PW Johnston DP
Administrative Appeals Tribunal
PW Johnston (Deputy President)
This is an application by the taxpayer for review of a decision by the respondent to disallow the objection dated 5 April 1989 to the assessment issued in respect of the applicant on 24 February 1989, for the year ended 30 June 1986 (``the tax year'').
The basic facts are as follows:
In the tax year, the applicant, a company incorporated in Western Australia, was a beneficiary in the H Trust (``the Trust''). The Trustee of the Trust at all material times was another company incorporated in Western Australia (which shall be described as ``Marco''). In the tax year, Marco as Trustee of the Trust received an amount of $165,000. That amount was distributed to the applicant as a beneficiary of the Trust in the tax year. The amount of $165,000 was paid to Marco by a company (which shall be referred to as ``Goldco'') on 27 May 1986 in relation to a Management and Consultancy Agreement (``the Agreement''). The Agreement was entered into on 1 July 1982 between Goldco and Marco for the latter to provide management services to Goldco, such Agreement being expressed to expire on 30 June 1986, but subject to the provisions of clause 14 providing for the Agreement to continue thereafter subject to three months' notice of termination. As of 1 July 1985, or shortly thereafter, an Agreement was made between the parties the effect of which was that the arrangement under the Agreement would continue to operate for a further four years effective from 1 July 1985.
Issues in dispute
The claims of the applicant may be summarised as follows:
- (1) The receipt by the Trustee of $165,000 is not assessable as income of the Trustee for the tax year pursuant to the provisions of the
ATC 220Income Tax Assessment Act 1936 (``the Act''). In particular:
- (a) the said amount is not income derived by the Trustee according to ordinary concepts and is not assessable income by virtue of s. 25, s. 25A, s. 26, s. 26AAA, the provisions of Division 5, Part IIIA, Part IVA or any other provisions of the Act;
- (b) the provisions of Part IIIA of the Act relating to capital gains tax are not applicable because any disposition of an asset relates to an asset acquired prior to 20 September 1985.
- (2) The amount of $165,000 distributed to the applicant is not assessable income of the applicant for the tax year not being assessable income of the Trust and the applicant is not assessable pursuant to the provisions of s. 97 or any other provisions of Division 6 Part III of the Act.
In response the respondent contends:
- (1) The said sum is income derived by the Trustee according to ordinary concepts and is assessable income by virtue of s. 25 of the Act.
- (2) Alternatively, the provisions of Part IIIA of the Act are applicable as the sum of $165,000 was received by the Trustee in consideration of the disposal by it of an asset acquired on or after 20 September 1985, such asset being its rights under the extended Agreement.
- (3) The sum of $165,000 distributed to the applicant is assessable income of the Trust and therefore of the applicant for the tax year and the applicant is assessable pursuant to s. 97 of the Act.
At the hearing, Mr B Collison, instructed by Blake Dawson Waldron, appeared for the applicant and Mr M Buss of counsel, instructed by the Australian Government Solicitor, appeared for the respondent. The Tribunal received into evidence the documents furnished to the Tribunal pursuant to s. 37 of the Administrative Appeals Tribunal Act 1975 (exhibit 1) and a copy of the Agreement (exhibit 2). Oral evidence was given in support of the applicant by Mr H. Further documents were received into evidence and where appropriate, reference will be made to them.
Summary of evidence
Mr H gave evidence as follows:
(a) Details of Marco (Trustee):
Mr H told the Tribunal that Marco was a family company in which he and his wife held one share each. It was the Trustee of the H Family Trust of which the taxpayer was an income beneficiary at the relevant time.
(b) History of Goldco:
Goldco was floated as a public company in the early 1980s to take advantage of a number of leases acquired by Mr H and associates. After it became operational most of its activities were carried out by Mr H who was one of the initial directors. On the advice of accountants, the Agreement between Goldco (referred to as ``the Company'') and Marco (referred to as ``the Executive'') was executed on 1 July 1982 (exhibit 2). The following clauses are relevant to this application:
- (1) The Company shall employ the Executive and the Executive shall serve the Company by providing general managerial and administrative services up to and including the managing director level and by performing such duties functions and responsibilities as the Board of Directors of the Company (hereinafter referred to as ``the Board'') may from time to time determine upon the terms and conditions following.
- (2) This Agreement shall extend for a period of four (4) years from the date hereof but subject to earlier determination as hereinafter provided.
- (6) The Company shall pay to the Executive during the continuance of its engagement pursuant to this Agreement consideration exclusive of any sums receivable as Directors' fees or other remuneration or allowances from the Company the sum of THIRTY FOUR THOUSAND DOLLARS ($34,000.00) per annum.
- (14) After the expiration of the term of four (4) years of this Agreement the employment of the Executive by the Company shall (unless either party shall give written notice to the contrary to the other prior to the expiration of such term) continue on the same basis terms and
ATC 221conditions mutatis mutandis as are herein specified until terminated by either party giving to the other not less than three months notice of termination. Such notice may be given so as to expire at any time after the expiration of the term.
Details of company meetings
Various minutes of Goldco were tendered. They include the following:
(i) Minutes 15 January 1982 (exhibit 3).
It was RESOLVED that a management fee of $50,000 per annum be paid to H, or nominated company for services rendered by him over a five (5) year period commencing July 1, 1981, on the basis that it will be reviewed every 12 months.
(ii) Minutes 7 July 1982 (exhibit 4).
IT WAS RESOLVED THAT a management fee of $34,000 be paid to Marco for management services provided over a period of four years commencing 1 July 1982 in accordance with a management services Agreement between the company and Marco a copy of which is attached.
(iii) Minutes 22 August 1984 (exhibit 5).
Mr R put on notice the matter of the managing directors' remuneration and considered that the existing service Agreement should be reviewed at the budget meeting to be held on 14th September.
(iv) Minutes 14 September 1984 (exhibit 6).
These included the statement: ``Managing Directors Remuneration E and GH to consider the remuneration package of Mr H and report to the board.''
Oral evidence of Mr H
In explanation of those minutes, Mr H who had been a director of Goldco at the relevant time, told the Tribunal that under the original Agreement the remuneration should have been increased each year on 1 July right through until 1985 but it had not been increased at all. At that point of time, legal advice about an increase in the consulting package was sought from R and C solicitors. The solicitors prepared and forwarded a draft service contract to cover the position of Mr H under cover of a letter dated 16 May 1985 (exhibit 7). It also gave advice about whether a director could enter into a contract with the company. Mr H explained that the advice was sought because there was some doubt by the board as to whether the management fees could be increased without reference to a general meeting of members.
The applicant also tendered a letter from the solicitors to a firm of accountants dated 12 June 1985 (exhibit 8) with which was enclosed an updated service Agreement for Marco. Mr H explained that the letter was sent pursuant to instructions from the board of Goldco requesting the solicitors to prepare the Agreement.
Following the preparation of the updated Agreement, advice was sought by the board from the solicitors (exhibit 10), in consequence of which the solicitors provided advice by letter dated 8 August 1985. In part it reads:
``Article 94 of the Articles of Association of the Company provide that `the remuneration of a Managing Director shall from time to time be fixed by the Company in general meeting and may be by way of fixed salary or commission on profits of the Company'. Notwithstanding that it is envisaged that Marco as trustee for the WH Family Trust shall enter into a further Agreement with the Company to provide management services, the question arises whether by using Marco as the consultant to the Company this sufficiently removes the receipt of Mr H's remuneration from coming within Article 94 of the Article of the Articles of Association.''
Mr H told the Tribunal that nothing further was done about the draft consultancy Agreement forwarded by the solicitors. Instead the board of Goldco resolved on 2 October 1985 (exhibit 11) as follows:
``It was noted that the remuneration package of Mr H a (sic) company's Managing Director had not been reviewed since its inception. A letter from Messrs. R and C setting out the terms of a proposed extension of the Agreement together with an opinion with regard to shareholder approval was tabled. Following discussion and a review of comparable packages it was agreed that the service Agreement be extended for a further period of four years with a salary package of eighty thousand dollars plus motor vehicle and telephone to be paid effective from 1 July 1985. (Mr H abstained from discussion and voting on this resolution.)''
[bk ]Takeover of Goldco
Mr H informed the Tribunal that around July or August 1985 he had approached a merchant[ek ] bank in Perth to underwrite a rights issue for Goldco. He was advised by an employee of the merchant bank that another public company, PCo, would serve a Part A Statement on the shareholders of Goldco. On that happening Goldco prepared a Part B Statement (exhibit 20). Following the release of the Part B Statement an offer was made by PCo for all the shares in Goldco. The first offer was made at 25 cents per share. This was raised further but it was not until the offer was raised again to 40 cents that the bulk of acceptances were notified to PCo. The takeover was completed on 16 May 1986 even though the consideration was not paid till some weeks later. A major factor in the takeover going ahead was that shareholder companies associated with Mr H filed their acceptances. Those companies, with which Mr H was associated, according to Mr H, held approximately 80 million shares so that at a price of 40 cents per share, the deal was worth about $3.2 million. As mentioned the consideration was paid a few weeks later.
Termination of consultancy
During the course of the takeover negotiations and before settlement, the applicant received a letter dated 23 May 1986 from Goldco (exhibit 13) which advised that the Agreement between it and Marco had been terminated forthwith and no further services were required by Goldco.
Mr H told the Tribunal that he then sought advice from Marco's accountants. They advised him by letter dated 26 May 1986 (exhibit 12) that in relation to damages that might be claimed by Marco, on the basis of income accruing over the next 36 months, they had calculated the value of the damages to be between $280,000 and $300,000.
On receiving this as a director of Marco, Mr H had then approached Mr E, who had continued on as chairman of Goldco, seeking clarification of the situation about the management Agreement. Mr E had undertaken to discuss the matter with a representative of PCo, the company which had taken over Goldco.
As a result, Mr E subsequently advised Mr H that he had had such a discussion and that an amount of $140,000 had been offered to get rid of the Agreement with Marco. Upon Mr H indicating this was not acceptable, Mr E had again approached the representative of PCo and a new offer of $165,000 was made. Marco had accepted that offer. Accordingly a letter from Marco to the directors of Goldco dated 27 May 1986 (exhibit 14) was sent, along with a receipt for $165,000. So far as relevant that letter reads:
``Marco acknowledges receipt of $165,000 as full and final settlement of any claims for damages it may have against Goldco as a result of its Management and Consultancy Agreement being prematurely terminated.
Marco shall indemnify the Company against any claim by Mr H or any officer of Marco.''
Mr H also told the Tribunal that he had been, prior to the takeover, the principal person concerned with the management of Goldco. He understood that the payment of $165,000 was to ensure that he had no further ongoing role with Goldco.
Affairs of Marco
Mr H also gave evidence about the business of Marco, and in particular its activities as recorded in the 1985/1986 tax year. He informed the Tribunal that besides the Agreement with Goldco, Marco had interests in a pharmacy business with which he was associated. One element of that business was that Marco sold non-scheduled goods through the pharmacy operated by Mr H. It also received a procurement fee for scheduled items. In respect of sales, commission, and procurement fees in the tax year Marco received a gross profit of $62,267 from those sources. Marco also had an informal management agreement with the pharmacy and had received a fee of $93,484 in respect of that.
Apart from the pharmacy operations, Marco also had investments. Through the agency of a partnership (which shall be called the ``Andean'' partnership), in which it held a 75% interest, Marco received a return of $91,179 in the tax year for the operation of a hotel. It had also received $12,010 in respect of share trading, $19,932 by way of rent from properties and $136,376 return on shares held as investments.
Cross-examination of Mr H
Cross-examined by Mr Buss, the witness was asked to comment on the tax return of Marco for the year of income ended 30 June 1987, the
ATC 223year following the tax year in question. He agreed with the description of the business of Marco in that year as being retail, investment and share trading. He further agreed that the balance sheet of the company for that year showed land and buildings at a cost of $638,062. The return also disclosed income and gross profit from trading in the amount of $47,707. The Trust had received a share of profit in the order of $61,000 from its share in the Andean partnership. A sum of $397,721 was listed as interest received. Further, $114,648 was attributed to management fees received. The witness explained that they would have been earned in respect of the pharmacy business. He also conceded that in the 1986/1987 year of income Marco had also owned two properties. These had been owned for some considerable time stretching back to 1971 in one case and 1980 in the other.
The 1986 return
The witness was also referred to the details of Marco's operation in the 1985/1986 tax return, the tax year in question. In that return the following appears in a schedule headed: ``Assessor's Note: Damages Received'':
``For several years the Trust had earned income from a management and consulting Agreement for services provided to Goldco.
This management and consulting Agreement was to run until 30 June 1989. However, in May 1986 Goldco was taken over by PCo. Following this change of control of Goldco, (it) decided to terminate the management and consulting Agreement. As a result of this premature termination the Trust received a damages payment of $165,000 in exchange for agreeing not to take any action against Goldco for the premature termination of the Agreement.
It is submitted that the damages received are of a capital nature and not subject to tax under any section of the Act.''
Mr H was asked whether the note correctly described the transaction in relation to the $165,000 subject to this application. He insisted that the payment was made in return for him giving up his right to litigate against Goldco. He said the note was therefore inaccurate.
Schedules to the 1985/1986 return also indicated that Marco was engaged in share trading during both the 1985 and 1986 years of income and that it held an interest in the Andean partnership, as well as a film production partnership.
Although the witness informed the Tribunal that, as he recalled the matter, he believed that Marco along with Andean and another company owned by him, DLT Co, held shares in Goldco at the time of the PCo takeover, when shown the tax return for Marco for the year ended 30 June 1986 (exhibit 19) he agreed that no shares in Goldco were listed as being held by that company as at 30 June 1985.
When shown an extract from the Register of Members of Goldco which disclosed that at the relevant time prior to the takeover, DLT Co held 8.79 million shares in Goldco and Marco none (exhibit 21) the witness accepted that was the situation. He therefore conceded that it was DLT Co who had accepted the PCo offer for those 8 million odd shares on 16 May 1985 and not Marco. The witness was also shown minutes of a Goldco board meeting of 23 May 1986 (exhibit 22) in which it was recorded:
``The Chairman reported that PCo as the Company's major Shareholder had indicated that it wished to terminate the services of Marco, which Company has been providing managerial and consulting services to Goldco.
lt was noted that under the Agreement, as varied by the Company in meeting of 20th October, 1985, it still had a term of three years to run until 30th June, 1989.
It was resolved that the Company pay to Marco the amount which in the opinion of (solicitors) and (accountants) would represent fair and reasonable damages for premature termination of the Agreement. The payment is subject to Marco and Mr H agreeing that neither would have any further claim against Goldco now or in the future in respect of the management services consultancy Agreement.''
He was also shown minutes of a directors' meeting of Goldco on 27 May 1986 (exhibit 23) which records:
``The meeting was referred to the contract which was terminated with Marco at the meeting of 23rd May, 1986. Letters dated 26th and 27th May, 1986 from the Company's Solicitors and another dated 26th May, 1986 from (accountants) were tabled for discussion. The Directors were of the view that after consideration of all the
ATC 224circumstances of the matter that $165,000 was an appropriate sum to settle all claims which Marco might have under the terminated contract.
IT WAS RESOLVED that subject to Marco confirming that neither it, its employees or offices (sic) had any further claims against Goldco. Mr H abstained from voting.''
The Tribunal interprets this to mean that subject to those persons mentioned agreeing to forgo any rights against Goldco, the payment of $165,000 would be made to Marco in settlement. The witness said, however, he had no recollection of either of those minutes.
The witness was also referred to a copy of a letter from the accountants, to him dated 8 November 1989 (exhibit 24) about the $165,000, in which the following appears:
``Given the facts of the situation and the case law, it will be very difficult to successfully argue the receipt is one of capital and as such not assessable under Section 25(1) of the Act.
We have raised the issue of the loss of management control of Goldco that followed termination of the management contract. We argued that the management contract was a key element in protecting the value of your shares and control over the company.
If a portion of the termination payment was to compensate this loss, we contended that portion was of a capital nature. The discounting of the future income flows under the management Agreement however, approximates the termination payment received. Accordingly, it will be difficult to argue that the termination payment is more than the net present value of a future income flow.''
He said however he had no knowledge of that letter as letters of this nature were ordinarily handled by another employee.
In the course of cross-examination about matters recorded in the tax return of Marco for the year ended 30 June 1988, Mr H also conceded that Marco had undertaken a similar management and consultancy Agreement, this time with a company which shall be referred to as Mari Gold. Fees were received in respect of that Agreement during that tax year.
[bk ]Submissions for the applicant
Mr Collison made the following submissions on behalf of the applicant:[ek ]
- (a) The basic issue is whether the payment of $165,000 to Marco should be characterised as a capital or revenue receipt.
- (b) This is a matter that should be approached having regard to the whole context in which the transaction occurred.
- (c) The receipt is of a capital nature because, based on the evidence, it bears no relationship to the quantum of income, having been based on a figure reached as a result of negotiation. There is no nexus to the anticipated value of the income that would have been received under the Agreement. The accountants' valuation (exhibit 12) was not taken into account in accepting the settlement.
- (d) The actual amount of payments that would have been received by Marco under the Agreement in the remaining three years was not capable of specification, given the uncertainty of the terms under which the consultancy arrangement would have been carried on. In this respect the draft Agreement prepared by the solicitors (exhibit 8) had not been ratified.
- (e) The offers of $140,000 and then $165,000 in settlement of any claim by Marco was incidental to the main ``payout'' which was the $3.2 million the value of which was to be received by companies controlled by Mr H that had previously held shares in Goldco.
- (f) The payment was principally directed to achieving the severance of any participation by Mr H in the future management and dealings of Goldco, rather than as a payment of damages for future lost income.
- (g) Even if some of the payment was in respect of compensation for lost income, some of it was also attributable to payment for loss of capital and, it being impossible to apportion between income and capital, it would be inequitable to regard the whole sum as income in the circumstances.
- (h) The termination of the Agreement had the result that Marco parted with a substantial enduring business asset which was of a distinct character and quite separate from the other kinds of arrangements and activities through which Marco continued to
ATC 225draw income. In this respect it was distinguishable from the consultancy Agreement relating to the pharmacy business. The latter had no formal basis in documentation nor did it have a firm fixed term.
- (i) The Agreement, at the time of termination, had a substantial period of time to run, namely three years and that was a factor which should be taken into account in assessing whether it was of a capital nature or not.
In making these submissions Mr Collison conceded that the applicant must accept that cessation of the Agreement had to be taken in context with the other continuing activities through which Marco continued to derive income. Nevertheless his submission was that the business activities conducted pursuant to the Agreement was so different and remote from the other activities that its termination should be viewed entirely within those boundaries.
Submissions of respondent
Mr Buss, on behalf of the respondent, submitted that the documentary evidence, including the tax records, should be preferred in the event of any conflict to the oral evidence of Mr H.
In that regard, the Tribunal would comment in passing that it accepts that much of the day to day details of Mr H's business affairs were left to others, such as his accountants, to deal with. His inability to recall particular matters persuaded the Tribunal that it should rely on the documentary material before it as its primary source of information in preference to Mr H's recollections where they differed.
Counsel then made the following submissions:
- (a) On the basis of the statement in the Part B Statement to the effect that Goldco had a four year service Agreement commencing 1 July 1985 with Marco, a company associated with Mr H, that should be taken to be the fact.
- (b) The character of the termination should be taken from the letter of 23 May 1986 (exhibit 13) from Goldco to Marco. It simply informed Marco that the Agreement was terminated forthwith and no further services were required by Goldco. At that stage Marco therefore was faced with a repudiation of the Agreement and could either affirm the contract or accept the repudiation and sue for damages. The acceptance of the $165,000 should therefore be seen in the context of accepting an amount of money which Goldco considered was a reasonable amount for it to pay in lieu of damages.
- (c) Having regard to the minutes of the directors' meeting on 23 May 1985 (exhibit 22) the purpose of the payment should be seen to be an amount that was struck having regard to what Marco might recover if it brought proceedings for a breach. The amount should be taken to include some element of give and take appropriate in a commercial dealing rather than a precise assessment.
- (d) The reason for terminating the Agreement with Marco was so that Goldco could install its own management. The repudiation was simply an incident of a successful takeover. That was the reason for the further condition that neither Marco nor its employees or officers should have any further claim against Goldco.
- (e) The amount was therefore clearly an amount of compensation with a revenue character.
- (f) This was recognised in the accountants' letter of 8 November 1989 (exhibit 24) which should be seen to be an admission against the interests of the applicant. That letter also indicated that when the future income flow under the management Agreement was discounted, the amount would have approximated the actual payment that was made.
- (g) Marco, as it happened, did not hold any shares in Goldco so there was no nexus between the payment for the repudiation of the contract, and the larger payment for acquisition of the shares actually owned by DLT Co subsequent to the takeover. The $3.2 million received by DLT Co stood in its own right as a good deal.
- (h) Marco's business activities for the tax year comprised a number of components. As well as the Andean partnership, it had a number of investments which generated income. Dividends were received on shares it held. Through the agency of Andean it also held various rental properties. There was also the management fees received in
ATC 226relation to the pharmacy under the consultancy arrangement with it, as well as the management fees under the Agreement with Goldco.
- (i) There was no basis for distinguishing the pharmacy arrangement from the receipt of fees under the Agreement. Each was concerned with Marco providing management services through the agency of Mr H in fulfilment of contracts, each of which yielded a profit.
- (j) In accepting the payment of $165,000 Marco was giving up its right to provide services and thus receive income. The payment of the fees under the Agreement was something that was generated in the course of carrying out the management business.
- (k) The termination of the Agreement did not destroy or cripple the whole structure of Marco's profit-making activities. The Agreement was merely one of a number of elements comprising the business operations of Marco and it was therefore able to continue to draw from those other operations despite the termination of the Agreement.
Though, in cross-examination, counsel for the respondent directed the Tribunal's attention to events after the tax year where, in particular, Mr H continued to service Marco's management Agreements, including one with another exploration company, Mari Gold, he made no extensive mention of it in his address. The Tribunal, however, regards the matter as relevant.
Findings by the Tribunal
The Tribunal makes the following findings:
- (a) The payment of $165,000 by Goldco to Marco on 23 May 1986 was payment by reason of the termination of the Agreement between Goldco and Marco.
- (b) At 23 May 1986 the Agreement still had three years to run. In the Tribunal's view, though there was no formal ratification of the particular term under which the Agreement continued to operate, the negotiations in the period of May-August 1985, evidenced by the exchange of correspondence between Goldco, Marco and the solicitors and accountants, evidenced an intention, on the part of the two parties, Goldco and Marco, to continue the arrangement for at least another four years, presumably subject to the giving of three months' notice pursuant to clause 14 under the original Agreement. In its character, the Tribunal regards the extension of the Agreement as a matter of variation of the original Agreement and not the substitution of a new contract.
- (c) The amount of $165,000 was offered by the new Board of Directors of Goldco on 23 May 1986 as the amount it regarded as compensation to avoid payment of damages that arose by virtue of the repudiation of the Agreement. The amount was offered on the basis of professional advice, and though it had an element of understatement in it for the purposes of negotiation (as evidenced by the prior offer of $140,000) the amount was a reasonable offer. In the circumstances some leeway between the various figures calculated by the accountants (in exhibit 12) should be accepted as necessary to account for the discounting of future income and commercial realities.
- (d) There is no nexus whatsoever between the payment of the $165,000 and the payment of $3.2 million in respect of the takeover. It is quite clear that Mr H was mistaken in his evidence that the shares in Goldco were sold to PCo by Marco. The Tribunal accepts that they were in fact sold to PCo by DLT Co.
- (e) The Tribunal also accepts that the termination of the Agreement did not constitute a destruction of Marco's profit- making and income-earning apparatus. Marco was a vehicle through which Mr H, himself having a variety of talents and business interests, was able to pursue those interests. In fact, subsequent to the termination of the Agreement, Marco was able to engage in a not dissimilar consultancy arrangement with a new company Mari Gold.
- (f) Essentially, the payment stands in lieu of damages to compensate Marco for the loss of future profits and not for the loss or destruction of the facility or business asset which Marco would have exploited to earn those management fees. Marco was free and able to continue such income-earning pursuits despite the payment.
In making these findings, the Tribunal has had regard to the whole context in which the offer and acceptance of the $165,000 occurred
FC of T v Cooling 90 ATC 4472, 4481). That includes the circumstances that as a result of what could be described as an unfriendly if not hostile takeover of Goldco by PCo, the new board of Goldco no longer desired to have Mr H, through the medium of Marco, involved in the company's management. But to identify that as the reason or motivation behind the termination of the Agreement does not make the payment of the sum in issue something other than compensation in lieu of the damages that might be payable for loss of future earnings if Marco were to sue Goldco for breach of the Agreement (see
FC of T v Meeks (1915) 19 CLR 568;
Heavy Minerals Pty Limited v FC of T (1966) 14 ATD 282; (1966) 115 CLR 512). The undertaking not to pursue litigation by persons associated with Marco is perfectly intelligible as intended to forestall the prospect of future suit. There is nothing by way of evidence to suggest it was a requirement of the payment that Marco or Mr H desist from management of any mining companies other than Goldco.
It is also relevant in that context that the sum was in respect of a matter that, with some degree of tolerance as to the precise figure, constituted a single loss; ie of the accumulated payments over the remaining three years of the Agreement. This was not a case as in
McLaurin v FC of T (1961) 12 ATD 273; (1960-1961) 104 CLR 381, of a lump sum in settlement for release of a claim for unliquidated damages made up of various elements relating to different causes of action, the amounts attributable to the various elements being indistinguishable. No cause for apportionment therefore arises:
Allied Mills Industries Pty Ltd v FC of T 89 ATC 4365 at 4372 (Full Federal Court).
The payment of the $165,000 is, in the words of Lord Russell in
Commissioners of Inland Revenue v Fleming and Co (Machinery) Ltd (1951) 33 TC 57, at 63, ``no more than a surrogatum for the future surrendered''.
It is also necessarily implicit in the findings of the Tribunal that the payment did not involve Marco parting with a substantial part of its business undertaking (
Wiseburgh v Domville (Inspector of Taxes) (1956) 36 TC 527, per Lord Evershed MR at 539-540). The business of Marco survived the loss of the fees generated under the Agreement. It was not deprived of its capacity to earn income from its other undertakings. It could not be said to be ``crippled'' or ``destroyed'' to use the metaphors in Fleming's case (supra). The derivation by Marco of income in accordance with the terms of the Agreement was not something entirely unique and disparate from the other sources of income possessed by that company (see
Allied Mills Industries Pty Limited v FC of T 88 ATC 4852, per Gummow J at 4864). The common thread in its various activities was Mr H who was possessed of a number of skills (eg both pharmacist and mining entrepreneur). The payment of the sum as compensation and the Agreement of Marco not to litigate and to indemnify Goldco against suit by persons associated with Marco did not sterilise either Mr H or Marco from later engaging again in managing a gold mining enterprise (ie Mari Gold) (see Fleming's case, supra, at 73).
The Tribunal, for those reasons, is satisfied that the payment of $165,000 in the hands of Marco as Trustee of the Trust was clearly of a revenue or income nature. It is properly assessable as income falling within s. 25 or s. 26(e) of the Act. No part of it should be regarded as capital. No question of apportionment arises.
It follows that the sum of $165,000 would form part of the Trust's net income pursuant to s. 95 of the Act, and having been distributed to the applicant as a beneficiary not under any legal disability, is assessable to it by s. 97.
Whether payment was a capital gain within Part IIIA
Having come to the conclusion above, it is strictly unnecessary for the Tribunal to consider the alternative contention advanced by the respondent, that if the payment should be in the nature of capital, it should be regarded as a capital gain accruing to the applicant and assessable under s. 160ZO of Part IIIA of the Act. As both counsel conceded in argument, to enter the complexities of Part IIIA is a forbidding task. The provisions of that Part of the Act entail a high degree of technicality and the interrelationship between particular provisions is, at least on the surface, somewhat elusive. The Tribunal, in this case, delayed its decision pending the High Court's decision in
Hepples v FC of T 91 ATC 4808. In the event, with great respect, the Tribunal is not generally assisted in the resolution of the present application by having regard to the differing
ATC 228views expressed by the Court in that case. The difficulties of extracting a ratio from that decision can be appreciated from the subsequent decision of the High Court in
Hepples v FC of T 92 ATC 4013.
Having come to the conclusion with a fair degree of satisfaction that the payment in issue was assessable under s. 25 or s. 26(e) of the Act, the Tribunal does not propose to come to any definitive conclusions in relation to the capital gains aspects of this application. In deference to the submissions of counsel, however, it would make the following comments.
For the purposes of deciding whether the sum of $165,000 (treating it as the sum paid by Goldco in consideration of Marco disposing of an ``asset'', being either the right to earn future income under the Agreement or the right to sue for damages upon repudiation) should be assessed to tax under Part IIIA, regard must be had, in the first instance, to s. 160A, s. 160M and s. 160U of the Act. So far as relevant they read:
``160A In this Part, unless the contrary intention appears, `asset' means any form of property 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;
- (c) any form of property created or constructed, or otherwise coming to be owned without being acquired;
- (d) a taxpayer's interest in a partnership asset of a partnership in which the taxpayer is a partner; and
- (e) so much of a taxpayer's interest in a partnership as is not covered by paragraph (d);
but does not include a motor vehicle of a kind mentioned in paragraph 82AF(2)(a).
160M(2) [Various means of change in ownership] A reference in subsection (1) to a change in the ownership of an asset is a reference to a change that has occurred in any way, including any of the following ways:
- (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.
160M(3) [Declaration of trust, choses in action, etc.] Without limiting the generality of subsection (2), a change shall be taken to have occurred in the ownership of an asset by-
- (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;
160M(6) [Disposal of asset that did not previously exist] 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 of 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.
160M(7) [Entitlement to receive money or other consideration] Without limiting the generality of subsection (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
ATC 229of 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
- (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.
160U(1) [Scope of section] Subject to the provisions of this Part other than this section, where an asset has been acquired or disposed of, the time of acquisition or disposal for the purposes of this Part shall be ascertained in accordance with this section.
160U(3) [Acquisition or disposal under contract] Where the asset was acquired or disposed of under a contract, the time of acquisition or disposal shall be taken to have been the time of the making of the contract.
Mr Collison for the applicant submitted that for the purposes of determining, in accordance with s. 160U(3), the time at which Marco had acquired the ``asset'' under the contract with Goldco, the decision of the board of Goldco on 2 October 1985 (evidenced by the minutes of that date - exhibit 11) constituted an Agreement to extend the existing Agreement formed in 1982. The effect of the decision of the board was not to extinguish the pre-existing contract and substitute another (as was contended by the respondent) but rather to vary the subsisting Agreement so that it continued in an altered form. That distinction is recognised in Chitty on Contracts (26th ed, 1989, para 1595). Clear words would be required if the intention of the parties had been to rescind the Agreement and substitute a completely new one.
If the Tribunal accepts (1) that the asset was constituted by the benefit provided under the Agreement by way of the undertaking to continue to pay management fees until the Agreement was terminated, and (2) that the Agreement had come into effect before 20 September 1985 (s. 160L(1)) the date when transactions come within the reach of Part IIIA of the Act, any ``disposal'' of the asset on 23 May 1986 would not fall within the provisions of Part IIIA.
Mr Buss for the respondent submitted that the ``asset'' involved in the transaction of 23 May 1986 should be taken to be the right to take action to sue for damages (ie the chose in action; see definition of ``asset'' in s. 160A) that arose, and hence was ``acquired'' by, Marco, on that date upon the repudiation of the contract.
Alternatively, he submitted that the Agreement entered into in 1982 ceased to operate on 2 October 1985 when a new Agreement commenced pursuant to the decision of the board of Goldco on that day. This, he asserted, was clear from statements made in the Part B Statement issued by the board of Goldco at the time of the takeover.
Whichever of these two views be adopted, the asset, according to the respondent, should be found to have been acquired by Marco at a date later than 20 September 1985 and hence within the reach of Part IIIA.
The Tribunal accepts as correct the submissions of Mr Collison on these points. It finds that the original Agreement which commenced in 1982 was only varied on 2 October 1985 by way of extending its term for a further four years. It further takes the view that the ``asset'' in issue was the right of Marco to receive management fees whilst that Agreement continued.
Having come to those conclusions, it necessarily follows that the asset was acquired at a time that predated the operation of Part IIIA upon it. Accordingly the payment of $165,000 would not fall to tax.
The decision under review is affirmed.