Case M40

AM Donovan Ch

LC Voumard M

No. 2 Board of Review

Judgment date: 7 July 1980.

A.M. Donovan (Chairman) and L.C. Voumard (Member)

The facts with which this reference is concerned were the subject of a ``Statement of Agreed Facts'' (Exhibit B) which, except for the omission of the taxpayer's name and other possible means of identification, read as follows:

``1. Income in year ended 30/6/76 derived from operation as log haulier.

2. On 18/6/73 the taxpayer signed Leasing Agreement with Esanda lease a Mack R 600 truck for period of 36 months at monthly rental of $505 with a residual value of $8,250.

3. Leased vehicle to conduct log hauling operations from that time until approximately end of calendar year 1975.

4. It was the taxpayer's normal practice to lease major items of plant and equipment, and leasing all through Esanda Ltd.

5. In September 1975 the taxpayer wished to replace the unit with a larger vehicle which had a larger loading capacity.

6. The taxpayer sought, and was granted oral approval from an officer of Esanda to dispose of the leased vehicle.

7. The taxpayer obtained approval on the understanding that he was to act as agent for Esanda Ltd., and that he would account to Esanda Ltd., for the proceeds.

8. While the unit remained unsold the rent payments continued to be debited to his current account at the A.N.Z....

9. A replacement vehicle, a V8 Mack Thermodyne and Log Jinker, was obtained pursuant to a lease between the

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taxpayer and Esanda Ltd. dated 29/9/75 for a period of 48 months at a monthly rental of $1,256.80 and a residual value of $7,000.

10. The taxpayer did not succeed in disposing of the vehicle in (his home State) and could not do so without incurring a loss.

11. The taxpayer was advised by Esanda Ltd. in or about September 1975, at the time approval to dispose of the vehicle was obtained, for (sic.) the payment figure required by Esanda.

12. The taxpayer placed the vehicle with a Sydney dealer, and eventually sold in March 1976 to a third party.

13. The taxpayer incurred expenses of cleaning, repair and transport of the vehicle, of telephone charges and commission and these are reflected in the revenue statement.

14. The taxpayer sent the vehicle to Sydney in the expectation that he would not incur a loss.

15. The net proceeds of sale were $18,838 and were received on the 1st April 1976 at the taxpayer's account at the A.N.Z. Bank...

16. The proceeds went to the taxpayer's credit because he omitted to advise Mr. W (the Sydney dealer by or through whom the vehicle was sold) that the vehicle was being sold on behalf of Esanda Ltd.

17. On the 5/4/76 the sum of $10,268 was debited to the account, and such sum was transferred to Esanda Ltd. which sum represented the payout figure at that date.

18. The taxpayer was unaware of the debit until he received a copy of the debit note from the Bank, but he accepted the authority of the Bank Manager to make the deduction as agent for Esanda Ltd.

19. The taxpayer was permitted to retain the surplus of $8,570, and he had assumed that this would be the situation.

20. Where a lessee is granted approval to sell a leased vehicle on behalf of Esanda Ltd., it is normal practice to allow any excess to be retained by the lessee.''

Neither side called any evidence.

2. In his return of income for the year ended 30 June 1976, the taxpayer disclosed the receipt of the surplus of $8,570 (that being the item now in dispute) as follows. To the ``Net Trading Profit'' revealed in a revenue statement was added an item, ``Profit on disposal of No. 1 Unit from lease $8,570'' to give a figure of ``Net Profit for Year''. In the balance sheet, under the heading ``Proprietorship'', the amount of $8,570 was disclosed as a ``capital gain on sale of vehicle''. As far as appears from the papers before the Board, no further information concerning the item now in dispute was given in the return. It must be said at once that when these statements in the return are compared with the more detailed and rather different version of events set out in Exhibit B, it is apparent that there was not made to the Commissioner the full and true disclosure of which 170(2) of the Income Tax Assessment Act speaks.

3. The Commissioner issued an assessment dated 22 March 1977. Accompanying it was an adjustment sheet which, ignoring a minor item not disputed by the taxpayer, increased the taxable income by $8,570. The explanation given was: ``Add Profit on disposal of No. 1 Unit from lease (sec. 26AAA)... + $8,570''. The taxpayer's agents lodged an objection claiming that sec. 26AAA did not apply, and that neither sec. 25(1), sec. 26(a), sec. 26(e) nor any other section applied to render the disputed sum assessable. Some further information was also given of the transaction giving rise to the disputed sum. After further correspondence, the objection was disallowed by notice dated 27 October 1977, but in an attached letter the Commissioner repeated his earlier assertion that the $8,570 was assessable by virtue of sec. 26AAA. After referring to the ``assessable profit of $8,570 from sale of'' the unit, his letter went on: ``It is considered, that as you had a possessory right to the above-mentioned unit and as this unit was sold by yourself, the surplus of $8,570 credited to you, has been correctly included as assessable income under sec. 26AAA of the Income Tax Assessment Act.'' But by the time the Commissioner came to furnish the Board with the statement required by reg. 35(1), he had abandoned sec. 26AAA - or, at least, he made no mention of it - and apparently for the first time sought to defend the assessment under sec. 25(1). At the hearing his representative presented no

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argument on sec. 26AAA, conceding very properly that that section had no application. He defended the assessment under sec. 25(1), and no other provision.

4. The case for the taxpayer involved two separate submissions. First, Mr. Mollard argued that in the events which had happened the Commissioner was not at liberty to change the basis of his assessment from sec. 26AAA to sec. 25(1); if this were to be upheld, then the factual inability of sec. 26AAA to apply to the present circumstances would, without more, require the objection to be upheld. The second submission was that in any event the sum of $8,570 was not ``income'', and accordingly should be excised from the taxpayer's assessable income. It is convenient to deal with this latter submission first.

5. For the proposition that the sum was not income according to ordinary concepts, reliance was placed on the decision of the Full Court of the High Court in Hamblin's case, 74 ATC 4310. But because of the very different factual situation, and the very different issues involved there, we do not think that this decision assists the present taxpayer. There, in relation to the leased equipment and the equipment under hire purchase, the Court was concerned with a number of sec. 26(a) questions, and in our opinion did not consider, and did not have to consider, a situation such as that before us. Likewise, the Board decision relied on by the taxpayer (Case F73,
74 ATC 431) was concerned with a different situation. There the taxpayer purchased then sold the item of leased equipment and, following Hamblin, it was held that the profit was not assessable income under sec. 25(1) or sec. 26(a). But that provides no assistance in considering the assessability of an amount paid by the lessor to the lessee following the former's sale (through the agency of the lessee) of the leased item.

6. It was also submitted for the taxpayer that the amount of $8,570 was not income in ordinary concepts because he was not carrying on a business of buying and selling equipment, and because the payment made to him was of a voluntary and ex gratia nature. But, as the Commissioner's representative pointed out, the taxpayer did have a history of leasing equipment, used in his business, from Esanda (see para. 4 of the Statement of Agreed Facts), and the taxpayer had incurred the expenses described in para. 13 of that Statement, in the main, after he had ceased to operate the unit, and in the course of his efforts to sell it. As in Case C56,
71 ATC 247, these expenses were said to lend weight to the submission that the amount came to the taxpayer as an ordinary incident of his business, and as such represented assessable income. Some further support for this view was claimed from that part of the Hamblin decision which treated as income according to ordinary concepts, and assessable by virtue of sec. 25(1), the $5,000 ``no-trade discount'' that the machinery supplier credited to the construction company in consideration of the latter inducing Transfield to acquire extra equipment. And as to the voluntary nature of the payment, it should be remembered that a payment does not necessarily lack the character of income simply because of its voluntary nature (see the judgments of Fullagar and Kitto JJ. in
The Squatting Investment Co. Ltd. v. F.C. of T. (1953) 86 C.L.R. 570).

7. On the whole, and looking only at the merits of the matter, we consider that the sum of $8,570 is assessable income pursuant to sec. 25(1). Some assistance can be obtained from the decision of the High Court in
H.R. Sinclair & Son Pty. Ltd. v. F.C. of T. (1966) 114 C.L.R. 537, in that it may be permissible to treat the amount paid to the present taxpayer by Esanda as in a sense a refund of part of the rental paid by him. In such a case it would take on a revenue character. Alternatively, the payment can be regarded as something the taxpayer received because of his successful efforts, as agent for Esanda, in disposing of the unit for a price in excess of the payout figure, knowing that the practice in such a case was to allow the lessee to retain any surplus (see Statement of Agreed Facts, para. 20). In either event, the amount seems to us to have come to the taxpayer in the character of a business receipt and, therefore, is properly to be regarded as assessable income pursuant to sec. 25(1).

8. If the matter rested there, it would be enough for the assessment before the Board to be confirmed. But that assessment was based on sec. 26AAA, and to that extent must be regarded as incorrect, because in no

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relevant sense can the words ``profit arising from the sale of the property'' (an essential ingredient of sec. 26AAA) be used to describe the sum of $8,570 that is in dispute. The Board is thus faced with a most unusual situation, in that on the merits of the matter the assessment should be confirmed, but that assessment is itself not correct. In purely arithmetical terms it may have stated what happens to be the correct amount of the taxable income, and may have correctly calculated the amount of tax payable on that amount of taxable income. But by purporting to include the amount of $8,570 in the assessable income as a sec. 26AAA profit it has fallen into error, and the Board is understandably reluctant to confirm an assessment that it believes to be erroneous. In the result, then, we feel the proper course for us to adopt is to allow the taxpayer's objection in full, in so far as it relates to the inclusion in the taxable income of a profit under sec. 26AAA, leaving it to the Commissioner to make such further adjustments, if any, to the assessment as he may consider appropriate in the light of the true facts of the matter and the requirments of sec. 170 of the Act.

9. We are conscious of the fact that these reasons do not consider the argument put on behalf of the taxpayer that the Commissioner was not at liberty to change the basis of his assessment from sec. 26AAA to sec. 25(1). But on the view expressed in para. 8 above, we think it unnecessary to do so.

Claim allowed

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