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[2000] FCA 721
Federal Court of Australia
2000-06-09
Sundberg JJ
Original judgment source is linked above.
THE COURT ORDERS THAT:
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
ON REFERRAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL
THE COURT REASONS FOR JUDGMENT 1 Pursuant to s 45 of the Administrative Appeals Tribunal Act 1975 (Cth) a Deputy President of the Administrative Appeals Tribunal ("the Tribunal"), Mr McMahon, has referred to the Court for decision two questions of law which arise out of an application to it by the applicants, Rowena Brooks and Lincoln Chrysiliou, for review of an objection decision made by the respondent Commissioner of Taxation ("the Commissioner") in relation to assessments issued against them in respect of the year of income ended 30 June 1995. For reference the following facts, as set out in the Special Case stated, are agreed: "1. Skaggs Pty Ltd is and at all relevant times has been the trustee of a trust fund ("the Andros Chrysiliou Family Trust") established by deed executed 29 June 1978 ... 2. Aisolet Pty Ltd is and at all relevant times has been the trustee of a trust fund ("the KMC Family Trust") established by deed executed on 8 June 1980 ... 3. On 20 October 1988 Skaggs Pty Ltd in its capacity as trustee of the Andros Chrysiliou Family Trust (in that capacity "Skaggs") and Aisolet Pty Ltd in its capacity as trustee of the KMC Family Trust (in that capacity "Aisolet") as joint tenants acquired the land at Narrabeen near Sydney being the whole of the land comprised in Folio Identifier 13/17768 ("the Narrabeen land") ... 4. On 27 July 1994 counterparts of a contract of sale between Skaggs and Aisolet as vendors and John Harold Masters and Marion Rae Masters ("Mr and Mrs Masters") as purchasers were exchanged ... 5. On exchange Mr and Mrs Masters paid a deposit of $31,500 to the agent for the vendors, namely, Elders Real Estate of Manly Vale. 6. On 12 January 1995 Aisolet and Skaggs served on Mr and Mrs Masters a Notice to Complete the purchase ... 7. On 26 January 1995 the solicitors for Aisolet and Skaggs wrote to the solicitors for Mr and Mrs Masters the letter of offer, to extend the date of settlement ... 8. On 27 January 1995 the solicitors for Mr and Mrs Masters accepted the offer ... 9. On 27 January 1995 the solicitors for Mr and Mrs Masters ... authorised Elders Real Estate to release to Aisolet and Skaggs the deposit paid under the contract of sale. 10. The sum of $31,500 being the deposit was paid to Aisolet and Skaggs by Elders Real Estate on 27 January 1995. 11. Mr and Mrs Masters did not complete the purchase of the Narrabeen land. 12. On 17 February 1995 Aisolet and Skaggs terminated the contract for breach by Mr and Mrs Masters and forfeited the deposit. 13. Aisolet and Skaggs neither brought proceedings against Mr and Mrs Masters for damages for breach of contract nor released them from any liability for such damages. 14. Aisolet and Skaggs jointly incurred costs of $888 in connection with the making and termination of the contract between them and Mr and Mrs Masters. 15. At all material times the Narrabeen land has been let to tenants unrelated to the registered proprietors ..." 2 The questions posed by the Tribunal in the special case are as follows: "1. Is the amount of (a) $15,750, (b) $15,306, or (c) some other and if so what amount an amount which under section 160Z(1) of the Income Tax Assessment Act is to be brought to account as a capital gain which accrued to Aisolet for the purpose of determining the amount of the net income of the KMC Family Trust for the year ended 30 June 1995. 2. Is the amount of (a) $15,750, (b) $15,306, or (c) some other and if so what amount an amount which under section 160Z(1) of the Income Tax Assessment Act is to be brought to account as a capital gain which accrued to Skaggs for the purpose of determining the amount of the net income of the Andros Chrysiliou Family Trust for the year ended 30 June 1995." 3 It may be inferred that the applicants had requested the Tribunal to refer the questions of law to this Court because they wished to submit that the decision of a Full Court of this Court in Federal Commissioner of Taxation v Guy (1996) 67 FCR 68, binding upon the Tribunal, was wrongly decided.
The Full Court decision in Guy 4 In Guy a differently constituted Full Court held that the provisions of Part IIIA of the Income Tax Assessment Act 1936 (Cth) ("the Act") concerned with capital gains had no application to the case where a deposit paid under a contract of purchase and sale of land was forfeited following upon a default by the purchaser. That case however differed from the present agreed facts in one particular. In Guy immediately after the settlement of proceedings which had been brought by the vendors against the defaulting purchasers for damages the vendors entered into a contract to resell the land at a price less than that which was originally to have been paid. The land in question was used wholly as a residential dwelling and the Full Court held, as an alternative ground for its decision, that, had the provisions of Part IIIA of the Act applied contrary to the Court's view, any gain would not have been included in the taxpayer's assessable income by virtue of the provisions of s 160ZZQ(12) of the Act which exempts capital gains accruing in respect of the disposal of a dwelling which was at all relevant times used as the taxpayer's principal residence. As will have been noted in the present case the land in question was used for investment purposes and would not qualify under s 160ZZQ. No further sale of the land occurred after the relevant contracts were brought to an end and the deposits forfeited. 5 The judgment of the Full Court in Guy largely concentrated upon the provisions of s 160ZZC of the Act. That section, which is in Division 13 of Part IIIA, is concerned with the capital gains tax consequences of options. The operative provision is s 160ZZC(3) which, subject to certain subsections not presently relevant, deems the grant of an option to constitute a disposal of the options at the time when the grant took effect and deems the option to have been owned by the grantor immediately before the disposal took place. As will shortly be seen, this has the consequence that any consideration for the grant of the option which is received will be taken into account in calculating a capital gain made by the grantor of the option. However, if the option is in fact exercised, the grant and exercise of the option are to be treated as a single transaction for the disposition of the property the subject of the option for a consideration equal to the consideration if any paid for the option and the ultimate purchase price of the property. 6 It is in this context that s 160ZZC(12) falls to be considered. That subsection provides as follows: "Where a deposit of money or other consideration, being a deposit that was made in respect of a prospective purchase or other transaction that is cancelled or otherwise abandoned, is forfeited- (a) the deposit shall be deemed to have been paid or given as consideration in respect of the grant by the person who received the benefit of the forfeiture of an option that bound the grantor to dispose of an asset and was not exercised; and (b) any costs that the person who received the benefit of the forfeiture incurred in connection with the prospective purchase or other transaction shall be deemed to be amounts of expenditure incurred by that person in respect of the grant of the option." 7 The Full Court in Guy was of the view that s 160ZZC(12) was confined to a case where a deposit was paid in respect of a purchase or other transaction that may or may not take place in the future so it would operate to apply to a case where a deposit was paid prior to a contract for sale having been entered into. Examples which the Full Court gave of cases which would fall within subs (12) were cases where a holding deposit was paid or cases where an amount was paid in return for a negative pledge, that is to say, a promise not to dispose of property for a limited period. Specifically the subsection did not apply where the forfeited deposit was paid under the very contract of sale and purchase itself. The Full Court referred in the course of its reasons to other provisions of Part IIIA, for example s 160M(3)(b), s 160M(6) and s 160M(7), but without giving any particular reasons why these provisions had no application. It seems that, at least in the case of s 160M(7), this was because the Commissioner had not sought to argue that it applied on the facts of the case. The argument before their Honours, and this is reflected in their Honours' reasons, was rather that, if Part IIIA of the Act was to apply, this was because of the provisions of s 160ZZC and not otherwise.
The competing submissions 8 It was submitted on behalf of the Commissioner that this Court should not follow the decision of the Full Court in Guy. Rather it was submitted that the decision of the Full Court in Guy was, in accordance with the usually accepted tests, "plainly" or "clearly" wrong: cf Transurban City Link Ltd v Allan (1999) 168 ALR 687, at least in so far as it dealt with issues other than s 160ZZQ, the residential dwelling exemption. 9 It was submitted for the Commissioner that the present case fell within s 160ZZC(12) and that the Full Court had erred in restricting that subsection to cases where no contract of purchase had yet been entered into. Alternatively, the Commissioner submitted that the facts of the present case fell within s 160M(6) together with s 160M(3)(b) or s 160M(7). For the taxpayers it was submitted that Guy was not "plainly" or "clearly" wrong and in any event the case fell outside s 160ZZC(12) and did not fall within the other provisions referred to, particularly because those provisions were excluded by s 160MA(2) of the Act. In support of their submissions the taxpayers made reference to the provisions of s 104-150 of the Income Tax Assessment Act 1997 (Cth) ("the Rewrite") where it was said both the Explanatory Memorandum which accompanied the Tax Law Improvement Bill (No. 2) 1997, which was subsequently enacted as the Rewrite, and the example given in s 104-150 confirmed the Parliamentary intention that the forfeiture of a deposit under a contract of sale of property was not intended to give rise to a capital gain. The Rewrite operated to replace the Act as from its commencement so far at least as concerns capital gains. 10 Before the competing submissions are examined it is necessary to set out the scheme of the legislation dealing with capital gains and in particular the provisions upon which the parties rely in their submissions.
The statutory scheme 11 It is strictly incorrect to speak of the Act operating to tax capital gains, as such. Tax is assessed upon taxable income, that being assessable income, less allowable deductions. However, s 160ZO(1) includes in assessable income a "net capital gain" accruing to the taxpayer in the year of income. The computation of net capital gains commences with the concept of "capital gain". A capital gain is deemed to accrue to a taxpayer in the case of an asset, not being "a personal-use asset" (and no personal-use asset is involved on the facts of the present case), where there has been a disposal of an asset which has been acquired by the taxpayer on or after 20 September 1985 which asset was immediately before the disposal took place owned by the taxpayer and the consideration in respect of the disposal exceeds the indexed cost base to the taxpayer in respect of that asset: ss 160L(1) and 160Z(1). The word "asset" is defined in s 160A of the Act and includes an option, a debt, a chose in action or any other right, whether legal or equitable and whether or not a form of property. It includes also "currency of a foreign country" but not specifically Australian currency. At least by implication Australian currency, being a means of exchange, is excluded from the definition. The case was argued by the parties on this basis. 12 In the ordinary case, therefore, a capital gain will accrue to a taxpayer who owns land and disposes of it for a consideration which is in excess of the cost base of the asset (ordinarily calculated in accordance with s 160ZH(1)) but subject to indexation, a matter with which we are not here concerned. This is, however, subject to the provisions of s 160ZZQ (not relevant on the facts of the present case) which excludes from consideration (subject to certain conditions, not presently relevant) any capital gain "in respect of the disposal" of what may be described as a dwelling which is the sole or principal residence of the taxpayer. 13 The key concepts of acquisition and disposal are defined, or expanded upon in s 160M of the Act. It is not necessary here to consider whether s 160M contains a conclusive code of what constitutes acquisition and disposal. That it does was conceded by counsel for the Commissioner. What s 160M(1) makes clear is that both words are not to be given a narrow interpretation. Anything which involves a change in the beneficial ownership of an asset is treated as a disposal and as giving rise to an acquisition. Further, it is irrelevant how that change in ownership is brought about: s 160M(2), whether it be by a transaction, by an instrument, by operation of law, by the doing of some act or thing, or the occurrence of an event. Section 160M(3) expands upon the circumstances that are to be taken to give rise to a change in ownership. Relevant to the facts of the present case is paragraph (b) which provides that a change shall be taken to have occurred in ownership of an asset by: "(b) in the case of an asset being a debt, a chose in action or any other right, or an interest or right in or over property - the cancellation, release, discharge, satisfaction, surrender, forfeiture, expiry or abandonment, at law or in equity, of the asset:" 14 It is necessary then to turn to s 160M(6) and s 160M(7) of the Act. Those sections, in their present form, were enacted in 1993 by the Taxation Laws Amendment Act (No. 4) 1992 as a result of the decision of the High Court in Hepples v Federal Commissioner of Taxation (1992) 173 CLR 492. That case concerned the grant by the taxpayer of a restrictive covenant for consideration. There were seven judgments delivered by the High Court in which both subsections were discussed and, in some at least, criticised. It is difficult to find a clear ratio in the case as was illustrated by the fact that the Court heard argument by the parties as to the orders to be made. The Court's judgment concerning the orders is to be found at (1992) 173 CLR 550. It suffices to say that the orders had the consequence that in that case neither of the subsections were held to apply. 15 In the result the subsections in the form they stood at the time of Hepples were repealed and the present subsections relevant to the facts of the present case were enacted. They are in the following form, as expanded by subsections 6A, 6B, 6C and 6D: "160M(6) Subject to this Part (other than subsection (7) of this section), if: (a) a person creates an asset that is not a form of corporeal property; and (b) on its creating, the asset is vested in another person; then subsections (6A) and (6B) apply. 160M(6A) If subsection (6) applies: (a) the person creating the asset is taken to have acquired, and to have commenced to own, the asset at the time applicable under subparagraph 160U(6)(a)(ii) or (b)(ii); and (b) the person creating the asset is later taken to have disposed of the asset to the other person mentioned in paragraph (6)(b) of this section at the time applicable under subparagraph 160U(a)(iii) or (b)(iii); and (c) the person so taken to dispose of the asset is taken not to have paid or given any consideration, or incurred any costs or expenditure, referred to in any of paragraphs 160ZH(1)(a) to (d) (inclusive), (2)(a) to (d) (inclusive) and (3)(a) to (d) (inclusive) in respect of the asset; and (d) paragraph 160ZD(2)(a) does not apply to that disposal of the asset. 160M(6B) Also, if subsection (6) applies: (a) the other person mentioned in paragraph (6)(b) is taken to have acquired the asset from the person creating it, and to have commenced to own it, at the time applicable under subparagraph 160U(6)(a)(i) or (b)(i); and (b) paragraph 160ZH(9)(a) does not apply to that acquisition of the asset. 160M(6C) Subsection (6) applies to the creation of an asset: (a) whether or not the asset is created out of, over or otherwise in connection with, an existing asset; and (b) whether or not the person creating the asset owned or disposed of anything at the moment of creation of the asset. 160M(6D) In subsections (5) and (6): "vest", in relation to an asset, means: (a) in the case of an asset that is not a right - confer ownership of the asset on a person; or (b) in the case of an asset that is a right - create the right in a person (whether or not conferring ownership of the asset on the person)." 16 It may be noted that s 160M(6) in the form it was relevant to the present case is concerned with the case where an asset is created by the taxpayer in another. Without special provision the creation of an asset would not involve a disposition of any asset. The consequence is therefore that where there has been the creation of an asset there will be deemed to be the disposal of an asset that the taxpayer who created it owned before the disposal, with the possibility that a capital gain may accrue. 17 Prima facie, therefore, where a taxpayer owning land enters into a contract to sell that land, at the time the contract is entered into, that taxpayer creates a right in the purchaser to have the contract performed upon payment of the consideration under that contract. The vendor under the contract is thus treated as having disposed of this right, being a right which the taxpayer is deemed to have owned immediately prior to the creation of it. Conversely, the purchaser is deemed to have acquired the right pursuant to the disposition. 18 It may be observed that this prima facie position could cause some difficulties where the contract is one which is for the disposal of an asset, for example where, as in the present case, there is a contract for the sale of land entered into by the vendor. The performance of the contract would constitute a disposal of the rights under the contract (cf Federal Commissioner of Taxation v Orica Ltd (1998) 194 CLR 500 at 539, 540). Indeed, a conclusion which flowed from Orica, as the majority of their Honours (Gaudron, McHugh, Kirby and Hayne JJ) noted at 540, was that the performance of the obligation undertaken by a party to an executory contract would give rise to a disposition although whether a taxable gain would emerge would depend upon whether the consideration for the disposal of the right exceeded the indexed cost base to the taxpayer. In particular, the majority of the Court observed that s 160M(3) should not be given a narrow construction. Gummow J dissented. 19 Section 160M(3) provides as follows: "Without limiting the generality of subsection (2), a change shall be taken to have occurred in the ownership of an asset by: (a) the creation of a trust, by declaration or settlement, over the asset, other than where either: (i) all of the following sub-subparagraphs apply: (a) the person who owned the asset immediately before the creation of the trust is the sole beneficiary of the trust; (b) that person is absolutely entitled to the asset as against the trustee or would, but for a legal disability, be so entitled; (c) the trust is not a unit trust; or (ii) all of the following sub-subparagraphs apply: (a) the trust is created by the transfer of an asset to a trust from another trust; (b) the beneficiaries of the trusts are identical; (c) the terms of the trusts, including the interest of each beneficiary in the income and corpus of the trusts, are identical; (aa) the conversion of a trust over an asset to a unit trust where: (i) the trust is not an existing unit trust; and (ii) immediately before the conversion, a person was absolutely entitled to the asset as against the trustee or would, but for a legal disability, have been so entitled; (b) in the case of an asset being a debt, a chose in action or any other right, or an interest or right in or over property - the cancellation, release, discharge, satisfaction, surrender, forfeiture, expiry or abandonment, at law or in equity, of the asset; (c) in the case of an asset being a share in or debenture of a company - the redemption in whole or in part, or the cancellation, of the share or debenture; or (d) subject to subsection (4), a transaction in relation to the asset under which the use and enjoyment of the asset was or is obtained by a person for a period at the end of which the title to the asset will or may pass to that person." 20 The difficulty to which the High Court adverted in Orica was avoided by Parliament, at least so far as the purchaser under a contract of purchase of property is concerned, by s 160MA(2) of the Act, inserted in 1995. That subsection reads as follows: "If: (a) a person creates a right in another person to require the first person to do any thing; and (b) the doing of the thing will constitute the disposal of an asset for the purposes of this Part; then neither subsection 160M(6) nor subsection 160M(7) applies to the creation of the right." 21 The Explanatory Memorandum which accompanied the Taxation Laws Amendment Bill (No. 4) 1992 which when enacted introduced s 160MA(2) into the Act commented: "Creation of a right to require the disposal of an asset. When a person, A agrees to sell property to another person, B, the transaction will give rise to a disposal of that property for CGT purposes. A capital gain could accrue to A, depending on when the property was acquired, its cost base and the amount of consideration received. By entering into the agreement, A has also created in B a right to require A to transfer the property to B. It could be argued that A has received, as consideration for creating that right, the amount of the consideration payable for the disposal of the property. If that were the case, new subsections 160M(6) and 160M(6A) would apply to deem the whole of the consideration to be a capital gain to A. However, it is unlikely that the consideration for the disposal of the property could also be the consideration for the creation of the right. To put the issue beyond doubt, subsections 160M(6) and 160M(7) will not apply to the creation of a right to require the disposal of an asset. The other provisions of Part IIIA will continue to apply to the disposal of the asset." 22 It is clear, both from the language of s 160M(6) and the comment from the Explanatory Memorandum set out above, that s 160MA is at least primarily (exclusively, the Commissioner would submit) directed to ensuring that the creation by the vendor of the right in the purchaser to require the vendor on completion of a contract to transfer the property to the purchaser is not to fall within either s 160M(6) or s 160M(7). 23 Section 160M(7) was in the following terms so far as is presently relevant: "Without limiting the generality of subsection (2) but subject to the other provisions of this Part, where - (a) either: (i) an act or transaction has taken place in relation to an asset, whether or not affecting the asset; or (ii) an event affecting an asset has occurred; where, in a subparagraph (i) case in which the asset was affected or in any subparagraph (ii) case, it does not matter whether the asset was affected adversely or beneficially, or neither adversely nor beneficially; and (b) the person who owned the asset at the time of the act, transaction or event has received, or is entitled to receive, an amount of money or other consideration by reason of the act, transaction or event (whether or not any asset was or will be acquired by the person paying the money or giving the other consideration) including, but not limited to, an amount of money or other consideration - (i) in the case of an asset being a right - in return for refraining from exercising the right; or (ii) for use or exploitation of the asset, the act, transaction or event constitutes a disposal by the person who received, or is entitled to receive, the money or other consideration of an asset created by the disposal and, for the purposes of the application of this Part in relation to that disposal - (c) the money or other consideration constitutes the consideration in respect of the disposal; and (d) the person shall be deemed not to have paid or given any consideration, or incurred any costs or expenditure, referred to in paragraph 160ZH(1)(a), (b), (c) or (d), (2)(a), (b), (c) or (d) or (3)(a), (b), (c) or (d) in respect of the asset; and (e) the person is taken to have acquired and owned the asset immediately before the disposal." 24 Because s 160M(7) is expressed to be subject to the other provisions in Part IIIA, it is a residual provision intended only to apply where other provisions do not. This is confirmed, if confirmation be needed, by the brief comments of the Minister assisting the Treasurer in the Second Reading speech to the Bill introducing the present section in 1992 into the Act. Both ss 160M(6) and (7) were intended, he said "to assess certain capital payments not received in respect of the actual disposal of assets… Where a taxpayer creates an incorporeal asset - such as a right under a restrictive covenant agreement - in another person, any consideration, less incidental costs, received by the taxpayer for creating the assets will be a capital gain to that taxpayer. Subsection 160M(7) will have a residual operation to tax payments not received in respect of the disposal or creation of assets." 25 It may be noted from the extract cited above that Parliament was concerned, in particular, to overcome the effect of the decision in Hepples. It will be necessary shortly to refer to the operation of both these subsections in considering the submissions of the Commissioner. It may also be noted, however, that the subsections quoted above are in different terms to those considered by the Full Court in Guy. In particular it must be said that they are in somewhat clearer terms than the previous subsections. 26 We have already noted the effect of the provisions of s 160ZZC dealing with options, which was introduced into the Income Tax Assessment Amendment (Capital Gains) Act 1986. Absent that section it was arguable that the grant of an option would fall to be considered under s 160M(6) or s 160M(7) and constitute a disposition by the grantor of an asset deemed to have been owned by the grantor and the acquisition by the grantee of an asset, that being the right under the option. The exercise of the option could then constitute a disposition by the grantee of that asset by the performance of the option contract: s 160M(3); and the ultimate sale of property the subject of the contract would likewise be a disposition capable of giving rise to a capital gain. In this argument the possibility of there being further dispositions by virtue of the formation of the contract upon exercise of the option has been disregarded. 27 Clearly Parliament intended that where there was an option, followed by exercise and ultimate disposition, the transaction should be looked at as involving but one disposition capable of giving rise to a capital gain. On the other hand, where the option was not exercised and the grantor of the option received an option fee, the option fee would be taken into account in the computation of a capital gain to the grantor. This would be the case where the option was granted to purchase investment land, as well as where the option was granted to purchase a residential dwelling, notwithstanding that a disposition of that dwelling could fall within the provisions of s 160ZZQ(12). 28 Section 160ZZC(12), whatever it may comprehend, was clearly intended to be equated in its tax treatment with options in the ordinary sense, falling within the general terms of 160ZZC. The Explanatory Memorandum to the Bill introducing Part IIIA into the Act in 1986 made the following comments concerning the then proposed s 160ZZC(12): "Paragraph 160ZZC(12)(a) deals with the forfeiture of money paid as a deposit on a prospective purchase or other transaction, which is cancelled or abandoned. In such circumstances, the deposit is to be treated as consideration in respect of the grant of an option that bound the grantor to dispose of an asset and which was not exercised. The sub-section ensures that money forfeited by a party to a prospective sale is treated as a capital gain in the hands of the person who received the benefit of the deposit. By paragraph (b), any expenditure in connection with the prospective purchase or transaction incurred by the person who keeps the forfeited deposit will be deemed to be expenditure incurred by that person in respect of the grant of the option."
The application of ss 160M(6) or (7) to the present circumstances 29 Both because ss 160M(6) and (7) received no real attention in Guy and because the form they now take differs from the form they took at the time of the facts in Guy, it is convenient to commence the present discussion by seeing whether these subsections would, at least if s 160ZZC(12) were inapplicable, operate to treat the vendors in the present case as having made a gain on the disposal of an asset owned, or deemed to be owned, as at the time of the disposition. Although s 160M(7) is residual only, it is nevertheless a convenient starting point. 30 The submissions of the applicants, so far as they deal with s 160M(7) do not contest the possibility that the language of s 160M(7) could apply to the case where the vendor forfeited a deposit under a contract of sale. Indeed it is hard to see what could be said against that proposition. Adapting the subsection to the facts of the present case, there has been an act or transaction which has taken place in relation to an asset, namely the chose in action (an asset within s 160A(1)) of the vendor under the contract of sale. The relevant act or transaction is the termination of the contract. The vendor, being the person who owned the asset at the time of the act or transaction, received an amount of money, namely the forfeited deposit. Those matters being fulfilled, s 160M(7) operates to deem there to be a disposal by the vendor, who has received the deposit, of an asset which was created by the disposal. By force of s 160M(7)(e) the vendor is deemed to have owned the asset which the subsection deems both to have been acquired and disposed of, with the consequence that all the elements necessary to constitute a taxable disposal of an asset have been made out. The deposit becomes the consideration for the deemed disposal. 31 Senior counsel for the applicants submitted that the subsection could not apply because there had been an actual disposal of the vendor's rights under the contract when they were extinguished within the meaning of s 160M(3). This being the case, presumably there would be a capital gain arising by the combination of s 160M(6) and s 160M(3). Since, however, the applicants submit that s 160M(6) can have no application, the submission has an air of circularity about it. What the submission does reinforce is that unless some other section of the Act has application, whether that be s 160M(6) in association with s 160M(3)(b) or s 160ZZC(12), clearly s 160M(7) would operate to bring a gain into assessable income. The real submission of the applicants is that neither s 160M(6) nor (7) have application because of the operation of s 160MA.
The application of s 160M(6) in association with s 160M(3)(b) 32 The applicants' submissions appear to concede that, but for s 160MA, the provisions of s 160M(6) operate to treat the creation of the mutual rights of both vendor and purchaser as involving the creation and disposal of assets, being respectively the right of the purchaser to a transfer upon payment of the balance of purchase price and other contractual assets and the rights of the vendor to payment of the purchase price but subject to the vendor performing the contract. It has to be said that literally this is the effect of s 160M(6). 33 The submissions concede also that s 160M(3) would operate to treat there to be a disposal by the vendor of the asset being the chose in action representing the vendors' rights under the respective contracts. Given that the High Court in Orica has counselled in favour of a wide reading of s 160M(3) the concession is probably correctly made, despite the problem that there may be some verbal difficulty about treating the termination of a contract of sale by a vendor following upon default by the purchaser and the acceptance of the repudiation of the contract by the purchaser as being a discharge, or satisfaction of the chose in action. 34 Senior counsel for the applicants argues, however, that there was no consideration for the disposal constituted by the extinction of the vendors' contractual rights. So it is submitted that the correct analysis is that the consideration in respect of the extinction of the vendors' contractual rights was the mutual extinction of the purchasers' rights. The forfeited deposit, it is submitted, was not consideration for the extinction of the vendors' rights, but rather an amount which had been paid by the purchasers pursuant to the contract which the purchasers were not entitled to recover following termination. 35 The question which must therefore be decided is whether the forfeiture of the deposit which is deemed by s 160M(3) to be a disposal of a vendor's rights under the contract by way of discharging or satisfying them can be said to be consideration "in respect of" the disposal. When a purchaser commits a fundamental breach of a contract to purchase land which entitles the vendor to terminate the contract, the vendor may elect to accept the breach and terminate the contract or affirm the contract and seek specific performance of it. It was the former course which was taken in the present case. The contract, by its terms provided in clause 9 that the vendor was entitled to terminate by serving a notice and in such a case to "keep" or "recover" the deposit. The two alternatives reflect the possibilities that the deposit may either have been paid directly to the vendor before the breach or have been paid to an estate agent to hold as stakeholder for the parties. 36 The word "consideration" is a technical term in the law of contract. However, like many technical words in a statute, it may be used in either a technical or a non technical sense. The meaning will depend upon the context, cf Commissioner of Taxation v Skully (2000) 74 ALJR 504 at 509-10. In Skully it was held that the expression "consideration … for or in respect of" indicated that the use of the word "consideration" was not used in a technical sense. Rather than the technical meaning of a promise given or an act done in exchange for an act or promise by another party, it had, in the context there under consideration (the context was the taxation of eligible termination payments), the meaning of "recompense". In the context of stamp duty the word has been held to mean that which moves the conveyance which is liable to duty: Archibald Howie Pty Ltd v Commissioner of Stamp Duties (1948) 77 CLR 143 at 152 per Dixon CJ. 37 In the present context where the word "consideration" is used in conjunction with the words "in respect of" it is apparent that it does not have its narrow meaning in the law of contract. We see no reason why it could not comprehend the forfeiture of a deposit received in respect of the termination of the contract. It follows in our view that both ss 160M(6) and (7) could apply to the forfeiture of a deposit unless the provisions of s 160MA operate to exclude them from operation. 38 The applicants' principal submission is that neither s 160M(6) nor (7) can have operation because of s 160MA. It is to that section that it is now necessary to turn.
Whether s 160MA has application to exclude ss 160M(6) and (7) 39 It is the submission of the Commissioner that s 160MA(6), while capable of operation where the rights of a purchaser are terminated could have no application to the case where there is a termination of a contract of sale and the rights which are extinguished are the rights of the vendor. 40 Obviously s 160MA was introduced into the Act because of the width of s 160M(6) in particular. Clearly the entering into of a contract by an intending vendor and an intending purchaser operates to create rights in both. The rights created in the vendor in the present case consist of the rights the vendor has to enforce the contract so as to obtain payment of the balance of the purchase money upon completion, whether with or without the need to seek the assistance of a court in equity to obtain specific performance and the right to be paid or retain the deposit in the event that the deposit is brought to an end by breach. The rights under the contract may compendiously be referred to as "the vendor's rights". The creation of the vendor's rights would, if s 160M(6) applied, be deemed inter alia to be the acquisition by the vendor of an asset, namely the vendor's rights. On the part of the purchaser there is deemed not to be consideration for the deemed disposition by the purchaser. 41 The extract from the Explanatory Memorandum makes it clear that s 160MA covers the creation of rights in a purchaser by force of the contractual obligation which is entered into. By entering into the contract the vendor creates in the purchaser the right to require the vendor to transfer the property the subject of the contract to the purchaser. Such transfer would, itself, be a disposition of property. Whether there is any consideration for that deemed disposition would be an arguable issue, as the Explanatory Memorandum states. Interestingly the Memorandum makes no reference to the deposit as consideration for the creation of the purchaser's rights. The argument it raises is whether the ultimate payment of the purchase money might be seen to be consideration for the creation of the purchaser's rights. In any event it is clear from the terms of s 160MA that s 160M(6) and (7) can have no application to the creation of the right by the vendor in the purchaser. That, however, does not of itself mean that the subsections can have no operation so far as they operate to treat there to be a disposition by the purchaser to the vendor of the vendor's rights. 42 The question whether s 160MA operates to prevent the creation of the vendor's rights by the purchaser being a disposition to which s 160M(6) or (7) could apply depends upon whether it is correct to describe the vendor's rights as being the doing of a thing which would constitute the disposal of an asset for the purposes of the Part. The vendor's rights, so far as they are such as to require the purchaser to do anything, are rights to require the vendor to present a transfer duly signed by the vendor and, more especially, the right to require the purchaser to pay the purchase money. The case was argued on the basis that the payment of the purchase money would not of itself be a disposition of an asset to which the Act applies if only because Australian currency is treated, it would seem, as a medium of exchange rather than as an asset: s 160A(1). In any event, even if money were an asset, its cost base would likewise be its value in Australian currency so that the Part could have no operation to bring into assessable income any gain. 43 It can be accepted that, as a result of the decision of the majority in Orica, performance of obligations under an executory contract may be described as satisfaction of a chose in action and therefore, by virtue of s 160M(3), as a disposition of that chose in action; but it is difficult to see that s 160MA is intended to have the effect of treating the vendor's rights as being properly described as "a right in the vendor to require the purchaser to do any thing [which would] constitute the disposal of asset" by the purchaser. So to hold would produce the result that s 160MA negates the operation of both ss 160M(6) and (7) to every case of the creation of rights under an executory contract. Yet this, it may be thought, is the major area of operation of the sections. This leads to the result that, where s 160MA refers to a "disposition" it does so in the sense of a disposition of property in the ordinary sense of the word, or perhaps in the sense of the word as defined in s 160M(1), but not in the extended sense to which s 160M(3)(b) applies. In other words, s 160MA was intended only to apply to the class of case to which the Explanatory Memorandum referred and not to the creation of rights in the vendor by the purchaser under a contract. 44 On this view the result would be that ss 160M(6) and (7) would apply in the present case, but because s 160M(7) is subject to s 160M(6) it would be that subsection which would have application rather than subsection 7. From this it follows that we think the decision in Guy was wrong so far as it concerned these provisions. It is in this context that we would now proceed to re-examine the issue dealt with in Guy, that is to say, whether the forfeiture of a deposit under a contract of sale and purchase fell within s 160ZZC(12) of the Act.
The application of s 160ZZC(12) 45 The above discussion concerning the application of ss 160M(6) and (7) demonstrates the complexity surrounding the two-stage application of those sections in every case involving a contract of sale and purchase of land, and particularly where the contract is brought to an end and the deposit forfeited. One would have thought that in the case of what is a rather normal transaction the legislature would have dealt specifically with it, rather than leave the question to be dealt with by the application of the rather complicated analysis which the above discussion reveals. The question, therefore, is whether s 160ZZC(12) is, at least so far as it deals with forfeiture of deposits intended to do that. 46 Before considering the terms of s 160ZZC(12) it is useful to say something about the policy of the legislation in its application to dispositions of land, so far as that can be gleaned from the Act. After all, the question of statutory interpretation is one which requires the ascertaining of the meaning of the words which Parliament has enacted by reference to the context in which they appear, the word "context" being used in the broad sense: CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384; Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation (1981) 147 CLR 297, and as thus including the perceived Parliamentary policy. 47 One thing emerges clearly from the provisions of Part IIIA of the Act. It was the Parliamentary intention that if a sale of land, not being land on which there was erected a dwelling used as the principal residence of the taxpayer, produced a profit, that profit would, subject to indexation and incidental expenses, be included in assessable income. That being the case it would seem strange that Parliament would have intended that, where a contract of purchase and sale of such land was terminated and the deposit paid under it forfeited, the result produced would be that no such amount be included in assessable income. It is less clear what one might expect Parliament to have intended where there was a forfeiture of a deposit under a contract for the purchase and sale of residential land to which the provisions of s 160ZZQ(12) applied. On the one hand, where the situation as in Guy was that the vendor, following termination, proceeded to sell the residential land, it might be concluded, as was held in Guy as an alternative basis for the decision, that the whole amount, deposit and ultimate sale price, was properly to be characterised as being "in respect of" the one disposition, viewing the initial uncompleted contract and the ultimate completed contract as part of the one transaction. Such a policy would make sense. Where there was not one transaction involving a disposition, but rather there was but an original contract that was terminated and as a result the vendor of the residential land became entitled to the forfeited deposit, it would not be unlikely that Parliament would take the view that the putative vendor had made a profit upon which tax should be payable for the vendor still retained the dwelling and the ability to dispose of it without the disposition attracting the provisions of Part IIIA. 48 The language of s 160ZZC(12) is, to say the least, far from elegant or, worse, clear. The subsection uses two words which seem rather at opposition to each other, namely "forfeiture" and "prospective purchase or other transaction". The opposition can clearly be seen by contrasting two cases, the one said by the Court in Guy to be included within the subsection and the other the present case. 49 Where money is paid under a contract entered into prior to and in anticipation of a subsequent contract of sale, it is clearly apposite to refer to the purchaser under the proposed contract as being a "prospective purchaser". However it is not so clear that what is paid under the initial contract is "forfeited". It is interesting to examine a number of the cases referred to in Guy, a number of which derive from Stonham The Law of Vendor and Purchaser 1964 at pp 343-4 and consider the extent to which the provisions of s 160ZZC(12) might apply to them on the basis of what is said by the Full Court. 50 The first case is Sorrell v Finch [1977] AC 728. That was the case of a precontract deposit paid "subject to contract" in circumstances where, subsequently, negotiations in fact did not reach the stage of a contract. In the result it was held that the prospective purchaser had no right to recover the consideration paid from the putative vendor. Until the contract was formed the estate agent to whom it was paid (he subsequently disappeared and could not be sued) held the deposit paid to him as trustee for the purchaser, not the vendor. In so holding the House of Lords brought the law of the United Kingdom into conformity with the position that existed in Australia: cf Egan v Ross (1928) 29SR (NSW) 382. Obviously in such a case, s 170ZZC(12) could have no operation. Until a contract was in fact entered into, there was no deposit which a vendor could forfeit. 51 The next case is Chillingworth v Esche [1924] 1 Ch 97. In that case an agreement was entered into for the purchase of a nursery "subject to a proper contract to be prepared by the vendor's solicitors" and a deposit paid under it. Although a proper contract was prepared, the purchaser declined to proceed with the transaction and claimed the return of the deposit paid. It was held by the Court of Appeal that the agreement which had been signed was only conditional and did not constitute a binding contract to purchase and accordingly the purchasers were entitled to a refund of the deposit. Again no question of the operation of the subsection could arise. 52 The next, Masters v Cameron (1954) 91 CLR 353, is a case so familiar for its discussion of the possibilities that may arise where an agreement is reached "subject to contract" that it scarce needs comment. On the facts of the actual case it was found that there was no binding contract and since the deposit had been paid to the agent on terms requiring the agent to apply it once a formal contract had been entered into or otherwise return it to the purchaser, the purchaser was held entitled to receive the deposit. The deposit paid was, in the words of Dixon CJ, McTiernan and Kitto JJ: "an anticipatory payment intended only to fulfil the ordinary purpose of a deposit if and when the contemplated agreement should be arrived at." Indeed this was the normal prima facie inference to be drawn in such cases. As the Court made clear, the inference was only prima facie and could be displaced by the parties. 53 In Wright v Newton (1835) 2 Cr M & R 124, 150 ER 53, a contract of purchase of a leasehold public house was entered into subject to the consent of the landlord which was not forthcoming. It was held that the purchaser was entitled to a return of the deposit for the consideration had wholly failed. Again this was not a case to which s 160ZZC(12) could have application. 54 Henderson v Young (1912) 15 WALR 5 involved the payment of a deposit under a verbal agreement for the sale of land in circumstances where the payer of the deposit did not accept the terms of the subsequent written agreement. It was again held that the deposit had to be returned. 55 Richards v Hill [1920] NZLR 724 concerned a contract signed by the agent without authority of the vendor. It was held that the deposit paid under that contract had to be refunded by the agent to the purchaser when the purchaser did not proceed with the contract. 56 Finally, Whinfield v Lovell [1926] VLR 185 was another case where the contract under which the deposit was paid was "subject to contract". Again it was held that the deposit had to be repaid by the agent to whom it was paid when the contract was not proceeded with. 57 We would not suggest that the Full Court in Guy used these cases as examples of circumstances to which s 160ZZC(12) could apply, for certainly they were all cases to which it could not. They were used as authority for the obvious proposition that the right to retain or forfeit a deposit depended upon all the circumstances. However, what the cases do illustrate, as common experience tells, is that in the normal case before a formal contract eventuates a deposit paid would, unless there were express provision to the contrary, have to be repaid to the proposed purchaser. 58 A class of case to which the Full Court in Guy referred in its discussion, and presumably as a class of case to which s 160ZZC(12) would apply, was what the Court referred to as "a negative pledge or a right of pre-emption". By negative pledge was presumably meant an agreement whereby a prospective vendor agreed for a period not to deal with the land to enable a purchaser, for example, to carry out investigations prior to entry into a contract. While it would be possible (although not particularly appropriate) to refer to what was paid as consideration for this promise as a "deposit", it would obviously not be the case that such a "deposit" would be "forfeited", a matter not discussed in Guy. The amount paid by the prospective purchaser is consideration for the covenant obtained and is immediately the property of the prospective vendor. There is nothing to forfeit. Likewise consideration for a right of pre-emption is not ordinarily referred to as a deposit and what is paid is on no view forfeited. Inherent in the concept of "forfeiture" is the concept of loss, in the present context, loss of an interest: cf The Macquarie Dictionary 3rd ed. 1997, where one of the meanings given is "to lose, or become liable to lose, in consequence of crime, fault, breach of engagement etc...". The case of Mackay v Wilson (1947) 47 SR(NSW) 315 to which the Full Court refers in this connection was in fact an option case so that it would fall within the provisions of s 160ZZQ(3) directly and not by force of s 160ZZQ(12). 59 On the view taken by the Full Court, but excluding cases where there is no forfeiture, the only case to which s 160ZZC(12) would seem to apply would be a precontract contract where the parties had agreed that the prospective vendor would, if the contract did not proceed, become entitled to forfeit the deposit. Forfeiture could only arise where the amount paid was not immediately and unconditionally the property of the prospective vendor. That would generally only be the case where the deposit (or earnest paid for the performance of the contract: cf Workers Trust & Merchant Bank Ltd v Dojap Investments Ltd [1993] AC 573 at 578-9 referred to in Guy) had, in some circumstance, to be refunded. 60 What then is the difficulty with applying s 160ZZC(12) to a deposit paid under an ordinary contract of sale? First, what is paid is clearly a deposit on any view. Second, if the contract is terminated it is correct, and precisely correct, to refer to there being a forfeiture of the deposit. The forfeiture will arise where the contract has been cancelled or abandoned by the purchaser. The only obstacle, therefore, lies in the use of the phrase "prospective purchase". It was upon this phrase that the Court in Guy rested its decision. In doing so it referred to the dictionary meaning of "prospective", the case of Drewery v Ware-Lane [1960] 1 WLR 1204, the case of Sorrell v Finch (to which reference has already been made) and to an extract from Mr Stonham's work. 61 The dictionary meaning of "prospective" quoted (the quotation is from the Macquarie Dictionary 2nd ed. 1991) is "potential, likely expected". The first meaning given in that dictionary is not inconsistent with that quoted by the Full Court, which was "in the future". But the meaning of the phrase "prospective purchase" falls to be determined, not merely by reference to the word "prospective", but by reference to the complete phrase and in particular the word "purchase". No doubt it is correct to refer to a precontract contract as a contract prior in time to a purchase in the future and thus as a prospective purchase. However, the real question is whether it is correct or incorrect to refer to a contract which calls for completion in the future as a prospective purchase. We do not find the same difficulty as the Full Court in Guy did. A purchase of land is not completed until the purchase money is paid and an executed transfer handed over. That is when the sale actually takes place. Until completion, it is not inaccurate to treat the purchase as being in the future. Once the purchase money is paid the payer becomes a bona fide purchaser for value, but not before. 62 The case of Drewery depends, as most cases in this area must, upon its context. There, the agreement between an estate agent and his client, the putative vendor, required payment of a commission when a "prospective purchaser signs your 'purchaser's agreement'". It was held, not surprisingly, that in this context the words "prospective purchaser" meant a person who had the buying of the property genuinely in prospect. But what we are concerned with is not the words "prospective purchaser" but "prospective purchase". Both before a contract is entered into and during the time between its being entered into and completion, there is a "prospective purchase". Accordingly we find ourselves, unfortunately, unable to agree with the view put by the Full Court.
The Income Tax Assessment Act 1997 63 It was submitted for the applicants that we should take account of the Parliamentary intention revealed by the Rewrite. That Act represented a rewrite of parts of the 1936 Act in what is suggested to be "a clearer or simpler style": cf s 1-3 of the Rewrite. It was not intended to change the substance of the law, unless otherwise stated. 64 The Rewrite contains examples of the operation of the relevant provisions. Although these are not "operative provisions" they do form part of the Rewrite (s 2-45) and can be taken account of in construing it. It is the applicants' submission that in construing s 160ZZC(12) we should have regard to the example given in s 104-150, which section is the rewrite of s 160ZZC(12). It is submitted also that regard should be had also to the Explanatory Memorandum which accompanied the Tax Law Improvement Bill (No 2) 1997, which subsequently became the Rewrite. 65 Section 104-150 is in substantially similar terms to s 160ZZC(12). The changes like "prospective sale" instead of "prospective purchase", are of little moment. However, if they have significance at all, they probably favour the interpretation we would adopt of s 160ZZC(12). The section is in the following terms: "(1) CGT event H1 happens if a deposit paid to you is forfeited because a prospective sale or other transaction does not proceed. The payment can include giving property: see section 103-5. Example: You decide to sell land. Before entering into a contract of sale, the prospective purchaser pays you a 2 month holding deposit of $1,000. The negotiations fail and the deposit is forfeited. (2) The time of the event is when the deposit is forfeited. (3) You make a capital gain if the deposit is more than the expenditure you incur in connection with the prospective sale or other transaction. You make a capital loss if the deposit is less." 66 It will be noted that the example refers to a precontract contract. It does not refer to a forfeiture of a deposit paid under a contract of sale actually entered into. An example is just that, an example, it is not intended to be exhaustive of cases which might fall within the section. Even if it were appropriate to have regard to a subsequent statute to interpret a previous statute, a matter on which there are conflicting views: cf Grain Elevators Board (Vic) v Dunmunkle Corporation (1946) 73 CLR 70 at 85-6, Federal Commissioner of Taxation v Consolidated Press Holdings Ltd (1999) 166 FCR 51 at 64-5 and Hunter Resources Ltd v Melville (1988) 164 CLR 234 at 241, the example would not be definitive. Indeed, because the word "forfeited" is used, the example presumably is incomplete, in so far as it would be necessary that there be some condition requiring, for example, the deposit to be applied towards the deposit under a contract. 67 We have some difficulty in the submission that regard should properly be had in construing the Act, to the Explanatory Memorandum prepared for the Rewrite. That fits rather uneasily within s 15AB of the Acts Interpretation Act 1901 (Cth). The Explanatory Memorandum reads as follows: "Section 104-150 Forfeiture of deposit: CGT event H1 This section treats as a CGT event the forfeiture of a deposit relating to a prospective purchase or other transaction.
Should the Court depart from Guy? 69 It should by now be clear that we are of the view that Guy was plainly wrong. The present is a case where error should not be perpetuated. Both the policy of the legislation and its language lead to the conclusion that the forfeiture of a deposit under a contract of sale which has been terminated for breach gives rise to a gain which, subject to such adjustments as are required to be made, is to be included in assessable income. Although, in the view we take, all of ss 160M(6), (7) and s 160ZZQ(12) have application, because both ss 160M(6) and (7) are subject to the other provisions of Part IIIA, the consequence is that the provisions of s 160ZZC(12) will apply to bring into operation s 160ZZC(3). 70 We are firmly of the view that the Court should not be quick in declining to follow prior authority. This is so particularly where that prior authority may have been relied upon: cf John v Commissioner of Taxation (1989) 166 CLR 417 at 438-440. Although it may be said that taxpayers might, in the relatively short time since Guy was decided, have omitted from their returns gains arising from the forfeiture of deposits, and thus become liable to penalty, that is not, in reality, likely to give rise to any great difficulty. It is not as if there has been shown to be reliance upon the decision in the sense that steps were taken to forfeit a deposit because of the taxation consequences which Guy espoused. We are accordingly of the view that Guy should not be followed.
Conclusion 71 The questions in the stated case raise not merely the issue of whether Part IIIA of the Act operates to include any amount in assessable income, but also the question of the quantum of the amount. Neither the applicants nor the respondent addressed this question. By force of s 160ZZC(6), the cost base to a taxpayer of an option is taken to comprise the expenditure incurred by the taxpayer in respect of the grant and not any other amounts. By force of s 160ZZC(12)(b), the costs incurred in connection with the prospective purchase are to be taken to be the expenditure incurred in respect of the deemed grant of the option to which paragraph (a) of the same subsection refers. According to the facts as stated, the expenditure incurred was $888. Accordingly we would answer the question stated in the special case as follows:
I certify that the preceding seventy two (72) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Court.
Associate: Dated: 9 June 2000 Counsel for the Applicants: B J Sullivan SC, R M Gordon
Solicitor for the Applicants: Chrysiliou Moore Martin
Counsel for the Respondent: A H Slater QC, C J Bevan
Solicitor for the Respondent: Australian Government Solicitor
Brooks
Commissioner of Taxation
(1996) 67 FCR 68
(1999) 168 ALR 687
(1998) 194 CLR 500
(2000) 74 ALJR 504
(1948) 77 CLR 143
(1997) 187 CLR 384
(1981) 147 CLR 297
(1954) 91 CLR 353
(1946) 73 CLR 70
(1999) 166 FCR 51
(1988) 164 CLR 234
(1989) 166 CLR 417
(1992) 173 CLR 492
(1992) 173 CLR 550
(1996) 137 ALR 193