Case S34

Judges:
MB Hogan Ch
P Gerber M
GW Beck M

Court:
No. 3 Board of Review

Judgment date: 16 May 1985.

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M.B. Hogan (Chairman)

The taxpayer in this reference is the female member of a husband and wife partnership engaged in the year of income in a log-haulage business by way of subcontract. The taxpayer's husband, who was at all times the operator of the partnership business, gave evidence at the hearing. For 18 months, the husband drove the first of the two vehicles involved in the reference (the vehicle which Dr Beck has termed the old Volvo) as an employee of a log-hauling company. Towards the end of August 1978, he, as a partner with his wife, acquired a lease of the vehicle from a finance company; it appears the finance company acquired the vehicle from the husband's former employer and leased the vehicle to the partnership which then commenced operations as a subcontractor in the log-haulage business.

2. Around 30 June 1979, the husband who had been experiencing mechanical problems with the truck and whose ``contract... did not allow me to make up for any lost time'' approached a local dealer with a view to effecting a changeover of vehicles. He described the procedure as follows:

``Dr Beck: You had better tell us how you went about the changeover. A. OK, I had been having considerable mechanical difficulty with the truck and I had a contract with the department which did not allow me to make up for any lost time. So I thought the better thing to do was to get rid of it, so

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I went to the dealers. We negotiated a price. I agreed to it, then when the new truck was ready to go I gave them my old one, they gave me the new one. I gave them the first instalment for the new truck and that was it.

Dr Beck: But the truck was not yours. What negotiations did you have with the finance company? A. The dealers had the negotiations with the finance company. They made the necessary enquiry/or information - it was just done in the normal practice I believe - as to the actual payout figure. How much it would require in order to fulfil the lease payments and instalments, all the amount of money due to them, and they paid them whatever money was due.

Dr Beck: And at no stage were you advised of what the payout amount was by the finance company? You have no negotiations with them at all? A. I did not deal direct with the finance company myself, the dealers did, the dealers negotiated with them. They told me what the figure was and I said, okay, fine, I agreed to it, and they said there will be a $12,000 equity, which was also very good, the problem being I would have to leave that $12,000 with the finance company who was going to finance the new truck as security and I said fine. I did not see any money at all other than the fact that I wrote out the first monthly instalment for the new vehicle.''

Dr Beck, in his decision, has set out the detailed summation of the transactions so far as the evidence established the facts and I accept his findings of fact.

3. A witness from the finance company - the witness was not the person who dealt with the particular transaction the subject of this reference - gave generalised information as to the policy of the finance company during the relevant period. He stated the company had a general policy of allowing lessees to arrange a sale of goods on lease from it, even while the lease was still running. He went on to state that the general policy concerning any surplus over and above the payout figure was that the company took what was owing to it at that date, ``the termination figure'' and that ``the lessee or the person in control of that unit obtained the excess funds''. As to the practice in relation to ``trade-ins'' of leased vehicles he stated that ``in most cases'' the finance company would contact the lessee but ``it could happen'' that the company would take the word of a motor dealer that a unit was being ``traded in'' and that the dealer would pay the company ``the termination figure''.

4. The evidence of the husband is that he did not approach the finance company in relation to the termination payment but that the approach was made by the dealer. It was accepted as common ground by the parties that the partnership did not formally acquire title to the old Volvo in the course of the changeover operations. It would appear to be for this reason that no argument was addressed to the Board as to liability under sec. 26(a) and sec. 26AAA. The amount of profit emerging from the transaction was not in dispute, it being accepted by both parties that the profit was an amount of $12,000.

5. It was put to the Board by the Commissioner's representative that the sum of $12,000, represented by bonds in Esanda Ltd. held in the names of the members of the partnership, was assessable income by reason of sec. 25(1). In support of that contention the Commissioner's representative relied strongly on the decision of Neasey J. in
F.C. of T. v. Reynolds 81 ATC 4131 and to a lesser extent on the decision in
A.L. Hamblin Constructions Pty. Ltd. v. F.C. of T. 74 ATC 4310 in respect of the credit of $5,000 made available to that company by Hastings Deering Queensland Pty. Ltd. Reliance was also placed on the decision of No. 1 Board (as then constituted) in Case C56,
71 ATC 247 (a case decided before the Hamblin (supra) cases which were first heard in 1974), wherein some support for a finding that the surplus was assessable in the hands of the taxpayer, was found in the decision of
H.R. Sinclair & Son Pty. Ltd. v. F.C. of T. (1966) 114 C.L.R. 537 , the view was taken by the Chairman and one Member (at p. 249) that:

``... the amount of the excess over the agreed residual value of the vehicle represented in one sense a reduction of the gross rentals outlaid by T Pty. Ltd. but in another sense an amount which flowed to it as a result of its successful bargaining to get into its hands an amount in excess of the amount of $860 which was due to the lessor company on disposal of the vehicle. In this latter sense, which we see as the more appropriate, the receipt takes on the character of a business receipt and, in our

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view, is correctly taken into the taxpayer's assessable income under the provisions of sec. 25(1) of the Assessment Act.''

(The other member (Mr O'Neill) appears broadly to have followed the same line as the Chairman and Mr Smith Q.C.) The rationale of the ``more appropriate'' view adopted by the Board has since been overtaken by the High Court decisions in the Hamblin cases, and in Case F73,
74 ATC 431 , this Board (as then constituted) did not follow the reasoning adopted above. I note also in that case that the payment received by that taxpayer came from a third party and not from a leasing company with whom the taxpayer was dealing. The facts of Case F73 are complex and of no particular relevance to this reference.

6. The decision most strongly relied upon in argument by the Commissioner's representative was Reynolds (supra) though the reliance was more in general terms than in specific passages bearing directly on the facts of this reference. The decision of Neasey J. in Reynolds drew heavily on the decisions in the High Court of Mason and Jacobs JJ. in the Hamblin Constructions case (supra). His Honour summarised those decisions in the following passage (at 81 ATC 4142-4143):

``A construction company was paid a sum of $5,000 by an equipment supplying company, in consideration partly of its past transactions with the supplying company, and partly in consideration of its using its influence to persuade another company to purchase a large order of equipment from the supplying company in order that that equipment should be leased by the purchaser to the construction company. It was acknowledged that if the construction company had purchased the equipment itself direct from the equipment supplier, that amount would have been allowed by the supplier as a discount on the purchase. That sum of $5,000 was held by all four justices in the Full High Court to be assessable income. Barwick C.J. agreed with Mason and Jacobs JJ. on the point. Mason J. said, in relation to this credit of $5,000 (at p. 4320):

• `In fact there was a credit of $5,000 received by the taxpayer in consideration of business which it had previously done with Hastings Deering. The receipt was therefore an incident of the contracting company's business. That it was considered by the parties to be a substitute for an allowance on the trade-in of equipment disposes of the notion that it was a gift and emphasizes its true character as a trade receipt arising out of the business relationship between Hastings Deering as a supplier of earth-moving equipment and the Construction company as the purchaser of such equipment in the course of carrying on its business as a contractor.'

Jacobs J. said (at p. 4324):

• `Lastly, the $5,000. The taxpayer company received this sum because it was able to nominate or at least to influence the selection of Hastings Deering Queensland Pty. Ltd as a supplier of the machinery which it would take on lease when that machinery was purchased by Transfield (Qld.) Pty. Ltd. It was not a dealer in machinery and it was not part of its business to arrange or negotiate contracts for the purchase of machinery by third parties. Its business was the use in construction work of machinery acquired by it on purchase or lease. Savings by it in the cost of purchasing machinery were savings on capital account. However, savings in the cost of leasing machinery cannot be so regarded. The receipt of $5,000 was directly related in a business sense to the leasing of the new machinery from Transfield (Qld.) Pty. Ltd. Its receipt effectively reduced the cost of leasing that machinery by the amount of $5,000. In these circumstances it seems to me that it must be brought into revenue account.''

From that summation, His Honour drew the following conclusion to the case of Reynolds:

``In the present case there was no legal obligation on the part of Esanda Ltd. as a matter of contract or otherwise to make this payment to the respondent, so that the payment was voluntary in that sense. The respondent contended in argument that the payment was a mere gift, but in my view it was not. Although the payment was voluntary in the strict sense, the respondent had a well-founded business expectation that he would receive it should the market price exceed the residual value. The

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evidence of established business practice in that regard is very strong. The inference is inescapable that the motive of Esanda Ltd. in allowing the respondent to have the surplus after expenses was wholly commercial and had regard to its own business interest - see, by way of contrast,
Hayes v. F.C. of T. (1956) 96 C.L.R. 47 at p. 55 . The existence of the business expectation which the respondent had is confirmed by his undertaking the task of selling the machine on behalf of the lessor. But the dominant consideration is the close relationship of the receipt of money to the business activity carried on by the respondent. It was the respondent's normal practice to lease major items of plant and equipment through Esanda Ltd. In sending the vehicle to Sydney for sale he expected that he would not incur a loss - that is to say, that the market value would exceed the residual value. Both these matters are stated in the agreed statement of facts. In my opinion the inference is strongly indicated that the receipt of this sum of money was fairly incidental to the respondent's conduct of his business. I so infer, and hold that the sum of money in question was income and assessable as such, pursuant to sec. 25(1).''

7. There are quite significant factual differences between the case of Reynolds and this reference. The most obvious ones are that the profit in question in Reynolds emerged from vigorous action taken by that taxpayer to dispose of the leased property with the permission of the lessor and that the profit on the sale came to Reynolds direct and he was permitted by the lessor to retain that part of the profit which was over and above the amount required to pay out all of Reynolds' financial obligations under the lease to the lessor. That decision appears to provide little precedent in this reference.

8. The case was not argued by the Commissioner under sec. 26(a) or sec. 26AAA. But it appears to me to emerge from the evidence of the taxpayer and the officer from the leasing company that the dealer in contacting the finance company to determine ``the actual payout figure'' can only be seen to be acting as a duly accredited agent of the taxpayer who agreed that the dealer should pay out the leasing company on the lease to which he was a party. There is evidence of this in a ``TRADE-IN DECLARATION'' attached to the ``RETAIL BUYER'S ORDER FORM'' completed by the taxpayer's husband on behalf of the partnership on the day on which he took delivery of the new Volvo truck, viz. 12 July 1979. That document recited:

``I/We have this day sold and delivered to (the dealer) the vehicle described hereunder, together with all tyres, tubes, radio, tools and accessories thereof and thereon for the sum of $28,133.00.''

The document then goes on to set out details of the vehicle sold and to state that:

``(b) The only encumbrance, charge, lien by way of Bill of Sale or Hire Purchase Agreement is with:

• COMPANY: GENERAL CREDITS
• BRANCH: A/C NO:
• PAYOUT: $16,133
• PERSON CONTACTED:''

and to include various declarations to be made by the person signing the form. The document appears to me to reflect a correct view of what had occurred in the transaction between the dealer and the taxpayer's husband acting on behalf of the partnership. In effect what had occurred is that the dealer acting as agent for the taxpayer had utilised part of the sum of $28,133 to pay out General Credits thus clearing all obstacles to the title to the old Volvo vesting in the partnership. The evidence of the witness from General Credits was that the policy was to allow lessees to arrange for sale of the goods the subject of a lease, while the lease was still running and that the company took what was owing at that stage and released any obligation on the lessee in respect of that specific unit. His further evidence was that, in most cases where enquiries were made as to the termination figure, the company contacted the lessee but ``it could happen'' that the company would ``just take the word of the motor dealer that the unit is being traded in'' and that the dealer would pay the termination figure. It seems to me clear, and I so find, from the dealer's documents which I have noted above, prepared by the husband of the taxpayer on behalf of the partnership, that the dealer saw himself acting as agent for the taxpayer in making the termination payment on the taxpayer's lease. That being so it will be seen that ownership of the Volvo during the course of the transaction with the dealer vested in the

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partnership for some few fleeting moments after the making of the terminal payment by the dealer before becoming vested in the dealer by reason of the on-sale of the vehicle by the partnership to the dealer per medium of the trade-in. This particular trade-in appears to me to avoid the problems associated with identifying the consideration in money's worth on a trade-in which were pointed out by Jacobs J. in Hamblin (74 ATC at p. 4322). It is to be noted that the Chief Justice and McTiernan J. must be seen to agree with the view of Jacobs J., vide at p. 4315 in the decision of the Chief Justice. The partnership paid the full retail price for the new vehicle and received in the form of bonds in Esanda the sum of $12,000 and had paid by the dealer on its account a terminal payment of $16,133.

9. In such circumstances, the position in this reference becomes indistinguishable from that in Case N59
81 ATC 304 . From the evidence of the husband of the taxpayer there can be no doubt that he was aware that there would be what he termed ``a $12,000 equity'' long before the steps were taken which were to lead to payment out of the General Credits lease by the dealer on behalf of the partnership and the husband agreed to the dealer taking the necessary steps to realise that sum for the benefit of the partnership. I am conscious, of course, of the limitations which Jacobs J. in Hamblin saw as applying to cases where the goods acquired by paying out a lease were utilised as a trade-in in the acquisition of another article in the case where the trade-in figure merely results in ``obtaining a reduction in the effective price to be paid for goods'' (74 ATC at p. 4322). His Honour, in such circumstances, saw the purpose of the taxpayer in acquiring leased goods as not being a purpose of making a profit by the amount of the reduction but rather ``a purpose of obtaining a reduction in the effective price paid''. However, in a case such as this where, clearly, a discrete sum arose over and above the payout figure (even if the free enjoyment of that sum were deferred for a period), I believe the purpose of the partnership can be equated with the purpose of the Hamblin company in relation to the paying out of the lease on the Le Tourneau scraper for the purpose of transferring it to Hastings Deering in a transaction which gave rise to a payment to Hamblin Constructions of an amount of $8,900. There Jacobs J. found at p. 4323 that:

``... the purpose had been formed of acquiring the title so that Hastings Deering Queensland Ltd. would purchase it at a higher price from the taxpayer company.''

He finally went on to find:

``... and one is left with the position that the item was acquired for the purpose of profit making by selling it at the higher price which was available.''

The reasoning of Barwick C.J. in Hamblin (with whom McTiernan J. agreed) indicated considerable reservations at this mode of calculating a profit (vide 74 ATC at p. 4315) but there is a clear majority acceptance of the view espoused by Jacobs J.

10. In Case N59, I dealt at some length with the difficulty confronting a Board in dealing with the problems of profits arising from the sale of goods acquired by paying out a lessor which emerge from the differing views of the five High Court Judges who heard, at first instance and on appeal, the appeals of the Hamblin companies, which difficulties emerge from the diverse approaches to their decisions adopted by those Judges. However, I see the evidence in this reference as being no more satisfactory than the evidence in Case N59, a situation which, as I pointed out there, emerges from the unsatisfactory manner - from the point of view of those charged with the administration of the Income Tax Assessment Act (as this Board is on reference) - in which leasing arrangements are structured. They have ``growed'' like Topsy, with minimum planning, strained and contorted by all sorts of forces, governed by ``understandings'' grouped around a bland leasing document drafted primarily to provide security for the finance company and taking great care not to transgress in writing against the strictures insisted on in such documents by a former Commissioner of Taxation in a circular dated July 1960 to those involved in leasing operations. The document, the full text of which appears in Dr Gerber's decision in Case N59, and the law as it has developed, have not realised the modest aims of the reluctant authors of the circular with the result that to deal rationally with even the simplest transaction in this area - and this reference must reflect an almost daily dealing of this type - is a matter of considerable difficulty. There certainly appears to be a need for some sort of overhaul of the existing

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arrangements. The evidence on behalf of the taxpayer, though it was honest and may well have been the best that was available, is unsatisfactory and the taxpayer cannot be seen to have satisfied the onus placed on her by sec. 190(b) of proving the assessment is excessive. Accordingly, I would confirm the Commissioner's assessment in this reference.

11. If I be wrong in my conclusion that during the course of the transaction, the partnership did acquire for a few fleeting moments title to the old Volvo, I would still be of the view that the taxpayer in this reference was liable for assessment on her aliquot share of the amount of $12,000 derived by the partnership from the transaction which occurred on 12 July 1979. The amount then, instead of being seen as the profit emerging from the sale of the vehicle acquired for resale at a profit, is seen to be an amount paid by a motor vehicle dealer to a client emerging from a deal struck between the parties, the amount being described as a trade-in allowance though, in fact, it was not applied in reduction of the price of the new vehicle being taken on lease. The amount was paid over to the finance company providing facilities for the new leasing arrangement and invested by that company in bonds of the finance company registered in the name of the partnership. The situation is seen to be not unakin to the $5,000 credit granted by Hastings Deering Queensland to the Hamblin Constructions company, describing it as a subsidy or trade allowance; that credit was not in form a trade-in allowance but arose out of a transaction in which it appears the Hamblin group influenced the purchase by Transfield Corporation of certain equipment supplied by Hastings Deering Queensland; it appears the equipment was to be leased by the Hamblin Constructions company from Transfield Corporation but Hastings Deering Queensland granted the allowance to the Hamblin group, the allowance appearing to be calculated as a form of ``no trade-in'' bonus. All five Judges who heard the Hamblin cases agreed that the allowance was assessable income. The passage from the decision of Jacobs J. in Hamblin which is quoted in the extract from the decision of Neasey J. in Reynolds quoted at para. 5 above, is clearly apposite to the circumstances of this reference. There is (in Hamblin ) express agreement in the decision of the Chief Justice (whose reasons for decision were agreed in by McTiernan J.) with the decision of Jacobs J.; Mason J. (and Stephen J. at first instance) may appear to place emphasis on the continuity of transactions between the Hamblin companies and Hastings Deering Queensland in their decisions in relation to the $5,000 in question in that appeal, but the fact of continuity does not appear to be in any way central to their decisions. In essence, each decided that the sum of $5,000 was an incident of the Hamblin companies' business bearing no characteristics which classified it as being of a capital nature or as a gift.

12. In this reference, the very size of the profit realised, viz. $12,000, vis- à -vis, the purchase price of the new vehicle involved in the lease with Esanda, some $64,000, makes it appear that the amount represents something more than a trade allowance; nothing in the evidence raises any suggestion that the amount was a gift, nor does any evidence point to any element of capital in the amount emerging as it does from the termination of one leasing arrangement and the institution of a fresh leasing arrangement. The Board could obtain no information from the taxpayer's husband as to the make-up of the amount allowed as a ``trade-in allowance'' (a massive $28,133) other than that it represented, as was clearly apparent, an amount $12,000 in excess of the sum required as a termination payment by the old lessor. It would seem that the amount would contain some element other than the discount or allowance element so clearly taxable under the Hamblin decision but the onus placed on the taxpayer by sec. 190(b) would require that that other element be identified and quantified. In these circumstances, I would confirm the Commissioner's assessment in this reference.