HENRY JONES (IXL) LIMITED v FC of T

Judges: Jenkinson J

Hill J
Heerey J

Court:
Full Federal Court

Judgment date: Judgment handed down 16 August 1991

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Hill J

The appellant, Henry Jones (IXL) Limited, appeals against the judgment of a judge of the court ( Sweeney J) [reported at 91 ATC 4119] dismissing an appeal brought by it against the disallowance by the respondent Commissioner of Taxation of the appellant's objection to an assessment of income tax. The assessment was made in respect of the accounting period ended 30 September 1982, being a substituted accounting period for the

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ATC 4665

year of income ending 30 June 1983 (hereafter referred to as the ``year of income'').

At issue is the liability of the appellant to be assessed in respect of an amount of $7,581,691 received by it in the year of income from Citicorp Canberra Pty Limited (``Citicorp'') as consideration for the assignment to Citicorp on 28 May 1982 of the whole of the right title and interest of the appellant under a certain licence agreement. The Commissioner submits that the whole of the amount was income in ordinary concepts when it was received, or alternatively that the whole amount was profit derived by the appellant from the carrying on or carrying out of a profit-making undertaking or scheme and assessable under s. 26(a) of the Income Tax Assessment Act 1936 (Cth) (``the Act'').

For many years prior to the year of income, wholly owned subsidiaries of the appellant had been involved in the deciduous canned fruit business. The activities of manufacture were carried out by Kyabram Preserving Co Ltd (``Kyabram''). Kyabram sold all of its production of deciduous fruits to the Australian Canned Fruits Council, which in turn had appointed another subsidiary, Henry Jones Limited as the agent of the Council to sell that produce. The canned fruit was sold under trademarks or labels, some of which were owned by Kyabram but most of which were owned by the appellant. The great majority of these trade marks were registered trade marks. Where the trade marks were owned by the appellant, it licensed Kyabram to use them without charge. The greatest part of the income of the appellant was derived from management charges for services performed by it for its many subsidiary companies, although some income was derived by way of royalties. The circumstances in which these royalties became payable were not explored in evidence.

In 1980 or 1981, the appellant decided that the group should quit the deciduous canned fruit industry because of reduced profitability. The appellant had, since 1972, a continuing policy of monitoring the activities of its ``divisions'', and of selling off or dropping those activities which were not sufficiently profitable to meet its test of achieving a 20% return on invested capital. As a result Mr PD Scanlon, a director of the appellant, commenced negotiations with SPC Ltd (``SPC'') and Ardmona Fruit Products Co-operative Company Ltd (``Ardmona'') with the view to the disposal of the deciduous canned fruit business.

Early in the negotiations it seems Mr Scanlon suggested that a substantial amount of the consideration which SPC and Ardmona might pay to the appellant should be paid for a covenant on the part of the appellant not to compete against SPC and Ardmona, who were themselves involved in the deciduous canned fruit industry as competitors of the appellant. This suggestion was not taken up, however, because early in the negotiations SPC and Ardmona made it clear that it was a prerequisite of their involvement in the deal that the payment of the consideration be by instalments over time and that the payment be fully tax deductible to SPC and Ardmona. His Honour found that the appellant originally wanted a lump sum, but was unable to obtain it, having regard to the objectives of SPC and Ardmona.

By October 1981, when Mr Scanlon ceased to be involved in the negotiations, agreement had, in principle, been reached that the consideration payable to the appellant or subsidiary companies would be paid over time. However, his Honour found that the effective deal with SPC and Ardmona was arrived at after Mr Scanlon departed the scene. The form which the agreements entered into ultimately took was arrived at on the initiative of Ardmona and SPC and was accepted by the appellant because it was, in effect, the only way out of a ``take it or leave it'' situation.

Ultimately a series of agreements were executed between the appellant and Kyabram on the one hand and SPC and Ardmona on the other, on 16 December 1981. These agreements included a licence agreement, a quota share agreement, an agreement for the sale of stock and a restraint of trade agreement.

The licence agreement, which is critical to the present appeal, is a rather peculiar document. It took the form it did, according to submissions made by counsel for the appellant, because there was no intention at all on the part of SPC and Ardmona to actually use the trade marks or labels referred to in the agreement, but rather those companies proposed, once existing stocks were disposed of, to continue production under their own labels and marks. In other words, Ardmona and SPC were effectively paying the consideration under the

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ATC 4666

agreements to rid themselves of a competitor. On the other hand, it was clear that Ardmona and SPC were insistent that they obtain tax deductions for amounts payable by them and the agreement was framed having regard to this insistence.

No finding to this effect was made by his Honour and indeed, no evidence having been advanced from representatives of Ardmona or SPC (albeit that there was some evidence of file notes from other sources which gives credence to this hypothesis), it is difficult to see how such a conclusion could be drawn. While this explanation would make some sense of the licence agreement, it would also require the conclusion that the licence agreement was a sham, a conclusion not contended for by the appellant and not advanced below. Accordingly, the agreement must be construed as if the commercial transaction embodied in it reflected the true agreement between the parties.

The licence agreement recited that the appellant and Kyabram (therein referred to as the ``licensors'') had built up a substantial goodwill in the labels and trade marks referred to in the schedule to the agreement and that Ardmona and SPC (therein referred to as the ``licensees'') believed that they could utilise excessive productivity capacity by taking a licence of those labels and marks. It then proceeded to record a grant by the licensors to the licensees of the marks for a period of ten years commencing on 1 January 1982, which grant was to be sole and exclusive but subject to the rights that had previously been conferred in respect of those labels and marks on Riverland Fruit Products Co-operative Ltd (Receivers and Managers appointed) and to a South African related company in relation to the continent of Africa and Mozambique. As consideration for the grant, the licensees covenanted to pay each year a royalty equal to 5% of the net value of its sales of canned fruits under the labels worldwide, with a minimum royalty of $750,000 for the calendar years 1982 to 1986 and of $500,000 for the calendar years 1987 to 1991. Failure to pay the minimum royalty attracted interest.

The licensees, for their part, covenanted that the fruit produced and marketed under the labels would be at the same standard as that produced by the licensors. However, there was no express obligation upon the licensees to actually use the labels, notwithstanding that under the Trade Marks Act 1955 (Cth) failure on the part of the registered proprietor or registered user to use in good faith a registered mark in relation to the goods in respect of which the mark is registered, is a ground for removal of the mark from the register: s. 23(1)(b). In any event, non-use of the marks, registered or unregistered would have a substantial effect upon the residual value of the marks at the end of the licence period.

The licensors covenanted that during the term of the licence agreement, but subject to the South African arrangements, neither it nor corporations related to it would sell canned fruit under any of the labels or permit others to do so. To secure payment of the royalties the licensees agreed to grant a charge over their assets on demand. Finally, the licence agreement dealt, in cl. 8, with what was to happen at the expiration of the licence period. Clause 8 provided relevantly:

``Upon the expiration of this Agreement by effluxion of time or other earlier determination of a Licensee's rights pursuant to clause 6 or upon default by a Licensee in the performance of its obligations under clause 7 the rights in respect of the Henry Jones Group labels hereby conferred upon the Licensees or that Licensee (as the case may be) shall become the property of Elder Smith Goldsbrough Mort Ltd. or its nominee and such corporation or its nominee shall be required to assume the period until 29 March 1989 or such later date as is from time to time nominated in writing by Henry Jones the obligations of the Licensee's (sic) hereunder or the continuing Licensee (as the case may be).''

Elder Smith Goldsbrough Mort Ltd was not a party to the agreement. Clause 6 of the agreement entitled the licensors on default in payment of the royalty for more than 14 days to determine the licence. Clause 7 referred to the obligation to grant a charge to secure the royalty payable.

Of the remaining agreements little need be said. Existing canned fruit stock and materials were purchased by Ardmona and SPC from Kyabram at that company's standard cost, less a damage allowance. Under the restrictive

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ATC 4667

covenant agreement the applicant and Kyabram covenanted for the ten year period not to be directly or indirectly engaged or interested in the manufacture, processing, canning, exporting, sale or dealing in canned fruits, subject to the existing arrangements to which reference has already been made. No separate consideration was allocated to this agreement. The quota agreement was concerned to divide among Ardmona and SPC the quota of the Henry Jones group for the purposes of a statutory marketing scheme established pursuant to the Canned Fruits Marketing Act 1979 (Cth). It provided for reallocation of these quotas in the event of default. The appellant was to retire as a marketing agent of the statutory marketing corporation.

Prior to entering into these agreements, consideration was given by the appellant to its own taxation position. Not unnaturally, it did not want to pay income tax on what it saw as the consideration for the transfer of its canned fruit business to Ardmona and SPC. Professional advice was taken and a decision made that the rights under the royalty agreement should be transferred to a bank or finance house. A professional adviser, reviewing the draft documents, made a file note, presumably recording his instructions, in the following terms:

``Not covered in agreement but intention is for Henry Jones IXL to `income stream' royalties so as sell `paper' for a lump sum to finance house so as receive capital sum. SPC/Ardmona continue getting deduction for amounts paid as minimum royalties (Never any possible [ sic ] that 5% of proceeds re Jones labels will ever be received as intention not to use labels).''

Negotiations with Citicorp for the contemplated assignment commenced in December 1981, that is to say, after the execution of the royalty agreement. On 25 May 1982, an assignment and related documents were executed. His Honour found that prior thereto:

``officers of the taxpayer other than those called by it as witnesses had taken a lively and natural interest in the best way in which the deal could be expressed so as to assist its claim that it should not be taxed on the proceeds, given the commercial realities in which it found itself.''

His Honour drew the inference that before entering into the arrangements with Ardmona and SPC, the appellant had decided that it would assign its rights under the licence agreement to a bank or financial house in return for a lump sum payment. There was no challenge to his Honour's conclusion.

The assignment agreement was entered into both by the appellant and Kyabram (referred to as the ``licensors'') and Citicorp. It recited the licence agreement and the entitlement of the licensors to royalty payments under it as well as the wish of the licensors to assign to Citicorp all of their right title and interest in and to ``the royalty payments and interest thereon'' and costs. The operative clause was in the following form:

``The licensors in consideration of the sum of Seven Million five hundred and eighty-one thousand six hundred and ninety-one Australian dollars ($7,581,691.00) paid to them by Citicorp on the date hereof in Canberra (the receipt whereof is hereby acknowledged) hereby as beneficial owners transfer convey and assign to Citicorp absolutely the whole of their right title and interest under the Licence Agreement including the moneys due or to become due as the royalty payments and interest thereon and costs pursuant to the Licence Agreement and it is acknowledged that Citicorp shall be entitled beneficially from the date hereof to all the right title and interest of the Licensors in and to the royalty payments and interest thereon and costs including without limiting the foregoing the Licensors' rights pursuant to Clauses 5, 6, 7 and 8 of the Licence Agreement.''

Notice of the assignment was given to Ardmona and SPC. In association with the assignment, the appellant was to procure a guarantee from a related company, Elders IXL Limited, that if the royalty payments received by Citicorp under the licence agreement did not equal an amount calculated in accordance with a formula, Elders IXL Limited would make up the difference. The basis of the formula was not explained, but it is clear that the commercial arrangement was that Citicorp was to be assured that it receive a minimum annual amount, if need be, from the Elders IXL group, in exchange for its lump sum. The guarantee

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contemplated was in fact given in a deed entered into between Elders IXL Limited and Citicorp at the same time.

The decision of the High Court in the Myer case

It is convenient at this point, before setting out the basis of the judgment below, to refer to the decision of the High Court in
FC of T v Myer Emporium Ltd 87 ATC 4363 ; (1986-1987) 163 CLR 199 , upon which his Honour relied and around which much of the argument in the appeal revolved.

The taxpayer in Myer, the parent company of a group of companies, lent $80,000,000 to a company incorporated for the purpose (``Myer Finance''). The loan was at interest and was for a term in excess of seven years. On the same day it assigned to Citicorp ``absolutely the moneys due or to become due as the interest payment and interest thereon... pursuant to'' the loan agreement, for a consideration of $45,370,000 paid by Citicorp on the same day. These transactions took place as an integral part of a reorganisation of the Myer group. The High Court was unanimously of the view that the consideration received was assessable income.

There are two strands of thought (not necessarily unconnected on the facts of that case) in the judgment of the High Court in Myer which led to this result. The first strand depended upon the taxpayer having made a profit or gain in circumstances where the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making. This first strand expressed in the now well-known passage (at ATC 4367; CLR 209-210) in the joint judgment of Mason ACJ, Wilson, Brennan, Deane and Dawson JJ, where, in considering whether a gain made otherwise than in the ordinary course of carrying on a business is stamped with the character of income, their Honours said:

``Generally speaking, however, it may be said that if the circumstances are such as to give rise to the inference that the taxpayer's intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer's business. Nor does the fact that a profit or gain is made as the result of an isolated venture or a `one-off' transaction preclude it from being properly characterized as income... The authorities establish that a profit or gain so made will constitute income if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit.''

In the passage cited, the High Court was considering the question whether the receipt by the taxpayer in that case was income in ordinary concepts assessable under s. 25(1) of the Act. However, their Honours expressed the view that the same process of reasoning would have led to the conclusion that the amount constituted assessable income under the second limb of s. 26(a) of the Act. It was, therefore, unnecessary for their Honours to consider the relationship between s. 26(a) on the one hand and s. 25(1) on the other.

The second strand of the Myer decision was that the assignment of a mere right of interest generally brought about the result that the consideration for the assignment was on revenue account. Their Honours deal with this matter (at ATC 4371; CLR 218) in the following passage:

``If the lender sells his mere right to interest for a lump sum, the lump sum is received in exchange for, and ordinarily as the present value of, the future interest which he would have received. This is a revenue not a capital item - the taxpayer simply converts future income into present income.''

The reference in this passage to a mere right to interest is a reference to the sale of a right to interest severed from the debt itself. Such a case was different, so the High Court suggested, from the sale of an annuity, where the sale of the contractual right which produces the payment of the annuity is ordinarily capital. While the annuity is derived solely from the annuity contract, interest is not derived from the loan agreement, but rather from the principal sum.

The judgment appealed against

His Honour found the facts before him indistinguishable for relevant purposes from those involved in Myer. Referring to the first strand of reasoning in Myer, his Honour said [91 ATC at 4141]:

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``I am satisfied that when the taxpayer entered into its commercial transaction with Ardmona and SPC whereby it acquired the rights to receive future royalty payments from them, it had already formed the intention of selling those rights to a bank or finance house for a lump sum.

...

In the present case I am satisfied that the decision to sell the rights which the taxpayer expected to acquire from the transaction with SPC and Ardmona had been taken by it before they were acquired. The decision of the taxpayer to sell those rights to Citicorp was taken by way of implementation of an intention or purpose, existing at the time of acquisition, of profit-making by sale, in the context of carrying out a business operation or commercial transaction.

Not only did the amount here in question, in my opinion, form part of the income of the taxpayer under S. 25(1) of the Act, but in any event, it would have constituted assessable income under the second leg of S. 26(a).''

As to the second strand of the Myer decision, his Honour pointed out that the appellant had not conveyed the property in the trade marks or labels to SPC and Ardmona, rather, his Honour said [at 4140]:

``It became entitled to a stream of future income and, had no more been done, the receipts of royalties would have been assessable in the hands of the taxpayer. The principal effect of the agreement with Citicorp was to assign the right to receive future income, which was a conversion of future income into present income. The payment received by the taxpayer from Citicorp was, in my opinion, income within the meaning of S. 25(1) of the Act.''

His Honour found it unnecessary to deal with a submission made by the Commissioner based upon the decision of the Full Court of this court in
Allied Mills Industries Pty Limited v FC of T 89 ATC 4365 ; (1989) 20 FCR 288 .

The appellant's submissions

For the appellant, it was submitted that the first strand of the Myer judgment had no application because on the facts the appellant had no purpose of profit-making, nor had his Honour so found. Further, that in the circumstances of the present case, which differed from those in Myer, there had been in any event no profit. The second strand of Myer was submitted to have no application because whereas in Myer the income stream had been assigned separately from the principal debt, in the present case the whole of the relevant property (the benefit of the licence agreement) had been assigned.

For the respondent, it was submitted that the differences which the appellant sought to make between the facts of the present case and those in Myer were illusory, and that, indeed Myer was indistinguishable. Alternatively, it was said that the amount received under the assignment was received in a transaction which took place in the ordinary course of the appellant's business of managing its subsidiaries and was thus, applying Allied Mills (supra), income in ordinary concepts. As an alternative submission, it was said that the taxpayer's business included licensing others to use its trade marks and the assignment was a transaction entered into the ordinary course of that business.

Purpose or intention of profit-making

It was submitted for the appellant that the judge at first instance had not found that the appellant entered into the licence agreement with SPC and Ardmona for the purpose of profit-making, with the consequence that the first strand of the Myer decision could have no application. It is true that there is no express finding relating to the appellant's purpose, although there is a finding as to the appellant's intention of assigning the rights under the royalty agreement to a bank or finance house. However, it is clearly implicit in his Honour's application of the first strand of Myer, that his Honour was of the view that the necessary purpose or intention existed.

In Myer, their Honours refer, on some occasions, to ``purpose of profit-making'' and on others to ``intention or purpose'' without distinguishing the two. There may be a fine distinction between purpose and intention, purpose being generally the object which the taxpayer has in view, and intention being the act of determining mentally upon some action or result. A person may acquire property having the intention of reselling it without, of course, acquiring it for the purpose of

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profit-making; cf
Plimmer v Commissioner of Inland Revenue (NZ) (1957) 11 ATD 480 . As I said in
Raymor Contractors Pty Limited v FC of T 91 ATC 4259 at 4270 :

``Generally speaking a person will be said to intend the natural and probable consequences of his acts and likewise his purpose may be inferred from them.''

It is unnecessary, in the present case, to determine whether there is a distinction of substance between the two concepts, since in using them interchangeably, the High Court must be taken to have been of the view that there was no relevant distinction between them for present purposes. Hereafter I propose to refer to ``purpose'' as including ``intention''.

Even if it were true that his Honour found there to be the necessary purpose, it was submitted that this finding was contrary to the evidence. The underlying trade marks were clearly not acquired with any purpose or intention of profit-making. They had been held for many years and used for the purpose of the group's trading. The licence agreement was entered into for the commercial purpose of enabling the group to extract itself from the canned fruit industry. It is, of course, true, as counsel for the Commissioner emphasised, that the appellant was not itself involved directly in that industry. It neither manufactured nor sold anything. Its role was as the holding company of the group and the owner of the marks which were licensed to the subsidiaries directly involved in the industry, but that hardly seems to matter for the present purposes.

While it must be accepted that in entering into the licence agreement the appellant did so with the intention of thereafter assigning the benefits of it to a bank or finance house, it would seem a misleading half-truth to say that its purpose of entering into the licence agreement, or for that matter the purpose of Kyabram, was to realise the amount which it ultimately obtained from Citicorp. It may be noted that the royalties under the licensing agreement were payable to both the appellant and Kyabram and that the Citicorp consideration was also payable to both companies. It would seem, however, that the Citicorp consideration was in fact received by the appellant which did not account for any part of it to Kyabram. Neither party suggested that this matter had any relevance, and the case below and the appeal before us proceeded on the basis that the whole amount, both for royalties and in respect of the Citicorp consideration was payable or paid to the appellant.

The analogy was made, by counsel for the appellant, of a farmer desirous of selling a capital asset such as a farm, who enters into a terms contract for the sale of the farm and before doing so has formed the intention to assign the benefits of that term contract to a bank so that the cash may be obtained immediately. In such circumstances it could not be said that the farmer had the purpose of profit-making by sale of the terms contract. The analogy could hardly be said to be a true one. Perhaps a closer analogy might be the case where the farmer sells his farm for an annuity and then assigns the benefit of the annuity to the bank. However, at least for the purposes of the first strand of reasoning in Myer, the farmer would not be said to have acquired the annuity for the purpose of profit-making.

Closely related to the issue of purpose was, in the appellant's submission, the question whether there was in truth a profit in the present circumstances. Clearly, if the farm in the analogy were acquired other than for the purpose of profit-making, no profit would be involved if at some time later the farmer by a two-stage process disposed of the farm and acquired a lump sum. The point is illustrated by the decision of the High Court in
FC of T v Becker (1952) 10 ATD 77 ; (1951-1952) 87 CLR 456 . In that case the taxpayer owned land the sale of which was regulated by regulations imposing price control. Under the relevant regulations it appeared that no objection would be taken to a sale at £ 8,000. Accordingly, the taxpayer transferred the land, which had not been acquired for profit-making by resale, to a company which he had formed for the purpose and in which he beneficially owned the only two issued shares for £ 8,000, or such lesser sum as the appropriate price control authority might approve, the consideration to be satisfied by the allotment to him of 8,000 shares or such lesser number of shares as would equal in face value the purchase price approved. That transaction proceeded and 7,998 shares were allotted. Subsequently, the taxpayer sold his shares in the company for £ 12,000. It was held that there was no profit arising to the taxpayer from a profit-making undertaking or scheme

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within the meaning of s. 26(a) of the Act. The land at the commencement of the scheme was worth £ 12,000 and that was the amount ultimately received by the taxpayer. As Kitto J, with whose judgment Dixon CJ agreed, said:

``a profit is not found to have arisen until there has been deducted from the ultimate sum received the amount or value of all that in fact it has cost the recipient to obtain that ultimate sum.''

Thus the steps taken by the taxpayer in Becker had no other purpose than to obtain the full amount which a willing purchaser was prepared to pay to obtain the land or its equivalent, shares in the company, which had no other asset. The only profit that could be said to arise was the difference between what the land had cost and what was ultimately received. That profit was a capital profit.

For the appellant it was submitted that similarly here no profit emerged. It was said that before the transaction the appellant owned the trade marks having a particular value at the moment the transaction was entered into. It granted a right to use those marks, and having assigned its benefits under the licence agreement, the marks were reduced in value by an amount at least equal to the amount received by Citicorp. It is not self-evident that the marks themselves are affected in value by the grant of a licence to some person other than the owner or registered proprietor to use them. If the licensee does not propose to use them that is a different matter, but as I have already indicated, the evidence does not go so far. No attempt was made by the appellant to adduce evidence as to the value of the marks after the transactions, or for that matter an estimate of the value of the marks at the expiration of the ten year licence period.

What the appellant really sought to convey by its submission, was that the value of the trade marks to it were reduced by virtue of the Citicorp transaction because thereafter for a period of ten years no royalties were forthcoming, nor could the appellants use the mark, unless default occurred on the part of SPC and Ardmona.

For the Commissioner it was submitted that there was as much of a profit in the present case, as there was in Myer. In Myer, the taxpayer had sought to argue that no profit arose because as a result of the assignment, the value of the underlying right to repayment of capital had declined by an amount at least equal to the sum received. This argument was rejected by the High Court. Their Honours said (at ATC 4370; CLR 216):

``As a result of the two transactions Myer, having lent $80,000,000 on 6 March 1981 repayable in accordance with the terms of the loan agreement, had profited by 9 March 1981 to the extent of the first interest payment received on 6 March 1981 and the sum of $45,370,000 paid for the assignment, the principal on the loan being intact. Of course the value of the chose in action, the right to recover the principal sum, was substantially less than the amount of the principal sum because there was no obligation to repay until 30 June 1988. But this circumstance cannot affect the character of the consideration for the assignment. It exists in every case where money is lent for a fixed term.''

The court, however, went on to explain why this was so in the case of a loan of money, by reference to the accounting basis employed in calculating profits and losses for the purposes of the income tax law, namely historical cost. When a taxpayer lends money, the right to receive the capital back at the end of the loan is not treated as a separate asset to be valued at an amount less than its face value because the loan is not repayable until the future. Were that the case, the right to interest would likewise have to be treated as an asset and valued in the accounts, being progressively reduced in value as the period of the loan expired and as the asset representing the right to repayment of the principal sum progressively increased in value. Their honours continued (at ATC 4371; CLR 217):

``But when a debt is brought to account in the same amount as the amount of the money lent, the right to interest on the money lent is not treated as an asset at all. It does not appear in either the balance sheet or the profit and loss account of the lender. The right to interest is not distinguished for accounting purposes from the interest to which it relates. So long as the amount of the principal debt is treated as equivalent to the amount of the money lent, the right to interest cannot be treated as an additional capital asset. The making of a loan does not

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ATC 4672

immediately produce a capital gain equal to the present value of the interest to be paid. The right to interest is not a capital asset which is progressively transformed into income as and when the interest is received.''

It was submitted by the appellant that what is there said was relevant only to loans at interest, and had no application to the present case. Thus, there was no impediment in the present case to the appellant taking into account the decline in value of the rights it had under the royalty agreement.

Unless acquired by purchase, a trade mark, like internally generated goodwill will not, under current accounting standards, appear in the balance sheet of a company as an asset, no matter how valuable. One explanation for this is that the costs of generating the trade marks will have already been expended through the profit and loss account and will not be specifically identifiable. The same difficulty arises in bringing a royalty agreement into the balance sheet. Bringing a royalty agreement into the balance sheet at market value would have the peculiar result that at the time of execution there would be a profit made equal to the value of the income stream and thereafter each year the value of the agreement would have to be written down as the period of the agreement expired. Clearly the situation could not arise where both the trade marks and the royalty agreements were brought into the balance sheet, any more than the situation could arise that the future interest and covenant to pay principal were shown in the balance sheet as separate assets.

In seeking to demonstrate that there was a profit, counsel for the Commissioner directed attention to the situation at the end of the licence period. Then, it was said the appellant could be seen to have the trade marks, and to have received the sum of $7,581,691. When this was compared with the position before the assignment, where the appellant had only the trade mark, it could be seen that there was a profit to the appellant of $7,581,691. To this, the appellant replied that at the end of the ten year licence term the appellant would no longer have the trade marks (they could be assumed to pass to Elder Smith Goldsbrough Mort Limited), and even if they did not, as they were not likely to be used by the licensees, they would have no value. I have already explained the difficulty involved in the alternate submission. The difficulty in the first is that the assignment to Elder Smith Goldsbrough Mort Limited would, prima facie, be a separate transaction from that with Citicorp, even if intended by the appellant.

Counsel for the appellant preferred to direct attention, not to the end of the licence period, but to the beginning of that period, when the diminution of value of the royalty agreement could be assumed to be equal in value to the consideration payable by Citicorp. Looked at at that time, there was no profit.

In determining whether there was a profit-making purpose, it cannot be correct to focus attention at a particular period of time to the exclusion of any other period of time. The question falls to be resolved over the whole period of the agreement. The profit need not emerge in the one year of income. There is much to be said for the view that in a case such as the present, the profit emerges to the appellant over the entire period of the licence agreement, but that is not to deny that there was a profit. Rather, it would raise the issue whether the whole of the consideration received from Citicorp was derived in the year of income, rather than progressively over the term of the licence agreement.

It is not, however, necessary to pursue these issues since I am of the view that unlike the taxpayer in Myer, the appellant did not enter into the licence agreement with the purpose of profit-making by a sale of it. Thus in respect of the first strand of the Myer decision, I am of the view that the facts of the present case are distinguishable from those in that case.

The second strand in Myer

The appellant submitted that in respect of the second strand in Myer, the facts of the present case were likewise distinguishable. In Myer, the taxpayer had rights under the loan agreement. It assigned part of those rights to Citicorp, namely the right to interest, retaining the right under that agreement to repayment of the principal at the expiration of the loan term. In the present case the appellant had rights under the licence agreement and had assigned all the rights it had under that agreement.

For the Commissioner, on the other hand, it was submitted that the appellant started with

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ATC 4673

the trade marks, it assigned the royalties from those trade marks and retained the trade marks themselves so that what was in substance involved in the present case was an assignment of the ``mere right to royalties'' for a lump sum, severed from the marks themselves. So seen, it was said, the present case was indistinguishable from Myer.

As has already been explained, in Myer, the High Court pointed out that interest must always be referable to the principal sum, and is not the produce of the mere contractual right to interest severed from the debt. It was thus distinguishable from an annuity which is the produce of the very agreement which produces it. The assignment of a contractual right to be paid an annuity will, as the High Court pointed out, normally be capital in the hands of the vendor as the price received for the sale of a capital asset:
Paget v Inland Revenue Commissioners [1938] 2 KB 25 at 45 per Lord Romer.

Paget did not concern the assignment of an annuity. The taxpayer who held bearer bonds with interest coupons attached, sold certain interest coupons at a discount. It was held that the amounts received were not income of the taxpayer. The authority of Paget is somewhat diminished as a result of Myer. The High Court distinguished the facts in that case as depending upon the fact that the borrowers had defaulted and offered payments in blocked currency abroad as compensation. Thus the coupons had come to represent the sole source of the expected payments. However, the court added (at ATC 4372; CLR 219):

``The present case may thus be distinguished from the view of the facts which was the foundation of the decision in Paget. If Paget is not to be distinguished in this way, we should be unable to accept its authority for the purposes of the Act.''

In the course of its judgment in Myer, the High Court made reference to the decision of the United States Court of Appeals for the fifth circuit in
Commissioner of Internal Revenue v PG Lake Inc (1958) 356 US 260 in support of the general proposition that the assignment for a lump sum consideration of a mere right to interest was received on revenue account. That decision was not concerned with assignments of interest. What the taxpayers there assigned were oil payment rights (the right to a specified sum of money payable out of a specified percentage of the oil, or the proceeds received from the sale of such oil, if, as and when produced) and what is described as a ``sulphur payment'' consisting of a percentage of a pooled royalty interest. The court described the transactions in the following terms:

``The substance of what was assigned was the right to receive future income. The substance of what was received was the present value of income which the recipient would otherwise obtain in the future. In short, consideration was paid for the right to receive future income, not for an increase in the value of the income-producing property.''

Immediately after this passage, the court referred to the arrangements before it as ``transparent devices''. It rejected form controlling over substance and cautioned that the essence of the arrangement was to be determined (at 260):

``not by subtleties of draftsmanship but by their total effect.''

Counsel for the Commissioner relied on these words and urged the court to ignore the form of the present arrangement and the subtleties of drafting, a reference to the appellant assigning its right title and interest in the royalty agreement itself, rather than a mere right to royalty. It cannot be said that the High Court in Myer, by its reference to PG Lake Inc, intended to endorse everything that was said in that case. Indeed, an acceptance of
Helvering v Horst (1940) 311 US 112 , upon which the reasoning in PG Lake substantially depended, would have the result that the decision of the High Court in
Shepherd v FC of T (1965) 14 ATD 127 ; (1965) 113 CLR 385 was wrongly decided.

The difficult question is whether in Myer the High Court was propounding a view of the law that the assignment of every right to receive income in the future, other than a right arising under a contract dissociated from any other underlying property from which the income may be said to be derived, results in the consideration for the assignment being of a revenue nature as being in substitution for the income that would otherwise have been derived, or whether the decision was intended to be more narrowly confined.

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ATC 4674

There is an obvious distinction between royalties on the one hand and interest on the other. A trade mark, or for that matter any other form of industrial property right, may be used to generate income directly, by the use of that industrial property right in a business of manufacturing and selling. It may be turned to account by licensing others to use it. Such a licence grants permission to the licensee to do that which would otherwise be unlawful, namely to use the industrial property right in the licensee's business. The consideration for such a licence may be paid in a lump sum or may be paid by way of royalties.

In its true meaning, a royalty is a payment made in respect of a particular exercise of a right. Thus it will ordinarily be calculated by reference to quantity or value or the occasions on which the particular right is exercised:
Stanton v FC of T (1955) 11 ATD 1 at 4; (1955) 92 CLR 630 at 642 ;
FC of T v Sherritt Gordon Mines Ltd 77 ATC 4365 ; (1977) 137 CLR 612 at ATC 4372; CLR 626-627 per Mason J and at ATC 4374; CLR 630 per Jacobs J. On their face, the payments to be made by SPC and Ardmona are royalties in the ordinary sense of the word, with minimum yearly amounts reserved. Were it necessary to determine the source of these royalties as a matter of fact, that would be held to turn upon the location of the industrial property right in contradistinction to the licensing of know-how considered by the High Court in
FC of T v United Aircraft Corporation (1943) 68 CLR 525 . In that sense, royalty income may be said to be derived from the underlying industrial property right licensed.

A royalty payable periodically, and by reference to the occasions of exercise of the right, will clearly have the character of income. If an industrial property right is licensed for a lump sum payment, the question whether the lump sum is income or capital will depend upon all the circumstances. One matter of relevance will be the frequency with which the licensor grants such rights, another will be the question whether the rights granted are exclusive or non-exclusive. A lump sum payment, made in consideration of the grant of a non-exclusive right, will more likely be of a revenue character than if the grant is of an exclusive right:
Rustproof Metal Window Co Limited v Inland Revenue Commissioners [1947] 2 All ER 454 at 459 per Lord Greene MR. If the industrial property right is licensed by way of exclusive licence for a lump sum with no reference to anticipated quantum of user, the resultant amount will ordinarily be received as capital:
Inland Revenue Commissioners v British Salmson Aero Engines Ltd [1938] 2 KB 482 . If, on the other hand, the industrial property right is licensed by way of exclusive licence for a lump sum which is arrived at by reference to anticipated quantum of user, the English cases suggest that the lump sum will ordinarily be income in the hands of the recipient: Withers (Inspector of Taxes) v Nethersole per Lord Greene MR in the Court of Appeal [1946] 1 All ER 711, approved by Viscount Simon in the House of Lords [1948] 1 All ER 400, and per Denning MR in
Murray (Inspector of Taxes) v Imperial Chemical Industries Ltd [1967] Ch 1038 . The Australian case of
Kwikspan Purlin System Pty Limited v FC of T 84 ATC 4282 (Supreme Court of Queensland, Campbell J) said to be a ``borderline case'' may be thought to depend upon its own peculiar facts or alternatively stand outside the generally accepted authorities.

There are two points to be made. The first is that the mere industrial property right which is licensed does not, without more, generate the income. The income is generated by the turning the right to account, for example, by licensing another to use it. Although no income could be generated without the ownership or other relevant interest in the industrial property right, the right to income in the form of royalties is more immediately derived from the licence agreement itself. On the other hand, interest may be said to be more immediately derived from the loan of the moneys, interest being the price payable to the lender for his being without his money for the term of the loan. However, when a loan has been made the moneys have been parted with and in return a lender obtains a chose in action for the repayment of those moneys. That chose in action itself does not generate any interest covenanted to be paid.

The second point to be noted here is that had the appellant licensed SPC and Ardmona to use the trade marks in consideration of a lump sum, calculated by reference to the present value of the anticipated user of the marks (the minimum royalty payments being assumed to have been so calculated) the lump sum payment would, in accordance with the English cases, be capable of being seen as income.

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ATC 4675

It may here be remarked that it was conceded by the appellant that if the lump sum received by the appellant, had it been paid by SPC and Ardmona, were income, the appellant could not succeed in the appeal. This concession was presumably made on the basis that the assignment should on the appellant's submission be seen merely as the mechanism whereby in two stages, the appellant achieved what he was unable commercially to achieve in one, namely a lump sum payment for the rights granted by it to SPC and Ardmona. Given that I am of the view that the lump sum calculated as the present value of the right to receive payments which on the face of the document were calculated by reference to the exercise of the rights granted under the licence agreement would probably have been income, the concession could bring about the result that the appeal should be dismissed.

I prefer, however, to rest my decision on more general grounds. Notwithstanding some doubt, I think Myer must be taken as establishing that, except in the case of the assignment of an annuity where the income arises from the very contract assigned, an assignment of income from property without an assignment of the underlying property right will, no matter what its form, bring about the result that the consideration for that assignment will be on revenue account, as being merely a substitution for the future income that is to be derived. Thus, the fact that the future income may be secured by an agreement, and that the assignment is of the right title and interest of the assignor in that agreement will not affect the result.

So stated the principle is consistent with the development of the law in cases involving compensation for rights of income. Amounts received as compensation for an income right, amounts which thus fill the hole of income, have the character of income. The giving up of an opportunity to earn remuneration in consideration of the payment of an agreed sum payable in instalments was held to be income in
Commissioner of Taxes (Vic) v Phillips (1936) 3 ATD 330 ; (1936) 55 CLR 144 . The proceeds of an insurance policy on the life of an employee of a subsidiary was held to be income in
Carapark Holdings Limited v FC of T (1967) 14 ATD 402 ; (1966-1967) 115 CLR 653 where Kitto, Taylor and Owen JJ said (at ATD 405; CLR 663):

``in general, insurance moneys are to be considered as received on revenue account where the purpose of the insurance was to fill the place of a revenue receipt which the event insured against has prevented from arising...''

If the general proposition need be qualified, as it was in Carapark by restricting it to receipts in the course of business, the receipt here was as much gained by the appellant in the course of its business as a holding company as was the case in Carapark, using the expression ``business'' as it was used in Carapark to refer to the (at ATC 406; CLR 664):

``continuous course of conduct which the appellant was following for the derivation of income.''

It is true that in Phillips, Dixon and Evatt JJ said (at ATD 334-335; CLR 156):

``It is true that to treat a sum of money as income because it is computed or measured by reference to loss of future income is an erroneous method of reasoning. cf. Californian Oil Products Ltd. (in Liq/n) v. Federal Commissioner of Taxation; Van den Berghs v. Clark. It is erroneous because, for example, the right to future income may be an asset of a capital nature and the sum measured by reference to the loss of the future income may be a capital payment made to replace that right. Or, again, the computation may be done for the purpose of ascertaining what capitalized equivalent should be paid for the future income. But, where one right to future periodical payments during a term of years is exchanged for another right to payments of the same periodicity over the same term of years, the fact that the new payments are an estimated equivalent of the old cannot but have weight in considering whether they have the character of income which the old would have possessed.''

However, it will be noted that their Honours expressed themselves equivocally in discussing the payment of a lump sum measured by reference to future income, and did so, no doubt, having regard to what was said by Lord MacMillan in
Van den Berghs Ltd v Clark (Inspector of Taxes) [1935] AC 431 at 442 , where the principle is also expressed with some equivocation. Where, however, a taxpayer assigns a chose in action, being a right to

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ATC 4676

receive periodical sums, which when received would be income derived from underlying property which is retained and assigns that right in consideration of an amount which is calculated as the present value of that income stream, then I am of the view that that consideration should be seen as being as much income as the stream which it replaces, notwithstanding that it is paid in a lump sum rather than be periodical payments that are in substitution for the income stream.

As Professor Parsons points out in his work Income Taxation in Australia Law Book Co. 1985 at 165, written before the decision of the High Court in Myer, there has been no case which has applied what the learned author refers to as the ``compensation principle'' in a realisation of assets case, as distinct from a surrender of rights case. Like Professor Parsons, I see no reason why the ``compensation principle'' should not apply to a realisation of assets case.

It follows, in my view, that the appeal should be dismissed and the appellant must pay the cost of it. In these circumstances there is no need to consider the respondent's alternative submission that the amount paid to the appellant represented a transaction made in the ordinary course of business and for that reason should be seen as income.