FC of T v CO-OPERATIVE MOTORS PTY LTDJudges:
The question of law raised by this appeal from a decision of the Administrative Appeals Tribunal is whether the sum of $500,000.00, being ``an ex gratia payment in recognition of the 25 year association with Toyota'' paid by Toyota Motor Sales Australia Ltd (``Toyota'') to Co-operative Motors Pty Ltd (``the Taxpayer''), was income derived by the Taxpayer under paragraph 25(1)(a) of the Income Tax Assessment Act 1936. The Tribunal held it was not income. The Commissioner has appealed from that decision claiming that the receipt of the sum was income derived by the Taxpayer. The Commissioner does not rely on paragraph 26(e) of the Income Tax Assessment Act.
The ultimate facts found by the Tribunal are not challenged but in order to understand those facts a brief reference to some of the evidence is necessary. This will be done as an explanation of the relevant findings made by the Tribunal. The findings are taken from the reasons of the Tribunal but the terminology has been altered to conform to that used in these reasons. The essential findings were:
``56. The Taxpayer had been in the general business of dealing in motor vehicles since 1913. Since about 1962, the predominant part of its business involved the distributorship and dealership of Toyota cars and parts, to the point where, by 1988, its involvement with Toyota was virtually the sole source of its revenue. Its relationship with Toyota was regulated by two contracts terminable on terms... Given their terms, when the Thiess agreement was terminated by Toyota and the AMI (a related company) agreement not renewed, there was no breach on the part of these companies which would give rise to a claim for compensation. The fact that, when terminated, Toyota nevertheless paid some $500,000 to the Taxpayer thus requires detailed examination to determine the character of this receipt in the hands of the Taxpayer.
57. In the hands of the Taxpayer, the payment was exactly what was claimed for it by Toyota and accepted by the Taxpayer - an ex gratia payment `in recognition of past representation as a Distributor for the State of Tasmania on termination of the Company's Distributor status'... no more, no less. True it is that the Taxpayer had a reasonable expectation that its relationship with Toyota would continue indefinitely and that it organised its business in accordance with that assumption. It was also recognised that the termination of the arrangements would have a major impact on the company's future operations and earnings. It is therefore understandable that it sought desperately to obtain some compensation for that loss....''
It is necessary to make reference to some of the evidence considered by the Tribunal in relation to the next findings. It is clear ``that Toyota worldwide policy was that claims for loss of income, goodwill and the like are not and would not be recognised'' and that Toyota would not depart from that policy with respect to the Taxpayer. Despite the existence of this policy, negotiations took place between Toyota and the Taxpayer concerning compensation with respect to a number of subject matters including ``loss of income, goodwill and the like''. The resolution of these negotiations appears to have been settled at a meeting between representatives of Toyota and the Taxpayer on 16 November 1988.
The managing director of the Taxpayer prepared a summary of those discussions for consideration by the Board of Directors of the Taxpayer. The summary included a number of subject matters, including the subject matter
ATC 4413``Loss of Income''. Under that heading, the summary stated:
``LOSS OF INCOME:
It was clearly restated that Toyota worldwide policy was that claims for loss of income, goodwill and the like are not and would not be recognised.
As a consequence the company's claim was rejected.
However an ex gratia payment in recognition of the 25 year association with Toyota was offered, the amount being $500,000 .''
By letter dated 24 November 1988, the Chairman of Directors of the Taxpayer wrote to Toyota as follows:
``RE: TOYOTA REPRESENTATION - TASMANIA
Subsequent to the meeting held in Sydney on 16th November, we summarise as follows, our understanding of the items on which we reached agreement:
- 6. Loss of Income
- In recognition of past representation as a Distributor for the State of Tasmania, T.M.S.A. (Toyota) offers the amount of $500,000 as an ex gratia payment on termination of the Company's Distributor status.
By letter dated 5 December 1988, the Taxpayer wrote to Toyota as follows:
``RE: TOYOTA DISTRIBUTORSHIP - TASMANIA
Our Board considered the settlement proposal in regard to the above matter at its meeting on Friday 2nd December and have agreed to the understanding reached at our meeting in Sydney on the 16th November and documented in Mr Carrick's letter to you of 24th November.
The Board thanks Toyota Motor Sales Australia Limited (Toyota) for this satisfactory resolution and looks forward to a continuation of the long standing relationship between the company and Toyota.''
The last part of paragraph 57 of the reasons of decision of the Tribunal is:
``Thus, the Taxpayer, having exhausted all attempts to obtain compensation based on its projected future loss of earnings, accepted the ex gratia payment in terms of the offer with as much grace as it could muster. End of story.''
The Tribunal then considered the possible reasons why Toyota made the ex gratia payment and continued:
``60. However, I am less concerned with the motives of the donor of this gift than with the character it has in the hands of the recipient. Thus the motive of the donor is relevant, `though seldom, if ever, decisive'. Can it be maintained that this payment constitutes `goodwill' as alleged? The answer must be `no'. The two written agreements, averring a payment of $500,000 (2 x $250,000) as consideration `for loss of goodwill and for the reduced value of [the applicant]'s fixed assets' first surface in late January 1989, i.e. after the transfer of the distribution responsibilities from the Taxpayer to Toyota and after the Taxpayer had `twisted' Toyota's arm to include the phrase for reasons that do not require much imagination.''
The payment of $500,000.00 to the Taxpayer was made on 5 January 1989. Thereafter, two separate agreements in writing were entered into between Toyota and the Taxpayer purporting to cover the matters earlier agreed upon. These are the agreements referred to in paragraph 60. In paragraph 62, the Tribunal rejects the two agreements as containing the true agreements between Toyota and the Taxpayer and said ``the payment (of $500,000) was not made pursuant to the agreement executed in January 1989, which must come close to being a sham''. The Tribunal continued:
``It follows that once I accept that the payment was made `in recognition of past representation as a Distributor for the State of Tasmania', counsel for the Taxpayer's submission that the consideration for the payment was the loss of a substantial part of the business structure, loss of goodwill and damage to the fixed assets of the business `or a mixture of all three' cannot be sustained on the evidence. It only remains to determine whether the payment is income or capital in the hands of the Taxpayer.''
As has been said, the findings of fact made by the Tribunal are not challenged.
The Tribunal then considered the legal principles to be applied. It accepted that a voluntary payment or a gift may be subject to income tax in the hands of the recipient. It referred to
Blakiston v Cooper  AC 104 and
The Squatting Investment Co Ltd v FC of T (1953) 10 ATD 126; (1953) 86 CLR 570 per Kitto J at ATD 146; CLR 627. It considered at some length
Hayes v FC of T (1956) 11 ATD 68; (1956) 96 CLR 47. Paragraphs 65 and 68 of the reasons are set out:
``65. Can it be maintained that the payment was in the nature of a trade receipt? I think not. The amount of $500,000 was one large unprecedented sum (or rather two sums of $250,000) paid by Toyota without any consideration passing from the Taxpayer to it. Nor do I see the payment as the product of any business or income-producing activity which the Taxpayer carried on.
68. On the whole of the evidence, I am satisfied that the receipt of $500,000 is of a capital nature.''
In conformity with its reasons, on 30 September 1994, the Tribunal made the following decision:
``The Tribunal sets aside the objective decision under review and allows the applicant's (Taxpayer's) objection in full.
The Tribunal certifies that these proceedings have terminated in a manner favourable to the applicant (Taxpayer).''
The Commissioner seeks to have that decision set aside. For present purposes, the relevant part of paragraph 25(1)(a) of the Income Tax Assessment Act provides:
``25(1) The assessable income of a taxpayer shall include-
- (a) where the taxpayer is a resident-
- the gross income derived directly or indirectly from all sources whether in or out of Australia;...''
The word ``income'' is not defined in the Income Tax Assessment Act. The meanings to be given to the phrases ``income from personal exertion'' and ``income from property'' appearing in subsection 6(1) are of no assistance, see
Scott v FC of T (1966) 14 ATD 286; (1966) 117 CLR 514 per Windeyer J at ATD 292; CLR 524. Normally, whether receipt of money or property is income within paragraph 25(1)(a) is to be determined according to ordinary usages and concepts. The principle is stated clearly by Jordan CJ in
Scott v C of T (NSW) (1935) 3 ATD 142 at 144-145:
``The word `Income' is not a term of art, and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income, must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of receipts;
A.-G. of British Columbia v. Ostrum (1904) A.C. 144 at p. 147;
Lambe v. Inland Revenue Commissioners (1934) 1 K.B. 178 at pp. 182-183.''
Applying these principles, the receipt of a voluntary payment of money, a ``gift'', prima facie does not make that money income derived by the recipient. Whether that money is income depends upon a consideration of all the circumstances surrounding the receipt of the money or, as it is suggested by Windeyer J in Scott, it depends upon its quality in the hands of the recipient. The true position is expressed by Kitto J in The Squatting Investment case at ATD 146; CLR 627-628:
``Although the Commonwealth was not under any unsatisfied legal liability to the appellant, and the amount became payable simply because the Parliament chose to provide for its payment, it is not entirely accurate to call the payment a gift. Nevertheless the word has frequently been used in order to emphasise that there was no antecedent liability which the payment discharged. It must be observed at once, however, that even if it were correct to describe the payment as a gift in the strict sense of the word, the question we have to consider would still await an answer; for it is a commonplace that a gift may or may not possess an income character in the hands of the recipient. The question whether a receipt comes in as income must always depend for its answer upon a consideration of the whole of the circumstances; and even in respect of a true gift it is necessary to inquire how and why it came about that the gift was made.
ATC 4415When, as in the present case, the word `gift', if it is to be used at all, must be used by way of imperfect analogy, it is specially important to recognise how inconclusive is that word for the purpose of deciding whether the receipt is of an income nature.''
In that case, the majority of the High Court, Fullagar and Kitto dissenting, held that the money received by the taxpayer was not income. On appeal, the Privy Counsel set aside the orders of the High Court on the basis that the money so received was income under paragraph 25(1)(a) of the Income Tax Assessment Act, see
FC of T v Squatting Investment Co Ltd (1954) 10 ATD 361; (1953-1954) 88 CLR 413.
In Hayes the question was whether shares in a public company given voluntarily to Mr Hayes by a friend constituted income derived by Mr Hayes. There had been business dealings between Mr Hayes and the donor and a company controlled by the donor. These had ceased some time before the gift was made. Fullagar J held that the shares did not constitute income. His Honour discussed the principles to be applied and at ATD 72; CLR 54 said:
``A voluntary payment of money or transfer of property by A to B is prima facie not income in B's hands. If nothing more appears than that A gave to B some money or a motor car or some shares, what B receives is capital and not income. But further facts may appear which show that, although the payment or transfer was a `gift' in the sense that it was made without legal obligation, it was nevertheless so related to an employment of B by A, or to services rendered by B to A, or to a business carried on by B, that it is, in substance and in reality, not a mere gift but the product of an income-earning activity on the part of B, and therefore to be regarded as income from B's personal exertion.''
In that passage the reference to ``personal exertion'' can be ignored, the distinction between income from personal exertion and income from property having, for present purposes, disappeared. The only issue was whether the property received was income.
In Scott the question was whether a voluntary payment or gift made to Mr Scott, a solicitor, by a client long after Mr Scott had received his fees for services supplied, was income. Windeyer J held that the gift did not constitute income. At ATD 293; CLR 526, his Honour said:
``I return to the general concept of income. Whether or not a particular receipt is income depends upon its quality in the hands of the recipient. It does not depend upon whether it was a payment or provision that the payer or provider was lawfully obliged to make. The ordinary illustrations of this are gratuities regularly received as an incident of a particular employment. On the other hand, gifts of an exceptional kind, not such as are a common incident of a man's calling or occupation, do not ordinarily form part of his income. Whether or not a gratuitous payment is income in the hands of the recipient is thus a question of mixed law and fact. The motives of the donor do not determine the answer. They are, however, a relevant circumstance.... An unsolicited gift does not, in my opinion, become part of the income of the recipient merely because generosity was inspired by goodwill and the goodwill can be traced to gratitude engendered by some service rendered.... The relation between the gift and the taxpayer's activities must be such that the receipt is in a relevant sense a product of them.''
It is necessary to apply these principles to the facts found by the Tribunal. There was a finding that the payment of the $500,000 was voluntary but it was made in the context of the business that had been carried on between the Taxpayer and Toyota and the business that was to continue to be carried on between the Taxpayer and Toyota. Until the decision by Toyota to terminate the distributorship agreement, the Taxpayer had been the distributor of Toyota vehicles in the whole of Tasmania and a dealer of Toyota vehicles in Hobart and southern Tasmania. The payment by Toyota, though made voluntarily, was made ``in recognition of past representation as a Distributor for the State of Tasmania on termination of the Company's Distributorship status''. The money was received by the Taxpayer on that basis and the Taxpayer looked ``forward to a continuation of the long standing relationship between the company and Toyota'', see the letter from the Taxpayer to Toyota dated 5 December 1988 set out earlier in these reasons. This refers to the ongoing dealership arrangement between the Taxpayer
ATC 4416and Toyota. The continuation of this relationship was one of the reasons found by the Tribunal to explain the ex gratia payment.
All these facts point to the conclusion that the receipt of the $500,000 by the Taxpayer was related to the businesses carried on by the Taxpayer with the result that in substance and reality the sum received was not a mere gift but the product of the income-earning activity on the part of the Taxpayer.
At the hearing, counsel for the Taxpayer had difficulty in contending that the principles enunciated in Hayes and in Scott should not be applied to the facts found by the Tribunal. He contended that the $500,000 received by the Taxpayer had none of the attributes of income according to ``ordinary usages and concepts''. There was nothing recurrent in the nature of the payment. It was not a normal or natural incident of carrying on such a business and it did not represent a purpose for which the Taxpayer's business was carried on, see
Dickenson v FC of T (1958) 11 ATD 415; (1957-1958) 98 CLR 460 per Dixon CJ at ATD 416; CLR 475. Reliance was had on
FC of T v Spedley Securities Ltd 88 ATC 4126, a decision of a Full Court of the Federal Court of Australia,
Sabine (HM Inspector of Taxes) v Lookers Ltd (1958) 38 Tax Cases 120 and
Northumberland Development Co Pty Ltd v FC of T 94 ATC 4717; (1994) 126 ALR 97. In the last of these cases, Hill J in considering whether a voluntary payment received by a taxpayer was income, said at ATC 4721; ALR 103:
``The question whether the incremental component in the present case is to be treated as income, must, I agree, be determined by reference to its essential character. That is only another way of saying that the question whether the payment is income or capital will depend upon the nature of the payment or what it is for. What is important is that the question whether the amount is income or capital will depend upon the quality of that amount in the hands of the recipient:
Scott v FC of T (1966) 14 ATD 286 at 293; (1966) 117 CLR 514 at 526;
Hayes v FC of T (1956) 11 ATD 68 at 72; (1956) 96 CLR 47 at 55;
The Federal Coke Co Pty Ltd v FC of T 77 ATC 4255 at 4273; (1977) 15 ALR 449; (1977) 34 FLR 375 at 402 per Brennan J;
FC of T v Cooling 90 ATC 4472 at 4479; (1990) 22 FCR 42 at 50; 94 ALR 121. In considering the character of the receipt in the hands of the recipient the Court will have regard to all the circumstances which give rise to the receipt without a disproportionate emphasis upon the form in which the transaction was structured:
SP Investments Pty Ltd v FC of T 93 ATC 4170 at 4180; (1993) 41 FCR 282 at 295; 112 ALR 443;
Reuter v FC of T 93 ATC 4037 at 4045-4047; (1993) 111 ALR 716 at 727-730, affirmed on appeal: 93 ATC 5030.''
In that case, the Court held that the payment was made and received as compensation for a coal interest forfeited to the Crown. On this basis the Court held that the character of the money received by the taxpayer was capital, not income.
The reference in the passage quoted to what Brennan J said at ATC 4273; FLR 402-403 in The Federal Coke Co Pty Ltd is of particular importance since it illustrates the approach to be taken in deciding issues of the kind presently before the Court.
The findings of fact made by the Tribunal are not in issue in this appeal. Each case involving the application of these principles depends upon the facts found.
Accordingly, the submissions made on behalf of the Taxpayer are rejected.
In the result, the appeal must be allowed. The orders made by the Tribunal must be set aside and in lieu thereof it should be ordered that the application for review be dismissed and the decision of the Commissioner be affirmed. The parties have agreed that there should be no order for costs.
THE COURT ORDERS THAT:
1. The appeal be allowed.
2. The orders of the Tribunal be set aside and in lieu thereof it be ordered that the application to the Tribunal be dismissed and the decision of the Commissioner be affirmed.