Premier Automatic Ticket Issuers Ltd v Federal Commissioner of Taxation

50 CLR 268

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(Decision by: Dixon J)

Premier Automatic Ticket Issuers Ltd v Federal Commissioner of Taxation

Court:

Judges: Rich J
Starke J

Dixon JEvatt J
McTiernan J

Subject References:
Taxation and revenue
Income tax
Patent rights
Licensee empowered to sell patent rights
Share of proceeds to taxpayer
Income or capital
Profit-making scheme

Legislative References:
Income Tax Assessment Act 1922 (Cth) - Section 4; Subsection 13(1); Section 16C
Income Tax Assessment Act 1930 (Cth) - Paragraph 2(c); Subsection 26(1)

Hearing date: 16 August 1933; 17 August 1933;
Judgment date: 7 November 1933

SYDNEY

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Decision by:
Dixon J

The facts, my statement of which is contained in the special case, raise the questions whether the sum obtained by the taxpayer in consequence of the transfer of its patents was capital or income, and whether it was derived from a source in Australia or a source in Great Britain. These questions are not as completely independent of one another as might be supposed. For, in the circumstances of the case, the conclusion that the source of the income is in Australia necessarily confines the activities producing the income within narrower limits not only of area but also of period and description. For this and other reasons, it was thought more satisfactory to decide the taxpayer's appeal against its Federal assessment to this Court before disposing of the appeal of the State Commissioner against the decision of the Supreme Court determining that the moneys in question are not taxable as income derived from sources in New South Wales. The ground of the decision of the Supreme Court is that the sum was not derived from a source in New South Wales. As the money was in fact paid to the taxpayer company in performance of a condition of the agreement of November, 1922, this conclusion necessarily involves a consideration of its provisions. Street C.J., who delivered the judgment of the Court, in describing its general character, said that what the parties to it had in contemplation was a pooling of their patent rights and an exploitation of them in combination both in Australia and in other parts of the world, a joint enterprise for the benefit of all parties to the agreement; that the dominant idea was the sale and use of ticket-issuing machines in conjunction with totalisators in the joint interest of all concerned.

"The agreement made here by" the taxpayer company "gave it a right, no doubt, to share in the benefit of sales wherever made but as a hard practical matter of fact the income which it received, and which is under consideration, arose from business transacted by Automatic Totalisators in England and wholly carried out there" ^[F9] . It cannot be denied that the sum of PD100,000 paid for the patents, of which the sum of PD10,000 paid to the taxpayer formed ten per cent, arose in the hands of Automatic Totalisators Ltd from a source in Great Britain. The patents were assets situate in Great Britain (English Scottish and Australian Bank Ltd v Inland Revenue Commissioners ^[F10] ); the contract of sale was made there; the assignments were executed there, and the money was paid there. If, therefore, this transaction is to be considered as the source from which the taxpayer derived its ten per cent, the judgment of the Supreme Court would clearly be right. But the transaction was conducted by Automatic Totalisators Ltd , not by the taxpayer. Doubtless, part of the price of PD100,000 paid in Great Britain was referable to the patent for the ticket-issuer invention, the beneficial title to which had been acquired by the taxpayer and, perhaps, ten per cent may have represented a proper apportionment. But the sum of PD10,000, which the taxpayer received, cannot be considered as derived simply as the proceeds of this piece of British property. For it did not become entitled to the PD10,000 simply because of the sale. Its title to ten per cent of the price obtained in Great Britain by Automatic Totalisators Ltd arose from the agreement of November 1922.

The facts are that the taxpayer did nothing outside New South Wales towards bringing about the transaction, which was wholly carried out by Automatic Totalisators Ltd Thus, except in so far as Automatic Totalisators Ltd should be considered as acting for or on behalf of the taxpayer, nothing actively done by it abroad constitutes the source of the income now excluded from the assessment as extra-territorial. At bottom, the decision of the Supreme Court treats the agreement of November 1922 as conferring upon the taxpayer a right to share in the distribution of moneys earned by the activities of Automatic Totalisators Ltd It denies to the agreement the character of a transaction by which the taxpayer earned profit afterwards to be ascertained in amount, and ascribes to it the character of a contractual disposal in favour of the taxpayer of future profit earned by Automatic Totalisators Ltd.

The provisions of the agreement of November 1922 fall naturally into four main divisions of subject matter:

(1)

The earlier clauses confer upon Automatic Totalisators Ltd an exclusive licence in respect of the invention of ticket-issuing apparatus limited to use with totalisator machines. The licence extended to the manufacture, sale, use, and operation of such machines; the consideration for the licence was a royalty of PD10 per machine. Provision is then made for the extension of the protection to other countries and also for the inclusion of subsequent improvements.

(2)

A special set of clauses deals with the rights in New Zealand in the ticket-issuing invention. These begin with the statement that the provisions of the agreement relating to the payment of royalties by Automatic Totalisators Ltd shall apply to all countries alike. They then proceed to except New Zealand and to confer upon the taxpayer an election to manufacture, sell, operate and use the apparatus in New Zealand at a royalty of PD10 per machine payable to Automatic Totalisators Ltd , subject to an option in Automatic Totalisators Ltd to purchase the New Zealand rights for a consideration in shares in any company it should form for the purpose of manufacturing totalisators in New Zealand.

(3)

A third subject dealt with by the agreement is the acquisition by the taxpayer from the inventor, Setright, of all patents present and future relating to the ticket-issuing invention and all improvements therein.

(4)

The fourth description of clauses is that relating to the disposal of the patents themselves. The leading provision is that "in the event of Automatic Totalisators Limited disposing of the whole or part of their proprietary rights to the totalisator and/or ticket-issuers in any country Automatic Totalisators Limited shall make payment to the" taxpayer in one of two methods then set out, the choice of which resided with the taxpayer. The second of these methods was in fact chosen and consisted in payment "of a sum equal to ten per cent of any cash consideration for the sale of totalisator and issuer rights in any country and a sum equal to five per cent of the total royalties received under the terms of such sale for a period of ten years." The next clause requires, "in the event of Automatic Totalisators Ltd disposing of rights as in the preceding paragraph," that the taxpayer and the inventor shall "execute all necessary transfers or assignments of patents held by them to effectuate such sales." Finally, the agreement provides that, "subject to any contracts or agreements in connection therewith as may have there-tofore been lawfully entered into by Automatic Totalisators Limited with any other party or parties," the rights in the ticket-issuing invention should "revert to and become vested in" the taxpayer, if Automatic Totalisators Ltd should discard the use of the apparatus and use another device, or if that company should be wound up and cease to carry on business, except on a reconstruction or sale. There is much obscurity in many of the provisions of this agreement besides those actually quoted, and both because this is not a litigation between parties to the agreement and because the meaning of some of the expressions and provisions might appear clearer if more of the circumstances were before us to which the instrument was intended to apply, it is undesirable to express any opinion upon the agreement which is not strictly necessary for the determination of this appeal.

But it appears reasonably clear that by it the taxpayer conferred upon Automatic Totalisators Ltd the complete and exclusive enjoyment of the right to exercise all patents for the invention. In my opinion, it confers also a power of disposition of the patents themselves. The clauses are clumsily and illogically expressed, and it is impossible to be confident of their meaning, but I think that when the undertaking to execute transfers of patents is considered with the text of the preceding clause, which fixes the consideration in the event of a disposition, it sufficiently appears that a right to dispose of the patents was intended. Both the right to exercise and the right to dispose of the patents are made liable to determination under the condition subsequent contained in the final provision, but, until the occurrence of this condition, they gave both enjoyment in use of the proprietary right and power of alienation. For the purposes of this case, it may be assumed that by reason of the nature of the terms which govern price the taxpayer might have made any particular sale impossible if it chose. But this does not mean that any action on its part out of the Commonwealth was required to effect the sale, nor that the sale was negotiated or made by Automatic Totalisators Ltd for it or on its behalf. In exchange for these rights it stipulated for a defined consideration. Subject to the election given it, the description of the consideration was finally fixed. The pecuniary sum payable depended upon events, but the mode of calculation was defined. The agreement does not make Automatic Totalisators Ltd the taxpayer's agent. Its liability to the taxpayer is for a consideration in the nature of a price for advantages secured to it by the agreement. There is nothing in the facts contained in the case stated which appears to me to suggest that anything was done by, or, unless under the agreement, on behalf of, the taxpayer in negotiation or carrying out the transaction in Great Britain.

In these circumstances, the only source whence the taxpayer derived the sum of PD10,000 whether as income, or as a capital profit, must be taken to be the agreement under which it became payable to it, and that was negotiated and made in New South Wales. I am of opinion that the sum was derived from a source within Australia.

The question then arises whether the sum so derived should be considered as income or capital. By Act No. 50 of 1930, par. (ba) was inserted in the statutory definition of "income" as from 1st July 1922. This paragraph defines income to include any profit arising from the sale by any person of any property acquired by him for the purpose of profit-making by sale or from the carrying on or carrying out of any profit-making undertaking or scheme.

The adoption of this provision probably has no more effect than to give legislative authority to the tests propounded and applied in decisions of this Court. In Ruhamah Property Co v Federal Commissioner of Taxation ^[F11] , in the judgment of Knox C.J., Gavan Duffy, Powers and Starke JJ., the rule was restated: "The principle of law is that profits derived directly or indirectly from sources within Australia in carrying on or carrying out any scheme of profit-making are assessable to income tax, whilst proceeds of a mere realization or change of investment or from an enhancement of capital are not income nor assessable to income tax (Commissioner of Taxes v Melbourne Trust Ltd ^[F12] ; Ducker v Rees Roturbo Development Syndicate ^[F13] ; Commissioner of Taxation (W.A.) v Newman ^[F14] ; Blockey v Federal Commissioner of Taxation ^[F15] )." Their Honours added: "In our opinion the authorities show that the objects and powers of the company contained in its memorandum and articles of association are not decisive of the question whether the sale was an operation of business in carrying out a scheme of profit-making, but that a consideration of all the matters advanced by the company was relevant to a determination of that question (Hudson's Bay Co v Stevens ^[F16] ; Tebrau (Johore) Rubber Syndicate v Farmer ^[F17] ; C. H. Rand v Alberni Land Co ^[F18] ; Alabama Coal, etc, Co v Mylam ^[F19] )" ^[F20] .

The criterion, which the Legislature has now adopted and established, was formulated by the Courts in the absence of any statutory direction upon the way in which capital profits may be distinguished from income profits. So far as it lacks precision or is uncertain in its application, the cause is to be found in the powerlessness of the Courts to do more than state a wide general proposition and to apply it as each case arose. The statement of the proposition was not a definition, but rather an explanation of principle. No doubt, as the language of the statute it must receive a more literal application. It is not easy to say whether the expression "profit-making by sale" refers to a sole purpose, or a dominant or main purpose, or includes any one of a number of purposes. The alternative "carrying on or carrying out" appears to cover, on the one hand, the habitual pursuit of a course of conduct, and, on the other, the carrying into execution of a plan or venture which does not involve repetition or system (cp. Federal Commissioner of Taxation v Clarke ^[F21] ).

In the present case, the taxpayer was incorporated for the primary purpose of acquiring and turning to profit a ticket-issuing invention or inventions suitable for use with totalisators. The objects contained in the memorandum of association consisted of the familiar collection of seemingly unrelated powers. But the actual purpose with which the company was incorporated was, doubtless, that expressed in the first two objects, namely, to acquire patents, and in particular a patent for ticket-issuers, to that end to adopt an agreement already in draft, and to use, exercise, develop, grant licences in respect of, or otherwise turn to account, sell, or dispose of, any such patents. The taxpayer company, in pursuance of these objects entered into an agreement, which conferred upon it patent rights in the ticket-issuing invention and any improvements. The invention so acquired was saddled with contractual obligations which the vendors had undertaken immediately before the incorporation of the taxpayer. These included an exclusive licence in favour of Automatic Totalisators Ltd at a royalty for the duration of the patent for the Commonwealth and New Zealand. From its incorporation, in 1917, until the making of the agreement of 16th November 1922, the taxpayer made no attempt to dispose of the patent rights, or any of them, whether by assignment, licence, or otherwise, except that in 1919 it appointed a director agent for the sale of all patent rights outside the Commonwealth and New Zealand. It derived royalties from Automatic Totalisators Ltd , it obtained assignments of the improvements for ticket-issuers for win and place bets invented by the vendors, and it negotiated the agreement with Setright and Automatic Totalisators Ltd in the circumstances set out in par. 12 of the special case.

Except for the manufacture and supply of an attachment used in ticket-issuing machines, these appear to be the only active transactions of the taxpayer until the making of the agreement, which, in my opinion, is the source of the profit in question. In Collins v Firth-Brearley Stainless Steel Syndicate ^[F22] , Atkin L.J., as he then was, upheld the view that profit arising in that case from the disposal of patents was capital and not income because he thought the Commissioners "took the right view in this case, and came to the conclusion that this company was formed for the purpose of acquiring these patent rights as its one capital asset and that it was to make money out of the use of this one capital asset, but that it was not to make money by retailing them or peddling them, but to treat the one asset that it acquired as its capital and to use it accordingly, just as if it had acquired a business with goodwill, in which case it was trade, but the business and the goodwill which it had purchased would be its capital out of which it made its profits." This statement expresses, in effect, the final question in the present case. I have come to the conclusion that the question must be answered against the taxpayer. In acquiring the patent rights to the ticket-issuer invention and improvements, the taxpayer appears to me to have embarked upon a venture which had in view any profitable dealing with the property. The primary thing was perfecting the monopoly in such places as seemed desirable and the preservation of the interest by obtaining patent rights in improvements and competitive inventions. But, so far as enjoying or obtaining advantages from those rights, the taxpayer was empowered, and I think prepared, to exercise, licence others to exercise, or dispose of, the patent rights in any country, subject to the existing licence in Australia and New Zealand, as opportunity offered.

Because the utility of the invention was so much involved with totalisators, separate or independent opportunities of advantage were less likely to arise. But, nevertheless, the plan or purpose which up to November 1922 the taxpayer was pursuing, however inactive may have been that pursuit, includes the disposal of its interests piecemeal, or in any other fashion. It made the agreement of 16th November 1922 in fulfilment of the plan or end it was independently pursuing. Thereafter, its chief purpose was to await and distribute the profits which might arise under that agreement. But, in making the agreement, the taxpayer was, I think, carrying into execution one of the many alternatives of its scheme of profit-making. The patents were not to be its goodwill out of which it was to make its profits, but the taxpayer was to make money by retailing the patents if it could. The fact that in the end it entered into an anomalous agreement by which it surrendered to another company its right of retailing the patents may obscure, but, in my opinion, cannot alter the result.

For these reasons I think the first question in the special case should be answered: No; the second: Yes; and the third: No. I think these answers deprive the fourth question of relevancy.