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.

Hill J.

The appellant, the Commissioner of Taxation, appeals against the judgment of a judge of this Court allowing the appeal of Mr Cooling (the respondent) against an assessment of income tax for the year ended 30 June 1986 [reported at 89 ATC 4731].

The respondent was a partner in the firm of solicitors, Messrs Kinsey Bennett & Gill practising in Brisbane. The firm had been established in 1939 and had since that date occupied premises in various buildings in Brisbane - four in all, prior to moving to the eighth floor of the A.M.P. building at 12 Creek Street, Brisbane, known as Comalco House. The partners had never owned premises from which they practised but had always carried on practice in leased premises. The composition of the firm had changed from time to time since its establishment as a two-man partnership and in the tax year in question there were, including the respondent, six partners, one of whom left the practice on 31 December 1985.

Bengil Services Pty. Ltd. (``Bengil'') was a company established by the firm with the prior approval of the Commissioner of Taxation to provide superannuation to its director employees (the partners of the firm) based on salaries earned by such employees for work of an administrative nature performed for the firm. One of the services provided by Bengil was the provision of rental office accommodation for the firm, Bengil having been the head lessor for some of the period of occupation by the firm of the premises at 127 Creek Street, Brisbane occupied immediately before the move to Comalco House.

The premises at 127 Creek Street were not completely satisfactory. The senior partner regarded the configuration of space as ``pretty unworkable''. Additional space may have been available but would have required a refitting of the total space. Further there was no emergency power. Hence the prospect of moving to new premises was not, in 1985, unattractive. The lease of the 127 Creek Street premises expired at the end of February 1986.

The firm had acted for the A.M.P. Society, the owners of Comalco House. The possibility of the firm moving to Comalco House had been raised by Richard Ellis Ray White, real estate agents for the A.M.P. with the firm in January 1984 prior to the completion of the Comalco House premises and some negotiations took place at that time without success.

A year later the agents revived the possibility of attracting the firm as tenants in Comalco House. They recommended to the A.M.P. Society the possibility of offering concessions to the firm to make the move attractive. The suggested concessions were either a rent-free period of occupancy or a cash payment. By this time in early 1985 incentive packages to attract tenants were quite common. There was, it would seem, an oversupply of office space and incentives were a feature of the market for the rental of commercial premises. The type of incentives offered to tenants varied but commonly included rent-free periods and lump sum cash payments.

The advantage to be obtained by the developer of a building in granting incentives would vary during the course of a project. It was accepted by the trial Judge that at the beginning of a leasing period, the attraction of a high calibre tenant to a number of floors gave rise to the opportunity to advertise that tenant and thus attract other tenants to the building. After a certain percentage of the building was completed the extent of inducements was significantly reduced or perhaps eliminated altogether. So well known was the practice of inducements that the Australian Government through the Australian Property Group sought tenders for the lease by the Department of Community Services and Health of office space stipulating both a minimum rent-free period of 12 months and a contribution of $1m. towards the cost of fit-out. This was despite the fact that a government tenancy was said by the

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managing director of a large developer in Queensland not to be regarded as a prize tenant.

His Honour found that the firm was reluctant to move from its Creek Street premises. A proposal was put to the firm in April 1985 for a lease to commence on 1 July 1985 of the eighth floor (1,006 square metres with a rental of $202 per square metre and a 10-year term with biennial rent reviews). That proposal provided for an incentive payment to the firm of $150,000 at the commencement of the lease. As the proposal points out, the ``rent free equivalent of the cash incentive offered, if applied on a rental basis, effectively reduces the rate of $202 per square metre for the first two years to $127.44 per square metre per annum''. The proposal points out that, alternatively, the payment would fund the fit-out of the premises and leave $50,000 for utilisation for other purposes.

It would seem there were a number of obstacles that needed to be overcome before a lease could be finalised. Accordingly, the agents in August 1985 put a further package to the firm for consideration. This further package provided for a commencement date of the proposed lease on 1 January 1986 and offered two alternate incentives. Under the first there was to be a cash payment of $150,000 with no rental to apply to an area of 400 square metres for 12 months or until the area was occupied by the firm or subleased whichever was sooner. Under the alternative, a cash incentive of $200,000 was to be paid with the A.M.P. Society taking over the residue of the firm's lease contract at 127 Creek Street until 28 February 1986.

Following discussions, the firm indicated by letter of 11 October 1985 that it, ``or an entity to be nominated'' by it, was desirous of leasing the eighth floor at 12 Creek Street, taking 650 square metres on which rent was payable and the balance of approximately 350 square metres rent free for 12 months from lease commencement or until occupied or sublet.

The letter said:

``We understand that the payment of rent for a large area will (according to your formula) result in some adjustment to the cash concession of $150,000.''

The firm proposed a lease commencement date of 1 February 1986.

The proposal which was accepted by the agent on behalf of the Society resulted in a cash incentive payment of $162,000 being agreed, this figure being calculated by applying the original figure of $150,000 pro rata on a square metre basis. There remained, so the firm said in a letter to the agents of 6 November 1985, to be resolved, inter alia, ``the method of payment of the cash incentive''. This was understood by the A.M.P. Society to mean whether the amount would be paid as one lump sum to the partnership or made payable to the individual partners. The latter course was ultimately chosen.

It was in November 1985 that the name of Bengil first appeared in the correspondence as the prospective tenant. The only effect this suggestion had on the transaction was the standard requirement of the A.M.P. Society that the partners guarantee the obligations of Bengil. The lease (including the required guarantees) embodying the terms negotiated with the agents was entered into on 12 December 1985 and shortly thereafter on 16 December 1985 cheques totalling $162,000 in favour of the partners were drawn, the respondent's share being $21,060. The cheques were pro rata to the interest of the respective partners in the firm in the profits of the firm.

The incentive payment was initially used by the partners to fund the move and fitting out of the new premises. The anticipated budget was for a total expenditure of $205,009 of which $93,306 was for partitions, $21,066 for furniture, $27,500 for a new PABX system, $4,200 for facsimile machines, and the balance for joinery, renovations, architect's fees, and removalist expenditure. The last named item amounted to $6,500.

After the partitions, furnishings etc. had been paid for, those items were sold to a financier and leased back to the partners.

The payment to the partners of the total of $162,000 was preceded by a letter from the agents, addressed to (and in fact drafted by) the senior partner of the firm, Mr Macdonald and dated 29 November 1985, which said in part:

``We confirm that the Society is prepared to pay to Graham Donald Macdonald, James Francis Fitzgerald, Arnold Douglas Bennett,

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Michael Gerald Maxwell Walton, Cameron Richard Cooling and Ian Fergus Galton (in such proportions as you nominate) the sum of $162,000 as an incentive to sign the guarantees and to procure Bengil Services Pty. Ltd. to accept the lease.

The above payment will be made on the execution of the lease and guarantees.''

The description of the payment as relating to the guarantees and as an incentive to procure Bengil to accept the lease was repeated by the respondent by way of disclosure in his tax return in the following terms:

``... being made to me as an incentive to procure Bengil Services Pty. Ltd. to accept a ten year lease from the Australian Mutual Provident Society of premises at 12 Creek Street and to guarantee the performance by Bengil Services Pty. Ltd. of its obligations under such lease. The above payment was made on the execution of the lease by Bengil Services Pty. Ltd. and guarantee [ sic ] by me and my other partners. I consider such payment not taxable.''

Mr Cooling was asked in cross-examination:

``Is the description of the payment... in that letter one that you are happy with?''

He replied:

``I do not have any real problem with it; I mean, the fact was it was an inducement for us to shift and to take a lease.''

The senior partner of the firm, Mr Macdonald was asked in cross-examination:

``Do you regard the payment as anything other than the description which is attributed to it there?''

[being a reference to the letter of 29 November 1985]

To this question he replied:

``I think I would, because the whole sense of negotiations were that the partners of Kinsey Bennett and Gill were going to take a lease. The fact that we broached that we would have Bengil Services as a service company actually to take the lease to comply with the Commissioner's guidelines initially, sort of, arose only in the latter part of the proceedings. It was Kinsey Bennett and Gill that was going to take a lease, and it was Kinsey Bennett and Gill partners were going to get some money. It was as simple as that, and then the agent came along and asked me to give a letter saying how you wanted the money paid, and this is what ended up.''

The judgment

His Honour found that the payment was made as an incentive to the firm to move to Comalco House. His Honour said (at p. 4735):

``Notwithstanding the terms of that letter of 29 November 1985 which had been drafted by Mr Macdonald, nor the terms of the disclosure statement of Mr Cooling in his taxation return, the reality of the situation, in my opinion, is that the payment was made so that Messrs Kinsey Bennett & Gill would move to the Blue Tower and was made independently of the entity which formally took over the lease. In one sense, of course, it was paid for the giving of guarantees and the procuring of Bengil Services to take up the lease, in that the A.M.P. would not hand over the money until the relevant lease and guarantee documents had been executed. I am satisfied that the payment equally would have been made had the lease been taken up by the partners of Messrs Kinsey Bennett & Gill.''

His Honour was of the view that the payment was received by the respondent on capital account and was not income in ordinary concepts made assessable income under sec. 25(1) of the Act nor was it assessable income under sec. 26(e) of the Act.

His Honour then turned to consider whether the amount was made assessable income pursuant to the provisions of Pt IIIA of the Act and held that it was not. From this decision the Commissioner appeals.

The submissions

For the Commissioner it was argued:

• That his Honour erred in finding that the amount was paid to induce the firm to move to Comalco House but rather should have found that it was made to induce Bengil to enter into the lease and for undertaking the obligations of a guarantor in accordance with what had been said in the letter from the agents of 29 November 1985.
• That a payment for undertaking the obligations of a guarantor was income in ordinary concepts.

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• That a fee for the service of procuring Bengil to enter into a lease was also income in ordinary concepts.
• That even if his Honour's finding was correct, the payment arose from a business operation or commercial transaction entered into in the ordinary course of the carrying on of the partnership business and with a profit element in mind. It was thus, in accordance with the decision of the High Court in
F.C. of T. v. Myer Emporium Ltd. 87 ATC 4363 ; (1987) 163 C.L.R. 119 , income in ordinary concepts.
• Alternatively, the payment was given to the respondent as compensation or as a benefit in relation to services rendered and was thus assessable income within sec. 26(e).
• That if contrary to these submissions the payment was of a capital nature and not assessable income within sec. 25(1) or 26(e) there was both a disposal of an asset within either sec. 160M(6) or (7), and consideration received so that there arose a net capital gain which by force of sec. 160ZO(1) of the Act was included in assessable income.

The respondent accepted that if the payment was properly to be described as made for undertaking the obligations of a guarantor or as a fee for the service of procuring the execution of the lease by Bengil, such a fee was assessable income but denied that that was the proper characterisation of the payment. The respondent submitted that the amount was not assessable income under sec. 25(1) or 26(e) nor was it brought into assessable income by the provisions of Pt IIIA of the Act dealing with capital gains.

Whether the payment was income in ordinary concepts

It was Lord Greene M.R. who, in
I.R. Commrs v. British Salmson Aero Engines, Ltd. (1938) 2 K.B. 482 at p. 498 , said of the distinction between income and capital that:

``There have been many cases which fall on the borderline. Indeed, in many cases it is almost true to say that the spin of a coin would decide the matter almost as satisfactorily as an attempt to find reasons.''

That view is unduly pessimistic especially in the light of the many guiding principles which the authorities have laid down as relevant to the distinction. Nevertheless it emphasises, as all who have essayed the task in cases near to the borderline will concede, that the task of drawing the distinction is often difficult.

The cases make it quite clear that whether an amount is income in ordinary concepts depends upon its quality in the hands of the recipient:
Scott v. F.C. of T. (1966) 117 C.L.R. 514 at p. 526 ;
Hayes v. F.C. of T. (1956) 96 C.L.R. 47 at p. 55 ;
Federal Coke Co. Pty. Ltd. v. F.C. of T. 77 ATC 4255 at p. 4273; (1977) 34 F.L.R. 375 at p. 402 per Brennan J. This is not to say, as Fullagar J. pointed out in Hayes at p. 56, that the motive of the donor in making a payment will be necessarily irrelevant, but it will not be determinative.

The test to be applied will be objective rather than subjective ( Hayes at p. 55).

Where a taxpayer carries on a business, the proceeds of that business will be income in his hands and thus assessable:
Squatting Investment Co. Ltd. v. F.C. of T. (1952-1953) 86 C.L.R. 570 at p. 620 per Fullagar J. It will often be necessary to make a ``wide survey'' and ``an exact scrutiny of'' a taxpayer's activities:
Western Gold Mines N.L. v. C. of T. (W.A.) (1938) 59 C.L.R. 729 at p. 740 , cited with approval by Gibbs J. in
London Australia Investment Co. Ltd. v. F.C. of T. 77 ATC 4398 at p. 4403; (1976-1977) 138 C.L.R. 106 at p. 116 to determine whether a particular profit derives from the business operation or is part of the business operations of a taxpayer.

As the London Australia case illustrates, where the profit arises from the disposal of property the question whether the profit is on revenue account will be answered by applying the tests stated by the Lord Justice Clerk in
Californian Copper Syndicate Limited & Reduced v. Harris (1904) 5 T.C. 159 at pp. 165-166 . The principle was stated as follows in
Colonial Mutual Life Assurance Society Ltd. v. F.C. of T. (1946) 73 C.L.R. 604 at p. 614 :

``Prima facie the depreciation in or accretion to the capital value of a security between the date of purchase and that of realization is a loss of or accretion to capital and is therefore a capital loss or gain and does not form part of the assessable income... But in the words of the Lord Justice Clerk in Californian Copper Syndicate v. Harris (supra) which have been so often quoted, `it

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is equally well established that enhanced values obtained from realization or conversion of securities may be so assessable, where what is done is not merely a realization or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business.''

Thus where the nature of the business is such that of necessity the funds of that business are invested in the purchase of assets which are from time to time realised (e.g. as in a bank or insurance company), the proceeds of realisation will be income. In such a case the acquisition and subsequent realisation will be a normal step in carrying on the relevant business, an act done in what is truly the carrying on of that business: Colonial Mutual Life Assurance Society Ltd. v. F.C. of T. (supra) at p. 620;
Chamber of Manufactures Insurance Ltd. v. F.C. of T. 84 ATC 4315 . While the fact that a transaction is a normal incident of the business activity will be conclusive of the income character of the profit derived from that business, the converse is not the case and the profit arising from an unusual or indeed extraordinary transaction may be income at least where, as in F.C. of T. v. Myer Emporium Pty. Ltd. (supra) the transaction was entered into by a taxpayer with the intention or purpose of making the profit.

While the recurrent nature of transactions will suggest that the profit derived from them will be income, Myer at p. 210 makes it clear that the fact that a transaction is a one-off transaction will not preclude the profit generated being characterised as income. Similarly, while periodicity is a factor which leads to the conclusion that the periodical receipts are income:
F.C. of T. v. Dixon (1952) 86 C.L.R. 540 , the fact that a payment was received as a lump sum or as a once and for all payment will not necessarily result in the payment being received on capital account. Periodicity or the lack of it is but a factor to be taken into account.

Of course, where the payment to be characterised is compensation for services rendered, the payment will be income in ordinary concepts and that will be so even if the services are rendered once and once only and whether the compensation is received in a lump sum or by way of periodical payments. Thus there was no dispute between the parties in the present case that if the payments to the partners of the firm were fees for services undertaking the obligations of a guarantor they would constitute income in ordinary concepts:
Ryall v. Hoare (1923) 2 K.B. 447 ;
Sherwin v. Barnes (1931) 16 T.C. 278 ;
Wilson v. Mannooch (1937) 3 All E.R. 120 . Similarly, if the payments are to be characterised as having been made for the service of procuring acceptance of a lease by Bengil they will have the character of income: cf.
Austrotel Corporation Pty. Ltd. v. F.C. of T. 76 ATC 4245 at p. 4248; (1977) 51 A.L.J.R. 54 at p. 56 .

For the Commissioner it was submitted that it was not open to his Honour to have found that the payment was made to induce the firm to move to its new premises and that his Honour was bound by the contractual stipulation of the parties as contained in the letter of 29 November 1985 to find that the payment was made for the services as there enunciated. It was said that the form of the transaction entered into by the parties was determinative of the character of the receipt in the hands of the respondent. Reliance was placed on the well-known case of
I.R. Commrs v. Duke of Westminster (1936) A.C. 1 , where it was said that the form of the transaction entered into by the Duke with his gardener was determinative of the character of the payment made by the Duke as being an annuity or annual payment ``payable wholly out of profits or gains brought into charge''. The High Court in
Mullens v. F.C. of T. 76 ATC 4288 at pp. 4292, 4294, 4297; (1976) 135 C.L.R. 290 at pp. 298, 301, 308 emphatically rejected a doctrine of economic equivalence, relying on the Duke of Westminster's case in so doing. In
I.R. Commrs v. Fleming & Co. (Machinery) Ltd. (1951) 33 T.C. 57 the allocation made by the parties in the agreement of an amount as being for the surrender of contractual rights and another amount as being for a restrictive covenant was held to be determinative although the parties may have allocated the amounts in a way more beneficial to the taxpayer and thus have brought about the result that a lesser amount would have been treated as income.

The use of the Duke of Westminster's case to emphasise form rather than substance in the context of the characterisation of a gain as income has been trenchantly criticised by Professor Parsons in his work Income Taxation in Australia at 2.421. The learned author urges

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that the role of the Duke of Westminster doctrine should be ``confined to the context of a specific statutory provision which attaches tax consequences to the adoption of a legal form''. He continues:

``Where the context is the ordinary usage meaning of income and the only relevant statutory provision is the word `income' itself in s. 25, there is no role for the Duke of Westminster doctrine.''

But what is the Duke of Westminster doctrine? Does it preclude the finding made by the learned trial Judge below? The issue that arose in the Duke of Westminster case and which was determinative as to whether the Duke was entitled to a particular deduction was whether the payments made by the Duke were for remuneration for services or not. It was held that the legal effect of the covenant as between the parties to it determined for revenue purposes the character of the payments actually made, i.e. as annual payments or as remuneration. Lord Wright at p. 30 said:

``On the footing that the deed is genuine, I do not see any possibility of going behind what appears on the face of the document, or qualifying its effect by documents dehors the deed and in no way embodied in it, or regarding the payments as other than annual payments, as it is admitted that ex facie they are. And what the legal effect is as between the covenantor and the covenantee must determine for revenue purposes the character of the payments actually made.''

Lord Tomlin disposed of the arguments for the Revenue as follows (at pp. 19-20):

``... it is said that in revenue cases there is a doctrine that the Court may ignore the legal position and regard what is called `the substance of the matter', and that here the substance of the matter is that the annuitant was serving the Duke for something equal to his former salary or wages, and that therefore, while he is so serving, the annuity must be treated as salary or wages. This supposed doctrine (upon which the Commissioners apparently acted) seems to rest for its support upon a misunderstanding of language used in some earlier cases. The sooner this misunderstanding is dispelled, and the supposed doctrine given its quietus, the better it will be for all concerned, for the doctrine seems to involve substituting `the incertain and crooked cord of discretion' for `the golden and streight metwand of the law'. (4 Inst 41) Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax. This so-called doctrine of `the substance' seems to me to be nothing more than an attempt to make a man pay notwithstanding that he has so ordered his affairs that the amount of tax sought from him is not legally claimable.''

This however does not mean that in determining the legal effect of a contract between parties (and therefore the characterisation of the payment made under it as being income or capital), regard may not be had to the whole factual matrix of which the contract forms part.

Nothing in what his Lordship said requires the conclusion that regard cannot be had to the whole context in which the agreement was made to determine the character of a receipt. In
W.T. Ramsay Ltd. v. I.R. Commrs (1982) A.C. 300 , Lord Wilberforce , with whom Lord Russell of Killowen , Lord Roskill and Lord Bridge of Harwich agreed, said of the principle in the Duke of Westminster case at p. 323:

``This is a cardinal principle but it must not be overstated or overextended. While obliging the court to accept documents or transactions, found to be genuine, as such, it does not compel the court to look at a document or a transaction in blinkers, isolated from any context to which it properly belongs....''

It is of course true, as was urged upon us by counsel for the Commissioner, that the A.M.P. Society would not have made the payment to the partners unless Bengil entered the lease and the partners guaranteed the obligations of Bengil. Particularly, the A.M.P. Society would not have made the payments merely because the firm moved to Comalco House without entering into a lease. But it is equally true, if it be relevant to look at the matter from the point of view of the A.M.P. Society, that the A.M.P. Society was at least uninterested in having

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Bengil execute a lease of the space with or without the guarantee of the partners. The A.M.P. Society was concerned to have the space let to a prominent firm of solicitors, not to Bengil, and did indeed advertise this fact in due course.

When one looks at the entire context in which the payment was made including the interrelationship between the firm and Bengil (the latter being but the alter ego of the former), his Honour was, in my view, entitled to find as he did that the payment was an incentive to the firm to cause it to move rather than a payment for services to be rendered by the firm. This being the case, the character of the payment as income is not to be determined by focusing upon the words of the letter of 29 November to the exclusion of all the circumstances surrounding the payment which provide the real context in which the task of characterisation is to be assayed. In my view, his Honour was not in error in considering what his Honour saw as ``the reality of the situation'', namely that the payment was made so that the firm would move to Comalco House and that it was made independently of the entity which formally took over the lease. This being the case it is clear that sec. 26(e) of the Act relating to services will have no application: cf.
Constable v. F.C. of T. (1952) 86 C.L.R. 402 at p. 415 and
A.L. Hamblin Equipment Pty. Ltd. v. F.C. of T. 74 ATC 4001 at p. 4009; (1973-1974) 130 C.L.R. 159 at p. 171 .

But so to find is but the start of the enquiry.

His Honour's view that the payments were on capital account depended largely upon a finding that the receipt could not properly be characterised as being fairly incidental to Mr Cooling's occupation as a solicitor. His Honour said (at p. 4740):

``No doubt there is a connection, but the receipt of an incentive payment, a one-off receipt, cannot be described as fairly incidental to his practice as a solicitor. I do not regard Myer as requiring a receipt to be classified as income under sec. 25(1), if there is any connection between the receipt and the carrying on of a business.''

The taxpayer in Myer was the holding company of a group of companies carrying on business in the area of retail trading and property development. As part of a reorganisation of the group the taxpayer lent moneys to a subsidiary incorporated for the purpose at 12.5% interest for a term in excess of seven years. The taxpayer assigned to Citicorp Canberra Pty. Ltd. the moneys to become due as interest under the loan for a lump sum paid by Citicorp to Myer. It retained the right to receive the principal at the expiration of the loan term. It was intended at the time the loan was made that the income stream would be sold and that it would produce a lump sum. The High Court held in these circumstances that the ``profit'' (that is to say the amount of the lump sum received by the taxpayer) was income in ordinary concepts.

There are two strands of thought in the judgment. One strand of thought, irrelevant to the present enquiry, was that the lump sum was received in substitution for a stream of income so that the taxpayer had merely converted future income into present income rather than receiving a capital sum of the price for a capital asset. On this basis the purpose of the taxpayer in entering the arrangement was largely irrelevant. The other strand of thought was that the gain was made by the taxpayer in a business operation for the purpose of profit-making and was therefore income in ordinary concepts, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer's business.

The joint judgment of Mason A.C.J., Wilson, Brennan, Deane and Dawson JJ. addressed the two submissions which were made by the taxpayer, namely,

(1) that a gain made as a result of a business deal or venture in the nature of trade is not income unless made in the ordinary course of carrying on a business; and
(2) that the realisation of a capital asset was a matter of capital not income

and commented as to the first at ATC pp. 4366-4367; C.L.R. pp. 209-210:

``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

ATC 4483
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 characterized as income (
F.C. of T. v. Whitfords Beach Pty. Ltd. 82 ATC 4031 at pp. 4036-4037, 4042; (1982) 150 C.L.R. 335 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.''

Later their Honours discussed the Californian Copper Syndicate case and said of it at ATC p. 4367; C.L.R. p. 211:

``The important proposition to be derived from Californian Copper and Ducker is that a receipt may constitute income, if it arises from an isolated business operation or commercial transaction entered into otherwise than in the ordinary course of the carrying on of the taxpayer's business, so long as the taxpayer entered into the transaction with the intention or purpose of making a relevant profit or gain from the transaction.''

Their Honours observed that the courts had been deterred from accepting the simple proposition that the existence of an intention or purpose of making a profit or gain sufficed to stamp a receipt with the character of income. However, where a profit was made in the course of carrying on a business and was generated as ``a profit component of a profit-making scheme'' the judgment makes it clear that the profit will be a revenue profit rather than a capital profit.

Following Myer it would seem that the Commissioner sought to argue that the case established a new principle that all gains made by a business entity were assessable. That the case did not stand for such an extreme proposition was made clear by the Full Court of this Court ( Fox, Fisher and Sheppard JJ.) in
F.C. of T. v. Spedley Securities Ltd. 88 ATC 4126 where the Court said at p. 4130 :

``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 must exist in relation to the particular operation.''

What then is the result on the facts of the present case? If the transaction can properly be said to have been entered into by the firm in the course of carrying on its business and if it can be said that the arrangement is a profit-making scheme in the sense that those words are used by the High Court in Myer then it will follow

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that the amount received by the parties will be income and it will matter not that vis- à -vis the firm, the transaction was extraordinary.

For the respondent it was submitted that the partnership business was the performance of professional services and not the receipt of incentive payments. In my view this submission, while in one sense true, disguises the true nature and extent of the firm's business. It is true that the firm's business includes the rendering of professional services but the firm does not cease business when it moves from one set of leased premises to another as the decision of the High Court in
Lister Blackstone Pty. Ltd. v. F.C. of T. 76 ATC 4285 at p. 4286; (1976) 134 C.L.R. 457 at p. 459 makes clear. That case held that the cost of moving from leased premises to other premises acquired when the first premises became inadequate, to the extent that it was necessary to move stock and plant, was an allowable deduction to a distributor of imported agricultural equipment. The real issue in that case was not whether the expenditure in question was necessarily incurred in carrying on a business, but whether it was capital in nature. It was held that it was not on the facts of the case.

Where a taxpayer operates from leased premises, the move from one premises to another and the leasing of the premises occupied are acts of the taxpayer in the course of its business activity just as much as the trading activities that give rise more directly to the taxpayer's assessable income. Once this is accepted, the evidence established that in Queensland in 1985 it was an ordinary incident of leasing premises in a new city building, at least where the premises occupied were of substantial size, to receive incentive payments of the kind in question. Why then should a profit received during the course of business where the making of such a profit was an ordinary incident of part of the business activity of the firm not be seen to be income in ordinary concepts?

Another way of analysing the facts of the present case is to consider whether the transaction giving rise to the incentive payment can properly be characterised as a profit-making scheme.

It was submitted that the evidence illustrated that the firm was reluctant to move. That may be so. But the firm did commit itself to the move and it was an integral part of this commitment that it receive the incentive payment which is properly a profit of the partnership. It is true that the incentive payment was not the sole purpose of the firm moving premises. The previous premises had the disadvantages to which I have earlier referred and the securing of premises in what may be assumed to have been a prestige building was a clear purpose of the firm in taking the course it did which led both to Bengil entering into the lease and to the receipt of the incentive payment.

A scheme may be a profit-making scheme notwithstanding that neither the sole nor the dominant purpose of entering into it was the making of the profit. In Myer the assignment of the right to interest was an integral part of the total reorganisation entered into by the Myer Group. While the judgment of the High Court in Myer referred to the case as involving the intention or the purpose of making the profit there is no suggestion that the Court dissented from the factual finding of Murphy J. that the motivating purpose of the transaction was for Myer to obtain working capital to enable it to diversify. It should however be noted that on the facts of that case the obtaining of working capital was possible only if the profit contemplated by the taxpayer was made.

In
Moana Sand Pty. Ltd. v. F.C. of T. 88 ATC 4897 , the profit made by a taxpayer on the sale of land acquired with the twofold purpose of working and/or selling surplus sand on it and thereafter holding the land until some time in the future when it became appropriate to sell it at a profit, was held to be income in ordinary concepts. This was so despite a finding that the dominant purpose of the company in acquiring the land was not resale of the land at a profit. The Court ( Sheppard, Wilcox and Lee JJ.) applied Myer's case in so holding.

In my view the transaction entered into by the firm was a commercial transaction; it formed part of the business activity of the firm and a not insignificant purpose of it was the obtaining of a commercial profit by way of the incentive payment. This result accords with common sense. The firm had the alternative of paying less rent and therefore obtaining a smaller tax deduction for its outgoings or paying a higher rent (assuming its lessor

ATC 4485

(Bengil) passed on the rental holiday), and therefore obtaining a larger tax deduction but receiving an amount in the form of assessable income.

For the respondent it was argued that the amount received was analogous to what was referred to as ``key money''. It was said that it had been held that a premium paid to a landlord to obtain the key to leased premises was prima facie capital. Reference was made to
Regent Oil Co. Ltd. v. Strick ; Regent Oil Co. Ltd. v. I.R. Commrs (1966) A.C. 295 , and
Kosciusko Thredbo Pty. Ltd. v. F.C. of T. 84 ATC 4043 .

As his Honour pointed out, there have, from time to time been specific provisions in the Act dealing with premiums (cf. Div. 4 of Pt III of the Act, now virtually obsolete following the enactment of sec. 83AA(1) which had the effect of limiting the Division's application to leases granted before October 1964). Section 26AB now has the effect that the receipt of a premium paid in relation to the grant of a lease of premises not leased for the purpose of producing assessable income is assessable income.

However, the reason why the receipt of a premium by a company not carrying on the business of leasing would ordinarily, in the absence of a special legislative regime, be capital, stems, as the Regent Oil Case itself demonstrates, from the nature of the estate or interest of a lessee. The concept of ``premium'' is normally explained, as by Warrington L.J. in
King v. Earl Cadogan (1915) 3 K.B. 485 at p. 492 as being ``... a cash payment made to the lessor, and representing or supposed to represent, the capital value of the difference between the actual rent and the best rent that might otherwise be obtained''. A premium is ``the consideration for the grant of the lease'' as distinct from rent which is a payment for the use of the land itself (cf.
Frazier v. Commr of Stamp Duties (N.S.W.) 85 ATC 4735 and cases there cited). Hence it is the capital sum received by the landlord for the grant by him of the leasehold estate to the tenant and prima facie thus received on capital account. By contrast the present incentive payment is not received for the firm parting with an estate in land; the analogy is in my view not sound.

Accordingly, I am of the view that the payment was income in ordinary concepts and that the appeal should be allowed. This being the case it is strictly unnecessary for me to deal with the Commissioner's submissions that the provisions of Pt IIIA of the Act, colloquially referred to as the capital gains tax provisions, apply. However, in deference to counsel's full argument and the importance of the submissions, it is appropriate that I set out my views.

Part IIIA of the Act was inserted by Act No. 52 of 1986 which secured the Royal Assent on 24 June 1986. However, the Part applied to disposals accruing on or after 20 September 1985 of property acquired on or after that date (see sec. 160L). The date 20 September 1985 was the day following the announcement of the introduction of capital gains tax made by the Treasurer in his 19 September 1985 Statement on Tax Reform. In that statement the Treasurer (the Honourable Mr Paul Keating) pointed out that the then taxation system without a capital gains tax ``violated horizontal equity, since it favours those who receive income [ sic ] in the form of capital gains, and undermines the progressivity of the tax system''. The system was said, also, to distort investment decisions in favour of assets yielding capital gains and encourage tax avoidance in the area of converting income into capital gains.

The Part provides that where a ``net capital gain'' accrues to a taxpayer in respect of the year of income, that net capital gain is included in the taxpayer's assessable income: sec. 160ZO(1). The concept of net capital gain is defined in sec. 160ZC(1) and (2). In a case such as the present where there is no capital loss incurred during the year of income, or any net capital loss available to be carried forward from the previous year, a net capital gain accrues to a taxpayer if a ``capital gain'' or more than one capital gain accrues to him during the year of income: sec. 160ZC(1)(a).

Section 160Z defines when a capital gain accrues to a taxpayer. This occurs where an asset (other than a ``personal use asset'', defined in sec. 160B(1)) has been ``disposed of'' during the year of income and the consideration for that disposal exceeds what the Act refers to as the ``indexed cost base to the taxpayer in respect of the asset''. The excess is treated by the Act as a capital gain which accrues to the taxpayer during the year of income. The circumstances where consideration is deemed to arise and the quantification of that

ATC 4486

consideration is dealt with in sec. 160ZD. The reference to ``indexed cost base'' is a reference to the indexation of assets to take into account inflation (see sec. 160ZH(2) and 160ZJ), it being the policy of the legislation that the Part will apply (except where assets are acquired and disposed of within 12 months) only to real gains. Thus, to avoid the taxation of the purely inflationary element in a gain, the cost base is to be regularly indexed according to the movement in the Consumer Price Index between the time when the expenditure on the asset was incurred and the date of disposal. The cost base of an asset is generally to be determined in accordance with rules which are set out in sec. 160ZH of the Act.

The tax was not intended to be retrospective in its effect. Thus subject to sec. 160L(1) of the Act, the Part only applies to disposals on or after 20 September 1985 of an asset where the following conditions apply:

(a) The asset was one which immediately before the disposal was owned by the taxpayer.
(b) The taxpayer was, if not a trustee, a resident of Australia (there are specific provisions dealing with the case where the person disposing of the asset is a trustee).
(c) The asset was acquired by the person on or after 20 September 1985.

The assets to which the Part applies are defined in sec. 160A as meaning:

``... any form of properly and includes -

(a) an option, a debt, a chose in action, any other right, goodwill and any other form of incorporeal property;

(b) currency of a foreign country; and

(c) any form of property created or constructed, or otherwise coming to be owned without being acquired,

but does not include a motor vehicle of a kind mentioned in paragraph 82AF(2)(a).''

Three points may be noted from the definition of ``asset'' in sec. 160A. First, it is clear that the definition is expressed in wide terms and that the concept of ``asset'' was intended to be comprehensive. Second, it is clear that the concept of ``asset'' takes some colour from the context of the present legislation. An asset must be capable of disposition to give rise to a taxable gain. Prima facie, this suggests that when the Act speaks of an ``asset'', what is comprehended is an item of property or an interest in property rather than rights of a non-proprietary kind; cf. as to the comparable United Kingdom definition (sec. 19(1) of the Capital Gains Tax Act 1979 reproduced post, and its predecessor, sec. 22(1) of the Finance Act (1965)) , see
Kirby (Inspector of Taxes) v. Thorn E.M.I. plc (1988) 1 W.L.R. 445 and
O'Brien v. Bensons Hosiery (Holdings) Ltd. (1980) A.C. 562 . The meaning of the expression ``disposal'' and cognate terms must be explored to confirm whether this prima facie view is to be accepted. Third, the words ``any other right'' and the words ``any other form of incorporeal property'' in para. (a) of the definition suggest that, in that paragraph at least, it is only proprietary rights and interests that are included within the definition of ``asset''. Cf.
Commr of Stamp Duties (N.S.W.) v. Yeend (1929) 43 C.L.R. 235 at pp. 241 and 244-245 .

Strangely, the Act does not directly define what is meant by ``disposal'' or cognate expression, although sec. 160M and 160N of the Act assist in the elucidation of the meaning of the expression.

Although sec. 160M(1) is framed in terms of a deeming provision, it clearly expresses the normal meaning of ``disposal''. Section 160M(1) is in the following terms:

``Subject to this Part, where a change has occurred in the ownership of an asset, the change shall be deemed, for the purposes of this Part, to have effected a disposal of the asset by the person who owned it immediately before the change and an acquisition of the asset by the person who owned it immediately after the change.''

Thus sec. 160M(1) covers most, if not all of the field normally embraced by the word ``disposal'', particularly when it is remembered that the asset ``disposed of'' needs to have been acquired and owned by the taxpayer prior to the disposition. The normal meaning of disposal is ``alienation'':
Henty House Pty. Ltd. (in vol. liq.) v. F.C. of T. (1953) 88 C.L.R. 141 at pp. 151-152 . There is involved in the concept a dealing with the property in some way, the property remaining in existence: Re Leven (Earl) (deceased) ;
I.R. Commrs v. William Deacon's Bank Ltd. & Ors (1954) 3 All E.R. 81

ATC 4487

. Thus in
Equity Trustees Executors & Agency Co. Ltd. v. Commr of Probate Duties (1976) 10 A.L.R. 131 at p. 134 Stephen J. observed that: ``In any disposal of ownership one person loses title and another gains it...''

The width of sec. 160M(1) is made clear by subsec. (2) which provides that the change in ownership of which subsec. (1) speaks may arise in any way including:

``(a) by the execution of an instrument;

(b) by the entering into of a transaction;

(c) by the transmission of the asset by operation of law;

(d) by the delivery of the asset;

(e) by the doing of any other act or thing;

(f) by the occurrence of any event.''

Subsection (3) of sec. 160M then details four situations which are taken to fall within the words of sec. 160M(1). Each of the cases enunciated may be thought to have presented difficulties if the legislature had confined the scope of the capital gains tax to cases where an existing asset was alienated so that a change in its ownership occurred. The four cases listed in sec. 160M(3) are as follows:

``(a) a declaration of trust in relation to the asset under which the beneficiary is absolutely entitled to the asset as against the trustee;

(b) in the case of an asset being a debt, a chose in action or any other right, or an interest or right in or over property - the cancellation, release, discharge, satisfaction, surrender, forfeiture, expiry or abandonment, at law or in equity, of the asset;

(c) in the case of an asset being a share in or debenture of a company - the redemption in whole or in part, or the cancellation, of the share or debenture; or

(d) subject to sub-section (4), a transaction in relation to the asset under which the use and enjoyment of the asset was or is obtained by a person for a period at the end of which the title to the asset will or may pass to that person.''

In the first class of case the taxpayer remains the legal owner of the asset in relation to which he declares the trust but the beneficiary becomes, as against the declarant, absolutely entitled to the asset. The scheme of the Act is thereafter to treat the beneficiary as having become the owner of the asset: sec. 160V(1). The reason there may not have been a ``disposal'' in the ordinary sense of the word is that the legal ownership of the asset remains with the declarant who has not parted with it.

The second and third class of case involves the extinguishment of the relevant asset, be it a share, a debenture, a debt, a chose in action or another right. Since the concept of disposition ordinarily requires the continuation in existence of the asset after the dealing with it, this second class of case clearly extends the operation of the legislation beyond the normal concept of disposal.

The fourth class of case looks essentially to arrangements having the effect of hire purchase, with the qualification that if the arrangement terminates without title passing, there is not to be taken to be a disposition for the purposes of the Part (sec. 160M(4)).

Subsection (5) of sec. 160M is concerned more with the concept of acquisition rather than with the concept of disposal. It illustrates in its present form four circumstances where there can be an acquisition without there being a disposal.

Section 160M(5)(a) seeks to ensure that the issue or allotment of a share does not constitute a disposal of an asset by the company although it constitutes an acquisition of the shares by the shareholder. It is self-evident that the allotment or issue of shares would not constitute a disposition of property by the company unless the concept of ``disposition'' is so defined as to require that conclusion: cf.
F.C. of T. v. St Helens Farm (A.C.T.) Pty. Ltd. & Ors 81 ATC 4040 at p. 4042; (1980-1981) 146 C.L.R. 336 at pp. 349-350 . By amendment in 1986 retrospective to the operation of the Part, sec. 160M(5)(aa) equated units in a unit trust to shares so that the issue of units does not involve a disposal by the trustee but there will be an acquisition of those units by the person to whom the units are issued.

Paragraph (b) extends the concept of acquisition to ensure that the construction of an asset by or for a person will constitute the acquisition of the asset.

ATC 4488

Paragraph (c) provides that the creation of an asset by or for a person will constitute the acquisition of the asset.

This brings us then to subsec. (6) and (7) upon which the Commissioner founded his submissions. While both subsections present difficulties of construction, the former is drafted with such obscurity that even those used to interpreting the utterances of the Delphic oracle might falter in seeking to elicit a sensible meaning from its terms. Subsection (6) provides as follows:

``A disposal of an asset that did not exist (either by itself or as part of another asset) before the disposal, but is created by the disposal, constitutes a disposal of the asset for the purposes of this Part, but the person who so disposes of the asset shall be deemed not to have paid or given any consideration, or incurred any costs or expenditure, referred to in paragraph 160ZH(1)(a), (b), (c) or (d), (2)(a), (b), (c) or (d) or (3)(a), (b), (c) or (d) in respect of the asset.''

It was the Commissioner's submission that the partners, by entering into the guarantee arrangements, created in the lessor, the A.M.P. Society, an asset which, prior to the guarantee did not exist and that the effect of sec. 160M(6) was to treat each partner as having disposed of the right under the guarantee in favour of the A.M.P. Society. It was said that the subsection was inserted to bring about the result that the creation of a right of any kind was to be taken as the disposal of that right. In support of this argument reference was made to the United Kingdom legislation and the comments thereon made by Whiteman and Wheatcroft in their work on the United Kingdom legislation ( Whiteman and Wheatcroft on Capital Gains Tax , Sweet & Maxwell, London, 1960, 3rd ed. at pp. 134-135).

Before turning to the United Kingdom legislation it may be observed that the Commissioner's interpretation of subsec. (6) does not easily emerge from the language of the subsection, but perhaps that is not wholly untrue of any attempt to elucidate it.

The first difficulty lies in the use of the word ``disposal'' in conjunction with the words ``asset that did not exist''. If ``disposal'' is to be given its ordinary meaning it relates to a dealing with an existing asset. Thus it may be inferred that in this subsection the word ``disposal'' must be intended to have some different meaning. Two possibilities emerge for consideration. The first, is that the meaning of the word ``disposal'' as used in this subsection may be found elsewhere in the Act; the second is that the word ``disposal'' has a meaning, different from its normal meaning, as for example a ``dealing with'' or a ``bestowing upon another''. Neither of these meanings would fall readily to mind in the present context. However, the difficulty seems, with respect to the argument, to be that if the legislature had intended to provide that the creation of all rights would be taken to involve the disposal of those rights by the person creating them it could certainly have so provided, not only by using fewer words but also by using words more clearly appropriate to the meaning intended to be conveyed.

A third difficulty with the Commissioner's suggested interpretation lies in the results which it produces. While it may not be a conclusive argument that a particular interpretation produces difficult results, where the interpretation leads to perverse and bizarre results it must clearly raise the question whether the construction which best promotes the legislative purpose has been adopted. For example, let it be assumed that A covenants that he will contribute $100 to a charitable appeal. A payment of that amount will not involve a disposition of an asset because, it would seem, Australian currency may not be an asset as defined. Whether or not it is, the $100 will, under the legislation, have a cost base of $100, whether A gave value for the $100 or received it by way of gift. If the Commissioner's interpretation be correct, by covenanting to pay the money A will have created a right in the charity, hence there will be a disposal of that right. The section itself ensures that the ``right'' disposed of has effectively no cost base. Although A receives no consideration for the creation of the right, sec. 160ZD(2) appears to treat the disposer in such a case as receiving consideration equal to the market value of the asset (i.e. the right created). Hence A is required, on the Commissioner's interpretation, to include in his assessable income $100.

Another example, equally bizarre, arises where A draws a bill of exchange upon X payable to bearer and hands the bill to his wife.

ATC 4489

A has thereby created in her a right to recover against X the full value of the bill. Again because there is no consideration, there is deemed by sec. 160ZD(2) to be consideration equal to the value of the right created in the wife. The value of the bill is, on the Commissioner's interpretation, included in his assessable income.

A third example is the case where A pays B money in consideration for a promise from B that B will settle property in favour of C. On the Commissioner's interpretation B creates a right in C (or perhaps A) and in return B receives the consideration. There being effectively no cost base of the right created the consideration becomes a taxable gain of B. In this case if the assets to be settled are acquired after 20 September 1985 B may as a result of the transaction have a further capital gain if the indexed cost base of the assets settled is less than the consideration for the settlement.

The suggestion that the wording of sec. 160M(6) derives from what is said by Whiteman and Wheatcroft should now be explored.

The Capital Gains Tax Act 1979 like the present legislation deals with disposals of assets generating a gain. Section 19(1) and (2) provide:

``(1) All forms of property shall be assets for the purposes of this Act, whether situated in the United Kingdom or not, including -

(a) options, debts and incorporeal property generally, and

(b) any currency other than sterling, and

(c) any form of property created by the person disposing of it, or otherwise coming to be owned without being acquired.

(2) For the purposes of this Act -

(a) references to a disposal of an asset include, except where the context otherwise requires, references to a part disposal of an asset, and

(b) there is a part disposal of an asset where an interest or right in or over the asset is created by the disposal, as well as where it subsists before the disposal, and generally, there is a part disposal of an asset where, on a person making a disposal, any description of property derived from the asset remains undisposed of.''

It will be observed that there is an identity of language in sec. 19(1)(c) to the words used in sec. 160A(c) and that there is reference in sec. 19(2) to the concept of an asset being created by a disposal which in part resembles the language of sec. 160M(6). I should say that sec. 19(2)(a) dealing with part disposals finds its counterpart in the present sec. 160R which provides:

``For the purposes of this Part, a reference to a disposal of an asset includes, unless the contrary intention appears, a reference to a disposal of part of an asset.''

Clearly part of the work for sec. 160R will be where each of two persons (not partners) own a part of an overall asset and together dispose of the whole. But there will be difficult cases where new assets are carved out of existing assets. The creation of an easement over an existing asset at common law involved (excluding the case of an easement created by statute or arising by prescription), a grant, although the grant of an easement could arise by implication. See Co. Litt. 9a; Halsbury's Laws of England , 4th ed. vol. 14 para. 47 and 50;
The Commonwealth v. Registrar of Titles (1918) 24 C.L.R. 348 at p. 353 . The creation out of land of a profit a prendre involves an instrument whereby the proprietary interest so created is transferred to, vested in or accrues to the grantee:
Commr of Stamp Duties (N.S.W.) v. Henry (1963-1964) 114 C.L.R. 322 and is thus a conveyance for stamp duty purposes. The grant of a lease is in ordinary parlance a conveyance and as Danckwerts J. observed, that is also true in general in legal parlance:
Littlewoods Mail Order Stores Ltd. v. I.R. Commrs (1961) 1 Ch.D. 195 at p. 198 . Thus Blackstone's Commentaries , vol. 2 p. 319 says: ``A lease is properly a conveyance of any lands or `tenements'.''

The grant of an option over property, where the contract to be performed was capable of specific performance confers upon the grantee a proprietary right in the property the subject of the option:
Laybutt v. Amoco Australia Pty. Ltd. (1974) 132 C.L.R. 57 ,
George Wimpey & Co. Ltd. v. I.R. Commrs (1975) 1 W.L.R. 995 . While the grant of an option may be said not to

ATC 4490

transfer any right of property which had previously belonged to the grantor:
Commr of Taxes (Qld) v. Camphin (1937) 57 C.L.R. 127 it is at least colloquial usage to refer to the grant of an option as involving a disposition of property and for the purposes of stamp duty legislation it has been held that an agreement granting an option over land for consideration was a conveyance on sale as defined in the Stamps Act 1891 as being an instrument ``whereby property or an interest in any property upon the sale thereof is transformed to or vested in a purchaser'' ( George Wimpey & Co. Ltd. v. I.R. Commrs (supra) ).

In all of the above cases, rights have been created in others by grant out of an original asset in circumstances where the ownership of that asset continues, albeit perhaps diminished in value by virtue of the transaction. Absent sec. 160M(6) or other express provisions, a question would arise whether such cases involved a disposal of part of an asset within sec. 160R. This is clearly the problem to which sec. 19(2)(b) of the United Kingdom legislation is directed.

We were referred to Whiteman and Wheatcroft's work where the learned authors at pp. 134-135 comment:

``We now have to consider the other case of disposal without acquisition, namely, where A disposes of an asset which he never acquired from anyone else. This can occur in two ways, (1) where he created the asset before he disposed of it, e.g. he disposes of goodwill or a copyright, or (2) where he created the asset on the disposal, e.g. where he executes a covenant or contract in favour of B under which B acquires an asset, such as contractual rights, which were not in existence before, or when a company issues and allots shares.

In the first case it is clear that there is a prima facie charge to capital gains tax on A as `asset' includes any form of property created by the person disposing of it or otherwise coming to be owned without having been acquired.

Where, however, the asset did not exist (either by itself or as part of another asset) before the disposal but is created by the disposal, it is submitted in the absence of special provisions there is no disposal for capital gains tax. The word disposal must, it is suggested, involve there being some proprietary or beneficial right in the disposer at the time. Hence there will be a distinction between the creation of a contractual right in B's favour, which will not involve a disposal by A, and the creation in favour of B of a right in or over an asset owned by A, and the creation in favour of B of a right in or over an asset owned by A, which will be a part disposal of that asset.''

That the language of the United Kingdom legislation and perhaps the discussion in Whiteman and Wheatcroft were the inspiration for sec. 160M(6) would seem plain but what conclusions follow from that? An interpretation which confines sec. 160M(6) to a reasonable meaning, consistent with the object and policy of the legislation is, in my view, to be preferred to one which produces capricious results which seem inconsistent with the scheme of it. This is one case at least, where, in my view, ambiguity of expression should be resolved in favour of the taxpayer. Perhaps the word ``ambiguity'' is in the present context unduly kind.

When reference is had to the explanatory memorandum to the Bill which introduced Pt IIIA into the Act, it will be seen that the two examples used to illustrate the section are leases and options. It is not suggested that these are the only examples, but what stands out is that no suggestion is made in the explanatory memorandum or elsewhere that the creation of rights, proprietary or otherwise, will always be a disposition of property within sec. 160M(7).

Against the interpretation which I favour it can be said that the Act deals specifically with ``options'' and ``leases'' in sec. 160ZZC and sec. 160ZS respectively. Thus sec. 160ZS(1) and (2) provide:

``160ZS(1) For the purposes of this Part, the grant of a lease of property shall not be taken to constitute the disposal of part of the property but shall be deemed to constitute the disposal by the lessor to the lessee of an asset (that is to say, the lease) created by the lessor for a consideration equal to the premium paid or payable for the grant of the lease.

160ZS(2) Notwithstanding section 160ZH, the cost base to a taxpayer of a lease of property granted by the taxpayer comprises the amounts of expenditure incurred by the taxpayer in respect of the grant of the lease

ATC 4491
and does not include any other amounts, and the indexed cost base and the reduced cost base shall be ascertained accordingly.''

Section 160ZZC(3) and (6) provide:

``160ZZC(3) Subject... to the following provisions of this section as to treating the grant of an option as part of a larger transaction, where an option has been granted -

(a) the grant of the option shall be deemed to have constituted a disposal of the option at the time when the grant took effect; and

(b) the option shall be deemed to have been owned by the grantor immediately before the disposal took place.

...

160ZZC(6) Notwithstanding section 160ZH, the cost base to a taxpayer of an option granted by the taxpayer comprises the amounts of expenditure incurred by the taxpayer in respect of the grant of the option and does not include any other amounts, and the indexed cost base and the reduced cost base shall be ascertained accordingly.''

I had at one time been attracted to the view that sec. 160M(6) was really a cross-referencing provision to the provisions of the Act dealing with leases and options, having regard to the language used in both sec. 160ZS and 160ZZC which is close to that used in sec. 160M(6) in its reference to assets created and disposed of by the creation. There are, it is true, real difficulties in the way of such a construction. If all that was intended was a cross-reference it is hard to see why the cross-referencing would take such a clumsy form. Second, it is difficult to see why all of sec. 160M(6), 160ZS(2) and 160ZZC(6) deal with the calculation of cost base (and marginally differently from the way sec. 160M(6) deals with the same matter) although it is possible to read them together. On the other hand the reference to those sections does provide some content to the concept of a disposal of an asset that did not exist before the disposal.

Another possible view is that sec. 160R is to be read into the section in place of the word ``disposal'' where firstly appearing. So read, sec. 160M(6) provides:

``A disposal of part of an asset that did not exist (either by itself or as part of another asset) before the disposal, but is created by the disposal, constitutes a disposal of the asset...''

That view also has its difficulties.

It is however unnecessary to comment on the ultimate ambit of sec. 160M(6). It suffices to say that the section should be confined to those cases where proprietary rights are created out of or over existing assets in circumstances where the asset affected by the right created continues to exist. That is not the present case and accordingly, like his Honour below, I am of the view that sec. 160M(6) has no application to the facts of the present case.

The Commissioner sought also to rely upon sec. 160M(7). That subsection is in the following terms:

``Without limiting the generality of sub-section (2) but subject to the other provisions of this Part, where -

(a) an act or transaction has taken place in relation to an asset or an event affecting an asset has occurred; and

(b) a person has received, or is entitled to receive, an amount of money or other consideration by reason of the act, transaction or event (whether or not any asset was or will be acquired by the person paying the money or giving the other consideration) including, but not limited to, an amount of money or other consideration -

(i) in the case of an asset being a right - in return for forfeiture or surrender of the right or for refraining from exercising the right; or

(ii) for use or exploitation of the asset,

the act, transaction or event constitutes a disposal by the person who received, or is entitled to receive, the money or other consideration of an asset created by the disposal and, for the purposes of the application of this Part in relation to that disposal -

(c) the money or other consideration constitutes the consideration in respect of the disposal; and

ATC 4492

(d) the person shall be deemed not to have paid or given any consideration, or incurred any costs or expenditure, referred to in paragraph 160ZH(1)(a), (b), (c) or (d), (2)(a), (b), (c) or (d) or (3)(a), (b), (c) or (d) in respect of the asset.''

There are a number of propositions that can be gleaned from the wording of subsec. (7) which provide a guide to the interpretation of the subsection. First, it is to be noted that the subsection is subject to the other provisions of Pt IIIA. It is not totally clear what the precise effect is of making the subsection subject to the other provisions of Pt IIIA. Presumably however if a particular act or transaction gives rise to the inclusion of a particular gain in assessable income under some other section or subsection of Pt IIIA in the hands of the same taxpayer but the cost base is to be differently calculated, the other section or subsection will prevail. For example, when an asset is disposed of in circumstances that give rise to a change of ownership of that asset, literally subsec. (7) could apply because an act or transaction will have taken place in relation to that asset in circumstances where the owner of that asset will have received or become entitled to receive an amount of money or other consideration for the disposal. If subsec. (7) were to apply to such a case the consequence would practically be that there would be no cost base so that the whole consideration would be taxable as the gain.

That is not the scheme of the legislation. Where an asset is the subject of a disposal otherwise brought within the legislation the general scheme of the Act is to determine the cost base and indexed cost base of the asset having regard to sec. 160ZH and tax the net gain rather than the gross gain.

As a matter of construction of the subsection it follows also that the subsection will only operate where there is in existence prior to the act or transaction to which the subsection refers an asset as defined but the consequence of the transaction is not to involve a disposal of that asset.

The second proposition is that the act or transaction must be either in relation to the asset of which the section speaks or there must be an event which affects the asset in some way. The words ``in relation to'' are very broad words but they do require a real relationship between the act or transaction on the one hand and the asset on the other: cf.
Smith v. F.C. of T. 87 ATC 4883 ; (1987-1988) 164 C.L.R. 513 . The section is silent as to whether the ``asset'' referred to must be an asset owned by the taxpayer. I will return to that question subsequently.

Third, it is clear that the consideration received or to be received by the taxpayer must be derived by reason of the relevant act, transaction or event. There must be a causal connection between them. The use of the word ``consideration'' suggests that there will be some contractual relationship between the recipient and some other person giving rise to a receipt or entitlement to receive that consideration, be it a monetary consideration or otherwise.

Fourth, it is clear that it will not be a necessary precondition to the operation of the section that the person paying the money or providing the consideration himself acquire any property.

The Treasurer's explanatory memorandum is of little assistance in elucidating the operation of the paragraph. It says:

``Sub-section 160M(7) also applies, subject to the other provisions of Part IIIA, in situations where there is a disposal of an asset created by the disposal. It will deem a disposal of an asset to have occurred where a taxpayer receives or becomes entitled to receive an amount of money or other consideration for the forfeiture or surrender of a right or for refraining from exercising the right or receives consideration for the use or exploitation of an asset. The sub-section provides that the act, transaction or event which results in the taxpayer receiving the consideration will constitute the disposal by the taxpayer of an asset created by the disposal for the purposes of Pt IIIA. Examples of the acts, transactions or events affected by this provision include that of an amateur sportsman who receives a payment on becoming a professional, the receipt of consideration for entering into exclusive trade tie agreements or restrictive covenants, or in connection with the variation, cancellation or breach of business contracts or agency agreements.''

ATC 4493

Not all that is said in the memorandum can be accepted. First, it is hard to see how the section can be said to apply where there is a disposal of an asset created by the disposal. Rather the consequence of the operation of the subsection is to constitute or deem there to be a disposal of an asset created by the disposal. The effect of that deeming would seem to be that the ``asset'' created by the disposal is not an actual asset (and in particular is not the asset referred to in para. (a) of the subsection) but a fictitious asset. This may be thought to create a problem for the operation of the subsection having regard to sec. 160L which requires not only that there be a disposal of an asset but also that the asset have been acquired on or after 20 September 1985 and be owned by that person immediately before the disposal took place. However, I do not believe the subsection to be unworkable. Section 160M(5)(c) deems inter alia the creation of an asset by a person to be an acquisition of the asset by the person and sec. 160U(6) provides a time of acquisition for the purpose of the Part. That subsection provides relevantly:

``Where the asset was created by a person otherwise than pursuant to a contract under which the person created the asset for another person, the asset shall be taken to have been acquired by the first-mentioned person -

(a) if the asset did not exist (either by itself or as part of another asset) before the disposal - immediately before the asset was disposed of;...''

Once one finds the deemed acquisition to occur immediately before the disposal it is not a big jump to conclude that in between the deemed acquisition and the deemed disposal of the deemed asset it was for the purposes of the Part to be deemed owned by the taxpayer. In so concluding, I am conscious of the numerous cases that require deeming provisions to be confined and which caution against extending a deeming for one purpose to another purpose: cf.
F.C. of T. v. Comber 86 ATC 4171 at pp. 4172, 4177 and 4180; (1986) 64 A.L.R. 451 at pp. 451-452, 458 and 462 .

The Commissioner pointed to Comalco House owned by the A.M.P. Society or that part of it which was subjected to the lease to the firm as being the relevant asset. Alternatively he pointed to the guarantee given by the parties as the relevant asset. The last alternative may be disregarded because even if the obligations under the guarantee are properly an asset as defined they were not in existence at the time of the relevant act, transaction or event. The same cannot be said of Comalco House. There is raised, accordingly, the question whether the section can have application where there is an event which affects an asset and which gives rise to consideration payable to the taxpayer but where the asset affected is not the asset of the taxpayer.

If the literal words of the subsection are read without reference to the scheme of Pt IIIA as a whole, it can readily be said that the subsection is capable of referring to any asset at all, be it an asset of the taxpayer or an asset of some other person. So read, the only qualification is that the asset be one that is either affected by the event or one in relation to which an act or transaction has taken place. If the subsection is given a literal reading then it can be said that the exact words appear to apply such that tax will be levied whenever an act or transaction has taken place in relation to an asset of some person other than the taxpayer or an event affecting the asset of such a person has occurred and the taxpayer has received, or is entitled to receive, an amount of money or other consideration by reason of the act, transaction or event.

But the process of statutory construction does not consist merely of ascertaining the meaning of words used aided, if necessary, by a dictionary. As Gibbs C.J. said in
Cooper Brookes (Wollongong) Pty. Ltd. v. F.C. of T. 81 ATC 4292 at p. 4296; (1980-1981) 147 C.L.R. 297 at p. 304 : ``Of course, no part of a statute can be considered in isolation from its context - the whole must be considered.'' It is only where the language of the statute, being seemingly clear and unambiguous is ``... consistent and harmonious with the other provisions of the enactment and can be intelligibly applied to the subject matter with which it deals'', that effect will be given to what appears to be the ordinary and grammatical meaning of the words (cf. per Gibbs C.J. at ATC p. 4296; C.L.R. p. 305).

As Mason and Wilson JJ. remarked in the same case at ATC p. 4305; C.L.R. p. 320:

``But there are cases in which inconvenience of result or improbability of result assists the

ATC 4494
court in concluding that an alternative construction which is reasonably open is to be preferred to the literal meaning because the alternative interpretation more closely conforms to the legislative intent discernible from other provisions in the statute.''

A good example of a case where the provisions of a taxing statute which on its face applied literally to subject a taxpayer to tax yet which, having regard to the context of the legislation as a whole and the inconvenient results which a literal meaning of the words used produced was read down, is to be seen in
D.F.C. of T. (S.A.) v. Ellis & Clark Ltd. (1934) 52 C.L.R. 85 . Under the provisions of the sales tax legislation there considered, a sale value and consequent charge for sales tax arose whenever a registered person sold goods to an unregistered person or to a registered person who did not quote his certificate in respect of the purchase of goods. In
Re Searls Ltd. (1932) 33 S.R. (N.S.W.) 7 , Harvey C.J. applied the literal meaning of the words to find a registered person (in liquidation) liable to pay sales tax upon the sale by the liquidator of second-hand office furniture. The High Court in Ellis & Clark Ltd. however, read down the meaning of the word ``goods'' so as to comprehend only goods which had not gone into use or consumption in Australia. See too, more recently,
Brayson Motors Pty. Ltd. (in liq.) v. F.C. of T. 85 ATC 4125 ; (1984-1985) 156 C.L.R. 651 .

Accordingly it is necessary to look at the context of Pt IIIA as a whole to see whether the literal meaning of the words used conforms ``to the legislative intent as ascertained from the provisions of the statute, including the policy which may be discerned from these provisions'': Cooper Brookes (supra) at ATC p. 4306; C.L.R. p. 321 per Mason and Wilson JJ. In so doing it is also relevant to have regard to the consequences which the literal interpretation may give rise to.

First, it seems to me that the purpose of sec. 160M(7) was to deal with the case where an asset of a taxpayer was not disposed of in the ordinary sense as a result of the transaction (i.e. not within sec. 160L), was not the subject of the creation of an interest out of that asset (i.e. not within sec. 160M(6)) but nevertheless there was a transaction etc. which related to or affected that asset which gave rise to consideration being paid or becoming payable. Because the taxpayer may be left, so far as the specific sec. 160M(7) transaction is concerned, with the existing asset in his ownership it is appropriate not to allow him any cost base just as was the case with sec. 160M(6) where the existing asset also continued in the taxpayer's ownership. To consider the section by reference to an asset of a person other than the taxpayer seems to me to turn the policy of the legislation upon its head.

By way of illustration, a taxpayer has an asset being a business acquired by him after 20 September 1986. He contracts to sell that asset and as part of the transaction covenants for consideration not to compete with the purchaser. The sale of the business will be a disposition in the ordinary sense. There will be obvious difficulty in determining how much of the consideration relates to the sale of the goodwill of the business and how much to the personal covenant: cf.
Eastern National Omnibus Co. Ltd. v. I.R. Commrs (1939) 1 K.B. 161 . The transaction giving rise to the payment of consideration for the personal covenant relates to or affects the goodwill but does not dispose of it. In this sense the goodwill continues in the hands of the vendor unaffected, although of course that goodwill may be dealt with by an actual disposal of it. It is, in such a case, clear what work sec. 160M(7) was intended to do.

Second, the two examples contained in para. (i) and (ii), while not limiting the construction of the section, both suggest that the relevant asset was intended to be the asset of the taxpayer and not some other person. For example, if the taxpayer has a right which is an asset (e.g. a right to manufacture granted to him by another) and he is paid a sum of money for refraining from exercising that right the section operates. The section thus avoids the difficulty of determining whether the payment on termination of agency agreements is income or capital: cf.
Heavy Minerals Pty. Ltd. v. F.C. of T. (1966) 115 C.L.R. 512 ;
Californian Oil Products Ltd. (in liq.) v. F.C. of T. (1934) 52 C.L.R. 28 ;
Allied Mills Industries Pty. Ltd. v. F.C. of T. 89 ATC 4365 .

The second example contained in para. (b)(ii) seems even more clearly to relate to a case where the asset was owned by the taxpayer. It deals with the class of case where

ATC 4495

the taxpayer owns a patent or other industrial property right and ``sells'' to another the exclusive right to use or exploit the patent in a particular territory. The difficulties which such a situation creates for the characterisation of a receipt as income or capital are well illustrated by the decision of the Supreme Court of Queensland in
Kwikspan Purlin System Pty. Ltd. v. F.C. of T. 84 ATC 4282 and the cases referred to in that judgment.

It was argued for the Commissioner that a case such as Federal Coke Co. Pty. Ltd. v. F.C. of T. 77 ATC 4255; (1977) 34 F.L.R. 375 may have been intended to fall within the first example. That case involved a payment made by Societe Anonyme le Nickel (``Le Nickel'') to the taxpayer at the instigation of Bellambi Coal Co. Ltd. (``Bellambi''), the holding company of the taxpayer. The occasion of the payment was the alteration of an agreement between Bellambi and Le Nickel under which Bellambi agreed to sell to Le Nickel coke produced by its subsidiaries. On the facts of the case there was the decided possibility that the payment could have been income of Bellambi which it had directed to the taxpayer but that was irrelevant to the assessability of Federal Coke. See e.g. per Bowen C.J. at ATC pp. 4263-4264; C.L.R. pp. 387-388, per Nimmo J. at ATC p. 4272; C.L.R. p. 400, and per Brennan J. at ATC pp. 4273 and 4274; C.L.R. pp. 402 and 404.

It was said by the Commissioner that in such a case the relevant asset for consideration under sec. 160M(7) would be the contract between Le Nickel and Bellambi. With respect to this argument the payment in the hands of Federal Coke was a mere gift, and was for that reason not assessable income of that company. The policy of Pt IIIA was clearly not to tax gains in the form of gifts not involving disposals of assets owned by a taxpayer. It was to tax realised gains in respect of assets. Federal Coke had no asset. In my view it could not have been intended to tax a taxpayer in the position of Federal Coke, although it was clearly intended to ensure that a taxpayer in the position of Bellambi was taxed. See too sec. 160D(1) which provides:

``(a) a taxpayer shall be deemed to have received money or other property if the money or other property has been applied for the benefit, or in accordance with the directions, of the taxpayer; and

(b) a taxpayer shall be deemed to be entitled to receive money or other property if the taxpayer is entitled to have the money or other property applied for the benefit, or in accordance with the directions, of the taxpayer.''

It cannot one would think have been intended that in a factual situation such as occurred in Federal Coke both Bellambi and Federal Coke were assessable in respect of the same gain.

Indeed, the Commissioner's argument brought about the result that where a contract of sale of an asset by a husband provided for payment of the purchase money to the wife, both husband and wife would be potentially assessable, the husband to the gain arising from the difference between the indexed cost base of the land and the consideration payable to the wife and the wife on the whole of the consideration received by her by virtue of sec. 160M(7). Such a peculiar result is avoided only if sec. 160M(7) is construed so that the asset referred to in the section is confined to an asset belonging to the taxpayer. It is pertinent to note that counsel for the Commissioner could not suggest why two amounts of tax were not payable in the example cited on the assumption that the Commissioner's submission was correct.

An even more absurd example of the consequences of giving to the subsection an interpretation such that the asset involved is not that of the taxpayer can be seen by analysing the consequences of the handing over of a cheque to a person by way of gift. The delivery of a cheque to a donee is an act which either takes place in relation to the donor's bank account (a chose in action against the banker and thus an ``asset'') or which can be said to affect that bank account. By reason of the delivery of that cheque, a person, the donee, becomes entitled to receive money when the cheque is drawn upon. Can it seriously be suggested that the recipient of the cheque is to be deemed to have made a chargeable gain equal to the cash received? Yet this would seem to be the result which follows unless the asset of which the subsection speaks is confined to an asset of the taxpayer who receives the money or other consideration or becomes entitled to receive it.

Whatever else is clear, the legislative policy of Pt IIIA of the Act was not to introduce a gift

ATC 4496

tax by stealth. The clear policy was to bring to tax gains made by a taxpayer only where the taxpayer held an asset acquired by him on or after 20 September 1985 which he turned to account by either disposing of it in the normal sense of that word or by entering a transaction that by force of one or other of the subsections of sec. 160M of the Act was deemed to be a disposition. This policy is furthered by interpreting subsec. (7) as applying to, and only to a case where the taxpayer does not dispose of the asset itself but enters into a transaction that has a real relationship to the asset or affects the asset and gives rise to a circumstance where the taxpayer receives money or other consideration but is left still holding the asset at the end of the transaction, albeit that the asset has been diminished in value. In such a case, the cost base of the asset is undiminished but the consideration is treated as a gain to him. If separately or even in a related transaction the asset is disposed of then the cost base of the asset will be available to calculate any gain or loss to the taxpayer arising from the disposition of the asset itself.

Another difficulty of the view that sec. 160M(7) could operate where the relevant asset is an asset of a person other than the taxpayer is the question whether in a case where the same transaction gives rise to income in ordinary concepts the provisions of sec. 160ZA(4) would operate to relieve double tax. For example, a person who repairs a house for reward is assessable on the consideration he receives for so doing under sec. 25(1) of the Act or sec. 26(e). On the view that sec. 160M(7) operates where the asset is that of a person who does not receive or become entitled to receive the consideration the repairer will also have the consideration included in assessable income under sec. 160ZO(1), not necessarily in the same income tax year if the repairer is not properly assessable on an accruals basis. Double taxation would only be relieved if it is right to say that the amount included in assessable income under, say, sec. 25(1) is included as ``a result of the disposal of the asset''. There is no actual asset the repairer will have disposed of and it would be necessary to give sec. 160ZA(4) a forced construction to alleviate double tax.

To construe sec. 160M(7) as confined to assets of the taxpayer and not as extending to assets of some other person provides a coherent taxing scheme which avoids the absurdities thrown up by the Commissioner's interpretation. Under that scheme the underlying theme is that the Act is concerned with gains arising from assets that are owned by a taxpayer. In the ordinary case the operation of Pt IIIA is limited to gains made on the disposal of assets acquired by the taxpayer on or after 20 September 1985 and disposed of by him. The disposal will involve a change of ownership of either the whole or a part of the asset and the gain will be calculated by reference to a tax base relevant to the asset indexed for inflation. In addition, transactions involving the settlement of property by way of declaration of trust and the extinguishment of proprietary rights will be treated as dispositions of the property the subject of those transactions. The Act further treats there as being a disposition if there is a grant of a proprietary right out of an existing asset of a taxpayer, notwithstanding that the asset continues to exist after the grant (sec. 160M(6)) or if there is a transaction not being otherwise a disposition concerning or affecting an asset of the taxpayer pursuant to which the taxpayer receives or becomes entitled to receive consideration for by so doing he has turned the asset to account, notwithstanding that he may still retain the asset or deal with it separately. In each of the last two cases the cost base to the taxpayer of his existing asset is not reduced (although the value of the asset may well have been) and thus it is appropriate to bring to tax the whole of the consideration he received.

Since I am of the view that the amount derived by the respondent was on the facts of the present case income in ordinary concepts, I would allow the appeal. Most of the argument before us concerned the provisions of sec. 160M(6) and (7) in respect of which the Commissioner has been unsuccessful. Accordingly I would set aside the orders as to costs made below and order the respondent before us to pay the appellant's costs below but would make no order as to the costs of the appeal.

THE COURT ORDERS THAT:

1. The appeal be allowed.

2. The respondent pay the costs of the appellant of the appeal.

3. The order for costs made at first instance be set aside.

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