Case S34

Judges: MB Hogan Ch
P Gerber M

GW Beck M

Court:
No. 3 Board of Review

Judgment date: 16 May 1985.

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Dr G.W. Beck (Member)

The matter in issue in this reference is whether $12,000 received by a partnership when a Volvo truck leased by the partners was sold to a truck dealer and a new Volvo truck taken on lease from a different finance company is assessable income of the partnership. The taxpayer, Mrs Mac, and her husband, Mac, were partners in a timber hauling business and it is her half share of the $12,000 that is the subject of the reference. The taxpayer did not attend the hearing but her

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husband gave evidence and it was clear that he had full knowledge of the partnership actions.

2. On 29 August 1978 the partners leased from a finance company a used Volvo truck (the old Volvo). The term of the lease was 24 months, but, after encountering mechanical trouble with the truck which was making the meeting of contractual obligations difficult, the partners decided to replace it in June 1979. The evidence of Mac can be summarised as follows:

• • he approached a truck dealer who told him what the ``trade-in'' value of the old Volvo was and the price of a new Volvo;
• • the dealer ascertained from the finance company the payout price on the old Volvo;
• • these amounts were:

                                              $
  
        Price of new Volvo                  64,133
  
        Trade-in value of old Volvo         28,133
  
        Payout amount due to finance
  
        company on old Volvo                16,133;
                

• • Mac said he understood during the negotiations that the difference between the trade-in value and the payout amount, i.e. $12,000, would belong to the partnership;
• • he said that he told the truck dealer that he was prepared to lease a new truck on the basis of those figures and on 29 June 1979 he and his wife signed a new lease, not with the original finance company but with Esanda;
• • Esanda required that the $12,000 due to Mac and his wife be used to buy Esanda debentures and Esanda took a lien over the debentures as security for the leasing transaction;
• • neither partner talked to the original finance company at any time during negotiations and Mac said he left any necessary arrangements to the truck dealers;
• • he was pleased about the $12,000, but he did not receive the money then because it was paid straight to Esanda by the truck dealer;
• • he knew that the $12,000 was applied to securities in the names of the partners and was not used to reduce the purchase price to Esanda of the new Volvo.

The transaction was included in the partnership's 1980 tax return due to a substituted accounting period and the taxpayer's assessment for that year included her share of $12,000 added to partnership income as returned. On the adjustment sheet it was described: ``Profit from sale of truck now included in assessable income''. That description, of course, is quite incorrect for the partnership did not, and could not, sell the old Volvo. As I see it, the finance company owned a truck the value of which in their books was $16,133. The truck dealer was prepared to give $28,133 for it and the finance company, as a matter of policy, was prepared to give the excess to the former lessees. Although the transaction has a superficial appearance of a disposal by trade-in (and the truck dealer probably so regarded it) there is an unavoidable conclusion that the original finance company did not trade in because the new Volvo was not sold to that company but to Esanda. The Commissioner's representative acknowledged that there were two distinct transactions - the sale of the old Volvo by the original finance company and the purchase of a new Volvo by Esanda - and there was no trade-in.

4. The causative factors responsible for the receipt of $12,000 of debentures by the partnership are difficult to identify but it is possible to say with certainty that the debentures did not arise from the sale of anything or from the undertaking of the new leasing. This is clear because the partnership had no title to the old Volvo and so could not sell it, and the new lease was with Esanda and the funds used to buy the debentures belonged to the original finance company. On the other hand, it is logical to conclude that the partnership received $12,000 of value because (a) it had engaged in a leasing transaction with the original finance company and (b) it had made payments to that finance company of such amount that the leased asset was, in the view of the finance company, now worth $16,133. Using as a basis two assumptions (which seem to me to come close to self-evident truths) that (i) the original finance company was not prone to charitable gestures and (ii) the value placed on the old Volvo by the truck dealer was an acceptable measure of the commercial value of the vehicle, it seems to follow that the lessees (i.e. the partnership) had built up an equity in the old Volvo which could be measured by the gap between its commercial value and the ``value'' in the books of the finance company. This gap was, of course, $12,000.

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5. I have discussed in Case N59,
81 ATC 304 the nature of the excess of a selling price over the payout figure for an asset acquired and sold after leasing and reference could be made to para. 7 and 8 of my decision in that case if elaboration is required of the view put in the above paragraph. The character of the $12,000 obtained by the partnership in this reference makes it essentially an item of capital. It is perhaps worth observing that finance companies themselves refer to the equity of lessees and, indeed, in evidence Mac stated that ``they said there will be a $12,000 equity'' although ``they'' must have been the truck dealers on this occasion.

6. Because the partnership did not pay out the lease sec. 26(a) does not apply, and the Commissioner's representative conceded this. Instead he put the following:

``The Commissioner contends that the $12,000 is assessable income by operation of section 25 of the Income Tax Assessment Act. The $12,000 was a voluntary payment. It was not a mere gift from (the finance company) to the partnership; it arose out of the business relationship between (that company) and the partnership, and in the hands of the partnership was a business receipt of a revenue nature.''

In support of that contention he put the following arguments:

• • the facts in this case are similar to those in
  F.C. of T. v. Reynolds 81 ATC 4131 where a log haulier was assessed under sec. 25(1) on the excess over the payout figure of the sale proceeds of a truck;
• • of relevance is the decision in
  H.R. Sinclair & Son Pty. Ltd. v. F.C. of T. (1966) 114 C.L.R. 537 where a timber-feller overpaid royalties and obtained a refund which was found to be assessable;
• • in
  A.L. Hamblin Equipment Pty. Ltd. & A.L. Hamblin Constructions Pty. Ltd. v. F.C. of T. 74 ATC 4310 the Full High Court was unanimous that $5,000 ``no-trade discount'' credited to the construction company was assessable under sec. 25(1) as income according to ordinary concepts and that $5,000 was in character similar to the $12,000 received by the partnership in this reference;
• • that certain Board decisions supported the Commissioner's interpretation notably my own decision in Case N59, 81 ATC 304 and, more specifically, the decision of No. 1 Board in Case C56,
  71 ATC 247 .

7. It was never argued that the taxpayer and her husband were in the business of buying and selling trucks or of entering into lease agreements with a view to making profits by paying out the leases early and, indeed, such an argument could not have been sustained. If the Commissioner's argument for assessability under sec. 25(1) is to succeed it is therefore necessary to accept that the $12,000 that came to Mr and Mrs Mac came as an incident of their log hauling business. In Reynolds' case there was a clear arrangement that the taxpayer act as an agent for the lessor in the selling of the truck and Reynolds more actively pursued a profit than did the partnership here. However, I do not think those differences are material and the essential circumstances are similar in Reynolds' case and this case. However, I consider the decision in Sinclair's case to be based on circumstances and principles that are quite different from those relevant here. A refund of overpaid royalties was in Sinclair found to be assessable, but here it cannot be argued that the partnership got a refund of lease rentals. The rentals received by the finance company were unaffected by the transactions and decisions that resulted in $12,000 coming to the partnership. The Sinclair decision is not relevant. I also consider the Hamblin decision regarding the $5,000 ``no-trade discount'' to be irrelevant because the source of the $5,000 was an equipment supplier which had previously sold large quantities of machinery to the company that received the $5,000 and was at that time selling an expensive item of equipment to an associated company. The Hamblin group was a large and frequent purchaser of equipment and it is difficult to disagree with the observations of Mason J. (74 ATC at p. 4320):

``... there was a credit of $5,000 received by the taxpayer in consideration of business which it had previously done with Hastings Deering. The receipt was therefore an incident of the contracting company's business. That it was considered by the parties to be a substitute for an allowance on the trade-in of equipment disposes of the notion that it was a gift and emphasizes its true character as a trade receipt arising out of the business relationship between Hastings Deering as a supplier of

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earth-moving equipment and the Construction company as the purchaser of such equipment in the course of carrying on its business as a contractor.''

The $5,000 received by Hamblin Constructions Pty. Ltd. had at least some of the characteristics of a commission and there was no suggestion that the partnership involved in this reference received anything of this nature. There was no evidence that the partnership received anything at all from the truck dealer, although it might have indirectly if the sale price of the old Volvo was inflated beyond its genuine market value. In the absence of evidence on that point it has to be accepted that the $12,000 came entirely from the finance company. It was obvious from the evidence of a man from the finance company that it did not consider it was paying anything in the nature of a commission or fee to the partnership and I do not consider the $5,000 received by Hamblin and the $12,000 received here should be regarded as possessing the same characteristics. In my reasons in Case N59 I found amounts assessable under sec. 25(1) but in that case the corporate taxpayer, like the Hamblin companies, changed equipment frequently and the controlling shareholder conceded that he knew at all times that new contracts would call for different equipment and it was inevitable that the taxpayer's business would require significant turnover of units of equipment. Again, the facts in Case N59 are a far cry from a partnership running one prime-mover hauling logs. That leaves for mention Case C56 from the list presented by the Commissioner's representative in support of the assessment. The facts in Case C56 are very like those in this reference: a vehicle was sold by the lessee acting as agent for the lessor and the excess obtained over the residual value of the vehicle was handed by the lessor to the lessee. This excess was found to be assessable in the lessee's hands.

8. It can be seen from this summary that I accept that the circumstances in Reynolds' case and in Case C56 are not distinguishable in any significant way from the circumstances in this reference. In both those cases the taxpayer failed. With the utmost respect, I consider both decisions to be in error. Where a lessee pays out a lease and resells the item at a profit I consider that profit is caught by sec. 26(a) because sec. 26(a) applies to profits of any sort. But where a taxpayer simply receives from a lessor an amount that in economic terms represents his built-up equity in an item subject to lease, the receipt is at least predominantly, and perhaps wholly, capital for the reasons set out in para. 4 and 5 above. I cannot avoid the conclusion that the nature of such receipts has been misapprehended in Reynolds' case and in Case C56. Because a taxpayer has received a deduction on revenue account for the lease rentals paid it does not follow that an amount received at the conclusion of the lease is therefore on revenue account. And this is what the Chairman and one member of No. 1 Board (as then constituted) assert in para. 6 of their reasons in Case C56 (71 ATC at p. 249).

9. It is intellectually unsatisfying to have to accept, in spite of these views, that the taxpayer in this reference must lose. But this Board is bound by the decision in Reynolds which I am unable to distinguish in a regard that would enable me to find otherwise. Half the amount received by the partnership of Mr and Mrs Mac is assessable to the taxpayer in accordance with sec. 25(1).

10. The Commissioner's decision on the objection is upheld.

Claims disallowed