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23 Oct 2013
Appeal Status

Challenge of commissioner’s assessments

2013 case note – Taxation Review Authority found the Sale and Purchase Agreement to be one agreement only – contractual interpretation.

TRA 009/12

Income Tax Act 2004, Income Tax Act 2007


This was a capital/revenue case involving a sale and purchase of a shopping centre that was partially completed at the time of sale. The Commissioner of Inland Revenue ("the Commissioner") considered that the Sale and Purchase Agreement contained two separate agreements, one for the completed portion of the shopping centre (an undeveloped land) as at the time of the agreement, and the other for subsequent development of the undeveloped portion.

The Commissioner assessed the taxpayer on the basis that monies received for the subsequent development were revenue receipts and taxable income. The taxpayer ("the vendor") argued there was only one agreement and that all payments were capital receipts and not taxable. The Taxation Review Authority ("TRA") found for the taxpayer and cancelled the Commissioner's assessments.

Impact of decision

The TRA concluded, on the clauses contained in the relevant contract, that it is one agreement rather than two. The decision is confined to the clauses of this particular contract.


The taxpayer, incorporated in 1987, purchased a block of land in January 1988. The shares in the taxpayer were sold to Company P in 1996, and transferred to Company G as nominee in 1999. The land was to be developed into a shopping centre ("the Centre").

Before the development was complete, Company Y put forward a proposal to purchase the Centre "in its entirety". According to the proposal, the remaining development was to be undertaken on a "joint venture" basis.

Company Y and the taxpayer entered into an agreement for the sale and purchase of the Centre on 12 December 2003 ("the Agreement").

The taxpayer continued working on the development without any change in the plans or contractors, and found tenants. The disputant obtained funding from Company Y to complete the development as it was going to be easier. Money was advanced on commercial terms with interest charged. The remaining development was completed over a period of five years.


In relation to interpreting the Agreement and admissibility of extrinsic evidence, Sinclair DCJ, after referring to Commissioner of Inland Revenue v Renouf Corporation (1998) 18 NZTC 13,914, and Justice Tipping's judgment in Vector Gas v Bay of Plenty Energy Limited [2010] 2 NZLR 444, held that she would not place any weight on the views of the parties as to their intentions in relation to the Agreement. Rather she focussed on the key clauses of the Agreement itself.

The Commissioner submitted that despite there being a measure of uncertainty in the recitals and definitions in the agreement, clause 4.1, which set out the purchase price, clarified that the Development Option was a separate agreement. The Commissioner argued that because the purchase price only took into account the price of the completed portion of the centre, and the land of the uncompleted portion, the further development was part of a separate agreement.

Sinclair DCJ held that this clause could not be looked at in isolation. She referred to other clauses within the agreement which she considered indicated it was one agreement for the sale of the completed shopping centre. In particular, she focussed on clauses 4.3 and 4.4 which provided a mechanism for the refunding of the purchase price paid in relation to any portion of the as yet undeveloped land, if that portion was unable to be developed into large format retailing. She concluded that these clauses clearly envisaged completion of the development, and were consistent with the taxpayer's position.

The main focus of the Commissioner's submissions was on the Development Option provided for in clause 15. The Commissioner argued that the option was independent of the sale of existing buildings and future development units ("FDUs"); that if the taxpayer did not take up the option under clause 15, it would not have been required to complete the development. Further, the Commissioner argued that the taxpayer was only obliged to use its best endeavours to develop the FDUs under the option.

Sinclair DCJ found that in fact there was no option to exercise as the taxpayer was already granted an option in consideration of the sum of $1.00 already received and acknowledged by the purchaser under clause 15.1.

The Commissioner submitted that the Agreement does not provide any provision that will apply in case of a breach of the main Agreement or the Development Option. Sinclair DCJ referred to clause 16.4 where it requires the Vendor to indemnify the Purchaser against any loss or damage as a result of any breach of any term of the Agreement. Sinclair DCJ also noted that Company Y could still sue for breach of contract even if there was no specific provision in the Agreement.

The Commissioner argued that the parties were under a contractual obligation to enter into a construction contract under clauses 3.1 and 3.2 of the Sixth Schedule and this was an indication that the Development Option was a separate agreement. The Commissioner submitted that it showed the FDUs were intended to be developed under a contract for building services (within the wider Development Option) and this was inconsistent with the taxpayer's position that the contract was one agreement.

Sinclair DCJ, after referring to Justice Richardson's judgment in Marac Life Assurance Limited v Commissioner of Inland Revenue and Ors; Commissioner of Inland Revenue and Ors v Marac Life Assurance Limited and Anor (1986) 8 NZTC 5,086, did not consider that the parties intended to enter into a construction contract in the usual sense. It was only intended to detail the arrangement in the Development Option.

The TRA concluded that the parties entered into one agreement and therefore all payments received are of a capital nature and not assessable income under sections CB 1(1) or CB 3 of the Income Tax Act 2007. The Commissioner's assessments were cancelled.