GRANBY PTY LTD v FC of TJudges:
This is an ``appeal'' on a question of law pursuant to s. 44 of the Administrative Appeals Tribunal Act 1975 from a decision of the Administrative Appeals Tribunal (``the Tribunal''). The Tribunal affirmed the decision of the respondent (``the Commissioner'') which disallowed the objection lodged by the applicant (``Granby'') to the amended assessment of income tax issued by the Commissioner to Granby in respect of the year of income ending 30 June 1989.
The question of law relates to the proper construction of s. 160ZH of the Income Tax Assessment Act 1936 (``the Act''), in particular, the meaning of the words ``dealing with each other at arm's length'' used in para 160ZH(9)(c).
At relevant times Granby was a partner in a partnership which carried on business as a contract driller. various items of plant and equipment used in the business, including motor vehicles and drilling rigs, were provided to the partnership under leases, or lease agreements, made between the partnership as lessee and several finance corporations as lessors.
In March 1982 the partnership agreed to lease a motor vehicle from Commercial and General Acceptance Limited (``C.A.G.A.'') for a term of four years. It was a term of the agreement that the partnership would pay to C.A.G.A. the amount by which the ``residual value'' recited in the lease exceeded the amount received by C.A.G.A. upon sale or disposal of the vehicle after expiration of the lease. According to that term the payment would be ``by way of indemnity for the capital loss so sustained'' by C.A.G.A. In the course of the period of the lease the interests of C.A.G.A. as lessor were assigned to Custom Credit Corporation Limited (``Custom Credit''). In March 1986 Custom Credit informed the partnership that upon expiration of the lease the partnership may apply to re-lease the vehicle, return the vehicle to Custom Credit, or make an offer to purchase the vehicle.
The partnership purchased the vehicle for a price equal to the ``residual value'' recited in the lease agreement, namely, $5,500.
In February 1983 the partnership offered to lease another motor vehicle from Australian Guarantee Corporation Limited (``A.G.C.'') for a term of four years. The offer was accepted and pursuant to the agreement for lease then formed the partnership agreed to pay to A.G.C. ``by way of indemnity for the capital loss so sustained'' the amount of the deficiency, if any, between the ``residual value'' of the vehicle as recited in the lease agreement and the best price A.G.C. reasonably could obtain upon disposing of the vehicle after the vehicle was returned to A.G.C.'s possession at the expiration of the
ATC 4242lease, subject to the proviso that if the vehicle was sold to the lessee, or to anyone on the lessee's behalf - otherwise than by public auction, or to or through traders dealing in goods of a similar description - no amount would be payable by the lessee for such deficiency.
In February 1987, upon expiration of the lease, the partnership purchased the vehicle from A.G.C. for $2,820. a price equal to the ``residual value'' of the vehicle recited in the lease.
In December 1984 the partnership took on lease from Custom Lease Pty. Limited (``custom Lease'') a mobile drilling rig for a term of one year. Pursuant to the terms of the lease the partnership agreed to pay the difference between the ``residual value'' of the plant and the proceeds of sale obtained by Custom Lease after expiration of the lease upon sale of the goods by public auction or by tender. In the lease ``residual value'' was defined as the amount specified in the lease as a pre-estimate of the value of the goods upon the expiry of the term of the lease. In December 1985, upon expiration of the lease, the partnership purchased the drilling rig from Custom Lease for $9,925 a price equal to the ``residual value'' of the plant recited in the lease.
In May 1985 the partnership took on lease from Custom Credit a drilling rig for a term of one year. In all relevant respects the terms of the lease were identical to the terms of the lease referred to in the preceding paragraph. In May 1986 when the lease expired the partnership purchased the drilling rig from Custom Credit for $10,000, a price equal to the ``residual value'' of the rig recited in the lease.
The Tribunal found that in respect of each acquisition of property no negotiations were conducted between the partnership and the respective lessors to settle the price to be paid by the partnership for the chattel. In each case the partnership offered to buy the vehicle, or plant, by tendering as the purchase price an amount equivalent to the ``residual value'' nominated in the lease and in each case -he amount tendered was accepted.
In August 1988 Granby sold its interest in the partnership. The consideration paid for that interest was calculated by allocating values to the vehicles and plant described above which exceeded the prices paid for that property by the partnership.
In the amended assessment of income tax issued to Granby, the Commissioner included in Granby's assessable income the amount of $142,996 as a new capital gain obtained by Granby upon disposal of its share in the partnership. At the hearing before the Tribunal, and on the hearing of this appeal, it was agreed by the parties that if a capital gain had been obtained by Granby the net amount of that gain was $123,558 not $142,996 as set out in the amended assessment.
At the relevant time sub-s. 160ZH(9) read as follows:
``For the purposes of the application of subsection (1), (2) or (3) in determining the cost base, the indexed cost base or the reduced cost base to a taxpayer of an asset, if-
- (a) the taxpayer acquired the asset from another person and did not pay or give any consideration in respect of the acquisition;
- (b) the whole or a part of the consideration paid or given by the taxpayer in respect of the acquisition cannot be valued; or
- (c) the consideration paid or given by the taxpayer in respect of the acquisition would, but for this paragraph, be greater or less than the market value of the asset at the time of the acquisition and the taxpayer and the person from whom the taxpayer acquired the asset were not dealing with each other at arm's length in connection with the acquisition of the asset,
the taxpayer shall be deemed to have paid or given as consideration in respect of the acquisition of the asset an amount equal to the market value of the asset at the time of the acquisition.''
It was not an issue in the hearing of the appeal that when the partnership purchased the vehicles and plant, Granby had ``acquired'' the property or that the ``consideration paid or given'' for the property had been paid or given by Granby.
Before considering the meaning of the expression ``dealing with each other at arm's length'', it is necessary to keep in mind the context in which the expression appears in sub- s. 160ZH(9). The sub-section provides that for the purpose of determining the cost base of the
ATC 4243asset under sub-s. 160ZH(1) the market value of the asset at the time of its acquisition is to be deemed to be the consideration paid or given in respect of that acquisition in the circumstances described in paras. 160ZH(9)(a), (b) and (c). In brief, those circumstances describe transactions in which the consideration paid or given in respect of the acquisition is not fixed or, as in para. 160ZH(9)(c), has to be disregarded.
Paragraph 160ZH(9)(C) reflects a legislative presumption that if the consideration expressed in a transaction in which the parties have not dealt with each other at arm's length is greater, or less, than the market value of the asset, that consideration cannot be relied upon to reflect the proper incidence of taxation payable under the Act in respect of that transaction. However, if parties deal with each other at arm's length the consideration paid or given to acquire the asset may be relied upon notwithstanding that the consideration is greater, or less, than market value.
Thus the operation of para. 160ZH(9)(c) does not depend upon the consideration paid or given being greater, or less, than market value alone. It is necessary to show that the transaction under which the consideration is paid or given was not conducted by parties dealing with each other at arm's length.
The expression ``dealing with each other at arm's length'' involves an analysis of the manner in which the parties to a transaction conducted themselves in forming that transaction. What is asked is whether the parties behaved in the manner in which parties at arm's length would be expected to behave in conducting their affairs. Of course, it is relevant to that enquiry to determine the nature of the relationship between the parties, for if the parties are not parties at arm's length the inference may be drawn that they did not deal with each other at arm's length.
When Hill J. considered the meaning of similar words in sub-s. 102AG(3) of the Act in
The Trustee for the Estate of the late AW Furse No 5 Will Trust v FC of T 91 ATC 4007 he said as follows at 4014-4015:
``There are two issues, relevant to the present problem, to be determined under sec.102AG(3). The first in whether the parties to the relevant agreement were dealing with each other at arm's length in relation to that agreement. The second is whether the amount of the relevant assessable income is greater than the amount referred to in the subsection as the `arm's length amount'.
The first of the two issues is not to be decided solely by asking whether the parties to the relevant agreement were at arm's length to each other. The emphasis in the subsection is rather upon whether those parties, in relation to the agreement, dealt with each other at arm's length. The fact that the parties are themselves not at arm's length does not mean that they may not, in respect of a particular dealing, deal with each other at arm's length. This is not to say that the relationship between the parties is irrelevant to the issue to be determined under the subsection.''
His Honour approved of the following statement by Davies J. in respect of the use of like words in sub-s. 26AAA(4) of the Act in
Barnsdall v FC of T 88 ATC 4565 at 4568:
``However, sec. 26AAA(4) used the expression `not dealing with each other at arm's length'. That term should not be read as if the words `dealing with' were not present. The Commissioner is required to be satisfied not merely of a connection between a taxpayer and the person to whom the taxpayer transferred, but also of the fact that they were not dealing with each other at arm's length. A finding as to a connection between the parties is simply a step in the course of reasoning and will not be determinative unless it leads to the ultimate conclusion.''
Whatever the meaning of the expression may be in equity (see:
Australian Trade Commission v WA Meat Exports Pty Ltd (1987) 75 ALR 287 at 291; Barnsdall at 4567-4568) for the purpose of sub-s. 160ZH(9) of the Act the term ``at arm's length'' means, at least, that the parties to a transaction have acted severally and independently in forming their bargain. Whether parties not at arm's length have dealt with each other at arm's length will be a matter of fact. As Hill J. stated in Furse at 4015, determination of the manner in which parties not at arm's length have dealt with each other requires ``an assessment whether in respect of that dealing they dealt with each other as arm's length parties would normally do, so that the outcome of their dealing is a matter of real bargaining''.
If the parties to the transaction are at arm's length it will follow, usually, that the parties will have dealt with each other at arm's length. That is, the separate minds and wills of the parties will be applied to the bargaining process whatever the outcome of the bargain may be.
That is not to say, however, that parties at arm's length will be dealing with each other at arm's length in a transaction in which they collude to achieve a particular result, or in which one of the parties submits the exercise of its will to the dictation of the other, perhaps, to promote the interests of the other. As in
Minister of National Revenue v Merritt 69 DTC 5159 at 5166 where the parties to the transaction were parties at arm's length, the terms of a loan transaction made between them had been dictated by a unilateral decision of one of them and no independent will in the formation of that transaction had been exercised by the other. It followed that it could not be said that the parties had dealt with each other at arm's length at the material time. (c.f.
Robinson v Minister of National Revenue  1 CTC 2055.)
Counsel for Granby submitted that to deal at arm's length the parties must engage in ``real bargaining''. By that argument counsel sought to apply the observations of Hill J. in Furse on the dealing of parties not at arm's length to the dealing of parties at arm's length. Counsel submitted that once the Tribunal found that there had been ``no real bargaining'' between the lessor corporations and the partnership when the vehicles and drilling rigs were purchased by the partnership, the Tribunal should have found that the parties had not been dealing with each other at arm's length in connection with the acquisition of those assets by the partnership.
However, there was no evidence that the lessor corporations and the partnership acted in concert with an ulterior purpose, or that the lessor corporations accepted dictation or instruction from the partnership to the exclusion of the exercise of the independent minds of the corporations, when the partnership acquired the motor vehicles and drilling rigs from the corporations. In accepting the amounts tendered by the partnership to purchase those assets the lessor corporations made decisions which, they perceived, served the interests of the businesses conducted by them. ``Residual values'' were set by the lessor corporations to safeguard the capital they, as financiers, invested in the chattel purchase and lease transactions they entered into and their decisions to accept consideration which did not exceed ``residual values'' when the chattels were sold were decisions made for, and according to the requirements of, the businesses they conducted. The independent will of the lessor corporations was not merged in collusive activity with the partnership nor subjugated to direction from the partnership. It follows that there was no evidence that the lessor corporations and the partnership dealt with each other, other than at arm's length.
The Tribunal found that the lessor corporations and the partnership had dealt with each other at arm's length in arranging the leases of the vehicles and drilling rigs and, therefore, under para. 160ZH(9)(c) the parties had dealt with each other at arm's length ``in connection with'' the acquisition of the assets by the partnership. In the opinion of the Tribunal the contracts for the sale of the assets were made under the ``umbrella'' of the negotiations which had taken place before the leases and lease agreements had been entered into.
Whether the Tribunal erred in that finding is unnecessary to decide. For the reasons set out above the Tribunal did not err in affirming the decision of the Commissioner by concluding that sub-s. 160ZH(9) did not apply to the acquisition of the assets by the partnership.
The appeal must be dismissed with costs.
THE COURT ORDERS THAT:
The appeal be dismissed with costs.