchased with a dominant intention of resale at a profit, it would be difficult for me to find that the land was trading stock in any ordinary sense of that expression, and I do not do so. The land was occupied by Dr J for farming purposes: it had been purchased by the company, which he controlled, and not by him, for reasons to do with minimising the effect of probate duty. Whatever the basis of other activities of the company with regard to investments, as to which I have little or no evidence, Blackacre and Whiteacre were not acquired by it as trading stock, and the profit on the sale of those properties was not income according to ordinary concepts and usages.

Conclusion

82. Accordingly I find that the applicant has discharged the onus imposed on it by sec. 190(b) of satisfying me that its assessment for the 1980 tax year is excessive in so far as it includes the profit on the sale of Blackacre and Whiteacre.

83. I would emphasise that I have reached this conclusion on the evidence before me and that it relates only to Blackacre and Whiteacre, the profits on the sale of which are the amounts sought to be included in the objection, the decision on which is under review. It was made clear at the hearing that similar issues in relation to other properties and other years are in dispute between the applicant (or possibly Dr J) and the respondent. I know nothing of those issues, and express no view on them. There may well be facts relevant to the determination of those issues, evidence as to which was not before me. No inference can or should be drawn from my decision which would be determinative of any of those issues. They must await the ascertainment in the appropriate place or places of the relevant facts and of the law applicable thereto. I make these self-evident observations because of references made, at the hearing of this matter, to the possible relevance of my decision to those other issues.

B. The losses carried forward

84. The adjustment sheet referred to in para. 47 (supra), which issued on 1 July 1981, showed an amount of $57,109, described as ``deductible losses from previous years'', as deducted from the applicant's taxable income for the year ending 30 June 1980. An adjustment advice which had issued on 18 March 1981 in respect of the applicant's return for the year ending 30 June 1979, read as follows so far as relevant:

``The income tax return in respect of the year ended 30 June 1979 has been assessed non-taxable.

Alterations to the amount of loss to be carried forward have been made as follows: 

      Net loss as returned ...................................


             $110,960

                                      Increase       Decrease
          Adjustments                   Loss          Loss
                                                       $                     $
Remuneration paid to Director
[Dr J] allowed to $20,800                           14,400
Profit on sale of lot 1 [M Road,
Redcreek], included in
assessable income                                   60,013
                                                   -------
                                                   $74,413
                                                                        -------
Net adjustment                                                          $74,413
                                                                        -------
Net loss for the year as adjusted ....................................  $36,547''

The making of those two adjustments to the 1979 return had effectively increased the amount, as assessed, of the applicant's taxable income for the 1980 tax year by $74,413. It was to those two adjustments, as carried forward losses disallowed in 1980, as appears from the adjustment sheet issued on 1 July 1981, that Mr Pagone directed his submissions.

Director's remuneration paid in 1979

85. Taxation returns before me indicated that Dr J was the only director of Z Pty. Ltd. who received any remuneration as a director in 1978 or 1979; in 1978 his total remuneration as a director of that company was $20,800, and in 1979 it was increased to $35,200.

86. Mr H said in evidence that he thought that he would have advised the company to pay the increased remuneration on the basis of a discussion in which Dr J had advised him that in 1979, as a director of Z Pty. Ltd., he had carried out a substantial amount of work on a joint venture building project with Mr A, and his salary should therefore be increased.

87. I accept that evidence, which was not challenged by the respondent, and find the facts on this issue to be as I have set them out in the two preceding paragraphs. Accordingly, I find that the sum of $14,400, the first amount by which the losses carried forward were reduced, was a loss or outgoing incurred by the applicant in carrying on a business for the purpose of gaining or producing assessable income; that it did not fall within any of the exceptions to subsec. 51(1) of the Assessment Act; and that it was not, in whole or in part, in excess of a reasonable amount within the meaning of sec. 109 of that Act.

Profit on sale of land in 1979

88. On this issue, having considered the evidence before me, I find the facts to be as set out in this and the two succeeding paragraphs. The land in question (``Brownacre''), briefly described as lot 1, M Road, Redcreek, is not the same land as the land similarly described in the applicant's 1980 return and defined in para. 47 as ``Whiteacre''.

89. Brownacre, which was purchased by Z Pty. Ltd. in 1974, adjoined a larger parcel of land which had been purchased by Dr J in 1966. It was proposed to subdivide the area of land comprised in the two parcels, and a plan of subdivision was in fact registered at the Titles Office in May 1979. Before the plan could be registered it was necessary for the whole of the property to be in the same ownership, and accordingly to transfer one parcel to the owner of the other parcel. For stamp duty reasons, it was desirable to transfer the less valuable, and Brownacre was transferred by Z Pty. Ltd. to Dr J during the year ending 30 June 1979, and stamp duty paid on the transfer.

90. The description of Brownacre in the tax return as ``Lot 1'' is imprecise. Lot 1 on the plan of subdivision registered in May 1979 comprised the greater part, but not the whole, of Brownacre. As I have said, the transfer necessarily preceded the subdivision in any case.

91. Many of the considerations applicable to my decision in respect of the profit on sale of Blackacre and Whiteacre apply with equal force to the profit on sale of Brownacre. I find that the evidence of Dr J as to his purpose in the acquisition of land at Redcreek (whether by

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himself or by Z Pty. Ltd.) is as applicable to the acquisition of Brownacre in 1974 as to the acquisition of Blackacre in 1970 and Whiteacre in 1973. For the reasons given at length in respect of those properties I find that his dominant purpose was the same in each case; that the transfer of Brownacre by Z Pty. Ltd. to Dr J did not constitute the carrying on or carrying out of a profit-making undertaking or scheme; and that Brownacre was not trading stock of Z Pty. Ltd. and profit on sale of Brownacre was not income according to ordinary concepts and usages. What I have said in para. 83 supra with respect to Blackacre and Whiteacre applies with equal force to Brownacre.

92. For the reasons given, the objection decision under review will be set aside in so far as it relates to the matters which I have considered, and these matters remitted to the respondent for reconsideration in accordance with an appropriate direction.

 

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