O'CONNELL v FC of TJudges:
MEDIA NEUTRAL CITATION:
 FCA 904
1. The applicant appeals from a decision by the respondent (``the Commissioner'') on 21 April 1997 disallowing the objection by the applicant dated 24 February 1993 against the amended assessment issued by the Commissioner on 5 January 1993. In the amended assessment the Commissioner included in the applicant's assessable income the sum of $52,673 being the applicant's share of an amount of $8,009,000 received by the Peat Marwick Hungerfords partnership (``PMH''), of which he was a partner, as an inducement for PMH to enter into an agreement for the lease of certain premises at 147-165 Collins Street, Melbourne owned by Sweetvale Pty Ltd. The applicant contended that the amount received by him on 23 November 1988 pursuant to an agreement bearing that date was a receipt of capital and was not income pursuant to s 25(1) of the Income Tax Assessment Act 1936 (Cth) (``the Act''). The subject premises are variously described in relevant documentation as 147-165, 151, 157 and 161 Collins Street. Nothing turns on the different descriptions.
2. In its partnership income tax return for the year ended 30 June 1989, PMH disclosed that on 23 November 1988 Sweetvale Pty Ltd paid PMH the sum of $8,009,000 to induce the partnership on 23 November 1988 to enter into an inducement agreement and an agreement for the lease of floors one to six of a building to be erected at 147-165 Collins Street, Melbourne. In the return PMH contended that the amount received was not part of the assessable income of the partnership pursuant to the provisions of the Act and was a receipt of capital.
3. The Commissioner contended that the amount of $8,009,000 was a gain made from a profit-making undertaking or scheme, or was a receipt from an ordinary incident of a transaction undertaken by PMH in the course of its business and was, therefore, income for the purposes of s 25(1) of the Act.
4. A critical issue in the proceeding was the purpose for which PMH engaged in its search for new premises. The applicant's case was that its purpose in looking for new premises was ``space driven'' in the sense that it was running out of space and had no alternative but to seek new space. The Commissioner did not challenge the proposition that PMH had this purpose and needed new premises but contended that its investigations of new premises and its decision to take the particular premises it did also had the purpose of a profit- making scheme or the obtaining of a financial gain or profit.
5. Having regard to the centrality of the issue of the purpose of PMH in choosing the premises it did, I adopt the observation of Dixon and Evatt JJ in
Western Gold Mines No Liability v Commissioner of Taxation (Western Australia) (1938) 4 ATD 453 at 461; (1938) 59 CLR 729 at 740:
``In considering whether a profit arising from a transaction is of an income or capital nature, it is necessary to make both a wide survey and an exact scrutiny of the taxpayer's activities.''
The background leading up to the inducement payment
6. The survey commences at a point of time in 1986 when the offices of accountancy firm Peat Marwick Mitchell & Co (``PMM'') were located at 500 Bourke Street, Melbourne. It continues through October 1987 after PMM had merged with another accountancy firm, KMG Hungerfords (``Hungerfords''), to form PMH. The survey concludes in November 1988.
7. On 5 July 1977 PMM entered into a lease of premises at 500 Bourke Street, Melbourne (then owned by Abbey Capital but now owned by the National Australia Bank Ltd). Under the terms of the lease PMM had a number of options for renewal and also pre-emptive rights
ATC 4630to lease further space. However, the occupation of a substantial part of 500 Bourke Street by the National Australia Bank and the fact of other long-term leases by major tenants in the building restricted the ability of PMM to obtain sufficient space to accommodate the expansion of the firm.
8. By early 1986 the issue of space had become a matter of concern to PMM. It had grown in size since its move to 500 Bourke Street and it had taken up leases over the floors in respect of which it had pre-emptive rights. According to Mr Kenneth Spencer, who was Managing Partner of PMM in early 1986 (and who became Managing Partner of the merged firm PMH until 30 June 1993), the staff/space ratio had become quite tight and it made working conditions uncomfortable. On 27 March 1986, Mr Spencer wrote to the National Australia Bank enquiring as to the possibility of obtaining further space in 500 Bourke Street. The Bank responded on 10 April 1986 saying that present indications were that further space in the mid-rise section of the building was unlikely to become available in the medium term.
9. In early 1986 Mr Spencer requested the applicant, Mr O'Connell, to review the long- term space requirements of PMM and to prepare a long-term space plan for the period from 1986 to approximately 1995. On or about 1 May 1986 Mr Spencer appointed Mr O'Connell and two other persons to the ``Space Committee'' whose role was to project PMM's estimated tenancy requirements and to evaluate where, within the Melbourne central business district (``CBD''), PMM could be relocated and to make recommendations as to alternative premises. Mr O'Connell was responsible for the detailed work involved in reviewing the long- term space requirements and assessing the options available. The Space Committee was to make recommendations to PMM's Practice Management Committee (which after the merger with Hungerfords became known as the Local Executive Committee and included representatives of PMM and Hungerfords). The Practice Management Committee made recommendations to the whole partnership. Although Mr O'Connell had the executive role in relation to space issues, Mr Spencer played an active role and any recommendations made to the Practice Management Committee (and later the Local Executive Committee), were reviewed and agreed to by him.
10. Mr O'Connell, with the assistance of PMM's architects, Metier III Pty Ltd, engaged Colliers International Property Consultants (``Colliers'') to assist PMM in its search for space. Mr O'Connell met with Colliers and on 22 April 1986, Mr Carew of Colliers wrote to PMM's architects setting out Colliers' understanding of PMM's requirements. In the letter Colliers recommended that PMM's approach to relocation ``should be entrepreneurial and not passive''. The letter continued:
``The size and desirability of the tenancy ensures that the property development and investment market will regard them highly. They effectively control an asset on which they can capitalise. It should not be assigned without the Partnership sharing in the value created.
There are several permutations and options available to them ranging from negotiating a premium payment (or generous fit-out contribution) from a prospective lessor, to the development of a new building by the Partnership acting as a developer.''
Colliers noted that PMM's options were many and continued:
``They should be aware that they have the potential to create a development profit of $8-10 Million by making a long term commitment of 80,000-100,000 sq.ft. in a City office building.
There would need to be extremely exceptional circumstances for them to fail to profit by such an exercise, provided that they are properly and professionally advised, and given the considerable size and value of the tenancy offered.
The degree to which they share in that profit will be determined by the structure decided upon and the degree of risk they wish to bear.''
Although Mr O'Connell said that he took Colliers' statement that PMM had the potential to create a development profit of $8,000,000 to $10,000,000 with a ``grain of salt'', he recommended in a memorandum to Mr Spencer entitled ``The Long Range Space Plan'' dated 24 July 1986 that PMM form a working party to examine the feasibility of taking an
ATC 4631entrepreneurial role in pursuing their space requirement.
11. The Long Range Space Plan addressed issues including space volume, projected staff numbers, space availability at 500 Bourke Street and the options which were available. One option was to stay at 500 Bourke Street which would involve relocating part of the firm, although Mr O'Connell was not in favour of this option. Another option identified by Mr O'Connell was approaching a developer on the basis that the firm would enter into a pre- commitment to take space. A further option identified by Mr O'Connell was to take an entrepreneurial role whereby the firm could earn a profit of between 20 per cent to 30 per cent of the costs of the development. Mr O'Connell's recommendation was to form a working party to examine the feasibility of pursuing the option of taking an entrepreneurial role. He saw a number of advantages of this proposal which included:
``If managed properly we will generate savings in rental or earn up front profits depending on how we wish to structure it.''
12. By this time PMM was aware Price Waterhouse had previously taken an entrepreneurial role in developing a new building which was subsequently sold to a financier and leased back. According to Mr Spencer, for a time PMM considered taking a similar entrepreneurial role but around the middle of 1987 it dismissed this as a viable option because of the development risks involved in the perceived overheated state of the economy.
13. On 22 August 1986 Mr O'Connell met with the National Australia Bank to obtain an update on the information previously supplied. Mr O'Connell was told that no new additional space would become available.
14. A meeting of PMM's Practice Management Committee was held on 5 September 1986 at which The Long Range Space Plan was discussed. The advantages of commissioning PMM's own building, as Price Waterhouse had done, which included the ability to exercise some control of rental costs and the availability of a developer's profit, were canvassed. The discussion also included the importance of location, whether it was desirable to keep divisions together, and the impact of the possible merger between PMM and Hungerfords which was then under discussion.
15. In December 1986 the Space Committee instructed Colliers to publish advertisements seeking submissions for a solution to the long- term space problems of PMM. The advertisements were published in January 1987 and were headed ``Wanted - Office Space''. The text was in the following terms:
``A leading International and National Professional organisation is outgrowing its current office accommodation in Melbourne and will require new premises to be available no later than 1991. Our client is interested in considering innovative proposals whereby they could:
- • Participate as joint venturers in a major development
- • Acquire all or part of an existing building
- • Purchase a development site
- • Lease the required area or take a Head Lease of an entire building .
The required area is the Melbourne CBD, preferably the western end. Area required is 18,000 square metres, with on site parking for 150 cars. Preferred floor size is 1,400 square metres.''
Proposals from interested parties were requested to be addressed to Mr W Carew of Colliers.
16. Dayton Hazama Pty Ltd wrote to Colliers on 25 March 1987 with a proposal to undertake a development of the T & G site at 147-161 Collins Street, Melbourne which would be designed to suit the requirements of PMM. Dayton Hazama proposed that PMM would enter into a joint development of the site and would receive a 25 per cent equity in a development company and that Dayton Hazama would undertake the development. PMM's equity of 25 per cent would be at no cost to PMM. The proposal was based on PMM's willingness to commit to 18,000 sq.m. in the proposed building. In fact neither PMM nor PMH decided to take a 25 per cent equity in the building.
17. Around the same time a proposal was put forward by Property Estates Ltd for PMM to occupy premises at 469 Latrobe Street, Melbourne but this was not pursued.
18. Dayton Hazama sent a formal proposal to PMM in April 1987. It involved PMM having an entitlement to a 25 per cent share in the
ATC 4632development profits from the undertaking of the project. That proposal was based on a commitment from PMM to lease 18,000 sq.m. On 13 April 1987 Dayton Hazama altered the proposal on the basis that PMM commit to a minimum of 13,000 sq.m. on completion in 1990 and that it be entitled to 18 per cent of the profit. A further revised offer was sent by Dayton Hazama to PMM on 16 April 1987 based upon a commitment by PMM to 11,500 sq.m. of space with a guaranteed minimum profit of $6,250,000 and a further profit share depending upon the profits derived from the development. An alternative proposal was put on the basis that PMM committed to 17,000 sq.m. of space.
19. On 24 April 1987 Mr Spencer sent a memorandum to the partners in PMM in which he told them that Colliers had received twenty- four submissions following the advertisements and that there were eight proposals of ``apparent primary appeal''. The memorandum referred to the proposal of the development of the T & G site from Dayton Hazama which included the opportunity for PMM to share in the total development profit of the proposed project. Mr Spencer noted that the Space Committee had decided to consider seriously the Dayton Hazama proposal as it would accommodate PMM's long-term space requirements either alone or as a merged firm to at least 2005. Other reasons were given for considering the proposal.
20. Dayton Hazama tendered for the T & G site but it was not successful. The successful tenderer was Sweetvale Pty Ltd, a member of the JGL Group of Companies (``JGL''). The ultimate contracting party with PMH was Sweetvale Pty Ltd but frequently in the course of correspondence letters were sent to or from, or referred to, JGL. For the sake of convenience I refer mainly to JGL in these reasons when considering the correspondence between, and the documentation relating to, the parties. Nothing turns on whether any reference to JGL or Sweetvale Pty Ltd is a correct description of the party referred to at the time.
21. Mr Spencer's memorandum to the partners of PMM on 24 April 1987 was preceded by a memorandum on 14 April 1987 from the Space Committee to the Practice Management Committee in which it noted that the major objective in considering PMM's long- term space plan was to minimise its long-term space costs ``whilst having regard to certain criteria as preferred location, quality of space, etc.'' The memorandum noted that the factors considered to be of primary importance at the time Colliers were appointed to assist PMM were:
- • a CBD location, preferably the western end;
- • an area of 18,000 sq.m. of office accommodation to be available by 1990 with a preferred minimum floor size of 1,400 sq.m. with on site parking for at least 150 cars; and
- • the consideration of innovative proposals whereby PMM could:
- - participate as joint venturers in a major development;
- - acquire all or part of an existing building;
- - purchase a development site; or
- - lease the required area or take a head lease of an entire building.
22. Mr Spencer told Mr O'Connell towards the middle of 1987 that he should plan on the basis that a merger with Hungerfords was now most likely to occur. In or about July 1987 the Australian partners of PMM agreed to merge with Hungerfords and the formal merger occurred on 19 October 1987 when PMH came into existence as a new firm. In general terms, PMM and Hungerfords had different types of practices and different cultures. As a consequence of the merger PMH became the largest Melbourne chartered accountancy practice. At the time of the merger the new firm made a policy decision that it was critical that the merged firm be located at the one premises to maximise the benefits of the merger and to enable the two cultures to be integrated into one culture. Prior to the merger PMM occupied premises at 500 Bourke Street Melbourne and Hungerfords occupied premises at 80 Collins Street Melbourne. The merger increased the personnel numbers of PMM by 76 per cent.
23. On 12 August 1987 Mr O'Connell provided Mr Spencer with a summary of his investigations and work to date in relation to PMH's space problems and requirements. The memorandum stated that the requirement was for 15,000 sq.m. as at 1 July 1990 and that the options available to locate the merged firm into one location were limited because of the amount of space required. The memorandum
ATC 4633noted that Colliers was negotiating with JGL in relation to the T & G development along lines similar to the offer received from Dayton Hazama. The memorandum continued:
``In essence, the deal was that Dayton- Hazama would develop the site, taking all the risks associated with construction and finance and that we would commit to 17,000 sq.m. of rental accommodation in 1990 at market rates, building up to 28,000 over a 15 year lease period. In return the developer would offer us an incentive which was equivalent to approximately 40% of the profit five years after completion of the project. This incentive was equivalent to a present value of approximately $30 million in 1990.
We understand JGL are investigating the feasibility of a development on the T & G site and they have made a verbal offer which, in their view, would return to KPMG an amount which would be at least equal to the profit earned by Price Waterhouse on their own development. It is too early at this stage to know whether we will be able to proceed further with JGL's eventual offer as there are other considerations, not the least is independence as JGL is a client of KMGH.''
24. On 17 August 1987 Mr Carew of Colliers wrote to Mr O'Connell giving him a summary of the current position of the five properties which were then of primary interest to PMH. In that letter Mr Carew recorded that PMM's basic brief was that it was to minimise its occupancy costs. The letter continued:
``We believed that the best method to achieve this would be by you taking an active, rather than a passive role and looking upon yourselves as entrepreneurs or at least a joint venture partner. This would enable you to claim a share of the development profit and depreciation allowances.''
The letter concluded:
``It should be borne in mind that your requirement is of a major size and somewhat out of the ordinary. The mere size of your proposed tenancy and the required minimum floor sizes largely dictate the extent of development and the range of suitable sites. Consequently many options previously thought available to you have now been closed following the merger.''
25. On 18 August 1987 Mr O'Connell forwarded a copy of the Colliers letter to Mr Spencer and other members of the Space Committee noting that they were progressing with the T & G site and the Westpac site (333 Collins Street).
26. Although PMM may have been able to remain at 500 Bourke Street for a period of time up to the expiration of its lease on 31 December 2001, the merger with Hungerfords changed the position. Mr Spencer and the Practice Management Committee held the view, which I accept, that it was critical for the whole of the new merged firm to be at one location, and that there was no doubt that the merged firm needed to move to new premises which could accommodate the whole of the merged firm at one location.
27. Around this time, August 1987, Colliers commenced negotiations with JGL about the development of the T & G site as a purpose- built building for PMH.
28. At a meeting of the Local Executive Committee on 9 September 1987 it was decided that PMH should enter into serious negotiations with JGL in relation to its proposed office development on the T & G site and that the firm should continue to pursue other practical and possible alternatives so as to be satisfied as far as possible that PMH achieved its objectives in the most cost efficient matter.
29. Colliers continued negotiations with JGL and in late September or early October 1987, JGL accepted an ``in principle'' proposal by PMH relating to its leasing premises at the T & G site. Mr O'Connell instructed Mr Carew at Colliers to write to JGL confirming that he and Mr Spencer would agree to recommend to the Local Executive Committee that a full meeting of partners be called to consider a move to the T & G site on certain terms offered by JGL. Those terms were recorded in a letter of 6 October 1987 from Colliers to JGL Investments Pty Ltd which was written on the instructions of PMH. The letter set out the basic terms of a proposed lease, the floors to be leased, the rental, the term of the lease and other provisions relating to outgoings, rent reviews, naming rights and building services. Relevantly, the letter stated:
``The lessor will fit-out the tenancy in a manner and to a standard approved by Peats and will permit Peats and its consultants to have access to the building during
ATC 4634construction to enable Peats to oversee the fit-out.
It is essential from Peat's point of view that floor areas be approximately 4,000-4,500 sq.m.
The Lessor will pay to Peats an agreed sum of compensation in return for Peats terminating its tenancy at National Bank House, provide assistance with the fit-out of the tenancy in a manner to be agreed and grant to Peats a right to acquire an interest in the building.''
30. On 12 October 1987 Mr O'Connell sent a memorandum to Mr Spencer in which he reported on the progress of the negotiations with JGL and on the progress with other alternative sites. In relation to the T & G site, Mr O'Connell reported:
``The JGL Group have agreed to offer us a sum of up to $30m which is represented by a guaranteed sum of $25m payable on completion of the building (estimated 1/7/91) and an additional sum dependent on the profit of the development which sum can be up to a maximum of $5m if taken on completion of the building (1/7/91) or a maximum of $6.612m if taken at the end of year 2 (1/7/93) or $8.745m if taken at the end of 4 years after completion of the building (1/7/95). The additional sum is dependent on the profit performance of the building and is determined on the formula prepared by Sallmans Limited and the step ups are calculated at 15% p.a.''
31. The memorandum recorded the ``major factors concerning the T & G development'' as being:
- ``1. We commit to taking 16982 sq.m. on completion of building at a commencing net rent (not including outgoings) of $6,589,016.
- This represents 4 floors of the building at an average rate of $388 per square metre. The basis of determination of this rate is covered in para. 5.4
- 2. The initial lease term will be 5 years with two options of 5 years each, exerciseable by either the lessor or lessee with options for a further 16 years, i.e. minimum term is 15 years and maximum term of 31 years.
- 3. We will have options,
, to take further space in the building so that our space holding could be as follows:
COMMITTED AVAILABLE TOTAL ON OPTION SQ M SQ M SQ M 1991 to 1995 16982 -- 16982 1995 to 1998 16982 2234 19216 1998 to 2001 16982 8936 25918 2001 to 2005 16982 13404 30386
- 4. The rent is to be reviewed every 2 years to market based on rents then payable in comparable premises at a mutually agreeable basis, but not taking into account tenancy fit-out.
The memorandum then set out the basis of the financial model which Mr O'Connell had prepared which allowed comparison by project on an equal basis.
32. The memorandum addressed the financial impact of PMH's long-term space plan and noted that the purpose of the exercise was:
``To minimise our Long Term Space costs whilst having regard to certain criteria as preferred location and quality of space.''
The memorandum considered the matters which impacted on the choice of location of a site and asked a number of questions relevant to the firm's objective of minimising long-term rental costs. The questions included:
- ``- do we want average floors of 1500 sq.m. or jumbo size of 4,000 sq.m. which affects the area over which the firm is located. On 1/7/91 it would be 11 floors or 4 floors.
- - if we want jumbo floors, where can we build them,
- - if we want them what is the general market demand for them as this will affect letting of balance of space,
- - can we let jumbo floors easier in Collins St. against Latrobe St. or Victoria Parade,''
(underlining in original)
33. The memorandum then set out the financial analysis of the net cost of total rent which took into account the incentive of $30,000,000 offered by JGL. The memorandum set out other relevant considerations such as stamp duty, naming rights, consultants to be used, floor sizes and other alternatives. In relation to floor sizes, the memorandum noted that the T & G development would have floors of approximately 4,500 sq.m. (other than one floor) which would enable the whole of PMH to be housed on four floors. The memorandum then noted:
``The preferred size of floors is very subjective. I personally favour larger floors as I don't relish the thought of possibly having the firm eventually located over 20 floors of a building.''
34. The memorandum noted that Mr Carew of Colliers and Mr O'Connell had continued to pursue other alternatives and set out a comparison of three ``serious alternatives'' which included the present value of incentive payments offered by potential lessors. A comparison was made with the offer of JGL to offer a sum of up to $30,000,000 of which $25,000,000 was guaranteed. A comparison was made of the financial aspect of each of the proposals other than the JGL proposal. In comparing the various projects consideration was given to the future total rent which was described as the net rent plus outgoings between 1991 and 2005 which net rental was less any incentive offer.
35. The memorandum concluded on the note that Colliers had confirmed that the JGL proposal provided the best solution within the context of the parameters defined by PMH which were set out in a letter from Colliers. Mr O'Connell recommended that the Local Executive Committee approve the JGL proposal for consideration at a partners' meeting. The reference to Colliers' letter was to a letter dated 13 October 1987 which had apparently been sent by Colliers to Mr O'Connell before he sent his memorandum to Mr Spencer.
36. In that letter Colliers expressed the belief that the proposal from JGL should be recommended to Mr O'Connell's partners for a number of reasons which were set out. These reasons related to the position of the site, the nature of the building and the size of its floors, the rent, the incentive offered and the financial package. In relation to the incentive offered, Colliers observed:
``We are unaware of a higher incentive ever having been offered to a Lessee.''
In relation to the financial package, Colliers observed:
``If one considers the various offers made to you one conclusion can be drawn which is that the J.G.L. offer is the one most advantageous to you when compared with other propositions relating to such buildings as 120 Collins Street or 90 Collins Street.''
Colliers' letter was attached as an appendix to Mr O'Connell's memorandum to Mr Spencer.
37. It is to be noted that 120 Collins Street was not proceeded with as an option because it was not seen as primary Collins Street frontage and large floor sizes were not available. PMH did not enter into any detailed negotiations in relation to the incentive which might have been on offer in respect of that site.
38. On 22 October 1987 Mr O'Connell prepared a report for the partners of PMH on the subject of long-term space and on the same day Mr Spencer sent the report to the partners of PMH for discussion at a partners' meeting to be held on 28 October 1987. Mr Spencer noted that the Local Executive Committee recommended that the firm agree to move to a new building to be developed by JGL on the T & G site which was due for completion on 1 July 1991.
39. In the report Mr O'Connell noted that in reviewing the firm's long-term space requirements certain parameters were established relating to location, space standard (that is the amount of space per person), projected space requirement, quality of building and whether the firm should always be in one location. The report noted that the primary objective of the firm was to minimise long-term space costs having regard to certain parameters such as preferred location, required space
ATC 4636standards and quality of building. The report then listed the factors which were considered to be of primary importance at the time Colliers were appointed and they were then summarised. Those factors were the factors that appeared in the newspaper advertisement in January 1987 and covered CBD location, preferred minimum floor size of 1400 sq.m. with on-site parking for at least 150 cars and a consideration of innovative proposals whereby the firm could participate as joint venturers in a major development, acquire all or part of an existing building, purchase a development site or lease the required area or take a head lease of an entire building.
40. The report then identified eight sites or proposals of ``Apparent Primary Appeal''. The report noted that the Local Executive Committee recommended that partners of the firm enter into a lease of the building to be developed on the T & G site. The report set out the details of the T & G site and the major factors which related to it. The financial incentive and the payment up to $30,000,000 was explained in the same terms as were in Mr O'Connell's memorandum to Mr Spencer of 12 October 1987. The floor sizes and the proposed development were explained and the financial comparison of the projects were set out in the same terms as in the earlier memorandum. The same questions were asked as in the earlier memorandum. The major features of the T & G site were set out and the recommendation was made that approval be given to proceed with the JGL offer.
41. Mr O'Connell said that the T & G site was the most acceptable proposal for a number of reasons. These can be listed shortly:
- • The entire firm would be located in one building.
- • The firm would be granted exclusive naming rights over the building at no extra cost.
- • There was very acceptable access and egress.
- • There was a long-term lease.
- • The firm was to be the major tenant with options to occupy additional floor space.
- • The parking facilities were very acceptable.
- • There was an opportunity to achieve substantial fit-out savings and greater aesthetic outlook by integrating floor fit-out with the construction of the building.
- • There was an opportunity to achieve considerable rental savings by paying the market rent relevant to base (unfitted out) floor space.
- • The rental payable per square metre was lower than the expected rental payable at the firm's present sites during the same period.
- • Each floor was approximately 4,500 sq.m. (except for floor one which was approximately 3,500 sq.m.) which would allow the whole of the firm to be housed on six floors.
- • The nature of the proposed building had significant advantages in relation to the more efficient movement around large floors and access to natural light.
- • The building was a CBD location with relatively easy access to public transport.
- • The retention of the T & G facade ensured that the building would likely to be regarded as an attractive landmark building.
42. Although Mr O'Connell had told Mr Spencer in his memorandum of 12 October 1987 that Colliers' letter of 6 October 1987 formed the basis for heads of agreement, no such document was prepared and the Colliers' letter effectively recorded the in principle agreement reached between JGL on behalf of Sweetvale Pty Ltd and PMH at the time.
43. The partners' meeting was held on 28 October 1987 and the partners resolved that PMH accept the proposal put forward by Sweetvale Pty Ltd or JGL on its behalf.
44. There were no minutes of the partners' meeting but two of Mr O'Connell's discovered documents disclosed that a number of slides prepared by Mr O'Connell were used to give a visual presentation at, or shortly prior to, the meeting and that Mr Carew from Colliers who spoke at the meeting prepared notes for the meeting. Mr O'Connell said that Mr Carew came to the meeting but he did not know whether the discovered document was a copy of notes from which he spoke to the meeting. However, Mr O'Connell recalled Mr Carew telling the meeting a number of the matters which are referred to in the document and I am satisfied that the document records the substance of what Mr Carew told the partners at the meeting. Its relevance is that Mr Carew recounted Collier's relationship with PMM and
ATC 4637the steps it had taken to investigate suitable sites for occupation by PMM. According to the document Mr Carew read the basic points he had made in his letter to Mr O'Connell dated 13 October 1987 which included a reference to the fact that the size of the floors of the T & G building made it unique and that he was unaware of a higher incentive ever being offered to a lessee and that Colliers ``were able to convince J.G.L. to treat you [the firm] as a quasi joint venture partner''. Mr O'Connell recalled Mr Carew making this statement at the meeting.
45. Mr Carew apparently added that Colliers had endeavoured to walk a fine line between maximising PMM's development profit and minimising its exposure to risk. According to Mr Carew, Colliers had attempted to have the firm wear two hats, firstly a developer's hat and secondly a tenant's hat. Mr O'Connell also recalled Mr Carew making this statement as, according to Mr O'Connell, Mr Carew was ``hot to trot on the sort of joint venture thing'' but Mr O'Connell said that it was not a financial joint venture. The project never became a financial joint venture but I am satisfied that the quantum of the financial incentive loomed large in the discussions between JGL and PMH as is shown by earlier and subsequent documentation.
46. The slides prepared by Mr O'Connell and shown to partners at or shortly prior to the partners' meeting are significant. There are a number of aspects of them upon which the Commissioner relied in support of his submission that in looking for new accommodation PMM, and later PMH, was undertaking a profit-making scheme and had a significant purpose in undertaking its accommodation enquiries and negotiations of making a profit. There were twelve slides in all.
47. Slide one was in the following terms:
``THE OBJECTIVE ------------- TO MINIMISE LONG TERM RENT COSTS HAVING REGARD TO CERTAIN PARAMETERS SUCH AS: * LOCATION * SPACE STANDARDS * QUALITY OF BUILDING THE MEANS --------- THE USE OF REPUTATION AND COMBINED PURCHASING POWER OF KMG AND PMM ... NOW PMH.''
48. Slides two and three displayed an agenda summary and the parameters of the space requirements, namely location, average space standard, projected space needs, quality of building and the need for one location.
49. Slide four displayed factors relevant to a consideration of the firm buying and developing its own site and the cost involved for each partner.
50. Slide five set out a summary of the profit which might be achieved having regard to the investment value of the building after deducting development costs with different capitalisation rates applied to the net rental. This slide showed how a profit might be distributed between PMH and JGL depending upon the application of different capitalisation rates in the following terms:
``PROFIT $117,261 $101,840 $87,353 DISTRIBUTION PMH $ 30,000 $ 30,000 $30,000 JGL $ 87,261 $ 71,840 $57,353 N.B. PMH SHARE OF $25,000,000 UNCONDITIONAL ON PROFIT. ENTITLEMENT TO AN ADDITIONAL $5,000,000 COMMENCES WHEN JGL EARN $41,139,000 AND CEASES WHEN JGL EARN $55,027,000.''
Other slides dealt with the feasibility of the project and the advantages of the T & G site which included jumbo floors of 4,000 sq.m.
51. Slide 10 displayed tax implications in the following terms:
PROJECT ASSESSMENTS MADE ON THE BASIS OF INCENTIVE BEING ASSESSABLE IN OUR HANDS. HOWEVER, RHB AND JJO'C ARE LOOKING AT DIFFERENT ALTERN- ATIVES.
SOME OF THESE ARE THAT JGL COULD PAY:-
- - MAKE GOOD AND REMOVAL EXPENSES OF EXISTING TENANCIES.
- - FIT-OUT COSTS
- - ACQUISITION OF PRE CAPITAL GAINS TAX ASSETS SUCH AS NAB LEASE, FIXTURES AND FITTINGS.
IT IS TOO EARLY AT [sic] PROVIDE ANY FURTHER DETAILS AT THIS STAGE.''
52. Slides eleven and twelve set out two resolutions which were in fact passed by the partners. The first resolution was in the following terms:
``THE PARTNERS GIVE AUTHORITY TO THE LEC TO ENTER INTO AN AGREEMENT TO LEASE THE OFFICE SPACE AT A BUILDING TO BE DEVELOPED BY JGL ON THE EXISTING T & G SITE IN THE TERMS SET OUT IN THE MEMORANDUM TO PARTNERS DATED 22ND OCTOBER, 1987.''
53. Resolution two was in the following terms:
``1. IT IS RECOGNISED THAT TAX AND THE DISTRIBUTION OF THE INCENTIVE BETWEEN PARTNERS IS OF PARAMOUNT IMPORTANCE. THIS NEEDS TO BE CONSIDERED WITHIN THE FRAMEWORK OF THE STATED OBJECTIVE OF `MINIMISING OUR LONG TERM RENTAL COSTS WITHIN CERTAIN PARAMETERS'.
2. THE PARTNERS AGREE THAT, IN RELATION TO THE PROPOSED INCENTIVE:
- (A) STEPS TO BE TAKEN TO MAXIMISE THE AFTER TAX BENEFIT OF THE INCENTIVE.
- (B) PARTNERS NOT TO BE WORSE OFF 'AFTER TAX' AS A RESULT OF THAT PORTION OF THE INCENTIVE WHICH IS TAXABLE.
- (C) THE BALANCE OF THE INCENTIVE AFTER PAYING SUCH AMOUNTS AS FIT-OUT COSTS AND OTHER FIRM EXPENDITURES RELATIVE TO THE BUILDING BE DISTRIBUTED HAVING REGARD TO THE OBJECTIVE STATED IN 1. ABOVE AND THAT A PAPER DEALING WITH THE PROPOSED ALLOCATION OF THE BALANCE OF THE INCENTIVE BE PUT TO PARTNERS FOR CONSIDERATION AT A FUTURE PARTNERS' MEETING.''
54. The letter of 6 October 1987 from Colliers to JGL Investments Pty Ltd remained as the documentary record of what was agreed. Heads of agreement, as contemplated by the letter, were not drawn up or executed.
55. Thereafter PMH liased with Sweetvale Pty Ltd in relation to the construction of the building at the T & G site. PMH's architect, Metier III, was appointed by Sweetvale Pty Ltd to be the architect for the building.
56. The arrangement which had been agreed between PMH and JGL in October 1987 related to PMH leasing just on 17,000 sq.m. of space with options to take up further space in subsequent years. It was also part of that arrangement that JGL would pay PMH $25,000,000 plus an additional $5,000,000 depending upon the profitability of the project to JGL. On 20 April 1988 Mr O'Connell sent a memorandum to Mr Spencer in which he outlined two alternative proposals which had been put forward by JGL dependent upon PMH agreeing to take additional space above 17,000 sq.m. on commencement of PMH's occupancy which was then expected to be 1 March 1991. By this stage the number of persons estimated to be moving into the premises in 1991 had grown from 917 to 1,072.
57. One alternative (described as ``Deal 2'') was for PMH to agree to take space on two further floors, a commitment to 21,338 sq.m., in exchange for which JGL would make unconditional the $5,000,000 expressed to be conditional in the October 1987 arrangement and would also pay an additional $2,000,000. Under this alternative PMH would receive $32,000,000 on commencement of its occupation without any amount being subject to
ATC 4639any criteria relating to the profitability of the building to JGL. The other alternative (described as ``Deal 3'') involved PMH agreeing to take 19,235 sq.m. on five floors with options over other floors in exchange for which JGL would make one-half of the proposed $5,000,000 payment unconditional with the remaining $2,500,000 dependent on the profitability of the building to JGL.
58. In the memorandum Mr O'Connell analysed PMH's projected space requirements and compared the three alternatives. The memorandum showed that PMH might suffer a shortage of space in the early years of its occupancy. Mr O'Connell recommended the alternative described as Deal 2. This deal involved a payment to PMH of $32,000,000 on the commencement of its occupancy. Mr O'Connell sent a copy of his memorandum of 20 April 1988 to the Space Committee on 29 April 1988. In it he analysed PMH's projected space requirement and analysed the financial consequence of the alternative proposals taking into account the incentive amount offered in relation to each alternative.
59. The Space Committee agreed that PMH should proceed with Deal 2 and Mr O'Connell communicated this decision to the Local Executive Committee on 9 May 1988.
60. Mr O'Connell acknowledged that by this time it was becoming apparent to him that there would be a significant cash component in the incentive amount, over and above what was required for fit-out, which would be available and would have to be considered. This situation had however been recognised in the slides he had prepared for the partners' meeting in October 1987 and in the second resolution, recorded in slide 12, passed on 28 October 1987 (par  above).
61. The building contract was entered into between Sweetvale Pty Ltd and Grocon Limited on 17 May 1988. The building works provided for in that contract included tenancy fit-out work for PMH. The contract provided that in consideration for the payment of $20,000,000 to be added to the contract sum the builder would carry out fit-out work on the floors to be occupied by PMH. The contract provided that the builder was to integrate the execution of the fit-out works with the building construction works with a view to completing the fit-out works on the date on which practical completion of the building occurred. The contract also contained provisions as to what was to happen if adequate drawings and specifications for the fit-out works were not provided to the builder by 1 March 1989. A project management committee was formed which comprised the builder, Sweetvale Pty Ltd, the architect and Mr O'Connell representing PMH, which monitored the planning of the building construction project.
62. On 18 May 1988 the Local Executive Committee met and the minutes of that meeting record a number of matters not relevant for present purposes. In relation to the proposed building it was noted that PMH had agreed to take 21,000 sq.m. with the agreed incentive of $32,000,000. The minutes then recorded the following:
``JJO'C [Mr O'Connell] and RHB [Mr Richard Buchanan] then discussed the tax implications of the lease incentive. Agreed that JJO'C would continue to negotiate with a view to maximising the benefit to the firm.
The internal arrangements within the firm will be separately addressed. Individual members expressed their views as to how the benefit should be treated and over what term.''
Mr O'Connell agreed that it was the view of Mr Buchanan, the rest of the Local Executive Committee and himself that the benefit to the firm of the lease incentive should be maximised.
63. A meeting of the partners of PMH was held on 27 and 28 May 1988. The minutes of the meeting record the following discussion in relation to the new premises:
``JJO'C explained the current status with our new premises. Discussion arose on not only the timing of the building but also the incentive deal which was being proposed.
On conclusion of the discussion, the meeting was overwhelmingly in favour of delegating Messrs Spencer, O'Connell and Barnett to consider the precise amounts and timing of the incentive payments. These would be reported back to the next partners meeting for decision.''
64. In the course of the development of the building project it became apparent that the total lettable area in the building would be less than anticipated having regard to the size of columns and ducts. This had an effect on the annual rental payable as in order to maintain the
ATC 4640area to be leased by PMH it would be necessary to take substantially more space on the sixth floor. PMH received advice that it would be preferable for it to take a lease of the whole of the sixth floor and JGL offered to pay PMH an additional incentive of $100,000 to take the additional space.
65. On 17 October 1988 Mr O'Connell sent a memorandum to the Local Executive Committee. He noted that floor sizes were to be reduced due to the sizes of columns and ducts which had an effect of increasing the annual rental of the floors. He noted that JGL had offered an additional upfront amount of $100,000 as an incentive for PMH to take additional space on the sixth floor. Mr O'Connell also noted that he and Mr Spencer agreed with the proposal. The memorandum then referred to the fact that the incentive (called the ``COP'' or contribution of proprietor) payable on 30 November 1988 would be $8,022,000. The Local Executive Committee agreed to the proposal put up by Mr O'Connell and Mr Spencer at a meeting on 17 October 1988.
66. The memorandum of 17 October 1988 also noted that a copy of the inducement agreement ``also agreed'' was enclosed with the memorandum. That reference was enigmatic as there was no prior documentation referring to, or a draft of, an inducement agreement. Neither Mr Spencer nor Mr O'Connell were able to say whether the reference was to an agreement ``already agreed'' between Sweetvale Pty Ltd and PMH or whether it was to the fact that it had been agreed between the partners of PMH. Nothing turns on this issue.
67. The reference in the memorandum to a payment of $8,022,000 payable on 30 November 1988 referred to a change which had been made to the manner in which the incentive or inducement of $32,000,000 was to be paid. Mr O'Connell noted that an issue had arisen in relation to the termination of the PMH lease at Nauru House and its occupancy of the new building and that JGL agreed to make a further payment of $250,000, which, with the extra $100,000 payable in respect of PMH leasing the whole of the sixth floor, was included in the figure of $8,022,000.
68. The original arrangement in relation to the payment of the incentive of $32,000,000 was that $20,000,000 was to be allocated to the cost of PMH's fit-out which Sweetvale Pty Ltd included as a term of its building contract with Grocon Limited. The balance of $12,000,000 was to be paid on the commencement of PMH's occupancy of the new building. What was ultimately agreed was that instead of the payment of $12,000,000 on the commencement of PMH's occupancy of the building, Sweetvale Pty Ltd would advance the time of payment to the time the agreement to lease the premises was entered into and the amount would be discounted to $8,009,000.
69. Mr O'Connell's explanation (which I accept) for the manner in which the figure of $8,009,000 was derived was as follows. The $32,000,000 was measured in an amount payable as at June 1991. $20,000,000 was to be applied to the cost of fit-out, for which Sweetvale Pty Ltd was to pay. As the amount for the fit-out would be paid earlier than 1 June 1991 a discounting factor of 9 per cent per annum would be applied to that amount. The Local Executive Committee considered it important that the $12,000,000 be received as a non-refundable upfront payment so as to have JGL ``on the hook'', that is to say to have JGL committed to the project which would take some two to three years to complete. The non- refundable upfront payment was to be paid as an inducement to enter into the agreement to lease. The $12,000,000 was negotiated to $8,009,000 as a result of the following reasoning. JGL wanted a tax deduction for the $12,000,000 and was concerned that if PMH paid this amount at an earlier date JGL may not get a tax deduction as the payment might be regarded as of a capital nature. The parties negotiated a discount of 50 per cent of 40 per cent of the amount which was half the corporate tax rate on the $12,000,000, namely $2,400,000, and that left a figure of $9,600,000 which was discounted by 9 per cent per annum for 30.23 months, that is for advancing the payment date from June 1991 to November 1988. That exercise achieved a figure of $7,660,000 to which was added the $350,000 agreed to be paid by JGL (par  above).
70. On 21 October 1988 Mr O'Connell sent a memorandum to the partners in PMH attaching summaries of the building contract, the agreement to lease, the lease, a car park agreement and the inducement agreement.
71. Mr Spencer had prepared a detailed paper on the allocation of the inducement to be paid on the execution of the agreement to lease
ATC 4641entitled ``Allocation of Cash Inducement''. This paper was discussed at a meeting of the Local Executive Committee on 17 October 1988, at which Mr O'Connell was present, and sent to PMH partners on 24 October 1988. Mr Spencer agreed that every member of the Committee, and Mr O'Connell, had the opportunity to have input into the contents of the paper.
72. There are a number of passages in Mr Spencer's ``Allocation Of Cash Inducement'' paper which should be identified as they bear upon the purposes for which PMH entered into the inducement agreement and the agreement to lease and received the $8,009,000 and also bear upon the issue whether the firm was undertaking a profit-making scheme or had a purpose of obtaining a financial gain or profit. Mr O'Connell contended that the payment of the inducement was a factor to be taken into account in deciding to enter into the agreement for lease and the inducement agreement but that it was not the purpose for which those agreements were entered into. The Commissioner contended that the firm was undertaking a profit-making scheme and that the purpose for which it entered into the inducement agreement was to obtain a gain.
73. The paper noted that:
``The treatment of the inducement we will receive just prior to entering into a lease of 151 Collins Street is of great interest and importance to us all.''
The paper noted that the Local Executive Committee recommended that the inducement would be treated as two elements:
``- fit-out inducement of $20 million
- cash inducement of balance.''
This allocation had been determined by PMH through Mr O'Connell. As noted earlier, JGL had insisted that it obtain a tax deduction for the payment it was to make and it did not mind the form the payment took so long as it obtained a tax deduction. It was PMH's decision that JGL pay for, and own, the fit-out. Mr O'Connell was advised by his tax partners that he should negotiate with JGL for it to make the payment for fit-out to the building contractor who would be undertaking that work rather than for PMH to receive the money and then disburse it on fit- out costs. Mr O'Connell negotiated with JGL on this basis.
74. The Local Executive Committee recommended that the fit-out inducement ``be carried forward as a benefit to the future practice'' and that the cash inducement be distributed when received to existing partners in a manner which was then set out.
75. The paper explained how the inducement of $32,000,000 was divided up and how the cash component had been discounted to approximately $8,000,000. It was explained that the Local Executive Committee wanted to obtain a non-refundable amount at that time rather than in 1991 ``which should better commercially bind JGL to the completion of the building and at the earliest practicable date''.
76. The paper set out the events which led to the agreement with JGL in October 1987. Significantly the following statement appeared under the heading ``EVENTS LEADING UP TO OUR AGREEMENT WITH JGL'':
``During 1986, Peat Marwick (PM) Melbourne had identified that its future space requirements were not adequately catered for and needed reassessment. To assist with this, Colliers and Andrew Norbury were retained. As a result of discussions, it became clear that even without merging with KMG Hungerfords (KMGH), PM had a `valuable' tenancy. To maximise the value of that tenancy, it could either:
- • rent space in an existing building (including National Bank House)
- • develop itself a building project
- • participate in a new development as `joint venturer'.
As PM's search for space was progressing, the PM/KMGH merger vote occurred and as a result:
- • the space pressures intensified,
- • the need for a `one' office location became clearly apparent, and
- • the value of our tenancy increased.''
(The Commissioner submitted that this passage showed a pre-merger view, and demonstrated a pre-merger purpose, of PMM to exploit a capital asset, namely its valuable tenancy and to maximise the value of that tenancy. It was said by the Commissioner that the merger only increased the value of that tenancy).
77. The paper noted that the firm strategy in October 1987, when the partners of PMH voted to accept the proposal, was:
``to maximise the value of our tenancy by convincing JGL that we were a quasi joint venture partner - notwithstanding that they owned the freehold.''
The paper then noted that this strategy had succeeded through Mr O'Connell and Colliers.
78. The paper then addressed the nature of the inducement and noted:
``The size of the tenancy committed by PMH has been a major element in underwriting the viability of the project. The inducement agreed reflects the importance of our commitment to the project in the pre- planning stage. Participation as tenants after JGL had committed to the development is likely to have resulted in a significantly smaller inducement.''
The paper analysed the fit-out and cash components of the inducement and in relation to the fit-out element noted that:
``having regard to the amount received recently by other lessees the fit out can be seen as a normal occupancy inducement, although the quantum is highly favourable.''
Mr O'Connell agreed with this observation. This statement shows that the firm was aware at this time that the receipt of an incentive was a normal incident of leasing premises and this becomes relevant to a subsequent finding that in 1988 the giving by a lessor, and the receipt by a lessee, of a financial amount was a normal incident of leasing commercial premises.
79. The paper then explained why and how the cash component should be allocated to existing partners. It was said that:
``In determining the nature of the cash inducement, the overriding objective should be that partners feel that the treatment has been fair.''
One of the issues raised in relation to how the cash component should be dealt with was set out in the following terms:
``At future times the partners of the day will have opportunities to deal with the firm's premises as they see fit at those times. Whilst the agreement entered into for 151 Collins Street is highly favourable, it is not the last time partners of the day will have the opportunity to benefit from the value of the tenancy requirements they and their predecessors have built up.''
80. The proposal was that the partners admitted after receipt of the cash inducement should not share in it. The reason for this was expressed in the following terms:
``Because of the substantial benefits being carried forward to future periods and because of the quasi joint venture role of the firm in the project, it is believed that the remainder of the inducement, i.e. the cash inducement, should be shared by present partners, these being the partners who voted in principle in October 1987 for the concept of taking up the space, together with the partners who were admitted on 1st July 1988.''
I draw particular attention to the use of the expression ``the quasi joint venture role of the firm in the project''. It is important to understand how Mr Spencer was using the expression. The Commissioner submitted that this was a reference to the partners sharing in the profits of the joint venture. Mr Spencer's understanding of a joint venture was that it was an unincorporated business arrangement between two or more partners with a view to profit. Although he said in cross-examination that he would not characterise the venture with JGL in this way but would characterise it differently as a mutually beneficial arrangement whereby JGL would build and PMH would occupy, it is still implicit in his use of the expression ``quasi joint venture role of the firm in the project'' that it was participating in the project for the purpose of obtaining a profit or gain. Mr Spencer agreed that the benefit PMH would derive by entering into the proposed development was that PMH would get premises and a substantial inducement.
81. Mr Spencer explained why he was recommending that the cash component of the inducement should be distributed between the then existing partners in the following exchange in cross-examination:
``Then in terms of the treatment of the cash element of the inducement, you drew a distinction, didn't you, between the long- term benefit of the fit-out contribution on the one hand, which would inure [sic] to future partners, and the cash, which in your view should be distributed amongst those involved in getting this proposal to the barrier, meaning all current partners
ATC 4643effectively? - It should be distributed to the partners of the day.
And the reason for that I suggest to you was that you thought this was a financial return on this proposal and the benefit of that financial return should go to those who had agreed to it in 87 and were now agreeing to it finally in 88? - For a variety of reasons. That was one of a number of reasons. The others included the fact that the partners who received it, the partners of the day, would be people who would be undertaking risks during the period between 1988 and the completion of the building in terms of JGL's ability to deal with both the physical and financial demands of the construction of the building; the desire for the partnership I think I mentioned in my memorandum not to act as trustees; and also because accounting firms at that time and subsequently were the subject of litigation and clearly the partners were better protected not to have an amount of 8 million-odd sitting in the partnership accounts. In fact shortly after the time of this, the firm was involved in a litigation with Tricontinental.''
82. A number of the matters referred to by Mr Spencer in this answer in cross-examination were not identified or referred to in his memorandum as justifying or explaining the reason for his recommendation that the cash component of the inducement be distributed to existing partners. When this was put to Mr Spencer in cross-examination he agreed that some of them were not mentioned. More importantly he agreed that the first sentence in the extract from his paper in par  above was true, that is, it expressed the reason why those partners should share the cash inducement. Although he said that that was not the only reason for his recommendation, I am satisfied that it was the predominant or principal reason for his recommendation. That is to say Mr Spencer was recommending that the benefit of the financial return of the cash component of the inducement should go to the existing partners because of the substantial benefits being carried forward to the future and because of the ``quasi joint venture'' role of PMH in the project. The paper prepared by Mr Spencer in October 1988 is more likely to be a reliable indication of Mr Spencer's reasons and the circumstances that existed at the time, than Mr Spencer's recollection almost thirteen years later. More particularly is this so when Mr Spencer did not exhibit, or otherwise refer to, his ``Allocation of Cash Inducement'' paper in his affidavit as the document did not come readily to his mind at the time he swore the affidavit.
83. The paper then set out the manner in which the cash incentive was to be allocated between, and within, existing groups in the merged partnership and noted:
``It is recognised that this basis of allocation has some element of arbitrariness in that a quasi venture profit is being distributed based on projected equity averaged over a period.''
The nature of the quasi venture, according to Mr Spencer, was not that PMH would own any part of the asset, but rather that JGL would construct the building and PMH would occupy it which was a mutually beneficial arrangement. Mr Spencer accepted that by the arrangement PMH would obtain occupancy of premises and a substantial inducement, a cash amount of $8,009,000.
84. Mr O'Connell agreed that by the time of the PMH partners' meeting on 27 October 1988 the treatment of the inducement was a matter of great interest and importance to all the PMH partners.
85. At a meeting of the partners of PMH on 27 October 1988 Mr O'Connell explained the rationale behind the calculation of the inducement and Mr Spencer presented his paper on the allocation of the inducement which was the subject of extensive discussion. It was resolved that PMH enter into the proposed agreement for lease and accept the recommendations in Mr Spencer's paper.
The inducement agreement
86. On 23 November 1988 Sweetvale Pty Ltd and PMH entered into what has been called the ``incentive'' or ``inducement'' agreement whereby, in consideration of Sweetvale Pty Ltd paying to PMH $8,009,000, PMH agreed to enter into an agreement for the lease of six floors in the proposed building on the T & G site, together with a series of options, for an initial term of five years with two further terms of five years each. The agreement was in the following terms:
- A. Sweetvale is the registered proprietor or entitled to be registered as proprietor of the land bounded by Collins Street, Russell Street and Flinders Lane, Melbourne, which is more particularly described in the Plans and Specifications referred to in the Building Works Contract referred to in Recital B (`the Site').
- B. Sweetvale has entered into a Building Works Contract dated 17th May, 1988 with Grocon Pty. Ltd. as Builder for the construction on the Site of an office building comprising, inter alia, ten upper floors (`the Contract' and `the Building' respectively).
- C. Sweetvale has purchased the Site and entered into the Contract for the construction of the Building as a long term investment and proposes letting the Building once it has been constructed.
- D. Sweetvale has been advised and has formed the view that it is highly desirable that there be a major tenant in a building of the type proposed, which tenant is prepared to commit to a long term lease for a significant floor area in the Building.
- E. Sweetvale and PMH now agree that in consideration of the payment referred to in this Agreement PMH will enter into an Agreement for Lease under which Sweetvale will grant to PMH and PMH will take from Sweetvale once the Building has been completed a lease of six floors in the Building with a series of options for a further two floors, the initial area to be occupied by PMH being approximately 22,000 square metres for an initial term of five years with two further terms of five years each.
NOW IT IS HEREBY AGREED as follows:
- 1. In consideration of the payment by Sweetvale to PMH of the sum of $8,009,000 immediately prior to the signing hereof PMH agrees to make the forward commitment to Sweetvale by forthwith entering into the Agreement for Lease thereby:
- (a) relieving Sweetvale of the need to find a prestigious major tenant for six floors in the Building;
- (b) securing for Sweetvale a major tenant of a substantial part of the Building;
- (c) enabling Sweetvale to advise other prospective tenants that PMH has committed to take a lease of a substantial part of the Building;
- (d) assisting Sweetvale to attract prospective tenants to the Building; and
- (e) assisting Sweetvale to finance the overall Project at lower financing cost.
- 2. The above payment is made by Sweetvale to PMH as a direct inducement to PMH to enter into the Agreement for Lease long before the Building is constructed so as to obtain for Sweetvale the advantages mentioned above.
- 3. The said payment by Sweetvale to PMH shall be non refundable.
- 4. Sweetvale and PMH shall keep confidential the terms and conditions of this Agreement and shall not (save as required by law) disclose the terms and conditions hereof to any person.''
87. On the same date Sweetvale Pty Ltd and PMH entered into the agreement for lease. The amount of $8,009,000 was distributed to those persons who were partners in PMH at the date of the receipt of the amount.
88. This recitation of the events leading up to the execution of the inducement agreement and the agreement for lease have been extensive but rendered necessary by the need to discern the purpose or purposes for which PMH entered into the inducement or incentive agreement and agreed to accept the $8,009,000. This issue was canvassed at some length with Mr O'Connell and Mr Spencer in cross-examination. In particular, counsel for the Commissioner put to Mr Spencer in cross-examination the following propositions (which appeared in his memorandum to partners dated 24 October 1988):
``1. As a result of discussions between Peat Marwick and Colliers, it became clear that even without merging with KMG Hungerfords, Peat Marwick had a valuable tenancy.
2. As Peat Marwick's search for space was progressing, the Peat Marwick/KMG Hungerfords merger vote occurred. As a result, the value of the tenancy increased.
3. At the time, October 1987, when the partners of Peat Marwick Hungerfords voted to accept the opportunity to participate in the T and G development, the strategy was to maximise the value of the tenancy by convincing JGL, the landlord or developer, that PMH was a quasi joint-venture partner.
4.... This [the strategy in point 3] through Mr O'Connell and Colliers was achieved [ and] PMH secured a tenancy which was highly suitable to the firm's physical needs in a prime location and at competitive future rentals and for which the inducement offered was highly satisfactory.
5. The size of the tenancy committed by PMH was a major element in underwriting the viability of the project.
6. The inducement agreed reflected the importance of PMH's commitment to the project in the pre-planning stage. Participation by PMH's tenants after JGL had committed to the development is likely to have resulted in a significantly smaller inducement.
7. The treatment of the inducement was of great interest and importance to all the partners.''
Mr Spencer assented to all these propositions save for the second sentence in par 6. In respect of that proposition he could only speculate and was not prepared to agree or disagree. He said it would depend on the circumstances at the time. However, he had stated the proposition in his paper (par  above), and he said that it represented his view at the time.
Findings and Reasoning
89. The Commissioner's case was put on two general bases:
- • the amount of $8,009,000 was a receipt from a commercial transaction entered into by PMH with the intention or purpose of making a relevant profit or gain;
- • the receipt of the $8,009,000 was a profit or gain from a transaction entered into by PMH in the course of carrying on its business and was an ordinary incident, albeit infrequent or extraordinary, of the conduct of PMH's business. It was an integral part, and a not insignificant purpose, of the entry into the agreement for the lease of the premises at the T & G site.
90. Mr O'Connell's case was that the original purpose was to obtain new larger premises with a particular configuration, that the only really suitable premises were to be found at the T & G site and that that purpose did not change because PMH sought to achieve the outcome of the desired premises in a particular way. He submitted that the occasion of seeking and acquiring new leased premises was not converted to a revenue occasion just because PMH wanted to maximise the financial inducement.
91. Mr O'Connell submitted that it was significant that PMH's purpose was to obtain or lease fitted-out premises and that its negotiations, including the negotiations in relation to the financial inducement, were directed to that objective or purpose. Mr O'Connell said that the decision to move premises was not influenced by the payment offered by Sweetvale Pty Ltd and had its genesis in the need for PMM to look for new premises when it became apparent that 500 Bourke Street would not be able to accommodate the firm adequately in the future. He said that that concern was accentuated by the decision to merge the two firms and the need to move to premises which could hold the entire merged firm and cater for the merged firm's long-term need.
92. As Mr Spencer said in his affidavit:
``There were few foreshadowed buildings that could house the expanded firm and the T&G site offered numerous other advantages including, importantly, locating all the firm over six floors as against as many as 24 floors at other high rise alternatives and achieving naming rights of a landmark building.''
Mr Spencer said that the merger with Hungerfords effectively ruled out any existing Melbourne CBD building. That view is not borne out by the documentation to which I have referred.
93. In October 1987 PMH was not devoid of choice as to the location of its proposed new premises. It was necessary for new premises to be obtained but as the memoranda in October 1987 demonstrated there were a number of alternatives available. It is apparent from the documentation to which I have referred that Mr O'Connell was giving consideration (not simply nominal) to other buildings. In his memorandum to Mr Spencer dated 12 October 1987 he set out a comparison of ``the serious alternatives at this stage'' and in his memorandum to partners dated 22 October 1987 he set out a financial comparison of ``the serious alternatives at this stage.''
94. I am satisfied that the initial motivation for the search by PMH for premises was generated by the need for further space which was seen to be not available in the existing premises at the time. This motivation or need was accentuated by the merger. PMH was outgrowing its available space and the merged firm needed to integrate either the two firms being merged, or at least units of the two firms, under the one roof. I am satisfied that the initial steps which were taken were motivated by the need to obtain new premises.
95. That is not to say that in the course of the progression of the process of looking for, and deciding upon, new premises a motivation or purpose of gaining an incentive or a cash payment did not emerge or manifest itself. The original purpose may have been to obtain new premises, because existing premises were, or were shortly going to become, inadequate for the firm's needs. But it is necessary to address whether a further subsequent significant purpose emerged as the process of deciding upon new premises continued, namely a profit- making purpose whereby a significant financial gain could be obtained by the use of the bargaining power the merged firm had as a result of its tenancy needs and requirements.
96. Ultimately the relevant decision and purpose to be analysed is that of the merged firm. However, the process of looking for new premises had been commenced by PMM before the merger and the process which was instigated and pursued by PMM informs, in a number of respects, the process which was picked up and continued by the merged firm.
97. I am satisfied that there came a point of time at which PMH, in particular through Mr O'Connell, Mr Spencer and the Local Executive Committee, decided that a financial advantage could be obtained from the proposal to acquire new premises and that objective became a significant purpose of the transaction.
98. It is important to draw a distinction between a consideration by PMM and then PMH of a financial aspect of a leasing proposal which arises in the course of negotiations, and a purpose by PMM and then PMH to obtain or derive a financial or profit advantage or gain from the proposed transaction. A discussion about, or view expressed by PMM or PMH about, a financial inducement or advantage offered by a proposed lessor such as JGL does not automatically translate into a purpose of entering into the leasing transaction to achieve that result. Whether that purpose is to be deduced from the conduct of PMM or PMH depends upon a critical analysis of its conduct, relevant documentation and its negotiations with proposed lessors. Put shortly, one should not confuse a purpose of a transaction with factors that are taken into account in deciding whether to enter into the transaction and, if so, on what terms.
99. There are indications in the documentation and in the evidence of Mr O'Connell and Mr Spencer that by October 1987 PMH was seeking to obtain a substantial financial benefit, advantage, or profit by capitalising on the nature of the firm, the extent of the premises it required and the fact that financial inducements offered to proposed tenants to enter into leases were a feature of the property leasing market in 1987 and 1988. Mr Johns, a property consultant called by the Commissioner, gave evidence as to this latter fact and Mr Aylward, a property consultant called by Mr O'Connell, agreed. Mr Aylward said that by 1986-1987 the payment of incentives by lessors to lessees of premises was a matter of discussion, and was known in the property marketplace. Mr Spencer recognised this factor in his ``Allocation of Cash Inducement'' paper where he said:
``Having regard to the amount received recently by other lessees the fit out can be seen as a normal occupancy inducement, although the quantum was highly favourable.''
100. Mr O'Connell submitted that October 1987 was the point of time at which PMH's purpose should be analysed and determined as at that time PMH was practically, commercially
ATC 4647and effectively bound, albeit not legally bound, to proceed with the transaction to lease the premises at the T & G site. Mr O'Connell fixed on this point of time because he contended that at this point of time the purpose of PMH and his purpose was to obtain suitable new premises. I consider that the proper time at which PMH's purpose and the applicant's purpose in entering into the transaction and receiving the inducement amount is at the time the inducement agreement was entered into and the $8,009,000 was received, namely 23 November 1988. Nevertheless the events which occurred up to, around, and after 28 October 1987, are informative of, and relevant in ascertaining, the purposes of PMH and Mr O'Connell in entering into the inducement agreement and receiving the money.
101. Mr O'Connell contended that PMH chose the T & G site and JGL's proposal as it was the only site which was able to provide it with its requirement of what were called ``jumbo'' floors, that is floors of an area of around 4,000 sq.m. or 1 acre. However, the documentation does not support the proposition that floors of this size were a critical requirement. Floors of this size were no doubt highly desirable for PMH but they were not a critical requirement. Mr O'Connell's memorandum to PMH's partners on 22 October 1987 set out the parameters established for PMH's long-term space requirements, such as location, space standard, total area required, quality of the building and whether the firm should always be in the one location. There was no reference in the identified parameters to floor size. Mr O'Connell had asked Mr Spencer and the Local Executive Committee in the memorandum dated 12 October 1987 whether the firm wanted average floors of 1,500 sq.m. or jumbo floors of 4,000 sq.m. and he expressed the view that the preferred size of floors was very subjective.
102. Further, in his memorandum to PMH partners of 22 October 1987 Mr O'Connell noted that the factors considered to be of primary importance at the time Colliers were appointed and at the date of the memorandum included ``Preferred minimum floor size 1,400 sq.m. with on-site parking for at least 150 cars''. Later in the memorandum when Mr O'Connell undertook a financial comparison of the projects under consideration, he noted that rental accommodation prima facie would be cheaper ``outside the CBD'' compared with a prime location such as Collins Street. He explained the basis for the difference by reference to a number of matters which included:
- ``• whether we want average floors of 1500 sq.m. or jumbo size of 4,000 sq.m. which affects the area over which the firm is located. On 1/7/91 it would be 11 floors or 4 floors.
- • whether we want jumbo floors, where can we build them,
- • whether we can sub let jumbo floors more easily in Collins St. against Latrobe St.''
Mr O'Connell had raised similar questions in his paper to Mr Spencer and the Local Executive Committee on 12 October 1987 when he asked whether PMH wanted average floors of 1,500 sq.m. or jumbo size of 4,000 sq.m.
103. The fact that the availability of jumbo floors in the T & G site was not critical to the decision is demonstrated by the fact that, as the memorandum of 22 October 1987 noted, Mr Carew of Colliers and Mr O'Connell had continued to pursue other alternatives and three serious alternatives were considered. There was also a reference to eight sites or proposals of apparent primary appeal.
104. The opportunity to obtain jumbo floors had an attraction for PMH but the fact that they were not essential and therefore critical to the decision to choose the T & G site highlights the significance given by Mr O'Connell, Mr Spencer, the Local Executive Committee and PMH as at October 1987 to the financial consequences of choosing the T & G site and the JGL proposal. It demonstrates that PMH was looking at a number of options by reference to a number of criteria, a significant criterion being the amount of the incentive available and being offered. It also diminishes the cogency of the submission that PMH had no choice but to move to the T & G site and that by 1987 it was essential from the merged firm's point of view that it have floors which were in excess of 4,000 sq.m. Colliers, in its letter of 6 October 1987 to JGL, had stated that ``It is essential from Peat's point of view that floor areas be approximately 4,000-4,500 sq.m.''. But that was PMH's requirement for the T & G site. The memoranda of 12 and 22 October 1987 more accurately reflect what PMH's general criteria and preferences were and what the firm
ATC 4648regarded as alternatives in October 1987. Nor is the submission as to the critical significance of the availability of jumbo floors supported by Mr O'Connell who said that the T & G site was considered by the ``Working Party to be the most acceptable proposal'' for PMH for the reasons he set out. He did not say it was the ``only'' acceptable proposal.
105. I do not accept that the T & G site was chosen by PMH solely for its physical requirements. I am satisfied that the financial incentive offered played a significant role in the decision-making process of PMH, particularly having regard to the firm's proposal, carried into effect, to use its reputation and exploit its tenancy requirements to maximise the value of its tenancy and minimise its long-term rental costs.
106. Mr O'Connell submitted that as at October 1987 PMH's purpose was to obtain fitted-out new premises and that there could be no other purpose in agreeing to go with the JGL proposal. It was said that in 1987 PMH was negotiating for fitted-out premises and that as at October 1987 there was no expectation of PMH obtaining a detachable gain or profit; what PMH was after was fit-out.
107. That submission is not borne out by the slides which were prepared by Mr O'Connell in October 1987 and presented to the PMH partners, and on the basis of which they resolved to enter into the agreement to lease with JGL. Slide 10 is premised on the basis that a cash or monetary incentive will be paid and that there are a number of alternative ways in which the incentive could be applied or used, only one of which was was for fit-out costs. Further the resolution in slide 12, (par  above) is premised on the basis that ``the distribution of the incentive between partners is of paramount importance'', that is a distribution of money to partners, not a distribution for fit- out or the cost of fit-out.
108. At this time, October 1987, PMH may have wanted to cover its fit-out costs, but the resolution contemplates, or evidences an expectation, that there would be cash available for PMH partners.
109. I am satisfied that as at October 1987 PMH expected that there would be a detachable gain or profit after fit-out costs were covered and provided for and that the firm was concerned to take steps to maximise the after- tax benefit of the incentive. The resolution contemplated that a paper would be prepared dealing with the proposed allocation of the incentive and in the events which occurred that paper turned out to be Mr Spencer's ``Allocation of Cash Inducement'' paper sent to PMH partners on 24 October 1988.
110. Mr O'Connell was reluctant to acknowledge that it was important to consider what was the most financially advantageous offer available to PMH. His memorandum of 12 October 1987 noted that he had asked Mr Carew from Colliers to comment on incentives offered for other major leases yet, in cross- examination, he initially denied that he wanted to know what the market was offering. The following answers in cross-examination are illuminating as they demonstrate that the size of the incentive being offered was a relevant consideration in Mr O'Connell's and PMH's decision-making process:
``Yes, you wanted to know what the market was offering, didn't you? - Yes, because I expected all these sorts of questions when I had to address the partners.
Yes, you wanted to know what the market was offering, didn't you? - No, as I keep saying to you, the objective was to minimise our long-term rental costs, the economics of the situation were relevant so I had to do all the research. I had to do my job thoroughly.
I'll put the question again: you wanted to know what the property market was offering by way of incentives to professional firms to take up tenancies, didn't you? - I did want to know, yes. I needed to be fully informed.
Yes? - Yes.
You wanted to maximise your firm's return on its size and reputation, didn't you? - No, I wanted to minimise our long-term rental costs within the objective of the preferred location and quality of the building. That was my objective all the way along.
Then if you would go to tab 8 which, as we would read it, is appendix 3. [The letter from Mr Carew of Colliers to Mr O'Connell dated 13 October 1987] I'd like you to look at paragraph 4 on the third page under the heading Incentive. You must have been encouraged by being told by Colliers that this was the biggest incentive they'd ever heard of? - Well, I took that with a grain of
ATC 4649salt, actually. I was more interested in getting the right building.
So you were indifferent, is that your evidence, to the assertion by your property expert that this was the biggest incentive ever heard of in Melbourne? - Well -
Indifferent, was my question, you didn't care about that. Is that correct? - Well, it was nice to know, but I mean, property consultants are making all sorts of outlandish statements all the time. So, you know, I was pleased that we were getting towards achieving our objective.
It was important to you, was it not, that in the view of Colliers, as set out at the foot of that page, the JGL offer was financially the most advantageous to you? - Well, it was good to know that because I would then be able to address that issue when I spoke to the partners.
Do you have a problem with the word `important'? I'll ask you my question again: it was important to you, was it not, that Colliers advised that the JGL offer was the most advantageous financially? - It was important, yes.''
111. Although Mr O'Connell said in cross- examination that at that stage (October 1987) distribution to partners was not an issue, I do not accept his evidence in that respect. It is contradicted by the terms of the resolution proposed and passed on 28 October 1987, as recorded in slide 12 which was prepared by Mr O'Connell (par  above).
112. Mr O'Connell said that in recommending, and participating in, PMH's decision to enter into the lease of the premises at the T & G site he personally was not influenced by the cash payment of $8,009,000 from Sweetvale Pty Ltd which made no difference to his decision. I do not accept that evidence having regard to the documentary evidence.
113. Although Mr O'Connell was only grudgingly prepared to acknowledge, in cross- examination, that the distribution of the incentive was important, I am satisfied that slide 12 accurately records the importance and significance of the proposed incentive payment to the PMH partners and the centrality of that payment in their decision-making process.
114. Mr Spencer was influenced in favour of the JGL proposal by the offer of the cash contribution of $8,000,000. It was one of the matters, but not the only matter, which influenced him in favour of the proposal. I accept Mr Spencer's evidence in this respect. The T & G site met all PMH's requirements.
115. I am satisfied that as at 28 October 1987 the distribution of the incentive payment proposed by JGL was of ``paramount importance'' to PMH and to Mr O'Connell in particular.
116. I do not accept Mr O'Connell's evidence that by October 1987 he was not aware that if JGL made a cash payment to PMH in consideration for the firm leasing the T & G site, that would give PMH the opportunity to make a cash distribution to partners. The slides prepared by Mr O'Connell contemplated that very situation. Although Mr O'Connell said in cross-examination that he discounted the value of what was proposed to be paid by JGL, I do not accept that as at October 1987 he did not have an expectation that there would be a cash amount available for distribution to PMH partners.
117. As at 28 October 1987, the proposal from JGL, agreed to in principle by PMH, involved a firm unconditional payment to PMH of $25,000,000 and a further payment of $5,000,000 conditional and dependent upon the profitability of the project by JGL.
118. The slides prepared by Mr O'Connell, shown to the partners in PMH and on which their decision was based to go with the T & G site, demonstrate that they knew money was to be paid and they wanted to organise their affairs to make that payment tax effective. The receipt of money was more than just a factor in the transaction; it was one of the significant purposes of the transaction. It is true that in November 1988 PMH wanted to get JGL ``on the hook'' and make sure it was committed to the development. That accounted for the discounting of the $12,000,000 to $8,009,000 and its immediate payment up-front, but by this stage the purpose had been well established and pursued to obtain the money sum of $12,000,000 and thereby to make a profit or gain from the proposed transaction.
119. The ultimate purpose of the payment and receipt of $8,009,000 in November 1988, rather than $12,000,000 on completion of construction and occupation of the premises,
ATC 4650may have been to ensure that JGL was commercially bound and had committed itself to the project and completed it, but it still remained that a significant purpose of the transaction involving the payment of an inducement amount remained operative.
120. I am satisfied that at an early point of time, well prior to October 1987, PMM, and later PMH, set out to exploit what each firm regarded as its valuable tenancy for the purpose of obtaining a financial advantage. Each firm, by virtue of its space requirements, was an attraction to a building owner or developer as a tenant and each firm recognised this fact. This was recognised, for example, in the January 1987 advertisement in which Colliers, on behalf of PMM, sought innovative proposals whereby, inter alia, PMM could ``Participate as joint venturers in a major development''.
121. The objective was to obtain appropriate new premises and to minimise the cost of so doing. Slide 1 presented to the PMH partners shortly prior to or at their meeting on 28 October 1987 expressed the objective as being ``to minimise long term rent costs'' having regard to certain parameters relating to the building. The means by which this objective was to be achieved was ``the use of reputation and combined purchasing power of KMG and PMM... now PMH''.
122. This desire and intention as at October 1987 to exploit PMH's reputation and goodwill to obtain a financial benefit in whatever leasing arrangement was made was also demonstrated in Mr Spencer's important paper on ``Allocation of Cash Inducement'' when Mr Spencer explained under the heading ``EVENTS LEADING UP TO OUR AGREEMENT WITH JGL'' that PMM had ``a `valuable' tenancy'' the value of which could be maximised in a number of ways which he identified (par  above).
123. That was the situation before the merger, and it was carried through after the merger into October 1987, as Mr Spencer explained in his paper:
``The opportunity to `participate' in the T & G development arose and, in October 1987, the partners of PMH at the time voted to accept it. Our strategy then was, inter alia, to maximise the value of our tenancy by convincing JGL that we were a quasi joint venture partner - notwithstanding that they owned the freehold.
This, through Jack O'Connell and Colliers, was achieved and we have secured a tenancy which is regarded as:
- • highly suitable to our physical needs;
- • in a prime location, and
- • at competitive future rentals because of the low rise nature of the building and because the large floor areas make the building less attractive to most other potential tenants
and for which the inducement offered is highly satisfactory.''
124. There was debate in submissions and in cross-examination of Mr Spencer as to what he meant by ``quasi joint venture partner''. Obviously a joint venture strictly so-called was not contemplated: see
United Dominions Corporation Limited v Brian Proprietary Limited (1985) 157 CLR 1 at 10. But what Mr Spencer made clear was that he was referring to the fact that what he contemplated was a mutually beneficial arrangement whereby JGL would build and PMH would occupy and obtain a substantial inducement.
125. PMH, and in particular Mr Spencer and Mr O'Connell, were influenced in their approach to the nature of the premises to be chosen by the profit Price Waterhouse had made on its building development. In Mr O'Connell's memorandum to Mr Spencer dated 12 August 1987 he noted that JGL had made a verbal offer which, in JGL's view, would return to KPMG an amount at least equal to the profit earned by Price Waterhouse on its own development. Mr O'Connell agreed that it was attractive to him that PMH might obtain from JGL an amount comparable to the profit earned by Price Waterhouse. Mr Spencer was not prepared to acknowledge that he had concluded that it ought to be possible for PMH to engage to its financial advantage in an office development project as Price Waterhouse had undertaken. However he did accept that one of the objectives by which he would judge the available options was that so far as possible the financial advantage to PMH should be maximised.
126. The purpose of PMH in seeking to exploit the value of its reputation, goodwill and tenancy needs to obtain an appropriate tenancy on financially advantageous terms is also confirmed by Mr Spencer's response to the seven propositions put to him (par  above).
127. PMH may not have made any ultimate decision in relation to their quest for new premises which could be classified as ``entrepreneurial'' but I am satisfied that it had a desire to be entrepreneurial in the sense of exploiting the capital value of its reputation, goodwill and lease purchasing power. This desire was carried through into the firm's use of what Mr Spencer called its ``valuable'' tenancy and the firm's perception of itself as a ``quasi joint venture partner'' with JGL. As early as 24 July 1986 Mr O'Connell, in his Long Range Space Plan, was investigating the option of taking an entrepreneurial role whereby, if managed properly, they would generate savings in rental or ``earn up front profits''. Further, on 24 April 1987 Mr Spencer's memorandum referred to the Dayton Hazama proposal which included the opportunity for PMH to share in the total development profit of the proposed project. From an early stage PMM was prepared to consider innovative proposals whereby it could, inter alia, participate as joint venturers in a major development. These matters support the conclusion that PMM and later PMH was looking to make a profit or gain from its acquisition of new premises.
128. The use and exploitation of PMH's valuable tenancy, reputation, goodwill and capital asset was further acknowledged by Mr Spencer in his ``Allocation of Cash Inducement'' paper where he said:
``The size of the tenancy committed by PMH has been a major element in underwriting the viability of the project. The inducement agreed reflects the importance of our commitment to the project in the pre- planning stage. Participation as tenants after JGL had committed to the development is likely to have resulted in a significantly smaller inducement.''
129. This survey of the evidence shows that from 1986 through to October 1988 PMM and then the merged PMH was intent on seeking to obtain new premises appropriately adapted to its needs and at the same time was seeking to maximise the value of its tenancy requirements so as to obtain a financial gain or profit. As Mr Spencer's ``Allocation of Cash Inducement'' paper noted, the objective of maximising the value of the tenancy was achieved by convincing JGL that PMH was a quasi joint venture partner through Mr O'Connell and Colliers. The result was, as the paper noted, a highly suitable tenancy and a ``highly satisfactory'' inducement.
130. Further, the maximising of the value of the tenancy produced what Mr Spencer's paper and the Local Executive Committee called a ``quasi venture'' profit. Although Mr Spencer sought in cross-examination to qualify and explain away his use of the expression ``profit'', it aptly described the $8,009,000 which was to be received. It was paid and received after the cost of fit-out had been provided for and it was not to be diminished by any offsetting costs. It was the product of PMH being what Mr Spencer and the Local Executive Committee described as ``a quasi joint venture partner'', that is to say, a partner in the project who made an early commitment to the project by agreeing to become a substantial tenant.
131. The notion of PMH sharing in the profit of the proposed development by JGL had been recognised at the time of the decision taken on 28 October 1987 in slide 5 prepared for the meeting on that day by Mr O'Connell (par  above). Slide 5 showed that PMH would have distributed to it a fixed proportion of the profit generated by the development of the building, $25,000,000, which would rise to $30,000,000 once JGL's profit rose to $41,139,000. At that stage no apportionment of the amount to be received by PMH was proposed between covering fit-out costs and the amount being available for payment to the partners. Slide 10 referred to fit-out costs as one of the options for which JGL could pay (par  above). Slide 10 noted that as between the three options, it was too early to ``provide any further details at this stage'', although the second resolution in slide 12 contemplated the incentive being used to cover costs including fit-out costs.
132. I am satisfied that at the time the PMH partners resolved on 27 October 1988 to enter into an agreement for a lease with JGL a significant and substantial motivating factor and purpose in their decision to pass the resolution was the receipt and distribution of the proposed incentive payment. They were using their reputation and exploiting their tenancy requirements to achieve that result. I reject Mr O'Connell's evidence that the inducement offered by JGL did not enter into consideration in deciding which was the most acceptable proposal. He ultimately accepted that as at October 1987 he regarded the distribution of the incentive as of paramount importance.
133. I am satisfied that from an early stage, PMM, and certainly by October 1987 PMH, was looking to obtain a financial advantage from its need to obtain new premises for the merged firm and that it sought to exploit its tenancy requirements to obtain a substantial financial incentive.
134. I am satisfied that the inducement agreement entered into on 23 November 1988 was a commercial transaction entered into with a view to profit or gain. Obtaining that profit or gain was a significant purpose of the negotiations with JGL and the conduct of PMH in 1987 and 1988.
135. Mr O'Connell acknowledged that at the time he made his recommendation in October 1988 that PMH should enter into the inducement agreement and the agreement to lease he was aware that the cash payment of $8,009,000 would provide an opportunity for PMH to make a cash distribution to the partners in PMH. I reject his evidence that at that time it was only a possibility. At that time it was a certainty. He had been present at the meeting of the Local Executive Committee on 17 October 1988 at which Mr Spencer's ``Allocation of Cash Inducement'' paper had been discussed and he presented his paper which referred to the amount of the inducement payable.
136. I am also satisfied that in and around October 1987 and November 1988 the offer and receipt of cash incentives was an ordinary incident of leasing commercial and business premises in the Melbourne CBD. Mr O'Connell submitted that the incentive deal or transaction negotiated by PMH was out of the ordinary course of business of PMH. I do not accept that submission. Although there were unusual features of the transaction, the evidence of both Mr Johns and Mr Alyward was that by 1988 the payment and receipt of lease incentives was known in the workplace and was part of the ordinary incident of leasing office premises in the Melbourne CBD. It should also be noted that Mr Spencer agreed that for a firm like PMH generic expansion and space pressures were facts of life and his firm had to deal with them from time to time. As I have found in par [ 78] above, PMH was aware by October 1988 that the receipt of an incentive was a normal incident of leasing premises.
137. The Commissioner submitted that the receipt of the inducement amount fell directly within the principles set out in
FC of T v The Myer Emporium Ltd 87 ATC 4363; (1987) 163 CLR 199 (``Myer'') as it was a receipt from a commercial transaction entered into by PMH with the intention or purpose of making a relevant profit or gain. In Myer the High Court focused on the intention or purpose of a taxpayer entering into a transaction in circumstances where the transaction was entered into otherwise than in the ordinary course of carrying on the business and was thereby extraordinary. The High Court said at ATC 4366-4367; CLR 209-210:
``Although it is well settled that a profit or gain made in the ordinary course of carrying on a business constitutes income, it does not follow that a profit or gain made in a transaction entered into otherwise than in the ordinary course of carrying on the taxpayer's business is not income. Because a business is carried on with a view to profit, a gain made in the ordinary course of carrying on the business is invested with the profit- making purpose, thereby stamping the profit with the character of income. But a gain made otherwise than in the ordinary course of carrying on the business which nevertheless arises from a transaction entered into by the taxpayer with the intention or purpose of making a profit or gain may well constitute income. Whether it does depends very much on the circumstances of the case. Generally speaking, however, it may be said that if the circumstances are such as to give rise to the inference that the taxpayer's intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer's business.''
The isolated nature of a transaction does not preclude the receipt from it constituting income if the relevant intention or purpose exists, as Myer makes clear. At ATC 4367; CLR 211 the High Court said:
``The important proposition to be derived from Californian Copper and Ducker is that a receipt may constitute income, if it arises from an isolated business operation or commercial transaction entered into otherwise than in the ordinary course of the carrying on of the taxpayer's business, so long as the taxpayer entered into the
ATC 4653transaction with the intention or purpose of making a relevant profit or gain from the transaction.''
At ATC 4370; CLR 215-216 the High Court said:
``... If the profit be made in the course of carrying on a business that in itself is a fact of telling significance. It does not detract from its significance that the particular transaction is unusual or extraordinary, judged by reference to the transactions in which the taxpayer usually engages, if it be entered into in the course of carrying on the taxpayer's business. And, if it appears that there is a specific profit-making scheme, it is pointless to say that it is unusual or extraordinary in the sense discussed. Of course it may be that a transaction is extraordinary, judged by reference to the course of carrying on the profit-making business, in which event the extraordinary character of the transaction may reveal that any gain resulting from it is capital, not income.''
138. What Myer makes clear is that:
- • a gain or profit made in the ordinary course of carrying on a business is invested with a profit-making purpose and is therefore characterised as income because a business is carried on with a view to profit;
- • a gain or profit made otherwise than in the ordinary course of carrying on a business, but which arises from a transaction, albeit extraordinary, entered into with the intention or purpose of making a profit or gain will constitute income if the intention or purpose of the taxpayer was to make a profit or gain from the transaction.
139. The application of the Myer principles to the findings I have made leads to the conclusion that the receipt of the $8,009,000 and Mr O'Connell's share of that amount was the receipt of a gain or profit which was the receipt of income for the purposes of s 25(1) of the Act.
140. There have been a number of decisions which apply the Myer principles to payments by lessors to lessees in the context of the receipt of financial inducements to enter into leases of business premises. A consideration of these cases demonstrates that the receipt of the $8,009,000 by PMH and Mr O'Connell's share of that amount is properly characterised as the receipt of income, and not the receipt of capital.
FC of T v Cooling 90 ATC 4472; (1990) 22 FCR 42 (``Cooling'') the Full Court of the Federal Court held that a payment to a firm of solicitors by an owner of premises, as an inducement to move its offices to the owner's building, was assessable income within s 25 of the Act. The firm's existing premises were not completely satisfactory, at the relevant time there was an oversupply of office space, and incentives such as rent-free periods and cash payments were a feature of the market for the rental of commercial premises.
142. Hill J, delivering the leading judgment of the Court, considered the quality of the payment in the hands of the recipient and applied the Myer principles to which I have referred. Hill J rejected the Commissioner's submission that Myer established a new principle that all gains made by a business entity were assessable. His Honour then considered the firm's submission that its business was the performance of professional services and not the receipt of incentive payments but observed that the firm did not cease business when it moved from one leased premises to another leased premises. Hill J said at ATC 4484; FCR 56:
``Where a taxpayer operates from leased premises, the move from one premises to another and the leasing of the premises occupied are acts of the taxpayer in the course of its business activity just as much as the trading activities that give rise more directly to the taxpayer's assessable income. Once this is accepted, the evidence established that in Queensland in 1985 it was an ordinary incident of leasing premises in a new city building, at least where the premises occupied were of substantial size, to receive incentive payments of the kind in question. Why then should a profit received during the course of business where the making of such a profit was an ordinary incident of part of the business activity of the firm not be seen to be income in ordinary concepts?''
(This passage was approved by the majority in
FC of T v Montgomery 99 ATC 4749 at 4769; (1999) 198 CLR 639 at 676 (``Montgomery'') to which I shall refer.)
143. Hill J then turned his attention to whether the transaction was properly described
ATC 4654as a profit-making scheme. His Honour said at ATC 4484; FCR 56-57:
``It was submitted that the evidence illustrated that the firm was reluctant to move. That may be so. But the firm did commit itself to the move and it was an integral part of this commitment that it receive the incentive payment which is properly a profit of the partnership. It is true that the incentive payment was not the sole purpose of the firm moving premises. The previous premises had the disadvantages to which I have earlier referred and the securing of premises in what may be assumed to have been a prestige building was a clear purpose of the firm in taking the course it did which led both to Bengil entering into the lease and to the receipt of the incentive payment.
A scheme may be a profit making scheme notwithstanding that neither the sole nor the dominant purpose of entering into it was the making of the profit. In Myer the assignment of the right to interest was an integral part of the total reorganisation entered into by the Myer Group. While the judgment of the High Court in Myer referred to the case as involving the intention or the purpose of making the profit there is no suggestion that the Court dissented from the factual finding of Murphy J. that the motivating purpose of the transaction was for Myer to obtain working capital to enable it to diversify. It should however be noted that on the facts of that case the obtaining of working capital was possible only if the profit contemplated by the taxpayer was made.
In my view the transaction entered into by the firm was a commercial transaction; it formed part of the business activity of the firm and a not insignificant purpose of it was the obtaining of a commercial profit by way of the incentive payment.''
144. In my view the principles in Cooling when applied to the present circumstances under consideration confirm my conclusion that the receipt of $8,009,000 was the receipt of income. The facts I have found fall within Hill J's reasoning at ATC 4484; FCR 56, (par  above). PMH's move to new leased premises and the leasing of the new premises were acts of PMH in the course of its business activity and the evidence was that in Melbourne in 1988 it was an ordinary incident of leasing premises in a city building of substantial size to receive incentive payments. Consistently with the reasoning in Cooling, the receipt of the $8,009,000 was income according to ordinary concepts.
145. Further the finding that a significant purpose of the transaction leading to the inducement agreement and the agreement to lease premises at the T & G site was the obtaining of a financial incentive demonstrates the existence of a profit-making scheme. It was not the sole or dominant purpose, but it was a significant purpose of the transaction as it developed.
146. Mr O'Connell placed significant reliance on
Selleck v FC of T 97 ATC 4856; (1997) 78 FCR 102 (``Selleck'') where the Full Court of the Federal Court distinguished Myer and Cooling. Two firms of solicitors occupying separate premises merged to form Arthur Robinson & Hedderwicks (``AR & H''). The merged firm needed to obtain new premises as the existing premises of the two firms could not accommodate the merged firm. The Australian Mutual Provident Society Limited (``AMP'') offered suitable premises and as an incentive offered sums totalling $1,066,000 to the merged firm as a contribution towards fit-out costs. The amounts were paid into the firm's general bank account and fit-out costs were disbursed from the same account. The decision by the merged firm to move to the AMP premises was not prompted by the AMP contribution to fit-out costs. There was no direct payment to the partners of the merged firm of the amounts received from AMP at the time the payments were received. Lockhart J (with whom Black CJ agreed), at ATC 4858; FCR 104, found it:
``... impossible to draw the inference that AR&H regarded the AMP offer of a cash contribution to fit out as giving it the opportunity to make a substantial cash distribution to the partners.''
147. Lockhart J was also influenced in reaching his conclusion that the payments by AMP were not assessable as income by the fact that:
- • the evidence did not establish that it was intended to make immediate cash distributions to the partners of the amounts contributed by AMP towards the cost of fit- out; and
- • neither the decision to move and find new premises nor the decision to choose the AMP premises in preference to another site was influenced by, or had as a purpose, the receipt by the partnership of the AMP contribution to the fit-out.
148. Lockhart J continued at ATC 4859; FCR 105-106:
``The only purpose of AR&H entering into the lease with the AMP was to obtain premises from which the new firm would conduct its legal practice.
It is clear from both Myer and Cooling that whether a gain is assessable depends on the circumstances of the case. The facts of Cooling are different. In Cooling the relevant firm had not decided that it was essential or even important to move. The real estate agents acting for AMP in Cooling initiated the attempt to have the firm move premises, and the agents recommended to AMP that they offer an inducement to make the move more attractive. The firm chose to have the incentive paid to the individual partners rather than to the firm. The partners used the funds they received individually to fund the fit out; but notwithstanding this, there was no requirement for them to do so. The proceeds of the sale and lease back were paid back to the partners, unlike the present case.
In Cooling the promised receipt by the partners individually of the incentive payment was a not insignificant purpose in the firm's decision to move to the AMP premises. In Cooling the decision to leave the firm's old premises and take up a lease with the AMP was influenced by the incentive payment to a not insignificant degree.
In the present case the primary Judge correctly found that the decision to take up the premises with the AMP rather than Rialto was not influenced by the payment from the AMP.
The need to find new premises for the new firm was a capital occasion. This could not be transformed into a revenue occasion because AR&H desired the AMP contribution to the fit out to be higher than had been first offered.
In my opinion AR&H did not have any relevant purpose of profit-making when entering into the lease with AMP.''
149. Although Mr O'Connell placed considerable reliance on Selleck, it is of no assistance to him having regard to the findings in that case which distinguish it from the present circumstances. This last passage from the reasons of Lockhart J supports, indeed confirms, the proposition that if a not insignificant purpose in a decision by a firm to move to particular premises is the promised receipt by the partners of the firm individually of an incentive payment, then the receipt of the payment will be considered as a receipt of income and not of capital.
150. Unlike the conclusion of Lockhart J (par [ 146] above), the facts of this case make it possible to draw an inference that the offer of the $8,009,000 gave PMH the opportunity to make a substantial cash distribution to the partners in PMH. I consider that such an inference should be drawn for the reasons to which I have already referred. In particular Mr Spencer agreed that in October 1988 he regarded JGL's offer of a cash contribution of $8,000,000 to the partners in PMH as giving it the opportunity to make a cash distribution to the partners.
151 In Selleck Lockhart J was influenced by the fact that the evidence did not establish that an immediate cash distribution to partners of the payment was to be made, nor that the decision to find new premises and to choose the premises which were in fact chosen was influenced by, or had as a purpose, the receipt of the payment by the partnership. However the evidence in the present case does enable me to find such facts and reach such conclusions. I am satisfied that PMH, and in particular Mr O'Connell, in deciding to enter into the inducement agreement and the agreement to lease, were influenced in favour of the proposal by, amongst other things, the offer of the cash contribution of $8,009,000. Mr Spencer agreed he was so influenced. Mr O'Connell said he was not so influenced but I have rejected that evidence; it is inconsistent with the contemporaneous documentation to which I have referred and the views of Mr O'Connell expressed in it. By 28 October 1987 it was intended by PMH and, in particular, by Mr O'Connell to make cash distributions to the partners of at least part of the amount to be paid
ATC 4656by JGL. This was evidenced in particular, by resolution 2(C) in slide 12 (par  above). I have also found that the decision to find new premises and the decision to choose the T & G site was significantly influenced by, and had as a significant purpose of, the receipt by PMH of the inducement amount.
152. The case more directly on point is Montgomery in which a firm of solicitors moved their offices to a new building. The firm entered into an inducement agreement, an agreement to lease and a deed of acknowledgement whereby some members of the firm guaranteed the obligations of the corporate lessee. Under the inducement agreement the lessors agreed to pay the firm $15,890,000 (later increased) against which the lessee could draw for certain expenses before the term of the lease commenced and the balance of which was payable to the lessee after fitting-out of the new premises was completed. The Commissioner assessed the respondent, a member of the firm, on the basis of including in his taxable income an interest in the net income of the firm, which included amounts received by the firm under the inducement agreement. The High Court, by a majority (Gaudron, Gummow, Kirby and Hayne JJ), held that the payments under the inducement agreement were received as income on the grounds that:
- • the payments arose from a singular transaction in the nature of trade undertaken in the course of a wider business activity; and
- • the partners of the firm had used or exploited their capital in the course of carrying on their business to obtain the inducement payments which were received for their separate benefit and not as an increment to their profit-yielding structure.
153. In Montgomery, as in the present case, the evidence was that at relevant times it was an ordinary incident of leasing premises in the Melbourne CBD that lessees received incentive payments as an inducement to take up leases in new buildings. In the present case the evidence was that these arrangements existed in 1988 against a background of looming oversupply.
154. In Montgomery the primary judge found (and his finding was not disturbed by the majority in the High Court) that one purpose of the firm in entering into the transaction was to secure a gain and that the transaction occurred in the course of the firm carrying on its business. The primary judge found that the firm did not think itself devoid of choice at the relevant time between staying where it was and leaving for other premises. The primary judge found that the partners in the firm ``set upon making a choice between the alternatives placed before them in the papers prepared for the meeting'' (cited at ATC 4763; CLR 665). That observation may be aptly made as to what the partners of PMH undertook in and prior to the meeting on 27 October 1987. The majority of the High Court also thought it significant that the papers put before the partners of the firm noted that the firm's size made it a particularly attractive tenancy target and should therefore obtain ``a substantial or total fit-out contribution and some initial rent incentive'' at ATC 4763; CLR 666.
155. The majority rejected the submission that the payments were on capital account because the transaction which gave rise to the receipts was not in the ordinary course of business of the firm. The majority said at ATC 4767; CLR 672:
``... But it is well established that the singularity of the receipts that now are in question, or (to put it another way) the fact that they are receipts standing apart from or outside the ordinary course of the ordinary business of the firm, does not inevitably stamp those receipts as capital receipts.''
The majority quoted the passage from Myer referred to in par  above and went on to say at ATC 4769; CLR 676-678:
``The singularity of a transaction may very well invite close attention to whether it is in business. The singularity of a transaction may suggest that there is a mere realisation of a capital asset or change of investment rather than a transaction on revenue account. The purpose of profit-making may be an important consideration in deciding these questions. But, as Myer demonstrates, a singular transaction, in business, even if unusual or extraordinary when judged by reference to the transactions in which the taxpayer usually engages, can generate a revenue receipt. And that is why, in FC of T v Cooling, the Full Court of the Federal Court rightly emphasised the fact that, in that case, the receipt was an ordinary incident of part (albeit an extraordinary and unusual part) of the firm's business activity.
It can be seen, then, that two of the different ways in which the Commissioner put his case (receipt as an ordinary incident of transaction in course of business, and gain from profit-making undertaking or scheme) intersected or overlapped. The `gain' alleged was the gross amount of the receipts under the inducement agreement. The `profit- making undertaking or scheme' was the entry into these agreements as a step in the conduct of the taxpayer's business. The receipt was, so the argument went on, a receipt from carrying on the business (albeit by means of an unusual transaction). The receipt was an ordinary incident of transactions of this kind. Its receipt was, then, neither an unexpected nor unintended by-product of the transaction; its receipt was a purpose of entering the trans- action.''
156. Finally, the majority turned their attention to the manner in which the firm exploited its capital. The majority said at ATC 4769-4770; CLR 677-678:
``The inducement amounts received by the firm did not augment the profit-yielding structure of the firm. The lease was acquired as part of that structure; the inducement amounts were not. There was, in the words of Pitney J in Eisner v Macomber `not a gain accruing to capital, not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value proceeding from the property, severed from the capital however invested or employed, and coming in, being ``derived,'' that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal'.
To put the matter another way, the firm used or exploited its capital (whether its capital is treated for this purpose as being the agreement to take premises or its goodwill) to obtain the inducement amounts. As the papers presented to the firm in August 1989 said, the firm was then `of a size which makes it a particularly attractive tenancy target'. And it was because it was a particularly attractive tenancy target that it was suggested in those papers that the firm should receive a good inducement offer to take premises. The firm used or exploited its capital in the course of carrying on its business, albeit in a transaction properly regarded as singular or extraordinary. And the sums it received from the transaction were not as some growth or increment of value in its profit-yielding structure - the receipts came in or were derived for the separate use, benefit and disposal of the firm and its members as they saw fit.''
These observations may be applied to the manner in which PMM and then PMH approached and conducted their process of obtaining new premises.
157. In Montgomery it was accepted (as it was in Cooling) that the receipt of the incentive was an ordinary incident of the business, albeit from an unusual transaction and what therefore followed was a finding of a profit-making purpose without further evidence.
158. What is made clear in Cooling, and confirmed in Montgomery, is that if a purpose of a transaction, albeit not the only purpose, but nevertheless a significant purpose, is a profit- making scheme then the receipt from it will be regarded as income notwithstanding that there is another purpose of the transaction which does not warrant the conclusion of a profit-making scheme.
159. The point made by the majority in Montgomery about the exploitation of capital is an aspect of identifying a profit-making scheme or purpose. It is not a separate head of identifying a taxable situation but rather an exposition based on Myer principles. The point about exploitation of capital is no part of the application of the Cooling principle that was endorsed by the majority of the High Court in Montgomery at ATC 4769; CLR 676, (par  above).
160. Mr O'Connell submitted that Montgomery was to be distinguished as the facts presently before the Court were different in an important respect. In the present case both PMM in 1986, and the merged PMH in 1987, needed further office space whereas in Montgomery the firm did not have to move from BHP House, the firm had a choice. That distinction does not render inapplicable the reasoning of the majority in Montgomery or the application of the principles which the majority identified.
161. In Montgomery, the firm involved was not moving or seeking to move premises in the context of a recent merger. That is not a relevant basis on which to distinguish the
ATC 4658application of Cooling and Montgomery in relation to the circumstances under consideration. The merger did not change the purposes, intention or objectives which had been conceived and sought to be implemented and attained by PMM and then PMH. The space requirements increased, but the purposes sought to be achieved remained the same, namely the attaining of new premises satisfying certain criteria and the exploitation of the firm's reputation, purchasing power and capital to achieve a financial advantage, gain or profit.
162. Accepting that PMM and then PMH had to move and seek new premises does not deny or negate the application of the principle set out by Hill J in Cooling at ATC 4484; FCR 56, and endorsed by the majority in Montgomery at ATC 4769; CLR 676, as follows:
``... But, as Myer demonstrates, a singular transaction, in business, even if unusual or extraordinary when judged by reference to the transactions in which the taxpayer usually engages, can generate a revenue receipt. And that is why, in FC of T v Cooling, the Full Court of the Federal Court rightly emphasised the fact that, in that case, the receipt was an ordinary incident of part (albeit an extraordinary and unusual part) of the firm's business activity.''
163. Further, the fact that PMM and then PMH had to move and seek new premises can be accepted at the same as it can be found (as I have found) that as well as having a purpose of obtaining new premises both firms had a significant purpose of obtaining a gain from a profit-making scheme, namely exploiting its reputation, goodwill and tenancy requirements to obtain a financial gain or advantage. Again I refer to the slides shown to the PMH partners in October 1987 as a result of which they resolved to enter into an agreement with JGL, and to Mr Spencer's ``Allocation of Cash Inducement'' paper of 24 October 1988 which was approved by the Local Executive Committee and as a result of which the inducement agreement and agreement to lease were executed.
164. Both purposes had their genesis in the need of both PMM and then PMH to obtain additional space and they continued concurrently, as an end sought to be achieved, through 1986, 1987 and up to November 1988 when they, and the relevant transaction, were consummated.
165. Mr O'Connell submitted that the application of the Cooling principle required a finding of a profit-making purpose but that submission misunderstands the content of Cooling. The passage at ATC 4484; FCR 56 referred to in par  above is predicated upon a transaction generating a receipt as an ordinary incident of part of a firm's business activity, not upon the finding of a profit-making undertaking or scheme. If a receipt is received as an ordinary incident of a business or part of a business, it is stamped with a profit-making purpose. If it is not received in the ordinary course of business, but still in the course of business, it is necessary to find a profit-making purpose before the receipt from the transaction is taxable as income.
166. Mr O'Connell submitted further that Cooling should be read and understood in the light of
Westfield Limited v FC of T 91 ATC 4234; (1991) 28 FCR 333 (``Westfield'') especially at ATC 4242; FCR 342 where Hill J (with whom Lockhart and Gummow JJ agreed) said:
``... The transaction of sale may be one which arises in the ordinary course of the taxpayer's business, but that profit will not ordinarily be income, particularly where, at the time of acquisition of the site, there was no intention or purpose of profit-making by sale when the premises became too small. The profit in Cooling (supra), the receipt of a leasing incentive payment, was one intended to be made at the time the transaction with the lessor was entered into, just as the profit in Myer was one which underlay the whole transaction.''
This passage does not assist Mr O'Connell having regard to my findings as to the purposes of PMH and Mr O'Connell in entering into the inducement agreement. In any event the majority of the High Court in Montgomery has endorsed the passage in Cooling at ATC 4484; FCR 56 (par  above) with the result that, properly understood, it is no part of that passage in Cooling that there be a profit-making scheme or purpose. Rather the principle focuses upon whether the relevant receipt arises from a transaction which is an ordinary incident of part, albeit an extraordinary or unusual part, of the firm's business.
167. If a receipt arises from a transaction which occurs in the ordinary course of business, albeit as an unusual transaction, it is not
ATC 4659necessary for the Commissioner to show that the transaction is part of a profit-making scheme because the fact that it occurs in the course of business stamps it with a profit- making purpose because one is in business to make a profit. This was made clear in Westfield where Hill J said at ATC 4242; FCR 342-343:
``When in Myer the High Court spoke of profits made in the ordinary course of business, their Honours were not speaking in a temporal sense. Rather, as the judgment of the Full Court of this Court in
FC of T v Spedley Securities Limited 88 ATC 4126 at 4130 points out, it is necessary that the purpose of profit-making must exist in relation to the particular operation. In a case where the transaction, which gives rise to the profit, is itself a part of the ordinary business (eg a profit on the sale of shares made by a share trader), the identification of the business activity itself will stamp the transaction as one having a profit-making purpose. Similarly, where the transaction is an ordinary incident of the business activity of the taxpayer, albeit not directly its main business activity, the same can be said. The profit-making purpose can be inferred from the association of the transaction of purchase and sale with that business activity.''
168. When the principles in the cases to which I have referred are applied to the findings of fact I have made, I reach the conclusion that the amount of $8,009,000, and Mr O'Connell's share thereof was received by PMH and Mr O'Connell from a transaction:
- • which had as a significant purpose a profit-making scheme entered into with a significant, albeit not sole, intention or purpose of making a profit or gain;
- • in which the receipt was received in the course of PMH's business as an ordinary incident of part of the firm's business.
169. The amount received by PMH as an incentive payment and Mr O'Connell's share thereof was therefore correctly assessed by the Commissioner as ``income'' for the purposes of s 25(1) of the Act and the Commissioner did not err in disallowing Mr O'Connell's objection to that assessment made on the basis that the payment ought properly to have been characterised as ``capital''.
170. The appeal will be dismissed with costs.
THE COURT ORDERS THAT:
1. The appeal be dismissed.
2. The applicant pay the respondent's costs of and incidental to the appeal.