JB CHANDLER INVESTMENT COMPANY LTD & ANOR v FC of T

Judges:
Gummow J
von Doussa J
Hill J

Court:
Full Federal Court

Judgment date: Judgment handed down 22 December 1993

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Gummow J

This appeal was heard in Brisbane. The nature of the proceeding before the Administrative Appeals Tribunal (``the AAT'') and at first instance in this Court, together with the salient facts, are described in the judgment of Hill J. The decision of the primary Judge is reported,
JB Chandler Investment Co Ltd & Anor v FC of T 93 ATC 4810 . The matter came before this Court from a decision of the AAT and was an appeal ``on a question of law'', as required by s. 44 of the Administrative Appeals Tribunal Act 1975 (``the AAT Act'').

In my view, no error on the part of the primary Judge has been demonstrated and the appeal should be dismissed. There are three aspects of the appeal to which I should refer.

The dispute before the primary Judge and this Court largely turned upon the significance to be attached to cl. 19 of the written offer made 30 September 1987 (``the Offer''). The Offer is stated as being made by the two appellants (``Chandler Investment'' and ``Chandlers Rental'' respectively) and by Chandlers Pty Limited (``Chandlers''). Chandlers and Chandler Investment were wholly owned by Chandlers Australia Limited which, with Billy Guyatts Limited, wholly owned Chandlers Rental.

In the Offer, cl. 1.1 provided:

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``1.1 In this Offer, unless the context otherwise requires, the following words and expressions shall have the following meanings: -

• ...
• `the Company' means each of the companies referred to in Recital A hereof which expression means, unless the context otherwise indicates, the said companies jointly and each of them severally.
• ...
• `the Premiums' means the sums payable to the Company as more particularly set out in Clause 19 hereof.''

Clause 19, which was headed ``Premiums'', stated:

``19.1 The Offeree [HFC Financial Services Limited (`HFC')] shall pay to the Company the Premiums for entering into this Agreement and for procuring each of John Martin Pty Limited, Chandlers Appliance Stores Pty Limited, Chandlers Appliance Stores (Northern) Pty Limited, Chandler Piesse Pty Limited and Chandler Derrick Pty Limited (each of which is associated with a company within the Chandler Group) to enter into a certain Merchant Agreement of even date herewith with the Offeree which Agreements will hereinafter enable the Offeree to provide credit facilities or other facilities to persons (whether or not presently Hirers and Borrowers) wishing to purchase the goods and merchandise offered for sale by the Company or their associated companies within the Chandler Group.

19.2 The Premiums payable to the Company contemporaneously with the acceptance of this Offer shall be: -

• J.B. Chandler Investment Company Limited - $400,000
• Chandlers Rental Pty Limited - $100,000

19.3 Should the Merchant Agreement be terminated at any time prior to the 30th day of September, 1990, then the Company shall effect a pro rata refund of the sum of TWO HUNDRED THOUSAND DOLLARS ($200,000.00) of the Premium for that period from the date of termination to the 30th day of September, 1990.''

The first aspect of the appeal concerns the significance for revenue purposes of certain points of construction of the Offer.

The use of the phrase ``the Company'' in cll. 19.2 and 19.3, dealing with the payment and pro rata refund of the premium, in a context where the phrase identifies only two of the three companies within the definition in cl. 1.1, that is to say the first and second appellants, Chandler Investment and Chandlers Rental, is significant in the construction of cl. 19.1. It strongly suggests that the phrase in cl. 19.1 ``the Offeree shall pay to the Company'' refers only to two of the three companies, and does not include Chandlers. That is to say, cll. 19.2 and 19.3 provide a particular context which requires that the term ``the Company'' should be read otherwise than as indicated in the definition in cl. 1.1.

It is true that Chandlers wholly owned four of the five companies which entered the Merchant Agreement, and that the first and second appellants lacked this direct relationship. Nevertheless, all corporations involved were members of the Chandler Group. In any event, lack of direct ownership by them of a shareholding would not necessarily be inconsistent with the taking of a procurement fee by the two appellants for the rendering of services in bringing about the entry of other members of the Chandler Group into the Merchant Agreement. The receipt of the procurement fee by the appellants would be income according to ordinary concepts.

As it happened, the Merchant Agreement also bore the date 30 September 1987. It was suggested by the appellants in argument that this indicated that the procuration for which the consideration was paid to them never took place. This assumes that the expression in cl. 19.1 of the Offer ``for procuring... to enter into a certain Merchant Agreement...'', speaks only in terms of futurity. There is, however, no reason why this necessarily is so. The participle ``procuring'' may equally well be read as identifying a state of affairs already existing whereby the companies in question were now ready to enter into the Merchant Agreement. This is consistent with the later terms of cl. 19.1 which identify the Merchant Agreement as being ``of even date herewith''.

In my view, there is nothing in the construction of the Offer which indicates the contrary of the decision reached by the primary

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Judge. This was that there was no error of law in the conclusion of the AAT that the two receipts were of an income character in the hands of the taxpayers.

The second issue upon the appeal with which I should deal, concerns the significance to be attached to certain observations both at first instance and on appeal in
FC of T v Cooling 90 ATC 4472 ; (1990) 22 F.C.R. 42 .

Counsel for the appellants submitted that ``the reality of this situation'' meant that it was ``artificial'' to see the arrangements between the Chandler Group and HFC as involving payment of a procuration fee to secure the benefit of the Merchant Agreement. Rather, the payments were made for goodwill and were capital receipts. Counsel submitted that the situation was relevantly the same as that in Cooling .

In that case, the solicitors received a proposal for a lease by their firm of space in the ``Blue Tower'' office block. The proposal included a payment of cash to the solicitors. The firm had replied stating that it ``or an entity to be nominated by us'' desired to lease space in the building subject to a number of matters. One was the terms of the guarantees by the partners, if these were to be sought by the lessor. The solicitors then wrote to the agent confirming that ``we wish to take up the offer of a lease on the eighth floor of the Blue Tower on the terms basically as outlined in the correspondence''. The letter went on to say that among the issues which needed to be resolved was the method of payment of the cash incentive. These factual findings appear from the judgment of the primary Judge (
Cooling v FC of T 89 ATC 4731 at 4735 ). It was in this setting that there followed the letter of 29 November written by the agent to the senior partner of the firm of solicitors. In fact, his Honour found that the letter had been drafted by a member of the firm. The letter confirmed that the lessor was prepared to pay to the partners the sum of $162,000 ``as an incentive to sign the guarantees and to procure Bengil Services Pty Ltd to accept the lease. The above payment will be made on the execution of the lease and guarantees''.

In the Full Court (90 ATC at 4482; 22 F.C.R. at 53) Hill J. said:

``When one looks at the entire context in which the payment was made including the interrelationship between the firm and Bengil (the latter being but the alter ego of the former), his Honour was, in my view, entitled to find as he did that the payment was an incentive to the firm to cause it to move rather than a payment for services to be rendered by the firm. This being the case, the character of the payment as income is not to be determined by focusing upon the words of the letter of 29 November to the exclusion of all the circumstances surrounding the payment which provide the real context in which the task of characterisation is to be assayed. In my view, his Honour was not in error in considering what his Honour saw as `the reality of the situation', namely that the payment was made so that the firm would move to [the Blue Tower] and that it was made independently of the entity which formally took over the lease.''

What was decided in Cooling is no support for the proposition that where the circumstances show that what appears to be a formal written agreement between the parties represents a bargain hammered out in negotiations, the terms of the agreement are to be disregarded in determining the revenue or other character of payments made pursuant to the agreement. In the present case, the surrounding circumstances supported rather than gainsaid the proposition that, as indicated on its face, cl. 19 represented that which the parties were prepared to accept as their bargain.

The material before the primary Judge included the oral evidence given to the AAT by the principal negotiator for the Chandlers Group, Mr R.G. Turner. In cross-examination, he was shown a letter dated 23 November 1987 written to him by the solicitors to the Chandlers Group, Chambers, McNab, Tully & Wilson.

Mr Turner agreed that it would be a fair summary of the disagreement which occurred in the course of negotiations between the Chandlers Group and HFC that Chandlers wanted the written documents expressly to refer to the payment as being a payment for goodwill and HFC would not agree to that course. Mr Turner was shown the penultimate paragraph of the letter of 23 November. This read as follows:

``In the end, you will recall in our discussions with Phil Ezzy [of HFC] that the clause, which finally became Clause 19 of the offer document, would be drafted in such a way as to correctly record, in the context

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of the correspondence and discussions which had already passed and taken place, the description and reasons for the payment. It was agreed that the reason why the premium was being paid was to enable HFC to be in a position where it could receive the referrals from customers and to provide to them the financing arrangements previously provided by the Chandler Group. Clause 19 was therefore drafted in the way that it now appears. It was acknowledged that we could have tried to state specifically that it was for the acquisition of the goodwill attaching to the businesses but you will remember that it was agreed with Phil Ezzy that we wouldn't take that extra step so as to enable them at least to have an argument from their side as to the deductibility of those sums.''

Mr Turner agreed that what was said in the letter accorded with his recollection of what was orally agreed to between Chandlers and HFC in the course of the negotiations.

On that footing, the AAT had been entitled to find that the payments had not been made for goodwill and were properly characterised as revenue items in the hands of the taxpayers. It follows that the primary Judge was correct in finding that there was no error of law in that conclusion.

The remaining issue concerns the question of dissection of the payments. The proceeding in this Court was instituted by a notice of appeal dated 19 February 1993. It specified three questions of law as being raised in the ``appeal'' under s. 44 of the AAT Act. The second of these was in the following terms:

``... whether the premium payments of $400,000.00 and $100,000.00 to the first and second [appellants] respectively were a procurement fee and so income according to ordinary usages and concepts within section 25(1) of the Income Tax Assessment Act 1936 (as amended) (`the Act') where clause 19.1 of the Offer Agreement states and the Tribunal accepted that the premiums were paid to the first and second [appellants] for entering the Offer Agreement as well as for procuring each of the retail companies in the Chandlers group to enter into a Merchant Agreement with [HFC].''

In his reasons for judgment, the primary Judge said (93 ATC at 4818):

``No argument was put to me that because clause 19.1 identified entry into the agreement, as well as the promise to procure the retailers' execution of the Merchant Agreement, as the consideration for the payments of $400,000.00 and $100,000.00 which were described as `premiums', those premiums were receipts of a mixed nature and that insofar as the premium was paid for the appellants' entering into the Offer Agreement, it was a payment for the whole of the appellants' income producing business and, to that extent, a capital receipt by the appellants. If such an argument were well-founded, its consequences might be that the whole of the $500,000.00 was not assessable, if the case was like
FC of T v Spedley Securities Limited 88 ATC 4126 at 4131 , or that only that part of the $500,000.00 attributable to the procuration promise was taxable, as is more likely: cf.
McLaurin v FC of T (1961) 12 ATD 273 at 275; (1960-1961) 104 C.L.R. 381 at 391 . But before any question as to whether a dissection should be made could arise, the appellants would have to show that the premiums, considered in the whole context of the transaction, were truly intended to have this dual character. That conclusion does not automatically flow from the opening words of clause 19.1.''

Ground 4 in the Notice of Appeal before us asserts that the primary Judge:

``... erred in holding that no argument was put to him that because clause 19.1 identified entry into the agreement, as well as the promise to procure the retailers' execution of the Merchant Agreement, as the consideration for the payments of $400,000 and $100,000 which were described as `premiums', those premiums were receipts of a mixed nature and that insofar as the premium was paid for the Appellants' entry into the Offer Agreement, it was a payment for the whole of the Appellants' income producing business and, to that extent, a capital receipt by the Appellants.''

The respondent supports the accuracy of the treatment of the point by the primary Judge and disputes ground 4.

In support of the proposition that the primary Judge was in error in describing the submissions that were before him, the

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appellants referred us to para. 19 of the written outline of submissions which was before his Honour. They also referred to pp. 16-18 and 57-58 of the transcript for 25 August 1993. In my view, none of these references gainsay his Honour's conclusion that no argument was before him that the sums in question were receipts of a mixed nature. If the argument had been put to the primary Judge, then it appears that a further question would have arisen, namely whether in the light of the conduct of the proceeding before the AAT, it was open for the taxpayers to propound any such issue as an available ``question of law'' under s. 44 of the AAT Act.

In
Coulton v Holcombe (1986) 162 C.L.R. 1 at 8 , four members of the High Court repeated the earlier statement by six Justices in
University of Wollongong v Metwally (No. 2) (1985) 59 A.L.J.R. 481 at 483 :

``It is elementary that a party is bound by the conduct of his case. Except in the most exceptional circumstances, it would be contrary to all principle to allow a party, after a case had been decided against him, to raise a new argument which, whether deliberately or by inadvertence, he failed to put during the hearing when he had an opportunity to do so.''

An illustration of such ``exceptional circumstances'' is provided by
Electricity Commission of New South Wales v Yates (1993) 30 N.S.W.L.R. 351 . There the trial court had completely misconceived the relevant law by overlooking the statute which governed the award of damages in the case.

In the present case, the primary Judge pointed out (93 ATC at 4818) that he had not been directed to any attempt made at the hearing before the AAT to characterise part of the premium as being a capital receipt with the balance only being attributable to the promise in cl. 19.1. His Honour continued:

``Moreover, no such argument was put to me. It was not suggested that the matter should go back to the [AAT] for a rehearing with further evidence to enable such an apportionment of the premium payments to be made. The appellants instead joined with the respondent in submitting that the appeal should be finally disposed of by me, the only issue being whether the entirety of the $500,000.00 was or was not assessable as income of the appellants.''

In that state of affairs it certainly could not be said that on the ``appeal'' to this Court under s. 44 of the AAT Act the relevant facts had been found by the AAT or that the dissection point was one purely of law. Further, the state of authorities as to mixed payments is not such as to engender confidence that there exists a clearly defined body of principle. If the point were to be agitated before us, it would be appropriate to do so only with the benefit of the views of the primary Judge on these matters. It must be remembered that, save for the exceptional case where there is a grant by the High Court of special leave, in a case such as the present, this Court is the ultimate court of appeal. It must be unwise for a court in that position to decide an appeal upon a difficult body of law where the appellants have so conducted the case below as to deny the provision of a consideration of the matter at first instance.

Ground 4 of the Notice of Appeal should not be entertained.

The appeal should be dismissed with costs.