Income Tax Assessment Act 1936: s. 25A.

Counsel for the Applicant: D H Bloom QC and M Bozic

Solicitors for the Respondent: Australian Government Solicitor

2. The decision of the Commissioner of Taxation to include the sum of

$561,263 in the assessable income of Warriewood Valley Pty Limited

as trustee of the Jill Trust for the year of income ended 30 June

1985 be affirmed;

3. Warriewood Valley Pty Limited as trustee of the Jill Trust pay the

costs of the appeal of the Commissioner of Taxation, including

reserved costs, if any.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

LOCKHART J The primary question in this case is whether Warriewood Valley Pty Limited ("the taxpayer") acquired property at Warriewood, a northern beach suburb of Sydney (I shall generally refer to it as "the taxpayer's property"), for the purpose of profit-making by sale within the meaning of s. 25A of the Income Tax Assessment Act 1936 ("the Act"). Part of the taxpayer's property was sold during the year of income ended 30 June 1985 at a profit of $561,236. The respondent, the Commissioner of Taxation ("the Commissioner"), included that sum in the assessable income of the taxpayer for the 1985 year of income. The taxpayer disputes this and contends that its profit was a capital profit in that it purchased the taxpayer's property as a long term investment with no intention of selling it or any part of it.

2. The case turns on the facts. The evidence consists of affidavits from four witnesses called by the taxpayer together with their oral evidence. Documents were also tendered. The Commissioner called no evidence.

3. The taxpayer called as its primary witness, Henry Hirz Roth, a director of the applicant and a director and shareholder of a number of other companies to which reference shall be made later and which are key players in the relevant events. Mr Henry Roth is the most important witness in the case. The taxpayer called also Joseph Brender (a director of the taxpayer and a friend of Mr Henry Roth); Leo Wilfred Roth (the proprietor of L W Roth and Co, real estate agents, and a friend and business associate of Mr Henry Roth) who introduced the purchaser of the relevant portion of the taxpayer's property, the sale of which gave rise to the assessment. Mr Henry Roth and Mr Leo Roth are not related to each other. The other witness for the applicant was David Zalmon Baffsky, a solicitor and former director of the taxpayer.

4. I shall state my findings of fact. To obtain a clear picture of the relevant parcels of land involved in purchase and sale by the taxpayer it is necessary to look at certain coloured plans which were in evidence before me and constituted exhibit 1. A copy of the plans in black and white is attached to these reasons for judgment.

5. Before turning to the purchase of the taxpayer's property by the taxpayer in 1977 it is desirable to commence with the earlier purchase of adjoining land by a company in which Mr Henry Roth had a 50% interest.

6. In May 1971 a large area of land in the Warriewood Valley with frontages to Jackson Road and Garden Street (which I shall call "the Jackson Road property") was purchased by John Petray Pty Limited ("John Petray"), a company which was effectively (through various companies) owned as to 50% by Mr Henry Roth, 10% by Mr Brender and 40% by Mr Leo Roth. Mr Henry Roth gave evidence that the Jackson Road property was purchased with the intention of having it rezoned, constructing a shopping centre upon part of it which would then be leased to tenants and not sold. It was intended that the other portion of the property would be developed by subdivision, construction of buildings on the subdivided land and leasing the properties to tenants, again not to be sold. The precise form of development would depend on the rezoning. Mr Henry Roth said that in 1972 the then President of the Warringah Shire Council said to him "A shopping centre will be built on the land over my dead body".

7. In late 1972 Lend Lease Developments Pty Limited ("Lend Lease") approached John Petray and sought an option to purchase part of the Jackson Road property. Mr Henry Roth gave evidence that, in view of the Council's opposition to any rezoning, John Petray granted an option to Lend Lease in 1973 to purchase part of the Jackson Road property. Lend Lease was eventually successful in obtaining the rezoning of the part of the land the subject of the option which is a part that is on the northern side of Jackson Road and close to, though not fronting, Boondah Road. This rezoning took place in 1977 before the acquisition by the taxpayer of the taxpayer's property. In 1978 approval was given for a shopping centre to be built on part of the Jackson Road property. Following the approval of the building application, John Petray sold part of the Jackson Road property to Lend Lease which built the Warriewood Valley Shopping Centre upon it.

8. The remainder of the Jackson Road property which had been purchased by John Petray in 1971 was transferred in June 1979 to Henlen Pty Limited, a company which in 1979 Mr Henry Roth owned as to 50%, Mr Brender 10% and Mr Leo Roth 40%. Mr Henry Roth acquired Mr Leo Roth's 40% interest about two years ago so that he now has a 90% interest in Henlen. Mr Henry Roth gave evidence that the purpose of Henlen, in acquiring part of the Jackson Road property from John Petray, was the same as the purpose of John Petray had been, namely, to seek rezoning and then develop the land, but not to sell it.

9. In September 1977 the taxpayer purchased Lot 4 Boondah Road, Warriewood ("Lot 4 Boondah Road"). Lot 4 Boondah Road has a frontage to Boondah Road. Mr Henry Roth gave evidence that this land was and still is intended to be an investment for his family company, Henry Fraser Pty Limited ("Henry Fraser") that it was initially and mistakenly purchased by the taxpayer for reasons which he does not recall; but that the property was transferred by the taxpayer to Henry Fraser in 1978 for a nominal consideration of $1. Henry Fraser is 100% owned by Mr Henry Roth's family interests. In 1979 Henry Fraser applied for the development and rezoning of Lot 4 Boondah Road as a drive-in bottle shop. In October 1982 the Council indicated that it would not give its consent to this proposal as it was contrary to the Council's adopted planning strategy for the Warriewood Valley. Mr Henry Roth said that if the application had been successful, the drive-in bottle shop would have been constructed and kept as an investment. Henry Fraser still owns Lot 4. There is a house on the property which has been leased to tenants since 1977.

10. I turn to the purchase of the taxpayer's property. In August or September 1977 Mr Henry Roth was in St Vincent's Hospital recovering from an operation when he was visited by Mr Baffsky and Mr Brender. Mr Henry Roth gave evidence which I shall summarize. Mr Baffsky said to him that he and Mr Brender wished to talk to him about certain land in the Warriewood Valley which was available for purchase having an area of approximately 45 acres; that the owners of the land were suffering financial difficulties and that both Mr Baffsky and Mr Brender considered the land to be a good investment. Mr Baffsky said to him that the land was currently zoned for agricultural purposes but that he (Mr Baffsky) thought it would be rezoned in the future and the land could then be developed as an industrial or commercial estate. Mr Baffsky asked Mr Roth whether he would be interested in participating in a joint venture to purchase the land as a minority shareholder with Mr Baffsky and Mr Brender. After discussion, following some misgivings by Mr Roth, Mr Roth gave evidence that he agreed to participate in the joint venture on the basis that Mr Baffsky would contribute 49% of the purchase price of the land, Mr Brender would contribute 20% and that Mr Roth would contribute 31%. It was agreed also that Mr Roth would lend monies to Mr Baffsky to enable him to make his 49% contribution on the basis of an interest bearing loan and that each party would have equity in the joint venture in proportion to his contribution to the purchase price of the property. Mr Baffsky would arrange a suitable entity to purchase the land. Mr Roth said that Mr Baffsky said to him that he could repay the loan "within a few months, a year at the latest". Mr Roth gave evidence that he intended that the land would be developed once it was rezoned: it would be subdivided, premises constructed on the subdivided lots and the premises then leased to tenants. The type of development would depend on the type of use in respect of which the land was rezoned. For example, if the land or part of it was rezoned for industrial use, then industrial premises would be constructed and leased to tenants. Alternatively, if the land or part of it was rezoned for commercial use, commercial premises would be constructed and leased to tenants. But on no account did he intend that the land would be sold, although the prospect of sale is always a possibility with any purchase of land. The property was to be a long term investment. Mr Roth said that during the course of the discussion at St Vincent's Hospital there was no mention of the future sale of the land, nor was this subject discussed at any time before the purchase of the land. He said that during the course of the visit to the hospital, Mr Baffsky said to him there were poplar trees growing on the land and that they may be able to earn sufficient money from the sale of the trees to pay for council rates and other outgoings before the land was rezoned and developed; the land was used for agricultural purposes and hence was exempt from land tax. Mr Roth said in evidence that whilst his primary intention was to develop the land after rezoning, the possibility of selling the trees would provide a cashflow pending rezoning and development of the land and an additional incentive to the purchase.

11. Both Mr Baffsky and Mr Brender gave evidence by affidavit and orally about the visit to Mr Henry Roth in St Vincent's Hospital in August or September 1977. The evidence of each of the three men was not entirely consistent one with the other, but there was a fair degree of commonality in the versions of the conversations which they gave.

12. The evidence of the three men is of a very general nature and I have no doubt that the evidence given by each of them was basically reconstruction. I do not say this critically because some 16 years have elapsed since the relevant conversation and there is no evidence of any contemporaneous document or note which records any of the terms of the discussion or the fact that it took place.

13. It is plain that the three men trusted each other. Mr Henry Roth was an experienced and shrewd business man and developer of real estate. Mr Baffsky was an experienced solicitor and Mr Brender was also a man of experience in business who was a friend of Mr Roth. In effect, Mr Brender went into the venture to support Mr Roth. If one aggregates the interest of Mr Roth and Mr Brender, they had 51% of the share in the venture and Mr Baffsky 49%.

14. Mr Roth's role was to take charge of the rezoning and subsequent development of the taxpayer's property, using his expertise for this purpose. Mr Baffsky was to put in place the appropriate structure to give effect to the wishes of the three men.

15. Mr Baffsky subsequently arranged for the establishment of a trust known as the Jill Trust and the acquisition of a company Warbarb No. 103 Pty Limited (which subsequently changed its name to that of the taxpayer) which were used for the purposes of the joint venture. He also arranged for the establishment of another trust known as the Jack Trust which was also used for the purposes of the purchase of the taxpayer's property. Mr Baffsky or his nominee was to be the "protector" of the Jack Trust and Mr Henry Roth and Mr Brender were to be the "protectors" of the Jill Trust. The taxpayer was to be the trustee of the trusts and the registered proprietor of the taxpayer's property.

16. On 29 August 1977 Mr Baffsky and his partner Mr Peter Simons were appointed as directors of the taxpayer, Mr Simons acting in a nominal capacity.

17. On 30 August 1977 two ordinary $1 shares in the taxpayer (being the only issued shares) were transferred to Mr Baffsky and Mr Simons.

18. On 5 September 1977 deeds were executed in Hong Kong establishing the Jill Trust and the Jack Trust. Under the trust deeds it was declared that the trust funds of each trust were held on trust for certain eligible charities and such persons as were appointed to be beneficiaries by the trustee of each trust from time to time (clauses 3 and 6), certain companies were appointed as "protectors" of the Jill and the Jack Trusts with power to appoint one or more persons to be additional or replacement trustees, or additional or replacement "protectors" (clauses 18 and 26); and the consent of the protectors was required to the appointment of any beneficiaries by the trustee (clause 18).

19. Also on 5 September 1977 three deeds poll were executed whereby the taxpayer (then known as Warbarb No 103 Pty Ltd) was appointed as the sole successor trustee of the Jack Trust and the Jill Trust in place of the Hong Kong company, Tsid Limited. The third deed poll was executed ensuring that Mr Baffsky and, in the event of his death, another person, was appointed as the sole "successor/protector" of the Jack Trust in place of two companies that had executed the three deeds poll.

20. On 12 September 1977 the directors of the taxpayer resolved that the company would accept the appointment as trustee of the Jack Trust and the Jill Trust. On 16 September 1977 the directors of the taxpayer resolved that it would purchase the taxpayer's property as trustee of the two trusts.

21. On 16 September 1977 contracts for purchase of the taxpayer's property were exchanged. It was purchased by two contracts from different vendors. Under one such contract the taxpayer, as trustee of the Jack Trust and the Jill Trust, agreed to purchase from the owner (Haig Properties Pty Limited) a portion of the property for $680,975. Under a second contract with the owner of another portion of the property, McCormack Earthmovers Pty Limited, that portion was purchased for $56,062.50.

22. On 28 September 1977 Warbarb No 103 Pty Limited changed its name to that of the taxpayer.

23. On 1 November 1977 a deed poll was executed whereby Mr Henry Roth and Mr Brender (and in the event of the death of either of them, another person) were appointed as the sole "successor/protectors" of the Jill Trust in place of W T (Nominees) Limited and W T (Registrars) Limited. It appears that no persons were appointed to be beneficiaries of the Jack Trust or the Jill Trust (apart from the eligible charities referred to in the original deeds of trust).

24. On 4 September 1978 Mr Henry Roth and his son Mr John Roth were appointed directors of the taxpayer. The reason for this is not very clear from the evidence, although Mr Henry Roth said something about it in his oral evidence. Although Mr Henry Roth and his son did not become directors of the taxpayer until this lastmentioned date, it was accepted by counsel for both parties that to determine the relevant intent and purpose of the taxpayer for the purposes of s. 25A it is necessary to look to the conduct and state of mind of each of the three men concerned who was involved in the venture: Mr Henry Roth, Mr Baffsky and Mr Brender. The structure which Mr Baffsky put in place is consistent with this approach.

25. In April 1980 an Interim Development Order ("IDO") was introduced which applied to the "Warriewood Wetlands" and surrounding areas which included a portion of the land still owned by Petray. The IDO had the effect of only permitting development of this area for the purpose of open space and public recreation and provided for a wetlands reserve to prevent further development. The reserve was to consist of 25 acres of land west of the shopping centre, that is on land owned by Henlen and the taxpayer. The IDO covered most but not all of that land. Pursuant to the IDO, the Warringah Shire Council was subject to a statutory obligation to acquire the land covered by the IDO if requested to do so by the owners. The creation of the wetland reserve thus depended upon the sale by the taxpayer and Henlen of the relevant land to the Council.

26. On 13 February 1981 Mr Simons resigned as a director of the taxpayer and a Mr Ray Travers, another partner of Mr Baffsky, was appointed a director in his place.

27. Following the acquisition of the taxpayer's property by the taxpayer, Mr Henry Roth was responsible for the negotiations with the Warringah Shire Council and other bodies to achieve rezoning. Mr Baffsky did not participate in any discussions or negotiations with the Council or anybody else in relation to the rezoning, although he did advise Mr Henry Roth from time to time with respect to relevant correspondence.

28. In late 1981 or early 1982 Mr Henry Roth and Mr Baffsky had what was described as a "falling out" and Mr Roth acquired Mr Baffsky's interest in the Jack Trust. Mr Baffsky did not repay the loan to him by Mr Henry Roth which had enabled him to acquire his 49% interest; so it seems that the assignment of the interest of Mr Baffsky in the Jack Trust to Mr Henry Roth was in essence in lieu of the repayment of the loan because Mr Roth had financed the Jack Trust to purchase its interest in the venture.

29. On 15 January 1982 the ordinary $1 share in the taxpayer which had been held by Mr Simons was transferred to Brenmoss Holdings Pty Limited, a company controlled by a Mr Sam Moss and Mr Brender. On 16 January 1992 Mr Baffsky and his partner resigned as directors of the taxpayer and Mr Moss and Mr Brender were appointed in their place.

30. On 16 January 1982 two deeds poll were executed by the taxpayer and Mr Baffsky whereby in the case of one deed all the assets of the Jack Trust were vested in the Jill Trust and in the case of the other deed the Jack Trust was terminated.

31. On 16 January 1982 the board of directors of the taxpayer resolved that it, as trustee of the Jill Trust, acknowledged that it held all of the assets formerly of the Jack Trust upon the trusts of the Jill Trust.

32. On 18 January 1982 the ordinary $1 share in the taxpayer held by Mr Baffsky was transferred to Brenmoss Holdings Pty Limited and eight ordinary $1 shares in the taxpayer were allotted to Henroth Investments Pty Limited ("Henroth"), a company wholly owned by Mr Henry Roth's family interests.

33. Following his resignation as director of, and the transfer of the ordinary share in, the taxpayer, Mr Baffsky ceased to have any further involvement in relation to the taxpayer's property. He was not involved in the sale or grant of options in respect of the taxpayer's property to the ultimate purchaser in 1983 and 1984. Nor was Mr Brender involved in any of these matters.

34. In about 1980 or 1981 Mr Henry Roth commenced negotiations with Warringah Shire Council about rezoning the taxpayer's property. He spoke to the mayor, aldermen and officers of the Council from about 1980 to 1984. He also had discussions with the officers of the Department of the Environment and Planning during the same period. The taxpayer, in about 1980 or 1981, retained a Mr Neil Ingham of Planning Workshop Pty Limited, town planning consultants, and Mr Jeremy Bingham, a solicitor, to assist in the negotiations with the Council and the Department. Mr Henry Roth was unsuccessful in having the taxpayer's property rezoned.

35. In late 1982 Mr Leo Roth (who was a local real estate agent and who, it will be remembered, was a business associate and friend of Mr Henry Roth and who owned 40% of John Petray, the initial purchaser in 1971 of land adjoining the taxpayer's property and who until about two years ago had a 40% interest in Henlen) told Mr Henry Roth that a third party (who was not identified by him) was interested in purchasing some of the taxpayer's property owned by it, namely, about 2.025 hectares of the land which was included in the parcel of land purchased in 1977 from the taxpayer from Haig Properties. Mr Henry Roth gave evidence that he said to Mr Leo Roth that he was not interested in selling, but that Mr Leo Roth said to him that the holding charges on the property, such as rates and land tax, were significant and expensive and that he was approaching Mr Henry Roth to sell part of the land to a third party to give some relief in respect of the holding charges. Mr Henry Roth said that he would consider his position and "get back" to Mr Leo Roth.

36. Mr Henry Roth considered the third party's interest and said in one of his affidavits that he agreed to consider an offer from the third party notwithstanding his intention to hold the taxpayer's property, because the holding charges were significant and his attempts to rezone the land had not succeeded. He said "Further, it has not been possible to sell the poplar trees, so there was no cashflow from the land to meet the holding charges". For reasons which I shall give later, I do not accept this evidence of Mr Henry Roth about the poplar trees.

37. There were further discussions between Mr Leo Roth and Mr Henry Roth which culminated in Mr Henry Roth saying that he would "sell part of the land and grant an option". There were further discussions between Mr Leo Roth and this third party, whose identity was still unknown to Mr Henry Roth, which culminated in lodgement with the Land Titles Office of a plan of subdivision on 14 February 1983 of portion of the taxpayer's property into two lots, one of 2.025 hectares and the other of 4.827 hectares. On 14 February 1983 an agreement for sale of land was exchanged whereby the Council for the Promotion of Sydney Anglican Diocesan Schools ("the Anglican Council") agreed to purchase from the taxpayer a portion of the taxpayer's property for $500,000. On the same date a deed of grant of option was executed by the taxpayer in favour of the Anglican Council which subsisted until 1 July 1983 whereby the Anglican Council had the right to purchase portion of the taxpayer's property for $1,192,500 and another portion for $692,228. The precise definition of this land is not important for present purposes except to say that the land purchased by the Anglican Council on 14 February was on the north-western extremity of the taxpayer's property fronting Garden Street - a long rectangular block - and the land the subject of the two options was to the south of it, also fronting Garden Street (see the attached plans).

38. On 1 July 1983 a memorandum of transfer of the lands subject to the agreement for sale of 14 February 1983 was executed. On 1 July 1983 a deed of variation of grant of option was executed whereby the options granted pursuant to the deed of 14 February 1983 were extended until 30 June 1984.

39. On 28 June 1984 there were further variations to the deeds of grant of option. On 28 June 1984 the Anglican Council exercised the second option granted under the deed of 14 February 1983 as extended by the deed of 1 July 1983; and on the same date an agreement for sale was exchanged with the Anglican Council which agreed to purchase from the taxpayer the land the subject of the second option for $692,228.

40. In 1982 Seaside Nursing Home Pty Limited approached Henlen with a view to purchasing part of Henlen's land. In view of the IDO and the inability to secure rezoning, it was decided, so Mr Henry Roth said, to sell part of the land. A contract was entered into between Henlen and Seaside which was conditional upon consent being granted to a development application for a retirement home. The Council initially refused to consent to the development application, but this decision was overturned by the Land and Environment Court. In December 1984 the Council finally approved the development application for the construction of a retirement village. Henlen sold the land to Seaside Gardens Pty Limited, a company associated with Seaside Nursing Home Pty Limited, on 27 September 1985. The land sold to Seaside Gardens is a rectangular strip of land, the western portion of which fronts Garden Street.

41. The taxpayer remains the registered proprietor of the taxpayer's property which it purchased in 1977 from Haig Properties and McCormack Earthmovers save for the parcels of land sold by it to the Anglican Council.

42. It is apparent from the evidence, including that of Mr Leo Roth, that it was he who arranged an introduction to Mr Henry Roth of the Anglican Council as the prospective purchaser of the portion of the taxpayer's property mentioned above.

43. Mr Henry Roth is an experienced man in the field of real estate development. I briefly recount the history of his real estate dealings with land other than the taxpayer's property and other land in the Warriewood Valley.

44. This property was purchased in 1954 by Mr Henry Roth. He had previously leased the premises from its then owner and conducted a fashion business there. He continued to conduct the business after he bought the freehold. Later he leased the premises to a tenant, but in 1962 the tenant's business failed financially. At that time Woolworths who owned the property next door and wanted to expand, offered to purchase the premises from Mr Roth for a "good" price, an offer which Mr Roth accepted and sold the property to Woolworths in 1962. He said that his intention when he purchased the property was to own it and conduct there his business of a frock shop. 24, 26 and 28 The Corso, Manly

45. These three properties were purchased by London Fashions Pty Limited between 1957 and 1960. London Fashions is a company wholly owned by the Henry Roth family interests. Mr Roth gave evidence that the properties were purchased solely as an investment with a view to consolidating them with the property behind them so that the site would then be redeveloped as a whole and leased to tenants. He could not purchase the additional property at 30 The Corso necessary to effect the consolidation of all these properties. He demolished certain of the shops and then constructed a new building with shops on the ground floor and offices on the first floor. He conducted his business at that address until 1967 when he sold the business to Katies. Katies then leased two of the properties for use as a shop and it has been there since then as a tenant of one of the properties. The second and third shops and the offices have been leased to various tenants. London Fashions still owns the three properties.

46. These premises are directly behind the premises at 24-28 The Corso. The Wentworth Street properties were purchased in June 1957 by Manly Properties Pty Limited, a company also wholly owned by the Henry Roth family interests. Originally there were two cottages on the Wentworth Street property which were rented. The property was purchased, according to Mr Henry Roth, solely as an investment with a view to consolidating it with the property in front, i.e. 24-28 The Corso, the redevelopment of the site as a whole and leasing to tenants. As mentioned earlier, this did not come about; so 5-7 Wentworth Street was developed separately. This development was carried out by means of a joint venture with a developer, Silverton Limited, in 1980. The developer approached Mr Roth and suggested a joint venture to him which he accepted and a "very good" price for the land was offered which was accepted.

47. This property was purchased by Henroth in May 1959. Mr Roth arranged for the demolition of the old building and the construction of a new building for the purposes of conducting a frock shop. Mr Roth gave evidence that he purchased the property because prior to May 1959 he conducted a business about six shops away from this property which he was leasing from Coles. He was given a notice to quit by Coles, so he purchased the property in order to have premises nearby from which to run his established business. He redeveloped the property and started trading. He operated the frock shop from the King Street premises until the mid 1960s. From 1967 to 1985 the property was continually leased to different tenants. In 1986 he failed to find a tenant despite efforts to do so and sold the property to a developer who intended to develop the whole site bounded by George, Pitt and King Streets and he made what Mr Roth described as an "exceptionally good offer" which was accepted and the property was sold.

48. According to Mr Roth London Fashions purchased this property in July 1960 as an investment. It demolished the old shops and erected a three storey arcade. Mr Roth occupied one of the shops in the 1960s for his own business and leased the other shops and offices. He currently has his office in the building. London Fashions still owns the building.

49. This property was purchased in November 1970 by Henry Fraser. The land was purchased in order to build a shopping centre. The property was consolidated with a property at 29-31 Oaks Avenue which was purchased by Henry Fraser in February 1971. The land was eventually consolidated with 32 Pacific Parade, Dee Why which Henry Fraser purchased in 1973.

50. Mr Roth obtained a development consent and a commitment from Woolworths to open a supermarket in the shopping centre and arranged for the building of a shopping centre to commence. After all this had been done he fell sick and was admitted to hospital for some time. After which he felt that he would be unable to devote the necessary time to the supervision of the construction work. He therefore sold this project in 1976 after it had started. He gave evidence that, had he not become sick, he would not have sold the property, but would have leased it as a shopping centre and held it as an investment.

51. In 1970 Manly Properties purchased half this property as an investment and an estate agent purchased the other half. In 1979 Manly Properties purchased the estate agent's 50% interest. The property was bought by Manly Properties as an investment, according to the evidence of Mr Roth, in order to lease the building. It has since been refurbished. Manly Properties still owns the property.

52. Section 25A is the successor to s. 26(a) of the Act. Section 26(a) was repealed by Act No 47 of 1984 and s. 25A was substituted. Section 25A(1) re-enacts the former s. 26(a).

53. The relevant principles governing the construction and application of s. 25A (a fortiori, its predecessor, s. 26(a)) are well established. The leading case is McCormack v Federal Commissioner of Taxation [1979] HCA 18; (1979) 143 CLR 284. Gibbs J said at 303:

"The taxpayer bears the burden of proving that

the assessment was excessive. To discharge that

burden in a case such as the present he must

prove affirmatively, on the balance of

probabilities, that the property was not

acquired for the purpose of profit-making by

sale. The burden may be discharged by drawing

inferences from the evidence. In some cases in

which all the relevant facts are known, and

there is no material upon which it might

properly be concluded that the property was

acquired for the relevant purpose, the inference

may properly be drawn that the property was not

acquired for the relevant purpose. But it is

not enough, even when all the facts are known,

that there is no material upon which it may be

concluded that the property was acquired for the

purpose mentioned in s. 26(a). If a taxpayer

can succeed, simply because there is no evidence

from which it can be concluded that the relevant

purpose existed, that must mean that the burden

of proving the existence of that purpose lies on

the Commissioner. That in my respectful opinion

would be to invert the onus of proof. The

taxpayer will succeed if the proper inference

from the evidence is that the property was not

acquired for the relevant purpose, but if there

is no evidence as to the purpose for which the

taxpayer acquired the property the appeal must fail."

"In a case arising under s. 26(a) the taxpayer

is usually the person best able to give evidence

as to the purpose for which the property in

question was bought. Although evidence given by

a taxpayer as to the purpose with which the

acquired property must, for obvious reasons, 'be

tested most closely, and received with the

greatest caution' (Pascoe v Commissioner of

Taxation (1956) 30 ALJ 402 at 403 citing Cox v

Smail [1912] VicLawRp 50; (1912) VLR 274 at 283), I completely agree

with Barwick CJ in Gauci v Federal

Commissioner of Taxation [1975] HCA 54; (1975) 135 CLR 81 at

86, that it would be wrong for a judge to regard

the evidence of a taxpayer as prima facie

unacceptable. The taxpayer's evidence must of

course be considered on its merits, in the light

of the circumstances of the case, without any

prepossession, favourable or unfavourable."

Gibbs J at 303 adopted with approval the following passage from the statement of Mason J in his dissenting judgment in Gauci v Federal Commissioner of Taxation [1975] HCA 54; (1975) 135 CLR 81 at 89-90:

"The Act does not place any onus on the

Commissioner to show that the assessments were

correctly made. Nor is there any statutory

requirement that the assessments should be

sustained or supported by evidence. The

implication of such a requirement would be

inconsistent with s. 190(b) for it is a

consequence of that provision that unless the

appellant shows by evidence that the assessment

is incorrect, it will prevail ... The crux of

the matter is that when in a s. 26(a) case an

appellant seeks to overcome the onus created by

s. 190(b) by adducing evidence as to his

intentions with a view to establishing the

purpose of the acquisition was not a s. 26(a)

purpose and that evidence is not accepted, he

has not discharged the onus which he bears. At

best, from the appellant's viewpoint, the

evidence stands in a situation in which it is

equivocal, neither establishing a s. 26(a)

purpose nor denying the existence of such a

purpose. At worst, the judge may, in the

circumstances, be able to infer the existence of

a s. 26(a) purpose. In either event the

appellant fails to discharge the onus and the

appeal fails."

55. Gibbs J's statements were agreed to by Stephen J at 306 and in substance by Murphy J at 322-3.

56. Mason J's statement in Gauci, approved by Gibbs J in McCormack, stemmed from Mason J's earlier judgment in Admin Exploration Pty Limited (In Liq) v Federal Commissioner of Taxation (1972) 72 ATC 4253 at 4259-4260. Mason J made observations to the same effect as he made in Gauci. In Admin Exploration Mason J also said:

"That profit-making by sale was not the sole or

dominant purpose for acquisition in a given case

may be demonstrated by showing that the dominant

purpose actuating the acquisition was another

and inconsistent purpose, as for example,

retention as an investment".

The taxpayer relies on this passage in the present case.

57. Compare G Williams v Federal Commissioner of Taxation (1974) 74 ATC 4237 per Hogarth ACJ where his Honour said at 4250 that, although the onus is upon the taxpayer so far as the first limb of s. 26(a) is concerned to establish on the balance of probability that it was not his main or dominant purpose in acquiring the shares to sell them at a profit:

"it does not necessarily follow that he must

establish what in fact his main or dominant

purpose was. If he can establish that it was

some other specific purpose, so much the better

for him. That is one way of proving that it was

not the purpose of resale at a profit. But he

may be able to prove the absence of that purpose

by evidence that establishes that he had no

particular purpose, but merely a vague general

hope that the shares would be a good investment.

In this case I am satisfied that that was the

taxpayer's main or dominant purpose. He hoped

to better his financial position in some vague

and undefined way."

58. The facts of the present case are different from the facts in Williams.

59. In Adelaide Olive Co Pty Limited v Commissioner of Taxation (1974) 22 FLR 413 Wells J said at 450 that the taxpayer may have a purpose other than the making of a profit on resale for which he acquires property:

"even though the chances of fulfilling it may

appear uncertain or even remote; and it is, in

my opinion, consistent with that proposition

that the same taxpayer may, without incurring

liability under s. 26(a), contemporaneously have

it in mind that if, for some reason, he cannot

proceed with his original project, he will

resell the property in question and

believe - even hope - that he will do so at a profit."

60. Whether Adelaide Olive Oil is consistent with the view of the majority in McCormack is perhaps open to debate, but it is not necessary for me to resolve that question in the present case. As at present advised, however, I do not see any inconsistency. See also Westfield Limited v Commissioner of Taxation (1991) 28 FCR 333 per Hill J at 342-344.

61. The Commissioner relied on both limbs of s. 25A; but both parties fought the case essentially on the first limb of the section.

62. The Commissioner faintly argued that s. 25 applied, so that the profit generated by the sale of a portion of the land is income according to ordinary concepts. In a case such as the present, s. 25 could not apply unless his Honour's interpretation in Westfield at 342-345 of the taxpayer's purpose when purchasing the property was of the kind mentioned in s. 26(a).

63. The taxpayer claims that the land was not purchased for purposes of resale at a profit within s. 25A. It claimed that it was purchased for the purpose or the dominant purpose of development and retention as an long term investment.

64. Statements by taxpayers, and, in the case of corporate taxpayers, those who control and manage their affairs, must be scrutinized with care, weighed against the objective facts and the inferences to be drawn from the taxpayer's activities generally. Statements of this kind must "be considered most closely and received with the greatest caution": Pascoe v Commissioner of Taxation (1956) 30 ALJ 402 at 403 per Fullagar J; Eisner v Federal Commissioner of Taxation (1971) 45 ALJR 110 per Walsh J at 112; McCormack per Gibbs J at 301-2; Digby-Bennett v Federal Commissioner of Taxation (1973) 73 ATC 4175 per Mahoney J at 4180.

65. The central question is whether the taxpayer has satisfied the Court that it did not acquire the taxpayer's property for the dominant purpose of resale at a profit.

66. The starting point must be the conversation at St Vincent's Hospital in September 1977 between Mr Henry Roth, Mr Baffsky and Mr Brender, the evidence of which has already been mentioned. It is agreed between the parties that the intention or purpose of all three participants in the conversation is relevant. Although it is the purpose of the taxpayer that the Court must examine, the taxpayer purchased the taxpayer's property on behalf of the interests represented by all three men. The purchase of the taxpayer's property was a form of joint venture between the three of them through the medium of the Jack and Jill Trusts.

67. In the present case where Mr Henry Roth, Mr Baffsky and Mr Brender in essence engaged in a form of joint venture through the corporate vehicle of the taxpayer, the directing mind and will of the taxpayer is in truth to be gleaned from the state of mind of the three people concerned (Commissioner of Taxation v Whitford's Beach Pty Limited [1982] HCA 8; (1982) 150 CLR 355 per Gibbs CJ at 370 and per Mason J at 384). It was primarily the state of mind of Mr Roth that is relevant because he was the primary financier of the project and was to attend to the rezoning and development of the taxpayer's property. Subsequent events confirmed the role which Mr Henry Roth was to play because he did in fact attend to these matters.

68. Both parties accept the correctness of these propositions.

69. The evidence of all three men of the terms of this conversation was very general and vague. There is also some degree of inconsistency. Mr Brender said in cross examination that there was discussion at the hospital to the effect that the taxpayer's property would be rezoned for industrial purpose, appropriate buildings erected and let out to tenants. Mr Baffsky said in cross examination that the directors of the taxpayer had no specific purpose in mind for the taxpayer's property at the time it was purchased and he recalls no specific discussion at the hospital as to what might be done with the land in the future. Mr Roth says that at the time of the discussion at the hospital he had in mind that the taxpayer's property would be rezoned for industrial or commercial use, developed and then held as a long term investment. His evidence was very general as to what in fact was discussed at the hospital.

70. I take a generous view about the recollection of the witnesses of the terms of the conversation. It was almost sixteen years ago. It would not be surprising therefore to find that each gave a version of the conversation that differed in some respect from the other versions.

71. Having observed all three witnesses give their evidence and assessed it in the light of the evidence given by affidavit and the documentary material, I have come to the firm conclusion that each of the participants in the conversation at St Vincent's Hospital at the bedside of Mr Henry Roth had only the vaguest idea of what was said at that time; their evidence is almost entirely reconstruction without any independent recollection of what was said. I say "almost entirely" because each did in fact recall that there was discussion as to the fractional interest that each was to have in the joint venture and broadly that it was to be a venture whereby the taxpayer's land would be purchased for the benefit of all three of them. But their independent recollection did not go beyond this. I approach their evidence as to the terms of the discussion with great caution; indeed I cannot accept it as reliable. This reservation on my part is strengthened when it is remembered that there are no contemporaneous documents of any kind relating to terms of this conversation. The evidence is totally bereft of them. There are no minutes of meetings of the directors of the taxpayer and no records of either the Jack or the Jill Trust which cast any light on the intentions of the three men at the time of the September 1977 discussion.

72. On one point all three men were in agreement, namely, that none of them intended to resell the taxpayer's property. I do not accept that evidence.

73. The documents prepared by Mr Baffsky to give effect to whatever the arrangement was that was made at St Vincent's Hospital are consistent with the view that it was left to Mr Baffsky to create the appropriate structure and I accept that this was the tenor of a portion of the conversation at Mr Henry Roth's bedside. But the documents merely support the conclusion that the conversation at the hospital included discussion as to the shares of each participant in the venture and are consistent with Mr Baffsky's role being to prepare and put in place the necessary legal structure. They say nothing relevant about the purpose of the parties in making the acquisition.

74. The evidence as to Mr Baffsky's 49% share in the venture is curious. He and Mr Henry Roth gave conflicting accounts as to the liability of Mr Baffsky to repay the loan. Mr Henry Roth was plainly of the view that he made a loan of money to Mr Baffsky that was to bear interest and was to be repaid. Mr Baffsky said that he regarded himself as having no personal obligation to repay the loan or pay interest; and he said that he could not recall Mr Roth saying at any stage that he regarded Mr Baffsky as liable to repay the loan or pay interest on it. Mr Baffsky described himself as a "49% passive investor" in the venture in the sense that he had no obligation to contribute any funds to the venture and that the interest in the venture was given because of the introduction which he made of the taxpayer's property to Mr Henry Roth and the association between himself and Mr Roth.

75. The fact is that Mr Baffsky's 49% share was financed by Mr Roth. It would be very curious, indeed, if a loan which did not permit recourse by the lender to the borrower for repayment was intended to subsist forever or unless and until Mr Baffsky had sufficient funds to repay it from whatever source. The more likely result is that it was intended by the parties that Mr Baffsky's loan would be repaid to Mr Roth out of the proceeds of sale of the whole or portion of the taxpayer's property. At any rate, whether this be so or not, the vague and curious nature of the arrangement between the parties with respect to the 49% is one of the matters which I take into account in examining the probabilities, though it is not the major matter.

76. An important part of the evidence consists of three letters together with the income tax return of the taxpayer for the year of income ended 30 June 1984.

77. In the 1984 return of the taxpayer it was claimed that the profit on the sale of five acres of the taxpayer's property to the Anglican Council, settlement of which was effected on 5 July 1983 and resulted in a profit of $402,055.52, was a capital profit.

78. Schedule 16 of the return contained the following statements:

" WARRIEWOOD VALLEY PTY LIMITED

AS TRUSTEE FOR THE JILL TRUST

INCOME TAX - 30TH JUNE, 1984

SCHEDULE 16 - SALE OF PROPERTY

In December, 1977 the Company acquired on behalf of

the Trust a total of approximately 45 acres in Jackson Road,

Warriewood Valley at a cost of $760,351.15.

The property consisted of a poplar tree plantation

growing for supply to match stick manufacturers and was

purchased for this purpose. There was also a house on the

property which was let most of the time.

The property was let to various people from time to

time to agist livestock thereon.

The property has been exempt from New South Wales Land

Tax in recognition of its use for primary production.

In early 1983 the Company was approached by the Church

of England Council for Diocesan Schools to sell portion of

the land to them for use as a Church of England School.

Due to the fact that use of poplar wood in match stick

manufacture was superseded so that the Companies were no

longer interested in purchasing poplar trees for that

purpose and the occurrence of a 'blight' of some

description which had attacked the poplar trees it was

decided to abandon the venture and to sell five acres to the

Church of England School and an option was granted on a

further seven acres.

The sale of the five acres was settled on 5th July,

1983 and resulted in a capital profit of $402,055.52 which

is arrived at as follows:-

Sale Price 500,337.48

Less: Selling Commission 11,100.00

Legal Fees 2,698.96 13,798.96

486,538.52

Less: Cost of Land Sold

5 x 760,351.15 = 84,483.00

45 1

Capital Profit on Sale 402,055.52

Asset Revaluation Reserve

Revaluation of approximately

40 acres in Jackson Road, Warriewood

Valley to $112,500 per acre $3,824,131.85"

79. Messrs Greenwood Challoner and Co, chartered accountants, wrote on behalf of the taxpayer to the Commissioner by letter dated 11 November 1985 in support of the taxpayer's assertion that it did not purchase the taxpayer's property for the purpose of resale at a profit. The letter was written on Mr Henry Roth's instructions and the relevant facts related in the letter were conveyed to the accountants as instructions from Mr Roth. In particular, the material included in Schedule 16 of the tax return was included on the express instructions of Mr Henry Roth.

80. The letter from Greenwood Challoner is four pages in length. I shall set out the principle provisions of it which bear upon this case. The letter recited a number of facts supporting the submission made in the letter that the taxpayer acquired the taxpayer's property for the purpose of growing poplar trees to make matches, but that due to the introduction of the more popular "disposal lighters" "matches requiring the use of poplar wood diminished in popularity and therefore the opportunity to plant and cultivate and replant was lost". Nevertheless the trees at Warriewood Valley were maintained by an employee of the taxpayer who lived there until July 1981 when he was dismissed for not carrying out his duties properly. The letter said:

"It is for the foregoing reasons that it is

contended that Warriewood Valley Pty Limited as

trustee did not acquire the land for resale at a

profit but acquired it for the purpose of

growing, cultivating and replanting poplar trees

which opportunity was lost when disposable

lighters superseded wooden matches."

81. Greenwoods and Freehills, taxation consultants, wrote a letter to the Commissioner on behalf of the taxpayer dated 7 April 1986 furnishing certain information in response to a request from the Australian Taxation Office. In that letter it was stated, amongst other things, that the acreage used for the poplar tree plantation of 45 acres purchased in 1977 was approximately 33, the total number of poplar trees planted at the time of acquisition was approximately 4,500 and that approximately the same number was there at the time the venture was abandoned; but no acreage was set aside for any other purposes and approximately 12 acres was swampland on which nothing could be done. It was also stated that the taxpayer as trustee "purchased the land with the poplar trees at a growing stage for the purpose of taking advantage of the sale of the trees". This letter also was written on instructions from Mr Henry Roth.

82. Finally a letter from the solicitors for the taxpayer to the Commissioner of 13 July 1988, again written on Mr Henry Roth's instructions, and also with respect to the Commissioner's assessment for the 1984 income year issued to the taxpayer in its capacity as trustee of the Jill trust, set out to make a case that the taxpayer did not acquire the taxpayer's property with the intention of reselling it at a profit. The letter said that it was necessary for the purpose of determining the application of s. 26(a) of the Act to look to the intention of Mr Henry Roth as he at all relevant times controlled the taxpayer. It said that about 2,000 poplar trees were growing on the taxpayer's property at the time it was purchased by the taxpayer and they were approaching maturity; that based upon certain representations made to Mr Henry Roth (presumably when the taxpayer's property was purchased) farming of the poplar trees would yield a profit of about 20% on monies invested and that the profit would have paid the "carrying" costs of the land (ie. rates and taxes etc) and would have also yielded a profit. The letter continued:

"After acquisition the person who had supervised

the poplar trees for the vendor was engaged by

the taxpayer and continued to maintain the

trees. Several hundred new trees were also

planted. However shortly after the purchase of

the land and before the trees had reached full

maturity the market for matches made from the

wood of poplar trees effectively collapsed.

This was as a result of the advent of matches

made from cardboard and disposable cigarette

lighters. The price of poplar tree wood fell

sharply and did not recover during the time of

the taxpayer's ownership of the property. The

harvesting of the trees growing upon the

property no longer became a commercial

proposition and effectively the poplar tree

growing activities came to a halt.

Due to the failure of the poplar tree growing

the taxpayer, through Mr Roth, proceeded to

examine whether there were alternative uses to

which the land could be put. Its examination of

the alternative was not a success. Discussions

with Wahroonga (sic) Shire Council became

complex and protracted. There were

modifications made to a water way in the area

'Mullet Creek Weir' which had the consequence of

inundating the property with water.

As a result some of the property became a part

of what is now known as 'The Warriewood Wet

Lands'. There were various questions regarding

the conservation of this area and it became a

political question.

The taxpayer became frustrated with its

inability after more than five years of

discussions to obtain some form of rezoning to

permit the land to be used in some profitable

way. During this period it was required to bear

substantial charges for shire and water rates as

well as interest and other expenses associated

with holding the land.

In 1983 the taxpayer was approached by the

Promotion of Sydney Anglican Diocesan Schools

which made an offer to purchase part of the land

owned by the taxpayer. The land had not been

marketed for sale by the taxpayer. The taxpayer

subsequently accepted the offer and sold the

property. Its immediately motive in selling was

to recoup some of its outgoings in respect to

the acquisition and holding of the land."

...

... the taxpayer acquired the land with the

intention:

(1) To grow and farm poplar trees and to

derive income from that activity; and

(2) If that activity failed to examine what

alternative uses the land could be put to.

There is nothing in the history of the

acquisition and sale of the land or in Mr.

Roth's previous activity that would indicate

that the land was acquired with the dominant

purpose of being resold at a profit."

83. Mr Roth said in evidence that his intention and the intention of the taxpayer when acquiring the taxpayer's property was to have it rezoned, develop it and retain the land for income earning purposes as an investment, but his intention was not to resell the land. He said that the role of the poplar trees in the purchase of the land was an "incentive" to him because it might generate income to cover some of the taxpayer's holding charges and ensure the retention of exemption from land tax. Mr Roth described the letters to which I have referred and Schedule 16 to the tax return, all written on his instructions, as telling "half truths" because they concealed the balance of the facts which made the whole truth. He said he did not intend deliberately to deceive anybody.

84. Plainly the intention of the letters and Schedule 16 to the 1984 tax return of the taxpayer was to convey to the Commissioner the impression that the taxpayer had purchased the taxpayer's property for the purpose of growing and farming poplar trees and deriving income from that activity as the primary, if not the only, purpose of the acquisition. Indeed the false statement is made in the letter of 13 July 1988 (it is not suggested that it was false to the knowledge of the writer, only to the knowledge of Mr Henry Roth) that several hundred new trees were planted by the taxpayer after acquisition in 1977. The letters and Schedule 16 did not contain "half truths"; they told lies intended to mislead the Commissioner in a material respect in the process of carrying out assessment.

85. Certainly this material reflects adversely on Mr Henry Roth's credit. I do not believe his evidence on matters material to issues in this case. But these documents have wider ramifications to the case than Mr Henry Roth's credit. They go to the foundation of the taxpayer's case that its purpose in acquiring the taxpayer's property was to develop and hold it and that the presence of the poplar trees was merely an incentive to acquire the land. These assertions are inconsistent with the statements made in Schedule 16 and in the letters to which I have referred.

86. The taxpayer's purpose in acquiring the taxpayer's property was not the purpose of growing poplars. The poplars have been virtually ignored since the taxpayer's property was acquired. The evidence on these matters in my opinion discredits not only Mr Henry Roth's credibility, but the taxpayer's case that its purpose was to retain the land. In the absence of corroboration of the evidence of any of the material witnesses as to the purpose of the acquisition of the subject property, and in the light of material revealed by these documents, the Court could not possibly accept that the taxpayer had discharged the requisite onus of proving that it was not its purpose when acquiring the subject land to do so for the purpose of resale at a profit.

87. Another part of the matrix of facts which must be considered is that before the taxpayer's property was acquired by the taxpayer, the rezoning of part of the adjoining land which had been purchased by John Petray had been achieved through the efforts of Lend Lease. When the conversation in St Vincent's Hospital was held, this land had been rezoned, and this in my view renders it more likely than not that the taxpayer's property was purchased with the possibility of successful rezoning and development of the taxpayer's property in mind. Of course, it does not follow from this circumstance by itself that the taxpayer's property was more likely than not purchased for the purpose of resale at a profit; it is equally consistent that it was purchased for the purposes of a long term investment. But when it is viewed in the light of all the other facts to which I have referred, it seems to me that the successful rezoning of the adjoining land by Lend Lease makes it even more difficult to accept the taxpayer's case.

88. It is true that other acquisitions of real estate made by Mr Henry Roth or interests which he controls or in which he has a substantial interest and which I have related earlier in the evidence (that is other than the Warriewood land), tend to show the retention of land generally for lengthy periods. But some of those investments are associated with other businesses in which Mr Roth was involved and have little to do with the land as such. In any event there was a reasonable amount of selling of land by those interests during the time in question.

89. Primarily, however, the case falls to be determined on the facts that directly surround the acquisition of the taxpayer's property. Looking at all the relevant matrix of facts the Court is not satisfied that the taxpayer did not acquire the taxpayer's property for the dominant purpose of resale at a profit.

90. I would dismiss the appeal and affirm the decision of the Commissioner to which the taxpayer objected in this case. The taxpayer must pay the Commissioner's costs of the appeal including reserved costs, if any.