Californian Oil Products Ltd v. Federal Commissioner of Taxation
(1934) 52 CLR 28(1934) 8 ALJ 195
[1934] ALR 339
(1934) 3 ATD 10
(Judgment by: Starke J) Court:
Judges:
Gavan Duffy CJ
Starke JDixon J
Evatt J
McTiernan J
Subject References:
Taxation and revenue
Income tax
Agreement for company to carry on agency
Cancellation of agreement
Company wound up
Money paid in consideration of cancellation
Income or capital
Proceeds of profit-making scheme
Licence
Legislative References:
Income Tax Assessment Act 1922 (Cth) No 37 - Section 4; Section 16; Section 93A
Judgment date: 24 August 1934
SYDNEY
Judgment by:
Starke J
The facts are fully set out in the case stated by Rich J. for the opinion of this Court. The substance of the matter is that by force of an agreement dated 16th November 1927, adopting and ratifying an agreement of 30th June 1927, the Atlantic Union Oil Co Ltd (hereinafter called the principal) appointed the Californian Oil Products Ltd (hereinafter called the agent) sole agent for the sale of petroleum products and lubricating oils and greases from time to time manufactured or acquired or dealt in by the principal, during a period of five years from 1st April 1928 to 31st March 1933, in the territory of New South Wales, excepting certain specified areas. The remuneration payable to the agent, and the other terms and conditions of the agency, are set forth in detail in the agreements, and need not be here repeated. By an agreement dated 11th October 1928, between the principal and the agent, the agreement of 16th November 1927 was cancelled. In consideration of such cancellation, the principal agreed to pay to the agent the sum of PD70,000, payable by ten equal half-yearly instalments, without interest, of PD7,000 each, the first of such instalments to be paid on 1st May 1929, and the remaining instalments to be paid at successive intervals thereafter of six months each. The agent covenanted that, as from the date of the signing of the cancellation agreement, it would not directly or indirectly handle or deal in petroleum products of any kind. And each of the parties released the other from all claims of every kind other than those arising under and by virtue of the provisions of this agreement. The Commissioner of Taxation assessed the agent to income tax in respect of the sum of PD14,000 received by it under the agreement of 11th October 1928 during the year which ended on 30th June 1931. The question is whether he was right in so doing.
It is now well enough settled that the profits arising from carrying on or carrying out any trade or business by a taxpayer, or any scheme of profit-making, are assessable to income tax ( Ruhamah Property Co v Federal Commissioner of Taxation [F13] ; and cf. Commissioner of Taxes v Melbourne Trust Ltd [F14] , at p. 1009; Commissioner of Taxes v British Australian Wool Realization Association Ltd (In Liquidation) [F15] , at p. 231). The argument for the appellant is that the sum of PD14,000 assessed to income tax did not accrue to the agent in carrying on or carrying out any trade or business or any scheme of profit-making, or as a reimbursement of or damages in lieu of the profits which the agent would have earned under the agreement, but was compensation for a loss of opportunity to earn profits; in other words, that the sum of PD14,000 did not represent a receipt in the nature of profits or income, but a receipt in the nature of capital. Now the PD70,000 mentioned in the agreement is payable on the terms that the agent shall not pursue its agency; it is deprived of its right to carry on its agency and earn remuneration or income therefrom; its right under the agreement of 16th November 1927 has been "sterilised and destroyed." The case of Glenboig Union Fireclay Co v Commissioners of Inland Revenue [F16] , makes it clear, I think, that a payment made in such circumstances cannot be regarded as a profit or income earned in the course of business, or as part of a profit-making scheme. It represents a capital and not an income receipt. It may be that the sum was calculated on a basis of profits, but, as Lord Buckmaster observed in the Glenboig Union Fireclay Co 's Case [F17] , "it is unsound to consider the fact that the measure, adopted for the purpose of seeing what the total amount should be, was based on considering what are the profits that would have been earned." The ine of demarcation between cases on the one side and the other is neatly stated in the report of the argument in the case of Burmah Steam Ship Co v Commissioners of Inland Revenue [F18] , and the important cases are there collected in a footnote. But the decision in the Glenboig Union Fireclay Co 's Case [F19] renders further consideration of the matter unnecessary.
The questions should be answered:(1) Yes. (2) No. (3) Yes.