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Taxpayer L v Fiji Revenue and Customs Authority [2012] FJTT 19; Income Tax Appeal 4.2006 (21 September 2012)

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

Income Tax Appeal No 4 of 2006
Value Added Tax Appeal No 4 of 2006

BETWEEN:

TAXPAYER L
Applicant

AND:

FIJI REVENUE & CUSTOMS AUTHORITY
Respondent

Counsel: Ms M Tikoisuva, Mitchell Keil Lawyers for the Applicant
Ms R Malani, for the Respondent

Date of Hearing: Friday 21 September 2012
Date of Judgment: Monday 26 November 2012

JUDGMENT

INCOME TAX ACT (CAP 201) – Section 11; VALUED ADDED TAX – Section 15 Value Added Tax Decree 1991 –

Background

1. This an application for review against the decision of the Respondent Authority dated 4 July 2006, partially disallowing the objection of the Taxpayer to tax assessments issued by the Authority.
   
2. The Agreed Facts prepared by the parties are as follows:
   
   • On 1 August 1995, the Applicant purchased Lots 1 to 8 INCLUSIVE ON Deposited Plan NO 7534 being Certificate of Title Nos 29251 to 29258 and Lot 13 on Deposited Plan No o7535 being Certificate of Title No 29273 comprising a total area of 4.4311 hectares from Consolidated Agricultural Fiji Limited (hereinafter referred to as the "Property").
     
   • Shortly following purchase the Applicant cultivated the Property with dalo, but the property was uneconomical.
     
   • The Applicant in November 2005 sold the Property.
     
   • The Applicant engaged Real Estate Agents to sell Certificate of Title Nos 29252 to 29258.
     
   • The following properties were regarded as sold for purposes of the tax assessment:
     
     1. CT29252 Lot2 on DP 7534 Price $30,000.00
     2. CT29253Lot3 on DP7534 Price $25,000.00
     3. CT29254 Lot4 on DP7534 Price $25,000.00
     4. CT29255 Lot5 on DP7534 Price$25,000.00
     5. CT29256 Lot 6 on DP 7534 Price $37,000.00
        
   • The Applicant did not register for Value Added Tax Purposes after purchase of the Property. The Applicant states that his intention was to carry on business as a producer supplier and was therefore not required to register under Section 22 of the VAT Decree. This statement is disputed by the Respondent.[1]
     

The Submissions and Evidence of the Taxpayer

3. Counsel for the Applicant Ms Tikoisuva, provided further background information in relation to the nature of the acquisition of the property.
   
4. The submissions of Counsel were that the parcel of land when purchased at Navua had already been subdivided into 9 lots.
   
5. The Taxpayer initially commenced farming dalo on two lots of land. His previous experience in Fiji, was working at a rice mill.
   
6. According to the Taxpayer, he purchased dalo tops from a local farmer and used inexperienced labourers to plant the crop. He claims that he did this for two seasons. Some of the crop was sold at the Suva Markets, the rest on the local highway. He also experienced a lot of problems with theft of the crop.
   
7. It was Taxpayer L's evidence, that within a two year period, the whole exercise had come to an end. Coinciding with this time, the Taxpayer had been involved in the operation of a rice milling business that was initially milling locally produced rice. With an intensification of that business, it was the Taxpayer's evidence that he eventually needed more capital in 2003 and 2004. He was approached by real estate agents to sell the property in 2005. His initial intention was to sell the property as a whole, but eventually accepted the fact that it had to be done in stages.
   
8. Taxpayer L freely admitted that he had no farming experience prior to the acquisition of the property.
   

Was the gain from the sales of the properties, income for the purposes of Section 11 of the Income Tax Act (Cap 201)?

9. The definition of total income commences at Section 11 of Act and that is the appropriate starting point when assessing whether gains secured by a taxpayer are captured within that definition.
   
10. In addition, Section 11 (a) provides further guidance as to what is and is not regarded as income.
    
11. The first limb provided within that provision states:
    

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)

12. Section 2 of the Act provides assistance to interpreting this first limb, where it sets out a non-exhaustive definition of "dealing in property" and "dealing in real and personal property".
    
13. That definition was introduced into the legislation with the introduction of the Income Tax Act 1974[2] and includes:
    

(i) the acquisition (including a gift and transfer inter vivos or by inheritance) and sale or disposition of—

(a) any land scheduled for development under the Town Planning Act6 either before or after acquisition where any subdivision takes place;

(b) any land where permission for development is granted after acquisition;

(ii) the purchase of any land scheduled for development at the date of acquisition which is sold within 3 years of acquisition; unless the taxpayer can establish that one of the prime purposes of the purchase was not to make a profit [on]7 resale;

(iii) any transaction involving the sale or disposition [or] transfer of shares of a company to the extent that the transaction is a scheme or undertaking or part of a scheme or undertaking entered into with the intention of making a profit and the company is [the owner of any land, or of shares, either directly or indirectly, in another company which is the owner of any land, to which paragraph (i) or (ii) applies;]9

14. The Second limb as adapted, 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 property was acquired for the purpose of selling or otherwise disposing of the ownership of it

15. Here in cases such as Steinberg [3], the case law dictates 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.
    
16. Finally, the 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.
    
17. In Lowe v Commissioner of Inland Revenue[4], 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.
    
18. It should be always kept in mind, that there is further exclusionary provision to Section 11(a). It provides that none of these three illustrative examples shall be considered to contribute to total income, where the profit or gain derived from a transaction of purchase and sale and does not form part of a series of transactions. Though it equally should be noted in McClelland v Commissioner of Taxation,[5] 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.
    

General Provision of Section 11

19. Chief Justice Young in the case of Commissioner of Inland Revenue v Morris Hedstrom Ltd,[6] referred to the definition of income contained within the Fijian income tax law, as being ".. of very comprehensive and sweeping nature".
    
20. As the second reading of the 1957 Bill to amend the then Income Tax Ordinance reveals[7], the modifications of the law so as to include the provisos that make up the now Section 11(a), were very much to embrace the principles established by Lord Justice Clarke in the case of Californian Copper Syndicate v Harris, 5 Tax Cases 165, where his Honour stated:
    

"it is quite a well settled principle in dealing with questions of assessment of income tax that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he 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..."

Determination of the Tribunal

21. There are many possibilities open to this analysis.
    
22. Firstly, in relation to the general provision of Section 11, it is most likely that the income from the proceeds of the sale of the lots could be regarded as:
    

Profits from a trade or commercial or financial or other business or calling

23. In that case, the Taxpayer sought to venture into dalo farming. He acquired property for that purpose; the venture failed and he disposed of the property. At disposal though, he didn't seek to simply dispose of a farming property, but systematically sold lots in conjunction with the real estate agent, in a manner more akin to the business of selling of property.
    
24. That to my mind would be a matter caught within the principle established in California Copper. Though it would seem on this occasion, we should look for greater certainty in relation to the language of the legislation.
    
25. It is here where the illustrative examples are most helpful. In relation to the 'first limb' of Section 11(a), this activity of purchasing and selling 'farming land', does not fall easily into that example as being
    

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;

26. It possibly could though, if the business of the taxpayer was viewed as being entrepreneurial for example and included any of the activities set out within the definition of "dealing in property" and "dealing in real and personal property" as set outwithin Section 2, or if a more expanded interpretation of what constitutes "dealing in property", was given. In this regard, it should be noted that this is not an exhaustive definition.
    
27. The 'second limb' within Section 11(a) refers to circumstances where the property was acquired for the purposes of selling or otherwise disposing of the ownership of it.
    
28. This seems to be the primary allegation of the Respondent.
    
29. Here as Steinberg's case dictates, we are asked to look at the purpose and intention of the Taxpayer at the time of acquisition.
    
30. The Taxpayer claims it was his intention to hold onto the subdivided lots for the purposes of exporting dalo. The fact of the matter remains, that the Taxpayer was not a farmer. He had no experience in the cultivation and agriculture associated with dalo. He was on the other hand heavily involved in the rice milling industry.
    
31. It is also the case that he only sought to cultivate two lots of land. According to the witness, he had outlayed an amount of $5,000 in his dalo investment, but this to me is not a significant amount of money in any event, particularly when one is intending to commence a project effectively from 'ground zero' and ultimately be competing in the export market.[8]
    
32. On balance, I am of the view that the ctivity of the Taxpayer and the profit or gain accrued from the sale, also falls within the 'second limb 'of Section 11(a) of the Act.
    
33. I note that the Respondent feels that the sale of land in the manner undertaken by the Taxpayer, may also be characterised as an undertaking or scheme.
    
34. As mentioned earlier, in Lowe's case, Richardson J defined the concept of "undertaking" as a project or enterprise organized and directed to an end result. It may be the case given the lots were partitioned and sold in the manner in which they did, that such a conclusion could be reached. It is not necessary to reach that conclusion on this occasion.
    
35. I believe the profit arises out of the general provision of Section 11, as well as the 'second limb' of Section 11(a). I am content to dismiss the application of the Taxpayer on that basis.
    

Should the Taxpayer be Required to Pay Value Added Tax?

36. It is clear that the Value Added Tax Decree 1991, is only to apply and impose taxes on registered persons.
    
37. Section 22(1)(a)(i) of the Decree creates the automatic registration of a person, in the case where the total value of supplies made in Fiji, in the course of the taxable activity, exceeds the threshold amount.
    
38. At the time of the Respondent's assessment of the Taxpayer, that threshold amount was $30,000.00.[9] Despite the initial arguments advanced by the application, there is no evidence that the Taxpayer had been granted the status of a producer supplier, nor had it made application for that exemption.[10] The Taxpayer could not be regarded as a dalo farmer at the time of sale.
    
39. The Respondent argues that the taxable activity of the Taxpayer was in the dealing of properties.
    
40. The activity does appear to have some continuity and regularity to it, at least in the relevant time period in question:
    

41. On that basis, I am prepared to accept the argument of the Respondent, that the disposal of those properties was a "taxable activity" for the purposes of Section 4 (1) (a) of the Decree.
    
42. The application of the Taxpayer in relation to Value Added Tax Appeal No 4 of 2006, must therefore fail.
    

DECISION

(i) That the Applications be dismissed.
(ii) That each party bear their own costs.

The Tribunal orders accordingly.

Mr Andrew J See
Resident Magistrate

^[1] That open statement would be also be disputed by the Tribunal.

^[2] See Act No 6 of 1974

^[3] See Steinberg and Others v Federal Commissioner of Taxation[1975] HCA 63; (1975) 7 ALR 491 at 495

^[4] (1981) 5 NZTC 61,006 (CA).

^[5] (1970)120 CLR 487

^[6] [1937] FJSC 1

^[7] See Fiji Council Debates 6 December 1957, pages 380-384.

^[8] There is no evidence before the Tribunal as to what this involves, the size of the market and the steps involved in order to do so.

^[9] Note amendment to the Decree by virtue of Decree No 6 of 2010.

^[10] Note Section 27 of the Decree in this regard.