Case V146

Members:
KL Beddoe SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 8 September 1988.

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K.L. Beddoe (Senior Member)

The question at issue in this application is whether the gross proceeds or some portion of the gross proceeds of a bill of exchange purchased by the applicant company is assessable income within the terms of sec. 25 or para. 26(a) of the Income Tax Assessment Act 1936 (``the Act'').

2. Subsection 25(1) provides, so far as is relevant to this application, that the assessable income of a taxpayer shall include the gross income derived directly or indirectly from all sources whether in or out of Australia which is not exempt income. Paragraph 26(a) of the Act (repealed by Act No. 47 of 1984) provided that the assessable income of a taxpayer shall include the profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme.

3. The respondent's sec. 37 statement gave the following as the reasons for disallowing the objection:

``The full amount of $57,800 in relation to the taxpayer's profit on redemption of a bill of exchange is assessable income under either section 25, paragraph 26(a) or section 26AAA.''

4. At the hearing of this application, Mr B. Pape of counsel appeared for the applicant company and the respondent Commissioner was represented by one of his officers. The respondent did not seek to rely on sec. 25A or 26AAA. Oral evidence was confined to that of one witness who is a director (and the controlling mind) of the subject company.

5. The facts are quite straightforward. The applicant's income tax return for the year ended 30 June 1984 disclosed that its business or income-producing activity was ``partner in an hotel''. The company derived substantial income which was made up of a share of the net income of a partnership operating an hotel ($13,903), interest received ($94,853) and dividends received ($1,797). After expenses and overheads amounting to $22,630 the company disclosed a profit before tax of $87,923. The income tax return also disclosed as a capital profit discount amounting to $57,800.00 being a discount on a bill of exchange. That is the amount in dispute in these proceedings.

6. On 7 January 1983 the applicant purchased a bill of exchange from Bill Acceptance Corporation Ltd. for the sum of $442,199.12. The bill was drawn by Bill Acceptance Corporation and accepted by another company as the drawee of the bill for the sum of $500.000 payable on 9 January 1984. The applicant company held the bill until

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it matured and received the face value of the bill in January 1984. The evidence establishes that this is the only bill of exchange purchased by the company up to and including the year ended 30 June 1984.

7. The company's principal business over the years has been investments in the hotel industry. The director who gave evidence before the Tribunal has, although clearly the controlling mind of the company, retired from the hotel business and because of the sale of the various interests in the industry, the company had become highly liquid in funds. The director gave evidence that he intended that his two sons would take over the operations of the business in due course when they had completed their studies and in the meantime the company had determined to maintain its assets in a liquid form so as to be ready for the change in its operations when the sons assumed control of the company. None of this is very relevant to the issue before the Tribunal except to explain the obvious concern of the director that the company should maintain its assets in a liquid form, but in such a way that those assets would not decline in value because of the effects of inflation. Hence the company's decision to purchase the bill of exchange.

8. It was also established in evidence that the applicant held a money lender's licence for a number of years; the company had sold an hotel on terms which involved the purchaser paying interest on the unpaid balance of the purchase price and the company had in the past invested in the short-term money market. It was also established that the company, although licensed to do so, did not engage in money lending operations within the ordinary meaning of those words. The only lending which had been done in the year ended 30 June 1984 involved the unpaid purchase price in respect of the sale of the hotel just mentioned and loans to associated persons.

9. The applicant's counsel submitted that the proceeds of the bill i.e. $500,000, was a receipt of a capital nature and was not income according to ordinary concepts and usages and therefore not within the terms of subsec. 25(1). The applicant also submitted that the discount (or the difference between the purchase price and the proceeds) does not come within the terms of either subsec. 25(1) or para. 26(a). Furthermore, the applicant submitted that there was no relationship of lender and borrower between the applicant taxpayer and the company which accepted the bill of exchange. Counsel for the applicant also submitted that there is no basis for characterising the discount as interest or in the nature of interest.

10. The respondent Commissioner contended that the amount of $57,800 was assessable income within the terms of subsec. 25(1) or the second limb of para. 26(a). It will be seen that the Commissioner is thereby claiming the company was carrying on a profit-making undertaking or scheme. The Commissioner supports these propositions by relying on the decision of the High Court in
F.C. of T. v. Myer Emporium Ltd. 87 ATC 4363; (1987) 71 A.L.R. 28.

11. The bill of exchange in question was an accommodation bill as distinct from a trade bill. It was a bill drawn for the purpose of raising money on it. It was therefore a bill of exchange of the kind considered by the High Court in
D.K. Morris & Sons Pty. Ltd. (in liq.) v. Bank of Queensland (1980) 146 C.L.R. 165. In the course of his judgment Aickin J. discussed accommodation bills at some length. In particular at pp. 193-194 his Honour said:

``... The transactions were of a common commercial kind, taking advantage of the existence of a commercial bill market, in which commercial bills are bought and sold, or, as it is usually described, `discounted'. It is a mistake to treat what was done, as the trial judge did, as if it were the equivalent of a loan of money repayable at the expiration of five years, or in certain events earlier.

In my opinion it is clear that the transaction entered into by the Bank and the Company did not involve the borrowing of money repayable on a contingency, or at all, or anything equivalent in law thereto. This view may not necessarily lead to a different ultimate determination of the issues in the appeal, but it does require a different approach to them.

It is well settled, as Lord Devlin, speaking for the Privy Council, said in
Chow Yoong Hong v. Choong Fah Rubber Manufactory [1962] A.C. 209 at p. 215 that:

• `The business of buying bills at a discount, that is, for their value at the date of purchase, is well known and is quite distinct from moneylending.

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• Nowadays the buyer is usually a bank or a discount house, but the fact that he cannot be put into either of those categories does not alter the nature of the transaction, neither does the designation of the discount as interest. There is here no loan of money and no promise of repayment. Their Lordships' conclusion on this point is in accordance with the decision of Branson J. in
  Olds Discount Co. Ltd. v. John Playfair Ltd. [1938] 3 All E.R. 275 that a purchase of book-debts for a specific sum was not a moneylending transaction.'

His Lordship further said [1962] A.C. at pp. 216-217:

• `The fundamental error that underlies the defendants' case on both groups of cheques is that because they were, so they say, in need of ready cash, and because the plaintiff supplied them with it and made, if he did, a profit out of doing so, therefore there was a loan and a contract for its repayment. There are many ways of raising cash besides borrowing. One is by selling book-debts and another by selling unmatured bills, in each case for less than their face value. Another might be to buy goods on credit or against a post-dated cheque and immediately sell them in the market for cash. Their Lordships are, of course, aware, as was Branson J., that transactions of this sort can easily be used as a cloak for money-lending. The task of the court in such cases is clear. It must first look at the nature of the transaction which the parties have agreed. If in form it is not a loan, it is not to the point to say that its object was to raise money for one of them or that the parties could have produced the same result more conveniently by borrowing and lending money.'''

12. Subsection 32(2) of the Bills of exchange Act 1909 provides that where value has at any time been given for a bill, the holder is deemed to be a holder for value as regards the acceptor and all parties to the bill who became parties prior to such time. Subsection 33(2) provides that an accommodation party is liable on the bill to a holder for value.

13. The evidence in this application makes it clear that the applicant purchased the bill with the intention of holding the bill until it matured. On maturity the applicant received payment of the face value of the bill. There was no intention to sell the bill and the applicant did not in fact sell the bill.

14. Were the proceeds of the bill income according to ordinary concepts? The answer must be no! Clearly the proceeds of the bill were on capital account. No other conclusion is open on the facts because all that happened was that the bill realised more than it cost. There was no fruit from the tree - the tree just grew a bit bigger (cf.
Eisner v. Macomber (1919) 252 U.S. 189). The discount reflects the growth but the discount cannot itself be income. In my view the applicant's counsel correctly relied upon
Lomax v. Peter Dixon & Sons Ltd. (1943) 1 K.B. 671 to establish this point.

15. The next question is whether there was an assessable gain. The respondent says there was and relies upon the decision of the High Court in F.C. of T. v. Myer (supra). In that case Myer assigned a future flow of interest income on loans made to associated companies to Citicorp in consideration for Citicorp paying Myer the present value of the interest flow. That amount was paid to Myer. The High Court held that the amount paid to Myer in consideration for the interest flow was a profit which formed part of its assessable income. What was done in that case was to sever the loans made and the interest payable to Myer; it being the latter which was assigned to Citicorp. There was not a mere realisation of a capital asset, but a profit-making scheme made up of the group's loan arrangements and the assignment of the interest rights to Citicorp. The reasons for decision, far from supporting the respondent's case tend to support the applicant's case. I refer in particular to 87 ATC pp. 4370-4371; 71 A.L.R. pp. 37 and 38. However, the present case does not involve the conversion of future income.

16. The respondent also sought to support the objection decision by referring to the fact that the applicant had held a money lender's licence and that it made loans. The loans were in fact loans made to purchasers of hotels from the applicant whereby the purchasers were given time to pay on terms. At the relevant time there was one such loan in existence. I do not regard those loans as constituting the carrying on of a business of money lending.

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17. The facts proven in evidence make it abundantly clear that the bill transaction was an isolated transaction by the applicant brought about by the applicant holding liquid funds which it needed to invest. In Myer the High Court stated the law as follows at 87 ATC pp. 4366-4367; 71 A.L.R. p. 32:

``Although it is well settled that a profit or gain made in the ordinary course of carrying on a business constitutes income, it does not follow that a profit or gain made in a transaction entered into otherwise than in the ordinary course of carrying on the taxpayer's business is not income. Because a business is carried on with a view to profit, a gain made in the ordinary course of carrying on the business is invested with the profit-making purpose, thereby stamping the profit with the character of income. But a gain made otherwise than in the ordinary course of carrying on the business which nevertheless arises from a transaction entered into by the taxpayer with the intention or purpose of making a profit or gain may well constitute income. Whether it does depends very much on the circumstances of the case. Generally speaking, however, it may be said that if the circumstances are such as to give rise to the inference that the taxpayer's intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer's business. Nor does the fact that a profit or gain is made as the result of an isolated venture or a `one-off' transaction preclude it from being properly characterised as income (
F.C. of T. v. Whitfords Beach Pty. Ltd. 82 ATC 4031 at pp. 4036-4037, 4042; (1982) 39 A.L.R. 521; 150 C.L.R. 355 at pp. 366-367, 376). The authorities establish that a profit or gain so made will constitute income if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit.''

18. The applicant falls within the test if the bill transaction was ``a business operation or commercial for the purpose of profit-making by the means giving rise to the profit''.

19. It must be accepted that a profit may constitute assessable income, notwithstanding that it arises from an isolated business operation or commercial transaction entered into otherwise than in the ordinary business of the taxpayer, if the taxpayer entered into the transaction for the purpose of making a profit (Myer's case). The profit may be of a capital nature (per Gibbs C.J. and Mason J. in F.C. of T. v. Whitfords Beach Pty. Ltd. 82 ATC 4031; (1982) 39 A.L.R. 521, but a mere realisation of a capital asset is not a profit-making undertaking or scheme within the terms of para. 26(a). Furthermore there is authority for the proposition that even if the proceeds of the transaction are of a capital nature the net profit derived may have the character of income (per Mason J. in
Commercial and General Acceptance Ltd. v. F.C. of T. 77 ATC 4375 at pp. 4379-4380; (1977) 137 C.L.R. 373 at p. 382. However, the profit yielded by the mere realisation of a capital asset, not acquired for the purpose of profit-making by sale, is not a profit arising from the carrying on or carrying out of a profit-making undertaking or scheme within the terms of para. 26(a)
F.C. of T. v. N.F. Williams 72 ATC 4188; (1972) 127 C.L.R. 226.

20. The determinative point in this case is that the applicant did nothing except hold the bill and present it for payment. That must fall precisely within the words ``mere realisation''. The applicant did not sell the bill and it did nothing to enhance its value. There was therefore no profit-making undertaking or scheme so that the profit (being the difference between the cost of acquiring the bill and the proceeds of the bill) does not fall within the terms of para. 26(a).

21. In the event that I had found that the transaction fell within the terms of para. 26(a) it would have been necessary for the Tribunal to consider the effect of Act No. 47 of 1984 on the operation of the paragraph. The respondent Commissioner took the view before the Tribunal that para. 26(a) was the relevant provision. I do not need to express a conclusion.

22. The question which remains is whether the profit falls within the terms of subsec. 25(1). I do not think it does. The applicant did not acquire the bill for the purpose of resale at a profit. It did not hold the bill for any purpose other than to collect the proceeds when the bill

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matured. If the applicant had made a practice of acquiring bills and holding them to maturity these operations would form part of the business of the applicant and the profit arising from each transaction would be assessable income. (See
Beazley & Ors v. Commr of I.R. (N.Z.) (1980) 4 NZTC.) This is not the case here. The evidence is that the applicant has only held the one bill so that the transaction has all the attributes of an isolated transaction on capital account. The applicant has established that the assessment is excessive.

23. For these reasons the objection decision under review will be set aside and the objection allowed.