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29 Apr 08 Residue of purchase price of land incurred in year of exchange - Malouf

The Federal Court (Allsop J) has held that the amount of $33,250,000, being the balance of the amount payable under a contract for the purchase of land in Mt Evelyn in Victoria, was incurred in and referable to the 1999 income year when the contract for sale of the land was entered into. The balance of the purchase price was not payable until completion of Stage 1 of building work involved in the development of a retirement village. The taxpayer sought to take advantage of Taxation Ruling TR 94/24, in which the Commissioner stated that outgoings representing the purchase price for land in connection with the development of a retirement village would be viewed on revenue, not capital, account.

The Commissioner argued that the balance of the purchase price was not incurred in the 1999 income year or, if it was, it was not referable to the 1999 income year. In relation to incurrence, Allsop J found considerable force in the Commissioner's submissions. However, his Honour considered himself bound by the Full Federal Court decisions in FCT v Raymor (NSW) Pty Limited (1990) 24 FCR 90 and FCT v Woolcombers (WA) Pty Limited (1993) 47 FCR 561. His Honour said, at para 76:

"The Full Court [in Woolcombers] rejected the argument. In so doing, it referred to and relied on the two passages from Raymor 24 FCR at 97 and 101, cited earlier. This was to support the conclusion that the entry into the obligation to pay for future goods was sufficient for there to be an incurring of the liability to pay for them, even if the obligation was defeasible. Coles Myer [1993] HCA 29; 176 CLR 640 was then referred to. At 47 FCR at 573-575 the Full Court expressed its reasons fully for coming to the view that there was an accrued obligation or present liability imposed by definite contractual commitment. The Court said that it was not necessary for the taxpayer to have an interest in the wool, though it was recognised that equity would give protection to the taxpayer’s interests. Stern v McArthur [1988] HCA 51; 165 CLR 489 was referred to. The Court rejected the argument of the Commissioner based on the requirement of delivery to create a present and accrued liability to pay."

In relation to referability, his Honour said, at para 80:

"This was not a liability that accrued day to day. It was a once and for all contractual undertaking. As in Woolcombers 47 FCR at 575-576, there is here no complexity (as in New Zealand Flax [1938] HCA 60; 61 CLR 179), no day-to-day accrual (as in Coles Myer [1993] HCA 29; 176 CLR 640) or other appropriate financial apportionment (as in Australian Guarantee 2 FCR 483). The question of referability is not dictated by any principle of matching. Given the approach of the Full Court in Woolcombers to the virtually identical question, I would conclude that the outgoing incurred was referable to the 1999 year of income."

The taxpayer's appeal against the Commissioner's objection decision was upheld: Malouf v FCT [2008] FCA 497 (Federal Court, Allsop J, 22 April 2008).

For a copy of the decision, go here

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