Between: The Squatting Investment Co Ltd
And: Federal Commissioner of Taxation

Judges: McTiernan J and Williams J
Webb J
Fullagar J

Kitto J

Subject References:
Taxation and revenue
Income tax
Assessable income
Acquisition of wool supplied by grower in course of business

Legislative References:
Income Tax Assessment Act 1936 No 27 - s 6; s 25; s 26(g)
Wool Realization (Distribution of Profits) Act 1948 No 87 - s 7; s 28; s 29
Wool Realization Act 1945 No 49 - s 9; s 10
National Security (Wool) Regulations 1939 SR No 108 - r 30

SYDNEY

Judgment by:
Kitto J

The question to be decided in this appeal is whether an amount paid to the appellant by the Australian Wool Realization Commission in pursuance of the Wool Realization (Distribution of Profits) Act 1948 formed part of the income derived by the appellant either in the year of receipt or in an earlier year.

The amount in question was paid to the appellant "in relation to" its "participating wool": (s. 7 (2)), that is to say in relation to its wool which had been appraised under the National Security (Wool) Regulations and listed as participating wool in the appraisement catalogue used by the appraisers for the purpose of that appraisement: (s. 4 (1), definition of "participating wool"). Moreover the amount was paid to the appellant as "the person who supplied the wool for appraisement": (s. 7 (3)). But it was not money which, before the Act was passed, the appellant had any legally enforceable right to demand, and the Act itself gave the appellant no right enforceable by action or other proceedings: (s. 28).

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. When, 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 recognize how inconclusive is that word for the purpose of deciding whether the receipt is of an income nature.

I shall not describe in any detail the Wool Purchase Arrangement made between the United Kingdom Government and the Australian Government at the beginning of the war, the provisions and the working of the National Security (Wool) Regulations, or the agreement, embodying the Disposals Plan, which was approved by the Wool Realization Act 1945-1946. They are fully discussed in the judgments which have already been delivered, and I need not go over the ground again. The features that stand out as significant for the present problem when the whole history of the matter is surveyed seem to me to be few and clear-cut.

In the first place, the National Security (Wool) Regulations took from a wool grower in the position of the appellant wool which in other circumstances he would have disposed of by the normal method of sale by auction, and they gave him in its place two things. One was a right to receive what reg. 30 (1) described as "the payments for wool". In the administration of the regulations these payments comprised the appraised value of the appellant's wool (divided into an initial payment and the "retention money" paid at the end of the wool season), and the flat rate adjustment which was the appellant's proportionate share of the excess, ascertained at the end of the season, of the price received by the Commonwealth for the whole clip at the flat rate purchase price over the total appraised value of the whole clip. For the purpose of determining the income or non-income quality of these payments, no real distinction can be drawn between them and a price realized by sale. Indeed the regulations (reg. 15) actually described the compulsory disposition of wool in pursuance of their provisions as a "sale of wool ... by appraisement". But that was not all. The grower also got, no less certainly than these payments, a chance of receiving something more, in effect an addition to the price, by an exercise of the discretion which reg. 30 (2) entrusted to the Central Wool Committee. The discretion was conferred as an absolute discretion, but on well-known principles it could not have been validly exercised otherwise than upon grounds within the scope of the regulations. The moneys to which the discretion extended (if any should come into existence) were thus significantly differentiated from moneys intended for the public purse, and solid ground was provided for an expectation that, as the history of wool in the previous war and considerations both ethical and political would all combine to suggest, any distribution that might be made under reg. 30 (2) would be a distribution to the wool growers who had supplied wool for appraisement. That is to say that any such distribution would be made (not precisely, but as nearly as common knowledge suggests that it was either practicable or necessary to go), to the persons who had supplied shorn wool for appraisement. This expectation was, of course, confirmed by the action of the Central Wool Committee in causing all shorn wool to be designated "participating wool" in the appraisement catalogues, in contemplation, as the case stated sets out, that the Commonwealth Government's share of any profit to arise would be paid to the suppliers of shorn wool.

The point which it is important to observe here is that the expectation thus created, resting as it did upon most substantial considerations, arose, together with and no less surely than the moneys which were paid in respect of the appraised value and the flat rate adjustment, in favour of the persons who supplied the shorn wool for appraisement; and together they formed the totality of that which the regulations gave those persons in place of their wool. It must have followed, if there had ever been a distribution under reg. 30 (2), that the question whether moneys distributed to a particular supplier of wool were of an income nature would be answered yea or nay, according as the proceeds of his wool if sold at auction would or would not have constituted an income receipt in his hands. In the vast majority of cases, and certainly in the case of the appellant, whose wool had been produced for sale in the course of a business of growing and selling wool, the moneys received would certainly have had to be brought into the trading accounts, and would accordingly have gone to swell assessable income.

The next point which emerges from a consideration of the history of the matter is that the fund out of which came the moneys now in question, though it was not the identical fund which reg. 30 (2) contemplated, had such a relation to the wool supplied for appraisement that considerations were applicable to it which were not substantially different from those which have just been mentioned. This view was stoutly contested by counsel for the appellant, who contended that it had been too readily accepted by the Court in Ritchie v Trustees Executors & Agency Co Ltd. ^[F86] Counsel pointed out that immediately before the agreement containing the Disposals Plan took effect (as it did in Australia by virtue of the Wool Realization Act 1945), the potential sources of distributions to wool growers by the Central Wool Committee in exercise of its discretion under reg. 30 (2) were of three descriptions: Australia's one-half share of amounts which had been accumulated in an account known as the Divisible Profits Account; other moneys which had already arisen to the Committee; and such further moneys as might be derived from the continued operation of the Wool Purchase Arrangement. Clause 2 (b) of the Financial Plan, which formed Pt. III of the agreement, disposed of the amounts accumulated in the Divisible Profits Account by authorizing the United Kingdom Government to retain them. The Wool Industry Fund Act 1946 disposed of all other moneys vested in the Central Wool Committee by diverting them to a Wool Industry Fund which it made applicable for certain purposes not material to be considered. And of course there could not be any further share of profits accruing under the Wool Purchase Arrangement, for that arrangement was brought to an end. The result, it was said, was to destroy the possibility of any distribution being made to wool growers under reg. 30 (2); and the new scheme which came into being was so essentially different from the Wool Purchase Arrangement of 1939 that any moneys that might accrue to the Commonwealth in consequence of its operation must be regarded as completely unaffected by the expectation of further payment which the wool growers had formerly possessed.

The points of difference were certainly not unsubstantial. First, it was pointed out, the Disposals Plan dealt with different wool from that covered by the Wool Purchase Arrangement, for it included the 1945/46 clip and any wool of later clips that might be purchased for the Joint Organization at auction. Moreover, whereas under the Wool Purchase Arrangement the wool to be sold was the property of the United Kingdom Government, under the Disposals Plan the wool dealt with by the Joint Organization was wool held in joint ownership by the United Kingdom and Australian Governments. Further, the profit in which Australia was entitled to share had been limited, under the Wool Purchase Arrangement, to profit on the sale of Australian wool outside the United Kingdom, whereas under the Disposals Plan it extended to profit on the sale of Australian wool wherever it might be sold. Again, instead of the Central Wool Committee being entitled to only one-half of certain defined profits but standing to lose nothing in the event of a loss being incurred on the resale of Australian wool by the United Kingdom Government, the Commonwealth became a shareholder in the Joint Organization, in effect paying for its share over PDE40,000,000 (i.e. one-half of the PDE82,777,089 mentioned in par. 33 of the case stated). By the same token, under the new plan the Commonwealth was entitled to have some say in the disposal of the wool, whereas under the old plan disposal was a matter for the United Kingdom Government alone. Because of these and other differences, the argument proceeded, the view should be accepted that any profit coming to the Commonwealth under the Disposals Plan not only belonged to it in point of law, but was unaffected by any such considerations favouring the persons who had supplied participating wool for appraisement as those which formerly applied to moneys falling within reg. 30 (2); and for that reason the moneys which the Act of 1948 directed the commission to distribute were moneys which the Commonwealth was in the fullest sense free to dispose of as it saw fit. Add to that the fact that the Act chose as the recipients, not wool growers as such, but the persons who supplied wool for appraisement whether they had grown it or acquired it from the growers, and the right conclusion, it was said, is that the distributions were truly in the nature of gifts which cannot be classified as income, for they arose from the bounty of the Commonwealth to persons chosen by the Commonwealth in exercise of a complete freedom to apply its own moneys as it saw fit, persons chosen for reasons which were personal to them and which had no reference to any carrying on by them of income-producing operations.

To take this view, however, is to get the whole matter out of focus. When the Commonwealth by cl. 2 (b) of the Financial Plan gave up to the United Kingdom Government its half share of the amount standing to the credit of the Divisible Profits Account, it acquired by virtue of cl. 1 of the Disposals Plan an interest as joint owner with that government in the latter's accumulated stocks of Australian wool. Such possibility as there was that further profits might have arisen to the Central Wool Committee from the continued operation of the Wool Purchase Arrangement was, of course, wrapped up in the same stocks of wool. So that Australia's share of realized profit and the Commonwealth's rights under the old arrangement with respect to future profit both went into the acquisition by the Commonwealth of an interest as joint owner of the accumulated wool; and that meant that the wool growers' prospect of having distributions of those profits made to them by the committee under reg. 30 (2) was in effect invested in the Australian wool which the Joint Organization was to turn into money. It is true that the Commonwealth Government also undertook by the Financial Plan to contribute to the Joint Organization fifty per cent of the original capital represented by the opening stock of wool; but as it turned out it was able to do this out of its share of the proceeds of sales of wool effected by the Joint Organization; so that the proceeds actually coming to the hands of the Commonwealth must be considered as really standing in the place of the Australian share under the Wool Purchase Arrangement of the profits, realized and prospective, which the Commonwealth gave up by entering into the 1945 agreement. It is also true that the Joint Organization would be selling, not only the accumulated stocks, but also such wool of later clips as it might buy with a view to supporting the market; but this was only a means; the main purpose of the Disposals Plan was to ensure the realization of the accumulated stocks in a manneras advantageous as possible to those who were interested in their profitable sale, while at the same time preventing prejudice to the sale of future clips: see the third paragraph of the preamble to the Wool Realization Act 1945. It is also clear that the Commonwealth's share of the profits of the Joint Organization would be received by the Commonwealth itself and not by the Central Wool Committee, and that the manner of their ultimate disposal would be determined by the Commonwealth and not by the committee. But it is evident that in a practical sense, as in a constitutional sense, the power of the Commonwealth to dispose of those profits was not unlimited; and it would be only a partial view of the situation which would lead one to describe the profits as the Commonwealth's own moneys which it might apply as it thought fit. The considerations which had operated to give substantial assurance that the committee would distribute amongst the wool growers any surplus that might have arisen in its hands operated now to give no less assurance that the Commonwealth would distribute amongst the same persons such profits as should become available for distribution by it in consequence of the working of the Disposals Plan.

The Commonwealth having substantially fulfilled, by means of the Act of 1948, the expectations thus existing, what ground can there be for denying to the payments made under the provisions of that Act the same quality as would have belonged to distributions, if there had been any, under reg. 30 (2)? It is nothing to the point that the Act of 1948 selected as the criterion for participation the fact of having supplied the wool for appraisement, as distinguished from the fact of having grown the wool for profit. What is to the point is that in truth and in fact the moneys distributed under the Act to the persons who supplied wool for appraisesent cannot be regarded otherwise than as part of the total sum which has taken the place of the wool in the hands of those persons; and accordingly the principle (of which Commissioners of Inland Revenue v Newcastle Breweries Ltd, ^[F87] is perhaps the best-known example), is applicable here, that moneys received from any source, if in truth they represent items of a revenue account, must be regarded as received by way of revenue: Federal Commissioner of Taxation v Wade, ^[F88] at pp. 112, 123.

The Act of 1948 itself could hardly have made the position clearer. It harks back to the appraisement which took place under the regulations, and observes that some of the wool appraised was marked for future participation in distributions, being listed as participating wool. Specifically in relation to each lot of participating wool, it provides for a payment to the persons who supplied that wool for appraisement. The amount to be paid to each such person is regulated by means of a proportion sum, so that the whole of the wool disposals profit shall in the long run be divided amongst those who supplied participating wool, proportionately to the appraised values of their respective contributions to the mass. Subsidiary provisions are added; but there, in s. 7, at the heart of the statutory scheme, is the clearest recognition that both the individual's qualification to participate and the extent of his participation are referable to his having supplied particular wool for appraisement, and are referable to no other consideration.

This being so, it may seem somewhat odd that support for the contention that the amount received is not income is claimed from the well-known line of decisions upon the question whether gratuitous payments are assessable as profits arising out of the recipient's employment or by reason of his office, within the meaning of English taxing statutes. The distinction those decisions have drawn between taxable and non-taxable gifts is the distinction between, on the one hand, gifts made in relation to some activity or occupation of the donee of an income-producing character, such gifts being variously described as accruing to the donee in virtue of his office (Herbert v McQuade, ^[F89] at p. 649), or as remuneration (Beynon v Thorpe, ^[F90] at p. 11; Seymour v Reed, ^[F91] at p. 559), or in respect of his past services (Beynon v Thorpe), ^[F92] or substantially in respect of his services (Blakiston v Cooper, ^[F93] at p. 107); and, on the other hand, gifts referable to the attitude of the donor personally to the donee personally, such as those which have been called mere gifts or presents made to the donee on personal grounds (Seymour v Reed), ^[F94] mere donations (Stedeford v Beloe, ^[F95] at p. 391), gifts moved by the remembrance of past services already sufficiently remunerated as services in themselves (Beynon v Thorpe), ^[F96] payments peculiarly due to the personal qualities of the particular recipient, or personal gifts as marks of esteem and respect (Blakiston v Cooper). ^[F97] The application of the distinction thus drawn ought surely to be that amounts such as that now in question are to be regarded as income if they were received in relation to wool supplied for appraisement in the course of a business carried on for profit. The Act makes it plain that these amounts are made payable in respect of the wool which was supplied and because it was supplied; not because of any admiration for the personal qualities of the suppliers or because of gratitude for their having supplied wool for which adequate payment was considered to have been made already.

The explanation of the appellant's reliance upon the line of cases just referred to is that in Maslen's Case (Perpetual Executors Trustees & Agency Co (W.A.) Ltd v Maslen), ^[F98] Lord Porter, in the course of stating the reasons of the Judicial Committee, described as "personal gifts" certain payments of the very kind with which the present case is concerned. If I understood his Lordship to have used that expression in the sense which it has in the tax cases, I should of course put aside at once any inconsistent view of my own. But when account is taken of the actual problem to which the judgment was addressed, when one considers the precise question raised by the case and the competing views which had been reflected in the judgments delivered in this Court, it becomes, I venture to think, quite clear that in the context of their Lordships' judgment the expression "personal gift" has a meaning which not only affords no support for the argument of the appellant here but tends strongly in the opposite direction.

The amount in question in Maslen's Case ^[F99] had been distributed in relation to wool which had been supplied for appraisement by a firm consisting of two partners. After the wool had been so supplied, one of the partners assigned to a third party all his right title and interest as a partner in the assets of the partnership. Thereafter the partnership was dissolved. Upon a distribution being made under the Wool Realization (Distribution of Profits) Act 1948, the question arose whether the destination of the assignor's share in that distribution was affected by the assignment. In this Court ^[F100] Latham C.J. and I considered that the question should be answered in the affirmative because of the provisions of sub-ss. (2) and (3) of s. 10 of the Act. Sub-section (2) provides that where participating wool was supplied for appraisement by a partnership which has been dissolved, an amount which would otherwise be payable to the partnership may be paid by the Commission to any partner; and sub-s. (3) provides that where an amount has been paid in pursuance of the section (and the amount in question in Maslen's Case ^[F101] had been so paid), the rights, duties and liabilities of the person to whom it is paid in respect of the amount shall be the same as if it were part of the proceeds of a sale of the wool of the partnership, made at the time of the supply of the wool for appraisement. If the wool supplied for appraisement by the partnership in Maslen's Case ^[F102] had been sold by auction instead of being supplied for appraisement, and part of the proceeds of sale had remained outstanding and had come in at the time when the distribution was made under the Act, the assignee would clearly have been entitled to that part of the proceeds of sale; and for that reason the majority of the Court considered that the assignee was entitled to the distribution moneys, not by force of the assignment itself, but by force of the parallelism which s. 10 (3) required to be observed.

Fullagar J. dissented. He considered that the main general provision of the Act was the provision in s. 7 (3) that an amount payable under the Act in relation to any participating wool shall be payable to the person who supplied the wool for appraisement. He pointed out ^[F103] that the general principle of the Act was that the wool produced the profit, and the man who produced the wool should receive the profit. Sub-section (3) of s.10 his Honour regarded as simply giving a particular legal character to a sum of money, and as doing so without creating the inferential consequences, first, that a debt must be regarded as having been owed to the suppliers of the wool as from the date on which they supplied it, and secondly, that any past transaction affecting debts owing to the suppliers at the time of the transaction must be deemed to have affected a notional debt created by the sub-section.

Now, their Lordships of the Privy Council had to choose, as they said, ^[F104] between the two constructions, and they upheld the view of Fullagar J. They said ^[F105] that the sums paid by the commission were admittedly nothing but a gift, and ^[F106] that it would do violence to that admitted fact to construe the provisions (of s. 10) as going further than to require a member of a dissolved partnership to account to his former partner, that is to say as going so far as to stipulate that the money should be dealt with as if it were the result of a contract or debt which came into existence when the wool was supplied for appraisement. Thus their Lordships decided the case by giving effect to what they considered to be the intention permeating the Act, that is to say the intention that the man who supplied participating wool for appraisement, and (broadly) no one else, should participate in distributions. If I understand the judgment correctly, it was for the purpose of emphasising that intention that the expression "personal gift" was used to describe an amount paid to a participant in a distribution. The moneys payable under the Act, being bestowed as the Parliament had seen fit to bestow them, were described by their Lordships as "payable to the supplier". ^[F107] "It is a true gift", they said, "to the supplier of the wool"; ^[F108] "a personal gift to the parties concerned". ^[F109] It seems clear that what their Lordships were insisting upon by their use of the term "personal gift" was that s. 10 must be construed in the light of the essential point in the scheme of the Act, which was that the wool disposals profits were to be put into the very hands from which participating wool had been compulsorily taken. So construed, s. 10 had the effect of attaching to those profits, when they reached the hands of a member of a partnership which had supplied participating wool for appraisement, the incidents which would have attached at the time when the wool was supplied to the proceeds of a sale of the wool made by the partnership at that time. That meant that it was incorrect to give the section such a retrospective operation as it would have if treated as allowing events occurring between the supply of the wool for appraisement and the distribution under the Act to alter the destination of the moneys distributed. The destination remained what it would have been if those events had not happened; the recipients were selected by reference to the fact that it was they who had supplied wool for appraisement; the Act operated in favour of them personally.

The point which was decided in the particular case was that the assignment made by one partner after the partnership had supplied wool for appraisement, even though it was an assignment of his partnership interest as an entirety, could not operate under s. 10 to deprive the assignor of the right to receive for his own benefit his share of moneys distributed under the Act in relation to the partnership wool; for it was to him and his co-partners, and to them alone, that the Act intended the proper proportion of the wool disposals profit to go. It was to go to them as individuals personally selected as having themselves supplied for appraisement the wool to which the proportion related; it was bestowed upon them-given to them if you will-as individuals, personally; it was a personal gift to them.

But this did not mean that moneys received in a distribution under the Act did not possess in the hands of the recipients the same character as would have attached to payments received in satisfaction of a legal right to be paid for the wool supplied. The argument their Lordships were concerned to deny was that the beneficial title to the moneys received was to be determined as if those moneys were paid in satisfaction of a debt which had arisen at the time of the supply and had remained unpaid until the date of distribution. Their Lordships decided, in effect, that s. 10 (3) should be construed as operating only as between the former partners themselves (and of course their estates if they had died), and not so as to give rights to outsiders. And why? Because it was the partners who had supplied the wool; it was they who were the chosen beneficiaries of the Act. And bearing that fact in mind, all that s. 10 (3) should be understood as doing was to require, for the purpose of adjusting the rights of the partners inter se, the hypothesis of a sale at the date of supply, that is to say a sale on the terms of immediate payment in cash, and not a sale on the terms that a debt for a portion of the price should remain outstanding so as to be exposed to divesting as a result of subsequent events. But all this being granted, the question remains, what was the character in which the subject matter of the "personal gift" came to the hands of the recipients? Their Lordships gave the answer and underlined it, I should have thought, when they described the payment ^[F110] as "the extra proceeds", "the extra profit", "the additional payment", and "the extra sum paid". There could hardly be a clearer recognition of the similarity in character of the moneys distributed under the Act and the moneys which at an earlier date had been paid for the wool under the regulations.

It is pertinent to recall some remarks made by Atkinson J. in Calvert v Wainwright, ^[F111] which was a case concerning tips received by taxi drivers from their passengers. His Lordship said: "I shall deal with the authorities in a moment, but the principle which they establish, if I understand them correctly, is that tips received by a man as a reward for services rendered, voluntary gifts made by people other than the employers, are assessable to tax as part of the profits arising out of the employment if given in the ordinary way; but, on the other hand, that personal gifts, which means gifts to a man on personal grounds, irrespectively of and without regard to the question of whether services have been rendered or not, are not assessable. The commissioners have obviously misunderstood what is meant by a personal gift. They have not found that the tips were personal gifts: they have found that they were gifts given to the respondent personally, which is a totally different thing. Every tip is given to a man personally, but that merely means that it is given to him for his own benefit, and not for that of the employers. Having listened to the cases, the commissioners thought the words `personal gift' meant given to him personally, whereas it is quite clear from the cases that what is meant by `personal gifts' is a condensation of the full sentence personal gifts given on personal grounds other than for services rendered". ^[F112] To describe the moneys in question in the present case as personal gifts in the sense of the tax cases would be to fall into the very error which the commissioners had made in Calvert v Wainwright. ^[F113]

For these reasons I am of opinion that the receipt here in question was a receipt on income account. The question whether it should be included in the assessable income of the year of receipt or of an earlier year presents no difficulty. Under statutes such as that which the House of Lords had to consider in Gardner, Mountain and D'Ambrumenil Ltd v Inland Revenue Commissioners. ^[F114] It is often proper to re-open the accounts of a past year and to attribute a subsequent receipt to that year as being the year in respect of which it arose. No such process is possible here, for under the provisions of the Income Tax Assessment Act which govern this case the inclusion of an amount in the assessable income of a year depends upon its having been derived in that year. There is no ground upon which the moneys in question here can be considered to have been derived in any year earlier than that in which the appellant received them.

In my opinion the questions asked in the stated case should be answered:

(i)

Yes.

(ii)

In the year ended 31st December, 1949.