Breakwell v Commissioner of Taxation

REASONS FOR JUDGMENT 1 This appeal from the Administrative Appeals Tribunal (the Tribunal) concerns the taxation liability of the applicants (Mr Breakwell) and Breakwell Investments Pty Ltd (BIPL) in respect of the 2007-08 financial year. 2 For many years before July 2007, the East Terrace Unit Trust (the ETUT) conducted a finance broking business under the name "Access Capital". The trustee of the ETUT (formerly known as Access Capital Unit Trust) was Access Capital Pty Ltd. 3 The Allan Breakwell Family Trust (ABFT) was a beneficiary of the ETUT. Mr Breakwell and BIPL were, in turn, beneficiaries of the ABFT. 4 On 26 July 2007, the ETUT sold the finance broking business for $500,000, giving rise to a capital gain in that amount. In its tax return lodged on 21 July 2008, the ETUT claimed the small business 15 year exemption in relation to the whole of the capital gain of $500,000 in 2008. 5 In January 2012, the Australian Taxation Office (ATO) commenced a risk review of the taxation affairs of Mr Breakwell, BIPL, ABFT and ETUT as well as of their associated entities. Later, that review became a comprehensive audit. The audit culminated in amended assessments being issued on 21 and 27 November 2013 respectively in respect of the 2008 financial year for Mr Breakwell and BIPL on the basis that the capital gain was taxable in their hands. 6 It was common ground that the $500,000 capital gain had to be included in the applicants' taxable income for the 2008 financial year unless they were entitled to relief under s 152 of the Income Tax Assessment Act 1997 (Cth) (ITAA). Section 152-10 sets out the basic conditions for relief. If those conditions are satisfied, an entity may be able to reduce its capital gain using the small business concessions. Section 152-10 provides (relevantly): 152-10 Basic conditions for relief (1) A *capital gain (except a capital gain from *CGT event K7) you make may be reduced or disregarded under this Division if the following basic conditions are satisfied for the gain: (a) a *CGT event happens in relation to a *CGT asset of yours in an income year; Note: This condition does not apply in the case of CGT event D1: see section 152-12. (b) the event would (apart from this Division) have resulted in the gain; (c) at least one of the following applies: (i) you are a *small business entity for the income year; (ii) you satisfy the maximum net asset value test (see section 152-15); (iii) you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership; (iv) the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year; Note: For determining whether an entity is a small business entity, see Subdivision 328-C (as affected by sections 152-48 and 152-78). (d) the CGT asset satisfies the active asset test (see section 152-35). Note: This condition does not apply in the case of CGT event D1: see section 152-12. … 7 It was common ground in the Tribunal that conditions (a), (b) and (d) in s 152-10(1) were satisfied. In relation to condition (c), it was also common ground that the conditions in (i), (iii) and (iv) could not be satisfied in the applicants' case. That meant that the applicants had to satisfy the "maximum net asset value test" (MNAVT) to which s 152-10(c)(ii) refers. Section 152-15 specifies the circumstances in which the MNAVT is satisfied: 152-15 Maximum net asset value test You satisfy the maximum net asset value test if, just before the *CGT event, the sum of the following amounts does not exceed $6,000,000: (a) the *net value of the CGT assets of yours; (b) the net value of the CGT assets of any entities *connected with you; (c) the net value of the CGT assets of any *affiliates of yours or entities connected with your affiliates (not counting any assets already counted under paragraph (b)). Note 1: Some assets are not included in the definition of net value of the CGT assets: see subsections 152-20(2), (3) and (4). Note 2: The meaning of connected with is affected by section 152-78. 8 As can be seen, s 152-15 requires regard to be had to the aggregate "net value" of the assets of the tax payer, entities "connected with" the taxpayer, any "affiliate" of the tax payer and entities associated with those affiliates. 9 The term "net value" in s 152-15 is defined in s 152-20(1) as (relevantly): The amount (whether positive, negative or nil) obtained by subtracting from the sum of the market values of those assets the sum of: (a) the liabilities of the entity that are related to the assets; and (b) the following provisions made by the entity: (i) provisions for annual leave; (ii) provisions for long service leave; (iii) provisions for unearned income; (iv) provisions for tax liabilities. 10 In the Tribunal there was agreement between the parties as to all but one of the assets to be included in the MNAVT. It was agreed that the total net value of the agreed assets in 2008 was $5,930,913. The parties disagreed, however, as to whether an amount of $1,144,934 shown in the ABFT 2008 balance sheet as "Loan - A Breakwell (pre-1998)" should be included as an asset. If it was, then the total assets for the purposes of the MNAVT exceeded $6,000,000, and the applicants were not entitled to the claimed CGT relief. It was common ground that the entry "Loan - A Breakwell (pre-1998)" referred to a loan in some form by the ABFT to Mr Breakwell at some time before 1998. 11 The applicants contended that the pre-1998 loan of $1,144, 934 should be regarded as of nil value because any recovery by the ABFT from Mr Breakwell was in 2008 statute-barred. They referred to the principle that, other than in those cases in which a loan contract makes a demand a precondition for its repayment, if no time is specified for repayment or the loan is repayable on demand, an immediate debt is created, and the cause of action accrues at the time the loan is made: Young v Queensland Trustees Ltd (1956) 99 CLR 560 at 566; Ogilvie v Adams [981] VR 1041 at 1043; Central City Pty Ltd v Montevento Holdings Pty Ltd [2011] WASCA 5 at [36]-[38]. This meant, it was said, that the cause of action of ABFT for recovery of the loan of $1,144,934 must have accrued at the latest before 1998. 12 The applicants then contended that s 35(a) of the Limitation of Actions Act 1936 (SA) (the LAA) applied. It provides that actions founded on any simple contract, express or implied, must be commenced within six years after the cause of action accrued. The applicants contended that, as ABFT's cause of action had accrued before 1998, the six year limitation period had expired, at the latest, in 2004. It was on this basis that the applicants contended that ABFT's ability to enforce the loan against Mr Breakwell in 2008 was statute-barred and, accordingly, that the loan had no value. 13 The Commissioner disagreed with that approach, and issued amended assessments on the basis that the MNAVT exceeded $6 million. 14 In the Tribunal, the applicants submitted that they satisfied the MNAVT test on two alternate bases: (a) The funds which were the subject of the pre-1998 loan had been used for business purposes and, accordingly, the loan constituted a liability of Mr Breakwell which was related to the assets in question, namely, the finance broking business. This had the consequence, it was contended, that s 152-15(a) applied so that the pre-1998 loan should have been deducted from the other assets for the purposes of the MNAVT. (b) The effect of s 35(a) of the LAA was to bar enforcement of the loan so that it should be regarded as of nil value. 15 The Tribunal rejected both of these contentions: Breakwell v Commissioner of Taxation [2015] AATA 628. 16 In relation to the second, the Tribunal considered that s 42(1) of the LAA had the effect that the debt was not statute-barred. Section 42(1) provides: (1) In any action of debt or other action in the nature of an action founded upon simple contract no acknowledgment or promise by words only shall be deemed sufficient evidence of a new and continuing contract whereby to take any case out of the operation of this Act, or deprive any party of the benefit thereof, unless that acknowledgment or promise is made or contained by or in some writing to be signed by the party to be charged thereby or by his agent. 17 The Tribunal held, at [28]-[30], that Mr Breakwell's signing of the balance sheets of the ABFT in each of the 2003 to 2008 financial years was a sufficient acknowledgement in writing by him of the currency of the debt to satisfy s 42. The Tribunal said, at [30]: This signing of the 2007 balance sheet is writing which would take the acknowledgment out of section 35(a) of the Limitation of Actions Act 1936 and will restart the limitation period for six years from 1 July 2007. In my view, the pre-1998 loan is not statute-barred. It is an asset of the ABFT as at 30 June 2008 and must be included as part of the maximum net asset test calculation.

The appeal to this Court 18 The appeal to this Court from the Tribunal lies on a question of law only (Administrative Appeal Tribunal Act 1975, s 44(1)). 19 The applicants' Notice of Appeal identified a single question of law: Should the Tribunal have found that there was no acknowledgement or promise made or contained in writing signed by the party charged or by his agent as required by Section 42(1) of the Limitation of Actions Act 1936 (SA) (the Act) and therefore that Section 35(a) of the Act operated to bar any action in respect of a pre-1998 loan to the First Applicant? 20 There were five grounds of appeal. Each complained, in one way or another, of the finding of the Tribunal that s 42 of the LAA had the effect that the debt of $1,144,934 was not statute-barred and the consequent finding that the pre-1998 loan did not have a nil value. 21 This was reflected in the principal submissions of counsel for the applicants on the appeal. He submitted, first, that the evidence in the Tribunal had been insufficient to support the Tribunal member's conclusion that Mr Breakwell had signed the 2007 balance sheet. Counsel submitted that in fact there had been no signature on the balance sheet at all. Later, however, counsel acknowledged that this submission did not raise a question of law and did not pursue it. 22 Counsel then submitted that Mr Breakwell's signing of the 2007 balance sheet of the ABFT could not amount to an acknowledgement of a debt for the purposes of s 42 of the LAA. It was, he submitted, at best an acknowledgement of an asset, and not of a debt.

Consideration 23 It is convenient to address the matter first on the basis that s 35(a) of the LAA does apply to the loan from the ABFT to Mr Breakwell. That is the basis upon which the hearing proceeded in the Tribunal and on which the appeal was brought to this Court. 24 The applicants' submissions in the Tribunal and in this Court assumed that s 35(a) operated, by itself, to bar any claim by the ABFT against Mr Breakwell in respect of the pre-1998 loan. That is to say, the applicants assumed that there was an absolute bar, by force of statute, to any claim by the ABFT against Mr Breakwell. 25 This assumption is unsound, for two reasons. 26 First, s 35(a) does not have the effect of extinguishing a claim in contract (or for repayment of a debt) after six years. It is well established that provisions such as s 35(a) bar the remedy, but not the cause of action. Section 35(a) does not prohibit an action being brought to recover a debt after six years have elapsed since the cause of action accrued and does not establish an element to be satisfied by an applicant pursuing the cause of action. Instead, provisions such as s 35(a) create a defence which can be raised by a respondent. 27 The position was explained by Windeyer J in Australian Iron and Steel Limited v Hoogland (1962) 108 CLR 471 at 488-9: It may be that there is a distinction between Statutes of Limitation, properly so called, which operate to prevent the enforcement of rights of action independently existing, and limitation provisions annexed by a statute to a right newly created by it. In the latter case the limitation does not bar an existing cause of action. It imposes a condition which is of the essence of a new right. … It seems that, under the common law system of pleading, when a limitation is annexed by a particular statute to a right it creates, the plaintiff should allege in his declaration that the action was brought within time. On the other hand it is for the defendant to plead the Statute of Limitations as a defence to an action on a common law cause of action, as if he does not it is assumed that he intends to waive it … When time has run against a purely personal action the result, for a plaintiff, is that his remedy is barred but his cause of action is not extinguished; for a defendant, it is that he has, if he chooses to assert it, an immunity which Lord Esher called "his existing right to the benefit of the Statute of Limitations" … (Emphasis added and citations omitted) 28 In The Commonwealth of Australia v Verwayen (1990) 170 CLR 394, Mason CJ at 405 noted that provisions such as s 35 "have been held to bar the remedy but not the right and thus create a defence to the action which must be pleaded …". See also Brennan J at 426. The same principle was applied to s 36 of the LAA in Robinson v Craven (1994) 63 SASR 267 at 268-9 (King CJ) and 274 (Perry J). Section 36 is a counterpart provision to s 35, and the principles stated in the authorities should be applied to s 35. 29 Because the expiry of a limitation period is a matter of defence, it is a matter which can be waived by the defendant: Hoogland at 488. 30 For these reasons alone, s 35(a) does not have the effect, on the expiry of the six year limitation period, of barring absolutely any action to enforce a contract. 31 The second reason why the applicants' assumption about the effect of s 35(a) is unsound is that it overlooks the effect of s 48 of the LAA. Section 48, which was introduced into the LAA in 1972, empowers courts to extend certain limitation periods, including that fixed by s 35(a). The effect of s 48, as Bray CJ observed in Napolitano v Coyle (1977) 15 SASR 559 at 572, is that "since 1972 every defendant knows or ought to know that the lapse of the statutory period does not leave him absolutely and forever immune from suit". 32 Thus, in 2008, it was open to the ABFT to commence proceedings to enforce repayment of the pre-1998 loan. There is some hypotheticality about Mr Breakwell, in his capacity as trustee of the ABFT, commencing such proceedings against himself but, given the applicants' submissions, that hypotheticality must for present purposes be put to one side. 33 Had such proceedings been commenced, there is a question as to whether Mr Breakwell would have raised s 35 of the LAA as a defence. Whilst in theory he could have done so, it is not readily to be inferred that, in practice, he would have done so. One would expect that Mr Breakwell would have honoured his obligations as trustee, one of which was to avoid a conflict between his own interests and those of the ABFT and, in particular, not to prefer his own interests to those of the ABFT. It is not easy to see how Mr Breakwell, acting consistently with his duties as trustee, could have raised a limitation defence against the ABFT. It is not readily to be supposed that he would have done so. 34 Faced with this difficulty, counsel for the applicants on the appeal submitted that it would have been open to Mr Breakwell to resign as trustee of the ABFT, thereby relieving himself of any conflict. The difficulty for this submission is that the relevant time at which to consider the position is 2007. That is when the MNAVT is to be considered in relation to the applicants' tax liabilities: see the opening lines of s 152-15. Mr Breakwell had not, as a matter of historical fact, resigned his trusteeship of the ABFT at that time. Accordingly, the matter should be considered on the basis that he is not able by this means to avoid the conflict in interest. 35 Suppose, however, that the hypothetical action by the ABFT is commenced now. What would be the effect of Mr Breakwell resigning his trusteeship now so as to permit a new (and independent) trustee to be appointed and to pursue the action so that he (Mr Breakwell) could avoid the conflict? The answer is that, if Mr Breakwell raised the limitation defence, the new trustee could be expected to seek an extension of time in which to bring the action pursuant to s 48 of the LAA. In order to obtain the extension, the new trustee would have to establish that facts material to the ABFT's claim had been ascertained by him or her within the period of 12 months immediately prior to the commencement of the action (s 48(3)(b)(i)). Alternatively, the new trustee would have to establish that the failure by the ABFT to commence the action within the six year limitation period resulted from "representations or conduct" of Mr Breakwell and had been reasonable in view of those representations or that conduct (s 48(3)(b)(ii)). In addition to satisfying one or other of those matters, the new trustee would have to show that it is just, in all the circumstances of the case, for the extension of time to be granted (s 48(1)). 36 Given that Mr Breakwell was the trustee of the ABFT throughout the six year limitation period, one would have thought that a new trustee would have little difficulty in showing that the failure of the ABFT to commence proceedings within that time resulted from the conduct of Mr Breakwell. 37 It is not necessary (nor possible) for the Court on the present appeal to express concluded views about whether Mr Breakwell, in his personal capacity, would refrain from raising a limitation defence and whether, if he did not, an extension of time would be granted. I have referred to these matters to demonstrate that, contrary to the applicants' supposition, s 35(a) would not operate, by force of statute, to prevent any claim by the ABFT against Mr Breakwell in his personal capacity and, further, that the ABFT must be taken to have realistic prospects of pursuing Mr Breakwell successfully. At the least, those prospects could not be regarded as fanciful. 38 Accordingly, the ABFT claim against Mr Breakwell should not be regarded as absolutely statute-barred, and the pre-1998 loan cannot be regarded as having no value. 39 So far, I have proceeded on the basis that s 35(a) of the LAA does operate to fix a six year limitation period in the present case. That is the basis upon which the applicants brought the appeal. I consider, however, that that view of the matter is also unsound. 40 In a case like the present, being an action by a trust to recover trust property, there is no limitation period. That is the effect of s 32(1) of the LAA, which provides: (1) In any action or other proceeding against a trustee or any person claiming through him, except where the claim is founded on any fraud or fraudulent breach of trust to which the trustee was party or privy, or is to recover trust property, or the proceeds thereof still retained by the trustee, or previously received by the trustee and converted to his use, the following provisions shall apply: (a) All rights and privileges conferred by this Act shall be enjoyed in the like manner and to the like extent as they would have been enjoyed in the action or other proceeding if the trustee or person claiming through him had not been a trustee or person claiming through him. (b) If the action or other proceeding is brought to recover money or other property, and is one to which no other provision of this Act applies, the trustee or person claiming through him shall be entitled to the benefit of and be at liberty to plead lapse of time as a bar to the action or other proceeding, in the like manner and to the like extent as if the action or other proceeding had been an action for money had and received; and that so this Act shall run against a married woman entitled in possession for her separate use, whether with or without a restraint upon anticipation, but shall not begin to run against any beneficiary unless and until the interest of such beneficiary is an interest in possession. … (Emphasis added) 41 Any action by the ABFT against Mr Breakwell to recover the pre-1998 loan would be an action to recover trust property. The LAA does not prescribe any limitation period in respect of claims of that kind. 42 Thus, for this reason too, the contention that the pre-1998 loan was statute-barred and did not have to be brought into account in the calculation of the MNAVT must be rejected. 43 As the parties appeared not to have adverted to these matters in the Tribunal and had not addressed them in their outlines of submissions on the appeal, I gave each an opportunity to provide supplementary submissions. 44 In their supplementary submissions, the applicants referred to the following passages in the Commissioner's original outline of submissions and contended that these amounted to an acknowledgement of fact from which the Commissioner should not now be permitted to depart: [11] Unless a loan contract contains a pre-condition of a demand being made for its repayment, where no time is specified for repayment or the loan is repayable on demand, an immediate debt is created and the cause of action accrues at the time the loan is made. [12] By operation of ss 35(a) and 42(1) of the Limitations Act, actions in simple contract for debts are statute-barred if not commenced within 6 years of the accrual of the cause of action, unless there is an ("acknowledgement or promise [that] is made or contained by or in some writing to be signed by the party to be charged thereby or by his agent"). … [15] The question for determination by the Tribunal was whether the oral evidence of Mr Breakwell that he signed financials of the Trust in the period 2003-2007, in which the pre-1998 was included on the balance sheet, constituted evidence of an acknowledgement or promise made or contained in some writing of the pre-1998 loan signed by him, for the purposes of s 42(1) of the Limitations Act. (Footnotes omitted) 45 The applicants' submission was that these paragraphs were, effectively, a concession that the pre-1998 loan was worthless unless the Commissioner could establish that Mr Breakwell's signature of the 2007 balance sheet was an acknowledgement in writing for the purposes of s 42(1). 46 I do not accept that submission. In my opinion, a fair reading of the passages in the Commissioner's outline indicates only that the Commissioner was contesting that the pre-1998 loan was worthless for the reason advanced by the applicants, namely, that s 35(a) constituted a statutory bar to the ABFT enforcing repayment of the loan. The Commissioner also appears to have been using the term "statute-barred" in the colloquial sense, that is, as indicating that the period of limitation fixed by s 35(a) had expired and not to indicate that no action at all could be brought to enforce its repayment. 47 The applicants' supplementary submissions also referred to s 38 of the LAA in a way which seemed to suggest that it may be an alternative statement of a limitation period. However, s 38 is not applicable in the present circumstances, because it is concerned only with actions for the recovery of money paid under a mistake (whether of law or of fact) or otherwise based on restitutionary grounds. 48 It may be that the applicants were intending to refer to s 35 and not to s 38. If so, I have addressed the effect of s 35 in the reasons given above. 49 The applicants submitted that an issue arising from the expiry of a limitation period may arise otherwise than by way of a pleaded defence. They noted that in Re Brookers (Aust) Ltd (in liq); Brooker v Pridham (1986) 41 SASR 380, a liquidator had rejected proofs of debt because the claims were statute-barred at the date of the liquidation. The applicants noted that, on the appeal, the Court had considered whether the claims were statute-barred on the date the company went into liquidation. They then submitted that "there would have been no point in [the court] proceeding in that manner if it was correct to treat the debt as being on foot until a pleading was made in the course of proceedings". Although not made expressly, this seemed to be a submission that s 35(a) did more than create a defence for a defendant and could, at least in some circumstances, operate on its own terms to defeat an applicant's claim. 50 I do not accept that submission. The issue in Re Brookers (Aust) Ltd (in liq); Brooker v Pridham was whether the limitation period had expired at all, and not the effect of the expiry. Accordingly, it was not necessary for the Full Court to address the latter issue. It is not reasonable to suppose that the Full Court intended by the approach which it adopted to qualify the well-established principle evidenced in the judgment of Windeyer J in Hoogland, to which I referred earlier. 51 The applicants submitted that the circumstance that the claim of ABFT against Mr Breakwell was a claim in debt had the effect that s 32 did not apply or, at least, did not preclude the application of the other provisions in the LAA such as s 35. In support of the proposition that a debt claim is different to a claim to recover trust property, the applicants referred to Barker v Duke Group Ltd (in liq) [2005] SASC 81, (2005) 91 SASR 167 at [70] et seq; and to In the matter of Auzhair Supplies Pty Ltd (in liq) [2013] NSWSC 1, (2013) 272 FLR 304 at [23]-[25]. However, on my understanding, neither of these cases stands as authority for the proposition for which the applicants contended. 52 In these circumstances, it is unnecessary to consider the interesting submissions advanced by the parties concerning the application of s 42 of the LAA in the present case. 53 I add that there is no incongruity in the conclusion that the pre-1998 debt is not statute-barred. On the contrary, it would be a surprising result if the trustee of a trust like the ABFT could take a loan from the trust, not repay the loan, and then rely successfully on the expiry of the limitation period in defence to a claim for repayment.

Conclusion 54 For the reasons given above, the appeal should be dismissed. 55 The applicants submitted that, in the event that the appeal was determined against them by reason of the effect of ss 32, 35 and 48, there should be no order for costs because the Commissioner had not raised these matters in the Tribunal, by notice of contention on the appeal, or in the outline of submissions. The submission was to the effect, that if everyone had proceeded on a misconception of the law, then the applicants should not have to bear the costs of that. 56 I do not accept that submission and consider that the principle of costs following the event should be applied. First, it is the applicants who pursued their claim in the Tribunal on a mistaken basis and, being unsuccessful, brought the present appeal. Secondly, it cannot be said that the applicants have been misled by the Commissioner's position. I note in this respect that, even after ss 32, 35 and 48 were raised with the applicants at the hearing, they continued their pursuit of the appeal. 57 The appropriate orders are that the appeal be dismissed and that the applicants pay the Commissioner's costs of and incidental to the appeal. I certify that the preceding fifty-seven (57) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice White.