Appellant v Respondents

1 The Commissioner of State Revenue ("the Commissioner") seeks leave to appeal from a decision of the Victorian Civil and Administrative Tribunal ("VCAT") made on 19 November 2010 ("the decision") setting aside an assessment made by the Commissioner against Mr and Mrs Frost. The originating motion sought leave to appeal under s 148 of the Victorian Civil and Administrative Tribunal Act 1998 (Vic) ("the VCAT Act") and sought ancillary orders but did not seek orders on the appeal if leave were granted. The Commissioner subsequently filed a proposed notice of appeal on 2 March 2011 and the hearing before me was fully argued both on whether leave should be granted and, if granted, whether the appeal should be allowed.

(1) A party to a proceeding may appeal, on a question of law, from an order of the Tribunal in the proceeding -

(a) to the Court of Appeal, if the Tribunal was constituted for the purpose of making the order by the President or a Vice President, whether with or without others; or

(b) to the Trial Division of the Supreme Court in any other case -

if the Court of Appeal or the Trial Division, as the case requires, gives leave to appeal.

By this provision any appeal is dependent upon two important qualifications. The first is that the appeal be "on a question of law" and the second is that the Court "gives leave to appeal".

3 The requirement for leave under s 148(1) of the VCAT Act "is a safeguard that the appeal is on a pure question of law and that the grounds supporting the question of law articulated for determination by the Court do found the subject matter of the appeal".[1] It also confers a discretion about whether to grant leave[2] which an applicant must persuade the Court to exercise in its favour. What must be shown will depend upon the particular case bearing in mind the statutory criteria being a grant of leave and not special leave.[3] It will ordinarily be necessary (in addition to a clearly articulated question of law)[4] for an applicant to make out a prima facie case[5] and in an appropriate case it may be necessary for the applicant to show that the question upon which leave is sought has public or general importance.[6]

4 The two questions of law pressed by the Commissioner were, first, whether the term "consideration" in s 21(3) of the Duties Act 2000 (Vic) ("the Duties Act") encompassed an amount calculated on the basis of a "rule of thumb" approximation, and secondly, whether on the evidence before the Tribunal it was open for it to find or to infer that there had been no challenge to the underlying facts on which a statutory declaration had been based. I am satisfied that the first question is one of law and that the importance of the question is such that leave should be granted. I am not confident that the Commissioner had made out a prima facie case of error, but I am satisfied that there is a real argument about the construction of the provision raised by the application and that the issue is one of importance to others involved in purchasing "off the plan" properties. The Commissioner thought the matter sufficiently important to have issued a ruling and the legislature has made amendments to the Duties Act by adding s 21A. Accordingly I propose to grant leave to appeal on the first question. I shall deal with the second question later in these reasons.

5 The legislature has not provided an unqualified right of appeal from a decision of VCAT; on the contrary, the legislature has imposed two conditions upon the ability to appeal from decisions of VCAT: namely, the need for leave and the restriction of the subject matter of appeals to questions of law. The importance of these conditions is reinforced when it is recalled that tax cases may be commenced, at the taxpayer's election, in either VCAT or this Court.[7] The legislative policy is that VCAT decisions should not generally be disturbed where cases have been decided in that forum other than on questions of law and where there is something about the decision bearing upon the question of law which warrants a grant of leave to appeal.[8]

6 The first question raised by the Commissioner involves the construction of s 21 of the Duties Act. The Commissioner put the question in terms of the construction of the word "consideration" in s 21(3) but it might more accurately be identified as a construction of the words "any amount paid or payable" appearing in that sub-section. Section 21(1) of the Duties Act identifies the consideration for the transfer of dutiable property and provides:

(1) The consideration for the transfer of dutiable property is taken to include the amount or value of all encumbrances, whether certain or contingent, subject to which the dutiable property is transferred.

Sub-section 21(3) affects that provision by excluding from its ambit amounts paid under a contract referable to the cost of construction after the date of contract of sale. Sub-section 21(3) provides:

(3) The consideration for the transfer of land on the sale of that land does not include any amount paid or payable in respect of the construction of a building to be constructed on that land on or after the date on which the contract of sale was entered into.

The underlying policy reflected in this provision is that the purchaser of property ought not to pay (as duty upon the transfer) the costs on a contract to purchase which are referable to the construction of the property after the date of contract. In this way the purchaser pays duty upon the economic value of the property as at the date of contract and the provision recognises, in effect, that the contract to purchase includes a component referable to the construction cost as distinct from the acquisition of property interests acquired under the contract as at the date of contract. The duty is thus imposed upon the property transferred at the date of contract and not upon property which the vendor did not have to transfer as at that date.

7 Mr and Mrs Frost signed a contract of sale dated 16 April 2007 to purchase Apartment 5, 37 Wallace Avenue Toorak for a price of $4,600,000. The purchase was of a kind commonly referred to as "off the plan" in that the apartment had not been erected at the time the contract was signed. The vendor, Wallace Constructions (Toorak) Pty Ltd, executed a transfer to the Frosts dated 2 May 2008. The transfer was presented to the Commissioner for payment of stamp duty under the Duties Act and Mr and Mrs Frost were entitled to the concession in s 21(3).

8 Calculating the amount allowable under the concession in s 21(3) will frequently be difficult in the case of apartment blocks and many subdivisions. The statutory concession contemplates an ability to determine that part of the contract price referable to the construction of a building on or after the date on which the contract of sale was entered into, but in the case of apartment blocks, and in the case of many subdivisions, that will necessarily require some apportionment of amounts as between different landholding. The difficulty in the application of s 21(3) has been recognised by the legislature and has been in part remedied by the enactment of s 21A which allows the Commissioner to publish percentage amounts referable to different classes of buildings or refurbishments and permits taxpayers to adopt the published percentages if they wish to do so. Section 21A, however, was not enacted or applicable to the contract entered into by Mr and Mrs Frost.

9 The Commissioner had, however, published a standard form by which the amount under s 21(3) was to be calculated and claimed. The form required the making of a statutory declaration including various figures by which the concession was calculated. The information needed to be provided in the statutory declaration will be known to the developer or vendor of an "off the plan" property sale rather than the purchaser. Mr Henderson made such a declaration on behalf of the vendor in respect of the apartment purchased by Mr and Mrs Frost. The declaration identified $521,660.92 as the cost of the works that occurred before the contract, being 16.564% of the construction works. It also identified $2,627,665.10 as the cost of the works to be completed after the contract date, being 83.436% of the construction works. The sum of these two amounts is $3,149,326.02 rather than the contract price itself. That is because the calculation initially required the exclusion of GST, the "off the plan land value" of the lot and the "non deductible costs" referable to the dutiable property. The declaration identified the GST inclusive amount for construction costs after the contract date to be $2,890,431.60 with, therefore, a dutiable value of $1,709,568.40. Based upon the declaration the transfer was assessed to duty in the sum of $94,026 on 1 July 2008.

10 A year after the payment of stamp duty a member of the investigations branch of the Commissioner wrote to Mr and Mrs Frost challenging the figures which had been supplied in the declaration by the vendor. The Commissioner's calculations were said to be based upon the vendor's construction records rather than upon the figures in the statutory declaration. The purchasers, as is usually the case, had no access to the vendor's construction records and the declaration upon which their duty was initially levied and paid was a statutory declaration made by the vendor and not by the purchaser. The Commissioner's determination a year after the initial assessment was made increased the amount of duty payable by $24,457. The Commissioner apparently invited the vendor to consider contributing towards the purchaser's increased duty but by 29 October 2008 the vendor had been deregistered and, unsurprisingly, as the reasons of VCAT noted, the vendor declined to contribute to the additional duty levied upon the purchaser.

11 The dispute between the parties in VCAT, and before me, was fundamentally one about the appropriate method to be applied in calculating the concession under s 21(3). The Commissioner challenged the figures relied upon by Mr and Mrs Frost on the basis that they were a misapplication in principle and not on the basis that any of the base figures were factually incorrect. Counsel for the Commissioner in the VCAT proceeding had prepared a document entitled "Summary of Agreed and Contentious Issues" which was tendered at VCAT and in which there was a table of "Calculations Not Agreed". The table identified those figures relied upon by Mr and Mrs Frost which differed from those relied upon by the Commissioner. Counsel for the Commissioner (who appeared both in VCAT and before me) candidly conceded that she did not know during the hearing at VCAT, or until they were explained by counsel for Mr and Mrs Frost in the hearing before me, how Mr and Mrs Frost had arrived at their figures.

12 The Commissioner's position before VCAT, and before me, was that the method of calculating the concession in s 21(3) required what was described in the reasons by VCAT as "the whole of project" approach. The approach is set out in Revenue Ruling DA.048 issued September 2008 with effect from 1 October 2008. No point appears to have been taken about the relevance of the ruling applying to events occurring on the earlier date on which Mr and Mrs Frost paid duty. The Revenue Ruling relevantly describes the process which the Commissioner maintained should be followed to be:

This approach requires evidence of (but not limited to) progress payments claimed by the builder and supported by quantity surveyor reports. The whole of project approach accords with industry practice and ensures the calculations take into account the relevant proportion of costs attributable to common areas (eg security, lifts and stairwells).

An example of the whole of the project approach is where the quantity surveyor report states that 60 percent of construction is completed at the date of the contract of sale. Although no construction has commenced in regards to units on the top floors, the transferor must state that based on the whole of project approach, 60 percent of construction is completed in regards to all units sold at that time.

To implement this process the Commissioner identified what he believed to be the total cost of the project and those costs which had been incurred up to the date of contract. The latter were identified in a spreadsheet, and in the Summary of Agreed and Contentious Issues, as $2,136,738.05 (including GST). These figures gave the Commissioner a percentage completion of about 29% in contrast to the 16.564% stated by the vendor in the statutory declaration.

13 Mr and Mrs Frost challenged this process and the learned Deputy President accepted that challenge. It may be helpful for me to say something about why the Commissioner's preferred process was rejected before turning specifically to the proper construction of s 21(3) of the Duties Act. What was fundamental to the learned Deputy President's rejection of the Commissioner's approach was its "possibly distorting effects". Implicit in the Commissioner's approach is that the calculation of the consideration for the purposes of duty will necessarily include some amount not actually referable to the property in respect of which duty is paid or in respect of which the concession is thought to apply. In other words, the Commissioner's approach does not require an exact matching of "any amount" paid or payable with post contract construction of the dutiable property acquired. On the contrary, the Commissioner's approach adopts a broad whole of project calculation assuming (as is no doubt frequently sensible) that the overall costs may fairly be attributable uniformly across the whole of the building or other development. That assumption, however, as the learned Deputy President correctly said, was possibly distorting.

14 The learned Deputy President preferred the method advanced by Mr Frost who appeared without legal representation in the VCAT proceeding on behalf of himself and his wife. Mr Frost relied upon the figure in the vendor's declaration which had identified $3,149,318.20 as being 100% of the construction costs (as the Commissioner's form had required to be declared) rather than the total cost of the project subsequently adopted by the Commissioner as $7,865,239.57. The learned Deputy President correctly observed during the hearing before him, and in his reasons, that the adoption of the figure in the declaration might also create a distortion because the figures in the declaration referred to what the developer was being charged by the builder and not to what the property was costing to the purchasers. In other words, each of the competing methods of calculating the concession had some potential for distortion but in the case of that method urged by Mr Frost, it sought to identify the costs referable to the apartment acquired rather than to assume a uniform apportionment of costs across the apartments as a whole. The specific distortion in the method urged by Mr Frost which concerned the Deputy President was that the figures made no allowance for the vendor's profit.

15 Mr Nott had been called to give evidence by Mr Frost and was asked questions to deal in part with that concern. Mr Nott had been a director of the vendor before its deregistration. He confirmed that the figure of $521,660.92 supplied in the declaration had been derived simply from the amount of progress payments to which the builder engaged by the vendor had become entitled at the relevant time of the progress payment. That figure, however, the learned Deputy President considered not to be sufficiently referable to the cost to Mr and Mrs Frost as end users for the purpose of calculating the concession because it did not include the vendor's profit. Mr Nott was cross examined about the necessity to include a profit element when calculating the costs to which Mr Nott responded that there had been a profit element included to some extent. The learned Deputy President then asked a number of questions including:

MR MACNAMARA: Yes, well that's right. But can I ask you about a hypothetical? Suppose hypothetically unit 5 had been half-completed. Would the appropriate calculation be to half of $3.149 million which is the price of unit 5 minus the price of the land? Or would it be half of something else?

MR NOTT: The way it's calculated there I think you start off with the sale price and you take off various costs as approved by the ---

MR MACNAMARA: So if it was half finished it would be half of 3.14 million?

MR NOTT: Roughly. I should imagine you could say that. If unit 5 had have been ---

MR MACNAMARA: And if 3.149 is the figure that's charged to Mr and Mrs Frost, and the point that the commissioner is making her is that it's just by adding up the progressive payments that have been made to the builder, you were referring not to what this thing cost Mr and Mrs Frost, but what the developer was being charged by the builder - and they're two different things. That's the commissioner's point. Is there anything in it?

MR NOTT: I don't know how you actually calculate that.

MR MACNAMARA: Then the commissioner says it's impossible to calculate that, therefore we've got this whole-of-project approach. That's what this case is all about. So I hope I've exposed it to you in the clearest possible way. The commissioner is saying, in effect, that you can't really calculate what the percentage of 3.149 is, therefore you don't do it that way at all?

MR NOTT: I suppose in the worst situation you could add on another 10 per cent.

MR MACNAMARA: Would that be fair enough?

MR NOTT: I'd say that would be fair and reasonable.[9]

Counsel for the Commissioner then resumed cross examination but asked no further questions about the profit component.

16 There can be little doubt that the questions asked by Mr Macnamara concerning the profit calculation were directed to what he perceived to be (and were) the central issues in the case. Mr Frost was then asked whether he wished to re-examine on any point arising from the questions that counsel for the Commissioner had been asking. Mr Frost declined to do so observing, however, that the building world appeared to adopt a "10% plus cost" for profit on projects. Mr Frost appeared to invite the learned Deputy President to ask Mr Nott about that and the learned Deputy President did so:

MR MACNAMARA: All right. I will just ask for the clarification on that. You mentioned 10 per cent. Is that a rule of thumb?

MR NOTT: I think that's a fair and reasonable amount. The last job we did we lost - that was a minus per cent.

MR MACNAMARA: All right. But at any rate you're seeking to put 10 per cent when you're trying to sell to the public?

MR NOTT: That's right. In general terms over the project.[10]

That concluded Mr Nott's evidence and no further cross examination was sought.

17 The learned Deputy President considered the method adopted by Mr and Mrs Frost, based upon the vendor's statutory declaration, to be a more accurate method of determining the dutiable amounts of the actual property transferred than that adopted by the Commissioner once the former method was amended by adding 10% to the figure of $521,660.92. The learned Deputy President relevantly said:

1. One can understand how in the absence of any proper evidence at all ... the broad brush approach of the "whole of project" approach may be appropriate. Where more detailed evidence is available I cannot think the possibly distorting effects of the whole of project approach can be justified. The example quoted in the passage from the Revenue Ruling DA.08 is an example of such distorting effects - as is the present proceeding. There are alternatives. Mr Nott in uncontradicted evidence said that as a rule of thumb the cost to a builder of building works in an off the plan purchase could be converted to the cost to end purchaser by the addition of 10%. In the present instance acceptance of that evidence would have 10% added to the figure of $521,660.92 as being the cost of the works completed with respect to Apartment 5 as at the date of the Frosts' contract to purchase it.
2. Given that there is no challenge to the underlying facts on which the original declaration was based we can take the $521,660.92 as a reliable figure. If that figure has 10% added to it, in accordance with the evidence of Mr Nott it can be taken to represent the cost to the Frosts as end purchasers of the construction work and form the basis for the calculation under Section 21(3).

The learned Deputy President went on to order a remittal of the proceeding to the Commissioner to vary the assessment in accordance with the terms of his reasons.

18 Section 21(3) excludes from the dutiable consideration "any amount paid or payable in respect of the construction of a building" after the contract date. The provision provides a concession and there is no reason for it to be construed in any narrow or pedantic sense.[11] It is a provision intended to apply in circumstances where there will be inevitable difficulties in making a precise matching of any amount paid with the property which is subject to a dutiable transfer. Neither party contended that s 21(3) should be read as requiring precise matching of (a) amounts with (b) pre and post contract property and construction of the specific land transferred. The approach adopted by the Commissioner sensibly, and correctly, adopts a more liberal construction of s 21(3) than a construction insisting upon a precise matching of amounts in the contract for the sale of a property and the costs incurred in its actual construction. The subsequently amended s 21A presupposes a construction of s 21(3) that does not require a precise matching of amounts and property. The use of the words "in respect of" as the link between the amounts paid or payable and the dutiable relevant land or post contract construction recognises and effects some relaxation of any need for a precise matching of amounts paid or payable, on the one hand, and the land subject to the dutiable transfer, on the other.

19 The question for my determination in an appeal under s 148(1) of the VCAT Act is not whether I prefer the "whole of project" approach favoured by the Commissioner or the method adopted by the Deputy President, but rather, whether the approach adopted by the Deputy President was legally incorrect. If the approach adopted by the Deputy President is permitted by s 21(3) it must stand even though I might prefer some other method of calculation or that I might consider the Commissioner's approach also lawfully open to be adopted (as the learned Deputy President seemed to have accepted). The Commissioner's contention was that the term "consideration" in s 21(3) did not permit the identification of an amount by reference to a "rule of thumb" approximation. Both the method adopted by the Tribunal and that advanced by the Commissioner necessarily required some estimation. What is to be excluded from the dutiable consideration by s 21(3) is any amount that can be identified as being paid or payable in respect of the construction of a building on or after the date on which the contract of sale was entered into. The legal test for the concession created by the section depends upon a factual inquiry and the section does not require the factual inquiry to be limited in the way maintained by the Commissioner. The Commissioner may prefer his method but that does not mean that it is the only method or that it excludes any other inquiry which may reliably identify an amount which may be said to have been paid or payable in respect of the construction after the date of contract. Estimations will necessarily be involved in application of the section to the facts and that is what the learned Deputy President did, and he did so upon the uncontradicted evidence of a witness who was likely to know and who was not cross examined upon the matter which had clearly been signalled as being critical to the issue for determination by VCAT.

20 At one point counsel for the Commissioner described in argument the learned Deputy President's reliance upon the "rule of thumb" as a figure "plucked out of the air". However, that is hardly a correct or fair characterisation of either the figure or the task performed by the Deputy President. The acceptance of a 10% profit margin was evidence given as an objective within the industry as a whole. It was a figure identified by someone in that industry and who had been involved in the particular construction including the actual apartment purchased by Mr and Mrs Frost. It was not the evidence of an unrelated person unlikely to know what the profit margin was of the particular apartment which had been purchased. No question was asked of Mr Nott to undermine the applicability of the 10% figure to the particular apartment in respect of which the dutiable consideration was in issue. No questions were put to Mr Nott to undermine the reliability of the figure either for the industry as a whole or in its application to the apartment purchased by Mr and Mrs Frost. Nor did the Commissioner object to the evidence or seek to tender contrary evidence. In the circumstances I do not consider the decision in VCAT to demonstrate any error of law. The learned Deputy President relied upon the evidence available to him at a contested hearing and applied it with the other evidence to a correct view of the concession designed to exclude from duty the post contract portion of the contract price to Mr and Mrs Frost as end users.

21 The second question sought to be agitated by the Commissioner as a question of law was that on the evidence before VCAT it was not open for it to have found or to have inferred that there was no challenge to the underlying facts on which the statutory declaration was based. This challenge focused upon the sentence in paragraph 28 of the learned Deputy President's decision which I have quoted above. The challenge relies upon the "Summary of Agreed and Contentious Issues" which counsel for the Commissioner had given to the learned Deputy President and which had a table of "Calculations Not Agreed". It is clear from the Summary of Agreed and Contentious Issues, and in particular the table of "Calculations Not Agreed", that the Commissioner asserted before VCAT that the amounts in the declaration on which Mr Frost relied were inapplicable. It is also clear that counsel appearing for the Commissioner did not know how the figures identified in the table had been arrived at by Mr and Mrs Frost. Counsel for the Commissioner took me to passages in the transcript in which points of disagreement were identified to the Deputy President but there was no informed identification of how the figures relied upon by Mr Frost were in error. At one point counsel for the Commissioner appeared to suggest that the difference between the two figures might have been a simple miscalculation of the same integers relied upon by the Commissioner. This, however, was shown by counsel for Mr and Mrs Frost in these proceedings not to be the case.

22 That said, however, the learned Deputy President was entirely correct in saying that there was "no challenge to the underlying facts on which the original declaration was based". It is true that the Summary of Agreed and Contentious Issues identified disagreements about calculation but those disagreements arose from differences about methodology and not from any challenge to the underlying facts upon which competing methodologies were sought to be applied. The Commissioner's entire case before the learned Deputy President was that Mr Frost's methodology was simply wrong and that the only methodology available to be applied was that of the Commissioner. It was the calculations which were identified as being in dispute rather than any underlying fact upon which the calculations, or the original statutory declaration, were based.

23 The failure of VCAT to decide upon the evidence may amount to an error of law if there is no evidence upon which the decision could be based or if the evidence does not permit a finding.[12] In this case there had been no challenge in VCAT to the figure of $521,660.92 (or to any other of the underlying facts upon which the original deduction was based) other than the challenge to the methodology used by the parties. At no time did the Commissioner, for example, seek to argue that the figures relied upon by Mr Frost were inappropriate or wrong even if the methodology he propounded was right. Accordingly I reject the Commissioner's second ground of appeal.

24 There is a further matter which I should mention which bears upon the subsequent disposition of the assessment. During the course of submissions counsel for Mr Frost explained how the figure of $521,660.92 had been arrived at. In the course of that explanation it appeared possible (although neither established nor engaged as an issue in the proceeding) that some elements in the calculation might have been included or excluded erroneously. For example, the amount may have been calculated in part by reference to the quantum of Progress Claim 3 having been "paid" rather than the amount which had been "due" for payment at the time of the claim. That might suggest that the figure of $521,660.92 may have been shown not to be accurate had it been tested at the hearing. The orders made by the learned Deputy President were to the effect that the Commissioner re-assess in accordance with his reasons. The effect of that order was to have upheld the methodology advanced by Mr Frost upon the basis that the figures be amended as he had indicated. I see no reason to vary those orders on the basis upon which the Commissioner conducted the case before VCAT and before me.

25 Accordingly I will (a) give leave to appeal on the first question on which the Commissioner sought leave but will dismiss the appeal and (b) refuse leave to appeal on the second question on which the Commissioner sought leave. I shall hear the parties upon any question of costs.

[1] Commissioner of State Revenue v STIC Australia Pty Ltd [2010] VSC 608, [10] (Davies J).

[2] Secretary to the Department of Premier and Cabinet v Hulls [1991] 3 VR 331; Al-Hakim v Monash University (Unreported, Victorian Supreme Court of Appeal, 28 March 2003); Myers v Medical Practitioners Board (Vic) [2007] VSCA 163.

[3] See Morris v R [1987] HCA 50; (1987) 163 CLR 454, 475 (Dawson J).

[4] Osland v Secretary to the Department of Justice [2010] HCA 24; (2010) 241 CLR 320, [21] (French CJ, Gummow and Bell JJ).

[5] Morris v R [1987] HCA 50; (1987) 163 CLR 454, 475 (Dawson J); Secretary to the Department of Premier and Cabinet v Hulls [1991] 3 VR 331, 335.

[6] Secretary to the Department of Premier and Cabinet v Hulls [1991] 3 VR 331, 335-6 (Phillips JA); Commissioner of State Revenue v Challenger Property Nominees Pty Ltd [2006] VSC 203, [20], [65] (Hollingworth J).

[7] Taxation Administration Act 1997 (Vic) s 106.

[8] Secretary to the Department of Premier and Cabinet v Hulls [1991] 3 VR 331, 335-6 (Phillips JA); Myers v Medical Practitioners Board (Vic) [2007] VSCA 163, 55 [28] (Warren CJ).

[9] Transcript of Proceedings, Frost v Commissioner of State Revenue (Victorian Civil and Administrative Tribunal, Deputy President Macnamara, 12 November 2010) 41-2.

[11] Bull v Attorney-General for NSW [1913] HCA 60; (1913) 17 CLR 370, 384 (Isaacs J).

[12] S v Crimes Compensation Tribunal [1998] 1 VR 83, 89-90 (Phillips JA).