MIM HOLDINGS LTD v FC of TJudges:
Full Federal Court
Northrop, Hill and Cooper JJ
The appellant, MIM Holdings Ltd (``Holdings'') appeals from the judgment of a judge of this Court (Drummond J) in two applications in which his Honour dismissed with costs appeals brought by Holdings against the Commissioner of Taxation in respect of amended assessments in relation to the years of income ended 30 June 1984 and 1985. The Commissioner appeals from an application in respect of the year of income ended 30 June 1986 in which his Honour allowed Holdings' appeal with costs in respect of an amended assessment issued in relation to that year.
In each of the three years of income with which the present appeals are concerned, Holdings received payments from the Government of Queensland pursuant to an agreement hereafter referred to as ``the Reservation Agreement''. Original assessments were issued in respect of each of the three years, excluding the payments received by Holdings which Holdings, in its income tax return, had claimed to be of a capital nature. Subsequently, the Commissioner formed the view that the payments were in fact payments of income and issued amended assessments in respect of each of the three years.
It is common ground that in respect of the 1984 and 1985 years of income, the Commissioner had never seen, prior to the issue of the original assessments, the Reservation Agreement. However, on 1 July 1986, and indeed many months before the original assessment issued for the 1986 year, the Commissioner received a copy of the Reservation Agreement. Thus, the original 1986 assessment was made by the Commissioner with full knowledge of that agreement.
Two issues arose for decision before Drummond J. The first was whether the payments received by Holdings in each year of income were income in ordinary concepts or were on capital account. The second, which arose only if the first issue was answered adversely to Holdings was whether in any of the three years of income there had been a full and true disclosure of all material facts necessary for the assessment of the relevant income years so that the Commissioner was not entitled to amend the original assessments.
In respect of the 1984 and 1985 years, the learned primary judge held that there had not been a full and true disclosure, with the result that the Commissioner was empowered to amend the original assessments to include the payments received under the Reservation Agreement as assessable income. However, his Honour found that, as a result of the Reservation Agreement having been made available to the Commissioner prior to the issue of the 1986 assessment, there had been a full and true disclosure with the consequence that the Commissioner was not empowered to amend the original assessment so as to include in it the payments received by Holdings. His Honour thus allowed Holdings' appeal with the consequence that the Commissioner was required to allow Holdings' objection to the 1986 amended assessment and reduce it accordingly.
The parties take no issue with the statement of facts contained in the judgment appealed from. Accordingly, it is convenient to repeat the facts as narrated by Drummond J as relevant to the assessability to Holdings of the payments received by it under the Reservation Agreement.
``THE SUPPLY BY ISA OF POWER TO NORQEB
For many years Mount Isa Mines Limited (`Isa') has conducted a mining operation at Mt Isa. In 1970, following a reconstruction, the applicant, MIM Holdings Ltd (`Holdings') was formed and Isa became a wholly owned subsidiary of Holdings. Well
ATC 4423before that, Isa established and operated at the Mt Isa mine site a power station called the Mines Power Station, which supplied electrical power to the mine, smelter and associated installations. The Mt Isa township, close to the mine site, in which many of Isa and Holdings' employees live with their families, has never had any public source of electrical power supply. Power was initially provided by Isa from the Mines Power Station through the Mt Isa City Council, to the town's residents. Because of increased demands for electricity from both the mine and the township, a second power station was established by Isa at Mica Creek in the early 1960s. The Mica Creek Power Station was connected with the Mines Power Station.
In June 1972, Isa and the Mt Isa City Council entered into a Bulk Electricity Supply Agreement, pursuant to which Isa agreed to supply electrical power from its power stations to the Council for reticulation within the Mt Isa township and also within the Shire of Cloncurry (`the 1972 Agreement'). In 1976, the North Queensland Electricity Board (`NORQEB') was constituted; it replaced the Mt Isa City Council as a party to the 1972 Agreement. That Agreement was expressed to be subject to review in June 1982. In about February 1982, officers of Isa met with officers of NORQEB to negotiate a new Bulk Electricity Supply Agreement for the Mt Isa region. Officers of Holdings were not then involved. The demand for power, both by the mine and the township, had continued to increase and, by late 1981, Holdings and Isa considered that an additional 30 to 33 megawatts of capacity would be required by 1985/1986, to meet the growing requirements of both the Mt Isa Mine and NORQEB.
The State Electricity Commission (`SEC') became involved in the negotiations between NORQEB and Isa. Initially, its interest was to ascertain whether the increasing power requirements of north-west Queensland could best be served by a power line from the coast linked with the State electricity grid or by increased local generation or by a combination of both. Moreover, NORQEB was required by s 67 of the Electricity Act 1976 (Qld) to obtain the approval of the SEC before entering into any new Bulk Electricity Supply Agreement and the SEC had a duty under the Electricity Act to ensure that electric power was supplied to consumers throughout Queensland as economically as possible. It turned out that the most economical option was to increase local power generation from the Mica Creek Power Station, although this involved the construction of an additional generating unit there.
The representatives of Isa and NORQEB were able to reach agreement on most aspects of the proposed new Bulk Supply Agreement. But they could not agree on the proposed electricity tariffs, in particular, on the capital components of the tariffs (by which Isa planned to recoup, among other things, part of the cost of constructing the additional generating unit) or on the formula for escalation of those capital components. The tariffs Isa proposed that NORQEB should pay for supply under the new agreement would form the basis for the tariffs NORQEB, in turn, would charge the consumers it supplied. If NORQEB agreed to Isa's proposal, that would have resulted in NORQEB having to increase substantially its own tariffs to consumers over its current charges.
By about 3 June 1982 negotiations between Isa and NORQEB had reached an impasse. This breakdown was not acceptable to the SEC. On or about 5 August 1982 Mr Galwey, the Commissioner of the SEC, wrote to Sir Bruce Watson, the Managing Director and Chief Executive Officer of Holdings and Chairman of Isa, expressing the SEC's concern about the magnitude of the tariff increase attributable to the capital components proposed by Isa; Mr Galwey asked for Sir Bruce Watson's assistance in arranging discussions that would resolve the differences that existed between Isa and NORQEB. On 27 August 1982, Mr Galwey met Mr Middlin, a director of Holdings. Mr Galwey suggested that the SEC might make what he called `a non-refundable capital contribution' towards the cost of the capital works for the additional generating unit at Mica Creek Power Station, as a solution to the dispute between Isa and NORQEB. When the SEC provided a new bulk electricity supply to a large industrial or
ATC 4424mining project in Queensland, it commonly required, as a condition of that supply, the payment by the project owner to the SEC of a non-refundable contribution to the capital cost to the SEC of providing the supply. Mr Galwey considered that since NORQEB was in a position analogous to a bulk consumer of another's supply, it was appropriate to offer the same sort of contribution to that other's capital costs of supply as the SEC required in similar circumstances. If Mr Galwey's proposal were acceptable to Isa, it would enable a tariff to be agreed between NORQEB and Isa which would be within limits acceptable to the SEC, having regard to its statutory duty to ensure economical supply to consumers, because it would cover only Isa's operating costs of supply, with no component for recovery of Isa's capital costs of supply. From that point, senior employees of Holdings participated in the negotiations.
The board of directors of Holdings ultimately resolved to accept the SEC's offer of capital contributions. The negotiations culminated in two written agreements, viz:
1. An agreement between the Minister for Mines and Energy (on behalf of the Queensland Government) and Holdings dated 11 August 1983 (`the Reservation Agreement'). This dealt with the contributions to be made by the SEC to Holdings in respect of certain of the capital costs incurred and to be incurred by Isa in relation to its existing and its expanded plant.
The Reservation Agreement was entered into by the Minister, at the request of the SEC, because of doubt that the SEC had power to enter into an agreement of that kind.
2. An agreement for the bulk supply of electricity at Mount Isa (`the Bulk Supply Agreement') between Isa and NORQEB dated 4 January 1984. This dealt with the periodic payments to be made to Isa for supplying electricity to NORQEB: the two tariffs provided for by this Agreement covered only Isa's operating costs of power supply and did not include any component in respect of capital costs which had been incurred by Isa up to 1983 in establishing, and which were thereafter to be incurred by Isa in expanding, its power stations.
The Reservation agreement contained, inter alia, the following provisions:
`The government of Queensland (``the Government'') desires and has arranged with MIM Holdings Limited (``the Company'') to reserve for use by an Electricity Authority constituted pursuant to the Electricity Act 1976-1982 a portion of the available capacity from the Company's generating system at Mount Isa.
Accordingly the Government has authorised the Minister for Mines and Energy to enter into the following arrangements with the Company-
(1) The reserved block of electric power required is a maximum of 27 megawatts aggregate co-incident demands at the agreed points of supply (hereinafter called ``demand'') generally in accordance with the attached forecast load and the Government would require the Company to undertake that 22 megawatts of demand will be available up to and including the date of commissioning of the fifth generating set at Mica Creek power station (but that the Company shall use its best endeavours to supply demands in excess of 22 megawatts of demand but not exceeding 27 megawatts of demand if this is required before the aforementioned date) and 27 megawatts of demand thereafter until such requirement is varied in accordance with this agreement.
In consideration of this undertaking the Government will make the following non-refundable capital contributions to the Company on the terms and dates of payment as hereinafter stated:
(i) An initial payment of $5.265 million (in June 1982 dollars) payable within 14 days of acceptance of this agreement.
(ii) A further payment of $10.605 million towards the final capital cost of the installation of the Fifth Set (nominal 33 megawatt capacity) at Mica Creek Power Station such payment being made in accordance
ATC 4425with the schedule set out hereunder:-
23% of the further payment payable within 14 days of acceptance of this agreement.
47% of the further payment payable on 6 January 1984.
20% of the further payment payable on 6 July 1984.
10% of the further payment payable on 7 January 1985.
This further payment is based on a provisional estimate in June 1983 of capital costs of the Fifth Set of $53.6683 million and shall be adjusted by payment of a lump sum amount equal to 19.76% of the difference between $53.6683 million and the final actual capital costs established upon completion of the words [sic], no later than 1 November 1986 and such payment shall be made forthwith.
(2) In the event that the Company is required to undertake a substantial capital works project (being a project that is estimated to cost $50,000 or more) on its power generation system at Mount Isa and such capital works project does not increase the then total capacity of the power generation system then the Government shall make a further non-refundable capital contribution towards the actual cost of such capital works so undertaken. The amount of such capital contribution shall be calculated using the following formula:-Reserved block of power (MW) Agreed capacity of X Actual cost generating plant of capital including all plant works project under construction (MW) ($)
(7) These arrangements may be terminated by the Government or the Company by giving seven years notice (or such shorter period as may be agreed upon) to the other party. Provided that if notice is given by one party to the other before 1 January 2000, the parties shall then in good faith enter into discussions as to the appropriate monetary compensation that is to be paid by the party giving notice to the other party.
(8) It is agreed by the Government and the Company that these arrangements do not confer on or imply that the Government or The State Electricity Commission of Queensland or any Electricity Authority has any right or equity in or over the assets used by Mount Isa Mines for power generation at Mount Isa nor do the arrangements:-
(i) confer any rights on the Government or the Commission or any Electricity Authority with regard to the actual operation of such power generated system;
(ii) derogate from any statutory rights or obligations of the Commission, any Electricity Authority or the Company in respect thereto.'
Clause 8 was of special significance to Holdings. Sir Bruce Watson said:
`One of the fundamental principles of our negotiations with the SEC and NORQEB was that there was to be no suggestion that NORQEB or the SEC could have ownership or operational say in the Mica Creek Power Station. There was no sense in the SEC building a power station alongside our power station and we did not want the introduction of different operating conditions that would apply to State employees and not our workers. We have an industrial agreement, the Mount Isa Mines Ltd Award, that was separate from all the others in the State. Isa was not normally involved in any of the one day stoppages that were taking place in the State electricity grid in the early 1980s.'
Holdings' concern that neither the SEC nor NORQEB should have any ownership interest or operating control in respect of Isa's power stations at Mount Isa was apparent during negotiations to the SEC officers involved. Mr Viertel, a Deputy Commissioner of the SEC who was closely involved in the negotiations, said that it was
ATC 4426Holdings' concern about industrial relations considerations and its desire to have Isa, the operating company, removed as far as possible from the SEC and from any possibility of the SEC either having a claim to ownership of or control in the power station that led to the capital contribution being paid to Holdings under an agreement separate from that under which NORQEB periodically paid the operating company, Isa, for electricity supply. The importance to Holdings and Isa of Isa retaining full ownership and control of the generating plant necessary to supply Isa's power needs for all of its own mining and industrial operations at Mt Isa, so clear from the evidence, appears to have been dictated by concern that any reliance on power externally supplied might expose Isa's own operations to interruption: industrial unrest was then prevalent in the State controlled power generation industry. It appears that the opinion of senior Holdings management was that continuity of the supply of power on which Isa relied for its operations was better assured if all power came from Isa's own plant, operated by its own employees who all worked under the one enterprise- specific industrial award.
The Reservation Agreement formed but one component of the whole arrangement negotiated between SEC and Holdings: the Bulk Supply Agreement between NORQEB and Isa, agreed in the course of those same negotiations, although executed a little later, was an integral part of the arrangement. The Reservation Agreement cannot be said to have ignored the fact that Holdings and Isa were separate entities, given the evidence explaining Holdings' insistence on the capital contributions being paid to it rather than to Isa, as the legal owner of the plant, for Holdings' own commercial reasons. Since Isa was wholly owned and controlled by Holdings, the reference in the Reservation Agreement to `[Holdings'] generating system at Mount Isa' was not a loose expression; the assumption by Holdings in that Agreement of an obligation to reserve for NORQEB part of that system's output was apt to achieve the mutual objectives of Holdings and the SEC, supplemented as it was by the Bulk Supply Agreement between NORQEB and Isa. It was important to Holdings for its own business purposes, to which I have referred, to ensure that the capital contribution payments came to it as an entity legally distinct from the operating company, Isa.
It appears that the payments received by Isa under the 1972 Agreement and then under the 1983 Reservation Agreement and the 1984 Bulk Supply Agreement provided only for recoupment of capital and operating costs, ie, that there was no profit component in them. The price initially payable (subject to escalation) by the Mt Isa City Council, and later NORQEB, under the 1972 Agreement for electricity supplied by Isa, was 2.1 cents per kilowatt hour. This figure was made up of a component of 1.027 cents for fuel and a component of 0.38 cents for labour and maintenance. The residual 0.7 cents was a component to cover part of Isa's acquisition and ongoing ownership costs of the generating equipment and all other capital charges. As the table in Part 3 of Schedule B to the 1984 Bulk Supply Agreement shows, the two tariffs provided for in that Agreement are made up of allowances for salaries and wages, fuel and other operating and maintenance costs: there is no provision for either a capital component or a profit component. I do not regard Mr Charlton's memorandum to Mr Middlin as suggesting the contrary. The evidence shows that the payments to be made to Holdings under the 1983 Reservation agreement did not include any profit component: they comprise a contribution towards the original capital costs of the Mine and the Mica Creek Power Stations from 1972 to 1982, and towards capital costs of the fifth 33MW generating unit which Isa, with Holdings' approval, decided in 1982 to install at Mica Creek Power Station.
The one-off contribution of $5.265M to be paid by the SEC, or rather by the State Government, with respect to the existing plant pursuant to clause 1(i) of the Reservation Agreement was based on the ratio of NORQEB's total demand (20MW) to the total installed capacity of Isa's existing plant in 1982 (139MW), ie, very approximately 14%, applied to the total of Isa's costs of establishing its power plants to 1972 ($33.3M), plus 14% of its capital
ATC 4427expenditure on plant from then to end of the 1982/83 financial year, less the capital component of the tariff charges paid to Isa by Mt Isa Council and then by NORQEB for each year from 1972 to 1982, when the new Bulk Supply Agreement came into effect, all converted to a constant value in 1982 dollars. But, as Mr Galwey said, the $5.265M was a negotiating figure, ie, a broad estimate only, that Holdings ultimately accepted: `it has no mathematical support'. There were extensive negotiations before agreement was reached on how the SEC's contribution to Isa's capital costs of installing the extra generating capacity at the Mica Creek Station should be determined. Although it is difficult to identify all the figures used in the final calculation, it is apparent that the parties arrived at the provisional contribution figure of $10.605M in clause (1)(ii) of the Reservation Agreement on the basis of the ratio of NORQEB's agreed maximum demand to June 1994 to the total installed capacity of the plant, including the planned extensions (ie 19.76%), applied to the estimated cost of constructing the extensions. This figure was provisional in that the Agreement provided for it to be adjusted when the final costs of these extensions were known. In addition, a similar method of calculating the capital contribution to be paid by the State Government was agreed in relation to certain other capital works projects 'on its power generation system at Mt Isa' that Holdings might undertake.
A number of reasons emerge from the evidence for Holdings and Isa adopting a policy of supplying power to NORQEB on a costs recoupment basis only. Sir Bruce Watson explained that, in the 1970s, the company was prepared to subsidise electricity supply to the township to support the local community (then mostly Isa employees and their families) and because it was concerned that full cost recovery might cause industrial trouble in the Mount Isa operations. By the early 1980s Mount Isa had a larger and more diverse population. But the industrial relations advantages to Holdings and Isa from continuing to supply subsidised electricity to the town explain, in part, the willingness of Holdings and Isa to continue to supply power to the township on a cost recovery basis under the new Bulk Supply Agreement of 1984. Isa's willingness to supply power at cost to the public was also, I think, seen by Holdings and Isa's management as assisting in ensuring that Isa would retain control over power generation in the Mt Isa region, something of central importance to Holdings and Isa, as is evidenced by clause 8 of the Reservation Agreement: there would be no pressure on the public authorities to provide power to the Mt Isa public if Isa were prepared to supply public needs at attractive prices.
It is plain that the arrangements with respect to the supply of electricity to the Mount Isa Region from 1982 were arrived at as a result of arm's length negotiations between officers of Holdings and Isa, on the one side, and officers of the SEC and NORQEB, on the other. The Reservation Agreement and the Bulk Supply Agreement, in my opinion, accurately reflect the objectives Holdings intended to achieve. The form of the two Agreements and the relevant surrounding circumstances, to the more important of which I have referred, show that it was to serve Holdings' own business interests that the arrangements for supply of electricity to the Mount Isa township and surrounding areas that came into effect on the expiry of the 1972 agreement took the form they did of the Reservation Agreement between Holdings and the State Government and the Bulk Supply Agreement between Isa and NORQEB. Holdings insisted, for its own business purposes, that the capital contribution in respect of Isa's existing and new plant was paid to it rather than to Isa, the legal owner and operator of that plant. It insisted on these arrangements taking the legal form of the two separate contracts because, in large part, that was in the best interests of Holdings (and Isa) from a number of industrial relations aspects. It was, I think, of fundamental importance to Holdings to prevent Isa's workforce from being dispersed among different trade unions, as a means of minimising the risk of industrial disruption and thus disruption to Isa's operations. The State power industry had a tradition of industrial volatility. Holdings considered it vital for Isa to retain control of the generation of all its power
ATC 4428needs, even if this meant supplying the local residents with subsidised power. This also produced other industrial relations benefits for Holdings and Isa in their relations with their own workforce residence in Mt Isa.
The form, in which the transaction was structured, at Holdings' insistence, was thus of very substantial significance to Holdings for its own commercial purposes. It is a form apt to achieve Holdings' objectives of recouping from the public purse what it regarded as a satisfactory contribution towards the capital costs of its subsidiary supplying electricity for public consumption. There is no suggestion in the evidence that, prior to formulating the statement in Holdings' 1984 tax return purporting to describe the nature of the payments made under the Reservation Agreement in the 1984 financial year, anyone within the Isa organisation considered the payments under the Reservation Agreement as compensation for the sterilisation or fettering of capital assets of Isa or of capital assets of Holdings, viz, its shares in Isa. Rather was it a demand which Isa and Holdings were keen to meet to advance their own business purposes.
THE PAYMENTS RECEIVED BY HOLDINGS
In the 1984 year of income Holdings received $13,555,200 pursuant to the Reservation Agreement, made up of the following amounts:(1) Capital contribution towards existing plant (clause 1(i)) $ 5,265,000.00 (2) First payment for 5th set at Mica Creek (clause 1(ii)) $ 2,439,150.00 (3) Overpayment of $50 $ 50.00 (4) Adjustment to (1) to bring to June 1982 dollars $ 866,700.00 -------------- $ 8,570,900.00 (5) The second payment for 5th set, less $50 overpayment (3) (clause 1(ii)) $ 4,984,300.00 -------------- TOTAL $13,555,200.00 --------------
In the 1985 income year Holdings received $2,121,000 pursuant to clause 1(ii) of the Reservation Agreement (being the third payment for the 5th set at Mica Creek) and $143,267 pursuant to clause 2 of that agreement (being payment for the installation of the number 6 boiler). In the 1986 income year Holdings received $324,096 pursuant to clause 2 of the Reservation Agreement (being payment for the upgrade of instrumentation associated with the Number 1 and 2 boilers at Mica Creek Power Station). The Commissioner did not include any of these receipts by Holdings in any of his initial assessments of Holdings' income for the three years in question.''
Although, as has already been indicated, the parties agreed with his Honour's statement of facts, senior counsel for the appellant emphasised that when his Honour referred to the ``objectives'', or ``commercial reasons'' as the case may be, of Holdings, it had to be accepted that his Honour was referring to the importance both to Holdings and Isa of Isa retaining full ownership and control of the generating plant. Clearly, Holdings as the parent company of Isa took into account in determining to enter the arrangements described, the advantages not only to itself but to Isa in the arrangement. It is not suggested that his Honour meant otherwise in expressing himself as he did.
The difference between the parties lies not in any question of principle under the Income Tax Assessment Act 1936 (Cth) (``the Act'') in its application to the facts of the present case, but rather in a difference between the parties in characterising the payments.
For Holdings it is submitted that the true construction of the Reservation Agreement viewed against the background of the circumstances to which reference has been made, was that the payments in the relevant years of income were made by the Queensland Government for the restriction on the use by Isa of a significant group asset, namely its generation plant. The payments, it is said, were payments calculated by reference to the cost of that asset and were, as a consequence of both these matters, of a capital nature. It is accepted by the Commissioner that if the proper characterisation of the payments is that they were payments for a restriction as submitted by
ATC 4429senior counsel for Holdings, then they should properly be treated as on capital account.
However, the Commissioner submits that the payments should be seen as payments in return for Holdings promising that its subsidiary, which was bound to do its bidding, would make available a stipulated level of power (between 22 and 27 megawatts) to the Queensland Government when required. Although senior counsel for Holdings did not go so far as to concede that if the Commissioner's characterisation was correct the appeal should be dismissed, he was left with a submission that because the payment to Holdings was calculated by reference to costs of the initial facility and the ``fifth set'' facility at Mica Creek Power Station, that had the consequence that the payments received were capital. He did concede, as indeed he had to, that authority was against a submission that there was a relationship between the measure that was used for the purpose of calculating a particular payment and the quality of that payment as income or capital in the hands of the recipient: see, for example,
FC of T v Northumberland Development Co Pty Ltd 95 ATC 4483 at 4492 per Beaumont J and at 4495 per Einfeld J;
Van den Berghs Ltd v Clark  AC 431 at 442;
Commissioner of Taxes (Vic) v Phillips (1936) 3 ATD 330 at 334-335; (1936) 55 CLR 144 at 156.
In our view, the characterisation of the payment received by Holdings was not that of a payment for the imposition of some restriction, fetter or tie on the part of Isa. The present was not a case where a fee was paid to secure that Isa not utilise the whole or some part of the electricity which it generated. So to describe the arrangements between the parties would involve a misleading half-truth.
The clear contractual arrangement between the Government of Queensland and Holdings was that there was to be constructed by Isa a generating plant having a capacity greater than the needs of Isa and that Holdings would ensure that up to the 27 megawatts of power being power referred to in the Reservation Agreement, would be made available for reticulation by the Government as and when required and pursuant to a distribution agreement that was ultimately to be entered into as the bulk supply agreement. No doubt it was a consequence of Holdings ensuring that Isa made available the 27 megawatts that, if demand required it, capacity to that amount would not be available to Isa for its use. But the payment was not made for this restriction but rather, as the agreement itself made explicit, for Holdings ensuring that its subsidiary, Isa, would supply the demands of the Queensland Government up to the requisite 27 megawatts as required in accordance with the Reservation Agreement.
Once the question of characterisation is determined, the conclusion is inexorably reached that the payments are of an income character. The relevant principles can be shortly stated.
- 1. In determining whether a payment has the character of income or capital, regard must be had to the character of the receipt in the hands of the recipient:
Scott v FC of T (1966) 14 ATD 286 at 293; (1966) 117 CLR 514 at 526;
Hayes v FC of T (1956) 11 ATD 68 at 72; (1956) 96 CLR 47 at 55;
The Federal Coke Company Pty Limited v FC of T 77 ATC 4255 at 4273; (1977) 34 FLR 375 at 402 per Brennan J. So here regard is to be had to the quality of the payment in the hands of Holdings.
- 2. The Court is obliged to have regard to all of the facts and can not disregard the separateness of different corporate entities or decide liability to tax upon the basis of the substantial economical business character of what was done: Federal Coke per Bowen CJ at ATC 4263; FLR 387.
- 3. Where the recipient of a payment provides consideration for a payment, that consideration will ordinarily supply the touchstone for ascertaining whether that payment was received on revenue account or not: Federal Coke per Brennan J at ATC 4273; FLR 401. Here the consideration was the undertaking of Holdings that Isa would supply the demands of the Queensland Government for electricity up to the stated 27 megawatt limit.
- 4. The answer to the question whether a receipt is income or capital will not be determined by the character of expenditure which the recipient is required to make:
GP International Pipecoaters Pty Ltd v FC of T 90 ATC 4413; (1989-1990) 170 CLR 124. Thus the fact that expenditure was required to be made to build the additional generating capacity was not determinative of the
ATC 4430character of the payments received by Holdings.
- 5. While periodicity, regularity or recurrence may stamp a particular receipt as income, the fact that a receipt is in a lump sum will not require the conclusion that the payment was of a capital nature: cf GP International Pipecoaters at ATC 4420; CLR 138;
FC of T v Cooling 90 ATC 4472 at 4480; (1990) 22 FCR 42 at 51.
- 6. The test to be applied in determining whether an item is income or capital will be objective rather than subjective: Hayes (supra at ATC 72; CLR 55).
- 7. Amounts paid in consideration of the performance of services will almost always be income: Hayes (supra at ATC 73; CLR 57-58);
Reuter v FC of T 93 ATC 4037 at 4047; (1992) 111 ALR 716 at 730. Thus if the agreement is properly characterised as one whereby Holdings is to procure its subsidiary to make capacity available, it will most likely have the character of income.
- 8. However, a payment made to a person to fetter that person's capacity to perform services or to carry on business may be a capital payment:
Higgs (Inspector of Taxes) v Olivier  Ch 899 and cf the cases referred to in Reuter at ATC 4047; ALR 730; and, especially,
Dickenson v FC of T (1957-1958) 98 CLR 460. Thus if the agreement is properly to be seen as a restriction or fetter, that might lead to the conclusion that it was received as capital.
Senior counsel for Holdings relied heavily upon Dickenson's case with which it was suggested the present facts had analogy. In Dickenson, payments were made to the taxpayer pursuant to agreements with the Shell Company of Australia Ltd in the form of leases and releases as well as personal covenants, having the consequence that the taxpayer was precluded from selling petroleum products other than those provided by the Shell Company, as well as precluded by covenant from having other service station interests in the neighbourhood. In the circumstances, the payments received were held to be capital. Why this is so emerges from the judgment of Williams J, with which Dixon CJ agreed at 482-483.
It was significant to the result that the taxpayer was not required to purchase any petroleum products. Rather, the taxpayer entered into a covenant which was negative in form and substance, restricting his activities. As Dixon CJ put it (at 474), the taxpayer was changing a feature of his business and the payment was part of an inducement to change that feature. The business was being changed from one where a plurality of brands of petrol was sold to one where a solo arrangement prevailed. The end result was, as Kitto J (with whom Dixon CJ also agreed) pointed out, a substantial restriction on the taxpayer's business, so that the payments received were in the nature of a sale price for a substantial and enduring detraction from pre-existing rights.
The present case bears, with respect, little resemblance at all to the facts in Dickenson. The fact that a consequence of the agreement with the Queensland Government was a practical restriction on the ability of Isa to use the totality of electricity generated at all times is but incidental to the arrangement and a consequence of it. It is not what the payment received by Holdings was for.
Particular reliance too was placed upon the decision of the High Court in GP International Pipecoaters. In that case the taxpayer had entered into a contract to construct equipment for use in coating pipes and thereafter to coat certain pipes. To fulfil the contract the taxpayer was required to expend money in constructing the plant. The money expended was capital. That did not, however, bring about the result that the consideration received was capital in the hands of the taxpayer. In the course of its judgment the full High Court, comprising Brennan, Dawson, Toohey, Gaudron and McHugh JJ, placed emphasis on the fact that the taxpayer's business corresponded with what the contract required, namely it extended beyond merely coating pipes to the construction of the plant. Thus the payment of the monetary consideration to the taxpayer took the character of income. Their Honours said (at ATC 4421; CLR 140):
``... The establishment costs were not received under a severable part of the contract relating to the construction of the plant.''
This comment was no doubt made in answer to the argument which appears on the preceding page of the report (ie at ATC 4420; CLR 139) that the scope of the taxpayer's business was coating pipes but not constructing plant.
ATC 4431Perhaps had there been separate contracts, a different result may have followed. But it is hardly possible to construe from the sentence cited that necessarily had there been a severable contract relating to the construction of the plant the consideration received by the taxpayer would have been received as capital. In any event, again the facts of that case are totally different from those of the present case and the decision does little to support the appellant's case.
It follows from the principles set out above, that once the payment in question is characterised as a payment for ensuring that Isa would make available capacity up to the requisite amount upon demand, and as required by the Queensland Government, it is clear that the payment had the character of income.
It follows, therefore, that unless there was full and true disclosure in each of the relevant tax years, the amended assessments must stand.
Section 170(2) of the Act, as it applied in relation to assessments for years of income before the 1989-90 income tax year, read as follows:
``Where a taxpayer has not made to the Commissioner a full and true disclosure of all the material facts necessary for his assessment, and there has been an avoidance of tax, the Commissioner may-
- (b)... - within 6 years from the date upon which the tax became due and payable under the assessment,
amend the assessment by making such alterations therein or additions thereto as he thinks necessary to correct the assessment.''
The question for determination is whether, in any of the years in question, Holdings made a full and true disclosure.
The test most often stated as to the meaning of the expression ``full and true disclosure'' is to be found in the judgment of Menzies J in
Austin Distributors Pty Ltd v FC of T (1964) 13 ATD 429 where his Honour said (at 432-433):
``The requirement of s 170 of the Income Tax and Social Services Contribution Assessment Act is not met by anything less than full disclosure of all the material facts, and a disclosure which leaves the Commissioner to speculate as to some of the material facts is not sufficient.... The matter can be tested in this way. If advice were to have been sought by the taxpayer whether or not the sum in question was a taxable premium, would the person from whom the advice was sought have required more information than this return disclosed to the Commissioner?''
Sheppard J in
Stapleton v FC of T 89 ATC 4818 at 4829; (1989) 88 ALR 606 at 619 subsequently qualified what Menzies J had said because of the possibility that a prudent adviser might require further information, but on receipt that information might prove to be immaterial. As his Honour pointed out in the passage referred to, any omission must be a material one for the full and true disclosure of which the section speaks is a full and true disclose of all the material facts.
As Sheppard J further pointed out, the purpose of the sub-section was to ensure that the Commissioner was given an adequate opportunity to consider properly whether a particular receipt was assessable income or a particular outgoing was an allowable deduction. Such questions are often notoriously difficult. A taxpayer may well in a return submit that a particular item has a capital character whereas the facts as ultimately disclosed bring about the result that a payment has an income character. The mere fact that there has been a submission in a return as to the character of a payment which turns out not to be accepted by a Court does not bring about a lack of full and true disclosure if otherwise all relevant facts have been disclosed:
W Thomas & Co Pty Ltd v FC of T (1965) 14 ATD 78 at 89; (1965) 115 CLR 58 at 76.
On no view of the matter, in the present case, could there have been full disclosure without disclosure of the Reservation Agreement. Without that Agreement it would be impossible for the Commissioner or anyone else to determine whether the payments which Holdings received had the character of income or capital.
The only disclosure made by Holdings in its return for each income tax year was in the following terms:
``Compensation from the Queensland State Government for permanent reduction in value of Company investment in its subsidiary Mount Isa Mines Limited resulting from the State Government requirement that Mount Isa Mines Limited
ATC 4432reserve on commercially restrictive terms, portion of power generating capacity of its Mount Isa power station, for future allocation to the North Queensland Electricity Board (Non-assessable).''
That statement may, no doubt, be seen as an attempt to characterise the payments in a particular way and thus as a submission, but it hardly could be said to be an adequate description of the terms and conditions of the Reservation Agreement let alone to state adequately what the covenants given by Holdings were, for which the payments were received.
The position was different, however, in the 1986 year for the Commissioner had been given a copy of the Reservation Agreement. It is hard to see what further information the Commissioner would require to determine the character of the payments, other than the quantum of them, which had been disclosed. The Act does not require a taxpayer to disclose that which is known to the Commissioner:
Foster v FC of T (1951) 9 ATD 248 at 253; (1951) 82 CLR 606 at 619, and it would not seem to matter that the information relied upon to show disclosure might have been lodged in another taxation office:
Levy v FC of T (1960) 12 ATD 231; (1960-1961) 106 CLR 448 and see
FC of T v Riverside Road Pty Ltd (In Liq) 90 ATC 4567 at 4578. Such qualification as may be suggested by these cases to the general principle stated have no present relevance.
There was, as a result of the Commissioner coming into possession of the Reservation Agreement, no further need for disclosure and, as a result, no lack of full and true disclosure. The Commissioner's appeal for that year must thus be dismissed. Holdings' appeals for the 1984 and 1985 years will likewise be dismissed.
THE COURT ORDERS THAT:
1. The appeal be dismissed.
2. The appellant pay the respondent's costs of and incidental to the appeal to be taxed if not agreed.
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