Dickenson v Federal Commissioner of Taxation

98 CLR 460

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(Judgment by: Kitto J)

Between: Dickenson
And: Federal Commissioner of Taxation

Court:

Judges: Dixon CJ
McTiernan J
Williams J
Webb J

Kitto J

Subject References:
Taxation and revenue
Income tax
Income or capital

Legislative References:
Income Tax and Social Services Contribution Assessment Act 1936 - 83; 88; 260

Hearing date: 8 February 1957; 19 November 1957; 20 November 1957
Judgment date: 2 April 1958

SYDNEY

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Judgment by:
Kitto J

These appeals concern the inclusion by the Commissioner of Taxation of a sum of PD2,000 in the appellant's assessable income of the year ended 30th June 1952 and a similar sum in his assessable income of the year ended 30th June 1953.

The two sums were paid to the appellant by the Shell Company of Australia Ltd , one on 30th June 1952 and the other on 1st July 1952. The circumstances were these. The appellant was the registered proprietor of an estate in fee simple in certain land upon which was erected a garage and service station. He there carried on a business which, until the relevant events occurred, included the selling of the petroleum products of a variety of companies. About May 1952 the Shell Company opened negotiations with him to the end that his service station might become a one-brand station, dealing exclusively in Shell products. Agreement was reached, and the parties gave effect to it by executing five documents and making and accepting the payments now in question. It is conceded that the documents were all interdependent in the sense that none would have been executed without the others. The first document, for some reason, was executed as early as 11th June 1952 and was expressed to commence a month earlier still, on 9th May 1952. It was to continue for ten years and thereafter until determined by three months' notice by either party. By this agreement the Shell Company bound itself to sell and deliver at the appellant's premises, at the company's usual list prices to resellers, Shell products as the appellant should from time to time require for his business; but this was subject to a provision enabling the Shell Company to annul the contract if it should be prevented from selling or delivering the products by any of a number of causes, including any unexpected or exceptional cause or any reason beyond its control. The appellant agreed to purchase a minimum quantity of motor spirit and lubricants every month, and he also agreed (putting it broadly) not to permit the sale, use or consumption upon his premises of any petroleum products not supplied directly by the Shell Company, and not to purchase any petroleum products from anyone else so long as that company should be able to supply sufficient Shell products to satisfy his weekly requirements. The Shell Company granted the appellant "a non-exclusive right" of selling Shell products under their registered trade marks or trade names, and agreed to make available to the appellant "such technical assistance as Shell for the time being extends to buyers of its products under this franchise".

Then, on 30th June 1952 three documents were executed: a memorandum of lease by which the appellant leased his premises to the Shell Company for ten years from that date at a yearly rental of PD1,040 payable by monthly payments in advance of PD86 13s. 4d.; a memorandum of lease by which the Shell Company sub-leased the premises to the appellant for the same term less two days at the same yearly rental payable by identical instalments; and a deed of covenant expressed to be made in consideration of the sum of PD2,000 then paid by the Shell Company to the appellant. On the next day the parties executed the fifth document, which was another deed of covenant, expressed to be made in consideration of a second sum of PD2,000 paid by the Shell Company to the appellant.

All the documents of 30th June and 1st July 1952 need to be considered closely. The lease from the appellant to the Shell Company contained nothing which need be remarked upon, but the sub-lease back to the appellant contained covenants by the appellant designed to ensure the preservation of the premises as a garage and service station, and covenants by him duly to observe and perform his covenants and agreements in the supply agreement of 11th June 1952 or any extension variation or renewal of or agreement in substitution for that agreement, and in every way possible to promote extend and develop the sale of the products mentioned in that agreement. There was also a covenant against assigning, sub-letting, parting with possession, mortgaging or pledging, and a provision for re-entry by the lessee in a variety of events, including the neglect or failure of the lessee for one month to perform or observe any of the covenants of the lease, and including also the cesser or determination of the supply agreement or any extension variation or renewal thereof, or any other agreement in substitution therefor. "Lessee" was defined to include the appellant's successors in title.

The supply agreement and the two memoranda of lease formed together the means by which the appellant's premises were effectually tied to the Shell Company for a substantial period of years. What did the appellant get for submitting his premises to the tie? So far as these three documents are concerned, he got very little. The Shell Company's promise to supply the petroleum products required for his business was subject to a large qualification, and was at least as much in the Shell Company's interest as in his. The non-exclusive right to sell Shell products under their trade marks and trade names was no real concession to him, for the Shell Company wanted its products so sold, and the more extensively the better. The promise of technical assistance was, if not meaningless, at least hardly worth weighing in the scales.  

But the position in regard to the two deeds of covenant was exactly the reverse. The appellant received under them PD4,000 and gave little in return. He entered into two restrictive covenants for consecutive periods, but they were covenants of doubtful validity and still more doubtful practical value to the Shell Company. The first deed of covenant recited that the appellant owned and carried on a garage and service station business. That business (and not the appellant's premises) it proceeded to call "the said premises". It contained a covenant by the appellant, in consideration of the first payment of PD2,000, in these terms:

"that he will not during a period of thirty (30) calendar months from the date hereof within a radius of five (5) miles of the said premises as an owner partowner partner servant employee or as an agent or as a director of any company or otherwise directly or indirectly open or carry on or conduct or be engaged concerned or interested in any other garage or service station unless and until arrangements satisfactory to the covenantee have been made whereby any such other garage or service station is or shall be operated and carried on in all respects as a garage and/or service station at and in respect of which the petroleum products of the covenantee or its successors in title are exclusively bought sold and dealt in ...."

The second deed of covenant contained the same recital as the first, and, like the first, it defined the expression "the said premises" to mean the appellant's business. It recited the making of the first deed of covenant, and contained a covenant by the appellant, in consideration of the second payment of PD2,000, in the same terms as the former covenant except that the period was thirty months from 31st December 1954.

There is no need to form any concluded view as to whether these covenants were void as being in unreasonable restraint of trade. Suffice it to say that to the legal advisers of the Shell Company it must have been obvious that if proceedings should ever be contemplated a serious question of validity would almost certainly arise. What is meant by the reference above to the practical value of the covenants to the Shell Company is simply this. A number of rival petroleum companies were engaged in competing endeavours to get garages bound to the selling of their respective petroleum products. It seems obvious that in each case the important thing from their point of view was the garage and not the proprietor. That is not to say that there is no personal goodwill at all in connection with a business of selling petrol and oil. But if, in the case of the appellant's business for example, the Shell Company could get the premises effectually tied to it for ten years, it had very little to fear from the possibility of the appellant's being able to assign his sub-lease (so far as that could be done consistently with the covenant on the subject) and starting a new business selling rival products within a five mile radius-very little more, indeed, than it had to fear from the possibility of any other member of the community opening or being interested in such a business. It seems incredible that the two covenants, covering only five years between them, were considered by either side to be worth by themselves PD4,000. The appellant, in giving evidence, did not suggest it. The correct conclusion seems to be that the PD4,000 was really the substantial consideration paid to the appellant for the benefits which the Shell Company got from the entire transaction to which the five documents gave effect. It was the only benefit of much substance which the appellant received, and it took him a period of some weeks, from the time when the Shell Company made its first suggestion to him about making his business an exclusively Shell business, to raise the figure from PD1,000 to PD4,000.

The inference seems clear that the deeds of covenant, though no doubt genuinely intended to operate according to their terms, were a means adopted (perhaps inspired by a reading of Beak v  Robson ^[F11] ) in order to throw the money consideration in the transaction against restrictive covenants in the hope that thereby it might be given, or given more certainly than otherwise would be the case, a capital flavour. Not that any dishonesty was practised; but the only reasonable explanation of what was done seems to be that accountants, or lawyers, or both, considered that a transaction which might possibly be held to make the PD4,000 liable to income tax in the appellant's hands if carried out in some ways would or might make it free of income tax if carried out in the way that was adopted. Attention, it would seem, may even have been given to the possibility that if the transaction took some possible forms the PD4,000 might be taxable under Div. 4 of Pt. III of the Income Tax and Social Services Contribution Assessment Act 1936-1951 (Cth.) as a premium in connection with the grant of the lease by the appellant to the Shell Company. It is not easy to explain on any other basis the odd piece of draftsmanship in the deeds of covenant by which the area of the restriction is measured from "premises" which are defined as the appellant's business, so that no reference to the leased premises appears in these deeds.

However this may be, it is plain enough that the case should be decided on the basis of fact that the two payments of PD2,000 were part and parcel of the whole transaction evidenced by the five documents. The learned judge of first instance took this view, but he reached the conclusion that the payments were in the nature of income because their substantial purpose was not to pay the appellant for entering into negative covenants but was to induce him to devote his energies and the resources of his business to increasing the sale of Shell products. With great respect, I do not feel able to reach the same conclusion. The transaction as a whole if looked at from the appellant's point of view, was, I think, in essence restrictive. The ultimate result which the Shell Company sought was, of course, an increase in the sales of its products; but the actual transaction with which we are concerned was confined almost entirely to the exclusion of competitors from that part of the trade in petroleum products which would be done at the appellant's garage.

The problem that arises under the United Kingdom income tax legislation in cases of this general description was touched upon by the Master of the Rolls in Higgs v  Olivier, ^[F12] when he said: "I think Sir Frank Soskice was disposed to agree that, if a trader, or a professional man, for a money consideration covenanted to give up his trade or profession for the rest of his life, then it would be difficult to say that the money received was `profits or gains accruing or arising from his trade or profession'. On the other hand, it is not difficult to see that a restriction of a very limited or partial character might less easily be taken out of the ambit of the taxing provision. One example in the argument was that of an actor who covenanted for a limited period not to act for one particular company out of a large number. I myself gave the example of an actor who covenanted for a limited period not to act under his own or well-known stage name. But between the two extremes there is a large area, and for myself I am disposed to think that within that area it may well be a matter of degree". ^[F13] Much the same may be said, I think, in relation to the Commonwealth Act, though its conceptions are by no means the same as those of the United Kingdom Act and it is possible that such a case as Higgs v  Olivier ^[F14] might have to be decided against the taxpayer if it arose under the Commonwealth Act. In the area to which the Master of the Rolls referred as lying between the two extremes, cases must often arise in which it is difficult to be sure whether they fall on this side of the dividing line or on that. But a lump sum payment for a restriction of a garage and its proprietor to one brand of petroleum products for a period of ten years, effectuated by means of a lease and sublease of the premises as well as by personal covenants, seems in the nature of a sale price for a substantial and enduring detraction from pre-existing rights. The restriction does not strike my mind as an obligation undertaken incidentally to the carrying on of the business. Rather does it take a substantial piece out of the ordinary scope of the business activities to which otherwise the appellant might apply himself and for which he might use his premises-to adapt some words of the Master of the Rolls. ^[F15]

The consideration for it was paid to the appellant in two sums but was otherwise non-recurring. Although the two deeds of covenant related to an aggregate period of only five years, there is nothing in the case to suggest any likelihood that at the end of that period further payments would be made in consideration of further similar covenants. All things considered, the two payments savour much more of capital than of income. I should add that it does not seem possible to regard them as amounting to a rebate in advance against the price of petroleum products to be purchased by the appellant from the Shell Company, for there is nothing to suggest that the parties attempted to make any calculation by reference to probable sales, or that they ever regarded the PD4,000 as related in any way to such sales.  

There remains a question as to whether the PD4,000 should be treated, for the purposes of assessing the appellant's income tax, as a premium included in his assessable income by the operation of s. 88 of the Income Tax and Social Services Contribution Assessment Act 1936-1951 (Cth.). Having regard to the relevant portions of the definition of "premium" in s. 83 (1), the question is whether each payment of PD2,000 was a consideration in the nature of a premium fine or foregift payable to the appellant for or in connection with the grant by him of the lease to the Shell Company.

Upon consideration I think that the payments cannot be forced into that mould, and not even with the assistance of s. 260. Without that assistance it is clearly impossible to affirm either that they had the nature of a premium fine or foregift or that they were payable for or in connection with the grant of the lease. But suppose that s. 260 applies, so that the deeds of covenant are to be treated as being void as against the commissioner; and suppose also that it is legitimate then to infer that the payments were in the nature of consideration for the appellant's entering into the supply agreement, his granting the lease to the Shell Company, and his accepting the sub-lease back. These hypotheses seem to put the case at its highest in the commissioner's favour. In the situation which they produce the payments, though not in any sense "for" the grant of the lease, might no doubt be described as to some extent connected with the grant of the lease. But they were in truth no more closely connected with that than with the execution of the supply agreement and the sub-lease. They were really payable in connection with the whole machinery by which the desired tie to the Shell Company was accomplished, and not with any one part of that machinery considered by itself. To attribute to them the nature of a premium fine or foregift in connection with the grant of a lease would be to get them quite out of perspective.

I have come to the conclusion for these reasons that the amounts in question ought not to be treated as included in the appellant's assessable income, and that the appeals should be allowed.