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Commercial Banking Company of Sydney Limited v. Federal Commissioner of Taxation.

Judges:
David Hunt J

Court:
Supreme Court of New South Wales

Judgment date: Judgment handed down 28 April 1983.

David Hunt J.

These appeals concern two questions which are common to three of the four relevant years of income (1976-1979). The first question relates to a claim by the taxpayer by way of deduction for bad debts written off during all four years. The second question relates to the Commissioner's inclusion as income within his assessments for each of those years (other than 1977) of moneys received by the taxpayer by reason of its participation in the Bankcard scheme. The two questions themselves, however, are quite separate one from the other, and I propose to deal initially with the bad debts question.

Prior to the decision of the New Zealand Court of Appeal in
Commr. of I.R. v. The National Bank of New Zealand Ltd. 77 ATC 6001, the taxpayer's practice in relation to interest upon advances made to customers was to debit the customer's personal ledger card with the amount of interest calculated as at December 31 and June 30 each year at the relevant rate on a daily balance. That amount of interest was then added to the prior debit balance standing in the account and the new balance was treated as the amount of capital upon which interest was calculated in subsequent years. Some of these outstanding advances to customers were secured, and the various documents effecting the taxpayer's security authorised this capitalisation of interest. Interest statements were sent to all customers, whether or not the advance was secured, and there is no suggestion by the Commissioner that the procedure which I have outlined was adopted otherwise than with the assent of the customer. Except in relation to those accounts mentioned in the next paragraph, the amount debited to the customer's personal ledger card by way of interest was also credited to the taxpayer's profit and loss account and returned by it as assessable income.

Where there was some doubt as to whether any individual outstanding advance would be recovered, the taxpayer opened what was called a suspended interest account and the interest calculated on the outstanding debt was similarly recorded therein as at December 31 and June 30 each year (as a credit), but it was not credited to the taxpayer's profit and loss account nor was it returned by it as assessable income unless and until the taxpayer actually received the amount of that interest. When the doubt as to the prospects of recovery deepened into certainty that the advance had become a bad debt, the taxpayer would write off what it called the ``net balance'', being the final balance shown on the customer's personal ledger card less the final balance in the suspended interest account, and the amount written off was then claimed by the taxpayer as a deduction. Prior to 1976, the taxpayer did not write off as a bad debt any part of the moneys credited to the suspended interest account. The procedure which I have outlined was followed for what appears to have been sound commercial and accounting reasons, and no suggestion has been made by the Commissioner to the contrary.

In Commr. I.R. v. The National Bank of New Zealand Ltd. (supra), it was decided that interest credited to the suspended interest account in this way amounted to income derived by the bank in the income year in which it was debited to the customer's personal ledger card and so became due, and thus should have been returned by the bank as income. This decision is now accepted by the taxpayer in the present case as applicable in Australia.

Since that decision, the taxpayer has continued to operate suspended interest accounts where there exists some doubt as to whether the outstanding advance would be recovered, and it has continued to exclude the interest credited to those accounts from its profit and loss account, but it has in accordance with that decision returned that interest as assessable income. Where the taxpayer has concluded that the advance has become a bad debt it has written off (where appropriate) the final balance in the customer's personal ledger card, including however the total of the moneys credited by way of interest in the suspended interest account.

As at June 30, 1975, the total interest credited to suspended interest accounts operated by the taxpayer was $4,088,327. Since then, the taxpayer has received $1,210,145 of this amount. None of this amount has at any time been returned as assessable income (even the amount subsequently recovered), nor has it been included in any assessment issued by the Commissioner: see the Income Tax

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Assessment Act 1936, sec. 170. Since that date, the taxpayer has written off as bad debts advances which include the balance of this interest credited to suspended interest accounts prior to June 30, 1975, totalling $2,878,182. A claim by the taxpayer that these bad debts were allowable deductions in the year of income in which they were written off was disallowed by the Commissioner and is the first question for determination in these appeals.

The taxpayer submits that, as it must now be accepted that the $4,088,327 which it received was assessable income in the income years in which it was debited to the customer's ledger card (even though not so treated at that time):

  • (a) the amounts subsequently received by the taxpayer in relation to such accounts cannot now amount to assessable income in the income year in which they were received (even though previously they were so treated): Commr. of I.R. v. The National Bank of New Zealand Ltd. (No. 2) 77 ATC 6034; and
  • (b) the amounts subsequently written off must now be allowable deductions, under either sec. 63 or sec. 51.

This somewhat unusual result, whereby the taxpayer would be able to claim deductions for bad debts which it has written off when it has never paid tax in relation to the income which those debts represented (and it cannot be reassessed: sec. 170), is said by it to be a necessary consequence of the change in accounting methods enforced by the earlier National Bank of New Zealand case; cf.
Henderson v. F.C. of T. 69 ATC 4049 at p. 4056; 70 ATC 4016 at p. 4019; (1970) 119 C.L.R. 612 at pp. 629 and 649.

Section 63(1) provides:

``(1) Debts which are bad debts and are written off as such during the year of income, and -

  • (a) have been brought to account by the taxpayer as assessable income of any year; or
  • (b) are in respect of money lent in the ordinary course of the business of the lending of money by a taxpayer who carries on that business,

shall be allowable deductions.''

There is no dispute that the advances made by the taxpayer to its customers amounted to money lent in the ordinary course of its business of lending money and that the amounts in question debited as interest were in fact written off as bad debts during the relevant year of income. The taxpayer argues, therefore, that the interest so debited to the personal ledger cards of the customers either:

  • (i) amounted to debts ``in respect of'' that money lent, or
  • (ii) because it had been capitalised, it amounted itself to money lent just as much as did the advance to which it related.

The words ``in respect of'' have the widest possible meaning of any expression intended to convey some connection or relation between the two subject matters to which the words refer:
Trustees Executors & Agency Co. Ltd. v. Reilly (1941) V.L.R. 110 at p. 111
S.G.I.O. v. Rees (1979) 144 C.L.R. 549 at p. 561. But, as Mason J. points out in the latter case, the meaning to be ascribed to the phrase ``in respect of'', as with other words and expressions, must depend upon the context in which it is found. The Commissioner argues that the context in which that phrase is to be found in sec. 63 does not support the taxpayer's argument. He submits that the two categories of written-off bad debts which sec. 63 allows to be deducted are mutually exclusive, so that a bad debt which could (or should) have been brought into account by the taxpayer as assessable income in the relevant income year and thus included within category (a) cannot also fall within category (b); and, as the debts here were not in fact returned as income, they do not fall within sec. 63 at all.

The somewhat narrow operation which such a construction would permit to category (b) would, the Commissioner says, cover those expenses incurred by moneylenders in the ordinary course of their business which are repayable by the borrower and which do not amount to assessable income, such as the lender's legal costs and stamp duties. This construction would necessarily exclude interest which in normal circumstances would (or should) have been brought into account as assessable income. In reply, the taxpayer asserts that, as category (b) does not

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apply to taxpayers generally, it should be construed as a recognition by the legislature of the very special accounting problems experienced only by moneylenders, whose stock-in-trade is money.

I have already described the circumstances of this case as somewhat unusual, where it is accepted by the taxpayer that the amounts debited by it to its customer's personal ledger cards should have been returned as assessable income in the income years in which that debit was made. It is not, in my view, within the contemplation of the section that a deduction would be allowed in relation to debts which would (or should) have been so returned but which are not, simply because of the extreme width of the expression ``in respect of'' when divorced from its context. I accept the Commissioner's argument that the context of sec. 63 limits the width of that expression, so that the amounts of interest so debited in this case do not amount to debts ``in respect of'' money lent.

The alternative submission by the taxpayer was that the interest upon the advance, having been capitalised, amounted itself to money lent just as much as did the advance to which it related. In
I.R. Commrs. v. Holder (1932) 16 T.C. 540 (reported separately at (1931) 2 K.B. 81 (C.A.) and 48 T.L.R. 365 (H.L.)), Lord Hanworth M.R. (at T.C. pp. 554-557) said, in reference to a similar procedure, that the interest had been capitalised in the way which was usual with bankers in order to secure what really amounted to compound interest, notwithstanding certain usury laws (since repealed), that the interest had thus become an integral part of the advance to the customer, and that it was converted into an advance by the bank. On appeal, the House of Lords found it unnecessary to decide this question, and preferred not to do so in the absence of the bank as a party to the appeal. It was, however, made clear by Viscount Dunedin, presiding (at p. 564), that no inference was thereby to be drawn that doubt was being expressed as to the soundness of the judgment of the Court of Appeal on this point.

The Commissioner has drawn attention to the subsequent decision in Paton v. I.R. Commrs. (1938) A.C. 341, in which it is submitted, the House of Lords held that the decision of the Court of Appeal in Holder's case could not be supported. What the House of Lords held could not be supported, however, was what was described as the ``agreeable fiction'' that the interest was deemed to have been paid by the customer when in fact it had not been paid but was only debited to the customer's account and then capitalised as part of the advance itself. The taxpayer, of course, has not relied in its argument in the present case in any way upon such a fiction. In Paton case, the House of Lords did not quarrel with the statements by the Court of Appeal that the interest when so debited to the customer's account had become capitalised and converted into an addition to the advance itself. Indeed, the House of Lords took care to underline that the interest had become so capitalised, following the same Scottish case of Reddie v. Williamson (1863) 1 Macph. 228 that had been followed by the Court of Appeal: Lord Atkin (with whom Lord Thankerton agreed) at p. 351, Lord Macmillan at pp. 356-357 and 360. As Lord Macmillan said (at p. 356), the interest debited to the customer's account ``became transmuted into an addition to the principal loan''.

The problem still remains, however, as to how the written-off bad debts (so far as they concern the interest so debited) can be allowable deductions under sec. 63(1)(b) even if they are treated (correctly, in my view) as part of the advances themselves, where they could (or should) earlier have been brought into account as assessable income but were not. This part of the advance which was the interest so debited and which became transmuted into an advance cannot be said to be a debt ``in respect of'' the advance to which it has been added, for the reasons already advanced by the Commissioner and found by me in his favour. Nor can this advance be said to be a debt ``in respect of'' itself. That phrase, although wide, cannot transmute something which is no more than connected or related to another thing into that thing itself. It is conceded by the taxpayer (correctly, in my view) that the inclusion of interest in the amount of the bad debt allowed as a deduction pursuant to sec. 63(1)(b) in
Fairway Estates Pty. Ltd. v. F.C. of T. 70 ATC 4061 at pp. 4062-4064; (1970) 123 C.L.R. 153 at p. 156 was not the subject of that decision, which cannot be regarded as an authority supporting a deduction in the present case.

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It follows that the amounts of interest so credited by the taxpayer to the suspended interest accounts of its customers prior to the 1976 income year did not become allowable deductions pursuant to sec. 63 when subsequently they were written off as bad debts.

I turn then to the alternative basis upon which the taxpayer relies, that the amounts written off by it subsequently in that year and thereafter are allowable deductions under the second limb of sec. 51(1) as ``losses... necessarily incurred in carrying on a business for the purpose of gaining or producing (assessable) income''. That the amounts written off in respect of bad debts may amount to such losses under sec. 51 even where they are not allowable deductions under sec. 63 was recognised in the Fairway Estates case (supra), at ATC p. 4066; C.L.R. p. 162, and in
A.G.C. (Advances) Ltd. v. F.C. of T. 75 ATC 4057 at p. 4070; (1975) 132 C.L.R. 175 at p. 195

The taxpayer argues that the advances subsequently written off as bad debts represented money which had been ventured in its business of lending money, or money put out in order to gain assessable income: A.G.C. (Advances) case (supra), at ATC pp. 4065-4066; C.L.R. pp. 187-188. The money ventured or put out was the interest credited to the suspended interest accounts prior to the 1976 income year which thereafter became capitalised as part of the amount advanced to the customers and upon which interest was calculated in subsequent years. Of the $4,088,327 so credited as at June 30, 1975, and now treated as assessable income, the taxpayer's argument proceeds, the $1,210,145 subsequently received remains assessable income (although not in the year received) and the balance of $2,878,182 subsequently written off is the total of the losses incurred in the business of lending money.

The Commissioner submits that it cannot be said in the present case that the amount of interest credited to the suspended interest accounts had been ``put out'' in the relevant sense in which that phrase was used in the A.G.C. (Advances) case. He maintains and repeats his argument that the decision of the Court of Appeal in Holder's case - that such interest had become capitalised and converted into an addition to the advance itself - had been overruled by the House of Lords in Paton's case (supra). For the reasons I have already given, I reject that argument.

Next, the Commissioner submits that what amounts in reality to no more than a failure to get in money cannot also amount to a payment out in order to make money, so that the amount credited to the suspended interest accounts does not amount to a loss within the meaning of sec. 51. The non-receipt of a revenue item may amount to a bad debt, he says, but it is not a loss within the meaning of the section.

I do not accept that such a non-receipt is denied the character of a loss within the meaning of sec. 51. It is common ground that the amounts in question here were owing by the customers to the taxpayer, and that the taxpayer was entitled to expect to be paid that interest. When the position was reached that the taxpayer no longer expected to be paid, and the debt was written off, it suffered a loss of the amount which it previously expected to be paid. That is a real loss which it suffered. It recognised that loss by writing it off. The reference by Barwick C.J. to the deduction allowed under sec. 51 being ``the actual amount thus lost'' (in the A.G.C. (Advances) case, supra, at ATC p. 4063; C.L.R. p. 184) is defined immediately thereafter as being ``the actual amount which the (taxpayer) could claim as a debt... at the time the amounts are written off''. (The question in fact decided by the House of Lords in Paton's case (supra) - as opposed to the question which the Commissioner has submitted was there decided - has no application here.)

Then the Commissioner argues that such non-receipt cannot be equated to the ordinary case where a trader sells goods or services, in which he is permitted a deduction under sec. 51 for the cost of producing the goods or of providing the services and where the debt due to the trader from the customer includes a recoupment of his costs and his profit. To permit a deduction under sec. 51 for the whole of the trading debt when it becomes bad independently of it having been returned as assessable income would, it is submitted, be to give such a trader a double deduction and it would not produce a

ATC 4215

``substantially correct reflex'' of the trader's income.
XCO Pty. Ltd. v. F.C. of T. 71 ATC 4152 at p. 4156; (1971) 124 C.L.R. 343 at p. 351. But the absence of such a correct reflex, in my view, is the result not of a wrong interpretation of what is a loss under sec. 51 but simply the result of a combination of the change of accounting methods enforced by the National Bank of New Zealand case and the restrictions imposed by sec. 170 upon the Commissioner's power to amend his assessment of the taxpayer's income for the years in which the interest was assessable in accordance with that decision.

Finally, the Commissioner asserts that an examination of the amounts actually allowed as a deduction in the A.G.C. (Advances) case demonstrates that only amounts of a capital nature were in fact allowed as deductions under sec. 51, thus excluding the interest charges in the present case. Apart altogether from the capitalisation of those interest charges, as discussed in Holder's case, I would not be prepared to erect a statement of principle upon no more than an examination of the figures actually allowed. Barwick C.J. (at ATC p. 4063; C.L.R. p. 184) made it clear that the Court in that case did not investigate the figures involved, and the point for which the Commissioner contends does not appear to have been expressly argued.

It follows that the amounts of interest credited by the taxpayer to the suspended interest accounts of its customers prior to the 1976 income year became allowable deductions pursuant to sec. 51 when subsequently they were written off as bad debts. To this extent, therefore, the taxpayer's appeal must be allowed.

The second question with which this appeal is concerned relates to the Commissioner's inclusion as income in three of the four relevant years of income of certain moneys received by the taxpayer by reason of its participation in the Bankcard credit card scheme. Essentially this scheme (as it presently operates) comprises 14 separate but co-ordinated nation-wide charge card schemes being operated by each of the members with the aid of a common computer scheme, common rules, common procedure and mutual recognition to create at minimum cost an efficient operation on an Australia-wide basis. The scheme was founded in 1972. The seven major Australian banks of that time formed a consortium to establish it. They were the Australian and New Zealand Bank, the Bank of Adelaide, the Bank of New South Wales, the Commercial Bank of Australia, the Commercial Banking Company of Sydney (the taxpayer), the Commonwealth Trading Bank of Australia and the National Bank. A company called Charge Card Services Limited was incorporated as a utility company in order to carry out the centralised functions of the scheme, but the seven founder banks accepted responsibility for the expenses incurred prior to the commencement of operation of the credit card scheme itself. The total so incurred by the seven banks was $734,284. It is accepted by the taxpayer for the purposes of this appeal that that sum was in its component parts claimed by each of the seven banks severally as allowable deductions under one heading or another (such as wages and travelling expenses, allowed in the ordinary course of business). The amount incurred by the taxpayer and so claimed was $97,459.

Since 1972 there have been other banks admitted into the Syndicate. In 1973, the Rural Bank of New South Wales and the State Savings Bank of Victoria were admitted. In 1976, the State Bank of South Australia, the Savings Bank of South Australia, the Bank of Queensland, the Rural Bank of Western Australia and the Savings Bank of Tasmania were admitted. A term of admission for the new members was that each pay to the existing members an entry fee. The basis upon which each of these fees was calculated for the new members has not been completely consistent, but it is accepted by the taxpayer for the purposes of this appeal that the total amount paid to it by the new members bears a proportional relationship to the amount which it had expended and previously claimed as a deduction. The precise amount which was so paid to it has not yet been determined. The agreement entered into by the first two new members described the payments which they made to join the consortium as an assessment of their share (or a portion thereof) of the establishment and initial operating costs incurred by the founder banks prior to the commencement of the operation of the

ATC 4216

scheme. The remaining new members were charged a lump sum as a joining fee. Each of the seven new members is obliged as well to pay an annual fee.

The taxpayer says that the entry fee amounted to the purchase by the new members and the sale by the founder banks of a capital asset, which was the right to participate in the Bankcard scheme. The Commissioner, on the other hand, asserts that the payment received by the taxpayer amounted to assessable income either because it should be regarded as income in accordance with the ordinary concepts and usages of mankind: sec. 25(1);
Scott v. C. of T. (N.S.W.) (1935) 35 S.R. (N.S.W.) 215 at p. 219; or because it was received by the taxpayer by way of indemnity for a loss which was an allowable deduction and was thus included in its assessable income by virtue of sec. 26(j).

The Commissioner supports the first basis upon which he made his assessment by arguing that the right to participate in the scheme obtained by the new members was not a capital asset purchased and sold at all; it was, he submits, no more that an agreed method of doing business. The benefits of that business operated in both directions: the new (and more localised) members obtained the promise of the founder banks to continue their participation in the scheme for the period of the agreement (five years, subject to two years' notice of withdrawal) and the nation-wide cover of the scheme which they provided; the founder banks obtained the benefit of the additional merchants and customers which the new members introduced into the scheme. The founder banks gave up nothing, he says, because of the balance between these benefits:
I.R. Commrs. v. Rolls-Royce Ltd. (1962) 1 W.L.R. 251 at p. 429. The fact that the new members could quite validly treat what they purchased as a capital asset does not mean that the vendor could likewise treat it. This is all the more so, he says, when it is seen that the price paid by the new members was based ultimately upon the expenses incurred by the founder banks and claimed by them severally as allowable deductions.

The taxpayer replies that the right to participate in the scheme obtained by the new members was of great value to them, and that the benefits which the founder banks obtained from the entry of the new members could not be compared in any way to those obtained by those new members. At the stage when the first two new members (the Rural Bank of New South Wales and the State Savings Bank of Victoria) were admitted, although the scheme had not commenced operating, research and preparation for that operation had reached a fairly advanced stage. In addition, those two obtained a beneficial interest in the distinctive mark and logo associated with the Bankcard scheme. When the remaining new members were admitted, the scheme had been in operation for some time, but these banks did not obtain any beneficial interest in the Bankcard mark and logo. There were, however, changes made in the proportions in which the shares were held by each company in the utility company and changed representation upon the board of that company. The taxpayer argues that the Rolls-Royce Ltd. case is of no assistance because in that case it was held that the company had in fact been trading in its assets. No suggestion could be made in the present case that the founder banks were in the business of trafficking in joint-venture interests, and it could be neither a necessary nor a usual incident of the Bankcard scheme for its participants to buy and sell such interests:
Burnett's Motors Ltd. v. Commr. of I.R. (N.Z.) (1977) 3 NZTC 61,229 at pp. 61,234-61,236, nor does the receipt of this amount by the taxpayer bear the nature of proceeds of a trade or business:
A.L. Hamblin Equipment Pty. Ltd. v. F.C. of T. 74 ATC 4001 at pp. 4008-4009.

I agree with the taxpayer's argument. I am satisfied that what was sold by the taxpayer was a capital asset and that the price paid for that sale cannot be regarded as income in accordance with the ordinary concepts and usages of mankind. The fact that the taxpayer was able to claim the expenses it incurred as deductions against its assessable income was in my view of no real significance. Those expenses clearly amounted to expenditure incurred in the establishment of a profit-yielding subject, not in its operation, an expenditure made ``once for all'' and thus of a capital nature:
Sun Newspapers Ltd. v. F.C. of T. (1938) 61 C.L.R. 337 at pp. 360-361; and see
BP Australia Ltd. v. F.C. of T. (1966) A.C. 224 at pp. 265-266. I do not overlook the

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circumstances that the Charge Card Services company was intended to operate on a ``no profit, no loss'' basis, but a more realistic view is that the Bankcard scheme as a whole was intended to be (as it turned out to be) a very profitable one for the banks which participated in it. It was the expenditure incurred by the founder banks which represented the price of the capital asset which was sold, although what was sold was in reality the right to participate. The situation is quite unlike the adjustment of rates and taxes following the sale of land - which the Commissioner contended was the true analogy - where the actual price of the land remains fixed unaffected by the amount of the adjustment: cf.
F.C. of T. v. Morgan (1961) 106 C.L.R. 517 at p. 521.

I turn then to the alternative basis upon which the Commissioner made his assessment. Section 26(j) provides:

``The assessable income of a taxpayer shall include -

  • ...
  • (j) any amount received by way of... indemnity for or in respect of... any loss or outgoing which is an allowable deduction;.''

The Commissioner submits that the quoted wording of para. (j) must be given a wide interpretation. He argues that it contemplates an indemnification in respect of a loss already incurred, it includes the situation (as in this present case) where that indemnification is pro tanto only, and it is not limited to merely a contractual indemnity:
Goldsbrough Mort & Co. Ltd. v. F.C. of T. 76 ATC 4343 at pp. 4348-4349.

The taxpayer denies that the amounts which it has received can be equated in any sense to such an indemnity. It argues that, in the Goldsbrough Mort case, Walters J. extended the operation of sec. 26(j) beyond any previously accepted interpretation and that his decision should not be followed. The Commissioner contends that his Honour's decision is authority for the proposition that, if there be only a reimbursement to the taxpayer for an outgoing which was an allowable deduction, sec. 26(j) operates to make that reimbursement assessable income.

I have already recorded the taxpayer's concession for the purposes of this appeal that the total amount it received from the new members bears a proportional relationship to the amounts which it had expended and previously claimed as deductions under one heading or another. The taxpayer submits, however, that this coincidence between the total amount paid to it and the total expenses incurred by it is irrelevant. The real question, it is argued, is what was purchased and sold rather than how its price was calculated. The Commissioner does not dispute that what was purchased by the new members was a capital asset; and I have already held that it was a capital asset which the taxpayer sold. It is necessary, therefore, to examine the decision in the Goldsbrough Mort case (supra) upon which the Commissioner relies.

The taxpayer in that case sold an office building. The contract provided for an adjustment upon settlement of various outgoings, including municipal and water rates. Pursuant to this term of the contract, there was at the time of settlement an adjustment in favour of the taxpayer of $22,348 for those rates. The Commissioner included that sum in the taxpayer's assessable income upon two bases: that it was a receipt of a revenue nature (and thus income within sec. 25(1)), and that it was also an amount received by way of indemnity within sec. 26(j). Walters J. upheld the assessment upon both bases.

His Honour rejected (at p. 4349) the taxpayer's submission that the expression ``by way of... indemnity'' within the larger phrase ``by way of insurance or indemnity'' in sec. 26(j) should be construed narrowly in the sense of ``pursuant to a contract of indemnity''. His Honour went on to hold (at p. 4349) that included within sec. 26(j) was any indemnification or pro tanto indemnification in respect of a loss already incurred. For this reason, the obligation imposed by the contract of sale to reimburse the taxpayer for a proportion of the outgoings already paid by it before the obligation arose fell within sec. 26(j), and the reimbursement became assessable income.

Subject only to one matter to which I turn later, if the Goldsbrough Mort case is correctly decided, it would clearly, in my view, govern the decision in the present case so far as the taxpayer was reimbursed by the

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new member banks for outgoings previously paid by it before that obligation to reimburse arose.

As I have said, the present taxpayer argues that this ruling by Walters J. extended the operation of sec. 26(j) beyond any previously accepted interpretation and should not be followed. The Commissioner, on the other hand, has urged me to adopt the example of Rogers J. in
Hamilton Island Enterprises Pty. Ltd. v. F.C. of T. 82 ATC 4088; (1982) 1 N.S.W.L.R. 113, and follow the decision of Walters J. without full inquiry as to whether it is correct. What his Honour said in that case (at ATC p. 4093; N.S.W.L.R. p. 119) was:

``In my view it is of cardinal importance in the proper administration of justice that single judges of State Supreme Courts exercising federal jurisdiction should strive for uniformity in the interpretation of Commonwealth legislation. Unless I were of the view that the decision of another judge of co-ordinate authority was clearly wrong I would follow his decision.''

He then proceeded to follow the decision of Shepherdson J. in
W. Smith v. F.C. of T. 82 ATC 4073, which he said was precisely in point. However, within a few months the Full Court of the Federal Court had decided upon an approach to the particular question there in issue which differed in some not unimportant respects from that adopted by Shepherdson J. and followed by Rogers J.: see 82 ATC 4302 at p. 4305. I doubt, with respect, whether single judges should be quite as unquestioning of each other's decisions as is suggested. It is not always the case that single judges feel obliged to follow decisions even of other judges within the one Supreme Court unless considered to be clearly wrong; and I see no distinction in relation to the decisions of judges of other Supreme Courts merely because all may be exercising federal jurisdiction. Even judges of the Federal Court have differed from decisions of other judges of that Court. Communis error facit jus is a maxim of dubious worth: cf.
The King v. Eriswell (1790) 3 T.R. 707 at p. 725;
O'Connell v. The Queen (1844) 11 Cl. & Fin. 155 at pp. 372-373. Against this background, I propose to look for myself at the authorities upon which Walters J. relied in the Goldsbrough Mort case (supra).

There can, with respect, be no doubt that his Honour was correct in ruling that the expression ``by way of... indemnity'' should not be construed narrowly in the sense of ``pursuant to a contract of indemnity''. I do not understand the taxpayer in the present case to contend otherwise. In
F.C. of T. v. Wade (1951) 84 C.L.R. 105, it was held that compensation payable pursuant to a statute for the destruction of diseased cattle was paid ``by way of... indemnity''. Kitto J. said (at pp. 115-116) that these words:

``... described the character of the receipt, and in my opinion they may be satisfied as well by receipt pursuant to a statutory right as by a receipt under a contract... The purpose and effect of the receipt was, to the extent of its amount, to save the taxpayer harmless from the loss he sustained by the destruction of his cattle; in other words, to provide pro tanto indemnification in respect of the loss of the cattle.''

Dixon and Fullagar JJ. upheld the Commissioner's assessment upon another basis, but also said (at p. 112) that the word ``indemnity'' was not qualified and that it expressed the notion which compensation awarded under a statute ought to satisfy.

The other two cases upon which Walters J. relied were from Victoria. The first was
Robert v. Collier's Bulk Liquid Transport Pty. Ltd. (1959) V.L.R. 280. The plaintiff claimed damages as compensation for loss of profits whilst his semi-trailer and primemover - damaged as a result of the defendant's negligence - were being repaired. Gavan Duffy J. held that the damages awarded as compensation for such loss would be taxable in the hands of the plaintiff, and therefore he declined to deduct from the judgment the amount which would otherwise have been payable by way of tax on the lost profits: cf.
British Transport Commission v. Gourley (1956) A.C. 185;
Todorovic & Anor. v. Waller 81 ATC 4680; (1981) 37 A.L.R. 481. His Honour construed ``indemnity'' in sec. 26(j) as including compensation for loss or damage, and declined (at p. 285) to confine it to ``security or protection against contingent hurt''.

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This decision was followed by the Full Court of this State in
Williamson v. Commr. for Railways (1959) 60 S.R. 252. The plaintiff claimed for loss of income resulting from fire damage caused by the defendant's negligence. It was held (at pp. 256-258 and 273-274) that so much of the verdict which compensated him for that loss was assessable income within sec. 26(j) and thus that tax should not be deducted from the amount paid for that loss.

The other Victorian case was
Melbourne Sawmilling Manufacturing Co. Pty. Ltd. v. Melbourne & Metropolitan Board of Works (1970) V.R. 394. The plaintiff was entitled by statute to compensation for loss or damage suffered by it as a result of the operation of an interim development order. Part of its claim for compensation was based upon loss of profits. Barber J. held (at p. 399) that, as the amount of compensation representing loss of profit was assessable in the plaintiff's hands pursuant to sec. 26(j), no deduction for tax should be made by him.

The taxpayer in the present case correctly points out that, in each of these four cases, the obligation to indemnify for such losses - whether by virtue of a contract, a statute or a breach of some common law duty of care - was in existence before the loss occurred. In none of them did the obligation itself arise after the loss occurred, as it did in the Goldsbrough Mort case (and in the present case). Certainly, except perhaps for the somewhat indefinite reference to ``security or protection against contingent hurt'' in Robert's case, none of these four cases gives support to the following statement in the judgment of Walters J. for which the two Victorian cases are cited as authority:

``In my view, the language of sec. 26(j) may be treated as contemplating an indemnification in respect of loss already incurred.''

No other authority has been put forward by the Commissioner to support that statement. It is submitted by the taxpayer that there is no such authority which would support that statement. It is indeed difficult to comprehend the notion of an indemnity in respect of a loss which has already been incurred. It does not, with respect, seem to me to be a normal use of the word ``indemnify'', which in my view contemplates an obligation to make good, or to compensate for, a loss which may happen in the future, whether by contract or otherwise.

In the present case, there is at most a reimbursement of a loss already incurred or of an outgoing already paid. The contracts by which the new banks became obliged to pay their fees for entry into the Bankcard scheme were concluded after each of the founder banks had paid the outgoings in question.

A reimbursement, the taxpayer argues, is not an indemnity - nor is a payment, of which the ultimate purpose is only to reimburse, one which has the effect of indemnifying the taxpayer, to use the words of Walters J. (at p. 4349). I agree that a reimbursement is not the same as an indemnity, as a matter of the ordinary English usage of those two words. To take a simple example. If a company advertises for applications from overseas for employment, it may state in that advertisement a willingness to consider the ``reimbursement'' of travelling expenses incurred by applicants who attend for an interview; but it would seem to be a misuse of language to use the word ``indemnity'' in such a situation, because there was no antecedent obligation to indemnify.

If the legislature had intended to include as assessable income that which merely reimbursed the taxpayer for outgoings already paid, then it could and, in my view, should have used the word ``reimbursement'' and not ``indemnity''. Such an interpretation of sec. 26(j), it should be said, is unlikely to produce any drastic reduction in the revenue. If a taxpayer receives a payment which replaces a revenue receipt, that payment will be considered as income according to the ordinary concepts and usages (and thus assessable pursuant to sec. 25(1)), without any reliance having to be placed upon sec. 26(j):
Carapark Holdings Ltd. v. F.C. of T. (1967) 115 C.L.R. 653 at p. 663. It has been suggested, correctly in my view, that there remains little useful purpose for sec. 26(j) to fulfil: ``Taxation of Compensatory Payments and Judgments'', C.W. Pincus Q.C. (1979) 53 A.L.J. 365 at p. 366.

It follows, in my judgment (and with the greatest respect to Walters J.) that the

ATC 4220

decision in the Goldsbrough Mort case is wrong, and I decline to follow it. In my view, there has in the present case been no amount received by the taxpayer ``by way of... indemnity'', and sec. 26(j) does not apply.

If I am wrong in relation to either basis upon which the Commissioner has assessed these payments as income, there is a further basis upon which the taxpayer attacks his assessment. The basis upon which the entry fees paid by the new member banks were calculated was, as I have said, not completely consistent. Some paid a direct proportion of the total expenditure incurred by the founder banks (upon research and development or establishment and initial operating costs) prior to the commencement of the operation of the scheme. Others paid a lump sum, in the computation of which other factors were considered. In each case, however, it was a single payment. For that purpose, as I have said, the new member banks received a capital asset which went far beyond merely the value of the research and development and establishment costs incurred by the founder banks. I need not repeat that argument. It is thus quite impossible in those circumstances to attempt to dissect that single payment and to apportion it amongst the several heads to which it relates and to attribute to portions of it an income or non-income (or a reimbursement or non-reimbursement) nature accordingly; thus no part of the payments can be assessed as income in the taxpayer's hands:
McLaurin v. F.C. of T. (1961) 104 C.L.R. 381 at p. 391;
Allsop v. F.C. of T. (1965) 113 C.L.R. 341 at p. 351. Incidentally, the judgment in the former case (at pp. 392-395) distinguishes, inter alia, F.C. of T. v. Wade; Robert v. Collier's Bulk Liquid Transport Pty. Ltd. and Williamson v. Commr. for Railways.

It follows that the payments received by the taxpayer from the new member banks in the Bankcard scheme as entry fees were not assessable income in its hands. The taxpayer's appeal must therefore be allowed in relation to this question also.

I allow the taxpayer's appeal. I order the Commissioner to pay the taxpayer's costs.


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