Dickenson v Federal Commissioner of Taxation
98 CLR 460(Judgment by: McTiernan J)
Between: Dickenson
And: Federal Commissioner of Taxation
Judges:
Dixon CJ
McTiernan JWilliams J
Webb J
Kitto J
Subject References:
Taxation and revenue
Income tax
Income or capital
Legislative References:
Income Tax and Social Services Contribution Assessment Act 1936 - 83; 88; 260
Judgment date: 2 April 1958
SYDNEY
Judgment by:
McTiernan J
The appellant owned a garage and service station at Kingsgrove. The petrol and lubricants in which he dealt were of various brands, and were supplied to him by various oil companies. These included the Shell Company.
It appears that each of the companies had decided to organize service stations solely for distributing its own brands of petrol and petroleum products. Some, if not all, the companies made overtures to the appellant to secure his garage and service station for that purpose. The clear inference from the evidence is that the Shell Company, in the course of its negotiations, offered the appellant PD1,000 to obtain exclusive rights in respect of his garage and, to ensure that they got these rights, raised the amount to PD4,000.
On 30th June 1952, the appellant received from the Shell Company PD2,000, and on 1st July of the same year the balance of the PD4,000. The respondent included each of these sums in the assessable income of the financial year in which it was paid, on the basis that it was a receipt of income or a "premium". The appellant objected to both assessments on the ground that each receipt was in the nature of capital, and was not a "premium".
On an appeal from the assessments Taylor J. decided that each sum was a receipt of income and so was correctly included in the assessable income. The first question on the present appeal is whether these sums were receipts of income or capital
The substratum of the arrangement into which the Shell Company and the appellant entered is a series of instruments executed by them respectively. Two of these are memoranda of leases, both executed on 30th June 1952. One is a lease of the garage to the Shell Company for ten years at a yearly rental of PD1,040, and the other a lease of the same premises by the company to the appellant for that period less two days at an equivalent rental. These memoranda of lease deal with the relations of the parties as lessor and lessee in turn, and need not be referred to in detail.
The other instruments are a "supply agreement" and two other deeds. Each of these contains restrictive covenants relating to the appellant's trade. A payment of PD2,000 is annexed to each of these covenants. It is necessary to refer in some detail to the provisions of these three instruments. The "supply agreement" is expressed to have been made on 11th June 1952. It is sufficient to notice that the Shell Company thereby agreed to supply the appellant at the garage and service station at Kingsgrove with all the motor spirit, lubricants, and other petroleum products that he should require, and he agreed to buy from that company all goods of those descriptions that he dealt in at those premises, and undertook to purchase at least six thousand gallons of motor spirit and eighty gallons of automotive lubricants every month during the continuance of the agreement. The agreement is expressed to have been made on 11th June 1952 but to have commenced on 9th May 1952, and its term is fixed at ten years from that date, and thereafter until the expiration of three months' notice by either party. The first deed, which is expressed to have been made on 30th June 1952, contains a covenant whereby, in consideration of PD2,000 then paid by the Shell Company to the appellant, he agreed that he would not, during a period of thirty months nor within five miles of the above-mentioned service station, as owner or otherwise, directly or indirectly carry on or be interested in any other garage and service station unless and until arrangements satisfactory to the Shell Company had been made to operate it as a business buying and selling the Shell Company's petrol and petroleum products exclusively.
The second deed was made on 1st July 1952, and contains a covenant in similar terms which is espressed to be in consideration of a sum of PD2,000 then paid, and to operate for a period of thirty months from the expiry of the former restrictive covenant.
The respondent did not impugn these instruments as shams. Their form determines whether the two payments are in the nature of income or capital. According to their form, each of the sums of PD2,000 was paid in consideration of the covenant on the part of the appellant to which it relates, and not in consideration of anything in the "supply agreement". It is upon that basis that the question whether in the hands of the appellant these payments are income or capital has to be decided.
The appellant in evidence said this:
"The one brand was coming in and we were faced with the proposition of either becoming a Shell one-brand station-at the time we did not know what would be the outcome; we thought it would be a one-brand Shell or a one-brand C.O.R., or one type of petrol or another. I preferred the Shell myself. We thought at the time that if we did not go for one particular brand then that particular brand would take away its pumps. If I had not gone to Shell, I understand Shell would have taken their pumps away, and I would have been left with something that was not so good."
The appellant further said that he accepted the Shell Company's proposal to make his business a "one-brand station" in order to guarantee to himself supplies of a suitable motor spirit and oil products. According to the evidence, the Shell Company made concrete driveways at the appellant's garage and kept it painted.
The evidence of the circumstances that arose in the trade makes it reasonable to conclude that it was for the mutual advantage of the appellant's and the Shell Company's trade to enter into the arrangement based on the above-mentioned instruments. As stated above, the appellant undertook by the "supply agreement" to order six thousand gallons of petrol a month. The evidence shows that subsequently the sales exceeded 12,000 gallons a month. It is correct to assume that in the circumstances there was no real possibility of the appellant's becoming interested at any foreseeable time in a "one-brand" station within five miles of the Kingsgrove garage that would be tied to a rival of the Shell Company. On the evidence the sum of PD4,000 cannot be held to be in the nature of a capitalisation of profits expected to be lost over the total period of the restrictive covenants by reason of their operation. Taylor J. was of opinion that the real point of those covenants is not so much their restrictive effect as that they result in the appellant being concerned in nothing but a Shell "one-brand" service station, if he should choose to extend his business interests as a trader in petroleum products beyond the Kingsgrove garage.
In my opinion this is a tenable view, and its result is that the sum of PD4,000 bears the stamp of income because it is income arising from the appellant's trade. Taylor J. rested his view on the condition in each of the covenants modifying the restriction which it creates. But even if the covenants ought to be regarded as essentially restrictive, I am unable to see that the sum of PD4,000 is compensation for a capital loss. The argument for the appellant depends upon an analogy between the surrender or sterilisation of a capital asset and a restrictive covenant relating to trading.
The Master of the Rolls observed in Higgs v Olivier [F1] that the analogy may exist in the case of "a restrictive covenant of a substantial character". [F2] He distinguished the case of a covenant by a trader to give up his trade for life from "a restriction of a very limited or partial character", and said that the consideration for the latter might be more easily regarded as taxable than the consideration for the former. The Master of the Rolls added this:
"But between the two extremes there is a large area, and for myself I am disposed to think that within that area it may well be a matter of degree. In so far as it is a matter of degree it would be, I think, a question of fact". [F3]
The covenant in question in that case was limited, but it was held to be "a substantial piece out of the ordinary scope of the professional activities which were otherwise open to (the taxpayer)". The decision turned upon the question whether, in the view taken of the extent of the restriction, it could be said that the payment came to him "in the ordinary course of his profession". It was held that it could not, and therefore it was outside the taxing provision. The present question does not, of course, depend upon any such provision. It is: whether the sums of PD2,000 belong to the category of income or capital?
The restrictive covenants now in question operated concurrently with the "supply agreement" but only for a total period of five years. They are confined to a limited area, that within a radius of five miles from the service station conducted as a "Shell one-brand Station". The supply agreement provides for the supply to the appellant of all the petrol, oil, and other petroleum products that he requires for the purposes of his trade. According to his evidence, he preferred the Shell Company's brands of such goods to those of other companies, and he regarded his arrangement with the Shell Company as guaranteeing to him supplies suitable for the trade he was carrying on. It cannot be presumed that he had not entered into the arrangement with the Shell Company, and had he declined to have a tie with any oil company, he would have been able to obtain supplies of all the brands of petrol, oils, and other petroleum products in which he had been dealing. (What the respective quantities of those brands were is not shown by the evidence.) The question whether the result of the restrictive covenants was to curtail a substantial portion of the trade open to the appellant cannot be determined merely on the wording of the covenant. It is a question of fact whether a substantial part of those activities was cut off by the restrictive covenants. The substance of his trade remained the same, that is to say, a service station in which motor vehicles were repaired and petrol, lubricants, and other goods used in connection with motor vehicles were sold. The onus is on the appellant to prove that the circumstances and accidents of these two payments of PD2,000 do not present them as receipts of income. The only basis before the Court for deciding whether the restrictive covenants cut off a substantial portion of his trade was that he was limited, within the prescribed period and area, to dealing in the brands of petrol and petroleum products by the Shell Company, except when the company might be unable to supply them to him.
It is consistent with the terms of the covenants, read in the light of the circumstances proved by the evidence, that the restrictive effect of the covenants on the appellant's trading activities was very limited. and that the limitation that they imposed on him was an ordinary incident of his trade. In this view, both the payments of PD2,000 are trade receipts of an income character. I find it unnecessary to enter upon any other question which was raised by the appeal. In my opinion, the decision of Taylor J. was right. The appeals, in my opinion, should be dismissed.