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

Income Tax Appeal No 6 of 2010

BETWEEN:

TAXPAYER S
Applicant

AND:

FIJI REVENUE & CUSTOMS AUTHORITY
Respondent

Counsel: Mr A J Singh, Singh Law, for the Applicant 
 Mr S Vukica, FRCA Legal Unit for the Respondent

Dates of Hearing: Wednesday 16 November 2011
 Friday 7 September 2012
 Wednesday 28 November 2012 

Date of Judgment: Monday 17 December 2012 

JUDGMENT

INCOME TAX ACT (CAP 201) – Section 11; Capital Gains; Disposition of Property; Objective Purpose Test of Acquisition; Dealing in Land; 

 Background 

1.	This an application for review against the decision of the Respondent Authority dated 28 June 2010, disallowing the objection of the Taxpayer to an amended tax assessment issued on 19 March 2010.

2.	The Agreed Facts prepared by the parties are as follows:-

•	The Applicant is a farmer who purchased about 191 acres of Freehold Agricultural Land in Taveuni in 1964, for approximately 12,000 pounds. 

•	He farmed and lived on the land for about 31 years when he started to suffer ill health.

•	In the year 2000, the Applicant started sub-dividing part of the said 191 acres of land into 33 separate lots under 4 deposit plans. 

•	Throughout the years, the Applicant has successively sold 25 of the 33 subdivided lots.

•	For all his sales, the Applicant has filled in the appropriate Land Sales Act Declaration Forms and obtained separate individual titles for each of the new owners.

Issues Before the Tribunal 

3.	The issue before this Tribunal is whether or not, the gain or sale of the freehold land is assessable income for the purposes of the Income Tax Act (Cap 201).

4.	The application is heard in accordance with the relevant provisions of the Tax Administration Decree 2009 and the Magistrates Court (Amendment) Decree 2011. 

The Activity of the Taxpayer 

5.	According to the evidence of the Taxpayer Mr S, the property was acquired in 1964 and other than a "patch of coconut trees", was a "jungle". Progressively the Taxpayer worked the land, planting coconuts, dalo and raising goats and cattle. His evidence was that between 1964-1991, he worked full time on the land, and then shortly after went to hospital where he required heart surgery. 

6.	In 1995, he could do no farming as a result of the need for ongoing medical treatment and was advised that he should commence sub-dividing the land to make some money. 

7.	The witness's evidence was that his lawyer and accountant had suggested:

Why don't (you) sub-divide land to make some money 

8.	This he commenced in 1995 and established roads and drainage. Coinciding with that time and as the Agreed Bundle of Documents filed on 20 September 2001 reveal, though his accountants had sought to understand the implications, if any, that such sales and subdivision would have on his obligations to pay Land Sales Tax. 
.
9.	According to the Taxpayer he engaged the services of a firm of Consulting Surveyors, Planners and Project Managers who advised him how to subdivide the land. Taxpayer S said in cross examination:

Had to sell (the) land to buy a house in Suva. ...a $500,000.00 loan to son in United States. 

10.	The Taxpayer advised that he placed a For Sale sign in Taveuni to generate interest. 

Legal Issues to Consider

11.	The definition of total income is set out within Section 11 of the Income Tax Act (Cap 201). The present definition comes about after taking several interesting legislative turns along the way. When the taxation laws were first introduced by the Inland Revenue (Income Tax) Ordinance 1920, the initial concept referred not to "total income", but only "income". At that time, the founding definition located within Section 13(1) read as follows:

 Income Tax shall be payable in respect of the incomes following that is to say:-

(a)	Incomes arising or accruing to any person residing in the Colony and derived from the annual profits or gains of or in respect of or from any kind of property whatever whether situate or being within the Colony or elsewhere than in the United Kingdom or derived from the annual profits or gains of or in respect of or from any profession trade employment vocation or calling carried on in the Colony or elsewhere than in the United Kingdom. 

(b)	Incomes arising or accruing to any person not residing in the Colony or in the United Kingdom and derived from the annual profits or gains of or in respect of or from any kind or property whatever in the Colony or derived from the annual profits or gains of or in respect of or from any profession trade employment vocation or calling carried on within the Colony or from interest of money annuities and other annual profits and gains from whatsoever source derived. 

(c)	Incomes arising or accruing to any person resident in any place in or out of the Colony except the United Kingdom derived from any public office....... 

12.	As is evident in sub-section (a) of that definition, from the law's inception, taxes arising out of property, were a significant component of the Fijian tax law. Though the initial legislation remained in place for less than 12 months and the following year was replaced by the Income Tax Ordinance 1921.  It is from this point on that the specific nuances in the Fijian law, as opposed to the New Zealand, Australian or even Canadian law, appear to have come about. A quick illustration of this point is available by comparing the introductory language of the definitions of "income" between the Fijian and Canadian laws at the time.

Section 3 Income Tax Ordinance 1921	Section 3 Income War Tax Act 1917 (Canada)	
3.-(1) For the purpose of this ordinance "income" means the annual net profit or gain or gratuity whether ascertained and capable of computation as being wages salary or other fixed amount or unascertained as being fees or emoluments or as being profits from a trade or commercial or financial or other business or calling or otherwise howsoever directly or indirectly received by a person from any office or employment or from any profession or calling or from any trade manufacture or business or otherwise howsoever as the case may be ......
	3.-(1) For the purpose of this Act "income" means the annual net profit or gain or gratuity, whether ascertained and capable of computation as being wages, salary or other fixed amount, or unascertained as being fees or emoluments or as being profits from a trade or commercial or financial or other business or calling, directly or indirectly received by a person from any office or employment or from any profession or calling or from any trade manufacture or business as the case may be ......

13.	The inclusion of the words, "or otherwise howsoever" extends the definition of the concept of income, beyond that of the source law, that it appears borrowed from. This was clearly intended as a drafting means of 'covering the field'. It is quite understandable therefore, that Chief Justice Young in Commissioner of Inland Revenue v Morris Hedstrom Ltd,[36]  referred to the definition as being "of (a) very comprehensive and sweeping nature". 

14.	By way of further legislative historical backdrop, in 1957, a Bill to amend the Income Tax Ordinance was introduced into the Legislative Council. The effect of the passing of that Bill, was the enactment of the Income Tax (Amendment)(No2) Ordinance 1957, that came into operation on 1 January 1958. On that occasion, Section 3 of the Ordinance was amended by adding the following subsection immediately after subsection (1) – 

(1A) Without in any way affecting the generality of the last preceding subsection, total income for the purposes of this Ordinance shall include (a) all profits or gains derived from the sale or other disposition of any real or personal property or any interest therein, if the business of the taxpayer comprises dealing in such property or (except in the case of a transaction which is isolated and not part of a series of transactions) if the property was acquired for the purpose of selling or disposing of it, and all profits or gains derived from carrying on or carrying out of any undertaking or scheme entered into or devised for the purpose of making a profit. 

15.	The explanation for that amendment can be found within the second reading of the Bill, where the Commissioner of Inland Revenue stated:

Despite the criticism that has been aimed at it, (the clause) is merely a clarifying clause. The section it proposes to clarify is an important one as it defines "total income". This provisions now writes into the law what is believed is already in the law but it has been a matter of continual dispute

16.	To the extent that one can find utility in placing some context around the amendments that were brought about in 1958, the language appears reasonably clear in this regard. These amendments were not adding something new to what the expectation of the law was. They were clarifying provisions. To restate: 

 This provision now writes into the law what is believed is already in the law

17.	So much is clear by the use of the introductory words:

Without in any way affecting the generality of the last preceding subsection

18.	Those words should not escape those seeking to be overly influenced by international comparisons. The introduction of this provision at that time, was uniquely responsive to the issues of the day. And so the specific provision that is Section 11 of the Income Tax Act, while clearly sharing much jurisprudence with many other Commonwealth nations of the world, is nonetheless unique. 

19.	One only needs to look at the definition of "income" as it appeared in 1916, within the Land and Income Tax Act (NZ) to realise that these concepts of determining as income, profits or gain derived from the sale and disposition of land, had long been enshrined within the income tax laws of the region.

20.	Section 85 at that time, relevantly read:

 Without in any way limiting the meaning of the term, the assessable income of any person shall for the purposes of this Act be deemed to include save so far as express provision is made in this Act to the contrary:

 (a.) All profits or gains derived from any business: 

(b.) All salaries, wages, or allowances (whether in cash or otherwise), including all sums received or receivable by way of bonus, gratuity, extra salary, or emolument of any kind, in respect of or in relation to the employment or service of the taxpayer: 

(c.) All profits or gains derived from the sale or disposition of land 

or any interest therein, if the business of the taxpayer comprises dealing in such property, or if the property was acquired for the purpose of selling or otherwise disposing of it at profit....... 

21.	There are several things that can be observed here. Consider firstly how narrowly the general New Zealand provision was drawn in comparison to the Fijian Ordinance of 1921. This is why one needs to be careful when drawing analogies with the New Zealand case law and statute from a historical and interpretive point of view.

22.	This is also where the comments made by Henry J in Eunson v Commissioner of Inland Revenue gain meaning, when he stated:

If the legislature meant to tax all profits from the sale of land, the three limbs of Section 88 would be unnecessary.... 

23.	And this is where the two country's laws part company. It is also a good reason why when considering the application of the income tax provision, we start the analysis at Section 11 and not at Section 11(a) of the Act. Because for 38 years, the general provision that is Section 11, existed without any 'limbs' whatsoever. This may give food for thought to those who would argue that the laws of Fiji waited all this time to embrace the taxing concepts applying to property. With all due respect to those who advance such propositions, for the reasons contained above, I would beg to differ. 

24.	The provisos that have been created and that are Section 11(a) of the existing law, are clarifying examples. The principles of taxation that they canvas have always been encapsulated within the general provisions of Section 11 of the Act. One only needs to read the 1920 Ordinance to get that point. 

25.	For the sake of completeness I will nonetheless set out these three illustrative examples (limbs). In the case of this first limb, it reads:

 any profit or gain accrued or derived from the sale or other disposition of any real or personal property or any interest therein, if the business of the taxpayer comprises dealing in such property; (my emphasis) 

26.	Two questions arise out of this. Firstly, whether any profit or gain accrues or derives from the sale or other disposition or any interest therein. And secondly, whether or not the business of the taxpayer comprises dealing in such property? 

27.	To resolve that second question, Section 2 of the Act provides assistance, where it sets out a non-exhaustive definition of "dealing in property" and "dealing in real and personal property". That definition was introduced into the legislation with the introduction of the Income Tax Act 1974

28.	The 'second limb' reads fully:

 any profit or gain accrued or derived from the sale or other disposition of any real or personal property or any interest therein, if the property was acquired for the purpose of selling or otherwise disposing of the ownership of it 
 
29.	Under this second limb, the case law dictates that there must be in place a purpose of resale to gain a profit and that purpose must be present at the time of the acquisition. 

30.	The third limb deals with any profit or gain derived from the carrying on or carrying out of any undertaking or scheme entered into or devised for the purpose of making a profit. In Lowe v Commissioner of Inland Revenue, Richardson J defined the words "scheme" to connote a plan or purpose which is coherent and has some unity of conception. He defined "undertaking" as a project or enterprise organized and directed to an end result. 

31.	Finally, there is an exclusionary provision to Section 11(a). It provides that none of the three illustrative examples (the 'three limbs') shall be considered to contribute to total income, where the profit or gain derived from a transaction of purchase and sale does not form part of a series of transactions and which is not in itself in the nature of business. Though it should be noted in McClelland v Commissioner of Taxation, the Privy Council concluded that a single transaction can fall within the notion of assessable income, where the undertaking or scheme exhibits features that give it the character of a business deal.

Were the Profits Realised Capital Profits or Income? 
32.	In Californian Copper Syndicate v Harris (1904) 5 T.C. 159, Lord Justice Clerk, formulated the now long accepted test:

where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit in the sense of ...assessable to income tax. But it is equally 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..." 

33.	That this test was well enshrined within the legal development of the Fijian Income Tax Act (Cap 201) is easily illustrated when the legislative provisions that now make up Section 11(a) were introduced, with the enactment of the Income Tax (Amendment)(No2) Ordinance 1957. 

34.	On the second reading of the Bill to introduce that law, the Commissioner of Inland Revenue stated:

Despite the criticism that has been aimed at it, (the clause) is merely a clarifying clause. The section it proposes to clarify is an important one as it defines "total income". This provisions now writes into the law what is believed is already in the law, but it has been a matter of continual dispute and I believed that it is now necessary to have this in the law so that the taxpayer can see how and on what he is liable to pay taxes...........

This definition follows very closely that laid down in the model ordinance and has often been referred to as "wide as a church door". I too believe that it is and, also, the few people who have disputed it in Court have found it is....

......... In order to determine whether it sets out to tax items of capital, I would like to refer to a now famous remark of the Lord Justice Clarke in the case of Californian Copper Syndicate v Harris, 5 Tax Cases 165 .... I contend, Sir that the proposed amendment, or rather I prefer to call it the addition, to our law, does not intend to by-pass the principle laid down in those remarks. 

35.	That is the foundation on which any analysis of the Fijian law is to take place and should assist in the determination of the question whether the activities undertaken by Taxpayer S, were in fact the mere realisation of a capital asset (or assets), or part of the Taxpayer's business that dealt in properties? 

The Disposition of Land 

36.	The case of the Appellant is heavily reliant on the parallels that can be drawn from Statham's case. 
 
37.	The core of Statham's case, is this question of whether the factual scenario establishes a mere realisation of a capital asset or a business or profit making undertaking or scheme.

38.	The decision relevantly provides 

There is nothing surprising in the fact that (the owners) went about this realisation in a manner calculated to maximise their receipts. The fact that this occurred does not necessarily make the proceeds either profits from an undertaking or scheme, or income from a business. 

39.	 The Judges of the Full Federal Court then sought to reinforce the indicia that would give rise to a determination that a Taxpayer was not conducting a business or engaging in a profit making undertaking or scheme. This included the following matters:

•	The owners were content to sell the land as one parcel, but were unable to do so;

•	Only very limited clearing and earthworks were involved;

•	Dr Bickerton maintained his medical practice;

•	The owners did not advertise the land for sale.

40.	By way of comparative illustration, the evidence of Taxpayer S was that he commenced this process in response to advice received from his accountant and lawyer. He never wanted to relinquish the entire parcel of land. He sought the professional advice from a firm of Consulting Surveyors, Planners and Project Managers. He sold off pockets of land after it was subdivided. He installed a For Sale sign on the Island. He also appeared to release land when it suited. And he undertook the clearing of the land, construction of roadways, in a planning and development process that took five years.

41.	As the Amendment to the Applicant's Submissions state:

(a)	the Applicant's scheme plan was prepared by the surveyor in August 1995 and lodged for approval in September.

(b)	approval was given in February 1996, and thereafter the survey work was completed during 1996, resulting in the deposit plans being lodged for approval in November 1996; and

(c)	 approval was granted in May 1997.

3. The Applicant did not make any sales until 2000... 

42.	Within the Respondent's submission dated 8 November 2011, the full program of sales over the 10 year period is set out. The progressive profit arising out of the 25 land lots sold is $1,113,000.00. 

Applying the Law 

43.	The relevant language from Section 11 of the Act that needs to be considered in the first place, is whether the monies received from the land sales were:

..... profits from a trade or commercial or financial or other business or calling or otherwise howsoever, directly or indirectly accrued to or derived by a person from any office or employment or from any profession or calling or from any trade, manufacture or business or otherwise howsoever, as the case may be...

44.	The undertakings of the Taxpayer to convert his farming property into 35 lots of real estate, to clear the land and to progressively dispose of the parcels, seems in my mind a reasonably drawn out and well planned activity. 

45.	The Taxpayer S, appears to have made it his business to prepare the land for sale, in what was more than simply gaining subdivisional approval and then advertising the property for sale. This seemed quite a lengthy process and the physical land preparation phase took two years. I am satisfied that the Taxpayer had slowly transitioned from being a farmer to that of a developer of land. The fact that he had owned the land for 40 years, makes no difference. This was to be the new source of income to the Taxpayer. Something he is well entitled to do. Yet, whether the profits arising out of these schemes are income for the purposes of the Act, may nonetheless be a different story.There was no evidence put before the Tribunal of the Taxpayer placing the property in the hands of a real estate agent and then attempting to sell it. There was a five year gestation period before any sales came about. This is not analogous to the simple selling of the family home or farm for that matter. This was a business venture. It was planned over a long time. It is not analogous to Statham's case in my view. And certainly it is far more elaborate a notion of selling than set out within McLelland's case. 

46.	While I note too that the Counsel seeks to rely on Eunson's case, to suggest that nothing disadvantageous arises where sales are staggered as part of the disposition, I think the two cases are fairly distinguishable. One deals with events that span over three years as opposed to the 15 years before me.

47.	I have no doubt that the sales are caught within the general provision of Section 11. That is, they arise out of profits, being profits from a venture of the Taxpayer. That venture would be caught either as a business or calling, or more broadly collected up in the catch all expression "or otherwise howsoever". 

48.	 Taxpayer S had been working in the business of farming for 40 years. I would also think that part of what he did during the relevant period, comprised dealing in property. I am satisfied that the first limb of Section 11(a) provides clarification of that fact. 

49.	Having regard to Lowe's case, I would also think that the third clarifying limb meant that the Taxpayer had developed a plan or scheme to dispose of the property. It would be very hard to contemplate how this could be anything but. The fact that the 'real estate agent' marketing overlay was not as obviously present, does not seem to make much difference. But even if for some reason that the third limb was not seen as an apt example, the general provision along with the language of the first limb, would be sufficient to reach a conclusion, that the Taxpayer had been taxed appropriately.

50.	I believe that this was the intent of the legislation to regard this type of profit making as being caught by the law. It seems clear from the language of the general provision that is Section 11 and is supported by at least one of the clarifying examples at Section 11(a) of the Act.

51.	I determine accordingly. 

DECISION 

(i)	That the Application be dismissed. 

(ii)	That the Respondent be free to make application for costs within 28 days. 

Mr Andrew J See
Resident Magistrate