Brown v Commissioner of Taxation

REASONS FOR JUDGMENT 1 This proceeding is an appeal to the Court by the applicant, Mr John Joseph Brown ("the Taxpayer") against an appealable objection decision made by the respondent, the Commissioner of Taxation ("the Commissioner") on 9 November 1999. By that decision, the Commissioner disallowed an objection by the Taxpayer dated 26 May 1999 to an amended assessment issued by the Commissioner to the Taxpayer on 28 March 1996 in respect of the year of income of the Taxpayer ended 30 June 1991 ("the Tax Year"). 2 The question in the proceeding is whether the value of a home unit situated at Mermaid Beach, Queensland ("the Unit") that was transferred to the Taxpayer on 11 July 1990 by Ray Development Corporation Pty Limited ("RDC"), which the Commissioner assessed at $984,725, was assessable income of the Taxpayer for the Tax Year. There are subsidiary issues concerning additional tax and interest imposed by the Commissioner. 3 Counsel for the Commissioner sought to read in the proceeding affidavits by officers of the Australian Taxation Office ("the ATO") being Mr Donald Caldbeck and Mr Graham Thomas Smith. The evidence relates to discussions that took place at a meeting held on 9 October 1995 ("the Objected Evidence"). The meeting was attended by the Taxpayer and Messrs Caldbeck and Smith. Also in attendance were Mr Phillip Henry and Ms Jenny Nairne from KPMG, the Taxpayer's tax accountants, Mr A.J. Stammers, a solicitor of Blake Dawson Waldron and Mr Achilles Constantinidis, a chartered accountant and business associate of the Taxpayer. Also present was Mr John Seberry, Deputy Commissioner of the Parramatta Office of the ATO. 4 The evidence as to the discussions at the meeting was tendered on behalf of the Commissioner on two bases. The first is that statements made by or on behalf of the Taxpayer at the meeting were said to constitute admissions by the Taxpayer. Secondly, it is said that statements made by the Taxpayer at the meeting would be relevant to his state of mind in 1990. 5 Counsel for the Taxpayer objected to evidence concerning the discussions at the meeting on two grounds. First, reliance was placed on s 131(1)(a) of the Evidence Act 1995. Secondly, the evidence was objected to as being irrelevant. I heard evidence on the voire dire from witnesses called by both the Taxpayer and the Commissioner. 6 In order to put the evidentiary dispute in context, it is necessary to consider the issue in the proceeding in a little more detail. The Commissioner, in his statement of facts, issues and contentions ("the Commissioner's Statement"), states the facts as follows: "1 In early 1990 the applicant arranged a meeting between Mr Brian Ray, a property developer, and a delegation of Japanese businessmen who were looking at purchasing timbered land, for the purpose of constructing cabins and building a golf course on that land. 2 On 5 June 1990 the Japanese delegation purchased a property situated in the Tweed Valley called King's Forest from Monacorp Pty Ltd, a company associated with Mr Brian Ray for the amount of $21 million. 3 By reason of the introduction referred to in paragraph one above, a company of which Brian Ray was a principal, the Ray Development Corporation Pty Ltd ("RDC") proposed to transfer to the applicant a property known as Unit 4, 79 Albatross Avenue, Mermaid Beach, Queensland (Lot 4 in Building Units Plan No. 10077 - County of Ward, Parish of Gilston, Certificate of Title: Volume 7538 Folio 20) (hereinafter "the Unit"). 4 By a letter dated 22 June 1990 RDC provided to the applicant a valuation report of the Unit. The letter advised that the property was valued at $925,000 to which the following additional expenses were to be added: (a) a furniture allowance of $30,000; (b) legal costs of approximately $40,000; (c) costs of re-marbling of the bathrooms of approximately $30,000. 5 By a letter dated 10July 1990, Hopgood and Ganim, the solicitors acting for RDC in respect of the transfer of the Unit confirmed their instructions that 'your Company is transferring the above Lot to Mr Brown in consideration of Mr Brown waiving any right to commission on the sale of property situation at Kings Forest Estate to Narui Narin Co. Ltd.' 6 On 11 July 1990 the Unit was transferred to the applicant by a transfer dated 11 July 1990 and executed by RDC for an expressed consideration of $1,000,000. 7 By a letter dated 12 July 1990 the applicant appointed David Mausell of Hopgood and Ganim to sign as his solicitor the transfer dated 11 July 1990 transferring the Unit from RDC to himself for an amount of $1,000,000. 8 By a letter dated 12 July 1990 Mr Evan Dickson of RDC advised the applicant that the commission payable to him on the sale by Monacorp Pty Ltd of Kings Forest Estate amounted to $1,000,000. According to this letter the commission was to be applied towards the purchase of the unit. The letter also requested the applicant to sign a letter which Mr Dickson had prepared. That letter was signed by the applicant. It said: 'I refer to the sale of the Kings Forest Estate in northern New South Wales to Nauri Gold Coast Pty Ltd for an amount of 21,000,000 in respect of which Monacorp Pty Ltd owes me $1,000,000 for commission payable for the introduction of the purchasers. I hereby authorise Ray Development Corporation Pty Ltd to distribute the $1,000,000 towards the following: In respect of purchase of Unit 4, 79 Albatross Avenue $925,000 In respect of furniture allowance $ 30,000 In respect of acquisition costs $ 40,000 In respect of other costs $ 5,000 Total $ 1,000,000 In addition to the above Ray Development Corporation Pty Ltd is to cover the costs of remarbling the bathrooms to an amount of $30,000.' 9 On 25 May 1992 the applicant lodged his return for the year ended 30 June 1991 but did not include any amount in his assessable income in relation to the receipt of the Unit. 10 In an interview conducted by officers of the respondent on 13 December 1994 the applicant initially maintained that the value of the Unit was income for the year ended 30 June 1992 of the Nuboye Partnership which was conducted by the applicant in partnership with Mr Al Constantinidis. The respondent investigated this claim and rejected it. 11 On 2 February 1995 the Unit was inspected by a qualified valuer of the Australian Valuation Office and was valued as at the date of transfer (12 July 1990) at $920,000. 12 In an interview conducted on 9 October 1995 in the office of the respondent, the applicant, who on that occasion was accompanied by his professional representatives agreed that the value of the Unit should be included in his assessable income for the year ended 30 June 1991. In relation to penalties the applicant said at this interview that he would strongly resist any penalties imposed as he had genuinely believed that the value of the unit was to be included I the partnership return of the Nuboye partnership. 7 Part of the Objected Evidence is a statement by Mr Caldbeck that he said there was "no way that the ATO could accept the commission payment" as belonging to the partnership. After Mr Smith showed the Taxpayer correspondence between the Taxpayer and the Commonwealth Bank in 1993, Mr Caldbeck asked the Taxpayer whether he agreed "that the commission income was correctly yours and not partnership income". The Taxpayer responded "Yes". 8 Mr Caldbeck says that the Taxpayer said that he would accept "the commission" as being included in his income tax return but would argue very strongly if any penalties were imposed. The Taxpayer asserted that he genuinely believed that the value of the Unit should have been included in the partnership return. Mr Caldbeck responded that if the Taxpayer believed that no penalties should be imposed, he should lodge a submission setting out his reasons and that Mr Caldbeck would consider such submission fully before reaching any decision. 9 Mr Smith's affidavit is to the effect that, after he showed the Commonwealth Bank correspondence to the Taxpayer, Mr Caldbeck asked him whether "you now accept that the value of the Unit was your income and not income of the partnership" and the Taxpayer replied "Yes". Mr Smith also says that the Taxpayer said that he would accept inclusion of "the commission" in his income but would not agree to any penalties. 10 The evidence on the voire dire as to the circumstances in which the meeting of 9 October 1995 was convened was unsatisfactory. The Taxpayer said that he asked for the meeting through his accountants. Mr Caldbeck confirmed that the meeting was called by Mr Brown or his accountants. Mr Smith, who was Mr Caldbeck's subordinate, was simply told by Mr Caldbeck that the meeting was to take place. 11 The Commissioner's Statement asserts that the Taxpayer had initially maintained that the value of the Unit was income for the year ended 30 June 1992 (sic) of the Nuboye partnership and that the ATO had investigated that claim and rejected it. Mr Caldbeck said that, as at October 1995, the ATO had sought a submission on the reason why the Taxpayer claimed that the value of the Unit was partnership income. He said that the ATO had approached the Taxpayer, through his advisers, for a submission on why it should be treated as partnership income. He also said that he had advised the Taxpayer's tax accountants, KPMG, that the ATO was preparing to make third party inquiries. 12 In the Objected Evidence Mr Caldbeck said that the purpose of the meeting "was to discuss the taxation affairs of the [Taxpayer] and in particular to discuss the Gold Coast unit received from Brian Ray of Ray Development Corporation Pty Ltd". Mr Caldbeck's affidavit then proceeds to set out the terms of the discussion that took place at the meeting. 13 Mr Smith said that, prior to the arrival of some of the participants in the meeting, Mr Stammers asked him: "What entities and companies are involved in the original sale of the land to the Japanese and what evidence does the Tax Office have about the sale. Also what case are you making out against my client." 14 Mr Smith replied: "The land was owned by Monacorp Pty Ltd who sold it to Nauri Gold Coast Pty Ltd. Ray Development Corporation Pty Ltd owned shares in Monacorp. The Unit was owned by Ray Development Corporation. Mr Brown received a commission on the sale and the value of the Unit has not been declared in Mr Brown's income tax return." Mr Smith's affidavit then proceeds to set out his recollection of the discussion that then ensued.