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Company L v Fiji Revenue and Customs Authority [2012] FJTT 17; Income Tax Appeal 1.2007 (11 December 2012)

IN THE STATUTORY TRIBUNAL, FIJI ISLANDS
SITTING AS THE TAX TRIBUNAL

Income Tax Appeal No 1 of 2007

BETWEEN:

COMPANY L
Applicant

AND:

FIJI REVENUE & CUSTOMS AUTHORITY
Respondent

Counsel: Mr A Sen, Maqbool & Company, for the Applicant
Ms T Rayawa, FRCA Legal Unit for the Respondent
Date of Hearing: 24 September 2012

Date of Judgment: Tuesday 11 December 2012

JUDGMENT

INCOME TAX ACT (CAP 201) – Section 11; Capital Gains; Disposition of Property; Objective Purpose Test of Acquisition; Dealing in Land; Business of the Taxpayer; Speculative Dealings; California Copper Syndicate v Harris.

Background

1. This an application for review against the decision of the Respondent Authority dated 20 December 2006, disallowing the objection of the Taxpayer to a tax assessment issued for the year ending 31 August 2006.
   
2. The Agreed Statement of Issues prepared by the parties is as follows:
   
   • The Applicant company incorporated in the year 1983 and its core business was in the timber supply industry.
     
   • The company acquired Crown Lease No 10895 in 1989, after purchasing the 854.9 metre square property. The property is located in the main business district of Labasa town.
     
   • On 2 May 1991, the Company acquired Crown Lease No 1627. This lease related to adjoining property to that the subject of Lease 10895.
     
   • The properties situated on these Crown Leases, were sold to an unrelated Holding Company in 2005.
     
   • In 1994, the company had also acquired a property on Sangam Road, Labasa and had sold that in 1999.
     

Issue before the Tribunal

3. The parties identified the issues that warrant determination as being:
   
   • Has Company L engaged in a series of transactions in a number of properties with the intention of making profit;
     
   • Is the Company liable to pay tax on the sale of property in accordance with Section 11(a) of the Income Tax Act;
     
   • Was the sale subject to the tax pursuant to the Land Sales Act?
     
   • Is the Company's income for the relevant period, confined to that set out within the Annual Sales & Income provided by the Applicant.[1]
     
4. I note the submissions of the Taxpayer, that the Tribunal should concern itself only with the issues that have been identified by the Respondent as giving rise to the objection decision.
   
5. The application is heard in accordance with the relevant provisions of the Tax Adtrnistration Decree 2009 and the Magistrates CoAmendment) Decree 2011re here is n is nothing that confines ole o the tribunal to the issueissues of law that have been identified by the parties.
   
6. As previously mentioned within this Tribunal, while the document that sets out the Agreed Statement of Facts and Issues is a very essential starting point for the conduct of the case, this is not an arbitration of a fixed set of issues. Through its inquiry, the Tribunal is free to discover and rule on all relevant issues that fall within the powers set out in Section 17 of the Decree.
   

The Activity of the Taxpayer

7. Mr and Ms R were joint shareholders in Company L, that incorporated in 1983, operating in Wailevu, Labasa for the purpose of supplying building timber.
   
8. According to the oral evidence of the Shareholder Mr R and the Affidavit in Reply by the Applicant sworn on 20 June 2007, the company commenced its timber yard operations at Wailevu, Labasa and did so on property acquired from Shareholder and Director, Ms R, who had prior to that time, held the property as a tenancy at will since 1980.
   
9. It is the case that the location of the timber yard was the subject of a 99 year Native Lease No 26831, re-acquired by the company in 2003. The shareholders residential property was also located on a 30 year residential lease, reissued to Ms R in 2003. (Crown Lease No 13590).
   

Commencement and Operations in Labasa Town

10. According to the evidence of Mr R, in 1988 the Company commenced the rental of a property in the commercial precinct of Labasa township and purchased the same in the following year, for a sum of $75,000.00.[2]
    
11. It was the evidence of Mr R, that on this property, the Company was selling timber and some hardware products. His evidence was that the first block became too small. His intention was to construct a 3 level building that he could have for the whole of his life. The bottom floor was for an office, and was going to rent out the top floor for office space. A certificate of completion and permit to occupy that new commercial complex, was issued by the Labasa Town Council on 3 August 1993.[3]
    
12. Mr R said that in 1991, he bought the adjoining block of land with the intention of constructing a 4 level building. A certificate of completion and permit to occupy the proposed shop (Stage 1) was issued by the Labasa Town Council on 25 July 1995.[4]
    
13. In 1994, the company also acquired a property at Sangam Road, Labasa. According to the witness, this was purchased for a timber yard. It was converted from a residential lease to a commercial lease, though sold at a loss in 1999.[5] On 1 July 1998, Company L acquired a 99 year industrial lease of 2427 sq m (Crown Lease No 13591) for the purposes of continuing on the business at Wailevu. In addition on that same date, Ms R acquired a thirty year residential lease of 4729 sq m (Crown Lease 13590).
    
14. On 28 August 2003, Ms R, also acquired a 3028 sq m property lease for residential purposes at Wailevu. (Native Lease No 26809)[6]. On 8 September 2003, Company L entered into a 99 year Native Lease No 26831 on the adjoining lot.[7]
    

Purpose of Sale of Properties

15. During the giving of his oral evidence, Mr R indicated that one of the primary reasons for disposing of the properties was as a result of the communications received from the Fiji Public Service Commission, indicating that they would not be wanting to continue renting office space from the premises in 1999.
    
16. In addition, the Directors of the Taxpayer were wanting to migrate to New Zealand. According to Mr R, he did not need the property, as by this time he had a timber yard in Wailevu and a property located in another central location in town.
    
17. It is not in dispute that the sale price realised for the two properties was $1.675million.
    
18. Mr R indicated, that he would have never sold the property had he known it was subject to income tax.
    

Legal Considerations

19. As stated previously, the first issue to consider is whether the profit gained by the taxpayers as a result of the sale of the property, was in fact income for the purposes of Section 11 of the Income Tax Act (Cap 201). In Taxpayer A v Fiji Revenue & Customs Authority [2012] FJTT3, this Tribunal set out the manner in which Section 11 of the Income Tax Act (Cap 201) should be interpreted.
    
20. The definition of total income is at Section 11 and that is the appropriate starting point for analysis. Section 11 commences:
    

For the purpose of this Act, "total income "means the aggregate of all sources of income including the annual net profit or gain or gratuity, whether ascertained and capable of computation as being wages, salary or other fixed amount, or unascertained as being fees or emoluments or as being profits from a trade or commercial or financial or other business or calling or otherwise howsoever, directly or indirectly accrued to or derived by a person from any office or employment or from any profession or calling or from any trade, manufacture or business or otherwise howsoever, as the case may be, including the estimated annual value of any quarters or board or residence or of any other allowance or benefit provided by his employer or granted in respect of employment whether in money or otherwise, and shall include the interest, dividends or profits directly or indirectly accrued or derived from money at interest upon any security or without security or from stock or from any other investment, and whether such gains or profits are divided or distributed or not and also the annual profit or gain from any other source including the income from, but not the value of, property acquired by gift, bequest, devise or descent, and including the income from, but not the proceeds of, life insurance policies paid up upon the death of the person insured, or payments made or credited to the insured on life insurance, endowment or annuity contracts up the maturity of the term mentioned in the contract.

21. What follows within the proviso at Section 11(a) are three distinct categories of case.[8] In the case of this first illustrative example, (the first limb), it reads:
    

any profit or gain accrued or derived from the sale or other disposition of any real or personal property or any interest therein, if the business of the taxpayer comprises dealing in such property; (my emphasis)

22. That is the language of the legislation from which two questions unfold. The first being whether any profit or gain accrues or derives from the sale or other disposition or any interest therein. The second question is whether or not the business of the taxpayer comprises dealing in such property?
    
23. To resolve that second question, Section 2 of the Act provides assistance, where it sets out a non-exhaustive definition of "dealing in property" and "dealing in real and personal property". That definition was introduced into the legislation with the introduction of the Income Tax Act 1974[9]
    
24. The 'second limb' reads fully:
    

any profit or gain accrued or derived from the sale or other disposition of any real or personal property or any interest therein, if the property was acquired for the purpose of selling or otherwise disposing of the ownership of it

25. Under this second limb, cases such as Steinberg [10], dictate that there must be in place a purpose of resale to gain a profit and that purpose must be present at the time of the acquisition.
    
26. The third limb deals with any profit or gain derived from the carrying on or carrying out of any undertaking or scheme entered into or devised for the purpose of making a profit. In Lowe v Commissioner of Inland Revenue[11], Richardson J defined the words "scheme" to connote a plan or purpose which is coherent and has some unity of conception. He defined "undertaking" as a project or enterprise organized and directed to an end result.
    
27. Finally, there is an exclusionary provision to Section 11(a). It provides that none of the three illustrative examples (the 'three limbs') shall be considered to contribute to total income, where the profit or gain derived from a transaction of purchase and sale does not form part of a series of transactions and which is not in itself in the nature of business. Though it should be noted in McClelland v Commissioner of Taxation,[12] the Privy Council concluded that a single transaction can fall within the notion of assessable income, where the undertaking or scheme exhibits features that give it the character of a business deal.[13]
    

Were the Profits Realised Capital Profits or Income?

28. In Californian Copper Syndicate v Harris (1904) 5 T.C. 159, Lord Justice Clerk, formulated the long accepted test:
    

where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he[14] originally acquired it at, the enhanced price is not profit in the sense of ...assessable to income tax. But it is equally well established that enhanced values obtained from realization or conversion of securities may be so assessable, where what is done is not merely a realization or change of investment, but an act done what is truly the carrying on or carrying out of a business..."

29. That this test was well enshrined within the legal development of the Fijian Income Tax Act (Cap 201) is easily illustrated when the legislative provisions that now make up Section 11(a) were introduced, with the enactment of the Income Tax (Amendment)(No2) Ordinance 1957.
    
30. On the second reading of the Bill to introduce that law[15], the Commissioner of Inland Revenue stated:
    

Despite the criticism that has been aimed at it, (the clause) is merely a clarifying clause. The section it proposes to clarify is an important one as it defines "total income". This provisions now writes into the law what is believed is already in the law, but it has been a matter of continual dispute and I believed that it is now necessary to have this in the law so that the taxpayer can see how and on what he is liable to pay taxes...........

This definition follows very closely that laid down in the model ordinance and has often been referred to as "wide as a church door". I too believe that it is and, also, the few people who have disputed it in Court have found it is....

......... In order to determine whether it sets out to tax items of capital, I would like to refer to a now famous remark of the Lord Justice Clarke in the case of Californian Copper Syndicate v Harris, 5 Tax Cases 165 ....

I contend, Sir that the proposed amendment, or rather I prefer to call it the addition, to our law, does not intend to by-pass the principle laid down in those remarks.

31. That is the foundation on which any analysis of the Fijian law is to take place and should assist in the determination of the question whether the building and development activity at the two adjoining lots in the town centre, was the mere realisation of a capital asset (or assets), or part of the Taxpayer's business that dealt in properties?
    

The Purpose of the Acquisition

32. The evidence of Mr R is that this initial acquisition was to construct an office and hardware store. According to the witness, that hardware operation is now located elsewhere in the town centre. The difficulty for Mr R and his company appears to be this. That the Sangam Road property that was purchased in 1994, appears to have also been a speculative venture. It is immaterial in my view if the property once disposed of, generated profit for the Company or not. The conduct of the Taxpayer and its purpose is a relevant consideration.
    
33. A timber and hardware company based in Wailevu, does not need a registered office and hardware shop, the size of a three level building. Any objective by-stander would recognise that fact. The acquisition of a further adjoining property with the purpose of building a 4 level office block renders the nature of the business of the activity way beyond that of a timber and hardware sales. In any event, the submissions of the Taxpayer were not seeking to disguise the nature of their activities. They are what they are. And a Taxpayer is certainly entitled to deploy its capital and exploit its assets in any way that it sees fit.
    
34. The issue really is this; is the gain achieved by the Taxpayer, one that is envisaged to have fallen within the definition of total income for the purposes of Section 11 of the Act?
    
35. In the Australian case of Steinberg and Others v Federal Commissioner,[16] the Australian High Court observed in relation to the Income Tax Assessment Act (Cth) 1936, that:
    

It is not in its general provisions an Act to tax capital gains.

36. This may be true, though a comparison and contrast of the formative general provisions of the Australian and Fijian law, nonetheless reveals that they are different and in the case of the Fijian law, much wider in scope. Clearly California Copper is authority for the fact that some forms of capital gains are amenable to income tax.[17] Steinberg is nonetheless assisting in ensuring that the Tribunal focus on the purpose of the acquisition of property. That is, to probe into the objective intention of the Taxpayer when questions of acquisition and disposition arise.
    
37. One only needs to look at the photographs contained at "LTDA7" within the Applicant's Affidavit in Reply, sworn on 20 June 2007, to understand that this venture was more than a town office to service a timber distributor. And even if according to Mr R, it was also the home of a hardware store, the injection of so much more into the building to transform it into a three level office block converted the activity into something well beyond that. The fact that the further intention was to build a four storey property on the later acquired lot, imposes a complexion on these activities, something way beyond income arising out of the mere realisation of an asset.
    
38. This was more than likely a development scheme.
    
39. In any event, as Exhibit R3 produced by the Authority reveals, prior to the sale of the two lots, the tax agent for the Applicant wrote to the Respondent as follows:
    

Please be advised that the Company had ceased its operations as Timber and Hardware merchants in August 2000.

After August 2000, the Company only derived income from rental premises. As from February 2004 the Company recommenced its operations as timber merchants including rental of premises...

Since commencement of business as timber merchants the Directors who reside in New Zealand make trips every 2 months to look after the welfare and management of business.

40. My impression of the evidence is this. That even if the acquisition of the first central property on Crown Lease No 10895, was purchased as a legitimate capital asset of the business, with the acquisition of the second lot with the intention to construct a four storey building and the acquisition of a further property at Sangam Road, that was later converted to a commercial lease, is suggestive of something far more elaborate.
    
41. Much has been made by the Taxpayer that the adjoining lots needed to be sold at the same time, as they shared a common driveway and sewer line and somehow formed part of the same total development. Yes there was a common driveway, but that is something that is easily remedied. There is also nothing particularly novel with two adjoining properties sharing a common sewerage line. The properties are located on two separate titles.
    
42. During the conduct of these proceedings, the attention of this Tribunal was also directed to the lease arrangements at Wailevu, where on various occasions certain alterations to those leases were necessary in order to separate residential and industrial locations. It was also the case that in relation to the residential lease, that this was not the property of the Taxpayer, but that of Ms R.
    
43. I am not troubled by that activity for these proceedings and in any event, there was not adequate evidence or submissions by the parties, to be heavily influenced by those activities regardless. What I am concerned about is this. Is this a case about a Taxpayer buying and selling lands speculatively, in order to make gain, dealing in such investments as a business (or part of the business) and thereby seeking to make profits?[18].
    
44. It would appear that the answer to this question is yes.
    

Conclusions of the Tribunal

45. Upon introduction of the first Inland Revenue (Income Tax) Ordinance 1920, the proposed law was described to the Legislative Council as:
    

the fairest and most just form of taxation one can introduce, putting as it does the burden upon the people who can most afford it[19]

46. Chief Justice Young in the case of Commissioner of Inland Revenue v Morris Hedstrom Ltd,[20] referred to the definition as being ".. of very comprehensive and sweeping nature". So much can be ascertained by an examination of Section 11 of the current Act, that defines the total income to be assessed, to include profits from:
    

A trade or commercial or financial or other business or calling or otherwise howsoever directly or indirectly accrued to or derived by a person from any office or employment or from any profession or calling or from any trade, manufacture or business or otherwise howsoever as the case may be

47. More specifically though and reliant on the illustrative examples that are popularly referred to as the three limbs of Section 11(a) of the Act, it would seem that the profits arising from the sale of the adjoining lots would be captured by the first limb, being:
    

any profit or gain accrued or derived from the sale or other disposition of any real or personal property or any interest therein, if the business of the taxpayer comprises dealing in such property;[21]

48. The second limb of Section 11(a) reads[22]:
    

any profit or gain accrued or derived from the sale or other disposition of any real or personal property or any interest therein, if the property was acquired for the purpose of selling or otherwise disposing of the ownership of it

49. Under this specific example, the evidence is a little harder to apply. In relation to Crown Lease No 1627, the first lot within the central business district to be acquired by the Taxpayer, my sense is that it was secured for the purpose of ultimately developing and disposing of it.[23] In relation to the adjoining lot on Crown Lease No 10895, it too was more than likely, a venture well beyond the scope of the Taxpayer's business office and hardware shop.
    
50. Why the properties were sold at the time they were, remains unclear. It was seven years after the Public Service Commission had given their notice to quit, so I do not see any utility in the Applicant's reliance on that submission. The disposition is likely to be caught by this second example, the second limb of Section 11(a) as well. Though I am not making a conclusive finding in this regard.
    
51. For the sake of completeness, in relation to the third limb. This remaining category of case, deals with any profit or gain derived from the carrying on or carrying out of any undertaking or scheme entered into or devised for the purpose of making a profit. My impression of the Taxpayer's intentions was to create some sort of business precinct. This to my mind assumed the characteristics of an undertaking or scheme.
    
52. This was a planned development that ultimately was not completed by the Taxpayer. I believe that on the evidence, that the Taxpayers business and the profit arising out of the acquisition, development and disposition of the properties, came about due to the carrying out or carrying on of an undertaking or scheme. I believe that the 'limbs' of Section 11(a) provide clear examples why the gains made by the taxpayer, should be assessable income for the purposes of Income Tax Act (Cap 201).
    
53. More generally though and to restate the words of Lord Clerk, this seems a clear case of buying and selling lands speculatively, in order to make gain, dealing in such investments as a business (or part of the business) and thereby seeking to make profits.[24] On that basis, the sale of the lots and the conduct of the Taxpayer's business, would certainly be activities also caught within the general provision that is Section 11 of the Act,
    

being profits from a trade or commercial or financial or other business or calling or otherwise howsoever, directly or indirectly accrued to or derived by a person from any office or employment or from any profession or calling or from any trade, manufacture or business or otherwise howsoever, as the case may be,

Other Issues

54. Within the Agreed Statement of Facts, the parties had posed the question, Was the sale of the two lots in Labasa town, subject to taxation pursuant to the Land Sales Act (Cap 137)?
    
55. The answer to that question can be found at Section 4(1) of the Land Sales Act, that reads:
    

Any profits in respect of any dealing which would be liable to tax under the provisions of the Income Tax Act shall be assessed under the provisions of that Act and not under the provisions of section 3 (where the Land Sales Taxes are charged).

DECISION

(i) That the Application be dismissed.

(ii) That the Respondent be free to make application for costs within 28 days.

The Tribunal orders accordingly.

Mr Andrew J See

Resident Magistrate

^[1] See document “LTD A4” within Affidavit In Reply By the Applicant, sworn 20 June 2007.

^[2] That lot is the one now subject to the Crown Lease No 10895 LD 4/9/2408, Lot 28, Section 1 on Plan No M1778.

^[3] See documents provided within the Affidavit of Seveci Rokotakala sworn on 9 May 2007.

^[4] See also documents contained within the Affidavit of Seveci Rokotakala.

^[5] It needs to be kep in mind that this was not too long before it would appear that the Company ceased operating in 2000.

^[6] NL. Covata Lot 72(Part of) formerly BAL M1912 Shown as Lot 2 on Plan No SO.3560

^[7] NL Covata Lot 72 (part of) formerly BAL M1912 Shown as Lot 1 on Plan No SO 3560

^[8] In Taxpayer A v Fiji Revenue & Customs Authority [2012] FJTT3, I indicated because of the structure of the drafting that I was of the view that there were only two limbs, however I now recognise that the historical treatment of this provision by the courts has described Section 11(a) as containing three limbs.

^[9] See Act No 6 of 1974

^[10] See Steinberg and Others v Federal Commissioner of Taxation[1975] HCA 63; (1975) 7 ALR 491 at 495

^[11] (1981) 5 NZTC 61,006 (CA).

^[12] (1970)120 CLR 487

^[13] At [27]

^[14] I presume that the language intends to cover the case of female investors as well.

^[15] See Fiji Council Debates 6 December 1957, pages 380-384.

^[16] [1975] HCA 63; (1975) 7 ALR 491 at 495

^[17] Note particularly that judgment at page 166.

^[18] See Lord Clerk in Californian Copper Syndicate (Limited and Reduced) v Harris (Surveyor of Taxes) at p166.

^[19] Ibid, at p9

^[20] [1937] FJSC 1

^[21] So much is the Taxpayer’s own evidence by virtue of Exhibit R3.

^[22] Insofar as one needs to adapt the provision to give it the status of a limb.

^[23] Though I am not relying on that impression in reaching my decision.

^[24] Op cit.