Gauci v Federal Commissioner of Taxation [1975] HCA 54; (1975) 135 CLR 81 (10 December 1975)

HIGH COURT OF AUSTRALIA

GAUCI v. FEDERAL COMMISSIONER OF TAXATION ;
MASI v. FEDERAL COMMISSIONER OF TAXATION [1975] HCA 54; (1975) 135 CLR 81

Income Tax (Cth)

High Court of Australia
Barwick C.J.(1), Mason(2) and Jacobs(3) JJ.

CATCHWORDS

Income Tax (Cth) - Assessable income - Profit arising from sale of property acquired for the purpose of profit-making by sale - Compensation paid upon compulsory acquisition of land exceeding purchase price - Evidence of taxpayer as to purpose of acquisition of property not accepted - Absence of other evidence of purpose of acquisition of property - Income Tax Assessment Act 1936-1969 (Cth), ss.26 (a), 190 (b).

HEARING

Perth, 1975, September 8;
Sydney, 1975, December 10. 10:12:1975
APPEALS from the Supreme Court of Western Australia.

DECISION

December 10.
The following written judgments were delivered: -
BARWICK C.J. The appellants, Edwin and Eleanor Gauci, husband and wife (the appellants Gauci (the appellant Masi), whilst residents of Nairobi, Kenya, but temporarily on a visit to Australia in 1962, purchased two parcels of land each of approximately six acres in an area of Kwinana which, though the lots fronted made roads, was otherwise undeveloped. The lots were not contiguous but were in close proximity to each other, that acquired by the appellants Gauci fronting Richardson Street and that acquired by the appellant Masi fronting Beach Street. (at p83)

2. In fact, though unknown to any of the appellants at the time of their purchases, the area in which the land was situated had then been gazetted on 3rd February 1956 by the Shire of Kwinana under bylaws made pursuant to the Town Planning and Development Act 1928 (W.A.) as a "general industrial" zone thus restricting its use to a number of industrial purposes and excluding residential and rural purposes. (at p84)

3. It was said by the appellants Gauci that the land was acquired having in mind the retirement of the male appellant, expected to take place in 1973. It was claimed that the then purpose of those appellants was to build their home on the land and for the male appellant to there pursue his hobby of poultry breeding, an occupation in which he had shown interest, skill and had had experience. (at p84)

4. These appellants acquired other land in Western Australia during the same visit to Australia, that land being in developed areas near Perth. (at p84)

5. The appellant Masi, who purchased her land less than one month later than did her parents theirs, and who paid the purchase price therefor out of her own funds, claimed to have done so in order to be able to establish her home in proximity to her parents. She was then nineteen years of age and undoubtedly relied on her father's judgment and advice in purchasing the land. At that time she was intending to, and did, return to Nairobi with her parents and in the ordinary course would have remained there for at least eleven years. (at p84)

6. The appellants Gauci returned to Western Australia in 1965 to take up permanent residence there: he had been prematurely retired from his employment in Nairobi. He then had a family dependent upon him, and in consequence first obtained employment but later purchased a business in Perth which he still conducts in partnership with his wife. The appellant Masi returned to Western Australia with her parents and in 1969 married. The appellants Gauci, after their return, purchased a house in Melville, a suburb of Perth, and have since occupied it as their home. The appellant Masi, after her marriage, has lived with her husband in a house in Booragoon, a suburb of Perth several miles distant from her parents' home in Melville. (at p84)

7. Neither the appellants Gauci nor the appellant Masi at any time sought to sell their land at Kwinana, though an agent in the district, by whom they had been brought into touch with the land, had during the intervening years kept them apprised of the movement of land values in the area. They had received but had not accepted written offers for the land. (at p85)

8. In November 1968 the Metropolitan Region Planning Authority compulsorily acquired the land of each of the appellants at Kwinana for the purpose of the Metropolitan Town Planning Authority so that consolidated sites could be available for industrial development. The compensation received by the appellants Gauci in respect of this acquisition amounted to $43,711.88 and that received by the appellant Masi in respect of the acquisition of her land to $44,500. These sums considerably exceeded the purchase price paid for the land, namely, $1,200 and $1,400 respectively. (at p85)

9. The respondent included the differences between these sums as part of the assessable income of the respective appellants. He did so on the ground that the purpose of the acquisition of the land and what he claimed was the resultant profit fell in each instance within the scope of s.26 (a) of the Income Tax Assessment Act 1936, as amended (the Act). (at p85)

10. The appellants objected to the respective assessments. Upon their objections being overruled, the appellants requested their objections to be treated as appeals and sent to the Supreme Court of Western Australia. The Supreme Court (Lavan J.) found the facts which I have recited. The learned judge felt unable to accept, what he described as "the improbable claim", that Mr. and Mrs. Gauci had an intention i.e. at the time of the purchase of the land, to reside in Kwinana. He held, moreover, that even if he were able to accept that view of the purpose in purchasing the land, "there could be no doubt in my mind that that purpose was subordinate to the intention that in the fullness of time they would profit considerably by the resale of the property". (at p85)

11. His Honour said in relation to the appeal by the appellant Masi that he was "unable to come to any other conclusion than that in purchasing the property she was guided by her father's advice and acted upon his judgment". He further said that he was "unable to accept her evidence that her intention in acquiring the Kwinana land was to establish her home there". He said that "in her case the evidence points clearly to a finding that the appellant acquired the land 'for the purpose of profitmaking by sale'". (at p85)

12. In evaluating the evidence of the appellants, his Honour acted upon a dictum of Fullagar J. in Pascoe v. Commissioner of Taxation (1956) 30 ALJ 402, at p 404; 6 AITR 315, at pp 320-321 that, whilst a person's sworn testimony may be the best evidence of his purpose, object or state of mind in entering into a transaction, such evidence should be tested most closely and received with the greatest caution. Of course, the recollection of a person as to a past state of mind is apt consciously or unconsciously to be distorted and at times unreliable. Thus, to test such evidence closely before accepting it is proper. But care must be taken not to treat the evidence of a citizen in a contest with the Revenue as prima facie unacceptable. I am quite sure neither Fullagar J. nor my brother Gibbs in Jacob v. Commissioner of Taxation (1971) 45 ALJR 568 intended to encourage any such attitude. I am inclined to think that, in the present case, his Honour's approach to the evidence of the appellants tended to go beyond the caution appropriate to the case of evidence which may possibly spring from a conscious or unconscious distortion of recollection. He does not seem to found his conclusions of fact to any extent on the unacceptability of any of the appellants as witnesses, or on contradictions in their evidence. Rather, he decided the matter on his own view of the probability or improbability of persons unaware of the restrictions on the use of the land, who were intending it for domestic use when making its purchase. None the less, I would not be prepared to decide the appeal otherwise than on the footing that the evidence of the appellants as to their intention current at the time of the purchase of the land was not accepted by the Supreme Court. (at p86)

13. However, in my opinion, his Honour fell into a fundamental error in the question which he posed for himself. The actual facts
- apart from any evidence of intention or purpose of the appellants - were fully exposed in the evidence before his Honour. The appellants had bought the land and, if it matters, were unaware of the restrictions upon its use: they had not voluntarily sold it: they had held it some six years at the time it was compulsorily acquired, meantime declining offers of purchase. (at p86)

14. Whilst a compulsory sale of property may yield a profit by resale for the purposes of s. 26(a) of the Act, if the property were purchased with an intention which satisfies the requirements of that section, evidence of that intention being otherwise absent, it cannot be inferred, in my opinion, from the fact of the compulsory sale. (at p86)

15. Thus, in the present case, assuming that the appellants had offered no evidence at all, there would, in my opinion, have been no basis for an assessment of any part of the compensation paid for the resumption of the land as income of the appellants by reason of the provisions of s. 26(a). There is no presumption that property is acquired for resale at a profit. No doubt s. 190 of the Act requires the appellant to show that the assessment is excessive. But the relevant facts being known, if there is no material upon which it may properly be concluded that the property was acquired with the relevant purpose, the assessment is thereby shown to be excessive. As I have said, there is no presumption of purpose to aid the assessment. In particular, s. 190 does not raise any such presumption. (at p87)

16. If, on the other hand, the acquired property is resold within what may fairly be described as a time proximate to its acquisition, the requisite purpose may be inferred. Thereafter, the taxpayer must overcome the prima facie inference there drawn. Unless he does so, s. 190 will require the confirmation of the assessment. That was the situation in Pascoe v. Commissioner of Taxation (1956) 30 ALJ 402; 6 AITR 315 and in Jacob v. Commissioner of Taxation (1971) 45 ALJR 568 . (at p87)

17. The question in the application of s. 26(a) is not whether the taxpayer, when purchasing, hoped that at some time in the future he could sell the land at an enhanced value. The question is whether he was then intending to sell it at a profit, doing so as a matter of "business". The purchase of land as a long term investment, or as a hedge against the depreciating value of money does not, in my opinion, come under s. 26(a). (at p87)

18. In this case, there was no sale by the appellants at a time so proximate to the acquisition that any prima facie inference of relevant purpose could be drawn: in fact, as I have said, they did not voluntarily sell at all. No relevant attitude of mind could be inferred from the fact of the compulsory sale to the Planning Authority. (at p87)

19. I have examined the evidence before the Supreme Court and can find no admission of a relevant purpose in acquiring the land, nor any admission of any fact from which an inference of such a purpose could be drawn. If the evidence of the appellants as to their purpose in purchasing the land is not accepted, there remains no evidence of their purpose. Disbelief does not amount to positive evidence of the opposite of what is disbelieved. Consequently, there was no evidence before his Honour of the purpose of profitmaking by resale at the time of acquisition of the land so as to bring the differences between the purchase price of the land and the amount of compensation paid within the provisions of s. 26(a). (at p87)

20. His Honour, it seems to me, approached the case as if there was an onus on the appellants to convince him that their purpose in purchasing the land was not to make a profit by its resale whenever they might dispose of it. Not having any evidence before him of a voluntary sale, or of any admission of such a purpose, his Honour really acted on the footing that there was a presumption, though rebuttable, that the land was acquired for the purpose of resale at a profit as a matter of business or, as I have said, as a transaction of trade. This, in my opinion, was a fundamental error which vitiated his Honour's ultimate conclusion. (at p88)

21. In my opinion, the appeals should be allowed and the assessment set aside. (at p88)

MASON J. The issue in these appeals is whether the primary judge was correct in deciding that the substantial profits which the appellants made on the compulsory acquisition by the Metropolitan Region Planning Authority of their two lots of land at Kwinana fell within the first limb of s. 26(a) of the Income Tax Assessment Act 1936, as amended ("the Act"). (at p88)

2. The appellants Mr. and Mrs. Gauci claimed that they acquired lot 386, Richardson Street, in order that on Mr. Gauci's retirement they would establish their home there and Mr. Gauci could engage in his hobby of raising poultry. Their daughter, the appellant Mrs. Masi, claimed that she acquired lot 395, Beach Street, so that upon her marriage she and her husband could build their house on the site and live in close proximity to her parents. (at p88)

3. The judge declined to accept the appellants' evidence as to their intentions in purchasing the land and the evidence of the land agent Graham who acted for them. His Honour regarded the Gaucis' claim that they intended to reside on the land as an "improbable claim". This conclusion was based on a number of considerations deriving from the character of the land acquired (which his Honour found to be quite unsuited to residential purposes), from its zoning (of which the appellants claimed to be unaware), from its proximity to existing and projected industrial development (of which the appellants also claimed to be unaware) and from his Honour's assessment of Mr. Gauci, who was a banker, as a man of considerable business experience who had an eye for a bargain. Although some criticism has been made of the accuracy of some of his Honour's remarks on these matters, I am left with the impression that there were sufficiently strong reasons for the learned judge declining to accept the oral evidence of the appellants as to their intentions in purchasing the land. Of the appellant Mrs. Masi his Honour said: "I am unable to accept her evidence that her intention in acquiring the Kwinana land was to establish her home there." (at p89)

4. These findings must be accepted as correct, involving as they did, an assessment of the appellants' credibility. They constitute a defect in the appellants' case which is in my view fatal to their success. (at p89)

5. Section 190(b) of the Act imposed on the appellants the burden of proving that the assessments were excessive. The appellants relied on their evidence and that of Graham in order to show that the assessments were excessive. Once that evidence was rejected, the appellants' case necessarily failed. (at p89)

6. 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. (at p89)

7. I am unable to discern any basis for declining to give effect to s. 190(b), according to its terms. Nor, for that matter, does it seem to me that the provision, understood according to its terms, operates unjustly in cases which turn on s. 26(a). There is nothing inherently unfair in a provision which places the onus on a taxpayer to prove his case when the purpose for which an asset was acquired depends so much on his intentions and on circumstances of which he, rather than the Commissioner, has comprehensive knowledge. (at p89)

8. In Steinberg v. Federal Commissioner of Taxation (1975) 134 CLR 640, at pp 683-684 , Barwick C.J., who held that the profits on the disposition of the land at Wanneroo did not fall within s. 26(a), expressed the view that no inference can be drawn as to the existence of a s. 26(a) purpose when the subsequent disposition is pursuant to a compulsory acquisition and that in the absence of evidence of such a purpose there is no foundation for an assessment based on the sub-section. The Chief Justice was alone in expressing this view and in my opinion it should not be applied in circumstances where the evidence as to the taxpayer's intentions is equivocal. (at p89)

9. 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 his appeal fails. (at p90)

10. As Fullagar J. said in Pascoe v. Commissioner of Taxation (1956) 30 ALJ 402, at p 404; 6 AITR 315, at pp 320-321 , it is "broadly true to say that, when a man invests money in the purchase of any kind of property, it will generally be either with a view to holding it and deriving income from it, or with a view to realising sooner or later an enhanced capital value ... Evidence which tends to exclude one of the two contrasted 'uses' as the use intended will generally, I think, tend to support an inference that the other use was intended". This statement leaves out of account other purposes such as acquisition for capital appreciation as a hedge against inflation not falling within s. 26(a) which are not relevant to this case. The point is that circumstances which combine to throw doubt on an appellant's evidence in a s. 26(a) case are often circumstances from which the existence of a s. 26(a) purpose can be inferred. (at p90)

11. For these reasons I would dismiss the appeals. (at p90)

JACOBS J. I agree that the appeals should be allowed. I agree with Barwick C.J. that s. 190 did not assist the Commissioner in the particular circumstances of this case. All the facts were known except the state of mind of the appellants when they purchased the respective lands. They each denied having the requisite intention and, even if this was not accepted, before s. 190 could operate there must have been something in the evidence from which an inference could have been drawn of an intention on their part to resell at a profit. As the disposition of the lands was compulsory, the commonly found evidence by inference from an actual resale was lacking. (at p90)

2. Nor was there evidence from which it could be inferred that the appellants were trading in land as a matter of business. The Commissioner was therefore bound to rely on s. 26(a) where the concept of trade or business in land buying and selling is not a necessary constituent. But even in s. 26(a) the purchase of land for the purpose merely of long term investment or as a hedge against inflation does not establish the purpose which s. 26(a) requiries. I agree with the statement to this effect by Barwick C.J. (at p91)

ORDER

Appeals allowed with costs.

Orders of the Supreme Court of Western Australia set aside and in lieu thereof order that the appeals to that Court be allowed with costs.

Matters be remitted to the Commissioner to re-assess in accordance with the reasons of this Court.

(HIGH COURT OF AUSTRALIA.)

GAUCI........................APPELLANT;

AND

THE COMMISSIONER OF TAXATION OF THE
COMMONWEALTH OF AUSTRALIA....RESPONDENT.

MASI.........................APPELLANT;

AND

THE COMMISSIONER OF TAXATION OF THE
COMMONWEALTH OF AUSTRALIA....RESPONDENT.

ON APPEAL FROM THE SUPREME COURT OF
WESTERN AUSTRALIA.