FC of T v GUY

Judges:
Beaumont J
Carr J
Lindgren J

Court:
Full Federal Court

Judgment date: 6 June 1996

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Beaumont, Carr and Lindgren JJ

Introduction

In these two appeals the Commissioner of Taxation challenges two decisions made by the Administrative Appeals Tribunal. The Tribunal decided that two payments which the respondent taxpayers received, following the termination of a contract for sale of their former ``principal residence'', were not assessable as taxable income under what are known as the capital gains tax provisions of the Income Tax Assessment Act 1936 (``the Act''). The case involves a familiar trilogy of simultaneous or consecutive sales of homes in a market (Sydney in late 1989 and early 1990) in which prices were falling rapidly. It was a market which might not have been expected to throw up short-term capital gains. The respondents, Mr and Mrs Guy, contend that despite the above receipts, they lost money on the transaction when they re-sold their home. The Commissioner contends that they made a taxable capital gain when they forfeited part of the deposit and recovered another payment after suing the defaulting purchasers. We were told that there are many taxpayers in a similar situation and that this is a test case funded by the Commissioner.

Factual background

The following factual background is taken largely from a most helpful summary of the agreed facts prepared by counsel for the Commissioner (Mr W G Muddle).

On 11 May 1989 Mr and Mrs Guy exchanged contracts for the sale of their home at Minkara Road, Bayview Heights (``the Minkara Road Property''), which had been acquired by them in 1977, to a Mr and Mrs Starling for $906,000. The contract provided for completion within three months, that is to say, by 11 August 1989.

The form of contract was the standard (New South Wales) Law Society 1988 edition Agreement for Sale of Land, with certain common amendments. The contract required Mr and Mrs Starling to pay a deposit of ten per cent of the contract price ($90,600) and contained the standard provisions in relation to forfeiture of that deposit.

By clause 31 of the contract Mr and Mrs Starling agreed to release to Mr and Mrs Guy one half of the deposit (ie $45,300). By clause 34 the parties agreed that the remaining one- half of the deposit would be payable by the Starlings upon completion or earlier demand following default.

On 11 May 1989, simultaneously with the exchange of contracts in relation to the Minkara Road Property, Mr and Mrs Guy exchanged contracts for the purchase of a property at Kookaburra Close, Bayview (``the Kookaburra Close Property'') from a Mrs Tucker for $432,500. The contract provided for completion within 90 days, that is to say, by 9 August 1989, and provided that in this respect time was to be of the essence of the contract.

The form of that contract was again the standard (New South Wales) Law Society 1988 edition Agreement for Sale of Land, with certain common amendments. That contract also required a ten per cent deposit ($43,250) and contained the standard provisions in relation to forfeiture of the deposit.

By clause 35 of their contract with Mrs Tucker, Mr and Mrs Guy agreed to release to Mrs Tucker, one-half of the deposit and Mrs Tucker agreed that the balance was to be invested on certain terms. Notwithstanding that provision, the whole of the deposit was released to Mrs Tucker.

On 9 August 1989 Mr and Mrs Guy failed to complete the purchase from Mrs Tucker. The following day Mrs Tucker gave a notice calling on them to complete the purchase on 28 August 1989 and advising that if they failed to do so

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Mrs Tucker would be entitled to terminate the contract.

The Starlings also defaulted in completing the purchase of the Minkara Road Property from Mr and Mrs Guy. On 14 August 1989 Mr and Mrs Guy demanded payment from Mr and Mrs Starling of the balance ($45,300) of the deposit, and served a notice to complete the contract by 29 August 1989, making time of the essence of the contract in this respect.

Mr and Mrs Guy did not complete the purchase from Mrs Tucker on 28 August. Mr and Mrs Starling did not complete their purchase from Mr and Mrs Guy on 29 August.

On 29 August 1989 Mr and Mrs Guy served on the Starlings notice (a) of termination of the contract, (b) of forfeiture of the deposit of $45,300 paid, and (c) that the outstanding balance of the deposit of $45,300 was ``forthwith due and payable''.

On 17 October 1989 the Guys sued the Starlings in the Supreme Court of New South Wales seeking declarations and ``damages, including but not limited to the balance of the deposit being $45,300''.

On 19 October 1989 Mrs Tucker sued Mr and Mrs Guy in the Supreme Court of New South Wales seeking an order for specific performance of the contract for purchase of the Kookaburra Close Property.

On 25 February 1990 the proceedings between the Guys and the Starlings were settled on the basis that a consent order would be made declaring that the contract between them had been validly terminated and requiring the Starlings to pay the Respondents $65,000 inclusive of costs.

On 26 February 1990 Mr and Mrs Guy exchanged contracts for the sale of the Minkara Road Property to a Mr and Mrs Rooke for $830,000 (ie for $76,000 less than the purchase price which Mr and Mrs Starling had agreed to pay for that property).

On 5 March 1990 consent orders were made in the proceedings brought by Mr and Mrs Guy against Mr and Mrs Starling in accordance with the terms of settlement referred to above.

The proceedings brought by Mrs Tucker against the Guys were also settled. A consent order was made requiring Mr and Mrs Guy to perform the contract specifically. It was noted that they had paid $30,000 to Mrs Tucker in full and final settlement of her damages and costs.

The extant contracts for the Minkara Road and Kookaburra Close Properties were subsequently completed.

The Commissioner's assessments

The Commissioner included one half of the forfeited deposit in respect of the Minkara Road Property (less one half of certain wasted conveyancing costs) in each of Mr and Mrs Guy's assessable income as a net capital gain, purporting to apply the general provisions of s 160ZO in combination with the specific provisions of s 160ZZC(3)(a) and 160ZZC(12) of the Act. (The text of the latter two provisions is set out later in these reasons.) (References to sections of the Act are to the sections as they were in the relevant year of income, namely the year ended 30 June 1990.)

The Commissioner treated the sum of $65,000 which Mr and Mrs Guy received under the terms of settlement of the Supreme Court action somewhat differently. From that sum he was prepared, without conceding that he was legally obliged to do so, to deduct the moneys which they had had to pay to Mrs Tucker ($30,000) and certain incidental (mainly legal) costs ($18,598) and he included one half of the resultant amount in each of their assessable incomes. In making those assessments the Commissioner relied upon s 160A and sub-para 160M(3)(b) and, in the alternative, upon sub-s 160M(7) of the Act.

The Tribunal's decision

The Forfeited Deposit

The Tribunal held that the forfeited deposit did not fall within the terms of sub-s 160ZZC(12) of the Act and should be seen as part of the realisation of the value of an exempt asset, being Mr and Mrs Guy's principal place of residence. Sub-section 160ZZC(12) provided:

``Where a deposit of money or other consideration, being a deposit that was made in respect of a prospective purchase or other transaction that is cancelled or otherwise abandoned, is forfeited-

• (a) the deposit shall be deemed to have been paid or given as consideration in respect of the grant by the person who received the benefit of the forfeiture of an option that bound the grantor to dispose of an asset and was not exercised; and

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  ATC 4524

• (b) any costs that the person who received the benefit of the forfeiture incurred in connection with the prospective purchase or other transaction shall be deemed to be amounts of expenditure incurred by that person in respect of the grant of the option.''

The Tribunal gave two main reasons for holding that sub-s 160ZZC(12) had no application to the deposit forfeited to Mr and Mrs Guy. First, after noting that the whole of s 160ZZC was devoted to various types of options and the taxation consequences of payments made under or in respect of those options, it described the subsection as ``... merely a catch all provision of a type often found at the end of a succession of sub-sections designed to cover specific situations under a general heading'' (AB 278). The Tribunal expressed the view that sub-s 160ZZC(12) was designed to catch any other types of transactions resembling options and any moneys paid in respect of those transactions. Secondly, the Tribunal held that the words ``prospective purchase'' in that sub-section do not include an enforceable contract of purchase of the type entered into by Mr and Mrs Guy and Mr and Mrs Starling. The Tribunal held that the deposit referred to in the sub-section was ``a sum which could be referred to as a `holding deposit', being an amount paid by the purchaser to the vendor pending entry by the parties into a legally enforceable written contract'' (AB 278).

The Moneys Received Upon Settlement of the Supreme Court Action

The Tribunal held that the amount received by Mr and Mrs Guy pursuant to the settlement of the Supreme Court action was not a net capital gain resulting from the disposal of an asset acquired after 20 September 1985. This was because, so the Tribunal held, there had been no disposal of a ``right to sue'' (the Tribunal's term) falling within sub-s 160M(3). The Tribunal considered that upon commencement of the Supreme Court action ``... the right to sue became a former right and was subsumed into the court proceedings'' (AB 280). Alternatively, the Tribunal held that if there had been a disposal, the ``underlying asset'' was the Minkara Road Property. That asset was the respondents' principal place of residence and any or all of the proceeds of its sale would have been free of tax on any capital gain (s 160ZZQ). Accordingly, the Tribunal held that the damages which the Court ordered Mr and Mrs Starling to pay were not included in the assessable income of the applicants. Finally, the Tribunal concluded that sub-s 160M(7) had no application because if there had been a disposal (contrary to its finding), sub-s 160M(3) would have applied and there would have been no room for the operation of sub-s 160M(7) which the Tribunal described as a ``fall back provision''.

The appellant's contentions

The appellant Commissioner contends, in summary, that the circumstances in which Mr and Mrs Guy received these two amounts of money fall squarely within the respective sections (referred to above) upon which he relied when he made the assessments. The Commissioner submits that the Tribunal made several legal errors. The main error was to focus on the nature of the underlying asset. Counsel for the Commissioner pointed out that the expression ``underlying asset'' does not appear in Part IIIA (the Part which contains the capital gains provisions) of the Act. The moneys had not been received as part of the realisation of an exempt asset. The deposit money forfeited had been received as consideration for what sub-s 160ZZC(12) of the Act deemed to be the grant of an option by Mr and Mrs Guy which bound them to dispose of their house, an option which was not exercised. That receipt was brought to tax by Part IIIA.

The moneys which Mr and Mrs Guy received upon settlement of the Supreme Court action were the proceeds of the disposal of a debt, chose in action or other right, that is to say, an ``asset'' as defined in s 160A. Sub-paragraph 160M(3)(b) or, in the alternative, sub-s 160M(7), deemed Mr and Mrs Guy to have disposed of such an asset. In normal circumstances the whole proceeds would be assessable but, as a concession, the sum of $30,000 paid to Mrs Tucker had been deducted in the process of assessment. The Commissioner further contended that sub-s 160ZZQ(12) did not operate to exempt the receipts as being the proceeds of disposal of Mr and Mrs Guy's principal place of residence.

Conclusions on the appeal

It will be convenient to deal with the two amounts in question separately.

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(1) The forfeited deposit

As has been noted, two issues arise here. First, did the amount fall within the general provisions of Part IIIA, and specifically, within Division 13 (ie s 160ZZC) which deals with ``Options Generally''? If so, did the ``principal residence'' exemption in Division 18 (ie s 160ZZQ) of Part IIIA apply? We will deal with the two issues in turn.

(a) Did the general provisions of Part IIIA, and in particular s 160ZZC, apply?

First, some reference should be made to the statutory scheme.

By sub-s 160ZO(1), it is provided that where a net capital gain has accrued to a taxpayer in respect of a year of income, the assessable income of the taxpayer includes that net capital gain. But, as Brennan J (as he then was) observed in
Hepples v FC of T 91 ATC 4808; (1991-1992) 173 CLR 492 (at ATC 4812; CLR 500), the application of Part IIIA is governed by s 160L, to the effect, relevantly, that Part IIIA applies in respect of every ``disposal'' on or after 20 September 1985 of an ``asset'' that, immediately before the disposal took place, was owned by a person who was a resident of Australia.

By s 160A, ``asset'' was defined to mean ``any form of property'' and to include-

``(a) an option, a debt, a chose in action, any other right, goodwill and any other form of incorporeal property;

...''

As Brennan J went on (at ATC 4812; CLR 501) to note, the ``leading, but not exhaustive, provisions relating to the `disposal' of an asset are'' first, sub-s 160M(1), to the effect that a change in the ownership of an asset is deemed to effect a disposal and acquisition of that asset; and secondly, sub-s 160M(2), to the effect that a change in ownership occurs in any way including the following:

• ``(a) by the execution of an instrument;
• (b) by the entering into of a transaction;
• (c) by the transmission of the asset by operation of law;
• (d) by the delivery of the asset;
• (e) by the doing of any other act or thing;
• (f) by the occurrence of any event.''

Reference should also be made to sub-para 160M(3)(b) (relied on by the Commissioner in respect of the second payment) as follows:

``Without limiting the generality of sub- section (2), a change shall be taken to have occurred in the ownership of an asset by-

• (a)...
• (b) in the case of an asset being a debt, a chose in action or any other right, or an interest or right in or over property - the cancellation, release, discharge, satisfaction, surrender, forfeiture, expiry or abandonment, at law or in equity, of the asset;
• ...''

Reference should also be made to the definition of ``taxpayer'' in s 160C as a reference (1) in relation to an asset disposed of - to the person who owned the asset immediately before the disposal; and (2) in relation to an asset that has been acquired - to the person who owned it immediately after its acquisition.

To borrow the language of Brennan J in Hepples (at ATC 4814; CLR 504), sub-ss 160M(6) and (7), inter alia, apply when an asset ``is created by an act which vests it in the person who acquires it and when an asset is extinguished or sterilized by an act done in favour of another though the other acquires no asset''. As has been noted, the Commissioner here relies on sub-s 160M(7), as follows:

``Without limiting the generality of sub- section (2) but subject to the other provisions of this Part, where-

• (a) an act or transaction has taken place in relation to an asset or an event affecting an asset has occurred; and
• (b) a person has received, or is entitled to receive, an amount of money or other consideration by reason of the act, transaction or event (whether or not any asset was or will be acquired by the person paying the money or giving the other consideration) including, but not limited to, an amount of money or other consideration-
  • (i) in the case of an asset being a right - in return for forfeiture or surrender of the right or for refraining from exercising the right; or
  • (ii) for use or exploitation of the asset,

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  ATC 4526

the act, transaction or event constitutes a disposal by the person who received, or is entitled to receive, the money or other consideration of an asset created by the disposal and, for the purposes of the application of this Part in relation to that disposal-

• (c) the money or other consideration constitutes the consideration in respect of the disposal; and
• (d) the person shall be deemed not to have paid or given any consideration, or incurred any costs or expenditure, referred to in paragraph 160ZH(1)(a), (b), (c) or (d), (2)(a), (b), (c) or (d) or (3)(a), (b), (c) or (d) in respect of the asset.''

Of this provision, Brennan J said in Hepples:

``Sub-section (7) may be compared with sub-s. (6), though it is an equally difficult sub-section to interpret. Whereas sub-s. (6) operates only when the asset to which it relates has no existence prior to the act of disposal, sub-s. (7) operates only when there is an asset in existence prior to the act of disposal, being the asset referred to in par. (a). Sub-section (7) may apply to cases where the existing asset is extinguished or sterilised and where no asset is vested in the person who pays the consideration (see par. (b)(i)), whereas sub-s. (6) can apply only to a case where an asset is vested in a person other than the disponor.''

(at ATC 4816-4817; CLR 508)

We turn to s 160ZZC, being Division 13 (``Options Generally''). By sub-s 160ZZC(1) it is provided that the section does not apply to an option if certain other Divisions apply. They are Divisions 10 (``Rights to Acquire Shares''), 10A (``Rights to Acquire Units in a Unit Trust''), 11 (``Company-issued Options to Shareholders to Acquire Unissued Shares'') and 11A (``Unit Trust-issued Options to Unitholders to Acquire Unissued Units'').

By sub-s 160ZZC(3), which is relied on by the Commissioner in the present connection, it is provided that, subject to certain provisions not here material and to the following provisions of the section as to treating the grant of an option as part of a larger transaction, where an option has been granted-

• ``(a) the grant of the option shall be deemed to have constituted a disposal of the option at the time when the grant took effect; and
• (b) the option shall be deemed to have been owned by the grantor immediately before the disposal took place.''

The effect of the exercise of an option on the grantor is provided for by sub-s 160ZZC(7) as follows:

``If an option is exercised, the grant of the option and the transaction entered into by the grantor in fulfilment of the grantor's obligations under the option shall be treated as a single transaction and accordingly...

• (a) if the option binds the grantor to dispose of an asset, the consideration for the option forms part of the consideration received by the grantor in respect of the disposal;...''

The effect of the exercise of an option on a grantee is provided for by sub-s 160ZZC(8).

The terms of sub-s 160ZZC(12) upon which the Commissioner relies here (in conjunction with sub-para 160ZZC(3)(a)) have already been set out.

What is meant by the term ``option'' in the present connection?

The term is not defined in the Act, although, as has been said, s 160A provides that in Part IIIA the word ``asset'' means, unless the contrary intention appears, any form of property and includes an ``option''. The word ``option'' itself suggests a right in one party unilaterally to require another party to enter a new set of jural relations or to extend or continue an existing jural relationship. Put and call options, options to purchase and options to renew leases are, perhaps, the most common illustrations.

Division 13, which consists only of s 160ZZC, and is headed ``Options Generally'' is to be read in its context. As noted earlier, sub-s 160ZZC(1) provides that s 160ZZC does not apply in relation to an option if Division 10, 10A, 11 or 11A applies in relation to the option. Those Divisions are all concerned with unilateral options to acquire. This is consistent with the general notion of an ``option'' which we have described.

Most significantly, there are indications within s 160ZZC itself that the kind of

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ATC 4527

``option'' being referred to is of the familiar kind to which we have referred. Perhaps most importantly, it will be recalled that sub-s 160ZZC(7) is as follows:

``If an option is exercised, the grant of the option and the transaction entered into by the grantor in fulfilment of the grantor's obligations under the option shall be treated as a single transaction...''

(emphasis supplied)

As has been noted, sub-s 160ZZC(8) makes similar provision for the case of the grantee. This points directly to a distinction between the grant of the option and the transaction to be entered into by the grantor if the grantee of the option exercises the option.

Sub-section 160ZZC(12) speaks of the same distinction. It refers to ``a prospective purchase or other transaction''. Thus, the deposit of the money or other consideration is in respect of a prospective purchase or other transaction which is in contemplation when the deposit is ``made''. This is consistent with the ordinary meanings of the adjective ``prospective'' as: ``1. of or in the future. 2. potential; likely; expected'' (Macquarie Dictionary, 2nd ed). In
Drewery and Drewery v Ware-Lane [1960] 1 WLR 1204, it was agreed that a commission would be payable to an estate agent if a ``prospective purchaser'' signed an agreement to sell and if the vendor also signed that agreement. It was held, in that context, that ``prospective'' did not connote necessarily either the term ``ready'' or ``willing'' or ``able'', that is, a ``purchaser'', but meant rather a person who had the question of buying the property in prospect or contemplation and was prepared to make an offer, so as to be a ``bona fide prospect'' (cf
AGC (Advances) Ltd v Auctioneers and Agents Committee [1987] 2 Qd R 6 per McPherson J at 9).

Although ``prospective'' is not a term of art or a technical term, it is occasionally used in the sense we have described in contexts where a deposit has been paid. For instance, in
Sorrell v Finch [1977] AC 728, an estate agent received a ``holding'' deposit but negotiation did not reach the stage of a contract. Holding that the ``vendor'' was not liable to pay to the ``purchaser'' the amount of the deposit, Lord Edmund-Davies said:

``... it is not in accordance with first principles to hold the estate agent in such circumstances as the present was authorised to receive on the vendor's behalf a pre- contract deposit in the absence of express or implied authority so to do, and in neither way was such authority here given. Nor does the prospective vendor's knowledge that a deposit had been received of itself impose any liability upon him to repay it.''

(at 750-751, emphasis supplied).

Others have used language of the kind employed in sub-s 160ZZC(12), in particular, ``prospective'' and ``deposit'' where a payment described as a ``deposit'' has been paid before a contract for sale has been entered into. Referring to
Kean v Dunfoy [1952] NZLR 611, Stonham, The Law of Vendor and Purchaser (Law Book Co, 1964), states that ``[t]he fact that the offeror, the prospective vendor, has received a `deposit' (ie, money to be used as a deposit in the event of a contract being concluded) does not oblige him to give notice to the purchaser or to take any other step before assuming after the lapse of a reasonable time, that negotiations are at an end'' (para 20, fn 25(d), p 15).

Presumably, sub-s 160ZZC(12) would apply to such a case as perhaps also to the case of an amount paid in return for a negative pledge, that is, a promise not to dispose of the property for a limited period which, although not strictly an option, is akin to one.

Stonham, op cit, goes on (at 343-344) to discuss the potential for recovery of a ``deposit'' paid in the course of negotiations which do not result in a contract. Prima facie, the ``deposit'' is recoverable by the payer, but the terms upon which the deposit was paid will usually require an examination of all the circumstances (see
Chillingworth v Esche [1924] 1 Ch 97;
Masters v Cameron (1954) 91 CLR 353 at 365-366; see also
Wright v Newton (1835) 2 Cr M & R 124 (150 ER 53);
Henderson v Young (1912) 15 WALR 5;
Richards v Hill [1920] NZLR 724;
Whinfield v Lovell [1926] VLR 185). Sub-section 160ZZC(12) addresses the situation in which it is not recoverable but is forfeited, and assimilates the deposit to the irrecoverable consideration paid for the grant of an option.

Another example of a reference to a ``prospective'' purchaser and vendor is found in the observations by P J Butt, The Standard Contract for Sale of Land in New South Wales on the nature of a pre-contract deposit:

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ATC 4528

``It is not uncommon, when prospective purchaser and vendor have agreed upon the terms and conditions of a sale, for the purchaser to pay a pre-contract deposit (if such a payment can properly be called a `deposit' at all). The pre-contract deposit serves as an indication of the purchaser's genuine interest in buying the property, and so may be described loosely as an `earnest' of the bargain or a `guarantee that the purchaser means business'. But such descriptions confuse the legal nature of a pre-contract deposit with the legal nature of a deposit paid upon entry into a binding contract; they impute to a pre-contract deposit characteristics and consequences which, in law, it does not possess.''

(at 206-207)

This may be accepted. Nonetheless, it is generally appropriate, and as we have seen, a common practice, to describe a ``pre-contract deposit'' as a ``deposit''. It is something ``deposited'', the legal fate of which depends on the terms on which it was deposited and on an unknown future course of events. Such a payment can, we think, be capable of being fairly described as a ``deposit'' for the purposes of sub-s 160ZZC(12).

However, while a ``deposit'' paid in connection with the grant of an option, or of a negative pledge, or of a right of pre-emption (cf
Mackay v Wilson (1947) 47 SR (NSW) 315) would, along with a mere ``holding'' deposit, be capable of being a ``deposit'' within the meaning of sub-s 160ZZC(12) because the transaction contemplated may be characterised as a ``prospective'' purchase, the question remains whether the contract for sale here can be described as ``prospective'' for our purposes. In our opinion, it cannot. It is one thing to describe a person who has paid a ``holding'' deposit as a ``prospective'' purchaser. It is a different thing so to describe a person who has entered into a contract to purchase. Mr and Mrs Starling were, in our view, actual rather than prospective purchasers. It follows, we think, that their contract, and the deposit paid thereunder, fell outside the scope of sub-s 160ZZC(12).

While s 160A picks up an ``option'' in its definition of ``asset'', there is nothing in the provisions of Part IIIA, sub-s 160ZZC(12) itself, which could possibly suggest that a standard contract for the sale of land, as here, is an ``option''. For present purposes, it is sufficient for us to note that there still is, as Dixon CJ described it in
Braham v Walker (1961) 104 CLR 366 (at 376), a ``standing controversy'' as to the true nature of an option, in particular as to whether an option is an irrevocable offer, or a conditional contract to sell, or an ``if'' contract (which, upon exercise, creates a synallagmatic or bilateral contract, but until then, in the case of one party gives legal rights but imposes no legal obligations while doing the converse in the case of the other party). This is a difficult question which may depend upon the exact terms of the parties' dealings, but we need not decide it here (see, eg the discussion by Donald J Farrands, The Law of Options (Law Book Co, 1992) pp 3-16). It is enough to say that on no approach can it be said that the standard contract for sale entered into in the present case was an option.

Does sub-s 160ZZC(12) deem such a contract for sale to be an ``option''? A differently constituted Tribunal (Dr P Gerber, Deputy President) appears to have assumed that it did, but apparently without the benefit of legal argument (see Case 32/94, 94 ATC 298). But there is nothing specific in the language of sub-s 160ZZC(12) having the effect of changing the relationship of the parties from that of vendor and purchaser under a contract for sale and purchase, on the one hand, to that of grantor and grantee of an option under an option relationship, on the other hand. To effect such a fundamental change would ordinarily require clear language. Yet there is nothing explicit in the provisions of sub-s 160ZZC(12) to that effect.

The situation rather is that sub-s 160ZZC(12) which deals, in terms of its operation, with the effect of the forfeiture of a deposit by deeming it to have certain consequences, does not also operate to deem the substantive relationship of the parties to change from that of the vendor and purchaser of land to that of the grantor and grantee of an option. It may be accepted that words may be supplied by the courts, even in a taxing statute, in order to avoid absurdity or inconsistency where it is evident that there has been an oversight on the part of those drafting the legislation (see
Cooper Brookes (Wollongong) Pty Ltd v FC of T 81 ATC 4292 at 4305-4307; (1980-1981) 147 CLR 297 at 320-323). But that is not this case. There is no absurdity in capital gains tax terms if, as we

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think, sub-s 160ZZC(12) applies to the forfeiture of a deposit paid pre-contract where the contract does not eventuate, but does not apply to the forfeiture of a deposit paid under a standard contract.

But the forfeiture of a normal deposit under a standard contract for sale is a different thing. The nature of such a deposit was discussed by Lord Browne-Wilkinson in
Workers Trust & Merchant Bank Ltd v Dojap Investments Ltd [1993] AC 573 as follows:

``In general, a contractual provision which requires one party in the event of his breach of the contract to pay or forfeit a sum of money to the other party is unlawful as being a penalty, unless such provision can be justified as being a payment of liquidated damages being a genuine pre-estimate of the loss which the innocent party will incur by reason of the breach. One exception to this general rule is the provision for the payment of a deposit by the purchaser on a contract for the sale of land. Ancient law has established that the forfeiture of such a deposit (customarily 10 per cent. of the contract price) does not fall within the general rule and can be validly forfeited even though the amount of the deposit bears no reference to the anticipated loss to the vendor flowing from the breach of contract.

This exception is anomalous and at least one textbook writer has been surprised that the courts of equity ever countenanced it: see Farrand, Contract and Conveyance, 4th ed. (1983), p. 204. The special treatment afforded to such a deposit derives from the ancient custom of providing an earnest for the performance of a contract in the form of giving either some physical token of earnest (such as a ring) or earnest money. The history of the law of deposits can be traced to the Roman law of arra, and possibly further back still: see Howe v Smith... per Fry L.J. Ever since the decision in Howe v Smith, the nature of such a deposit has been settled in English law. Even in the absence of express contractual provision, it is an earnest for the performance of the contract: in the event of completion of the contract the deposit is applicable towards payment of the purchase price; in the event of the purchaser's failure to complete in accordance with the terms of the contract, the deposit is forfeit, equity having no power to relieve against such forfeiture.

However, the special treatment afforded to deposits is plainly capable of being abused if the parties to a contract, by attaching the label `deposit' to any penalty, could escape the general rule which renders penalties unenforceable.''

(at 578-579)

The Privy Council there held that a ``deposit'' of 25 per cent of the purchase price was a penalty.

In
Howe v Smith (1884) 27 Ch D 89, on a sale of land, the purchaser paid an amount ``as a deposit, and in part payment of the purchase- money''. The purchaser failed to perform his contract within a reasonable time. The vendor resold for the same price. It was held that the purchaser had no right to a return of the deposit. Fry LJ said:

``Money paid as a deposit must, I conceive, be paid on some terms implied or expressed. In this case no terms are expressed, and we must therefore inquire what terms are to be implied. The terms most naturally to be implied appear to me in the case of money paid on the signing of a contract to be that in the event of the contract being performed it shall be brought into account, but if the contract is not performed by the payer it shall remain the property of the payee. It is not merely a part payment, but is then also an earnest to bind the bargain so entered into, and creates by the fear of its forfeiture a motive in the payer to perform the rest of the contract.''

(at 101)

In
Brien v Dwyer (1978) 141 CLR 378, Gibbs J said:

``The nature of a deposit is well understood. In Soper v Arnold... Lord Macnaghten said: `The deposit serves two purposes - if the purchase is carried out it goes against the purchase-money - but its primary purpose is this, it is a guarantee that the purchaser means business...' In the same case Lord Herschell said... `The deposit is given as a security for the performance of the contract'.''

(at 392)

But, while a deposit payable under a standard sale contract should not be characterised as an option fee, a payment made pre-contract may be fairly described as a ``deposit'' for purposes which include those of Division 13 and specifically those of sub-s 160ZZC(12).

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ATC 4530

In our view, while it may be accepted that sub-s 160ZZC(12) applies to a mere ``holding'' deposit, as the Tribunal held, the provisions of Division 13 did not apply to the present deposit.

The Commissioner submits that even if the deposit was not made in respect of a ``prospective purchase'', it was made in respect of an ``other transaction'' and so was caught by the language of sub-s 160ZZC(12). The Commissioner submits that the Tribunal failed to consider the words ``or other transaction''. It is true that the Tribunal did not refer specifically and separately to those words in its Reasons for Decision.

In our view, the expression ``or other transaction'' refers to a transaction of the same relevant kind as a prospective purchase. That is a transaction in which the person who has received the benefit of the forfeiture did not, when the deposit was paid, become ``bound... to dispose of an asset'' (cf para (a) of sub-s 160ZZC(12)). In the present case, Mr and Mrs Guy did bind themselves to dispose of an asset at that time. If the word ``prospective'' in the condition described in sub-s 160ZZC(12) is to be read distributively (``a prospective purchase or other [prospective] transaction''), this provides a further, more specific and grammatical ground for the conclusion which we have reached as to the proper construction of the condition.

In the respondents' further statement of agreed facts before the Tribunal it was stated, in para 8, ``[t]hat the deposit of money was paid in respect of a prospective purchase, namely the prospective purchase of Minkara Road.'' The Commissioner submits that the Tribunal's decision was ``contrary to the agreed facts'' and was, in this respect, ``an error of law''.

We think that there are two answers, or two ways of expressing the answer, to this submission. Firstly, para 8 did not simply state facts, but was a mixed statement of fact and law, and the Tribunal was not intended to be bound, and in any event correctly did not treat itself as bound, by the statement in so far as it was a statement of law. Secondly, properly understood, para 8 was not a statement which imported the legal concepts of ``deposit'' and ``prospective purchase'' in conformity with the usage of those expressions in sub-s 160ZZC(12). Rather, it was a perhaps somewhat loose statement signifying that the deposit of $45,300 which was paid on exchange of contracts was to be brought to account upon the then prospective completion of the contract of purchase.

(b) Did the ``principal residence'' exemption in Division 18 apply?

Although strictly not necessary to do so, we propose next to address the taxpayer's alternative argument, also upheld by the Tribunal, that the exception in Division 18 applied in any event.

By sub-s 160ZZQ(12) it is relevantly provided that, subject to certain exceptions not material here, where-

• (a) a ``dwelling'' owned by a taxpayer, being a natural person, is disposed of; and
• (b) the dwelling was, throughout the ``relevant period'', the sole or principal residence of the taxpayer,

a capital gain shall not be deemed to have accrued to the taxpayer.

By sub-s 160ZZQ(2) provision is made with respect to the meaning of the ``ownership'' and ``acquisition'' of a dwelling for the purposes of the section. It is provided, relevantly, that a person shall be taken to own a dwelling constituted by or in a building if, inter alia, the person owns a legal or equitable estate or interest in the land on which the dwelling is erected.

The ``relevant period'' is defined by sub-s 160ZZQ(1) to mean the period after 19 September 1985 during which the dwelling was owned by the taxpayer.

The question then arises whether the forfeiture of the deposit in the present circumstances falls within the exempting provisions of Division 18. In our view it does.

It will be recalled that the operative conditions of sub-s 160ZZQ(12) were:

• (1) That a dwelling was owned by a natural person. (It was common ground that this condition was satisfied.)
• (2) That the dwelling was, throughout the relevant period, the taxpayer's sole or principal residence. (It was common ground that this condition was satisfied.)
• (3) That the dwelling was disposed of. (In our view, there was such a disposal.)

As has been noted, in those circumstances, sub-s 160ZZQ(12) deems, inter alia, that a capital gain has not accrued to a taxpayer ``in

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ATC 4531

respect of the disposal of the dwelling'' (emphasis added).

What is meant by the phrase ``in respect of'' in this context? It has been said that the words ``in respect of'' have the ``widest possible meaning of any expression intended to convey some connection or relation between the two subject matters to which the words refer'' (per Mann CJ in
Trustees, Executors & Agency Co Ltd v Reilly [1941] VLR 110 at 111; see also, eg,
Tarea Management (North Shore) Pty Ltd (In liq) v Glass (1991) 28 FCR 93 per Hill J at 100).

In our opinion, the ``disposal'' of the taxpayers' dwelling should be characterised as starting with the sale to the Starlings and as including both the falling through of that sale and the completed sale to the Rookes very soon after. There was, we think, no interruption in that continuum of events which might justify not treating all that took place as being ``... in respect of the disposal of the dwelling'' within the meaning of sub-s 160ZZQ(12).

Furthermore, that view is consonant with what would commonly be regarded as the ``disposal of a dwelling''. A dwelling is put on the market, a contract is made, the purchasers default, the dwelling is put straight back on the market and then it is sold. It must follow, in our view, that the exemption provided by Division 18 extended to the forfeiture of the deposit which occurred as part of this continuum. The forfeiture may fairly be regarded as part of the process of disposal of the dwelling, rather than as an event divorced from that process. The receipt of the deposit in those circumstances is deemed by sub-s 160ZZQ(12) not to constitute a capital gain.

We therefore agree with the Tribunal's decision on this aspect also.

(2) The damages claim

Even if it be accepted (and we prefer to express no opinion on the point) that, absent the exempting provision of Division 18, the damages recovered would have constituted a capital gain, we are of the view, for the reasons already given in connection with the forfeited deposit, that that provision applied in regard to them as well. That is to say, we think that the recovery of the damages also formed part of the process, or continuum of events, which constituted the disposal of the dwelling, so as to be picked up as something ``in respect of'' that disposal, and accordingly exempt from the operation of Part IIIA.

Again, we agree with the Tribunal's decision on this aspect.

ORDERS

The appeals will be dismissed. As has been said, the Commissioner has agreed to pay the taxpayers' costs in any event.

THE COURT IN PROCEEDINGS NO:

NG 541 of 1995

Commissioner of Taxation v Alexander Robertson Guy

1. ORDERS that the appeal be dismissed.

2. ORDERS that the appellant pay the respondent's costs.

NG 542 of 1995

Commissioner of Taxation v Margaret Isabel Guy

1. ORDERS that the appeal be dismissed.

2. ORDERS that the appellant pay the respondent's costs.