McDonald v Commissioner of Taxation

REASONS FOR JUDGMENT 1 On the evening of the budget of 19 September 1985 the announcement of a capital gains tax was made. It came into effect on the morning of 20 September 1985. Mr and Mrs McDonald, the present applicants, were assessed for the 1989 and 1990 income tax years on the basis that capital gains resulting from the disposition of a previously acquired property were subject to capital gains tax. It had been and remains the McDonald's contention that the subject property was acquired under an oral contract on 13 September 1985, ie a week prior to the introduction of the tax. The respondent Commissioner of Taxation has in contrast contended - and the Administrative Appeals Tribunal ("the Tribunal") has found - that no contract was made to acquire the property prior to the exchange of written contracts on 31 October 1985, albeit these were backdated to 13 September 1985. 2 The present appeal to this Court under s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) ("the AAT Act") challenges the Tribunal's conclusion on the grounds that its findings of fact gave rise to an error of law or were totally unreasonable and perverse. Additionally the decision has been challenged on the basis that the circumstances surrounding Mr McDonald's giving evidence by video conference link gave rise to a denial of procedural fairness. There is no substance in either claim. 3 It is common ground between the parties that the time at which the McDonalds acquired the property in question was, for the purposes of Part IIIA of the Income Tax Assessment Act 1936 (Cth), "the time of the making of the contract" under which the property was acquired: see s 160U(3). It is likewise common ground that it is immaterial that the contract at that time may have been unenforceable or subject to conditions precedent: see Kiwi Brands Pty Ltd v Commissioner of Taxation (1998) 90 FCR 64. Indeed the question whether the contract need be enforceable was the subject of a successful application to me from an earlier Tribunal decision: see McDonald v Commissioner of Taxation (unreported, 25 February 1998). 4 Before outlining the factual setting and the decision of the Tribunal, I should emphasise the restraint that should be demonstrated in analysing the reasons for decision of administrative decision-makers and tribunals. Reasons "are not to be construed minutely and finely with an eye keenly attuned to the perception of error": Collector of Customs v Pozzolanic (1993) 43 FCR 280 at 287; Minister for Immigration and Ethnic Affairs v Wu Shan Liang (1996) 185 CLR 259 at 271-272. That restraint is as necessary in appeals under the AAT Act as it is in judicial review proceedings: Canberra Tradesmen's Union Club Inc v Minister for Environment, Land & Planning [2000] FCA 203 at [30]. Further, the "proper principles" to be applied in examining a decision either in an AAT appeal or in judicial review proceedings do not admit of a reconsideration of the merits of that decision: Wu Shan Liang at 272. Importantly for present purposes those principles do not allow for doubtful fact finding to be characterised as an error of law: see Minister for Immigration and Multicultural Affairs v Rajalingam [1999] FCA 719 at [146]. The Factual Setting and the Tribunal's Decision 5 The respondent agreeing with the applicants' factual outline, it is sufficient for present purposes to reiterate that outline. "1. In September 1985 the Applicant and his wife commenced negotiations for the purchase of Roscommon, a property near Ulladulla NSW consisting of a residence and 40 acres of land. The price was $200,000. Negotiations proceeded as follows. 2. On 13 September 1985, the Applicant orally made an offer of $200,000 to purchase the property known as Roscommon and this offer was accepted by Mrs Ransom. 3. On 13 September 1985 the vendor's solicitor wrote to the Applicant's solicitor concerning Roscommon and stated "We enclose herewith Contract for Sale for your clients' perusal and approval and if approved for execution with a view to an early exchange. Kindly note that no legal liability shall attach to either party until such time as an exchange has been effected". 4. On 19 September 1985 the Applicant's solicitor replied enquiring if the vendor would be prepared to accept a deposit of 5% instead of the normal 10%. 5. On 10 October 1985 the Applicant's solicitor forwarded the Contract of Sale to the Applicant requesting that he and his wife sign it and advise of any inclusions (carpets, curtains, blinds etc) required to be added to the contract. The solicitor began the letter with a reference to the proposed purchase of Roscommon and then indicated to the Applicant that the property did not in fact have a frontage to the Princes Highway and stated that: "We have been very concerned about ability to identify the property accurately due to Mrs Ransom's solicitor not making available any Survey Certificate which might be held by the Mortgagee, the Director of War Service Homes or there being no Survey Certificate in existence in respect of the property and request that you telephone us upon receipt of this letter and discuss the proposed purchase with us". 6. On 16 October 1985 the Applicant sent the signed contract to the solicitor with a handwritten note requesting that the solicitor try to obtain a survey and stated "Providing you are reasonably happy that the designated road runs right to the highway in title please exchange contracts ASAP". 7. 18 October 1985 the Applicant's solicitor forwarded the signed contract to the vendor's solicitor and drew his attention to a number of alterations made to the contract. He then made the following request: "We further note negotiations between our respective clients have been proceeding for a considerable period of time and in pursuance of those negotiations we have dated the enclosed copy of the contract the 13th of September 1985 and you are to date the original contract the same date of the 13th September 1985". 8. On 31 October 1985 the vendor's solicitor replied "We refer to the letter of 18th instant and now enclose original contract signed by the vendor, to complete the exchange". The contract was dated 13 September 1985 but was not witnessed. 9. The Applicant and his wife initially lived in the "Roscommon" residence, but later subdivided the property into two equal size lots which were sold as follows: 10. The land only sold in November 1988 for $195,000. 11. The land and residence sold in March 1990 for $405,000. 6 I would note additionally the following. First, the Tribunal was without the benefit of the vendor's account of the contracting process as Mrs Ransom had died some time prior to the hearing. Secondly, both the McDonalds' and Mrs Ransom's solicitors gave evidence as well as providing their respective files to the Tribunal. In relation to the back-dating of the contract the Tribunal recounted the evidence of each as follows: (i) Mr McDonald's solicitor ("Mr B"): "20. … When asked why the contract was dated 13 September, Mr B stated that it was in accordance with instructions received from the male taxpayer just prior to writing the letter of 18 October 1985. He then said that the 13 September 1985 was inserted because it was the date that Mr P wrote to him enclosing the contract of sale for signing, which, in his view, was the date of agreement between the parties being the date on which the oral agreement was reduced to writing. Mr B gave evidence that he didn't recall asking the male taxpayer why a date was to be inserted that was in the past. Rather, he said he was satisfied that it was a significant date on file being the date of agreement being the parties." (ii) Mrs Ransom's solicitor ("Mr P"): "24. Mr P could not recall the actual conversation he had with Mrs R regarding the issue of the dating of the contract. He said that he recalled receiving instructions from her a few days prior to receipt on 22 October 1985 of Mr B's letter dated 18 October 1985 to the effect that the contract was to be dated 13 September 1985. He said Mr B's instructions therefore came as no surprise to him. Later in his evidence Mr P stated that the impetus for the dating of the contract came initially from Mr B in the course of a phone conversation, and that he confirmed this with Mrs R before agreeing to it. He too said that, having received confirmation that this was the relevant date for the contract, he had no cause to inquire further about it." 7 While accepting the solicitors' evidence as to the events that occurred in the course of preparation of the written contracts, the Tribunal nonetheless observed: "33. … the Tribunal cannot allow one aspect of their evidence to pass without comment. This was the evidence concerning the dating of the written contract, ie the insertion, in October 1985, of the 13th September 1985 into the written contract as the date of the making of the written contract against a background of each of the solicitors and the male taxpayer being aware of the introduction of the capital gains tax regime operative as and from 20 September 1985. Regarding this issue the solicitors could be said to have turned a blind eye to the reason why they were being instructed to date the written contract other than with the date of the actual signing and exchange which occurred in late October. As Mr B stated in his answer to a question pertaining to why he didn't feel it necessary to inquire as to the reason why he was being asked to date the contract 13 September 1985, he replied, tellingly, that "he [the male taxpayer] might have given me a reason that I wouldn't want to know". Clearly, on the accepted evidence, the only significance to be attached to 13 September 1985 was that it was a date prior to the commencement of the capital gains tax regime. It was certainly not the date of agreement as to the terms of the written contract and the Tribunal so finds." 8 The Tribunal had earlier indicated that: "22. Mr B's evidence was at variance with that of the male taxpayer in some significant respects. … Regarding the dating of the contract, the male taxpayer denied giving instructions that the contract was to be dated 13 September. Rather, he said that Mr B must have inserted the date on the contract in accordance with his own understanding as to the date of agreement from the initial phone conversation on or around 12 September 1985." 9 Mr McDonald's evidence was that there was an oral contract agreed with Mrs Ransom. The Tribunal did not accept his evidence: "34. … The Tribunal found the male taxpayer to be an unimpressive witness. The Tribunal gained the distinct impression that he tailored his evidence to suit his own ends and particularly so with respect to his evidence concerning the events leading up to the signing of the written contract." It then exemplified the latter. 10 Basing itself on the evidence in the files of the solicitors and on the solicitors' own evidence, the Tribunal found: "39. Some days prior to 13 September 1985 the male taxpayer (on behalf of himself and his wife) made an oral offer to Mrs R to purchase the subject property for $200,000. Shortly afterwards Mrs R agreed that she would accept the offer and sell her property subject to the drawing up, execution and exchange of a written contract which would embody all the terms and conditions to be agreed upon between her and the taxpayers. 40. Each party was at liberty to withdraw at any time before the drawing up, execution and exchange of a written contact embodying all the terms and conditions agreed to by the parties. 41. What was agreed between the parties prior to 13 September 1985 was never intended by the parties to be a contract but was merely an initial step along the path to establishing a contract if the parties were able to agree upon suitable terms and conditions. 42. In this regard the Tribunal would indicate that until the vendor and purchasers had executed the Agreement for Sale of Land and exchanged contracts they were still in the process of negotiating the terms and conditions of a proposed contract. This is evident from the correspondence which flowed between the parties from time to time." 11 In relation to the finding that the parties were still negotiating, the Tribunal had previously expressed the view that: "35….[Mr McDonald] did his best to advantage himself in the course of his negotiations with Mrs R as evidenced by the price he offered her, by the amount of the deposit, the inclusion of fixed floor coverings, wall to wall carpets, some curtains, blinds, light fittings, TV mast and antenna in the written contract, and more particularly so with respect to the inclusion of clause 36 in the written contract which reserved to he and his wife the right to rescind the written contract should it be found by search that the reserve road did not extent to the Princes Highway. The Tribunal is in no doubt that the male taxpayer (and inferentially his wife) would not have signed the written contract in October 1985 unless and until all that they needed to have resolved had in fact been resolved to their satisfaction. 36. If not so resolved the Tribunal is confident that in any subsequent litigation the male taxpayer would no doubt have maintained that there was no contract of any form envisaged by the parties until there was an exchange of written contracts and that until that point in time the parties were only in the stage of negotiating - any agreement on any topic was subject to the drawing up, execution and exchange of a contract in writing. 37. The considered view of the Tribunal is that that aptly depicts the situation as between the taxpayers and Mrs R. The Tribunal rejects the contrary assertions of the male taxpayer implicit or otherwise in the giving of his evidence which might be said to be relevant to the issues before the Tribunal." 12 In light of those findings and applying Masters v Cameron (1954) 91 CLR 353, the Tribunal concluded that the first time at which a contract at common law was entered into was on 31 October 1985 when written contracts were executed and exchanged. The Appeal, Submissions and Conclusions