LAND TAX PROBLEM

Dominion, Volume 4, Issue 1017, 5 January 1911, Page 2

LAND TAX PROBLEM

IMPORTANT COURT DECISION. SETBACK TO TAX DEPARTMENT. "EVASION" DEFINED, Two judgments were 'delivered in the Supremo Court: yesterday by Jlr. Justice Cooper, which are of interest ill their bearing on tho rights and liabilities of largo holders of land or money in New Zealand. In ono case the Whiterock Estate Company had claimed a refund, from the Commissioner of Taxes, of a sum of «£"2GSO, paid, under protest,' as taxation upon profits derived from- the sale of a sheep run. In a companion.case the ilaraiunnga Estate Company claimed a refund, under parallel circumstances, of the sum of ,£2518. In the Whiterock esso it was admitted by the plaintiff company that tho Whiterock Estate had been sold with a view to avoiding payment of graduated land tax. Dealing, in his judgment, with this aspect of tho case, Mr. Justice Cooper quoted the following from a judgment of Lord Lindley's"Thoro are two ways of construing the word 'evade': ono is, that a person may go to a solicitor and ask him how to keep out of ail Act of Parliament—how. to do something which does not bring him within tho scope of it. That is evading in ono sense, but there is nothing illegal in it. Tho other is, when lie.goes to his solicitor and says 'Tell ms Tioir to eseapo from the consequence of an Act of Parliament, alt-hough I am brought within it?'. That is an act of quite a different character." In the , present case, Mr. Greenwood, the former owner of Whiterock, by the advice of his solicitor, formed a private company, and so kept out of the scope of tiio statute. His Honour delivered separate judgments, but stated that the question of law involved was tho same, in cach case.

In the Whiterock case, Afr. C. P. Skerrett, K.C., with him Mr. H. J. Beswiek (of Christehurch) appeared for tho plaintiff. The Solicitor-Uenoral (Mr. 0; "\V. Salmond) and Mr. T. Neave appeared for the defendant. In the companion case, Mr. <T. Hosking, K.C., with him Mr. A. W. Blair, appeared for the Marainanga Company. Counsel for the dcfencc were the same as in the Whiterock case.

The Whiterock'Claim. Adjudicating upon the Whiterock claim, his Honour .reviewed the past proceedings at considerable length. Briefly,, the facts ns set out were that, in January, 1905, Mr. C. 1). Greenwood, runholder, of Canterbury, and then owning Teviotdale Station, purchased the Whiterock Estate, Canterbury, for ,£75,000, .-and the • stock which, it carried for cE25,0Q0. Of the total purchase money of «£IOO,OOO, one-half had been paid off before it was determined by the plaintiff company (really Mr. Greenwood) to resell 'tho property. In the Whiterock Company—a private concern formed in February, 1905—Mr". Greenwood held 31,90S of its'one pound 35,000 shares. Two shareholders who were merely nominees each held' one share. 1 radically tho company was owned by Mr. Greenwood. Its ostensible object, as expressed in tho memorandum of association, was to acquire ironv Greenwood tho Whiterock Station,'and to carry on A sheepfarming business thereon. It had power to let or lease the station, and also to sell it as a going concern, or to sell all or any of the-real or personal property of the company in lots or separately at the solo discretion of the company, and tlie usual .subordinate powers necessary lor a company of this description. Its real object was to enable Greenwood to avoid the higher rate in graduated land tax for which lie would be liable if leviotdale (which was also a very valu-' able property), and Whiterock were both' vested in him. In April, tho plaintiff company bought from a Mr. Tutton (for «£5 an acre) a piece of land containing SoS acres adjoining the Whiterock property. In March, 1908, the plaintiff company determined to sell tho wholo of its property. This was successfully effected ni various -lots by auction, and the profit this sale .was admittedlym'*! 11 the Commissioner"' of i la*cs assessed; income .f.axy .and tliis'.-tlio' company,paid tinder protest', tion for'•.determination was whetiier , the: company was liable ,tobo so assessed, < ; r :':The ' Law of 1903. ■'

Legal, provisions bearing on the 1 case, his Honour stated,, were contained-in Sections «1 and 7!) of the consolidating Land and: Income Assessment Act,. 1908. As his Honour had shown in previous -'judgment on cases between the Wblliiigtou Steam berries Company and .the Commissioner, ot laxcs,-_;ahd the Commissioner of Taxes v. tho Miramar Land Company, a company was only liable to >-pay income tax on profit' derived from. :the .sale of land" if its ordinary'business. .qomprised dealjnrid' Quoting froni lus judgment }N' the last-named case,-his Honour, said:It .is clear that ,a company may vbuy land, and afterwards ficll.it-.at'a profit, if; its memorandum of association -contains sufficient power, and that' such -profit may hot bo taxable. In order- to render tho .profit taxable, it. is not sufficient that the transaction or transactions shall' bo within the power of the company. Such transaction or transactions must be carried out by a company whose business comprises 'dealing in sucli property' and not otherwise/'

"I am satisfied," his Honour continued, "that I correctly stated the law, and • the question I nave to determine, in this case is really n very narrow, one, namely, was the sale of tho. Whiterock lilstate by the plaintiff company a salo of land by a company whose ordinary business it was to deal in 'land? If it was.not, -the- plaintiff -company was- not liable to be-assessed for income tax -on the profit made by it' on such sale, and it is entitled to a refund of the money paid.

Scylla and Charybdis. "Tlie Solicitor-General lias admitted," said his Honour (and in my opinion rightly so) "that, if the question depends upon tliti construction of tho memorandum of association of tho company, that body was not liable to bo assessed. He .also admits that, if Greenwood had retained the title to the Whiterock lis-' tote, and had sold it and made the profit which the company lias made, lie would not have been liable to an assessment for income tax upon such profit. • nis argument is shortly this; 'That -Greenwood really bought tho property us ft- speculation. He could have resold it (if ho had himself retained it), and would not have been liable to pay incomo tax oil the resulting profit. Ile would, however, have bjeii liable to pay graduated land tax, 011 the scale to be calculated, oil' the joint value of Teviotdale and Whiterock. He, however, transferred' Whiterock to tlie company in order to prevent this. The company was, therefore, a speculative concern formed for the purpose of dealing in land, namely, in tho Whiterock > Estate. It acquired Hie land for that purpose. It. resold the land for tho purpose of making a profit. Therefore, notwithstanding the apparent [innocence of its memorandum of association, it conies within the decision of tlie Court' of Appeal in the Miramar case.* As Greenwood .was practically tho only .shareholder in the comnany it may be said, if the argument of tlie Solicitor-General is sound, that bo avoided Scylla and fell into Charybdis."

Investment and Speculation. After referring to certain evidence by both parties (characterised as of doubtful relevancy), his Honour continued:—. There is 110 evidence that a part of Greenwood's ordinary business comprised dealing in land. The liability to pav income tax 011 pt-olits arising from tho sale of land only attaches to an individual, as it does, also to a company, when the individual's ordinary business comprises dealing in land. Greenwood was a slicopfarmer, and a wealthy man.. There is 110 indication that ho was the class of man hit at by the statute. In my opinion, a person who merely buys a property ns an investment,- and afterwards resells it at a profit, cannot be said to be a person whose ordinary business comprises dealing iu land. The person whom the Legislature intended to affect with liability is the. land speculator who, as part of his ordinary business, carries 011 tho business of trafficking in land. .

Mr. Greenwood's Motives, I think also that the purchase of tlio Whiterock Estate by Greenwood was tlio .outcome :of three inducing causes in his •mind.: -First, it'was a-desirable''sheep

station, and could he profitably used by him as such, and his business was that of a sheepfarmer. Next, it was likely to prove a sound and profitable investment,, and ho had a considerable amount of uninvested capital available. This is established by the fact that he paid at onco in cash v. largo sum of money, partly for the slock, and partly in part payment of the agreed-upon purchase money of- the bud, and the fact that ho had been previously negotiating for a large run known as Mount Parnassus, tho negotiations having, however, fallen through. Thirdly, by a latent idea in his mind .that ho would, in tho future, settle his sons, or some of them, 011 tho station. Then, 1 think that no sinister inference can be drawn from the circumstances that, in order to avoid an increased * amount of graduated land tax, he formed the private plaintiff company. •By thin means lie created nn independent separate legal -entity, in which it was true that ho had practically tho whole interest, but which, as the law stood in 1005, enabled him to avoid the increased rate of graduated land tax for which ho would have been liablo had he taken tho title in his own name.

A Reasonable Inference, "Tho purchase of Tutfcon's land by the company does not, in .my opinion, afford any 'conclusive evidence that the company was speculating in land. It was a desirable property, to acquire for the more pflicient working of the estate, and, although no doubt its acquisition materially assisted tho subsequent subdivision, of tho property, l am unable to draw any necessary inference that it'was acquired for that purpose. It was bought in 1905, and the property was not subdivided and sold until 11)08, and there is a reasonable inference that, if-the company had acquired Tutton's property for the purpose of more efficiently subdividing and selling tho Whiterock Estate, this purpose would havo been carried out in the years 1006 and 1307, rather than in 1008, when, admittedly, money was scarce, and land more difficult to sell."

The True Explanation. I think that the true reason why the company (practically Greenwood) determined to sell in March, 1908, and (as the circumstance? show), very hurriedly, was the passing of the Land and Incomo Assessment Act Amendment Act, 1907. The effect of Section. II of that Act -was to .destroy the immunity from an increased graduated land tax which Greenwood,-as the practical owner of Whiterock, had obtained by the formation of the company, and to render him liable to bo assessed personally in respect of both ieviotdale and "Whiterock, as lie was owner- of Teviotdale, and owned 3i,9!)S out of the 35,000 shares in the plaintiff company. Tho scalp of graduated "tax was largely increased, and the percentages, were also increased by. 25 per cent. The result was that a much heavier amount of taxation was immediately in prospect.' 1

A Forccd Sale. "It is stated that, so heavy would the amount in. future have been, that the not profits of, both stations would have shrunk materially. Greenwood lias stated, and I see no substantial reason to. doubt his statement, that this was the sole reason why the company (which I repeat was practically Greenwood) hurriedly determined to subdivide, and soil "its property. Indeed, the policy of the Legislature, as evidenced by the alteration in the law effected by tho Act of 1907, was to so increase the graduated land tax in the case of large and valuable properties suitablo for # closer settlement, as to compel tho owners to cut up and sell such 'properties. 1

_ /Tor these reasons I am unable to adopt the argument of the Solicitor-General. In my opinion, therefore, the profit derived from tho sale of Whiterock was not income derived from • business within the meaning of tho Land and .Income Assessment Acts, and -was, therefore, not taxable.

"There must bo judgment for the.plaintiff, with costs on tho highest scale, and an allowance of £8 Bs. for second counsel.

THE MARAINANGA CASE, REFUND'ALSO ORDERED. . 'j Tho- Marainanga case, although similar in essential feature.<pto r .the.; companion (U hiterock);case, 'differed in some of its attendant circumstances. " vi The Marainanga station, in the-provin-!. .cial district or; Wellington— a property- • containing: .30,355 acres—was acquired in .1882 by Messrs. J. C. Itandyside, cf Akitio, and John Roberts, C.M.G., of Dunedin, for a partnership consisting ,of themselves and Hugh Haridyside, Adain Rolland, James Henry Holland, and Thos. .T. S. Roberts, all of these latter residing in Scotland. For many, years Marainanga, and some small additions purchased for .the more./convehiplit working of the property, were worked as a sheep station by •the partnership, which prospered. In 'October, 190G, tho Marainanga Company was formed with a capital' of ,£160,000, divided into 16,000 shares of cSIO each. Fifteen thousand shares were issued, each inember of the original partnership holding 2500 shares, save. John Roberts, who lield 2177. Twenty-three .shares were held by five small .shareholders. In January, 1/JOS, the directors of the company decided to, sell its property.. Tho" amount on. which the company,' under protest, jtaid income tax was the, difference between tho amount set down as nominal, purch.ife money when tho company toolc over Marainanga .from the partnership, rind the proceeds of the sale.

As in tho previous case, his Honour declared himself satisfied that the sale of land was not the business for which the company was formed. It was not created for speculative purposes, and its business was.not land jobbing, but sheep farming. Judgment would, therefore, be given for the plaintiff for the sum of .£2-51S, witli costs on the highest scale, a. sum of .£8 Bs. allowance for second 'counsel, witnesses' expenses, and court fees.