Allied Mills Industries Pty. Limited v. Federal Commissioner of TaxationJudges:
The issue for decision in these proceedings is whether a sum of $372,700 paid to the applicant (which I shall call ``the taxpayer'') was a receipt in the nature of capital or income. The payment was made to the taxpayer (to put it neutrally) in connection with the giving up of rights it had with respect to the distribution and manufacture of Peek Frean biscuit products. The making of the payment was provided for in an agreement dated 16 February 1987 between the taxpayer, Arnotts Limited (which I shall call ``Arnotts''), and Consolidated Biscuits Pty. Limited (formerly Peek Frean (Australia) Pty. Ltd.).
In Sch. No. 11, which formed part of its income tax return (dated 28 February 1978) for the approved substitute period of 1 September 1976 to 31 August 1977, the taxpayer disclosed the following:
- The company has included under extraordinary items in its accounts, an amount of $372,700 representing a capital surplus on the termination of its biscuit distributorship whereby it was the sole distributor and del credere agent. As a result the company has now ceased its activities in the distribution of biscuits.
A notice of amended assessment in respect of the period in question was issued on 6 August 1980. The sum of $372,700 was included as assessable income pursuant to sec. 25 of the Income Tax Assessment Act 1936 (``the Tax Act''). An objection in respect of this sum (and other items not now material) was lodged by notice dated 24 September 1980, and after the adverse decision of the Deputy Commissioner of Taxation upon the objection, on 9 April 1981, the taxpayer requested the Deputy Commissioner to treat the objection as an appeal, and to forward it to the Supreme Court of New South Wales. The Commissioner did so on 1 December 1986. On 25 May 1987, the Supreme Court ordered that the proceedings before it be dismissed, save for the issue concerning the payment of $372,700 received by the taxpayer.
Upon the coming into force of the Jurisdiction of Courts (Miscellaneous Amendments) Act 1987, the matter was transferred to this Court, and on 8 September 1987 directions were given to ready the matter for hearing.
As I have indicated, the taxpayer's return for the period ended 31 August 1977 is dated 28 February 1978 and the notice of amended assessment was issued on 6 August 1980. Upon the matter coming on for hearing, counsel for the parties indicated that if the Commissioner was successful in his contention that the sum of $372,700 was an income receipt in the hands of the taxpayer, they were agreed that the amended assessment could not be challenged by the taxpayer on the footing that the taxpayer had made a full and true disclosure of all the material facts necessary for its assessment. In other words, the parties accepted that if the primary issue was decided adversely to the taxpayer, no issue remained under sec. 170 of the Tax Act.
The taxpayer's business
In 1977, the taxpayer was one of a number of subsidiary companies of Allied Mills Ltd. (``Allied Mills''). The directors' report of Allied Mills for the year ended 31 August 1977 discloses that the net amount of the profit of the Allied Mills Group for the financial year (after deducting income tax expense and outside shareholders' interest) was $6.3 million. Allied Mills itself contributed $478,000 to that profit. Of the contribution by 20 subsidiary companies, the largest proportion, $1.625 million, was contributed by the taxpayer.
From about 1969, the taxpayer conducted its activities within what was called in the evidence a divisional structure. This structure, as opposed to one involving subsidiary companies, was implemented principally for reasons of financial confidentiality to preserve from scrutiny by competitors financial information concerning the operations of the various divisions of the taxpayer.
In 1977, the activities of the taxpayer involved some nine divisions with head offices at six locations in New South Wales. The Bakery Division (based at Summer Hill) manufactured (at some 15 bakeries), marketed and distributed bread under the business names and trade marks ``Buttercup'', ``Country Style'', ``Country Fare'' and ``Siebers''. The Flavours Division (based at Smithfield) manufactured flavours and essences which were supplied to food manufacturers inside and
ATC 4855outside the Allied Mills Group. Six flour mills were operated in the Flour Milling Division (based at Summer Hill) to process wheat into flour, bran and various by-products. The Primary Products Division (based at Homebush and Baulkham Hills) was concerned with poultry breeding and growing on seven farms; the slaughtered poultry was sold directly to retailers under business names and trade marks including ``Allied Spring Chicken''; the eggs were sold to the egg marketing authorities; there were wholesale as well as retail sales. The Starch and Gluten Division (based at Lidcombe) processed flour, turning it into various by-products, including starch and gluten; the products were sold mainly by wholesale, although there were some retail sales; sales were made both in domestic and foreign commerce. The Stockfeed Milling Division (based at Rhodes) manufactured mainly cereal foodstuffs for pigs, chicken, dairy cattle and horses which were sold by wholesale both within and without the Allied Mills Group. The Stockmans Rural Traders Division (based at Rhodes) conducted the activities of produce merchants selling to the public and to land owners around the produce stores. The Pasta Products Division (based at Smithfield) produced and marketed pasta products.
The present case was much concerned with the activities of the Groceries and Packaging Division of the taxpayer. This was established in 1969 or shortly thereafter. The head office was at Smithfield. Until 1979, the activities of the division were conducted by the taxpayer under the registered business name, ``Allied Grocery Products''. Thereafter, the registered business name ``Allied Food Services'' was also used by the taxpayer for this division. Activities conducted in this division included processing and packaging of flour, starch, custard powder and ``convenience foods''. The taxpayer used trade names and trade marks, such as ``Betty Sydney'', ``Alpine'' and ``Federation''. ``Betty Sydney'' was used for cake mixes, ``Cameo'' for custard powder, ``Sydney'' and ``Federation'' for packet flour, and ``Kream'' for cornflour. The products of the division were sold to retailers using what was described in evidence as the ``central distribution system'' or the ``central warehousing system''. This involved the taxpayer making deliveries not direct to particular retail outlets, but rather to central warehouses controlled by a particular chain or group which for a fee delivered stock to retail outlets in combination with other products held in the central warehouse.
An arrangement was entered into with a Californian corporation. Lawry's Foods International Inc., whereby mixed spices, sauces and seasoning products were manufactured and marketed in Australia as part of the Allied Grocery Products range within the Groceries and Packaging Division of the taxpayer. This arrangement was in operation at all material times. Further, at some [time] early in the 1970s, the taxpayer entered into an agreement with another American company whereby for several years the taxpayer manufactured, marketed and distributed in Australia ``flavour ice'' iceblocks.
The Peek Frean arrangements
In 1973, the taxpayer entered into arrangements for the distribution (but not manufacture) of Peek Frean's biscuits, and this added something like 50% to the turnover of the Allied Grocery Products range. In March 1975, Arnotts took over the business of Peek Frean (Australia) Pty. Ltd. (``Peek Frean Australia'') and the taxpayer continued to distribute the Peek Frean products; the taxpayer did not distribute other biscuit lines. It was the financial arrangements made on the termination of these arrangements in February 1977 which gave rise to the present dispute.
After the termination of the agreement in February 1977, there was a winding-down period with limited sales. The termination agreement preserved the position of the taxpayer as distributor of Peek Frean products, but only as non-exclusive agent. In practice, it was impossible to sell any substantial volume on that basis, and the taxpayer ceased to have any involvement in the distribution or manufacture of biscuit products. As I have already indicated, the Groceries and Packaging Division continued after the events of February 1977; however, the word ``Packaging'' was later dropped from its title.
The net amount of the profit of the Allied Mills Group for the financial years ending 31 August 1978 and 31 August 1979 (after deducting income tax expense and outside shareholders' interest) was $5,734 million and $9,555 million respectively. The taxpayer
ATC 4856contributed the largest proportion of those profits, namely $1.62 million for 1978 (which was only slightly below the contribution for 1977 of $1.625 million) and $4.524 million for 1979. However, the Peek Frean products had been a substantial integer in the Allied Grocery Products range, which fell within the Groceries and Packaging Division of the taxpayer. The evidence was that ``losses'' in the order of $409,000 and $219,000 respectively were sustained in respect of that division in the two years following the year of termination of the Peek Frean arrangements, in contrast to ``profits'' of $128,000 for the year of termination, and of $161,000 and $231,000 respectively for the two years immediately preceding that year. The ``profits'' and ``losses'' were prepared for this case by the former group chief accountant of Allied Mills from management reports of the Groceries and Packaging Division over these years.
I turn now to consider in more detail the various steps in the dealings of the taxpayer with the distribution of Peek Frean products, leading up to the termination agreement of 16 February 1977.
On 1 April 1971, Peek Frean & Co. Limited, an English company, entered into a written licence agreement with Peek Frean Australia whereby the Australian company manufactured and distributed a range of products corresponding to those manufactured in the United Kingdom by Associated Biscuits Limited. The range of Peek Frean biscuit products included sweet biscuits, cookies, wafer, crackers and the well known ``Vita Weat'' biscuit. The taxpayer supplied ingredients to Peek Frean from its Flour Division and Starch and Flavours Division. Allied Mills supplied ingredients from its Edible Oils Division.
By mid-1973, Peek Frean Australia was in financial difficulties and was not able to carry on much longer without an injection of funds. Associated Biscuits Limited was no longer prepared to assist financially. Discussions were then initiated between it and the taxpayer. The taxpayer decided against entering into any joint venture or into any equity arrangement with Peek Frean Australia. This was partly because members of the Allied Mills group were substantial suppliers of ingredients to major biscuit manufacturers such as Arnotts and Nabisco, and if the Allied Mills Group embarked on a business activity in direct competition with those manufacturers, this might imperil the Group's position as suppliers of ingredients to Arnotts and Nabisco. On the other hand, the taxpayer was attracted to the prospect of distributing Peek Frean biscuit products, partly because the Peek Frean line was one which had a strong position in the market. In particular ``Vita Weat'' had approximately 60% to 70% of the ``crispbread market'' in competition with the ``Ry-Vita'' product of Westons, the major competitor of the taxpayer in bread products. A further benefit of a distribution arrangement was the maintenance of Peek Frean Australia as an existing purchaser of the ingredients for its biscuits.
In the result, a distribution agreement was entered into by exchange of letters commencing with the letter dated 8 November 1973, and ending with one dated 16 February 1974. The taxpayer became sole selling and distribution agent for the Peek Frean biscuit products in Australia, Papua New Guinea and Fiji, for the period from 1 October 1973 until 30 October 1974 and thereafter until such time as the arrangement was terminated by six months' notice in writing given by either party. The taxpayer received a fee or commission calculated as a percentage of the invoiced value of the products sold. The fee or commission was to be deducted from payments due in respect of products purchased by the taxpayer from Peek Frean Australia. If notice of termination of the agreement was given the taxpayer, the taxpayer was to be offered a licence for the manufacture and sale of ``Vita Weat'' for a period of not less than 10 years, and for a royalty calculated by reference to net sales value. The taxpayer also was granted the right of first refusal of a licence to manufacture biscuit lines other than ``Vita Weat''. It also had an option to purchase Peek Frean Australia's processing and baking equipment, and packaging plant in aid of the grant of any such licences. The agreement further provided that the taxpayer would lend to Peek Frean Australia an amount of $200,000 to be repaid by six equal monthly instalments.
Late in 1974, the taxpayer was informed that the British parent intended to close down the operations of Peek Frean Australia as soon as possible, unless the taxpayer wished to take it over. The taxpayer approached Arnotts.
ATC 4857Arnotts was told that although the taxpayer had an option to acquire the Peek Frean business, including ``Vita Weat'', it was not at that stage interested in direct involvement in the biscuit industry. The taxpayer suggested that Arnotts might like to consider the acquisition of Peek Frean Australia, but was anxious that Arnotts not ``kill'' the Peek Frean brand. The Trade Practices Commission was consulted, and gave the necessary rulings favourable to Arnotts.
On 12 March 1975, a written agreement was entered into between four parties, Associated Biscuits International Limited, Peek Frean Australia, the taxpayer and Arnotts. This agreement is of importance in the present litigation. The agreement recited that six months' notice expiring 31 March 1975 had been given to the taxpayer pursuant to cl. 1 of the agreement of 8 November 1973. The agreement also recited that contemporaneously with the execution thereof, Arnotts had entered into an agreement with Associated Biscuits International Limited and Peek Frean Australia for the acquisition by Arnotts of the whole of the issued capital of Peek Frean Australia, with a view to one or more of the Arnotts subsidiaries (including Peek Frean Australia) carrying on under licence from Associated Biscuits International Limited the manufacture for sale under the brand name of ``Peek Frean'' of biscuit products including those present manufactured by Peek Frean Australia.
The taxpayer surrendered and gave up any right or entitlement to manufacture and sell in Australia Peek Frean biscuit products, with the exception only of ``Vita Weat'' (cl. 1). As to ``Vita Weat'', the rights of the taxpayer under the letter dated 8 November 1973 remained on foot subject to the waiver of any obligation of the taxpayer to pay a premium for the licence and the deferral until 1 January 1977 of any obligation to pay royalties (cl. 3).
For its part, Arnotts undertook to cause one or more of its subsidiaries to continue to manufacture for sale the Peek Frean biscuit products, including ``Vita Weat''; distribution thereof was to be effected through the taxpayer until 31 March 1975, and Arnotts was to cause the subsidiary or subsidiaries in question to pay to the taxpayer commission of 12½% of the sales value of sales affected by the taxpayer (cl. 3). Clause 4 dealt with the position after 31 March 1975. It provided as follows:
``4. On and from 1st April, 1975 (the taxpayer) will continue the distribution for ARNOTTS subsidiaries of Peek Frean products other than Vita Weat as sole distributor within the Territory and shall receive from ARNOTTS in respect of their services in that behalf commission at the rate of 15% of net sales value. Such distribution arrangement shall continue until the 31st December, 1975, and shall continue thereafter only upon such terms and conditions (if any) as may be agreed between (the taxpayer) and ARNOTTS.''
The expression ``the Territory'' was defined as meaning Australia, Papua New Guinea, Fiji, New Caledonia, New Hebrides, The Solomon Islands and Tahiti.
Special arrangements were made concerning ``Vita Weat''. Clause 6 provided:
``6. The parties hereto mutually acknowledge and agree that in the event that (the taxpayer) does not by 31st March, 1975, accept the offer of a licence to manufacture and sell the product known as Vita Weat then such products shall remain the subject of a licence to ARNOTTS for manufacture and sale of such product.''
The taxpayer decided not to take up its rights to manufacture ``Vita Weat'' as reflected in cl. 6. Peek Frean Australia would remain an existing customer for its raw materials; the manufacturing equipment used by Peek Frean Australia was outdated and the taxpayer did not wish to spend a large capital outlay to purchase new plant and equipment. If the taxpayer had exercised its rights in respect of ``Vita Weat'', this would have put it in direct competition with Arnotts and thus might have affected the supply of raw materials by the taxpayer to Arnotts.
As 31 March 1975 approached, there was a flurry of correspondence between Arnotts Limited and the taxpayer. By letter from Arnotts to the taxpayer of 26 March 1975, the following was proposed:
``1. Sole distributors
Allied Mills Industries Pty. Limited will be the sole distributors of Peek Frean products within the Area.
2. Period of agreement
The Agreement is to be for a period of three years from 1st April 1975. The Agreement
ATC 4858may be terminated by either party by giving notice 6 months prior to the end of the 3-year period. If such notice is not given, the Agreement will continue for a further period of three years with the same right of termination as for the first period of three years.
Allied Mills will be paid or allowed commission at the rate of 10% of the invoiced value of sales made by Allied Mills less any rebates, settlement discounts and warehouse and promotional allowances.
5. Cessation of manufacture of Peek Frean products
If at any time during the three years commencing 1st April 1975 Arnotts wish to discontinue the manufacture of Peek Frean products, then Arnotts would give 6 months notice of its intention and assign to Allied Mills its right to the manufacture and sale of Vita Weat and sell to Allied Mills the plant required for the manufacture and packaging of Vita Weat at a fair value to be determined by an independent valuer acceptable to both companies, such value to be determined having regard to the current replacement cost and the age and condition of such plant.''
By letter bearing the same date, the receipt of the above was acknowledged, and the taxpayer went on to state that it was agreeable to the proposals set out in the letter, subject to the following which it believed set out more accurately the agreement with Peek Frean Australia confirmed in the document dated 12 March 1975:
``(a) We understand that if notice is not given six months prior to the end of the first three year term in accordance with Clause 2 of your letter, the agreement will continue for further consecutive periods of three years with the same right of termination as for the first period of three years.
(b) In the event that we seek an assignment of your right to manufacture and sell Vita Weet [sic] as set out in Clause 5 of your letter, then we would have an option to purchase the plant required for manufacture and packaging upon terms as to assessment of value as set out in your letter.
(c) In the event we seek assignment of the right to manufacture and sell Vita Weet [sic] then you will, for a period of 9 months from the date of such assignment or until the plant utilised for the manufacture and packaging of Vita Weet [sic] becomes inoperable by reason of its being dismantled for removal to our premises (whichever is the earlier), undertake and carry out at a price to be fixed by you from time to time in the manufacture of our requirements of Vita Weet [sic] on terms of payment of cash on delivery of goods so manufactured.''
By letter dated 27 March 1975, Arnotts told the taxpayer that it agreed that the terms set out in its letter of 26 March 1975 should incorporate the amendments set out in the taxpayer's letter of 26 March 1975.
The effect of this correspondence was to alter the scope of the distribution arrangements so as to include all Peek Frean products and ``Vita Weat'', but for three years with an option for a further three years subject to six months' notice of termination before the end of any current term. Arnotts also gave the taxpayer an option to purchase the right of Arnotts to manufacture and sell ``Vita Weat'' together with plant for manufacture and packaging, if Arnotts at any time during the three years commencing 1 April 1975 discontinued the manufacture of Peek Frean products.
The termination agreement
Peak Frean continued its operations under the new ownership and management by Arnotts. In late 1976 or early 1977, Arnotts indicated to the taxpayer that, regardless of where the fault lay, the distribution arrangements did not appear to be working out to the mutual satisfaction of the parties. Arnotts did not think there was any future for central warehousing of biscuits, and also it wished to rationalise the Peak Frean product range and to take over the distribution itself as soon as possible. Arnotts was a major customer for raw materials supplied by the taxpayer and in response to queries by the taxpayer indicated it would be likely to remain so. The taxpayer was asked to suggest a reasonable amount of compensation for termination of the agreement. The sum of $400,000 was arrived at.
The agreement made 16 February 1977 was in the following terms (omitting some formal parts):
``AGREEMENT made the sixteenth day of February One thousand nine hundred and seventy-seven BETWEEN ARNOTTS LIMITED a company incorporated under the laws of the State of New South Wales and having its registered office at 168 Kent Street, Sydney in the said State (hereinafter called (`ARNOTTS') of the first part, ALLIED MILLS INDUSTRIES PTY. LIMITED a company incorporated under the laws of the State of New South Wales and having its registered office at 2/28 Smith Street, Summer Hill in the said State (hereinafter called (`AMI') of the second part AND CONSOLIDATED BISCUITS PTY. LIMITED (formerly Peek Frean (Australia) Pty. Limited) a company incorporated under the laws of the State of New South Wales and having its registered office at... in the said State (hereinafter called `CONSOLIDATED') of the third part
A. By an agreement (`the said Agreement') made the 12th day of March, 1975, BETWEEN ASSOCIATED BISCUITS INTERNATIONAL LIMITED , (`ABIL'), CONSOLIDATED, AMI and ARNOTTS it was agreed that AMI would distribute products therein described as Peek Frean Products and Vita Weat (herein called `the Products') as a sole distributor and as a del credere agent for ARNOTTS or its subsidiaries.
B. AMI has given up or allowed to lapse all its rights, referred to in the said Agreement, to take from ABIL a licence to manufacture and sell Vita Weat in Australia and Arnotts has remained and remains licensed by ABIL to manufacture and sell Vita Weat as well as the other Products in the Territory as defined in the said Agreement.
C. AMI remains engaged in the sale and distribution of the Products as sole distributor and del credere agent for ARNOTTS or its subsidiaries pursuant to the said Agreement as varied by negotiations between the parties.
D. It has been agreed by and between the parties hereto that the said Agreement and all other agreements and arrangements between AMI on the one hand and ARNOTTS, CONSOLIDATED and all other subsidiaries of ARNOTTS or any of them on the other hand in respect of the Products will be discontinued upon and subject to the terms and conditions following.
NOW THIS AGREEMENT WITNESSETH:
1. The sole agency of AMI for the sale of the Products existing by agreement between the parties will cease and determine on the 28th day of February, 1977.
2. Notwithstanding the provisions of Clause I hereof AMI will for the purpose of disposing in an orderly way of stocks of the Products in its hands on the 28th February, 1977, continue sale of the Products on the now existing basis of commission payments as follows:
- (a) in Victoria and Tasmania - until 7th March 1977;
- (b) in South Australia - until 14 March 1977;
- (c) in New South Wales, Queensland and West Australia and elsewhere - until 21st March 1977.
3. During the month of March, 1977, the parties will negotiate and arrange for the return by AMI and acceptance by ARNOTTS of stocks of the Products held by AMI at the 28th February, 1977, to the extent that such stocks may not be sold and disposed of by AMI pursuant to the provisions of Clause 2 hereof.
4. ARNOTTS will as consideration for the termination of the agency pay or cause one of its subsidiaries to pay to AMI on the 21st March, 1977, the following sums or amounts -(a) Compensation for termination of Agreement $372,700 (b) Refund of severance pay payable by AMI to staff retrenched $18,000
5. It is agreed by and between the parties hereto that the Catering Division of Allied Grocery Products, a Division of AMI will continue to sell the Products as a non-exclusive agent of ARNOTTS or its subsidiaries upon such terms and conditions as may be agreed from time to time.
6. It is further agreed by and between the parties hereto that nothing herein contained shall prevent or restrain the sale by AMI of stocks of `Play Box' line of biscuit products held by AMI at 28th February, 1977, or in the course of shipment to it at that date.
7. None of the parties hereto will make any press release announcement or publish any advertisement otherwise than in the form of the Statement annexed hereto marked `A' without the consent in writing of the other parties to this Agreement.
8. The said Agreement and all other agreements and arrangements between AMI on the one hand, ARNOTTS, CONSOLIDATED and all other subsidiaries of ARNOTTS or any of them on the other hand relating to the sale and distribution of the Products and in existence immediately prior to the execution hereof shall terminate and end on the 28th February, 1977, without prejudice to any rights or liabilities between the parties in respect of any matter or thing occurring prior to that date and without prejudice to any claim for payments ARNOTTS may have in respect of the Products sold by AMI after that date and without prejudice to the continuance of all existing agreements between ABIL, ARNOTTS and CONSOLIDATED and the exclusively of any rights heretofore granted by ABIL to ARNOTTS or CONSOLIDATED in respect of the Products and expressed to be exclusive. AMI will upon request by and at the cost of ARNOTTS execute and deliver to ABIL written acknowledgement in such form as ARNOTTS may reasonably require that AMI has immediately after the execution hereof no further rights or claims against ABIL in relation to the Products or any of them.''
The present proceedings concern the correct characterisation of the sum of $372,700 identified in para. 4(a) of the agreement.
Income of capital receipt?
The applicant contends that the sum of $372,700 represents a capital receipt in its hands or, alternatively, that the sum bears a mixed but inseverable character of income and capital so as to attract in favour of the taxpayer the operation of the principles discussed in
Allsop v. F.C. of T. (1965) 113 C.L.R. 341; and
F.C. of T. v. Spedley Securities Limited 88 ATC 4126 at p. 4131. The Commissioner contends that the sum of $372,700 was a receipt of an income character in the hands of the taxpayer.
I should refer first to the provisions of the agreement of 16 February 1977 itself. Recital A defines as ``the said Agreement'', that dated 12 March 1975. It does not describe the consequences of the correspondence of 26 and 27 March 1975, but the effect of those arrangements as modifying the agreement of 12 March 1975 is spelled out in recitals B and C. What, however, is not there spelled out is the option given the taxpayer by Arnotts to purchase Arnotts' right to manufacture and sell ``Vita Weat'' together with the plant for manufacture and packaging, if Arnotts at any time during the three years commencing 1 April 1975 discontinued the manufacture of Peek Frean products (cl. 5 of the Arnotts letter of 26 March 1975 together with cl. (b) and (c) of the taxpayer's letter of the same date). Rather, recital B simply states that Arnotts (as was the case) remained licensed by Associated Biscuits International Limited to manufacture and sell ``Vita Weat''.
Recital D is widely drawn so as to refer to an agreement to discontinue not only ``the said Agreement'', but also ``all other agreements and arrangements'' between the taxpayer on the one hand and Arnotts, Consolidated and all other subsidiaries of Arnotts or any of them on the other hand, with respect to ``the Products''. This is of some importance in construing cl. 8 which provides in terms for the termination on 28 February 1977 not only of ``the said Agreement'' but of all other agreements and arrangements between the parties in question which relate to the sale and distribution ``of the Products''.
This may be compared with cl. 1 which provided for the cessation and determination on 28 February 1977 of the ``sole agency of (the taxpayer) for the sale of the Products existing by agreement between the parties''. The ``sole agency'' of the taxpayer for the ``sale of the Products'' is a reference back to recital A which defines ``the Products'' in terms of the rights of the taxpayer under the agreement of 12 March 1975 to distribute Peek Frean products and ``Vita Weat'' (defined as ``the Products'') ``as sole distributor as del credere agent for Arnotts or its subsidiaries''.
It is with the provisions of recital A and cl. 1 particularly in mind that one comes to cl. 4. This obliges Arnotts to pay or to cause one of its subsidiaries to pay to the taxpayer on 21 March 1977 ``two sums or amounts'' as ``consideration for the termination of the agency''. The agency there referred to is the sole agency identified in cl. 1 and recital A. One of the two amounts, that of $18,000 is then described as being ``refund of severance pay payable by (the taxpayer) to staff retrenched''. No question arises concerning this sum. However, it should be noted that the sum of $400,000 negotiated between the parties was divided imprecisely in this way when the agreement was drawn to embody the understanding of the parties. The second sum, that in question in these proceedings, of $372,700, is described in cl. 4 as ``compensation for termination of Agreement''. The ``Agreement'' there referred to is that pursuant to which the taxpayer held the agency I have described.
Federal Coke Co. Pty. Ltd. v. F.C. of T. 77 ATC 4255 at p. 4273; (1977) 34 F.L.R. 375 at p. 401, Brennan J. said:
``When a recipient of moneys provides consideration for the payment, the consideration will ordinarily supply the touchstone for ascertaining whether the receipt is on revenue account or not. The character of an asset which is sold for a price, or the character of a cause of action discharged by payment will ordinarily determine, unless it be a sham transaction, the character of the receipt of the price or payment. The consideration establishes the matter in respect of which the moneys are received. The character of the receipt may then be determined by the character, in the recipient's hands, of the matter in respect of which the moneys are received. Thus, when moneys are received in consideration of surrendering a benefit to which the recipient is entitled under a contract, it is relevant to inquire whether or not that benefit was a capital asset in his hands. To adapt the words of Lord Macmillan in
Van den Berghs Ltd. v. Clark (1935) A.C. at p. 443, and of Williams J. in
Bennett v. F.C. of T. (1947) 75 C.L.R. 480 at p. 485, the inquiry is whether the congeries of the rights which the recipient enjoyed under the contract and which for a price he surrendered was a capital asset.''
Thus, one asks whether or not the benefits to which the taxpayer was entitled under the agency agreement whereby (in the terms of recital A of the termination agreement) the taxpayer distributed Peek Frean products and ``Vita Weat'' as sole distributor and as del credere agent for Arnotts or its subsidiaries, comprised a capital asset.
Some guidance, by way of analogy, is offered by the decision of Windeyer J. in
Heavy Minerals Pty. Ltd. v. F.C. of T. (1966) 115 C.L.R. 512. In that case, the taxpayer was owner of a mining lease and plant and was a party to contracts with American and German customers. Following on the collapse of the rutile market in 1957-1958, the taxpayer agreed to the cancellation of these contracts in consideration of monetary compensation. Windeyer J. held that the contracts were not a capital asset and that the sums paid upon cancellation thereof were of the same nature of the profits for the loss of which the compensation was paid, namely income. His Honour said (at p. 517):
``Even if these contracts were such that they seemed to ensure that the taxpayer would have a secure market and some regular customers, that would not of itself make them part of the capital of its business. As to words and phrases like `framework', `capital structure' and others which were used to beg the question, the remarks of Lord Radcliffe in
Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd.  AC 948 at p. 959, are much in point.
The appellant sought to liken the moneys which the buyers paid to be released from their contracts to a price received as a consideration for going out of business as in
Californian Oil Products Ltd. v. Federal Commissioner of Taxation (1934) 52 C.L.R. 28. But there is no analogy. The taxpayer's business was mining rutile and dealing in rutile. Its capital assets were the mining lease and the plant. After the contracts were cancelled it still had these. It was free to mine its rutile and to sell it if it could find buyers: and it tried to do so. The taxpayer was not put out of business by the cancellation of its overseas contracts. It did not go out of business when they were
ATC 4862cancelled. What happened is that because the price of rutile had drastically fallen, it could not carry on its business at a profit.''
In the passage referred to, Lord Radcliffe (speaking for the Judicial Committee) said that phrases in earlier decided cases such as ``enduring benefit'' and ``capital structure'' were essentially descriptive rather than definitive; as each new case arose for adjudication, and it was sought to reason by analogy from its facts to those of one previously decided, the primary duty of the court was to inquire how far a description that was both relevant and significant in one set of circumstances was either significant or relevant to those which was presently before the court.
It also has to be borne in mind that whilst periodicity, regularity and recurrence of a receipt have been considered as a hallmark of its character as income in accordance with the ordinary concepts and usages of mankind, the significance of these considerations is diminished when the receipt in question is generated in the course of carrying on a business; that circumstance in itself is ``a fact of telling significance''; nor does it detract from that significance that the particular transaction is unusual or extraordinary, judged by reference to the transactions in which the taxpayer usually engages, provided it is entered into in the course of carrying [on] the taxpayer's business:
F.C. of T. v. The Myer Emporium Ltd. 87 ATC 4363 at p. 4370; (1987) 163 C.L.R. 199 at p. 215.
Anglo-French Exploration Co. Ltd. v. Clayson (1956) 36 T.C. 545 at p. 557, Lord Evershed M.R., in the course of delivering the judgment of the Court of Appeal, referred to various authorities and said that:
``[They] seem to me to emphasise that sums received for the cancellation of an agency or of other similar agreements which have been entered into by the recipient in the ordinary course of its trade will themselves, prima facie, be regarded as received in the ordinary course of trade unless the transaction involves a parting by the recipient with a substantial part of its business undertaking.''
In the present case, the sum of $372,700 was received as compensation for the termination of the agreement under which the taxpayer was sole distributor and a del credere agent for Arnotts or its subsidiaries in respect of the distribution of the Peek Frean products and ``Vita Weat''. What was given up was the right to exploit the distributorship under the agreement and thus to pursue profits. I would not, in the setting of this case, classify the compensation as consideration for the taxpayer going out of business as in Californian Oil Products Ltd. v. F.C. of T. (1934) 52 C.L.R. 28. Nor did the transaction involve a parting by the taxpayer with a substantial part of its business undertaking in the sense referred to by Lord Evershed M.R.
All of these considerations tend to the conclusion that the consideration in the hands of the taxpayer bore the character of an income receipt.
I bear in mind that when brought to an end of 28 February 1977, the 1975 arrangements had an assured term ending 1 April 1978, subject to termination on six months' notice given prior to 1 April 1978, that the taxpayer had had under these arrangements some rights, in certain events, to acquire the licence to manufacture and sell ``Vita Weat'', that the taxpayer was not ordinarily distributor of the products manufactured outside the Allied Mills Group, and that the attractive force attached to ``Vita Weat'' and Peek Frean had assisted sales of other Allied Grocery Product lines. But I also bear in mind, in addition to the matters already mentioned, the attraction for the taxpayer in retaining Arnotts as a major customer for raw materials supplied by the taxpayer, the fluctuating arrangements concerning Peek Frean products since 1973, the magnitude of the operations of the taxpayer, and the continuing profitability of those operations. As I have said, the termination agreement did not involve a parting by the recipient with a substantial part of its undertaking and was entered into in the course of carrying on its business. The conclusion is that the receipt in question was of an income character. There is, in my view, no basis for treating the receipt as comprising an inseverable compound of capital and income elements.
The taxpayer sought to escape this conclusion by reliance upon some of the authorities I have discussed, together with certain decisions from Scotland and England, including
Kelsall Parsons & Co. v. Commrs of Inland Revenue (1938) 21 T.C. 608;
Barr Crombie & Co. Ltd. v. Commrs of Inland
Commrs of Inland Revenue v. Fleming & Co. (Machinery), Ltd. (1951) 33 T.C. 57;
Wiseburgh v. Domville (1956) 36 T.C. 527 and
John Mills Productions Ltd. v. Mathias (1967) 44 T.C. 441. In Kelsall Parsons & Co. v. Commrs of Inland Revenue (supra) Lord Normand said in the Court of Session (at p. 619):
ATC 4863Revenue (1945) 26 T.C. 406;
``The sum which the Appellants received was, as the Commissioners have found, paid as compensation for the cancellation of the agency contract. That was a contract incidental to the normal course of the Appellants' business. Their business, indeed, was to obtain as many contracts of this kind as they could, and their profits were gained by rendering services in fulfilment of such contracts. The Appellants' business is entirely different from the business carried on by someone who, under contract, acts exclusively as agent for a single principal. In ordinary course this kind of contract was the only kind of contract that the Appellants entered into for themselves in the course of their business, for, when they made a contract for the sale of their principals' goods, these contracts of sale were entered into not on their own behalf, but on behalf of disclosed principals. Further, these agency contracts might be for a fixed term, or they might be terminable at will. It was a normal incident of a business such as that of the Appellants that the contracts might be modified, altered or discharged from time to time, and it was quite normal that the business carried on by the Appellants should be adjustable to variations in the number and importance of the agencies held by them, and to modifications of the agency agreements, including modifications of their duration, which might be made from time to time.''
The Court of Session affirmed the decision of the Commissioners to include the sum in question in the calculation of the taxable profits of the appellants. The agency agreement in the present proceedings was not of like character to the agency contracts before the Court of Session. But that does not necessarily mean that the Commissioner cannot succeed and the taxpayer cannot fail.
In Barr Crombie & Co. Ltd. v. Commrs of Inland Revenue (1945) 26 T.C. 406, another case from Scotland, the Court of Session treated as a capital payment a sum received as compensation for loss of an agency which was fundamental to the taxpayer's business. Lord Normand said (at p. 411):
``I regard the payment here as a payment made,... `once and for all', and received by the Appellant Company as the price of the surrender of its only important capital asset. In Kelsall Parsons & Co., on the other hand, the payment was in return for the loss of a single agency out of about a dozen agencies carried on by the company, and the fact that the payment in that case did not represent the whole capital assets of the company is easily shown by the fact that in the year after the surrender of the single agency profits were no less than they had been the year before the surrender. There is another distinction... Here we are not dealing with a single payment in return for the surrender of the prospect of making profits in the final year of the agreement, but with a payment for the surrender of an agreement while there was still a substantial period - indeed, more than half of the period of the agreement - to run...''
The result in the Barr Crombie case may be compared with that in the High Court decision to which Windeyer J. referred, namely Californian Oil Products Ltd. v. F.C. of T. (supra). But the present case is not one where the termination agreement satisfied any description as the only important capital asset of the taxpayer, loss of which meant it went out of business.
In yet another decision of the Court of Session, Commrs of Inland Revenue v. Fleming & Co. (Machinery), Ltd. (1951) 33 T.C. 57, Lord Russell said at p. 63:
``The sum received by a commercial firm as compensation for the loss sustained by the cancellation of a trading contract or the premature termination of an agency agreement may in the recipient's hands be regarded either as a capital receipt or as a trading profit... When the rights and advantages surrendered on cancellation are such as to destroy or materially to cripple the whole structure of the recipient's profit-making apparatus, involving the serious dislocation of the normal commercial organisation and resulting perhaps in the cutting down of the
ATC 4864staff previously required, the recipient of the compensation may properly affirm that the compensation represents the price paid for the loss or sterilisation of a capital asset and is therefore a capital and not a revenue receipt... On the other hand when the benefit surrendered on cancellation does not represent the loss of an enduring asset in circumstances such as those above mentioned - where for example the structure of the recipient's business is so fashioned as to absorb the shock as one of the normal incidents to be looked for and where it appears that the compensation received is no more than a surrogatum for the future profits surrendered - the compensation received is in use to be treated as a revenue receipt and not a capital receipt.''
If those metaphors are applied to the present facts, the result remains adverse to the taxpayer. Then, in Wiseburgh v. Domville (1956) 36 T.C. 527, Lord Evershed M.R. (at pp. 539-540) said:
``[T]o bring the matter over to what I have called the Barr, Crombie land, it must be shown, in truth and in substance, that what the taxpayer parted with was not merely his rights and expectations under a contract entered into in the ordinary course of his trade, but was a parting by him with one of his enduring capital assets, as it is called. It is on that sort of consideration, as I said earlier, that this case might well have been different if the £4,000 had been paid because Mr Wiseburgh's goodwill had been damaged. In the Barr, Crombie case the agency which was there cancelled amounted to the substance of the whole business of the taxpaying company; its receipts accounted for nearly nine-tenths of the total earnings and its loss necessitated the complete reorganisation of the taxpayer's business, a reduction in its staff, and the taking of new and smaller premises. In effect, a substantial part of the business undertaking had gone.''
No such substantial part of the business undertaking of the present taxpayer was gone after 28 February 1977. However, encouraged by the spectre of the crippled structure of the corporate profit-making apparatus, invoked by Lord Russell in Fleming's case (supra) and further summoned up by Ungoed-Thomas J. in John Mills Productions Ltd. v. Mathias (1967) 44 T.C. 441 at pp. 451-452, counsel for the taxpayer submitted that the termination of the agreement had the effect of destroying or crippling, if not the taxpayer, then the Allied Grocery Products divisional operations of the taxpayer.
However, to my mind, the taxpayer conducted activities in relation to foodstuffs and ingredients for foodstuffs, which activities answered various descriptions but collectively constituted its business as one business. As a matter of convenience to itself and particularly for purposes of confidentiality, the taxpayer conducted its business in several ``divisions''. But that does not have the consequence that when asking the questions thrown up by this case, one looks to a plurality of frameworks, capital structures, profit-making apparatus and the like, to see whether they or any of them are mortally wounded, destroyed, crippled, maimed, or, on the contrary, quite uninjured. The taxpayer received a certain sum and the issue is whether this had in the hands of the taxpayer the character of income in accordance with the ordinary concepts and usages of mankind. Viewed in the light of the conduct of business of the taxpayer as a whole, one cannot sensibly say that the taxpayer went out of business, that the taxpayer parted with a substantial part of its business undertaking, or that its profit-making apparatus was materially crippled.
It may be that the activities of a taxpayer are so disparate in character and so discrete in the manner they are conducted, that one properly asks questions of the type posed by the facts of this case by reference to some but not the whole of those activities; examples of several distinct businesses conducted by the one taxpayer may be provided by the Board of Review decisions Case H100
(1956) 8 T.B.R.D. 457 (retail jeweller and real estate letting agent), and Case N38
(1962) 13 T.B.R.D. 161 (printer and seller of goods on commission). But, in my view, for the reasons I have given, the present is not such a case.
The Commissioner was correct in assessing the sum in question as an income receipt. It follows that the decision of the Commissioner in disallowing the taxpayer's objection to the amended assessment in respect of the receipt of $372,700 should be confirmed and that the proceedings should be dismissed with costs.
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