JB CHANDLER INVESTMENT COMPANY LTD & ANOR v FC of T
Members: Gummow Jvon Doussa J
Hill J
Tribunal:
Full Federal Court
Hill J
JB Chandler Investment Company Limited (in liquidation) (``Investments'') and Chandlers Rental Pty Limited (in liquidation) (``Rental'') (``the appellants''), appeal from the decision of a judge of this Court (Drummond J) dismissing an appeal which they had brought to the Administrative Appeals Tribunal relating to their liability for income tax in respect of the year ended 30 June 1988. The appeals concern the question whether payments of $400,000 to Investments and $100,000 to Rental made by HFC Financial Services Pty Limited (``HFC'') in that year of income, were income within s. 25(1) of the Income Tax Assessment Act 1936 (``the Act'').
The appellants were members of a group of companies referred to as the ``Chandlers Group''. A number of companies in that group carried on business as discount retailers. The appellants were the main financiers within the group providing credit facilities to the customers of the retailer members of the group. These credit facilities included loans, hire purchase arrangements, continuing credit arrangements, 30 day trading accounts and lay- bys. The appellants were not, however, the sole financiers for customers of the group and at
ATC 5187
least two other companies, unrelated to the group, also provided such finance. The ultimate holding company of the group was Chandlers (Australia) Limited, which owned all the shares in John Martin Pty Limited (``John Martin''), Chandlers Pty Limited (``Chandlers'') and Investments. Chandlers, in turn, owned all of the shares in Chandlers Appliance Stores Pty Limited, Chandlers Appliance Stores (Northern) Pty Limited, Chandler Piesse Pty Limited and Chandler Derrick Pty Limited, which companies, together with John Martin, the shares in which were directly owned by Chandlers (Australia) Limited, are hereafter referred to as ``the merchants''. The merchants were the retailing members of the group.In July 1987 Billy Guyatts Limited acquired all of the shares in Chandlers (Australia) Limited, carrying with them ownership of the Chandler group. It determined to sell the businesses of the two appellants and to this end entered into negotiations with HFC. The substance of these negotiations was that HFC was to purchase receivables of the appellants on the basis of 100 cents in the dollar net. Excluded from the purchase were accounts which had been delinquent for 90 days. In addition there was to be payment of what was to be described in an initial letter of offer dated 28 August 1987 as ``a premium of $500,000''. The commercial arrangement presupposed that there would be a continuing relationship between HFC, on the one hand, and the merchants, on the other, for a period of three years so that in that period, at least, the merchants would refer customers desiring finance to HFC.
The negotiations between the parties were protracted. Ultimately they took the form of a document dated 30 September 1987 expressed as being an offer to HFC, which offer was accepted by that company. One matter of significance in these negotiations was how the offer agreement should be worded to reflect the payment of the $500,000 premium. HFC was adamant that the payment was not to be expressed as a payment for goodwill. HFC was concerned that a payment for goodwill would not be available to it as an allowable deduction. Mr RG Turner, who was the Group General Manager, in deposing to these discussions in his affidavit, said, inter alia :
``The Offer Agreement did not mention that the premium was paid for goodwill because of the heavy discussions which took place between the Chandler's finance companies and HFC. The term goodwill was not allowed to be used as HFC wanted to create a situation where they could at least have a claim for a deduction for the payment of the premium. There was much discussion on the wording of the clause as it was hard to get an agreement which would not compromise the whole deal. In the end, clause 19 was settled in terms which was intended by the applicants to show that the payment was for the goodwill of the finance portfolios of the taxpayers and CPL [one of the three companies in the Chandlers group] without making an express reference to the word goodwill to allow HFC to have a claim for deductibility of the premium.''
Although not express, there was an even more cogent reason why the premium could not be for the goodwill of the appellants. Since those companies had no continuing agreement with the merchants or any of them, the continuance of their business lay solely in the discretion of the ultimate parent company. Any goodwill the appellants had was thus of little or no value unless agreement could be reached with the merchants to secure their continued business.
The offer document was signed by three companies - the two appellants and Chandlers Pty Limited. It defined the expression ``the Company'' as meaning, unless the context otherwise indicated, the three companies jointly and each of them severally. It provided for the sale to HFC of the ``right, title, claim, demand and interest of the companies'' in the various hire purchase agreements, continuing credit contracts, loan agreements etc, to which reference has already been made, for a price, effectively being a dollar for each dollar of receivables. The offer is complicated because there is to be an initial loan made by HFC to the companies to be repaid out of a payment of the purchase price in the following June, but nothing presently turns upon that. Significant for present purposes are the provisions of cl. 19:
``19.1 The Offeree shall pay to the Company the Premiums for entering into this Agreement and for procuring each of John Martin Pty. Limited, Chandlers Appliance Stores Pty. Ltd., Chandlers Appliance Stores (Northern) Pty. Ltd., Chandler Piesse Pty. Ltd. and Chandler Derrick Pty. Ltd. (each of
ATC 5188
which is associated with the company within the Chandler Group) to enter into a certain Merchant Agreement of even date herewith with the Offeree which Agreements will hereinafter enable the Offeree to provide credit facilities or other facilities to persons (whether or not presently Hirers and Borrowers) wishing to purchase the goods and merchandise offered for sale by the Company or their associated companies within the Chandler Group.19.2 The Premiums payable to the Company contemporaneously with the acceptance of this Offer shall be: -
- J.B. Chandler Investment Company Limited - $400,000
- Chandlers Rental Pty. Ltd. - $100,000
19.3 Should the Merchant Agreement be terminated at any time prior to the 30th day of September, 1990, then the Company shall effect a pro rata refund of the sum of TWO HUNDRED THOUSAND DOLLARS ($200,000.00) of the Premium for that period from the date of termination to the 30th day of September, 1990.''
It seems clear that cl. 19, in its reference to ``the Company'', refers only to the two appellants, rather than the appellants together with Chandlers Pty Limited and indeed the appeal proceeded on this basis.
The offer was immediately accepted and upon acceptance payment was made to the appellants as required by the offer. Simultaneously there was handed over to HFC the merchant agreement which was terminable within the first three years of its operation by six months' written notice and thereafter by three months' written notice. Thus HFC was ensured the business of the merchants for at least six months and, provided the agreement was not terminated, for at least a three year term.
The Commissioner formed the view that each of the payments received by the appellants was assessable income to it by virtue of the payments falling within the provisions of Part IIIA of the Act concerned with including as assessable income certainly what might compendiously be described as capital gains. To assessments made by the Commissioner on this basis, the appellants each objected. Not surprisingly, considering that the assessment assumed the amounts in question became assessable income by virtue of the provisions of Part IIIA, a large part of each objection was addressed to the provisions of that Part. However, in the alternative, each of the taxpayers claimed that the amounts in question were not assessable income under the provisions of s. 25(1) of the Act. Reasons were advanced for this claim. In addition to a contention that each company was not in the business of trading in the assets which it sold, each of the appellants said in its Notice of Objection:
``Alternatively, the wording of Clause 19.1 may suggest that the amounts payable under this clause represent a procurement fee payable to Chandlers Rental and JB Chandler Investment Company Limited in exchange for their procuring various other companies in the Chandler Group to enter into Merchant Agreements - the purpose of such agreements being to ensure HFC of obtaining all credit provision contracts in relation to customers of the Chandlers Group.
However, we submit that this was not the true intention of the parties to the agreement. The intention, as supported by correspondence and discussions between the parties, was for HFC to pay the premium in order to be in a position where it could receive the referrals from Chandlers customers and to provide to them the financing arrangements previously provided by the Chandler Group. That is, it represented a payment to the vendors, in addition to consideration for the existing debt portfolio, for the transfer of the future right of access to a particular group of potential credit clients. The merchant agreements to be signed between the various Chandler Group companies and HFC was merely a formality to give effect to the transfer of the rights of access to that customer base to HFC. The premium did not relate to any services performed in relation to the physical act of arranging the Merchant Agreements but rather to the vendor companies surrendering their rights of access to those potential credit customers.''
Much of the argument before the Tribunal was concerned with Part IIIA of the Act. That matter is no longer at issue between the parties, it being conceded by the Commissioner that Part IIIA had no application. However, the
ATC 5189
provisions of s. 25(1) were also argued before the Tribunal. The appellants' case appears to have been that the payments in question were payments for goodwill of the appellants and so were of a capital nature falling outside s. 25(1) and as well outside Part IIIA.The Tribunal was of the view that neither of the appellants had any goodwill and that finding is not now challenged. In its view what had occurred was that the Chandler Group, having decided to rid itself of its finance arm sold a ``package'' which included a premium ``upfront payment''. It then remained for the Tribunal to characterise the premium. It did so by reference to the agreement into which the appellants had entered with HFC. Under this agreement the premium was consideration paid to the appellants for procuring the merchants to enter into the merchant agreement. The payments being made as consideration for rendering a valuable service were thus, in the Tribunal's view, of a revenue and not of a capital nature.
From the Tribunal's decision the appellants appealed to this Court.
The substantial argument before Drummond J was that the Tribunal had erred in characterising the payments made to the appellants as procuration fees. Having regard to the whole factual matrix of which the offer agreement formed but a part, it was submitted that the payments had a character either as being in substance payments for goodwill or as being payments for the appellants giving up their business to HFC. His Honour rejected this argument.
In the course of his Honour's judgment, it is noted that no argument had been put to him that because cl. 19.1 referred not only to procuration but also to entry into an agreement (upon acceptance of the offer) as being the real consideration for the payment of $400,000 and $100,000 premium, it followed that these payments were receipts of a mixed income and capital nature with the consequence that the whole of the amounts received were not assessable income: cf McLaurin v FC of T (1961) 12 ATD 273 at 275; (1960-1961) 104 CLR 381 at 391; FC of T v Spedley Securities Limited 88 ATC 4126 at 4131. The judgment notes further that no attempt was made at the hearing before the Tribunal to characterise part of the premium as having been paid as something additional to the price for the appellants' receivables, with the balance only being attributable to the promise in cl. 19.1. Despite these comments the appellants seek to raise now the argument not, in consequence, dealt with by his Honour.
Before us the appellants' principal submission was that having regard to the whole factual matrix surrounding the transaction with HFC whereby the payments by way of ``premium'' came to be made, those amounts were paid so that the appellants would sell all of their valuable assets and go out of business thereby enabling HFC to step into the appellants' shoes. Alternatively, it was said that the payments to the appellants, so far as they were made as consideration to acquire what in essence was a valuable asset of the merchants or of the holding company, were a ``mere gift'' and thus received on capital account just like the payment discussed in
The Federal Coke Company Pty Limited
v
FC of T
77 ATC 4255
;
(1977) 34 FLR 375
at ATC 4264-4265; FLR 388-9 per Bowen CJ and ATC 4271-4272; FLR 399-400 per Nimmo J
. Alternatively, the appellants submit that in receiving the premiums each received an undissected lump sum, one ingredient of which was that it was the consideration for the signing of the offer agreement. There being no basis for apportionment, it is said that the whole of the receipt should be treated as capital.
The proposition that in determining the character of a receipt as income or capital it is necessary to consider the whole of the circumstances surrounding the receipt, cannot be doubted: see, for example, per Bowen CJ in
Federal Coke
at ATC 4257; FLR 377. In
FC of T v Cooling
90 ATC 4472 at 4482; (1990) 22 FCR 42 at 53, upon which the appellants relied, I expressed the view that the decision of the House of Lords in
IRC
v
Duke of Westminster
[1936] AC 1
, did not require the conclusion that in determining the legal effect of a contract between parties and the characterisation of payments made under such a contract as being income or capital, regard could not be had to the whole factual matrix of which the contract formed part. The context in which that view was expressed was a submission by counsel for the taxpayer that the trial judge in
Cooling
had not been entitled to hold on the facts of that case that a payment made by a property developer to a firm of solicitors was a payment
ATC 5190
by way of incentive to the firm to move to new premises.In Cooling there had been a letter, written by the payer of certain moneys, which letter preceded the payment, in which the payer acknowledged its agreement to pay to the members of the firm a sum of money ``as an incentive to sign the guarantees and to procure Bengil Services Pty Ltd to accept the lease''. Bengil Services Pty Limited was the service company of the firm of solicitors and became the lessee of the premises, subletting to the firm. Rental obligations to the developer were naturally required to be guaranteed by members of the firm, a matter which would have gone without saying. The trial judge had found that the ``reality of the situation'' was that the payment was made so that the firm would move to the new premises and was made independently of the entity (Bengil Services) which formally took over the lease.
In considering the entire context in which the payment was made and that context included the relationship between the firm and its service company, I expressed the view that the character of the payment in the hands of the recipient as income was not to be determined by focusing upon the words of the letter of the payer to the exclusion of all surrounding circumstances. My judgment in this respect was agreed to by the other members of the Court, Lockhart and Gummow JJ. But to accept that the circumstances in which a payment is made will be relevant to a determination of the character of that payment in the hands of a recipient is not to say that surrounding circumstances can be used to contradict the words of an agreement reached between parties bargaining at arm's length as to what the consideration for a particular payment is to be, except in a case (and the present is not such a case) where it is claimed that the agreement is a sham and does not represent the true intention of the parties to it.
The present is a case where negotiations between arm's length parties resulted in an agreement being reached between them, couched in language that was the subject of hard bargaining. That language clearly represented the intention of the parties to the agreement. The real significance to HFC of entering into the arrangement with the appellants was to obtain the repeat business of financing customers of the merchants. That repeat business would not be available to HFC unless some agreement was entered into between the merchants and HFC. As is obvious from the sequence of events, the merchants had already agreed to enter the merchant agreement, subject to the offer being accepted and payment made under it to the appellants. In these circumstances it was apt for HFC to agree to pay to the appellants a sum of money for the appellants' having procured the merchants entering into the agreement. Clause 19, with its reference to procuring, is not only apt to record an agreement on the part of the appellants to procure in the future the merchants to enter into the merchant agreement, but also for expressing a consideration payable to the appellants for having procured the merchants to enter into the agreement which was to be entered into forthwith upon the acceptance of the offer.
There can be little doubt that a payment made to a taxpayer for procuring some other party to do something is income in ordinary concepts:
Austrotel Corporation Pty Ltd
v
FC of T
76 ATC 4245
. Such a payment is no more than a payment for services rendered. However, no matter how much one examines the surrounding matrix in the present case, one is left with no more than the agreement reached between the parties encapsulated in cl. 19.1. Here, for their own purposes, the parties have cast the transaction between them into the form of a payment made as consideration for entering an agreement and for procuring the execution of the merchant agreement. The parties did so quite deliberately and the taxation consequences which flow will be determined by the form which they have adopted. The surrounding or accompanying circumstances, however much they might explain the transaction, do not change it.
I would, with respect, adopt, as Drummond J did, what was said by Brennan J in
Federal Coke
, in a passage approved by this Court in
Allied Mills Industries Pty Ltd
v
FC of T
89 ATC 4365
at 4369-4370;
(1989) 20 FCR 288
at 309
:
``When a recipient of moneys provides consideration for the payment, the consideration will ordinarily supply the touchstone for ascertaining whether the receipt is on revenue account or not. The character of an asset which is sold for a price, or the character of a cause of action
ATC 5191
discharged by a payment will ordinarily determine, unless it be a sham transaction, the character of the receipt of the price or payment. The consideration establishes the matter in respect of which the moneys are received. The character of the receipt may then be determined by the character, in the recipient's hands, of the matter in respect of which the moneys are received.''
It is perhaps true that the appellants, in entering into the transactions with HFC, did so in the course of going out of business. There is no finding of fact to this effect by the Tribunal, although it was no doubt open to inference that this was so. But not all payments made to a company in the course of its ceasing business will necessarily be on capital account. The decision of the High Court in
Californian Oil Products Ltd
v
FC of T
(1934) 3 ATD 10
;
(1934) 52 CLR 28
upon which the appellants relied and which was said to involve facts similar to the present case, is, in reality, far removed from it. In
Californian Oil
the taxpayer received a payment for the termination of an agreement which constituted its sole business and in consideration for a covenant not to compete with the payer. A consideration for a covenant not to compete of itself would ordinarily be an affair of capital:
Beak (Inspector of Taxes)
v
Robson
[1943] AC 352
. To the extent that the payment was made for the termination of the agency, it was, to use the language adopted by Gavan Duffy CJ and Dixon J (at ATD 21; CLR 47) ``truly compensation for not carrying on their business''. It was not a compensation for services but a compensation paid when services came to an end and was thus received on capital account. There is thus no analogy at all between the facts of that case and those of the present.
To this point I have treated the payment as relating solely to the procuration of the merchant agreement. The offer agreement, however, referred also to the payment being consideration for the entry into the agreement constituted by the acceptance of the offer. There is some difficulty in understanding precisely what that meant in the present context. In essence the agreement involved four matters. First there was the sale of the receivables at face value. It hardly appears that the premium related to that matter. Secondly, there were ``covenants'' [sic] and warranties given by the appellants integrally tied to the sale of the receivables. Again, the premium does not appear to relate to these ``covenants'' or warranties. Thirdly, there was the agreement to procure the merchant agreement and finally there were other steps which the appellants undertook to take in the future. If the consideration had been paid for the appellants' undertaking to do things in the future then similarly the consideration in their hands would likewise have been for service and would have had the character of income.
To the extent that it is appropriate to look at the surrounding circumstances, the evidence makes it abundantly clear that the premium was paid for one thing and one thing only, that is the procuration of the merchant agreement. This was the key to the whole commercial arrangement between the parties and the real commercial reason why HFC was prepared to pay a premium. In these circumstances the whole of the $500,000 is income within the ordinary concepts and usages of mankind.
It follows from this analysis that the alternative submission, namely that the premium was paid to the appellants in part for an income matter and in part for a capital matter, must likewise fail. The premium was not a receipt of a mixed nature so as to come within the principle of McLaurin .
Accordingly it becomes unnecessary to determine whether the appellants' objection was wide enough to permit them to argue this point without leave, whether the point was indeed argued at all before the Tribunal, and if not whether permission should be given at this late stage for the matter to be argued before us.
I would accordingly dismiss the appeal with costs.
THE COURT ORDERS THAT:
1. Appeal dismissed.
2. Appellant to pay respondent's costs.
This information is provided by CCH Australia Limited Link opens in new window. View the disclaimer and notice of copyright.