KL Beddoe SM
Administrative Appeals Tribunal
K.L. Beddoe (Senior Member)
The question at issue is whether a surplus arising on the trade-in of a leased motor vehicle at time of leasing a new motor vehicle is assessable income.
2. The relevant statutory provisions are sec. 25(1), 26(a) and 26AAA of the Income Tax Assessment Act 1936 (``the Act'').
3. During the year ended 30 June 1982 the applicants, who are husband and wife, carried on business in partnership as cartage contractors. The respective applications of the parties were heard together. That hearing proceeded by way of a statement of agreed facts (ex. A).
4. The facts established may be summarised as follows:
- (a) during the year of income the income was derived from operating one truck on an owner/driver basis;
- (b) on 21 August 1979 the applicants leased an International truck from AGC for a period of 48 months at a monthly rental of $695 and a residual value of $9,000;
- (c) the truck was the only substantial item of plant used by the applicants in the business of the partnership until the vehicle was traded in on a new vehicle;
- (d) it was the practice of the partnership to have only one truck for use in the business and each truck was leased from AGC;
- (e) in February 1982 the applicants decided to replace the International truck with a vehicle of greater loading capacity and with tandem axles so as to meet the requirements of the organisations from which the partnership was most likely to obtain cartage work;
- (f) the applicants perceived a change in the market-place for cartage contractors with preference being given to contractors with modern, well-maintained tandem axle vehicles;
- (g) as a consequence the applicants approached AGC with a view to disposing of the International truck and acquiring the lease of a new vehicle which would meet the requirements of the market-place;
- (h) the applicants obtained oral approval from AGC to dispose of the International truck;
- (i) by letter dated 13 April 1982 a truck dealer quoted for supply of a new truck;
- (j) on 20 April 1982 the applicants placed an order for the new truck and took delivery of the vehicle in May 1982 on lease from AGC;
- (k) the old International truck had continued to be used in the partnership business until the partnership tool delivery of the new truck, the order of events being:
- (i) by letter dated 13 April 1982 the dealer quoted on the sale of the new truck to the partnership,
- (ii) the partnership ordered the new truck on 20 April 1982,
- (iii) delivery of the new vehicle to the partnership on 12 May 1982, and
- (iv) the old International truck was then delivered to the dealer;
- (l) the lease of the new truck for a period of 48 months to the partnership was evidenced in writing dated 10 May 1982;
- (m) on or about 12 May 1982 the partnership was advised by AGC of the payout figure on the old truck;
- (n) on 12 May 1982 the new truck dealer paid out the old truck with AGC by paying that company an amount of $17,626; and
- (o) also on 12 May 1982 the new truck dealer paid the partnership a cheque for $14,373 representing the excess of the trade-in allowed on the old truck over the payout figure required by AGC and that amount remained in the ownership of the partnership.
5. The amount of $14,373 was treated by the respondent as being assessable income and assessed to the partnership. The applicants objected against the resulting adjustment in their share of the net income of the partnership.
6. The essence of the applicants' case is that the dealer was the person who paid out AGC and acquired the old truck as trade-in on the new truck. The applicants did not act as agents of AGC, the dealer making the arrangements direct with AGC by paying out the lease of the old truck without the applicants being involved in the transaction. For these reasons the applicants' representative distinguished the decision of the Supreme Court of Tasmania in
F.C. of T. v. Reynolds 81 ATC 4131; (1981) 11 A.T.R. 629, on the facts. The respondent's representative drew attention to the similar facts situation in Case S34,
85 ATC 302, a decision of Taxation Board of Review No. 3. The difference with this case being that the taxpayer in that case received debentures in the financier rather than cash in respect of the ``surplus'' on the trade-in vehicle. It is also apparent on the reading of the reasons in that case that the Board throught it was bound to follow the decision in Reynolds.
7. This is not a case of the kind dealt with in Case T54,
86 ATC 419 where the trucks there in question continued to be used in the business after the leases were paid out.
8. An unfortunate aspect of this case is the lack of documentation in regard to the trade-in of the old truck. There is a lack of evidence of this transaction and also the payout of the lease. It has not been established as to exactly what transpired in relation to the disposal of the old truck. However, I am satisfied that the applicants took no direct part in the disposal. Contrary to what Mr Peden submitted it is the case, however, that the ``profit'' on the trade-in arose in the course of the business of the partnership. It was inextricably a result of transactions entered into by the partnership as part of the business of the partnership. The only question is whether the amount was a receipt of capital or in the nature of capital.
9. The ``profit'' was, it might be thought, an expected windfall in the sense that the partners must have had a reasonable expectation that a ``profit'' could result from the transactions. Because neither partner nor the truck dealer gave evidence and the statement of agreed facts ignores the question, the Tribunal is left to speculate about facts which are within the knowledge of the applicants. The matter of whether the ``profit'' was expected is left unexplained.
10. I infer that the applicants must have expected that there would be a ``profit'' on the overall transaction because they must be assumed to be aware of the terms of their lease agreement on the old truck and therefore they must be assumed to know what the payout figure was. Furthermore they must be assumed to know the market value of the old truck at the relevant time. I draw those inferences from the facts as found taking into account the applicants' prior experience with the leasing of trucks. The Tribunal is entitled to draw those inferences given the failure to call the applicants as witnesses (
Jones v. Dunkel (1958-1959) 101 C.L.R. 298).
11. The ``profit'' did not arise out of the sale of a capital asset nor did it arise out of the capital structure of the business. It arose out of the lease of the old truck. The ``profit'' was not capital or of a capital nature because it had no nexus with the capital structure of the business. It did, however, have a direct nexus with the business and arose out of the operations of the business. This is not a case where the leased vehicle was acquired for the payout figure and continued to be used in the business to produce assessable income as in Case W88,
89 ATC 756. This case is on the other side of the coin so that the principle in
F.C. of T. v. Myer Emporium Ltd. 87 ATC 4363; (1987) 163 C.L.R. 199 applies. The ``profit'' arose out of the business operations of the partnership and was not a receipt of a capital nature.
12. The objection decisions under review will be affirmed.