Federal Commissioner of Taxation v. Cooling

Judges: Lockhart J

Gummow J
Hill J

Court:
Full Federal Court

Judgment date: Judgment handed down 28 June 1990.

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Gummow J.

This appeal was heard immediately before the argument in
Hepples v. F.C. of T. [reported at 90 ATC 4497 ] and by the same Bench.

I agree with the conclusion reached on this appeal by Hill J. that the appeal should be allowed on the footing that the payment in question is assessable income of the taxpayer within the meaning of sec. 25 of the Income Tax Assessment Act 1936 (``the Act''). I reach that conclusion for the reasons advanced by his Honour, whose judgment I have had the advantage of reading.

Accordingly, it is strictly unnecessary to deal with the further submissions by the Commissioner in which reliance was placed upon the capital gains tax provisions of Pt IIIA of the Act. However, in response to the full argument which the Court received, I should set out my views. What is said should be read with my reasons for judgment in Hepples' case .

As in Hepples' case , the Commissioner relied principally upon two provisions in Pt IIIA, namely sec. 160M(6) and (7). I turn first to sec. 160M(6).

The lease between Australian Mutual Provident Society (``the lessor'') and Bengil Services Pty. Ltd. (``the lessee'') contained, in Pt 17, a guarantee by the taxpayer and his

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partners that with the lessee they would be jointly and severally liable to the lessor for the due payment of all moneys covenanted or agreed to be paid by the lessee and the due performance by the lessee of all of the covenants and provisions to be performed and observed on the part of the lessee. The Commissioner submitted that the creation of the rights under the guarantee constituted a disposal of an asset constituted by those rights, by force of the provisions of sec. 160M(6). In Hepples' case , I expressed agreement with the view that sec. 160M(6) should be read as confined in its operation to cases where proprietary rights are carved out of or over existing assets in circumstances where the asset affected by the rights created continues to exist. The rights created under the guarantee were not proprietary rights carved out of or over existing assets. In the result, it follows that the Commissioner's submission concerning the applicability of sec. 160M(6) fails.

There remains sec. 160M(7). On 16 December 1985, the lessor paid to the taxpayer $21,060, at the direction of his firm. The lease had been executed by the lessee on 12 December 1985, in respect of the premises being the eighth floor of the ``Blue Tower'' building at 12 Creek Street, Brisbane. The guarantee, embodied in the lease in the manner I have described, had been executed by the taxpayer on or about 12 December 1985.

The Commissioner's submission was that acts or transactions took place (entry into the lease and the giving of the guarantee) in relation to an asset (namely the eighth floor in the ``Blue Tower'' building), and the taxpayer received and was entitled to receive an amount of money by reason of those acts or transactions. It was then submitted that within the terms of sec. 160M(7), those acts or transactions constituted a disposal by the taxpayer of an asset created by the disposal, the $21,060 constituting the consideration in respect of the disposal, and that the cost base effectively was nil. It was emphasised in the submissions for the Commissioner that the learned primary Judge was apparently in error in thinking that the subject premises were not an existing asset at the time of entry into the lease and guarantee. The building was in fact completed in July 1984.

I accept the submission that the entry into the lease by the lessee and the giving of the guarantee by the taxpayer and his partners each constituted an ``act or transaction'' that took place in relation to an ``asset'' within the meaning of sec. 160A and 160M(7)(a). (It was not submitted by the Commissioner that there was ``an event affecting an asset'' within the meaning of para. 160M(7)(a); I have expressed my views as to the construction of this limb of the subsection in my reasons in Hepples' case and will not repeat them here.)

I also agree that the taxpayer received an amount of money ``by reason of'' those acts or transactions. The characterisation of a receipt for the purposes of sec. 25 of the Act will not necessarily involve the same processes of reasoning as those in determining whether the sum in question has been received by a person by reason of an act, transaction or event within the sense of sec. 160M(7) of the Act. Further, as I observed in Hepples' case , the existence of a sufficient nexus or connection for the purposes of sec. 160M(7) is a matter of fact and degree in the particular case.

The lessor would not have made the payment to the taxpayer unless the lessee had entered the lease and the taxpayer and his partners had guaranteed the obligations of the lessee. It is also true, as the learned primary Judge found, that the payment was made so that the taxpayer's firm would move to the premises in question and that it was made independently of the particular corporate entity which became the lessee, although this must be taken to have been subject to the proviso that the obligations of the lessee had to be secured by personal guarantees of the partners.

In those circumstances, there is sufficient connection or nexus, in my view, between the receipt by the taxpayer and certain acts or transactions, being the entry into the lease and the giving of the guarantees, to enable one properly to say that the taxpayer received the sum in question ``by reason of'' those acts or transactions. It follows from this that I accept the remainder of the Commissioner's submissions as to the operation in this case of sec. 160M(7).

As I have indicated in my reasons in Hepples' case , in my view it is not necessary for the operation of sec. 160M(7) that the asset, in relation to which an act or transaction takes place or which is affected by the occurrence of

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an event, be an asset owned by the recipient of the money or other consideration.

Section 160ZO(1) provides that where a net capital gain accrued to the taxpayer in respect of the year of income, the assessable income of the taxpayer of the year of income includes that net capital gain. It follows from what I have said that the Commissioner, in respect of the amount at issue in these proceedings, is entitled to succeed on the basis of its inclusion in the assessable income of the taxpayer both under sec. 25 of the Act, not only as income according to ordinary concepts, but also as assessable income by reason of the operation of sec. 160ZO upon sec. 25.

I would allow the appeal with costs and set aside the order for costs made at first instance.