Austrotel Corporation Pty Ltd v Commissioner of Taxation (Cth)

High Court of Australia GIBBS, Stephen, Mason, Jacobs and MURPHY JJ Austrotel Corporation Pty Ltd v Commissioner of Taxation (Cth)

ORDER Order Appeal dismissed with costs. Gibbs, Mason, Jacobs and Murphy JJ

This was an appeal from a judgment of Mahoney J dismissing an appeal by Austroted Corp Pty Ltd ("the taxpayer") from an assessment to income tax. The taxpayer was incorporated to promote the building and management of hotels and motels on the principle that individual suites or rooms therein would be owned on a freehold strata title basis by different persons who would lease their suites or rooms to an operating company in which they would be shareholders — the so-called "Austrotel principle". The taxpayer planned to make a profit from this scheme in two ways which Mr Norman, the managing director of the taxpayer, described in his affidavit as follows:—

"(a) By securing the right for the company's nominee to acquire an appropriate site, preparing a feasibility study and carrying out any other necessary preparatory work with a view to inducing a developer to purchase the site, construct the hotel or motel building and sell the units comprising suites or rooms therein on a freehold basis to individual investors on the Austrotel principle (for all of which we proposed that the company would charge 3% of the capital cost of the project) and

"(b) By providing management services to the operating company for the particular hotel or motel (for which we proposed that the company would charge 2½% of gross receipts from accommodation)."

In or about May 1970 the taxpayer became aware that it might be possible to buy from The Federal Hotels Ltd ("Federal") land which that company owned in Melbourne. The land comprised three areas, one of which the taxpayer regarded as a suitable site for the erection of a hotel on "the Austrotel principle". It was thought that if the whole land were acquired, the two unwanted areas might be sold, perhaps for development as office buildings. The taxpayer caused a feasibility study to be prepared, and negotiated with Federal with a view to the purchase of the land. In August 1970 the taxpayer was informed that Federal would grant it an option, and on 31 August 1970 received a draft option from Federal but found its terms unacceptable. Another draft option was prepared and given to the taxpayer on 8 October 1970. The latter document was in the form of an agreement between Federal of the one part and Construction Finance Australia Ltd (a company associated with the taxpayer) of the other part. Its effect was to give to the grantee or its nominee an option, expiring on 15 October 1970, to purchase the land for $3,950,000. This draft option, however, contained a covenant against the use of the land for the purpose of licensed premises without the prior written consent of Federal. This covenant would have made it impossible for the taxpayer to proceed with the development of a hotel on the property, unless, of course, Federal gave its consent. But in any case it had already appeared that such a development could probably not be carried out. About a month earlier — on 8 or 9 September — the taxpayer had learnt that it would not be possible, having regard to the existing requirements of the Melbourne City Council, for a strata title to be obtained for a unit which did not contain a separate kitchen and laundry. This in itself appeared to be an obstacle to the erection of a hotel on "the Austrotel principle". The draft option was never executed.