FEDERAL COURT OF AUSTRALIA
IN THE FEDERAL COURT OF AUSTRALIA
DATE OF ORDER:
THE COURT ORDERS THAT:
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
VICTORIA DISTRICT REGISTRY
VID 162 of 2014
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
TARAS NOMINEES PTY LTD AS TRUSTEE FOR THE BURNLEY STREET TRUST
THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
PERRAM, ROBERTSON AND PAGONE JJ
28 January 2015
REASONS FOR JUDGMENT
1 The principal issue in this appeal is whether the primary judge was correct in upholding the Commissioner’s assessment decision that a taxable disposal occurred when Taras Nominees Pty Ltd (“Taras”) entered into a trust deed and a joint venture agreement on 20 August 1998. Taras had been the owner of land at 27-45 Burnley Street Richmond and, on 20 August 1998, entered into a joint venture agreement with the owners of adjoining land to rezone and develop their respective land. Taras transferred legal title of its land by deed on 25 August 1998 to Victoria Gardens Developments Pty Ltd (“Victoria Gardens”) to act as trustee of the land and as nominee of the joint venture. The Commissioner treated the transfer of the land by Taras as a CGT event to be taxed at the market value of the land upon disposal. The primary judge accepted the Commissioner’s contention that Taras had made a taxable capital gain under Part 3-1 of the Income Tax Assessment Act 1997 (Cth) (the 1997 Act) in relation to the transactions in August 1998 on the basis that CGT events E1 and A1 had occurred but that the former applied as the more specific to the situation. Her Honour also found that the market value of the taxable asset at the time of the event was $16,626,115 plus an appropriate allowance for the relevant portion of the development costs.
2 The finding that event E1 had occurred depended upon her Honour’s conclusion that the transfer by Taras of its land to Victoria Gardens had been a “settlement” within the meaning of s 104-55(1). The finding that event A1 had occurred depended upon her Honour’s conclusion that Taras did not remain the beneficial owner of its land upon its transfer to Victoria Gardens upon the terms of the trust deed. Similar questions had been considered, and decided contrary to the taxpayer’s arguments, in Commissioner of State Revenue v Victoria Gardens Developments Pty Ltd (2000) 46 ATR 61 but that decision does not bind the parties to this proceeding.
3 Section 102-20 of the 1997 Act provides that a capital gain is made when a CGT event happens. Section 102-25(1) requires that the provision most specific to a taxpayer’s situation is used when more than one CGT event happens. Event E1 happens when a taxpayer creates a trust over a CGT asset by declaration or settlement. Event A1 happens if the taxpayer disposes of a CGT asset by a change of ownership from the taxpayer to another entity unless the taxpayer continues to be the beneficial owner of the asset or the change of ownership occurs merely because of a change of trustee.
4 Section 104-10 applicable at the relevant time defined CGT event A1 and provided for when event A1 happened:
(1) CGT event A1 happens if you *dispose of a *CGT asset.
(2) You dispose of a *CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur:
(a) if you stop being the legal owner of the asset but continue to be its beneficial owner; or
(b) merely because of a change of trustee.
(3) The time of the event is:
(a) when you enter into the contract for the *disposal; or
(b) if there is no contract — when the change of ownership occurs.
Event E1 was subject to a number of exceptions including that found in s 104-55(5), namely where the taxpayer was the sole beneficiary of the trust and was absolutely entitled to the asset as against the trustee and the trust was not a unit trust. Subsection 104-55(5) provided:
CGT Event E1 does not happen if:
(a) you are the sole beneficiary of the trust and:
(i) you are absolutely entitled to the asset as against the trustee (disregarding any legal disability); and
(ii) the trust is not a unit trust; or
(b) the trust is created by transferring the asset from another asset and the beneficiaries and terms of both assets are the same.
Section 104-55 provided for when event E1 happened:
(1) CGT Event E1 happens if you create a trust over a CGT asset by declaration or settlement.
(2) The time of the event is when the trust over the asset is created.
Section 106-50 applied generally to the CGT provisions to provide that an act done by a trustee was treated as if it were the act of the person who was absolutely entitled to the asset:
If you are absolutely entitled to a CGT asset as against a trustee of a trust (disregarding any legal disability), this Part and Part 3-3 apply to an act done by the trustee in relation to the asset as if you had done it.
The Commissioner had also argued in the alternative that the transactions had given rise to CGT event E2 but her Honour found that CGT event E2 did not occur but that issue was not pursued in the appeal.
5 The application of CGT event E1 relevantly depended upon whether Taras created a trust over its land by “settlement” upon the transfer of its land to Victoria Gardens. The word “settlement” is not defined for the purposes of the 1997 Act but has been the subject of judicial consideration in other contexts. The legal concept of a settlement has been said to be difficult to define but involves the creation of equitable interests over property. In Buzza v Comptroller of Stamps (Victoria) (1951) 83 CLR 286 Dixon J said at 300:
The creation of new trusts, the inclusion of trusts to persons in succession and the restriction involved in all the trusts upon the enjoyment which would arise from full ownership mark the instrument out as a settlement. Even the trust to appropriate and to distribute involves a departure from the rights of enjoyment which full and immediate ownership would give the children. It is notoriously difficult to define a settlement, but that does not mean that it is difficult to recognise one. This instrument appears to me to be well within the conception, even if the limitation of interest in succession were an indispensable attribute, which it is not.
Williams J said at 310:
It would be unwise to attempt to define what instruments are settlements and what are not. But at least it can be said that when a person or persons who own property at law or in equity solely or collectively dispose of that property by vesting it in a trustee on beneficial trusts for the benefit of themselves and others, such persons settle that property. And it is immaterial that the property is already vested in the trustee when the trusts are created (as in the present case) or that the trusts are created before the property is vested in the trustee and await the vesting for their operation. In Commissioner of Stamp Duties (Q.) v. Hopkins Dixon J. said: "An instrument is a settlement because it creates trusts and contains limitations which restrict or affect alienation and transmission, according to the course provided by law for estates in fee simple or a full ownership."
In Masserene v. Commissioners of Inland Revenue Palles C.B. said, in a passage which exactly fits the present case: "It is essential to such an instrument that there shall be - 1, such free property, by which I mean property which then is not, according to our jurisprudence, subject to the trusts in question; 2, a settlor, who either is, or appears on the face of this instrument to be, competent to subject that free property to trusts which, until the execution of the instrument, did not bind it; and 3, an imposition by the instrument of such trusts upon such property." The present case is in essence indistinguishable from Commissioner of Stamp Duties (Q.) v. Chaille. It is a stronger case than Davidson v. Chirnside, for there the trusts of the indenture corresponded with the trusts of the will, whereas in the present case they are different.
Fullagar J said at 312:
It has been said again and again that liability to duty under statutes framed as are the Stamps Acts 1946-1949 (Vict.) depends on the nature of the instrument in question, and not on the nature of any transaction which the instrument may be intended to effectuate or in which it may play a part. Looking at the nature of the instrument in question in the present case, I do not find it possible to say that "property" is not "settled" by it, and I think that the "property settled" is the whole of the property with which the instrument deals. It is true that it does not create successive interests in respect of the whole of the property with which it deals, but only in respect of part of that property. But it is not essential to the conception of a settlement that successive interests should be created in property. It is enough, in my opinion, if, as here, new equitable interests are created and the trust is more than a "bare" trust. The "property settled" is not merely the property in which successive interests are created. The whole of residue is "settled" by the instrument.
A key indicator of a settlement, therefore, is the vesting of property in a trustee for the benefit of others. In Buzza it was found, in the words of Williams J at 310, that there had been a settlement by the collective disposal of property by persons to a trustee on beneficial trusts “for the benefit of themselves and others”.
6 The primary judge in this case found that to have occurred in the transactions by which Taras transferred land to Victoria Gardens for the benefit of the joint venturers. Her Honour said at -:
 As explained below, the Taras land was settled on trust when it was transferred to the trust to be held by the Land Trustee under the terms of the Trust Deed. Prior to 20 August 1998, Taras was the owner of the Taras land and therefore had dispositive power over that land. By executing the transfer of the land on 25 August 1998, Taras sought to pass the legal interest in the land to the Land Trustee, who declared that it held the land on trust for the “respective Land Holding Parties subject to the terms of the [JVA] and of [the Trust] Deed”: Trust Deed, cl 2.1. The land here meant the land as defined in the JVA, i.e., the Marpine land, the SDA land and the Taras land: see Trust Deed, cl 1.1(a) and JVA, cl 1.1. Clause 2.2(a) of the Trust Deed made it clear that what was being created under the Deed was far more than a trust for sale of the kind considered by McInerney J in Scott v Comptroller of Stamps. Clause 2.2(a) made it clear that the trust created under the Deed was a trust whereby the Land Trustee was to hold and deal with the land for the purposes of the JVA. Clause 2.3 further emphasised that the Land Trustee was to hold and deal with the land pursuant to and in accordance with the JVA. Thus, the Trust Deed gave rise to an obligation so far as concerned the Land Trustee in its capacity as trustee to act so as to carry out the JVA and created a beneficial entitlement in relation to the beneficiaries of the trust to have the Land Trustee do all things necessary to carry out the JVA according to its terms.
94 In contrast to Scott v Comptroller of Stamps, in this case, the JVA (for which purpose the Land Trustee held the land: Trust Deed, cl 2.2(a), cl 2.3 and cl 2.5(b)) provided for a business to be carried out by the Joint Venture, including the development of the land: see JVA, cl 2.2(a) and (e). This included construction on the land, the sale, leasing or other disposal of the land, financing and the acquisition and development of other land: see JVA, cl 1.1, definitions of “Development” and of “JV”. The business to be carried on by the Joint Venture under the JVA also included the distribution of money derived from the development (not simply the proceeds of sale) as to the first $65 million amongst the Land Holding Parties and thereafter as to the amounts in excess of $65 million amongst the Joint Venturers: JVA, cl 6. The JVA also expressly provided that the “Land Holding Parties irrevocably ma[d]e their respective portions of the Land available to the JV” and prevented the land being returned to them: e.g., JVA, cl 2.2(a), cl 2.3(b), cl 6.2, cl 11.4, cl 12.4, cl 12.8. The Land Holding Parties were only entitled to payment for the respective portions of the land in accordance with the JVA. Clearly then, this was more than a trust for sale of the kind discussed in Scott v Comptroller of Stamps: see also Victoria Gardens (Court of Appeal) at 75, 77 (Batt JA).
95 Having regard to the terms of the JVA and the Trust Deed, powers of management, administration for the benefit of the beneficiaries were created and conferred on the Land Trustee: see, for example, Trust Deed, cl 2.2(a), cl 2.3 and cl 2.5(b); JVA, cl 4 and 5 (subject to Board approval in some instances). There were restrictions on the full enjoyment of the rights to ownership in the beneficial interests created pursuant to the trust: see, for example, Trust Deed, cl 2.2(a), cl 2.3 and cl 2.5(b); JVA, cl 2.2(a), cl 2.3(b), cl 6.2, cl 9, cl 11.4, cl 12.4, cl 12.8. The Land Trustee could make distributions of the capital and income of the trust fund for the benefit of the beneficiaries in certain defined circumstances: see, for example, Trust Deed, cl 2.2(a), cl 2.3 and cl 2.5(b); JVA, cl 6. There were succeeding interests contemplated in distributions of available cash from the development of the land: see Trust Deed, cl 2.2(a), cl 2.3 and cl 2.5(b); JVA, cl 6.2(a).
Her Honour was clearly correct in these conclusions. Taras transferred its land to Victoria Gardens to be held by Victoria Gardens upon the terms of the deed of trust made on 20 August 1998 which required that the land transferred by Taras be held for the benefit of Taras and other beneficiaries. The effect of the transfer was not that the land was thereafter held subject only to contractual terms binding Taras to act in accordance with agreements it had made with other parties. Taras had, rather, divested itself of legal title to the land and subjected its equitable interests in the land to the trust created by the deed made with Staged Developments Australia Pty Ltd (“Staged Developments”) and Victoria Gardens in its capacity as trustee of three separate trusts. The terms upon which the land came to be held by Victoria Gardens were for the benefit of others in addition to Taras.
7 The recitals to the trust deed recorded that the joint venture agreement required Victoria Gardens, as land trustee, to declare that it held land, including the Taras land, “on trust for the respective beneficial owners thereof subject to the terms” of the joint venture agreement (emphasis added). Victoria Gardens so declared by clause 2.1 of the trust deed in its capacity as the land trustee declaring that it held the land “on trust for the respective Land Holding Parties subject to the terms of the JV Agreement and this Deed” (emphasis added). Clause 2.2 concerned the use of the land “by” the joint venture and provided:
(a) Each of the Land Holding Parties irrevocably makes that portion of the Land of which it is the beneficial owner available to the JV for the purposes of the JV Agreement, and the Land Trustee shall hold and deal with the Land for such purposes.
(b) VGPT Trustee and Land Trustee are irrevocably appointed by the Land Holding Parties severally as their respective several attorneys, to do all things necessary to give effect to the terms of the JV Agreement in respect of or pertaining to their respective portions of the Land, including without limitation, to execute transfers and mortgages (including third party charges, securities, guarantees or indemnities) of all or part of their respective portions of the land in accordance with this Deed, as and when VGPT Trustee thinks fit.
The trust deed, therefore, did not merely declare that Victoria Gardens held the Taras land for the benefit of Taras but, rather, specifically that the holding of the land was irrevocable and was for Victoria Gardens “to do all things necessary” to give effect to the joint venture agreement including, for example, the creation of equitable rights over the land and its ultimate sale as attorney as may be necessary.
8 The terms of the trust deed, therefore, make it relevant and necessary to consider the terms of the joint venture agreement to determine the basis upon which Victoria Gardens held the Taras land: see also Grollo Homes Pty Ltd v Comptroller of Stamps  1 VR 445, 451. The joint venture agreement was entered into at around the same time as the land transfer and by the same parties except that Victoria Gardens entered into the joint venture agreement in the additional capacity as the land trustee for the land holding parties. The recitals to the joint venture agreement recorded that each of the land holding parties, including Taras, had agreed to make their parcels of land “available to” the joint venture for the purposes of the joint venture and to do so on the terms and conditions of the joint venture agreement. Another recital specifically required that Victoria Gardens, as land trustee, would execute a deed of trust pursuant to which it declared that it held the land “as trustee for the land holding parties subject to the terms of” the joint venture agreement. Clause 2 of the joint venture agreement concerned dealing with the land and empowered and authorised the trustee to deal with the land in accordance with the terms of the agreement. Clause 2.1(c) restricted the land holding parties, including Taras, from dealing with “their respective portions of the land” or to alter or affect their rights and obligations in respect of their portions of land “in any manner prejudicial to the interests” of the joint venture. The land holding parties, including Taras, irrevocably made their respective portions of the land available to the joint venture for the purposes envisaged by the joint venture agreement and the land holding parties, including Taras, were “not entitled to a transfer back of their respective portions of the land”. Clause 2.2(b) limited the entitlements of the land holding parties to be paid for their respective portions of the land to those provided for in the joint venture agreement. Clause 2.2(c) appointed Victoria Gardens, as land trustee, irrevocably as the attorney, relevantly for Taras, “to do all things necessary to give effect to the terms of the [joint venture] agreement in respect of or pertaining to [its] portion of the land, including without limitation, to execute transfers and mortgages (including third party charges securing guarantees or indemnities) of all or part of [its] respective portions of the land in accordance with this [joint venture] agreement”. Clause 3.6 conferred upon the trustee of the Taras land the power to deal with the land and to do all things in respect of or pertaining to that portion of the land for the purposes of the joint venture agreement, and provided also that Taras had irrevocably undertaken to do all things, at any time, to grant any relevant power or consent to Victoria Gardens Trustee to use its respective portion of the land as security. Clause 6.2 identified the consideration which the land holding parties were to receive for their respective contributions of land for the purposes of the joint venture. The clause provided a detailed mechanism for the distribution of cash to be received upon the performance of the joint venture arrangement. Clause 9.1 restricted the parties from creating equitable interests in their respective land without the written consent of the other and of Victoria Gardens. Clause 12 contained special default provisions to operate if there was a specified percentage change of unit holders in the Marpine Trust, or in the effective control of the Taras Trust, or the beneficial ownership of the Taras Trust, without the consent of the other. Clause 12.2, significantly, provided that either joint venture party could, at any time, serve a notice on the other joint venture party “requiring the sale of the assets of” the joint venture and “the Land” (the latter being defined to include the Taras land).
9 The transfer by Taras of its land to the trustee was, therefore, relevantly a settlement of the land and not excluded from CGT Event E1 by s 104-55(5) because Taras was not the sole beneficiary of the trust pursuant to which the trustee held the Taras land. Taras was not absolutely entitled to the Taras land as against the trustee because it did not have a vested, indefeasible and absolute entitlement to the Taras land and could not deal with the land other than in accordance with the rights and obligations which had been created by the deed of trust and the joint venture agreement: cf Kafataris v Deputy Commissioner of Taxation (2008) 172 FCR 242, 250, 253-4. The terms of the trust required the trustee of the Taras land to hold it, and to deal with it, for the purposes of the joint venture agreement. The Taras land could not be returned to Taras or be dealt with in accordance with any directions Taras might wish to give. Any interest of Taras in its land was, therefore, defeasible: see Kafataris v Deputy Commissioner of Taxation (2008) 172 FCR 242, 254, .
10 The reasons for concluding that CGT event E1 happened also require the conclusion that CGT event A1 happened. Event A1 occurred because there was a change of ownership by transfer of the Taras land from Taras to the trustee. The event would not have occurred if Taras continued to be the beneficial owner of the land but the analysis above also requires the conclusion that Taras was no longer the sole beneficial owner of the Taras land upon its transfer to the trustee for it to be held upon the terms of the trust deed and the joint venture agreement. Her Honour correctly concluded at :
Prior to 20 August 1998, Taras had ownership of the Taras land and it disposed of that land, for the purposes of s 104-10, when it transferred the land to the Land Trustee. There was a disposal of the Taras land for these purposes because the combined effect of the JVA, the Trust Deed and the transfer was that Taras ceased to be the owner of the Taras land and became an equitable tenant in common with the other beneficiaries under the trust, namely, SDA and the Marpine Trustee. In so concluding, I adopt the reasoning of Batt JA in Victoria Gardens (Court of Appeal), which is discussed at - above. For the reasons stated above, Booth v Ellard does not support Taras’ submission that it retained beneficial ownership in the Taras land: see - above.
The combined effect of the trust deed and the joint venture agreement was that upon transfer of the land by Taras to the trustee, Taras ceased to be the only beneficial owner of the land. Its interest was thereafter made “subject to” the rights of the other beneficiaries to the land. Taras became, as her Honour held at , an equitable tenant in common of the Taras land with the other beneficiaries under the trust.
11 It was contended for Taras that the taxing provisions of the 1997 Act should be interpreted so that no taxable gain could arise in circumstances where Taras had not received any capital proceeds from a CGT event. For that submission Taras called in aid the observation by Dixon CJ in Commissioner for Railways (NSW) v Agalianos (1955) 92 CLR 390 at 397 (cited with approval in Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355, 381) that “[t]he context, the general purpose and policy of a provision and its consistency and fairness are surer guides to its meaning than the logic with which it is constructed”. Taras also referred to passages from Booth v Ellard  1 WLR 1443 where the Court of Appeal found that taxpayers had not realised a taxable gain by the transfer of company shares to a trust in which they were beneficiaries even though, on a literal reading of the provisions, a gain may have resulted.
12 Her Honour the primary judge rejected the application of the dicta in Booth v Ellard saying at -:
125 In Booth v Ellard the English Court of Appeal held that taxpayers who transferred shares to a trust of which they were beneficiaries did not realise taxable gains in so doing. Taras submitted that the reasoning in that case was applicable to this proceeding, quoting from the concluding passage of Oliver LJ’s judgment (at 1450):
… the result seems to me to be in accordance with the common sense and commercial reality of the matter. … [I]t would seem capricious and unreasonable to tax these shareholders on a wholly illusory gain simply because of the technical machinery which they chose to adopt to effect an end which involved no quantitative alteration in their separate and individual beneficial entitlements.
126 As can be seen from the final clause of that passage, however, the decision turned on a finding that the arrangement in that case resulted in no change in the beneficial interest in the shares. The relevant finding is found in Buckley LJ’s judgment (at 1448), with which Ackner and Oliver LJJ agreed:
The effect of the trust was to subject all the trust shares to powers and discretions conferred upon the trustees for what was conceived to be the collective benefit of the settlors but, subject to those power and discretions which the settlors collectively could override, the measure of the beneficial interests of the settlors remained unaffected by the trust. There was no transfer of any beneficial interest from any one of them to any other. …
On the true view of the facts the taxpayer, in my view, never lost his interest in 55,000 shares of the company. He subjected that interest to certain restraints, as did the other settlors in respect of their shares, but it was at all times within their collective power to abolish those restraints, whereupon each settlor would become absolutely entitled to the same number of shares as he had brought into the trust.
127 The facts could, however, have been different, and this may have altered the outcome, as Buckley LJ acknowledged (at 1448):
In the circumstances of the present case, Mr Nicholls submits, all the 12 settlors who contributed shares to the pool comprised in the trust were together collectively and concurrently entitled absolutely to the whole trust fund as against the trustees … So … as Mr Nicholls contends … the position must be viewed as though none of the settlors had disposed of his or her or their shares.
The logic of this argument seems to me to be unassailable unless it can be said that by participating in the pooling arrangement the several settlors lost their existing beneficial interest in their own particular shares and became entitled merely to an undivided or unappropriated share in the pool formed by their several contributions and that, because the latter interest was different from the former, there were dispositions not merely of the shares themselves but of the anterior beneficial ownerships of specified shares.
128 Booth v Ellard therefore does not answer the question whether Taras retained beneficial ownership in the Taras land, other than by directing attention to the arrangements that were in fact made. As much as it may be “capricious and unreasonable” to impose CGT where there has been no change in the beneficial ownership of property that has been pooled, that does not determine whether there was such a change. It is necessary to examine the relevant arrangement to determine whether there was any change in the entitlements of the contributors. This was the task that Batt JA completed in Victoria Gardens (Court of Appeal), and as shown above, in this case Taras’ entitlements did change as a result of the JVA, the Trust Deed and the transfer of land. Moreover, cl 6.3 of the JVA, to be administered by the Land Trustee under the trust, made it clear that the Joint Venturers had equal entitlement to the profit derived by the Joint Venture otherwise than on sale of the land, to the exclusion of SDA, the third of the Land Holding Parties, with the result that the cash return could not be said to be reflective of their precise interests in the land before the relevant transactions were made. Booth v Ellard can therefore be distinguished from the present case: see also Victoria Gardens (Court of Appeal) at 78 .
129 This understanding of Booth v Ellard is confirmed by Jenkins (Inspector of Taxes) v Brown, which did no more than apply the principle in Booth v Ellard to a pooling arrangement with respect to land where the individual interests after transfer mirror the interests before transfer: see Jenkins (Inspector of Taxes) v Brown at 1177.
Her Honour was correct in this analysis. The Court of Appeal in Booth v Ellard was not, of course, concerned with the terms of the 1997 Act nor with the terms of the specific trust and joint venture agreement to which Taras is party. Significantly, however, s 22(5) of the UK Act with which the Court of Appeal was concerned in Booth v Ellard, unlike the provisions in contention in this appeal, contemplated joint ownership. Furthermore, a fundamental difference between the facts in that case and those in this appeal (and which points against the policy of non-assessability of a gain until receipt of “capital proceeds” which Taras sought to invoke), is that Taras did receive something in return for the transfer of its land because upon transfer it became entitled to the benefits flowing from the contributions to the joint venture of the land of others as well as the commercial advantages flowing from participation in the joint venture. It would not, therefore, be “capricious and unreasonable” for the legislature to contemplate the occurrence of a CGT event upon a transaction of the kind entered into by Taras and the other joint venturers because the disposal made by Taras of its land was in return for the acquisition of interests in the land of others and the commercial benefits from the bargain. Those interests and benefits included rights to the development of the land and to distributions of cash determined under clause 6.2 of the joint venture agreement. The restrictions that Taras had upon its beneficial interest in its land by these arrangements were matched by restrictions in its favour upon the rights attaching to the land contributed to the joint venture by the other land owners.
13 The second issue raised by the appeal is whether the primary judge was correct to include $5.5 million of the development costs in determining the value of the Taras land for the purposes of calculating the taxable capital gain. Taras had called a Mr Sweeney to give expert valuation evidence of the land and he was cross examined at trial by counsel for the Commissioner. Taras contended on appeal that her Honour was in error to include the development costs of $5.5 million in calculating the value of the Taras land for two reasons. The first was that the majority of the development costs related to rezoning the land and had already been taken into account in Mr Sweeney’s valuation, and secondly that most of the other costs included in the $5.5 million had been incurred in relation to lot 1 (rather than the Taras land) and ought not to have affected the value of the Taras land. At - her Honour recorded the factual issues arising in respect of that evidence as follows:
180 At the very end of closing submissions, Mr Davies QC pointed to a difficulty with the 1998 Sweeney affidavit in so far as the attributed value of $16,626,115 did not include part of the development costs that had been incurred in relation to the land prior to August 1998. He submitted that, in view of this, the valuation ought to be increased by that portion of those costs that were referable to the Taras land. Although this point had not emerged prior to trial, it did emerge in cross-examination, where Mr Sweeney agreed that he initially valued all of the land, including the Taras land, at $42 million, having regard to the development potential of the land as a whole. This was the effect of Mr Sweeney’s valuation of 22 May 1996.
181 In his subsequent valuation of 9 June 1998, Mr Sweeney said:
We believe the previous valuation of the overall site, of $42,000,000 remains appropriate, having regard to its relatively large size and the lack of large sites which might provide more specific direction than our general view of prevailing land values.
We have been provided with a summary of development costs paid or payable to 18 May, 1988. This list includes various items of infrastructure including planning and rezoning cost, contribution to Council site clean-up, road widening etc. A sum of slightly over $1,8000,000 has been expended on the Stage 1 office building construction. Funds have been spent on residential urban design and concept design for the proposed shopping centre. A small additional property has also been acquired.
The total funds outlayed to date is $5,522,867.
We believe it is appropriate to value the site as at 31 May 1998 at the sum of the bare land value and the development costs expended to date.
The sum total is therefore $47,522,867 which we would round to $47,500,000 for the purposes of this valuation.
In cross-examination, Mr Sweeney agreed that, in valuing the individual lots of 2 to 5 (which constituted the Taras land), it would have been appropriate to take into account the costs of development that had been incurred in relation to the development potential of those lots prior to August 1998. He also agreed that he adopted this approach in paragraph 4 of the 1998 Sweeney affidavit, in which he said:
The valuation provided by me on 9 June 1998 valued the site at $42 million, and inclusive of its development costs expended to date, at $47,500,000. The assumptions underlying that valuation were that there would be a consolidation of title for the six properties, and also that the site would be clean of environmental contamination, and that various derelict buildings on site had been demolished. That is, the valuation assumed that certain things had already been done which had not in fact yet been done at the time of valuation. The valuation of the site arrived at an aggregated $43,656,555 and the amount of $1, 626,000 was allowed for demolition costs which produced a rounded net market value for the six properties of $42,000,000. The valuation was carried out for book value purposes which allowed for the adding together of the value of the raw land and the development expenses as the developer moved forward through the developmental process.
182 In paragraphs 6 and 7 of this affidavit, Mr Sweeney purported to set out his conclusions:
I would estimate that the 6 parcels of land, adopting the numbering used in the plan exhibited at “BFS:1” would have an individual market valuation (as part of an aggregated whole, and disregarding demolition costs) as follows:
• Parcel 1 - $17,698,850;
• Parcel 2 - $11,033,950;
• Parcel 3 - $610,280;
• Parcel 4 - $1,330,790;
• Parcel 5 - $3,651,095;
• Parcel 6 - $9,139,600.
The valuation provided by me dated 9 June 1998 which valued the site at $42 million for its bare land value, and $47,500,000 comprising its bare land value and development costs expended to that date, would still be appropriate valuations for the site as at 20 August 1998. I do not consider there would have been any appreciable increase or decrease in value of the site in the period between 31 May 1998 and 20 August 1998. If there was any movement in value in the intervening period, then that movement is likely to have been marginally downward, due to market uncertainty about the number of competing inner suburban home unit developments now under construction.
183 In cross-examination, however, an arithmetical error in paragraph 6 came to light, as evidenced in the following exchange between senior counsel and Mr Sweeney:
Mr Davies QC: I’ve just been advised, Mr Sweeney, that the amounts are set out in clause paragraph 6 don’t add up to 47.5 million?
Mr Sweeney: No, they add up to 43.6.
Mr Davies QC: So why was it that in assessing the individual market values of the parcels the aggregate of the valuation doesn’t equal the aggregate value of the whole?
Mr Sweeney: Excuse me. The sum of the figures in paragraph 6 there match the 43.65 that’s in paragraph 4.
Mr Davies QC: Yes. And that’s taking a figure of 42 million, being a figure that’s arrived at after taking into account demolition costs?
Mr Sweeney: Yes
Mr Davies QC: It doesn’t take into account the development costs expended to date?
Mr Sweeney: No.
Mr Davies QC: And why in valuing the individual market values of the individual lots you didn’t take into account any …?
Mr Sweeney: Well, looking at the way this affidavit has been written in October 1998, it’s apparent to me now that the 43.656 figure was taken from the 1996 report and was somehow put into this document rather than the one of ’98.
Mr Sweeney agreed that it would be appropriate to increase the figures in paragraph 6 of the 1998 Sweeney affidavit by the respective amounts relating to the development costs that had been incurred as at the relevant date, providing “you were treating the property as a whole”.
184 In closing, Mr Davies submitted, consistently with Mr Sweeney’s evidence in cross-examination, that the development costs of $5.5 million (which had been erroneously omitted) should be apportioned between the lots 1 to 6 on that basis of area; and that the part of those costs referable to lots 2 to 5 (being the Taras land) should be added to the figure of $16,626,115, to arrive at the value that Mr Sweeney intended to attribute to the land in the 1998 Sweeney affidavit. Counsel for Taras did not submit to the contrary.
185 In all the circumstances, having regard to Mr Sweeney’s unequivocal acknowledgement that there was in fact an arithmetical error of this kind, I accept that this is appropriate.
The facts found by the primary judge were open to her Honour upon the evidence. The first reason relied upon by Taras to challenge the inclusion of the development costs is not justified on the evidence before her Honour. The contention for Taras was that the majority of the development costs relating to rezoning the land had already been taken into account by Mr Sweeney when he valued the Taras land, but that contention does not take into account all of Mr Sweeney’s oral evidence. Taras relied upon Mr Sweeney’s oral evidence in cross examination that his valuation of some $16 million as the value of the land had been on the basis of it being subject to rezoning and, therefore, that the zoning status of the land had already been taken into account in that valuation. However, that evidence had been given before it was drawn to Mr Sweeney’s attention that the amounts in his calculation did not add up and that his figure of $16 million was based on a total value of the land that did not incorporate all of the development costs. Mr Sweeney accepted that when it was put to him in cross-examination and went on to agree that it would be appropriate to increase the figures by respective amounts relating to the development costs that had been incurred “so long as you were treating the property as a whole” (as her Honour set out in the extract quoted above).
14 The second reason advanced by Taras to challenge her Honour’s finding was that most of the non-zoning costs did not relate to the Taras land, and for that reason ought not to have been included in its value. That reason, however, ignores her Honour’s finding that the correct basis for valuing the Taras land was as a portion of the value of the six parcels of land as a combined lot. That finding was not challenged on appeal. A valuation of a portion of a combined lot would need to include in its valuation its share of all costs incurred over the combined lot. Furthermore, Mr Sweeney’s oral testimony acknowledged that there had been a transcription error in calculating the value of $16 million and that the figure should have been a higher amount which incorporated the development costs. His valuation had itself been based upon an area based apportionment over the combined sites. It follows that the second reason advanced for Taras to challenge her Honour’s inclusion of $5.5 million in calculating the value of the Taras land also fails.
15 The next issue in the appeal to be considered is whether the learned primary judge erred in holding that the market value of the Taras land in August 1998 took into account the cost of remediating the soil. The claim by Taras that her Honour ought not to have taken into account the cost of remediation, in part assumed that the valuation made by Mr Sweeney had excluded the cost of soil contamination. His professional reports giving a valuation had concluded by stating that the valuation assumed that the certificates of title had been consolidated and “that no significant soil contamination is present”. It does not follow from the statement of this assumption, however, that Mr Sweeney was valuing the land on a basis which excluded the cost of remediation: the assumption, as expressed, is consistent with assuming that soil contamination had been remediated. The fact of the land being contaminated was known to the market since at least March 1995 and Mr Sweeney accepted in cross examination that the condition of the soil would have been the same in August 1998 as when Taras acquired the land in March 1995. The actual cost of remediation was not estimated until 2012 but the fact of contamination was something which her Honour could accept as being reflected in Mr Sweeney’s valuation. Furthermore, as her Honour the primary judge said at  it could be inferred that Mr Sweeney’s valuation had taken into account the costs of remediation or that, being aware of the soil contamination, Mr Sweeney did not consider it necessary or appropriate to take into account those costs. Her Honour said at :
The market value identified by Mr Sweeney in the 1998 Sweeney affidavit was based on comparisons with sales of other sites, without evidence of the environmental condition of those sites, and on earlier valuations based on capitalised rental returns. As the Commissioner submitted, in light of Mr Sweeney’s knowledge of the Taras land and his assumption about soil contamination, it may be inferred that these comparisons either took into account the costs of remediation or Mr Sweeney did not consider it necessary or appropriate to do so.
The finding by her Honour was, therefore, one which was open to be made upon the evidence.
16 Taras also submitted that the actual cost of remediation as estimated in 2012 should have been taken into account by her Honour (upon the assumption that it had not been taken into account in valuation) because a valuer should be assumed to be perfectly aware of the extent of the contamination. The conclusion that the cost of remediation was taken into account in the valuation makes it unnecessary to consider in detail whether the actual amount estimated in 2012 is the correct amount to determine the value of the Taras land as at August 1998. Taras maintained that dicta from Boland v Yates (1999) 167 ALR 575 required her Honour to take into account the 2012 estimate of costs on the assumption that the hypothetical buyer was perfectly aware of the extent of the contamination. In Boland v Yates Callinan J said, in a passage relied upon by Taras:
267 I would emphasise the important phrase in his Honour's judgment “persons conversant with the subject”. The formula suggested by Griffith CJ contemplates a prudent purchaser and one who would make a point of informing himself or herself of all of the relevant attributes and advantages that the property enjoyed so as to make that purchaser “conversant” with the subject, meaning thereby not just the land in its existing state but also any profitable uses to which it might be put.
268 Isaacs J put the matter even more strongly. His Honour said that the hypothetical parties should be regarded as not anxious to trade and as being :
… perfectly acquainted with the land, and cognisant of all circumstances which might affect its value, either advantageously or prejudicially, including its situation, character, quality, proximity to conveniences or inconveniences, its surrounding features, the then present demand for land, and the likelihood, as then appearing to persons best capable of forming an opinion, of a rise or fall for what reason soever in the amount which one would otherwise be willing to fix as the value of the property.
This passage, however, does not require the conclusion that the value of the land in 1998 was to be based upon the knowledge of the cost of the remediation estimated in 2012. The passage was not intended to depart from the clearly established principle that a valuation is based upon knowledge at the relevant time and not upon hindsight. Callinan J in Boland v Yates, indeed, cited with approval the statement of Griffith CJ in Spencer v Commonwealth (1907) 5 CLR 418 where his Honour at 432 said:
The necessary mental element is to put yourself as far as possible in the position of persons conversant with the subject at the relevant time, and from that point of view to ascertain what, according to the then current opinions of land values, a purchaser would have had to offer for the land to induce such a willing vendor to sell it…
17 An additional issue arose during the hearing of the appeal which had not been raised in the notice of appeal. Taras submitted on the morning of the hearing of the appeal that the development costs should also be taken into account as part of the cost base of the Taras land pursuant to s 110-25(5) of the 1997 Act to the extent that they had also been taken into account in increasing the market value of the Taras land. Leave was given to Taras to seek to amend its application to add to its grounds in the taxation objection and to contend that the cost base of the Taras land should be increased by $2.75 million to $11,246,113.30 pursuant to s 110-25(5) of the 1997 Act.
18 Her Honour found that the $5.5 million of development costs to which Mr Sweeney had referred in his valuation was to be apportioned between the six parcels of land on the basis of area and that the part of those costs referable to the Taras land should be added to the figure of $16,626,115 to arrive at the market value of the Taras land. Her Honour recorded at  that counsel for Taras did not submit to the contrary. However, the evidence was that half of the development costs of $5.5 million (namely $2.75 million) were incurred by Taras and, therefore, it is appropriate that the amount incurred by Taras ought to be taken into account as part of its cost base. The Commissioner does not contest the submission by Taras that the cost base should be increased by that amount provided that Taras can confirm that the amount of $2.75 million sought to be included in the cost base has not been taken into account in calculating capital gains or losses from some other CGT event and confirms also that no deduction has been claimed by Taras with respect to those development costs.