Dickenson v Federal Commissioner of Taxation

98 CLR 460

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(Judgment by: Williams J)

Between: Dickenson
And: Federal Commissioner of Taxation

Court:

Judges: Dixon CJ
McTiernan J

Williams JWebb J
Kitto J

Subject References:
Taxation and revenue
Income tax
Income or capital

Legislative References:
Income Tax and Social Services Contribution Assessment Act 1936 - 83; 88; 260

Hearing date: 8 February 1957; 19 November 1957; 20 November 1957
Judgment date: 2 April 1958

SYDNEY

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Judgment by:
Williams J

These appeals relate to two payments, each of PD2,000, made to the appellant by the Shell Company of Australia Ltd  (hereinafter called Shell), the first on 30th June 1952 and the second on 1st July 1952. The Commissioner of Taxation included the first of these payments in the assessable income of the appellant for the year ended 30th June 1952 and the second in his assessable income for the year ended 30th June 1953. Appeals from the assessments to this Court pursuant to s. 197 of the Income Tax and Social Services Contribution Assessment Acts 1936-1952 and 1936-1953, were dismissed by Taylor J. The taxpayer has now appealed to the Full Court.

In June 1952 the taxpayer was carrying on upon land he owned at 141 Kingsgrove Road, Kingsgrove, a suburb of Sydney, the business of a garage and service station under the name of the Kingsgrove Garage and Service Station at which he sold many brands of motor spirit, motor lubricants and other petroleum products. The two payments in issue were made as parts of a transaction between the taxpayer and Shell whereby he agreed to restrict the sales of these products at the service station to the products of Shell or in other words to convert the service station into what is known as a one-brand service station. In order to carry out the transaction five documents were entered into between the parties:

(1)

an agreement, which may be referred to as the supply agreement, made on 11th June 1952 whereby Shell agreed to sell and deliver at the service station at its usual list prices to resellers Shell motor spirit, Shell lubricants, and other petroleum products of Shell as the buyer should from time to time require for the purposes of his business, and the buyer agreed to purchase exclusively from Shell all products of this kind which should be sold used or consumed at or upon the premises and not to permit the sale use or consumption there of any motor spirit, lubricants or other petroleum products other than such as should have been supplied to him directly by Shell or its successors in business. The appellant promised to buy from Shell at least six thousand gallons of motor spirit and eighty gallons of automotive lubricants in every month during the continuance of the agreement (subject to a proviso if for any reason Shell was unable to supply him). Clause 6 of the agreement provided that the appellant subject as thereinbefore provided should not purchase any petroleum or its products from any other person or corporation during the continuance of the agreement so long as Shell should be able to supply it with sufficient Shell products to satisfy its weekly requirements of petroleum and its products, but nothing therein contained should prevent Shell from selling petroleum or its products to any other person or corporation to be used for any purpose whatsoever. The agreement provided that it should commence on 9th May 1952 and continue for ten years and thereafter until the expiration of three months written notice given by either party to the other:

(2) and (3)

a memorandum of lease and a memorandum of sub-lease each dated 30th June 1952 whereby the appellant leased the land upon which the service station is erected to Shell for ten years at the yearly rental of PD1,040 payable monthly and Shell sub-leased the premises to the appellant for the same period less two days at the same rental. The sub-lease contains a covenant by the appellant duly to observe and perform the covenants and agreements entered into by him in the supply agreement of 11th June 1952 or any extension variation or renewal thereof or any substituted agreement for the sale and purchase of petroleum products:

(4)

a deed executed by the appellant on 30th June 1952 whereby in consideration of the payment to him of PD2,000 (the first of the sums in issue on the appeals) the appellant covenanted with Shell that he would not during a period of thirty calendar months from the date thereof within a radius of five miles of the service station as an owner, part-owner, partner, servant, employee or as an agent or as a director of any company or otherwise directly or indirectly open or carry on or conduct or be engaged concerned or interested in any other garage or service station unless and until arrangements satisfactory to the covenantee had been made whereby any such other garage or service station is or should be operated and carried on in all respects as a garage and/or service station at and in respect of which the petroleum products of the covenantee or its successors in title are exclusively bought sold and dealt in:

(5)

a deed executed on 1st July 1952 whereby in consideration of the sum of PD2,000 (the second sum in issue on the appeals) the appellant entered into a covenant with Shell in the same terms as the previous covenant for the period of thirty calendar months from 30th December 1954.

 

If documents (4) and (5) can be regarded as independent agreements and not interdependent with the other three documents and forming parts of the same transaction there could be little doubt that the two sums of PD2,000 would be of a capital nature. They were paid on successive days, admittedly, so that if they were taxable, they would be split up between two years of income, but they were really one lump sum paid in consideration of the appellant entering into the restrictive covenants they contain. It was contended for the respondent that there was no consideration for the covenants because the appellant had, before they were entered into, by cl. 6 of the service agreement already entered into an even wider agreement for a longer term relating to the same subject matter. But his Honour held, rightly in my opinion, that this clause, read in the light of the supply agreement as a whole, related only to the mutual obligations of the appellant and Shell with respect to the sale and supply of Shell products at the Kingsgrove service station. The words "it" and "its" when first used in the clause would seem naturally to refer to the Kingsgrove service station at which Shell had agreed to deliver its products. Even if his Honour was wrong, cl. 6 of the supply agreement and the covenants in the deeds differ so widely in their operation that it would be quite impossible to say that they cover the same subject matter. The question could certainly arise whether the covenants may not be void as being in restraint of trade, but that is not a question with which we are concerned in these appeals. Upon the appeals they should be treated as valid. But it is clear that the two deeds are not independent documents, that they are interconnected with the other three documents, and that each of the five documents forms part of the one transaction. It could hardly be suggested that Shell would have been prepared to pay the appellant PD4,000 simply to secure the covenants contained in the deeds if Shell had not been able to secure the supply agreement. The substance of the transaction taken as a whole is that the appellant promised Shell that for a period of at least ten years he would sell only Shell products at the Kingsgrove service station and he also promised Shell that, for a period of five years, within a radius of five miles from that station, he would not become interested or concerned directly or indirectly in any business of a service station other than a station where the products of Shell were exclusively sold. The PD4,000 was in terms paid in consideration of the second promise, but that promise would have been of no benefit to Shell without the first promise. The appellant was engaged and engaged only in running the business of the Kingsgrove service station when the transaction as a whole was entered into, and it was no doubt mainly to secure a monopoly for its products at that station that Shell paid the PD4,000. The covenants not to be interested in a competing business within the prescribed area were plainly ancillary and incidental to this promise. No other conclusion could reasonably be reached from a perusal of the documents themselves read in the light of the surrounding circumstances but the matter is not left to inference because the appellant, whilst indicating a preference for Shell if he had to choose between the rival brands, made it clear that he was very dubious as to the wisdom of tying himself to any one company and it would appear that before he succumbed an initial offer by Shell of PD1,000 had to be increased to PD4,000.  

But even when the whole of the documents are treated as part of the one transaction. It is difficult to see how the PD4,000 can lose its capital nature. Taylor J. held that this sum was income because, as I understand his reasons, he considered that, when the transaction was considered as a whole, the deeds of covenant though negative in form were affirmative in substance. Together they constituted an agreement by the appellant to sell Shell products and the two sums of PD2,000 were intended to be part of the remuneration which he would derive from doing so. In other words they formed part of the receipts of the business of the proprietor of a service station which the appellant was carrying on and were of the same character as the profits derived from the sale of the Shell products. The definition of income from personal exertion in the Assessment Act includes "the proceeds of any business carried on by the taxpayer", but these proceeds would only include receipts which have the character of income according to ordinary usages and concepts except where the Act states or indicates an intention to the contrary: Colonial Mutual Life Assurance Society Ltd  v  Federal Commissioner of Taxation. ^[F4] When this test is applied, treating the whole of the documents as part of the one transaction, nothing appears to make the PD4,000 income. The covenants in the deeds did not oblige the appellant to make any purchases of petroleum products from Shell, they only obliged him not to purchase or be interested in the purchase of any products of that character from anyone else. The covenants are negative in form and substance. The only positive promise to purchase such products from Shell is the promise in the supply agreement to purchase at least six thousand gallons of motor spirit and eighty gallons of automotive lubricants from Shell in every month during the continuance of the agreement. Where a person agrees to restrict his personal activities and the use of his capital, the consideration he receives for doing so may be income or capital. If the consideration takes the form of recurring payments, these payments may well be considered to be a quid pro quo for the profits the covenantee would have made if he had not withdrawn from such activities and be income: Margerison v  Tyresoles Ltd; ^[F5] Thompson v  Magnesium Elektron Ltd; ^[F6] Commissioner of Taxes (Vict.) v  Phillips. ^[F7] But where the consideration takes the form of a lump sum, so that it appears to represent a quid pro quo for giving up a substantial sphere of activity which would otherwise be open to the covenantee, it would prima facie be capital: Beak v  Robson; ^[F8] Hose v  Warwick, ^[F9] at p. 472; Higgs v  Olivier. ^[F10] In the present case there is nothing to indicate that the PD4,000 was compensation for the additional profits the appellant would have made if he had continued to sell other brands than Shell. On the contrary, both the appellant and Shell probably hoped that the appellant would be able to sell more motor spirit and other petroleum products by selling a single brand than he had previously sold when he was selling all brands. But at least it can be said that the appellant was dubious about this and there is nothing to show that the true consideration for the PD4,000 was not his promise not to sell or to be interested in selling other brands.

Counsel for the respondent contended that the PD4,000 should be considered to be a premium paid by Shell to the appellant on the grant of the ten years' lease of the Kingsgrove land by the appellant to Shell. The material provisions of the Assessment Act in relation to this submission are those contained in Div. 4 of Pt. III of the Assessment Act 1936-1951. The amendments made to s. 83 of the principal Act by s. 15 of the Income Tax and Social Services Contribution Assessment Act No. 90 of 1952, do not apply in relation to a consideration received or paid under an agreement made not later than 31st December 1952 for the grant, assignment or surrender of a lease of land or under an agreement for the sale of goodwill or the assignment of a licence in connection with such an agreement. The appellant was not assessed under this division. He was assessed on the basis that the two sums were income from personal exertion. But if the two sums are premiums, the Court could, under s. 199 of the Assessment Act, order the assessments to be amended. But there is no evidence upon which the two sums could be held to be premiums. The payments were made at the same time as the appellant granted the lease of the service station to Shell but for a different consideration and that is all that appears. Premiums in Div. 4 include any consideration for or in connection with any goodwill attached to or connected with the land a lease of which is granted. But there is no evidence that the two sums of PD2,000 or any part thereof were paid for such a consideration. There may well have been a considerable goodwill attached to the land on which the service station is erected. But Shell was not leasing the land in order to obtain the benefit of that goodwill for itself. Otherwise it would not have sub-leased the land back to the appellant on the same day. Shell only wanted to benefit from the goodwill attached to the land in the sense that the larger the sales of motor spirits and other petroleum products at the service station, the larger would be the orders it would receive for its products. But that benefit would have been obtained by Shell without any lease and sub-lease of the land so long as the service station remained tied to it. The whole purpose of the lease was to enable Shell to grant the appellant a sub-lease and thereby to make the tie effective not only against the appellant but also against any assignee of the sub-lease.  

Counsel for the respondent made a last-minute attempt to invoke s. 260 of the Assessment Act. This section was not relied upon before Taylor J. It was not at first relied upon before us. If it became material, a serious question would arise whether the respondent should be allowed to invoke the section at such a late stage. If it had been relied upon before Taylor J. it may be that some evidence might have been led upon this issue. But, as the evidence now stands, the section could not help the respondent because, if the deeds of covenant are treated as void against the commissioner, there will remain simply two sums each of PD2,000 paid by Shell to the appellant, which, when the transaction as a whole is examined, are of a capital character.  

The appeals should be allowed.