J.V. (Crows Nest) Pty. Ltd. v. Commissioner of Stamp Duties (N.S.W.).

Lusher J

Supreme Court of New South Wales

Judgment date: Judgment handed down 29 March 1985.

Lusher J.

This is a summons which claims the decision or the determination of certain questions raised for decision in a Stated Case. The Stated Case itself expressed in short terms states by para. I that by Deed dated 20 April 1983 John Valentine Health Group Pty. Limited granted to J.V. (Crows Nest) Pty. Limited a franchise to conduct a ``John Valentine Health Club'' at Crows Nest, Sydney in the State of New South Wales.

paragraph 2 of the Case states that the Commissioner has assessed the Deed to Stamp Duty under the provisions of the Stamp Duties Act 1920 in the sum of $23,419.50, the paragraph continues to set out the basis of calculation which may be left for the present. In effect the basis of assessment is that the document is dealt with as a lease.

Paragraph 3 sets out that the plaintiff contends no duty is chargeable under the appropriate head of charge by reference to the ``service fee'' referred to in cl. 10 in the Schedule to the Deed or any part thereof on the basis that no part of the service fee is rent for the purposes of the appropriate head of charge referred to in the Act and Second Schedule thereto. The paragraph continues that if the plaintiff's contention is correct the stamp duty properly chargeable on the Deed is $2,587.50. Similarly if the ``administration fee'' referred to in cl. 10(a) is rent but the ``advertising contribution'' referred to in cl. 10(b) is not rent the stamp duty properly chargeable on the Deed subject to sec. 78D of the Act is $16,195.50. Paragraph 4 is formal and para. 5 sets out the questions for determination. These are as follows:

``(a) Whether any, and if so what, part of the service fee referred to in Cl. 10 in the Schedule to the Deed dated 20 April 1983, is rent for the purposes of the head of charge `Lease or Promise of or Agreement for Lease or Hire' in the Second Schedule to the Stamp Duties Act, 1920;

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(b) Whether the stamp duty properly chargeable in respect of the said Deed (subject to sec. 78D of the said Act) is:

  • (i) $23,419.50
  • (ii) $2,587.50
  • (iii) $16,195.50
  • (iv) some other and, if so, what amount;

(c) By whom should the costs of this Stated Case be paid.''

The Deed in question is more fully set out subsequently. At this point, however, it is appropriate to point out that the franchise is for a period of 40 years from 1 July 1983 or the period of 21 years after the death of the last survivor of the descendants now living of His late Majesty King George VI whichever shall first occur. Some initial payments by the Franchisee were called for under the Deed and there was provision for a service fee annually, provision for indexation as well as an advertising contribution both of which were to be paid on a monthly basis.

I turn now to the relevant legislation.

Section 76 defines ``lease'' as follows:

``76(1) For the purposes of this Act the expression `lease' includes any promise of or agreement for a lease of any property, and includes any instrument (not being an instrument liable to ad valorem duty as a conveyance) whereby a right to use at or during any time or times any property in New South Wales for any purpose whatever is conferred on or acquired by any person (who shall be deemed to be the lessee), but does not include any clause in a mortgage providing for attornment by a mortgagor or a hiring arrangement as defined in section 74D of this Act.''

Section 74D of the Act relates to hiring arrangements and nothing turns on this. Section 65 defines ``conveyance'' as follows:

``65. For the purposes of this Act the expression `conveyance' includes any transfer, lease, assignment, exchange, appointment, settlement, surrender, release, foreclosure, disclaimer, declaration of trust, and every other instrument (except a will), and every decree, judgment or order of any court whereby any property in New South Wales is transferred to or vested in or accrues to any person, and also includes a convenant to pay money not made for a full consideration in money or money's worth, the money convenanted to be paid to be regarded as the property conveyed; and `convey' has a meaning corresponding with that of `conveyance'. `Conveyance on sale' includes every instrument and every decree, judgment or order of any court whereby any property on the sale thereof is conveyed to a purchaser or other person on his behalf or by his direction.''

Section 3 defines ``property'' to include real and personal property and any estate or interest in any property real or personal and any debt and any thing in action and any other right or interest.

Section 78D is a provision whereby additional duty may be charged where a rental has been reappraised under circumstances where the total rent payable during the term is not ascertainable at the commencement of the lease. This section also may be left to one side since if the Deed were a lease it is subject to indexation and this section would apply ultimately.

Under the provisions of sec. 66 and the Second Schedule a ``conveyance'' is charged with ad valorem duty in respect of the unencumbered value of the property conveyed or the consideration for the sale and the charges are set out in the Second Schedule.

Under the same, that is the Second Schedule, ``lease'' is so far as is presently relevant charged with an ad valorem duty at the rate of 35c in respect of the ``total rent payable during the term and at the higher conveyance rates in respect of the monetary consideration by way of `premium, fine or foregift'''. If the lease does not fall into para. 1-4 of the charges it is liable to a duty of 50c unless otherwise exempted.

Paragraphs 1-6 of the Second Schedule charge as follows:

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``Nature of Instrument               Amount of duty       Person primarily liable
                                        $ c
(1) Except as provided in paragraph (10)
    in respect of the total rent payable
    during the term without any
    consideration by way of premium,
    fine, or foregift -
    Where such rent -
    does not exceed $100 ........    0.35                }
    exceeds $100 - for every $100 and                              }
    also for any remaining fractional part                         } The lessee
    of $100 .....................    0.35                          } or tenant
(2) In consideration of a sum of money     }
    by way of premium, fine, or foregift,  } The same duty as on   }
             without rent ................ } a conveyance under    }
(3) In consideration of a sum of money     } paragraph (1) under   }
    by way of premium, fine, or foregift,  } the heading `Conveys- }
    and also of rent whether real or       } ances of any Property'}
    nominal .............................. } herein.               } The lessee
                                                                   } or tenant
    On the amount of premium ..............}                       }
    And on the rent ..................   The same duty as on a     }
                                         lease under paragraph     }
                                         (1) hereof.               }
(4) Where the consideration is nominal,  The same duty as          }
    or where there is no consideration   chargeable on a conveyance}
    money or money's worth ............  under paragraph           }
                                         (2) under the heading     } The lessee
                                         `Conveyances of any       } or tenant
                                         Property' herein as if the}
                                         unencumbered value of     }
                                         the lease in question     }
                                         were the amount of the    }
                                         consideration.            }
(5)    (repealed)                                                  }
(6)    Of any other kind whatsoever.         6.00
            The lessee or tenant.''

Against the above legislative background the Deed may now be examined. The parties are referred to as the ``Franchisor'' and the ``Franchisee''. The recitals set out, and I express them in brief terms, that the Franchisor has expended time, effort and money in developing and acquiring knowledge about a health club consisting of programs of exercise and nutrition in conjunction with specialist equipment owned by the Franchisor (recital 1), that the Franchisor has set up clubs under the above name (2), that the system developed incorporates administrative service, advertising data, promotional techniques and training programs and is the exclusive property of the Franchisor (3), that the Franchisor has carried on business under such names and marks as are set out at (4), that the Franchisee desires to obtain the benefits of the Franchisor's knowledge, skill and experience and requests the right to carry on business of the health club referred to (5), (6) relates to guarantors and recital (7) states that the Franchisor has agreed to grant the franchise on the terms and conditions of the document and of the guarantees.

The Deed itself witnesses that in consideration of the payment made to the Franchisor by the Franchisee in the sum mentioned and in further consideration of the performance and observance of the convenants by the Franchisee to be observed and performed the Franchisor grants to the Franchisee the right to carry on the business until termination as therein provided using the methods and

ATC 4201

techniques development as used by the Franchisor as set out in the Sales Manual, Operational Manual and Instructional Manual and under the name, style and device set out. There was a further grant to the Franchisee to utilise equipment, fixtures and fittings listed and the rights granted (in the Deed collectively called ``the franchise'') are for the term previously set out. Clause 3 sets out the Franchisee's obligations and the convenants ``in the carrying on of the business''. These include to use his best endeavours, to devote the whole of his time and attention, not to make representations or warranties other than those permitted or implied by the Deed, to conduct the business as an independent proprietor, to invest the capital and expend the funds required, to conduct and operate the business in accordance with the provisions, instructions and procedures set out by the Franchisor in the manuals and with further details and particulars, except with consent not to permit the premises to be used for purposes other than that of the business, to permit the Franchisor to inspect and observe the business and the premises, not to advertise separately or to alter any written material used in connection with the business without consent, to supply the Franchisor every morning with breakdown figures required, to comply with the terms of the lease of the premises.

There are other obvious convenants such as to keep in repair and maintain fittings and the like. Clause 4 sets out the Franchisor's obligations whereby it convenants to provide management and sales advice and assistance at the cost of the Franchisor to the Franchisee. There then follows a considerable number of matters which are included in this concept including regular managers' meetings, backup support, introduction of new products, updating manuals, advice relating to staff and sales techniques, to conduct advertising campaigns and promotional activities, to provide technical information and assistance, advice and information as to marketing services, not to operate any other club within a certain area, to make operable improvements and developments to industrial property, to provide systems of bookkeeping, to provide advice on the structure of membership packages and the like. Clause 5 sets out obligations in regard to payment of membership fees and moneys taken at exhibitions by clubs generally. There is a provision for apportionment of liabilities which in the main fall on the Franchisee as from the taking over of the business (cl. 6). Clause 7 provides for the right in the Franchisor to revise manuals.

Paragraph 8 is important. It is headed ``Service Fee'' and provides ``the Franchisee shall pay to the Franchisor a fee at the rate and in the manner set out in para. 10 of the Schedule in consideration of the Franchisor providing the management, services and sales advice and assistance specified in cl. 4 of this Agreement''. Paragraph 10 of the Schedule is the provision for the monthly fee being the administration fee and the advertising contribution previously indicated. Clause 10 makes provision for secrecy in that the Franchisee shall maintain strict secrecy as to the Franchisor's modes and methods of business including the manuals and other programs, its trade secrets and advertising and publicity. By cl. 11 the Franchisee and the Franchisor are to consult regularly on the use of the Franchisor's trade marks, service marks, logos and other industrial property by the former. There is an acknowledgement of the Franchisor's exclusive ownership of such industrial property (cl. 12). Clause 13 deals with assignment and the Franchisee is not entitled to ``assign the franchise'' during the first 12 months of the term and thereafter only with consent the same not to be unreasonably withheld, and there are other matters touching assignment. There is provision (cl. 14) that the Franchisee indemnifies the Franchisor in relation to claims. Clause 16 deals with termination. The Franchisor thereunder has the option of suspending or terminating the agreement and the franchise in relation to a number of matters such as failure to pay the moneys due, breaches of the agreement, breaches of non-performance, and other matters. Clause 17 states that upon expiration or termination of the agreement the Franchisee will deliver up manuals, instructions and other documents relating to the business and equipment and fittings and shall cease to use or exploit any industrial property and shall remove and destroy all signs, colour schemes and other features associated with the franchise as well as other matters set out. There is a provision by cl. 22 that after 26 February 1991 the Franchisee may with consent relocate the club premises within the area. Clause 23 provides that the parties with the consent of the lessor shall enter into a sub-lease of the premises for an initial

ATC 4202

term terminating on 26 February 1986 with an option to renew by a further term of five years. The rent and outgoings payable by the Franchisee under the sub-lease shall be the same as rent and outgoings payable by the Franchisor under the head lease.

Some reference should be made to the manuals. The Sales Manual comprises some 110 pages and sets out a general policy and course in relation to sales in a comprehensive fashion. The Training Manual also in a comprehensive manner sets out a training schedule and some hundred or more pages of material dealing with the body, its structure, and organs, the circulation system, a degree of medical information and terms, identification of various parts of the skeleton and musculature and their relation to each other and their functions, a body of material dealing with health and fitness, basic training in physical culture and general systems relating to training. There was also material dealing with nutrition, food and diet. There is also a ``Franchisee's Manager's Operational Manual''. It contains 17 pages of management procedures and responsibilities etc. in considerable detail.

In addition to the above material there was some unchallenged evidence on affidavit. One related to the methods of the operation of a club and a general procedure on opening the same and the training of staff, matters relating to membership, voluminous material in the form of brochures, membership documents, banking material, personal interview records, applications for membership, breakdowns, gear records and innumerable other details. Up until 30 June 1983 all clubs were owned and operated by the company John Valentine Health Club Pty. Limited. In about December 1982 a decision was made that some existing and new clubs would be offered by way of franchise to suitable persons it being the company's intention that all franchised clubs would be conducted in a manner identical to the clubs owned and operated by the company. There was material which set out the scheme and method of such operations put before me in some detail. There was also evidence to the effect that the service fee referred to in para. 10 of the Schedule to the Deed is made up of two parts, namely administration fee and the advertising fee. Each fee was determined on an independent basis to the other and neither fee was open to negotiation. The administration fee was calculated to return to the company the annual costs of its day to day overheads as apply to the instant club and allowed such expenses as lease payments for equipment, a proportion of head office expenses including rent, telephone and electricity to which was added a profit margin. The computation did not take into account the value of copyrights, registered designs or trade marks because it was not contemplated that such property would pass to the Franchisee. The advertising fee was set on the basis of the past year's advertising costs as averaged out over all the clubs. The fee is paid directly into a separate account and withdrawals are only made to cover the advertising expenses incurred on behalf of each of the clubs. The club is provided with a statement of advertising expenses incurred each month. In the event that at the end of the year an amount is left in the account this is taken into consideration in determining future advertising fee contributions. The company has a logo for the purpose of affixing to products and which is sold to the club.

There was also unchallenged evidence that the club was conducted by the plaintiff in accordance with the procedures, requirements and manuals and by the use of all the material provided and that the club would not be able to be conducted without all this material and the assistance and advice offered and utilised. There was also evidence to explain the change in the form of cl. 8 of the Deed. In its original form it read:

``In consideration of the continuing right to conduct the business the Franchisee shall pay to the Franchisor a fee at the rate and in the manner set out in paragraph 10 of the Schedule.''

To the above evidence it should also be added that the material provided also included training for members of staff and comprehensive material as to the conduct of a highly personalised fitness program, the scheme and form of exercise, the conduct of classes and the innumerable other activities which are detailed in the activities and other material put before me and all of which I accept.

It is accepted by the plaintiff that the description of the document as a franchise agreement and a reference to the parties as Franchisor and Franchisee does not necessarily

ATC 4203

determine the matter and it is necessary to further consider the document. It is conceded that the definition of lease in sec. 76 goes beyond a lease in the sense of a demise of land as a consequence of the amendment introduced in 1931 by the introduction of the concept of the right to use any property, the definition of property including personal property (see
Conservators of the River Thames v. I.R. Commrs (1887) 18 Q.B.D. 279,
Ex parte Henry 63 S.R. 298 at p. 314 per Brereton J. and
Mena House Ltd. v. Commr of Stamp Duties 64 S.R. 290 at p. 293). The submission of the plaintiff takes two forms, first the charges under cl. 8 of the Deed are not ``rent'' and hence do not come within the Second Schedule to the Act, para. 1 and 3 of which relate the amount of duty to the rent (para. 2, 4 and 6 are said to be inapplicable), secondly that there is no property involved here within the terms of the section. The argument is that cl. 8 expressly contains a service fee, the consideration for which is the providing of technical and managerial information and advice which does not amount to property.

In examining these contentions it is seen that cl. 10 of the Schedule which is referred to in cl. 8 of the Deed divides the service charge into two components, an administration fee which is indexed and an advertising contribution. The latter can be left to one side since it is simply a contribution to joint advertising and if there is none no such fee is payable.

Neither of these components is rent payable during a term such as is envisaged by para. 1 and 3 of the Second Schedule of the Act. The Act does not define rent. In the accepted legal sense rent is essentially a payment for the right to use demised premises,
Yanchep Sun City Pty. Ltd. & Anor v. Commr of State Taxation (W.A.) 84 ATC 4761. Equally it is accepted that not every payment imposed upon a lessee by covenant are payments of rent. Illustrations of this are covenants to pay rates and taxes, stamp duty, lessor's legal costs, cleaning fees, tied house arrangements and the like. This is so even though the right to use and occupy conferred by the lease and the lease itself may, depending upon its terms, be determined for breach of the particular covenant. In
Robinson v. Learoyd (1840) 7 M. & W. 48 this type of situation was considered by the Court in a judgment delivered by Baron Parke, and the value of the supply of power on premises was not within the concept. Obviously the use of the word ``rent'' is not to be looked at solely in the technical sense of real property law, for example, a bailment for reward of goods for a period would be a ``lease'' as defined by sec. 76 and the result would be that the reward would presumably be regarded as rent under the Second Schedule. Nevertheless the analogy of rent in relation to property in its real property sense is still present. In my opinion under this Act the essential character of the payment which is to be categorised as ``rent'' under the Second Schedule is that it is a payment made for the enjoyment of the right to use property for a term. However, in my opinion a service charge such as is made here is not rent within the meaning of the Second Schedule although I say this subject to the qualification that this finding is in part dependent upon the opinion I have reached in relation to the second aspect of the matter, namely whether the charge was in relation to property. It is to this aspect of property that I now turn.

The definition of property has been set out previously. Information or knowledge in my opinion is not property within the terms of sec. 76 even though secrecy or confidence in relation to it may be involved. In
F.C. of T. v. United Aircraft Corporation (1943) 68 C.L.R. 525 Latham C.J. at pp. 534 and 535 said:

``Knowledge is valuable, but knowledge is neither real nor personal property. A man with a richly stored mind is not for that reason a man of property. Authorities which relate to property in compositions, etc. belong to the law of copyright and have no bearing upon the question whether knowledge or information, as such, is property. It is only in a loose metaphorical sense that any knowledge as such can be said to be property. Either all knowledge is property, so that the teaching of, for example, mathematics, involves a transfer of property, or only some knowledge is property. If only some knowledge is property then it must be possible to state a criterion which will distinguish between that knowledge which is property and that knowledge which is not property. The only criterion which has been suggested is the secrecy of the knowledge - it is said that the fact that knowledge is secret in some way creates a proprietary right in that knowledge. I confess myself completely

ATC 4204

unable to appreciate this proposition as a legal statement.''

Jacobs J. in a dissenting judgment in
F.C. of T. v. Sherritt Gordon Mines Ltd. 77 ATC 4365 at p. 4374; (1977) 137 C.L.R. 612 at p. 630 referred to this decision when he said ``A right to put to use `know-how' as it is defined in the present agreement is not a right in respect of property because the possessor of the `know-how' has no right in it against the world''.

Brent v. F.C. of T. 71 ATC 4195; (1971) 125 C.L.R. 418 which involved an agreement to publish a life story of the vendor and where it was held that the information imported was not property or equivalent to a right of property Gibbs J. (as he then was) in 71 ATC at p. 4198; 125 C.L.R. at p. 425 said:

``It is not possible speaking strictly to say that in communicating the information to the agents of the company the appellant was parting with property. Neither knowledge nor information is property in a strictly legal sense, although they can be said to be property in a loose metaphorical sense and have been referred to as property in a number of cases.''

His Honour there referred to the remarks of Latham C.J. (supra). In 71 ATC at p. 4199; 125 C.L.R. at p. 427 his Honour said ``It is impossible to hold that the appellant sold any property to the company''. Here the information contained was of a technical and managerial information and advice of considerable extent and of a substantial nature which has been more fully indicated by me previously. In my opinion the material was not property within the terms of sec. 76.

Two further matters remain to be mentioned. One is that it is of course true that industrial property can be property within the terms of the section. Here two points emerge, the first being that reference in cl. 4(g) of the Deed is to future industrial property. Since there is none in existence there was no property within the terms of sec. 76. The other point is that industrial property is the subject of Commonwealth legislation and by virtue of that it is exercisable and maintainable throughout the Commonwealth and is thus not within the instant statutory description ``property New South Wales''. This is to be construed as property solely within New South Wales otherwise the power of the State to levy duty in relation to property which exists throughout the Commonwealth would be raised and no such submission was put forward on this point by the Commissioner. A further aspect is that there is no provision in the legislation for apportionment in relation to conveyances or leases although the Court itself could in a proper case no doubt remit the matter to the Commissioner to make an apportionment (see sec. 124(4)),
Eastern National Omnibus Co. Ltd. v. I.R. Commrs (1939) 1 K.B. 161, Tooth & Co. Ltd. v. Commr of Stamp Duties 9 S.R. 652 at pp. 667-668. The final matter was that on the facts there is no material to suggest that either component of the fee payable under cl. 8, namely administration and advertising, contained any component referable to industrial property. Accordingly in my opinion the reference to industrial property in cl. 4 does not affect the finding I have made earlier in relation to property.

In saying this I come to the second point, namely that I am mindful of the definition of property in the Act as including ``any other right or interest''. Even so, it is proprietary rights and interests with which the definition deals (
Commr of Stamp Duties v. Yeend in (1929) 43 C.L.R. 235 per Isaacs J. at pp. 235 and 244).

It will be seen from the above that I have reached the conclusion that the plaintiff should succeed in this Stated Case. However there were submissions put to me by the Commissioner with which I should deal before concluding these reasons and to them I now turn.

The main submission of counsel for the Commissioner centred about recital (5) and cl. 2 of the Deed. It is put that by recitals (2) and (4) the club is identified as indeed it clearly is. Recitals (5) and (6) recite that the Franchisee desires, inter alia, that the Franchisor grant the right to carry on the business of the health club referred to in recital (2). The Deed then witnesses by cl. 2 that in consideration of the lump sum payment and in further consideration of the performance of the covenants of the Franchisee the Franchisor granted to the Franchisee the right to carry on the business and to utilise the equipment, fixtures and fittings installed. Emphasis is placed on the reference to the further consideration being the covenants, one of which covenants is set out in

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cl. 8. It is submitted that what was granted was the right to exploit the expertise and the business and its equipment in the sense of its goodwill and a going concern. The argument then continues that its goodwill and equipment is property within sec. 76. This may be accepted, and it is obvious that a business (including tenure to the premises in which it is carried on) can be the subject of sale, lease or other forms of disposition. Here, however, the consideration for the franchise of the business is the lump sum and the Franchisee's covenants. As mentioned, one covenant is cl. 8. However, cl. 8 in express terms is directed to and limited to the services and assistance specified in cl. 4. Although strictly not relevant the obvious alteration in the document makes this point so much more clear by the specific alteration of that clause as it was initially and alteration of that clause as it was initially and before execution. Then the consideration for cl. 4 was a continuing right to conduct the business and the subsequent intention of the parties relating to cl. 4 becomes so much more clear. Counsel sought to meet this by a submission that cl. 8 is not merely directed to cl. 4 but also for all matters including the business, its goodwill and equipment. To so say is to ignore the exclusive and independent nature of the terms of the clause. It is also to be seen that cl. 4 does not come under the heading ``Franchisee's obligations'' in cl. 3 where the covenants on its part are there specified and relate to the business but in a separate portion of the Deed. Finally, cl. 4 is not expressed in terms of covenant although of course it is an agreement expressed in a Deed. As a matter of construction where cl. 2 makes reference to covenants on the part of the Franchisee it is a reference to those covenants stated as such.

Counsel for the Commissioner also made reference to the provisions for assignment as being appropriate to the property although this submission was diminished in its effect by the circumstances that an assignment, if it occurred, was to be dealt with by way of novation. Similarly reference was made to cl. 22 dealing with relocation as showing that the Franchisor retained some interest in the goodwill of the business as also did the provisions relating to termination. This of course is obvious since the franchise was for a limited term and ultimately the business would be expected to revert to the Franchisor. It is curious however that although the term of the franchise is for a period of 40 years or the period of 21 years after the death of the last survivor of the descendants now living of His late Majesty King George VI whichever should occur first, the provisions of tenure of the premises are stated in cl. 23. The Franchisor and Franchisee with the consent of the Lessor were to enter into a sublease of the premises of which the Franchisor was then the lessee for an initial term terminating in 1986 with an option to renew for a further five years. There is no provision for tenure of the premises beyond that period.

Reliance was placed by counsel for the Commissioner on
Mortarty v. Evans Medical Supplies (1958) 1 W.L.R. 66 where their Lordships in the House of Lords were divided and the Court of Appeal decision therefore remained. It dealt with a transaction involving ``know-how'' and whether a capital or income receipt of the company's trade was involved. Viscount Simmons, with whom Lord Tucker agreed, said in his speech at p. 77 that property in the sense of a capital asset was involved and as I read it so too did Lord Keith. On the other hand, Lord Denning at p. 89 took the view that the possessor of ``know-how'' could use it to make things for sale or to teach for reward but he cannot sell it outright, that it was rather like the ``know-how'' of a professional man who could use it to earn fees but he cannot sell it as a capital asset for a capital sum. This is a view of course which is similar to that expressed by Latham C.J. (supra).

Subsequently in
Musker v. English Electric Co. Ltd. (1964) 41 T.C. 556 the problem was looked at by Viscount Radcliffe at p. 585 where he plainly said:

``There is no property right in `know-how' that can be transferred, even in the limited sense that there is a legally protected property interest in a secret process. Special knowledge or skill can indeed ripen into a form of property in the fields of commerce and industry, as in copyright, trademarks and designs and patents... But imparting `know-how' for reward is not like this, anymore than a teacher sells his knowledge or skill to his pupil.''

His Lordship went on to say:

``... that `know-how', though very naturally looked upon as part of the capital equipment of a trade, is a fixed asset only by analogy and, as it were, by metaphor. The nature of

ATC 4206

receipts from it depends essentially, I think, upon the transaction out of which they arise and the context in which they are received.''

Lord Donovan at p. 581 made observations to similar effect and explained Moriarty. (See also
Wolf Electric Tools Ltd. v. Wilson (1969) 2 All E.R. 724, and
Rolls Royce Ltd. v. Jeffrey 40 T.C. 443; (1962) 1 All E.R. 801; (1962) 1 W.L.R. 425, which was regarded by Viscount Radcliffe in Musker's case as imparting no more than a service.) It is to be remembered that in the same case it was said that where, as in Moriarty's case, ``know-how'' is imparted as one element of a comprehensive arrangement the moneys paid may properly rank as capital receipts whether or not independently quantified, per Viscount Radcliffe at p. 285.

These cases involve different legislation and questions of capital and/or income but nevertheless the observations are pertinent to the instant matter. However closely analysed and related to this instant transaction the principles expounded do not advance the submissions of counsel for the Commissioner but rather support those of the appellant.

For the reasons earlier given, in my opinion there is no ``conveyance'', there being no property involved. On this point I accept the submissions and authorities of counsel for the plaintiff referred to earlier to which should be added a further authority to which he referred,
Limmer Asphalte Paving Co. Ltd. v. I.R. Commrs (1871-1872) L.R. 7 Ex. 211 discussed also in Eastern National Omnibus Co. v. I.R. Commrs (1939) 1 K.B. 161. In the result the plaintiff succeeds overall in the matter and the appropriate answers to the questions will be discussed with counsel in the light of this judgment when formal orders will be made. I order that the Commissioner pay the plaintiff's costs of the summons. The exhibits may be returned.

In this matter the view that I have reached is that the plaintiff should succeed in the matter and consequence will be that the defendant Commissioner will pay the plaintiff's costs of this summons and the summons in the stated case, other than those occasioned by the amendment before Needham J.

I answer the questions submitted by the case stated as follows:

  • Q. 5A ``No''.
  • Q. 5B ``as in (ii) namely, $2,587.50''.
  • Q. 5C I order the defendant to pay the plaintiff's costs of the summons and stated case other than those occasioned by the amendment before Lee J.

The exhibits may be returned.

I publish my reasons.

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