Earle v. Federal Commissioner of Taxation.

Judges:
Derrington J

Court:
Supreme Court of Queensland

Judgment date: Judgment handed down 10 June 1986.

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Derrington J.

The appellant taxpayer, in partnership with her husband, was the owner of certain land which had been purchased by them for cattle grazing. It was acquired piecemeal, but ultimately an aggregation of approximately 1,800 acres was acquired. Not long after the acquisition the taxpayer and her husband, whom together I shall refer to as the partners, were approached by a Mr Brown who owned a rock quarrying company and who sought their permission to search for industrial rock upon their property.

In 1968, because of the ill health of the appellant's husband, the partners decided to sell the land, but on the advice of Mr Brown decided also to excise from the land sold and to retain a certain area which they correctly believed to contain commercial quantities of quarryable rock.

On 9 July 1970, they entered into a contract with Mr Brown's company to allow it to quarry rock upon the property. The terms of the contract are easily found in exhibit 6, and I shall not repeat them except to indicate that they coincided with those of later contracts, the essential parts of which I will refer to later.

In 1976, there was a further contract of the same nature with General Quarries Gilstone Limited which was the successor of Mr Brown's company. That company then assigned its interest in the contract to Pioneer Concrete Queensland Pty. Ltd., the successor of General Quarries Gilstone Limited. Pioneer Concrete took a further overlapping contract in 1980 for a further quantity of rock.

This appeal is brought in respect of an assessment of tax made by the Commissioner for the 1982 financial year upon the amounts received by the appellant during that year under the two contracts which were then current. It is unnecessary to go into detail as to the respective amounts except that together they total $86,738.40, of which the appellant was entitled to one-half share. It should be noted that the payments under the respective contracts were made by monthly instalments and were always paid on time and quite unrelated to any quantities of rock removed from the land.

The essential nature of each agreement is manifest in para. 1, 2, 4 and 27. Paragraph 1 provides for the sale by the partners of a specified quantity of rock with a right in the purchaser to remove it from the subject land. Paragraph 2 provides for a specific total purchase price for that quantity of rock and for the purchase price to be paid by monthly instalments. Paragraph 4 provides that the vendor permits the purchaser a specified period of time in order to remove the prescribed quantity of rock. It is to be noted that the payments of instalments were to be made irrespectively of the quantities taken, and that was so right up to the conclusion of the agreement. Paragraph 27 bears some interest and reads as follows:

``27. If it shall be found that there are not One million (1,000,000) cubic yards of industrial rock in the said land and if the Purchaser shall have quarried, cut and removed all industrial rock from the said land, the Purchaser shall be entitled to a rebate of the purchase price of $201,600 hereby agreed upon in respect thereof of a sum which bears the same proportion to the said sum of $201,600 as the quantity of industrial rock found to be short or deficient in the said land bears to One million (1,000,000) cubic yards of such industrial rock and if any purchase moneys shall have been paid by the Purchaser to the Vendors under this agreement in excess of the amount due by the Purchaser to the Vendor after deducting the said rebate, such moneys shall forthwith be refunded by the Vendors and shall be recoverable by the Purchaser.''

Two things to be noted about that. They are that there is to be a proportionate rebate first if the land did not yield up the prescribed quantity of material; and second if the purchaser should have quarried, cut and removed all the industrial rock from the land. These conditions are conjunctive which means that both would

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need to be fulfilled before the rebate could operate.

The Commissioner has made his assessment under sec. 26(f) of the Income Tax Act upon a determination that the payments to the appellant constituted a royalty, and that is the only issue in the appeal. The characteristics of a royalty, as in this type of circumstance, have been discussed in two cases dealing with this section of the Act or its equivalent. They are
McCauley v. F.C. of T. (1944) 69 C.L.R. 235 and
Stanton v. F.C. of T. (1955) 92 C.L.R. 630. The characteristics were said to be that the amount payable for the material should be calculated thereon by reference to the quantity taken as distinct from a sale of a particular quantity of material at a price based on the amount of material there: McCauley's case; and that the liability to make payments should arise if and when the material is taken, and then it should be to pay an amount calculated at a specific rate upon the quantity taken: ibid.; alternatively that the payments should be made in respect of the particular exercise of the right to take the substance and therefore should be calculated either in respect of the quantity or value taken (my emphasis) on the occasions on which the right is exercised: Stanton's case.

The terms of the contract are very closely similar to those of the relevant contract in Stanton v. F.C. of T. (supra) where the payments were found not to be royalties. There is one small divergence which formed the basis of one branch of the argument of learned counsel for the Commissioner. That divergence consisted of the presence in para. 27 of the subject contract of the reference to the purchasers having quarried, cut and removed all industrial rock from the land. That was not contained in para. 20, the equivalent term of the contract in Stanton's case, and it was submitted that in some way that distinguishes that case from the present. With due respect to that argument, it is not so. On the contrary, if anything, the additional phrase in the subject agreement, by imposing an additional constraint upon rebate removes by one further step any suggestion that the contract in this case could be regarded as one where the payments provided for must be made in relation to the quantity of material actually cut or removed in pursuance of a right to do so even if that constraint be related to the quantity of material actually removed. That latter description of the standard is in conformity with a passage in Stanton's case descriptive of a royalty. The phrase relied upon by the Commissioner creates an additional requirement which be fulfilled before the rebate can reform the purchase price proportionately to any shortfall in the agreed removable quantity so this makes the whole agreement less in the nature of one providing for payment depending upon the quantity removed. Further the phrase itself does not create or enhance any existing provision of that kind. It does not oblige the removal of all the winnable material, and the price must be paid whether that be done or not. Its purpose is difficult to understand, but it is clear that it does not transpose the arrangement into one having the characteristics of the payment of a royalty as indicated above. It is simply an adjustment of a bulk-purchase price in the event of a shortfall.

Whilst by reason of this additional phrase in the subject agreement there is certainly a difference between the two respective clauses in the subject agreement and Stanton's case, that difference does not constitute a distinction in respect of the issue that is before this Court, and the argument on that ground is not adopted.

The second ground of distinction between Stanton's case and the present, as submitted on the Commissioner's behalf, is this. In the present case there was a series of sales of specified quantities at specified prices while in Stanton's case only one contract was dealt with in the judgment, though it must be observed that the report is silent on the question as to whether there were any other contracts in a series. Speaking realistically, one might assume that there were not for otherwise they would probably have been referred to by learned counsel in argument which was obviously very thorough. The position is somewhat equivocal, but the correctness of this premise may be adopted for discussion.

Now the essence of this argument is that given that the payments made under each agreement were not so related to the quantity taken as to have the characteristics of a royalty in respect of that particular contract, nevertheless, if an overview is taken of the series of contracts that have been entered into by the partners for the sale of the material found to be upon the land, then because there is a specific sum provided to be paid in respect of a specific quantity of material to be removed in

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respect of each of the contracts, as a series they manifest the characteristic of a royalty that there is to be a payment associated with the extraction of a particular quantity within a particular whole period of time; and that the long-term view consequently shows that there is a real relationship between the quantity taken and the price.

This is a refinement of considerable interest and is well taken. It is conceivable that in appropriate circumstances it might be successful in this or another area, but it is impossible to see how the character of the payments made in this case do change from being a simple payment for the purchase of material to one with the characteristics of a royalty. The amount payable for the material is still not calculated upon the amount of material taken but upon the right to take the whole of the specified quantity, whether the right is exercised or not. The obligation of the purchaser to make payment is not attached or the taking of the materials, for the payment is due whether the purchaser exercises his right or not. It is of no consequence that there may be a commercial imperative for his full exercise of those rights, for the necessary legal relationship between taking and paying is the feature of a royalty which is absent here, even in the totality of contracts. The payments never become associated with the actual exercise of the rights and even in the overview of all the transactions never lose association with only the right to exercise the rights. The total view works no transmogrification.

In expressing myself in that way, I wish to indicate that, whilst the characteristics of the payments do not change here, it does not mean that in some possible circumstances they could not so change.

The result is that the second argument of the Commissioner cannot be adopted and the appeal is upheld.

There will be judgment in terms of the draft order agreed upon by counsel.