CASE 36/93
Members:P Gerber DP
Tribunal:
Administrative Appeals Tribunal
Dr P Gerber (Deputy President)
The applicant (henceforth referred to as ``T'') was, in the tax years now in dispute (1986-1990), a landbroker in the State of South Australia, a State in which one cannot practise that profession without being registered.
2. The sole issue raised in the case before the Tribunal is whether in those years, amounts claimed in his returns as payments made to one W (his then wife, since divorced), which T claimed as deductions from his assessable income derived from landbroking and described as ``wages paid'', should properly be treated as his income, which is how the Commissioner of Taxation (the respondent) treated it, or whether the claimed amounts constituted W's income derived by her pursuant to an express or constructive trust.
3. The answer to the above question, in turn, is said to depend on the surrounding circumstances in which T acquired the business - Landbrokers Pty Ltd (SA) (``Landbrokers'') - from his (then) father-in-law, (``FL'') and mother-in-law (``ML''). It was common ground that prior to the transfer of the business to T, Landbrokers had been operated by FL and ML in partnership. One of the issues in this case is whether T acquired the business absolutely or on terms that W would receive half the profits. W was at no relevant time a registered landbroker, and hence could not lawfully own or be in partnership in such a business in South Australia.
4. It is said on behalf of T that he not only conducted the business on the basis that he held its assets and profits on an express, alternatively a constructive trust for himself and W, but that W in fact, received that profit, i.e. that his returns reflected these payments - albeit misdescribed as ``wages''. It was common ground that the applicant lodged (through agents) tax returns for W, enclosing Group
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Certificates which showed that she had received qua ``Typist/Clerk'' $19,454 in 1986, $22,669 in 1987, $22,533 in 1988, $23,748 in 1989 and $25,193 in 1990, described as ``salary and wages''. The evidentiary effect of this, however, is somewhat weakened by the fact that these returns were lodged unbeknownst to W and, for good measure, T forged her signature on them. (There was dispute whether or not W signed the 1988 return. Although not relevant to the ultimate outcome, I am satisfied that she did not.) W was called as a witness by the respondent and denied having received any money, whether as salary, wages or otherwise in the years now before me. However, since this couple demonstrated in the witness box that they are clearly ``at daggers drawn'', I need to examine all of this couple's evidence closely, the more so since I am satisfied that Landbrokers had a ``tradition'' of syphoning off ``salary and wages'' to this lady for services not rendered, going back to the time when the business was still owned and operated by her parents and T was a mere employee and as yet unmarried.5. I may say at the outset that, notwithstanding much evidence given as to why this marriage failed, it is sufficient for my purposes to note that this couple parted amidst great acrimony and in circumstances in which FL felt compelled to align himself with his daughter (W). His evidence, too, requires close scrutiny.
6. Part of the taxpayer's version of events has been neatly summarised in a statutory declaration (``T15'') set out below, albeit slightly expurgated.
``I became involved in the Business in 1978. At that time, the Business was being run by FL, the father of my former wife. FL had allowed the Business to run down after suffering a heart attack in 1976.
I first met FL in 1977, at which time I was introduced to my former wife. We shared an interest in horses and FL gave me part time employment to instruct my former wife in the art of dressage and also to train one of his horses.
FL invited me to join the Business in 1978 and I commenced to receive wages as an employee of the Business. My former wife and I were married in April 1978.
In 1979, my former wife and I built a home on certain land owned by my former wife's parents at 105 Roe Road, Norwood. It was understood that, if my former wife and I ever wanted to move, FL and ML would reimburse us for the cost of the home we built on their land.
In my early years as an employee in the Business I received wages based on a minimum share of the profits so as to ensure the future viability of the Business.
Although my former wife had been employed casually by her father from time to time previously, my former wife became employed in the Business, along with me, in May 1979. She continued to have a financial involvement in the Business until I eventually took over the Business in April 1985.
In March 1984, I obtained my landbroker's licence. During the course of that year, the relationship between my former wife and me (on the one hand) and my in-laws deteriorated. However, by the end of 1984 the family differences had (for the time being) been resolved. It was agreed that my former wife and I would move from Norwood and would purchase a farm property belonging to ML and my former wife at Birdwood. The consideration for the farm property was to be partly cash and partly reimbursement for the monies spent by my former wife and me on the Norwood home, the total being $78,000. A memorandum of transfer was prepared, signed and dated 1 April 1985. It was agreed that my former wife and I could continue to live at Norwood until we could afford to build a home at Birdwood.
On 5 July 1985, the memorandum of transfer was stamped and it was expected that my former wife and I would thereupon settle on the Birdwood property. However, family differences again developed and FL determined not to settle on the Birdwood property. My former wife and I left the Norwood home and we purchased a farming property at Springton.
In June 1984, FL decided that he no longer wanted to be involved in the day to day running of the Business. It was initially agreed between my former wife and me (on the one hand) and FL that I would run the
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Business and my former wife and I would draw a wage, and that at the end of the financial year, any profits in the Business would be divided equally between my former wife and me (on the one hand) and FL and ML (on the other). FL and ML were to undertake all of the bookwork relating to the Business.The initial agreement was then changed at the end of 1984 by FL and ML. They wished to sell the Business to my former wife and me, and it was agreed that my former wife and I would pay $130,000 for the Business.
At the time of the discussion for the purchase of the Business by my former wife and me from FL, the private arrangements that I have already referred to in relation to the Birdwood property were also being discussed. The sale of the Business by FL to my former wife and me was part of a much wider family arrangement involving our intended eventual move from Norwood to Birdwood.
The Business was eventually acquired and taken over on 1 April 1985. The only document prepared in relation to the acquisition of the Business is a handwritten statement prepared by FL and which is annexed hereto as Annexure `A'. Under the heading `Requirements' on page 1 of the handwritten statement there appear the words-
`Advise Land Brokers Board T sole proprietor of Landbrokers as from 1st April 1985.'
The statement makes reference to the requirement that the Land Brokers Board be advised that I would be the sole proprietor licensee of `Landbrokers' as from 1 April 1985, and indeed the Land Brokers Board was so advised. However, it was always intended and agreed that my former wife would have an interest in the Business as part of the wider family arrangement agreed with FL. This intention was evidenced in lines 11 to 13 of FL's statement (on page 1), wherein it says `Fees from settlements after 1.7.84 to 31.3.85 to be divided equally between T and W and FL and ML'. The intention was further evidenced in line 16, wherein it says `Fees divided as follows T and W 40% and FL and ML 60%'.
As my former wife was not a licensed broker, she could not be a proprietor of the Business. However, the Business was transferred by FL on the understanding and with the intention that my former wife would have an interest in the Business and a share of the profits referable to that interest.
Although the handwritten statement refers to a consideration of $130,000 for the Business, it was agreed that I would myself only pay one-half of this amount. The remaining one-half referable to my former wife's share or interest was to be forgiven.
Upon the transfer of the Business, I conducted it on the basis that my former wife had a share or interest in it. The business name `Landbrokers' was transferred into the name of T & W. The bank accounts and other records were maintained in the names of T & W trading as `Landbrokers'. The group employer tax application was also made in the name of T & W trading as `Landbrokers'. It was always intended (and FL's handwritten statement supports the fact) that the profits of the Business would be shared by my former wife and me. To this end, the Business paid my former wife a salary in satisfaction of the share of income to which she was entitled out of the Business. Annexed hereto as Annexure `B' is a statement setting out in random selection certain of the salary payments made to my former wife from the Business during several years of income. (These have been omitted from my Reasons for Decision, but will be referred to later)
Given the nature of the agreements entered into by my former wife and me (on the one hand) and FL and ML regarding the transfer of the Business, it was my belief that the Business would thereafter be owned by my former wife and me in partnership. The salary paid by the Business to my former wife was her share of the income of the Business referable to her partnership interest. However, as my former wife was not a licensed broker, a formal partnership for the Business could not be conducted. We did not prepare and lodge a partnership tax return because our accountant advised us that we should not do so. It would be inappropriate for a partnership return to be
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lodged when a formal partnership was not being conducted. Nevertheless, my former wife had and maintained an interest in the Business and a right to a share of the income of the Business referable to that interest.Having considered the matter further and upon taking advice on the nature of my former wife's interest in the Business, I am now of the view that, at all times since the transfer of the Business on 1 April 1985 and until the Business (as it was then constituted) ceased on 19 May 1991, I held the share or interest of my former wife in the Business as a constructive or implied trustee.
I have no independent evidence of the existence of a trust for my wife. However, I now believe that the Business was transferred and made over to me by FL in circumstances which gave rise, not to a partnership, but to a constructive or implied trust.
I have considered the possibility of seeking independent evidence from my former wife and her father in support of the statements I make in this declaration. However, in view of the relationship I presently have with my former wife and her father, I believe that I would not have their co-operation in seeking such evidence.''
Attached to T's declaration are three pages of handwritten notes made by FL in relation to the proposed transfer of the business from FL and ML to T. These are set out below.
``PROPOSED TAKEOVER DATE 1st April 1985
Requirements
Advise Landbrokers Board T Sole Proprietor of Landbrokers as from 1st April 1985. Advise Registrar of Companies as to change relating to registered trade name.
Establish new banking accounts for trust and general accounts to take effect from 1.4.85.
Audit of existing T/A as at 31.3.85.
Fees from settlements completed and not appropriated to be apportioned as follows:
Fees from settlements prior to 1.7.84 to be paid to FL and ML. Fees from settlements after 1.7.84 to 31.3.85 to be divided equally between FL & ML and T & W. All transactions booked in as at 31.3.85 and not settled to be listed, copy to each party and subsequent fees divided as follows FL and ML 40% & T and W 60%.
The interest to be purchased from FL and ML to be purchased for the sum of $130,000.00 paid twice monthly over a period of four years being $40,000.00 for the first year commencing from 1.4.85 and $30,000.00 for each of the remaining three years.
Rent and outgoing to be paid account DBR on basis of rent $800 a month. Outgoings proportionate percentage of whole.
T Grieves (if applicable) rent $600 a month. Outgoings 50% of whole. Rents payable are subject to CPI index adjustments annually. [Grieves was an agent interested in leasing an office of the building owned by FL].
FEASIBILITY ----------- LANDBROKERS From 1st July 1984 -- 30th November 1984 Actual Settlements 213 Gross Fees $74,458 Average Fee Transaction 349-60 Average Monthly Approx. 14,892 Average Monthly Transactions 43 Average converted to annual basis Fees $178,704 Potential to 55 Sales Monthly 230,736 Approx Outgoings Annually For Approx 45 ---------------- -------- ------------- Monthly ------- Settlements ------------- Staff Sal. 1 perm, $20,000.00Gross 1 Pt. Time T $40,000.00 Gross FL BDM (1st Year) $40,000.00 Phones & Stationery 1,800.00 Stamps & Petrol 4,200.00 Audit & Licences 1,600.00 Bank Fees - FID 6,000.00 Search Fees 6,000.00 Rent & Outgoings DBR 11,000.00 Rent Grieves (if so arranged) 7,200.00 Miscellaneous ETSA Printing etc 6,000.00 ----------- $143,800.00 ----------- If Grieves pays own rent and outgoings above estimated costs reduce to $136,600 which would require a minimum of 33 transactions only each month. The potential, with T Grieves, should be not less than 50 transactions minimum monthly or possibly higher than 65 monthly.
If transactions averaged less than 45 monthly estimated outgoings would be reduced accordingly.
Agreed Factors
Property at Birdwood to be transferred from Quality Realty to T and W for the sum of sixty thousand dollars. T to transfer to FL Shares registered in Quality Realty as well as signed transfer of interest in 105 Roe Road...
T and W to retain possession of 105 Roe Road for their own occupation for as long as required. Existing mortgage payments additional to rates payable during term of occupation as rental requirements.''
7. It was part of the taxpayer's claim, as opened by Mr O'Brien, of learned counsel for the taxpayer, that W was paid her share of the profits of the business each week ``on either a Thursday or a Friday in accordance with the practice that prevailed in the office at the time, a point which I can hardly see my friend can contest seriously, and that is whether or not amounts of $400 or more per week were paid to W by the secretaries who were in charge with making payments to the employees of the business from week to week.''
8. The first witness to be called on behalf of T - Joanne - was employed by T between March 1984 and November 1991. She described her duties as including ``making out pays, doing settlements, booking contracts, doing the banking - just the whole general office running''. The witness deposed that on the occasions she made out the weekly pay, provision was made for an amount to be paid to W, who would come in and say: ``Okay, where's my pay?''. It seems, according to Joanne, that W ``always came up with the kids and left the car running outside''. When asked how much was paid to W, the witness replied ``usually over $400''. When asked by Mr O'Brien whether the witness ever saw W ``in the employ of Landbrokers'', she replied: ``She never worked there while I was there''. In cross-examination, Joanne recalled that ``there were occasions where T would ask me to go down to the bank and pay money into her account, or he'd give me cash, or she'd come up and say she needed more cash or whatever, things like that. But as to exactly, I don't remember''.
9. The witness was shown annexure B (the random statement setting out payment of wages referred to in T's statutory declaration (``T''15) which, although revealing certain irregularities which the witness was unable to explain, such as a ``wages'' payment to W of $22 and some withdrawals for such outgoings as stationery and title searches under the entry ``wages''), the witness was able to demonstrate regular payments to W from the business account, albeit these rarely were identical in amount. She claimed that when she made out the wages cheque, she would merely look at what W had been paid the previous week and use that in computing the total amount to be drawn for wages in that week. The witness was to add that ``W was always asking T for money, but I don't
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know whether that was meant to be out of wages, or whether that was housekeeping or what extra it was. She'd ring up and say: `I need some money to go and buy this, or food or whatever'... T would usually go to the bank and cash it while W waited''. When asked whether that would be entered up into the books, the witness replied that she ``supposed so''. She conceded that looking at the General Account (``T''15) one could not identify what represented wages, an advance on wages or the additional gratuitous payments referred to.10. The witness added that whilst she believed that W was a proprietor of the business, she took no active interest in the running of the business - ``her whole thing was her kids - and money''.
11. Another employee of Landbrokers - Donna - worked in the office between January 1990 and June 1991. She was able to say that she remembered that ``W got paid every week, the same as we did''. She agreed that throughout the time she worked at Landbrokers, W did not perform any services. When cross- examined as to how W's remuneration was calculated, all the witness could say was that the amount ``remained the same all the time''.
12. T gave evidence about his courtship with W, how he trained W in dressage, how her parents were avid matchmakers, and how, on the occasion when T forgot to turn the gas off in the flat in which he was then living and succeeded in burning the place down, they invited him to move in with them and their daughter W. T went on to explain that at that time he was studying engineering, but was persuaded by FL to change his career path: (p 38 tr)
``I had conversations with FL, who said that he had a landbroking business. He wasn't actively engaged in the business at the time. He had a heart attack some 18 months previously, quite a bad one, and spent a lot of his time at home. He had a secretary. He explained that if I wished I could join the business. He was of two minds whether to close it down or not at that time and if I wished I could join the business, and once I had my licence the business would be mine. He indicated to me at the time that he would help me, he would put me in the - just help me in the office and get me started.''
13. T and W became engaged in or about September 1977 and were married in April 1978. They continued to live in the same house as W's parents for some two years at 107 Roe Rd Norwood, after which they moved to 105 Roe Rd, immediately adjacent to 107 into a house the couple had built on the land which was jointly owned by FL, ML and W. The building costs were paid for out of the couple's combined savings together with a loan from the bank of $28,000. In the events that occurred, title to the land was never transferred to the couple. T claimed that most of the repayments to the bank came from him. He stated: (p 39 tr)
``When we were planning to have our own home it was discussed between the two families that there was a vacant block of land next door, and we could, if we wished, build on that land, and at any time - we were told - should we wish to leave, we would be paid the present value of that property. But we were told it wouldn't be sold.''
14. When asked by counsel to describe ``a typical day'' in this menage a cinq in 1979 (the couple's first child was born just before the move next door), T deposed that the relationship was harmonious, adding that both his wife and mother-in-law worked in the office at that time, generally arriving there at about 9.30 or 10 o'clock, W bringing the young baby with her. This cosy relationship lasted until 1982 when T and W wanted to have another child, a proposition strongly opposed by W's parents: (``They were dead against it'').
15. The deterioration in relations was further exacerbated after T passed his landbroker examinations in 1982. T had been led to believe that once he became qualified, FL would cease his involvement in the business and hand it over to T. Arguments arose, T maintaining that that was the understanding and FL claiming that he was unable to recall any such undertaking. Domestic arguments also became ever more heated, particularly about having children and what was to become of the house that T and W had built. It seems that FL now refused to pay for the building costs, claiming that the land was more valuable as vacant land.
16. I do not propose to go into the wealth of detail I was given, chronicling the deteriorating relationships within this family - including physical violence on one occasion - which, although useful as background to explain later events, can serve little purpose in being recorded for posterity. Suffice it to say that as a
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chronicle of family life, it could have been written by Chekov.17. It seems that after a great many tears shed by FL and an agreement by the young couple to stay, the parties reached a new modus vivendi. As T put it (p 45 tr):
``It was decided that first of all we would not move, we agreed that we would stay where we were for the next 12 months, that we would have, like, a cooling off period. I think Charlotte was to be born in about four months time or three months time from then, and that it was agreed that the families were living too closely together, that rather than move away FL and ML would take a different role in the business and that they would do the book work, the trust account and the general account and I would take over the day to day running of the business. It was agreed at that stage that the moneys from the business, the income would be divided equally, that we would each get a wage and that the profit would be divided equally between the four parties at the end of the financial year.''
(my emphasis)
It was at or around this time, when the birth of the second child Charlotte was imminent, that W retired from the business, never to return to any active participation in its conduct.
18. Referring to FL's handwritten notes (see para 6 above), T stated that it was his belief that the reason that the Land Agents Board would be advised that he, T, was to be the sole proprietor of Landbrokers was because his wife was unable to be a proprietor at that time (not being registered). However, it was his understanding that he was not to be the sole legal or beneficial owner of the business. He was asked by his counsel what he understood when he saw the initials T and W in the proposal. He replied: ``It was that profits were to be equally divided by my wife and myself; that she and I were to receive those moneys. We were partners''. Counsel then put to him:
``So an unstated assumption is that when the business was transferred it was transferred to both of you? - Yes.''
19. It was part of the proposed arrangement that the name of the business be changed from Landbrokers to ``T & W'' and T deposed that this name change was subsequently effected.
20. The proposal, as set out, was finally not put into effect. T deposed that he thought it unfair. As T put it:
``The figure of $130,000, I felt, was unfair in that previous to this time there had never been mention of any form of consideration - any form of payment for the business - ever.
Did you raise that matter with FL? - Yes, I did.
When did you raise that matter? - On the next - the day after I received this from FL.
Can you tell Dr Gerber the effect of the conversation that you had with FL? - The full effect? FL threw me out of his house....''
21. Later ML approached T and asked him to return and have a further conversation with FL. On that occasion:
``I said to FL that I thought that the whole proposal was very unfair. I said that - there was no mention of the house - our moneys for the house; that he had never mentioned any figure for the business. I couldn't afford - I didn't believe that this was viable in any form. It would make me - it was just not possible to be carried out. I didn't think it was possible to be carried out in the form that he said. Basically, I said that he - basically, I called him a cheat. He had put me in a position where I was being `done'.
Mr O'Brien: When you say he was `a cheat', what had he done precisely that you thought was dishonest? - Well, I had put - both W and I had put a lot of effort into that business over the years. I'm not saying that FL didn't, but - he had. I thought that it was just contrary to every conversation, impression, that he ever gave me to me, or we had together, that this idea was all - it was just totally foreign.''
22. It seems that as a result of family pressure, FL was prepared to reduce the purchase price to $65,000, being T's half share of the business and that FL would ``forgive'' the other half, being his daughter's share. T was asked:
``Of that $65,000 how much did you pay? - $7,000 or $8,000 in cash.
Did you make provision to pay that $65,000? - Yes.
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How did you make provision? - I got a term loan from the Commonwealth Bank at Norwood.
How much did you borrow? - $55,000.
So you had that loan approved? - I had the loan approved.
Did you pay that money over to FL? - No.
Why was that? - Because the Birdwood property which was part of this proposal was to be transferred to W and myself and at some stage in the time there before the transfer was to be effected we, or W - I made it known that we did not intend to live on that farm, that we intended to sell the farm and buy something which was already established - a home and possibly something closer to Adelaide or elsewhere. When FL found out about this - FL and ML - they put their foot down and said that the farm was not to be sold. They saw it as the family farm and even though they'd only had it for a year they wished that the farm not be sold. I had a transfer which had been signed by ML and W as the director and secretary of Quality Realty and it had been stamped by the Stamp Duties Office. I even had the title to the property so that at any time I could have for approximately three days registered that transfer, but I was told by FL that he didn't want us to sell and that he wished to have the transfer and the title back, and I gave them back. About the same time there was a problem with the house that we had built and from the proposal that FL had given me I understood that the farm property was in compensation for our interest in the house that we had built next door and FL wanted that document back, the transfer and the title, and I gave them back. He agreed that he would work out with me a cash payment for the moneys that were owed - that should be - the value of the farm less the mortgage, but that never happened.
You settled upon a purchase of a property in Springton. Is that correct? - That's right.
Now, in anticipation of paying the purchase price you relied on what promise from FL? - He'd agreed to pay us $30,000.''
(pp 59-60 tr)
23. Suffice it to say FL did not pay the $30,000 but instead offered T the opportunity to remove the house physically from the Norwood property. In the events that occurred, however, T bought a house at Springton for $155,000, using (i) all of the $55,000 borrowed from the bank for the purpose of paying FL, (ii) a further $30,000 borrowed from his father. Apart from the $7,000 or $8,000 T paid FL in cash, he made no further payments for the acquisition of the business.
24. T, having taken over the business in April 1985, claimed to have paid his wife a regular salary. According to the Group Certificate (exh ``B''), W received $14,695 for the 1984/85 tax year. It will be recalled that for the major part of that tax year, the business was still being operated by FL and ML. When it was pointed out to T that W had ceased working in the business after the birth of Charlotte in March 1984, so that the payments could not have been wages for work performed, he explained that the money paid to W ``was her share'' of income of the business. Mr O'Brien put to T - and he agreed - that he paid this money to W pursuant to ``the profit-sharing agreement that had been entered into in late '84, applicable from 1 July '84 to 31 March '85''. However, when I pointed out to counsel that according to the evidence, the document appended to T's declaration could hardly be said to constitute an ``agreement'', T stated to the Tribunal that he regarded W nonetheless as his ``partner'' as counsel put to the witness: ``in furtherance of the agreement [you] made with her father''.
25. When shown the general accounts which had been previously shown to the two employees of the firm, and in particular a cash withdrawal in May 1984 for $673 disbursed as follows:
Stamps & Searches Joanne T W
$81.70 195 177.15 177.15
Asked why T paid those sums to himself and W, he replied:
``That was W's money; it was her share of the profits.
And how did you ascertain the amount of $177.15? (the next withdrawal shown in the accounts) - It was agreed between W and myself.
And how was that agreement struck? - By discussion.
Discussion where? - At home.
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And how long prior to this payment did that discussion occur? - There were ongoing discussions as to how much W received, whether - initially when we took the business over, we discussed these things.
So periodically you and W would discuss how much she was entitled to? - Yes.
And how would you resolve her entitlement, what basis, what formula would you adopt? - Well, basically, I kept it to what - W had received a wage from a share of the money from her father, we agreed that we would follow that basically in principle, but if the business could not afford it then it would have to come down, but usually the business was able to afford that sum of money that we agreed. I think there was only one occasion where I could not afford to pay out for a week or so.
If you go down the column again you will see $170 and $170 (shown as having been paid to T and W) - Mm.
What is that a reference to? - The same drawing of cash and payments.
Then you go over the page and you will see $2150.15 and $2150 being amounts brought forward? - Yes.
That represents the sum of the numbers that have gone before? - Yes, it does.
We come down again to the pay $142 and $142? - Yes.
And that represents? - Again, payments made for W and myself.
Then we come down a little further and it says, $170 and $170? - Yes, again, payments for W and myself.
You come down further and it says, $500 and $500? - Again, payments to W and myself.
Why are these amounts so different? - I am not absolutely sure. Usually they were - this was right at the beginning, in 1985, when I took over the business. At that time I had registered the business in the name of W and myself. I had my Group Certificates in the name of W and myself trading in partnership as Landbrokers and the moneys were drawn in equal amounts at that stage.
Go over to page 92. There we have the same two columns more or less in the same position as before. Against W, we have an entry for $300 and we have no entry for you? - Yes.
What would that be due to? - It may have been a mortgage payment that was due. I really wouldn't know.
Then down below... we have $1014 and then $1014 again, but in the case of W it is crossed out and $300 is substituted? - Yes.
What is that? How would you explain those entries? - At the time I was making payments to FL of $400 a week or thereabouts, I am not quite sure of the exact amount.
Why were you making those payments? - That was part of the agreement that we'd come to in respect of the business changing over. This is part of your payment of the purchase price? - Yes.
When did you stop making those payments? - It was at about the time of the argument on the Birdwood property and the home at Norwood.
Now, go down a little further you will see in the column under your name you have got $4000? - Yes.
Have you any idea what that is? - I could try to find out, but I do not have a clear recollection of the $4000.''
(pp 65-66 tr)
26. T agreed that he filled in the Group Certificate in the year now under review (1985/86) and insisted that W received the amount stated therein ($19,454.20). When counsel asked the witness whether this sum represented W's share of profits, he readily acceded to that proposition. When it was pointed out to T that the payments appeared to fluctuate from week to week, he nevertheless persisted with the assertion that the various payments constituted ``payments of profit''. T's net income in the same year from the business was returned as $19,904.
27. The Tribunal was informed that the couple separated on 2 April 1991 (according to T: ``She wanted more out of life than I could give her. She had a boyfriend''. According to W: ``Locked out of my home, mother of five kids, with another woman living in my home, which is still the present situation. I have no maintenance, not even a home''). As a result of this marital break-up, it seems FL went to the
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tenant who occupied the office next to T at Landbrokers and advised the tenant that henceforth he was to pay the rent directly to him (FL) and there and then increased the rent from $400 to $800. As a result, the tenant moved out on April 25 and, as T took the view that the loss of tenancy was due to FL's action, he informed him that:``as he had been the cause of my tenant leaving, I was unwilling to pay the rent. I would only pay the rent for my side of the office at that stage. FL wrote a letter back and demanded I pay the full rent and wouldn't acknowledge that he had even been in touch with my tenants.''
This, in turn, led to FL - who still owned the business premises - to come to the office, remove all the computers and fax machines, change the locks and put up the following notice:
``To the proprietor or manager of Landbrokers. These premises have been locked as a result of non-payment of rent. All present and future tenancy rights are cancelled forthwith.
Signed by the landlord this 18th day of May, 1991.''
T thereupon called in a locksmith to open the premises, and having gained entry, he removed the files ``and set up an office at home the next day''. T claimed that, because he was handling a lot of money, the notice would lead his clients ``to worry about the security of any money that I held or was to be holding on their part to complete any transactions''.
28. That concluded his evidence-in-chief.
29. T stated in cross-examination that after he took over the business in April 1985, the important decisions were made by him in consultation with W. He regarded her as his partner ``in the sense that - in the way the business was run immediately before I took over; in the way the business was transferred to me; and in the way we ran it afterwards''. He admitted that when he saw his accountant, a Mr Foti, in September 1985, he was advised that, because of the legislation then in force relating to landbroking, T could not continue to operate the business as ``T & W trading as Landbrokers in partnership.... I (therefore) discontinued the practice of W & T trading as Landbrokers as a partnership. When I'd first gone there, I'd understood that we would lodge a Partnership Return and that wasn't possible from his point of view''. When asked whether ``there was a time at which the partnership was dissolved between you and your wife?'', he replied that he believed that this dissolution occurred ``just after our separation''. However, notwithstanding the advice received from Mr Foti, T claimed he did not terminate the partnership before the marriage break-up ``because that was part of the deal with FL and ML, with our deal with FL and ML''.
30. T was asked whether there had been any discussion between him and Mr Foti (who prepared the returns) as to why W, who was allegedly a partner, was shown in the books as being in receipt of wages. T replied:
``She had been up to then (receiving wages). There was no question raised at that point in respect of W having become suddenly a partner and then not a partner.''
31. As I understood that the case was being fought on the basis of some sort of a trust and that a partnership was not being alleged, I asked T:
``The D President: Did you ever at any stage at the end of any financial year work out just what the profits of the business were? - No, Sir.
Really, these moneys that were paid to your wife at that time were an anticipation of profits? What happened to the rest of the money if there were profits? Was there a distribution, ever? - No, Sir.
Well, what happened to the profits over and above? - As the business grew - and for the first few years it went down slightly and then it came up - those additional profits went into my pocket.''
32. Counsel then asked T to confirm that after April 1985, W ceased to be employed in the business. He readily agreed.
``That it was incorrect and inaccurate to present to the Taxation Commissioner that she was an employee of the business? - Yes.
In relation to most, if not all, of the returns which were filed by your wife, they were prepared by accountants or tax agents on the basis of information that you provided? - Yes.
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That perhaps with one exception, you signed the returns on your wife's tax return? - Yes.
You accept that that does not accurately reflect the circumstances operating in the business for those financial years in relation to your wife? - I accept that.''
33. Later, the following took place:
``You say now, do you not, that the arrangement as of about 1 April 1985 is that there was the business of Landbrokers that you had taken over and you were required to account to your wife for half of the income? - Yes.
That is what you say, is not it? - That's true, yes.
Now, what I am asking you is that why is it from the time you took it over that you haven't worked out the half which you say you needed to account to your wife for? - In the first few years I think it was, approximately half the money - I am not quite sure exactly what the proportion was - but it was approximately half, and in later years as the profits went up and things got better the arrangement wasn't that I keep on paying W exactly half of the profit, if the business was earning $100,000, I didn't feel that I was bound to pay W $50,000.
Well, how do you say it started. What was the percentage breakdown when you started? - It was roughly fifty-fifty.
When you say roughly fifty-fifty -? - Roughly fifty-fifty, yes. It wasn't worked out.
Well, who determined that the division of income ought to be roughly fifty-fifty? - That's how I understood it from FL.''
34. T was taken through the Statement of Profit & Loss Account in the 1986 tax return and asked to explain a claimed deduction of ``interest - 10,730.50''. He explained that this was the interest on the $55,000 he borrowed to pay FL the $65,000 he had agreed to pay for the business. When I pointed out to him that he had only paid FL some $7,000 odd, T explained that ``it went both ways - he didn't pay me and I didn't pay him''. He agreed that the borrowed funds were not used in the business.
35. As noted before, the couple separated in circumstances of singular acrimony. Mr Cole, of learned counsel for the respondent, put the following to T:
``Was there a point at which you say that your requirement to account to your wife for a share of the business ceased? - Yes, there was.
When was that? - In May 1991.
Was that purely, as you see it, on account of the separation? - No.
What happened then to mean that you did not have to account to your wife any further as you would see it? - That was when FL locked me out of my business.
On your version of events why did that mean you no longer had to account to your wife for a share of the business? - Because I no longer used Landbrokers, I was locked out of that office. I started a new business under the name of T, Licensed Land Broker.
Doing the same work? - I was a Licensed Land Broker. Yes, I was working from home, not from the old office.''
36. It was common ground that in 1989 a document was lodged showing a change in the registration of the business name. T claimed that it was signed by both him and W. T persisted in this assertion when pressed that the signature ``W'' was in fact signed by his wife. He strongly denied that he had placed the signature on the document.
37. Much cross-examination was directed to what became of the business after T was ``locked out''. However, since this occurred outside the period I have to consider, I propose to omit this evidence. Suffice it to state that the computers and other equipment seized by FL were claimed to have belonged to T and W (``They were W and my property, they belonged to - they were purchased outright''). At the time of the hearing before me, the property dispute between the parties in the Family Court had not yet been resolved. T claimed that he believed W would like him to sell the business ``and that they should get the proceeds from my business''.
38. When I asked the witness whether he made any contributions to the running of the household apart from the moneys W received weekly from the business, he replied:
``I made all the mortgage payments, paid Telecom bills, ETSA bills and private hospital bills - they were my responsibility
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and I also paid some accounts for doctors, dentist bills and things like that.She paid for the children's clothes and things like that? - Yes, she did. We did share that sometimes.''
39. ``T7'' consists of two statements made by W to an officer of the Tax Department. When I pointed out to both counsel that these statements were wildly at variance with the evidence given by T, and that as counsel for the Commissioner had not addressed a single question to the witness to enable him to agree or disagree with W's assertions, I could see little point in calling the lady, this resulted in further cross-examination of T, directed to these statements made by W, whom the respondent intended to call. For the sake of completeness, I propose to set out the two statements W made to the respondent.
``STATEMENT NO 1
My husband and I became involved in a land broking business called Landbrokers in I think 1984. At that time my husband and I purchased the business from my parents. The business was registered in our joint names. At this time no money changed hands for the purchase. The price of $180,000 was to be paid by instalments from the profits of the business. Nothing was ever discussed as to me having a working role in the business. I understood that my name was on the Corporate Affairs documents because my interests were being protected as the business was previously my father's.
I have never worked in the business either at the business address or at home. I have no clerical qualification. I cannot type and have no idea how to do the books for a business. When I married my husband I was a trainee nurse. During a marital dispute I became aware about April 1991 that my husband claimed that I was a skilled typist/clerk and had worked for the whole marriage.
Sometime later I became aware that taxation returns had been lodged in my name. I have never lodged or signed taxation returns in recent years.
I have examined taxation returns for the years ended 30 June 1986, 1987, 1988, 1989 and 1990. These returns are in my name. I have never signed those returns, each signature I consider to be a forgery. I notice that there are Group Certificates attached to each return suggesting that I earned income and tax instalments were deducted. I have never (illegible).
I have been shown copies of Reserve Bank of Australia cheques in my name. These cheques are dated and numbered 16/12/86 - 18382582 8, 20/11/87 - 18998792 1, 16/11/88 - 19566392 4, 27/11/89 - 20115155 7. Mr S from the Australian Taxation Office has told me that these cheques are taxation refund cheques. I have no recollection of every [sic] seeing or receiving those cheques. I noted also that cheque number 18998792 1 dated 20/11/87 has a signature on it. This is definitely not my signature. I also note that cheque number 20115155 7, dated 27/11/89 also has a signature on it. This looks similar to my signature but as I have previously said I have no recollection of ever receiving or signing these cheques.
Earlier this year as a result of a Corporate Affairs search, I became aware that my name had been removed from the business of Landbrokers. It appears that was done in July 1989. I have no recollection of discussing this with my husband and furthermore I have no recollection of ever signing the document authorising this to be done. I have seen a copy of the change of ownership form and it appears that my signature was forged again.
The name of the business Landbrokers has since been changed to T Licensed Land Broker. The business is operating at.... I have supplied with this statement a business card in his name.
I have been separated from my husband since April 1991.
(Sgd) W Witnessed: X 27.11.91
STATEMENT NO 2
This statement signed by me is true to my knowledge and belief and I make it knowing that if it is tendered in evidence I shall be liable to prosecution if I have wilfully stated in it anything I know to be false or do not believe to be true.
Dated the 6th day of January 1992.
(Sgd) W
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Signature witnessed by: X
I am married to T, a licensed land broker. My father, FL, owned a business called Landbrokers. This business prepared documents for the transfer of land.
...
In about May, 1985 my father transferred the business to my husband and myself. The agreement for this transfer was that we would pay him about forty thousand dollars a year for a number of years.
I was occupied full time on home duties and I took no part in the running of the business, although I regarded myself as a half owner. Both my husband and I were cheque signatories, with either of us to sign.
During late 1990 my husband told me that he did not wish me to visit the office any more.
In about January 1991 I found that I was no longer a cheque signatory on the business bank account.
In April 1991 I separated from my husband.
In order to determine what property I was entitled to, I obtained details of the registration of Landbrokers. This showed that the name was owned solely by my husband. A document in the file dated the 21st July 1989 purported to be signed by my husband and myself, transferring the business to his name only.
I never signed this document, and I had never seen it before I obtained a copy from the State Business Office.
In my opinion, based on my knowledge of his writing over our thirteen years of marriage, I believed that my husband has signed my signature on his document. This was confirmed for me when I showed the document to my eldest daughter, who is twelve years of age. She examined it, and said, `That's Dad's writing!'. I decided to confront him, and I asked him why he had done this and he replied words to the effect, `Because I knew you wouldn't sign it.'
In April 1991 my husband's solicitor claimed in Court that I had worked in the business for thirteen years, that I was well equipped for employment in the real estate or brokering business, and that therefore it was not necessary for me to be provided with any maintenance for the support of myself or the children.
In fact I had been totally supported by my husband throughout our married life, up to the time of our separation.
I then received a demand from the Taxation Department for $1300 provisional tax. On following this matter up, I discovered that my husband had submitted false tax returns for the past five or six years, signing my signature on them. In these, he claimed I was earning nearly $40,000 a year. I have reported this matter to the Taxation Department.''
40. When shown this document, T denied that the figure of $180,000 was ever mentioned as the purchase price of the business. He agreed that there was no discussion at any time between the parties to the effect that W would have a working role in the business. Whilst admitting to signing W's taxation returns for the years 1986, 1987, 1989 and 1990, he was adamant that W signed the 1988 return. As to the tax refund cheques which W claimed she did not receive, T maintained that they went into the couple's joint account. He admitted signing one of W's refund cheques using her name. He denied W's assertion that she was unaware that her name had been removed from the Register of Business Names. The following then transpired:
``You are aware that your wife says that she did not sign the change of registration of business name in her own name? - I am aware.
And she says that you signed it? - I am aware of that.
You disagree with that? - I disagree.''
T also denied that there was an agreement to pay $40,000 a year to FL ``for a number of years'' on the transfer of the business.
41. In yet another statement by W to the Tax Office, dated 13 May 1992 (``T11''), she alleges that she was present ``when T and my father agreed on a price of $180,000''. T vehemently denied that there was any such conversation. When referred to W's statement that (i) she did not sign the Change of Business Name application and (ii) she recognised T's writing on the form, T reaffirmed that W had signed the form. Indeed, it is fair to say, without
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repeating each and every allegation made by W to the Tax Office at various times, that T denied, in substance, all the more serious accusations she made. When asked why he had forged his wife's signature to the various returns (save the 1988 return), he replied ``because most of the time we were living in Springton and it meant taking the tax returns home. It sounds flippant, but it was a matter of convenience''.42. At the end of the further cross- examination, I asked T that, when comparing the various forged signatures, which he admittedly forged, and the signatures of W which were unquestionably hers, would he not agree that the signature on the Business Name Change document - which he was adamant was not a forgery but had been signed by W - did not look like W's known signature?
``The D President: I want you to think very carefully about this because this is one area where there is a clear dispute on evidence. Your wife has sworn that it is not her signature, and you have sworn that it is. Do you think there is any chance that you may have signed that, too? - I can't remember having signed it, but it's possible, yes.
So that the evidence comes to this: is it possible you may have signed it, but you recall clearly discussing it with your wife? - My wife knew about this, yes.
...
Mr O'Brien: I wonder if you could explain to the Tribunal the apparent inconsistency in the evidence that you have given. You have given evidence in response to my friend's questions - on I do not know how many occasions, but on a number of occasions - in which you said, quite definitely, you did not sign [it]? - I don't remember having signed it. It - you know, I have got no recollection of having signed this.
Well, having - what is your view - and I want you to consider this carefully - what is your view about the comparison of the signatures on those statements [i.e. W's signed statements to the Tax Office] that you have looked at, and the signature here? - They're inconsistent.
You do not doubt that? - No.
You do not want time to consider it? I am just asking? - No.''
He was pressed by his own counsel:
``You know your own signature? - Yes, I do.
You know the signature of your wife? - Yes, I do.
You know the signature you produce when you forge her signature? - Yes.
Now, having had a look at all of those signatures, and coming to the statement of change of persons, which signature do you think this one is? - It more resembles mine.
More resembles yours? - Yes.
Can you recall forging her signature on this document? - No, I can't.
If you had forged her signature on this document, do you know any reason why you would tell an untruth about it in these proceedings? Is there any motive that you can think of? - Well, if I had signed it, it would be a problem in the Companies Office.
Apart from that? - No.''
43. At the conclusion of the applicant's case, the respondent called FL as his first witness. He claimed that he was at all relevant times a registered landbroker. However, when he commenced in business as a landbroker, there was no requirement for registration. Hence he could practise in partnership with his wife (who was unregistered).
44. FL maintained that prior to taking over the business in April 1985, T was a mere employee of the business, having been employed by the business for about four years. He added that there was no change in running or management of the business up until T took over in April 1985. He claimed that until early in 1985, there had never been any discussion with T about FL and ML relinquishing their interest in the business. However, when shown the document headed ``Feasibility'' in his own handwriting, he remembered that he had offered T a percentage of the profits from July 1984. I am satisfied that there had indeed been negotiations for the takeover of the business well before 1985. When asked why W was included in the profit-sharing agreement as of July 1984, FL replied: ``only that she had been working for me and I could not protect her once I had transferred the business to T''. On the whole of the evidence, I am satisfied that FL
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intended, as early as July 1984, to get out of the business and hand it over to T.45. I do not propose to repeat the evidence of the witness relating to the various property transactions and alleged ``gifts'' and ``transfers'' between the family save that FL maintained that none of the transactions were remotely relevant to the transfer of the business nor bore on the consideration.
46. FL was carefully taken through his handwritten notes relating to the sale of the business to T. When asked why he noted that the Land Brokers Board be advised that T was the sole proprietor, he replied:
``Well, it wasn't a limited company that I could transfer shares to my daughter. T would be operating the company solely and wholly. He would be in possession of the income and it was only right that the Land Brokers Board should know that he was sole proprietor.
Was there any consideration given in your discussion with T to your daughter being a partner in the business? - No, never.''
47. When asked to what extent W was involved in discussions relating to the takeover of the business, FL replied: ``She virtually wasn't involved in any shape or form''. Nor was she present at any discussions (``I don't think the workings of the operation had any concern of hers at all. She was not concerned with it.''). Yet later he claimed that it was his original intention to sell the business to T for $180,000 and he only reduced the sale price to $130,000 ``purely and simply as pressure was put to me by my daughter and my wife''. He also claimed that the only money he ever received as consideration for the business were four instalments of $800 each, a total of $3,200. He did not pursue the debt because ``it would have only reflected back on my daughter, anyway''. When asked whether W had worked in the business during his reign, he replied that her work consisted of ``generally booking-in contracts; and answering the phone; a little typing - but very little; making tea - just general duties''. W's contribution, it seems, varied a great deal, depending on family commitments.
48. It soon became clear in cross- examination that FL's memory was gravely defective. For example, when asked when T was first employed in the business, he replied ``about 1982''. However, he was subsequently compelled to concede that it was, in fact, in 1977.
49. FL was adamant that notwithstanding the terms of the ``Proposed Takeover'' and notwithstanding his evidence-in-chief to the contrary, that there was never a business partnership which included the taxpayer and his wife - ``there was no agreement that my daughter or T should have a percentage other than what I wanted to give them''. The following then took place:
``Mr O'Brien: But you agreed that you would enter into an agreement with T prior to this proposal being drawn up, that he would be entitled to a share of the profits as from 1 July 84? - It was only a discussion that I would give him a share. There was no agreement. It was discussions.
There were discussions about him having an entitlement to a share of the profits from 1 July 84? - That's exactly right.
And this is a reference to those discussions? - Yes.
And what you are saying here is that those discussions have somehow crystallised into an agreement -? - No, no. No, there was never any agreement. It was only discussions that I would give him a percentage of the profits.
These are adjustments, are they not? - It was like an incentive.... There was no agreement that I had to do it at all. No written agreement. It was purely and simply a verbal agreement that I had decided on myself to get a percentage of the profits.
You just volunteered this? - That's so - it's an incentive.
So when you drew up this proposal and when you set it out, you decided out of the goodness of your heart to make a gift of those? - That's exactly right.
Why did you choose 1 July 1984? - Well, probably that was a date that suited me at that time. I don't know. I can't go back six years. This agreement to me became basically voided, anyway.''
50. I then took a hand in the examination of the witness:
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``Until you saw that document this morning, you had forgotten about that arrangement in July 1984, had you not? - Yes, I had.
And you were only reminded of it when you were shown that document? - That's right, yes.
And did that include your daughter in your munificence? - I looked on it, Sir, as a means of giving my daughter some benefit from the work she'd done with me. Now, after T took over I had no control over the fees.
Yes, I appreciate that, but let us just go back to 1 July 1984. Did you communicate to T that henceforth he would be entitled to a share in the profits? - I think that I discussed with him that I would give him a percentage of the profits but there was never any suggestion whether it was five per cent, 10 per cent, 50 per cent or anything else.
So, some time on or about 1 July 1984, you had come to some oral agreement with T at that stage that he would get a share of the profits? - That's right, Sir.
Now, did you at that same time communicate a similar arrangement to your daughter? - No, I never discussed it with my daughter at all.
So she was quite unaware of any entitlement to share in the profits? - Yes.
That only crystallised when this was put down on paper in April 1985? - That's right.''
51. When the witness was first asked when his daughter ceased working for the business, he claimed that it was about the time the business was taken over by T, but he was later forced to concede that W ceased working for the business when the second child was born (March 1984). Yet, when shown the Group Certificate for the year ended 30 June 1985 (exh ``B''), signed by him, showing that W had received some $14,695 as ``salary and wages'' between 1 July 1984 and 31 March 1985, he returned to the proposition that she worked for him for that period. When told that one of the secretaries (Joanne) who was employed in the business from March 1984 had stated on oath that W ``never worked in the business while she (Joanne) was there'', FL doubted that she was telling the truth, ``I think her memory could be failing there, too''. However, having observed both witnesses, I am satisfied that Joanne's memory was accurate and that FL's memory cannot be relied on. It follows, although irrelevant to my determination, that the Group Certificate for 1985 shows a payment of some $14,695 as being ``wages'' paid to W, a claim difficult to justify on the evidence. I mention it merely to illustrate that T may well have ``inherited'' a system of deductions which he continued throughout the period of his control of the business.
52. Mr O'Brien spent considerable time with the witness on the question whether his wife's (ML) involvement in the business contravened the Land and Business Agents Act 1973 (SA). Section 55 of which provides:
``(1)... a person shall not carry on business, or by any means whatsoever hold himself out, as a land broker unless he is licensed as such under this Part.
Penalty: Five hundred dollars.''
FL maintained that since his wife did not hold herself out as a land broker, he believed that there was no breach of the legislation. In any event, his understanding was that since he and his wife had operated in partnership prior to the passing of the 1973 Act, ``the Act after that date did not have any bearing on those partnerships which were in existence. That is what I believed''. When asked why he did not sell the business to both T and W, he replied: ``Because at that stage I knew there had been amendments to the Act that W could not conduct a business and, furthermore, I knew also that she would have no physical operation in the business.... I also felt that my sale of the business was to T, and T was the one that was responsible for the payment to me''.
The following then took place in cross- examination:
``Mr O'Brien: And that was the reason why you sold the business exclusively to your son-in-law? - Basically, yes.
That is a little difference from the evidence that you gave to my friend's question. You said it was a legal impossibility? - Well, it is both. I believe that it is impossible now under the Act. I've not engaged in studying the details of the Act since I transferred the business. I am no longer interested.
Well, let us answer this question: if it was possible for your daughter to acquire an
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interest in the business, would you have wanted her to acquire an interest in the business? - No, I would not.You would not? You would not have wanted to have protected her interest? - Not with the operation of the business, no.
You would not want her to have an interest in the business? - I would only want her to have an interest if the business was sold, not in the operations of it.... I wanted her to have an interest in the trade name of the company itself, in the business itself.
Any by the trade name, do you mean the goodwill? - Not really, no. If the business was to be sold I would then have expected my daughter to be protected, yes.''
53. Later FL was asked:
``Basically, you did not care whether your daughter's interest was protected or not, did you? - Not a great deal at that time. The relationship was good between her and her husband, and my belief was that, as long as he operated the business, she was going to get benefits from a better lifestyle, anyway. In other words, he would be capable of looking after her and the children. That was my main purpose.
Are you aware that your daughter has filed a series of affidavits in the Family Court in which she has said consistently that the business was sold by you to T and her? - She may well have said that. I don't know. I'm not a party to what she thinks, either.
Are you aware that she has made that same statement to officers from the Tax Office? - No, I'm not aware of what she said in that respect.
You are not aware that the purchase price agreed upon was $180,000? - I'm not aware of the purchase price claimed. No, I'm not.''
54. Mr O'Brien then took the witness through the method he had employed in arriving at the valuation of the business and succeeded in demonstrating that the figure of $180,000 was, to say the least, a highly ``optimistic'' estimate and that the true value of the business was nearer $100,000:
``Mr O'Brien: And you did this when dealing with your son-in-law? - Yes, that's correct.''
55. At the end of the cross-examination, there being no re-examination, I asked the witness whether there had ever been a discussion within the family that ``you would forgive half the amount of $130,000, being your daughter's share of the business? - Never. I never had that discussion, ever''. When pressed, he grew ever more adamant that never, never, never had there ever been such a discussion. On that note, the witness departed.
56. The final witness for the Crown was W (since remarried). She was asked whether she was ever involved in the business (both before and after the takeover). Her answer was clear: ``Occasionally I would just help out making tea, coffee or just briefly call in. But not really, No, not as an employee''. She also denied being involved in any discussions involving the transfer of the business from her parents to her (then) husband. The witness was extremely vague in her evidence, as the following will disclose:
``Mr Cole: And how did you find out that there was a proposal for him to take over the business? - Well, during the course of the marriage I wasn't aware of anything. It would have been after we separated and I tried to establish what ownership or part of it I had. That would have been way after.
Were you aware at some stage that your husband had taken over the business of Landbrokers? - Well, I was aware that my father was not running it now and it was T's to run.
And how did you learn that T was to run the business as opposed to your father? - Well, dad had retired from it.
And how did you know that? - Well, it was a family affair so I guess I was there to see.
The D. President: Don't guess. Do you recall that anyone ever told you? Did it all just happen - discover it by accident? - No, dad just stopped working in the business-
Yes, but did he say something to you about it? - I guess he did, yes.
No, don't guess. Do you recall him telling you about it? - I don't recall an incident.
Did your husband tell you about it? This all happened in total ignorance - or any
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awareness on your part? - Well, it probably would have been in '84.Did someone say something to you in '84? Did your husband say: look, I'm taking over the business? - Yes, he would have.
Well, did he? - Yes, he did.
Mr Cole: Do you recall the circumstances in which it was mentioned to you that your then husband was taking over the business of Landbrokers? - It would have been at home some time and just discussed.
Were you involved in any of the discussion as to the terms of the takeover business? - No.
Do you recall, now, when it was that your then husband took over the business? - Yes, it would have been in '84 after my daughter, Charlotte, was born. She was born in March.
From your understanding did you have any interest or involvement in the business of Landbrokers from the time that your husband took it over? - No.
Did you have a view about whether the business was transferred just to your husband or to your husband and yourself, or to your husband and any others? - No, I would have thought it would have been T to run it and my part would have been as his wife.
The D. President: This evidence is very unsatisfactory, Mr Cole. Everything is `would've'. I am not interested in what `would've' - I am interested in what this witness knows, what she can recollect.
Do you recall any conversations you had with your father or your husband in relation to this? - We didn't have any conversations.
It was never discussed either between you and your father or between you and your husband? - That's right.
These things just happened? - Yes.
The only way you became aware of it is when you say your father had retired and your husband was in the office? - That's right.''
57. Subsequently, the following took place:
``Mr Cole: I understand that you separated from T in about April of 1991? - That's right.
Up to that time, did you know anything about the circumstances of the transfer of the business to T other than what you have already told the Tribunal? - I knew nothing about it.
Did you work at all in the business after your husband took it over? - No.
Did you attend there on occasions? - No.
Did you receive money from the business? - No.
During the time that T was operating the business did you receive any money from him? - Only his housekeeping.
How was that paid to you? - It was through the week as an amount to buy groceries - it was never a lot.
How did you physically get your hands on that money? - He'd give it to me.
Where? - At home.
In the time after your husband took over the business did you attend there at all for matters other than business matters? - No, except perhaps to call in and say `hi' if I was passing by - just very briefly.
During the time that your then husband was running Landbrokers, were there ever any discussions between yourself and him as to the running of the business? - No.
Were there discussions as to major decisions which were required in relation to the business? - No.
Were there any discussions between yourself and T during the time that he was running the business of Landbrokers in relation to payments which were, or should be, made to you? - No.
During the time that T ran the business did you have any understanding as to how profitable, or otherwise, the business was? - Definitely not.
Did you ever see any business documents in relation to Landbrokers after the time that your husband took it over? - Not at all.
Did you have a share in the business? - Apparently not.
ATC 420
Did you think you had a share in the business? - As his wife I would have thought so.
What made you think that? - I thought all wives would have had part of whatever their husband had.
Is there anything else to lead you to think that? - I thought it was common knowledge.''
58. When I pointed out to W that she had stated in one of the interviews with the Tax Office (``T7''):
``My husband and I became involved in a land broking business called Landbrokers in, I think, 1984, she `explained' this away by stating:
Yes, well, that would have been after I left him and I became aware of the fact that these events did occur. I mean, evidently after I left him, people did point out that I had some kind of a part of the business. That was revealed after I left him, though.
Mr Cole: That is what you are referring to when you say you became involved in the land broking business? - As his wife. I didn't really mean as having a working part of it.''
59. When asked by Mr Cole to explain the next part of her statement: ``At that time my husband and I purchased the business from my parents'', she replied:
``Well, look, I really don't know. This was pointed out by my dad after I left T and that was a fact. I had no idea of that at the time.
The D. President: Just so I get this clear, your father pointed out to you that you and your then husband were the joint purchasers of the business, is that what you are saying? - I don't believe so, no.
Well, what are you saying? - That it must have been sold to T.
Well, that is not what you are saying there, though, is it? - Well, it must have been worded wrongly.
Well, you read it through, you said, you signed it? - Mm.
`My husband and I became involved in a land broking business called Landbrokers. At that time my husband and I purchased the business from my parents.'
It is a very clear statement, is not it? - I had nothing to do with any of it, I was just married to him.
Quite, but you just now said that you were told by your father. - After I left him.
After you left him, what did your father say to you? - Well, that's what happened.
What did he say to you? - That he had sold it to T.
But that is not what you are saying there, is it? - I am sorry about it.
What you are saying is that, `my husband and I purchased the business from my parents', so you were a purchaser, and a moment ago you said that that was what your father told you? - I thought as his wife I had no part of the business or the running of it. He made it specially a point that I would know nothing of it, especially during the marriage.
Well, see whether you can clear it up any better than I can, Mr Cole.''
60. The witness denied having signed any of the returns (including 1988). She also denied receiving any tax refund cheques and claimed that the endorsements were forgeries. She also denied that there had been any discussions with her husband about business name change and that her ``signature'' on the application form was signed by her husband.
61. When shown the statement signed by her dated 6 January 1992, claiming to be ``true to my knowledge and belief'', she admitted that ``my dad would have written that out at that time''. In other words, the claim in the statement: ``In about May 1985 my father transferred the business to my husband and myself. The agreement for transfer was that we would pay him about forty thousand dollars a year for a number of years'' came from her father, not from her.
62. In yet another statement by this witness (``T11'') she claims that ``I was present when T and my father agreed on a price of $180,000. This was to be paid in instalments''. She agreed that the statement was false and when asked to explain how it came about, the witness just shrugged her shoulders and said: ``I can't explain it. I don't know''. When pressed by me:
ATC 421
``The D. President: How did it come about that you said it in the statement? - I can't explain it.
There are only two possibilities, are there not; either you said it, or the Tax Officer said it. Which is the more probable? - I wasn't there when it was said.
So when you said it at the time [to the Tax Officer] you deliberately misstated the position, did you? - I don't - Well, did you? - I don't now what to say. I don't know what - I wasn't there. It was never a formal contract. Nothing was ever signed. Whether it was just bandied about-
The point was that you stated on that occasion that you were present when your father and your then husband agreed on the price of $180,000. You say that that is untrue? - Well, sometimes it must have been mentioned. I mean, whether it was set- down and-
WERE YOU PRESENT, MRS W? - No.
So when you said it on that occasion it was false, was it not? - It must have been, yes.
Carry on, Mr Cole.''
63. The witness was adamant that throughout their married lives T maintained that the business was his and his alone and that she never received any benefit from the business. When shown the Group Certificate (exh ``B'') for the year 1984/85 signed by her father, showing that she received some $14,695 as salary from the business, she persisted in her claim that she did not receive the money. She was then asked:
``Mr Cole: When did you last recall receiving money from Landbrokers? - You mean directly; here's some money the business has earned; here it is?
Yes? - Never. Not even those refunds with my name printed on the cheques, evidently. They were never handed to me.
What about prior to your then husband taking over the business? - I didn't receive it then, either. I might have received it in forms of fridges and washing machines which I still haven't got. I've never been paid direct money from that business.''
(p 186 tr)
64. The witness conceded that the statements she made to the Tax Officer (``T7''), although signed by her, were really made by her father, who was present at the interviews. The witness was shown an affidavit filed in the Family Court in which she deposed:
``The business of Landbrokers and the registered name was owned and run for years by my parents. The business was sold to my husband and myself and the 1st day of April 1985 for $180,000 on vendor finance, to be repaid out of earnings.''
When asked whether that, too, was her father talking, she replied:
``Well, not entirely with that one because I would have just assumed, I mean, I was his wife, wouldn't it have been sold to both of us?... I really did think that as his wife, that I had part ownership. Apparently, that is not true, is that right? That even though I am his wife and we were married for 13 years, that gives me no interest in that business?... I thought as a wife that you were part-owner in whatever, including the husband's business.''
65. W denied ever going to the office on a Thursday or Friday to collect some money and went so far as to say that both her husband and the two secretaries called by the applicant were lying when they asserted that she received money regularly. (``God, that's just not true. That's just not true. How can people lie like that? I am astounded really.'') She was then asked:
``Okay, and if your father said you were paid before T took over, he was also lying? - Well, with that before T took over, my father might have given the money, and I do believe he did, on my behalf to T, which means that I never received it directly. But money on my behalf was given to T and I do believe that was the case, because sometimes I was meant to have received a certain amount and I never did receive it.
THE D. PRESIDENT: But it was never for any work done on behalf of the firm? - Apart from odd jobs, I suppose.
Apart from what? - Making coffee or just helping a bit around the place.
But you would not be making $14,000 worth of coffee a year? - Apparently so, if that is what you are saying.
Well, in the years starting from 1982 you received $9875, the same amount as your
ATC 422
husband. In 1983 you allegedly received $11,697.50? - That money was given to T not directly to me.Yes, and in 1984 you received more than your husband, you received $15,465, just for making coffee? - Well, it was still paid to T and not to me.''
(p 191 tr)
66. In view of the inconsistencies in the evidence between father and daughter, I suggested that FL should be available to be recalled. In the result, he was recalled. He was asked as to his involvement in the statements made by W to the Tax Office. He claimed to be unable to recall whether or not he was involved. When shown her statement ``In 1985 my father transferred the business to my husband and myself'' and asked whether it was correct, he replied:
``Well, if she thought so, well, that's it. I can only give my evidence of what I know. I can't presume to know what my daughter thought.''
He reaffirmed that all negotiations for the sale of the business took place between him and T and that his daughter was not present at any of these negotiations. He denied ever having told W that the business was sold on the basis that T and W obtained the business in equal shares. When pressed in cross-examination whether he had read that statement relating to the transfer of the business to T and W, he replied: ``I more than likely did. I know I witnessed her signature, but whether I read it at the time I cannot recall''. When it was put to him that himself might have written those words, he replied: ``Anything's possible but I honestly don't remember''.
67. The issue which I have to determine will ultimately turn on the question which of the three protagonists in this drama - T, W and FL and the two bit players - come closest to telling the truth, a problem aggravated by the fact that FL appeared to have lost his memory and W claimed to have been kept in ignorance as to the state of affairs relating to the business prior to the breakup of her marriage and her subsequent awareness - such as it is - appears to have been acquired second-hand via daddy.
68. At the conclusion of the evidence, in view of the fact that the case had to be finalised in the remaining two hours, I made certain fact findings in the hope that it might shorten counsels' addresses. I stated:
``THE D. PRESIDENT: Well, I am mindful of the time factor. This is a procedure I would not normally adopt, but given the fact that we have got less than two hours to complete addresses...
I have heard the evidence of all the combatants, I think that is the only word to describe them, the parties are obviously at daggers drawn. I am satisfied, on the balance, that T did his best to tell the truth. On balance, the probabilities are that he did, in fact, sign that document which transferred the Business Name to himself, and I think that this is one aspect of his evidence that I am less than happy with, but on balance I am satisfied that when the business was transferred it was the intention of FL to ensure, as far as possible, that his daughter would be safeguarded as far as the law would permit. It was the intention, as far as he could take it, to ensure that T would obtain no more than a 50 per cent interest in the business and I am satisfied that T accepted the transfer on that basis.
What he did thereafter in giving effect to it is another matter... I propose to enlarge upon this in my written reasons. I am just giving an indication at this stage as to which way my mind is going. Having heard the evidence of the two employees and T, I am satisfied that W did receive amounts from the business. I am unable to conclude whether the amounts were, in fact, the amounts set out year by year in the returns. I totally reject W's evidence to the effect that she did not receive any benefits from the business, she clearly did and I so find.
It is also clear that T made no attempt at all to ensure that what may have been the original intention, namely that W's 50% interest was given effect to, and I think by his own admission, as the business prospered, he saw no reason at all why she should get anything approximating half...
It then becomes ultimately a question of law whether, in those circumstances, the moneys which were claimed as deductions for `salary' can somehow be salvaged by recourse to an implied trust, or by some other method.
ATC 423
I find that as a fact that there was no partnership, and I find as a fact that the business was transferred with the intention, accepted by both parties, that the wife would have an interest to the extent of half the (profits), and the only reason that it was not put into any contract was, of course, that as a matter of law it was believed this could not be given effect to. Indeed, the whole transfer appears to me to have been done in a very sloppy manner....
I do not know whether that assists the parties or not.
Mr O'Brien: I think that greatly assists in terms of how we formulate the relevant submissions, yes, Sir.
The D President: I am in no position to find that the amounts claimed were received. I am able to say that W did receive moneys on a regular basis from the firm and collected them in much the manner which was deposed to, and this receives considerable support even from the evidence of FL.''
(pp 213-214 tr)
69. Having now considered the totality of the evidence at leisure, a number of matters can be stated with reasonable confidence. Firstly, I am satisfied beyond all doubt that W at no relevant time performed any services for Landbrokers (other than making the occasional cup of tea) which would justify putting her on the payroll as an employee of the business. The fact that FL saw fit to deduct certain substantial sums from the returns during his reign over the business, year by year, allegedly paid as ``salary and wages'', does not make the Group Certificate ``definitive'', as was put to me by Mr O'Brien. As I see it, it was a tax ``lurk'' indulged in by FL and continued by T after he took over the business.
70. Notwithstanding FL's denials, I am satisfied that he intended W to benefit from the business at all relevant times both as to capital and income, a fact which receives some support from the ``remuneration'' paid to W between 1981 and 1985, which were roughly equal to the amounts paid to T, notwithstanding that on a quantum meruit W's contribution would justify no more than pin money.
71. I also find as a fact that during the negotiations between T and FL for the transfer of the business, it was expressly agreed between them orally that the income generated by the business would be beneficially owned by T and W in equal shares. It was this express agreement which was the cause of the reduction of the purchase price from $130,000 to $65,000, payable only by T, the other $65,000, being W's share was forgiven. This view receives support from the various statements allegedly made by W to the Tax Office but, as I find, dictated by FL. W's true position can be likened to a ventriloquist dummy mouthing her father's utterances. However, consistent throughout these statements is the proposition that the business was purchased by ``my husband and I'' and that ``in about May 1985, my father transferred the business to my husband and myself''. I therefore reject FL's vehement denials that the business was sold exclusively to T for $130,000. He struck me as a witness who would not shrink from saying anything on oath that came into his head, indifferent whether it bore any relation to the truth or not. I treat W's evidence as having no evidentiary value - she knew nothing and claimed amnesia for what little she might have known. I am satisfied that in the period now under review, she received regular payments out of the business. I am unable to say, however, how much she ultimately received. It soon became obvious that W is now consumed with palpable hatred for her former husband, and that this hatred coloured the whole of her testimony, even to the point where it may said to be ``against interest''.
72. That leaves T. Whilst moral rectitude was not one of his most outstanding characteristics - he was not above the occasional forgery and at first attempted to cover this up before me - he's the best I've got, and, on the whole, his evidence is credible and the most plausible libretto of this opéra bouffe.
73. Once I accept that the takeover was on the terms outlined above, it remains to be seen to what extent - if any - law or equity will give effect to the parties' intention.
74. The first thing to observe is - and I so find - that, for all practical purposes, W made no contribution whatever to the running of the business in any of the years now before me. Ignoring for the moment any contractual obligation T may have been under to pay her a share of the profits, her entitlement to a share of the income on a quantum meruit would be nil. The question thus remains: assuming that the facts as found by me, i.e. that T acquired
ATC 424
Landbrokers on terms that he and W (through her father) expressly agreed that the business would be owned by T and W in equal shares as to both assets and income, so that the relationship between T and W can be said to involve an express trust, will equity regard them as beneficially entitled to the assets and income of the business in equal shares?75. I find that Landbrokers was a business operated by a sole trader - the income it generated depended upon the services provided by T, the only person legally entitled to act as a land agent - it follows that T's income from the business was derived from his personal exertion.
76. What effect does my finding of a trust have on the fiscal consequences with respect to the income derived by T? On this aspect, the view of Beaumont J in
MacFarlane v FC of T 86 ATC 4477 at 4486 is instructive. The judge there stated:
``... The (Tax) Act, in my view, takes the taxpayer's income as it finds it - this is to say, subject to the general law in all its aspects. This will pick up the position at law and equity, modified by any relevant legislation, including the provisions of the Act itself. In
Stewart Dawson & Co. (Victoria) Pty. Ltd. v. F.C. of T. (1933) 48 C.L.R. 683 Dixon J., speaking of the presumption of advancement, said (at p. 691):`I see no reason why this rule should not apply in revenue matters. If liability for tax depends upon the existence or non- existence of a trust, the occasion seems to demand the application of the rules by which the determination of such questions is governed in Courts of equity.'''
77. I am satisfied that there are limits to what can be achieved by the use of a trust. ``Picking up the position in law'', it seems to me that, for tax purposes, one cannot use a trust in this case, whether express, implied or constructive, in order to divert income from this taxpayer's personal exertion; the income remains his income, irrespective of the method that may be adopted to dispose of it, and even if there is no intention to reduce the incidence of tax. It follows that such income cannot constitute trust income, not subject to tax in the hands of the trustee in reliance on sec 96 of the Act, which provides:
``Except as provided in this Act, a trustee shall not be liable as trustee to pay income tax upon the income of the trust estate.''
78. In the result, what is alleged to constitute W's share of the profits from the business was and remains the income derived by T by means of his own exertion, being his earnings as a land broker, and does not constitute the income of an income-producing property or income of a trust estate.
79. I have therefore concluded that as I understand the law, T cannot create a right to receive future income from his personal exertion. Whilst he can bind himself to hand over future income, it remains his income for tax purposes.
80. The instant case is somewhat complicated by the fact that, on a finding that there was a trust in respect of the assets of the business, including its equipment and goodwill, on one view, the income flowed in part from the assets and in part from the effort of its sole legal owner. However, this point was not raised in argument. In any event, it seems to me that on the evidence of both T and FL, there was little goodwill and even less equipment, so that the contribution of the assets to the income would not only be insignificant but, in any event, it would be almost impossible to disentangle ``income from property'' from ``income from personal exertion''.
81. The Crown sought to argue that, in any event, T cannot invoke equity because of his dirty hands (he forged tax returns and sought unsustainable deductions). For the reasons outlined above, there is no need for me to resort to the ``clean hands'' doctrine. In any event, that is an argument that should rightfully be advanced in ``another place'' rather than before an administrative tribunal.
82. In view of my conclusion on the law, if it is thought that I may have been ``overgenerous'' in my findings of fact, I can only plead in extenuation that, out of an abundance of caution, I have deliberately set out every fact that may be thought material if the matter goes ``to another place''.
83. In the result, the objection decisions under review are affirmed.
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