Shepherd v. Federal Commissioner of Taxation

(1965) 113 CLR 385
39 ALJR 351

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(Judgment by: Barwick C.J.)

SHEPHERD
v. FEDERAL COMMISSIONER OF TAXATION

Court:

Judges:
Barwick C.J.Kitto
Owen JJ.

Judgment date: 17 December 1965

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Judgment by:
Barwick C.J.

Reference by a Taxation Board of Review pursuant to s. 196 of the Income Tax and Social Services Contribution Assessment Act 1936-1957 (the Act) of questions of law arising in a reference by the Commissioner of Taxation of an objection by a taxpayer to an assessment made by the Commissioner under the Act.

The taxpayer is the grantee of letters patent in respect of improved castors. He granted a licence to a manufacturer in Victoria to manufacture the castors upon terms inter alia that the licensee convenanted to pay him monthly during the continuance of the licence a royalty of five per cent of the gross sale price of castors manufactured by or on behalf of the licensee which had been sold during the preceding month.

On 23rd July 1957, whilst both the letters patent and the licence to manufacture were in force, the taxpayer executed a deed poll in the following terms: "I George Frederick Shepherd of 11 Manor St. Brighton in the State of Victoria Engineer Do Hereby Assign absolutely and unconditionally to the persons hereinafter named and described and in the proportions hereinafter specified all my right title and interest in and to an amount equal to ninety per centum of the income which may accrue during a period of three years from the date of this assignment from royalties payable by Mark Cowen of 370 Orrong Road Caulfield in the said State manufacturer under a Deed made on the twelfth day of March 1954 between myself the said George Frederick Shepherd and the said Mark Cowen in respect of a license granted by me to the said Mark Cowen to make use exercise and vend castors under and in accordance with the Inventions protected by Letters Patent of the Commonwealth of Australia No. 122566 in respect of an Invention entitled 'Improved Castor' and Letters Patent of the Commonwealth of Australia No. 136548 in respect of an Invention entitled 'Improvements Relating to Castors' and Letters Patent of the Dominion of New Zealand No. 99930 for an Invention entitled 'Improvements relating to Castors'.

"The names and descriptions of the persons to whom my right title and interest in such income is assigned and the proportions in which the amount of ninety per centum of such income is assigned are:

1.

Mary Louisa Shepherd of 11 Manor Street Brighton in the State of Victoria Married Woman - twenty five per centum

2.

Kathleen Campbell of 11 Manor Street Brighton aforesaid Spinster - twenty per centum

3.

George Eric Campbell of 8 Ross Street Surrey Hills in the State of Victoria Clerk - fifteen per centum

4.

Cecil Hamilton Campbell of 9 Norbert Street Balwyn in the State of Victoria Schoolmaster - fifteen per centum

5.

Charles Geoffrey Campbell of Consolidated School Lockington in the State of Victoria Schoolmaster - fifteen per centum."

Thereafter the taxpayer informed the licensee of the "arrangements", meaning the provisions of the deed poll. He directed the licensee that each royalty payment due under the licence should be divided into six parts and to pay the persons named in the deed poll the appropriate proportion of the royalties set opposite their names therein. The taxpayer arranged at the same time that the licensee should pay the royalties quarterly rather than montly as provided by the licence.

The payments by the licensee to the recipients of these respective percentages of the amounts of royalty payable under the licence apparently commenced in September 1957 and continued thereafter. Such payments were effected by not negotiable cheques drawn in favour of the named persons for the appropriate amount sent to the taxpayer and by him forwarded to the persons concerned.

The total amount which became payable under the licence for royalties during the financial year commencing on 1st July 1958 was 7,030 pounds; 999 pounds thereof being paid to the taxpayer and the balance to the persons named in the deed poll in the manner described.

The Commissioner assessed the taxpayer in respect of the income year 1958-1959 upon the full sum of 7,030 pounds as income derived by him. The taxpayer objected to that assessment claiming that 6,031 pounds, being the total of the amounts paid to the donees by the licensee, was not income derived by him during the year of income.

The questions upon which the Taxation Board of Review seeks answers are: "1. Whether the taxpayer by the deed referred to in par. 5 hereof effectively assigned to the persons named therein in the proportions therein set forth, all his right title and interest in and to an amount being ninety per centum of the royalties which in fact accrued during the period of three years from 23rd July 1957 under the agreement made on 12th March 1954 referred to in par. 2 hereof. 2. Whether the sum of 6,031 pounds or some and what part thereof, referred to in par. 9 hereof formed part of the taxpayer's assessable income for the year ended 30th June 1958."

The Commissioner's principal contention is that the gift was a gift of part of the taxpayer's income to be derived from royalties. The income was thus first derived by the taxpayer and then, pursuant either to a voluntary promise so to do, or to a voluntary assignment of the royalties themselves, portions of his income were handed over to the donees. The taxpayer on the other hand contends for an immediate gift of parts of his right to the royalties.

The answers to the questions asked by the Taxation Board of Review turn, in my opinion, exclusively upon the construction of the deed poll. The licensee was under promise to pay royalties to the taxpayer. That promise in its entirety would have been assignable at law pursuant to the provisions of s. 134 of the Property Law Act 1958 (Vict.). But part of it could not be so assigned, nor could the royalties as after acquired property be assigned at law. Thus, whether the deed poll be construed as an attempted assignment of part of the promise to pay royalties or an attempted assignment of part of the royalties themselves when received, it will in either case be ineffective at law. In my opinion, the deed poll is not capable of being regarded as or as containing a covenant by the taxpayer to pay money in the future to the named persons, the amount to be paid being quantified in relation to the amount of royalties received by the taxpayer. The function of the expression "an amount equal to" in the operative words of the deed poll is not, in my opinion, to make the purported assignment a covenant to pay money but, as I shall mention later, its purpose, in my opinion, is to work out the fraction of the right to royalties which in total is being assigned to the donees. Indeed, I see in the employment of the words "an amount equal to" an indication that it is the right to the royalties rather than the royalties as after acquired property which is the subject matter of the assignment. There is therefore no need to consider whether the principle that a person with whom or for whose benefit a covenant is made in a deed poll may recover at law upon the covenant though neither a party to nor a signatory of it would be applicable to this deed if on its proper construction it contained a covenant to pay money to the named persons.

In my opinion, the situation of the deed poll is that it is ineffective at law to confer on any of the named persons any legal right whether to any part of the promise to pay royalties or of the royalties themselves when received.

However, a part or parts of a chose in action can be assigned in equity. In my opinion, if the assignment of a part of the chose in action consisting of the promise to pay royalties is complete, it is effective to vest the appropriate part of the right equitably in the assignee, whether or not the assignment is for consideration or by way of gift. It is only if the donee needs the assistance of equity to complete the gift, as distinct from enforcing the right given, that he can be met with the defence that equity will not assist a volunteer. Here, if there was an immediate gift of a proportion of the right to the royalties, the donees need seek no assistance. If the deed upon its true construction evidences an intention presently to assign part of the right, the assignment would be complete within the doctrines of equity. If, on the other hand, the deed purports to assign the stated proportion of the royalties as after-acquired property the assignment would be ineffective in equity for want of consideration. The question therefore, in my opinion, is a narrow one, namely, whether upon its true construction the deed purports to assign part of the right to the royalties or of the royalties themselves as after-acquired property.

Nothing, it seems to me, turns on the fact that the taxpayer himself obtained or transmitted the cheques to the donees. Such a course is quite consistent with either construction of the deed poll, i.e. either construing it as an immediate gift of a part of the chose in action or as a gift of the royalties themselves as and when received.

The task in construing the deed is to find the meaning intended by the taxpayer as expressed. No form of words is required for an equitable assignment but it is necessary to find the expression of an intention to assign. The deed does purport in terms presently to assign its subject matter and to do so absolutely and unconditionally. In describing what he considered he had done by the operative words of the deed, the taxpayer in the second paragraph of the deed, speaks of the persons "to whom my right title and interest . . . is assigned". The difficulty in the case arises in the description of the subject matter of the gift. That description begins with the words "all my right title and interest in and to" which words are appropriate to the assignment of a chose in action as distinct from its ultimate produce. But the words that follow create the problem, "an amount equal to ninety per centum of the income which may arise during a period of three years from the date of this assignment".

Had the taxpayer been dealing with his entire right to royalties, probably the description of the subject matter of the intended gift would not have been difficult. But because the deed was to deal with only part of that right and that only for a limited period of years, the draftsman, it seems to me, has been led into the use of the awkward words which I have quoted. I think it not inappropriate when seeking the intended meaning of the words to notice the consequences of not finding in the language of the deed, as a whole, an intention to make a present gift of part of the right to royalties arising under the licence to manufacture. For if the deed poll is not an equitable assignment of part of that right it must be, in my opinion, an attempted equitable assignment of the royalties as after-acquired property. Equity would treat such an assignment as or as evidencing a promise to hand over the royalties when received: but the promise being voluntary would not be enforced by it. The directions given by the taxpayer to the licensee subsequent to the execution of the deed poll would then be no more than revocable mandates. As such, of course, they would not support the taxpayer's objections.

No doubt to speak of the subject matter of the gift as an amount of income to accrue from royalties would seem to support the conclusion that what is to be given is the property in the form of money produced by the promise to pay royalties. But the full description of the subject matter of the assignment is of "the right" to such amounts - an unlikely expression to describe the money itself. In my opinion, it indicates that the taxpayer was not intending to promise that he would pay money measured by the amount of royalties accrued or that he was intending to assign the royalties themselves. Its use rather suggests, to my mind, that he was intending to place the persons he wished to benefit in the position of being able themselves to assert a right to receive the appropriate amounts from the licensee.

As I have mentioned, the dominant consideration is the intention of the taxpayer as expressed in the deed. The expressed indications of an intent presently to assign portions of his right to royalties are strong enough, in my view, to overbear any contrary indication which might possibly be derived from the words which I have just discussed. These clumsy expressions are used, in my opinion, as I have said, in an endeavour to attain the two desiderata of a gift of part only of the right and only for a limited period of years. They are not in any case really so inappropriate to a present gift of a part of the right to royalties that they should be allowed to dominate the construction and to displace the evident intention expressed in the earlier part of the deed.

I have come to the conclusion that upon the true construction of the deed poll the taxpayer did thereby equitably assign to the named donees the stated proportions of his right during the ensuing three years to royalties from the licensee under the licence to manufacture the patented article.

It was also submitted by the Commissioner that the subject matter of the intended assignment was a mere spes or possibility which could not be voluntarily assigned. This argument concedes the intention to assign, but attacks its subject matter as insusceptible of assignment by way of gift. If there is no such intention to assign evidenced, the Commissioner would succeed on other grounds, as I have mentioned.

The basis of this submission is that in the event there may not be any amount payable for royalties because no sales of castors may be made. But this misconceives the matter. That a promise may not be fruitful does not make it incapable of assignment. Reference was made on behalf of the Commissioner in this connexion to Norman v. Federal Commissioner of Taxation (1963) 109 CLR 9 . But that case did not decide anything to the contrary of what I have just said. So far as the case dealt with the attempted assignment of the promise to pay interest, it must, in my respectful opinion, depend upon the view that the promise to pay interest in that case inhered in the existence of a principal sum upon which the interest was to be calculated and payable. Consequently, there was there no promise to pay interest, if no principal remained due. The case, in my opinion, has no relevance to the problem raised by the language of this deed poll as applied to the facts of this case.

Accordingly, in my opinion, the questions asked by the reference by the Taxation Board of Review should be answered: 1. Yes. 2. No.