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Marbutt Gunnerson Industries Pty. Ltd. v. Federal Commissioner of Taxation.

Judges:
McGarvie J

Court:
Supreme Court of Victoria

Judgment date: Judgment handed down 17 August 1981.

McGarvie J.

A central question of law is common to appeals by two different taxpayers which were separately heard by me. In each appeal objections to assessments of taxable income and tax payable have been treated as appeals and are heard under sec. 187 and 197 of the Income Tax Assessment Act 1936.

After I reserved my decision on 23 July, in the appeal by Marbutt Gunnerson Industries Pty. Ltd. I learnt that the second appeal by Monaro Sawmills Pty. Ltd. would raise the same central question. I reserved my decision on 11 August in the second appeal. Mr. Noel Webb appeared for the appellant in the appeal first heard and Mr. Shaw Q.C. and Mr. Webb appeared for the appellant in the later hearing. Mr. Burnside appeared for the respondent in both appeals. The same construction of sec. 124J was advanced for the appellant in each of the appeals. In both appeals the respondent contended for another construction of the section. While there were some differences in the emphasis and content of the respective arguments upon construction in the two appeals, there was substantial similarity and no inconsistency. It is convenient now to deal first with the issue of construction and then to apply the section to the different facts of the two appeals.

It is enough at this stage to state briefly some facts which are common to both appeals. Each of the appellants purchased a sawmilling business. Each of the vendors had been granted by the Forests Commission (``the Commission'') a licence under sec. 52 of the Forests Act 1958 to cut and take away logs from a reserved forest. For many years it has been the practice of the Commission upon the sale of a sawmilling business to decline to transfer to the purchaser the vendor's licence but instead to terminate the licence and grant a new licence on the same terms to the purchaser. It is also the long-standing practice of the Commission that so long as the holder of a licence to take timber in a particular area maintains satisfactory standards, no other licence to take timber in that area will be granted to anyone else and further licences will be granted successively to the holder while the timber lasts. A licence cannot exceed a term of three years.

In each of the appeals a small portion of the purchased price paid by the taxpayer was attributable to the sawmill and other property purchased but the major portion was paid in respect of the licence. In each case the Commission at the request of the vendor and purchaser terminated the vendor's licence and granted another in the same terms to the purchaser. The Commission has since granted further licences to each of the taxpayers.

The Construction of the Section

Section 124J provides:

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``Where -

  • (a) a taxpayer has acquired -
    • (i) land carrying standing timber and part of the price paid for the land is attributable to that timber; or
    • (ii) a right to fell standing timber; and
  • (b) during the year of income, the whole or a part of the timber is felled -
    • (i) for sale, or for use in manufacture, by the taxpayer for the purpose of producing assessable income; or
    • (ii) in pursuance of a right to fell timber granted by the taxpayer to another person in consideration of payments to be made to the taxpayer as or by way of royalty,

so much of that part of the price so paid by the taxpayer to acquire the land, or so much of the amount paid by him to acquire the right, as the case may be, as is attributable to the timber felled during the year shall be an allowable deduction.''

Each of the taxpayers claims an allowable deduction of so much of the amount paid to the vendor as is attributable to the timber felled during each relevant year of income for use in the manufacture of sawn timber. The primary issue is whether any of the amount paid by the taxpayer to his vendor was paid to acquire the right to fell standing timber.

The arguments as to the proper construction of sec. 124J have to be considered on the background of the decision by Jenkinson J. in
Victree Forests Pty. Ltd. v. F.C. of T. 77 ATC 4236 upon the meaning of the section. Rival arguments were put to me as to the meaning of the words of the section and as to whether I should follow the decision of Jenkinson J.

In the Victree case it was argued for the Commissioner that only an amount paid as consideration for the right acquired could be regarded as an ``amount paid... to acquire the right''. For the taxpayer it was submitted in the case that an amount fell within those words if it was paid as consideration for some act or forbearance which would enable the right to be acquired. According to the submission, that would be satisfied, if, without that act or forbearance, the acquisition of the right would in a practical sense be impossible or commercially unrealistic to achieve. His Honour rejected the taxpayer's submission and did not unconditionally accept the Commissioner's argument. His Honour stated his conclusion in these terms (at ATC p. 4243):

``If the words of the section do not require that the amount paid should have been paid as the whole or part of the consideration for the right acquired, as to which I express no opinion, they do in my opinion require, at the least, that the amount paid should have been paid in consideration of something without which acquisition of the right in fact acquired would have involved breach of the law, civil or criminal, or paid in satisfaction of a statutory exaction which precludes acquisition of the right except upon compliance with its requirements.''

In each appeal the taxpayer has by the initial and succeeding licences granted to it by the Commission, acquired rights to fell standing timber. Was any part of the amount paid by the taxpayer to his vendor, paid to acquire all or any of those rights?

For the appellants it was argued that in both its ordinary and its strictly grammatical meaning the expression ``so much of the amount paid by him to acquire the right'' refers to an amount paid in order to acquire the right or for the purpose of acquiring the right. It was contended that the section itself indicated that the words were used with that meaning. The reference to the price paid, in the case of land, and to the amount paid, in the case of a right, was said to emphasise that, in the case of a right, the payment was not confined to one made in consideration of and exchange for what was acquired. It was submitted that the form taken by the predecessors of sec. 124J confirmed that view. I think I am justified in looking at the earlier sections because of ambiguity in the words of the present section. See:
The King v. Metal Trades Employers Association & Ors.; Ex parte Amalgamated Engineering Union, Australian Section (1951) 82 C.L.R. 208 at p. 263 per Kitto J. Before 1956 the Act contained these sections:

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``69. Where the taxpayer has acquired land carrying standing timber for the purpose of felling that timber for sale and part of the price paid for the land is attributable to that timber, so much of that part as is attributable to the timber felled in the year of income shall be an allowable deduction.

70. So much of the amount paid for a right to fell timber for sale as is attributable to the timber felled during the year of income shall be an allowable deduction.''

The submission was that the change from the words ``amount paid for a right'' to the words ``amount paid... to acquire the right'' was significant. As was pointed out for the respondent, that submission loses weight from the fact that a similar change was made in the case of land.

It was further submitted for the appellants that, before the ordinary grammatical meaning is to be rejected there must be good justification for concluding that that meaning does not convey the legislative intention. It was put that Jenkinson J. had rejected that meaning only because of the consequences of adopting it, which his Honour illustrated with two examples. Criticism was made of the two examples and it was contended that the consequences of adopting the ordinary and grammatical meaning did not justify a departure from it. It was also submitted for the appellants that there was nothing in the section or the rest of the Act which pointed to the section having a meaning which fell between the respective constructions which the parties had advanced in the Victree case. The submission was that while there were indications pointing to the words as referring to a payment in consideration of and exchange for a right, or to a payment made for the purpose of acquiring a right, there was no indication that the words referred to a payment necessary to avoid breach of the civil or criminal law or necessary under statute.

It was put for the appellants that the approach of looking at the overall transaction, rather than at separate parts of it, exemplified in
W.T. Ramsay Ltd. v. I.R. Commrs. (1981) 1 All E.R. 865; 2 W.L.R. 449 supported the wider construction of the section.

In both appeals evidence indicated that in New South Wales the Forestry Commission followed the practice of transferring similar licences from vendor to purchaser. In a transaction of the same commercial substance, a taxpayer making a purchase in New South Wales, having paid money to the vendor in consideration of and exchange for the licence is entitled to an allowable deduction, but the Victree case is said to preclude his counterpart in Victoria from the entitlement. For the appellants it was argued that the consequence raised doubts as to the correctness of the construction adopted in that case.

It was stressed for the appellants and not questioned by the respondent that the transactions the subject of these appeals were entered into at arms length, for good commercial reasons and did not involve any scheme of tax avoidance.

For the respondent it was argued that the decision in the Victree case was correct for the reasons there given by the learned judge. The argument for the Commissioner stressed that sec. 124J provided that a payment which on ordinary principles would be regarded as a capital expenditure should be an allowable deduction. It was put that the section should not be construed so as to allow it to be used in cynical tax avoidance schemes. In support of the contention that the construction for which the appellants contended, would produce undesirable results the examples mentioned by Jenkinson J. were relied on and other examples were put forward. It was submitted that the appellants' construction would mean that if the Commission required a licensee to own a sawmill the capital cost of the mill would be an allowable deduction under the section: if the Commission made it a condition precedent to the grant of a licence that an applicant pay for the planting of 5000 ha of forest, the amount so paid would be an allowable deduction. It was said that Parliament was not to be regarded as intending that result.

It seems to me that each of the three constructions considered by Jenkinson J. is one which is fairly open on the words of the section. There will be practical difficulties in the operation of the section whichever construction is adopted.

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If the question were free of authority, I would prefer the construction for which the appellants contend. That seems to me to be the natural meaning. The difficulties which would follow from the adoption of that construction are to be balanced against the inconsistent operation of the section upon the other constructions, as between cases of similar commercial substance which take different legal forms. The operation of the appellants' construction would often involve considerations of degree and the problem of more than one purpose, and be difficult to apply. It is common for courts to have to determine questions of degree (
Sutherland Shire Council v. Finch (1970) 123 C.L.R. 657 at p. 666) and questions of purpose. Cases under sec. 26(a) of the Income Tax Assessment Act provide examples of determinations of the latter question. The decision as to which construction is to be preferred is one on which judicial minds may well disagree.

There was argument before me as to whether, if I preferred a construction different from that adopted in the Victree case I should nevertheless follow the decision in that case.

In my opinion, as a general rule with this Federal Act, it is highly desirable where a single judge has placed a construction on particular words that another single judge should adopt that construction unless he is convinced that it is plainly untenable. I consider, with respect, that the approach of Wickham J. in
Leary v. F.C. of T. 80 ATC 4012 is correct. His Honour had to consider a section of the Income Tax Assessment Act which had been construed by another judge of his court. Wickham J. said (at ATC p. 4015):

``I am not bound by this view and if I thought it plainly untenable I would not follow it. But although I doubt whether I would have reached the same conclusion myself, I think that in general a Judge of the same Court or of a Court of coordinate jurisdiction should apply persuasive authority unless he is convinced that it is worng.''

The Act is one affecting numerous decisions made every day by taxpayers, their professional advisers, and the Commissioner and his officers. The legal system would not serve the community well if it commonly faced those decision makers with competing lines of authority flowing from the differing preferences of single judges for various tenable constructions. The exception is the decision which is plainly untenable. A judge who decides that a decision of another judge is plainly untenable is in effect affirming his confidence that if he departs from the decision other single judges will follow him rather than the first decision. As Mr. Shaw remarked during argument, such an approach presents difficulties if the second judge needs must say with Sir George Jessel ``I may be wrong, I sometimes am, but I never doubt''. It is still a good working approach. Rights of appeal from the decisions of single judges under the Act are commonly exercised. Usually differences of judicial opinion on construction, at the single judge levels are best resolved by the decision of the Federal Court or High Court on appeals which binds all single judges. Compare:
Viro v. R. (1978) 141 C.L.R. 88 at p. 129 per Stephen J.

In comparable situations there is much support for an approach leading to uniformity between judges or courts at the same judicial level throughout Australia. See:
Marshall v. Watts (1953) Tas. S.R. 1 at pp. 14-16;
Camden Park Estate Pty. Ltd. v. O'Toole (1969) 1 N.S.W.L.R. 784 at p. 785;
R. v. Jackson (1972) 20 F.L.R. 110 at pp. 119-122;
R. v. Drysdale (1978) 1 N.S.W.L.R. 704 at p. 708;
Zibillari v. R. (1980) 31 A.L.R. 693 at p. 695 and pp. 703-704.

I do not consider that the fact that the construction adopted in the Victree case would lead to timber millers in New South Wales receiving allowable deductions which could not in practice be denied to Victorian timber millers, provides sufficient justification for declining to follow that case. Nor do I consider that the new sec. 15AA of the Acts Interpretation Act 1901 provides such a justification. The approach adopted by Jenkinson J. was in accordance with the approach which the section is designed to enjoin.

I regard the construction of the section which was adopted by Jenkinson J. as one that was clearly open and I follow it.

It was not necessary for his Honour in the Victree case to make a final selection between

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the construction that the section covered only a payment in consideration of and exchange for a right to fell standing timber and the construction that it also covered a payment made in the course of acquiring the right and necessary to avoid breach of the civil or criminal law or necessary under statute. I prefer the construction that the section covers both types of payment. That construction receives more support from the words of the section than does the more limited construction.

In each appeal the parties asked me to determine the appeals in principle leaving them then to agree, if necessary, on the actual figures, with a right to refer to me for determination any figures on which they did not agree.

I will now consider the separate appeals.

The Appeal by Marbutt Gunnerson Industries Pty. Ltd.

The appeal relates to the financial years ended 1973 to 1976, in each of which the taxpayer felled timber under licence from the Commission.

By a written agreement dated 1 February 1973 J.H. Ryan & Sons Pty. Ltd. (``Ryans'') sold to the taxpayer a timber mill business carried on at Mansfield. Ryans had been granted by the Commission under sec. 52(1)(a)(iv) of the Forests Act 1958 a licence to cut and take away logs for sawmilling and veneer production purposes from specified areas of the State Forest in the Mansfield district. The duration of the licence was from 1 October 1970 to 30 September 1973. Ryans also had an agreement with the Commission dated 14 November 1972 which dealt mainly with the times and manner of payment of royalties for timber taken.

Under the agreement between them of 1 February 1973, Ryans sold to the taxpayer for $160,000 the timber mill and other assets of its timber milling business and also its right, title, interest and benefit in its licence, L1004. The agreement was conditional on the Commission consenting to the transfer of the licence ``or the grant by the Forests Commission to the purchaser of a new or substitute Log Licence and allocation on the same or not less favourable terms'' (cl. 7(d)). If the condition was not fulfilled the agreement was to be at an end. The purchaser agreed to pay the royalties under the royalty agreement (cl. 13). Clause 17 contained the statement that the vendor believed that the right under its licence would persist while log licences continued to be issued by the Commission and forests reserves permitted and that the Commission estimated that the rate of extraction permitted by the licence could be maintained for ten years.

On 4 December 1972, oral agreement had obviously been reached between the parties because the taxpayer then wrote informing the Commission that it had purchased Ryans' sawmill subject to the satisfactory transfer of the log licence and requesting the Commission to terminate that licence and re-issue it to the taxpayer on the same terms and conditions. A formal request to that effect was made to the Commission on behalf of Ryans on about 8 March 1973. On 29 March 1973, the Commission terminated Ryans' log licence and approved the grant of a new licence to the taxpayer on the same basis. The taxpayer was advised of this by letter written the next day. The new licence covering the period of about six months from 29 March 1973 to 30 September 1973, issued on 28 May 1973. There had been some variations to Ryans' log licence and it is common ground that the new licence gave the same rights to the taxpayer as Ryans had before termination of its licence.

Although the purchase price of $160,000 was not allocated between the various items the subject of the agreement, I was asked to assume for the purposes of argument, that $142,000 of that sum represented what, on this appeal, the taxpayer claimed were rights to fell standing timber, and that about $14,000 of that sum was attributable to the timber felled during each of the four relevant financial years.

Mr. McKittrick, the senior allocations officer of the Commission, was called by the appellant taxpayer and gave evidence. His evidence establishes that although the Commission has power to authorise transfers of log licences, for policy reasons which he explained, it never does so. One of the policy reasons is a desire by the Commission to retain sufficient control to avoid general trafficking in licences and to limit trading in licences to genuine members of the sawmilling industry who deal in sawn timber.

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What the Commission does is to terminate the existing licence and grant a new one on the same conditions. The taxpayer, after its first licence, was granted log licences for two, 3 year periods then for two, 1 year periods. There is no significance in the change of period.

The two issues in this appeal are:

1. Whether any part of the money paid by the taxpayer to Ryans under the agreement was, within the meaning of sec. 124J, paid to acquire a right to fell standing timber?

2. If so, whether the right which the money was paid to acquire, extended beyond the six months' period of the original log licence granted to the taxpayer?

I accept Mr. Webb's submission as to the facts established by the evidence. The assumed amount of $142,000 was paid by the taxpayer as the payment which in a practical commercial sense was the payment necessary to enable it to acquire the right to fell standing timber. Mr. Burnside conceded, in my opinion correctly, that under the agreement Ryans was contractually obliged to take reasonable steps in co-operation with the taxpayer to obtain the transfer of its log licence or its termination and the grant of an equivalent licence to the taxpayer. With that co-operation from Ryans, the taxpayer had a virtually certain prospect of obtaining the log licence which eventually issued on 28 May 1973. Without that co-operation from Ryans the taxpayer's prospect of obtaining that licence was negligible. The taxpayer at no time had any significant prospect of obtaining a transfer of Ryans' log licence.

I infer from the evidence that once the taxpayer had obtained its first licence there was a high probability that so long as it maintained satisfactory standards, the Commission would grant it successive licences while the timber in the area lasted.

There was no direct evidence as to this, but I infer it from the amount of the assumed price paid in respect of the licence, the inclusion in cl. 17 of the agreement of the statements I have mentioned, the reference in cl. 4 of the documents ``Information for Log Licensees'' which were attached to the relevant licences to the course the Commission would take ``during the period of this or any subsequent licence relating to such area'' and from the course followed by the Commission in granting the successive licences.

The assumed amount of $142,000 was paid by the taxpayer in order to acquire the licences which it was first granted and the successive licences which have since been granted. It paid the money to obtain the position where, as a matter of fact, there was a high degree of probability that so long as its standards were satisfactory it would be granted rights to fell timber in the area while the timber lasted. The money was not paid for any other purpose. It has so far achieved the objective for which it was paid.

Mr. Webb expressly affirmed that he was not advancing a submission that through the existence of cl. 4, of the document ``Information for Log Licensees'' attached to the licences, or otherwise, the Commission was bound by contract to Ryans not to issue a log licence to any other person in respect of the area during the period covered by Ryans' Licence L1004. On that basis the assumed amount of $142,000 was not paid in consideration of anything without which the acquisition of the licences by the taxpayer from the Commission would have involved any breach of the civil or criminal law. Nor was it paid as an exaction under a statute which was an essential precondition to the acquisition of the licences.

Mr. Webb argued that the rights to fell standing timber which the taxpayer obtained under the licence first granted to it were the same as those previously possessed by Ryans. It followed, he submitted, that the taxpayer paid the sum in consideration of an exchange for Ryans' rights. However, no rights to fell standing timber passed from Ryans to the taxpayer. The rights which the taxpayer obtained from the Commission under its licence were in law a different set of rights from those previously possessed by Ryans and authorised a different person to engage in similar conduct.

Accordingly, on the construction of sec. 124J which I have adopted, no part of the money paid by the taxpayer to Ryans under the agreement was paid to acquire a right to fell standing timber. The second issue on this appeal therefore does not arise.

The Appeal by Marbutt Gunnerson Industries Pty. Ltd. is dismissed.

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The Appeal by Monaro Sawmills Pty. Ltd.

The appeal relates to the financial years ended 1973 to 1975, in each of which the taxpayer felled timber under licence from the Commission.

By a written agreement dated 29 September 1972, Aberdeen Timber Company Pty. Ltd. (``Aberdeen'') sold to the taxpayer for $254,000 its timber milling business carried on at Goongerah. Aberdeen had held successive licences for the relevant area since at least 1967. The agreement apportioned $14,000 of the purchase price to plant and equipment and the remaining $240,000 to ``the right to fell timber under Log Licence No. L1060''. The purchase price was to be paid by a deposit of $9,400 on the execution of the agreement, $164,600 on 1 October 1972 and the remaining $80,000 on 1 October 1976. By cl. 6 Aberdeen was obliged to deliver the taxpayer such signed documents as might be required to enable the taxpayer to apply for the transfer into its name of that licence. Having regard to the industrial background on which the agreement was made and cl. 25 of the agreement the word ``transfer'' is to be treated as used in a commercial rather than a legal sense and to contemplate termination of the existing licence and the grant of a new licence on the same terms. Clause 25 requires both vendor and purchaser to apply to the Commission to have issued to the purchaser the rights and benefits conferred by the licence and provides that if the Commission refuses, the agreement is to be avoided.

It is clear that by 20 September 1972 Aberdeen and the taxpayer had reached final oral agreement upon the sale. By that date Aberdeen and the taxpayer had written to the Commission advising of the sale, requesting the termination of Aberdeen's rights and the grant of similar rights to the taxpayer and informing the Commission that the settlement date between them was 29 September 1972. The inference is that although they had been contractually bound to each other since at least 20 September 1972, the parties, on what had been agreed as the date of settlement, substituted a written contract for the oral contract. On 26 September 1972 the Commission resolved as follows:

``Logging rights held in the name of Aberdeen Timber Company Pty. Ltd. in Orbost Forest District are terminated. Approved grant of Log Licence to Monaro Sawmills Pty. Ltd. on the same basis as previously enjoyed by Aberdeen Timber Company Pty. Ltd.''

On 26 October 1972 a licence, L1664, was granted to the taxpayer for the period from 1 October 1972 to 30 September 1973. It is common ground that this was granted on the same basis as and covered the residue of the period of, licence L1060. On the expiration of licence L1664 the taxpayer was granted licence L2070 for the period from 1 October 1973 to 30 September 1976. Other licences have been granted since.

Mr. McKittrick was called for the taxpayer and gave evidence substantially to the effect of his evidence in the earlier hearing and some additional evidence. He gave evidence of a policy adopted by the Commission after discussions with representatives of the sawmilling industry, and known as ``the established miller policy''. This had been followed at all times relevant to this appeal. In relation to existing forest areas (as distinct from a planted forest first becoming available) a policy was followed which gave sawmillers a secure supply of standing timber. In practice the only way a person could obtain a licence in such an area was by the purchase of an existing sawmilling business. The Commission would not grant a licence to a person whose standard of conduct was not expected to be satisfactory. Whether conduct is regarded as satisfactory depends on considerations of the maximising of social benefit from the resource and environmental considerations. Where the purchaser of a saw milling business is expected to act satisfactorily he would, as a matter of course receive a new licence on the same basis as that held by the vendor, upon a request to that effect from vendor and purchaser. Once granted an initial licence, a licensee expected by the Commission to act satisfactorily, will, as a matter of course, on the expiration of a licence receive a replacement licence so long as there is suitable timber available to be taken in the area.

Mr. Richards, the managing director and general manager of the taxpayer gave

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evidence. He has been associated with the sawmilling industry in Victoria for more than 30 years. He negotiated the purchase of the business from Aberdeen. He said that in purchasing a sawmill the most important feature is the forest that goes with it. The taxpayer had put most value on that feature. In assessing the value of the forest that goes with the sawmill, one considers the life of the timber licences, the area of available forest and the quality of the timber. He considered that if the taxpayer bought from Aberdeen it would have licences for the area for a long time. He regarded all State forest licences as being long term. His estimate was that the timber in the area would last for a couple of decades. The taxpayer would not have made the purchase if the licence was not one which would be renewed. He believed at the time that it was the proved policy of the Commission that if the taxpayer acquired Aberdeen's operation it would continue to get licences from the Commission until the forest resource was exhausted. He had appreciated at the time that the only way that the taxpayer could get itself in a position to exploit that logging area for its usable life was to take over the Aberdeen operation.

The evidence establishes to my satisfaction that the sum of $240,000 was paid in order to acquire the rights to fell the standing timber covered by the licence initially granted and succeeding licences. That was the purpose of, and reason for the payment. Once the agreement was made the taxpayer was placed in a position where it was virtually certain that it would receive, as it has, the initial and succeeding licences. The taxpayer having paid, or agreed to pay that amount of money, and having acquired such a high prospect of use of the timber resources, was highly unlikely to allow its conduct to fall short of that regarded as satisfactory by the Commission.

However, the taxpayer did not pay the money in consideration of and exchange for any of the rights to fell standing timber which it acquired. Mr. Shaw argued that on the construction of the section which I have adopted, the section applied. The basic submission was that the Commission was bound by contract to Aberdeen not to grant a licence to any other person to cut and take away logs from the area covered by the licence, L1060, during the period covered by the licence. The Commission would have been in breach of that contract if it had, without the consent of Aberdeen, granted the taxpayer licence L1664 to take logs from the area during the last year covered by licence L1060. It was put that the money was paid in consideration of obtaining that consent from Aberdeen. In my opinion the substance of what was received by the taxpayer under the agreement, in exchange for the payment, was Aberdeen's agreement to consent and its consent.

I regard Mr. Shaw's argument as valid in principle. See the Victree case 77 ATC 4236 at p. 4241. To succeed on the argument the taxpayer must establish that the Commission was bound to Aberdeen by contract in the way contended.

Mr. Shaw submitted that the contract between the Commission and Aberdeen had, in the circumstances of the issue of licence L1060, come into existence by the operation of sec. 52 of the Forests Act 1958. Section 52(1)(a)(iv) provides:

``52(1) Subject to such covenants terms and conditions as are prescribed and to such additional covenants terms and conditions as the Commission thinks proper to impose in any particular case and subject also to the payment of such rent, fees, royalties or charges as the Commission determines the Commission, the Secretary of the Commission, or any person authorised by it in that behalf may grant to any person for any term not exceeding three years -

  • (a) a licence of, or a permit with respect to any Crown land within any reserved forest -
    • (iv) to cut, dig and take away any specified forest produce.''

``Forest produce'' includes trees and timber: sec. 3(1). Without a licence it would have been an offence for Aberdeen to fell timber and take away logs: sec. 96(h). No regulations have been tendered before me, and there is no reliance on any prescribed covenant term or condition. The taxpayer seeks to rely on a covenant term or condition which it alleges the Commission imposed in relation to the licence.

It is clear that the section contemplates that the issue of a licence is to be associated

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with contractual covenants terms and conditions coming into existence between the Commission and a licensee. No doubt the prescribed covenants terms and conditions are intended to come into existence by virtue of the Act and regulations.

There is a question as to what the section means by its reference to ``such additional covenants terms and conditions as the Commission thinks proper to impose in any particular case''. In some contexts the word ``impose'' means to impose some obligation regardless of the will of the person who is subjected to the obligation. In other contexts it means to insist on including in a consensual contract a term disadvantageous to the other party. I do not think that the section gives the Commission a right to impose a covenant term or condition upon a licensee without the licensee's agreement. I consider that the section refers to a covenant term or condition which the Commission insists on being included in a contract between itself and the licensee. It is a covenant term or condition to which the licensee agrees as part of the transaction within which a licence issues. It is a covenant term or condition which, although insisted on by the Commission, becomes binding on the licensee as a matter of contract. The word ``impose'' is no doubt used in recognition of the fact that the covenant term or condition is likely to be part of a contract of adhesion. Section 51 provides that ``Subject to such covenants terms and conditions... as he determines the Governor in Council may grant to any person'' leases of particular areas of Crown land within a reserved forest. There again, in my opinion, the covenants terms and conditions would bind the lessee only by virtue of the contractual operation of the lease.

It is established in this case that licence L1060 and at least one earlier licence granted to Aberdeen in respect of the area, had attached to them six printed or roneoed pages in identical terms. The taxpayer argues that a paragraph in one of these pages brought into existence the contractual obligation on which it relies. If the clause in question is to be regarded as a contractual covenant term or condition, in my opinion it would have become part of the contract between the Commission and Aberdeen. Having had a licence on particular covenants terms and conditions, an application by Aberdeen for a further licence would be regarded as an application offering to take a licence on the same covenants terms and conditions, which the Commission accepted by the issue of the new licence L1060. Even if that were not so and the issue of licence L1060 were regarded as an offer by the Commission of a licence on the covenants terms and conditions in the attached documents, that offer was accepted when Aberdeen accepted the licence and cut and removed timber under its authority. In the context of this section I see no reason for limiting covenants terms and conditions created in this contractual way to those which are disadvantageous to the licensee.

It is necessary to examine licence L1060 and the pages attached to it when it issued to Aberdeen. It stated:

``This licence is granted to Aberdeen... to cut and take logs for sawmilling and veneer production purposes subject to the provisions of the Forests Act 1958 and the schedule hereunder and to the additional covenants terms and conditions imposed by the Commission and annexed hereto. In the event of a breach of any prescribed or imposed covenants terms and conditions, the licence may be suspended or cancelled.''

The period of duration of the licence is then set out. Then, in the schedule, is set out the logging area, the volume and type of timber to be cut and removed and the royalty rates. It is signed by the Secretary of the Commission. The next four pages commence:

``Additional Covenants Terms and Conditions Imposed by the Commission Log Licence L No. 1060. The following additional covenants terms and conditions imposed by the Commission will apply to this licence, but the Commission reserves the right to make such amendments or further additions as it may think proper to impose, at any time, after written notice to the licensee.''

On that page and the next three pages are set out 16 clauses and a schedule of rates relating to fire-fighting. Apart from an interpretation clause, the clauses are in typical contractual form stating what the licensee shall or shall not do, or may or may

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not do. At least two of the clauses (2 and 16(c)) expressly impose obligations on the Commission. The fifth page is headed ``Information for Log Licensees'' and it and the following page contain nine clauses. Clause 1 states that: ``All licensees must comply fully with the provisions of the Forests Act 1958 and Regulations'' and then sets out a summary of some of them. The next three clauses are in this form:

``2. All vehicles used by licensees within State forests must be maintained in a roadworthy condition and must comply with any Act or regulations relating to traffic on public highways.

3. The Commission may at any time issue licences to any person or organisation for the procurement of forest produce other than saw or veneer logs from the logging area to which any log licence relates.

4. The Commission will not, without the licensee's agreement, issue a log licence in respect of a similar log type from the logging area to any other person or organisation during the period of this, or any subsequent licence relating to such area, except -

  • (a) in the event of failure by the licensee to cut and remove logs at the rate authorised by the licences issued; or
  • (b) in respect of any timber which, in the opinion of the Commission -
    • 1. will not be utilised by the licensee,
    • 2. is likely, because of damage by fire or other cause to deteriorate before removal by the licensee,
    • 3. is unlikely to be utilised by the licensee soon enough to satisfy silvicultural management, or protection requirements, or
  • (c) to remove any species of timber other than the species named in the log licence; or
  • (d) where arrangements have already been made for another licensee to obtain logs from the logging area.
  • Before issuing any such log licence, without the licensee's agreement, to any other person or organisation, the Commission will allow the licensee a reasonable opportunity, not exceeding six months, to demonstrate his willingness and ability to utilise the timber concerned in a manner satisfactory to the Commission.''

Clause 7 provides: ``The licensee shall not be responsible for the maintenance of any Commission road or track.''

Mr. McKittrick was questioned as to whether or not the Commission intended the clauses in the pages headed ``Information for Log Licensees'' to bind the Commission in law. I regard the appropriate inquiry, however, as being what would a reasonable person in the position of Aberdeen, upon receiving the documents in the circumstances, take to be the intention of the Commission disclosed in the documents.
Life Insurance Co. of Australia Ltd. v. Phillips (1925) 36 C.L.R. 60;
Oscar Chess Ltd. v. Williams (1957) 1 W.L.R. 370 at p. 375;
Carter v. Hyde & Anor. (1923) 33 C.L.R. 115 at p. 126. The actual intention of the respective parties is not the relevant consideration.

Clause 1, in stating that licensees must comply with the Act and Regulations, is clearly and correctly stating that licensees have a legal obligation to do so. In my opinion cl. 2, in stating that vehicles in a State forest must comply with any Act or Regulations relating to traffic on public highways, is using the words ``must comply'' in the same sense. It was asserted before me, in argument, that this obligation in respect of vehicles in a State forest was imposed by a regulation, although no such regulation was intended. For present purposes it would make no difference if there were such a regulation. It is the apparent intention disclosed by the documents which matters. The Commission, having in cl. 1 set out summaries of various provisions of the Act and Regulations, appears, in cl. 2 to disclose an intention that licensees shall be bound to comply with Acts and Regulations, which of their own force apply to public highways not State forests. That indicates an intention by the Commission to bind by contract, a licensee not otherwise bound in State forests, by the Acts and Regulations relating to public highways. The obligation on licensees to maintain in roadworthy condition all vehicles used within a State forest would

ATC 4475

naturally be taken by a reasonable licensee also to be intended as a contractual obligation.

The question whether the Commission would be regarded by a reasonable licensee as intending cl. 4 to have contractual operation, is to be determined on the background of the knowledge which the Commission and the licensee both had, or which reasonable parties in their situation would have had about the sawmilling industry and its practices, and the practices of the Commission. See
Butt & Ors. v. Long & Ors. (1953) 88 C.L.R. 476;
R.W. Green Ltd. v. Cade Bros. Farms (1978) 1 Lloyd's Rep. 602 at pp. 606-607;
Prenn v. Simmonds (1971) 1 W.L.R. 1381 at pp. 1383-1385;
Terra Nova Pty. Ltd. v. Halanda Pty. Ltd. (1977) Qd. R. 296 at pp. 300-301;
Reardon Smith Line Ltd. v. Hansen-Tangen (1976) 1 W.L.R. 989.

I infer that Aberdeen, having conducted its extensive sawmilling business for a period shown by the evidence, to have been at least five years, was familiar with the background and operation of the policies of the Commission. The evidence was that the Commission, after discussions with representatives of the sawmilling industry, had followed its established miller policy by making available to a sawmiller a secure supply of standing timber and encouraging extensive capital investment by sawmillers. To confer on a licensee the advantage of that policy it was necessary that the Commission should act in accordance with, or along the lines of, the course of conduct which cl. 4 states that it will follow. Clearly both the Commission and the licensee treated the statement as one of basic importance to the transaction on which the licensee could rely. For its advantage to rest on more than the will of the Commission, and to give the transaction business efficacy, the licensee needed the Commission to be bound by an obligation along the lines of cl. 4. These factors tend to support cl. 4 being regarded as carrying contractual intention.
Shepperd v. Council of the Municipality of Ryde (1951-52) 85 C.L.R. 1. It is not to be overlooked that the Commission has not bound itself by any obligation, or given any statement under sec. 52(6)(a), of intent to grant further licences. While that does, to some extent, weaken the inference that cl. 4 is to be treated as disclosing a contractual intent, the Commission could understandably be reluctant to commit itself for the future, to a course which could become impracticable through fire, timber disease, environmental considerations or other causes.

For the respondent it was argued that the nine clauses on the fifth and sixth pages are, as the heading indicates, no more than information to licensees, including information that the Commission will, without any obligation to do so, follow the course stated in cl. 4. Clauses 1, 8 and 9, at least, seem to fulfil no function except the provision of information. However, it is difficult to see the statements that vehicles must be maintained in roadworthy condition and must comply with Acts and Regulations relating to public highways as intending merely to provide information, and not to impose obligations. The heading of the last two pages is, of course, significant, and tends to tell against those pages containing contractual terms. The statement at the commencement of the six pages states that the Commission reserves the right to impose such amendments and additions to the covenants terms and conditions as it thinks proper, after written notice to the licensee. I do not enter the question whether it has power to do that. Having regard to the inappropriate contractual forms sometimes used in commerce (e.g.
L.G. Thorne & Co. v. Thomas Borthwick & Sons (A/asia) Ltd. (1956) 56 S.R. (N.S.W.) 81) it would be open to a licensee to regard the last two pages as containing terms which, after the printing of the standard forms in the first four pages, the Commission had decided to impose. There is not much difference between giving notice, and giving information of additional terms.

In my opinion, in all the circumstances, the reasonable person in the position of Aberdeen, would have taken clauses in the last two printed pages, including cl. 4, as disclosing a contractual intention. It follows that the Commission was contractually bound to Aberdeen in the terms of cl. 4. If, without the consent of Aberdeen, the Commission had issued licence L1664 to the taxpayer, the Commission would have been in breach of its contractual obligation to Aberdeen under cl. 4. The taxpayer paid the money to Aberdeen for that consent. The

ATC 4476

money was therefore paid by the taxpayer to acquire a right to fell standing timber.

It was only during the remaining year of the period of Aberdeen's licence, L1060, that the Commission would have been in breach of its contractual obligation to Aberdeen if it granted a licence for the same area, to the taxpayer. It would have breached no contract by granting licences to the taxpayer, for periods later than the period covered by licence L1060.

I have held that the taxpayer paid the sum of $240,000 in order to acquire the rights to fell standing timber contained in Licence L1664 and succeeding licences. That was the purpose of the payment. However, under the construction of the section which I have adopted, the appropriate inquiry is not as to the purpose of the payment. Instead one asks: In consideration of, and exchange for what was the payment made? It was for, and only for, the consent of Aberdeen to the termination of its licence L1060 and to the grant of licence L1664. When that termination and grant were effected, the succeeding licences would be granted to the taxpayer as a matter of course, without any assistance from Aberdeen being needed. The $240,000 is therefore to be treated under the section as paid by the taxpayer, to acquire the rights under licence L1664 and it is only in respect of timber felled in exercise of the rights under that licence, that the taxpayer is entitled to an allowable deduction under the section. Compare:
Standard Sawmilling Co. Pty. Ltd. v. F.C. of T. 74 ATC 4084; (1974) 1 N.S.W.L.R. 217.

There was no argument before me as to the way in which amounts were to be attributed to the relevant financial years in the event of my reaching the conclusion I have, and if agreement is not reached, this may well be a question which the parties will wish to refer to me for further argument.

The appeal by Monaro Sawmills Pty. Ltd. is allowed to the extent that I have indicated.


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