CASE 24/94

Members:
P Gerber DP

Tribunal:
Administrative Appeals Tribunal

Decision date: 29 April 1994

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Dr P Gerber (Deputy President)

The applicant included in his income tax return for the 1991 tax year a ``request for section 169A ruling'' (exh A, T3, p 13) which reads as follows:

``The taxpayer sold an investment property and wishes to determine in which year the capital gain is assessable.

The contract for sale of the property was signed on 20th June 1991, but the finance

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clause was not completed until the 3rd July 1991 and the settlement date was the 19th July 1991.

The taxpayer believes that as the contract did not become unconditional until after 30th June 1991 and did not settle until 19th July 1991 that the date of disposal is in fact in the 1992 tax year.''

2. By letter dated 10 June 1992 (exh A, T5, p 15), the respondent advised that:

``... for capital gains tax purposes, where an asset is disposed of under a contract, the time of disposal is taken to be the time of the making of the contract.

The existence of a condition in a contract will not affect the time of the making of the contract unless the condition is a condition precedent, such that the contract will not be entered into until the condition is met.

In the vast majority of cases (eg. standard finance clauses), a condition will merely be a condition subsequent, that is, if it is not fulfilled the contract may be rescinded.

Accordingly, it is considered that the gain arising from the disposal of your property has correctly been included in this years [1991] return of income.

Your assessment will issue separately to this advice.

Yours faithfully,''

3. On 15 June 1992, the respondent issued a Notice of Assessment (exh A, T4, p 14) to the applicant in respect of his 1991 year of income, including a net capital gain of $24,004 in his assessable income for that year. By a Notice of Objection dated 11 August 1992, the applicant objected against that assessment (exh A, T6, p 16-23).

4. By letter dated 2 March 1993, the respondent advised the applicant that that objection was disallowed in full because ``[a] Contract is formed on the date [it] is signed''. Being dissatisfied with that decision, the applicant applied to this Tribunal.

5. At the hearing of this application, the applicant was represented by Mr Harrison of senior counsel, with him Mr Varitimos of counsel, and the respondent was represented by Mr Logan of counsel.

6. No oral evidence was given at the hearing. The parties contented themselves by tendering an ``Agreed Statement of Facts'' and the ``section 37 documents''.

7. It is appropriate to set out the ``Agreed Statement of Facts'' in full.

"1. The applicant is, and at all material times was, an Australian resident who acquired and became registered as the proprietor of a house property at [the address] (`the property') after 19 September, 1985. The circumstances of the acquisition and holding of the property are not such as to make the proceeds of sale of or any part of them assessable income other than pursuant to Part IIIA of the Income Tax Assessment Act 1936. The property is not a `personal use asset' for the purposes of Part IIIA.

2. On 20 June 1991 (i.e. during the year of income the subject of the assessment in question) the applicant signed a contract for the sale of the property to [person named]. A copy of that contract, including the standard conditions of sale incorporated in it, is annexure `A'. The purchaser and the stakeholder also signed that contract during the 1991 year of income. There were no changes to the contract after 30 June 1991.

3. By items S and T of the Items Schedule in the contract and clause 32 of the standard conditions of sale the contract was conditional upon the purchaser's obtaining finance.

4. Suncorp approved the purchaser's application for finance on 26 June 1991. A copy of Suncorp's letter of approval is annexure `B'. Some time on or after 1 July, 1991 the applicant received a letter dated 28 June, 1991 from [the purchaser's solicitors]. A copy of this letter appears as annexure `C'. Clause 32 was not satisfied until 3 July, 1991 on which date the applicant received a letter dated 2 July, 1991 from the purchaser's solicitors advising that their client's application for finance had been approved. A copy of that letter appears as annexure `D'.

5. The applicant answered the purchaser's requisitions on title on 8 July, 1991.

6. The contract was completed on 19 July, 1991 on which date the applicant received the purchase price (less deposit which represented the amount of the agent's commission) in exchange for his then giving

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to the purchaser an executed memorandum of transfer of the property in her favour. Soon after completion the applicant ceased to be the registered proprietor of the property.

7. The parties are agreed that, if the Commissioner's interpretation of the Income Tax Assessment Act 1936 is correct, a net capital gain of $24,004.00 was properly included in the applicant's assessable income for the year ended 30 June, 1991. If, as the applicant contends, that interpretation is not correct, the net capital gain which accrued to the applicant as a result of his disposal of the property constitutes assessable income in the 1992 year of income.

8. The figure of $24,004.00 referred to in paragraph 7 is derived as follows:-

  Date of property's acquisition:  6 November 1987

  Cost base                    :   $34,710
  Indexing factor              :   1.240
  Indexed amount               :   $43,040
  Consideration                :   $67,044
  Capital gain                 :   $24,004.''
      

8. In arriving at his decision to include a net capital gain of $24,004 in the applicant's assessable income for the year ended 30 June 1991, the respondent relied upon sub-s 160U(3) of the Income Tax Assessment Act 1936 (``the Act''), contending that the time of disposal of the land was the time of the making of the contract of sale, which he considered to be the date of its signing. Mr Harrison submitted on behalf of the applicant that, for a variety of reasons, sub-s 160U(3) was not applicable in the circumstances, but, even if it were applicable, it did not cause the net capital gain in question to be included in the applicant's assessable income for the 1991 rather than 1992 year of income.

9. The relevant sub-sections of s 160U of the Act provide:

``160U(1) Subject to the provisions of this Part other than this section, where an asset has been acquired or disposed of, the time of acquisition or disposal for the purposes of this Part shall be ascertained in accordance with this section.

160U(2) If the time of acquisition or disposal as ascertained under a sub-section of this section is different from the time of acquisition or disposal as ascertained under a subsequent sub-section of this section, the time of acquisition or disposal shall be taken to have been the time of acquisition or disposal as ascertained under that subsequent sub-section.

160U(3) Where the asset was acquired or disposed of under a contract, the time of acquisition or disposal shall be taken to have been the time of the making of the contract.

160U(4) Where the asset was acquired or disposed of otherwise than under a contract, the time of acquisition or disposal shall be taken to have been the time when the change in the ownership of the asset that constituted or gave rise to the acquisition or disposal occurred.''

10. Firstly, Mr Harrison submitted that sub-s 160U(3) is inapplicable because s 160ZX applies in the circumstances and takes precedence over s 160U because s 160ZX is not expressed to be ``subject to'' the other provisions of Part IIIA, whereas the operation of sub-s 160U(1) is to make s 160U (including sub-s 160U(3)) subject to the other provisions of Part IIIA including s 160ZX.

11. Section 160ZX provides:

``160ZX(1) Where-

• (a) an asset is held by a person as trustee otherwise than as trustee of a unit trust or of the estate of a deceased person; and
• (b) a beneficiary under the trust becomes absolutely entitled to the asset as against the trustee,

the trustee shall be deemed, for the purposes of this Part, to have disposed of the asset to the beneficiary at the time when the beneficiary became so entitled.

160ZX(2) Where-

• (a) a trustee of a trust estate is deemed by subsection (1) to have disposed of an asset to a beneficiary; or
• ...

the following provisions of this section have effect.

160ZX(3) The trustee shall be deemed for the purposes of this Part to have disposed of the asset to the beneficiary for a consideration equal to the market value of the asset at the time of the disposal.''

12. Mr Harrison submitted that:

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``... as a result of the contract, there was an asset held by the applicant as trustee within subsection 160ZX(1), the beneficiary being the purchaser. The beneficiary became absolutely entitled as against the trustee on payment of the purchase price, resulting in a disposal at the time when the beneficiary became so entitled by reason of subsection 160ZX(1), and not on any deemed disposal at the time of the contract.''

13. The threshold issue relating to this submission is whether the land was held by the applicant as trustee for the purchaser. The classic statement in this regard is the oft-cited statement by Sir George Jessel MR in
Lysaght v Edwards (1876) 2 Ch D 499, that:

``... The moment you have a valid contract for the sale the vendor becomes in equity a trustee for the purchaser of the estate sold, and the beneficial ownership passes to the purchaser, the vendor having a right to the purchase-money, a charge or lien on the estate for the security of that purchase money, and a right to retain possession of the estate until the purchase-money is paid, in the absence of express contract as to the time of delivering possession.''

(at p 506)

However, a more modern view, as espoused by several High Court judges, would appear to cast some doubt as to the continuing correctness of that statement. For instance, Mason J (as his Honour then was) in
Chang v Registrar of Titles (1975-1976) 137 CLR 177, stated at pp 184-5:

``It has long been established that a vendor of real estate under a valid contract of sale is a trustee of the property sold for the purchaser.

However, there has been controversy as to the time when the trust relationship arises and as to the character of that relationship. Lord Eldon considered that a trust arose on execution of the contract (
Paine v. Meller (1801) 6 Ves. 349 [31 E.R. 1088];
Broome v. Monck (1805) 10 Ves. 597, at p. 606 [32 E.R. 976, at pp. 979-980]). Plumer M.R. thought that until it is known whether the agreement will be performed the vendor `is not even in the situation of a constructive trustee; he is only a trustee sub modo, and providing nothing happens to prevent it. It may turn out that the title is not good, or the purchaser may be unable to pay' (
Wall v. Bright (1820) 1 Jac. & W. 494, at p. 501 [37 E.R. 456, at p. 459]). Lord Hatherley said that the vendor becomes a trustee for the purchaser when the contract is completed, as by payment of the purchase money (
Shaw v. Foster (1872) L.R. 5 H.L. 321). Jessel M.R. held that a trust sub modo arises on execution of the contract but that the constructive trust comes into existence when title is made out by the vendor or is accepted by the purchaser (Lysaght v. Edwards (1876) 2 Ch. D. 499). Sir George Jessel's view was accepted by the Court of Appeal in
Rayner v. Preston (1881) 18 Ch. D. 1.

...

... It is enough to say that it has been accepted in decisions in England and Australia that at least when the purchaser has paid the purchase money the vendor becomes a constructive trustee of the property sold and that he is a trustee of property within the meaning of the provisions of the Trustee Act relating to vesting orders...''

In that same case, Jacobs J went further at pp 189-190:

``... it is doubtful whether a vendor under a contract of sale can properly be described as a trustee within the meaning of the Trustee Act unless settlement has taken place and all that remains to be done is to transfer or convey an outstanding legal estate. It is true that a vendor at the stage of contract where the contract is enforceable by specific performance has at times been described as a trustee: see, e.g. Shaw v. Foster (1872) L.R. 5 H.L. 321; Lysaght v. Edwards (1876) 2 Ch. D. 499;... if by such a description it is sought to transpose into the law of vendor and purchaser the law governing the rights and duties of trustees, statutory or otherwise, considerable difficulties arise. The present case is an example of the confusion which can arise from giving this description to a party to a contract for the sale of land assumed to be capable of specific performance simply because he has the obligation under the contract to transfer property to the other party on completion of the contract and because equity regards the other as beneficial owner. Where there are rights outstanding on both sides, the description of the vendor as a trustee tends to conceal the essentially contractual

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relationship which, rather than the relationship of trustee and beneficiary, governs the rights and duties of the respective parties.''

Further, Brennan J in
KLDE Pty Ltd (in liq) v Commissioner of Stamp Duties (Qld) 84 ATC 4793; (1983-1984) 155 CLR 288, said at ATC pp 4799-4800; CLR pp 300-1:

``It seems to me to be inaccurate to describe as ownership the interest which a purchaser acquires on entering into a contract for the sale of land before he is entitled to call for a conveyance of what he has contracted to purchase. Until the vendor is under an obligation to convey the title which the purchaser has contracted to purchase the purchaser cannot himself show title to the property. He owns an interest in the property but he does not own the property. When a purchaser, on payment of the price becomes entitled to insist upon conveyance of title to the property he has contracted to purchase, he may rightly be described as the owner of it: see
R. v. Australian Broadcasting Tribunal; Ex parte Hardiman (1980) 144 C.L.R. 13 at p. 31. If the vendor then refuses or declines to convey or is disabled from doing so, the purchaser is entitled to a vesting order (Chang v. Registrar of Titles (1976) 137 C.L.R. 177 at p. 185). Until the purchaser is entitled to insist upon conveyance of title to the property which he has contracted to purchase, it may be right to describe the vendor as a trustee sub modo of the property and the purchaser as a beneficial owner of it sub modo. Though the purchaser has sometimes been described as a beneficial owner once the contract is unconditional, the effect of an unconditional contract for the sale of land is more accurately stated by Kitto J. as transferring `to an extent' the beneficial ownership of the land (
Haque v. Haque [No. 2] (1965) 114 C.L.R. 98 at p. 124).''

More recently still, an even stronger statement is to be found in the joint judgment of Deane and Dawson JJ in
Stern v McArthur (1987-1988) 165 CLR 489, when their Honours stated at pp 521-3:

``It has been said in a variety of ways that a vendor under a valid contract for the sale of land holds the land as trustee for the purchaser. He is, however, a trustee only in a qualified sense and the qualifications are such as to rob the proposition of much of its significance or, for some purposes, its validity. The vendor must make title before there can be any alteration in the equitable ownership of the land, although the alteration may then relate back to the date of the contract. Even so the vendor retains a substantial interest in the property until the whole of the purchase money is paid. He is entitled, subject to the contract, to possession and to the rents and profits in addition to a lien on the land as security for any amount outstanding. Any right to equitable ownership on the part of the purchaser is contingent only, being subject to the payment of the purchase money and being said to exist only so long as the contract remains specifically enforceable at his suit. In Rayner v. Preston (1881) 18 Ch. D. 1, at p. 11, considerations such as these led Brett L.J. to remark:

`Therefore, I venture to say that I doubt whether it is a true description of the relation between the parties to say that from the time of the making of the contract, or at any time, one is ever trustee for the other. They are only parties to a contract of sale and purchase of which a Court of Equity will under certain circumstances decree a specific performance.'

As Deane J. pointed out in
Kern Corporation Ltd. v. Walter Reid Trading Pty. Ltd. (1987) 163 C.L.R. 164, at p. 191, it is not really possible with accuracy to go further than to say that the purchaser acquires an equitable interest in the land sold and to that extent the beneficial interest of the vendor in the land is diminished. The extent of the purchaser's interest is to be measured by the protection which equity will afford to the purchaser. That is really what is meant when it is said that the purchaser's interest exists only so long as the contract is specifically enforceable by him. Specific performance in this context does not mean specific performance in the strict or technical sense of requiring the contract to be performed in accordance with its terms. Rather it encompasses all of those remedies available to the purchaser in equity to protect the interest which he has acquired under the contract. In appropriate cases it will include other remedies, such as relief by

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way of injunction, as well as specific performance in the strict sense. As Sir Frederick Jordan put it: `Specific performance in this sense means not merely specific performance in the primary sense of the enforcing of an executory contract by compelling the execution of an assurance to complete it, but also the protection by injunction or otherwise of rights acquired under a contract which defines the rights of the parties': Jordan, `Chapters on Equity in New South Wales', Select Legal Papers, 6th ed. (1947), p. 52, n.(e). See also
Legione v. Hateley (1983) 152 C.L.R. 406, at p. 446, per Mason and Deane JJ.;
Tailby v. Official Receiver (1888) 13 A.C. 523, at pp. 547-549, per Lord Macnaghten;
Redman v. Permanent Trustee Co. of N.S.W. Ltd. (1916) 22 C.L.R. 84, at p. 96, per Isaacs J.;
Hoysted v. Federal Commissioner of Taxation (1920) 27 C.L.R. 400, at p. 423, per Isaacs J.;
Pakenham Upper Fruit Co. Ltd. v. Crosby (1924) 35 C.L.R 386, at pp. 398-399, per Isaacs and Rich JJ.

To put the matter in this way is to say little more than that the equitable interest of a purchaser under a contract for the sale of land is that which equity recognizes and protects:
Hewett v. Court (1983) 149 C.L.R. 639, at pp. 665-666, per Deane J. The relationship of trustee and beneficial owner will certainly be in existence when the purchase money specified in the contract has been paid, title has been made or accepted and the purchaser is entitled to a conveyance or transfer. At that point the purchaser is entitled in equity to the land and the vendor is a bare trustee:
McWilliam v. McWilliams Wines Pty. Ltd. (1964) 114 C.L.R. 656, at p. 660, per McTiernan and Taylor JJ. Otherwise there is no unanimity upon when the relationship of trustee and beneficial owner arises: Chang v. Registrar of Titles (1976) 137 C.L.R. 177, at p. 184, per Mason J. But that does not mean that before that time has arrived the purchaser may not be entitled to a lesser equitable interest than ownership.''

14. In the present state of the law I am thus unable to accept Mr Harrison's submission that s 160ZX applies in the circumstances. Even if it is correct to say that the vendor under a contract for the sale of land does hold the land as trustee for the purchaser (a proposition which appears to me to be now doubtful at best), it would appear that any such trust does not arise prior to ``when the purchase money specified in the contract has been paid, title has been made or accepted and the purchaser is entitled to a conveyance or transfer'', and consequently, the vendor is simply a bare trustee. Since sub-s 160ZX(1) speaks of a beneficiary who becomes absolutely entitled to the asset which is held by a person as trustee, it follows (even assuming for present purposes that a trust does in fact arise) that that subsection can have no application in the present circumstances, because the ``beneficiary'' purchaser does not become absolutely entitled to the land after the trust has arisen; he, she or it is absolutely entitled to the land from the very moment that trust arises. It appears to me that such a result also accords with the intended purpose of the legislation as ascertained from the provisions themselves.

15. In the result, I am satisfied that s 160U and not s 160ZX governs the timing of the disposal of the land by the applicant.

16. Secondly, Mr Harrison submitted that ``in the case of a contract that requires a conveyance subsequent to the contract, though the land may be said to be disposed of in pursuance of the contract, it is not disposed of under the contract within subsection 160U(3)'' and later he put the same submission slightly differently: "Elmslie [
Elmslie & Ors v FC of T 93 ATC 4964] also supports the view that, in the case of a sale requiring an instrument of conveyance, where the obligation to tender is contingent on the payment of the price, the disposal should be taken to be under the conveyance, and not under the contract."

17. In
R v Clyne; ex parte Harrap [1941] VLR 200, O'Bryan J stated at p 201:

``It is rash to attempt to substitute a different expression for the more simple and usual one used, but in this connection `under' is perhaps more aptly translated by the expression `pursuant to' than by the phrase `by virtue of.' It is necessary to have regard to the context to determine in which sense the word is used.''

Further, in
Chan v Cresdon Pty Ltd (1989) 168 CLR 242, their Honours Mason CJ, Brennan, Deane and McHugh JJ said at p 249 (in the context of determining the meaning of the phrase ``under this lease''):

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``The word `under', in the context in which it appears, refers to an obligation created by, in accordance with, pursuant to or under the authority of, the lease.''

18. It is also relevant to consider the judgment of Wilcox J in Elmslie, where his Honour specifically dealt with the meaning and application of sub-s 160U(3), and usefully discusses some aspects of ``the scheme of Part IIIA''. His Honour said at pp 4975-6:

``The notions of acquisition and disposal of assets are fundamental to the operation of the Part [Part IIIA]. Section 160ZO(1) makes a `net capital gain' that `accrued to a taxpayer in respect of the year of income' part of the taxpayer's assessable income for the year. Section 160ZO(2) allows a `net capital loss' to be taken into account for certain purposes. For the legislation to operate satisfactorily, it is essential that taxpayers and the Commissioner be able to compute the amount of any capital gain or capital loss within a particular year. But it is not enough to ascertain the relevant year; acquisition has to be related to a particular quarter. Section 160ZJ provides for indexation of the cost base of an asset by reference to the number of the Consumer Price Index in respect of the quarter in which it was acquired. The system depends upon the acquisition date of an asset being capable of precise determination. Section 160U sets out the rules for determining that date. Where the asset was acquired otherwise than under a contract, and where no later subsection in s. 160U applies, the acquisition date is the date when the asset changed ownership (s. 160U(4)). Section 160U(3) substitutes a different rule where the asset `was acquired... under a contract'. In that case the date of `the making of the contract' applies. It will be noted that the word `contract' is in the singular. The assumption is that a contractually-acquired asset will be acquired under only one contract, the date of which will precisely fix the date of acquisition of the asset. This assumption is irreconcilable with the notion that it is enough that there be a contract that envisages or requires the acquisition of the asset. In a particular case there may be several contracts that contemplate or require a party to acquire an asset. Those contracts may bear different dates. If subs. (3) extended to all those contracts, and not just to the contract that directly got in the asset, it would provide a multiplicity of dates in respect of one asset. Unless all the dates happened to fall within the same quarter, the legislation would become unworkable in relation to that asset. It seems to me that, for the legislation to work satisfactorily, it is necessary for the courts to confine the words `under a contract', in s. 160U(3), to the contract that directly effected the acquisition. It is necessary to disregard any earlier contract obliging one or both parties to the acquisition to enter into the immediately operative contract.

This approach is consistent with the interpretation given in decided cases to analogous phrases, such as `under an enactment' and `under this lease'. I have already referred to some of these cases. They demonstrate that the word `under' usually imports a direct connection between the relevant act and the instrument. Chan is particularly telling. In that case, it was not enough that there was a contract (the lease) that envisaged that the lessee would go into possession and, indeed, required it to do so. It was not enough that, absent the lease, the lessee would not have gone into possession and the liability for rent not arisen. For the guarantors' liability to arise, the rental liability had to be incurred under the lease; that is, through its operation as an instrument that created a legal interest. In the same way, the contract under which an asset is acquired, within the meaning of s. 160U(3), is the contract through whose operation the asset changes ownership.''

19. Not surprisingly, Mr Logan relied upon the closing statement by Wilcox J that ``the contract under which an asset is acquired, within the meaning of s. 160U(3), is the contract through whose operation the asset changes ownership'' as supporting the view that the asset here in question - land (with improvements) - was disposed of ``under the contract''. However, I consider that that statement, made in the context of seeking to determine under which of a number of contracts certain shares were acquired, is not readily applicable to the situation in hand where the question is whether or not a particular asset was acquired under a contract.

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20. There was no dispute that a change in the ownership of the subject land in terms of sub-ss 160M(1) and 160M(1A) took place on 19 July 1991 - the date of completion of the contract - so that the disposal of that asset by the applicant actually occurred on that date. The change in ownership occurs at that time because it is then that, under the terms of the contract, the purchaser is able to insist on delivery of an executed transfer capable of registration and the instrument of title (the very documents which effect a conveyance of the property and provide the purchaser with the means to become the registered owner), provided the purchaser is at that time in a position to pay the balance of the purchase price. In all the circumstances, particularly considering that the abovementioned entitlement to a conveyance arises from the terms of the contract, I have concluded that the subject land was ``disposed of under a contract'' in terms of sub-s 160U(3). I consider that such a conclusion accords with the intended operation of the relevant provisions ascertained from those provisions themselves.

21. The next question to be answered is when was ``the time of the making of the contract'' for the purposes of sub-s 160U(3)? Mr Harrison suggested, albeit faintly, that since the contract's ``finance clause'' - clause 32 - was not satisfied until 3 July 1991, the time of the making of the contract was that date, on the basis that satisfaction of that clause is a condition precedent to the formation of the contract. Clause 32 of the contract provides:

``32.1 If Items S, T and U are not deleted from this Contract, the contract is subject to the Purchaser obtaining from the lender or class of lender specified in Item S on or before the approval date specified in Item T approval of a loan not being less than the amount of loan specified in Item U on the security of a registered first mortgage over the Land and otherwise upon and subject to the terms and conditions currently being imposed by the lender in respect of loans of a similar nature and if the Purchaser does not obtain such approval for any reason not being attributable to the Purchaser's own default, the Purchaser may terminate the contract by notice in writing given to the Vendor in which event all deposit and other moneys received by the Vendor or the Stakeholder on account of purchase price shall be refunded to the Purchaser by the Vendor or the Stakeholder as the case may be.

32.2 The Purchaser shall take all steps reasonably necessary to obtain such approval.

32.3 The Purchaser may waive the benefit of the condition contained in sub-clause 32.1 by giving notice (in writing) to the Vendor within two (2) Business Days from the said approval date.

32.4 If the Purchaser obtains such approval the Purchaser shall give notice in writing of such approval to the Vendor promptly and in any event within two (2) Business Days from the said approval date.

32.5 If the Purchaser does not:

• (a) terminate the contract pursuant to sub-clause 32.1; or
• (b) waive pursuant to sub-clause 32.3 the benefit of the condition contained in sub- clause 32.1; or
• (c) give notice pursuant to sub-clause 32.4 that the Purchaser has obtained such approval;

within two (2) Business Days from the said approval date then, in lieu of any other remedy available to the Vendor by reason of the failure of the Purchaser to fulfil the Purchaser's obligations under this clause and notwithstanding any continuing right which the Purchaser may have to terminate the contract under sub-clause 32.1, the Vendor may at the Vendor's option, by notice in writing to the Purchaser (which notice shall specify that it is given pursuant to this sub-clause) terminate the contract in which event all deposit and other moneys received by the Vendor or Stakeholder on account of purchase price shall be refunded to the Purchaser by the Vendor or the Stakeholder as the case may be.''

22. In
Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537, Gibbs CJ stated at p 543:

``... the description of the condition as a condition subsequent may be a mere matter of terminology, and may reflect an unwillingness to describe a condition as a condition precedent unless the formation of a binding contract depends on its fulfilment. Nevertheless, it probably does not matter in

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the present case whether the condition is described as `precedent' or `subsequent', provided that it is understood that its non- fulfilment did not prevent a binding contract from coming into existence but did have the effect that the respondent was under no obligation to complete the sale unless the condition was fulfilled or waived.''

Mason J (as his Honour then was) stated at p 551-2:

``... There is an obvious difference between the condition which is precedent to the formation or existence of a contract and the condition which is precedent to the obligation of a party to perform his part of the contract and is subsequent in the sense that it entitles the party to terminate the contract on non-fulfilment. In the first category the transaction creates no rights enforceable by the parties unless and until the condition is fulfilled. In the second category there is a binding contract which creates rights capable of enforcement, though the obligation of a party, or perhaps of both parties, to perform depends on fulfilment of the condition and non- fulfilment entitles him to terminate.

...

Generally speaking the court will tend to favour that construction which leads to the conclusion that a particular stipulation is a condition precedent to performance as against that which leads to the conclusion that the stipulation is a condition precedent to the formation or existence of a contract. In most cases it is artificial to say, in the face of the details settled upon by the parties, that there is no binding contract unless the event in question happens. Instead, it is appropriate in conformity with the mutual intention of the parties to say that there is a binding contract which makes the stipulated event a condition precedent to the duty of one party, or perhaps of both parties, to perform. Furthermore, it gives the courts greater scope in determining and adjusting the rights of the parties. For these reasons the condition will not be construed as a condition precedent to the formation of a contract unless the contract read as a whole plainly compels this conclusion.''

23. Shortly thereafter in
Meehan v Jones (1981-1982) 149 CLR 571, the High Court considered the effect of a special condition of a contract for the sale of land which provided:

``This Contract is executed by the parties subject to the following:-

• (a)...
• (b) The Purchaser or his nominee receiving approval for finance on satisfactory terms and conditions in an amount sufficient to complete the purchase hereunder;

and should either of the above conditions not be satisfied on or before [date] (or such extended time as the parties may agree upon) then this Contract (other than for the provisions of this Clause) shall be null and void and at an end and all monies paid hereunder by the Purchaser shall be refunded in full.''

Gibbs CJ, said of that condition at p 582:

``It is clear that the condition in special condition 1(b) is not a condition precedent to contract. Certain obligations under the contract attached immediately the contract was signed although the condition had not been fulfilled. For example, the provisions with regard to the deposit, and with regard to the giving and answering of requisitions on title, became immediately effective. Whether the contract is described as a condition precedent to completion, or as a condition subsequent, seems largely a matter of words. A similar question was discussed in
Perri v. Coolangatta Investments Pty. Ltd. Ante, p. 537. The condition in that case made the sale subject to the purchasers completing a sale of their property. It was within the power of the purchasers to prevent the fulfilment of such a condition; in that respect they had a discretion as to whether they would completely perform the contract. Nevertheless, it was not doubted that a binding contract had been concluded.''

Mason J had a similar view of that condition at pp 591-592:

``Although the binding words of the special condition suggest that its effect is to make the existence of the contract conditional, it is more sensible to regard the provision as one which provides for the determination of a valid and binding contract in the event that the purchaser or his nominee is unable to

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obtain approval for satisfactory finance on or before the appointed date.

...

Whether the condition is to be described as precedent or subsequent is an artificial and theoretical question. In one sense performance of the condition or non- avoidance for breach of it is precedent to the right of a party to call for the performance of a contract. In another sense there is a valid and binding contract which may be determined for non-performance of the condition, and in this sense the condition is subsequent, not precedent.''

24. In light of the above authorities, and having regard to the wording of clause 32 in the context of the whole of the contract here in issue, I am satisfied that that clause is not a condition precedent to the formation or existence of the contract, but is a condition subsequent or, as the abovementioned justices describe it, ``a condition precedent to performance''. As such, I am satisfied that the ``time of the making of the contract'' for the purposes of sub-s 160U(3) was 20 June 1991, the date upon which the contract was signed.

25. In light of my finding that clause 32 is not a condition precedent to the formation of the contract, it is strictly unnecessary for me to deal with the question which would have arisen had I come to the opposite conclusion, viz which of the following three times would have been the time of the making of the contract:

• (a) the date upon which Suncorp approved the purchaser's application for finance;
• (b) the date upon which the purchaser received Suncorp's approval letter (of which I have no evidence that satisfies me that the applicant has discharged his onus of proving that that occurred in the 1992 year of income); or
• (c) the date upon which the applicant received the letter from the purchaser's solicitors advising that their client's application had been approved.

However, assuming for present purposes (contrary to my finding) that the contract was indeed subject to a condition precedent contained in clause 32, I am satisfied that the source of that condition precedent would be sub-clause 32.1, not clause 32 as a whole, and therefore the coming into existence of the contract would have occurred prior to satisfaction of the separate requirement in sub- clause 32.4 for the purchaser to notify the applicant no later than within two business days from the apprxval date specified in item T of the contract. I am further satisfied that, contrary to Mr Harrison's submission, the purchaser can be said to have obtained finance approval from the lender at the time that approval was given. As a result, if, contrary to my finding, clause 32 was a condition precedent to the formation of the contract, I would hold that the time of the making of the contract was, in any event, in the 1991 year of income.

26. Having determined that sub-s 160U(3) applies such that the time of the disposal of the asset in question is taken to be 20 June 1991, it is necessary to consider Mr Harrison's further submission that even if ``there is no problem with section 160U deeming a disposal to have occurred on the earlier occasion, it simply does not say that the gain resulting from that deemed disposal is deemed to have been received at the date of the disposal''.

27. The first thing to note in relation to this submission, and I do not put this critically, is that it should be kept in mind that sub-s 160U(3) does not deem the disposal of the relevant asset, but states that the time of disposal (or acquisition) of the relevant asset shall be taken to have been the time of the making of the contract under which that asset was disposed (or acquired).

28. To deal with Mr Harrison's submission it is necessary to examine some of the more important provisions of Part IIIA which ultimately result in amounts being included in a taxpayer's assessable income.

29. At the relevant time, sub-s 160L(1) provided:

``Subject to this section, this Part applies in respect of every disposal on or after 20 September 1985 of an asset, whether situated in Australia or elsewhere, that-

• (a) immediately before the disposal took place, was owned by-
  • (i) a person (not being a person in the capacity of a trustee) who was a resident of Australia; or
  • (ii) a person in the capacity of a trustee of a resident trust estate or of a resident unit trust; and
• (b) was acquired by that person on or after 20 September 1985.''

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There was no suggestion that the necessary elements of that sub-section were not satisfied.

30. Subsection 160Z(1) provides:

``Subject to this Part, where an asset other than a personal-use asset has been disposed of during the year of income-

• (a) if the consideration in respect of the disposal exceeds the indexed cost base to the taxpayer in respect of the asset - a capital gain equal to the excess shall be deemed for the purposes of this Part to have accrued to the taxpayer during the year of income; or
• (b) if the reduced cost base to the taxpayer in respect of the asset exceeds the consideration in respect of the disposal - a capital loss equal to the excess shall be deemed for the purposes of this Part to have been incurred by the taxpayer during the year of income.''

The asset in question - the land (with improvements) was disposed of during the 1991 year of income as a result of the deeming operation of sub-s 160U(3). More particularly, bearing in mind Wilcox J's statements in Elmslie that ``it is not enough to ascertain the relevant year; acquisition has to be related to a particular quarter'' and ``[t]he system depends upon the acquisition date of an asset being capable of precise determination'', and the fact that generally the acquisition of an asset by one person is associated with the disposal of that asset by another person (see sub-s 160M(1)), I should say that the asset in question is taken to have been disposed of by the applicant on 20 June 1991. The parties agree, and I have no reason to doubt, that the indexed cost base to the applicant of that asset is $43,040. However, as far as the parties' agreement that the consideration in respect of the disposal is $67,044 is concerned, I consider that Mr Harrison's submissions at the initial hearing cast some doubt on that agreement and require me to consider the matter to ensure that the Tribunal fulfils its function to arrive at the correct result. Indeed, it was for this reason that I recalled the parties for submissions in relation to sub-ss 160ZD(1) and 160K(3).

31. Sub-section 160ZD(1) provides:

``Subject to this Part, for the purposes of this Part, the consideration in respect of a disposal of an asset is-

• (a) if the taxpayer has received or is entitled to receive an amount or amounts of money as a result of or in respect of the disposal - that amount or the sum of those amounts;
• (b) if the taxpayer has received or is entitled to receive property other than money as a result of or in respect of the disposal - the market value of that property at the time of the disposal; or
• (c) if the taxpayer has received or is entitled to receive both an amount or amounts of money and property other than money as a result of or in respect of the disposal - the sum of that amount or those amounts and the market value of that property at the time of the disposal.''

32. Mr Harrison submitted that ``the taxpayer was not entitled to the purchase money until he tendered a conveyance on the settlement date. During the [1991] year of income the taxpayer neither received nor was entitled to receive any amount in respect of the disposal. Accordingly there can be no capital gain until completion''. Looking at sub-s 160ZD(1), Mr Harrison's submission is to the effect that that sub-section requires an examination as to whether a taxpayer has received money or has an entitlement to receive money as at the time of the disposal, which in this case is deemed by sub-s 160U(3) to be in the 1991 year of income. Whereas, Mr Logan submitted that ``if one had to work through section 160ZD(1)(a) here, well, the disposal has occurred at the time when settlement occurred. At that time [the applicant] received an amount of money. One does not even have to get into entitlement''. In other words, one tests whether a taxpayer has received or is entitled to receive money, not at the deemed time of disposal, but at the ``actual'' time of disposal, which in this case was at completion.

33. At one point I thought the answer was to be found in sub-s 160K(3), to which I was not referred at the initial hearing, which provides:

``A reference in this Part to a person being entitled to receive money or property other than money includes a reference to a person being entitled to receive money or property other than money either immediately or at a

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future date and, in the case of money, either in a lump sum or by instalments.''

However, I am now satisfied that the words ``either immediately or at a future date'' attach to the word ``receive'', not to ``entitled'', so that in the present circumstances all sub-s 160K(3) does in the context of sub-s 160ZD(1) is confirm that an entitlement to receive money or other property in the future which exists at the time when one is required to test whether the taxpayer has received money, or has an entitlement to receive money, will satisfy sub-s 160ZD(1).

34. After much deliberation, I have concluded that one is required at the ``actual'' time of disposal to test whether a taxpayer ``has received or is entitled to receive an amount or amounts of money as a result of or in respect of the disposal'' within the terms of s 160ZD(1)(a). Section 160ZD is purely designed to set out how the consideration in respect of a disposal of an asset is to be calculated (leaving aside other provisions of Part IIIA which specifically set out a contrary method of calculation of that amount), so that, in the case of assets other than personal-use assets, as a result of the operation of sub-s 160Z(1), that amount can be compared to either the indexed cost base or reduced cost base as the case may be, so as to determine the amount of the capital gain which accrued to (or the amount of the capital loss which has been incurred by) the taxpayer during the year of income. It is sub-s 169Z(1), not s 160ZD which relies upon the deeming effect of sub-s 160U(3) so that it may be said that the asset ``has been disposed of during the year of [1991] income''. Section 160ZD is, I consider, predicated upon a disposal having taken place, because one simply does not get to the calculation of a capital gain or loss unless a disposal of an asset takes place.

35. As a result, it matters not when the applicant's entitlement to receive the purchase money arose, since looking at the time of ``actual'' disposal it can be said that the applicant had ``received an amount of money'' within the terms of s 160ZD(1)(a).

36. I would also say that, although I have held elsewhere that a right which vested in one contracting party to enforce a promise by the other not to sue constituted ``property'' for the purposes of s 160ZD(1)(b) (Case 5/93,
93 ATC 122, at 129), it was not suggested that I should attempt to apply similar reasoning to any ``rights'' which may have been vested in the applicant as a result of his entering into the contract. In these circumstances, and having no evidence as to what the ``market value'' of any such ``rights'' might be (if indeed they are property - as to which I express no conclusion), I do not consider it is appropriate for me to attempt to apply s 160ZD(1)(b) in the circumstances of this case.

37. For the sake of completeness, and in deference to the time taken by counsel in their submissions in relation to the aspect of when the applicant's entitlement to the purchase price arose, I would say that it will, for the reasons I have already outlined, be of little comfort to the applicant that I have concluded that that entitlement did not arise until the time of completion.

38. In
Gasparin v DFC of T 93 ATC 4479, at 4483 (which is on appeal to the Full Federal Court), O'Loughlin J, usefully referred to the relevant decisions regarding the question as to when the vendor in a contract for the sale of land has a right or entitlement to the purchase price. The law in this regard is as set out in the following extract of the judgement of Mason CJ in the decision of
Sunbird Plaza Pty Ltd v Maloney (1987-1988) 166 CLR 245, at 253-254, which O'Loughlin J quoted:

``The general rule, stated by Dixon J. in
McDonald v. Dennys Lascelles Ltd. (1933) 48 C.L.R. 457, at p. 476, is that a vendor of land cannot sue for the price before the contract is completed by conveyance, unless the price is expressed to be payable on a fixed day, not being the day fixed for completion. Here the balance of the purchase price was payable `upon settlement'. Settlement has not taken place and there has been no conveyance of the property sold. Once this is accepted, the appellant is faced with a daunting task in making good the submission that the respondent guarantors are liable under their joint and several guarantee to pay the balance of the purchase price and interest thereon, notwithstanding the absence of an accrued liability on the part of the purchaser to make the payment.''

Gaudron J expressed a similar view at pp 267-268.

(Note also the reference in
Benwerrin Developments Pty Ltd v FC of T 81 ATC 4524,

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at 4527, to the vendor becoming entitled to the purchase price on completion.)

The foundation for such an approach appears to lie in the mutually dependent and concurrent nature (in the absence of any contrary stipulation in the contract) of the obligation of a vendor to deliver a conveyance and the obligation of a purchaser to pay the price on completion:
Palmer v Lark [1945] Ch 182; and more recently
Foran v Wight (1989) 168 CLR 385.

39. No such contrary intention was suggested to exist in the contract in this case, and on looking at the contract, particularly clause 4, I am satisfied that any such suggestion would have no foundation (see
Beard v Wratislaw [1993] 2 QdR 494 at 502-3). I am furthermore satisfied that the applicant was unable to sue for the purchase price prior to completion. As a result, as stated above, I have concluded that, prior to completion, the applicant was not entitled to receive the purchase monies.

40. To follow the result through, by virtue of sub-s 160Z(1), the capital gain of $24,004 is ``deemed for the purposes of this Part to have accrued to the taxpayer during the [1991] year of income''.

41. Next, s 160ZC comes into operation. It relevantly provides:

``160ZC(1) For the purposes of this Part, a net capital gain shall be taken to have accrued to a taxpayer in respect of the year of income if a capital gain or capital gains accrued to the taxpayer during the year of income and-

• (a) the taxpayer did not incur a capital loss during the year of income and did not incur a net capital loss in respect of the immediately preceding year of income; or
• (b) where the taxpayer incurred a capital loss or capital losses during the year of income or incurred a net capital loss in respect of the immediately preceding year of income, the capital gain or the sum of the capital gains exceeded-
  • (i) if the taxpayer incurred a capital loss or capital losses during the year of income but did not incur a net capital loss in respect of the immediately preceding year of income - that capital loss or the sum of those capital losses;
  • (ii) if the taxpayer did not incur a capital loss during the year of income but incurred a net capital loss in respect of the immediately preceding year of income - that net capital loss; or
  • (iii) if the taxpayer incurred a capital loss or capital losses during the year of income and incurred a net capital loss in respect of the immediately preceding year of income - the sum of that capital loss or those capital losses and that net capital loss.

160ZC(2) The amount of the net capital gain that, by virtue of subsection (1), is to be taken for the purposes of this Part to have accrued to a taxpayer in respect of the year of income is an amount equal to-

• (a) in a case to which paragraph (1)(a) applies - the capital gain or the sum of the capital gains referred to in subsection (1); or
• (b) in a case to which paragraph (1)(b) applies - the excess referred to in that paragraph.''

42. Since sub-s 160Z(1) deemed a capital gain to have accrued to the applicant during the 1991 year of income, and it is clear from the parties' agreement as to the amount of the net capital gain in the ``Agreed Statement of Facts'' that there is no question of any capital loss or other capital gain affecting the calculation of the net capital gain, s 160ZC operates so that a net capital gain of $24,004 is ``taken to have accrued to'' the applicant ``in respect of the year of income'' - 1991.

43. It was also submitted on behalf of the applicant that he was:

``entitled to succeed on the basis that, although a disposal may have occurred in the 1991 year, the net capital gain did not accrue within subsection 160ZO(1) and was not derived within section 17 of the Assessment Act until completion, or in the alternative, until the contract became unconditional, in the 1992 year of income.''

It is with no disrespect to Mr Harrison that I have concluded that there is no substance in the ``160ZO(1) argument''. That subsection provides:

``Where a net capital gain accrued to a taxpayer in respect of the year of income, the assessable income of the taxpayer of the

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year of income includes that net capital gain.''

As stated above, the successive operation of sub-s 160Z(1) and s 160ZC is such that a net capital gain of $24,004 is `` taken to have accrued to'' the applicant ``in respect of the year of income'' - 1991. As a result, by virtue of sub-s 160ZO(1), the applicant's assessable income for the 1991 year of income includes that net capital gain of $24,004.

44. I now turn to the applicant's ``section 17 argument''. That section provides:

``Subject to this Act, income tax at the rates declared by the Parliament is levied, and shall be paid, for the financial year that commenced on 1 July 1965 and for each succeeding financial year, upon the taxable income derived during the year of income by any person, whether a resident or a non- resident.''

The submission was to the effect that, notwithstanding that the provisions of Part IIIA of the Act go to great lengths to determine the time at which assets are acquired and disposed of and ultimately to allocate the gains arising from those disposals to the assessable income of a particular year of income (deeming along the way those capital gains to have accrued to a particular taxpayer during the year of income, and the resultant net capital gain to have accrued in respect of the year of income), the existence of the word ``derived'' in s 17 meant that the amount in issue was taxable in a year different to that in respect of which it had been included in assessable income. With respect, I consider that the submission defies logic.

45. The many reported cases that have considered the term ``derived'' have, almost exclusively, done so in the context of sub-s 25(1). In the instant case, however, we are not examining whether an amount of income has been derived in a particular year such that it may be included in assessable income in that year, because the amount of the net capital gain is by virtue of sub-s 160ZO(1) included in the applicant's assessable income for the 1991 year of income, so that the term ``derived'' is being considered in the context of an association with ``taxable income'' which (so far as is relevant here) is the result of a purely mathematical operation, viz ``the amount remaining after deducting from the assessable income all allowable deductions''. For these reasons alone I consider that ``derived'' does not have exactly the same meaning in both s 17 and sub-s 25(1).

46. Finally, as early as 1917 it was said that ``accrued'' was synonymous with ``derived''. In
Harding v FC of T (1917) 23 CLR 119 at p 131, Barton ACJ stated:

``I see no difference between income arising from a source and income derived from a source, at any rate for present purposes, and the two interpretations would carry precisely the same meaning for present purposes if the one word were substituted for the other. In Commissioners of Taxation v. Kirk (1900) A.C., at p. 592 will be found observations by Lord Davey, speaking for the Judicial Committee, on the words `derived,' `arising,' or `accruing,' which are to the point in this connection. The case arose under the Land and Income Tax Assessment Act of 1895 (N.S.W.), and, speaking of the terms of sec. 15 of that Act, the learned Lord said: `Their Lordships attach no special meaning to the word "derived," which they treat as synonymous with "arising" or " accruing".'''

Therefore I consider it is correct to speak of an amount which has been included in assessable income pursuant to sub-s 160ZO(1), being ``a net capital gain [which] accrued to a taxpayer in respect of the year of income'', as forming part of ``the taxable income derived during the year of income'' in terms of sec 17 of the Act.

47. For the above reasons, the Tribunal affirms the decision under review.