Case G33

Judges:
JL Burke Ch
RE O'Neill M
CF Fairleigh QC

Court:
No. 1 Board of Review

Judgment date: 22 May 1975.

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J.L. Burke (Chairman); R.E. O'Neill and C.F. Fairleigh Q.C. (Members): The taxpayer is one of a group of three companies which have a common board of directors and, evidently, identical interests. The directors decided that the companies should engage in a project involving the supply by the taxpayer to associated company A of chattels some of which were owned by the taxpayer and some were to be obtained by it upon lease from ``Leasings Pty. Ltd.''; A was then to supply all the chattels and also personnel to associated company B which would carry out the project. The directors kept no record of minutes relevant to these matters and there was no formal documentation of the arrangements between the taxpayer and A nor between A and B.

2. The return of income by the taxpayer for the year ended 30 June 1970 contains a schedule which has the heading ``Provision for Unearned income $21,750'' and the material item is to the following effect -

      Rent received for supply of
        (chattels) for 12 months October
        1969 to September 1970 ...........       $87,000
      Deduct Unexpired period for
        which rental received
        (July/September 1970 =
        3/12 ..............................       21,750
                                                 -------
                                                 $65,250
                                                 -------
      

3. The Commissioner adjusted the income as returned inter alia by the addition of ``Rents received in advance $21,750''. The taxpayer duly objected thereto and upon the Commissioner disallowing the objection the decision was referred to a Board for review.

4. At the hearing of the reference the taxpayer reduced the amount in issue (originally $21,750) to $8,272 by restricting its claim to fractions of charges totalling $40,250 which it had included in two invoices to A in respect of chattels which it itself held under lease from Leasings Pty. Ltd. Such total sum of $40,250 represented the ``hiring value'' given by the directors arrived at such ``hiring value'' by reference to a budget which had been drawn up for B for the carrying out of the project. However it was necessarily conjectural both as to cost and time and inevitably the result varied from the forecast.

5. The sums of money attributed to the ``head lease'' chattels in the invoices were conceded to have no relationship to the cost or value of those chattels as referred to in the head lease or to the monthly payments which the taxpayer was obliged to make to Leasings Pty. Ltd. pursuant to the head lease. It was uncertain at the time that arrangements were made how long the project would take and thus the payments were not related to any definite

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ATC 194

period of time. The apportionment amongst the several chattels of the total sum paid by A to the taxpayer was on a somewhat arbitrary basis and for example the substitution of chattels of substantial difference because of the unavailability of the chosen article did not result in any change in the sum payable.

6. Although the evidence was deficient in some respects the inference is that on or about 15 August 1969 and on or about 7 January 1970 (those being the dates on the respective invoices) the board of directors for and on behalf of the taxpayer and of A agreed that A should pay to the taxpayer as a ``hire charge'' for what is set out in the invoices the amounts of $56,000 and $44,500, and that those amounts (which respectively included sums totalling $15,750 and $24,500 for items held by taxpayer under lease from Leasings Pty. Ltd.) were paid to taxpayer on 19 August 1969 and 9 January 1970.

7. There were three lease agreements between Leasings Pty. Ltd. and taxpayer each for a term of 36 months, two commencing on 15 October 1969 and the third on 23 October 1969. Under each agreement taxpayer was required to pay Leasings Pty. Ltd. monthly sums in advance. The ``hiring charges'' paid by A to taxpayer for the items taxpayer held under the respective leases and which it ``sub-hired'' to A may be summarized -

                                         First          Second
                                        Invoice         Invoice          Total
      For items held under lease No. 1   $6,250         $13,500        $19,750
      "     "    "    "      "   No. 2    9,500           1,000         10,500
      "     "    "    "      "   No. 3                   10,000         10,000
                                        -------         -------        -------
                                        $15,750         $24,500        $40,250
                                        -------         --------       -------
      

8. The budgeted production time for the project was from 1 October 1969 to 30 September 1970 and it was maintained for the taxpayer that the ``period of hire implicit in the arrangement'' was the budgeted production time. On this basis it was said that as at 30 June 1970, three months prior to the budgeted completion of the project on 30 September 1970, the taxpayer could only guarantee quiet enjoyment of the equipment it had ``sub-hired'' to A until 15 July 1970 in terms of its first and second lease agreements and until 23 July 1970 in terms of its third lease agreement with Leasings Pty. Ltd. Hence, it was said, rental ascribed to those periods - 15 July to 30 September 1970 in two instances and 23 July to 30 September 1970 in the third instance - for which guarantee of tenure could not be provided is the proportion to the total amount of rental that the balance of the term for which tenure could not be guaranteed bears to the total period. The sum which it was claimed should be classed as income not derived during the year ended 30 June 1970 was therefore -

      77/365ths of $19,750 =       $4,166
      77/365ths of $10,500 =        2,215
      69/365ths of $10,000 =        1,891
                                   ------
                                   $8,272
                                   ------
      

9. Thereupon the case for the taxpayer as set out in a written submission was essentially as follows -

• (a) Clause 8 of each of the three ``head leases'' provides that the covenant for quiet enjoyment only continues for so long as there is no default by the taxpayer in payment of rental monthly and no default in the performance or observance of any of the terms of the head lease; in the event of default Leasings Pty. Ltd. is expressly empowered to terminate the head lease and thereupon the taxpayer is bound to deliver up the subject plant to Leasings Pty. Ltd. The ``capacity of the taxpayer to perform its obligations in relation to the sub-hire to A of the subject plant for the period of the project was dependent upon the taxpayer performing its obligations'' under the head leases.
• (b) Default by the taxpayer under the head leases would enable Leasings Pty. Ltd. to exercise its right and thus ``would prevent completion of the sub-hire''. (It was stated in the address that there was no consent by Leasings Pty. Ltd. to the sub-hire so that there was a breach in limine but the Board pointed out that there was no evidence of a lack of consent.)

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  ATC 195

• (c) The exercise by Leasings Pty. Ltd. of its right to take possession of the subject plant would be analogous to a tenant being evicted by a person claiming by title paramount and reference was made to
  Matthey v. Curling (1922) 2 A.C. 180.
• (d) Payment of the amounts set out in the two invoices was for the whole period of the project and ``it is implicit in the payment of these amounts that the (plant) would be provided for the whole period of the project''.
• (e) It was only upon the taxpayer performing its obligations to Leasings Pty. Ltd. and upon each payment of the monthly rental that the taxpayer could guarantee its performance of the sub-hire to A; if there was default and repossession there would be no liability for payment by A for ``rent accruing after the date of repossession''.

10. It was claimed from that reasoning that: the $40,250 included in the moneys paid by A to taxpayer in the year ended 30 June 1970 should be apportioned so as to attribute $8,272 to the year ended 30 June 1971 (see para.8); the moneys received from A for rental were not separated in the taxpayer's plant hire account into rentals that accrued for the period prior to 30 June 1970 and those that accrued subsequent to 30 June 1970; at the time those moneys were received it was unknown as to whether the whole of the moneys would accrue for the financial year ended 30 June 1970; it was only at the balance date on 30 June 1970 that it was possible to determine what rental had ``come home'' to the taxpayer; if, for example, the project had been completed prior to 30 June 1970 then the full amount would have ``come home'' to the taxpayer as it would have fulfilled all its obligations in enabling A to have quiet enjoyment of the equipment; in such event the whole of the amount would have to be included in the taxpayer's return for the year ended 30 June 1970; however, at 30 June 1970 as the taxpayer still had certain obligations to fulfil and as there was a ``charge in favour of the payer'' the taxpayer had no right to treat the whole of the moneys as being income derived in that year.

11. The taxpayer's representative supported these submissions by reference to
Arthur Murray (N.S.W.) Pty. Ltd. v. F.C. of T. (1965) 114 C.L.R. 314; Case B47,
70 ATC 236; and Case C86,
71 ATC 385 and to ``business good sense'' and ``sound accounting practice''.

12. The fallacy in the taxpayer's case is that the arrangement could not be characterized as a lease (or sub-lease) by the taxpayer to A because each of the two amounts was paid as a lump sum payment in consideration of possession and use for an uncertain length of time, and the arrangement thus lacks the essential of certainty of duration of the term (cf. Halsbury 3rd Ed. Vol. 23 p. 440 in respect of a lease of land with a reservation of rent). So far as the chattels are concerned the legal relationship of the taxpayer and A was that of bailor and bailee (Halsbury 4th Ed. Vol. 2 pp. 658-659). The bailment of the chattels was for a payment which was not fixed in relation to a certain period of or periods of time. It was a lump sum payment regardless of dates of commencement or completion of the project and thus apportionment in respect of months or days (only able to be made ex post facto) is inappropriate.

13. The decision of the Commissioner on the objection was correct and the assessment is confirmed.

Claim disallowed