Salvatore Sanfilippo v Anvest Holdings Pty Ltd and Ors

The Anvest/Tamburri Contentions and Landco's FY 12 Tax Return 12Anvest/Tamburri contend that they are entitled to validly deduct $229,373.50 from the vendor finance on account of capital gains tax with respect to the sale of the Kookaburra Road property. Mr Stitt elaborated their argument through a number of steps. This section of these reasons sets out their argument and relevant supporting facts. The next section of these reasons deals with the issues raised by Mr Sanfilippo's contentions. 13Anvest/Tamburri contend as follows. CGT was payable by both Landco and Beneficial (50 per cent each), on the sale of the Kookaburra Road property on 27 December 2011. Landco's CGT of $466,741.20 has been paid in full. This was achieved by the recent payment of $121,240.50 in liquid funds to the ATO, together with a tax offset in Landco's FY12 tax return which resulted in a loss of a tax benefit to Landco in future years in an amount of $345,500.70. Whether income tax or CGT applies to a particular receipt the tax rate the company's is a flat 30 per cent. 14CGT on the Sale of the Kookaburra Road property. The sale proceeds of the Kookaburra Road property were $4,250,000 exclusive of GST. Landco's FY12 tax returns shows that the capital gain on that amount was $3,111,608. The property had been purchased in 1998 for $1,080,000. Landco's claim was that on that capital gain of $3,111,608 that Beneficial and Landco had a CGT liability of $917,494 on the sale of the whole of their interests in the Kookaburra Road property. Half of that $917,494 represented Landco's 50 per cent of the CGT liability, namely $458,747. Half of that again represents each of the plaintiff's and the defendants' claimed share of Landco's CGT liability on the sale, namely $229,373.50. 15The Anvest/Tamburri parties submit that the December 2010 deed clause 4L(5) requires the parties to conduct themselves on the basis that "Landco will pay from any net proceeds due to Landco" any applicable capital gains tax. After causing Landco to pay the $458,747 to the ATO, Mr Tamburri claims that clause 4L(5) now authorises Landco to deduct the plaintiffs share of $229.373.50 from the vendor finance. 16After correcting for some errors, Landco's CGT obligation on Landco's portion of the capital gain ($1,550,804 - as shown on Landco's 2012 tax return) amounted to $466,741.20. It is not in issue that this amount was subsequently adjusted to $458,747. This amount was met from three sources: Date Payment Amount 16 May 2014 PAYG instalment $19,181 27 May 2014 Cheque paid to the ATO $102,059.50 FY12 Tax Return Tax benefit from applied past tax losses $345,500.70

17These three figures add to $466,741.20, as claimed in the Anvest/Tamburri defence. But the actual CGT calculation relied upon in the proceedings is the slightly adjusted amount of $458,747. The difference of $7,994.20 is accounted for by some adjustments of no relevance to the issues in these proceedings and for which the Anvest/Tamburri parties have already accounted to Mr Sanfilippo. So the final amount in contest is a proportion of $458,747, even though the figures as between the ATO and Landco add to $466,741.20. 18The payment of $121,240.05 (being $19,181 plus $102,059.50) by way of cheque and PAYG instalment require no further explanation. But Mr Tamburri's submissions did explain that the $345,000 he claimed as a payment of CGT within clause 4L(5), represents 30 per cent of $1,151,699 in Landco's carried forward losses, to which Landco was entitled at the beginning of FY12 but which it applied against its profit on the sale of the Kookaburra Road property in its FY12 tax return. Landco would have been able to carry these losses forward into future tax years had they not been used in this way. And if it had carried these losses forward and not applied them in FY12, it would have had to pay an additional $345,000 in tax to the ATO in FY12. 19The Anvest/Tamburri parties contend is that this amount of $229,373.50 is now deductible from the vendor finance under clause 4L(5) and alternatively under 4L(1). The full text of clauses 4L(1) and 4L(5) in their context are set out in the principal judgment (at [41]). 20As to clause 4L(5), the Anvest/Tamburri parties submit that the sale of the Kookaburra Road property was a "capital gains tax event" that has occurred "in relation to the sale or transfer of the Kookaburra Road property". The Anvest/Tamburri parties further submit that as the parties have agreed that, through clause 4L(5) "that Landco will pay from any net proceeds due to Landco in Capital Gains Tax prior to distribution", then Landco is now obliged to pay any applicable Capital Gains Tax prior to the proceeds of sale of the Kookaburra Road property being distributed. They submit: that through the steps indicated above an amount of $458,747 in tax has been paid; and, that the words "vendor and purchaser will pay equally any short fall in capital gains tax payable by Landco on the sale" mean that the vendor must bear half the capital gains tax that Landco has so paid with respect to the sale of the Kookaburra Road property, namely $229,373.50. 21As to clause 4L(1), the Anvest/Tamburri parties put an alternative argument upon the hypothesis that the circumstances that enliven clause 4L(5) "that a capital gains tax event occurs", have not occurred. They submit that if clause 4L(5) is not enlivened, then clause 4L(1) will apply instead. But they submit that in substance the dollar-result is the same: the same amount of $229,373.50 may be deducted from the vendor finance, as Mr Sanfilippo's share of Landco's tax payable on the sale of the Kookaburra Road property, the only difference being one of classification, that the tax payable under clause 4L(1) will be income tax, not CGT. Based on the construction of clause 4L(1) reached in the Court's principal judgment, the Anvest/Tamburri parties submit that even if the tax paid is classified as income tax rather than capital gains tax it nevertheless falls within the clause 4L(1) description of "all outgoings paid in respect of this property" paid "on behalf of the vendor".

Determining the issues Mr Sanfilippo's Contentions Raise 22Mr Sanfilippo took issue with the Anvest/Tamburri contentions at many levels, both as to the characterisation of the sale of the Kookaburra Road property as a sale on capital account, and as to the construction of clauses 4L(1) and 4L(5). The interrelationship of clause 4L(1) and 4L(5) dealt with in these reasons was not considered in the Court's principal judgment. It is part of the matters reserved in the principal judgment for further consideration. This section identifies and determines each of the questions that Mr Sanfilippo's various counter-arguments raise. Mr Sanfilippo's first challenge was to the Anvest/Tamburri parties' reliance upon clause 4L(5). 23The Application of clause 4L(5). Mr Sanfilippo advanced a number of arguments why clause 4L(5) is not applicable to authorise the claimed deductions from the vendor finance otherwise payable to him. His first argument in relation to clause 4L(5) is unsuccessful but his second is successful. I conclude in this section that clause 4L(5) is not available to the Anvest/Tamburri parties to found a deduction from the vendor finance on account of capital gains tax. 24Mr Sanfilippo's first argument is that on the proper construction of clauses 4L(1) to 4L(5), the opening words of clause 4L(5) "in the event that a capital gains tax event occurs", only apply to the sale of Beneficial's interest in the Kookaburra Road property to Mr Sanfilippo or Mr Tamburri. Mr Sanfilippo submits the words are a clear reference to a future event, which words were crafted so the provision would deal only with a capital gains tax event arising from the circumstances set out in the preceding paragraphs of clause 4L (clauses 4L(2) to 4L(4)), namely, a sale by Beneficial involving the transfer of its interests in the Kookaburra Road property to one of the parties. Mr Sanfilippo submits: that those earlier sub-paragraphs (clauses 4L(2) to 4L(4)), provide for the purchase and transfer of Beneficial's interest in the property and for the consequent sharing between Mr Sanfilippo and Mr Tamburri of all costs associated with such purchase and transfer; and that clause 4L(5) operates only in respect of such a sale between Beneficial and the parties to these proceedings. 25This submission is not persuasive. Clause 4L(5) cannot be so limited. It does not merely deal with the subject matter of clauses 4L(2), 4L(3) and 4L(4), a sale by Beneficial of its interest in the property to one of the parties. Whilst in clauses 4L(2) to 4L(4) the parties spent much energy working through that option, it is not the only scenario they considered in clause 4L(5). 26Clause 4L(5) declares that it applies to capital gains tax events that occurs "in relation to the sale or transfer of the Kookaburra Road property" [emphasis added]. Its own language does not limit its application to the particular sale or transfer scenarios of the Kookaburra Road property that are covered in clauses 4L(2), 4L(3) and 4L(4). The words "in relation to the sale or transfer" of the property in clause 4L(5) are sufficiently wide to embrace a sale to a third party, such as occurred in December 2011. And that, in my view, is what they mean. Moreover, only the clause 4L(2) to 4L(4) sale or transfer scenarios were what was in contemplation in clause 4L(5), then clause 4L(5) would have been more aptly phrased as describing the sale or transfer of Beneficial's interest in the Kookaburra Road property, rather than the sale or transfer "of the Kookaburra Road property" as it does. 27Mr Sanfilippo puts this construction argument another way. He points out that the Anvest/Tamburri parties are relying upon the change of intended use of the Kookaburra Road property based upon the re-zoning back in 2005. But he submits that this is not a future CGT event, which is the subject matter of clause 4L(5). But rather it is an event which has occurred already in relation to "the sale or transfer of the Kookaburra Road property". He submits the parties did not draft clause 4L(5) to apply to an event which had already occurred. But this argument appears to misunderstand the Anvest/Tamburri parties' case. The capital gains tax event which they rely on as having occurred is not the 2005 re-zoning but the sale in December 2011, an event which was in the future when the December 2010 deed was signed. This construction argument fails. 28Mr Sanfilippo's second argument for the non-application clause 4L(5) focuses not upon its construction but on whether the Anvest/Tamburri parties have established that a "capital gains tax event" occurred in relation to the sale of the Kookaburra Road property. 29Mr Sanfilippo submits that the Kookaburra Road property was sold in December 2012 on revenue account and not on capital account. He submits that the property was part of Landco's Trading Stock and was disposed of within the scope of the company's ordinary business activities of property development. The submission is that as the property was not sold on Landco's capital account, its sale does not meet the description "capital gains tax event". Further Mr Sanfilippo submits that merely because the Anvest/Tamburri parties caused Landco to lodge the Landco FY12 tax return treating the property on capital account does not automatically bring it within clause 4L(5). 30The evidence firmly supports the conclusion that the Kookaburra Road property was sold on revenue account, whatever Landco's most FY12 tax return may declare. I find that the Kookaburra Road property was: (1) acquired as part of Landco's Trading Stock; (2) Landco treated it as Trading Stock (for subdivision and sale) for many years in its tax returns, until the FY12 tax return prepared on 2 September 2012 in contemplation of these proceedings; (3) Landco did not change its original intention to subdivide and sell the property to a new intention to develop, hold and lease out the property and none of the indicia are evidence that the expert's joint report (Exhibit C) says would be expected to evidence such a change of intention; and, (4) as Mr Damien's evidence shows, Beneficial had no capacity to re-develop the Kookaburra Road site for rental purposes by constructing industrial units to support the change of use. 31I accept Mr Sanfilippo's contention that no "capital gains tax event" has occurred so as to enliven clause 4L(5). The fact that he has cased Landco to lodge an FY12 tax return submitting itself to assessment on the basis of a capital gain on the Kookaburra Road property does not alter this conclusion. The Court must determine itself whether an event answering the clause 4L(5) description of "a capital gains tax event" has occurred. I conclude therefore that clause 4L(5) does not apply to authorise the Anvest/Tamburri parties to deduct amounts they claim to be capital gains tax from monies from the repayment of the vendor finance. 32The parties' arguments now shift to clause 4L(1). 33Application of Clause 4L(1). The shift in the parties' argument from clause 4L(5) to clause 4L(1) immediately creates a somewhat artificial situation for the parties and the Court. The FY12 tax return characterised the sale of the Kookaburra Road property for the assessment of tax, on a different basis (on capital account) from the basis which the Court has now found to be applicable (on revenue account). 34But Mr Sanfilippo submits, even clause 4L(1) does not apply. He advances a number of construction arguments to support this contention. First he submits that income tax is not an "outgoing" within clause 4L(1). It is true that an "outgoing" is commonly used in the sense of an "expense", which is an item deducted from revenue before net income is derived, upon which taxation is levied. But the Macquarie Dictionary definition of "outgoing" in the relevant sense of financial outgoing is "an amount of money expended; outlay; expenses". The Macquarie Dictionary notes that the expression is usually used, as it is in this context, in the plural. This dictionary meaning, especially "an amount of money expended" is sufficiently wide to cover the payment of various forms of taxation. Moreover, authority suggests that the expression may readily be used in this sense: "the precise meaning of 'outgoing' may be open to doubt; but it is certainly a large word, and may fairly comprehend rates and taxes" (per Patteson J in R v Shaw [1848] 116 ER 925, at 928). The Court held that in principle, taxes will fall within the general meaning of 'outgoings' unless the parties covenant to specifically excise them from that definition. And this approach has been followed in Australian law. Considering a purchaser's liability in respect of land tax, Campbell J held in the Supreme Court of Queensland that the word 'outgoings' may itself include rates and taxes: Holland v Goltrans Pty Ltd [1981] BC8421137. 35But context is decisive here. The full expression in clause 4L(1), "all outgoings paid in respect of this property on behalf of the vendor" is designed comprehensively to capture all Kookaburra Road property related outgoings from Landco and the payment of tax on the Kookaburra Road property sale is one of them. And merely because clause 4L(5) deals with a "capital gains tax event" does not mean that the whole subject matter of tax is therefore dealt with exclusively in clause 4L(5). Clause 4L(1) is sufficiently broadly expressed to embrace other forms of tax such as income tax, GST, land tax and the like. 36Mr Sanfilippo next argues that the $345,000 tax benefit evident in the FY12 tax return from the application of carried forward losses is not an outgoing "paid" within clause 4L(1). Mr Sanfilippo submits: that this amount of $345,000 was not "paid" to the ATO; and, that the only amounts "paid" to the ATO were the two May 2014 amounts of $102,059.50 and $19,181, totalling $121,240.05. 37This argument is not persuasive. The application of a carried forward loss to reduce tax liability is as much an outgoing "paid" with respect to this property as is the payment of the liquid funds of $121,240.05 to the ATO in May 2014. 38First the word "pay" or "payment" is one which may cover many ways of discharging obligations; it may even include discharge not by money payment at all but by what is called "payment in kind": see White v Elmdene Estates Ltd [1960] 1 QB 1; [1959] 2 All ER 605, per Lord Evershed. Payment is not a technical word but one which has been imported into legal proceedings "from the exchange" rather than "from law treatises" and it does not necessarily mean payment and satisfaction and discharge but may be used in a more popular sense: see Turney v Dodwell (1854) 118 ER 1091. A payment may generally be made by a mere transfer of value in an account without any money passing (Bodenham v Purchas (1818) 106 ER 281 and Hills v Mesnard (1847) 116 ER 103), or by the giving of receipts pursuant to a prior arrangement (Amos v Smith (1862) 158 ER 873) or even by agreement (Page v Meek (1862) 122 ER 98). Here the application of carried forward losses is readily comprehended within these meanings of the word "paid". 39But that a payment has occurred here can be readily tested. The parties did not dispute that if Landco had not applied the carried forward losses of $1,151,669 then the liquid funds that Landco would have had to remit to the ATO for FY12 would have been considerably larger. Landco's FY12 tax return shows how this is so. 40Landco lodged its FY12 tax return on 2 September 2013. The principal revenue and expense integers in the return leading to the calculation of tax are the following: Summary Landco FY12 Tax Return Total income $6,598,902 Total expenses -$6,832,895 Total loss -$233,993 Total losses (carried forward from FY11) -$917,676 Total capital loss -$1,151,669 Accumulated losses $1,555,804 K Road capital gain $404,135 Net taxable income $121,240.50 30% CGT

41The parties' arguments can be readily be understood from this table. The capital gain of $1,555,804 has been brought to account for taxation purposes by being added to Landco's taxable income for FY12. The net profit derived for the company for taxation purposes for that year includes the capital gain, against which the accumulated FY11 and the FY12 losses of $1,151,669 are applied. The tax payable to the ATO of $121,240.50 is 30 per cent of the resultant net profit of $404,135 ($1,555,804 less $1,151,699). It can be seen from these figures that if the current and previous year's losses had not been so applied, then the net profit, on which the tax of $121,240.50 was paid, would have been $1,151,699 more than it was. And 30 per cent of this notional increased profit of $1,151,669 would be $345,500, a figure which therefore represents the reduction in tax in FY12 from the application of these accumulated losses. 42I accept the Anvest/Tamburri arguments that the application of those losses in that way represents a payment of "outgoings". The matter is readily tested. If the losses had not been applied Landco would have been taxed at the 30 per cent rate in FY12 on $1,555,804, not on $404,135 as it was. If Landco decided not to apply the losses as it did the total payment to the ATO would have been an additional $345,500. In my view there is no merit in Mr Sanfilippo's argument that Landco has not paid $466,741.20 to the ATO. I do not accept Mr Sanfilippo's argument that Landco's is only entitled to set off 50 per cent of the $121,240.50. 43This result is consistent with the Court's construction of clause 4L(1) in the principal judgment (at [100] to [117]), the disputed words in clause 4L(1) were inserted to require Landco and Mr Tamburri to outlay funds to protect Mr Sanfilippo from losing the benefit of his clause 4L "effective 25 per cent interest" in the property (see [109]). The taxation of the capital gain on the Kookaburra Road property, when it was finally realised, is one of the costs that Landco has incurred in holding the property as long as it has to maintain for Mr Sanfilippo the benefit of his "effective 25 per cent interest" in this property.

A Final Accounting 44But the parties' submissions then descended into further accounting arguments. 45Mr Sanfilippo raises a final argument. He submits that if the Court were to permit Mr Tamburri to deduct from the vendor finance the taxation ($345,500) that would have been paid on the accumulated losses of $1,151,699, then the Court may be counting the same Kookaburra Road expenses twice for the benefit of the Anvest/Tamburri parties. For the purposes of this argument it is legitimate to treat Landco and Anvest/Tamburri as all one interest. The Court's construction of clause 4L(1) in the principal judgment legitimises this approach, holding that Anvest/Tamburri are entitled to deduct Landco payments from the vendor finance repayable. 46Mr Sanfilippo expresses his point in his written submissions as follows: "To [allow a deduction/offset for the $345,500] would be to allow Mr Tamburri the benefit of the offsets and Landco the benefit of tax deductions for the same expenses". In other words, the submission is that there is an overlap (and therefore potential double counting) between the Exhibit 4 expenses that the Court has not by the principal judgment allowed the Anvest/Tamburri parties to deduct/offset from the vendor finance, and the $345,500 now claimed. I accept that by implication, "all outgoings paid" in clause 4L(1), means "paid once". So, double counting is not permitted. 47The analysis of Mr Sanfilippo's final argument is provided by looking to see whether there is any double counting of the Kookaburra Road direct expenses, for which Mr Tamburri has by reason of the Court's principal judgment now been fully compensated, by their deduction from the vendor finance. It can be assumed for the purposes of argument, because they have not yet been able to be separated, to the Court's satisfaction that some of these recovered expenses overlap with the expenses incurred to reach the total accumulated losses figure of $1,151,669. Mr Sanfilippo's point is that there will be no double counting if those accumulated losses are deducted from the $1,555,804 capital gain on Kookaburra Road, and the Anvest/Tamburri parties are now accepted as having the additional clause 4L(1) right to reimbursement of 30 per cent of the tax on the resultant differential, the net profit of $404,135. This is because the $404,135 excess over the $1,151,699 cannot include any expenses element at all: it is just a capital gain calculated in accordance with applicable CGT legislation. 48But he submits that if on top of this legitimate compensation, Anvest/Tamburri get any part of the $345,000, which represents 30 per cent of that $1,151,669, by it being notionally added back into Landco's tax liability and subtracted from the vendor finance, then the Anvest/Tamburri/Landco parties would be: (a) receiving compensation from Mr Sanfilippo on the assumptions that the Anvest/Tamburri/Landco parties had paid tax after bearing all the expenses constituting that $1,151,669, now being added back; but nevertheless (b) having also now recovered under the principal judgment from Mr Sanfilippo some part of the same $1,151,669 representing those very same expenses. 49Put another way, the $345,000 represents the full tax that Landco would have had to pay in FY12 if the $1,151,669 had not been brought to account for taxation purposes that year. But if that $1,151,669 had not been brought to account, Landco could use it for its own benefit in the future. Had that course been taken, there would be no argument that Anvest/Tamburri/Landco would have to pay $466,740.50 in tax and recover half from Mr Sanfilippo. But as a result Mr Sanfilippo would have had an argument that the Anvest/Tamburri parties would have had to share that future tax benefit, which Mr Sanfilippo purchased by bearing his share of the past tax and expenses under clause 4L(1). 50This means that the Anvest/Tamburri parties can immediately deduct a further $60,620.02 (being $121,240.05 divided by 2) from the vendor finance. Mr Sanfilippo argues that the deduction figure should be less than this. He submits that as the $1,555,804 on which the $121,240.05 in tax is payable represents only 23 per cent of the total income of Landco that only had the 23 per cent of the $121,240 may be applied with respect to the Kookaburra Road property. 51But this argument fails to take into account the way the Landco FY12 tax return is constructed. The $1,555,804 is an exclusively Kookaburra Road derived capital gain figure, inserted answer an ATO request for "net capital gain", and the tax return's answer corresponds closely with the experts' calculation of the capital gain for the Kookaburra Road property. On the way the case has been argued there is no basis in my view to reduce the further amount that the Anvest/Tamburri parties may deduct from the vendor finance of $60,620.02. 52But can the Anvest/Tamburri deduct any more from the vendor finance? That will depend in my judgment on whether they can demonstrate no doubt counting in the balance represented by the $345,000. If the parties wish to further contest this issue of whether there is double counting, if any part of the $345,000 is allowed from the vendor finance then in light of the protracted nature of this litigation I will require the parties to attempt to mediate this final part of the dispute with the assistance of the experienced accountant professionals, who had given evidence in this case before occupying any more of the Court's time. A resolution of what remains now as essentially an accounting question should be possible, given the extensive findings the Court has made on the legal issues. Once that is resolved the parties can argue about any remaining costs issues.

Conclusions and Orders 53The Court has considered the parties' further submissions on the remaining taxation issues and reached the following conclusions. Clause 4L(5) of the December 2010 deed has no application to any claimed deduction from the repayment of vendor finance because a capital gains tax event did not take place within the meaning of clause 4L(5). Clause 4L(1) is available to the Anvest/Tamburri parties to claim a deduction from vendor finance, as both Landco's payments of tax and its application of current and carried forward losses are the payment of "outgoings" under clause 4L(1). The Anvest/Tamburri parties may deduct a further $60,622.02 from the vendor finance. But the extent to which there is double counting with respect to $345,500 representing 30 per cent tax on $1,151,669 is not obvious to the Court without the further assistance of the accounting experts who have given evidence in these proceedings. But if the parties wish to further debate this issue they should only be permitted to do so if they can demonstrate the Court they have attempted to resolve that which should now be purely an accounting question. 54The Court will make the following orders and declarations.

1. Declare the defendants are entitled to deduct a further $60,622.02 from the vendor finance under the December 2010 deed.
2. Order the parties to attempt to resolve any remaining issues of double counting before 28 July 2014.
3. The parties should exchange written submissions on issues of costs by Friday, 25 July 2014.
4. List the proceedings for argument on costs and final orders on Thursday, 31 July 2014.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 30 May 2014