Case L60
Members:AM Donovan Ch
LC Voumard M
G Thompson M
Tribunal:
No. 2 Board of Review
A.M. Donovan (Chairman); L.C. Voumard and G. Thompson (Members): The question for determination in these references is whether the amount of $8,500 paid to the taxpayer on 28 April 1972, and the further amount of $8,500 paid to him on 28 August 1972, being instalments of a lump sum of $17,000 payable to the taxpayer pursuant to the terms and conditions of a deed of release executed upon the termination of his appointment as consulting engineer to a company G Ltd., constitute assessable income pursuant to sec. 25(1) of the Income Tax Assessment Act 1936.
2. By a certain deed dated 1 July 1970, between G Ltd. (hereinafter called ``the company'') of the first part, the taxpayer of the second part, and P Pty. Ltd. of the third part, the taxpayer covenanted to provide certain design and engineering services to the company.
3. The company carried on the business, inter alia, of exploration for and the mining and marketing of sapphires, diamonds and other precious stones and minerals. The taxpayer was an engineer who specialised in the design and construction of industrial machinery and equipment. P Pty. Ltd. was a company operated and controlled by the taxpayer for the purpose of carrying on the same type of business as aforesaid, and of which the taxpayer was an employee. Pursuant to the terms of the said deed, both the taxpayer and P Pty. Ltd. agreed to provide services to the company upon terms and conditions to some of which reference will now be made.
4. Clause I provided the term of the deed as follows:
``This agreement shall extend for a period of five years from the date hereof subject
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to prior determination as hereinafter provided. The Company may by notice in writing to (the taxpayer) and (P Pty. Ltd.) within three months prior to the expiration of the term of this agreement elect to extend the agreement for a further period of five years in which event this agreement shall thereupon be extended for a further period of five years from the date of expiration of the present term hereof upon the same terms and conditions as herein contained but subject to any amendments which may have been made thereto during the first term of five years and subject also to any increase in the retainer fee payable to (the taxpayer) pursuant to clause 4 hereof.''
5. The services to be provided by the taxpayer and his employer P Pty. Ltd. are set forth in detail in cl. 2. In view of the lengthy and detailed cross-examination of the taxpayer by the representative of the Commissioner and the argument which he submitted to the Board, it is desirable to quote this clause in full.
6. It reads:
``During the term hereof (the taxpayer) and (P Pty. Ltd.) will provide to the company the following services, namely:
(a) The design and manufacture of all machinery plant and equipment of any nature and whether relating to mining of sapphires, diamonds precious stones or other specified minerals agreed upon or otherwise which the Company may require for the purposes of its business.
(b) The supervision of all such designing and manufacturing and advices to the Company on all aspects of its requirements relating to machinery plant and equipment as may be required by the Company from time to time.
(c) The purchase for the Company of all materials components parts and accessories whatsoever required or necessary for the manufacture and maintenance of such machinery plant and equipment PROVIDED THAT (the taxpayer) and (P Pty. Ltd.) shall obtain the prior approval of the Company to all purchases.
(d) The maintenance of the plant machinery and equipment of the Company in efficient running order and condition at all times at the place of operation of the said plant machinery and equipment or as the Company might from time to time designate.
(e) The responsibility to ensure that all machinery plant and equipment is manufactured in a proper and workmanlike manner and is fit for the purpose for which it was manufactured. Experimental machinery excluded.
(f) The provision of all necessary and appropriately trained and skilled labour and assistance for the purpose of carrying out the services hereinbefore mentioned.
(g) Generally the provision of all such services and the carrying out of all such duties as may be required for or incidental to the carrying out of the services hereinbefore mentioned.''
7. Clause 3 made provision for payment for labour and materials, and is not significant for present purposes. Clause 4, dealing with the retainer fee from 1 July 1970, should be reproduced verbatim. It reads:
``During the period of this agreement the Company will pay to (the taxpayer) or if he so directs the Company in writing, to (P Pty. Ltd.), a retainer fee of $7,500.00 per annum payable by equal fortnightly instalments in arrears or in such other manner as may be agreed from time to time between the parties PROVIDED HOWEVER that such retainer fee may at the Company's discretion be increased from time to time but shall not be reduced.''
8. Clause 5 relates to travelling and accommodation expenses, and need not be quoted. Clause 6 has reference to the important subject of ownership of and secrecy of designs and manufacturing processes and the like, and for the sake of accuracy and completeness ought to be set forth at length.
9. It reads:
``(a) All designs of machinery plant or equipment or component parts thereof and all manufacturing industrial or other processes of any nature whatsoever which may be devised created or made by (the
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taxpayer) or (P Pty. Ltd.) for or on behalf of the Company pursuant to this agreement shall forthwith be and become the property of the Company and (the taxpayer) and (P Pty. Ltd.) will take all such steps and execute all such documents and do all such things as may be necessary convenient or desirable or as may be required by the Company from time to time in order to procure the Company to be registered as the holder or proprietor of any patent or design of any such plant machinery or equipment or any component part thereof or any such manufacturing industrial or other processes according to the law of the Commonwealth of Australia or of any State thereof or according to the law of any other country or place.(b) Neither (the taxpayer) nor (P Pty. Ltd.) shall either during the period of this agreement or thereafter except in the proper course of their duties hereunder divulge to any person whomsoever and shall use their best endeavours to prevent the publication or disclosure of any trade secret or manufacturing industrial or other process or any such designs as aforesaid or any information concerning the business or finances of the Company or any of its dealings transactions or affairs which may come to their knowledge during the period of this agreement or any extensions or renewals thereof.''
10. Clause 7 prescribes certain important restrictive provisions governing the activities of the taxpayer and P Pty. Ltd. during the currency of the agreement between the parties. It reads:
``During the period of this agreement and any extensions or renewals thereof neither (the taxpayer) nor (P Pty. Ltd.) shall without the prior approval of the company in writing carry out for any other Company firm or person any work relating to the design or manufacture of any plant machinery or equipment for or in relation to the mining of sapphires diamonds or other precious stones or other minerals specified and agreed but save as aforesaid (the taxpayer) and (P Pty. Ltd.) shall be at liberty to carry out other work and activities for other persons firms or companies during the term of this agreement.''
11. Clause 8 may be noticed briefly since it provides for the giving of notice in writing by the parties to the other or others mutatis mutandis in the case of breach of default of the provisions of the deed.
12. Finally, cl. 9 is of potentially greater importance and provides as follows:
``It is acknowledged and agreed that the relationship of (the taxpayer) and (P Pty. Ltd.) to the Company is that of independent contractors and that it is not intended to create the relationship of employer and employee or principal and agent between the parties. The Company shall accordingly be under no obligation to deduct tax instalments from the retainer fee or any other monies payable hereunder nor to effect workers compensation or other insurance in respect of (the taxpayer) or any other person.''
13. In an amended assessment for the year ended 30 June 1972, and an original assessment for the year ended 30 June 1973, the Commissioner treated the two amounts referred to in para. I as assessable income of the taxpayer. The relevant adjustment sheets accompanying the notices of assessment stated: ``Consideration received from (G Ltd.) included in your assessable income, being considered a receipt of a revenue nature''.
14. The taxpayer objected to the said amended assessment and original assessment for each of the said years upon the same grounds. In his grounds of objection for both years the taxpayer contended, inter alia, that:
- (a) The agreement with G Ltd. constituted the whole of his business and he did not otherwise receive any retainers or consulting fees from any other source.
- (b) The amount ($8,500) in each year) received from G Ltd. was by way of compensation for the cancellation of his contract with that company.
- (c) The amount of compensation was not a receipt of a revenue nature which was incidental to his business operations. The compensation was in consideration for
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the cancellation of a contract which went to the root of his whole business and was therefore a receipt of capital.
15. The Commissioner disallowed both the taxpayer's objections and, as a consequence, the issues come before this Board for decision. The basic question is whether the payments of the two instalments of the agreed lump sum of $17,000 constitute capital or income in the hands of the taxpayer.
16. We now attempt a brief purview of the business activities of the taxpayer. During the period commencing some 12 years prior to 1 July 1970, the date of the said deed, the taxpayer designed printing machinery. In 1958 he formed a company, which changed its name to P Pty. Ltd. in 1964. The taxpayer and his wife were the shareholders, and he was managing director. The company was involved solely in the design and manufacture of printing machinery, and the taxpayer himself was an employee of this company.
17. The association between the taxpayer and G Ltd. began when he was asked by one of its directors to design alluvial mining machinery for use in exploration and sapphire mining. This was the taxpayer's first foray into the designing of mining machinery and equipment. He began providing these services for G Ltd. in ``late 1969'', and, as we have seen, the deed regulating the legal relations between the taxpayer and P Pty. Ltd., with G Ltd., was executed on 1 July 1970. However, this difference in dates does not assume any significance in these references.
18. The circumstances surrounding the commencement of work by the taxpayer are explained in the taxpayer's answer to a question put to him by his counsel as follows:
``You said that the first work you did for (G Ltd.) was in late 1969. Can you remember the month? - It was around November.
The formal contract is dated 1 July 1970. What was the arrangement prior to then, if any? - At the beginning when I agreed to take over the design of this kind of mining machinery I was taken up to the area to look at the machines they were using and I decided that yes, I could do the design. Of course the design took months of work. We already established that it will be a contract; I actually required a retaining fee for my work but at the beginning there was so much work involved and later I was also told to produce not only design it, I had to commission the machinery out to various places and my demand for the contract elapsed while we were going ahead to produce the prototype of the machine which had to be placed into position in the area to produce the first samples of sapphires. Hence the contract took quite a few months to be produced and signed. In the meantime as the commissioned work has not come in, in the required time, the promised delivery time, I was asked to get the employees of (P Pty. Ltd.) involved with the project and we would draw machinery from several firms to be able to finish it up and produce it. We produced our first prototype approximately May which went into operation.
May 1970? - Yes.''
19. The nature of the work done by the taxpayer in connection with mining, and the difference between his former business activities and those which he undertook with the said G Ltd. are appositely illustrated in the following citation from the transcript, namely:
``You did the design work where? - At home very late at night and mornings.
So this was quite different? - Entirely different from my previous experience but my designing ability I thought - and I still believe it does - would not just go to printing machines, so I designed successfully that mining machinery, an entirely different type. (G Ltd.) wanted to patent it and protect it in the area where several mining companies or individual miners worked, they wanted to copy them and especially the company which produced alluvial mining machinery in that area wanted to copy it.
So it was a significant advance in the design of machinery in relation to -? - It was not only me but people said it was a unique design free of the danger of sudden floods or damage by floods which occurred causing a great deal of damage
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to the past machinery which they used. It was a quite successful machine - not one machine but several machines put together to the requirements to do the mining process.Was the design work as a consulting engineer in your own right? - Yes.''
20. From the evidence it appears clearly enough that the subject matter of the aforesaid deed embodied a separate and different venture by the taxpayer into the designing and manufacturing of mining machinery and equipment. This he had not done before. He also envisaged that, despite the terms of the deed and the events which did actually happen, he could look forward to the association continuing ``for perhaps another 20 years''. In this context it is well to recall that the company approached the taxpayer to cancel the contract the subject of the deed, for the reason that the company now had its own ``technical people''. This came as a shock to the taxpayer since he had formed another particular company to manufacture the mining machinery, and he had in his mind ``to follow on and divide into different other fields, to carry on for larger operations''. He had ``sketches and drawings and literature gathered''.
21. For various reasons which are readily discernible from the evidence in chief, in cross-examination and from the minutes of meetings of directors of G Ltd., it appears plain that the initiative to part company with the taxpayer came from the company, and that the board of the company had determined to ``get rid of'' the taxpayer and consequently to cause the said deed to be extinguished: vide, inter alia, Exhibit 3, Minutes of Meetings of Directors of the company - 6 April 1971, p. 2, para. 7; 11 May 1971, p. 2, para. 2, and 20 October 1971, p. 2, para. 1. The Board therefore finds as a fact that the company sought to and did successfully bring to a final end the existing agreement with the taxpayer and P Pty. Ltd., which in turn destroyed the existing income earning structure of the taxpayer in relation to his status as consulting engineer in the design and manufacture of mining equipment.
22. Pursuant to the initiative of the company to seek to annul the said deed of 1 July, and after some negotiations, the matter culminated in the execution of a deed of release dated 28 April 1972 (Exhibit C). This was a tripartite agreement under seal duly executed by the said G Ltd. (``the company'') of the first part; the taxpayer in his personal capacity, described as Engineer and Company Director, of the second part; and P Pty. Ltd. of the third part. The avowed purpose of this deed of release was to achieve a final and binding solution to the problems which were thought to have arisen, and to reach a final settlement between the company, and the taxpayer and his employer company, who were parties to the original deed of 1 July 1970.
23. In order to expose the complete picture, it will be as well to reproduce the recitals of the deed at length. They read as follows:
``WHEREAS
(i) On the 1st day of July, One thousand nine hundred and seventy the Company, (the taxpayer) and (P Pty. Ltd.) entered into a deed relating to certain services to be provided to the Company by (the taxpayer) and (P Pty. Ltd.) (hereinafter called `the said deed')
(ii) The services to be provided by (the taxpayer) and (P Pty. Ltd.) included inter alia -
- (a) the design and manufacture of certain mining machinery, plant and equipment;
- (b) the supervision of all such designing and manufacturing and the rendering of advice to the Company on all aspects of its requirements;
- (c) the purchase for the Company of any materials, components, parts and accessories whatsoever required for the manufacturing and maintenance of such machinery, plant and equipment;
- (d) the maintenance of such plant, machinery and equipment of the Company in efficient running order and condition;
(iii) The Company agreed to pay (the taxpayer) or if he so directed, (P Pty. Ltd.), certain amounts as provided in the said deed;
(iv) In addition to the payments for such plant, equipment and services, the
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Company agreed to pay (the taxpayer) or, if he so directed in writing, (P Pty. Ltd.), a retainer fee of SEVEN THOUSAND FIVE HUNDRED DOLLARS ($7,500.00) per annum payable by equal fortnightly instalments or in such other manner as may be agreed from time to time between the parties;(v) The Company, (the taxpayer) and (P Pty. Ltd.) respectively entered into certain other obligations under the said deed;
(vi) Certain services were rendered by (P Pty. Ltd.) and by (the taxpayer) during the year ended 30th June, 1971;
(vii) An amount of SEVEN THOUSAND FIVE HUNDRED DOLLARS ($7,500.00) being the retainer for the financial year ended 30th June, 1971 was paid to (the taxpayer) during the said financial year and machines invoiced to the Company pursuant to the said deed during the said financial year were duly paid for;
(viii) Certain disputes have arisen between the Company and (P Pty. Ltd.) and (the taxpayer) relating to the said deed and the rights and obligations of the parties thereunder;
(ix) The Company thought it more advantageous to obtain the services previously rendered by (the taxpayer) and (P Pty. Ltd.) from other sources;
(x) The Company, (the taxpayer) and (P Pty. Ltd.) have agreed to settle the abovementioned matters upon the terms and conditions hereinafter appearing:''
24. The operative clauses of the deed of release then read as follows: (emphasis added)
``1. The said deed shall be and is hereby determined and such determination shall be deemed to have taken effect as from the first day of July, 1971.
2. By way of final settlement of the matters that have arisen between the parties hereto, the Company agrees to pay to (the taxpayer) a lump sum of $17,000.00 in two equal instalments of $8,500.00 each, the first of such instalments by the 28th day of April, 1972 and the second of such instalments by the 28th day of August, 1972.
3. In consideration of the hereinbefore referred payments the Company shall be entitled to all records and other material held by (the taxpayer) and (P Pty. Ltd.) relating to the work carried on by them respectively under the said Deed and to any information relating thereto that may be reasonably required by the Company.
4. Subject to the foregoing the Company, (the taxpayer) and (P Pty. Ltd.) mutually agree to release each other from any claims, rights, benefits, obligations and liabilities whatsoever accruing or arising or to accrue or arise under the said deed.''
25. The representative of the Commissioner cross-examined the taxpayer assiduously and at length relative to his other commercial or business ventures. The evidence discloses that the taxpayer, both personally and as an employee of corporate entities, had engaged in other business pursuits. But it is equally plain on the evidence that the present case was, up to the relevant time, the only occasion upon which the taxpayer engaged in the pursuit of consulting engineer concerning the design and manufacture of mining machinery and equipment. We also find as a fact that this was but a single instance of such business activity on the part of the taxpayer, and that his contract was terminated at the behest of the company.
26. The taxpayer was shocked and disappointed at the actions of the company to bring his contract to finality, and we find that, understanding the inevitable, the taxpayer, after negotiations, agreed upon the lump sum of $17,000 in ``final settlement of the matters that have arisen between the parties hereto''. In consideration of the payment to the taxpayer of the said lump sum in instalments of $8,500 each on 28 April 1972, and 28 August 1972 respectively, he and P Pty. Ltd. agreed to and did release the company from its obligations and liabilities under the said deed. The said deed also effectuated a reciprocal release of liability between the three said parties, the company, the taxpayer and P Pty. Ltd., respectively.
27. Having found those facts, on the evidence, the specific question of law for our decision is whether the two said instalments
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paid to the taxpayer represented assessable income or capital in his hands.28. The first authority cited by learned counsel for the taxpayer appears to us to be apposite to the issue raised in these references. Counsel relied upon
Bennett v. F.C. of T. (1947) 75 C.L.R. 480, which was a case where the managing director of a company in whom absolute control was vested was paid a lump sum in instalments for the release of such control.
29. The ratio decidendi of that decision may be found in the following passage from the judgment of Williams J. in the High Court (at 75 C.L.R. 485) where his Honour said:
``But the substance of the matter is that the sum of £12,255 was a lump sum payable by instalments as compensation for the cancellation of the indenture of 24th August 1935, and such payments are of a capital nature unless the compensation is some form of equivalent for the loss of the income which the taxpayer would have earned under the agreement but for its cancellation, as in the case of the payments in
Commr. of Taxes (Vict.) v. Phillips (1936) 55 C.L.R. 144. The payments in the present case are simply payments made as part of the consideration for the appellant agreeing to cancel one agreement under which he had certain rights and entering into a fresh agreement under which he had different rights. Adapting the words of Lord Macmillan in
Van Den Berghs Ltd. v. Clark (1935) A.C. 443, at p. 443, the congeries of the rights which the appellant enjoyed under the agreement and which for a price he surrendered was a capital asset. The payments are in the same category as those in
Du Cross v. Ryall (1935) 19 Tax Cas. 444;
Dewhurst v. Hunter (1932) 146 L.T. 510 and the payment in
Carter v. Wadman (1946) 176 L.T. 206 so far as attributable to the cancellation of the agreement there in question: cf.
Asher v. London Film Productions Ltd. (1944) 1 K.B. 133, at pp. 139, 140.''
30. Continuing with his submissions, counsel said:
``If I could turn to the proposition about an ordinary trading contract I submit that this is not an ordinary trading contract, that the evidence shows that as far as (the taxpayer) is concerned it was a chance circumstance quite unique, the only time he was ever a consultant on his own behalf, and for that matter the only time he was involved in the mining area, I submit that it plainly is not an ordinary trading contract and in any event I submit that there is no mere cancellation. That is, this is not a release between a consultant and a client, the deed of release is a tripartite agreement and the parties are (G Ltd.), (the taxpayer) and (P Pty. Ltd.).''
(Emphasis added.)
31. Taxpayer's counsel proceeded to summarise his submissions thus:
``So this is not a case, for example, where a person or a company in the ordinary course of business makes long term rutile contracts, as in Heavy Minerals. That is to say it is not the mere cancellation of an ordinary trading agreement because in the first place it is not an ordinary trading agreement. This was his first and ever venture in business on his own account. Secondly, it is not simply the mere cancellation. This is quite unique. This is a tripartite agreement with each of the three parties releasing each other from any rights and obligations they have. It is not simply a release between a consultant and a client.
It also purports to release all claims in relation to the original deed. Any claims that (P Pty. Ltd.) may have against (the taxpayer) or vice versa. So it purports to release all claims in relation to all of the three parties. In my submission it is not a mere cancellation.''
32. It was also submitted that the parties to the deed sought to achieve a final solution to, and settlement of, all matters between them, and reference was made to
McLaurin v. F.C. of T. (1960-1961) 104 C.L.R. 381 (H.C.). This case involved the settlement of a claim for compensation for damage caused by fire on the appellant's land. The defendant settled the action by payment of a lump sum in full settlement upon the advice of a valuer who had compiled a separate list of particulars of damage. The Full High Court held that the sum did not take the place in the appellant's hands of assessable
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income, so that no part of it could be treated by the respondent as such. The character of a single undissected sum accepted in settlement of a claim for unliquidated damages cannot be affected in the hands of the recipient by a consideration of the uncommunicated reasoning which led the payer to agree to pay it.33. It seems to us that the basic test applicable here is, what is the character of the payment in the hands of the taxpayer? A further authority on this particular aspect of the subject is
Allsop v. F.C. of T. (1965) 113 C.L.R. 341, where the appellant sued to recover sums paid for permit fees wrongly exacted under colour of office pursuant to the State Transport (Co-ordination) Act, which fees had earlier been allowed by the Commissioner of Taxation as deductions from the appellant's assessable income. By deed he released this cause of action as well as other claims for acts done pursuant to that legislation in consideration of the payment to him of an undissected lump sum which was less than the amount sued for. The Commissioner sought to include the lump sum in the appellant's assessable income as a refund of the permit fees allowed as deductions. The Court held that the lump sum was not assessable income in the hands of the appellant as neither the whole nor any part of it could be attributed solely to a refund of the permit fees.
34. Both the above authorities were applied by Board of Review No. 3, as then constituted, in Case B79,
70 ATC 366, at p. 370, where a Member of the Board, after referring in some detail to McLaurin's case (supra), went on to observe:
``Again although a lump sum paid by way of compensation may be calculated partly on future loss of profits or other items of a revenue nature, that lump sum is generally regarded as capital and is not assessable income in the hands of the taxpayer. See Allsop v. F.C. of T. (1965) 113 C.L.R. 341 where it was held that the payment of an undissected lump sum by the transport authorities to the appellant in respect of permit fees allegedly wrongly exacted from him under cover of fees was not assessable income. The Court also held that it could not come within the provisions of sec. 26(j) of the Income Tax Assessment Act.''
35. In final reference to the cross-examination by the representative of the Commissioner, counsel for the taxpayer submitted:
``The sum of the cross-examination of the Commissioner's representative seemed to be along the lines of an economic equivalence argument and Sir Nigel Bowen. I suggest, is very emphatic you just cannot treat it as engineering and forget about the corporate veil of (P Pty. Ltd.). In actual fact he is an employee. He was an employee during the time of this particular contract. He remained an employee. He is still an employee of (P Pty. Ltd.) and that the Commissioner is not entitled to disregard the separate corporate existence of (P Pty. Ltd.).''
36. During the course of the hearing the Commissioner's representative strongly sought, by pointing to the several companies with which the taxpayer was associated, to show by means of an economic equivalence argument that the payments received by the taxpayer were, in effect, the result of commercial activities, and thus bore a business character, and accordingly constituted assessable income. But the company P Pty. Ltd., of which the taxpayer was an employer, was a separate legal entity. We must, therefore, be astute to heed the warning of Bowen C.J. in the Full Federal Court in
The Federal Coke Company Pty. Ltd. v. F.C. of T. 77 ATC 4255 at p. 4263, where his Honour said:
``It is not legitimate to disregard the separateness of different corporate entities or to decide liability to tax upon the basis of the substantial economic or business character of what was done (
Slutzkin v. F.C. of T. 77 ATC 4076 at p. 4079; (1977) 12 A.L.R. 321 at p. 324;
Commr. of I.R. v. Europa Oil (N.Z.) Ltd. 70 ATC 6012 at p. 6018; (1971) A.C. 760 at p. 771; cf.
Littlewood's Mail Order Stores Ltd. v. I.R. Commrs. (1969) 1 W.L.R. 1241 at p. 1255).''
37. The representative of the Commissioner, by way of attempted confession and avoidance, sought to distinguish the principle enunciated in McLaurin's case et al. (supra), and laid emphasis upon cases dealing with the determination of agencies distinct from a sole agency. He further
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argued, in effect, that the subject deed of release did not destroy the taxpayer's income producing structure, since he was associated with other companies (see Exhibit 2), and was not precluded from getting other contracts and from earning further income from like sources in the future. We feel unable to accept these submissions in the present case as leading to the necessary conclusion that the said payments were of a revenue nature. We have also not overlooked other cases cited and arguments put on behalf of the Commissioner.38. In particular, in our opinion, no valid point arises in favour of the Commissioner from the fact that the deed of release executed on 28 April 1972, by cl. 1 thereof purported to take effect from 1 July 1971. The legal effect of such a provision was succinctly explained by the renowned Rowlatt J. in
Waddington v. O'Callaghan (1931) 16 T.C. 187 at pp. 197-198, where his Lordship said:
``When people enter into a deed of partnership and say that they are to be partners as from some date which is prior to the date of the deed, that does not have the effect that they were partners from the beginning of the deed. You cannot alter the past in that way. What it means is that they begin to be partners at the date of the deed, but then they are to take the accounts back to the date that they mention as from which the deed provides that they shall be partners.
There is no sort of doubt at all that that is the only effect which such a deed can have. No deed can alter the past, but of course, it is quite possible that before the deed was executed the partners may in point of fact have been carrying on business in partnership which would give rise to partnership accounts and which would give rise to partnership liabilities and so on; and when the deed is executed and said to relate back to an earlier period, that means that the provisions of the deed as to the partnership rights and partnership accounts shall supersede the rights which have accrued under the partnership which de facto had existed before the date of the deed. All this is perfectly clear and perfectly simple.''
39. On the authority of Allsop v. F.C. of T. (supra) and McLaurin v. F.C. of T. (supra), and upon the particular facts of this case where by there was a tripartite agreement designed to achieve a final settlement between the taxpayer, P Pty. Ltd. and G Ltd., it is our opinion that the two amounts received by the taxpayer bore the character of a capital receipt, and were not properly assessable to tax.
40. The Board therefore allows both the objections of the taxpayer and orders that the amount of $8,500 be deleted from the assessable income of each of the years ended 30 June 1972, and 30 June 1973.
Claims allowed
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