Taxpayer N v Fiji Revenue & Cutoms Authority [2013] FJTT 5; Income Tax Matter 16.2007 (6 March 2013)

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

Income Tax Matter No 16 of 2007

BETWEEN:

TAXPAYER N
Applicant

AND:

FIJI REVENUE & CUSTOMS AUTHORITY
Respondent

Counsel: Ms D Gandhi, Neel Shivam Lawyers
Ms T Rayawa, FRCA Legal Unit for the Respondent

Date of Hearing: Monday 11 February 2013
Wednesday 13 February 2013

Date of Decision: Wednesday 6 March 2013

JUDGMENT

Section 11 INCOME TAX ACT (Cap 201); Purpose of Acquisition; Business of the Taxpayer.

Background

1. The Agreed Statement of Facts provided by the parties, sets out the following background information. The Applicant Taxpayer is a former resident of Fiji and now resides in New South Wales, Australia.
   
2. In 1982, the Applicant whilst employed within a government department, purchased land at Deuba situated in the district of Serua, for the price of $32,000.00.[1]
   
3. On or about 2001, the Applicant subdivided the land into four lots, with each lot being approximately 1 hectare.
   
4. From the four lots that were sub-divided, the Applicant sold three lots at a total purchase price of $136,000.00.
   
5. The Respondent has treated this amount as income for the purposes of the Income Tax Act (Cap 201) and has offset against that amount the purchase price ($32,000.00) and verified revenue expenses in the amount of $4557.89.
   
6. The net result of all of this, is that the Taxpayer has been made to pay $29,685.05 in income tax. It is that assessment made by the Respondent, that is the subject of this review application.
   

Grounds of Appeal of the Taxpayer

7. The grounds of the appeal of the Taxpayer[2] can be summarised as follows:
   
   • (i) That the Respondent assessed the capital gain by the Taxpayer from the sale of the subdivided lots as income and therefore taxable when in actual fact the proceeds from the sale are a gain in capital and in the absence of Capital Gains Tax at the time of the transaction, it is not taxable for the same;
     
   • (ii) That the Applicant acquired the property in 1982, as an under developed plot of land and the Applicant has been in the ownership of the said land for 24 years, which clearly indicates that the Applicant is not engaged in the business of dealing with property and that this was a one off sale for profits;
     
   • (iii) That the Applicant has carried out substantial developments on the land since the acquisition of the property and through which he has incurred numerous expenses;
     
   • (iv) That in addition to the substantial developments, the Applicant has also incurred substantial expenses in the upkeep of the said property for 24 years;
     
   • (v) That the Applicant also incurred major expenses in carrying out the subdivision and developing the land for sale;
     
   • (vi) The Applicant has been residing in Australia since 1994 and has amassed expenses in the form of travel and communication expenses which he had incurred in relation to the maintenance of the property; and
     
   • (vii) That the Applicant had incurred a total cost of $128,851.20 from the time of purchase and that the realised sale amount was only $136,000.00. This yielded a profit of only $7148.80.
     
8. This application is heard in accordance with the relevant provisions of the Tax Administration Decree 2009 and the Magistrates Court (Amendment) Decree 2001.
   

The Evidence of the Taxpayer

9. The Taxpayer was called to give evidence by his Counsel. He is currently a Security Officer working in country New South Wales. Although a citizen of Fiji, he has resided in Australia for the past 19 years.
   
10. Prior to migrating to Australia, the Taxpayer had been engaged in the Ministry of Agriculture, where he had worked for 24 years.
    
11. He stated,
    

(that he had) purchased with (a) farming background...Thought when I retire I would go back on farm..I bought property for nephew..he was unemployed at the time. I would travel on weekend.

12. The witness stated, that he would work on the farm on the weekend and that his nephew would stay there full time. He said, that it was vacant freehold land, that at the time was grazing land. There were no crops, as cattle were grazing on it. His evidence was that he carried out bush clearing with farm dozers and used excavators to drain the land. The small drains were constructed with casual labour. The property was not fenced and he hired casual labourers for this purpose. The Taxpayer indicated that he planted coconut trees and then planted crops on weekends.
    
13. When asked by Ms Gandhi as to the nature of the expenses he incurred through this process, his evidence was that he use to pay the caretaker, buy chemicals to spray weeds and fertilizers for crops. He spent money placing culverts in drains. He constructed a 3 bedroom concrete and iron dwelling with sitting room, lounge and porch. He had labourers and carpenters, electricians and a plumber and paid cash to all of these people.
    
14. In terms of ongoing maintenance costs, the witness indicated that he paid for the maintenance of the fencing and for labourers to spray the grass. The total cost of these expenses he indicated, was $128,000.00 FJ.
    
15. In 1994, the witness says that he moved to Australia, for the main reason of enabling his two sons to study higher education. He says that he did not have enough to purchase a house in Australia, so wanted to sell three quarters of his property. He stated that his nephew wished to purchase some of the available land, though could not afford one entire parcel. So the Taxpayer sold the property locally to local "landless persons". He says that the he engaged various persons to assist in the sub- division process, that required expending monies for surveying and legal costs.
    
16. In relation to this expenditure, the Taxpayer advised the Tribunal that a flood in 2003, at the property, destroyed the majority of documentation relating to this expenditure. He claims that there was also a flood in 2000, in which relevant expense documentation was also destroyed.
    
17. On cross examination by Ms Rayawa, the witness was taken to various documents that suggested that the subdivision of the property commenced in 2001 and not 2003, as had been suggested. The point here being that it was put to the witness that his evidence in relation to the destruction of any expense documentation by flood waters, was a falsification.
    
18. Ms Rayawa took the witness to a further document dated 9 January 2007[3], in which the Taxpayer had written to the Authority indicating that
    

The records/receipts and documents which were kept by my caretaker on the farm was destroyed by the two big floods in 1990s' when there was 1.5 metres of water inside the house.

19. The Tribunal in turn questioned the witness, in relation to certain of the claims identified within Paragraph 4.6 of the Amended Submissions of the Appellant, as filed on 7 December 2012.
    
20. Those costs set out within Paragraph 4.6, make up the total amount of $128,000.00 claimed as expenses. The claim includes $5,000.00 worth of international telephone call charges and 9 overseas airfares in which it was stated that the Taxpayer came to "visit and work on the farm, liaise with the land surveyor, caretaker, Lands Department, Town and Country Planning, Ministry of Agriculture, Solicitors and other agencies".
    
21. When questioned by the Tribunal as to the nature of the farming being undertaken, the Taxpayer advised, it was rice and vegetable only for the caretaker's use.[4] Of the original 4 hectare parcel of land, he said that only the land around the house was being farmed. It was claimed the house was constructed in September 1987 and completed by December 1987.
    

The Case of the Respondent

22. Ms Rayawa for the Respondent, presented an outline of the Respondent's case, that had as its focus the profit arising out of a subdivision and sale of land.
    
23. In support of the Respondent's case, Counsel called one witness, Ms Laisa Turagalada a Senior Auditor of the Respondent, who spoke of the process relied on by the Authority when making its assessment.
    
24. Ms Turagalada indicated having regard to the relevant documents, that the Authority was of the view that the intention of the taxpayer was to make a profit and that the transaction was captured by Section 11(a) of the Income Tax Act.
    
25. According to Ms Turagalada, the Taxpayer was treated as a non-resident for tax purposes as he did not reside in Fiji continuously for 188 days.
    

Analysis of the Law

26. It is unclear, why the Applicant's submissions speaks of the affect of Section 11(e) of the Income Tax Act (Cap 201). That provision was repealed by the Income Tax (Budget Amendment) Act 2002.[5]
    
27. The starting point for any analysis of the definition of what is to constitute "total income", is the commencement of Section 11 of the Act. The scope of this provision has been previously considered.[6]
    
28. For the purposes of Section 11 and cases of this type, the governing principles that shape this question are set out within the decision in Californian Copper Syndicate v Harris[7], where Lord Justice Clerk formulated the test:
    

where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than (s)he originally acquired it at, the enhanced price is not profit in the sense of ..ssable to income tax. But it is equally wely 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 is the first question that needs to be considered, was the act done by the taxpayer realised through the carrying on or carrying out of a business?

.

30. This concept of business is an interesting one.
    
31. In Hope v Bathurst City Council[8], the High Court of Australia observed that the expression "carrying on a business", implies the repetition of acts and activities which possess something of a permanent character.
    
32. In Ferguson v Federal Commissioner of Taxation[9], a Full Court of the Federal Court of Australia were of the view, that there are many elements to be considered when looking at this question. These include, the nature of the activities, particularly whether they have the purpose of profit making; repetition and regularity of activities, or even the commencement of carrying on a business and whether there is an organization of activities in a businesslike manner.
    
33. Further the court held that "the fact that concurrently with the activities in question, the taxpayer carries on the practice of a profession or another business, does not preclude a finding that his additional activities constitute the carrying on of a business."[10]
    
34. As the High Court of Australia determined in Martin v Federal Commissioner of Taxation[11], whether a person is carrying out a business
    

is simply a question of the right conclusion to draw from the whole of the evidence.

35. Further within Fergusons's case, the Federal Court found, that
    

A person may conduct a business, albeit of a limited nature, the activities of which business are preparatory to or in preparation for the conduct of another business on a larger scale. The question is whether the activities at an earlier stage, standing alone, constitute a business.[12]

36. In my view and based on the evidence of the Taxpayer, that was his intent. To develop the foundations of a farming business that he could pursue upon his compulsory retirement from the civil service.
    
37. The Taxpayers own evidence of the extensive work that had been undertaken on the property in preparation for farming activities and the engagement of various labour to undertake different tasks, that included the hiring of a full time caretaker, all lead me to conclude, that this was the carrying out of a subsidiary business for the taxpayer, albeit on a small scale.
    
38. As his Honour Walsh J opined in the case of Thomas v Federal Commissioner of Taxation[13]
    

There is no doubt that the appellant's chief occupation was the practising of his profession and that the tree farming, if it had a business character, was relatively of minor importance both as to the time devoted to it and as to the returns to be expected from it. But a man may carry on a business although he does so in a small way.

39. So while the evidence of the Taxpayer may have been that the residual state of his property prior to sale was one in which his nephew only tendered to crops located nearby the farmhouse[14], that is not to say that had the Taxpayer not decided to change his mind and move to another country, that his venture would not have seen him pursuing his goal as a farmer at Deuba. The objective intention of the Taxpayer at the time of acquisition of the property appears quite clear.[15] This was the dominant purpose for which the property was acquired.[16]
    
40. I do not need to look further to the clarifying examples that make up Section 11(a) of the Act to be convinced otherwise. And in any event, the categories of case that are contained within that proviso, are not that relevant to these particular facts.
    

Implication of Determining that the Profit Arising is Income

41. Of course there are implications that flow from this.
    
42. Firstly, the Taxpayer would be entitled to claim revenue expenses arising out of the ongoing business operation. Though this is now a problem. The Taxpayer simply cannot validate his expenses.
    
43. According to Ms Rayawa, the Authority had allowed as deductible expenses, those items that could be verified through appropriate documentation.
    
44. In response, the argument was that the Taxpayer had a lot of his expense claims destroyed during the floods. It is the case as Ms Rayawa argued, that the evidence in this regard is contradictory.
    
45. Section 109(3) of the Income Tax Act (Cap 201) provides that the retention of records of a Taxpayer shall be retained after the relevant taxation year period, for seven years.
    
46. In the case of the Applicant, what is claimed is that all relevant documentation had been destroyed during various flood events. In Commissioner of Inland Revenue v United Touring Fiji Limited, [17] Pathik J, set out some of the considerations that are imposed on a Taxpayer when seeking to establish proof of evidence.
    
47. As his Honour said,
    

It is incumbent on the taxpayer to establish which &#16>of b>of those expenses have the necessary connection to its business in Fiji in order to be dedle.

48. Clearly that has not taken place and without more it was most difficult for the Respondent to make any informed decision otherwise.
    
49. Exhibit R5 provides what I believe is the more likely identification of expenses that were relevant to the business of the Taxpayer. While I note these have largely been replicated in submissions, I would think that the contemporaneous claim of the Taxpayer was more reliable for these purposes. These are summarised at exhibit R5 as follows:
    

Purchase, Development and Related Costs from December 1992-Sept2006

Item	Claim
1. Land purchase price	$25,000.00
2.Construction of 3 brm house	$25,500.00
3.Land Improvement/Development	$19,125.50
4.Survey Costs	$3,500.00
5.Solicitors Fees	$2,527.00
6.Caretakes Wages	$24,000.00
7.Home Maintenance	$4,900.00
8.International telephone charges etc	$5000.00
9. International Travel	$18,000.00
Total	$127,552.50

50. Given the nature of the farming business that the Taxpayer was seeking to pursue, I am satisfied based on his oral evidence, that some of these expenses would have been reasonably incurred as wholly and exclusively laid out or expended for the purpose of the business.
    
51. Once that business intent altered, I do not think that the expenses thereafter would be capable of deduction. Expenses incurred in subdivision of land and selling of property had no connection with the farming business of the Taxpayer. The Taxpayer has had the bonus of retaining one of the lots where the full benefits of the deductibility of the home construction costs as part of the farming business have been allowed. Once the Taxpayer decided to excise the three lots for sale from that venture, renders that activity outside of the farming business. These excluded costs would include the survey costs; solicitors fees; home maintenance; international telephone charges or travel costs[18]. These do not relate to the farming business of the Taxpayer.[19]
    
52. As a Full Bench of the Supreme Court of Fiji determined in Sweetman's case[20],
    

The key to the question which arises..lies in the words "wholly and exclusively "in s19(b). The word wholly is designed to exclude a disbursement which, as to part, is for a purpose other than those mentioned, while the word "exclusively" excludes a disbursement which serves another purpose as well as a purpose mentioned. So an expenditure, which serves the purpose of the Taxpayer's profession but another purpose as well is not an allowable deduction.

53. I would be prepared to allow expenses in the amount of $93,625.50 as being reasonably incurred over that 24 year period. That equates to less than $4,000.00 per annum which would be reasonable in my view. I am satisfied on the balance of probabilities that they would have been expended, having regard to the testimony of the Taxpayer and what would be the expenses reasonably incurred in such circumstances.
    
54. The net result of all of that, is that the income gained by the Taxpayer is $42,374.50.
    
55. The Respondent must reissue the Notice of Amended Assessment having regard to those calculations.
    

DECISION

(i) The Notice of Amended Assessment #2, issued by the Respondent on 28 August 2012 is set aside.

(ii) The Respondent is ordered to reissue an Assessment Notice based on the income gained by the Taxpayer, calculated in the amount of $42,374.50.

(iii) The Taxpayer is free to make application in relation to costs within 28 days.

Mr Andrew J See
Resident Magistrate

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^[1] I am not prepared to accept the accuracy of this amount. The correspondence of the Taxpayer (Exhibit R5) clearly showed that the price was negotiated from $32,000.00 down to $25,000.00.

^[2] Since the advent of the Tax Administration Decree 2009, this is an application for review and not an appeal, as it was formerly under Section 62 of the Income Tax Act (Cap 201).

^[3] Exhibit R5

^[4] Though my impression of the witness’s evidence was that this was not the original intent of what should have taken place, when he initially acquired the farm.

^[5] Act No 4/2002.

^[6] See for example Taxpayer A v Fiji Revenue & Customs Authority [2012]FJTT 3; A Property Management and Investment Company v Fiji Revenue & Customs Authority [2013] FJTT 3; Taxpayer S v Fiji Revenue & Customs Authority [2012] FJTT18.

^[7] (1904) 5 T.C. 159

^[8] [1980] HCA16 at [13]

^[9] [1979] FCA 29; (1979) 26 ALR 307

^[10] at 312

^[11] [1953] HCA 100; [1953] 90 CLR 470

^[12] Ibid at 318

^[13] (1972) 72 ATC 4094 at 4099

^[14] Which seems somewhat against the tone of the Taxpayer’s evidence, particularly given the preparatory works that had been applied to the entire property.

^[15] See Steinberg v Federal Commissioner of Taxation [1975] HCA 63

^[16] See Richardson J in Commissioner of Inland Revenue v National Distributors Ltd (1989) 11NZTC at 6352; See also Commissioner of Inland Revenue v Thompson [1979]FJSC 98..

^[17] [2000] FJHC 181

^[18] During the Taxpayer’s evidence at one point, he alluded to the fact that his travel had also coincided on at least one occasion with visiting a sick relative.

^[19] At least r S

^[20] [1996] FJSC3