McDonald v Commissioner of Taxation

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

STONE J: 4 This is an appeal from a decision of a judge of the Court (Finn J) confirming a decision of the Administrative Appeals Tribunal ("AAT"). The issue is the liability of the appellants under Part IIIA of the Income Tax Assessment Act 1936 (Cth) ("Act") to pay tax on capital gains derived from the sale of certain property. The capital gains tax provisions do not apply to the disposition of property acquired before 20 September 1985. Section 160U(3) of the Act provides: "where the asset was acquired or disposed of under a contract, the time of acquisition or disposal shall be taken to have been the time of the making of the contract." 5 It is common ground that the property was acquired in 1985 but the parties are in dispute as to the precise date on which it was acquired within the meaning of s 160U(3).

Procedural background 6 The property was subdivided and disposed of in separate parcels during the financial years ending on 30 June 1989 and 30 June 1990. On 23 August 1993, the Commissioner of Taxation issued a number of amended assessments to the appellant taxpayers including for the above income years. These assessments, which included capital gains in respect of the property in the assessable income of each of the taxpayers for these years, have been the subject of two appeals to the AAT and two appeals to this Court. The taxpayer challenged these assessments arguing, in so far as is relevant here, that the property was acquired under an oral contract which was made on 13 September 1985 and that, therefore, the capital gains tax regime did not apply. 7 In the first appeal, the AAT held that the reference in s 160U(3) to the "time of the making of the contract" meant the time at which an enforceable and binding contract was made. The Tribunal found that the contract did not come into existence until 31 October 1985, the date on which written contracts were exchanged between the vendor and the appellants. Therefore, it held that the time of acquisition of the property was after 20 September 1985 and that the capital gains tax regime applied. 8 On appeal to this Court, Finn J ((1998) 80 FCR 248) held that there was no reason to ascribe a date to the "making" of the contract "other than the date that would be ascribed to it at common law" even though such a contract may be unenforceable or even illegal at the time it is made. His Honour gave careful consideration to whether the error of law which the AAT had made in interpreting the section was material. The appellants' argument was that, because the AAT had focused on whether there was a legally binding and enforceable contract, it had not properly addressed the question of whether an oral contract had been made as at 13 September, as alleged. After examining the AAT's reasons, Finn J concluded at 252 that he was "not satisfied that the decision could not have been affected" and therefore remitted the case to the AAT for reconsideration in the light of his decision as to the proper interpretation of s 160U(3). The AAT (differently constituted) held that the relevant contract was made after 20 September 1985. 9 On appeal from this second decision of the AAT, Finn J held that that this conclusion was "unexceptionable" and that AAT's reasons were without error ((2000) ATC 4271, (2000) 44 ATR 226, [2000] FCA 577). His Honour also rejected the appellants' claim that the hearing before the AAT had involved a breach of natural justice. The appellants initially appealed from the whole of Finn J's judgment. However, at the hearing, Mr Moore, counsel for the appellants, advised that the appellants had abandoned their appeal on the natural justice point.

The facts and evidence 10 At the hearing of the second appeal to this Court, Finn J adopted the following outline of the facts prepared by the respondent and agreed to by the appellants. "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. 11 Unfortunately the death of the vendor denied the AAT the benefit of any direct evidence from the vendor. In his evidence before the two tribunals, the first appellant was adamant that he had reached an agreement with the vendor that the contract was to come into effect on 13 September 1985. He was unable to explain why the vendor's solicitor would have noted in the letter of 13 September that there was no liability until exchange. He stated that he did not regard any of the discussions between the parties' solicitors concerning the amount of the deposit, the survey and searches and the extent of the inclusions as having any significance for the issue of when the parties became legally bound. Not surprisingly, in the first AAT decision, the tribunal did not find Mr McDonald's evidence to be very helpful and commented: "Where there is a discrepancy between the taxpayer's evidence and the contemporaneous records I prefer to rely on the objective evidence of the contemporaneous records. The taxpayer's evidence was vague and imprecise. His explanations for the discrepancies between his evidence and the documentation was unsatisfactory, in that on being confronted with a document which contradicted his evidence that an agreement had been made, he simply reiterated his understanding or his intentions at the time." 12 The second AAT decision also contained a finding that the first appellant's evidence was unconvincing, commenting: "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. Particularly unconvincing was his evidence as to the reasons for purchasing the subject property, his denial that he gave instructions to his solicitor Mr. B to write 13 September 1985 on the written contract (despite giving evidence before the previous Tribunal that he had told his solicitor that that could be the date of the contract), his resolve to proceed with the sale irrespective of such matters as the deposit being reduced, the inclusion of fixtures and fittings of the home on the property and the written contract being subject to a confirming search regarding an adjoining reserve road." 13 The appellants' solicitor stated that the backdating was done on his clients' instructions and that he did not ask why a past date was to be inserted. He was satisfied that it was a significant date in the matter being the date of the agreement between the parties. The vendor's solicitor merely stated that it was done at the request of the appellants' solicitor and after confirmation by the vendor.

Submissions and reasoning 14 Mr Moore provided detailed written and oral submissions in support of his argument that the contract pursuant to which the appellants acquired the property was made on 13 September 1985. He submitted that facts accepted by the AAT showed that by this date the appellants had made an oral offer to purchase identifiable property at a specified price and that the vendor, Mrs Ransom, had accepted this offer. Mr Moore submitted that the AAT's mistake had been to confuse the task of identifying the time of the making of the contract with the quite different task of identifying the time when the contract became enforceable. Moreover, the finding of the AAT that the parties remained in negotiations until the date of exchange of the written contract on 31 October 1985 was said to be "totally unreasonable and perverse". Concerning the statement by the vendor's solicitor in the letter dated 13 September 1985 that there was to be no liability until exchange, Mr Moore submitted that the evidence showed it was made without authority. The vendor subsequently countermanded the position and instructed her solicitor to date the contract 13 September 1985. 15 Mr Erskine of counsel, for the respondent, pointed out that in addition to the factors identified by the appellants as being necessary to a valid contract, it is also necessary that the parties intend to enter into a binding contract. He pointed to a clear finding by the AAT that the parties did not intend to be legally bound until exchange of contracts. It is worth noting the AAT's comments: "… this Tribunal has undertaken the task of examining the totality of what has been placed before it with respect to whether the accepted evidence discloses any contract recognised by the common law and the time of the making of any such contract. The Tribunal finds that there was one contract and one only which had the attributes prescribed by the common law and that was the Agreement for Sale of Land referred to throughout these reasons as "the written contract". Until the execution and exchange of the written contract there was not a contract and what had taken place prior to that point in time clearly fell into the 3rd class delineated in Masters and Another v Cameron (1954) 91 CLR 353. As to the time of the making of the above contract the Tribunal finds that it was 31 October 1985. This was the first time that there was a meeting of the minds, a consensus reached incorporating an intention to form legal relations. This was the time that the common law would acknowledge that a contract had come into existence between the parties." 16 The AAT's finding of fact that 31 October 1985 was the first time that the parties had reached a consensus with the intention to form legal relations was made after a careful examination of the evidence. In my opinion, this finding was open to the AAT on the evidence and it is not for the Court to interfere with that finding. 17 In support of his contention that a binding agreement was reached on the earlier date (13 September), Mr Moore submitted that this was a commercial agreement and that it is rare for commercial agreements not to be intended to have legal consequences. He referred the Court to relevant passages in Carter and Harland Contract Law in Australia 2nd ed. 1991 at [401] and the cases referred to there. However, this argument does not take account of the strong convention concerning the sale of land in New South Wales which has been the subject of judicial comment on numerous occasions. 18 In Allen v Carbone (1975) 132 CLR 528 at 533, the High Court commented that the "usual method of selling real estate in New South Wales is by means of the signing and exchange of contracts in the form approved by the Real Estate Institute of New South Wales". It relied on this practice to support an inference that the parties did not intend an informal agreement for the sale of the property to be binding. In GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631, McHugh JA in the NSW Court of Appeal referred to the method of exchange at 634 and stated that "even though the parties agree in writing that real estate is sold for a specified price, the presumption is that no binding contract exists until 'contracts' are exchanged". This presumption or expectation has been accepted in many other cases; see for example Sindel v Georgiou (1984) 154 CLR 661 at 665-666, Elgas Ltd. v A. J. Young Industries Pty. Ltd. (1987) NSW ConvR ¶55-329 at 57,016 per McHugh JA and Kirton v Nethery (1996) 7 BPR 14,954. In Lezabar Pty. Ltd. v Hogan (1989) NSW ConvR ¶55-468 ("Lezabar")at 58,387-58,388, Gleeson CJ noted that in Allen v Carbone (above) the High Court had referred to this issue as "the first consideration" and commented: "One reason why this consideration is important is that the form of contract ordinarily used contains important provisions for the protection of both parties, and a court would not lightly attribute to knowledgeable parties an intention to forgo such protection." 19 In this case, as in Lezabar, the agreed facts show that the parties were aware of this method of selling land and contemplated that contracts of the usual kind would be exchanged in due course. They both put the matter in the hands of their solicitors. On the very day on which the parties agreed on the sale, the vendor's solicitor forwarded a contract to the purchaser's solicitor and specifically noted that "no legal liability shall attach to either party until such time as exchange has been effected". There followed a period of negotiation involving such things as the amount of the deposit, the inclusions and the identification by survey of the property. All of these factors tend to confirm that the parties here adopted the usual method of sale and purchase of land in New South Wales and that they did not intend to be bound by the oral agreement between them. 20 Neither my comments here nor the authorities cited above should be taken as denying that it is possible for a contract for the sale of land in New South Wales to be effected other than by exchange of contracts. Ultimately, the intention of the parties as to whether they enter into binding obligations is decisive; Masters v Cameron (1954) 91 CLR 349 at 360-2. In reaching the point from which they intend to be bound, they may agree that one of the terms of the contract is that certain obligations under it are to be retrospective to a specified date. However, the date of the formation of the contract is a matter of law and the parties cannot, by backdating the written document, rewrite history with the effect that a binding contract existed from the specified date. 21 No special form of words is necessary to ensure that an agreement is binding or not binding. However, the practice in New South Wales of proceeding by exchange of contracts is so entrenched that a party contending for an intention to proceed other than in accordance with the established procedure will need clear evidence to support the contention. As Bryson J commented in Dowdle v Inverell Shire Council (1999) 195 ANZ ConvR 429 at 431: In New South Wales courts approach questions relating to supposed informal contracts for the sale of land with a disposition towards finding that the parties intended to use the ordinary mechanism of an exchange of contract to achieve a binding contract." 22 In the decision appealed from, Finn J pointed out (at [15]) that the crucial aspect, from the appellants' point of view, was that the Tribunal did not believe Mr McDonald. "It was not because of error of law that Mr McDonald lost his application to the Tribunal. It was because he was not believed. And once his evidence was disregarded, that which remained pointed inexorably to the conclusion at which the Tribunal arrived." 23 I respectfully agree. The appeal must be dismissed with costs. I certify that the preceding twenty (20) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Stone.

Solicitor for the Respondent: Australian Government Solicitor