Starco Pty Ltd and Commissioner of Taxation [2002] AATA 6; (2002) 48 ATR 1192; 2002 ATC 2013 (10 January 2002)

Last Updated: 2 October 2009

DECISION AND REASONS FOR DECISION [2002] AATA 6

ADMINISTRATIVE APPEALS TRIBUNAL )

) No QT2000/82
TAXATION APPEALS DIVISION )
Re STARCO PTY LTD
Applicant
And COMMISSIONER OF TAXATION
Respondent

DECISION

Tribunal Mr. D.W. Muller, Senior Member

Date 10 January 2002

Place Brisbane
Decision The Tribunal: 1. Sets aside the objection decision under review insofar as it related to the sale of four penthouse units numbered 17, 18, 35 and 36 at 24 Munna Crescent, Noosaville and in substitution determines that the said units were not trading stock of Ukaba Pty Ltd; and 2. Remits the matter to the Respondent for re-assessment.


(Sgd) DW MULLER
SENIOR MEMBER
CATCHWORDS
TAXATION - Construction of 4 home units for private purposes along with 31 home units for sale at a profit – whether 4 home units trading stock.

Income Tax Assessment Act 1936 s.36
A.R.M. Constructions Pty Limited & Ors v F.C. of T. (1987) 87 ATC 4790 at 4805
Iswera and Commissioner of Inland Revenue [1965] 1 WLR 663
Commissioner for Inland Revenue v Paul [1956] S.A.L.R. 335

REASONS FOR DECISION

10 January 2002 Mr. D.W. Muller, Senior Member

1. This is an application to review an objection decision made by the respondent on 22 February 2000, in relation to the year of income ended 30 June 1989.
2. The original assessment for the year of income ended 30 June 1989 issued to the taxpayer on 20 February 1990 with the tax being due and payable on 27 March 1990.
3. The amended assessment for the year of income ended 30 June 1989 issued to the taxpayer on 27 February 1996.
4. By letter dated 26 April 1996 the taxpayer lodged an objection against the notice of amended assessment for the year of income ended 30 June 1989.
5. The Commissioner's formal notice of decision on objection for the year of income ended 30 June 1989 issued on 22 February 2000 and the taxpayer lodged an application for review with the Administrative Appeals Tribunal on 13 April 2000.
6. The question to be determined by the Tribunal is whether an increase of $668,051 in the distribution from the Starkey Family Trust, has been correctly included in the assessable income of the taxpayer, applicant, Starco Pty Ltd. The quantum of $668,051 is made up of:

(i) $655,338 being alleged profit on the sale of four penthouse units in the Noosa Pacific 1 complex, to members of the Starkey family; and

(ii) $12,713 being further settlement amounts received upon the sale of home units in the Noosa complex.

7. The amount of $12,713 mentioned in paragraph 6(ii) above relates to the amount granted as a sale discount on the management unit. It was later reduced to $11,500. This amount is not now in issue between the parties.
8. Although there were some differences between the parties as to the facts upon which this review should proceed, all material facts had been agreed upon by the time the matter came on for hearing. There were no witnesses called at the hearing.
9. The relevant facts were:

(i) Mr. Alan Starkey is the principal of Alan Starkey & Associates Pty Ltd., a business providing architectural services.

(ii) Ukaba Pty. Ltd. ("Ukaba") was at all material times the trustee of the Ukaba Unit Trust ("the Ukaba Trust").

(iii) At all material times Alanbeth Pty. Ltd. ("Alanbeth") was the trustee of the Starkey Family Trust ("the Starkey Trust").

(iv) At all material times the Starkey Trust owned all of the units in Ukaba.

(v) Starco Pty. Ltd ("Starco"), the applicant herein, was incorporated on 9 March 1989 as Croxstar Pty. Ltd. ("Croxstar") and was or became a beneficiary of the Starkey Trust for the year ended 30 June 1989.

(vi) In early 1984 Mr. And Mrs. Alan Starkey and their family ("the Starkey family") moved their principal place of residence to 18 Munna Crescent, Noosaville, Queensland ("the Starkey residence").

(vii) Late in 1984 the Starkey family became aware that certain parcels of land adjoining their residence comprising three lots being Lots 163, 164 and 165 Munna Crescent, "The Haven", Noosaville ("the land") comprising vacant land and more fully described as Allotments 163, 164 and 165 of sec. 7, County of March, Parish of Weyba, City of Noosaville on Certificate of Title, Volume 5962, Folios 240, 241 and 242 containing approximately 5,869 square metres were about to be released for sale by its then owner, Tricontinental Corporation Limited ("Tricontinental").

(viii) The Starkey family was interested in purchasing the land for the purpose of subdividing it and building a place of residence for each adult family member namely Alan and Beth Starkey, Philip Starkey, Brett Starkey and Debra Starkey, who has since married and whose married name is Debra Kotz ("the family members").

(ix) Due to the high cost of purchase of the land ($980,000.00) it was not feasible to develop it as private lots and consequently the Starkey family considered a strategy whereby they would construct both a multi-unit development for commercial purposes and private residences for each family member on the site.

(x) It is accepted by the Commissioner of Taxation that the dominant purpose from the commencement of proceedings with the development was to provide a place of residence for each family member as referred to previously herein.

(xi) On 20 December 1984 Valbase Pty. Ltd. ("Valbase"), a private Starkey family company whose shares are held by the Starkey family and whose public officer is Alan Starkey, offered to purchcase the site.

(xii) On 22 January 1985 Valbase and/or its nominee entered into a conditional contract with Tricontinental to purchase the land. The contract was conditional on obtaining development approval from the Noosa Shire Council ("the Council").

(xiii) On 26 April 1985 Valbase wrote to the Council making preliminary enquiries to determine the Council's attitude towards a proposed medium rise six storey unit building on the land. Favourable indications were given by the Council as to the proposed medium rise development.

(xiv) For administrative efficiency and cost effectiveness it was considered appropriate that Ukaba undertake the development and that each family member reimburse Ukaba for the cost of constructing their principal place of residence. This was decided at a meeting of members of Valbase on 14 May 1985.

(xv) On 9 September 1985 Ukaba lodged an application for rezoning of the land from residential medium density to residential high density and on 25 November 1985 the Council issued a letter of approval rezoning the land.

(xvi) On 28 June 1986 Ukaba held a meeting and resolved as follows:

"(a) that the minutes of the meeting of the members of Valbase of 14 May 1985 be confirmed and adopted;

(b) that Ukaba construct a medium rise development;

(c) the dominant purpose of constructing the development was to provide a place of residence for the family members of the Starkey family in exchange for the construction costs payable on demand;

(d) that agreements be drawn up and signed by each adult family member entitled to a unit and the vendor company;

(e) that 31 units be constructed and sold to the public off the plan;

(f) to construct an office area which is linked to the management unit;

(g) that the management company, Alanbeth, be entitled to the management unit and the office area and would be required to reimburse the construction costs upon demand;

(h) to accept all expenses as paid by Valbase on behalf of the company and to repay such expenses to Valbase at such time as was demanded."

(xvii) On 29 September 1986 Ukaba lodged an application for town planning consent.

(xviii) Initially the Council resolved not to approve the town planning consent application due to pressure from local lobby groups, however, this decision was subsequently reversed and the application was approved.

(xix) On 18 November 1986 an application was made to AGC (Advances) Limited ("AGC") for a building loan in the name of Valbase. Valbase had an established facility with AGC and Ukaba was the development company which had on 28 June 1986 resolved to reimburse all expenses to Valbase.

(xx) The facility was written in the name of Valbase as that company had previous borrowings with AGC and had established a good credit rating having secured a come and go facility on favourable terms and conditions. The establishment of Ukaba as the borrower would have required a new application together with new documentation. AGC was aware at all material times of the arrangement between Valbase and Ukaba.

(xxi) On 11 June 1987 the contract of sale for the land was settled with Tricontinental.

(xxii) On 25 June 1987 Ukaba signed a building contract with Jennings to construct the development. Jennings took possession of the site on the same day.

(xxiii) As soon as adequate plans for the private residences were completed each family member who was entitled to a private residence unit ("retained unit") in accordance with the family objectives entered into an agreement with Ukaba whereby Ukaba would be reimbursed for costs incurred in constructing the members' private residences. These agreements adopted the form of the standard REIQ contract of sale not being a residential units contract.

(xxiv) The details of the agreements are as follows:
Date Agreement Family Member Number of Unit
25 January 1987 Alan Beverley Starkey and Beth Yvonne Starkey Unit No. 17
25 January 1987 Debra Ann Starkey Unit No. 18
25 January 1987 Brett David Starkey Unit No. 36
15 February 1987 Philip Alan Starkey Unit No. 35

(xxv) The form of the standard REIQ contract was used although it was not appropriate to reflect the arrangements which had been put in place from a technical perspective. The parties did not appreciate the technical distinction between the terms of the contract and the pre-existing arrangements to which it was intended to give effect.

(xxvi) The standard contract of sale for the other units which were sold to the public was substantially different compared with the contract adopted for the residences and contained specific provisions in relation to "off the plan" sales.

(xxvii) On 15 May 1988 the shell of the total building was structurally completed to a stage where the surveyor could prepare the building unit plan.

(xxviii) On 10 June 1988 the Council settled the building unit plan which was registered in or about the end of June 1988.

(xxix) An inspection of the 31 units intended to be sold to the public and the manager's unit (Unit 4) which was below the top floor was made by the Council on 5 July 1988 and a certificate of classification for the 31 units was issued on 18 July 1988.

(xxx) On 13 October 1988 a certificate of practical completion was issued for 32 units only.

(xxxi) Settlement of 26 of these units took place on 20 July 1988 and settlement of the remaining 5 units took place subsequently (on 26 July 1988, 2 August 1988, 16 January 1989, 28 February 1989 and 8 February 1990 respectively.)

(xxxii) The work to complete the four residences which it had always been intended would be built for the family members, being units 17, 18, 35 and 36 took place after 20 July 1988 and the works were completed and occupation effected in or about the end of February 1989.

(xxxiii) In respect of the family members' residences the agreements were lodged for stamping with the Commissioner of Stamp Duties on 22 July 1988 and the building unit plan was registered on 20 June 1988. Settlement of the units occurred on 20 July 1988.

(xxxiv) The Commissioner of Stamp Duties required further information regarding the price and market value of the units. This information was not available to be provided until October 1988 and the Commissioner of Stamp Duties accepted the valuation of each unit as being $290,000.00 based on independent advice obtained from Richardson & Wrench, real estate agents in Noosa.

(xxxv) After occupation the family members resided in their units as their principal places of residence. Ukaba did not at any relevant time treat the retained units as trading stock, in the sense of being property available for sale. It did, however, treat the 31 units sold to the public as trading stock in its accounts.

(xxxvi) The methodology for apportioning the cost between the retained units and the other units was the actual cost as per unit entitlement and specific costs were applicable.

10. The Commissioner engaged the Australian Valuation Office ("the AVO") to value the units as at 27 April 1987. On 14 September 1993 a valuer from the AVO completed a report valuing the family units. The Commissioner formed the view that on the basis of this report and a supplementary advice that a value of $330,000.00 for each unit as at 27 April 1987 was fair and reasonable.
11. The Commissioner also engaged the AVO to value the units as at 20 July 1988. On 5 January 1996 a valuer from the AVO completed a report valuing the family units in accordance with the report. As at 20 July 1988 the market value of each unit was $450,000.00. The Commissioner formed the opinion on the basis of this report that a value of $450,000.00 for each unit was fair and reasonable.
12. The issues for the Tribunal are:

(i) Whether the four penthouse units transferred by Ukaba to the members of the Starkey family were trading stock of a business carried on by it and, if so, were disposed of by Ukaba outside the ordinary course of this business, with the result that section 36 of the Income Tax Assessment Act 1936 ("the Act") applied to that disposal. The relevant parts of s.36 provide:

"SECTION 36 DISPOSAL OF TRADING STOCK

36(1) [Value of property assessable] Subject to this section, where –

(a) a taxpayer disposes by sale, gift, or otherwise of property being trading stock,....;

(b) that property constitutes or constituted the whole or part of the assets of a business which is or was carried on by the taxpayer; and

(c) the disposal was not in the ordinary course of carrying on that business,

the value of that property shall be included in the assessable income of the taxpayer, and the person acquiring that property shall be deemed to have purchased it at a price equal to that value.

36(8) [Value of trading stock and profit on disposal] For the purposes of this section and section 36AAA –

(a) the value of any property .... shall be –

(i) the market value of the property ..... on the day of the disposal; or

(ii) if, in the opinion of the Commissioner, there is insufficient evidence of the market value on that day – the value which in his opinion is fair and reasonable;

36(9) [Value of "property"] Notwithstanding subsection (8), the value for the purposes of this section of any property disposed of by the taxpayer after 7 April 1978 shall, if the Commissioner so determines, be such value as the Commissioner considers reasonable, having regard to –

(a) the cost to the taxpayer of the property;

(b) if, in any agreement entered into in connexion with the disposal of the property, an amount was specified as the value of the property or as the consideration received or receivable in respect of the disposal – the amount so specified;

(c) if, before the property was disposed of, an agreement or arrangement (whether or not enforceable by legal proceedings and whether or not intended to be so enforceable) was entered into, or an understanding was reached, as a result of which, at any time after the disposal took place, there has been, or there could reasonably be expected to be, a substantial reduction in the value of the property – that agreement, arrangement or understanding;"

(ii) Whether, if the Tribunal decides that the penthouse units were trading stock of such a business and were disposed of outside the ordinary course of that business, the value at the time of disposal for the purposes of section 36 should be calculated as at 25 January 1987, 27 April 1987 or 20 July 1988 or some other, and if so, what date.

(iii) Whether the amended assessment was validly issued in compliance with the requirements of s.170 of the Act.

13. There is no doubt that the four penthouse units were built with the intention that they be owned by members of the Starkey family. They were not to be put up for sale to the public. The members of the Starkey family intended to acquire the four penthouse units for the cost of their construction – not their possible retail value.
14. There is also no doubt that the other 31 units were constructed with a view to selling them to the public at a profit.
15. I am satisfied that the members of the Starkey family were involved with Ukaba in a joint venture to construct the four penthouses for the members of the Starkey family at cost. The four penthouses were never intended to be part of the trading stock of Ukaba, nor were they ever treated as trading stock by the Starkey members or by Ukaba. The fact that the parties also participated, by way of the various entities, in the construction of 31 units for sale for profit at the same time does not automatically make the four penthouse units part of the trading stock of Ukaba. See the judgment of Yeldham J in A.R.M. Constructions Pty Limited & Ors v F.C. of T. (1987) 87 ATC 4790, at 4805:

"In F.C. of T. v St. Hubert's Island Pty. Ltd. [1978] HCA 10; 78 ATC 4104; (1977-1978) 138 C.L.R. 210 it was held, by a majority of the High Court, that land was capable of being "trading stock" for the purposes of sec. 36(1). In the present case I am clearly of the opinion that the properties erected at Bankstown, and the unsold town houses at Newtown, were not "trading stock" because in relation to them there was merely a joint venture between the appellants to construct buildings, in contrast to an agreement to make profits for sharing, and it was the intention of the parties at all material times to retain the units and town houses so erected, except to the extent that sales might be necessary to repay moneys borrowed from lending institutions. What in fact has happened in relation to the units and town houses erected on both sites is what, in my opinion, the parties at all material times intended, subject only to the fact that in relation to Newtown it was necessary to sell more properties than had originally been contemplated, having regard to the cost over-runs, etc. In my view the parties associated together to produce a product, a building of units capable of partition between them, so that each could thereafter go their own respective ways. Their expressed intention so to do was duly manifested in what they thereafter did and achieved, and their agreement constituted in law something in the nature of a joint venture to construct a building, in contrast to an agreement to make profits for sharing inter se."

16. The Respondent has taken a stance which it submits is supported by the judgment of the Judicial Committee of the Privy Council in Iswera and Commissioner of Inland Revenue [1965] 1 WLR 663. The facts are set out in the report which reads (inter alia):

"In and after 1950 the present appellant, her late husband, and their five daughters were living at Hulftsdorf, Colombo. Four of their daughters were attending St. Bridget's Convent School in Alexandra Place, and the appellant wished to move to a house nearer the school. She found out that there was a building site of about 2½ acres for sale in Alexandra Place close to the school and tried to buy a part of it. But the owner was only willing to sell the site as a whole.

The appellant then entered into negotiations for the purchase of the whole site but she did not have large sums immediately available. She owned certain houses in Colombo but they could not be readily sold as she could not give vacant possession. But on March 3, 1951, she made an agreement with the owner of the site to buy it for Rs.450,000. She had to pay immediately a deposit of Rs.45,000 and to pay the balance of Rs.405,000 on or before April 20, 1951, and it was provided that, in the event of her failing so to pay the balance, the deposit of Rs.45,000 should be forfeited to the vendor as liquidated damages. Under the agreement she was further bound to reconvey a site of 60 perches to the vendor and to make the necessary roads at her own expense.

The appellant borrowed the amount of the deposit by two loans and she then caused a plan of the site to be prepared. This showed 12 building lots as well as sites for the roads, and she or her husband found purchasers for nine of those lots. She kept two lots for her own house and one for reconveyance to the vendor. It was arranged that each of the nine sub-purchasers would get a direct conveyance of his lot from the vendor.

The prices paid by the nine sub-purchasers amounted in all to Rs.434,725, and out of this the balance of Rs.405,000 was duly paid, so the result was that the appellant only had to find Rs.15,275 of her own money and that she got the site for her house. The market value of that site at the time was Rs.87,040. The assessments under appeal were based on the view that the whole transaction was an adventure or concern in the nature of trade, and that the site purchased by the appellant for her house must be brought into the computation of profit from such adventure at its market value. A gross profit of Rs.71,765 was thus brought out. It was agreed by the appellant, without prejudice to the question of liability, that the net profit was Rs.66,331. The ground of appeal was that this transaction was not an adventure or concern in the nature of trade.

Section 5 of the Income Tax Ordinance (s.242 of the 1956 Revision of the Legislative Enactments) provides that: "(1) Income tax shall ...be charged at the rate or rates specified hereinafter ... for the year of assessment ... in respect of the profits and income of every person for the year preceding the year of assessment ...". Section 6 provides that "profits" means "the profits from any trade ..." and "trade" is defined in section 2 to include "every trade and manufacture, and every adventure and concern in the nature of trade."

The appeal was from a judgment of the Supreme Court of Ceylon, affirming a decision of the Board of Review which had affirmed an assessment made on the original appellant. The Board of Review had made a finding that:

"although Mrs. Ram Iswera may have been motivated by a desire to leave her home at Hulftsdorf and reside in a house near St. Bridget's Convent, nevertheless the dominant motivation of the transaction which she ultimately undertook appears to us to be a blocking-up of the premises and the selling of these blocks so as to make a profit on the transaction and obtaining a block for herself below the market value."

Counsel for Mrs. Iswera relied on the judgment of Centlivres CJ in Commissioner for Inland Revenue v Paul [1956] S.A.L.R. 335, which involved a taxpayer who bought 167 acres of land of which he wanted to keep 30 or 40 acres for his personal needs and sell the balance. Paul's case was decided in favour of the taxpayer. Their Lordships held that the judgment in Paul's case was of no assistance to them in deciding Mrs Iswera's appeal. They took the view that it was open to the Board of Review to make the findings and draw the inferences it did, from the material placed before it. They also took the view that the Board of Review could have come to a different conclusion to the one it did, on the material.

In my view the judgement in the case of Iswera merely repeats the following propositions:

(i) Findings of fact or on the credibility of a litigant in one case has no precedent value and cannot assist in the determination of the facts or credibility of another litigant in another case.

(ii) Findings of fact and credibility made by a tribunal will not usually be over-turned by an appeal court unless there was no basis upon which the findings could have been made by the tribunal, or the accepted evidence pointed clearly in some other direction.

See Lord Reid, at 668:

"The case may be a borderline one in the sense that the Board of Review might have taken a different view of some of the evidence. But, on the facts as found by the board, their Lordships find it impossible to hold that in law they were not entitled to reach their conclusion."

17. The objection decision is set aside in relation to the sale of the four penthouses numbered 17, 18, 35 and 36 at 24 Munna Crescent, Noosaville and in substitution the Tribunal determines that the said units were not trading stock of Ukaba Pty Ltd.
    

I certify that the 17 preceding paragraphs are a true copy of the reasons for the decision herein of Mr. D.W. Muller, Senior Member

Signed:

Secretary

Date/s of Hearing 22 January 2001

Date of Decision 10 January 2002

Counsel for the Applicant Mr D Russell QC and Mr P Bickford

Solicitor for the Applicant Messrs Clayton Utz

Counsel for the Respondent Mr M Robertson

Solicitor for the Respondent Ms L Gilligan, ATO Legal Practice