CATCHWORDS Taxes and Duties - Income tax - Ascertainment of assessable income - What is income derived by a taxpayer - Certain capital receipts or value by statute deemed to be income - Profit on resale of property within prescribed period - Meaning of "the value of the property" in s.26AAA(4)(c) of the Income Tax Assessment Act 1936 considered - Principles of valuation of land considered. Income Tax Assessment Act 1936 - s.26AAA Commissioner of Succession Duties (S.A.) v. Executor Trustee and Agency Co. of South Australia (1947) 74 C.L.R. 349 Hustlers Pty. Ltd. & Anor. v. The Valuer-General (1967) 14 L.G.R.A. 268 Raya Vyricherla Narayana Gajapatiraju v. The Revenue Divisional Officer, Vizagapatam [1939] A.C. 302 Spencer v. The Commonwealth (1907) 5 C.L.R. 41 MARION ELIZABETH COLLIS v. COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA VG462 of 1994 STEPHEN JOHN COLLIS v. COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA VG463 of 1994 Jenkinson J. Melbourne 21 August, 1996 IN THE FEDERAL COURT OF AUSTRALIA ) VICTORIA DISTRICT REGISTRY ) No. VG462 of 1994 GENERAL DIVISION ) On Appeal from the Administrative Appeals Tribunal constituted by Deputy President B.M. Forrest, Mr. D.L. Elsum, AM, Member and Mr. B.H. Pascoe Member. BETWEEN: MARION ELIZABETH COLLIS Applicant AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent CORAM: Jenkinson J. PLACE: Melbourne DATE: 21 August, 1996 MINUTES OF ORDER THE COURT ORDERS THAT: 1. The appeal be dismissed. 2. The applicant pay the respondent's costs of the appeal. (Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.) IN THE FEDERAL COURT OF AUSTRALIA ) VICTORIA DISTRICT REGISTRY ) No. VG463 of 1994 GENERAL DIVISION ) On Appeal from the Administrative Appeals Tribunal constituted by Deputy President B.M. Forrest, Mr. D.L. Elsum, AM, Member and Mr. B.H. Pascoe Member. BETWEEN: STEPHEN JOHN COLLIS Applicant AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent CORAM: Jenkinson J. PLACE: Melbourne DATE: 21 August, 1996 MINUTES OF ORDER THE COURT ORDERS THAT: 1. The appeal be dismissed. 2. The applicant pay the respondent's costs of the appeal. (Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.) IN THE FEDERAL COURT OF AUSTRALIA ) VICTORIA DISTRICT REGISTRY ) GENERAL DIVISION ) On Appeal from the Administrative Appeals Tribunal constituted by Deputy President B.M. Forrest, Mr. D.L. Elsum, AM, Member and Mr. B.H. Pascoe Member. No. VG462 of 1994 BETWEEN: MARION ELIZABETH COLLIS Applicant AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent No. VG463 of 1994 BETWEEN: STEPHEN JOHN COLLIS Applicant AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent CORAM: Jenkinson J. PLACE: Melbourne DATE: 21 August, 1996 REASONS FOR JUDGMENT Appeals from decisions of the Administrative Appeals Tribunal. The applicants were at relevant times husband and wife, and legal and beneficial joint owners of 4 abutting parcels of land at the north-east corner of Malvern Road and Meredith Street Malvern. On 29 March 1988 they sold all four parcels to Hannibal Bonython. Neither of them made in his income tax return for the year ended 30 June 1988 any reference to the sale. By an amended assessment the respondent included in the assessable income of each applicant $78750 which he considered to be one half the profit arising from the sale of the most westerly of the four parcels, being the parcel adjoining Meredith Street, and which he considered to be assessable income by reason of the operation of s.26AAA of the Income Tax Assessment Act 1936 as in force in respect of that year of income ("the Act"). Each amended assessment included also, pursuant to s.223(1) of the Act, additional tax considered by the respondent to be payable, by way of penalty, in respect of the applicant's omission from his return of reference to the purchase, and to the sale, of that parcel. The applicants had purchased that parcel on 29 January 1988. The other three parcels had been purchased by them in 1979. The relevant provisions of s.26AAA of the Act were: "(1A) This section does not apply to a sale of property, or of an interest in property, that occurs after 25 May 1988 (including a sale that occurs after that date but is required by subsection (3) or (3A) to be treated as if it had occurred on or before that date). (1) For the purposes of this section - (a) a reference to property generally or to a particular kind of property includes a reference to an estate or interest in property or in that kind of property, as the case may be; (b) a reference to an agreement or option includes a reference to an agreement or option that is not enforceable by legal proceedings whether or not it was intended to be so enforceable; (c) an arrangement or understanding, whether formal or informal and whether express or implied, shall be deemed to be an agreement; ............................................... (f) if property is transferred from a person or persons to another person or other persons in exchange for other property or without consideration, the transfer shall be deemed to constitute the sale of the property by the first mentioned person or persons and the purchase of the property by the second-mentioned person or persons; (g) if land is sold to or purchased by a person in pursuance of a contract, the date on which the contract was made shall be deemed to have been the date on which the land was so sold or purchased; ............................................... (2) Where - (a) a taxpayer has purchased property after 21 August 1973 and before the commencement of this section or purchases property after the commencement of this section; and (b) the taxpayer has, whether before or after the commencement of this section, sold the property or an interest in the property before the expiration of the period of 12 months from the date on which he purchased the property, then, subject to this section, the assessable income of the taxpayer includes any profit arising from the sale of the property or interest. ............................................... (4) Where - (a) sub-section (2) or (2A) applies in relation to the sale of any property by a taxpayer; (b) the Commissioner is satisfied that, having regard to any connexion between the taxpayer and the person to whom the property is so sold or any other relevant circumstances, the taxpayer and the other person were not dealing with each other at arm's length; and (c) there was no consideration for the sale or the consideration for the sale was greater or less than the amount (in this sub-section referred to as the `relevant amount') that, in the opinion of the Commissioner, was the value of the property - (i) in a case where sub-section (2) applies in relation to the sale of the property by the taxpayer and the sale is made before the expiration of the period of 12 months from the date on which the taxpayer purchased the property - at the time of the sale; (ii) in a case where sub-section (2) applies in relation to the sale of the property by the taxpayer and the sale is made, after the expiration of the period referred to in sub-paragraph (i), in pursuance of an option granted, or an agreement entered into, during that period - at the time when the option was granted or the agreement was entered into, as the case may be; ............................................... then, for the purposes of this section, the property shall be deemed to have been sold by the taxpayer, and purchased by the person to whom it is so sold, for a consideration equal to the relevant amount." At and before the time of sale the parcel of land adjoining Meredith Street ("the subject land") was vacant land. On the other three parcels ("the factory land") was a factory in which a company controlled by the applicants carried on a business of sheet plastic formation and fabrication. Reference to the subject land in the Tribunal's reasons for its decision is as "1343 M Road", 1343 being the postal address number. Reference to the factory land is as "1345-1349 M Road". The subject land was comprised in one certificate of title. The parcel adjoining the subject land was comprised in another certificate of title and the other two parcels were comprised in a third certificate of title. Each parcel had a frontage to Malvern Road of 6.1 metres and each had a depth of 36.6 metres. The Tribunal's reasons for its decision included the following passages: "The factory premises had a door which opened on to the adjoining site at 1343 M Road which was a vacant corner block of land. The doorway was used by the company as an access way for raw materials, although neither the company nor the applicants had any right of way or easement over the adjoining vacant land. On 29 January 1988 the applicants signed a contract note to purchase jointly 1343 M Road for $200,000, payable by a deposit of $20,000 on signing and the residue on 28 February 1988. On 29 March 1988 the applicants offered for sale by auction 1343-1349 M Road as one lot. The land was advertised as an `Exceptional Corner Development Site on 3 Titles'. The successful bidder at the auction was a Mr B acting on behalf of a company and the properties were sold to him for $1,430,000. Mr B was asked to and did sign two contracts for the purchase. One contract was for 1343 M Road with a sale price of $200,000 and the other contract was for 1345-1349 M Road with a sale price of $1,230,000. ............................................... In arriving at the view that the applicants had derived an assessable profit of $157,500, the respondent considered that the applicants and B were not dealing with each other at arms length, so as to allow the respondent to arrive at a deemed sale price of $357,500. This deemed sale price was arrived at by dividing the total auction price of $1,430,000 by four on the basis that 1343 represented one-fourth of the total area of land covered by 1343-1349 M Road. In the course of the hearing evidence for the applicants was given by Mr A, by the real estate agent who auctioned the property and by a valuer. For the respondent evidence was given by Mr Vestakis, a valuer with the Australian Valuation Office. The evidence of Mr A was that the applicants had ascertained in January 1988 that the vacant land at 1343 M Road was to be sold and that any such sale could limit access to their factory premises. Consequently they made an offer to purchase the land for $200,000 which was accepted. A contract note was signed on 29 January 1988. Mr A considered that the price paid exceeded the value of the property but stated that he was anxious to ensure continued access over the land. In February 1988 the company carrying on the business in the factory premises at 1345-1349 M Road received a large order to the value of approximately $1,000,000 which was, by far, the largest order ever received by the business. According to Mr. A, this led to a decision to sell the existing factory and move the business to larger premises. Instructions were given in February 1988 to an estate agent to auction the properties as one and the auction was held on 29 March 1988. Prior to the auction, solicitors for the applicants prepared and forwarded to the vendors' agent three separate auction contracts. One contract for 1343 M Road had the sale price of $200,000 inserted in the particulars of sale with `$20,000 on signing hereof' inserted for the deposit and `$180,000' for the residue. The date for payment of the residue was expressed to be at the expiration of 120 days from the date of the contract or earlier by agreement. A second contract was for 1345-1349 M Road which left the price, deposit and residue blank. The deposit was said to be, `10% on signing' and the date for payment of the residue was expressed similarly to the contract for 1443 M Road. A third contract for 1343-1349 M Road also had the price left blank. Mr A stated that he had not met the successful bidder Mr B prior to the auction. After the auction Mr B was asked by the auctioneer if he would sign two contracts, one for 1343 M Road at $200,000 and one for 1345-1349 at $1,230,000. Although the evidence was not entirely clear as to the discussions with Mr B, we are satisfied that there was little discussion and that it was basically limited to the purchaser ascertaining that he would not be prejudiced by the signing of two contracts. We are satisfied that there was no negotiation on the allocation of the successful bid of $1,430,000 between the two contracts. A's evidence was that he had instructed his solicitor prior to the auction to prepare a contract for 1343 at a price of $200,000 and that no discussion was held with Mr B when he was asked to sign two contracts as to whether that price was appropriate for that block of land as a proportion of the total amount bid for all of the land. The Tribunal was provided with an unsigned statement by Mr B and an indication that an application would be made to have his evidence given by telephone. The statement generally confirmed the evidence of Mr A and the auctioneer as to the limited nature of the discussions when the purchaser was requested to sign the two contracts. Whilst the statement indicated that questions were asked by Mr B as to whether the execution of two contracts as opposed to one would impact on stamp duty considerations, neither A nor the auctioneer had any memory of this. After hearing evidence from A and the auctioneer the Tribunal advised the parties that it proposed to make a finding that the applicants and Mr B on behalf of the purchaser of 1343 M Road, were not dealing with each other at arms length within the meaning of s.26AAA(4)(b). This preliminary finding was made so that the parties could consider the further course of the proceedings. On the evidence before it, particularly that of A, the Tribunal was of the view that, whilst the sale and purchase of the whole of the property at public auction was an arms length dealing, the contract of sale of 1343 M Road did not result from the applicants and Mr B dealing with each other at arms length. From the clear evidence of A, no negotiating or bargaining took place in relation to the price to be paid for that particular block of land. The purchase price was typed on the contract prior to the auction. Mr B was simply requested to sign two contracts for the total purchase price. The price for 1343 M Road was determined in advance by the applicants without waiting for a determination of the market value of the whole of the land at auction or without knowledge of what that might be. The question is not whether the parties were at arms length but whether they were dealing with each other at arms length. The distinction was considered by Hill J. in Trustee for the Estate of the late A.W. Furse No. 5 Will Trust v Federal Commissioner of Taxation 91 ATC 4007, where his Honour said (at p.4015): `The first of the two issues is not to be decided solely by asking whether the parties to the relevant agreement were at arm's length to each other. The emphasis in the subsection is rather upon whether those parties, in relation to the agreement, dealt with each other at arm's length. The fact that the parties are themselves not at arm's length does not mean that they may not, in respect of a particular dealing, deal with each other at arm's length. This is not to stay that the relationship between the parties is irrelevant to the issue to be determined under the subsection. The distinction was pointed out by Davies J in connection with the similar words used in s 26AAA(4) of the Act in Re Hains (dec'd); Barnsdall v FCT (1988) 19 ATR 1352 at 1355; 88 ATC 4565 at 4568, in a passage, which with respect, I agree: However, s 26AAA(4) used the expression "not dealing with each other at arm's length". That term should not be read as if the words "dealing with" were not present. The Commissioner is required to be satisfied not merely of a connection between a taxpayer and the person to whom the taxpayer transferred, but also of the fact that they were not dealing with each other at arm's length. A finding as to a connection between the parties is simply a step in the course of reasoning and will not be determinative unless it leads to the ultimate conclusion. What is required in determining whether parties dealt with each other in respect of a particular dealing at arm's length is an assessment whether in respect of that dealing they dealt with each other as arm's length parties would normally do, so that the outcome of their dealing is a matter of real bargaining. Here there was no bargaining, real or otherwise, as to the sale price for that particular parcel of land." It was a ground of appeal that the applicants had been denied procedural fairness by the Tribunal's premature announcement of what the Tribunal called a proposal to make a finding that the applicants on the one hand and Mr. Bonython on the other were not dealing with each other at arm's length. Consideration of that ground may be deferred. It does not appear from the material before the Tribunal, or from the reasons for the Tribunal's decision, or from submission on the hearing of this appeal, that the parties considered that the sale which attracted the operation of s.26AAA(2) was the sale concluded by the knocking down of the subject land at the auction. As Ormiston J. has pointed out, in Futuretronics International Pty. Ltd. v. Gadzhis [1992] 2 V.R. 217 at 220, 229-233, in Victoria an oral contract is formed by acceptance of the purchaser's bid on the fall of the auctioneer's hammer, which contract is unenforceable by reason of s.8 of the Sale of Goods (Vienna Convention) Act 1987 (Vic.), formerly s.127 of the Instruments Act 1958. If the subject land had been purchased by Mr. Bonython "in pursuance of" the oral contract he made at the auction, paragraph 26AAA(1)(g) would have operated to deem the date of the auction to have been the date on which the subject land was so sold. There is nothing in the material before the Tribunal to suggest, nor was it submitted, that Mr. Bonython and the applicants were not dealing with each other at arms length at and before the fall of the hammer. The fact that the oral contract was unenforceable - and remained unenforceable until Mr. Bonython became the registered proprietor of the subject land - would not affect the operation of s.26AAA(2). Presumably the parties have taken the view that the making of the subsequent written contract for the sale of the subject land and the written contract for the sale of the factory land had the result that the oral contract was thereupon rescinded, no doubt pursuant to an implied term of each of the written contracts that that should be so. The oral contract being rescinded, the subject land could not perhaps be said to have been sold "in pursuance of" that contract. The opinion that the knocking down of the subject land to Mr. Bonython did not, in the events which thereafter happened, attract the operation of s.26AAA(2) - which I have supposed to have been the opinion of the parties - is not in my opinion so clearly erroneous that I should raise the question on a further hearing. It was a ground of appeal that the Tribunal had erred in law in concluding that Mr. Bonython and the applicants "were not dealing with each other at arm's length". The form of contract for purchase of the whole of the land offered at the auction was before the Tribunal. It does not appear whether the auctioneer was authorised in writing by the applicants to sign the contract. (Cf. Futuretronics Case [1992] 2 V.R. at 221). No such an authority is in the form of contract. If it be assumed that no such an authority had been given, yet from the fall of the hammer until he had signed the two contracts in fact executed that day Mr. Bonython may be expected to have believed that a failure by the applicants to sign the form of contract for sale of the whole of the land at the auction price of $1,430,000 would, if he required execution of such a contract, constitute a contravention of s.52 of the Trade Practices Act 1974 (Cth) and s.11 of the Fair Trading Act 1985 (Vic.) (Cf. Futuretronics Case, supra.) On the evidence before the Tribunal Mr. Bonython could be expected to be indifferent as to whether he made the two contracts proposed or the one contract which the applicants had represented that they were willing to make with the successful bidder at the auction, provided that he was satisfied that the former course would not expose him to any disadvantage or risk of disadvantage not attendant on the latter course. The evidence before the Tribunal strongly suggested that he was so satisfied, and the Tribunal appears to have found that he was. If he was, the inference - which it is for the Tribunal, not for the court, to draw - seems irresistible that Mr. Bonython did not deal with the applicants at arm's length. Lee J. observed, in Grandby Pty. Ltd. v. Federal Commissioner of Taxation (1995) 95 A.T.C. 4240 at 4244: "If the parties to the transaction are at arm's length it will follow, usually, that the parties will have dealt with each other at arm's length. That is, the separate minds and wills of the parties will be applied to the bargaining process whatever the outcome of the bargain may be. That is not to say, however, that parties at arm's length will be dealing with each other at arm's length in a transaction in which they collude to achieve a particular result, or in which one of the parties submits the exercise of its will to the dictation of the other, perhaps to promote the interests of the other. As in Minister of National Review v. Merritt 69 DTC 5159 at 5166 where the parties to the transaction were parties at arm's length, the terms of a loan transaction made between them had been dictated by a unilateral decision of one of them and no independent will in the formation of that transaction had been exercised by the other. It followed that it could not be said that the parties had dealt with each other at arm's length at the material time. (c.f. Robinson v Minister of National Revenue [1987] 1 CTC 2055.)" I respectfully agree. The inference must surely be drawn that Mr. Bonython, being indifferent, submitted the exercise of his will to the applicants' wishes in acceding to their request. It was submitted for the applicants that the Tribunal had misunderstood reference, in judicial exposition of dealing at arm's length, to "bargaining" as a characteristic of such dealing. Mr. de Wijn of counsel for the applicants pointed out that no discussion of price occurs when an item of stock in a food store, the price of which is displayed, is being purchased, and submitted that the Tribunal had erred in thinking that the lack of discussion of the price proposed by the applicants for the subject land betokened a lack of bargaining and therefore a dealing not at arm's length. The expression of the Tribunal's reasons is not to be captiously conned for error. A parcel of land is not ordinarily dealt with in commerce as is a can of beans in a food store. The failure of Mr. Bonython to enquire why the apportionment of his accepted bid at auction was in the two amounts proposed by the applicants was an indication of his indifference concerning the two amounts. And that may be what evoked the last sentence in the passage I have quoted from the Tribunal's reasons for decision. In determining what in its opinion was "the value of the property ... at the time of the sale", for the purpose of applying s.26AAA(4)(c), the Tribunal found that Mr. Bonython's accepted auction bid was acceptable evidence of the market value of the land for which the bid was made ("the whole of the land"), for the Tribunal found that at the auction the parties were dealing at arm's length. The Tribunal considered, on the basis of that value ($1,430,000), that the subject land, being one quarter of the area of the whole of the land, had a market value at the time of the sale, when the contract of sale of the subject land was signed by Mr. Bonython, of $357,500. Mr. de Wijn submitted that the market value of the subject land is to be ascertained by reference to the price which a willing vendor might reasonably expect to obtain from a willing purchaser, at the time of the sale, for the subject land alone, and that therefore error of law had infected the Tribunal's valuation. There was evidence as to what that latter value was. John Vestakis, of the Australian Valuation Office, included in his valuation report the following: "By offering the vacant block in conjunction with the other sites, there is a dramatic increase in the value of the vacant site. On its own, 1343 Malvern Road, with the 6.1 metre frontage has very limited uses. The size of the site would possibly restrict the use of the two storey shop and dwelling type establishment. Upon consolidation with the larger site, the highest and best use undoubtedly becomes an office development site. It follows that the greater the potential and use of a site, the greater the underlying land value. Upon investigation of sales both improved and unimproved as at the respective valuation dates, I am of the opinion that the purchase of 1343 Malvern Road as at January 1988 for $ 200,000 was at a fair market value. The purchase price does not seem to represent an added value to the adjoining owner. If the vacant site was to be offered separately in March 1988, it would be reasonable to assume a resale value of $ 210,000 (Two Hundred And Ten Thousand Dollars). During the year of 1988, we were experiencing what is commonly referred to as the `Property Boom'. During this period, it was not uncommon to see property values rising at a rate of approximately 2% per calendar month. Hence, a slight increase from January to March if sold under the same conditions and circumstances." There was uncontradicted evidence, which the Tribunal did not say was rejected or was accepted, that the subject land was bought by the applicants in January 1988 because they had become aware that it was being offered for sale and they feared that a purchaser other than themselves might so use the subject land that the access to their factory over the subject land which the owner of the subject land had permitted them to enjoy would be lost. It was not until February 1988, according to that evidence, that an intention to sell the factory land was formed by the applicants, when their company received an order, for a product to be manufactured, of such magnitude that the company would require for its manufacture a factory larger than the whole of the land could accommodate. Thereupon, in February 1988, the applicants engaged a real estate agent to sell the whole of the land. If the Tribunal accepted that evidence, its attention may have turned to a consideration of the position and the potentialities of the subject land once it was known that the owners of both the factory land and the subject land were willing to sell. Even if the subject land and the factory land had been in different ownership in February and March 1988 the market value of the subject land, and of the factory land, was likely to have been influenced by the circumstances that the owners of both were willing to sell and the whole of the land was suitable for development as a site for an office building. Delivering the judgment of the Judicial Committee in Raya Vyricherla Narayana Gajapatiraju v. The Revenue Divisional Officer, Vizagapatam [1939] A.C. 302 Lord Romer observed (at 312-314): "The vendor is to be treated as a vendor willing to sell at `the market price,' to use the words of s.23 of the Indian Act. It is perhaps desirable in this connection to say something about this expression `the market price.' There is not in general any market for land in the sense in which one speaks of a market for shares or a market for sugar or any like commodity. The value of any such article at any particular time can readily be ascertained by the prices being obtained for similar articles in the market. In the case of land, its value in general can also be measured by a consideration of the prices that have been obtained in the past for land of similar quality and in similar positions, and this is what must be meant in general by the 'market value' in s.23. But sometimes it happens that the land to be valued possesses some unusual, and it may be, unique features, as regards its position or its potentialities. In such a case the arbitrator in determining its value will have no market value to guide him, and he will have to ascertain as best he may from the materials before him, what a willing vendor might reasonably expect to obtain from a willing purchaser, for the land in that particular position and with those particular potentialities. For it has been established by numerous authorities that the land is not to be valued merely by reference to the use to which it is being put at the time at which its value has to be determined (that time under the Indian Act being the date of the notification under s. 4, sub-s. 1), but also by reference to the uses to which it is reasonably capable of being put in the future. No authority indeed is required for this proposition. It is a self-evident one. No one can suppose in the case of land which is certain, or even likely, to be used in the immediate or reasonably near future for building purposes, but which at the valuation date is waste land or is being used for agricultural purposes, that the owner, however willing a vendor, will be content to sell the land for its value as waste or agricultural land as the case may be. It is plain that, in ascertaining its value, the possibility of of its being used for building purposes would have to be taken into account. It is equally plain, however, that the land must not be valued as though it had already been built upon, a proposition that is embodied in s. 24, sub-s. 5, of the Act and is sometimes expressed by saying that it is the possibilities of the land and not its realized possibilities that must be taken into consideration. But how is the increase accruing to the value of the land by reason of its potentialities or possibilities to be measured? In the case instanced above of land possessing the possibility of being used for building purposes, the arbitrator (which expression in this judgment includes any person who has to determine the value) would probably have before him evidence of the prices paid, in the neighbourhood, for land immediately required for such purposes. He would then have to deduct from the value so ascertained such a sum as he would think proper by reason of the degree of possibility that the land might never be so required or might not be so required for a considerable time." See also Spencer v. The Commonwealth (1907) 5 C.L.R. 41. A question then arises as to whether, the applicants being in February and March 1988 the owners of both the subject land and the factory land and being willing to sell the whole of the land under a single contract, the market value of the subject land on 28 March 1988 is to be ascertained by reference to the price a willing purchaser would offer as the consideration for such a contract, or whether that value is to be ascertained by reference to the price such a purchaser would offer as the consideration for a contract of sale of the subject land, being a purchaser aware that there was a willing vendor of the factory land with whom he could bargain for purchase of that factory land. I would suppose that a purchaser situated as the second of the two hypotheses contemplates would offer less per square metre for the subject land than a purchaser situated as the first hypothesis contemplates would offer per square metre for the whole of the land, because a contract for the whole of the land eliminates the uncertainty, as to the cost per square metre of the factory land, in which the hypothetical purchaser of the subject land is left after his contract for purchase of the subject land is made. But that is matter of opinion as to which it would be for a qualified witness to depose, and as to which it would be for the Tribunal, not this court, to make its finding. Before pursuing the question further I should deal with a passage in the judgment of Latham C.J. Rich and Williams JJ. in Commissioner of Succession Duties (S.A.) v. Executor Trustee and Agency Co. of South Australia (1947) 74 C.L.R. 349 at 366-367, upon which Mr. de Wijn relied in support of his submission that the subject land must be valued alone and without regard to the circumstance that the adjoining factory land was for sale on 28 March 1988. The High Court was in that case considering a valuation of shares in a company, which had never been listed on a stock exchange, for the purposes of the Succession Duties Act 1929-1942 (S.A.). That Act imposed succession duties to be assessed "upon the total of the net present value of all property derived, or deemed to be derived, by any person from any deceased person, and shall be assessed at the rate appropriate for the said total". The expression "net present value" was defined to mean, "in relation to property derived from a deceased person, the net value of the property at the time of the death of the said person". As the members of the court remarked, the Act prescribed no criterion by which the value was to be determined : 74 C.L.R. at 361, 370, 373. In addition to the shares under consideration, namely those in D. Clifford Theatres Ltd., the deceased's estate included a share in another company, the name of which was Cliffords Investments Ltd., which share entitled the holder to three votes as against every one vote conferred on all the other issued shares for the time being in that other company. Latham C.J. Rich and Williams JJ. observed (74 C.L.R. at 366 - 367): "We have reached this value without taking into consideration a contention based on the voting rights attached to the life-governor's share by the memorandum of association of Clifford's Investments Ltd. This contention was that the executors of the will of the deceased could become the registered holders of this share and by the exercise of its voting power could convene a general meeting of this company and pass a special resolution that the shares held by this company in D. Clifford Theatres Ltd. should be sold to a purchaser at the same time as the shares of the deceased and that in this way a purchaser would acquire 48,685 shares in D. Clifford Theatres Ltd. and thereby obtain control of this company. Mayo J. rejected this contention and we agree with him. One asset to be valued for the purposes of duty is the shares held by the deceased in D. Clifford Theatres Ltd. The share held by the deceased in Clifford's Investments Ltd. is a share in a different company and therefore a separate asset. It is no more permissible to amalgamate the two lots of shares than it would be to amalgamate two separate parcels of land for the purpose of giving an additional value to each. We need not consider, therefore, a number of difficulties which might stand in the way of the executors using the power conferred by the life-governor's share to sell the shares in D. Clifford Theatres Ltd. held by Clifford's Investments Ltd. possibly against the wishes of the other shareholders in the latter company." Dixon J. agreed in that judgment. Starke J. dealt with the submission in these terms (74 C.L.R. at 372): "Further it was said that the deceased was the governing-director of a company known as Clifford's Investments Ltd. which held 10,000 ordinary shares or thereabouts in D. Clifford Theatres Ltd. and that this gave him and his executors complete control of D. Clifford Theatres Ltd. Such a control would enhance the value of the ordinary shares in D. Clifford Theatres Ltd. All that need be said is that the argument is untenable, for the shares in D. Clifford Theatres Ltd. belonging to Clifford's Investments Ltd. were not the property of the deceased and gave him and his executors no right to use them for his own benefit." It was submitted that the reference to amalgamating two separate parcels of land for the purpose of giving an additional value to each demonstrated that the value of a parcel of land may not in law be regarded as enhanced by the circumstance that another parcel of land is available for purchase at the time as at which the value of the first parcel is to be determined. It is not quite clear to me what is meant by the words "to amalgamate". Since it is of "separate parcels" that their Honours speak, they seem not to have had in mind adjoining parcels. Presumably they had in mind the offering of the separate parcels for sale under a single contract for a single price. If each parcel had attraction for different potential purchasers a better price might be an expected outcome from competition among all those potential purchasers than the aggregate of the prices on a separate sale of each parcel, for which fewer potential purchasers would be in competition. The report does not disclose whether the share in Cliffords Investments Ltd. or the shares in D. Clifford Theatres Ltd. were by the will under a trust for sale, or whether both the one share and the parcel of shares had been bequeathed to the same person. The "total of the net present value of all property derived ... by any person" from the deceased is subject to succession duties at rates which are different as between, first, "property derived .... by any widow, widower, descendant, or ancestor of the deceased" and, second, "property derived .... by any or sister, or descendant of a brother or sister, or by any person in any other degree of collateral consanguinity to the deceased" and, third, "property derived .... by a stranger in blood to the deceased". In those circumstances it would seem impermissible to "amalgamate", in the sense in which I have supposed the word to have been intended, two separate parcels of land which were neither subject to a trust for sale nor devised to the same person. But I think that probably Williams J., who drafted the passage under consideration, had in mind the inadmissibility of giving an additional value to separate parcels when assessment to duty is upon "the total of the net present value of all property derived", which is an expression requiring separate valuation of each item of property and the aggregation of those separate amounts into a "total". In Hustlers Pty. Ltd. & Anor. v. The Valuer-General (1967) 14 L.G.R.A. 269 assessments of the annual value of each of three contiguous parcels of land in the City of Bathurst, made by the Valuer-General on a general revaluation as at a specified date in July 1965, were the subjects of three appeals to the Land and Valuation Court of New South Wales. The appeals were heard together. At the valuation date there was on each parcel an old building which at some earlier time had been used as a retail store by the Reid Murray Group of companies, in which each of the appellant companies was a subsidiary. The parcels known as No. 54 and No. 58 William Street Bathurst were owned by Hustlers Pty. Ltd. and the third parcel, known as No. 62-64, was owned by Robert Reid Pty. Ltd. Hustlers Pty. Ltd. had gone into liquidation in 1965. In July 1967 the three parcels were sold to the Rural Bank of New South Wales under two contracts, one of No. 54 and No. 58 by the liquidator of Hustlers Pty. Ltd. and the other of No. 62-64 by Reid Murray (Holdings) Ltd., of which Robert Reid Pty. Ltd. was a subsidiary. Else-Mitchell J. observed (14 L.G.R.A. at 276-277) : "These sales, which were inter-dependent and collateral, were made by private negotiation between an officer of the Rural Bank of New South Wales and a member of" a firm of accountants who acted as agent for both vendors. Valuation of the unimproved value, as well as the improved value and the annual value of each parcel was required. His Honour observed (at 272): "One matter which should be noticed before looking at the evidence which was tendered on the hearing of the appeals is that there were separate valuations of each parcel and in consequence the proper course to take in determining the value of each such parcel would be to assume the existence of improvements on the other two parcels, even though those improvements are now demolished (cf. Tetzner v. Colonial Sugar Refining Co. Ltd. [1958] A.C. 50.)" In considering the bases of valuation proposed in evidence the learned judge said (at 274-278): "In a determination of the value of the subject lands in the light of the competing opinions I have summarized, it is essential to remember that although the special adaptability of land for a specific purpose is an element in value, it is essential to the existence of a market value that there be some continuing demand for land for that purpose (cf. Tucker v. The Valuer-General (1961) 7 L.G.R.A. 380). In other words, whatever suitability the subject lands might have for a retail store or stores cannot influence value unless one can point to a field of potential purchasers who would be prepared to acquire those lands for such a purpose. At the valuation date the three parcels of land and the shop premises thereon had been vacant for some time and although advertised for sale and offered at auction, had not been purchased by any person or company for the purpose of a business of retail selling. If the assumption is made in the valuation of each parcel - as it must be - that it is unimproved and that the other two parcels have empty shops built thereon, the only inference one can draw is that there was no market for unimproved land for the business of retail selling in that situation; this must follow from the fact that there were available for purchase and for immediate occupation the existing premises on the other two parcels, both of which had formerly been used for retail selling. It may be, of course, that no retailer would be anxious to establish his business next to or between two empty shops, but, subject to one qualification, that is the basis on which the value must be approached. The qualification is that if there were a demand by retailers for a large parcel consisting of the three blocks in consolidation, it would be proper to determine the value of the entirety and then to arrive at the value of each parcel by making some apportionment of the total figure, subject to an appropriate loading. There was, however, no evidence of any demand by retailers for such a large parcel, except a passing reference to a refusal by G. J. Coles & Co. Ltd. to acquire it for the purpose of establishing a supermarket at $90,000 and, needless to say, the field of possible purchasers for some such purpose, of a consolidated parcel having a frontage of over 120 feet and a depth of over 200 feet in the City of Bathurst, would be few indeed; on the evidence I am prepared to infer that there were no such potential purchasers. If the potentiality of the subject lands for retail business purposes is excluded, as I think it should be, the next most profitable use to which those lands might be devoted would be some commercial use and, indeed, this is the purpose for which the sales principally relied on by the valuers were in fact made, namely the sales to the Australian Mutual Provident Society, the Mutual Life and Citizens' Assurance Co. Ltd., the Commonwealth Savings Bank of Australia and the sale of the subject lands themselves to the Rural Bank of New South Wales: an analysis and evaluation of all or some of these sales should accordingly provide a basis for determining the value of the subject lands on the hypothesis that they had no potentiality for retail selling. ............................................... There were two contracts of sale of the subject lands, one covering nos. 54 and 58 William Street and having a frontage of 79 feet 6 inches for $60,000, and the other covering no. 62-64 William Street and having a frontage of 45 feet 10 inches for $30,000. These sales, which were inter-dependent and collateral, were made by private negotiation between an officer of the Rural Bank of New South Wales and a member of the firm of Hungerford, Spooner and Kirkhope without the intervention of an agent so that there was no liability for agent's commission on the sale and an indemnity in respect of this matter was included in both contracts. This should probably be treated as suggesting a rather higher market price for the lands since the net return to the vendor would be better to the extent of the commission saved. Some history of prior negotiations to sell the subject lands was given in affidavits filed on behalf of the appellants by leave of the court and the material so furnished satisfies me that the vendors were reasonably diligent in their attempts to sell the subject lands and that they did not act with undue anxiety in relation to any of the offers made by prospective purchasers. Offers from purchasers are, of course, evidence of value only to a limited extent (cf. Blefari v. The Minister (1962) 8 L.G.R.A. 1) but in the present case, when coupled with evidence of the steps taken to sell the subject lands by auction and otherwise, those offers show unmistakably that the ultimate sales to the Rural Bank of New South Wales should not be regarded as forced sales nor as having the same prejudicial characteristics as sales by mortgagees. I think, accordingly, that I am entitled to have regard to these sales as evidence of the value of the subject lands, though as I have said the price should be increased to compensate for the saving of agent's commission by a round figure of $2,000, approximating the actual commission saved less costs of advertising which were incurred at an earlier time in connexion with the abortive auction. This would give a notional or adjusted price of $92,000 or, in round figures, $735 per foot of frontage of the subject lands. ............................................... The application of this figure to the subject lands should allow for the differences in the sizes of the three parcels and possibly also for the value of the rights of way which two of them enjoy. But as the valuations objected to and the evidence tendered by the parties proceeded on the footing that the only substantial matter of difference between the three parcels was the frontages which they respectively had to William Street, I think that any difference in the depths and the rights of way may be disregarded. Upon this basis and rounding off the resultant figures I determine the unimproved values of the three parcels at the following amounts: No. 54 William Street (40 ft. 6 ins. frontage) ... ... $29,750 No. 58 William Street (39 ft. frontage) ... ... ... $28,650 No.62-64 William Street (45ft. 10 ins. frontage) ... ... $33,700 Agreement was reached between the appellants and the Valuer-General at the hearing of the appeals on the added values of the improvements at the valuation date as follows: No. 54 William Street ... ... ... $800 No. 58 William Street ... ... ... $1,100 No. 62-64 William Street ... ... $2,200 and I accordingly determine the improved values of the three parcels as follows: No. 54 William Street ... ... ... $30,550 No. 58 William Street ... ... ... $29,750 No. 62-64 William Street ... ... $35,900 Agreement was also reached between the parties that the assessed annual value in each case should be determined at five per cent of the improved value and I therefore determine the assessed annual value of each of the three parcels at the following round figures: No. 54 William Street ... ... ... $1,530 No. 58 William Street ... ... ... $1,490 No. 62-64 William Street ... ... $1,795" The reasoning of Else-Mitchell J. in my opinion supports the conclusion, which I have reached, that when adjoining parcels of land are, on the date as at which one of them is to be valued, available for purchase under a single contract, (or under "inter-dependent and collateral" contracts) the value of that one lot may be, in law, ascertained by reference to what a willing purchaser would offer for all the parcels, who had the purpose of putting the whole of the land to a specific use, provided that there was at that date a demand for land for that use in the vicinity of the land to be valued. All the evidence before the Tribunal is consistent with a finding that on 29 March 1988 there was a demand for land, of the area of the whole of the land, for the use of developing office accommodation in the vicinity. There seems no reason to doubt that the Tribunal so found, although an explicit statement of the finding is lacking. The Tribunal certainly found, again without explicitly stating, that the price bid at auction reflected the potential of the whole of the land for that use. I find no error of law in the use the Tribunal made of the evidence of the auction price in its determination of the value of the subject land. It was not submitted that the value per square metre of the subject land should have been reduced to an amount less than the value per square metre of the whole of the land because the subject land was vacant land and there were improvements on the factory land. If the whole of the land is being acquired for the purpose of office development after demolition of existing improvements, the vacant land may be more valuable than the land which must be cleared for that purpose. It was submitted that the auction price could not be regarded as evidence of market value because Mr. Bonython and the person who made the penultimate bid were "anxious" prospective purchasers and the price was the inflated result of their competition for the land. But the evidence in support of those assertions was by no means compelling and in my opinion the Tribunal made no error of law in failing to accept it. Having stated its conclusion as to the value of the subject land, the Tribunal continued: "Whilst it was not an essential factor in arriving at our decision it is appropriate to comment on some of the evidence of Mr A. When asked his reasons for the preparation of a contract of sale for 1343 at a sale price of $200,000 he stated that it was his own idea, without advice and with no knowledge of potential taxation consequences. We find that explanation difficult to accept. Equally, we have reservations about his evidence that, at the time of purchase of 1343, he had no thought of any possible sale of it together with the existing property at 1345-1349. In his evidence he stated that he had discussions with the council about increasing the size of the existing building but car parking requirements and the old design of the building meant that such a proposal could not be considered. Notwithstanding his evidence of protecting access to the factory and the receipt of a large order by the company we have reservations that the decision to sell, the arrangement of the auction and the ultimate sale was accomplished in a space of only two months. Whilst these concerns about Mr A's evidence have no direct relevance to the primary question with which we are required to deal, that is, the result of applying the provisions of s.26AAA, they can be relevant to the question of quantum of additional tax imposed under s.223. The additional tax imposed by the respondent in the amended assessments amounted to $18,432.19 in respect of each applicant. This was made up of $17,576.65, or 45% of the tax applicable to the profit on sale of property, included as a culpability penalty and $855.54 as a per annum component at the rate of 14.026% from 26 April 1989 to 21 June 1989. Given our view that the preparation of two contracts, with 1343 M Road at a predetermined price of $200,000 was most likely done with the knowledge that any sale price in excess of the purchase price would have taxation consequences for the applicants and the short period between purchase and sale of the lot, it is appropriate that some penalty for non disclosure be levied. However, given the difficulty and the genuine differences of view of valuers in arriving at the correct assessment of the value of the land at the time of sale, we take the view that a culpability penalty of 45% is excessive. In our view a penalty equal to 20% of the tax avoided is appropriate." Section 223(1) of the Act, so far as is presently relevant, provided: "Where - (a) a taxpayer - ............................................... (ii) omits from a statement made to a taxation officer, or to a person other than a taxation officer for a purpose in connection with the operation of this Act or the regulations, any matter or thing without which the statement is misleading in a material particular; and (b) the tax properly payable by the taxpayer exceeds the tax that would have been payable by the taxpayer if it were assessed on the basis that the statement were not false or misleading, as the case may be, the taxpayer is liable to pay, by way of penalty, additional tax equal to double the amount of the excess." It was submitted that those provisions have no application to "tax properly payable by the taxpayer" only in consequence of the operation of s.26AAA(4). When the omission of reference to the transactions relating to the subject land occurred, at the time the applicants' income tax returns were lodged, there was in Mr. de Wijn's submission no tax properly payable in respect of those transactions. It was not until the Commissioner had reached the state of satisfaction contemplated by paragraph 26AAA(4)(b) and formed the opinion specified in paragraph 26AAA(4)(c) that tax became payable in respect of the transactions, according to the submission. The "deemed" profit, as Mr. de Wijn called it, arose only upon what he called the exercise of the Commissioner's discretion under s.26AAA(4). He pointed out that express provision was made in other provisions of the Act for penalty tax in respect of omission of matter from a return where liability to tax arises upon the formation by the Commissioner of a specified opinion. Sections 224 and 225 were cited as examples. I cannot accept the submission. There is involved, in my opinion, no exercise of discretion in the Commissioner's performance of the functions committed to him by s.26AAA(4). While it is his satisfaction as to the existence of the circumstances specified in paragraph 26AAA(4)(b), and his opinion as to the value of the property sold, which in the first instance brings into operation the deeming effect which the sub-section has, the specified circumstances are (except perhaps in quite extraordinary circumstances) capable of ascertainment by the taxpayer before his return is lodged, and the taxpayer is able (again, except in extraordinary circumstances) to form an opinion as to the value of the property sold. There is in my opinion no reason why s.223(1) should be understood as inapplicable to "tax properly payable" by virtue of the operation of s.26AAA(4). In exercise of its power to remit part of the additional tax payable by the applicants the Tribunal took into account evidence by Mr. Collis which it said had no "direct relevance to the primary question"posed by s.26AAA(4). It was submitted by Mr. de Wijn that error had infected the Tribunal's consideration of penalty. It was said that evidence "irrelevant to liability" cannot in law influence the exercise of the power to remit. That is in my opinion untenable. If the evidence of Mr. Collis that he had not adverted to the taxability of any profit on the sale of the subject land had been accepted, that would have been a consideration in favour of remission. The statement by the Tribunal, that "the preparation of two contracts, with 1343 M Road at a predetermined price of $200,000, was most likely done with the knowledge that any sale price in excess of $200,000 would have taxation consequences for the applicants", amounts to an affirmative finding in contradiction of that evidence, in my opinion, and is clearly relevant to the exercise of the power to remit. It was submitted that the evidence of Mr. Collis about which the Tribunal expressed "reservations" was "largely unchallenged and simply not in issue". If by "unchallenged" is meant uncontradicted directly by other evidence, that may be accepted. But the strain which is imposed on credulity by some of the evidence of Mr. Collis is quite apparent on a reading of the transcript of that evidence. About some of the evidence incredulity was expressed by a member of the Tribunal when it was given. There is no basis for a suggestion that the applicants or their counsel might reasonably have expected that the evidence would be accepted because it was uncontradicted. I find no error of law, unless mercy be erroneous in exercise of the power conferred by s.227(3), in the Tribunal's consideration of remission. Before evidence for the applicants before the Tribunal had concluded the presiding member said, immediately after the luncheon adjournment: "THE D.PRESIDENT: Well, before we proceed, perhaps there is something I should say here, Ms McNamara, is that having heard the evidence this morning, the tribunal proposes to make a finding that as these dealings between the taxpayers and the purchaser, and the purchaser I am referring to for present purposes, to Mr Bonython, were not at arms length." The reference to evidence is to the evidence of Mr. Collis and his estate agent, each of whom gave evidence of what was said after the auction and before the two contracts were executed. Counsel for the respondent had proposed that Mr. Bonython, a written statement of whose evidence had been filed, should be cross-examined by counsel for the applicants by telephone. Also filed was a written statement by Brian Sproule, one of the respondent's officers, verifying notes of a conversation about the events of 29 March 1989 between Mr. Bonython and him in November 1991. The following dialogue followed the presiding member's statement: "MR DE WIJN: I wonder if the tribunal could give its reasons for that finding? THE D.PRESIDENT: Well, we will give reasons for that. Well, so far as - we will give some reasons in writing, but certainly the evidence of Mr Collis is quite clear in that respect. MR DE WIJN: And the finding is that? THE D.PRESIDENT: The finding is that it is not - for the purpose of subsection (4) that the dealings between the - Mr Collis and purchaser, Mr Bonython, as I said he is the purchaser for the present purposes, were not at arms length. The evidence of Mr Collis being, of course, that when questioned about whether he allowed .... inaudible .... on price, he answered in the negative. MR DE WIJN: Yes. I am indebted to the tribunal for that. MS MCNAMARA: Could I just have one minute to confer with my - yes, we are no longer - we withdraw the application for telephone evidence. I no longer seek to call Mr Bonython nor Mr Sproule. I only wish to call the valuer, Mr Vestakis. THE D.PRESIDENT: Well, perhaps before you do that, I will need indication if there is any - I take it that is the evidence for the applicant, is it, Mr de Wijn? MR DE WIJN: Well, the only further evidence was the witness statement of Anne Moon, but that is - - - THE D.PRESIDENT: Yes, but that is not in issue. MR DE WIJN: It was only in response to the - to Mr Bonython's statement. THE D.PRESIDENT: Yes, yes. Yes, thank you. MS MCNAMARA: I call Mr Vestakis. MR DE WIJN: I presume the tribunal has made that finding without hearing any submissions on the point? THE D.PRESIDENT: Yes, it is based on the evidence, yes. MR DE WIJN: Yes, well - we do not propose to call any more evidence. THE D.PRESIDENT: Thank you." Mrs. Moon was the applicants' solicitor, who was present after the auction until the contracts were signed. The course taken by the Tribunal was said by Mr. de Wijn to have constituted a denial of procedural fairness, in that the issue about arm's length dealing was determined before the evidence of all the persons able and available to give evidence about events occurring where and when the dealing took place had been called before the Tribunal, either in person or by telephone, and before hearing submissions by the applicant's counsel on the issue. It may be assumed that the submission is correct. But, after taking instructions, Mr. de Wijn informed me that, if the Tribunal's decision were set aside and the matter were remitted for re-hearing, Mr. Bonython would not be called by the applicants to give evidence. It was not suggested that the evidence of Mrs. Moon would have been, or would on a re-hearing be, materially different from that of Mr. Collis. It cannot be supposed that the respondent's counsel would call Mr. Bonython to give evidence on a re-hearing. The evidence which the Tribunal had heard about the dealing - that of Mr. Collis and the estate agent - admitted, in my opinion, of only one conclusion : that the taxpayers and Mr. Bonython were not dealing with each other at arm's length. In those circumstances the "appropriate" order which s.44(4) of the Administrative Appeals Tribunal Act 1975 requires is that there be no setting aside of the Tribunal's decision, but that the appeal be dismissed. I certify that this and the 34 preceding pages are a true copy of the Reasons for Judgment of the Honourable Justice Jenkinson. Associate Dated: 21 August, 1996