Shepherd v. Federal Commissioner of Taxation

(1965) 113 CLR 385
39 ALJR 351

(Judgment by: Kitto)

SHEPHERD
v. FEDERAL COMMISSIONER OF TAXATION

Court:
HIGH COURT OF AUSTRALIA

Judges: Barwick C.J.

Kitto
Owen JJ.

Judgment date: 17 December 1965


Judgment by:
Kitto

The appellant, being the grantee of letters patent in respect of certain inventions for castors, granted to one Mark Cowen in 1954 a licence to use the inventions upon terms which included the payment to the appellant every month of a royalty of five per centum of the gross sale price of castors manufactured thereunder during the preceding month. In the year ended 30th June 1958, royalties amounting to 7,030 pounds became payable by Cowen. He made quarterly instead of monthly payments, each payment being made by sending to the appellant, in accordance with a request made by him, six cheques, one drawn in favour of the appellant himself and one in favour of each of five other persons. The appellant distributed the cheques amongst the named payees, and they were duly honoured. In all, the appellant received during the year 999 pounds from cheques drawn in favour of himself, and the other payees received amongst them 6,031 pounds. The Commissioner assessed the appellant to income tax on the footing that his assessable income including the 6,031 pounds as well as the 999 pounds. It is clear that if there had been no more relevant facts in the case than I have stated the assessment would have been justified, for the making of the payments to the five persons other than the appellant, even if not to be considered as payments by the appellant out of income derived by him, would have constituted the derivation of income by him: s. 19 of the Income Tax and Social Services Contribution Assessment Act 1936-1957 (Cth).

The appellant contends however that by a deed poll which he executed on 23rd July 1957 he assigned to the five other persons, by way of gift, ninety per centum of the benefit of Cowen's covenant to pay the royalties which should accrue to him in the ensuing three years; and he says that accordingly the receipt by each of those persons of the amounts paid to him or her by the cheques drawn in his or her favour after 23rd July 1957 was a derivation by that person of income from property which was vested in him or her, and not a receipt of money which the appellant should be considered to have derived as his income. The abovementioned sum of 6,031 pounds is taken to have been the total of the amounts received by the five persons between the date of the deed poll and the end of the relevant year of income.

The terms of the deed poll have been set out and I shall not repeat them. The deed exhibits in its operative words, and underlines twice later, the intention of effecting an immediate alienation of property presently existing, presently belonging to the assignor, and consisting of a right, title and interest in respect of royalties to become payable by Cowen under the licence agreement. The suggestion has been offered that nevertheless the operation of the deed on its true construction is not that of an assignment but is that of a covenant to pay an amount to be calculated by applying ninety per centum to the total of the royalties in the three-year period. If this were in truth its operation the consequence would necessarily be that the royalties themselves would have been the income of the appellant; but the suggested construction does not appear to me to give the deed its true effect. The force of the contention lies in the presence of the words "an amount equal to", which may be thought to show that the intention was to make over a sum of money measured by reference to the royalty income but not necessarily forming part of it, and thus to create though somewhat clumsily, a mere money obligation. But the subject of the right which the appellant had in respect of the three-year period under his agreement with Cowen was correctly described by the use of the indefinite article; it was "an amount" and not the royalty income itself. Consequently an assignment of ninety per centum of the right in respect of the period, or (what comes to the same thing) an assignment of the right to an amount equal to ninety per centum of the royalty income of the period, might be expressed, without inaccuracy, as an assignment of the right to be paid an amount out of that income equal to ninety per centum thereof. That, it seems to me, is what the collocation of words means.

To construe what purports to be an assignment of property as a covenant to make payments seems to me a step which only compelling circumstances or a compelling context could justify, and I do not think that it can be right to take that step in the present case. It would mean doing no little violence to the language of the instrument, and the probabilities seem to me to be against it. After all, a person whose intention it was to undertake a future pecuniary obligation, equal to a percentage of his royalty income in a future period but to be met out of his resources generally, would not be very likely to choose the language of assignment to express that intention, or even, I should have thought, to choose a deed poll rather than a deed inter partes as the appropriate instrument for the purpose.

On behalf of the Commissioner the contention was made that if the deed be construed as intending an assignment it should be held to have been ineffectual on the ground that in respect of the royalties to become payable by Cowen the appellant had no more than a mere expectancy or possibility such as cannot be assigned either at law or in equity: In re Ellenborough (1903) 1 Ch 697 . In support of this contention reliance was placed upon the decision which this Court gave in Norman v. Federal Commissioner of Taxation (1963) 109 CLR 9 in relation to a purported voluntary assignment of what was described in the relevant deed as the assignor's right, title and interest in and to the interest payable by a firm in respect of a sum of 3,000 pounds being portion of a larger sum that had been deposited by the assignor with the firm and was still outstanding at the date of the assignment. That case, however, stands in clear contrast with the case ment. That case, however, stands in clear contrast with the case that is before us. The deposit had been made under an agreement which provided that the firm might repay the money or any part of it at any time without notice, but that the taxpayer should not be entitled to require payment except upon eighteen months' notice. As it turned out, the money was not repaid before the end of the relevant year of income, so that interest in accordance with the agreement became payable and was paid in respect of that year. The interest was held to be the assignor's income, on the ground that the attempt to assign the right to receive it was void as being an attempt to assign, without valuable consideration, property not presently in existence. To understand the ground of decision it is necessary to remember that in respect of the future year the loan agreement recorded the terms which should apply to the relationship of borrower and lender so long as such a relationship should exist, but it left the borrower free to decide whether such a relationship should exist in the relevant year.

It gave the lender no right in any possible event to insist upon there being a loan in existence in that year. In the present case the situation at the date of the assignment was exactly the opposite. There existed at that time a contractual relationship between the appellant and Cowen which by its terms must continue throughout the ensuing three years, whether Cowen should wish it to continue or not. The appellant, therefore, had a vested right in respect of those three years. It might indeed become divested, for the licence agreement p rovided for cesser of Cowen's liability to pay royalties if the letters patent should not be maintained or should be declared void; but the right existed, though it was thus subject to defeasance by events not within the control of Cowen. It is true also that what the appellant's right under the licence agreement would yield in royalties in those years - indeed, whether it would yield any royalties at all in those years - no doubt depended upon contingencies partly within the control of Cowen. It was for him to decide how many castors, if any, he would manufacture in accordance with the appellant's inventions and try to sell. Market conditions would then determine how successful his efforts to sell would be. But whatever he might do or desire to do, the existence of the appellant's contractual right would be unaffected, though the quantum of its product might be. The tree, though not the fruit, existed at the date of the assignment as a proprietary right of the appellant of which he was competent to dispose; and he assigned ninety per centum of the tree. The case is of the general class of which Brice v. Bannister (1878) 3 QBD 569 is an example, and may be usefully compared with Bergmann v. Macmillan (1881) 17 Ch D 423 and Hughes v. Pump House Hotel Company Ltd. [1902] 2 KB 190 .

The intention being to assign a part only of a chose in action - only ninety per centum of it and for a limited period - the assignment had of necessity to be equitable: In re Steel Wing Co. Ltd. (1921) 1 Ch 349 . So far as the formal means employed is concerned there can be no doubt as to its sufficiency, for all that is required for an equitable assignment is a manifestation by the assignor of an intention to transfer the chose in action to the assignees in a manner binding upon himself, as distinguished from an intention merely to give a revocable mandate while retaining ownership of the chose in action: Milroy v. Lord (1862) 4 De G F & J 264, at p 274 ( 45 ER 1185 , at p 1189) . Construed in the sense I have indicated, the deed in the present case manifests unequivocably the intention to make an assignment. To construe it as intending a revocable mandate would be impossible. But we have been invited to hold that an equitable assignment of existing property is ineffectual unless for valuable consideration. The general question was discussed by Windeyer J. in his dissenting judgment in Norman v. Federal Commissioner of Taxation (1963) 109 CLR 9 , at pp 30-34 , where the proposition now contended for was rejected. I agree in the views which his Honour expressed in this portion of his judgment, as, apparently, did Dixon C.J. in that case. We are not here considering a purported equitable assignment of a legal chose in action capable of assignment at law. The consideration which is necessary to attract the jurisdiction of equity to perfect an imperfect assignment is not necessary where the only possible assignment is equitable and the assignor has done all that could be done by him to perfect an equitable assignment.

In the result, I am of opinion that when the distributions of royalty moneys were made amongst the five persons nominated as assignees the moneys each received were the fruits of an undivided share of a contractual right which share had become beneficially his or her own property. Accordingly I would hold that the royalty moneys which were paid to the five persons, up to ninety per centum of the whole, were not assessable income of the appellant.

I would answer the questions asked in the case stated: (1862) 4 De G F & J 264, at p 274 ( 45 ER 1185 , at p 1189) Yes; (2) No.