FEDERAL COURT OF AUSTRALIA

August v Commissioner of Taxation [2013] FCAFC 85

THE COURT ORDERS THAT:

1.    The appeal be dismissed.

2.    The appellant pay the respondent’s costs of the appeal.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

THE COURT ORDERS THAT:

1.    The appeal be dismissed.

2.    The appellant pay the respondent’s costs of the appeal.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

THE COURT:

introduction

1    On 21 April 2010 Mr Peter August made an application to this Court pursuant to s 14ZZ of the Taxation Administration Act 1953 (Cth) (“TAA”) whereby he appealed against a reviewable objection decision made by the Commissioner of Taxation. On the same day, Mrs Helen August, made a similar application. Her application raised the same issues as her husband’s application. The two applications were heard together. Before the trial judge the appellants bore the onus of establishing that the assessments were excessive (s 14ZZO of the TAA). On 28 June 2012, a judge of this Court, made an order that Mr August’s application be dismissed and that he pay the Commissioner of Taxation’s costs. The judge made similar orders in relation to Mrs August’s application (August v Commissioner of Taxation [2012] FCA 682). Mr August and Mrs August each appeal against the judge’s orders. The appeals were heard together.

2    In the case of each appeal, the respondent made his reviewable objection decision on 18 February 2010. The decision made by the respondent was to disallow the respective objections made by the appellants. Each appellant had objected to the respondent’s decision under s 175A of the Income Tax Assessment Act 1936 (Cth) (“ITAA 1936”) and Part IVC of the TAA whereby the respondent amended each appellant’s income tax assessments for the years ended 30 June 2006 and 30 June 2007.

3    Toorak Management Pty Ltd (“Toorak”) was the sole trustee of the Toorak Management Unit Trust (“Toorak Unit Trust”) and each appellant held 50% of the issued units in the Toorak Unit Trust. Toorak was also the sole trustee of the Wiz Unit Trust (“Wiz Unit Trust”). Mr August holds all of the issued units in the Wiz Unit Trust. Mr and Mrs August were the sole directors and shareholders of Toorak.

4    Toorak acquired a number of adjoining properties in Melba, a suburb of Canberra in the Australian Capital Territory, between late 1997 and the middle of 1999. The properties in Melba were referred to by the trial judge as “the Melba shops”. We will describe the properties involved later in these reasons. Toorak performed construction work on the properties which we will also detail later in these reasons. In early 2007 Toorak sold the properties for $2.33 million.

5    Dimensional Developments Pty Limited (“Dimensional Developments”) was a company in which Mr August had an interest as a shareholder. He was also a director of the company. In November 2001, Dimensional Developments purchased the lease for Block 47 Section 5 Hume in the Australian Capital Territory (“the Hume property”) for $800,000. The Hume property was a large vacant block. Dimensional Developments sold the Hume property to Optus Networks Pty Ltd (“Optus”) in late 2005 for a price of $5,472,500 inclusive of GST.

6    The issue at trial related to the profit or gain associated with the sale of the Melba shops and the Hume property. The trustee treated the profit or gain as discounted capital gains under Division 115 Part 3-1 of the Income Tax Assessment Act 1997 (Cth) (“ITAA 1997”). The respondent assessed the profit or gain to be income under s 6-5 of ITAA 1997, to which the 50% capital gains tax did not apply. By reason of s 97(1) of ITAA 1936 where a beneficiary of a trust estate is presently entitled to a share of the income of the trust estate, the assessable income of the beneficiary shall include the share of the net income of the trust estate. By reason of s 95 of the ITAA 1936 the net income in relation to a trust estate means (relevantly) the total assessable income of the trust estate calculated under the Act as if the trustee were a taxpayer in respect of that income.

7    The trial judge identified the issue before him as being whether the profit or gain made by Toorak upon the sale of the Melba shops, and the profit or gain made by Dimensional Developments upon the sale of the Hume property, was income according to ordinary concepts or income of a capital nature.

8    It is necessary to identify the trial judge’s findings in some detail because of the submissions made on the appeals. That is done below and before we deal with the arguments raised by the appellants on the appeals.

the findings of the trial judge

Background

9    Prior to 1994, Mr August carried on business as a trader of coins, bank notes and other collectables. After 1994, a company known as Universal Coin Company Pty Ltd (“Universal Coin”) carried on that business. The trial judge found that Mr August and his wife were the sole directors and shareholders of Universal Coin.

10    In 1995 Mr and Mrs August established various other companies and trusts. They established Toorak and the Toorak Unit Trust and the Wiz Unit Trust.

11    In 1997, Mr and Mrs August sold their principal residence in Windsor, Melbourne and they decided to use part of the proceeds of sale (i.e., the sum of $200,000) for investment purposes. Later that year, Mr August went to Canberra where he spoke to Mr Spiros (Jeff) Konstantinou (“Mr Konstantinou”) about investing in the Canberra property market.

12    Mr Konstantinou and his wife lived in Canberra, and originally they had been friends of Mrs August’s parents. Mr August met Mr Konstantinou in 1990 and in 1996 Mrs August asked Mrs Konstantinou to be godmother to Mr and Mrs August’s eldest child. Mrs Konstantinou suggested that her eldest son, Harry Konstantinou, be godfather. From that time on, the relationship between the families was particularly close.

13    Mr Konstantinou worked as a property developer in Canberra and he had done so for a number of years. His son was also involved in the business. By 1997 Mr Konstantinou was a very experienced property developer who was, as the trial judge put it, “well connected with others involved in the Canberra real estate market”. Mr Konstantinou’s business included buying and selling commercial real estate that would then be sold, preferably on a fully tenanted basis. Mr Konstantinou completed many such projects and he was extremely astute at identifying commercial sites suitable for these types of developments. The trial judge said that it was not surprising that Mr August turned to Mr Konstantinou for advice on investment opportunities in Canberra.

The Melba Shops

14    As we have said, in late 1997 Mr August went to Canberra to consult with Mr Konstantinou about possible investment opportunities. Mr Konstantinou told Mr August that Blocks 2 and 12 of Section 40, Melba, had recently been passed in at auction for $155,000 and that both properties were now on the market for a combined price of $165,000. Mr Konstantinou told Mr August that these properties would make a good investment providing Mr August was prepared to pay for some improvements. In November 1997, Toorak, as trustee of the Toorak Unit Trust, purchased Blocks 2 and 12 for $165,000.

15    There was a vacant shop in a very run down condition on Block 2. Shortly after the purchase of Block 2, a Mr Rourke approached Mr August and indicated that he wanted to lease most of the space for use as a supermarket. Mr August needed to spend about $100,000 to make the shop ready for Mr Rourke, and he agreed to do that. In August 1998, Toorak entered into a five year lease with Mr and Mrs Rourke for most of the available space on Block 2. The lease included two five year options to renew.

16    In 1998 Mr August took steps to obtain extensions of the Crown leases for Blocks 2 and 12, and a new and broader purpose clause that would apply to both blocks. As a result of these steps, Blocks 2 and 12 were consolidated to form Block 29, and that block became the subject of a new Crown lease commencing in July 1998.

17    In late 1998 Mr August negotiated for the purchase of adjoining Block 26 for $95,000. Early in 1999, Toorak purchased that block which incorporated a takeaway food shop. The area occupied by this shop was the subject of a lease in favour of the operator of the shop. The lease was granted in October 1998 for a term of five years with an option to renew for a further five years.

18    In late 1998 or early 1999, Mr August placed advertisements for the lease of another shop within Block 26 which was then unoccupied. This shop was leased in June 1999 to a husband and wife who carried on business as hairdressers. The lease was for a period of five years with an option to renew for a further five years.

19    In late 1998 or early 1999, Mr August set about looking for a tenant for the other unoccupied space in Block 29. In March 1999 Toorak granted a lease to butchers who then opened a butchers shop. The lease of the butchers shop was for five years with an option to renew for a further five years.

20    In mid 1999 Toorak, as trustee for the Toorak Unit Trust, purchased Blocks 30 and 31. These blocks consisted of land formerly used as a car parking space for the Melba shops, but was not at that time the subject of any Crown lease. The blocks were purchased at a public auction for $42,000 each. Mr August and Mr Konstantinou attended the auction.

21    Soon after it acquired Blocks 30 and 31, and for reasons which need not be set out, Toorak took steps which resulted in Block 29 and Block 30 being combined to form a new Block 34.

22    In 2000 Toorak spent approximately $120,000 to construct two shops on Block 30 and Block 31. The judge found that it was likely that the construction work was not completed until 2001, or perhaps even early in 2002. After the completion of the construction of the shops on Blocks 30 and 31, Toorak’s property holding at Melba incorporated a total of six shops.

23    The Westpac Banking Corporation (“Westpac”) obtained a valuation of the Melba shops in April 2002. The shops were valued at $1.375 million. At the date of the valuation, neither Block 30 nor Block 31 had been leased.

24    The trial judge found that Block 30 was leased for a term of five years with a commencement date of 15 April 2003 and an option to renew for a further five years to a company which operated a Chinese restaurant. Block 31 was leased for a term of five years with a commencement date of 21 June 2004 with an option to renew for a further five years for use as an Indian restaurant.

25    Bendigo Bank obtained a valuation of the Melba shops as at March 2005. The shops were valued at $1.83 million. Some time later, the Bendigo Bank made a loan facility of $1.281 million available to Toorak secured against, among other items of property, the Melba shops. The loan facility was provided to assist in the re-financing of an existing facility with Westpac. The trial judge noted that Mr August gave evidence that the loan from Bendigo Bank “came into effect” on 26 June 2005 which he inferred was the date on which the facility was drawn down. The trial judge found that the facility was an interest only loan for a term of five years and that the whole of the amount of the facility was required to be drawn down in one lump sum. The interest rate, although not fixed, was calculated by reference to the Bendigo Bank’s five year fixed lending rate to which a margin of 1.5% was to be applied. At the time the facility was established, this equated to 7.54% p.a. or about $96,000 p.a.

26    The trial judge noted that Mr August gave evidence that the facility was used by Toorak for purposes unrelated to the Melba shops. He gave evidence to the effect that his intention at this time was to use the rental income from the Melba shops to service the interest payable under the facility. The Bendigo Bank valuation showed that in March 2005 the Melba shops were generating net rental income of approximately $170,000 p.a.

27    In June 2005 Mr August had a conversation with a real estate agent, Mr Tony Hanley. Mr August had already had some contact with Mr Hanley in relation to the Melba shops.

28    The trial judge said that Mr August gave evidence that Mr Hanley approached him rather than the other way around. Mr August gave evidence that Mr Hanley told him that the market was going to peak, that it was a prudent time to sell, and that he could obtain more than market value for the Melba shops.

29    On 6 June 2005, Mr Hanley gave Mr August a letter that included various price estimates. Mr Hanley estimated that the Melba shops could be sold for between $2 million and $2.25 million if sold in one line and between $2.4 million and $2.6 million (net) if the shops were sold individually as unit title. Mr August said that in or after June 2005, he had conversations with Mr Hanley wherein the latter advised him that it would be to his advantage if the shops were converted to unit title (see Unit Titles Act 2001 (ACT)) so that they could be sold individually. Mr August said that Mr Hanley told him that this would not necessarily increase the sale price, but it would broaden the range of potential purchasers. Mr August said that he was persuaded by Mr Hanley to pursue this possibility and he did so later that year.

30    Mr Hanley’s company was Location Real Estate Pty Limited. That company and Toorak entered into an exclusive agency agreement in September or October 2005. The trial judge found that the terms of the document recording the exclusive agency agreement were “somewhat muddled as a result of the use of a standard form document which was not adequately adapted for the purpose”. The exclusive agency agreement was headed “Exclusive Auction/Selling Agency Agreement”. The trial judge found that it was apparently signed by Mr Hanley and Mr August on or about 5 October 2005, although it referred to 1 September 2005 as the commencement date.

31    The exclusive agency agreement referred to a marketing agreement dated 6 June 2005 and the trial judge found that there was nothing to suggest that the marketing agreement was anything other than the letter to which reference has previously been made (at [29]).

32    In the result, it was not possible for the Melba shops to be converted to unit title.

33    In November 2008, the respondent’s officers interviewed Mr Hanley in connection with their investigation of Mr August’s taxation affairs. The appellants submitted that a Jones v Dunkel ((1959) 101 CLR 298) inference should be drawn against the respondent as a consequence of his failure to call Mr Hanley. The trial judge found that the notation established no more than that a meeting of the kind described occurred and he rejected the appellant’s submission. He also noted that the respondent had not submitted that he should draw a Jones v Dunkel inference against Mr and Mrs August as a consequence of their failure to call Mr Hanley, and for that reason, he did not do so.

34    The trial judge said that the absence of any evidence from Mr Hanley was nevertheless not without significance. He said that the fact that much of Mr August’s evidence of his dealings with Mr Hanley was uncorroborated by other evidence, was a matter he regarded as quite significant in light of the view he had formed as to Mr August’s reliability as a witness.

35    The trial judge turned to consider Toorak’s purposes and intentions with respect to the acquisition of the Melba shops. He said that Toorak’s purposes and intentions will reflect Mr August’s purposes and intentions because although Mrs August was a director of Toorak, her affidavit (upon which she was not cross-examined) made it clear that she left all decision-making in relation to financial and business matters to her husband. The trial judge noted that there were no contemporaneous documents that evidenced Mr August’s purposes or intentions when acquiring the Melba shops. He said that whether or not the Melba shops were acquired for the purpose or with the intention of engaging in a scheme of profit-making by sale must be determined by reference to all the surrounding circumstances as well as the evidence of Mr August as to his own purposes and intentions.

36    The trial judge referred to Mr August’s evidence as to his intentions when he acquired Blocks 2 and 12.

37    The trial judge found that Mr August began discussing the value of the Melba shops with Mr Hanley in 2004 once all six shops were tenanted. The trial judge said that it was unlikely that Mr August would have sought Mr Hanley’s opinion as to the value of the Melba shops in June 2005 unless he was considering selling them either then or in the near future. Furthermore, he was not satisfied that Mr August would never have agreed to sell if he had not been offered a price “well over the market value”. Nor was he satisfied that it was ever Mr August’s intention to hold the Melba shops as a long term investment. The trial judge said that the most plausible explanation for what occurred commencing in or about June 2005 was that after completing the development and securing long term tenants, Mr August began to investigate selling the Melba shops, and that, in doing so, he was acting in accordance with a longstanding plan to redevelop a run down shopping centre into a rejuvenated and enlarged complex that he always intended to sell (if he could) for a substantial profit. The trial judge said (at [65]):

This was, as I will explain, the principal way in which Mr Konstantinou conducted his business and it was, in my view, an approach that Mr August sought to emulate.

38    The trial judge found that by June 2005 Mr August was preparing to sell the Melba shops subject, of course, to finding a buyer or buyers willing and able to pay an acceptable price for them. Mr August asked Mr Hanley for the information contained in Mr Hanley’s letter dated 6 June 2005 and he did that because by that time he was preparing to sell the Melba shops, by then developed and fully tenanted, into a rising market which Mr Hanley was warning Mr August was going to peak.

39    The trial judge rejected Mr August’s evidence that Mr Hanley “hounded” or “pestered” him, or that he told Mr Hanley that he was not interested in selling. The trial judge said that he was not satisfied that the exclusive agency agreement was ever terminated or that Mr August ever took steps to withdraw the Melba shops from sale. The trial judge rejected Mr August’s reasons for agreeing to sell. He did not think the suggestion that the purchaser was willing to pay “well over the market value” or “a mad price” was supported by the evidence. The trial judge considered that the property market in Canberra for commercial property was rising steadily between 2002 and 2006. He noted the Westpac valuation in April 2002 and the Bendigo Bank valuation in March 2005 and certain statements in those valuations. He said that those valuations showed that between April 2002 and March 2005 the value of the Melba shops increased by over 30%. He considered that the valuations suggested that a significant proportion of that increase was the result of a strengthening in the market that occurred in the last 12 months of that period. He noted that the figure ultimately obtained for the Melba shops of $2.33 million was only slightly above the upper end of the price range specified by Mr Hanley in June 2005 for a sale in one line, and $250,000 below the $2.6 million that Mr Hanley said he was confident of achieving in the event that the Melba shops were sold with unit titles.

40    The trial judge said that the fact that Mr August refused to accept that he ever turned his mind to the possibility of resale – even if only in the context of an exit strategy – at the time of acquisition raised serious doubts in his mind as to the reliability of his evidence generally. The trial judge considered that evidence given by Mr Konstantinou that he told Mr August that the risk was reduced because of the resale value suggested that Mr August gave consideration (contrary to Mr August’s denials) to the possibility of sale at the time of acquisition.

41    The trial judge said that he was satisfied that Mr August’s account of his intentions at relevant times was not reliable. He said that, in his view, Mr August embellished and exaggerated his evidence in a manner that he perceived would assist his case. He said that that was so not only in relation to his evidence of his state of mind, but also of his evidence about his dealings with Mr Hanley.

42    The trial judge noted that the fact that Mr August may have embellished and exaggerated his evidence did not establish that the Melba shops were acquired as part of a profit-making scheme, but it had left him in a situation where he had to form a view as to Mr August’s intentions at relevant times in circumstances where his direct evidence as to his state of mind was unreliable.

43    The trial judge then made the following observations and findings:

[83]    Mr August gave an account of driving around Canberra on numerous occasions with Mr Konstantinou. Some of these drives are likely to have occurred either prior to or around the time Toorak acquired blocks 2 and 12. According to Mr August’s evidence, during the course of these drives Mr Konstantinou would point out to Mr August various commercial and industrial properties which Mr Konstantinou had previously purchased, developed and sold. Mr August gave the following evidence in cross-examination concerning these drives:

What kind of developments did he show you?---Commercial developments.

And when you say commercial, is that – that includes industrial?---Yes, that’s correct.

When you say commercial developments, would you put the Melba shops in the same category as a commercial development?---No. Well, not really because he would buy the land, he would build the property, he would lease it out and then he would sell it. So Melba shops was an already built structure that I renovated and leased and held as an investment.

Did he have any developments of shops that he pointed out to you on these drives?---Initially I can’t recall, he may have.

And it’s true to say that the impression you gained on your drives around Canberra was that Jeff, if I can call him that, had a very good knowledge of Canberra real estate?---Yes, I would say that would be true.

And he had quite an impressive property portfolio at the time when he was driving you around?---No. I didn’t know what his portfolio was, all he showed me was properties that he had developed and sold.

And sold?---Yes.

[84]    Mr Konstantinou’s own description of his development activities was slightly different to that given by Mr August. Mr Konstantinou said that the properties he purchased were developed so that they might be either sold or leased. As Mr Konstantinou explained, if he got a good price for a property he purchased and developed, he would sell it, but if he did not get a good price he would keep it. Based upon Mr Konstantinou’s evidence, I am satisfied that most of the properties that had been developed by him or his related entities were commercial or industrial properties that he developed, leased and then sold. This is the approach to investment in the Canberra commercial real estate market that I consider Mr August was seeking to emulate when he purchased Blocks 2 and 12 in November 1997.

44    The trial judge was not satisfied that the Melba shops were acquired as long term investments. He found that it was more likely than not that they were acquired by Toorak as part of a profit-making scheme with the principal intention that they be developed, tenanted and sold for a profit. The profit or gain arising from the sale of the Melba shops was therefore income according to ordinary concepts.

The Hume Property

45    In about June 2001, Mr August and Mr Konstantinou agreed to enter into a 50/50 venture in relation to the purchase of a property known as Block 55 Section 6 Mitchell. The property was purchased at auction in June 2001. Mr August, Mr Konstantinou and Harry Konstantinou went to the auction and one or other of them was the successful bidder at $560,000. The trial judge said that the identity of the purchaser was not clear from the evidence, but that it was Mr August who paid the deposit.

46    On 6 August 2001, five parties executed a document entitled “Dimensional Developments Australia Syndicate” (“the Deed”). The parties to the Deed were Konstantinou Developments Pty Limited, Toorak, Mr Konstantinou, Mr August and Dimensional Developments Australia Pty Ltd. The Deed was prepared by Mr Bill Allen, a solicitor, who had died before the trial. In August 2001, Mr Allen practised in partnership under the name Bradley Allen.

47    The recitals to the Deed were as follows:

A.    The Syndicate Members have agreed to form a syndicate called the DIMENSIONAL DEVELOPMENTS AUSTRALIA SYNDICATE (“the Syndicate”) for the purposes of acquiring properties, entering into joint ventures and undertaking various property developments and also other business ventures.

B.    Each of the Principals is a director and shareholder of the Manager. For administrative reasons other persons are also directors and shareholders of the Manager.

C.     Each Syndicate member has a corresponding Principal and vice versa as set out in Schedule 1. Each Principal is a director of the corresponding Syndicate Member.

D.    The Syndicate Members have agreed to equally contribute certain moneys to the Syndicate and to make certain future contributions of income and capital to enable the objectives of the Syndicate to be achieved and to be fully and effectively managed, and to enable the Syndicate to participate in those other activities which the manager deems desirable from time to time.

E.    The Syndicate Members have agreed to appoint the Manager to act as sole and exclusive manager of the Syndicate for the purposes and objectives of the Syndicate and the Manager has agreed to accept such appointment as Manager of the Syndicate.

F.    As at the date of this Deed, the Manager has ratified the act of the Principals to agree to acquire, on its behalf and before its incorporation, land being Block 55 Section 6 Mitchell. The manager will on the date of this Deed formally acquire that property and hold it on behalf of the Syndicate under the terms of this Deed.

G.    The Syndicate Members, the Principals and the Manager have agreed to enter into this Deed to record their respective rights, obligations and duties in the ownership of the Syndicate Assets, the management of the Syndicate, and the membership of the Syndicate.

48    Clauses 2 and 3 provided as follows:

2.    Wide Objective and Purposes of the Syndicate and Manager’s Power

2.1    The purposes and objectives of the Syndicate are for the Manager to conduct an investment programme and strategy for the ultimate benefit of the Syndicate Members.

2.2    The Manager is expressly empowered by this Deed to carry out that investment programme and strategy and to exercise any of its powers whatsoever in its absolute discretion without the requirement for any consent, endorsement, approval or ratification whatsoever from any Syndicate Member.

2.3    The purposes and objectives and the Manager’s powers as set out in this Deed and the term “Syndicate Assets” have deliberately been set out in expansive language with the express intention of the parties being that each of those terms or concepts be given the broadest possible meaning in order to give the greatest flexibility to the Syndicate investment programme and strategy and to ensure the Manager has the widest power possible to conduct that programme and strategy in a completely unfettered manner.

3.    Commencement and Term of Syndicate

3.1    The Manager and the Members of the Syndicate agree and declare that the Syndicate commenced on 6 August 2001 (being the date the Manager formally acquired the first Syndicate Asset) and shall continue until determined by a Simple Majority of Syndicate Members.

49    Clause 10 of the Deed provided as follows:

10    Distribution of Syndicate Capital

10.1    In this Clause 10:

“Capital Proceeds” shall mean the Net Proceeds of Sale of the Syndicate Assets received by the Manager.

“Net Proceeds of Sale” shall mean the sale price of the Syndicate Assets less: the agent’s commission and expenses, advertising costs on sale, legal costs and disbursements incurred, repayment of the Bank Loan and all interest and charges associated therewith, the repayment of all other liabilities of the Syndicate, accountant’s fees, all other Syndicate Outgoings, and, if applicable the Manager’s Loan, Contributing Members’ Loans and any accrued interest and fees calculated in accordance with Clause 6.3 and Clause 6.4.

10.2    Unless otherwise agreed between the Syndicate Members, the Manager must repay any loans made by any Syndicate Member in respect of any Syndicate Asset which is sold, before any payment of the Capital Proceeds.

10.3    The Manager shall distribute the Capital Proceeds to each Member of the Syndicate within twenty eight (28) days of the completion of the sale of the Syndicate Assets.

10.4    The Manager makes no warranty whatsoever as to the treatment of Capital Proceeds or Net Proceeds of Sale for income tax or capital gains tax purposes and each Syndicate Member shall rely on its independent advice in this regard.

50    The trial judge said that there was nothing remarkable about the other provisions of the Deed. He said that in light of other evidence, it was relevant to note that the Deed said nothing at all as to whether properties acquired by the joint venture would be held as long term investments.

51    Mr George Bouhalis was a solicitor located in Melbourne and he acted for Mr August and his associated entities in 2001. He swore an affidavit which was read at trial. He was not cross-examined. Mr Bouhalis said that he had no actual recollection of any advice he gave to Mr August in relation to the Dimensional Developments syndicate in 2001. However, he was able to produce copies of his timesheet relating to the giving of such advice, three handwritten file notes made by him on 6 August 2001, and a facsimile transmission of the same date sent to him by Mr Allen. The trial judge also noted that the evidence included a detailed statement account of work carried out by Mr Allen in the period between 2 August 2001 and 5 November 2001 for Dimensional Developments.

52    The trial judge found that clause 10.2 of the Deed which dealt with the repayment of loans by syndicate members before payment of the proceeds of sale of syndicate assets, was included in the Deed at the request of Mr Bouhalis acting on the instructions of Mr August. The trial judge considered the amendment to be significant for two reasons. First, it suggested that Mr August was concerned to ensure that funds advanced by Toorak to purchase Block 55 Section 6 Mitchell would be repaid by the joint venture upon the sale of the asset acquired with such funds before there could be any return of capital to syndicate members. Secondly, it made clear that the form of the Deed was the subject of negotiation, and that there was a willingness on the part of Mr Allen and Mr Konstantinou and his sons to make amendments to the draft if requested to do so.

53    The trial judge referred to the evidence of Mr August and of Harry Konstantinou about whether the Deed reflected their respective intentions at the time it was executed.

54    The appellants’ case at trial was that an addendum to the Deed (“the Addendum”) was executed at Mr Konstantinou’s olive farm on 11 August 2001. Their case was that there was a discussion between Mr August and Mr Konstantinou and Mr Konstantinou made some handwritten notes of the discussion. Harry Konstantinou, who was also at the farm at this time, was later given the notes prepared by Mr Konstantinou and asked to produce another document which could then be signed by Mr August and Mr Konstantinou. The respondent contended before the trial judge that the Addendum was created some years later after Mr August became the target of a tax audit.

55    The Addendum is in the following terms:

56    As the trial judge noted, the clauses appearing under the heading “Strategy” are of particular significance. Clause 1 refers to “a long term investment portfolio” and clause 2 refers to the income and equity generated from the investment portfolio being reinvested. As the trial judge noted, the strategy did not contemplate that income generated by the sale of joint venture property would be paid to the syndicate members; rather, it contemplated that all such income would be reinvested to increase the portfolio.

57    Seven properties were acquired by the joint venture between June 2001 and July 2007. The Hume property and another property at Mitchell (Block 7 Section 57 Mitchell) have been sold. The appellants’ case was that the latter property was only sold as a result of pressure from the bank. Block 55 Section 6 Mitchell which was purchased at auction in June 2001, has been retained. The trial judge accepted Harry Konstantinou’s evidence that the ground floor of Charnwood (Block 44 Section 95 Charnwood) was to be sold and that the whole of Block 72 Mitchell (Block 72 Section 6 Mitchell) was also to be sold. Harry Konstantinou explained both of these sales as being necessary to enable Dimensional Developments to reduce borrowings.

58    Dimensional Developments was the successful bidder for the Hume property in November 2001. Dimensional Developments paid $800,000 for its lease of the Hume property and the relevant Crown lease was issued in favour of the company in January 2002. The Hume property was a large vacant block. The terms of the Crown lease required the lessee to commence construction on the block within 12 months of the commencement of the lease (i.e., by January 2003) and for the construction to be completed within 24 months (i.e., January 2004). The time limits could be extended with the approval in writing of the relevant government authority.

59    By September 2003 construction work had not yet commenced on the Hume property, nor had any extension of time been sought. On 10 September 2003 the Compliance Unit of the ACT Planning and Land Authority wrote to Dimensional Developments and drew its attention to the requirements of the Crown lease with respect to the commencement and completion of construction work. Dimensional Developments did not respond to the letter and the Compliance Unit sent a further letter dated 3 February 2004 indicating that if no response was obtained by 4 March 2004, action would be taken to terminate the Crown lease.

60    In 2004 and 2005 Dimensional Developments submitted a number of development applications in respect of the Hume property seeking permission to subdivide the large block into six smaller blocks. These development applications were submitted by Sellick Consultants Pty Ltd (“Sellick”) on behalf of Dimensional Developments. In May 2005 the second application received approval subject to conditions.

61    The development applications lodged on behalf of Dimensional Developments were accompanied by a report prepared by Sellick. Sellick was described as structural and civil engineers and Mr August described it as the project manager for the subdivision work. The Sellick report included an introduction which was in the following terms:

Block 47 Section 5 Hume is to be subdivided into six smaller lots, each of minimum 5,000m2 area in accordance with the Territory Plan. Each of the blocks is to be sold individually, and as such will require individual servicing and access.

This report outlines the design for the construction of civil works associated with the subdivision of the block.

In preparing this report, reference has been made to several previous meetings held at Actpla, and involving representatives from Actpla and City Management, and comments provided by each of these authorities have been incorporated into the design.

62    The trial judge found that Dimensional Developments was not prepared to commence construction on the Hume property until they had secured a tenant. It decided to subdivide the Hume property because it was proving difficult for it to find a tenant for one large vacant block.

63    The trial judge found that at some stage no later than January 2004 a sign was erected at the front of the block that stated “For Sale or Lease”.

64    In about the middle of 2005 there were discussions between Mr Konstantinou and Optus about the purchase of the Hume property by Optus. Contracts were exchanged on 27 October 2005. The trial judge found that the Hume property had special value to Optus as a site for a proposed communications facility and he was satisfied that the price which was initially offered and the price which it ultimately paid were well above market value.

65    In September 2006, the respondent selected Mr August and his related entities for a tax review because Mr August had not lodged an income tax return since 2002. In his dealings with the Australian Taxation Office (“ATO”) Mr August was represented by his accountant, Mr Alexander Papazoglou, of the firm, G A Gregory. Mr Papazoglou was and still is Mr August’s tax accountant.

66    On 31 March 2008, Mr August and Mr Papazoglou attended a meeting with ATO officers who were involved in carrying out the tax review. An entry in the notes of one of the officers and Mr August’s evidence showed that distributions were made to the syndicate members after the sale of the Hume property.

67    Mr Papazoglou sent a memorandum dated 19 January 2009 to Mr Dominic Gilbert of the ATO. On the basis of that memorandum, the trial judge found that Dimensional Developments eventually submitted a tax return for the year ended 30 June 2006 declaring a revenue loss and a substantial capital gain. The memorandum revealed that in the financial year ended 30 June 2006, the net capital gain was distributed equally between the two joint venture partners. Toorak then made distributions to the Toorak Unit Trust and the Wiz Unit Trust. The trial judge noted a passage in Mr Papazoglou’s memorandum as follows:

When reviewing the above listed chain of transactions, it is our view that the Tax Returns reflect distributions made by Dimensional Developments Australia who stands at the top of the chain. Any argument as to the treatment of amounts received will have to be argued at the level of the Partnership and not at the level of the individual beneficiary at the lower end of the chain. It is also our view that the partnership treated matters properly and in accordance with the initial memorandum of understanding between the partners at the inception of the operations back in year 2001.

(Emphasis added.)

68    The respondent had issued a detailed position paper in relation to the sale of the Hume property on or about 29 August 2008. Mr Papazoglou wrote a letter to Mr Gilbert dated 21 September 2008 in direct response to the position paper. He followed that up with a memorandum to Mr Gilbert dated 5 December 2008.

69    The trial judge noted that the covering letter with the position paper invited a response by 21 September 2008. The position paper included an Appendix A which consisted of a chronology of relevant events related to the development and sale of the Hume property. That chronology did not refer to the Addendum.

70    The chronology referred to the sign at the entrance of the site, being “a sign promoting expressions of interest concerning new modern warehouses, showrooms or offices available at the site”.

71    Mr Papazoglou’s letter of 21 September 2008 made no mention of the Addendum.

72    The trial judge said that there were two important points to make about Mr Papazoglou’s memorandum to Mr Gilbert dated 5 December 2008. First, like the letter of 21 September 2008, it made no mention of the Addendum. The trial judge considered that that was significant because, assuming Mr Papazoglou knew of its existence at the time, he could not have failed to appreciate that it was important evidence of the syndicate’s intentions at the time the Hume property was acquired. The trial judge considered that the question which arose was whether the Addendum was not referred to because it did not exist, or because Mr Papazoglou had not been made aware of it at the time he wrote to Mr Gilbert. Secondly, the trial judge noted that unlike the letter of 21 September 2008, the memorandum asserted that the syndicate decided to subdivide the Hume property into smaller blocks “to attract tenants interested in smaller lots or to allow the syndicate to sell one or two lots to reduce their borrowing and remove the pressure from the bank”. The trial judge said that this was at odds with Mr August’s evidence that the syndicate never intended to sell the Hume property, that the “For Sale or Lease” sign was erected by mistake, and that it was Mr Konstantinou’s intention to “get rid of [Optus]” by quoting a “silly price”.

73    The trial judge found that the reference to the “memorandum of understanding between the partners at the inception of the operations” in the last paragraph of Mr Papazoglou’s memorandum of 19 January 2009 was a reference to the Deed. He also found that Mr Papazoglou was never provided with a copy of the Addendum or told of its existence during the period of time in which he was corresponding with the ATO.

74    The trial judge said that there was no evidence to which Mr and Mrs August could point which showed that the Addendum was signed in 2001 apart from the evidence given by Mr August, Mr Konstantinou and Harry Konstantinou. He noted that Mr August’s evidence was corroborated by Mr Konstantinou and Harry Konstantinou. He said (at [148]):

To find that the Addendum was not created on 11 August 2001 necessarily involves rejecting the evidence of all three, and is tantamount to finding not only that the evidence of all three is unreliable, but that there has been collusion between witnesses of a highly improper kind.

75    The trial judge then considered the evidence of Mr August, Mr Konstantinou and Harry Konstantinou about the Addendum.

76    In rejecting Mr August’s evidence about the Addendum, the trial judge relied on a number of matters. First, he relied on his observations of Mr August’s reliability in the context of the Melba shops. Secondly, he rejected Mr August’s evidence with respect to the “For Sale or Lease” sign at the Hume property. Thirdly, he relied on Mr Papazoglou’s memorandum dated 5 December 2008 and the Sellick report as contradicting the evidence that it was never the intention to sell the Hume property and that the only reason it was sold was that Optus made an offer that was too good to refuse. Fourthly, he said that the evidence of Mr August and Mr Konstantinou that they were not interested in selling the Hume property was not credible in light of the fact that Dimensional Developments was in breach of its covenants and under considerable pressure. Finally, he did not accept Mr August’s evidence as to the reasons the Deed could not include the matters in the Addendum upon which he relied.

77    The trial judge rejected Mr Konstantinou’s evidence about the Addendum for a number of reasons including the presence of the sign, the Sellick report and the unsatisfactory nature of his evidence about the negotiations with Optus.

78    The trial judge rejected the evidence of Harry Konstantinou about the Addendum for a number of reasons including the unsatisfactory nature of his evidence concerning the meeting with Mr Allen on 6 August 2001 and with respect to the sign erected at the Hume property.

79    The trial judge said that he was not satisfied that the Addendum was created on 11 August 2001. He considered that the evidence given by Mr August, Mr Konstantinou and Harry Konstantinou in relation to the creation of the Addendum was not truthful. He said that he had come to that view for a number of reasons. First, he did not consider Mr August, Mr Konstantinou or Harry Konstantinou to be reliable witnesses. Secondly, he said that if Mr August had signed the Addendum on 11 August 2001 as he claimed, there was no explanation as to why did he not give a copy to Mr Papazoglou or at least tell him about it. Mr August was not able to provide any clear explanation for not doing either of these things. The trial judge rejected the possibility that Mr August could have forgotten that the Addendum existed or not appreciated its significance during the period of time that Mr Papazoglou was engaged in correspondence with the ATO.

80    The trial judge concluded that the Addendum was created in 2009 or 2010 before a copy of it was first supplied to the ATO in July 2010 as an exhibit to Mr August’s affidavit.

81    The trial judge said that another matter which he found quite telling was the way in which the proceeds of sale of the Hume property were dealt with. In the same financial year as the sale to Optus was completed, there was a substantial distribution made by Dimensional Developments to Toorak. Harry Konstantinou referred to the sale of the Hume property in October 2005 and said that “[t]he sale proceeds were shared between the joint venture members as per the Syndicate Deed”. The trial judge noted that this act was contrary to the strategy referred to in the Addendum.

82    The trial judge dealt with a submission made by the appellants to the effect that a Jones v Dunkel inference should be drawn against the respondent by reason of his failure to call an expert engaged to consider the authenticity of the Addendum. The trial judge said (at 173]):

The inference I would draw if Jones v Dunkel was applicable in such a situation is that the evidence of the expert could not have assisted the Commissioner’s case. But if I was to draw that inference, it would not affect my view of the facts. There may be a number of reasons why the expert evidence was not called by the Commissioner. For example, the expert may have been unable to form a view one way or the other as to the authenticity of the document in question. I certainly would not infer that the expert was not called because it was his or her opinion that the document in question was authentic.

83    The trial judge said that he was not satisfied that the Hume property was acquired by Dimensional Developments as a long term investment. He said that he was satisfied that it was acquired for profit-making purposes, and in particular, he was satisfied that the property was acquired so that the land could be developed and sold for a profit, or developed, leased and sold for a profit. He said that either way, the purpose to make a profit from the sale of Hume, which he was satisfied existed at the time of acquisition, was a substantial one. The profit or gain made from the sale of the Hume property was income according to ordinary concepts.

ISSUES ON THE APPEALS

84    It is convenient to organise the issues raised on the appeals into three categories. First, the appellants issued an interlocutory application before the appeals were heard seeking an order that they be permitted to adduce further evidence under s 27 of the Federal Court of Australia Act 1976 (Cth). The Court heard submissions on this interlocutory application at the hearing of the appeals and decided it would not receive the further evidence put forward by the appellants. The Court said that it would deliver reasons for its decision. These are our reasons. In the course of addressing this submission, we will also address the submission that the trial miscarried in relation to the Addendum.

85    Secondly, the appellants submitted that the trial judge erred in law in that he applied the incorrect test for determining what was income according to ordinary concepts. The appellants’ submission was that the trial judge applied the test embodied in what was the first limb of s 26(a) of the ITAA 1936 and that that was an error of law.

86    Thirdly, the appellants submitted that the trial judge made a number of errors of fact. First, he made errors of fact in relation to the appellants’ witnesses particularly in relation to the Addendum. Secondly, even accepting the trial judge’s conclusion that Mr August, Mr Konstantinou and Harry Konstantinou were unreliable witnesses, he nevertheless erred in concluding by reference to the objective evidence that the profit or gain made on the sale of the Melba shops and on the sale of the Hume property was income according to ordinary concepts. He should have concluded that the profit or gain was income of a capital nature.

The Application to call Further Evidence

87    The appellants’ interlocutory application sought an order that they be given leave to adduce by way of further evidence three expert’s reports which address the authenticity of the Addendum and documents comprising for the most part correspondence between the respective solicitors for the parties.

88    In submissions at the hearing of the appeals, the appellants’ counsel referred to another category of further evidence which he identified as “res gestae” evidence. This evidence was not put before the Court. Apparently it was evidence of communications between Mr August and his solicitors showing the former’s desire to do everything he could to have the authenticity of the Addendum determined and it was said that legal professional privilege over these communications had been waived. We fail to see a basis upon which this evidence would have been admissible at trial let alone pass the additional tests to be admissible as further evidence on the appeals. In any event, the proposed “res gestae” evidence was never put before this Court and it need not be considered any further.

89    We return then to the application to adduce by way of further evidence three expert’s reports and the correspondence. Most of the correspondence is referred to below [96] – [113]. Whether the correspondence should be received turned on whether the expert’s reports should be received and it is convenient to begin by outlining the nature of the expert evidence.

90    Ms Michelle Novotny is a forensic document and handwriting examiner. She prepared a report which is dated 30 January 2013. She sets out a summary of her findings at the beginning of her report:

Summary of Findings

On the basis of documents submitted and instructions received from Meyer Vandenberg Lawyers, I have undertaken examinations of documents in this matter and concluded as follows with respect to the signatures:

(a)    Within the limitations of the available material, the questioned signature in the name Peter August is consistent with the specimen signatures in that name dated in the period 1998 to 2002. However, given that there is no apparent evolution in the design or form of the Peter August signatures over the entire period 1998 to 2011, it is also consistent with the specimen signatures in that name dated in the period 2003 to 2011. Therefore, the signature examination does not assist in determining when the questioned signature in the name Peter August was written.

(b)    Within the limitations of the available material, the questioned signature in the name Spiros (Jeff) Konstantinou appears to be inconsistent with both the 2001 and 2002 specimen signatures in that name as well as those dated in 2010. This is not to say that the questioned signature in the name Spiros (Jeff) Konstantinou was necessarily not written in either period, rather that there are insufficient specimen signatures to be able to address this issue properly. Therefore, the signature examination does not assist in determining when the questioned signature in the name Spiros (Jeff) Konstantinou was written.

91    The documents show that Mr August’s solicitors sent an original briefing letter to Ms Novotny on or about 16 March 2011.

92    Mr John Murphy is a paper and fibre analyst. His report is also dated 30 January 2013. He also sets out a summary of his conclusions at the beginning of his report:

In summary, the paper used to produce the document in question cannot be dated by the means available to this examiner. From previous work and experience I know this grade of paper (ruled, acid-sized, low grammage memo pad paper) was freely available in the Australian market place, before, and around the time the document was claimed to have been drawn up (11 August, 2001), and also around the time the trial judge found the document to have be [sic] created (2009/2010), and is still freely available in office situations today. A characteristic of this type of paper, of which you should be made aware, and which can easily confuse the issue, is its propensity to rapidly “visually” age; a property discussed on pages 3 and 4 of this report.

(Emphasis in original.)

93    Dr Valery Aginsky is a forensic chemist. His report is dated 14 February 2013. He summarises his conclusions at the end of his report in the following way:

1.    Based on the results of this examination and my professional experience, it is my opinion that the blue ballpoint ink used to produce all the handwritten entries on pages 1 and 2 of the Addendum, as well as the “Spiros (Jeff) Konstantinou” and “Peter J. August” signatures, matches the blue ballpoint ink formulation that was used in ballpoint pens manufactured by A.T. Cross prior to 11 August 2001.

2.    For the reasons pointed out in the text of this report, I cannot, with a high degree of certainty, answer the question whether the above blue ballpoint ink is consistent or inconsistent with having been manufactured in the time period from 2004 to 2010.

3.    For the reasons pointed out in the text of this report, it was not possible to determine when the Addendum was actually written and signed.

94    As can be seen from these conclusions, none of the witnesses give affirmative evidence to the effect that the Addendum was executed in August 2001 when the appellants say it was as distinct from 2009 or 2010 which was the finding of the trial judge.

95    The appellants’ solicitor (Ms Bernice Lesley Ellis) swore affidavits in support of the appellants’ application to adduce the further evidence summarised above. She produced correspondence and outlined events leading up to the trial which relate to the authenticity of the Addenum. The course of events was as follows.

96    Mr August swore an affidavit in the proceeding on 14 July 2010 and he annexed the Addendum to his affidavit (annexure PA 14).

97    On 17 November 2010 the solicitors for the respondent wrote to the appellants’ solicitors advising them that the respondent wished to have the original Addendum (which had been produced to the Court pursuant to a notice to produce issued by the respondent) forensically tested by a document examiner. The proposed document examiner was identified as Mr Stephen Dubedat. The appellants’ solicitors consented to the proposal, but made the point that if fraud or dishonesty was alleged against Mr August, then they would expect the respondent to amend his Appeal Statement.

98    On 7 February 2011 the respondent served an unfiled copy of an affidavit of Mr Stephen Dubedat sworn on 28 January 2011. Mr Dubedat’s report was exhibited to the affidavit.

99    The appellants advised the respondent of objections to Mr Dubedat’s affidavit. They claimed that they had been denied procedural fairness. The respondent advised the appellants that he would consent to an adjournment of the trial which had been listed to commence on 7 March 2011 to overcome any difficulties. The appellants indicated that they would consent to the vacation of the date the trial was due to commence.

100    The parties appeared before the trial judge on 14 February 2011. The parties told his Honour that they both consented to an adjournment of the hearing date. His Honour asked for an explanation of the request for an adjournment. A summary of the explanation which the trial judge was given is as follows:

(1)    There was an issue about the authenticity of the Addendum and, in particular, the date upon which it was allegedly signed.

(2)    Mr Dubedat, a document examiner, had examined the original of the Addendum on behalf of the respondent. Mr Dubedat had not been able to reach a firm conclusion. He considered that there was a real possibility that the Addendum was created somewhat later than August 2001. He wished to carry out further tests which involved an examination and comparison of Mr August’s signature at various stages between 2001 and 2010.

(3)    The appellants wanted an opportunity to respond by way of expert evidence to any report by Mr Dubedat.

101    The trial judge was concerned that he was being asked to adjourn the trial because an expert had said that it was a possibility that the Addendum was not authentic as to the date upon which it was prepared. He did note that it was open to the respondent to dispute the authenticity of the Addendum even though he did not call any expert evidence with respect to it. Counsel for the respondent did indicate at one point that the respondent would call Mr Dubedat even if Mr Dubedat could not advance his opinion beyond the opinion he held on 14 February 2011. The trial judge adjourned the hearing to 17 February 2011.

102    On 17 February 2011, the matter came back before the trial judge. There was some debate before the trial judge as to whether Mr August was being accused of perjury as his counsel contended, or whether there was an issue as to the date upon which a document was executed. The trial judge made the observation that there was no doubt, “Briginshaw has a role to play when we’re investigating these allegations”. In the result, the trial judge vacated the trial date.

103    On 24 February 2011 the appellants’ solicitors served a Notice to Admit Facts (and authenticity of documents) on the respondent under Order 18 rule 2 of the then Federal Court Rules. Paragraphs 45 and 46 of that document were in the following terms:

The applicant requires you to admit for the purpose of these proceedings only the authenticity of the following documents –

45.    Document entitled ‘Dimensional Developments Australia Syndicate Deed’ dated 6 August 2001 and comprising annexure PA 13 to the affidavit of Peter August sworn 14 July 2010.

46.    Handwritten document entitled ‘DDA Syndicate Addendum’ dated 11 August 2001 and comprising annexure PA 14 to the affidavit of Peter August sworn 14 July 2010.

104    The respondent responded by serving a Notice Disputing Facts and Authenticity of Documents dated 10 March 2011. As to paragraphs 45 and 46 the respondent said:

The respondent disputes the authenticity of the following document which was specified in the notice of the applicant 24 February 2011:

45.    Paragraph 46 of the notice to admit facts: Handwritten document entitled “DDA Syndicate Addendum” dated 11 August 2001 and comprising annexure PA 14 to the affidavit of Peter August sworn 14 July 2010.

The respondent admits the authenticity of the following document:

46.    Paragraph 45 of the notice to admit facts: Document entitled “Dimensional Developments Australia Syndicate Deed” dated 6 August 2001 and comprising annexure PA 13 to the affidavit of Peter August sworn 14 July 2010.

105    On 16 March 2011 the appellants briefed Mr Paul Westwood of Forensic Document Services to provide a report going to the authenticity of the Addendum, including a response to Mr Dubedat’s report or reports.

106    The respondent filed and served an Amended Appeal Statement on or about 23 March 2011. There was a reference to the Deed executed on 6 August 2001 in the following terms:

9.    The Syndicate commenced on 6 August 2001 as a so called “joint venture” between Toorak Management, directed by the Applicant, and Konstantinou Developments Pty Limited (“Konstantinou Developments”), directed by Mr Spiros Jeff Konstantinou, for the purpose (as stated in the Recitals to the Syndicate Deed) of acquiring properties, entering into joint ventures, undertaking property developments and also other business ventures. Since November 2001 the Syndicate has developed a substantial property portfolio.

    (Emphasis in original.)

107    There was no reference to the Addendum in the Amended Appeal Statement.

108    On 24 March 2011 the respondent’s solicitors wrote to the appellants’ solicitors and advised them that he would not read Mr Dubedat’s affidavit and that he would not be filing any additional expert report.

109    The appellants’ solicitors wrote to the respondent on 28 March 2011 and they said:

At the outset, Peter August, Jeff Konstantinou and Harry Konstantinou have been put to wasted time, angst and expense by your client’s unfounded allegation the handwritten addendum is not genuine. Moreover, valuable Court time has been wasted and the resolution of the outstanding issues between our respective clients needlessly prolonged by your client raising, and then not pursuing, a most serious allegation against our clients. In light of this, we advise as follows.

First, we confirm our clients, the Augusts, do not intend to prepare or rely on any expert evidence in reply to your client’s allegations about the handwritten addendum. For the record, the Augusts (and the Konstantinous) maintain the document is genuine. Your client is of course free to try and convince the Court otherwise at trial.

110    They wrote again on 30 March 2011 saying:

We note that at paragraph 45 of the notice your client disputes the authenticity of the handwritten addendum to the Syndicate Deed. Your letter dated 24 March 2011 then advised that your client no longer wishes to proceed with expert evidence about the handwritten addendum. Our letter dated 28 March 2011 in response to yours dated 24 March was written without us having appreciated the contents of your client’s notice, including our advice that our clients will also not proceed with expert evidence about the handwritten addendum.

Given the seemingly conflicting position of your client about the authenticity of the handwritten addendum, can you please advise your client’s position about that document?

If your client no longer disputes the authenticity of the handwritten addendum then can you please confirm that and let us know when you will amend your client’s notice. If our clients’ consent to the amendment is required, then it is given.

If, however, your client still disputes the authenticity of the handwritten addendum then can you please provide full particulars of the basis of that disputation? Furthermore, our clients may reconsider their view about obtaining expert evidence about the authenticity of the document.

111    The respondent responded on 30 March 2011:

2.    Our client does not have a conflicting position in relation to the “handwritten addendum”. In this respect, we confirm that.

a.    our client will not be relying on the affidavit of Stephen Dubedat made 28 January 2011; and

b.    our client will not be amending the notice.

3.    In relation to your request that our client provides “full particulars of the basis of the disputation”, there is no requirement for our client to provide full particulars in respect of the notice and we decline to do so.

112    Finally, the appellants’ solicitors wrote to the respondent’s solicitors on 31 March 2011 saying:

Given the extraordinary circumstances of your client filing expert evidence about the authenticity of the handwritten addendum and causing the hearing to be adjourned, and then last week resiling from that course of action, we repeat our request for particulars of your client’s disputation of the authenticity of the handwritten addendum.

Your client’s notice disputing facts and authenticity of documents goes beyond a mere non-admission of fact, but puts a positive case about the authenticity of the handwritten addendum. If your client is indeed making a positive case then we seek particulars of that positive case. We will seek orders about this on 7 April 2011 if your client declines to provide such particulars.

113    The respondent’s solicitors responded on 1 April 2011:

3.    On 10 March 2011 we answered your notice with a notice disputing facts (and authenticity of documents) (“our notice”) in which we disputed the authenticity of the document. Our notice goes no further than this.

4.    You are on notice that you must prove the document if you wish to rely upon it. You have been on notice that our client questions the document since at least 17 November 2010 when we sought your consent to uplift the document for the purpose of forensic examination.

5.    In relation to your advice that your clients intend to seek an order for indemnity costs payable forthwith under Order 63 of the Federal Court Rules, please advise us of the nature of any other orders your clients propose to seek and, in particular, please advise us whether your clients intend to seek leave to file further evidence in chief such as expert evidence.

114    Ms Ellis deposes to the fact that as a result of the respondent’s attitude conveyed by his solicitor’s letter dated 24 March 2011, the appellants did not have leave to and did not obtain expert evidence for the trial and that as a result of his solicitor’s letter dated 1 April 2011, the appellants did not consider whether to seek leave to file expert evidence “out of time”. On 1 April 2011 the appellants’ solicitors instructed Mr Westwood to cease work once and for all.

115    It was very difficult to determine the precise basis upon which the appellants sought leave to adduce the three expert’s reports as further evidence. The appellants seemed to argue that irrespective of the further evidence, the trial with respect to the Addendum miscarried, partly as a result of the respondent’s conduct and partly as a result of the approach of the trial judge, and that this Court should determine the issue of the authenticity of the Addendum for itself with the aid of the further evidence. We reject every step of this argument. We do not think the trial miscarried with respect to the Addendum. Even if it did, it would not be appropriate for the Court to determine the issue of the authenticity of the Addendum. Finally, even if these points are put to one side, the further evidence is inconclusive and should not be received for that reason. Before expanding on these conclusions, we will briefly address the principles relevant to the receipt of further evidence.

116    The Court’s power to receive further evidence is contained in s 27 of the Federal Court of Australia Act 1976 (Cth). The authorities make it clear that in exercising the discretion the Court is not constrained by the factors relevant at common law as enunciated in Orr v Holmes and Another (1948) 76 CLR 632 and Council of the City of Greater Wollongong v Cowan (1955) 93 CLR 435. That is not to say that the common law factors are not relevant, only that they are not the only relevant factors. In many cases it would be most material to consider whether the evidence could have been called at trial and, if it could have been, the reasons it was not, and the extent to which the further evidence had the ability to affect the result.

117    In Sobey v Nicol and Davies as Joint and Several Receivers and Managers of the Property of Mercorella and the Scheme and as Joint and Several Liquidators of the Scheme (2007) 245 ALR 389 at 403-404 [68] – [72] the Full Court of this Court said:

[68] Section 27 of the Federal Court Act authorises the court in an appeal to receive further evidence by affidavit. The circumstances in which the court should exercise its discretion under s 27 to receive further evidence have been considered by the High Court in CDJ v VAJ (No 1) (1998) 197 CLR 172 ; 157 ALR 686 ; 23 Fam LR 755 ; [1998] HCA 67 (CDJ) (in the context of the similarly worded s 93A(2) of the Family Law Act 1975 (Cth)) and by the Full Court of this court in Cottrell v Wilcox [2002] FCAFC 53 at [20]–[24]; Gao v Official Trustee in Bankruptcy [2003] FCAFC 84 at [23]; Freeman v National Australia Bank Ltd (2003) 2 ABC (NS) 32 at 48–50; [2003] FCAFC 200 at [68]–[74] and Ye v Crown Ltd [2004] FCAFC 8 at [157]–[161] as well as in Williams: see [50] above.

[69] The above authorities reveal that the circumstances in which further evidence may be received in this court on appeal are not limited by the principles laid down in authorities such as Greater Wollongong City Council v Cowan (1955) 93 CLR 435 which concern common law procedures. The proper limits of the discretion vested in the court by s 27 are to be determined as a matter of statutory construction. As the Federal Court Act is silent as to the factors which govern its exercise, the discretion is confined only by the subject matter with which the Act is concerned. It should not be understood to be subject to implications or limitations not found in the words used by the legislature. It is a discretion to be exercised in the context of an appeal by way of rehearing. On appeal this court is required to determine the rights of the parties upon the facts and in accordance with the law as it exists at the time of hearing the appeal.

[70] A critical factor will be the subject matter of the proceeding with which the appeal is concerned. As the High Court observed in CDJ the court will more readily admit further evidence where the rights of third parties, such as children are at stake.

[71] The discretion to receive further evidence must be exercised judicially, consistently with proper judicial process and in the interests of justice. It is highly unlikely that the legislature intended that s 27 should be construed in such a way as to obliterate the distinction between original and appellate jurisdiction.

[72] The proper role of an appellate court under s 25 of the Federal Court Act has been considered on a number of occasions in recent years including in Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) 117 FCR 424 ; [2001] FCA 1833 and Poulet Frais Pty Ltd v Silver Fox Co Pty Ltd (2005) 220 ALR 211 ; [2005] FCAFC 131 at [45]; it is ordinarily to correct error. Nothing in CDJ was, in our view, intended to minimise the force of the observation of Gibbs CJ and Wilson, Brennan and Dawson JJ in Coulton v Holcombe (1986) 162 CLR 1 at 7 ; 65 ALR 656 at 660 that:

It is fundamental to the due administration of justice that the substantial issues between the parties are ordinarily settled at the trial. If it were not so the main arena for the settlement of disputes would move from the court of first instance to the appellate court, tending to reduce the proceedings in the former court to little more than a preliminary skirmish.

118    We also refer to, without setting out, the factors McHugh, Gummow and Callinan JJ considered relevant to the exercise of an equivalent discretionary power in CDJ v VAJ (1998) 197 CLR 172 at 202 – 204 ([112] – [116]).

119    In addition to the above matters, it should be noted that it is well-established by the authorities that the power in s 27 of the Federal Court of Australia Act 1976 (Cth) and equivalent sections in other Acts is a remedial power and that an important consideration in terms of the exercise of the power is whether the further evidence would have produced a different result had it been available at the trial or, at least, was likely to have produced a different result: CDJ v VAJ; Sharp v Rangott (2008) 167 FCR 225 at 228 – 229 [8] per Gray and North JJ; at 248 [92] per Besanko J.

120    In determining whether the trial miscarried with respect to the Addendum, it is necessary to consider not only the matters referred to above (at [96] – [114]), but the following additional matters including events at the trial which took place on 20 June, 21 June, 22 June and 23 June 2011.

121    The parties put before the trial judge a joint statement of agreed facts and disputed facts in which the authenticity of the Addendum was identified as a material fact in dispute.

122    In a written outline of submissions dated 23 May 2011 and filed before trial, the appellants referred to the Addendum in the following terms:

18.    Consistent with the terms of the addendum to the Syndicate Deed, the Hume property was purchased and developed by Dimensional Developments for the purpose of long-term investment. An aspect of that development was contemplation of subdividing the property to be more appealing to tenants, but that subdivision never eventuated. Instead, the property was sold well above market value to an unsolicited buyer.

123    In his outline of submissions dated 6 June 2011 the respondent said:

21.    The authenticity of the “DDA Syndicate Addendum” must be determined against all the surrounding circumstances, including the terms of the deed itself. Doubts about its authenticity will impact on the credit of the relevant witnesses, including Peter August. However, even if it is accepted, it is not a complete answer to the issues to be resolved on this application. Those issues can only be resolved by careful consideration of all of the relevant circumstances and particularly the objective circumstances, given Peter August’s obvious interest in the outcome.

124    At the trial, it was abundantly clear from an early stage (i.e., the trial judge’s rulings on objections to Mr August’s affidavit sworn on 14 July 2010) that Mr August and his advisors believed that the respondent was asserting that the Addendum was a fabrication.

125    Mr August was examined about the Addendum. He was then extensively cross-examined about the following matters:

(1)    The circumstances surrounding the execution of the Deed on 6 August 2001 including his conference with Mr Bradley Allen and the involvement of his lawyer in Melbourne, Mr George Bouhalis.

(2)    The amendments made to the Deed before it was executed.

(3)    The circumstances surrounding the execution of the Addendum. It was put to Mr August that the Addendum was prepared somewhat later than 11 August 2001.

(4)    The time when he first produced the Addendum to his accountant, Mr Papazoglou, and to the respondent.

(5)    That the Addendum was created for the purpose of his case.

126    Mr Konstantinou was also cross-examined quite thoroughly as to the circumstances surrounding the preparation and execution of the Addendum and it was clearly put to him that the Addendum was created to assist Mr August in the proceeding in the Court. Although the cross-examination of Harry Konstantinou was not as extensive, it was clearly put to him that the Addendum was created well after 11 August 2001 and that that had been done to assist his friend, Mr August in the proceeding.

127    There were both written and oral closing submissions.

128    The appellants’ written submissions following close of evidence addressed the Addendum in some detail and characterised the respondent’s submission as an allegation that the Addendum was “fabricated for the purpose of these proceedings, a direct allegation of conspiracy by the three witnesses to pervert the course of justice, and of perjury”.

129    The Addendum was addressed at length in the parties’ closing oral submissions. Two aspects of the closing oral submissions were identified by Mr August as significant. First, at one point during the appellants’ submissions the trial judge said that he was not going to make a finding of conspiracy to pervert the course of justice in relation to the Addendum. We do not think that by this comment the trial judge was suggesting that the authenticity of the Addendum, or indeed whether the Addendum was a fabrication, was not an issue before him. We think that read in context he was saying no more than that he would not be making a finding of a specific criminal offence. In the result, he did not make such a finding. Secondly, the trial judge said in the context of the appellants’ counsel’s submissions in reply dealing with consistencies and inconsistencies between witnesses that he was not looking for further submissions. The passage is as follows (T420):

MR RUSSELL:    Just the evidence that it would be the Konstantinous on the ground who did the work, and that is effectively what about half the addendum deals with, and that the purpose of this was to do something for their families. I mean, that, again, is in the affidavits. It is something for their families, meaning, in this context, long-term investment. I mean, it’s not as if there is anything surprising in that document in terms of things the parties have given other evidence of, nor in the circumstances would we – and if those things had happened as the parties said, then there is nothing particularly unlikely about it having been written down in that way. We will deal with issues like – I mean, our learned friends point to the fact there is a slight difference about whether the document was signed inside the caravan or outside the caravan, but there were a whole series of questions asked, as your Honour will recall, starting with, “Was the same pad used?” and “Was the same pen used?” On most of those issues, in fact, the evidence was identical. We will give your Honour a table that sets out all of that. We would ---

HIS HONOUR:    I am not looking for further submissions.

MR RUSSELL:    No, no.

HIS HONOUR:    It is references to evidence, particularly from your side, actually.

MR RUSSELL:    Yes. Yes, that’s right.

HIS HONOUR:    If I can have those.

130    There seemed to be a suggestion by the appellants on the appeals that they were denied procedural fairness and they made reference to the decision of the High Court in Stead v State Government Insurance Commission (1986) 161 CLR 141.

131    The suggestion that his Honour prevented Mr August’s counsel from making submissions about the execution of the Addendum must be firmly rejected. Mr August’s counsel had such an opportunity and the comments by the trial judge, made as they were in reply, were entirely appropriate.

132    The respondent disputed the authenticity of the Addendum. He said that he would not call any expert evidence with respect to the Addendum and he did not do so. The appellants characterised the respondent’s allegation about the Addendum as being to the effect that it was a fabrication. That is ultimately what his Honour found. We reject the submission that the trial miscarried in relation to the Addendum.

133    Even if it had, we would not receive the further evidence for the purpose of determining the issue ourselves. It would not be appropriate for this Court to do so. Even if it is correct to say that the trial judge did not rely on demeanour, that is not to say that another judge engaged in the fact-finding task would not be entitled to do so.

134    Finally, and irrespective of the preceding conclusions, the further evidence is quite inconclusive and ought not be received on that basis. It cannot be said that it would have produced a different result had it been available at the trial or, at least, was likely to have produced a different result. The appellants seemed to acknowledge this. Nevertheless, they put an argument that by reason of the respondent’s conduct they had been deprived of an opportunity to prove at trial that the finding by the trial judge that it was more likely that the Addendum was created in 2009 or 2010 was incorrect. This argument was made by reference to evidence in Dr Aginsky’s report that ink testing analysis was not effective after about two years. There are a number of difficulties with this argument, but we mention two which are fundamental. First, we do not accept that the alleged consequence followed from any conduct of the respondent. As we have said, the respondent said it was not calling expert evidence in relation to the execution of the Addendum (and did not do so), but that it challenged the authenticity of the Addendum. Secondly, and in any event, the argument does not lead anywhere. The appellants do not argue that the respondent cannot challenge the authenticity of the Addendum, but rather that for various reasons (which we have rejected) this Court should decide the issue.

135    It was for these reasons that we rejected the appellants’ application to call further evidence. We also reject the submission that the trial miscarried in relation to the Addendum.

The Correct Legal Test

136    The trial judge said at the beginning of his reasons that the issue before him was whether the profit derived by Toorak in relation to the sale of the Melba shops and by Dimensional Development in relation to the sale of the Hume property was income according to ordinary concepts or income of a capital nature.

137    The appellants submitted that the trial judge stated the test incorrectly in the section of his reasons entitled, “The Relevant Principles”. Alternatively, it was submitted that the trial judge’s conclusions on the facts indicate that he applied the incorrect legal test.

138    The appellants’ principal submission was that the trial judge focussed on purpose or intention and overlooked the fact that to be income according to ordinary concepts there must also be a scheme or business operation or commercial transaction. The submission was that this was important in this case for different reasons in relation to the Melba shops and the Hume property. In relation to the Melba shops, it was submitted that there never was any scheme and in relation to the Hume property, the property was sold to Optus after the scheme alleged by the respondent had been abandoned.

139    The respondent accepted that a scheme or business operation or commercial transaction was an element of the test, but submitted that the trial judge had both stated and applied the test correctly.

140    In dealing with the relevant principles for determining whether a profit or gain made upon a disposition of property constitutes income according to ordinary concepts, the trial judge started by noting that these principles were not in dispute. He said that they were explained by Hill J (with whom Lockhart and Gummow JJ agreed) in Westfield Limited v Commissioner of Taxation (1991) 28 FCR 333 (“Westfield”). He then analysed the decision in Westfield in detail.

141    The trial judge noted that Hill J in Westfield had referred to Californian Copper Syndicate v Harris (1905) 5 TC 159 (“Californian Copper”) as the starting point in his analysis. In Californian Copper the Lord Justice Clerk (the Right Honourable JHA MacDonald) said that the test for determining whether a gain constituted assessable income was as follows:

Is the sum of gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operation of business in carrying out a scheme for profit-making?

142    The trial judge then referred to Hill J’s discussion in Westfield of the High Court’s consideration of the test in Californian Copper in Commissioner of Taxation (Cth) v Myer Emporium Ltd (1987) 163 CLR 199. The trial judge set out a lengthy passage from Hill J’s reasons in Westfield dealing with that matter. We will also set that passage out. It is important because the trial judge emphasised part of the passage.

The test in Californian Copper (supra) was applied in more recent times by the High Court in Commissioner of Taxation (Cth) v Myer Emporium Ltd (supra) and GP International Pipecoaters Pty Ltd v Commissioner of Taxation (Cth) (1990) 170 CLR 124. In appreciating what was said in Myer, it is important to recall that an argument for the taxpayer was that the transaction there involved, of selling land, receiving a mortgage back at interest for a long term, and then assigning the income arising under the mortgage for a lump sum, was not income in ordinary concepts, because it was an extraordinary transaction and outside the scope of the taxpayer’s business. It was in answering this argument, that the judgment of the court in Myer said (at 209):

“Although it is well settled that a profit or gain made in the ordinary course of carrying on a business constitutes income, it does not follow that a profit or gain made in a transaction entered into otherwise than in the ordinary course of carrying on the taxpayer’s business is not income. Because a business is carried on with a view to profit, a gain made in the ordinary course of carrying on the business is invested with the profit-making purpose, thereby stamping the profit with the character of income. But a gain made otherwise than in the ordinary course of carrying on the business which nevertheless arises from a transaction entered into by the taxpayer with the intention or purpose of making a profit or gain may well constitute income. Whether it does depends very much on the circumstances of the case. Generally speaking, however, it may be said that if the circumstances are such as to give rise to the inference that the taxpayer’s intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer’s business. Nor does the fact that a profit or gain is made as the result of an isolated venture or a ‘one-off’ transaction preclude it from being properly characterised as income: see Commissioner of Taxation (Cth) v Whitfords Beach Pty Ltd (1982) 150 CLR 355. The authorities establish that a profit or gain so made will constitute income if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit”.

The judgment, not only in this passage, but in several later passages (at 211-213), emphasises that where a transaction occurs outside the scope of ordinary business activities, it will be necessary to find, not merely that the transaction is “commercial” but also that there was, at the time it was entered into, the intention or purpose of making a relevant profit.

What was said in Myer has been applied in a number of cases in this Court since. Among them are Moana Sand Pty Ltd v Commissioner of Taxation (Cth) (1988) 88 ATC 4897 and Commissioner of Taxation (Cth) v Cooling (1990) 22 FCR 42. It does not, however, follow from the judgment in Myer, or, for that matter, from the judgments in any later cases, that every profit made by a taxpayer in the course of his business activity will be of an income nature. To so express the proposition is to express it too widely, and to eliminate the distinction between an income and a capital profit. A taxpayer carrying on a business might sell its headquarters in order to move to larger premises and make a profit over historical cost. The transaction of sale may be one which arises in the ordinary course of the taxpayer’s business, but that profit will not ordinarily be income, particularly where, at the time of acquisition of the site, there was no intention or purpose of profit-making by sale when the premises became too small. The profit in Cooling (supra), the receipt of a leasing incentive payment, was one intended to be made at the time the transaction with the lessor was entered into, just as the profit in Myer was one which underlay the whole transaction.

(Trial judge’s emphasis.)

143    The trial judge then set out two further passages from the reasons of Hill J in Westfield which we will set out (at 343-344 and 344-345):

Once it is clear that the activity of buying and selling, which generated the profit, was not an activity in the ordinary course of business, or, for that matter, an ordinary incident of some other business activity, the profit in question will only form part of the assessable income of the appellant, by virtue of its being income in accordance with the ordinary concepts of mankind, if the appellant had a purpose of profit-making at the time of acquisition. What is meant by “profit-making” in this context?

…

There may be a case (the present is not one) where the evidence establishes that the taxpayer has the purpose or intention of making a profit by turning an asset to account, although the means to be adopted to generate that profit have not been determined: cf Steinberg v Commissioner of Taxation (Cth) (1975) 134 CLR 640. Steinberg (supra) was a case decided under the second limb of the then s 26(a) of the Act. The taxpayer had, having obtained an option to purchase some land (the Rockingham land), caused a company to be incorporated, the shareholders of which included his family and himself, intending to turn the land to account in the most advantageous way; in particular, either by selling the shares in the company, or liquidating the companies, distributing the assets in specie, and then selling those assets. It was the latter course that was taken. The court by majority held, affirming Mason J at first instance, that it was not necessary, to fall within the second limb, that every step which culminates in the making of a profit should be planned or foreseen. In the words of Mason J (at 670):

In a business transaction of this kind where property is acquired with the intention that a profit should be made out of its anticipated appreciation in value by whichever means prove most suitable, it matters not that the particular means by which the profit is to be made are left for subsequent decision.

To the same effect is the judgment of Gibbs J (at 699-700) and of Stephen J (at 704-705).

While a profit-making scheme may lack specificity of detail, the mode of achieving that profit must be one contemplated by the taxpayer as at least one of the alternatives by which the profit could be realised. Such was the case in Steinberg. But, even if that go too far, it is difficult to conceive of a case where a taxpayer would be said to have made a profit from the carrying on, or carrying out, of a profit-making scheme, where, in the case of the scheme involving the acquisition and resale of land, there was, at the time of acquisition, no purpose of resale of land, but only the possibility (present, one may observe, in the case of every acquisition of land) that the land may be resold. The same may be said to be the case where s 25(1) of the Act is involved. As the court observed in Myer, in the passage already set out, the property which generates the gain must be acquired in an operation of business or commercial transaction “for the purpose of profit-making by the means giving rise to the profit”. [Emphasis added.]

(Trial judge’s emphasis)

144    Each party accepted that the correct test is as stated by Hill J in Westfield. It appears to us clear that in identifying these passages the trial judge had in mind the need for the profit or gain to be associated with a scheme, business operation or commercial transaction as well as being accompanied by the relevant purpose.

145    However, the appellants contend that the error may be seen in the final paragraph of the trial judge’s treatment of the relevant principles. That paragraph is in the following terms (at [14]):

In the present case it is accepted by Mr and Mrs August that the relevant profits will constitute income according to ordinary concepts if the properties were acquired for the purpose of profit-making by sale. In this regard, it is now settled that the purpose of profit-making by sale need not be the sole or dominant purpose: Commissioner of Taxation v Cooling (1990) 22 FCR 42 per Hill J (with whom Lockhart and Gummow JJ agreed) at 56-57, and Moana Sand Pty Limited v Federal Commissioner of Taxation (1988) 88 ATC 4897 at 4,902-4,904. It is enough, at least in the case of a commercial or business dealing, that the purpose is a substantial (or a not insubstantial) one.

146    The appellants’ submission was that the above paragraph contains a reference to the test under the first limb of what was s 26(a) of the ITAA 1936 and they referred to the reasons for judgment of Gibbs CJ in The Commissioner of Taxation of the Commonwealth of Australia v Whitfords Beach Proprietary Limited (1982) 150 CLR 355 at 362, 367-368 for a statement of the distinction between the test for the first limb of s 26(a) and the test for income according to ordinary concepts.

147    We reject the appellants’ submission. The paragraph must be read as a whole and indeed in the context of the preceding discussion. When that is done, we do not think it can be said that the trial judge overlooked the element of a scheme, business operation or commercial transaction.

148    The alternative way in which the appellants put their argument was to submit that the trial judge misunderstood or misapplied the test because there was never a scheme, business operation or commercial transaction in the case of the Melba shops and there was not a scheme, business operation or commercial transaction in place at the time of the sale of the Hume property. We reject both of these arguments.

149    It was open to the trial judge to find that there was a scheme in the case of the Melba shops. He found that there was an intention or purpose that the Melba shops be developed, tenanted and sold for a profit. Development of properties, the securing of tenancies and the subsequent sale of the properties is a scheme or commercial transaction. Mr August knew that he would have to spend monies to improve the shops on Blocks 2 and 12 before Toorak purchased them and the vacant shop on Block 2 was in a “very run down condition”. Mr August obtained not only extensions for the Crown leases for Blocks 2 and 12, but also that a new and broader purpose clause that would apply to both blocks. Between 2000 and 2001 (or early 2002) Toorak constructed two shops on Blocks 31 and 30.

150    In relation to the Hume property, the appellants submitted that even if it was open to the trial judge to find that there was a scheme, business operation or commercial transaction, it was not open to him to find that it was continuing at the time of sale. They relied on the decision in Kratzmann v Federal Commissioner of Taxation (Cth) (1970) 44 ALJR 293 (“Kratzmann”).

151    In Kratzmann a taxpayer purchased land to carry out a profit-making scheme involving the borrowing of money to erect a building and the realisation of units in the building to cover the repayment of the loans and the cost of the project, leaving him with a substantial asset which would constitute a surplus. For financial reasons, he gave up the idea of so developing the land, and sold it at a profit. Menzies J held that the profit on the sale was not assessable income because the sale did not arise from the carrying on or carrying out of the profit-making scheme. Menzies J said (at 294):

For the Commissioner it was argued that, because the purchase was part of a profit-making scheme, any profit arising from the purchase was a profit from the carrying on or carrying out of that scheme. It seems to me, however, that the profit here arose not from the purchase but from the sale and because the sale was not part of the profit-making scheme the profit did not arise “from the carrying on or carrying out” of that scheme. Indeed, the profit in question did not arise until the scheme had been abandoned.

Accordingly, I am of the opinion, that the taxpayer is entitled to have the assessment, including this profit as part of his assessable income, amended to exclude it.

152    Kratzmann’s case is quite different from the present case. In Kratzmann’s case the sale was not part of the profit-making scheme. In the case of the Hume property, a sale was part of the profit-making scheme and we do not think the fact that it took place without the property being leased or being subdivided takes it outside the profit-making scheme. In this case, the scheme had not been abandoned in the relevant sense.

The Challenge to the Trial Judge’s Findings of Fact

153    This Court has jurisdiction to hear the appeals from the judgment of the trial judge by reason of s 24 of the Federal Court of Australia Act 1976 (Cth). The Court’s powers on the appeal include the powers in ss 27 and 28 of the Act and, in particular, the power to draw inferences of fact, the power to affirm, reverse or vary the judgment appealed from and the power to give such judgment, or make such order, as, in all the circumstances, it thinks fit, or refuse to make an order.

154    The appeal to this Court is by way of a “rehearing”. That does not mean a completely fresh hearing by the appellate court of all the evidence. Ordinarily, an appeal court proceeds on the basis of the record and any fresh or further evidence it admits. In Fox v Percy (2003) 214 CLR 118 Gleeson CJ, Gummow and Kirby JJ described the constraints marked out by the nature of the appellate process in the following terms (at 125 – 126 [23]):

The foregoing procedure shapes the requirements, and limitations, of such an appeal. On the one hand, the appellate court is obliged to “give the judgment which in its opinion ought to have been given in the first instance” (32). On the other, it must, of necessity, observe the “natural limitations” that exist in the case of any appellate court proceeding wholly or substantially on the record (33). These limitations include the disadvantage that the appellate court has when compared with the trial judge in respect of the evaluation of witnesses' credibility and of the “feeling” of a case which an appellate court, reading the transcript, cannot always fully share (34). Furthermore, the appellate court does not typically get taken to, or read, all of the evidence taken at the trial. Commonly, the trial judge therefore has advantages that derive from the obligation at trial to receive and consider the entirety of the evidence and the opportunity, normally over a longer interval, to reflect upon that evidence and to draw conclusions from it, viewed as a whole (35).

155    Their Honours said that within those constraints an appeal court must conduct a real review of the trial and, in cases where the trial was conducted before a judge sitting alone, of that judge’s reasons (at [25]). A real review includes the application of the rule reiterated by the High Court in Warren v Coombes and Another (1979) 142 CLR 531 at 551:

… in general an appellate court is in as good a position as the trial judge to decide on the proper inference to be drawn from facts which are undisputed or which, having been disputed, are established by the findings of the trial judge. In deciding what is the proper inference to be drawn, the appellate court will give respect and weight to the conclusion of the trial judge, but, once having reached its own conclusion, will not shrink from giving effect to it.

156    A real review includes the approach to a trial judge’s findings where they are or are said to be based on the credibility of witnesses adopted in Jones v Hyde (1989) 63 ALJR 349 at 351 – 352; Abalos v Australian Postal Commission (1990) 171 CLR 167 at 179 and Devries v Australian National Railways Commission (1993) 177 CLR 472 at 479, 482 – 483. Gleeson CJ, Gummow and Kirby JJ referred to circumstances in which an appeal court will interfere even though the trial judge’s conclusions are, or appear to be, based on credibility findings, and then said (at 128 [29]):

… But in every appeal by way of rehearing, a judgment of the appellate court is required both on the facts and the law. It is not forbidden (nor in the face of the statutory requirement could it be) by ritual incantation about witness credibility, nor by judicial reference to the desirability of finality in litigation or reminders of the general advantages of the trial over the appellate process.

157    It is relevant to note at this point that the respondent submitted that the trial judge may have relied on the subtle influence of demeanour in assessing the credibility of Mr August, Mr Konstantinou and Harry Konstantinou and that this Court would only interfere with his conclusions if they were “incontrovertible”, “glaringly improbable” or contrary to “compelling inferences” (Fox v Percy at 128 [29] per Gleeson CJ, Gummow and Kirby JJ). The appellants submitted that the trial judge placed no reliance on demeanour and that they did not have to overcome the hurdles which exist when credibility findings are based on demeanour.

158    It is true that the trial judge referred to the objective evidence and said that he found the attempts of Mr August, Mr Konstantinou and Harry Konstantinou to explain it away “unconvincing”. However, he did not refer to the appearance of the witnesses, and in our opinion, he did not base his conclusions about the truthfulness or reliability of the witnesses “solely or mainly from the appearance of witnesses” (Fox v Percy at 128 – 129 [30] per Gleeson CJ, Gummow and Kirby JJ).

159    The appellants submitted that even if their argument that the trial miscarried in relation to the Addendum was rejected, nevertheless, the trial judge erred in his analysis of the authenticity of the Addendum in three respects.

160    First, the appellants submitted the trial judge erred in not analysing the evidence which emerged from the respective cross-examinations of Mr August, Mr Konstantinou and Harry Konstantinou as to the physical circumstances surrounding the alleged execution of the Addendum on 11 August 2001. As an example, it was suggested that the trial judge should have considered whether it was of any significance that Mr August said he and Mr Konstantinou and Harry Konstantinou were outside the caravan whereas Mr Konstantinou said they were inside the caravan. The submission was not that the trial judge should have analysed the circumstances in a particular way, but that he should have analysed them. We reject this submission. A trial judge does not need to mention every piece of evidence put before him. He did not consider the evidence as to the physical circumstances to be of particular significance and nor do we.

161    Secondly, the appellants submitted that the trial judge should have drawn an adverse inference from the respondent’s failure to call Mr Dubedat. The adverse inference which the appellants said should be drawn was that Mr Dubedat’s evidence would support their case. That followed, so it was argued, from the fact that on 14 February 2011, counsel for the respondent said that the respondent proposed to call Mr Dubedat even if he could not say on the balance of probabilities that the Addendum was not executed in August 2001. We do not need to address whether a Jones v Dunkel inference can be drawn in the case of an expert witness of the type involved in this case (see Brandi v Mingot (1976) 12 ALR 551; Futuris Corporation v Commissioner of Taxation [2010] FCA 935). The point fails in this case because we agree with the trial judge that at best for the appellant the appropriate inference is that Mr Dubedat would not have assisted the respondent’s case. It would not be appropriate to infer that Mr Dubedat was not called because his opinion was that the Addendum was authentic. The inference that Mr Dubedat’s evidence would not have assisted the respondent’s case does not advance the appellants’ challenge to the trial judge’s conclusion with respect to the Addenum.

162    Thirdly, the appellants submitted that the trial judge erred in concluding that Mr Papazoglou was not supplied with a copy of the Addendum or told of its existence at any time when he was corresponding with the ATO. As we understand it, the appellants submit that the trial judge should have found that Mr Papazoglou’s reference to “the initial memorandum of understanding” was a reference to the Addendum. They sought to call in aid Briginshaw v Briginshaw (1938) 60 CLR 336 at 362 per Dixon J (as his Honour then was) (see also Evidence Act 1995 (Cth) s 140). We reject this submission. The trial judge carefully analysed the correspondence before Mr Papazoglou’s memorandum dated 19 January 2009 (at [146]) and we see no reason to doubt his conclusions.

163    The appellants criticised particular findings of the trial judge. First, it was submitted that the trial judge did not have a proper basis upon which to reject the evidence of Mr August, Mr Konstantinou and Harry Konstantinou in relation to the Addendum. That submission must be rejected. The basis upon which he rejected their evidence is summarised above (at [75] – [78]). In our view, his conclusions were amply justified on the evidence.

164    Secondly, the appellants submitted that the trial judge erred in “valuing” the Melba shops. The submission was that the evidence was insufficient to support the exercise the trial judge carried out. We reject this criticism. It is not as if there was other evidence of greater probative value. The trial judge was examining Mr August’s assertion that he had no intention of selling the Melba shops and only did so because of the “mad price” he was offered. He was entitled to assess that evidence by reference to the evidence put before him.

165    Thirdly, the appellants contended that a Jones v Dunkel inference should be drawn against the respondent because of his failure to call Mr Hanley. That submission should be rejected for the reasons given by the trial judge.

166    Finally, the appellants submitted that the trial judge erred in his interpretation of Mr Papazoglou’s memorandum dated 5 December 2008. We reject that submission because we think it is reasonable to conclude from the memorandum that it was the joint venture’s intention to subdivide the Hume property into smaller lots that it could then lease or sell.

167    The appellants submitted that accepting his Honour’s conclusions that Mr August, Mr Konstantinou and Harry Konstantinou were unreliable witnesses was not an end of the matter because they were still entitled to succeed if a correct weighing of the objective evidence led to the conclusion that the profit or gain was not income according to ordinary concepts. They referred to the following passage from the reasons for judgment in McCormack v The Commissioner of Taxation of the Commonwealth of Australia (1979) 143 CLR 284 at 302:

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. If the taxpayer gives evidence that the property in question was not acquired by him for the purpose of profit-making by sale, and that evidence is accepted, he of course succeeds. In some cases the taxpayer may establish that the case does not fall within s. 26 (a), even though he does not give evidence or does give evidence but is disbelieved. Of course the fact that the taxpayer did not give evidence, if unexplained, could be taken into account in deciding what inferences should be drawn from the evidence (Jones v. Dunkel (1959) 101 CLR 298, at pp 308, 312, 320-322 ). And the fact that the taxpayer was disbelieved could, in appropriate circumstances, itself give rise to an inference adverse to the taxpayer's case (Steinberg v. Federal Commissioner of Taxation (1975) 134 CLR 640, at p 694 ). Nevertheless, if the proper inference to be drawn from the evidence is that the taxpayer bought the property for a purpose other than that of profit-making by sale, the appeal will succeed. An obvious example would be a case in which it clearly appeared that a taxpayer purchased a house and for many years thereafter occupied it as his own home. In those circumstances the natural inference, in the absence of evidence to the contrary, would be that the taxpayer had bought the house for the purpose of dwelling in it, and the fact that the taxpayer was not an honest witness would hardly matter. However, if the taxpayer's evidence of the purpose with which he acquired the property is not accepted, and it does not appear from the other evidence on the balance of probabilities that he did not acquire the property for the purpose of profit-making by sale, he will fail to discharge his onus of proof. When I speak of purpose I mean, of course, the main or dominant purpose actuating the acquisition.

168    The trial judge cited the above passage in his reasons and he was aware that he needed to consider the objective evidence even though he had rejected the evidence of Mr August, Mr Konstantinou and Harry Konstantinou (see at [82]). Nevertheless, the appellants submitted that the trial judge erred in his conclusions about the objective evidence.

169    The appellants submitted that in determining intention or purpose the trial judge erred because he considered later events and then reasoned backwards. They did not go so far as to suggest that later events were irrelevant to the determination of intention or purpose at the time of acquisition and indeed, they relied on the length of time for which the properties were held as a circumstance in their favour. Plainly, the trial judge was able to consider later events and we do not think he erred in his use of later events.

170    The appellants identified a number of objective matters relevant to either the Melba shops and the Hume property, and one matter which was common to both of them i.e., the length of time for which the property is held. The Melba shops were held by Toorak for at least seven or eight years and the Hume property was held for something in the order of four years. The length of time during which the property is held is, or may be, a relevant consideration, but the extent to which it is relevant depends on all the circumstances (McCormack v The Commissioner of Taxation of the Commonwealth of Australia at 294 per Barwick CJ).

171    As to the Melba shops, the appellants emphasised, in addition to the period over which they were held, the fact that they were used as security for a long term loan facility. However, there were two matters which we think were of critical importance in relation to the Melba shops and which amply support his Honour’s conclusion and they were as follows. First, the trial judge found that Mr August was seeking to emulate Mr Konstantinou’s approach of purchasing commercial or industrial properties and developing, leasing and then selling the properties. Secondly, the trial judge found that Mr August started discussing the value of the Melba shops with Mr Hanley “once all six shops had been tenanted” and that the most plausible explanation for what occurred commencing in or about June 2005 is that after completing the development and securing long term tenants, “Mr August began to investigate selling the Melba shops”.

172    As to the Hume property, the appellants emphasised the fact that the syndicate purchased seven properties and at the time of trial still held five of the properties, including the block first purchased, namely, Block 55 Section 6 Mitchell. This was a matter the trial judge took into account, but again there was, in our opinion, ample evidence to support his finding as to intention or purpose. That evidence included the statements in the Sellick report about the sale of the subdivided blocks, the “For Sale or Lease” sign, the offers made to Optus and the treatment of the proceeds of sale of the Hume property.

173    The challenge to the trial judge’s conclusions based on what the appellants referred to as the objective evidence must be rejected.

conclusion

174    In our opinion, both appeals should be dismissed with costs.

Associate:

Dated:    7 August 2013