Beckham v Commissioner of Inland Revenue [2008] NZCA 301; (2008) 23 NZTC 22,066 (13 August 2008)

Last Updated: 5 January 2012

IN THE COURT OF APPEAL OF NEW ZEALAND

CA438/2007 [2008] NZCA 301

BETWEEN MAX BECKHAM
Appellant

AND THE COMMISSIONER OF INLAND REVENUE
Respondent

Hearing: 1 July 2008

Court: Hammond, Chambers and Baragwanath JJ

Counsel: M S Hinde for Appellant
E Aspey and R L Roff for Respondent

Judgment: 13 August 2008 at 4pm

JUDGMENT OF THE COURT

A The appeal is dismissed.

2. We order that the appellant pay the respondent’s costs for a standard appeal on a band A basis and usual disbursements.

____________________________________________________________________

REASONS OF THE COURT

(Given by Baragwanath J)

[1] This case concerns the appellant taxpayer’s liability to pay income tax on the proceeds of sale of a beef cattle farm that was converted into olive groves. Under s CD 1(2) of the Income Tax Act 1994 (now repealed) two classes of profits derived from the sale of land were included in taxpayers’ assessable income. The first was under para (e)(iii)(C) and (D), which applied where land was sold within ten years after the date of acquisition and, in the opinion of the Commissioner of Inland Revenue, at least 20 per cent of the amount of the profit was due to the grant or the likelihood of grant of a resource consent under the Resource Management Act 1991. The second was under para (f), which applied where a development had been carried out by or on behalf of the taxpayer on or in relation to the land within ten years of the date of its acquisition.
[2] The farm sale fell within the financial year to 31 March 2000. The Commissioner held that the appellant had made profits which were taxable under para (f), and issued an assessment in the sum of $326,321.49 with an added shortfall penalty of $32,632.15.
[3] The appellant’s challenge to the assessment under para (f) was successful and it was set aside by the Taxation Review Authority. But the Authority held that, although para (f) had no application, the sum of $77,237.37 was payable under para (e). Its decision was upheld by Frater J in the High Court: Beckham v Commissioner of Inland Revenue (2007) 23 NZTC 21,499.
[4] The taxpayer now appeals to this Court on questions of law, contending:

• (1) having set aside the assessment under para (f) the Authority lacked jurisdiction to substitute an assessment under para (e); and
• (2) the Authority’s factual findings were not open to it.

Jurisdiction

[5] The first issue is whether, having allowed the appeal against the application of para (f), the Authority possessed jurisdiction to reassess under para (e). For ease of reference we put those paragraphs in their context before proceeding:

CD 1 Profits or gains from land transactions

(1) Any amount derived from the sale or other disposition of any land, being an amount to which this section applies, is gross income.

(2) For the purposes of subsection (1), the gross income of any person includes the following amounts—

...

(e) Any amount derived from the sale or other disposition of land (not being an amount which is gross income under any of paragraphs (a), (b), (c), (d), and (f)), if—

(i) The land was disposed of by the taxpayer within 10 years after the date on which it was acquired by the taxpayer; and

(ii) The total amount derived by the taxpayer from the disposition exceeds the cost of the land; and

(iii) ... at least 20% of the excess is due to any one or more of the following:

...

(C) Any consent granted in relation to that land under any provision of that Act or any decision of the [[Environment Court]] made in relation to that land under that Act, where that consent was granted or that decision made after the acquisition of that land by the taxpayer; or

(D) The likelihood of any such consent being granted or of any such decision being made; or

...

(f) Any amount derived from the sale or other disposition of land where—

(i) An undertaking or scheme, whether or not an adventure in the nature of trade or business, involving the development or division into lots of that land has been carried on or carried out, and ... that development or division work, not being work of a minor nature, has been carried on or carried out by or on behalf of the taxpayer, on or in relation to that land; and

(ii) That undertaking or scheme was commenced within 10 years of the date on which that land was acquired by the taxpayer:

Provided that this paragraph shall not apply in any case where ... the development or division work involved in any undertaking or scheme (being development or division work in relation to which, apart from this proviso, this paragraph would apply if it were development or division work of other than a minor nature) is for the purposes of the creating or effecting of a development or division or any other improvement that is for use in and for the purposes of—

(iii) The carrying on by the taxpayer of any business on or from the land, not being a business that consists of that undertaking or scheme; or

(iv) The residing, on the land, of the taxpayer and any member of the taxpayer's family living with the taxpayer; or

(v) The deriving by the taxpayer, from or in relation to the land, of gross income of any of the kinds referred to in section CE 1(1)(e):

Facts relevant to the first issue

[6] In 1992 and 1993 the appellant purchased two adjoining farms at Midgley Road, Mangonui in Northland for a combined price of $444,525.66. The total property, comprising some 375 hectares, was run as a beef cattle unit.
[7] In February 1998 the appellant entered into a conditional agreement to sell the property to a developer, Stargate Holdings Ltd, for $2.1m plus GST. Stargate intended to subdivide and develop the property into olive groves and on 14 July 1998 obtained resource consent from the Far North District Council to do so. Stargate failed to perform its obligations under the contract and in October 1999 the appellant exercised its election to cancel the contract.
[8] In February 2000 the appellant instructed valuers, Garton and Associates, Northland, to prepare a valuation of the property for the purposes of sale. The valuer was instructed to take account of the potential for subdivision with an olive grove in mind. The valuation was to be retrospective to 1 July 1998, that is, prior to the resource consent of 14 July 1998. The valuation yielded a figure of $740,000 for the property as a farm and $1.6m on the basis of its potential subdivision value.
[9] On 8 February 2000 the appellant incorporated a company, Ocean View Olives Ltd (OVO), of which he was the sole shareholder and director. On 5 April 2000 he entered into a sale and purchase agreement to sell the property to OVO for $1.6m plus GST. Settlement of the sale occurred on 20 April 2000.
[10] On 30 March 2001 the appellant filed an income tax return for the year ended 31 March 2000. Because he had a non-standard balance date of 30 June, transactions up until 30 June 2000 were required to be included in the return for 31 March of that year (see s 38, Tax Administration Act 1994 and s OF 1, Income Tax Act). He did not include as a revenue item the proceeds of sale of the farm to OVO, which he showed as a capital transaction.
[11] On 24 June 2002 the Commissioner issued under s 89C of the Tax Administration Act a Notice of Proposed Adjustment (NOPA), showing the transaction as falling within para (f) of s CD 1(2).
[12] On 20 August 2002 the appellant gave notice of response (NOR) (s 89G) challenging the NOPA.
[13] On 21 February 2003, as required by s 89M(1), the Commissioner issued a disclosure notice in respect of the NOPA and a statement of position (s 89M(3) – (4)). On 22 April 2003 the appellant issued his competing statement of position (s 89M(5) – (6)).
[14] On 4 March 2004, following receipt by the Adjudication Unit of the Inland Revenue Department of a non-statutory “Adjudication Report”, the Commissioner issued another non-statutory document headed “Notice of Final Determination” which, in the Commissioner’s chronology, is described as a “disputable decision to reassess”. The Notice of Final Determination set out the Commissioner’s reasons for considering that s CD 1(2)(f) of the Income Tax Act was applicable to the gross income derived by the appellant from the sale of the land. It stated that detailed reasons were set out in an Adjudication Report. That report was enclosed with the copy of the Notice of Final Determination sent to the appellant but was not produced in evidence before the Taxation Review Authority or before the High Court.
[15] Out of caution, Mr Aspey applied to this Court for leave to adduce the Adjudication Report, an application which was resisted by Mrs Hinde. Our conclusion favouring the Commissioner is reached without reference to that document. Since it was not produced below and its production is not vital to determination of the appeal we have not read and do not admit it.
[16] The Notice of Final Determination summarised the Commissioner’s reasons for concluding that para (f) applied. It continued:

Had section CD 1(2)(f) not applied, the amount Mr Beckham derived from the sale of land would have been gross income under section CD1(2)(e)(iii)(C) (subject to section DJ 14), as at least 20% of the profit derived from the sale of the land within ten years of its acquisition by Mr Beckham was due to a resource consent granted for the land subsequent to its acquisition.

Section DJ 14 allows certain deductions from the gross income.

[17] Formal notice of assessment, on a para (f) basis, was issued on 11 March 2004.
[18] The appellant’s statement of position challenged the para (f) basis of assessment. Alluding to para (e) it said that the rezoning provisions did not apply, and even if they did there would be a reduction of 10 per cent for each year the property was owned (s DJ 14).
[19] The next stage was the appellant’s notice of claim in the Taxation Review Authority, brought under Part VIIIA of the Tax Administration Act (s 138D(1)(a)). The notice of claim challenged the assessment, contending that the sale proceeds were not taxable under para (f). It further asserted that para (e) had no application. It added that, if para (e) did apply, the Commissioner had accepted that the taxpayer would be entitled to a deduction under s DJ 14 “but the deduction has not been calculated by the Commissioner and hence is not subject to this challenge”.
[20] In the Commissioner’s notice of defence to that notice he first sought to uphold the assessment under para (f). He then pleaded:

In the alternative: Section CD(1)(2)(e)

3.8 In the event that s CD1(2)(f) does not apply, the amount derived by the Disputant from the sale or other disposition of the Midgley Road Property is gross income of the Disputant pursuant to section CD1(2)(e) of the Income Tax Act 1994.

The decisions of the Authority

[21] In an interim decision of 18 July 2005 the Taxation Review Authority upheld the appellant’s contention that the proceeds of sale were not taxable under para (f) but determined that they were taxable under para (e). The Authority indicated that it was prepared to make an assessment in favour of the Commissioner but withheld doing so, reserving leave to the appellant to call further evidence or make further submissions if he so wished. The appellant however filed notice of appeal to the High Court and the Commissioner cross-appealed to protect his position. The Authority then issued a final decision of 12 September 2005 holding the appellant liable under para (e) to pay income tax for the subject year in the amount of $77,237.37, based on the increase of the purchase price of $445,525 to the sale figure of $1.6m. An appeal and a cross-appeal were filed in relation to that decision.

The decision of the High Court

[22] In the High Court the appeals were consolidated and dismissed by Frater J, with whose reasons as to jurisdiction we essentially agree.

Submissions

[23] Mrs Hinde for the appellant argued that once the Commissioner chose to assess the farm proceeds under para (f) he was not permitted to assess under para (e), whether primarily or in the alternative. She emphasised that paras (e) and (f) are mutually exclusive. Paragraph (e) is restricted to “any amount derived from the sale ... of land (not being an amount which is gross income under ... paragraph ... (f))...”. It followed that the Commissioner could not and did not assess in the alternative. The Commissioner’s consequential rejection of para (e) prevented the taxpayer from being able to mount a challenge to such ground. Although his Statement of Position and Notice of Claim referred to the Commissioner’s “threatened prospective substitute assessment under [para (e)]”, that did not confer jurisdiction on the Authority to apply para (e). It could receive jurisdiction under para (e) only if there were a timely challenge to an assessment made under that paragraph. That is so even though there is no basis for suggesting breach of natural justice in the course adopted by the Commissioner and the Authority.
[24] The argument emphasised 138K of the Tax Administration Act:

138K Determination of challenge not to affect other matters

The determination of a challenge by a hearing authority under this Part—

(a) Relates solely to the matter that is the subject of the disputable decision being challenged; and

(b) Does not affect the right of the Commissioner to make a disputable decision relating to a different matter and to amend the disputable decision being challenged in any way rendered necessary by the later disputable decision.

Mrs Hinde submitted that “the matter that is the subject of the disputable decision being challenged” does not extend to a claim that para (e) applies. If “matter” is an open-ended label relating simply to the assessability of the farm proceeds of $1.6m, then the challenge to the assessment of the income under para (f):

... magically extends the dispute to include a general examination of whether there is any other provision under which the proceeds may be assessed in lieu of the unsuccessful head of ... (f).

[25] Mrs Hinde cited Commissioner of Inland Revenue v Farnsworth [1984] 1 NZLR 428 (CA) at 436 where Richardson J stated:

... at the hearing of an objection the Commissioner is tied to the basis on which he arrived at the assessment and cannot rely on a different provision on which the parties have not joined issue. Where there are two distinct provisions which may bear on the ascertainment of the liability for income tax the Commissioner may often properly rely on both provisions cumulatively (or alternatively) in making his assessment. That is frequently done in practice and is often carried through to the hearing of objections in Court or before the Taxation Review Authority - the refusal of a deduction on the ground that the expenditure does not satisfy the general deductibility test under s 111 of the 1954 Act and is barred from deduction as a capital expenditure under s 112(1)(a) is an obvious example. But if in respect of a particular item an amended assessment is made in reliance on one section and is then objected to on that basis the Commissioner is precluded by the scheme of the objection provisions from supporting his assessment under another provision.

She submitted that even if the effect of the decision of this Court in Zentrum Holdings Ltd v Commissioner of Inland Revenue [2007] 1 NZLR 145 is to authorise such “general investigation” or “hunt”, there was no hunt for an alternative provision to support what, she argued, could only be an assessment for an identical amount, undertaken either by the Commissioner or by the Authority.

[26] Accordingly, she submitted, as a result of the course adopted by the Commissioner, the Authority’s jurisdiction was confined to the challenge under para (f). Its conclusion that the assessment under that paragraph was wrong rendered it functus officio. It had no jurisdiction to substitute an assessment under para (e).
[27] For the Commissioner Mr Aspey supported the decisions of the Authority and of the High Court.

Decision on jurisdiction

[28] The whole of the appellant’s submission is met directly by the clear language of the Taxation Review Authorities Act 1994, which states:

16 Hearing of objections by an Authority

...

(2) For the purpose of hearing and determining any objection or challenge, an Authority shall have all the powers, duties, functions, and discretions of the Commissioner in making the determination.

[29] Parliament has made assurance doubly sure by making similar provision in the Tax Administration Act:

138P Powers of hearing authority

On hearing a challenge, a hearing authority may –

...

(b) Make an assessment which the Commissioner was able to make at the time the Commissioner made the assessment to which the challenge relates, or direct the Commissioner to make such an assessment.

[30] In Zentrum the Full Court held that the Tax Administration Act removed the basis of the decision in Farnsworth. In Zentrum the Commissioner had assessed the taxpayer under the general anti-avoidance provisions of the Income Tax Act. Before the Authority he maintained that position. On the Commissioner’s appeal to the High Court he argued that the transactions were in fact shams. The High Court held that argument was precluded by Farnsworth. But this Court held that under the Tax Administration Act the nature of the taxpayer’s challenge is an attack on the assessment itself and the Commissioner was not limited to contentions raised earlier in the dispute resolution process. The appeal was allowed.
[31] The jurisdiction challenge is inconsistent with s 16, s 138P and the decision in Zentrum. It is without merit. The Authority clearly had jurisdiction to substitute an assessment under para (e), albeit for a lesser amount than the Commissioner’s original assessment.

Factual findings

[32] The second issue is whether the Authority’s factual findings were open to it. Those findings were that the conditions in para (e) were satisfied in relation to the sale. Paragraph (e), in its context, is set out above at [5]. It has three conditions. The first is (i), disposal of the land within 10 years of the date of acquisition. It is satisfied. The others are that (ii) the total amount derived by the taxpayer from the disposition of the land exceeds the cost of the land and (iii) at least twenty per cent of the excess is derived from (for present purposes) the grant/likely grant of a resource consent.
[33] In the present case both parties agree that the cost of the land was $445,525.66 and the disposition was $1.6m. The excess was therefore $1,154,474.34. So (ii) is satisfied. As to (iii), twenty per cent of that excess is $230,895. The upshot is that in order to escape para (e) the land would have had to have been worth over $1,369,105 prior to the grant/likely grant of a resource consent.
[34] The Commissioner relied on the valuer’s figures which gave a pre-consent value of $740,000. The Commissioner therefore concluded that the remaining $860,000 of the excess could only be accounted for by reference to the resource consent. That equated to 74 per cent of the excess.

Submissions

[35] Mrs Hinde contended that none of the proceeds of sale were due to either the resource consent or the likelihood thereof. She submitted that there are two key points:

1. The Commissioner was required to calculate 20% of the excess as a “threshold amount” for coming within para (e) but failed to do so. The appellate decision-makers did not rectify this oversight; and
2. The decision-makers wrongly assumed that the $860,000 increase was due to the resource consent and erred by not analysing the valuation in order to identify the true source of the increase.

[36] In oral argument Mrs Hinde expanded on the second point. She contended that the $860,000 increase was unrelated to the likelihood or actuality of resource consent. That potential increase was, she submitted, always inherent in the property as its highest and best use and was to be recognised as is required by such authorities as In re Whareroa 2E Block [1959] NZLR 7 (PC). The only increase due to resource consent was the $500,000 being the difference between the $1.6m figure and the $2.1m which Stargate had agreed to pay but which was never realised and so was not taxable.

Discussion

[37] There is nothing in the first point. The Commissioner is not required to calculate explicitly a particular threshold amount. Even if he had it would have made no difference to the outcome.
[38] As to the second point, the short answer to the appellant’s submissions is that para (e) does tax potential value if that highest and best use derives from potential or, a fortiori, actual resource consent. And the evidence supporting the assessment was overwhelming.
[39] Moreover, as the Commissioner submitted, by s 149A of the Tax Administration Act the onus of proof lies on the taxpayer. In Buckley & Young Ltd v Commissioner of Inland Revenue [1978] 2 NZLR 485 (CA) Richardson J at 498 confirmed that:

... the final question must always be: “On all the evidence, has the taxpayer discharged the onus of demonstrating that the Commissioner’s assessment was wrong and, if so, why it was wrong, and how far it is wrong.”

[40] The submission that there was a potential value above $740,000, aside from the likelihood of resource consent, is without evidential support. There is nothing in the report or oral evidence of the valuer to show why there is any element of valuation above $740,000 that is not attributable to the resource consent, or the likelihood thereof. In any event, as we have mentioned, the appellant would have had to show that the land had a pre-consent value of $1,369,105 in order to fall outside of para (e). That is plainly untenable.

Decision

[41] The appeal is dismissed with costs.

Solicitors:
Palmer Macauley, Kerikeri for Appellant
Crown Law Office, Wellington for Respondent