FEDERAL COURT OF AUSTRALIA

Brown v Commissioner of Taxation [2001] FCA 596

JOHN JOSEPH BROWN v COMMISSIONER OF TAXATION

N 1480 OF 1999

EMMETT J

29 MAY 2001

SYDNEY

SUMMARY OF REASONS FOR JUDGMENT GIVEN ON 29 MAY 2001

In accordance with the practice of the Federal Court in certain cases of public interest, I have prepared a brief summary to accompany the reasons for judgment which are to be delivered today. The only authoritative pronouncement of my reasons is that contained in the full reasons for judgment. This summary is necessarily incomplete and deals only with certain aspects of the judgment.

On 12 July 1990, Ray Development Corporation Pty Ltd (“RDC”) transferred to the applicant in the proceedings (“the Taxpayer”) a home unit on the Gold Coast having a value of $920,000. RDC also paid stamp duty of $34,725 in respect of the transfer and provided an allowance to the Taxpayer for furniture in the sum of $30,000.  The respondent, the Commissioner of Taxation (“the Commissioner”), issued a notice of amended assessment to the Taxpayer on 28 March 1996. This amended assessment included the value of the unit, the stamp duty and furniture allowance paid by RDC. In addition, a penalty component was included, on the basis that the Taxpayer had made a statement that was false and misleading which resulted in the avoidance of tax.

The Taxpayer lodged notice of objection to the amended assessment. On 9 November 1999 the Commissioner issued a notice of decision on that objection, disallowing the objection.  The Taxpayer has appealed to the Federal Court against the decision of the Commissioner and applies for the decision to be set aside. 

ASSESSABILITY

The Commissioner contends that the value of the Unit, the stamp duty paid by RDC and the furniture allowance given to the Taxpayer (“the Benefits”) constituted assessable income of the Taxpayer derived in connection with the sale by Monacorp Pty Ltd (“Monacorp”) to Narui Gold Coast Pty Limited (“the Purchaser”) of several parcels of land known as “Kings Forest” (“the Kings Forest land”).  RDC is a 50% shareholder of Monacorp and was reimbursed for the amount of the Benefits. 

In his reasons for his decision on the Taxpayer’s objection, the Commissioner said that the Benefits were provided in lieu of the payment of commission for services said to have been rendered by the Taxpayer in connection with the negotiation and completion of the sale of the Kings Forest land to the Purchaser.  Completion of the sale took place on 5 June 1990.

The Commissioner contends that the Benefits represented income in the hands of the Taxpayer pursuant to s 25(1) of the Income Tax Assessment Act 1936 (Cth) (which provides that assessable income shall include the gross income derived directly or indirectly from all sources).

The Taxpayer, however, did not include the value of any part of the Benefits in his return for the year ended 30 June 1991 and contends that, while the receipt of the Benefits was prompted by appreciation for the role that he played in connection with the sale of the Kings Forest land, it should fairly be treated as a mere gift and not as income or remuneration for services rendered.

In connection with the sale of the Kings Forest land by Monacorp, the Taxpayer:

·         introduced a principal of Monacorp to the Purchaser.

·         lent his name to the Purchaser’s application to the Foreign Investment Review Board.

·         acted as an intermediary between Monacorp and the Purchaser following a misunderstanding concerning the price of some additional beachfront land sought by the Purchaser.

The sale of the Kings Forest land yielded a profit of close to $10 million dollars to Monacorp and the Taxpayer was not remunerated in any other way for any services that he rendered to Monacorp or RDC.  The Taxpayer had no personal relationship with Monacorp or RDC, although he had had a personal acquaintanceship with the principal of RDC for several years. 

Further, in a letter of 12 July 1990 from the Taxpayer to RDC, the Benefits were described as a distribution of $1 million for “commission owed” by Monacorp, for introduction of the Purchaser. 

Accordingly, I have concluded that the Benefits were not a mere gift. They were provided by Monacorp in recognition of and as a result of the services provided by the Taxpayer to Monacorp.

PENALTY

The Taxpayer contends that, even if the receipt of the Benefits should be treated as assessable income, the Commissioner erred in relation to the question of penalties.  At the relevant time, s 223 of the Income Tax Assessment Act provided that, where a taxpayer makes a false or misleading statement, the taxpayer is liable to pay by way of penalty additional tax equal to double the amount of the tax avoided. However, under s 227(3) the Commissioner may, in his discretion, remit the whole or any part of the additional tax payable. 

The Commissioner has published a policy relating to his discretion under s 227(3) (IT Ruling 2517). In accordance with IT 2517, the Commissioner considered whether the Taxpayer’s behaviour amounted to deliberate evasion.  Based on the evidence before him, the Commissioner found that it had. In accordance with IT 2517, a culpability component of penalty was imposed at a rate of 45% of the avoided tax. In addition, a per annum component of penalty was imposed for the period of avoidance of tax.  The statutory rate of penalty was remitted from 200% to the extent necessary to impose those penalties.

The Taxpayer contends that a finding of deliberate evasion was not open to the Commissioner on the basis of the following assertions:

·         The Taxpayer had been advised by his accountant in 1991 that it was not necessary to include the value of the Benefits as assessable income.

·         The assessability of the Benefits has always been shrouded with some doubt and the question is at least reasonably arguable.

·         There was no deliberate evasion, even if there were recklessness or carelessness.

·         The Commissioner took into account certain irrelevant considerations and inadmissible communications.

I have rejected those assertions and I am not persuaded that the Commissioner erred in the exercise of his discretion to reduce the statutory penalties.

Accordingly, I have dismissed the application with costs.  The full text of this judgment and this summary is available at the Federal Court’s website: www.fedcourt.gov.au.