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SP INVESTMENTS PTY LIMITED (AS TRUSTEE OF THE LM BRENNAN TRUST) v FC of T

Members:
Lockhart J

Tribunal:
Federal Court

Decision date: Judgment handed down 8 September 1992

Lockhart J

These are three appeals pursuant to s. 189 of the Income Tax Assessment Act 1936 (``the Act'') against decisions of the respondent, the Commissioner of Taxation, on objections by the taxpayers. The three appeals were heard together by consent. They raise the following questions:-

  • 1. Whether the receipt by the trustee of a trust fund known as the L.M. Brennan Trust (``the Brennan Trust'') of the amount of $3,963,900 pursuant to two deeds of assignment constitutes assessable income of the Brennan Trust for the year of income ended 30 June 1980 pursuant to s. 25(1) or s. 26(a) of the Act (WAG113 of 1988);
  • 2. If question 1. is answered in the negative, whether the two deeds of assignment are void as against the Commissioner pursuant to s. 260 of the Act (WAG113 of 1988);
  • 3. Whether the trustee of the Brennan Trust made a full and true disclosure of all material facts necessary for the assessment of the income of the trust fund for the year of income ended 30 June 1980 (WAG113 of 1988);
  • 4. Whether the assessable income of Perron Investments Pty Limited (``Perron Investments'') for the year of income ended 31 March 1985 includes the amount of $900,000 distributed to Perron Investments by the trustee of a trust known as the Perron Group Trust which in turn had been distributed to the trustee of the Perron Group Trust by the trustee of the Brennan Trust (this question arises pursuant to the issue by the Commissioner to Perron Investments of a Division 7 assessment) (WAG129 of 1988);
  • 5. Whether the assessable income of Perron Investments for the year of income ended 31 March 1986 includes the amount of $900,000 distributed to Perron Investments by the trustee of the Brennan Trust (this question arises in matter WAG130 of 1988 and raises the question whether the amount of $900,000 is assessable income of Perron Investments pursuant to s. 97 of the Act).

The facts are complex and need to be fully stated in order that the elaborate and labyrinthine transactions with which these matters are concerned can be understood. The evidence was principally documentary, but oral evidence was given by Mr CRH Fieldhouse, the solicitor for the applicants who was also the solicitor for the trustee of the Brennan Trust in 1979 and 1980; also Mr GJ Gadsdon, a director and secretary of S.P. Investments Pty Limited (``S.P. Investments'') and Perron Investments and L.S.P. Pty Limited (``L.S.P.''). S.P. Investments is the trustee of the Brennan Trust which was established pursuant to a deed dated 30 June 1953 as amended by deeds dated 16 December 1966, 28 October 1968 and 5 June 1971. L.S.P. was the former trustee of the Brennan Trust. The Brennan Trust is a discretionary trust and was established for the benefit of the family of Mr Perron.

S.P. Investments, L.S.P. and Perron Investments are three of a number of companies associated with Mr Perron and his family which is convenient to refer to as ``the Perron Group''. It is common ground that S.P. Investments, L.S.P., Perron Bros Pty Limited, Phoenix Holdings Pty Limited, Stan Perron Pty Limited, S.P. Management Pty Limited, Wellington Place Pty Limited, Perron & Sons Pty Limited, Century Finance Pty Limited and Perron Investments are companies controlled by Mr Perron. During the year of income ended 30 June 1980 the trustee of the Brennan Trust was L.S.P.

ATC 4499

Mr Gadsdon is a qualified accountant and since about 1962 has been the general manager of the companies in the Perron Group. He, together with Lloyd Stanley Perron (``Mr Perron''), was in charge of the Perron group of companies. During 1979 and 1980 he was directly concerned in and responsible for the financial management of the investments and business activities of the Brennan Trust. Witnesses gave evidence of events which occurred over a decade ago and it is not surprising that their recollection, to the extent that it was unaided by contemporaneous documents, was very general and at times vague, though I found Mr Fieldhouse's evidence basically reliable. Mr Gadsdon's evidence was reliable in certain respects, but I do not accept certain of his evidence, especially his evidence that the sale by L.S.P. as trustee of the Brennan Trust of its rights to royalties, to which reference will be made later, ``facilitated and was intended to and did facilitate the realisation of working capital for the Perron Group''. There are certain other respects in which I do not accept his evidence; but overall I thought Mr Gadsdon did his best to recall the events of long ago as accurately as his recollection enabled him to do so. In the end the oral evidence did not take the case very much further than what emerges from the documents themselves.

By letters dated 16 March 1959 and 20 March 1959, Wright Prospecting Pty Limited, Hancock Prospecting Pty Limited, Langley George Hancock, Earnest Archibald Wright and Hancock & Wright (``the prospectors'') confirmed a verbal agreement between them and Perron Bros. Pty Limited (``Perron Bros'') whereby Perron Bros acquired from the prospectors for £500 a 15% interest in an iron ore venture at Hamersley (or any other iron ore venture instituted by them if the then present venture did not reach the stage where mineral claims were granted to the prospectors within ten years pursuant to the terms and conditions set out therein).

By deed of assignment dated 29 January 1962 between Perron Bros as assignor and Mr Perron as assignee, Perron Bros assigned to Mr Perron all its right, title and interests in the agreement constituted and confirmed by the letters of 16 March and 20 March 1959.

By declaration of trust made 12 February 1962 Mr Perron declared that he held his interest under the deed of assignment of 29 January 1962 as the then trustee of the Brennan Trust. Mr Perron had declared a trust in favour of the Brennan Trust of his rights to this interest which is noted on the deed of assignment of 29 January 1962 in Mr Perron's handwriting.

By agreement dated 12 December 1962 between Mr LG Hancock, Mr EAM Wright, Wright Prospecting Pty Limited and Hancock Prospecting Pty Limited (therein described as the vendors) and Rio Tinto Management Services (Australia) Pty Limited, Rio Tinto Southern Pty Limited and Hamersley Iron Pty Limited (Hamersley Iron being called the purchaser) the vendors agreed to sell and the purchaser agreed to buy all the right, title and interest of the vendors in and to various reserves and land comprised therein and rights to prospect or mine relating thereto and to exploit the Hamersley Iron Ore venture and other iron ore ventures.

By agreement dated 22 October 1964 between Mr Perron and the prospectors their respective successors and assigns, agreement was made between them with respect to Mr Perron's 15% interest in the various iron ore ventures. Recital (a) to that agreement stated that it had been agreed between the parties to the agreement that, unless certain events occurred, Mr Perron could at any time up to 15 March 1969 elect which of the iron ore ventures of the prospectors mentioned in the agreement should be the subject of his 15% interest, and that such an election by him would free any other iron ore venture of the prospectors from any interest of Mr Perron therein under the letters of 16 and 20 March 1959. Pursuant to the deed of 22 October 1964 Mr Perron elected (by clause (1)) that the Hamersley iron ore venture of the prospectors would be the iron ore venture the subject of his 15% interest (see also recital (j)).

By a deed of 11 April 1979, L.S.P. became the trustee of the Brennan Trust and therefore in consequence entitled to all the right title and interest of Mr Perron in the 15% interest.

Pursuant to the agreements mentioned above between Mr Perron, the prospectors, Hamersley Iron and the trustee of the Brennan Trust became entitled to receive payments of monies from time to time (``the relevant payments'').

By deed dated 25 October 1979 (``the first deed'') between L.S.P. as assignor and trustee of the Brennan Trust and The National Mutual

ATC 4500

Life Association of Australasia Limited (``National Mutual'') as assignee, L.S.P. purported to assign, subject to clause (ii) of the first deed, its right, title, interest and benefit to the relevant payments to National Mutual for a period of seven years and three months commencing on 25 October 1979 for a consideration of $2,642,600.

The period of seven years and three months was selected no doubt because of s. 102B of the Act (which does not apply to the present case) but under which it is necessary if transferring a right to income shorn of the property underlying it, to do so in excess of seven years. Hence it is a reasonable inference, and the contrary is not disputed, that the period of seven years and three months was selected by the parties for more abundant caution.

Pursuant to clause (2) of the first deed National Mutual agreed to hold in trust for the use and benefit absolutely of L.S.P. all or any amounts of the relevant payments received by National Mutual pursuant to the first deed over and above the amount of $50,000 per month.

The final recital to the first deed and clauses (1) and (2) thereof provide as follows:-

``AND WHEREAS the assignor (LSP) and assignee (National Mutual) have agreed that in consideration of the payment by the assignee to the assignor of two million six hundred and forty-two thousand six hundred dollars ($2,642,600) on the execution hereof the assignor shall assign unto the assignee all the right, title, interest and benefit of the assignor in the assignor's interest for a period of 7 years and 3 months commencing on the date of execution hereof and terminating on the twenty-fourth day of January, 1987 (hereinafter called the `period') including the right title and interests of the assignor to all monies otherwise payable or to become payable to the assignor pursuant to or as a consequence of the assignor's interest...

1. SUBJECT TO clause 2 hereof in consideration of the sum of two million six hundred and forty two thousand six hundred dollars ($2,642,600) now paid by the assignee to the assignor (the receipt whereof is hereby acknowledged by the assignor) the assignor does hereby assign to the assignee all the right title, interest and benefit of the assignor in the assignor's interest for the period absolutely and so that the assignee shall be entitled beneficially to all the right title and interest of the assignor in and to the assignor's interest for the period including the right to receive all monies otherwise payable to the assignor thereunder or as a consequence thereof.

2. THE ASSIGNEE shall hold in trust all or any amounts received by the assignee as a consequence of the execution of these presents over and above the amount of fifty thousand dollars ($50,000) per month together with such further amount as shall equal the amount by which any previous amount received by the assignee in any month was less than fifty thousand dollars ($50,000) to the use and benefit absolutely of the assignor and shall forthwith pay and refund all such monies to the assignor or as it may direct from time to time.''

By bond sealed on 24 October 1979 Stan Perron Pty Limited, Phoenix Holdings Pty Limited and Mr Perron (described as ``the Obligors'') acknowledged themselves bound jointly and severally to National Mutual in the sum of $4,350,000. The bond was expressed to be ``conditioned to be void'' if National Mutual was paid the sum of $4,350,000 by monthly instalments of $50,000 each during the period of seven years and three months commencing on 24 October 1979.

By deed dated 30 June 1980 (``the second deed'') L.S.P. as trustee of the Brennan Trust:

  • (a) released to National Mutual all its beneficial interest to the extent of $25,000 per month in the amounts held in trust by National Mutual for L.S.P. pursuant to the terms of the first deed; and
  • (b) purported to assign, subject to clause 2 of the second deed, its right, title, interest and benefit to the relevant payments to National Mutual for a further period commencing on the termination of the period of assignment under the first deed and ending at the expiration of a period of seven years and three months from 30 June 1980 for a consideration of $1,321,300. Pursuant to clause 2 of the second deed National Mutual agreed to hold in trust to the use and benefit absolutely of L.S.P. all or any amounts received by National Mutual pursuant to the second deed during the said

    ATC 4501

    further period over and above the amount of $25,000 per month.

By bond sealed 30 June 1980 the Obligors acknowledged themselves bound to National Mutual in the sum of $6,525,000. The bond was ``conditioned to be void'' if National Mutual was paid the sum of $6,525,000 by monthly instalments of:-

  • (i) $50,000 each during the period from 24 October 1979 to 30 June 1980;
  • (ii) $75,000 each during the period from 30 June 1980 to 24 January 1987; and
  • (iii) $25,000 each during the period from 24 January 1987 to the expiration of seven years and three months from 30 June 1980.

The total consideration for the assignments by L.S.P. to National Mutual under the first and second deeds is $3,963,900 which is the amount asserted by the Commissioner to constitute assessable income of the trust fund for the year of income ended 30 June 1980.

Subject to one qualification, following the assignment by L.S.P. to National Mutual of its interest to the royalties throughout the subsequent period of seven years and three months under the first deed, royalties were paid by Hamersley Iron to National Mutual. The one qualification is that by clause 2 of the first deed which provided that, if the royalties exceeded in any month $50,000, then the excess above $50,000 was to be held by National Mutual on trust for L.S.P. Under the second deed, which had the effect of extending the period of the first assignment for a further nine months approximately and altering the basic amount in respect of which the trust attached, so that from June 1980 until January 1987 National Mutual held royalties which exceeded $75,000 on trust for the Brennan Trust; and from 24 January 1987 to September 1987 what was held on trust for the Brennan Trust were all monies over $25,000.

Pursuant to the deeds of assignment, royalties in the following amounts for the following years were paid to National Mutual, namely: 

    Year Ended 30 June 1980      $400,000
    Year Ended 30 June 1981      $900,000
    Year Ended 30 June 1982      $900,000
    Year Ended 30 June 1983      $900,000
    Year Ended 30 June 1984      $900,000
    Year Ended 30 June 1985      $900,000
    Year Ended 30 June 1986      $900,000

On 3 June 1983 the Commissioner issued a notice of assessment of income tax to S.P. Investments as trustee of the Brennan Trust in respect of the income of the trust fund for the year of income ended 30 June 1980. In assessing the income of the Brennan Trust the Commissioner did not include the amount of $3,963,900, being the total consideration received by L.S.P. pursuant to the deeds of assignment. The Commissioner asserts that the trustee did not make a full and true disclosure to him as required by the Act. S.P. Investments says that it did make full and true disclosure and relies in particular upon a statement in the income tax return of the trust fund for the 1980 year of income in the following terms:

``During the year the trust received the sum of $3,946,308 as a capital receipt on sale of right to receive royalties. The amount is a capital receipt and has been brought to account as a capital reserve.''

The Commissioner issued notices of assessment of income tax of the trustee in respect also of the subsequent years of income ended 30 June 1981 to 30 June 1986 inclusive. In assessing the income of the Brennan Trust the Commissioner did not treat as assessable income of the Brennan Trust the said sum of $3,963,900.

On 24 November 1987 the Commissioner issued a notice of amended assessment of income tax of the trustee in respect of the income of the trust fund for the year of income ended 30 June 1980. By the amended assessment the Commissioner increased the income of the Brennan Trust by the amount of $3,963,900 and imposed on the trustee additional tax of $7,196 for lodging an incorrect return.

On 13 May 1987 the Commissioner issued to Perron Investments a notice of assessment pursuant to Division 7 of the Act based on an ascertainment of Perron Investments' income for the year of income ended 31 March 1985. The Commissioner increased the assessable income of the trust fund and Perron Investments for that year of income by an amount of $900,000. Also on 13 May 1987 the Commissioner issued to Perron Investments a notice of assessment of income tax of Perron Investments for the year of income ended 31 March 1986. In making that assessment the Commissioner increased the assessable income of the Brennan Trust and Perron Investments

ATC 4502

for that year of income by an amount of $900,000.

The parties agreed on a written statement of what was described as alternative conclusions in view of the complexities of the facts and ramifications of the assessments with respect to them. That statement provides as follows:

``1. If the Court concludes that the consideration received by the trustee of the Brennan Trust for the assignments, viz. $3,963,900 constitutes assessable income of the Brennan Trust for the year of income ended 30 June, 1980 [WAG 113 of 1988], then the Court will uphold the objections of Perron Investments Pty. Limited in respect of the years of income ended 31 March 1985 [in lieu of 30 June, 1985] and 31 March, 1986 [in lieu of 30 June, 1986] [WAG 129 and WAG 130 of 1988].

2. If the Court concludes that the sum of $3,963,900 does not constitute assessable income of the Brennan Trust for the year of income ended 30 June, 1980 but concludes that the assignments are void as against the Commissioner of Taxation vide S.260 of the Income Tax Assessment Act or that they did not operate to effectively alienate the derivation of the royalty income by the trustee of the Brennan Trust, then the Court will conclude that the sum of $400,000 constitutes assessable income of the Brennan Trust for the year of income ended 30 June, 1980 to which no beneficiary is presently entitled [WAG 113 of 1988] and will uphold the amended assessments issued against Perron Investments Pty Limited for the years of income ended 31 March, 1985 [in lieu of 30 June, 1985] and 31 March, 1986 [in lieu of 30 June, 1986] [WAG 129 and WAG 130 of 1988].

3. If the Court concludes that the sum of $3,963,900 does not constitute assessable income of the Brennan Trust for the year of income ended 30 June, 1980 and also concludes that the assignments were effective to alienate the royalty income that would otherwise be derived by the trustee of the Brennan Trust but for the assignments, then the Court will uphold the objection of the trustee of the Brennan Trust for the year of income ended 30 June, 1980 [WAG 113 of 1988] and the objections of Perron Investments Pty. Limited for the years of income ended 31 March, 1985 [in lieu of 30 June, 1985] and 31 March, 1986 [in lieu of 30 June, 1986] [WAG 129 and WAG 130 of 1988].''

The applicants contend that the sum of $3,963,900 is a capital receipt in the hands of the trustee of the Brennan Trust and not assessable income of that trust for the year of income ended 30 June 1980 and accordingly is not to be included in the computation of the net income of the Brennan Trust for the year of income for the purposes of Division 6 of the Act. They contend that neither the whole nor any part of the amount of $3,963,900 was income or assessable income of the Brennan Trust for the year of income ended 30 June 1980 under s. 25 or s. 26(a) or any provision of Division 6 or Division 6A of Part III of the Act. The applicants also contend that the trustee of the trust fund made a full and true disclosure of all material facts necessary for the assessment by the Commissioner of the income of the trust fund for the year of income ended 30 June 1980, that, an assessment having been made after that disclosure, the Commissioner was not authorised to issue the amended assessments later than three years after the date on which tax became due and payable under the original assessment, namely, 26 July 1983. The applicants contend that the assessable income of the Brennan Trust did not include the amount of $900,000 or any part of it for the year of income ended 30 June 1985 and the subsequent year of income ended 30 June 1986. In the alternative, it is argued that neither the amount of $900,000 nor any part of it was assessable income of Perron Investments for either of those two years of income whether pursuant to s. 97 of the Act or any other provision of the Act. The applicants contend that on the facts of the case there was simply an assignment to National Mutual of a capital asset for a capital sum. What flowed from the assignment was that the income accruing from the capital was assigned and became the income of National Mutual as assignee.

The applicants rely on the agreement of 12 December 1962. In addition to the right to the royalties themselves, other clauses in the agreement were relied on as constituting the whole congerie of rights, including the right to royalty income, that became the subject of the later assignment (see for example clauses 9, 14, 15 and 17).

ATC 4503

Counsel for the applicants referred to the Commissioner's case that what was assigned was a mere expectancy because there may be no royalties in fact; Hamersley Iron might breach its obligations and not work the mine or alternatively there may be some catastrophe but in either case no royalties. It was argued by counsel that this very kind of argument was rejected by the High Court in
Shepherd v FC of T (1965) 14 ATD 127; (1965) 113 CLR 385.

The applicants' case is that there was an effective legal assignment of the Brennan Trust's right to royalties to National Mutual, satisfying s. 12 of the Conveyancing Act 1919 (NSW) as applied in the Australian Capital Territory by s. 3 of the Law of Property (Miscellaneous Provisions) Ordinance 1958.

As to s. 260 counsel for the applicants contend that the contract alleged to be void is limited to the deeds of assignment. An assignment of income-producing property of itself can never be void under s. 260 if it is to an arm's length purchaser, as it is here to the National Mutual.

The Commissioner's primary argument is that with respect to the 1980 year of income the substance of what was assigned was the expectant right to receive future income and the substance of what was received was the present value of income which the recipient would otherwise obtain in future. The consideration received by the trust was essentially a substitute for what would otherwise have been received in future by way of income from royalties. Thus, under s. 25, or, alternatively under s. 26(a), what was received was income according to ordinary concepts.

The alternative submission of the Commissioner is that the deeds of assignment are void under s. 260 which leaves the trust in receipt of royalty income in the sum of $400,000 in the 1980 year of income, that is to say $50,000 per month for eight months. The decision has ramifications in subsequent years of income which are not before the Court and in relation to other primary assessments. If the Commissioner fails under s. 25 or s. 26(a) in matter No. 113 then he relies upon an alternative allegation in matters 129 and 130 that the lump sum received was in effect a loan and that the assignment of royalties was in effect a payment of interest and a repayment of principal. This is essentially a s. 19 argument.

The only evidence of disclosure is the statement in the 1980 income tax return. The return is for the income to 30 June 1980 and is part of Exh 18 where the nature of the business of the taxpayer is simply not completed, so it is blank. Page 4, which is part of the financial statement of the Brennan Trust for the year of income ended 30 June 1980 simply states: ``Sale of capital assets reserve $3,946,308''. On page 5 there is a reference to an ``intangible asset'' ``Royalty Agreement (Hancock, Wright and Hamersley) $87.00'' and no change in value from the previous year. On page 11 of the exhibit it is noted that during the year the trust received ``the sum of $3,946,308 as a capital receipt on sale of right to receive royalties. The amount is a capital receipt which has been brought to account as a capital reserve''.

The following material facts were not disclosed.

  • • The identity of the payer of the royalties;
  • • the entitlement of the taxpayer to receive the royalties;
  • • the circumstances in which the entitlement arose;
  • • the nature and extent of the entitlement;
  • • the person to whom the right to receive the royalties was assigned;
  • • the period of the assignment (there was nothing to suggest that the assignment was of limited duration or for something less than the whole amount of the property for that period. On its face it suggests it is an outright assignment);
  • • whether the assignment was supported by guarantees and mortgages;
  • • no statement that there was a clause in the deeds of assignment which provided excess funds to be held absolutely and beneficially on trust for the assignor.

None of this was contained and all of it was material.

The assignment to National Mutual of the Brennan Trust's right to royalties from the Hamersley venture was for seven years and three months. At the end of that period the Brennan Trust again became entitled to possession of and immediate use and enjoyment of the whole of the rights attaching to the royalties. The right in this case to the receipt of the royalties was not limited in time, it was to continue indefinitely. Also, less than the right to

ATC 4504

receive royalties over the seven years and three months that was transferred because the use and enjoyment of National Mutual was limited after June 1980 to $75,000 per month and prior to that only $50,000; it later became $25,000. Only a maximum of $75,000 was assigned beneficially to National Mutual because everything received in excess of that was held upon trust beneficially and absolutely for the Brennan Trust. National Mutual was obliged to pay and refund all monies over and above that figure to the Brennan Trust or as it may direct from time to time. The evidence shows that it was the purpose of the trustee of the Brennan Trust, first, to obtain a tax benefit by releasing the trust from liability to pay income tax on the royalty receipts and, second, to make a gain or a profit from a commercial transaction. As early as February 1979 consideration was being given by Mr Perron and his advisers to an arrangement to avoid tax on the royalty income. In a letter dated 5 February 1979 from Mr Fieldhouse to Mr Perron the following statements appear.

``I have had further discussions with the Merchant Bankers, Hill Samuel Australia Limited who had originally arranged for the assignment of part of your royalty income to the Selcast Group.

They are aware that you will not be proceeding with the royalty assignment for the time being. However they are interested in becoming involved directly in any proposition along the lines of the royalty assignment.

It occurred to me that there could be some scope in connection with the spare parts business or any other part of your trading activities that is not put into the Lyon arrangement.

Briefly it would be possible for, say, the spare parts business to be transferred to a partnership comprising one of your entities and Hill Samuel. The partnership would be set up under the W.A. Limited Partnership Act by which Hill Samuel would be protected against normal partnership liability and at the same time would be prevented from participating in any way in the carrying on of the business activities.

The partnership would run for a period of 5 years and would involve the payment by Hill Samuel to you of approximately $2,000,000 which you would be free to use for other purposes. In return Hill Samuel would be entitled to receive a guaranteed income of $600,000 a year for the 5 year period from the partnership. If the partnership income was less than $600,000 in any one year then the difference would have to be made up independently. Any profits in excess of $600,000 would belong to you. At the end of 5 years Hill Samuel would withdraw without the return of the $2,000,000.

Security for the payment of the $600,000 a year would be by way of a registered charge over the royalty agreement and a guarantee from yourself.

From discussions that I had today it appears that Hill Samuel would not want to enter into a deal involving an annual income of less than $600,000 and in fact would prefer a much higher amount. The return to them is based on 15% which is the figure used in the royalty assignment calculations.

If in due course we wish to carry out the royalty assignment plan it would be possible to substitute real estate securities for the royalty security in the above proposal or alternatively use the real estate securities to support the royalty assignment.

I told Hill Samuel that I would be seeing you on 19 February and I would raise the matter then. However I thought it wise to give you prior notice of the proposal.

Although we anticipate making substantial tax savings with the Lyon plan I always believe it advisable to have additional plans working and I think the above proposition would be a neat and effective way of dealing with income of $600,000 to $1,000,000.''

Mr Fieldhouse sought senior counsel's advice which he sent to both Mr Perron and Mr Gadsdon. The deeds of assignment were then entered into and the inference is clearly open and I so infer that after the taking of advice from senior counsel as to the tax consequences of entering into the proposed assignment, the trust acted on that advice by entering into the deed. Mr Fieldhouse was a tax expert and was aware there was no point in approaching lending banks with a proposal to assign the royalty income to them because the whole of the royalty income would have been assessable

ATC 4505

income in their hands. He was aware in October 1979 of the possibility of a superannuation company taking an assignment of the royalties and channelling the income through a tax exempt superannuation fund, and he knew that the royalty income was to be used by National Mutual as part of a tax exempt fund (T 208). The deeds of assignment are explicable as a scheme to relieve the trust from liability to income tax on the royalty stream. A substantial purpose was to obtain a tax benefit. I do not accept Mr Gadsdon's evidence that he was concerned to raise funds for the provision of working capital for the Perron Group. Mr Gadsdon could not explain what the need for working capital was.

It would not have mattered to National Mutual if the amounts received from the royalties were less than $75,000 a month because Mr Perron and a number of the companies in the Perron Group had guaranteed jointly and severally to make up any shortfall and security for guarantee was provided by mortgages over various parcels of land owned by Mr Perron or companies in the group. National Mutual was fully secured. So far as National Mutual was concerned the transaction was similar to a loan by it of an amount in excess of $4m at a rate of interest which if applied on a discount rate of 16% would give a net figure of $2.6m initially and then $3.9m subsequently.

Much argument centred on the judgment of the High Court in
FC of T v The Myer Emporium Ltd 87 ATC 4363; (1986-1987) 163 CLR 199. In Myer the taxpayer, the parent company of the Myer group of companies, lent $80m to an associated company incorporated for the purpose (Myer Finance) for a period exceeding seven years at 12.5% per annum interest. Three days later the taxpayer assigned to an unassociated finance company (Citicorp) in accordance with an arrangement entered into before the loan was made "absolutely the moneys due or to become due as the interest payments and interest thereon... pursant [sic] to" the loan agreement for a consideration of $45,370,000 paid by Citicorp on the same day. These transactions took place as an integral part of a reorganisation of the Myer group. The High Court held that the consideration received from Citicorp was assessable income in the hands of the taxpayer. It was decided by the High Court that a gain made otherwise than in the ordinary course of carrying on the taxpayer's 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 (at ATC 4366; CLR 209). Whether it does depends very much on the circumstances of the case. The High Court said (at ATC 4367; CLR 209-210) that generally speaking 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. Their Honours said (at ATC 4367; CLR 210) that the fact that a profit or gain is made as the result of an isolated venture or a ``one-off'' transaction does not preclude it from being properly characterised as income. The Court also said that:

``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.''

Their Honours relied in particular upon
Californian Copper Syndicate Ltd v Harris (1904) 5 TC 159. These reasons led their Honours to hold that the receipt by the taxpayer was income according to ordinary concepts and assessable under s. 25(1) of the Act. Their Honours also expressed the view that their reasons led to the conclusion that the amount constituted assessable income under the second limb of s. 26(a) of the Act.

In
Henry Jones (IXL) Limited v FC of T 91 ATC 4663; (1991) 31 FCR 64 Hill J., in whose reasons for judgment Jenkinson and Heerey JJ. concurred, analysed Myer and perceived from the reasons for judgment of the Court ``two strands of thought'' (at ATC 4668; FCR 69). ``The first strand'' is that part of the reasoning of the joint judgment of their Honours ([in Myer] at ATC 4366-4367; CLR 209-210) which I mentioned earlier and the ``second strand'' identified by Hill J. was that the assignment of a mere right of interest generally brought about the result that the consideration for the assignment was on revenue account (at ATC 4668; FCR 69). His Honour derived that proposition in particular from the passage of

ATC 4506

their Honours [in Myer] at ATC 4371; CLR 218:

``If the lender sells his mere right to interest for a lump sum, the lump sum is received in exchange for, and ordinarily as the present value of, the future interest which he would have received. This is a revenue not capital item - the taxpayer simply converts future income into present income...''

Hill J. described the reference in that passage to a ``mere right to interest'' as a reference to the sale of a right to interest separate from the debt itself. Hill J. noted that the High Court itself suggested that such a case was different from the sale of an annuity where ``the sale of the contractual right which produces the payment of the annuity is ordinarily capital. While the annuity is derived solely from the annuity contract, interest is not derived from the loan agreement, but rather from the principal sum'' (at ATC 4668; FCR 69).

In relation to the ``second strand'' in Myer identified by Hill J. his Honour said at ATC 4675; FCR 78:

``Notwithstanding some doubt, I think Myer must be taken as establishing that, except in the case of the assignment of an annuity where the income arises from the very contract assigned, an assignment of income from property without an assignment of the underlying property right will, no matter what its form, bring about the result that the consideration for that assignment will be on revenue account, as being merely a substitution for the future income that is to be derived. Thus, the fact that the future income may be secured by an agreement, and that the assignment is of the right title and interest of the assignor in that agreement will not affect the result.''

In the present case, prior to the assignments made by the two deeds of assignment, the trustee of the Brennan Trust and its predecessors as trustees were entitled to receive income of 15% of the royalties payable by Hamersley Iron to the prospectors in respect of the Hamersley Iron Ore venture. The assignment effected by the two deeds was an isolated transaction and it was not entered into in the ordinary course of the trustee's activities (which were primarily pastoral pursuits). But the amount of $3,963,900 received by L.S.P. from National Mutual pursuant to the two deeds of assignment was a gain made in a business operation for the purpose of making a profit. The trustee received as a lump sum an amount representing the present value of income it would otherwise have received over the period of the assignment (the lump sum was not the precise assessment of present value but certainly substantially so). In my opinion the ``first strand'' of reasoning in Myer leads to the conclusion that the money received by the trustee from National Mutual constituted assessable income in the hands of the trustee under s. 25(1) and the second limb of s. 26(a).

It is also assessable income under the ``second strand'' of reasoning in Myer. This is not a case of an annuity where what is assigned is not merely the fruits of the underlying property right but the underlying property right itself because of the very nature of an annuity. Here the trustee assigned to National Mutual certain of its royalty rights for a limited period, namely, seven years and three months so that thereafter those rights reverted to the trustee itself. Further, it was not the whole of the entitlement of the trustee to the 15% royalty payments that was the subject of the assignment but rather so much of the royalty payments as did not exceed the maximum of $75,000 per month ($50,000 per month for the period November 1979 to June 1980) and for a small portion of the time $25,000. The assignment was therefore not of an underlying property right itself, with the result that the consideration for the assignment is on revenue account. It is merely a substitution for the future income that is to be derived.

What the deeds assigned was merely a specified amount of the royalty payments for a specified period and the consideration for the assignment was income being merely a substitution for future income that would otherwise have been derived: see Henry Jones per Hill J. at ATC 4672-4673 and 4675; FCR 75 and 78; Heerey J. at ATC 4676; FCR 80.

It is strictly not necessary to consider the application of s. 260 with respect to the 1980 year of income so far as the trustee of the Brennan Trust is concerned; but I propose to do so as the matter was the subject of extensive argument and in case the matter should go further it is desirable that the appellate court has the benefit of my views as the trial Judge. Section 260 is concerned not with subjective

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motives of taxpayers but with purpose in the sense of the purpose of the contract, agreement or arrangement. In
FC of T v Gulland; Watson v FC of T; Pincus v FC of T 85 ATC 4765; (1985) 160 CLR 55 Gibbs C.J. said (at ATC 4771; CLR 65), echoing the views of Lord Denning in Newton's Case,
Newton & Ors v FC of T (1958) 11 ATD 442; (1958) 98 CLR 1:

``The section does not refer to the motives of the taxpayer or other person who entered into the arrangement which it is sought to impugn; the purpose or effect of the arrangement must be ascertained from the terms of the arrangement itself and from the overt acts by which it was carried into effect.''

The tax avoidance purpose need not be the sole purpose or even the principal purpose of the transaction. As Hill J. observed in
Davis & Anor v FC of T 89 ATC 4377; (1989) 86 ALR 195 (at ATC 4401; ALR 227):

``It would seem now to be sufficient to attract the operation of the section that tax avoidance was a purpose at least so long as it was not merely an incidental or unessential purpose.''

In my opinion viewed objectively the arrangement in the present case was plainly designed to avoid the payment of tax by the trustee and does not have to have regard to subjective motivation or intention of the taxpayer or anybody else to draw this conclusion. It is sufficient if one examines the deeds of assignments themselves and the various documents referred to therein. Acting on the assumption (which I do for present purposes) that the sum of $3,963,900 is not income of the trustee under s. 25(1) or 26(a) of the Act, it is plain that the deeds were entered into for a tax avoidance purpose, namely, to ensure that the tax payable by the trustee or by the beneficiaries of the trust would be reduced, namely, the tax that they would ordinarily have to pay on the income as and when it is received from the Hamersley Iron Ore venture. Nor could it be said that the arrangement was referable simply to ordinary business or family dealings. Plainly it was not. This is not a case where the choice principle operates so as to render the test enunciated in Newton's Case inapplicable (see Gulland per Brennan J. at ATC 4778, 4779; CLR 79, 81). Nor was it suggested by counsel for the applicants that this was such a case.

It is of course clearly established that s. 260 is merely an annihilating section and does not permit the Commissioner to reconstruct a new set of facts to create a liability for the taxpayer: Gulland per Gibbs C.J. at ATC 4772; CLR 67 and Brennan J. at ATC 4780; CLR 81-82; see also
Clarke v FC of T (1932) 2 ATD 121; (1932) 48 CLR 56 and Davis per Hill J. at ATC 4402; ALR 228-229. If the two deeds of assignment are avoided by the operation of s. 260 the result is that there was no assignment to National Mutual of royalty income for the eight months from November 1979 to June 1980. The amount of $400,000 paid by Hamersley Iron to National Mutual during that period must therefore be income of the trustee of the Brennan Trust. No particular difficulty arises in the present case from the fact that the Commissioner is unable to reconstruct a new set of facts. One simply disregards the assignment of royalty income to National Mutual and what is left exposed are the monies that would have been received by the trust were it not for the assignment.

Turning to s. 170(2) of the Act, it is incumbent upon a taxpayer to provide all information to the Commissioner that is relevant to the proper assessment of income and liability to tax:
The Scottish Australian Mining Co Ltd v FC of T (1950) 9 ATD 135 at 142; (1950) 81 CLR 188 at 197-198;
Australasian Jam Co Pty Ltd v FC of T (1953) 10 ATD 217 at 222; (1953) 88 CLR 23 at 33; and
McAndrew v FC of T (1956) 11 ATD 131 at 133, 135, 136-137; (1956) 98 CLR 263 at 269, 273, 275.

It is plain that many material matters relevant to the proper assessment of the income and liability to tax of the taxpayer were not disclosed in the 1980 year of income. Plainly there was no full and true disclosure.

In formulating the orders to be made I shall follow the agreed written statement of the parties previously mentioned. As to costs, the Commissioner has succeeded on all material issues, so the taxpayers must pay his costs of the three appeals.

Appeal No. WAG113 of 1988 must be dismissed and the Commissioner's disallowance of the taxpayer's objections confirmed. The objections of Perron Investments Pty Limited in respect of the years

ATC 4508

of income ended 31 March 1985 and 31 March 1986 (WAG129 and 130 of 1988) upheld. The applicants must pay the Commissioner's costs of the appeals.


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