FEDERAL COURT OF AUSTRALIA

Taras Nominees Pty Ltd as Trustee for the Burnley Street Trust v Commissioner of Taxation of the Commonwealth of Australia [2014] FCA 1

THE COURT ORDERS THAT:

1.    The respondent file a draft form of orders, giving effect to the reasons for judgment delivered today, by 4:30 pm on Friday, 17 January 2014.

2.    In the event that the parties cannot agree on the disposition of costs, the parties file and serve any costs submissions they wish to make by 4:30 pm on Tuesday, 28 January 2014.

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

REASONS FOR JUDGMENT

INTRODUCTION

1        This proceeding is a tax appeal against an appealable objection decision under s 14ZZ of the Taxation Administration Act 1953 (Cth) (“TAA 1953”). By its notice of appeal filed on 2 November 2011, the applicant, Taras Nominees Pty Ltd as trustee for the Burnley Street Trust (“Taras”), appealed against a notice of objection decision issued by the Commissioner of Taxation (“the Commissioner”) on 5 September 2011.

2        Taras owned land at 27–45 Burnley Street, Richmond, Victoria (“the Taras land”). This proceeding arises out of a joint venture agreement that Taras executed on 20 August 1998 with the owners of adjacent land in order to develop the land and a deed of trust. As part of the agreement, Taras agreed to execute a transfer of the Taras land in favour of Victoria Gardens Developments Pty Ltd (“VGD”) as trustee and did so on 25 August 1998.

3        Three main questions arise for determination in this proceeding. The first and principal question is whether Taras made a taxable capital gain under Part 3-1 of the Income Tax Assessment Act 1997 (Cth) (“ITAA 1997”) in relation to the transactions in August 1998. This depends on whether or not there was a ‘CGT event’.

4        Secondly, if Taras made a taxable capital gain, what was the market value of the asset that was disposed of at the time of the transfer, since this will determine how much capital gains tax (“CGT”) was payable, if any.

5        Thirdly, as a capital gain in the 1999 tax year would remove losses Taras carried forward to the 2000 and 2002 tax years, the third question is whether the Commissioner was correct to impose administrative penalties on Taras at the rate of 25% of the tax shortfall, payable in the 2000 and 2002 tax years.

6        Taras relied on two affidavits of Peter Charles Veevers (sworn on 6 March 2012 and on 3 August 2012), two affidavits of Bernard Francis Sweeney (sworn on 26 June 2012 and on 19 October 2012), two affidavits of Dean Ashley Woods (sworn on 26 July 2012 and on 19 October 2012) and an affidavit of Damion Toes sworn on 3 August 2012. The respondent relied on an affidavit of Patrick Michael O’Neill affirmed on 14 September 2012. Messrs Veevers, Sweeney, Woods and O’Neill were the subject of cross-examination at the hearing. The evidence of Mr Toes was not contested and he was not cross-examined.

7        Since this is a tax appeal under s 14ZZ of the TAA, Taras has the burden of proving that the assessment is excessive: s 14ZZO.

8        For the reasons stated below, I conclude as follows.

1.        Taras made a taxable capital gain under Part 3-1 of the ITAA 1997 in relation to the transactions in August 1998, because there was a CGT event E1. There was also a CGT event A1.

2.        The market value of the Taras land at the time of the transfer was $16,626,115 plus an appropriate allowance for the relevant proportion of development costs (as discussed in [184] below).

3.        Taras was liable to the imposition of administrative penalties at the rate of 25% of the tax shortfall for the 2000 and 2002 tax years.

FACTUAL BACKGROUND

The Taras land and the joint venture agreement

9        On 10 March 1995, Taras purchased the Taras land, together with land at 6–10A Burnley Street, Richmond, for $8,500,000. Of this sum, $8,034,414.23 was attributable to the Taras land. Once stamp duty and other transaction costs were added, the cost base of the Taras land was $8,496,113.30. This figure was not in dispute in this proceeding.

10        In 1997, Taras began discussions with the owners of the land adjoining the Taras land on each side. The Taras land consists of four lots of land (lots 2, 3, 4 and 5) which, collectively, run east from Burnley Street to the Yarra River with a protruding segment touching Doonside Street to the south. The Taras land is described more particularly in Certificates of Title Volume 10291 Folio 881, Volume 10293 Folio 534, Volume 10306 Folio 291 and Volume 10291 Folio 882. Immediately to the north of the Taras land lies lot 1 (“the Marpine land”), which is bordered by Burnley Street, the Yarra River, the Taras land and Victoria Street. This is described in Certificate of Title Volume 9866 Folio 042. To the south east of the Taras land is lot 6 (“the SDA land”), which lies between the Taras land, the Yarra River, and Doonside Street, broadly speaking. This is described in Certificate of Title Volume 10212 Folio 083.

11        The Marpine land was owned by VGD as trustee of the Marpine Investments (Victoria Street) Trust (“the Marpine Trust”). The SDA land was owned by Staged Developments Australia Pty Ltd (“SDA”) as trustee of the Staged Developments Australia Unit Trust (“SDA Unit Trust”). SDA was also the beneficial owner of all the units in the Marpine Trust. SDA and the Marpine Trust were controlled by the same industry superannuation fund. Taras and SDA in its capacity as trustee for the SDA Unit Trust were two of the three landholding parties. The third of the landholding parties was VGD in its capacity as trustee of the Marpine Trust, save that, on 20 August 1998, SDARJV Pty Ltd (“SDARJV”) replaced VGD as the trustee of the Marpine Trust.

12        Mr Veevers, who was at all relevant times a director of Taras, deposed that, in 1997, the land holding parties discussed “the possibility of combining the 3 properties and having them rezoned to permit a multi-use development” which would comprise “retail, commercial, industrial and residential components”. Mr Veevers deposed that, on 1 August 1997, the land holding parties orally agreed “to commit their land to a joint venture for the purpose of creating a site that could be rezoned for more productive uses”. The land holding parties “engag[ed] architects to draw up conceptual plans, contractors, and town planners to rezone the land”.

13        On 20 August 1998, the land holding parties executed a joint venture agreement (“the JVA”). VGD did so in a number of capacities, including in its own right, as trustee of the Marpine Trust, as trustee for the “Land Holding Parties” and as nominee of the Joint Venture (“VGPT Trustee”). By the JVA the three landowners agreed to make their respective portions of the land available to the Joint Venture to develop the whole by building retail, commercial, industrial and residential premises in stages over a period. The parties contemplated that as each stage was completed the relevant portion of the land would be sold. The Joint Venture was to be known as the Victoria Gardens Property Trust (“VGPT”). The joint venturers were Taras and the trustee for the time being of the Marpine Trust (“the Joint Venturers”). As Batt JA put it in Commissioner of State Revenue v Victoria Gardens Developments Pty Ltd (2000) 46 ATR 61; [2000] VSCA 233 (“Victoria Gardens (Court of Appeal)”) at 65 [9], “[t]he 3 land owners were thus to provide land to a 2-party Joint Venture for development and exploitation”: see further below.

14        The JVA purported to record understandings and agreements on which “the Marpine Trustee, SDA and Taras have been acting since [1 August 1997]”. Under the JVA, VGD was appointed trustee (“the Land Trustee”).

15        The key terms of the JVA relevant to this proceeding were as follows:

(a)    the “Joint Venture Parties” (defined as Taras and, broadly, the trustee of the Marpine Trust for the time being) agreed to develop the land (Recital B and cl 2.2(e));

(b)    the “Land Holding Parties” (defined as Taras, SDA as trustee for the SDA Unit Trust and the trustee of the Marpine Trust for the time being) agreed to make their respective portions of the land available to the joint venture for the purposes envisaged by the JVA and that they “are not entitled to a transfer back of their respective portions of     the Land for such purposes” (cl 2.2(a));

(c)    the VGPT Trustee and the Land Trustee were “irrevocably appointed by each of the Land Holding Parties as their respective several attorneys, to do all things necessary to give effect to the terms of the Agreement in respect of or pertaining to their portion of the Land …” (cl 2.2(c)); and “the JV shall pay on behalf of the Land Holding Parties and indemnifies each of the Land Holding Parties against all and every cost risk, expenses, outgoings, losses or damages arising or incurred in connect with the JV and the Development relating to their respective portions of the Land” (cl 2.2(d));

(d)    under cl 2.3 the “price” for each of the Land Holding Party’s portion of the land was the price set out in Annexure B, and upon sale or other disposal of any part of the land, a Land Holding Party was entitled to be credited with an amount based on the prices set out in Annexure B (subject to cl 6, pursuant to which the Land Holding Parties would receive distributions in a particular order and in accordance with that clause (see below);

(e)    in Annexure B the price for:

(i)    the Marpine land was $25,000,000;

(ii)    the SDA land was $11,500,000; and

(iii)    the Taras land was $28,500,000

(there being no dispute that these “prices” greatly exceeded market value);

(f)    upon execution of the JVA:

(i)    Taras agreed to execute a transfer of the Taras Land in favour of VGD (being the Land Trustee) “as trustee for Taras” (cl 2.1(a)(1));

(ii)    SDA agreed to execute a transfer of the SDA land in favour of VGD (being the Land Trustee) “as trustee for SDA” (cl 2.1(a)(2));

(g)    VGD agreed to resign as trustee of the Marpine Trust; and to remain registered as proprietor of the Marpine land which it was to hold as trustee for the Marpine Trustee (cl 2.1(a)(3));

(h)    VGD agreed to execute a trust deed pursuant to which it would declare that it held the land “as trustee for the respective Land Holding Parties” (cl 2.1(a)(4)).

16        “Development” was defined in cl 1.1 of the JVA to mean “the construction on the Land for the purposes of retention, leasing or sale, or other disposal of a multi-purpose complex comprising offices, commercial premises, retail premises, residential premises together with all infrastructure and other requirements in relation thereto”. The Joint Venture or “JV” was also defined in cl 1.1 as:

… the joint venture to be known as the ‘Victoria Gardens Property Trust’ to undertake the business of the:

(a)    development of the Land on behalf of the Joint Venture Parties, which development may comprise the building of structures and improvements on the Land, the financing of the Development (including the granting of any security over the Land or the Development or any part thereof), the sale, leasing or other disposal of the Land and Development or any part thereof in accordance with this Agreement; and

(b)    the acquisition and development of other land.

17        Distributions of cash by the Joint Venture were made in accordance with cl 6, including in the case of termination of the Joint Venture and sale of assets: see cl 2.3(c), 11.4, 12.8. Pursuant to cl 6.2:

(1)    the first $65,000,000 of monies available for distribution (“Cash”) was to be distributed to the Land Holding Parties as follows:

(a)    the first $8,000,000 to SDA, to be paid no later than 30 June 2001 or an event of default would have occurred.

(b)    thereafter distributed:

(i)    50% to Taras until it had received the price for the Taras Land under Annexure B (i.e. $28,500,000); and

(ii)    50% to SDA until it had received in total the price for the SDA Land under Annexure B (i.e. the first $3,500,000) and thereafter to the Marpine Trustee until it had received the price for the Marpine Land under Annexure B ((i.e. $25,000,000).

(2)    any Cash in excess of $65,000,000 was thereafter to be distributed to the Joint Venturers equally.

18        The Joint Venturers (Taras and the Marpine Trustee) made contributions to the capital of the Joint Venture and were required to make ongoing contributions unless funding was in place (cl 3.1, 3.2 and Part 1 of Annexure D). Further capital requirements were to be by way of loan funds from trading banks, financial institutions or other persons as the Board of Victoria Gardens may determine, secured (if required) by the asset of the Joint Venture and the Land (cl 3.2). Any further contributions were to be by agreement between the Joint Venturers (cl 3.3). Under the JVA, the Land Holding Parties and the Joint Venturers could not, without the consent of the others, encumber any right or interest they had in shares in Victoria Gardens, the Land or the JV itself (cl 9.1).

19        Whilst the initial trustee of the JV was the VGPT Trustee (recital E), certain decisions required unanimous approval of the Board of the VGPT Trustee, including approval of operating budgets, issue of debt securities, entering into certain leases, making certain loans, establishing subsidiaries or entering into joint ventures or partnerships, the sale or lease of any part of the Development and the granting of any security over the Land: see cl 4. The Board appointed the Manager (cl 4.2(a)), who was responsible for the day to day management of the Development (cl 5(a)). The JVA recorded that the Joint Venturers intended to appoint Salta Properties Pty Ltd (“Salta Properties”) or nominee as initial Manager upon terms and conditions acceptable to both Salta Properties and the Joint Venturers: see cl 5(c). Salta Properties had a right to reimbursement of its costs but not to charge a management fee (cl 5(c)).

20        On 20 August 1998, SDARJV Pty Ltd (“SDARJV”) replaced VGD as trustee of the Marpine Trust and executed a transfer of land in favour of VGD on the same day.

21        Also on 20 August 1998, VGD, SDA and Taras executed a trust deed (“the Trust Deed”) under which VGD, referred to as the “Land Trustee”, declared that it held the Marpine land, the Taras land and the SDA land (“the Trust Land”) “on trust for the respective Land Holding Parties subject to the terms of the [JVA] and [the Trust Deed]” (cl 2.1). The Trust Deed further provided:

(a)    each of the Land Holding Parties had executed transfers to VGD of their portion of the land “to be held on trust for each Land Holding Party on the terms of this Deed and the JV[A]”(Recital B);

(b)    each of the Land Holding Parties made the portion of the land to which it was beneficially entitled available to the Joint Venture for the purposes of the JVA “and the Land Trustee shall hold and deal with the Land for such purposes” (cl 2.2(a));

(c)    VGPT Trustee and the Land Trustee were “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 [JVA] in respect of or pertaining to their respective portions of the Land” (cl 2.2(b));

(d)    the Land Holding Parties agreed to deal with “their respective portions” of the land in accordance with the JVA (cl 2.3); and

(e)    the Trust Deed was to be interpreted in accordance with the JVA, the terms of which would prevail to the extent of any inconsistency between the JVA and the Trust Deed (cl 1.2).

22        On 25 August 1998, Taras transferred the Taras land to VGD as the Land Trustee (“the Land Trustee”) to hold in accordance with the Trust Deed. Annexed to the three instruments of transfer was a statutory declaration declaring that the transfer did not result in any change in the beneficial ownership of the relevant land.

23        Similar transfers of the SDA land and Marpine land occurred on 14 August 1998 and 20 August 1998 respectively: see above [15(g)], with respect to the Marpine land. Also annexed to each of these instruments of transfer was a statutory declaration declaring that the transfer did not result in any change in the beneficial ownership of the relevant land.

24        All three statutory declarations were subsequently filed with the Victorian State Revenue Office (“SRO”) in support of an application for exemption from stamp duty.

Pre-August 1998 development work

25        Before entering into the JVA on 20 August 1998, Taras, SDA and the Marpine Trustee engaged architects to draw up conceptual plans, contractors, and town planners to rezone the Land. Zoning amendment were approved in May 1997, with the result that all of the Land was zoned “Comprehensive Development Zone No 8”. The planning permission received was for the consolidated site comprising the six parcels of land, rather than for each individual parcel. According to a letter of valuation dated 9 June 1998 from Mr Bernard Sweeney (a valuer with JLW Advisory) to SDA, Taras, SDA and Marpine contributed to Council site clean-up and road widening, and had expended a sum of slightly over $1.8 million on office building construction. The 9 June 1998 valuation also recorded that the total funds outlaid to 18 May 1998 was $5,522,867. As at 20 August 1998, the Marpine land was vacant but the Taras land and the SDA land contained buildings.

The stamp duty proceedings

26        The State Revenue Office refused the stamp duty exemption application and imposed stamp duty on the transfers of land by Taras, SDA and SDARJV. VGD and the land holding parties objected and appealed to the Supreme Court. They contended, relevantly, that s 18 of the Stamps Act 1958 (Vic) (“the Stamps Act”) applied to exempt the transfers from duty. Section 18 applied to:

[a]ny instrument for the conveyance of real property which is made by the transferor to a trustee or nominee to be held solely as trustee or nominee of the transferor without any change in beneficial ownership or made by way of re-transfer to such transferor.

27        The Land Trustee and the Land Holding Parties were successful at first instance with respect to the Taras land and the SDA land: see Victoria Gardens Developments Pty Ltd v Commissioner of State Revenue (1998) 41 ATR 187; [1998] VSC 158 (referred to below as “Victoria Gardens (first instance)”). In Victoria Gardens (first instance), Gillard J held, in a judgment delivered on 2 December 1998, that s 18 applied to the transfers of the SDA land and the Taras land, but not to the transfer of the Marpine land. Stamp duty therefore applied only with respect to the transfer of the Marpine land. Subsequently, on 10 February 1999, Gillard J delivered another judgment in which he determined that duty on the transfer of the Marpine land was payable on the market value of that land, which was accepted to be $17.7 million based on an undisputed valuation (by Mr Bernard Sweeney): see Victoria Gardens Developments Pty Ltd v Commissioner of State Revenue (No 2) (1999) 41 ATR 214; [1999] VSC 10 (referred to below as “Victoria Gardens (No 2)”).

28        The Commissioner of State Revenue appealed and, in a judgment on appeal delivered on 12 December 2000, the Victorian Court of Appeal held that the transfers of all three parcels of land were subject to duty: see Victoria Gardens (Court of Appeal). The Commissioner relied on Victoria Gardens (Court of Appeal) in this proceeding.

29        In Victoria Gardens (Court of Appeal), the Commissioner of State Revenue argued that by the transferors transferring their parcels of land to the Land Trustee in the context of the JVA and the Trust Deed, there was an immediate change in the beneficial ownership, and the land transferred to the Land Trustees was held on trust for the Land Holding Parties collectively, as equitable tenants in common. Batt JA (with whom Ormiston and Chernov JJA agreed) relevantly concluded that beneficial ownership of the land changed at the time of the transfers because, as a result of the transfers, “all three transferors have an interest in all the land transferred as tenants in common in equity collectively, provisionally in the shares or proportions which the price to which they respectively are entitled as set out in Annexure B [to the JVA] bears to the total price there set out”: Victoria Gardens (Court of Appeal) at 78 [40] (emphasis added). With respect to those parts of the JVA and the Trust Deed that asserted that the beneficial ownership of the separate parcels of land remained with the respective transferors, Batt JA said (at 78 [40]):

On the true construction of the whole JVA and the Trust Deed the words of severance and of beneficial ownership, so far as they do not merely refer to the position at the moment of execution, that is, immediately before the coming into effect of the several transfers, are overridden by the contrary indicia and have no real force.

30        Batt JA expressed the hope (at 79-80 [44]) that, “[i]n view of the affidavit and oral evidence of Mr Sweeney, the valuer” the parties could agree on the market value at the relevant date of the transfer of land by each of SDA and Taras and duty could be calculated on those transfers accordingly.

31        On 14 December 2001, the High Court refused to grant special leave to appeal from the judgment of the Court of Appeal: Victoria Gardens Developments Pty Ltd v Commissioner of State Revenue [2001] HCATrans 664; (2002) 23(1) Leg Rep LS6.

The tax assessments

32        On 30 October 2000 (which was after Victoria Gardens (first instance) and before Victoria Gardens (Court of Appeal)), Taras filed its tax return for the year ended 30 June 1999 (“the 1999 tax year”) on the basis that its transfer of land to VGD was to VGD as trustee for Taras and did not result in any CGT event. For the 1999 year, Taras claimed a tax loss of $1,649,772. Taras filed income tax returns for the years ended 30 June 2000 and 30 June 2002 on 2 July 2001 and 4 June 2003 respectively, being after the decision in Victoria Gardens (Court of Appeal). For those two years, Taras claimed deductions for losses carried forward from the 1999 tax year. Subsequently, it returned taxable capital gains from the sale of its portion of the land as and when it sold the land (through VGD, as the Joint Venture’s nominee) to third parties.

33        The Commissioner audited Taras and ultimately assessed it under s 99A(4) of the Income Tax Assessment Act 1936 (Cth) (“ITAA 1936”), on the basis that CGT event E1 occurred on 20 August 1998 in accordance with s 104-55(2) of the ITAA 1997, which resulted in Taras realising a taxable capital gain based on the alleged market value of its land. The Commissioner relied on Victoria Gardens (Court of Appeal) to support its assessment. The Commissioner’s reasons quoted from that case and then stated:

Accordingly, as a result of the transfer of land, you ceased to be the absolute owner of land which you had previously owned and you became entitled with the other landholders as tenants in common in equity collectively to an interest in the whole of the land which you and the other landowners had previously owned separately and which had now been transferred to the Land Trust.

As such, a new trust was created for the purposes of the joint venture and completed by the transfer of the parcels of land to the trustee.

The JVA commenced on 20 August 1998. Therefore, CGT event E1 occurred on 20 August 1998 in accordance with subsection 104-55(2) of the ITAA 1997.

34        The Commissioner issued notices of assessment on 11 December 2009, and 18 December 2009 for the years ended 30 June 1999, 2000 and 2002. In written submissions, the Commissioner explained that:

(a)    For the 1999 year, Taras had claimed a tax loss of $1,649,772, and for the 2000 and 2002 years Taras had claimed deductions for losses carried forward from the 1999 year.

(b)    The Commissioner assessed Taras (after amendment on objection) for taxable income for the 1999 year of $9,539,340, reflecting a net capital gain of $11, 189.112. … The Commissioner concedes that the assessed amount of the capital gain was excessive and contends that the correct amount is $7,637,227.

(c)    The Commissioner assessed Taras for taxable income for the 2000 and 2002 years of $963,421 and $684,351 respectively, reflecting the disallowance of deductions that had been claimed fot tax losses carried forward from the 1999 income year

35        The parties did not dispute that:

(a)    the cost base of the Taras land for the purposes of subdivision 110-A of the ITAA 1997 is, including indexation, $8,988,888; and

(b)    the market value substitution rule in s 116-30(2) of the ITAA 1997 applied to the transfer of the Taras land because the “price” for the Taras land set out in Annexure B to the JVA was above its market value, and Taras and the Land Trustee were not acting at arm’s length in connection with the transfer. Accordingly, if a CGT event occurred in relation to the Taras land, in calculating the assessable gain, the market value of the Taras land at that time would be determinative of the taxable capital gain.

36        The Commissioner assessed the market value of the Taras land at the time of the CGT event as $20,178,005, on the basis of the undisputed market value of the Marpine land recorded in Gillard J’s decision in Victoria Gardens (No 2) and the respective “prices” of the Marpine and the Taras land in Annexure B to the JVA. That is, the Commissioner determined the market value of the Taras land as 70.8% of the sale price of the Taras land in Schedule B to the JVA ($28,500,000). The Commissioner derived the 70.8% ratio from the value of the Marpine land determined in Victoria Gardens (No 2) compared with the price attributed to the Marpine land in the JVA. By applying this formula, the Commissioner determined the market value of the Taras land as $20,178,005 (approximately $432.92 per m²).

37        As a result of the Commissioner’s assessment of the market value of the Taras land (as amended after objection), the Commissioner assessed Taras’s taxable income for the 1999 tax year as $9,539,340, reflecting a net capital gain of $11,189,112. The Commissioner conceded that the assessed amount of the capital gain was excessive and, until the very end of closing oral submissions, contended that the correct amount was $7,637,227, based on a revised market value of $16,626,115 less an undisputed indexed cost base of $8,988,888. The Commissioner did not impose penalties in respect of the 1999 year on the basis that Taras filed its income tax return for this year before Victoria Gardens (Court of Appeal).

38        In addition, as indicated above, the Commissioner disallowed the deductions Taras had claimed in the 2000 and 2002 tax years for losses carried forward from the 1999 tax year. Taras’s taxable income for those years was thus assessed at $963,421 and $684,531 respectively. As the tax returns for those years were lodged after Victoria Gardens (Court of Appeal), the Commissioner imposed tax shortfall penalties on Taras for the 2000 and 2002 tax years at a rate of 25% of the shortfall amounts, on the basis that Taras failed to exercise reasonable care to comply with the tax law; alternatively, that Taras had adopted a position no capital gain had been realised in the 1999 income year, which was not a reasonably arguable position. See in relation to the 2000 income year, s 226G of the ITAA 1936 (failure to take reasonable care) and s 226K of the ITAA 1936 (treating an income tax law as applying in a way that, when the statement was made, was not reasonably arguable); and, in relation to the 2002 year, Items 3 and 4 of s 284-90(1) of Schedule 1 of the TAA 1953.

39        Taras objected to the Commissioner’s assessments and its objection was disallowed on 5 September 2011, save for a minor calculation adjustment leading to the issue of the revised notice of assessment on 27 September 2011. Taras then commenced this proceeding challenging the Commissioner’s objection decision.

Taras’ market value evidence

40        The history of the dispute in this matter indicates that Taras has advanced various contentions and different supporting evidence as to the market value of the Taras land at the time of the disputed CGT event. Thus, as the Commissioner noted in written submissions:

(a)    In its objection of 30 June 2010, Taras contended that the market value of the Taras Land at the relevant time was $16,759,848, which Taras asserted was the amount upon which stamp duty was calculated.

(b)    In its appeal statement of 16 December 2011, Taras contended that the market value of the Taras Land at the relevant time was between $16.2 million and $16.75 million. No basis was given for this valuation.

(c)    In an expert report dated 5 March 2012 and filed and served by Taras pursuant to the orders of Kenny J of 19 December 2011 (the First Sweeney Report), Mr Bernard F Sweeney opined that the market value of the Taras Land as at 20 August 1998 (the date of the JV Agreement) was $11.88m (valuing the four lots making up the Taras Land as a contiguous parcel) or $11.88m (valuing the four lots making up the Taras Land individually).

(d)    In a subsequent expert report dated 13 June 2012 (the Second Sweeney Report) that is exhibited to an affidavit of Mr Sweeney sworn on 26 June 2012 (2012 Sweeney affidavit) and filed and served by Taras pursuant to the orders of Kenny J of 27 July 2012, Mr Sweeney opined that the market value of the Taras Land as at 20 August 1998, after taking into account costs to remediate the site obtained from an expert report of Mr Dean Woods of 7 June 2012, was $8m (valuing the four lots making up the Taras Land as a contiguous parcel) or $8.45m (valuing the four lots making up the Taras Land individually).

A number of documents are exhibited to the 2012 Sweeney affidavit, including:

(a)    A letter from Mr Sweeney dated 22 May 1996 (1996 Sweeney letter) in which he opined that the market value of the Taras Land as at 22 May 1996 was $9.3m, based on capitalising future rental receipts.

(b)    A letter from Mr Sweeney dated 27 October 1997 (1997 Sweeney letter) in which he opined that the market value as at 27 October 1997 of the Taras Land was $10.4m, based on comparable site sales less demolition costs.

(c)    An affidavit of 22 October 1998 sworn by Mr Sweeney (1998 Sweeney affidavit) for the purposes of Victoria Gardens (first instance) in which he opined that the market value as at 20 August 1998 of the 4 individual parcels making up the Taras Land when aggregated with the Marpine and SDA Land were $11,033,950, $610,280, $1,330,790 and $3,651,095 respectively (totalling $16,626,115).

Evidence as to the cost of remediation work

41        In relation to the cost of soil remediation (the relevance of which is discussed below), Taras relied on the affidavits of Mr Dean Woods of 26 July 2012 and 19 October 2012. Mr Woods was an environmental engineer, who prepared an expert report dated 7 June 2012 and a supplementary expert report dated 15 October 2012. These were annexed to his respective affidavits.

42        In his 7 June 2012 report, Mr Woods expressed the opinion that the cost to remediate all of the Taras land for environmental contamination as at 20 August 1998 would have been around $3,800,000. This report assumed that a ground level development would be undertaken and that all contaminated soil within one metre of the surface would have to be disposed of off-site. In estimating the total cost of removal and disposal of contaminated soil, he applied a cost of $320 per tonne, which he derived from information provided by Mr Toes of Delta Group (who also deposed to the provision of this information).

43        In his supplementary report, which responded to Mr O’Neill’s report, Mr Woods explained that he considered a September 1999 report (Report on Environmental Site Assessment, Proposed Retail Development, Victoria Gardens Site, Burnley Street, Richmond) was “representative of pre-remediation conditions” and that he used it in preference to other reports “to establish site contamination status as at that time”. Mr Woods also explained why he chose not to adopt what he referred to as Mr O’Neill’s “fixed hot spot” method (see below). In his supplementary report, Mr Woods said:

As an alternative to assigning a fixed hotspot size with little or no reference to field data, DP chose to assume that detected contamination was laterally present up until the closest identified ‘clean’ sample or the site boundary. This approach was applied in the peer reviewed DP 1999 report (attached to my report of 7 June 2012) and estimated areas shown on Drawing 4, Appendix A. Highlighted areas comprised approximately 6,750 m² of the site which equates to approximately 17% of the total investigated area (40,000 m²). This estimated area of unacceptable contamination was then applied to the whole site with reference to the desktop site history indicating dumping of industrially sourced waste across the entire area. Mr O’Neill assumed that the balance of the site was all clean soil, which, based on the known encountered site conditions, is considered highly unlikely, therefore extrapolation of known data across the remaining un-investigated area is considered appropriate.

44        After further discussion of Mr O’Neill’s methodology, Mr Woods concluded:

It is considered that application of a hotspot removal methodology should be based on the limitations of available data. DP considers that the hotspot size should be increased to account for the spacing of sampling points which as a minimum would be 960 m². On this basis, the estimated cost would be $4 m, which is comparable to the $3.8 m calculated by DP.

45        Also in his supplementary report, Mr Woods defended his costs estimates, saying:

Costs used are based on those provided by an experienced contractor who was actually supplying remediation and waste disposal services in 1998 and have not been estimated by DP.

46        The Commissioner relied on an affidavit of Mr Patrick O’Neill of 14 September 2012, to which was annexed an expert report of 11 September 2012. Mr O’Neill was a Senior Specialist Scientist with Eco-tainable, specialising in contaminated land, sustainability, environment and earth sciences. In his report, Mr O’Neill expressed the opinion that the cost of remediation of the Taras land as at 20 August 1998 would have been about $1,170,000, or less if contaminated soil could be disposed of on-site. Mr O’Neill’s estimate also assumed that a ground level development would be undertaken and that all contaminated soil within one metre of the surface would have to be disposed of off-site. In estimating the quantity of contaminated soil to be removed, Mr O’Neill applied the process of removing fixed “hot spots” (of specified diameter). Further, Mr O’Neill disputed the figure of $320 per tonne for the removal of contaminated soil off-site. Mr O’Neill applied a figure of $300 per tonne for high level contaminated soil (which he referred to as “prescribed waste”) and $100 for low level contaminated soil.

LEGISLATIVE FRAMEWORK

47        Taras has contended that no CGT event happened when it transferred the Taras land to the Land Trustee. The Commissioner has contended that “CGT event E1 or E2 occurred, and/or CGT event A1 occurred”. It is convenient to set out the operation of the relevant tax legislation at this point.

48        Section 102-20 of the ITAA 1997 provides that a capital gain is made only when a CGT event happens. Numerous CGT events are listed in Division 104. Pursuant to s 102-25(1), “[i]f more than one [CGT] event can happen, the one you use is the one that is the most specific to your situation”. Taras and the Commissioner agreed that CGT events E1, E2 and A1 were the CGT events relevant to this proceeding, and that CGT events E1 and E2 were more specific than CGT event A1.

49        Section 104-55 defines CGT event E1. It relevantly provides:

(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.

…

50        Section 104-60 defines CGT event E2. It relevantly states:

(1)    CGT event E2 happens if you transfer a *CGT asset to an existing trust.

(2)    The time of the event is when the asset is transferred.

…

51        Section 104-10 defines CGT event A1. It relevantly states:

(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.

…

52        CGT events E1, E2 and A1 are subject to exceptions. Relevantly for this case, s 104-55(5) provided that:

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 trust and the beneficiaries and terms of both trusts are the same.

53        Section 104-60(5) relevantly provided:

CGT event E2 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 trust and the beneficiaries and the terms of both trusts are the same.

54        Section 106-50 relevantly stated:

If you are absolutely entitled to a *CGT asset as against the 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.

55        Section 112-25 relevantly provided:

(1)    This section sets out what happens if:

(a)    a *CGT asset (the original asset) is split into 2 or more assets (the new assets); or

(b)    a *CGT asset (also the original asset) changes in whole or in part into an asset (also the new asset) of a different nature;

and you are the beneficial owner of the original asset and each new asset.

(2)    The splitting or change is not a *CGT event.

…

56        The parties agreed that, if the Commissioner were correct in saying that one of the specified CGT events occurred, then s 116-30(2) applied to determine the capital proceeds from the event.

57        In relation to penalties, in relation to the 2000 income year, ss 226G and 226K of the ITAA 1936 were relevant. These provisions were as follows:

226G     Penalty tax where shortfall caused by lack of reasonable care

Subject to this Part, if:

(a)    a taxpayer has a tax shortfall for a year; and

(b)    the shortfall or part of it was caused by the failure of the taxpayer or of a registered tax agent to take reasonable care to comply with this Act or the regulations;

the taxpayer is liable to pay, by way of penalty, additional tax equal to 25% of the amount of the shortfall or part.

226K    Penalty tax where unarguable position taken

Subject to this Part, if:

(a)    a taxpayer has a tax shortfall for a year, and

(b)    the shortfall or part of it was caused by the taxpayer, in a taxation statement, treating an income tax law as applying in relation to a matter or identical matters in a particular way; and

(c)    the shortfall or part, as the case may be, so caused exceeded whichever is the higher of:

(i)    $10,000; or

(ii)    1% of the taxpayer’s return tax for that year; and

(d)    when the statement was made, it was not reasonably arguable that the way in which the application of the law was treated was correct;

the taxpayer is liable to pay, by way of penalty, additional tax equal to 25% of the amount of the shortfall or part.

58        In relation to penalties applicable to the 2002 income year, Item 3 (failure to take reasonable care) and Item 4 (treating an income tax law as applying in a way that, when the statement was made, was not reasonably arguable) of s 284-90(1) of Schedule 1 of the TAA 1953 were relevant.

THE PARTIES’ SUBMISSIONS

Taras’ submissions

59        Referring to a statement of Dixon CJ in Commissioner for Railways (NSW) v Agalianos (1955) 92 CLR 390 at 397 and an observation of Lord Wilberforce in Aberdeen Construction Group Ltd v Inland Revenue Commissioners [1978] AC 885 at 892-893 (which Gummow J referred to approvingly in Commissioner of Taxation (Cth) v Orica Limited (1998) 194 CLR 500 at 545 [118]), Taras submitted that the CGT provisions should be interpreted with regard to their context, purpose and policy; and that in this case the Court should “be slow to adopt an interpretation that would result in a taxable gain arising in circumstances where a taxpayer does not receive any capital proceeds from an alleged CGT event”. Taras referred to the English Court of Appeal’s decision in Booth v Ellard [1980] 1 WLR 1443 (“Booth v Ellard”) as illustrative of the approach it urged upon the Court.

60        In this case, so Taras contended, it did not make capital gains in a commercial sense until the land was sold to third parties. Taras submitted that “[t]he Land Trust was merely machinery adopted for administrative convenience to facilitate the development of the land by the joint venture parties”. In so submitting, Taras relied principally on the evidence of Mr Veevers, who was a director of Taras at the relevant time. In his affidavit, Mr Veevers deposed that “[t]he main advantage of this type of arrangement for the parties was that it would overcome the administrative complexities of having several different entities dealing with third parties”.

61        Taras’s primary argument was that none of CGT events E1, E2 or A1 happened. Taras submitted that CGT event E1 did not happen because the trust was not created by settlement, as claimed by the Commissioner. Relying on McInerney J’s decision in Scott v Comptroller of Stamps [1967] VR 122 (“Scott v Comptroller of Stamps”), Taras submitted that “CGT event E1 did not happen, because although the consequence of the transfer of the Taras Land was that it was held on trust, Taras did not create the trust over the Taras Land by settlement”. In the alternative, Taras argued that even if it did create a trust over the Taras land by way of settlement, the exception in s 104-55(5) of the ITAA 1997 applied. Taras submitted that, “[a]lthough the Land Trust had a number of beneficiaries, Taras was the sole beneficiary of the trust over the Taras Land, because under the terms of the JVA and the Land Trust, the trustee held the Taras Land solely for Taras, and not on behalf of the other transferors”. To the extent that Taras’s submissions maintained that there was no change in the beneficial ownership of the Taras land upon its transfer to the Land Trustee, Taras invited this Court to avoid placing too much weight on the decision in Victoria Gardens (Court of Appeal). Taras contended that that case was concerned with a different statutory context and that the remarks of Batt JA relied upon by the Commissioner were obiter dictum and expressed tentatively. Taras submitted that this Court should consider the issue “afresh”. Relying on Kafataris v Deputy Commissioner of Taxation (2008) 172 FCR 242 (“Kafataris”) Taras also submitted that, because it was the sole beneficiary of the Land Trust over the Taras land, then it was absolutely entitled to the Taras land as against the Land Trustee for the purposes of s 104-55(5). Taras argued that, although the JVA constrained its dealings with the Taras land, those constraints were contractual in nature, pre-dated the Trust Deed and the transfer, and did not prevent it from being absolutely entitled to that land.

62        In the alternative, Taras relied on s 112-25. That is, Taras argued that, if CGT event E1 would otherwise happen, then s 112-25 relevantly prevented this result. Referring to Stern v McArthur (1988) 165 CLR 489 at 522, Taras submitted that:

Upon the transfer of the Taras Land to the Land Trustee the contractual obligations and equitable rights arising under the JVA remained largely unaltered. The interest of Taras in the land, subject to the equitable and contractual obligations changed from legal ownership to equitable ownership, but Taras was the beneficial owner of the legal title (the original asset) and also of the equitable ownership (the new asset).

63        Taras argued that CGT event E2 did not happen because the Land Trust was not an “existing trust” for the purpose of s 104-60(1). Rather, the Land Trust was, so Taras argued, created when the Taras land was transferred to it; and upon transfer the Land Trustee “held each allotment of land for the transferor, not for all the beneficiaries”. Taras contended that, if it were wrong and a CGT event E2 would otherwise happen, then, for the reasons it relied on in relation to s 104-55(5), the exemption in s 104-60(5) applied; alternatively, the exemption in s 112-25 applied.

64        Finally, Taras contended that CGT event A1 did not happen because it remained the beneficial owner of the Taras land after the transfer. Taras argued that the transfer of title from Taras to the Land Trustee did not change the beneficial ownership of the Taras land because, under the Trust Deed and the JVA, the Land Trustee was to hold each party’s land “on trust for the respective beneficial owners thereof”: see Recital A of the Trust Deed. In written submissions, Taras said as follows:

In accordance with this statement, the Land Trustee declared that it held the Land “on trust for the respective Land Holding Parties” (cl 2.1 of the Land Trust deed) and each of the owners of the land made “that portion of the Land of which it is the beneficial owner available to the JV for the purposes of the JV Agreement” (cl 2.2(a) of the Land Trust deed).

The JVA was drafted on the basis that Taras was the beneficial owner of the Taras Land. Hence, cl 2.1(c) prevented the Land Holding Parties from “dealing with their portion of the land” and under cl 2.2(c) Taras and the other Land Owners authorised VGD to do all things necessary to give effect to the JVA in respect of “their portion of the Land”. If Taras had given up beneficial ownership of the Taras Land it would have been unnecessary for it to authorise VGD to deal with the Taras Land.

The rights which the other Land Holding Parties acquired in respect of the three parcels of land were acquired pursuant to the JVA, which preceded the transfer to the Land Trustee. As such, the transfer to the Land Trustee did not enlarge the interests of the other parties in the Taras Land. Taras remained the beneficial owner of the land which shortly before the transfer to the Land Trustee had been subjected to the contractual and equitable rights arising under, and as a consequence of, the JVA

65        Taras further argued that, if, contrary to its submissions, there was a change in the beneficial ownership of the Taras land, then under s 106-50, if Taras was absolutely entitled to the CGT asset as against the Land Trustee (as it claimed), any disposal under CGT event A1 was ignored. In submitting that Taras was absolutely entitled to the Taras land as against the Land Trustee, Taras again relied on Booth v Ellard as well as Jenkins (Inspector of Taxes) v Brown [1989] 1 WLR 1163 (“Jenkins (Inspector of Taxes) v Brown”) and reiterated its submission that the Commissioner’s reliance on Victoria Gardens (Court of Appeal) was misplaced. In the alternative, Taras argued that, even if the Court found that the Land Holding Parties held the combined land holdings as tenants in common and there was therefore a change in beneficial ownership, nonetheless “Taras could still be absolutely entitled to the Taras Land as against the trustee”. In so contending, Taras relied on the remarks of Brightman J in Hoare Trustees v Gardner (HM Inspector of Taxes) [1979] Ch 10 (“Hoare Trustees v Gardner”) at 14, which Taras said were equally applicable to s 106-50.

66        Taras also submitted that if CGT event A1 would otherwise happen, then s 112-25 applied.

67        Taras also argued that, if the Court found that Taras, SDA and the Marpine Trustee owned the combined land as tenants in common in proportions determined by reference to Annexure B to the JVA, then Taras continued to own a proportion of the Taras land beneficially. Thus, so Taras argued, “[i]t disposed of (CGT event A1), or transferred (CGT event E2), only the proportion of the Taras land that the other beneficiaries of the Land Trust acquired from it”. On this basis, Taras contended that if the Court found that either CGT event A1 or CGT event E2 happened, it should find that there was only a part disposal of the Taras Land and remit the matter to the Commissioner to determine the capital gain in accordance with the Court’s reasons.

68        On the valuation issue, Taras contended that even if a CGT event happened, Taras made no capital gain because the true market value of the Taras land at the time of the transfer on 20 August 1998 was less than the land’s agreed indexed cost base of $8,988,888. Taras relied on a 13 June 2012 report by Mr Sweeney, who was a land valuer, in which Mr Sweeney estimated the net market value of the Taras land in 1998 as $8.45 million if the four lots were sold separately, or $8 million if sold as one parcel, taking into account the costs of remediating contaminated soil. In relation to these costs, Mr Sweeney relied on the 7 June 2012 report of Mr Woods, discussed above, who estimated the cost of soil remediation at $3.8 million. Assuming that the capital proceeds from the CGT event were $8,450,000, after taking into account indexation of the cost base of the land, Taras submitted that it realised no capital gain.

69        As to the administrative penalties, Taras submitted that even if it did understate its taxable income in the 2000 or 2002 tax years, it should not be liable for penalties. Taras contended that it was reasonably arguable that it did not realise a capital gain in the 1999 tax year. It also submitted that it had exercised reasonable care in deciding to declare capital gains when the Taras land was sold to third parties, rather than in the 1999 tax year, when the legal title was transferred to the Land Trustee.

The Commissioner’s submissions

70        The Commissioner argued that the premise of Taras’ argument that it did not make a capital gain in a commercial sense until the land was sold to third parties was wrong. The Commissioner submitted that “[w]hilst the cash distributions to which Taras became entitled would occur over a number of years, it does not follow that Taras did not make a commercial gain upon the transfer of the Taras Land to the Land Trustee”. The Commissioner submitted that when Taras transferred its land to the Land Trustee, Taras received entitlements under the Trust Deed, including rights in relation to the trustee’s obligations to develop all of the land transferred to it and to make distributions of money to the beneficiaries in accordance with the JVA.

71        Further, the Commissioner submitted that the CGT legislation must be applied in accordance with the ordinary meaning of its terms, rather than “views of ‘commercial reality’”. The Commissioner submitted that CGT event E1 happened because Taras did create a trust by settlement within the meaning of s 104-55(1) of the ITAA 1997. Scott v Comptroller of Stamps was, so the Commissioner argued, distinguishable on its facts and/or the trust that Taras created was, in any event, by “settlement” as that term was used by McInerney J in that case.

72        The Commissioner further submitted that the exception in s 104-55(5) did not apply. The Commissioner relied on the decision in Victoria Gardens (Court of Appeal) and the terms of the Land Trust (and the JVA) to support his contentions that Taras was not the sole beneficiary of the trust over the Taras land and Taras was not absolutely entitled to the Taras land as against the Land Trustee. The Commissioner submitted that Taras’ contention as to the nature of the constraints placed on it with respect to dealing with the Taras land failed to take account of the fact that the terms of the JVA were, “by reason of express incorporation”, terms of the Trust Deed.

73        The Commissioner contended that s 112-25 was not applicable because there was no split of or change in the nature of Taras land. Rather, CGT event E1 occurred because a trust was created over that land by settlement.

74        Alternatively, the Commissioner argued that a CGT event E2 happened, because in transferring the Taras land to the Land Trustee under the then existing Trust Deed pursuant to the JVA, Taras transferred a CGT asset to an existing trust within the meaning of s 104-60(1) of the ITAA 1997. The Commissioner contended that a trust was created on 20 August 1998, when the Land Trustee, holding the transfers from SDA and the Marpine Trustee, declared itself the holder of the land subject to those transfers as subject to the terms of the Trust Deed. According to the Commissioner, the subsequent execution of the transfer of the Taras land to the Land Trustee had the effect of transferring the Taras land to an existing trust.

75        The Commissioner argued that s 104-60(5) did not apply because, as outlined with respect to s 104-55(5), Taras was not the sole beneficiary of the trust and was not absolutely entitled to the Taras land as against the trustee. Section 112-25 did not apply because there was no change or split in a CGT asset.

76        Further or in the alternative, the Commissioner argued that CGT event A1 happened on 20 August 1998 because, in transferring the Taras land to the Land Trustee in accordance with the JVA, Taras disposed of the land within the meaning of s 104-10 of the ITAA 1997. There was a disposal because the transfer effected a change of ownership. Relying on CPT Custodian Pty Ltd v Commissioner of State Revenue (2005) 224 CLR 98 (“CPT Custodian”), the Commissioner contended that “[t]he beneficiaries of the Land Trust were not entitled to the gross receipts from the Land – they were not even entitled to the net income from the Land, but only to such cash as the Board of the VGPT Trustees determined was available for distribution, pursuant to clause 6 of the [JVA]”. In this circumstance, so the Commissioner submitted, “neither Taras alone nor the beneficiaries of the Land Trust as a whole were the beneficial owners of the Taras Land”; and in these circumstances Taras disposed of its land when it transferred the land to the Land Trustee because it did not retain the beneficial ownership of the land.

77        In oral submissions, the Commissioner relied heavily on Victoria Gardens (Court of Appeal) in support of the submission that the effect of the transactions in August 1998 “was that a change of ownership did occur because [Taras] ceased to be the owner of the land and became, as a result of those transactions, an equitable tenant in common together with the other beneficiaries under the trust deed”.

78        The Commissioner contended that s 106-50 of the ITAA 1997 did not assist Taras because:

(1)    the disposal of the Taras land giving rise to the CGT event A1 was the act of Taras, not the trustee; and

(2)    after the transfer Taras was not absolutely entitled to the Taras land as against the Land Trustee, for the reasons the Commissioner advanced in relation to ss 104-55 and 104-60. The Commissioner submitted that s 106-50 did not encompass joint absolute entitlement.

79        The Commissioner also contended that s 112-25 could not assist Taras by preventing CGT event A1 from occurring because there was no change or split in a CGT asset.

80        As to the market value of the land, the Commissioner rejected the valuation contained in Mr Sweeney’s second 2012 report, relying instead on an affidavit sworn by Mr Sweeney on 22 October 1998 for the purposes of Victoria Gardens (No 2). In that affidavit, Mr Sweeney estimated the market value of the Taras land as being $16,626,115. The Commissioner maintained that there was no evidence that this figure should be reduced to take account of soil remediation and that, in any event, Mr Woods’ estimate of the cost of such work was excessive. On this point, the Commissioner submitted that the 11 September 2012 report of Mr O’Neill should be preferred. As already noted, Mr O’Neill estimated the cost of remediation of the Taras land at 20 August 1998 at $1.17 million.

81        In relation to the penalties, the Commissioner maintained that the position Taras took in submitting its tax returns for the 2000 and 2002 tax years was not reasonably arguable, given the decision in Victoria Gardens (Court of Appeal) and, by 2002, the High Court’s refusal to grant special leave to appeal. The Commissioner also submitted that, for much the same reasons and because it had provided no evidence of having obtained independent specialist legal advice, Taras also failed to exercise reasonable care in completing its 2000 and 2002 tax returns.

CONSIDERATION

Was there a CGT event?

82        I address first the question whether or not there was a CGT event. If there was no such event, then nothing turns on the valuation question.

CGT event E1

83        Broadly speaking, pursuant to s 104-55 of the ITAA 1997, a CGT event E1 happens if a trust is created over an asset by declaration or settlement. Plainly enough, a trust was created over the Taras land by the combined operation of the Trust Deed, the JVA and the transfer executed by Taras in favour of the Land Trustee on 25 August 1998. The parties were in dispute, however, as to whether or not the trust was created by settlement, it being agreed that it could not have been created by declaration.

84        The word “settlement” is not defined in the ITAA 1997 and the authorities do not provide a generally accepted all-inclusive definition: Halsbury’s Laws of England, volume 91 (Lexis Nexis, 2012, 5th edition), “Settlements” at [501]. They do, however, provide a good deal of guidance in identifying a “settlement”. As Dixon J said in Buzza v Comptroller of Stamps (Victoria) (1951) 83 CLR 286 (“Buzza”) at 300, “[i]t is notoriously difficult to define a settlement, but that does not mean that it is difficult to recognize one”. His Honour held that there was a settlement in that case, noting (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. … This instrument appears to me to be well within the conception, even if the limitation of interests in succession were an indispensable attribute, which it is not.

85        Like Dixon J, in Buzza, Fullagar J also noted (at 312) that “it is not essential to the conception of a settlement that successive interests should be created in property. It is enough … if … new equitable interests are created and the trust is more than a ‘bare’ trust”.

86        Also in Buzza, 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 person settle that property. … In Commissioner of Stamp Duties (Q) v Hopkins [(1945) 71 CLR 351 at 378] 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”.

87        On the broad approach adopted in cases such as Buzza and Commissioner of Stamp Duties (Q) v Hopkins (1945) 71 CLR 351 (cited in the above passage) one would be inclined to conclude that the creation of the trust in question in this case was “by settlement”. Both parties specifically relied, however, on Scott v Comptroller of Stamps in support of their respective submissions as to the existence (or non-existence) of a settlement.

88        In Scott v Comptroller of Stamps, McInerney J held that a deed of arrangement over a deceased’s estate was not an instrument under which property was “settled” for the purposes of the Stamps Act 1958 (Vic). Under the deed, one of the beneficiaries was entitled to one-third of the proceeds from the sale of the testator’s house while the remaining assets were to be distributed to two other beneficiaries. His Honour so held because, although it created new equitable interests, the trust was no more than a bare trust, except in relation to the deceased’s house. McInerney J stated (at 148):

… I do not think that this deed of arrangement “settles” the testator’s estate (see per Latham, CJ and Dixon J, in Buzza’s Case (83 CLR) at pp 295 and 300, respectively, and per Dixon J, in Hopkins’ Case (71 CLR), at p 378). I do not think a conveyance of land upon trust to sell and to pay the net proceeds of the sale equally between A, B and C would ordinarily be described as a settlement. I do not think therefore that the present deed of arrangement “contains such limitations as are ordinarily contained in settlements” (per Griffith, CJ, in Davidson v Chirnside (7 CLR), at p 341).

89        Taras argued that the creation of the trust in the present case was analogous. In written submissions, Taras argued:

Like the deed of arrangement in Scott’s case, the JVA and the Land Trust were to take effect for a limited period, namely, the time required to develop and sell the developed land, and the trustee’s duties were limited to developing the land, selling it and distributing the proceeds. It therefore lacked the usual indicators of a settlement.

Moreover, the Land Trust was a device to give effect to a commercial agreement between the joint venture parties (one of which was ultimately owned by an industry super fund), rather than a traditional settlement, intended to benefit individual members of a family. The Court should therefore find that CG[T] event E1 did not happen as a result of Taras transferring the Taras Land to VGD.

90        In opening, Mr de Wijn QC, senior counsel for Taras, acknowledged that more was involved in this case that merely a trust to sell; and he conceded that the conveyance by Taras to the Land Trustee could be characterised as “a conveyance of land upon trust to develop and sell and apportion according to [the JVA]”. In closing, he emphasised that there was no limitation on estates in succession; and that the Trust Deed itself contained “no restrictions or impositions” and made no provision for periodic payments or powers of management. As noted above, however, both Dixon and Fullagar JJ stated in Buzza that there might be a settlement without any provision for successive interests; and I consider that Taras’ other objections were the product of an overly narrow approach, which failed to take account of the effect of the whole of the relevant circumstances, namely, the interaction of the JVA, the Trust Deed and the transfer of land executed by Taras. When the transactions in question are fully considered, it seems to me that Taras’ argument on this point fails.

91        In deciding Scott v Comptroller of Stamps, McInerney J surveyed many authorities on the meaning of “settlement”, concluding (at 146) that:

… one must look for the presence of one or other of the common “indicators” of a settlement, e.g., the limitation of estates in succession; the imposition of restriction of full enjoyment of the rights of ownership in the beneficial interests created or declared by the instrument; provision for periodical payments, the conferring of powers of management and administration of the subject property.

92        As the above passages from McInerney J’s reasons for judgment indicate, his Honour found that the deed of arrangement was not a deed of settlement because it did not contain enough of the common “indicators” of a settlement. In the circumstances of that case, his Honour found that the rights created by the deed of arrangement were “rights to the immediate and absolute, unfettered enjoyment of the property in question” and imposed on the executor an immediate trust to sell the house to pay the net proceeds to the beneficiaries: see Scott v Comptroller of Stamps at 147-148. The circumstances in the present case are relevantly different from those in Scott v Comptroller of Stamps.

93        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).

96        Having regard to the authorities, including the “indicators” to which McInerney J referred in Scott v Comptroller of Stamps, there are sufficient “indicators” of a settlement to warrant the conclusion that Taras created a trust “by settlement” within the meaning of s 104-55 of the ITAA 1997.

97        As the Commissioner submitted, this conclusion is supported by the result in B L & M Grollo Homes Pty Ltd v Comptroller of Stamps [1983] VR 445 (“Grollo Homes”), in which the Full Court of the Supreme Court of Victoria held that an instrument of transfer of land was a “deed of settlement” for the purposes of the Stamps Act 1958 (Vic). In Grollo Homes, the transferor had transferred land to a unit trust created the same day, in which all of the units were held by the transferor. All parties agreed that the land, when transferred, became subject to the terms and conditions of the trust. Tadgell J (with whom Starke J agreed) held that the instrument of transfer was an instrument whereby the land was settled. Tadgell J said (at 451):

What was done appears to me to have been simply that, on 11 June 1980, the land was subjected to trusts by its being vested in the transferee which held it on the terms of trusts established by a trust deed contemporaneously executed. I consider that when the land was subjected to the trusts of that deed it became settled land. … The trusts do not involve the creation of interests in succession, but that is not necessary to a settlement: Buzza v Comptroller of Stamps (Vic) (1951) 83 CLR 286 at p 313 per Fullagar J. The trust did, however, create new equitable interests to which alone after their creation, the beneficiary was entitled to look for its rights in relation to the trust property. Furthermore, so far as the subject land was concerned, the right to enjoyment of the new interests was restricted and regulated by the trusts in a manner wholly inconsistent with the rights of enjoyment of an estate in fee simple in the land which the transferor had before the trusts affected it. This, I consider, amounted to a settling of the land in accordance with any of the tests which have hitherto been adopted for identifying a settlement. I do not think it is necessary to discuss the tests, which have been comprehensively considered by McInerney J in Scott v Comptroller of Stamps [1967] VR 122. It is sufficient to say that, even on the strictest view, the land was settled when it was subjected, as all parties have accepted that it was, to the trusts of the Grollo Homes Third Trust.

…

In my opinion the position was that the instrument of transfer and the trust deed together … operated to subject the real property in question to a trust on the terms of the trust deed. The property thereupon became “settled” and the instrument of transfer was an instrument “whereby” it was settled in terms of heading IX of the Stamps Act.

98        Adopting much the same reasoning, I would conclude that Taras created a trust “by settlement” within the meaning of s 104-55 of the ITAA 1997.

99        It is true, as Taras submitted, that the facts in Grollo Homes were different from the facts here and that the decision turned in large part on the terms of the relevant unit trust deed. I bear these considerations in mind in assessing the significance of Grollo Homes for this case.

100        For reasons set out below, however, I do not accept that Taras’ rights were purely contractual, as Taras claimed. This does not, therefore, distinguish Grollo Homes from the present case. As already observed, the nature of Taras’ rights overall must be considered, having regard to the combined operation of the JVA, the Trust Deed and the land transfer executed by Taras. This approach conforms to the authorities: see, for example, Victoria Gardens (Court of Appeal) at 74 [32]-78 [40]; Scott v Comptroller of Stamps at 146-148.

The exemption in s 104-55(5)

101        As already noted, Taras sought to rely upon s 104-55(5) of the ITAA 1997. For the reasons stated hereafter, however, s 104-55(5)(a) cannot assist it because:

(a)    Taras was not the sole beneficiary of the trust over the Taras Land, and/or

(b)    Taras was not absolutely entitled to the Taras land as against the Land Trustee.

102        As stated earlier, Taras contended that it was the sole beneficiary of the trust over the Taras Land, because, under the terms of the JVA and the Trust Deed, the Land Trustee held the Taras Land solely for Taras, and not for the other Land Holding Parties. As Mr de Wijn put it, the effect of the Trust Deed, the JVA and the transfers executed by the Land Holding Parties was to create three separate trusts for each of them, rather than to create one trust. In developing this argument, senior counsel for Taras referred to provisions of the JVA, which were inconsistent with the construction that the Commissioner sought to place upon the combined operation of the JVA, the Trust Deed and the transfers. These provisions of the JVA included cl 2.1(a)(1)-(3) (including that Taras would execute a transfer of Taras land to the Land Trustee “as trustee for Taras”); cl 2.1(a)(4) (the Land Trustee to execute a trust deed declaring it holds the land “as trustee for the respective Land Holding Parties); cl 2.2(c) (the Land Trustee appointed by the Land Holding Parties as their respective attorneys regarding their “respective portions of the Land”); cl 2.2(d) (the Land Holding Parties indemnified in respect of risk etcetera “relating to their respective portions of the Land”); cl 2.3 (refers to the “price for each Land Holding Party’s portion of the Land”); cl 6 (distributions partly referable to land portion originally held by a Land Holding Party); cl 10.4 (contemplating a transfer of its land to another interest). On Taras’ argument, the Trust Deed was largely immaterial, its senior counsel submitting that “all of this could have been done without a transfer to the trustee”. On Taras’ argument, the Trust Deed simply reflected what had been achieved by the JVA. In this connection, senior counsel for Taras referred to recitals A and B of the Trust Deed and to cl 2.1, cl 2.2 and cl 2.3. Senior counsel for Taras submitted that:

What’s being done is the landholding parties are giving authority or a direction to the nominee to deal with [the land] on their behalf and in accordance with the joint venture agreement.

103        The major difficulty with this argument was that it was entirely inconsistent with the characterisation of the effect of the JVA, the Trust Deed and the transfers ultimately adopted by Batt JA (with whom Ormiston and Chernov JJA agreed) in Victoria Gardens (Court of Appeal). As already indicated, the Commissioner relied heavily on this decision to support the proposition that, under the Trust Deed, the Land Trustee held the whole of the Land, including the Taras Land, for all the beneficiaries, being SDA, the Marpine Trustee and Taras.

104        As I am about to explain, I accept that, as the Commissioner submitted, the decision in Victoria Gardens (Court of Appeal) is highly relevant to the current issue. First, the Court of Appeal in fact considered virtually the same set of facts with which I am presently concerned, discussing the clauses of the JVA and the Trust Deed in detail (at 66-71 [13]-[25]). It is true, as Taras noted, that the Court of Appeal was concerned with a different statute and a different question. The question being considered by the Court was whether an exemption to stamp duty, for transfers of real property “to a trustee or nominee to be held solely as trustee or nominee of the transferor without any change in beneficial ownership”, applied to any of the three transfers of land described earlier: see [26]-[31] above. Batt JA held that “none of the transfers falls within the exemption”: at 77 [37].

105        His Honour gave two reasons for this conclusion. First, he found that the transferred property “[was] not ‘to be held’ as trustee of the respective transferors, but rather [was] to be developed and sold or otherwise disposed of, or at least possibly sold or otherwise disposed of”: at 77 [38]. His Honour then stated (at 77 [39]):

Secondly, disregarding the first reason entirely but taking into account all the terms of the Trust Deed and the JVA I am of opinion that their overall effect, though by no means their universal effect, is that each piece of land is on transfer not held on trust for the transferor alone, that is, not held or to be held “solely as trustee … of the transferor”. The critical document is the JVA because the declaration of trust in the Deed is subject to the terms of the JVA.

(Emphasis added.)

106        His Honour noted various clauses of the JVA supporting his conclusion, before remarking (at 77 [39]) that “[a] transferor to the Land Trustee [VGD] is not entitled to possession in virtue of beneficial ownership but only as a joint venturer (if it be such)”. In particular, his Honour said (at 77 [39]):

A critical provision in the latter is cl 2.2(a), whereby the transferors irrevocably make their respective portions available to the joint venture “for the purposes envisaged by” the JVA. The transferor is not entitled to a re-transfer of the land. It cannot assign, mortgage or charge it without consent. The transfer of the relevant portion of the Land that is provided for in cl 10.4 is nominal or notional, and whether the declaration of trust confirming that the Land Trustee holds the land transferred on trust for the Transferee is really about that portion of the Land or rather about the whole of the Land or in truth about a right to be paid depends upon a review and analysis of the whole document, which of course includes cl 10.4 itself.

107        Turning to cl 6.2, which governed the distribution of cash becoming available from the development and sale of the land, his Honour stated (at 78 [39]):

In return for the land transferred the transferor, by cl 6.6 together with cll 2.2(b) and 2.3(c), is entitled only to receive a distribution of cash in accordance with cl 6.2. In whatever circumstances the land is sold and however the JVA comes to an end cl 6.2 ultimately operates. For a correct appreciation of the operation of the JVA, it is necessary to decide whether cl 6.2 is merely a contractual provision as to the manner in which a transferor’s money entitlement is to be paid or is a substantive provision bearing on the transferor’s entitlement in equity or in other words evidencing or constituting its proprietary rights. I have concluded that it is the latter. The universality of operation of cl 6.2 emphasises its significance in the determination of the entitlements of the parties. A transferor’s essential entitlement is to receive ultimately an amount of money calculated in accordance with cl 2.3, but this is subject to the operation of cl 6.2, pursuant to which that essential entitlement may be delayed, defeated in part or (except in the case of Staged Developments) defeated in whole. Similarly, each of the 3 transferors is entitled, in certain circumstances depending on the order of selling and the price obtained, to receive money generated by the sale of land contributed by one or both of the others. In addition, in the event of a surplus of Cash over $65 million the 2 joint venturers alone share. Although the circumstances of this case do not bring it, strictly, within any of the established categories where the doctrine of conversion in equity applies it is hard to resist the conclusion that the JVA treats previous rights in land as converted into rights to money. Further, equitable ownership is always commensurate with the right to relief in a court of equity and it is difficult here to think of a case where a transferor would obtain relief declaring its interest to be in the land originally transferred by it or giving effect of an interest so defined. In most cases the relief would be pecuniary or would define the interest in pecuniary terms. It is artificial to view the “payment” provisions as separate from those setting out how the Land Trustee holds the land. For these reasons, it is correct to look, as his Honour did, to cl 6.2 in ascertaining the interests of the transferor.

(Emphasis added.)

108        His Honour continued (at 78 [40]):

I conclude that, if the transferors’ rights in land are not to be treated as converted into money, at any rate all three transferors have an interest in all the land transferred as tenants in common in equity collectively, provisionally in the shares or proportions which the price to which they respectively are entitled as set out in Annexure B bears to the total price there set out. On the true construction of the whole JVA and the Trust Deed the words of severance and of beneficial ownership, so far as they do not merely refer to the position at the moment of execution, that is, immediately before the coming into effect of the several transfers, are overridden by the contrary indicia and have no real force. Nor does cl 10.4.

(Emphasis added.)

109        In its written submissions in the present case, Taras said of this decision:

The [Commissioner’s] reliance on this decision is misplaced, first because the case dealt with exemptions from stamp duty, the effect of which depended upon their own unique terms, and secondly because Batt JA himself expressed doubt about his conclusion.

To support its contention that Batt JA’s conclusion was tentative, Taras pointed to his Honour’s remark (see [105] above) that a change in beneficial ownership was the “overall effect, though by no means [the] universal effect” of the terms of the JVA and of the Trust Deed, and also to a footnote in the judgment (at 78 [40] fn 44) acknowledging that another possible view was that it was the Joint Venturers (Taras and the trustee of the Marpine Trust) alone who were interested in the land, “as tenants in common in equal shares in equity”.

110        Referring to Upjohn LJ’s remarks in Re Pilkington’s Will Trusts [1961] Ch 466 at 489, Taras submitted that the Court of Appeal’s conclusions “must be read in relation to the issues which they had to try”, and that in light of the different statutory context this Court should “consider the application of the capital gains tax rules afresh, and should not be unduly influenced by the reasoning in that decision”.

111        As already noted, it may be accepted that the Court of Appeal’s decision did not relate specifically to whether a CGT event happened. It may also be accepted that, in light of the first reason for Batt JA’s decision (see [105] above), the second reason was, strictly speaking, an independent and non-essential reason for the decision, ultimately based on a finding of fact that, in any event, this Court is not bound to accept. Nevertheless, I would respectfully adopt Batt JA’s conclusion that the transfers changed the beneficial ownership of the land at least to the point that the Land Holding Parties had “an interest in all the land transferred as tenants in common in equity collectively”, for the reasons set out in his Honour’s detailed analysis as well as those that follow. While it is true that his Honour’s attention was ultimately directed to whether an exemption to stamp duty applied, his conclusion on beneficial ownership and his considered interpretation of the connection between the JVA, the Trust Deed and the transfers are of great relevance to the question of beneficial ownership currently before this Court.

112        As a preliminary matter, Taras’ claim that Batt JA “expressed doubt about his conclusion” must be rejected. His Honour’s remark (at 77 [39]) that his conclusion was “by no means [the] universal effect” of the terms of the relevant documents followed from his recognition (at 73 [30]) that “[d]ifferent provisions point in different ways”; it should not be read as distancing his Honour from the opinion he reached by considering those provisions as a whole. His Honour stated that his preferred view, that the previous rights in the land were converted into rights to money, was “hard to resist”. Alternatively, all three transferors acquired an interest in all of the land as tenants in common collectively. As an aside, his Honour acknowledged that the beneficial interest in the land could also be viewed as being shared by the two Joint Venturers alone. It is clear enough that his Honour did not doubt that the transfers changed the beneficial ownership of the land in one way or another, which is what is relevant for present purposes, and that the various alternatives his Honour proposed were each, with respect, sound interpretations of what occurred.

113        In this Court, Taras maintained that the Land Holding Parties did not intend any transfer of the beneficial ownership of the Taras land at any time prior to the sale of the land. As already indicated, in support of this submission, Taras emphasised language in the JVA and the Trust Deed which would, all else being equal, indicate that each parcel of land was to be held on trust exclusively for its previous legal owner, who would retain beneficial ownership. Thus, for example, the Land Trustee declared that it held the land “on trust for the respective Land Holding Parties” (Trust Deed, cl 2.1) (emphasis added), while each Land Holding Party made “that portion of the Land of which it is the beneficial owner available to the JV” (cl 2.2(a)) (emphasis added). Problematically for Taras, other language in the JVA and the Trust Deed weighs against this view, as Batt JA recognised in Victoria Gardens (Court of Appeal). This much is revealed even when clauses Taras relied upon are set out more fully. The Land Trustee in fact declared in cl 2.1 of the Trust Deed 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]” (emphasis added), while under cl 2.2(a), “[e]ach 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 [JVA]” (emphasis added). Another example is cl 2.2(a) of the JVA, which provided that “[t]he Land Holding Parties … are not entitled to a transfer back of their respective portions of the Land” (emphasis added).

114        It is clear enough from its express terms that the Trust Deed was made subject to the JVA and that the JVA prevails to the extent of any inconsistency. Clause 6.2 of the JVA, which was fundamental to Batt JA’s conclusion, provided for the distribution of cash to the Land Holding Parties upon sale of the land, or parts of the land, as follows, broadly speaking:

    The first cumulative $8 million was to be distributed to SDA;

    Thereafter 50% was to be paid to Taras until it had received the $28.5 million “price” set out in Annexure B, “in payment for portions of Taras Land actually sold … or … on account of future sales of parts of Taras Land”;

    The remaining 50% was to be paid to SDA until it had received $11.5 million (including the $8 million it received first), and then to the trustee of the Marpine Trust until it had received $25 million;

    Any cash in excess of $65 million was to be distributed equally.

115        Batt JA found that cl 6.2, in light of the inability of the Land Holding Parties to have their respective prior lots returned to them, determined alone the entitlements of the parties in relation to the land they contributed to the Joint Venture. This was clearly the case. Yet the sums to be received by each Land Holding Party under cl 6.2 were not, except perhaps in a loose way, even proportional to the value of the land each had originally contributed to the Joint Venture. The parties to this proceeding accepted that the “prices” in Annexure B of the JVA, which are the basis for the distribution scheme established by cl 6.2, did not reflect the market value of the three parcels of land in 1998. Even if one supposed that those “prices” were at least proportional to the value of each parcel of land, the scheme envisaged by cl 6.2 in no way guaranteed that the Land Holding Parties would ultimately be paid amounts in those proportions. For example, because of the equal distribution of amounts over $65 million, Taras would have been paid a lesser proportion of the total sum if the sale price had been $200 million than if it had been $65 million. This illustrates that Taras’ entitlements under the JVA were based not on the value or even the relative value of the Taras land, but instead on a contractual formula which would pay Taras a greater or lesser proportion of sale monies based, ultimately, on the amount received for so much of the aggregated land as was sold. This weighs strongly against Taras’s argument that it retained beneficial ownership of the Taras land, and in favour of the view that after the transfers made pursuant to the JVA, all three Land Holding Parties had a collective interest in all of the land.

116        The above discussion makes it plain that there was only one trust, not three separate trusts as Taras claimed, and that the Land Trustee held the whole of the land, including the Taras land, for all three Land Holding Parties. The Taras land was not held by the Land Trustee for Taras alone. Rather, all three transferors had an interest in it.

117        In these circumstances, Taras was not the sole beneficiary of a trust over the Taras land and was not absolutely entitled to the Taras land as against the Land Trustee. The Land Trustee owed fiduciary obligations with respect to all the land, including the Taras land, to SDA, the Marpine Trustees and Taras. In this circumstance, all three were beneficiaries of the trust which included the Taras land within the meaning of s 104-55(5)(a) of the ITAA 1997: see, for example, Kafataris at 249-230 [42]-[43] (Lindgren J)); also Yazbek v Commissioner of Taxation [2013] FCA 39 at [20]-[24] (Bennett J). Amongst other things, as discussed above, the Land Trustee had fiduciary obligations to administer the trust in accordance with the Trust Deed and therefore the JVA, including to distribute the proceeds from the development (whether or not by way of sale) of the Taras land among all three in accordance with cl 6 of the JVA: see Trust Deed, cll 2.3, 2.4 and JVA, cll 2.2(b), 2.3(c), 11.4, 12.8.

118        Further, Taras was not absolutely entitled to the Taras Land as against the Land Trustee. The expression “absolutely entitled” in s 104-55(5)(a) (and in s 104-60) of the ITAA 1997 refers to a situation “in which the beneficiary of a trust has a vested, indefeasible and absolute entitlement in trust property and is entitled to require the trustee to deal with the trust property as the beneficiary directs”: see Kafataris at 253-254 [61]. Taras did not have a vested, indefeasible and absolute entitlement in the Taras Land and was not entitled to require the Land Trustee to deal with the Taras Land in accordance with its directions. As already noted, the terms of the trust pursuant to which the Land Trustee held the Taras land prevented the return of that land to Taras (Trust Deed, cl 2.2(a) and (b)) and required that the land be developed and used by the Land Trustee with the whole of the Land in accordance with the JVA, which Taras was not permitted (by cl 2.5) to vary without prior written agreement of each of the Joint Venturers. Moreover, the Land Trustee, not Taras, had the power of sale of the Taras land; and hence any interest of Taras in the Taras land was a defeasible interest. Taras’ relevant entitlements under the trust were to the cash distributions in accordance with cl 6 of the JVA. Clause 6.2 dealt with distributions that were to occur upon sale of the developed land; and cl 6.3 dealt with the distribution of profit, to which the Joint Venturers were equally entitled. In the circumstances Taras was not absolutely entitled to the Taras land as against the Land Trustee.

119        Accordingly, the exemption in s 104-55(5) of the ITAA 1997 had no application in this case.

120        In the present context, it is appropriate to mention Taras’ submission that the constraints on it with respect to the Taras land were purely contractual in nature. I consider this submission misconceived for two reasons. First, the submission leaves out of account the fact that the parties intended that the executed transfers of land pursuant to the JVA and the Trust Deed were the mechanisms by which their land would be brought on a combined basis into the structure they established to conduct their business affairs. As noted already, the Trust Deed imposed clear and distinct fiduciary obligations on the Land Trustee in its capacity as trustee with respect to the JVA, the benefit of which enured to the benefit of the three beneficiaries – the Marpine Trustee, SDA and Taras. The Taras submission wrongly disregards the transfers and the Trust Deed.

121        Secondly, the evidence of Mr Veevers was to the effect that the parties to what became the JVA agreed to commit their land to a Joint Venture before they entered into formal agreements. Taras and the Marpine Trustee shared the costs of work done on or in respect of that land, including the costs of having the land re-zoned. In cross-examination, Mr Veevers said that there were negotiations between the parties about the terms of the JVA in the period 1 August 1997 to 20 August 1998; and that whilst “the terms of the positive agreement had been … in place for more than 12 months”, not all the terms of the JVA were agreed prior to August 1998. There was, as Mr Davies QC submitted, no disposal of the proprietary interests in the land until August 1998.

122        In the present context, it is also appropriate to discuss Taras’ reliance on s 100-35 of the ITAA 1997 and on Booth v Ellard. Taras referred to s 100-35 of the ITAA 1997 in support of the proposition that, from a commercial perspective, it did not stand to “make capital gains in a commercial sense until the land was sold to third parties”. It pointed to s 100-35 to support its claim that the “general principle” of the provisions dealing with CGT was that a capital gain was “only” made where the taxpayer received capital amounts from a CGT event that exceeded the total costs associated with the event. Taras’ inclusion of “only” is not consistent with the terms of s 100-35, which relevantly provides:

For most CGT events:

    You make a capital gain if you receive (or are entitled to receive) capital amounts from the CGT event which exceed your total costs associated with that event.

…

(Emphasis added.)

123        Section 100-35 evidently states that a mere entitlement to receive capital amounts exceeding total associated costs constitutes a capital gain for “most” CGT events. Moreover, the section clearly anticipates that for some CGT events, a capital gain may be made even without the receipt of or an entitlement to receive capital amounts in excess of total associated costs. The fact that Taras did not make any gain, commercially speaking, until the aggregated land was sold to third parties does not, therefore, bear on whether a CGT event occurred; nor does it bear on whether there was a change in the beneficial ownership of the Taras land. Section 100-35 does not assist Taras.

124        In addition to s 100-35, as noted, Taras also referred to Booth v Ellard, in support of the proposition that there will be no taxable capital gain where there was none as a matter of commercial reality and that, in a ‘pooling’ arrangement such as happened in relation to land in this case, there was no change in the beneficial ownership of the land, even though the equitable interests might have changed. Taras also relied on Booth v Ellard in support of its contention that after the transfer of the Taras land to the Land Trustee, it remained absolutely entitled to the land as against the Land Trustee. Booth v Ellard does not support any of these propositions.

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.

(Emphasis added.)

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.

(Emphasis added.)

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 [40].

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.

The exemption in s 112-25

130        It follows from the above discussion that Taras is also not able to rely on s 112-25 of the ITAA 1997. Section 112-25 did not apply because there had been no change or split in a CGT asset. Further, even if the Taras land changed in whole or in part into an asset of a different nature, the provision cannot apply because Taras did not remain the sole beneficial owner of the new asset as it had before the transfer.

CGT Event E2

131        In the alternative, as we have seen, the Commissioner relied on s 104-60(1), arguing that a CGT event E2 happened. Pursuant to s 104-60(1), a CGT event E2 happens “if you transfer a CGT asset to an existing trust”. As noted above, the Commissioner argued that the trust to which Taras transferred the legal title to its land had been brought into existence on 20 August 1998. I reject this submission.

132        Certainly, on that date, the Land Trustee declared itself the holder of the land on trust subject to the terms of the JVA and the Trust Deed: see Trust Deed, cl 2.1. Further, on that date, the Marpine Trustee executed an instrument of transfer of the Marpine land to the Land Trustee. SDA had executed an instrument of transfer of the SDA land to the Land Trustee some days earlier, on 14 August 1998. Taras did not, however, execute an instrument of transfer of the Taras land until 25 August 1998.

133        Until all the land that was the subject of the JVA and the Trust Deed was conveyed to the Land Trustee, the trust was not completed. This meant that, in this case, the trust was not completed until Taras had given the executed instrument of transfer to the Land Trustee and the Land Trustee as the transferee of all three executed transfers had obtained registration. This was because the terms of the Trust Deed and the JVA made it clear that the subject of the trust was the whole of the land, being the combination of the Marpine land, the SDA land and the Taras land. The Land Trustee did not, moreover, acquire the legal interest in the land that was to be the subject of the trust until it had obtained registration of all three executed transfers (see Transfer of Land Act 1958 (Vic), s 34(1)), although once the Land Trustee had the executed transfers, it was in a position to secure legal title.

134        Since there was no completed trust as at 25 August 1998 when Taras executed the transfer, there was no trust “existing” as at that date within the meaning of s 104-60(1) (assuming without deciding that the execution of the transfer might constitute a “transfer” within s 104-60(1) of a CGT asset: see generally Healey v Federal Commissioner of Taxation (2012) 208 FCR 300 at 317-320 [67]-[89]).

135        In the circumstances of the case, there could, therefore, be no CGT event E2.

136        If there were a CGT event E2, however, then the exception in s 104-60(5)(a) did not apply because, for the reasons already stated, Taras was not the sole beneficiary of the trust, and was not absolutely entitled to the Taras land as against the trustee. See [100] to [118] above. Further, s 112-25 did not apply because, even if there was a CGT event E2, on no view was there a change or split in a CGT asset. See [130] above.

CGT Event A1

137        Further or in the alternative, the Commissioner argued that, in transferring the Taras land to the Land Trustee in accordance with the JVA, Taras disposed of the land within the meaning of s 104-10 of the ITAA 1997 and, accordingly, CGT event A1 happened. Pursuant to s 104-10(2), an asset is disposed of “if a change of ownership occurs from you to another entity”.

138        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 [103]-[115] above. For the reasons stated above, Booth v Ellard does not support Taras’ submission that it retained beneficial ownership in the Taras land: see [124]-[128] above.

139        As the Commissioner submitted, in some respects, the terms of the trust in this case were relevantly similar to the terms of the trust in CPT Custodian where the High Court held, on the facts in that case, that, for the purposes of s 53(a) of the Land Trust Act 1958 (Vic), none of the holders of units in a trust was “entitled to [the trust land] in possession” held by the trustee. Under the terms of the trust in that case, the trustee and the manager were entitled to monthly reimbursement for their costs, charges and expenses; and the beneficiaries were not entitled to require the transfer of any property comprised in the fund or to lodge a caveat claiming an estate or interest in any property but were entitled to periodic income distributions, and, upon determination of the fund, the assets were to be realised and the proceeds distributed amongst the beneficiaries: see CPT Custodian at 110-111 [19]-[21]. Having regard to these terms, the High Court approved the comments of Nettle J at first instance (in the Supreme Court of Victoria) explaining that a beneficiary of such a “complex trust” would not be liable to tax as “owner”: see CPT Custodian at 116 [37].

140        Given the differences in the facts and in the law under consideration in CPT Custodian, however, I would not regard it as authority in this case for much beyond the proposition that, where a question arises such as that under s 104-10 of the ITAA 1997, attention must be given to the arrangements that were in fact made: see also Byrnes v Kendle (2011) 243 CLR 253, to which reference was made by Mr de Wijn QC.

141        The provisions of the JVA and the Trust Deed, which are referred to in detail at [106]-[107] and at [113]-[118] above establish that, after Taras transferred the Taras land to the Land Trustee, it ceased to have ownership of the Taras land. Instead, the Land Trustee held the whole of the land, including the Taras land, for all three Land Holding Parties, as equitable tenants in common. In this respect, cl 6.2 (which provided for distributions of cash to the Land Holding Parties upon sale of the land) and cl 2.2(a) of the JVA (which provided that the Land Holding Parties were not entitled to a transfer back of their land) are key provisions: see the discussion at [106]-[107] and at [113]-[118] above. As the Commissioner said:

The beneficiaries of the Land Trust were not entitled to the gross receipts from the Land – they were not even entitled to the net income from the Land, but only to such cash as the Board of VGPT Trustees determined was available for distribution, pursuant to clause 6 of the JV Agreement. They were not entitled to the transfer back of any of the Land or to use the Land as security. In the event the Land Trust is determined, the Land must be sold and distributions made in accordance with clause 6. The gross receipts from the Land may be applied to acquire further land, or to undertake further development of the remaining Land. The trustee of the JV or the Manager had wide authority, including power to prepare operating budgets, issue debt securities, enter into contracts, settle claims, enter into leases, make loans, establish subsidiaries or enter into joint ventures or partnerships, sell or lease any part of the Development and grant security over the Land. …

142        In these circumstances, I am of the opinion that, in transferring the Taras land to the Land Trustee in accordance with the JVA, Taras disposed of the land within the meaning of s 104-10 of the ITTA 1997 and, accordingly, CGT event A1 happened.

143        In this connection, Taras re-iterated its contention that, as the JVA preceded the transfer to the Land Trustee, the transfer to the Land Trustee did not enlarge the interests of the other parties in the Taras Land and there was, therefore, no change in beneficial ownership as a result of the transfer. As already stated, I reject this contention: see [120]-[121] above. A disposal and a change in beneficial ownership have occurred and thus a CGT event A1 has occurred. Pursuant to s 104-10(3), this CGT event A1 occurred on 20 August 1998 when the contract for the disposal was entered into.

144        Taras contended that a finding that Taras did not continue to own the Taras land beneficially would undermine the existence of the trust, because there would not be certainty of intention of the trust subjects or objects. I reject this contention. Plainly enough, Taras intended to enter into the Trust Deed and the JVA and to create legal relationships, including the trust, in accordance with the terms of those documents. There can be no uncertainty as to the parties’ intention to create a trust on the terms contained in the constituent documents.

145        Taras also contended s 106-50 applied because Taras was absolutely entitled to the Taras land as against the trustee and, in consequence, any disposal under CGT event A1 was to be ignored. I reject this submission. First, the disposal of the Taras land which gave rise to the CGT Event A1 was the act of Taras, not of any trustee. It was Taras that brought about the change of ownership by transferring the land to the Land Trustee. The disposal by Taras is not a matter to which s 106-50 is directed. That section is concerned only with acts of a trustee. Secondly, for the reasons already stated, after the transfer of the Taras land to the Land Trustee, Taras was not absolutely entitled to the Taras land as against the Land Trustee. See [101] to [118] above.

146        In this latter regard, Taras further argued that the “absolute entitlement” exception in s 106-50 differed from that in ss 104-55 and 104-60 in that the exception in s 106-50 applied where the taxpayer was jointly absolutely entitled to the asset as against the trustee. Taras relied on Booth v Ellard and Jenkins (Inspector of Taxes) v Brown but these cases turned on an English provision that, in contrast to s 106-50 of the ITAA 1997, expressly covered the situation where there were persons “jointly … entitled”. Lindgren J’s analysis in Kafataris does not support Taras, as Taras claimed. Further, I accept the Commissioner’s submissions that Hoare Trustees v Gardner (Inspector of Taxes) [1979] Ch 10 does not assist Taras’ argument to any extent because of the material difference in the relevant English and Australian provisions. Notwithstanding this, whether or not s 106-50 applies where a taxpayer is jointly absolutely entitled to the asset against the trustee is a recognized area of uncertainty. See Cooper G and Evans C, Cooper and Evans on CGT (Thomson Reuters, 4th ed, 2012) at 360. As the provision is inapplicable for the reasons stated in the preceding paragraph and the issue was not fully argued, it is inappropriate to determine it here.

147        For the reasons already stated, s 112-25 does not apply because there was no change or split in a CGT asset. CGT event A1 occurred because Taras disposed of the Taras land.

148        In light of the foregoing, I would also reject the proposition that Taras disposed of or transferred only a proportion of the Taras land.

149        Pursuant to s 102-25(1), “[i]f more than one [CGT] event can happen, the one you use is the one that is the most specific to your situation”. For the reasons stated, in this case, CGT event E1 and CGT event A1 happened. Since CGT event E1 is more specific to Taras’ situation than CGT event A1, CGT event E1 is to be used.

What was the market value of the asset that was disposed of at the time of the transfer?

150        Given that there was a CGT event, the next question is, “what was the capital proceeds from creating the trust?”. To determine this, a market value must be determined for the Taras land at the date of its transfer to the Land Trust.

151        Taras acquired the Taras land on market pursuant to a contract of sale dated 10 March 1995 for approximately $8,034,414. Between the date of purchase and August 1998 there was an increase in market values. In addition, as indicated earlier, work had been undertaken for the development of the Taras land together with the SDA land and the Marpine land. Rezoning and planning approval relevant to the development was obtained. As stated above, zoning amendments were approved in May 1997, with the result that all of the land (the Taras land, the SDA land and the Marpine land) was zoned “Comprehensive Development Zone No 8”. The planning permission received was for the consolidated site comprising the six parcels of land, rather than for each individual parcel. Funds outlaid to 18 May 1998 totalled $5,522,867.

152        As we have seen, the three parcels of land were transferred to one entity, the Land Trustee, in August 1998 for the purposes of the development. In an affidavit of 22 October 1998 sworn by Mr Sweeney for the purposes of Victoria Gardens (first instance), Mr Sweeney assessed the value of the Taras land at August 1998 as $16,626,115 (“1998 Sweeney affidavit”). In 2001 the Land Trustee paid stamp duty in relation to the transfer of the Taras land on the basis that the market value of the Taras land as at August 1998 was $16,626,115. The Commissioner maintained that this was the market value of the Taras land in August 1998. If this were accepted, there would be a capital gain of $7,637,227.

153        It may be noted at this point that this was not the value assumed in the assessments or set out in the Commissioner’s appeal statement. In both instances, the Commissioner attributed a market value of $20,178,000 to the Taras land in August 1998, which resulted in an asserted capital gain of $11,189,112. As Taras said, this meant that that, even on the Commissioner’s case, the appeal should be allowed and Taras’ net income for the year ended 30 June 1999 be reduced to $5,987,455. The Commissioner did not dispute this.

154        Taras contended at trial that the market value of the Taras land on 20 August 1998 was $8.45 million (valuing each lot separately), based on Mr Sweeney’s most recent valuation prepared for this taxation appeal (“Second Sweeney Report”). There were two principal factors contributing to the difference between the valuation relied on by the Commissioner and that relied on by Taras. First, in Mr Sweeney’s most recent valuation, but not in the 1998 Sweeney affidavit, Mr Sweeney valued the Taras land separately from the land owned by the other Land Holding Parties. Secondly, in Mr Sweeney’s most recent valuation, but not in the 1998 Sweeney affidavit, Mr Sweeney took into account the cost of remediating the contamination of the Taras land, as estimated in the expert report of Mr Dean Woods of 7 June 2012 (“the Woods report”). Mr Sweeney’s most recent valuation of $8,450,000 was arrived at by attributing a value of $11,880,000 to the land (valuing the land separately) less the estimated cost of soil remediation, as estimated in the Woods report. Taras argued that the valuation of $16,626,115 was not accurate because it was based on the value of the consolidated site and assumed, contrary to the fact, that the land was uncontaminated.

155        The Commissioner contended, however, that the Second Sweeney Report was erroneous in three respects. First, it failed to apply the correct legal principles in determining “market value”. In particular, the Second Sweeney Report failed to base the market value on the “highest and best use” of the Taras land (which was the ongoing development with the SDA land and Marpine land). Secondly, the evidence did not support the conclusion that the value of the land identified by Mr Sweeney in the 1998 Sweeney affidavit should be reduced by any estimated cost of remediation work. Thirdly, on the evidence, the estimated cost of remediation asserted by Taras was excessive.

Highest and best use

156        In assessing the market value of land, it is necessary to have regard to the price that would be paid by a willing buyer to a willing seller. In the seminal case of Spencer v Commonwealth (1907) 5 CLR 418 (“Spencer”), Griffith CJ said (at 432) that the test for determining land value was as follows:

In my judgment the test of value of land is to be determined, not by inquiring what price a man desiring to sell could actually have obtained for it on a given day, i.e., whether there was in fact on that day a willing buyer, but by inquiring “What would a man desiring to buy the land have had to pay for it on that day to a vendor willing to sell it for a fair price but not desirous to sell?” It is, no doubt, very difficult to answer such a question, and any answer must be to some extent conjectural. The necessary mental process 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 opinion of land values, a purchaser would have had to offer for the land to induce such a willing vendor to sell it, or, in other words, to inquire at what point a desirous purchaser and a not unwilling vendor would come together.

(Emphasis added)

157        In assessing the price that would be paid by a willing buyer to a willing seller, it is proper to have regard to the additional advantages the land presents: Spencer at 436 (Barton J) and 441 (Isaacs J). As Isaacs J there said:

To arrive at the value of the land at that date, we have, as I conceive, to suppose it sold then, not by means of a forced sale, but by voluntary bargaining between the plaintiff and a purchaser, willing to trade, but neither of them so anxious to do so that he would overlook any ordinary business consideration. We must further suppose both to be perfectly acquainted with the land, and cognizant 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.

In The Queen v Brown [LR 2 QB 630 at 631] Cockburn CJ said – “A jury, whether the dispute be as to the value of land required to be taken by the company, or as to the compensation for damages by severance, in assessing the amount to which the landowner is entitled, have to consider the real value of the land, and may take into account not only the present purpose to which the land is applied, but also any other more beneficial purpose to which in the course of events as no remote period it may be applied, just as an owner might do if he were bargaining with a purchaser in the market. That is the mode in which the land would be valued.”

158        In accordance with these principles, the Taras land should therefore be valued as at August 1998 by reference not only to the purpose to which it was then applied, but also any other more beneficial purpose to which “in the course of the events at no remote period it [might have been] applied”: see above. The notional purchaser is taken to have full knowledge of the advantages and deficiencies of the land. Advantages include any planning permits that have been obtained by the vendor and the work done by the vendor with respect to planning and building approvals. As Callinan J said in Boland v Yates Property Corporation Pty Ltd (1999) 167 ALR 575 (“Boland v Yates”) at 650 [274]:

[To] use the language of Griffith CJ in Spencer’s case, each party to the transaction should be regarded as being full conversant, or as Isaacs J said, perfectly acquainted, with the subject, that is to say, the subject land with all of its potential. It follows that the more work, the more proving up that is done by the vendor before the sale, the more any uncertainty as to the realisation of the potential will be reduced, and the higher the price will be. … A purchaser who made himself or herself conversant or perfectly acquainted with the property in the way in which he or she should be taken to do so as contemplated by this court in Spencer’s case would have been in no inferior position to exploit the planning and building approvals, the clearing work that had been done and the investigation of the demand for licences than the respondent.

159        In this case, planning permission had been obtained to develop the Taras land together with the SDA land and the Marpine land. Amendments to zoning had been sought and obtained to facilitate a development over all three parcels of land, as a result of which all had been zoned “Comprehensive Development Zone No 8”. The owner of the SDA land and of the Marpine land had been shown willing to enter into a contract with the owner of the Taras land on favourable terms to develop the Taras land: see, for example, recital J to the JVA. Applying the principles to which the authorities refer, the existing potential for development with the adjoining land was a factor of which a “willing buyer” would be presumed to be cognisant. It was a factor which Mr Sweeney ought properly to have considered in valuing the Taras land as at August 1998. At this time, there was clear evidence that the “highest and best use” of the Taras land was to develop it with the adjoining lands.

160        As noted above, the market value of the Taras land was around $8.034 million in March 1995. In cross-examination, Mr Sweeney’s evidence was that the factors affecting this market value between March 1995 and August 1998 were the costs of development, the rezoning as “Comprehensive Development Zone No 8”, the creation of a master plan for the development of the whole of the land, including the Taras land, and a general rise in market prices. Mr Sweeney’s evidence was that all these factors would have increased the value of the land; and he could point to no factor in the period that would have caused the market value to fall. In valuing the Taras land, the 1998 Sweeney affidavit took account of the development costs and the development potential considered in conjunction with the adjoining land, whereas Mr Sweeney’s most recent valuation in the Second Sweeney Report did not do so.

161        The application of the principles in Spencer and re-iterated by Callinan J in Boland v Yates required Mr Sweeney to take into account all of the work that had been done to realise the potential of the Taras land for development together with the adjoining land as at August 1998. As noted earlier, as at 18 May 1998, some $5.5m had been spent on the development. The development potential gave the Taras land “additional advantages” that were relevant to its valuation. As I have said, as at August 1998, the “highest and best use” of the Taras land was as a development site as part of the consolidated site, being the use to which in the course of events and at no remote period it might be applied. The best evidence of this market value having regard to it “highest and best use” was the amount that had been identified by Mr Sweeney in the 1998 Sweeney affidavit (being the amount upon which stamp duty was paid). This was, as the Commissioner said for almost the duration of the hearing, the amount of $16,626,115. An indexed cost base of $8,988,888 and capital proceeds of $16,626,115 give an assessable capital gain of $7,637,227.

162        The Commissioner also referred to Inland Revenue Commissioners v Clay [1914] 3 KB 466 (“Clay”) as illustrative of the proposition affirmed by Waddell J in Brisbane Water County Council v Commissioner of Stamp Duties [1979] 1 NSWLR 320 at 324 that, in making a valuation, “all possible purchasers are to be taken into account, even a purchaser prepared for his own reasons to pay a fancy price”. Clay indicates that such a purchaser might be the owner of adjoining land where the physical characteristics of land are such as to give it an enhanced potential value to the adjoining landowner. Clay was concerned with the market value of a house with a value to anyone desirous of using it as a private residence of not more than £750, but the owners of an adjoining nurses’ homes were prepared to pay at least £1,000 for it in order to expand their premises, and did in fact do so. The English Court of Appeal held that the market value of the property was £1,000, being the higher amount that the owner of the adjoining property was prepared to pay. See also Raja Vyricherla Narayana Gajapatiraju v The Revenue Divisional Officer, Vizagapatum [1939] AC 302 at 324-325 and Walker Corporation Pty Limited v Sydney Harbour Foreshore Authority (2008) 233 CLR 259 at 274.

163        As it happens, however, I do not consider that the decision in Clay and the related authorities to which the Commissioner referred (mentioned in the paragraph above) assisted the Commissioner’s argument. As Taras submitted, whether the land possesses additional value for an adjoining owner and if so, how much additional value, is a question of fact: see, for example, Croghan v Hawkesbury City Council (1998) LGERA 375 at 387 and Bowmont Pty Limited v Transport Infrastructure Development Corporation [2004] NSWLEC 118 at [13]. There was little, if any specific evidence, as to the adjoining owners’ interest in this regard, although some interest might possibly be inferred. The fact that I would place little, if any, reliance on Clay and the related authorities does not, however, detract from the fundamental principles set out in Spencer and re-iterated by Callinan J in Boland v Yates.

Contamination

164        This issue arose from the fact that the Second Sweeney Report took into account the actual cost of remediating the land, estimated in the Woods report as $3.8 million, and reduced the market valuation of the Taras land by a corresponding amount.

165        The Commissioner contended that the evidence did not support the conclusion that the August 1998 value of the land as identified by Mr Sweeney in the 1998 Sweeney affidavit should be reduced by the estimated actual cost of remediation work. Taras argued to the contrary that it was appropriate to take account of this cost. Taras submitted that the reduction in value on account of the contamination of the soil was consistent with the valuations made by Mr Sweeney in his valuation letters of 22 May 1996 and 27 October 1997.

166        For the reasons stated hereafter, I do not consider that it is legitimate to take into account the estimated actual costs of remediating the land, as estimated by Mr Woods (or Mr O’Neill).

167        First, as Griffith CJ said in Spencer at 432, in assessing the market value at a particular date, it is necessary to put oneself “as far as possible in the position of persons conversant with the subject at the relevant time” and to ascertain from this perspective “what, according to the then current opinion of land values, a purchaser would have had to offer for the land to induce such a willing vendor to sell it” (emphasis added).

168        In March 1995, the market value of the Taras land was about $8,034,414, being the amount for which Taras purchased the land on the market. Pursuant to cl 16 of the relevant contract of sale, Taras acknowledged that it had had an opportunity to examine an environmental survey report and agreed to accept the condition of the land and improvements as at the date of sale. It may be inferred from cl 16 that the on-market purchase price paid by Taras for the Taras Land in 1995 took into account the condition of the soil.

169        There was no evidence adduced at trial that there was any material difference between the condition of the soil at the time Taras acquired the land by contract in March 1995 and the condition of the soil in August 1998. Nor, more importantly, was there any evidence that there was any material change in the market’s appreciation of the condition of the soil and the likely extent of contamination and/or need for remediation of the land.

170        This is entirely consistent with the fact that the industrial uses to which the land had formerly been put, including its former use as a quarry and the use of back fill, are to be taken as known as at March 1995. At the time of purchase and in August 1998, the Taras land had various buildings on it, which had been used for industrial purposes, such as the Ajax Fasteners factory (which manufactured nuts, bolts and nails) and associated warehouse – all of which are to be taken as known to Taras (and the market) both in March 1995 and by Taras and the market in August 1998.

171        Indeed, it is clear that Mr Sweeney was aware of these matters and that there was a risk of soil contamination at the time of making his first valuation in May 1996, since in this valuation he specifically referred to this possibility, to buildings on the site and the presence of the Ajax Fasteners factory. In his valuation made in May 1996, Mr Sweeney stated that he valued the Taras land on the basis that the amount of soil contamination was not significant. It has not been shown that this evaluation was not one shared by the market at the relevant time and in August 1998. In his valuation of 27 October 1997, Mr Sweeney referred to his earlier valuation and made a second valuation, again on the assumption that there was no significant soil contamination. He provided a further updated valuation on 9 June 1998, which was consistent with these earlier valuations and formed the basis of his valuation as deposed to in the 1998 Sweeney affidavit, upon which the Commissioner relied.

172        When Mr Sweeney deposed to the value of the land in the 1998 Sweeney affidavit, he was evidently familiar with the land and the matters considered at that time to be pertinent to its valuation. In this affidavit, he deposed to his preparation of “a valuation of the site for the purposes of assessing its current market value as at May 1998 for financial reporting purposes”. Mr Sweeney further deposed that this valuation, which was dated 9 June 1998, assumed that:

[T]here 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. … 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 developers moved forward through the developmental process.

In carrying out the valuation I allocated a value to the overall site, which assumed that all 6 parcels of land would be consolidated and that they would form one contiguous parcel which would thereby have a higher value than the unaggregated value of the 6 parcels of land. The shape of some of the 6 parcels of land is so long and deeply rectangular that by themselves they have only a limited value but when they form part of a larger squarer shape, they become a much more valuable commodity.

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 of $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.

173        Parcels 2 to 5 inclusive were the Taras land. Thus, as at August 1998, Mr Sweeney valued the Taras land as at of $16,626,115, upon the bases referred to above, including that there was no significant soil contamination. This valuation was the basis upon which the Land Trustee paid stamp duty in 2001.

174        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.

175        By the time the Land Trustee paid the stamp duty in 2001, if not by August 1998, Taras can be taken to have been cognisant of the extent and likely cost of any remediation work associated with the development. Nonetheless, the duty paid was based on a market value of the Taras land of $16,626,115 in accordance with the 1998 Sweeney affidavit. It may be inferred that the cost of remediation work actually associated with the development was such that it did not materially affect the value that had been identified by Mr Sweeney in the 1998 Sweeney affidavit.

176        In cross-examination, Mr Sweeney conceded that in the Second Sweeney Report (i.e., his valuation report of 13 June 2012) he assessed the market value of the Taras land as at August 1998 at $8,000,000, which was slightly below the value it had been purchased at in March 1995. Mr Sweeney attributed this result to his taking into account the Woods report as to the cost of remediating the site. As Mr Sweeney agreed, however, there was no reason to believe that the purchase price of the land in March 1995 did not fairly represent the then market value of the land, including the market’s appreciation of the risk of soil contamination and the likely cost of remediation. It must also be borne in mind that Mr Sweeney’s evidence was that during the relevant period the market value of the Taras land increased.

177        Considerations such as the above indicate that not only was the soil contamination issue reflected in market valuations of the Taras land prior to the Second Sweeney Report but that there is a difficulty in introducing the ex post facto estimated actual costs of remediation into the calculation of market value of the Taras land as at August 1998. The nature of the difficulty is indicated in the following exchange between Mr Davies QC and Mr Sweeney, in Mr Sweeney’s cross-examination.

Mr Davies QC:     And if one then looks at what has affected the land between that date and August 1998, they have been matters that would only cause an increase in the market value?

Mr Sweeney:     Well, the external economic factors would cause an increase, but what we have is the – is a better quality of knowledge of the contamination than was known before.

178        The market value of the Taras property as at August 1998 is to be assessed by reference to the price that would be paid by a willing buyer to a willing seller as at that date. It is therefore necessary to ask oneself “what, according to the then current opinion of land values, a purchaser would have had to offer for the land to induce such a willing vendor to sell it”: see Spencer at 432 (Griffith CJ). Leaving aside the Second Sweeney Report, the evidence is that this price would have been at least $16,626,115, assuming development potential and non-significant soil contamination issues. These two assumptions reflected what was then known and would therefore have informed the market’s perception of value.

179        In this circumstance, estimates as to the actual remediation costs as at that date is not ascertainment of market value as at August 1998. This was not a factor that, as at August 1998, impinged on the market value, although it might have affected an estimate of the “actual” worth of the land at that date. The actual value, whether in August 1998 or some other date, is not, however, relevant to the question presented in the current statutory context. It follows from this that I would regard the evidence of both Mr Woods and Mr O’Neill as irrelevant to the current inquiry.

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.

Estimated costs of remediation

186        For the reasons stated, I do not consider that the evidence of Mr Woods or Mr O’Neill was relevant to the determination of the market value as at August 1998. It is therefore unnecessary to determine which of the methods of estimating remediation costs advocated by them should be preferred. Since the matter was fully argued, I would, however, indicate that, in my view, the methodology pursued by Mr Woods was preferable to that outlined by Mr O’Neill.

187        The Woods report estimated the actual cost of soil remediation at $3.8 million. In a report dated 11 September 2012 (“the O’Neill report”), Mr O’Neill estimated the cost to remediate the lots for ongoing use as commercial and industrial to street level as $1.17 million. This difference was the result of the experts’ disagreement about the quantity of soil needing to be removed. This disagreement flowed from their different assessment strategies.

188        These strategies were examined in some detail in the cross-examination of Mr Woods and Mr O’Neill. Ultimately, however, I accept that, as Mr Woods maintained, Mr O’Neill’s strategy of removing only “hotspots” of contaminated soil 20m x 20m in area was less satisfactory than Mr Woods’ methodology. Mr Woods’ assessment was based, at least in part, on the historical data about the site, disclosed in an earlier report of September 1999, prepared by his employer, Douglas Partners. In his supplementary report exhibited to his affidavit of 19 October 2012, Mr Woods said that this report “was used to establish site contamination status” as at the relevant date. There was evidence that the methodology used in the Douglas Partners September 1999 report would have enabled the identification of hotspots of 35 metres diameter with 95% confidence.

189        Mr Woods’ estimate was challenged on the basis that it depended on samples collected from the western end of the sites, whilst Mr O’Neill used data from the eastern end. The data from the eastern end was of very limited value, however, and, given the site’s land use history, Mr Woods was justified in extrapolating his results from samples from the western end across the eastern end of the sites. In any event, I accept that, as Mr Woods said, these limited results would not have changed the outcome as he assessed it. The Commissioner also challenged the criteria used in the Woods report to determine the soil to be removed, but, as Mr Woods noted, the salient criteria were those applied in the September 1999 report, which was roughly contemporaneous with the relevant date.

190        There were some aspects of the Woods report, however, that indicated that Mr Woods may have over-estimated the quantity of soil requiring removal to some extent. For example, the Woods report assumed that all contaminated soil would have to be disposed of off-site, whereas the evidence of Mr Sweeney was that at least some contaminated soil could be disposed of on-site. Had the Woods report proved relevant, it may have been necessary to bear this in mind in calculating the cost of soil remediation.

Penalties

191        As already noted, in relation to the 2000 and 2002 income, the Commissioner assessed penalty tax at a rate of 25% on the tax shortfall amounts for adopting a position that was not reasonably arguable, or for failing to take reasonable care to comply with the tax law. No issue as to penalty tax arises in relation to the 1999 income year. The argument on the penalty issue was limited to whether Taras had treated an income tax law as applying in a way that, when the statement was made, was not reasonably arguable, or had failed to take reasonable care to comply with a tax law. Taras did not contend that it was, for any other reason, not liable to pay a penalty at a rate of 25% of the tax shortfall for the 2000 income year and for the 2002 year.

192        The penalty provisions applying in the 2000 income year were, relevantly, s 226G of the ITAA 1936 (failure to take reasonable care) and s 226K of the ITAA 1936 (treating an income tax law as applying in a way that, when the statement was made, was not reasonably arguable). The penalty provisions applying in the 2002 year were, relevantly, s 284-75(1), s 284-75(2) and Items 3 and 4 of s 284-90(1) of Schedule 1 of the TAA.

193        The meaning of “reasonably arguable” was set out in s 222C of the ITAA 1936 (applying in the 2000 income year) and in s 284-15 of Schedule 1 of the TAA 1953 (applying in the 2002 year). The two provisions are in similar terms. It is sufficient to refer to s 284-15 of Schedule 1, which provided that a matter was reasonably arguable “if it would be concluded in the circumstances, having regard to relevant authorities, that what is argued for is about as likely to be correct as incorrect, or is more likely to be correct than incorrect”. Relevant authorities include a decision of a court.

194        I accept that, as the Commissioner submitted, the position that Taras took was not “reasonably arguable” for the purposes of s 226K of the ITAA 1936 and s 284-90(1) of the TAA 1953 because Taras lodged its income tax returns in respect of the 2000 and 2002 income years after judgment in Victoria Gardens (Court of Appeal) had been delivered and on a basis plainly contrary to that judgment and reasons stated therein by the Court of Appeal. As explained above, Taras’ contentions that:

(1)    there was no change in the beneficial ownership of the Taras land; and

(2)    Taras was the sole beneficiary of the Taras land;

were both contrary to the reasoning of the decision in that case. The position taken by Taras for the 2000 and 2002 income years that there was no CGT event in August 1998 in relation to the Taras land depended on it adhering to these contentions in the face of the judgment of the Court of Appeal. Having regard to Walstern Pty Ltd v Commissioner of Taxation (2003) 138 FCR 1 at 26-27 [108], this meant that the position taken by Taras for these years constituted treating an income tax law as applying in a way that was not reasonably arguable within the meaning of s 222C of the ITAA 1936 and Item 4 of s 284-15 of Schedule 1 of the TAA 1953. Following the decision of the Court of Appeal, this was not a matter about which it could properly be said that “reasonable minds” could differ, as Taras claimed. If there was any doubt about the matter (and I do not consider there was) there could be none after 14 December 2001, when the High Court refused to grant special leave to appeal from the judgment of the Court of Appeal.

195        In view of this conclusion, it is unnecessary to consider the alternative basis for the imposition of a penalty, namely, that the taxpayer failed to exercise reasonable care within the meaning of s 226G of the ITAA 1936 or Item 3 of s 284-90(1) of Schedule 1 of the TAA 1953.

196        This said, if it were necessary to do so I would also conclude that there was a failure to take reasonable care on Taras’ part and that s 226G of the ITAA 1936 would provide an alternative basis for requiring Taras to pay a penalty at a rate of 25% of the tax shortfall for the 2000 income year and that Item 3 of s 284-90(1) of Schedule 1 of the TAA 1953 would have done so similarly for the 2002 income year.

197        I accept that the provisions dealing with reasonable care and with a reasonably arguable position are concerned with different standards: see Commissioner of Taxation v Traviati [2012] 205 FCR 136 (“Traviati”) at 150 [70]-[71] (Middleton J); Fowler v Commissioner of Taxation (2012) ATC 20-351 at [135]. The reasonable care test “calls upon a taxpayer to exercise the care that a reasonable person would be likely to have exercised in the circumstances of the taxpayer in fulfilling the taxpayer’s tax obligations”: see Aurora Developments Pty Ltd v Federal Commissioner of Taxation (No 2) (2011) 196 FCR 457 (“Aurora”) at 465 [38]. In Aurora, Greenwood J went on to say (at 465 [38]):

The test looks to whether such a person would have foreseen, as a reasonable probability or reasonable likelihood, the prospect that the action or step or the failure to act or take an affirmative step would result in a shortfall amount and in determining that question, a relevant factual enquiry is whether the taxpayer made the reasonable attempts a person in the position of the taxpayer ought to have taken so as to comply with the provisions of a taxation law.

These observations apply, whether one is concerned with s 226G of the ITAA 1936 or Item 3 of s 284-90(1) of Schedule 1 of the TAA 1953.

198        Taras argued that there was no lack of reasonable care on its part. Taras submitted that:

By the time Taras lodged its income tax returns from 2000 and 2002 its directors, who included an experienced solicitor (Charles Veevers), were thoroughly familiar with the arguments in the stamp duty case (indeed, this is the basis for the Respondent’s imposition of penalties). They concluded that the decision did not mean that …Taras had realised a capital gain. They did turn their minds to the potential capital gains tax liability, they were aware of the arguments against capital gains tax applying and those arguments were, as is argued above, soundly based. Accordingly, the Court should find that they exercised reasonable care.

199        I would reject this submission. For the reasons stated, I have not found Taras’ arguments to be soundly based. More importantly, after the delivery of the judgment of the Court of Appeal in Victoria Gardens (Court of Appeal), with its reasons, Taras ought reasonably to have foreseen, as a reasonable probability or reasonable likelihood, that its statements in its income tax returns (which depended on there being no CGT event) would ultimately result in a shortfall amount. Even if, prior to the refusal of special leave in December 2001, Mr Veevers and the other directors of Taras subjectively believed that their own view of the significance of the August 1998 arrangements might ultimately prevail, there is no evidence that they caused Taras to seek the advice of an independent qualified taxation specialist after the judgment of the Court of Appeal was delivered. In all the circumstances, including that the Court of Appeal had ruled on key aspects of Taras’ position (subject to a grant of special leave by the High Court) Taras did not make reasonable attempts to comply with the relevant provisions of the taxation law. Once the High Court refused special leave, there is even less of a basis upon which it might be said that, in acting as it did, Taras acted with reasonable care. Accordingly, I would also conclude that there was a failure to take reasonable care on Taras’ part and that s 226G of the ITAA 1936 would provide an alternative basis for requiring Taras to pay a penalty at a rate of 25% of the tax shortfall for the 2000 income year and that Item 3 of s 284-90(1) of Schedule 1 of the TAA 1953 would have provided such an alternative basis for the 2002 income year.

DISPOSITION

200        For the reasons stated, I conclude as follows.

1.        Taras made a taxable capital gain under Part 3-1 of the ITAA 1997 in relation to the transactions in August 1998, because there was a CGT event E1. There was also a CGT event A1.

2.        The market value of the Taras land at the time of the transfer was $16,626,115 plus an appropriate allowance for the relevant proportion of development costs (as discussed in [184] above).

3.        Taras was liable to the imposition of administrative penalties at the rate of 25% of the tax shortfall for the 2000 and 2002 tax years.

201        I would direct the Commissioner to prepare a draft form of orders to give effect to these reasons. I trust the parties can agree upon the disposition of costs. If they are unable to do so, however, I would direct them to file written submissions as to costs within 14 days of the delivery of these reasons. Orders shall be made accordingly.

Associate:

Dated:    21 January 2014