Commissioner of Taxation v Malouf
Document type: Decision Impact Statement
Venue: Federal Court of Australia (NSD 674, 675 of 2008)
Judgment date: 2 April 2009
Date published: 22 October 2009

Summary of decision:
Outlines the Tax Office's response to this case which concerned the issue of whether the taxpayer's obligation to pay, upon settlement, the balance of his share of the amount payable under a contract for the purchase of land and development of a retirement village was incurred at the time of entering into the contract.

Overview of facts:
The taxpayer was an investor in a retirement village syndicate set up to obtain the benefit of Taxation Ruling TR 94/24 . He had a share in a partnership (TPC), which was a partner in another partnership (Cresthaven). Cresthaven entered into arrangements, through a nominee company, to purchase a property from PrimeLife that would be developed as a retirement village. The contract was entered into on 25 June 1999 with a deposit paid of $6,500,000 and the residue of $33,250,000 payable fourteen days after completion of stage 1 of the development. Each of the investors in the syndicate financed their share of the $6,500,000 deposit separately. When Cresthaven lodged its partnership return for the 1999 year, it reported a partnership loss of $40,830,260, which included a deduction of $39,750,000 for the full purchase price of the property. The taxpayer claimed a deduction of $474,457, as his share of the partnership loss. | The Australian Taxation Office view expressed in Taxation Ruling TR94/24 was that expenditure incurred in acquiring and developing retirement villages would be allowed on revenue account and would be deductible in the year in which the expenditure was incurred. The Commissioner accepted that the partnership was entitled to a deduction for the amount of $6,500,000 paid as a deposit, but not the unpaid balance of $33,250,000 and allowed the taxpayer a deduction for the amount he had paid, being $94,891, and disallowed the balance of the deduction claimed in the 1999 year. | No significant development work was carried out on the property, and in February 2006 the contract was terminated and the deposit was refunded, with interest. | The issue in this case was whether the partnership was entitled to claim a deduction of $33,350,000 in the 1999 income year, being the unpaid balance of the purchase price of the property. The ATO view was that, under the terms of the contract, only the deposit was incurred in the 1999 year. | The taxpayer in this case was provided with funding under the test case litigation program at both the Federal Court and Full Federal Court stages of the appeal process. | Issues decided by the court | 1. The primary judge (Allsop J) allowed the taxpayer's appeal and held that the taxpayer's obligation to pay the residue of the purchase price under a contract for the purchase of land and the development of a retirement village (settlement taking place in a later year of income), and which was agreed to be on revenue account, was incurred in and was referable to the year of income in which the contract was entered into. His Honour considered that he was clearly bound by the decisions of the Full Federal Court in Woolcombers and Raymor. | 2. Allsop, J. also made some remarks concerning the conduct of Mr Malouf and whether this constituted reasonable care for penalty purposes. Having found in favour of the taxpayer, it was not necessary for Allsop, J. to decide the penalty matter. Nevertheless, he expressed the view that a penalty was not legally warranted in the circumstances of this case, because Mr Malouf had exhibited reasonable care. | 3. The Commissioner appealed to the Full Federal Court on the basis that the contract remained executory until settlement when a transfer of the property would occur, that there is no liability or debt due to the vendor until settlement, and that, accordingly, there was not, during the 1999 income year, a debt or pecuniary liability due by the taxpayer for the residue of the purchase price. The Commissioner did not challenge the views of Allsop J in respect of the penalty issue. | 4. In their unanimous decision, the Full Federal Court (Sundberg, Jessup and Middleton JJ) set aside the decision of the primary judge and found in favour of the Commissioner. The Full Court said that 'every contract must be construed according to the intention of the parties, and upon taking a legal or jurisprudential approach, the contractual arrangements and surrounding circumstances must be considered in determining when the loss or outgoing has been incurred' . | 5. The Court distinguished Raymor on the basis that the terms of the arrangements in that case are materially different from the contract in this case, which meant that the primary judge fell into error by adopting the result in Raymor . | 6. Their Honours also distinguished Woolcombers on the basis that, although the contract terms in both cases were of a similar nature, in Woolcombers the Full Federal Court had treated the agreement as unconditional, subject to defeasance as a result of an event that would give rise to frustration of the agreement; whereas, in this case, the contract was not an unconditional agreement subject to defeasance by unforeseen events. | 7. As a result of its analysis, the Court held that the pecuniary liability for the balance of the purchase price was not incurred at the time of entering into the contract, but would only be incurred upon settlement. At the same time, the vendor would deliver a transfer and title of the land. The Court also concluded that the obligation to pay the residue was not referable to the 1999 year of income.

Issues decided:
1. The primary judge (Allsop J) allowed the taxpayer's appeal and held that the taxpayer's obligation to pay the residue of the purchase price under a contract for the purchase of land and the development of a retirement village (settlement taking place in a later year of income), and which was agreed to be on revenue account, was incurred in and was referable to the year of income in which the contract was entered into. His Honour considered that he was clearly bound by the decisions of the Full Federal Court in Woolcombers and Raymor. 2. Allsop, J. also made some remarks concerning the conduct of Mr Malouf and whether this constituted reasonable care for penalty purposes. Having found in favour of the taxpayer, it was not necessary for Allsop, J. to decide the penalty matter. Nevertheless, he expressed the view that a penalty was not legally warranted in the circumstances of this case, because Mr Malouf had exhibited reasonable care. 3. The Commissioner appealed to the Full Federal Court on the basis that the contract remained executory until settlement when a transfer of the property would occur, that there is no liability or debt due to the vendor until settlement, and that, accordingly, there was not, during the 1999 income year, a debt or pecuniary liability due by the taxpayer for the residue of the purchase price. The Commissioner did not challenge the views of Allsop J in respect of the penalty issue. 4. In their unanimous decision, the Full Federal Court (Sundberg, Jessup and Middleton JJ) set aside the decision of the primary judge and found in favour of the Commissioner. The Full Court said that 'every contract must be construed according to the intention of the parties, and upon taking a legal or jurisprudential approach, the contractual arrangements and surrounding circumstances must be considered in determining when the loss or outgoing has been incurred' . 5. The Court distinguished Raymor on the basis that the terms of the arrangements in that case are materially different from the contract in this case, which meant that the primary judge fell into error by adopting the result in Raymor . 6. Their Honours also distinguished Woolcombers on the basis that, although the contract terms in both cases were of a similar nature, in Woolcombers the Full Federal Court had treated the agreement as unconditional, subject to defeasance as a result of an event that would give rise to frustration of the agreement; whereas, in this case, the contract was not an unconditional agreement subject to defeasance by unforeseen events. 7. As a result of its analysis, the Court held that the pecuniary liability for the balance of the purchase price was not incurred at the time of entering into the contract, but would only be incurred upon settlement. At the same time, the vendor would deliver a transfer and title of the land. The Court also concluded that the obligation to pay the residue was not referable to the 1999 year of income.

ATO view of decision:
• Deductions | 1. No new principle emerges from this decision. The contract in this case was found to be distinguishable from the contracts considered in Raymor and Woolcombers . | 2. Retirement village investors will be entitled to a deduction for the balance of purchase price when paid at settlement. At the same time, the vendor would provide delivery of a transfer and title of the land. | • Penalties | 1. Although it was not necessary for him to do so, Allsop J, at first instance, expressed the view that Mr Malouf should not be subject to any penalty, because he had exhibited sufficient care and displayed no impropriety. The Commissioner accepts his Honour's views in respect of the penalty issue in this case. | 2. The Commissioner considers that penalty matters should be decided having regard to the individual circumstances of each taxpayer and their actions. | 3. Consideration will be given to penalty remission requests by retirement village investors who have commenced proceedings in the Federal Court or the AAT. In making such a request, retirement village investors will be expected to outline their own particular circumstances and actions which they consider constitutes reasonable care.

Administrative treatment:
Implications on current Public Rulings & Determinations | None. [TR 94/24 has been withdrawn]

Legislative references: Income Tax Assessment Act 1936 226G Taxation Administration Act 1953 284-90(1) item 3 of Part 4-25 Income Tax Assessment Act 1997 8-1
Case references: Commissioner of Taxation v Woolcombers (WA) Pty Limited 47 FCR 561 27 ATR 302 93 ATC 5170 Commissioner of Taxation v Raymor (NSW) Pty Limited 24 FCR 90 21 ATR 458 90 ATC 4461 Automatic Fire Sprinklers Pty Ltd v Watson 72 CLR 435 [1946] ALR 390 Coles Myer Finance Ltd v FC of T [1993] HCA 29 93 ATC 4214 176 CLR 640 25 ATR 95 Emu Bay Railway Co Ltd v FC of T (1944) 71 CLR 596 FC of T v Citylink Melbourne Ltd [2006] HCA 35 2006 ATC 4404 62 ATR 648 228 CLR 1 FC of T v James Flood Pty Ltd [1953] HCA 65 88 CLR 492 [1953] ALR 903 Gasparin v FC of T 50 FCR 73 28 ATR 130 94 ATC 4280 McDonald v Dennys Lascelles Ltd [1933] HCA 25 48 CLR 457 39 ALR 381 Merrill Lynch International (Australia) Ltd v FC of T 113 FCR 79 2001 ATC 4541 47 ATR 611 Nilsen Development Laboratories Pty Ltd v FC of T [1981] HCA 6 81 ATC 4031 11 ATR 505 144 CLR 616 Sunbird Plaza Pty Ltd v Maloney [1988] HCA 11 166 CLR 245 77 ALR 205 Ogilvy & Mather Pty Ltd v FC of T 95 ALR 663 21 ATR 841 90 ATC 4836
Subject references: Deductions Penalties