TNT Skypak International (Aust.) Pty. Ltd. v. Federal Commissioner of TaxationJudges:
This is an appeal by the taxpayer from a decision of the Administrative Appeals Tribunal [reported as Case U9, 87 ATC 138] whereby the Tribunal affirmed the decision of the Commissioner of Taxation which was under review. The Tribunal rejected the taxpayer's case that an amount of $95,200 had wrongly been included in the assessable income of the taxpayer for the year ended 30 June 1983.
Section 44 of the Administrative Appeals Tribunal Act 1977 (``the AAT Act'') restricts the proceedings in this Court to an appeal ``on a question of law''.
The taxpayer, TNT Skypak International (Aust.) Pty. Ltd., was formerly named
ATC 4280Newspak International Pty. Ltd. In its income tax return in respect of the year commencing 1 August 1982 and ending 30 June 1983, the taxpayer, under the heading ``PROVISION FOR EMPLOYEE BENEFITS'' in Sch. 4 (dealing with additions to provisions and reserves, being items not allowable as deductions) included the following:
``Transfer on Acquisition of Business $108,973.''
On 18 April 1984, the Deputy Commissioner wrote to the accountants of the taxpayer seeking, inter alia, the separate amounts of holiday pay, sick leave and long service leave included in this amount. The accountants replied on 8 June 1984 as follows:
(a) The amount of $108,973 transferred to the company on the acquisition of the business by TNT Ltd. [sic] from Ipec Holdings Ltd. was comprised of the following amounts:(a) Holiday pay $ 95,200 (b) Sick leave $ 200 (c) Long Service Leave $ 13,573 -------- $108,973 --------''
This information was contrary to the facts as later established before the Tribunal by evidence led for the taxpayer. In truth, no such sum was ``transferred'' to the taxpayer, and the Commissioner was led (no doubt unwittingly) into dealing with the assessment on a factually false basis.
The Commissioner issued an Amended Adjustment Sheet which included $95,200 in the assessable income of the taxpayer for the period in question as ``Amount in respect of Holiday Pay Transferred''.
Before the Tribunal, the relevant grounds of objection were:
- (i) that the amount of $95,200 was not income for the purposes of sec. 25 of the Income Tax Assessment Act 1936 (``the Tax Act'') nor for any other provision of that statute and accordingly was not assessable to income tax under sec. 25 or any other provision of the Tax Act.
- (ii) that the amount of $95,200 was a receipt of capital or a receipt of a capital nature and accordingly was not assessable to income tax pursuant to sec. 25 of the Tax Act or any other provision of the Tax Act.
As I have indicated, at the hearing before the Tribunal, it emerged that there was no payment to the taxpayer of $95,200 or any other amount for or on account of holiday pay liabilities. Rather, what occurred was the taking up in the accounts of the taxpayer of an amount on account of this and other employee benefits equal to the provision that had been made in respect of such items by the previous owner of the business acquired by the taxpayer. The taxpayer's submission to the Tribunal was that such a taking up of a provision by the taxpayer in its accounts did not constitute the derivation of assessable income in accordance with ordinary principles or under any specific provision of the Tax Act.
The Tribunal held that the amount in question was income according to ordinary concepts, and, further, that it was also brought into the assessable income of the taxpayer by the operation of sec. 26(j) of the Tax Act. The reasoning by which the Tribunal reached these conclusions is by no means clear. It is fair to say that on the appeal both parties developed their submissions as the law applicable with no great regard to the Tribunal's reasons, whilst praying in aid what each said were actual or ``inferential'' favourable findings of fact.
The taxpayer contends that the Tribunal fell into errors of law which this Court should correct. The Commissioner takes the preliminary point that, contrary to the submissions for the taxpayer, the appeal is not brought ``on a question of law'' as required by sec. 44 of the AAT Act but on questions of fact, with the result that the appeal is incompetent.
The competency of the appeal
Whilst it is a trite observation, proceedings in the Court brought pursuant to sec. 44 do not constitute an appeal from any decision which has been given in respect of a ``matter'' (in the sense of Ch. III of the Constitution) by a court exercising the judicial power of the Commonwealth; the proceedings in this Court are proceedings in the exercise of original jurisdiction.
Farbenfabriken Bayer Aktien-Gesellschaft v. Baver Pharma Pty. Ltd. (1959) 101 C.L.R. 652 at p. 657;
Committee of Direction of Fruit Marketing v. Australian Postal Commission (1979) 25 A.L.R. 221;
Minister for Immigration and Ethnic Affairs v. Gungor (1982) 42 A.L.R. 209.
Section 44 of the AAT Act is expressed in narrower terms than the old sec. 196 of the Tax Act. This provided for appeals from the Board of Review which ``involved'' a question of law. The result was that if some question of law was involved, the whole of the decision of the Board was open to review, not merely the question of law:
XCO Pty. Ltd. v. F.C. of T. 71 ATC 4152 at pp. 4154-4155; (1971) 124 C.L.R. 343 at p. 348;
McCormack v. F.C. of T. 77 ATC 4543 at pp. 4544-4545 and 4548-4549; (1977) 33 F.L.R. 53 at pp. 55, 61-62 (reversed on other grounds 79 ATC 4111; (1978-1979) 143 C.L.R. 284).
The history of the old sec. 196 is traced in
Watson v. F.C. of T. (1952-1953) 87 C.L.R. 353 at p. 373; see also, Zines, The High Court and The Constitution, 2nd ed., pp. 166-177. As Starke J. put it in
F.C. of T. v. Lewis Berger & Sons (Australia) Ltd. (1927) 39 C.L.R. 468 at p. 469, the Board exercised not the judicial power of the Commonwealth, but the administrative function of reviewing the Commissioner's assessments to ascertain the taxable income upon which tax should be levied. The Board's decision was not an adjudication and did not create an issue estoppel:
W.J. & F. Barnes Pty. Ltd. v. F.C. of T. (1957) 96 C.L.R. 294 at p. 315 per Kitto J. cf.
The Commonwealth of Australia v. Sciacca (Full Court, 31 March 1988, unreported). Before the Court, the ascertainment of the taxpayer's liability was submitted to judicial review. That is to say, if the condition as to jurisdiction were met (i.e. there was a question of law involved) the whole of the ``matter'' or controversy between the taxpayer and the Commissioner came before the Court. This no longer will be the case with appeals brought to this Court under sec. 44 of the AAT Act. The existence of a question of law is now not merely a qualifying condition to ground the appeal, but also the subject matter of the appeal itself:
F.C. of T. v. Brixius 87 ATC 4963 at p. 4967.
The constitutional setting of sec. 44 of the AAT Act indicates that some care is necessary in treating as applicable to the construction of sec. 44, in its application to revenue matters, decisions upon the taxation review structures in other jurisdictions which lack the significant distinction found in Australia between judicial power on the one hand and executive or administrative power on the other. What has been said, for example in the House of Lords in
Edwards (Inspector of Taxes) v. Bairstow (1956) A.C. 14 at p. 38, as to the significance to be attached to the decision of the Commissioners as the first step in an integrated review system in revenue cases, in my view should not necessarily be treated as offering a safe or appropriate analogy for this country: cf.
Blackwood Hodge (Australia) Pty. Ltd. v. Collector of Customs (N.S.W.) (1980) 47 F.L.R. 131 at pp. 145-146;
Tabag v. Minister for Immigration and Ethnic Affairs (1982) 70 F.L.R. 61 at pp. 71-72 and 75-83; F.C. of T. v. Brixius (supra) at p. 4968.
In any event, one must bear in mind the force of the frank confession by Scott L.J. in
Rothwell v. Caverswall Stone Co. Ltd. (1944) 2 All E.R. 350 at p. 362, as to the drawbacks in ``splitting'' jurisdiction between factual and legal issues. His Lordship (speaking of workmen's compensation legislation) said:
``The question of whether and to what extent the incapacity of a workman results from an injury within the Act is obviously very often what is loosely called a mixed question of law and fact; Wills's Workmen's Compensation, 36th Edn., pp. 263-317, is packed with a vast number of appellate decisions in which the courts have sometimes thought the decision of the county court judge (or his Scottish counterpart) was a decision of pure fact and refused relief, but in the great majority have discerned a mixed question of law and fact susceptible of appeal. In the latter event it means that the appellate court has analysed the decision of the first instance and seen that behind the factual form there has lurked a question of law - often a principle of high importance in the interpretation of the Act. But where the analysis is difficult and it is hard to see exactly what the point of law really is, there is a terrible temptation - to which I am sure my brethren will at least theoretically confess, and to which I am equally sure that I have myself succumbed before now - to shirk the intellectual task and take refuge in the view that the judgment under appeal was a finding of fact, with which we are forbidden to interfere.''
Further, in the Australian context, that limitations on jurisdiction in cases arising under revenue laws are to be carefully scrutinised is suggested by the principles evolved as to ``incontestable'' taxes. In
MacCormick v. F.C. of T. 84 ATC 4230 at p. 4237; (1983-1984) 158 C.L.R. 622 at pp. 640-641, Gibbs C.J. Wilson, Deane and Dawson JJ. said:
``For an impost to satisfy the description of a tax it must be possible to differentiate it from an arbitrary exaction and this can only be done by reference to the criteria by which liability to pay the tax is imposed. Not only must it be possible to point to the criteria themselves, but it must be possible to show that the way in which they are applied does not involve the imposition of liability in an arbitrary or capricious manner. In
Giris Pty. Ltd. v. F.C. of T. 69 ATC 4015 at pp. 4021-4022; (1969) 119 C.L.R. 365 at pp. 378-379, Kitto J. pointed out that the expression `incontestable tax' in the sense in which it is used in Hankin and Brown
- `... refers to a tax provided for by a law which, while making the taxpayer's liability depend upon specified criteria, purports to deny him all right to resist an assessment by proving in the courts that the criteria of liability were not satisfied in his case.'
The purported tax is thereby converted to an impost which is made payable regardless of whether the circumstances of the case satisfy the criteria relied upon for characterisation of the impost as a tax and for characterisation of the law which imposes it as a law with respect to taxation. Such an incontestable impost is not a tax in the constitutional sense and a law imposing such an impost is not a law with respect to taxation within sec. 51(ii). It is in this sense that an incontestable tax is invalid.''
D.F.C. of T. v. Brown (1957-1958) 100 C.L.R. 32 at p. 40, Dixon C.J. spoke of the general assumption that:
``[U]nder the Constitution liability for tax cannot be imposed upon the subject without leaving open to him some judicial process by which he may show that in truth he was not taxable or not taxable in the sum assessed, that is to say that an administrative assessment could not be made absolutely conclusive upon him if no recourse to the judicial power were allowed.''
In cases such as the present, the taxpayer had the option presented by sec. 187 of the Tax Act as it then stood, of having the decision of the Commissioner disallowing the objection referred either to the Tribunal or to a specified Supreme Court. In that sense, the administrative assessment was not made absolutely conclusive by denial of all recourse to the judicial power. Nevertheless, in my view, the important considerations to which the High Court has referred indicate that, where there is a choice between construing widely or narrowly a provision investing the Federal Court with jurisdiction with respect to an assessment under a revenue law, the former course is the preferable one.
Further, while the nature of the jurisdiction invested by sec. 44 of the AAT Act is such that to exercise it is to exercise the judicial power of the Commonwealth (Minister for Immigration and Ethnic Affairs v. Gungor (1982) 42 A.L.R. 209), that is not the extent of the significance of Ch. III of the Constitution. It should be noted both that jurisdiction may only be conferred with respect to ``matters'' in the constitutional sense, and that this means jurisdiction to quell the controversy between the parties:
Fencott & Ors. v. Muller & Anor (1983) ATPR ¶ 40-350 at p. 44,222; (1982-1983) 152 C.L.R. 570 at p. 608.
Section 44 of the AAT Act is not drawn in terms so as to confer jurisdiction on this Court in respect of ``matters''. No doubt sec. 44 is to be read as seeking to do so because otherwise it may not be a law defining the jurisdiction of this Court with respect to a matter, conformably with sec. 77(i) of the Constitution:
Philip Morris Inc. v. Adam P. Brown Male Fashions Pty. Ltd. (1981) ATPR 7 ¶40-197 at pp. 42,699-42, 700; (1981) 148 C.L.R. 457 at pp. 506-507, per Mason J.; Fencott & Ors v. Muller & Anor (supra) at ATPR p. 44,218; C.L.R. p. 602 per Mason, Murphy, Brennan and Deane JJ.
Section 44 is ambulatory in its operation, and picks up proceedings arising under a miscellany of federal laws. In the present case, the controversy between the parties arose from the dissatisfaction of the taxpayer with the assessment and the decision of the Commissioner to disallow the taxpayer's
ATC 4283objection. The taxpayer then exercised the rights given it by sec. 187 of the Tax Act, and the decision of the Commissioner was then referred to the Tribunal. The controversy between the parties thus arises under federal law:
Moorgate Tobacco Co. Ltd. v. Philip Morris Ltd. (1980) High Ct and Fed. Ct Practice ¶65-036 at p. 96,298; (1980) 145 C.L.R. 457 at p. 476 per Stephen, Mason, Aickin and Wilson JJ. There arises no claim under non-federal law as a footing for invoking ``accrued'' or ``pendent'' jurisdiction; cf.
O'Neil v. Wratten (1986) 65 A.L.R. 451. Nor is there any distinct but ``associated'' federal matter to attract sec. 32 of the Federal Court of Australia Act 1976.
It may be that in a given case, of which in my view (as I shortly shall indicate) the present is one, the factual controversy between the parties has been quelled before the Tribunal, so that all that remains outstanding between the parties are questions of law. There is no difficulty in such a case with the application of sec. 44 because sec. 44 will be coterminous with the matter submitted by the Parliament for resolution by the exercise of the judicial power of the Commonwealth. However, after the exhaustion of the administrative processes before the Tribunal, the parties may still be in controversy as to questions both of law and of fact. In such a case it might appear that the jurisdiction of this Court was, on the face of sec. 44, limited to less than the whole of the controversy and thus less than the whole of the matter arising under federal law. This would be because the effect of the law made by the Parliament would be to excise from the matter so much of the claims made therein as did not constitute questions of law. In such cases questions may arise as to the extent of the validity of sec. 44 of the AAT Act. I have already indicated that such questions did not arise with the old sec. 196 of the Tax Act. There, given compliance with the threshold requirement of a question of law, the whole matter was before the Court.
Putting to one side the appellate jurisdiction of the High Court provided for by sec. 73 of the Constitution, federal jurisdiction may arise under any of the heads listed in sec. 75 and 76 of the Constitution. Section 44 of the AAT Act is concerned with matters that arise under laws made by the Parliament (subsec. 76(ii) of the Constitution, as implemented for this Court by sec. 77 of the Constitution). It may be that with respect to matters which arise under a law made by the Parliament, it is for the Parliament to create the rights or obligations in question and in so doing to determine the content of matters arising under that law. In other words, the rights and obligations, which supply the foundation for the controversy which is the ``matter'', would be provided by the statute. The statute itself thus would govern the content of that matter:
The Queen v. Quinn; Ex parte Consolidated Foods Corporation (1977) 138 C.L.R. 1 at pp. 5 and 10. In this way, factual disputes might never be brought within the ambit of matters arising under the law in question. The only matter for the purposes of sec. 44 of the AAT Act which arose under laws made by the Parliament would be questions of law; questions of fact effectively would be excluded from the matter in respect of which this Court was invested with jurisdiction.
That would provide, in respect of the present case, a further answer to any doubts concerning sec. 44 of the AAT Act, in addition to that answer already suggested (viz. that the only controversy in this case concerns questions of law). It would, indeed, provide an answer generally in respect of sec. 44, even where the parties' controversy as to factual questions still remained outstanding. But it would not provide an answer applicable generally to matters in federal jurisdiction.
Where the source of the matter was not the circumstance that it arose under a law made by the Parliament within the meaning of subsec. 76(ii) of the Constitution, the problem would remain. For example, subsec. 75(iv) of the Constitution creates as a head of federal jurisdiction matters between residents of different States. Such a matter might involve a controversy with various claims in contract and tort, together comprising the controversy between the parties. A question would arise as to the competence of the Parliament to invest a federal court, purportedly pursuant to sec. 77 of the Constitution, with jurisdiction with respect to part only of those claims which together constituted a matter arising under subsec. 75(iv). In the case of matters grounded in subsec. 75(iv), it is the identity and status of the parties which gives their dispute the character of a ``matter'', not the content of the dispute; the content of the dispute is not one which necessarily arises under any federal law.
Questions of law and of fact
In order to succeed before the Tribunal, the taxpayer had the burden of satisfying the Tribunal that the assessment in question was excessive because the sum of $95,200 was not assessable income for the purposes of sec. 25 of the Act. It was alleged not to be assessable income because it was not income in accordance with the ordinary concepts and usages of mankind and was not otherwise rendered assessable income by the specific provision of the Act relied upon, namely sec. 26(j). This was the ultimate issue between the parties. There was little dispute between the parties as to the primary facts, although there was disagreement as to the legal consequences to be drawn from those facts. Ordinarily, the process of finding the facts by the Tribunal will not present a question of law:
Lombardo v. F.C. of T. 79 ATC 4542 at pp. 4544-4546; (1979) 40 F.L.R. 208 at pp. 210-212 per Bowen C.J.;
Waterford v. The Commonwealth (1986-1987) 163 C.L.R. 54 at p. 77 per Brennan J.
Whether the facts, once they have been found by the Tribunal, fall within the terms of a particular statute will frequently be a question of law. This, in my view, will be so even though the criterion fixed by the statute for its operation is so supple (if not subtle) that its application to given facts may be described as ``one of degree'' or ``of fact and degree''. Nevertheless, special considerations apply where on its proper construction (itself a question of law) the statute is found to use terms, not in any special or technical sense, but according to the sense they have in ordinary speech. If the statute adopts as its criterion a term used with its ordinary meaning, then whether the facts as found fall within that description will be a question of fact: Lombardo's case (supra) at ATC pp. 4544-4545; C.L.R. p. 210.
However, the material before the Court or Tribunal may reasonably admit (as matters of ``degree'' or of ``fact and degree'') of several conclusions as to whether the statutory criterion is satisfied. The question whether the material reasonably so admits of several conclusions is one of law. If the answer is in the affirmative, it is then necessary to decide which is the correct conclusion. That is a question of fact. These propositions are drawn from the authorities analysed in
Hope v. Bathrust City Council 80 ATC 4386 at pp. 4389-4390; (1980) 144 C.L.R. 1 at pp. 7-8 per Mason J.; cf.
Memorex Pty. Ltd. v. F.C. of T. 87 ATC 5034 at p. 5045.
Despite the apparent layman's language of the precept that the characterisation of a receipt or gain as income for the purposes of the Tax Act is to be determined in accordance with the ordinary concepts and usages of mankind
Scott v. C. of T. (1935) 35 S.R. (N.S.W.) 215 at p. 219) the meaning of the term ``income'' in the sense in issue in this case has been said to be a question of law:
Hayes v. F.C. of T. (1956) 96 C.L.R. 47 at p. 51 per Fullagar J.; XCO Pty. Ltd. v. F.C. of T. (supra) at ATC pp. 4154-4155; C.L.R. p. 348 per Gibbs J. See also
Commr of I.R. v. Walker (1963) N.Z.L.R. 339 at pp. 353-354 per Gresson P. This is because, despite the terms in which the precept to which I have referred is expressed, the term ``income'' in the expression ``assessable income'' is not used in some non-technical sense. The question of what (on facts as found) is income for the purposes of the Tax Act is as much, in my view, a question of law as the question of what is income and what is capital in a dispute concerning the respective rights of life tenant and remainderman. Moreover, the relevant principles of tax law and trust law may differ in the result of their application to the same facts:
Tindal v. F.C. of T. (1946) 72 C.L.R. 608.
What I have said so far has dealt principally with that part of the case concerned with whether the $95,200 assessed against the taxpayer was income according to ordinary concepts. In so far as the assessment was sought to be supported on the ground that sec. 26(j) applied, questions of construction of that section arise. I do not think it was seriously disputed that on that branch of the case, the appeal was on questions of law.
Accordingly, my conclusion is that the appeal is confined to questions of law. That is the content of the matter between the parties, in respect of which the Court is invested with jurisdiction. It follows that the preliminary objection to competency of the proceedings fails.
In order to evaluate the submissions made upon the questions of law on the appeal, it is appropriate first to turn in more detail to the
ATC 4285transaction out of which the dispute arises, and to the findings of fact made by the Tribunal.
Prior to February 1983, Ipec Holdings Ltd. (``Ipec'') either conducted itself or controlled through subsidiaries the conduct of an international courier business. The business was conducted in Australia and other countries under the name ``Skypak'', save in the United States where the style ``Ipec Courier'' was used. In Australia, the style ``Overseas Courier Service'' was also used. The effect of the arrangements hereinafter described was that this business was acquired by Thomas Nationwide Transport Ltd. (``TNT'') or its subsidiaries. This was achieved by:
- (a) the sale by Ipec to TNT of the whole of the issued capital of Skypak Holdings Pty. Ltd., a company incorporated in New South Wales; this was effected pursuant to a written agreement made between the vendor and purchaser on 15 February 1983;
- (b) the sale and purchase of the shares in another Skypak company, this being a company incorporated in the Netherlands Antilles; and
- (c) the purchase by the taxpayer, then named Newspak International Pty. Ltd., from Ipec of the business of the International Courier Division of Ipec Holdings Ltd. which was carried on in Australia and at the Bahrain Airport Office under the name ``Skypak International'' and in Australia under the name ``Overseas Courier Service''.
The dispute between the taxpayer and the Commissioner as to the $95,200 arose out of step (c). However, the transaction is best understood by first considering step (a), that is to say the agreement made 15 February 1983 between Ipec as vendor and TNT as purchaser. I should add (though nothing turns on it) that step (b) appears to have involved an agreement in like terms.
By the agreement of 15 February 1983, Ipec agreed to sell to TNT the whole of the issued capital of Skypak Holdings Pty. Ltd. (therein called ``Skypak NSW'') for a price of $A1,000,000, payable on completion; completion was to take place on 22 February 1983. The agreement contained a recital that Ipec had informed TNT that the aggregate of the liabilities of Skypak NSW and its subsidiaries, as shown in the consolidated statement of assets and liabilities of that company and its subsidiaries to be prepared after completion of the agreement as at 31 January 1983, would exceed the aggregate of the assets of Skypak NSW and its subsidiaries. Clause 3 then contained a provision for TNT to be ``compensated'' for this deficiency, notwithstanding completion. This was to be done forthwith upon the establishment of the deficiency, by Ipec forgiving debts owing to it by Skypak NSW or by any of the subsidiaries. If the aggregate of the debts so forgiven was less than the deficiency because sufficient debts were not available or otherwise, then cl. 3 obliged Ipec, unless Ipec and TNT agreed otherwise, to pay the ``shortfall'' to TNT on demand. Clause 4 contained provisions for the preparation after completion of an audited statement of assets and liabilities of Skypak NSW and the subsidiaries.
The taxpayer, as Newspak International Pty. Ltd., was a subsidiary of Skypak NSW and thus, after completion, became a subsidiary of TNT. Clause 7 of the agreement of 15 February 1983 provided that:
``After completion of this Agreement [Ipec] shall, if requested in writing to do so by TNT and/or Newspak International Pty. Limited within 1 month of such completion, sell to Newspak International Pty. Ltd. the business of its division carried on in Australia under the name `Skypak International by way of Newspak International Pty. Ltd. purchasing all the assets (the value thereof to be established on the same basis as assets are to be recorded under clause 4(2) and (3) above) which will include the registered business names `Skypak International' and `Overseas Courier Service' and the benefit of lease agreements, and assuming (and indemnifying [Ipec] against) all the liabilities (to the extent established as hereafter mentioned) thereof for a price representing the amount by which such assets exceed such liabilities...''
Clause 16 provided that each of the parties to the agreement, that is to say Ipec and TNT, should sign, execute and deliver all such further deeds and other documents and perform all such further acts as might be necessary or desirable to give effect to the terms of the agreement or to carry out its intent.
No written request was made in terms of cl. 7. However, on 23 March 1983, there was a meeting of directors of Ipec. The secretary reported that he received on behalf of Ipec an oral offer from the secretary of the taxpayer, Newspak International Pty. Ltd., for the purchase of the business of that company's International Courier Division, carried on in Australia under the name ``Overseas Courier Service'' and at Bahrain Airport under the name ``Skypak International'' upon certain terms and conditions. These terms and conditions are set out in the annexure to the minutes of the meeting. It was resolved that Ipec accept that oral offer and that this acceptance be communicated to the taxpayer. The annexure is headed:
``Terms and conditions applicable to purchase by Newspak International Pty. Ltd. (`Newspak') from Ipec Holdings Ltd. (`IHL') of the business of its international Courier Division (`the Division') carried on in Australia and at Bahrain airport office under the name `Skypak International' and in Australia under the name `Overseas Courier Service'''
Paragraph 2 states that the purchase is to be subject to Ipec giving to the taxpayer warranties in the form set out in an attachment. Paragraph 4 provides that ``The price shall constitute an interest free loan from Ipec to Newspak''. Paragraph 7 provides that the purchase shall be deemed to be effective and the taxpayer shall be entitled to the income and shall bear the expenses of the business as from the beginning of 28 February 1983, notwithstanding that possession of the business shall be given and taken from the date of acceptance of the offer by Ipec.
The provisions of primary importance for the present case are found in cl. 1 and 3. These provide as follows:
``(1) The purchase shall be effected by way of Newspak
- (a) purchasing from [Ipec] all the assets (other than book debts due or owing by customers) employed as at the end of 27th February, 1983 in the carrying on of the business of international couriers (the value thereof to be established on the same basis as assets are to be recorded under Clause 4(2) and (3) of Agreement dated 15th February, 1983 between Thomas Nationwide Transport Ltd. and [Ipec]) such assets to include the registered business names `Skypak International' and Overseas Courier Service' and the benefit of lease agreements (although no value is or shall be in the audited statement hereinafter referred to attributed thereto); and
- (b) assuming (and indemnifying [Ipec] against) all the liabilities as at 27th February, 1983 of the business (to the extent established as hereinafter mentioned)
for a price representing the amount by which the value of such assets exceeds the amount of such liabilities.
(3) The parties will procure that Peat Marwick Mitchell & Co. shall following the acceptence of the offer carry out with due despatch an audit and prepare an audited statement of assets and liabilities of the Division at the end of 27th February, 1983 and shall issue a certificate to [Ipec] and Newspak stating the price payable in respect of such sale.
The liabilities of the Division for this purpose shall include (without limiting the generality of the foregoing) in respect of the employees of the Division all amounts which at the end of 27th February, 1983 were due or accruing for or on account of:
- (a) long service leave, after an employee has been in [Ipec's] employment for more than 5 years;
- (b) annual leave, including any applicable loading;
- (c) sick leave (if Newspak, as the successor of [Ipec] as employer, will be liable under any relevant award for sick leave prescribed thereunder accumulated during the employee's employment by [Ipec]); and
- (d) any other matter whatsoever,
calculated having regard to the period of employment of each employee of the Division as a proportion of the relevant qualifying period.''
It is agreed by the taxpayer and the Commissioner that in respect of the employees
ATC 4287of the Division the sum of $95,200 was, at the end of 27 February 1983, due or accruing for or on account of holiday pay. It is also clear, as I have indicated, that no amount equal to this sum of $95,200 was paid by Ipec to the taxpayer. Rather, in the accounts of the taxpayer, there was the taking up of a provision of an amount equal to $95,200 on account of holiday pay.
Evidence was given before the Tribunal by a solicitor who was a director of Ipec at the time of the sale of the Skypak business that, with reference to these minutes and the annexure, the provisions of the annexure embodied the totality of the agreement between Ipec and the taxpayer as to the determination of the purchase price. He also gave evidence referring to the provisions for adjustment in respect of the deficiency provided for in cl. 3 of the agreement of 15 February 1983 between Ipec and TNT. He said his recollection was that Ipec had to allow TNT considerable sums because the audit of Skypak NSW and its subsidiaries and of the Netherlands Antilles company disclosed a deficiency of shareholders' funds. Accordingly, he agreed that the amount payable by Newspak to Ipec was ``applied or set off against the amount payable by Ipec to TNT''.
This is confirmed by documentary evidence. It shows that in August 1983 there was set off against the sum of $A4,463,210 (which was due to TNT from Ipec under cl. 3 of their agreement of 15 February 1983) the sum found due to Ipec from the taxpayer under their agreement for the purchase of the business of the Ipec International Courier Division. The result was that Ipec paid TNT the balance owing under their agreement of 15 February 1983, namely $A1,462,357.
There is no express statement in the minutes, or the annexed terms and conditions, that the employees of Ipec employed in the business in question were to become employees of the taxpayer, but it appears to have been assumed by the Tribunal that this is what was to happen.
The subject matter of the transaction between Ipec and the taxpayer was the purchase by the taxpayer from Ipec of the business of the Ipec International Courier Division carried on in Australia and at Bahrain airport office. The heading to the annexure so states. The expression ``the business'' thus referred to a complex of assets and liabilities. The liabilities could not be assumed in a legal sense by the taxpayer without novations with the creditors involved. For this the agreement did not provide. Rather, the assets of the business (as described in para. 1(a) of the minutes) were to be purchased and there was to be, as between the taxpayer and Ipec, an assumption of liabilities (i.e. a promise by the taxpayer to Ipec to pay the creditors of Ipec) together with an indemnity of Ipec by the taxpayer against claims by the creditors of Ipec. Thus, from a practical point of view, it may be said that the taxpayer ``assumed'' the liabilities of Ipec; cf.
F.C. of T. v. Foxwood (Tolga) Pty. Ltd. 81 ATC 4261 at p. 4264; (1980-1981) 147 C.L.R. 278 at pp. 285-286 per Gibbs J. Indeed, as Mason J. pointed out in the same case (at ATC pp. 4268-4269; C.L.R. p. 293), payment by the taxpayer to creditors of Ipec would enable Ipec to sustain a plea of payment to an action against it by any of those creditors.
The liabilities included amounts which, in the terms of para. 3 of the minutes, were ``due or accruing for or on account of'', inter alia, ``annual leave including any applicable loading''. In this case, unlike in the Foxwood (Tolga) case (supra), there was no material to indicate what were the applicable statutes or awards under which annual leave was payable. The business in question apparently was conducted in a number of jurisdictions.
The transaction between the taxpayer and Ipec thus called for the ``purchase'' of the business as described. The ``purchase'' in the opening words of para. 1 of the minutes is the purchase of the business described in the heading above para. 1. That ``purchase'' (i.e. the putting of the taxpayer in the place of Ipec) was to be achieved by several steps. First, Ipec was to sell and the taxpayer purchase the assets. Secondly, the taxpayer was to pay to Ipec the amount by which the value of those assets exceeded the liabilities. Thirdly, the taxpayer, in the sense I have described, undertook to Ipec that it would honour the liabilities in question and also indemnified Ipec against the claims of creditors in respect thereof. These steps, taken together, effectuated the purchase of the business in question. As I have indicated, the only sum to become due and payable by the taxpayer was that provided for in the second step. There was no payment earmarked for use by the taxpayer in discharging any liabilities; cf. the Foxwood
ATC 4288(Tolga) case (supra) at ATC p. 4267; C.L.R. p. 290. Further, it follows from what I have said that it would be a distortion of what occurred to single out one of the three steps involved, the sum paid as the second step, and treat this as ``the purchase price'' in the sense of the only consideration moving from the taxpayer in connection with the acquisition of the business in question.
Before the Tribunal, it was asserted by the Commissioner that whilst no sum on account of holiday pay was paid to the purchaser, there was nevertheless a set-off within the computation of which that sum was included. Reference was made to a passage in the judgment of Mellish L.J. in
Spargo's case (1873) 8 Ch. App. 407 at p. 414 (which was approved in
Larocque v. Beauchemin (1897) A.C. 358 at p. 365). His Lordship postulated a transaction where A was obliged to pay money to B and B obliged to pay money to A. In those circumstances, ``if the parties meet together and agree to set off one demand against the other, they need not go through the form and ceremony of handing the money backwards and forwards''. The principle thus requires there to be cross-debts, something which was not the case with the transaction between Ipec and the taxpayer. Before this Court, the Commissioner submitted that there was involved, in the reasons of the Tribunal, a finding to the effect that there had been cross-debts and a set-off. Those reasons are by no means easy to follow, but there was, in my view, no such finding. If such a finding had been made, it would have been contrary to other findings of fact and made on ``no evidence'' in the sense described by Bowen C.J. in Lombardo v. F.C. of T. (supra) at ATC pp. 4545-4546; C.L.R. p. 212, as giving rise to an error of law.
In August 1983, on the settlement of this transaction and of that between Ipec and TNT, there was a tripartite transaction which was loosely called (in the evidence to which I earlier referred) a ``set-off''. That does not touch the present point.
Section 26(j) of the Tax Act
This provides that the assessable income of a taxpayer shall include:
``[A]ny amount received by way of insurance or indemnity for or in respect of any loss -
- (i) of trading stock which would have been taken into account in computing taxable income; or
- (ii) of profit or income which would have been assessable income,
if the loss had not occurred, and any amount so received for or in respect of any loss or outgoing which is an allowable deduction.''
The threshold question is whether any amount at all, within the meaning of this provision, was received by the taxpayer. The taxpayer submits that there was no such receipt. In argument counsel contended that at best for the Commissioner the situation was as if assets worth, for the purposes of illustration, $100 were acquired for a sum of $40, and liabilities totalling $60 were ``assumed'' by the taxpayer, including therein a liability due or accruing of $10 on account of annual leave. Where, asks the taxpayer, was ``any amount'' which was ``received'' by the taxpayer by way of insurance or indemnity ``for or in respect of any loss... of profit or income'' which would have been assessable income if ``the loss'' had not occurred?
The Commissioner sought to counter this formidable argument by submitting that the ``amount'' in question for the purposes of sec. 26(j) may be ``received'' by a set-off of liabilities. There would have been such a set-off if, to continue with the above example, (i) the taxpayer had agreed to pay $100 to buy the assets, (ii) in consideration of the assumption of the liabilities by the taxpayer, Ipec had agreed to pay the taxpayer $60, and (iii) this $60 included $10 on account of holiday pay (which was susceptible of severance from the $60 by a process of dissection as described in
McLaurin v. F.C. of T. (1960-1961) 104 C.L.R. 381 at p. 391, and
Allsop v. F.C. of T. (1965) 113 C.L.R. 341 at pp. 351 and 352) leaving the taxpayer to pay $40 to Ipec. But there were no cross-debts, as I have earlier explained. The result is that there was no footing for the Commissioner to make good this submission.
That is sufficient to deal with the attempted application of sec. 26(j).
However, I should add that even if the Commissioner otherwise had been correct in his contention that the taxpayer had received an amount, in my view such an amount would
ATC 4289have been received by the taxpayer in return for the ``assumption'' by the taxpayer of the liabilities in question, and for the giving by the taxpayer of the indemnity to Ipec against the making on Ipec of claims by creditors. There would not have been any receipt by the taxpayer by way of insurance or indemnity, within the meaning of sec. 26(j). The form and nature of the transaction was not one where on any footing there was a receipt by the taxpayer of an amount by way of insurance or indemnity for or in respect of any loss of profit or income which would have been assessable income if the loss had not occurred.
Income according to general concepts
The Commissioner begins by pointing to the undoubted truth that there may be a gain constituting a derivation of income according to general concepts without a receipt of money, provided at least that the gain is one which is convertible into money in a practical and commercial sense:
Abbott v. Philbin (1961) A.C. 352;
Heaton v. Bell (1970) A.C. 728.
The fundamental question on this branch of the case is whether there was a transaction possessing as regards the taxpayer those attributes ordinarily regarded as the attributes of a transaction of a revenue nature giving rise to income as commonly understood:
A.L. Hamblin Construction Pty. Ltd. v. F.C. of T. 74 ATC 4001 at pp. 4008-4009; (1973-1974) 130 C.L.R. 159 at pp. 170-171 (reversed on other grounds, 74 ATC 4310; (1974) 131 C.L.R. 570). The Commissioner does not point to any authority as plainly indicating an affirmative answer to that question as posed by the facts of this case.
Rather, the Commissioner prays in aid proposition 15 of the propositions concerning the concept of income according to ordinary usage, which are propounded by Professor Parsons in his work Income Taxation in Australia at p. 165. Proposition 15 is that:
``A gain which is compensation for an item that would have had the character of income, or for an item that has the character of a cost of deriving income, has itself the character of income.''
The Commissioner submits that in the present case, the gain, to use the example adapted earlier in these reasons from illustrations used by counsel in the course of submissions, was the acquisition, for a cash outlay of $40, of assets worth $100, and the $60 worth of value so gained was, as to $10, in exchange for the assumption by the taxpayer of an obligation to pay for an item that had the character of a cost of deriving income viz. payment of $10 annual leave. Translating that example to the present facts and to the terms of proposition 15, it is said that the taxpayer acquired the assets of Ipec's business for a lower cash outlay than the value of the assets and as to a proportion of the value of those assets, viz. $95,200, the taxpayer derived a gain by way of compensation for it assuming an obligation to pay a revenue outgoing. Therefore, the Commissioner submits, the gain of $95,200 itself has the character of income.
Counsel for the Commissioner pointed to a number of authorities which he submitted were consistent with, if not plainly illustrative of, the terms of proposition 15. The first of these was
Burmah Steamship Co. Ltd. v. I.R. Commrs (1930) 16 T.C. 67, where damages, received for breach of contract by a late delivery of a ship thereby rendered unavailable for trading operations, were included as a trading receipt of one of the ship owners. In the course of his judgment the Lord President, Lord Clyde, said (at pp. 72-73):
``In the present case there can be no doubt that, when the Appellant entered into the contract with the repairers, the consequences of a failure by the latter to deliver punctually, which were in the contemplation of both parties at the time, were that the Appellant would be deprived of the opportunity of putting the vessel to immediate profitable use in his business. It was in respect of this deprivation that the damages were recovered. The contemplated `hole' in the Appellant's profits was unfortunately made, and in my opinion the damages recovered must go, as a matter of sound commercial accounting, to fill that `hole', and therefore constitute a proper item of profit in the Appellant's profit and loss account.''
Other cases included
Gray v. Lord Penrhyn (1937) 21 T.C. 252 (in which the recoupment by a trader from a negligent auditor of an amount of fraudulent misappropriation from wages accounts, not detected by the auditor, was a trading receipt);
Vaughan v. Archie Parnell and Alfred Zeitlin Ltd. (1940) 23 T.C. 505 (in which damages for breach of an
ATC 4290exclusive licence in respect of Sir Noel Coward's play Cavalcade, by the licensing of the film rights to a third party so that the film was shown extensively during the currency of the licence, were a trading receipt);
Roberts v. W.S. Electronics Ltd. (1967) 44 T.C. 525 (in which moneys paid in settlement of a claim against officers of the taxpayer company for breach of fiduciary duty by diversion of profits from the company were treated as a revenue receipt as going to reduce the company's loss);
Carapark Holdings Ltd. v. F.C. of T. (1966-1967) 115 C.L.R. 653 (in which proceeds of insurance on the life of an employee of insurance on the life of an employee of a subsidiary company of the taxpayer were received on revenue account as gained in the course of business of the taxpayer) and
F.C. of T. v. D.P. Smith 81 ATC 4114; (1980-1981) 147 C.L.R. 578 (in which proceeds of a policy to provide the taxpayer with monthly indemnity against loss of income during his period of physical incapacity to earn money were revenue receipts).
It may be conceded that, as a practical matter, the employees ``taken over'' would look to the taxpayer for payment of holiday pay as it accrued, and in so doing would rely on the combined period of their service with Ipec and the taxpayer. It may also be assumed that the payments by the taxpayer to those of the ``taken over'' employees who made these claims upon it would have the character of a cost of the derivation by the taxpayer of income from the business conducted by it. However, questions might arise as to the rights of employees in particular cases and as to the quantum to which they were entitled. The answers could require the examination of the terms of applicable annual leave legislation and awards. As I have said, the materials before the Tribunal in the present case were silent on this subject.
In a sense, the present situation is that in the Foxwood (Tolga) case (supra), seen through the eyes of the purchaser rather than the vendor. But it also will be recalled that subsec. 51(3) of the Tax Act (added by the Income Tax Assessment Amendment Act (No. 3) 1978 denies a deduction in respect, inter alia, of annual leave except in respect of an amount paid to the person to whom the leave relates (or to dependants or legal personal representatives) and provides that the amount paid shall be deemed to be a loss or outgoing incurred at the time the payment is made; cf. the Foxwood (Tolga) case (supra) and
Nilsen Development Laboratories Pty. Ltd. & Ors v. F.C. of T. 81 ATC 4031; (1980-1981) 144 C.L.R. 616; both of which were concerned with the law before the 1981 amendment.
It also may be accepted that the question of whether there has been derivation of income depends for its answer upon a consideration of the whole of the circumstances indicated by the findings of fact (cf.
The Squatting Investment Co. Ltd. v. F.C. of T. (1952-1953) 86 C.L.R. 570 at pp. 627-628). Further, whilst due respect must be paid to what on their true construction are the contractual obligations of the parties, those obligations need not be accorded conclusive effect in deciding the true nature of a gain or receipt which was derived or received:
I.R. Commrs v. The Church Commissioners for England (1977) A.C. 329 at p. 344; Roberts v. W.S. Electronics Ltd. (supra) at p. 541. Accordingly, I have earlier set out the facts surrounding the agreement for the purchase of the business in question by the taxpayer.
However, the taxpayer submits that in the present case there was no gain or accretion to the economic power of the taxpayer; rather, the taxpayer assumed, in a practical sense, the liability of Ipec in respect of due or accruing amounts for or on account of annual leave, including any applicable loading, and at general law the assumption of a liability does not ordinarily constitute the derivation of income. The taxpayer further submits that the taking up in the accounts of the taxpayer of an amount on account of employee benefits did not give rise to a derivation of assessable income by the taxpayer. I accept these submissions.
The ``gain'' upon which the Commissioner relies is the product of the rationalisation he proffers of what passed between the taxpayer and Ipec. But, as the taxpayer in my view correctly submits, what the Commission characterises as that ``gain'' on the facts was not shown to have been intended as, or in fact to have been, a substitute for such outgoings which the taxpayer would meet in paying annual leave to employees which it had ``taken over'' on acquisition of the business: cf.
F.C. of T. v. Dixon (1952) 86 C.L.R. 540 at p. 568.
There is some difficulty in the Commissioner's submissions, even within the
ATC 4291universe of discourse within which he seeks to place the debate by his reliance upon No. 15 of Professor Parsons' propositions. First, as the use of the term ``compensation'' suggests, the gain spoken of in proposition 15 appears to be principally a gain to replace or provide a substitute for something lost to or inflicted upon the taxpayer and identified by reference to the pre-existing position of the taxpayer; hence the concentration both by the learned author (at para. 2.506-2.552) and the Commissioner (illustrated by the cases I have earlier described) upon authorities dealing with compensation received on surrender of rights, compensation under statutory compensation schemes, compensation payments under contracts of insurance, awards of damages in tort or contract, and refunds of outgoings already suffered by taxpayers. In the present case, as counsel for the taxpayer emphasised, the taxpayer ``assumed'' as a fresh obligation on its part certain liabilities of the vendor as a step in the acquisition of a business.
Further, in formulating proposition 15, the learned author is at pains to emphasise that what he calls a compensation receipt is income only to the extent that it involves a ``gain''. Thus, where a compensation receipt substitutes for a revenue asset that has been realised or destroyed, what is income is the excess of compensation over the cost of the asset (see para. 2.508). However, on this footing, there is difficulty with the insurance cases and with cases dealing with receipt of damages in respect of injury to an asset. Of these Professor Parsons says (para. 2.509):
``The assertion of principle in the last paragraph requires qualification where there is a realisation of an asset, or there is an insurance recovery or a recovery of damages in respect of an asset, and a number of receipts are held to be income as substituting for the income receipts that would have been derived had the asset been retained, or retained undamaged. It seems that the receipts will be income as to the whole of their amounts, and in this there is a contradiction of the principle that gain is an essential quality of income. To avoid that contradiction, in the case of a revenue asset, there should be a subtraction, against each receipt, of part of the cost of the asset so that only the profit emerging is brought to tax. Where the asset is not a revenue asset, there should be a subtraction in the same manner of the value of the asset at the time it was realised or damaged, in order to avoid the contradiction, and to protect the principle that a capital gain is not income.''
The present case did not fit happily, from the Commissioner's point of view, with what is there said. The closest analogy is probably with authorities giving a revenue character to certain payments received as refunds. In particular, the Commissioner relied upon
Goldsbrough Mort & Co. Ltd. v. F.C. of T. 76 ATC 4343 at pp. 4346-4347. In that case, on completion of the sale of income-producing properties, the taxpayer received adjustments on account of payments it had made for rates and taxes. The amount so received was held to have filled ``the hole'' in profits (to use the metaphor of Lord Clyde in the Burmah Steamship case (supra)) which had been made by the payment of the rates and taxes; thus the refund was treated as bearing the character of a revenue receipt. In that sense, the filling of the existing ``hole'' was the making of a gain that otherwise would have been forgone. The present case is not one of compensation for an outgoing which already had been incurred by the taxpayer and which then had the character of a revenue outgoing. In the present case, there was as yet no ``hole'' in the taxpayer's profits to fill by a compensatory receipt. Attractive though Lord Clyde's metaphor may be, it has been well said (by Cardozo J. in
Berkey v. Third Ave Railway Co. 155 N.E. 58 at p. 61 (1926)) that ``Metaphors in law are to be narrowly watched, for starting as devices to liberate thought, they end often by enslaving it''.
Ultimately, one is left with the impression that, through no error on the part of the Commissioner, before the Tribunal the facts turned out rather differently from the disclosure by the taxpayer on which the Commissioner had raised the assessment in question. The result has been to provide the occasion for ingenious submissions which might still save the day for the revenue. However that may be, my conclusion is that the taxpayer's objection should have been upheld by the Tribunal and that the Tribunal erred in law in not so doing.
I should add that the Commissioner did not seek to rely on anything said by the High Court in
F.C. of T. v. Myer Emporium Ltd. 87 ATC 4363;
ATC 4292(1987) 61 A.L.J.R. 270. I do not mean to suggest that this was an omission or oversight on his part.
The appeal will be upheld with costs. I will hear the parties as to the form of order under sec. 44 of the AAT Act.