Federal Commissioner of Taxation v. Spedley Securities LimitedJudges:
Full Federal Court
Fox, Fisher and Sheppard JJ.
We are hearing an appeal from the Administrative Appeals Tribunal in a taxation matter. As the appeal comes from a Presidential Member (Purvis J.) we sit as a Full Court.
Spedley Securities Limited (``Spedley'') is a merchant bank. For the year ended 31 October 1980, by notice of assessment dated 19 March 1981, it had been assessed to tax on an amount of $200,000 which was paid to it by Santos Limited (``Santos'') after an agreement between them was terminated in which Spedley was to secure the equivalent of $A65,000,000 by way of loan for a mining enterprise about to be carried out in South Australia by Santos. Spedley lodged a notice of objection, dated 13 May 1981, against the assessment, and the objection was disallowed by letter dated 9 December 1981. The Tribunal found that the
ATC 4128$200,000 was not liable to tax and it set aside the decision of the Commissioner and allowed the objection in full. The Commissioner appeals to this Court.
The agreement between Spedley and Santos, as varied, provided that the commission payable to the taxpayer was 1¼% of the amount of the loan. The immediate cause of the termination was the introduction of legislation which reduced the percentage of issued shares any one shareholder could own in Santos, and this directly affected Bond Corporation Holdings Limited which had acquired 37.5% of the capital of Santos. Mr Alan Bond had become deputy chairman of Santos and was active in connection with the enterprise.
A discharge was executed on 23 April 1980, which was apparently at or about the time of the payment, but many months after the agreement had come to an end, which was in or about July 1979. The taxpayer had by July done most of the work in arranging the finance. It had found prospective overseas lenders and the main matters remaining were documentation and the approval of the Reserve Bank.
After negotiation, an entire sum of $200,000 was accepted. Its payment was the subject of agreement, but there was no agreement as to the way in which it was made up. The evidence as to the way the settlement was seen, from one side or another is scant. On the hearing of this ``appeal'' (which is nevertheless brought in the original jurisdiction of the Court) we can only determine questions of law (see
F.C. of T. v. Brixius 87 ATC 4963). We are bound by the findings of fact of the Tribunal, unless, indeed, it can be shown that there was no ``evidence'' to support a stated finding or conclusion of fact. It can be remarked, incidentally, that this is not an easy task, having in mind, in particular, that the Tribunal, as well as not being bound by the rules of evidence, can inform itself as it sees fit (Administrative Appeals Tribunal Act 1975, sec. 33(1)).
The Tribunal made the following principal findings or comments upon the facts:
``The evidence establishes that the amount of $200,000 was offered, accepted and paid:
- (i) by way of a lump sum;
- (ii) in respect of unliquidated damages;
- (iii) after a consideration of the various possible heads of damage to business standing or reputation;
- (iv) as a `first and last offer' and `in release of all claims' without any break up of component parts being communicated between the parties;
- (v) without apportionment or any indication as to the inclusion or non-inclusion of a fee element.
``In my opinion the character of the receipt of the sum of $200,000 resulting from the peremptory termination of the mandate given by M.C. Limited [Santos Ltd.] to S. Securities Limited was one whereby for a lump sum payment all claims that S. Securities Limited had, or might have had, against M.C. Limited were resolved. The claims so resolved included a claim for the effect that the termination had or might have had upon the reputation, standing and goodwill of S. Securities Limited and it may have included an amount in respect of expenses or disbursements incurred. There was however, no differentiation of the one item from the other; it was a lump sum settlement. The compromise so reached as evidenced by the release document was intended to have a legal effect, not only upon the rights of S. Securities Limited but on those of M.C. Limited. It was intended to preclude any right of action in the future that the one may have had against the other, arising out of the mandate that had been terminated. The payment made was in settlement of a number of claims as evidenced by the matters put during the settlement discussions and negotiations.''
The Tribunal found that at the time of termination of the mandate, there was possibly not a present entitlement to any part of the commission which was to be paid to Spedley, the funds negotiated to be received by Santos not then having been drawn down. Normally, it said, the entitlement to any commission accrues ``after the deal [is] done''. The Tribunal considered that no part of the lump sum payment was attributable solely to or identifiable with the fees which, but for the termination, might have been earned under the mandate.
The agreement respecting $200,000 was accepted and binding on Santos, but was apparently executed only by the taxpayer. This is the release document referred to in the second of the passages cited above. It provided that Santos would request that the taxpayer, in certain events, be given the opportunity to become sub-underwriter in connection with certain share issues, or the opportunity to purchase the rights of non-resident shareholders to them but, so far as appears, what was provided for in this connection is unrelated to the release aspect. The amount of $200,000 was, however, expressed to be the consideration for the release.
We set out this part of the document in full:
``Spedley HEREBY ACCEPTS the said agreement on the part of Santos Limited to pay the said sum of TWO HUNDRED THOUSAND DOLLARS ($200,000) in full and final satisfaction, settlement and discharge of all actions, costs, claims, charges, demands and expenses whatsoever which Spedley now has or hereafter may have or but for the execution hereof might have had against Santos Limited or its servants or agents for or on account of or in any way whatever arising out of or connected with any advice, assistance or services provided or offered by Spedley to Santos Limited or any other person in connection with the raising or proposals to raise for Santos Limited a loan of the equivalent of Australian SIXTY FIVE MILLION DOLLARS ($A65,000,000) or otherwise and Spedley HEREBY RELEASES AND DISCHARGES Santos Limited and its servants and agents and each of them from all such actions, costs, claims, charges, demands and expenses whatsoever and Spedley HEREBY UNDERTAKES not to commence or proceed with any action or proceedings against Santos Limited or any of its servants or agents in respect of any claim for any fee remuneration expenses or damages arising out of or in any way connected with any such advice, assistance or services or otherwise AND Spedley agrees if called upon by Santos Limited so to do to execute a formal Deed of Release in respect of the premises for the purpose of giving effect hereto AND Spedley agrees that this Discharge may be pleaded in bar to any action or other proceeding now or at any time hereafter commenced by Spedley against Santos Limited or any of its servants or agents for any such fee, remuneration, expenses or damages as aforesaid.''
It has not been argued that the arrangement concerning sub-underwriting and share options was part of the consideration for the release, and we do not know what happened in connection with it.
There were two principal submissions made by the appellant. The first as we noted it, was ``as a matter of construction of the deed and as a matter of analysis of other facts identified by the Tribunal the only possible conclusion is that the moneys were paid, not for loss of reputation, but for loss of commission''. This submission, as presented, really had three aspects. The first is the alleged failure of the Tribunal to construe the discharge as providing for compensation exclusively for loss of fees. The second aspect is that there was no evidence upon which the Tribunal could have concluded that the claim for loss of reputation or goodwill was a valid or enforceable claim and that therefore there was no evidence that the release would in this respect be other than illusory.
In respect of the first aspect it is pointed out that the discharge document does not mention goodwill or loss of reputation, and it is argued at the same time, in relation to the second aspect, that loss of business reputation or goodwill is not recoverable as a head of damage in an action for breach of contract, assuming for the sake of the argument that the latter was available (cf.
Addis v. Gramaphone Company Ltd. (1909) A.C. 488). The claim for loss of reputation is, it is said, therefore not a valid claim, and consequently the release therefrom is illusory. What counsel seeks to do is to circumscribe, or categorise, the nature of the receipt by reference to the legal claims which are discharged. In our view, this approach is misleading.
The discharge document relates to all possible claims arising out of the termination. It is in wide and comprehensive terms, plainly going beyond the necessities of the case. What it does do, assuming its effectiveness, is to bar legal proceedings. It does not follow that because a particular matter of complaint could not, or might not, lead to a legal claim, it has no existence. If it did, or could, its prosecution would be barred. Nor does it follow that the
ATC 4130payment is related only to matters with which the discharge deals. The nature of the receipt and the causes of action (if any) to which the termination gave rise are distinct.
On the facts of this case, it was the evidence that it was thought by Spedley and its advisers that an action for damages for loss of reputation and damage to goodwill would lie. More will be said of this matter in a moment when we consider the third aspect of the submission. It may have been that, by way of damages, an amount could have been recovered, possibly in excess of $200,000, which could have been capital or income. We do not express any view on what, if anything, might have been recovered in an action. There is no adequate basis for saying that the release was illusory; on the contrary it was undoubtedly meaningful and of practical importance to Santos.
In sum, we do not think that the discharge is of assistance in resolving the present question.
The third aspect of the submission as put, is that as a matter of analysis of the facts before the Tribunal it is quite obvious that the amount must have represented part of the agreed commission. We do not find this assertion at all convincing. The most that can be said is that quite possibly some part of the agreed commission played a part in arriving at the figure of $200,000. There was, however, evidence of concern by Spedley's principals for its reputation in the international money market. It had been formed for only two years and this was its largest endeavour. It seems to us to be perfectly reasonable that a main concern was its international (as well as its national) standing. One thing that had happened was that the principal overseas lender, having earlier been satisfied as to the taxpayer's mandate to negotiate, was told by Santos at a late stage to deal direct with it. The Tribunal found that Mr Yuill, the managing director of Spedley, had informed Mr Bond that according to legal advice the former had received, Spedley's most substantial claim against Santos would be for damage to its reputation and goodwill and that this would be the primary ground of relief in any proceedings taken. This finding was supported by the evidence, which included the evidence of the solicitor who had given the advice.
There was also evidence in an affidavit of Mr Coulter (sworn 11 June 1987), a managing director of Credit Commercial de France, a merchant bank operating in Australia, that the termination of the mandate would have damaged Spedley's reputation. In his opinion, bank officers who discovered that Spedley no longer had a mandate from Santos might well conclude that Spedley had misrepresented its mandate or otherwise acted irregularly, or that Santos had terminated the mandate because it had lost confidence in Spedley. This would result in Spedley's next approach to each of the banks being closely scrutinised. This evidence was not challenged.
There was therefore evidence upon which the Tribunal could hold that the payment was, at least in a substantial part, recompense for damage to its reputation.
The second principal submission relies on the recent decision of the High Court in
F.C. of T. v. Myer Emporium Ltd. 87 ATC 4363; (1987) 61 A.L.J.R. 270. The decision in that case was given jointly by five Judges, doubtless with some recognition that the Court was reversing cumulative decisions of the Supreme Court of Victoria, and this Court on a question of whether a receipt was, on the application of the Income Tax Assessment Act 1936 (the ``Act'') sec. 25(1), one of capital or income. The case is strong authority for what it decides, but it may only have taken a different view of the facts than had the lower courts. The use made of the decision in this case on behalf of the Commissioner is to say that the amount in question was received in the course of business operations, the operations, taken broadly, being intended to produce a profit. The phrase ``in the course of'' involves a temporal connection. If the proposition were correct, it would mean that any receipt by a business would necessarily be of an income nature, and this would be contrary to authority, to the Act itself and to basic concepts concerning the distinction between capital and income. In Myer what was received related solely to income by way of interest on a loan made by the taxpayer, the amount received being for a transfer of the right to receive the interest in the future. The High Court did not base its decision on Myer being, in a broader sense, a profit-making company. The purpose of profit making must exist in relation to the particular operation. Compare the decision of the Administrative Appeals Tribunal in Case U224 (Fisher J., R.A. Layton and D.J. Trowse) 87 ATC 1238 at p. 1250.
In the present case the amount received comprised or included recompense for damage to goodwill, which, it is agreed, is an item of capital. The point of the present case is that what was received was a lump sum, the ingredients of which were not identified (there may in fact have been no dissection made on either side) but which, it was held, included compensation for injury to a capital asset. There is no basis for dissection or apportionment. In these circumstances, in accordance with authority (
McLaurin v. F.C. of T. (1961) 104 C.L.R. 381;
Allsop v. F.C. of T. (1965) 113 C.L.R. 341; and see Parsons, Income Taxation in Australia (1985) para. 1.78) the whole receipt is to be treated as one of capital. Queries concerning McLaurin are made by Professor Parsons in his work (para. 2.558 et seq.) but they relate to the matter of apportionment, and it has not been contended here that the amount paid could be divided, or apportioned. The Tribunal found that there was not any evidence that the quantum of out-of-pocket expenses incurred by Spedley in securing the loan had been communicated to Santos, although the fact of Spedley having incurred disbursements was a fact well known to Santos. It is not clear what part this amount played in the final settlement, and there is no specific evidence of any relevant claim for an income tax deduction in respect of it (see
H.A. Sinclair & Son Pty. Ltd. v. F.C. of T. (1966) 114 C.L.R. 537).
In our view, the appeal should be dismissed, with costs.