York House Pty Ltd v Federal Commissioner of Taxation [1930] HCA 7

York House |Pry. Lr. oo FeperaL Comaus- SIONER OF TaxaTION,

owners of the land prior to the incorporation of the company and recouped by it and the expenditure by the company after that date in connection with the erection of the building. ;

Held, (1) that though the lease, being unregistered under the Transfer of Land Act, was ineffective to pass any estate or interest in the land, yet it was specifically enforceable as an agreement for a lease and, as such, fell within - the scope of sec. 23 (1) (n) of the Income Tax Assessment Act, which, however, does not cover the case of tenancies arising by implication of law: Great West Permanent Loan Co, v. Friesen, (1925) A.C. 208, and National Trustees, Burecu- tors and Agency Co. of Australasia Ltd. v. Boyd, (1926) 39 C.LLR. 72, applied; - and (2) that the company was entitled to a deduction in respect of the money paid by it after its incorporation, but not in respect of the money recouped by it to the owners of the land for moneys paid by them prior to the incorporation of the company.

This was a case stated pursuant to sub-sec. 8 of sec. 51a of the Income Tax Assessment Act 1922-1929 for the opinion of the High Court by Knox C.J. on the hearing of an appeal to the High Court under sec. 51a of that Act by York House Pty. Ltd. against an assessment to income tax, the Company claiming a deduction under sec. 23 (1) (n) of the Income Tax Assessment Act 1922-1925 in respect - of the year of income ending 30th June 1925. It appeared that Marks Bros. purchased certain land in Little Collins Street, Melbourne. On 30th August 1922 an agreement under seal was executed which was expressed to be made between Marks Bros. and E. A. Wilmot on behalf of York House Pty. Ltd., a company intended to be registered under the Companies Act 1915 (Viet.). - By this instrument Marks Bros. purported to demise and lease the land (which was under the provisions of the Transfer of Land Act 1915 (Vict.)) unto Wilmot on behalf of the Company for the - term of ten years as from Ist September 1922 at a yearly rental. Wilmot covenanted by this document, for himself, his executors and transferees, and so as to be binding on him or them until the Company should become substituted as lessee and /or legally bo : to perform and observe the conditions and provisions in the leas that (inter alia) he or the Company would erect and complete prior to Ist July 1924 a building on such land in conformity with certaii plans agreed upon, which building should remain the property the lessors, and would expend not less than £80,000 on the buildi

e terms of such clause are fully set out in the joint judgment of Know C.J. and Starke J. hereunder. This instrument was never gistered as a lease under the Transfer of Land Act 1915. On 9th October 1923 York House Pty. Ltd. was incorporated under the Companies Act 1915. On 26th October 1923 an agreement under was made between Marks Bros., Wilmot and the Company, sed on the back of the lease of 30th August 1922, whereby the was adopted by the Company, and it was agreed that it should binding upon the lessors, Wilmot and the Company, in the same er and take effect in all respects as if the Company had been inexistence at that date and had ratified the lease and that Wilmot should be discharged from all liability thereunder. A building was ed on the land by one Cooper under a contract dated 1st wember 1922 which he made with Marks Bros. to erect a building accordance with the plans referred to in the covenant in the lease. building was not completed until after the incorporation of York House Pty. Ltd.; and of the total sum of £64,584 6s. 5d. paid Cooper for the building, £49,046 17s. 11d. was paid by Marks before the incorporation of the Company and £15,537 8s. 6d. ie Company after its incorporation. There were also separate ntracts with other persons to complete the building and render it for occupation, some of which were entered into by Marks Bros. e the Company was incorporated and some by the Company. these contracts and to the architect, Marks Bros. paid ether £10,797 4s. 8d. and the Company paid £10,079 6s. 8d. The thole of the above sums of £49,046 17s. 11d. and £10,797 4s. 8d. paid 'Marks Bros. before the Company was incorporated towards the

y Marks Bros. The Commissioner of Taxation assessed the any deduction under sec. 23 (1) (n) of the Income Tax sment Act. The Company claimed under that section a tion for that year of a sum computed in the manner provided h section in respect of both the expenditure by Marks Bros. to 30th November 1923, recouped by the Company, and the

York House Pry. Lrp. v FrepERAL Commas- SIONER OF TAXATION.

1930, wey York House Pry. Lrp. vw. FEDERAL Commis- SIONER OF TAXATION.

expenditure by the Company after that date in connection with the erection of the building.

Ham K.C. (with him Tait), for the taxpayer. The claim for the deduction is made under sec. 23 (1) (m) as it appeared in 1925 before the amendment introduced in 1927. The Company is entitled to deduct both the sums paid direct to the contractor and those recouped to Marks Bros. It is entitled to deduct the latter because it recouped Marks Bros. for money expended by them erecting the building and the former as being money expended by the Company in completing it. In each case the amount falls within the words of sec. 23 (1) (nm) of the Act as it stood in 1925, as it is

improvements, and the Company had covenanted by the adopting agreement to perform the covenant set out in the agreement between Marks Bros. and Wilmot.

[Isaacs J. referred to Encyclopedia of Forms and Precedents 2nd ed., vol. 1v., pp. 104-105.]

the improvements must be paid for by the lessee, though they nee not necessarily be effected by the lessee. In any event the Company is entitled to deduct the sum actually: paid by it after 30th November 1923 to the several contractors and architects who did the work of erecting the building.

Sir Edward Mitchell K.C. (with him Phillips), for the Comn of Taxation. :

[Knox C.J. You may confine your argument to the money other than those repaid to Marks Bros.] zi

The work in question was done for Marks Bros. To come the section the Company has to show a sum expended by the under a covenant, and, if before there is any covenant at all by tl lessee, the owners have contracted to have that work done and he

done by or for the lessee at all. There must be a liability by the

by Wilmot to erect and forthwith carry out the work. That renant was entire, and was enforceable in its entirety or not at all. e document is not sufficiently stamped as a lease and is not sible in evidence (Dent vy. Moore (1)). In any event the ment not being registered under the Transfer of Land Act is a lease but only an agreement for a lease, and therefore the

that the obligations could never become covenants. It is only diture covenanted to be made in a lease which is protected. lease was entered into before the Company came into existence, the Company purported to adopt the terms of that lease. This olved a lease beginning before the lessee was in existence, which possible. Therefore there was no valid lease, and therefore no valid covenant. [Counsel referred to In re Johannesburg Hotel Ex parte Zoutpansbery Prospecting Co. (2) and Gluckstein v. Barnes (3).]

Ham K.C., in reply. The Company, in effect, took a lease for the lance of the term, and whether this was expressed to be for a od of ten years from a past date or for a less period of years months from the date of the agreement is immaterial (Halsbury's s of England, vol. xvut., p. 551). If the lease is not technically good as a lease, it is a valid and enforceable agreement for a lease of lich the Courts would order specifie performance (Morrisy v. (5) ). The doctrine of Walsh v. Lonsdale (6) applies to

(1919) 26 C.L.R. 316, at p. 324, (5) (1884) 11 V.L.R. 13, at p. 21; (1891) 1 Ch, 119, at p. 12 6 A.L.T. 107, at p. 108. (1900) A.C, 240, at (6) (1882) 21 Ch, D. 9. (7) (1905) 25 N.Z.L.R. 689, at p. 707. (8) (1926) 39 C.L.R. 72, at p. 81.

work is carried out for them under such contract, that is not work H.C. or A.

essee coupled with payment afterwards. The only covenant is Yorx House

"Lease" is defined in Earl of St. Germains v. Willan (1) and Halsbury, vol. xvm1., -pp. 387, 335, 366. The Court will grant [Starke J. referred to Swain v. Ayres (3) and Strong v. Stringer (4).] a

Knox C.J. anv Srarke J. This is an appeal against an assessment to income tax for the financial year 1925-1926. Marks Bros. purchased certain land in Little Collins Street, Melbourne, upon which they proceeded to erect a substantial building. On 30th August 1922 an agreement under seal was executed, which was expressed to be made between Marks Bros. and E. A. Wilmot ; behalf of York House Pty. Ltd., a company intended to be registered under the Companies Act 1915 of Victoria. By this instrument Marks Bros. purported to demise and lease the land (which was under the provisions of the Transfer of Land Act 1915 of Victoria) unto Wilmot on behalf of the Company for the term of ten years as from 1st September 1922 at a yearly rental. Wilmot covenanted, - by this document, for himself, his executors and transferees, and 80. as to be binding on him or them until the Company should become substituted as lessee and/or legally bound to perform and observe the conditions and provisions in the lease, inter alia, as follows care "That the lessee or the Company shall at his or its own cost and expense in all things forthwith on the said land erect cover in and prior to the first day of July one thousand nine hundred and twenty-four or such further time as the lessors shall allow for such purpose complete fit for occupation in a substantial and workmanlike - manner with the best materials of their several kinds and in conformity in every respect with the plans elevations sections a specifications already agreed to by the parties hereto and under the inspection and to the satisfaction of the architect and surveyor for the time being of the lessors a building for use as shops offices (1) (1823) 2B. & C. 216, at p. 220; (2) (1888) 41 Ch. D. 248, at p. 264. ER. 363.

107 (3) (1888) 21 Q.B.D, 289. (4) (1889) 61 LT. 470.

all usual and proper offices outbuildings walls drains sewers 1930- itary appliances and appurtenances all of which as and when Yorx House ed shall be deemed to be and remain the property of the lessors. ?"",,/""- nd neither the lessee nor the Company shall be deemed to have any ee

nt or other right or interest therein other than as lessee under Ee N!

sys. . Knox C.J. nd pounds on such building and erections and necessary Starke.

goings connected with the erection thereof and if required shall produce to the lessors proper vouchers for such expenditure and shall d may for such purpose pull down remove or alter or otherwise with all buildings and erections at present on the said land nd the lessee or the Company shall in the erection and completion ch building do all acts and things required by and perform the conformably in all respects with the provisions of the statutes 'able thereto and with the by-laws and regulations of the Council he City of Melbourne and shall pay and keep the lessors indemnified nst all claims for all fees charges fines penalties and other neuts whatsoever which during the progress of the works may ome payable or be demanded by the said authorities or any of in respect of the said works or any of them or of anything done er the authority herein contained and shall punctually and from to time discharge and pay all claims assessments and outgoings Wor at any time hereafter chargeable against an owner or occupier statute municipal law or otherwise in regard to the said land or buildings thereon and the lessors their agent architect and eyor shall have the right at all reasonable times to enter upon said premises to view the state and progress of the said works y of them to inspect and test: the materials and workmanship for any other reasonable purpose including the constructing ng or cleansing of any sewers or drains and the lessee or the mpany shall before commencing any such works obtain the

ssary licences therefor and set up sufficient hoardings and sures and perform all the shoring and other works necessary uphold the adjoining buildings and shall take all necessary steps omply with the requirements in relation to the work of any statute ocal authority and shall pay all fees and charges required for

H.C. or A. any such purposes and the lessee or the Company shall not in 1930. ee

'York House cause or allow any nuisance or do or permit anything which Poy. Lav.

a cause any unnecessary annoyance or disturbance to the occupi peasy of adjacent premises and shall pay and indemnify the lessors against er puE ax all claims for damage done in the course of such pulling down or 'AXATION. . 5 7 ' connection with the works hereby authorized and also all clai Knox C.J.

Starke J. and demands witl. respect to any alleged interference with or disturb-

lawfully have or make in regard to the said premises and shall execute all works that may in the opinion of the lessors be nece for the repair and maintenance of the party walls between pr buildings comprised in this lease and other adjoining buildings far as such repair and maintenance ought to be borne by the oy or oceupier of the old buildings or of the buildings to be substitut for them."

This instrument was never registered as a lease under the Transfer of Land Act 1915, and is ineffective, until registered, to pass any estate or interest in the land (sec. 61). On 9th October 1923 York House Pty. Ltd. was incorporated under the Companies Act 19 On 26th October 1923 an agreement under seal was made betwei Marks Bros., E. A. Wilmot, and the Company, indorsed on the back of the document or lease of 30th August 1922, whereby the lease was adopted by the Company, and it was agreed that it should binding upon the lessors, Wilmot, and the Company, in the manner and take effect in all respects as if the Company had in existence to date and had ratified the same, and that Wilmo should be discharged from all liability under the lease. This, course, did not operate as a ratification of the agreement or made before the Company's incorporation, but as a new contra to carry into effect the terms of that agreement, or lease. Befo

Cooper was paid these sums under a contract made between hit and Marks Bros., whereby he had agreed to erect the building it accordance with certain specifications, general conditions and plan

eciation of a lease is not allowed as a deduction (sec. 25(i)),buta = 20 yer is allowed the following deduction under sec. 23 (1) (7) : - Yor House 'The annual sum necessary to recoup the expenditure covenanted P47":

be made on improvements on land by a lessee who has no tenant

its in the improvements. The deduction under this paragraph sion ion Il be ascertained by dividing the amount (not exceeding the sum greta,

ified in the covenant) expended on the improvements by the ee by the number of years in the unexpired period of the lease ithe date the improvements were effected."" The taxpayer claims deduction under this section in respect of the sum of 046 17s. 11d. paid by Marks Bros. prior to 30th November and the sum of £15,537 8s. 6d. paid by the Company after that date. The Commissioner does not rely upon the provisions of sec. 93 the Income Tax Assessment Act, and expressly disclaimed any ggestion that the arrangement with the Company was made for purpose of defeating, evading or avoiding any duty or liability posed by the Acts or for any other purpose mentioned in the ction. We must therefore treat the arrangement as real and bona fide, and in no wise colourable or unreal. The provisions of 23 (1) (n) must therefore be applied to the case. Those Wisions allow a deduction to be made (a) of expenditure under a enant, (b) upon improvements on land, (c) by a lessee, (d) who no tenant rights in the improvements. No doubt exists in fact at the taxpayer expended £15,537 8s. 6d., under a covenant, on mprovements on land, and that the arrangement between the arties excludes any tenant rights in these improvements. But contended that the taxpayer was not a lessee of the land, use the agreement pursuant to which it expended the moneys was ineffective, owing to non-registration, to pass any estate or st in the land. The agreement or lease is not, however, void. quitable claims and interests in land are recognized by the Transfer and Act 1915, and unregistered instruments may confer such able claims or interests. (See Great West Permanent Loan V. Friesen (1) ; National Trustees dc. Co. v. Boyd (2).) '" When is such a state of things that a Court of Equity would compel

(1) (1925) A.C. 208, at p. 223. (2) (1926) 39 C.L.R., at pp. 81-82.

H.C. or A. specific performance of an agreement for a lease by the execution of

ee a lease, both in the Equity and Common Law Divisions the case ought

York Housn to be treated as if such a lease had been granted and was actually - aera in existence. There would then be the equivalent of a lease, tha ioe is to say, the lease of which equity would compel the execution in eae specific performance of the agreement" (Swain v. Ayres (1): see

Coatsworth v. Johnson (2); Strong v. Stringer (3)). A lease and a Starke 3. agreement for a lease are, as Lindley L.J. pointed out in Swain y.

Ayres, two different things, and it is quite true that the taxpayer

in the present case had no legal interest in the term under

agreement. It certainly went into possession of the land, and

rent under the agreement, and doubtless at law became a

far as they were applicable to such a tenancy. (See, in this Cor Moore v. Dimond (4).) But sec. 23 (1) (m) does not, in our opinion, cover the case of tenancies arising by implication of law, and legal interest in the taxpayer avails it nothing. So the matte resolves itself into the question whether an agreement for a lease is within the scope of sec. 23 (1) (nm). If the agreement can be specifically enforced, the landlord has the same rights as if a lease had been granted, and the tenant is protected in the same way as if a lease had been granted. There is thus the equivalent of a lease, and the tenant is the lessee in equity (Walsh v. Lonsdale (5); Swain v. Ayres). It is not in opposition to ordinary legal parlance to describe such an agreement as a lease, and the person entitle thereunder as a lessee. Nothing in the nature of the Income

upon taxpayers to legal demises and tenants taking under suel demises. But it was argued that the agreement before us is not such as

difficult to follow, for registration of the agreement or lease is that is required to make it operative as a demise in point of law. decree for specific performance of the agreement is not required to give it efficacy or effect as a legal demise. The suggestion, however,

(1) (1888) 21 Q.B.D., at p. 293. (3) (1889) 61 L.-T, 470. (2) (1886) 55 L.J. Q.B. 220. (4) Ante, 105, (5) (1882) 21 Ch, D. 9.

it the agreement is so uncertain that the Court would have H. ©. or A. quite unable to watch over, supervise, and enforce the building 1g mt. The argument is, for the reason given, quite irrelevant, York House in any case, we think, untenable. In Fry on Specific Perform- ee 6th ed., pp. 47-48, it is said - - '' Thereare . . . exceptional aes

s of building contracts in respect of which the Court will StoN=R or

: i a TAXATION. ere. . . . But whether. the Court will, or will not, interfere

. . Ki oJ. nforce all such contracts when definite, it appears to be settled Starke J.

at it will assume jurisdiction where we have the following three stances : first, that the work to be done is defined ; secondly, the plaintiff has a material interest in its execution, which

ession of the land on which the work is to be done " (Wolver- Corporation. v. Emmons (1); Puddephatt v. Leith (2); ard v. Oory Bros. & Co. (3)). The work in the present in the main, quite specific and definite : it is to be executed to plans and detailed specifications and to the satis- on of the architect and surveyor for the time being under e contract. The difficulty arises in connection with the words with all usual and proper offices outbuildings walls drains sewers ary appliances and appurtenances." Some or all of these dditions to the building are not described in the main contract, ad were the subject of subsidiary contracts. But, on the proper truction of the agreement, it would be for the architect and or under the contract to determine what was usual and in the way of offices and outbuildings, &c., and to watch supervise their erection. No real difficulty could be apprehended ing the work to be done, and whether it had been executed not executed according to the terms of the contract. Consequently condition mentioned by Fry is fulfilled. And the fulfilment e other conditions cannot be seriously contested.

sum of £48,046 17s. 11d. remains for consideration. This | was not expended by the taxpayer, York House Pty. Ltd., on ovements on the land, or covenanted to be so expended. It

(1) (1901) 1 K.B. 515. (2) (1916) 1 Ch, 200. q (3) (1922) 1 Ch, 265. VOL, XLII, ss 29

H.C. or A. was expended by Marks Bros. on improvements on the land, mai pits before the existence of the Company; and all the Company did wa Yorx House to recoup them their expenditure eo Lastly, it was argued that no agreement for a lease to the Company

eee could operate or be effective from a day which was past and befor ahd the incorporation of the Company, as in the present case. But ; argument is also untenable. Leases are frequently expressed Kner CF commence from a day which is past, and they relate back to s day for the purposes of computation only (Enys v. Donnith

(1); Bird v. Baker (2); Cooper v. Robinson (3) ). The result is that the taxpayer is entitled to a deduction in respec of the sum of £15,537 8s. 6d., to be computed in accordance ¥

Isaacs J. The taxpayer claims a deduction under sec. 23 (1) (n) of the Income Tax Assessment Act 1922-1925, in respect of the year

up to 30th November 1923, the taxpayer is clearly not entitled t any deduction, for the reason, independently of any other, the improvements were effected before the taxpayer came i existence and were therefore not effected by it, and they were paid for by it, nor by Marks Bros. as agent for the taxpayer.

recoupment alleged, really bookkeeping, was on a basis that not satisfy the requirements of the sub-section. As to moni actually paid by the taxpayer after 30th November 1923, Thave ha some doubt whether the taxpayer did at all material times legally fill the character of lessee required by the sub-section. To satisfy the statutory provision, there must first be a covenant by a "lessee before the improvements are effected ; then the lessee must ef them under the covenant in the "lease" ; next, the " lessee" n pay for the improvements, and then he is entitled to the " annual

(1) (1761)2 Burr. 1190; 97 E.R. 782. (2) (1858)1 E. & E. 12; 120 ER.8)? (3) (1842) 10 M. & W. 694; 152 E.R. 651. '

with it "lessee," must exist at every necessary point. It is H.C. or A. necessary, in my opinion, that the "lease " should be a strictly ey

| demise: it is satisfied by an agreement of which specific Yorx House performance would be granted. (See Coatsworth v. Johnson (1).) Env ay The one vital point is whether a Court of Equity would lend its aid pee ee specific performance. In this connection two questions oped it themselves. The first is whether, assuming no other x ion, the building lease is such as would attract the jurisdiction. o this, and not without some hesitation, I am influenced by the stated in Wolverhampton Corporation vy. Emmons (2) to to the view that specific performance would be an appropriate ly. The other question is more general. Was the transaction business transaction, which the statutory relief was designed et, or was it a mere scheme for escaping liability, while the antial ownership remained unchanged, a state of affairs with hich sec. 93 would effectively cope? But as that section is not lied on, nothing can, on the facts of this case, be based on the question.

In the result, the agreement for a lease operates as to payments ter 30th November 1923, and I agree with the order proposed by

y learned brothers, the Chief Justice and Starke J.

The taxpayer should be allowed a deduction for the financial year 1925-1926 of a sum computed in manner provided by sec. 23 (1) (n) of the Income Taw Assessment Act 1922-1925 in respect of the expenditure by it of the sum of £15,537 8s. 6d. on improvements on the land mentioned in the case stated. Further the Court does not think fit to answer the questions stated in this case. Remit case to a Justice of this Court for further hearing. Reserve costs of case to Justice who hears appeal.

citors for the appellant, Blake & Riggall. itor for the respondent, W. H. Sharwood, Crown Solicitor for