Malouf v Commissioner of Taxation [2009] HCATrans 216 (4 September 2009)

Last Updated: 9 September 2009

[2009] HCATrans 216

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Sydney No S93 of 2009
No S94 of 2009

B e t w e e n -

ANTHONY MARK MALOUF

Applicant

and

COMMISSIONER OF TAXATION

Respondent

Applications for special leave to appeal

GUMMOW J
BELL J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 4 SEPTEMBER 2009, AT 4.23 PM

Copyright in the High Court of Australia

MR D.G. RUSSELL, QC: May it please the Court, I appear with my learned friend, MR D.K.L. RAPHAEL, for the applicant in both matters. (instructed by Gibsons Lawyers)

MR J.W DE WIJN, QC: May it please the Court, I appear with my learned friend, MR F.D. O’LOUGHLIN, for the respondent in each matter. (instructed by Australian Government Solicitor)

GUMMOW J: Yes, Mr Russell.

MR RUSSELL: If the Court pleases, the material that you should have is a joint application book and a joint book of authorities and legislation.

GUMMOW J: Yes. Why are there two applications again?

MR RUSSELL: There is no difference whatever between the two, your Honour, so although there are submissions in each, it will only be necessary to refer to one set of them. These are applications for special leave from the decision of Justices Sundberg, Jessup and Middleton of the Full Federal Court allowing an appeal by the respondent from a decision of Justice Allsop. His Honour the primary judge’s decision appears at pages 1 to 31 of the application book, and the Full Court at pages 46 to 66 of the application book. The issue raised is whether the Full Court was correct to overturn the decision in favour of the applicant by Justice Allsop that he was entitled to an income tax deduction for an amount agreed to be - - -

GUMMOW J: The primary judge regarded himself as constricted by some Full Court authorities, did he not?

MR RUSSELL: That is correct, your Honour.

GUMMOW J: The Full Court was a little less constrained, I suppose.

MR RUSSELL: Yes, although, your Honour, it did not deal with the matter in that way. It was open to the Full Court and, indeed, our learned friends, as your Honours can see from the notice of appeal below, submitted that the decision in the Woolcombers Case was wrong. That appears at the bottom of page 38 of the application book, but that was not the basis on which the Full Federal Court determined the matter. It determined the matter on the basis that his Honour was not bound. That perhaps appears most clearly from page 63 of the application book at about line 19, paragraph 52:

His Honour was entitled to find, and should have found, differently, from the conclusions reached by the Full Courts in Raymor and Woolcombers.

That sentence is really the nub of our application. We say that is wrong.

BELL J: You do not in relation to Raymor?

MR RUSSELL: No, that is certainly in relation to Woolcombers, yes.

GUMMOW J: Just explain to us the distinction between Woolcombers and this case, or the lack of distinction.

MR RUSSELL: Perhaps the useful starting point is the decision of the Full Federal Court. If one starts at page 61 and goes through to page 63, one has their Honours’ reasons for saying that there was a distinction. First of all at paragraph 44 their Honours say:

The conclusion of the Full Court that ‘[d]elivery of the wool was not a condition precedent to liability to pay’ can be reconciled with the statement of Dixon J in Automatic Fire Sprinklers [1946] HCA 25; 72 CLR 435, 464 that ‘until [the goods] are accepted there is no indebtedness’ on the basis that both conclusions were reached only after an analysis of the intentions of the parties to the respective contractual arrangements.

As to that statement, the statement that payment was not subject to a condition for prior delivery must be understood as having a special meaning, because if one goes to the decision of the Full Court in Woolcombers which is behind tab 8 in the case book, at page 563, midway between points A and B, the precedent contract is set out, and your Honours will see that it is said:

Payment shall be made ... days after the date of completion of delivery at the store of the Purchaser.

BELL J: The indemnity provision was important in Woolcombers.

MR RUSSELL: Yes, your Honour. The indemnity provision is set out at paragraph 4 at about point F on page 563. In our respectful submission, it does not say any more than would be the case arising under this contract. In other words, a vendor is liable in relation to a sale of land to indemnify a purchaser –

for any loss or damage direct, indirect or consequential suffered by the purchaser as a result of the Seller’s failure –

to deliver the land. We have given your Honours various references to that. Wenham v Ella is an obvious one. We do not see the indemnity as taking the matter further. Where we saw the discussion of the indemnity as relevant is in relation to the distinction between a sale of goods and a sale of land and that is the point that their Honours, we think, are making in paragraph 44 on page 61 where they talk about the reconciliation of Justice Dixon’s statement in Automatic Fire Sprinklers with what is said by the Full Court in Woolcombers. What his Honour said is behind tab 3 of the case book.

BELL J: Just before we go there, I think it is also, is it not, in that part of paragraph 46 on application book 61, going over to the next page where the reference is to the indemnity making:

it clear that it was intended that a correlative liability be imposed on the taxpayer at the same time to pay the woolgrower.

MR RUSSELL: That is correct, your Honour, and your Honour, that is a response, as we apprehend it, to the observations of Justice Dixon in Automatic Fire Sprinklers that in a contract for the sale of goods the purchaser is under no obligation to pay until the purchaser has inspected the goods and accepted them. So that a purchaser in the circumstances that Justice Dixon is talking about has himself the capacity to prevent the liability from arising, because the purchaser simply says these goods do not comply. So at that point there would be no liability to pay.

What, as we apprehend, the majority were saying in Woolcombers, is when you have a contract that makes it clear that a purchaser does not have that right because the purchaser simply has to take delivery, subject only to a rise and fall if the goods do not comply with the description, then there will be a liability incurred for the purposes of section 8-1 of the Income Tax Assessment Act and we say that is exactly the situation that obtains in relation to a contract for the sale of land. A purchaser under a contract for the sale of land cannot turn up on settlement and say, “I have looked at this and I do not like it”.

GUMMOW J: What do you say about paragraphs 47 and 48 of the Full Court’s reasons in this case at page 62 of the application book?

MR RUSSELL: We say in relation to the first sentence –

The agreement in Woolcombers concerning an existing and identifiable subject matter, namely wool on the sheep -

it is simply wrong, with great respect to their Honours. If your Honour goes to page 562 of the report in Woolcombers, again behind tab 8, the court sets out its description of the contract starting two lines below point B. Having talked first about the spot contract, they then move to discuss the forward contract, and this sentence appears:

The second is by way of contract to purchase a woolgrower’s wool clip several months, often up to six or nine months, prior to shearing for delivery in the future when the wool has 12 months growth.

So that the reality is that these contracts, as the Full Court recognised, related to goods that were not in existence and would not come into existence for nine months after the contract was signed.

GUMMOW J: Yes, but the actual promise between E and F on 562 was to sell –

(THE WOOL) shorn or to be shorn –

so in a sense it was future goods, I suppose –

from all the sheep on the Sellers property at the time of signing the Contract –

So in a way, the tree was identified, but the fruit had some futurity.

MR RUSSELL: Yes, your Honour, but the goods were not in existence. The point of identifying the sheep - - -

GUMMOW J: They had to be severed from the sheep in any event.

MR RUSSELL: Well they had to grow first, your Honour. That is relevant because at a later point of time their Honours draw a distinction between the proportion of value at the time of the contract and the intended value at the time of sale in the case at hand, and of course that was exactly the situation in relation to Woolcombers. The point about identifying all of the sheep on the property, of course, was one of the things that the court relied upon as saying this is a contract for the sale of specific goods and therefore there is no question of rejecting any of the wool. So there is not a right on the part of the purchaser to decline to accept delivery and therefore to bring to an end its obligation, and we say it was that feature that distinguished the Woolcombers situation from the usual situation of a sale of goods, and it is precisely that feature, we say, which distinguishes this contract. Moving on, your Honours, the presiding judge, paragraph 47:

The agreement in Woolcombers concerned an existing and identifiable subject matter –

I have dealt with that –

This was the subject matter of the agreement to sell. For delivery to occur steps customarily taken in the trade were required to be completed . . . the sheep would be shorn and delivery of the wool would take place.

That is really consequential on the primary error. The first thing one has to do is husband the sheep and get the wool grown –

In the circumstances, the Full Court treated the agreement as unconditional, subject to defeasance . . . The only real basis for defeasance being an event which would give rise to frustration of the agreement and prevent delivery.

It was certainly the case that the vendor could have done a number of things which would prevent delivery. It would have been in breach of the contract, but we say that is exactly the same as applies in the present context for contract for the sale of land. At paragraph 48 their Honours say this:

Looking then to the contract before us in the appeal, the obligations of the vendor were to bring the development to Stage 1 completion.

We say that is analogous to the circumstances in Woolcombers. In other words, one had to husband the sheep and procure the wool to grow for a period that could be up to nine months of the 12-month period.

The major portion of the value which the taxpayer obtained under the contract related to a development which did not exist at the time the contract was entered into by the parties.

The major portion of the value in the case of the wool relates to “does not exist at the time the contract was entered into”, quite apart - - -

BELL J: I suppose you have the sheep.

MR RUSSELL: You have the sheep, but not the wool, so - - -

BELL J: You did not even have a development application here, did you?

MR RUSSELL: That is not correct, with respect, your Honour. I will come to that, but that is the next point to which we take objection. If the question is what the major portion of value is, the major portion of value in the context of wool is not just the three-quarters of the period of growth of the wool, but it is also the cost of shearing the wool, which is a very substantial part of the underlying costs. So in fact if one were going to look at questions of proportion of value added over the period, we would submit, that there would have been a lot to be said for the view that the proportion of value to be added in Woolcombers was actually higher than occurred in this case. It is then said:

Not even the preferred planning permit was in existence which would give rise to the increased value of the land by reason of any development.

If your Honours go to pages 11 and 12 of the application book, your Honours will see how this matter was dealt with by the primary judge. The position was, as his Honour found, that there was an existing planning permit. It contained an obligation to apply for a new permit, and then at the bottom of page 11 it said:

If the new permit were granted, the construction would be in accordance with Plans A; if not, it would be in accordance with Plans B . . . The vendor’s obligation to build under one or other of Plans B or Plans A or any agreed variation was unconditional.

In case it be said that there was a world of difference between the two development plans, that is dealt with in paragraph 22, about halfway down page 12:

If the Existing Permit . . . formed the basis of the operative planning permit, the price was to be reduced by $6 million to $33,750,000 –

so it is a factor of about 15 per cent. It is not as if one is talking about land on the one hand in an undeveloped state, as opposed to land under a development application which would be - the development application would be the fundamental part of the value. Their Honours then say:

The contract was not an unconditional agreement subject to defeasance by unforeseen events.

The basis on which they say that, given that his Honour the primary judge found to the contrary, is not at all clear. If they mean what applies in the following sentence:

The taxpayer’s obligation to pay under the contract was dependent upon further performance by the vendor, and upon the happening of events which were anticipated but were under the control of neither party.

The short answer to that is that if that is put as a point of distinction for Woolcombers, then exactly those propositions applied to Woolcombers. The purchaser’s obligation was dependent on further performance by the vendor, and in particular delivery of the wool. Upon the happening of events which were anticipated but under the control of neither party, that really amounts simply to a question of the amount that would be paid, and a variation of 15 per cent at the most because the first planning permit was already in existence. Then their Honours go on to say:

The fact is that with the executory contract before the primary judge, the liability to pay was not due until settlement and delivery of a transfer and title to land.

The liability to pay in Woolcombers was not due until delivery, if by that it is meant the actual obligation to pay. What the court, in our respectful submission, was saying in Woolcombers, and saying correctly, was that a present liability to pay, or a debt, as our learned friends put it in their submission in a number of places, is not what is required. What is required is pecuniary liability, even if it is to be actually payable in the future.

Now, our learned friends at paragraphs 3(c), 4 and 10 use the expression “debt” as if that is the only critical issue. If a presently existing liability was critical, then of course the decision of Woolcombers should have gone the other way.

GUMMOW J: We would not be bound by Woolcombers.

MR RUSSELL: No, your Honours, and it would certainly be open to our learned friends to indicate, as indeed they did below, that in the event we were to be granted this application, they could file a notice of contention. We would say in that event, that very clearly what is raised is a matter of major principle, making this an appropriate case for special leave. It is certainly not, we would say, clear to the point where your Honours would say on the special leave application that a decision of the Full Federal Court is so clearly wrong that one would proceed on the basis that the notice of contention would necessarily be upheld.

If the matter does not get to notice of contention stage – back to the notice of contention point – if our learned friends are saying that the law is such that a contractual obligation to pay, which is conditional upon the performance by the other party of their contractual obligations, is not a sufficient incurrence of an expense because the other party may fail to perform, then in our respectful submission, that is close to revolutionary,

but in any event something that is certainly worthy of the attention of this Court.

GUMMOW J: Mr Russell, what do you say about paragraph 21 of the Commissioner’s submissions on page 113?

MR RUSSELL: “A possible liability to pay” – well, in our respectful submission, our proposition is not that because we would have to pay an unquantified amount by way of damages, therefore there is an outgoing incurred on execution of the contract. That really is the alternative. Our primary obligation is to pay the purchase price if the vendor turns up at settlement with a transfer, which is its obligation under the contract.

GUMMOW J: What is the significance of paragraph 27, namely the contract “has been terminated and the deposit refunded”?

MR RUSSELL: In our respectful submission, if one were to accept the other propositions that we have put forward, then that simply amounts to a proposition that this sort of injustice may be accepted in this case, but perhaps in others should not. It should be accepted simply because of the way in which the matter has proceeded. In our respectful submission, that would not be a reason for refusing special leave if your Honours were otherwise with us. Your Honours, if our learned friends - - -

GUMMOW J: I see the red light is on, Mr Russell.

MR RUSSELL: I am sorry. Those are our submissions.

GUMMOW J: Was there anything you wanted to add?

MR RUSSELL: Only that if our learned friends do not go to the notice of contention point, then we would say this is an important issue. It is a central provision of taxation law and because there is no factual dispute between the parties, it is an entirely appropriate case for the grant of special leave. Those are our submissions.

GUMMOW J: Thank you.

MR DE WIJN: Could I take your Honours to Woolcombers at tab 8 at page 570, because the way my learned friends presented the case is really an appeal in the Woolcombers decision and that is not what we are concerned about. What the Full Court did in Woolcombers was take a two-step approach. The first was to establish the relevant principles that need to be satisfied in order to see whether an outgoing that has not yet been discharged is deductible, and they do that starting at page 570, and they set out the relevant principles, and your Honours will see at line E that they make what we say is the clear point:

Although it is not enough if there is “no debitum in praesenti solvendum in futuro ... [or] an inchoate liability in process of accrual but subject to a variety of contingencies” –

That is clearly the correct principle and it is a principle that this Court adopted in Coles Myer, so there is a requirement that there be a debt - Emu Bay was another case - is a requirement before a liability can be incurred that there is a debt, albeit one payable in the future. So what the Full Court did in Woolcombers is set out the correct principles. My learned friends now accept that in relation to this contract there was no debt - they accept that -at the time at which the contract was entered into. So, accepting the correct principles set out in Woolcombers, my learned friends must fail because there is no debt and not even one payable in the future.

What the Full Court then go on to do in Woolcombers, starting at page 573, is they take the correct legal principle, which they have set out on the previous page, and then apply it to the particular contract in question, and on about four occasions the Full Court says you have to look at the particular contractual matrix in the particular case, and just below line C they say:

In our view, Lee J was correct in his analysis of the effect of the contractual provisions, that is to say, as has been noted, that “[t]here was [here] an accrued obligation or present liability imposed on the taxpayer by a definite contractual commitment”.

That is saying that based on this contractual arrangement in Woolcombers that there was a debt payable, albeit one payable in the future. That might be right, or it might be wrong, and the Full Court in this case distinguished Woolcombers, but it is irrelevant whether it is right or wrong because the question is the principle. The first issue is the legal principle - - -

GUMMOW J: The problem is that the general words of the statute will always give rise to decisions which seem to turn on close attention to particular facts.

MR DE WIJN: They do, and this is one of those, so as a matter of general principle, the principle is that there must be a debt in existence, or an accrued pecuniary liability, as the courts refer to it. Emu Bay they refer to debt. Coles Myer, the judgment of this Court said it is not sufficient if there is not a debt in praesenti solvendum in futuro, so that principle is clearly established. My learned friends then accept, as they are bound to do, that in the case of a contract, on signing the contract, there is not a debt in respect of the balance of the purchase price. So then they bring into play the alternative argument about damages, and my learned friend has really not pressed that, but if your Honours look at the way in which their draft notice of appeal at page 99 is formulated, it is based entirely on damages. They say at paragraph 7:

The Full Court erred when it said in paragraph 53 of the reasons that no pecuniary liability was incurred at the date of the contract. To the contrary as from the date of contract the Appellant was liable for damages if he and his co-purchasers repudiated –

At the point in which the contract was entered into, there was no breach, there was no liability for damages, and there was no loss. They had paid a deposit of $6.5 million for which they got a deduction on land that had an agreed value of $2.5 million. With respect, we say that the Full Court in this case applied the correct principle. The Full Court in Woolcombers applied the correct principle. There could be a debate about the contractual provisions in Woolcombers, but this is not the vehicle to decide whether - - -

GUMMOW J: What is the situation about this planning permit?

MR DE WIJN: There was a planning permit for Plans B, there was not a planning permit for the plans that they had agreed to build according to - Plans A.

GUMMOW J: So an attack is made on the factual steps in paragraph 48 of the Full Court’s reasons at page 62.

MR DE WIJN: Sorry, your Honour, not by us.

GUMMOW J: No, by your opponent, that is why I am giving you the chance to respond to it.

MR DE WIJN: What the Full Court said was perfectly correct. There was no planning permit for Plans A. It was a contract for land, there was an obligation to build a retirement village under this contract in accordance with Plans A. The price was set in respect to Plans A, there was no planning permit for Plans A, and then if they did not get a permit, they had to do something else, and then the price would be reduced by $6 million.

BELL J: As I understand it, there was an existing permit in relation to Plan B, and a contractual obligation in the event a permit for Plan A was not granted to proceed with the construction of Plan B.

MR DE WIJN: That is correct, and that is why the Full Court said there was no planning permit for the preferred development, so they were perfectly correct. Your Honours will see, of course, when your Honours read Justice Allsop’s decision, he found that the contention the Commissioner was putting fitted with what Chief Justice Barwick said in Nilsen’s Case and was the preferable view. He felt constrained by what turned out to be a misunderstanding of Raymor and the decision of the Full Court in Woolcombers, so we would say that we effectively have four judges saying we are right. Justice Allsop was cautious, and there is no now reliance on Raymor, which was a totally different facts situation. If your Honour pleases.

GUMMOW J: Thank you. Mr Russell.

MR RUSSELL: Your Honour, very briefly, we would simply, in response to our learned friend’s submissions, invite your attention to paragraph 73 of Justice Allsop’s discussion and the nature of the obligation that he was considering and what he thought and which in due course the Full Federal Court found satisfied the requirement of a pecuniary liability to pay. We say that that is precisely what existed here. Thank you, your Honour.

GUMMOW J: Thank you, Mr Russell.

We do not regard the issues which would arise on an appeal to this Court as likely to be governed by factual distinctions or analogies between this case and Commissioner of Taxation v Woolcombers (WA) Pty Ltd [1993] FCA 631; (1993) 47 FCR 561. The general words of the statute necessarily give rise to decisions which turn upon close attention to the particular circumstances.

We are not satisfied that any question of principle arises nor do we see sufficient prospects of success in displacing the conclusion reached by the Full Court of the Federal Court to warrant a grant of special leave. Special leave is refused with costs.

AT 4.54 PM THE MATTERS WERE CONCLUDED