S T Y (Afforestation) Pty Ltd v Atkinson & Anor [2006] VSCA 283

"Significant tax deductions are available for all expenditure incurred by growers. Substantial after-tax returns should be achieved by growers."

The land in question was leased by the owner to STY. STY in turn leased the land to the trustee of the trust which held the subscription moneys and the trustee in turn leased allotments to investors, including Atkinson and his wife. A company called Environinvest was engaged by investors to manage the project.

6 The contractual right said to have been waived is contained in the lease between the landowner, STY, the trustee and Atkinson, dated 30 June 1999. The relevant provision is sub-clause 7.1(a):

"7.1 The Landlord HEREBY COVENANTS to:

(a) purchase from the Lessee the Lessee's right title and interest to the Eucalyptus globulus established on the Allotments in accordance with the provisions of this clause upon the written request of the Lessee to do so and to pay to the Lessee the amounts calculated in accordance with Item 6 of the schedule. The Lessee may give a written request to repurchase trees on an Allotment in each of the years that the Lessee wishes the Landlord to repurchases (sic) trees."

I will refer to the right thus conferred as the "buy-back right".

7 The availability of tax deductions to investors depended essentially on the Australian Tax Office being satisfied that the investors were carrying on a business of afforestation. In a product ruling dated 16 June 1999, the Tax Office ruled that the lease fees and management fees would be deductible to the investors:

"3. The class of persons to whom this Ruling applies is those who enter into the arrangement described below on or after the date this Ruling is made. They will have a purpose of staying in the arrangement until it is completed (i.e., being a party to the relevant agreements until their term expires) and deriving assessable income from this involvement as set out in the description of the arrangement. In this Ruling these persons are referred to as 'Growers'.

4. The class of persons to whom this Ruling applies does not include persons who intend to terminate their involvement in the arrangement prior to its completion, or who otherwise do not intend to derive assessable income from it. Specifically, the Ruling does not apply to persons who enter the arrangement and who exercise the buy-back election. So far as persons who exercise the buy-back election are concerned, circumstances surrounding the exercise of the election may be relevant to their entitlement to deductions. Those persons may seek a private binding ruling on the tax consequences of such action.

...

44. Growers have a continuing interest in the trees from the time they are acquired until harvest. The afforestation activities, and the fees associated with their procurement, are consistent with an intention to commence regular activities that have an 'air of permanence' about them. The Growers' afforestation activities will constitute the carrying on of a business." (emphasis added)

8 On 9 May 2001, the ATO published a general policy in relation to buy-back mechanisms. It stated:

"Various buy-back mechanisms have been examined in connection with a number of primary production arrangements ... We have decided that we will decline to rule in these cases. The reasons for this are that tax treatment of the initial and any ongoing fees are not settled, and that this type of feature can significantly detract from finding that the arrangement will amount to the carrying on of a business (the argument typically put forward for the fees being deductible under the general deduction provisions)."

9 In June 2000, Non-Commercial Tax Loss Rules were inserted as Division 35 of the Income Tax Assessment Act 1997 (Cth). The Rules prevented losses from business activities being offset against an individual's other assessable income unless one of four tests was met, or the Commissioner exercised his discretion in the taxpayer's favour.

10 On 30 July 2001, Environinvest wrote to growers (including the respondents) offering to apply on their behalf for an exercise of the Commissioner's discretion, and requesting the growers to complete and return an enclosed written consent. (Atkinson said in evidence that he had advocated this course.) The respondents completed and returned their consents. The consent form stated:

"I consent and authorise [Environinvest] to prepare, lodge and negotiate the terms of a Private Ruling regarding my participation in the afforestation product described in the 1999 Prospectus ... for and on my behalf in relation to the exercise of the Commissioner's discretion in respect of the non-commercial loss rules pursuant to section 35-55 of the Income Assessment Act 1997. Consent to and request that all further correspondence be forwarded to Ms Miffany Pescott of [Environinvest]. Consent and authorise [Environinvest] to provide the ATO with copies of my documents supplied with my application."

11 On 9 April 2002, Environinvest sent a further letter to the growers, including the respondents, regarding Environinvest's application on their behalf for an exercise of the Commissioner's discretion regarding non-commercial tax losses. The letter stated that the ATO had requested Environinvest to ask its investors to indicate whether they intended to exercise the buy-back right. The letter stated further that the ATO had indicated its belief that those people who intended to exercise the buy-back were not carrying on a business. As a result, the letter said, it was almost certain that the Commissioner would not exercise his discretion in favour of those persons, such that their deductions would be quarantined or possibly even disallowed altogether. The letter went on to state:

"You will find enclosed a statement on which you need to indicate whether or not you intend to exercise the buy-back option contained in your Project. Also enclosed is a stamped addressed envelope to return your notification. Please complete the form and post it back to us as soon as possible."

12 The letter to each of the respondents enclosed a copy of a letter from Environinvest's solicitors, Hall & Wilcox, which explained the issues concerning the buy-back right and the ATO's position. Hall & Wilcox's letter stated:

"If you intend to exercise the buy-back option, please confirm this in writing to Environinvest by Friday 26 April 2002. We ask that you complete the attached form and either fax it or send it to Environinvest. If you do not confirm your intention in writing by this date, it will be taken that you do not intend, at any stage during the Project, to exercise the buy-back option.

...

If you do not intend to exercise the buy-back option, you need not do anything."

Neither respondent returned the form to Environinvest.

13 In evidence, Atkinson said he was concerned about - and had discussed with Ms Pescott of Environinvest - how far he would have to go in saying what he would and would not do in the future about the buy-back right. He said to Ms Pescott, "My present intention may not be my future intention." Ms Pescott responded, "It's not just your present intention. It has to be your intention for the life of the project". Atkinson responded, "It is present intention that is relevant."

14 In evidence, Atkinson said he had known that a present intention to exercise the buy-back right in the future would be an impediment to the Tax Office's exercise of discretion in his favour with respect to undeferred deductions. He also knew that the converse was true: if he had no such present intention, he was likely to get a favourable exercise of discretion.

15 On 30 April 2002, Environinvest wrote to the ATO, stating that all growers had indicated that their intention was not to exercise the buy-back right. On 4 June 2002, the ATO issued favourable private rulings to each of the respondents. Each ruling stated (in part):

"Your Forestry activity is as described in the Prospectus. Notwithstanding the presence of clause 7 of the Lease Agreement between Blackburne Pty Ltd and S.T.Y. (Afforestation) Pty Ltd, you will not take up the option contained therein."

16 On 17 December 2002, Atkinson emailed Environinvest asking how payment in advance (of annual project fees) operated if a grower subsequently elected to take the buy-back, and requesting confirmation there was no implicit forfeiture of the buy-back which Environinvest would rely on if a grower participated in the early payment option. Environinvest responded:

"Environinvest has never implied implicitly or explicitly that it intends to forfeit the buy-back. Only that it is now our and our advisors' opinion, that the ATO would challenge Growers deductions in their entirety with penalties, if a Grower decides to exercise a buy-back (as previously discussed)."

On 18 June 2003, Atkinson wrote to Environinvest advising that the second respondent had exercised the buy-back for 2003 and asking for confirmation.

17 Atkinson said in evidence that he had no intention, at the time the enquiry was made of him by Environinvest, to exercise the buy-back right in the future. It was not suggested at trial, nor has it been suggested on the appeal, that this was anything other than a true statement. Atkinson also said that he was quite clear that he might change his mind subsequently and that, if he did so, any favourable ruling obtained on the basis of the earlier statement of (lack of) intention would be inapplicable.

18 As I have said, the letter seeking from Mr Atkinson and his wife a statement of present intention about the buyback right was not responded to by either of them. The letter had made plain that non-response would be taken as a statement that there was no present intention to exercise the buy-back right in the future. Given the frequency of the communication between Mr Atkinson and Environinvest, it seems clear enough that the non-response was intended by both respondents to convey that they did not intend at that time to exercise the buy-back right in the future. As I have already mentioned, Mr Atkinson fully understood the significance of his response to that question.

19 In the end, however, it is unnecessary to make any finding in that respect. It is sufficient for the disposition of the appeal to proceed on the assumption most favourable to the appellant - that what occurred at that time was the making of a statement, by silence, by each of the respondents that he/she had no present intention to exercise the buy-back right at any time in the future.

20 Any characterisation of the respondents' statement of present intention must necessarily be informed by the purpose for which, and the context in which, that statement was sought. The very letter which requested the statement of present intention adverted to the possibility that there might be a later change of mind, which could have potential adverse tax consequences for the investor. It said:

"Please note that should you later exercise the buy-back option, the Commissioner may either:

1. defer the claiming of your deductions to an income year when the project generates assessable income; or

2. disallow all deductions for all income years outright."

In these circumstances, in my view, it is untenable for STY to argue that the (implied) statement - that they had no present intention - was a renunciation or abandonment of the right altogether.

21 At one point, Mr Clough appeared to contend that it was a condition of the favourable ruling which Mr Atkinson and his wife sought and obtained from the ATO that they give up or abandon the buy-back right. Suffice it to say that there is nothing in any of the tax documentation to support this characterisation. On the contrary, the private ruling also expressly adverted to the possibility that the taxpayer's position might change subsequent to the ruling. The ruling concluded with these words:

"This means that any 'loss' for that activity can be taken into account in calculating your taxable income for those years, provided that the arrangement carried out does not differ materially from that described in the ruling. If there is a material difference you may need to apply for another private ruling on how paragraph 35-55(1)(b) would apply to those changed circumstances." (emphasis added)

22 We have been assisted by helpful submissions on both sides about the relevant law on waiver and election. For my part, I am content to follow the approach of Chernov, J.A. in Zhang and Philip Jones Pty Ltd v Shanghai Wool and Jute Textile Co Ltd:[2]

"As was pointed out in Mann v Carnell, and by Robert Walker, L.J. in Oliver Ashworth (Holdings) Ltd v Ballard (Kent) Ltd, 'waiver' is a vague or imprecise term that is used in many senses, and often must be defined according to its context. ... Nevertheless, the common thread that runs through the several judgments in Verwayen that deal with waiver as such is that, in general, waiver is constituted by the deliberate, intentional and unequivocal release or abandonment of the right that is later sought to be enforced."[3]

23 It is also necessary to refer to what Brennan, J. said in Commonwealth v Verwayen:[4]

"As a right is waived only when the time comes for its exercise and the party for whose sole benefit it has been introduced knowingly abstains from exercising it, a mere intention not to exercise a right is not immediately effective to divest or sterilize it. Vaughan B. in Chapple v. Durston was precise in speaking of a defendant's failure to plead a time bar not as a waiver but as the foundation for a presumption that the defendant 'intends to waive it.' Waiver of a time limitation which bars a remedy occurs only when the time for granting the remedy arrives, that is, the moment before judgment. Until that time arrives, the time limitation is not waived. If a party is to be held to an intention to waive the limitation, it can be only by contract or estoppel or, where the intention to waive appears from a failure to plead the limitation, by refusal of leave to amend the pleading (if leave be necessary and refusal of leave be justified)."[5]

24 In the present case, the time had not come for either of the respondents to exercise the buyback right. If - for example - the buyback right had been available for exercise only up to a certain date, and that date had been allowed to pass without the right being exercised, STY could have argued with real force that the respondents had waived the right, by engaging in conduct inconsistent with the continued existence of the right. But that is not what occurred here. This was no more than a statement of present intention not to exercise a right in the future. For the reasons I

have given, that is not - and could not be characterised as - a waiver of the right, or the adoption of a position inconsistent with the future exercise of the right.

25 Accordingly, in my opinion, the appeal should be dismissed.

26 I agree. The appellant's case as pleaded was that the respondents had, by their failure to respond to the Hall & Wilcox letter of 9 April 2002, unequivocally conveyed to the appellant a choice not to exercise the buy-back option or, alternatively, a determination to abandon the option. In my view that contention was untenable. The penultimate paragraph of the attachment to the Hall & Wilcox letter read:

"You will find enclosed a statement on which you need to indicate whether or not you intend to exercise the buyback option contained in your Project. Also enclosed is a stamped addressed envelope to return your notification. Please complete the form and post it back to us as soon as possible."

27 To fail to respond to that letter was in no way to convey an unequivocal election not ever to exercise the option or a determination to abandon the option. As the learned trial judge said in his reasons for judgment:

"Hall & Wilcox were not contemplating a situation in which a person would be agreeing permanently to deprive himself of his rights to the buyback under the lease by filling in the form and posting it within the due date. ... Those are not the terms in which the proposition was put under the aegis of Environinvest through their advisers Hall & Wilcox. ... Whether or not they exercised the option or notified the exercise of the option does not in the terms of the Hall & Wilcox letter preclude them from doing so. It might have unpleasant taxation consequences and other forms of disability but there is no legal bar to it in the contemplation of the author of the letter which left the filling in the form to inform the recipient Environinvest of the exercise of the option."

28 To be fair to the appellant, it should be noted that it also relied on a statement

contained in the income tax ruling which was obtained that the respondent would not exercise the buy-back option. In oral argument counsel for the appellant submitted that the statement showed that the respondents knew that it was a condition of the ruling that the buy-back option would not be exercised and thus that they must be taken to have elected not to exercise the option or, alternatively, to have abandoned the option at the very time when a choice had to be made between seeking a favourable ruling dependent upon stipulation of the condition or, alternatively, giving up the quest.

29 In my view, there are two answers to that contention. First, the ruling expressly contemplated that the taxpayer may in future change its position, in the paragraphs to which the learned President has referred at page 289 of the appeal book. Secondly, and in any event, the ruling and its conditions were, as between the appellant and the respondents, res inter alios acta. If I take an option to purchase land and before the date for exercise of the option I communicate to the Commissioner of Taxation an intention not to exercise the option, I do not thereby give up the option as against the vendor. Any consequences of my actions or my communications with the Commissioner enure only as between the Commissioner and me. Of course it might be different if the vendor heard of my communications to the Commissioner and relied upon them to his detriment, or perhaps even if he heard of them and they were such as objectively to be construed as constituting a determinative election to abandon the option or to choose not to exercise it. But that is not this case. Here, as the judge plainly and correctly found, the communications as between the respondent and the appellant were such both as objectively and subjectively not to be capable of sustaining such a construction.

30 Accordingly, I too would dismiss the appeal.

31 The appellant's contention in substance was that statements made to the

Australian Tax Office by law extinguished the respondents' buy-back rights under their contracts; that is to say that, upon the making of the statement to the Australian Tax Office, the respondents did not intend to exercise their buy-back rights; they elected to no longer rely upon them or abandoned those rights by unilateral waiver. This is not a case of election between contractually conferred rights, nor a case where the inconsistent legal right arose as a consequence of non-observance of a statutory requirement or by operation of the common law.

32 Counsel for the appellant cited no authority for the proposition that communications by a party to the contract to a third party which contained assertions of a position inconsistent with a right under the contract could extinguish that right. I thus regard it as, to say the least, uncertain that such a proposition can be sustained. Assuming it to be right, without so deciding, I am not persuaded that any communications made to the Australian Tax Office through the appellant's representatives on behalf of the respondents involved any unequivocal taking up of an inconsistent position which extinguished the rights that existed under the contract. The evidence showed that neither contracting party or the Australian Tax Office understood the respondents to have abandoned their contractual right. Rather it was understood that it was the respondents' present intention not to exercise that right thought they may in the future change their mind and choose to do so.

33 In Immer v. Uniting Church in Australia[6], in the judgment of Brennan, J., it was observed:

"An act amounting to an election must be unequivocal. Where a contract can be terminated at the option of a promisee, the right to terminate is not necessarily lost by the promisee doing any act consistent with the continuance of a contract. If the act is also consistent with the reservation of a right to terminate in certain events, the right to terminate is not lost by the doing of the act."

That line of reasoning, in my respectful view, is apposite to the present

circumstances.

34 For the reasons given by the learned President and my brother Nettle, I too would dismiss the appeal.

[1] The position of the second respondent, his wife, is for practical purposes identical. It seems clear on the material that Mr Atkinson acted on her behalf as her adviser and her agent in all relevant respects.

[2] [2006] VSCA 133.

[3] At [14].

[4] (1990) 170 CLR 394

[5] At 427 (emphasis added).

[6] [1993] HCA 27; (1993) 182 C.L.R. 26 at 30.