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Hepples v. Federal Commissioner of Taxation

Judges:
Lockhart J
Gummow J
Hill J

Court:
Full Federal Court

Judgment date: Judgment handed down 28 June 1990.

Lockhart J.

This case raises for the first time the construction of Pt IIIA of the Income Tax Assessment Act 1936 (``the Act'') relating to capital gains and capital losses and in particular sec. 160M(6) and (7) which concern the deemed disposal of assets.

The matter comes to this Full Court as a case stated by the President of the Administrative Appeals Tribunal under sec. 45 of the Administrative Appeals Tribunal Act 1975 [reported as Case W116,
89 ATC 914 ] which states the following facts as agreed to by the parties:

``1. In or about late August or early September 1985 the applicant was first employed by Hunter Douglas Limited (`Hunter Douglas'). He was employed as the marketing director/general manager of the window furnishings division of that company. On or about 1 September 1985 the applicant and Hunter Douglas entered into a written agreement (`the employment agreement') governing the terms and conditions of the employment.

2. In the course of his employment with Hunter Douglas the applicant was responsible for management of the operations of the window furnishings division of Hunter Douglas. The business activities of that division accounted for a very significant proportion (approximately two-thirds) of the total business activities of Hunter Douglas.

3. On or about 27 June 1986, the applicant entered into a deed with Hunter Douglas, the purpose of which was recited in the deed as being `to record the terms upon which Hepples has agreed, in consideration of the covenants of Hunter Douglas herein contained and from and after the date of his ceasing to be employed by Hunter Douglas, to be restrained from carrying on or being interested in any business or other undertaking or activity as more particularly herein referred to' (hereinafter referred to as `the restrictive covenant deed'). A true copy of the restrictive covenant deed is annexed to this stated case and marked `A'.

4. It was orally agreed between the applicant and Hunter Douglas that the restraint of trade imposed by the employment agreement should cease to have any effect from the date of entry into the restrictive covenant deed.

5. On or about 27 June 1986, and before 30 June 1986, Hunter Douglas paid to the applicant an amount of $40,000, pursuant to the terms of the restrictive covenant deed.

6. The taxpayer did not incur any capital loss during the year of income ended 30 June 1986.''

The deed, a copy of which is referred to as annexure ``A'' to the special case, is between Hunter Douglas Limited and the applicant and it reads as follows:

``WHEREAS:

  • (a) Hepples is presently employed by and has acted as a Director and General Manager Window Covering Products of Hunter Douglas.
  • (b) Hepples and Hunter Douglas have agreed to enter into this Deed to record the terms upon which Hepples has agreed, consideration of the covenants of Hunter Douglas herein contained and from and after the date of his ceasing to be employed by Hunter Douglas, to be restrained from carrying on or being interested in any business or other undertaking or activity as more particularly herein referred to.

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NOW THIS DEED WITNESSETH as follows:

  • 1. In consideration of Hepples entering into this Deed and provided that he shall at all times observe and fulfil all of the terms covenants and conditions hereof Hunter Douglas shall pay Hepples the sum of FORTY THOUSAND DOLLARS ($40,000.00) upon signing of this Deed.
  • 2. In consideration of Hunter Douglas entering into this Deed, Hepples covenants with Hunter Douglas or any successor, subsidiary or affiliate thereof (hereinafter called `the Associated Companies') that for a period of TWO (2) years immediately following the moment of the termination of his employment by Hunter Douglas within the territorial limits of Australia, he will continue to be bound by the Clauses 2, 3, 4 and 5 of his Employment Agreement; copy of said Clauses are attached to this Deed as Schedule `A'.
  • 3. During the term hereof, Hepples shall be entitled to request Hunter Douglas' acknowledgement that the terms of this Deed shall no longer apply in relation to any products which Hunter Douglas and/or its Associated Companies has ceased to produce or license which acknowledgement shall not be unreasonably withheld.
  • 4. Hepples acknowledges and agrees that this Deed has been entered into by him not only in favour of Hunter Douglas but in favour of each of the Associated Companies for their respective rights and interests the intent that each of the same shall be entitled to enforce the obligations of this Deed against him to the extent to which the protection of the business and assets may require.
  • 5. Hunter Douglas covenants to pay all costs of and incidental to the preparation execution and stamping hereof and any stamp duty payable hereon.

Schedule `A'

2. Special Processes and Trade Secrets

  • (1) The Employee covenants with the Employer and each of the Companies that during the continuance of his employment and for a period of ( ) years after termination thereof (from any cause whatsoever):
    • (a) he shall not (except in the proper course of his duties) divulge to any person, firm or corporation any information concerning the Special Processes,
    • (b) he shall not utilise or turn to his own account whether or not in association or co-operation with any other party any of the Special Processes.
  • (2) The Employee covenants with the Employer and each of the Companies that during the continuance of his employment and for a period of TWO (2) years after termination thereof (from any cause whatsoever):
    • (a) he shall not (except in the proper course of his duties) divulge to any person, firm or corporation any information concerning the Trade Secrets,
    • (b) he shall not utilise or turn to his own account whether or not in association or co-operation with any other party any of the Trade Secrets.

3. Non-Competition

The Employee covenants with the Employer that upon the termination of his employment (from any cause whatsoever) and for the period described in Schedule VIII and within the territorial limits of Australia:

  • (1) he will not either on his own behalf or in partnership or as an employee directly or indirectly engage in any business or occupation in which he or his Employer will manufacture distribute or sell to any party any of the goods or perform any of the operations listed in Schedule II.
  • (2)... an independent contractor or consultant or... or of assistance in such employment or engagement by any other party, of any person who at any time in the period of the two (2) years immediately prior to the termination of the Employee's employment has been an employee of the Employer.

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  • (3) he will not by himself or any servant or agent canvass or solicit for himself or any other person or any firm or corporation any customer of the Employer, who was a customer or a prospective customer of the Employee's employment and with whom the Employee had during the course of his employment dealings or negotiations.

4. Inventions

  • (1) The Employee will treat as confidential and promptly disclose to the Employer in writing any inventions, formulae, special processes, techniques, know-how and the like (hereinafter called `the Inventions') which are discovered, conceived or developed by him, either alone or in conjunction with others:
    • (a) during the course of his employment,
    • (b) or at any time resulting from use or utilisation of the Special Processes,

    PROVIDED THAT the Inventions relate to or are useful in the business of the Employer.

  • (2) The Employee will assign and convey to the Employer or as it may direct all his interest in the Inventions and perform all such acts (at no expense to himself) which the Employer may consider necessary or helpful in obtaining or maintaining patent or like protection in the Commonwealth of Australia and foreign countries for all of the said Inventions.
  • (3) The Employee hereby irrevocably appoints the Employer to be his attorney in his name and on his behalf to execute and do any such instrument or thing and generally to use his name for the purpose of giving to the Employer or nominee the full benefit of the provisions of this Clause. A certificate in writing signed by any director or the secretary of the Employer that any instrument or act falls within the authority hereby conferred shall be conclusive evidence that such is the case.

5. Severability

  • ...
  • THE SCHEDULES HEREINBEFORE MENTIONED

SCHEDULE 1

...''

The learned President of the Administrative Appeals Tribunal stated the following questions of law to be determined by the Full Court:

``(A) Was there, in consequence of the facts recited herein, included in the assessable income of the applicant for the year of income ended 30 June 1986 -

  • (a) an amount of $40,000; or
  • (b) some other amount, and if so, what amount,

pursuant to subsec. 160ZO(1) of the Income Tax Assessment Act 1936 ?

(B) Who should pay the costs of these proceedings?''

The Act was amended by the inclusion of Pt IIIA which introduces a tax on capital gains applying to assets acquired on or after 20 September 1985. In determining whether a gain has been made on the disposal of an asset that has been held for at least 12 months the asset's cost base is adjusted for inflation by reference to the consumer price index. Hence, only gains in excess of the inflation rate on assets are subject to tax. Assets disposed of within 12 months of acquisition are subject to the tax if disposed of for more than the cost base of the asset.

Part IIIA commences with sec. 160A and concludes with sec. 160ZZU. Broadly speaking a liability to capital gains tax arises where:

  • • an asset which is not exempt was acquired on or after 20 September 1985;
  • • that asset was disposed of on or after 20 September 1985;
  • • the owner of the asset immediately before its disposal was a resident of Australia or the asset was a ``taxable Australian asset''; and
  • • the asset is not in the owner's hands trading stock or subject to sec. 26AAA or other form of excluded asset.

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Central to the operation of the capital gains tax provisions are the concepts of an ``asset'', ``disposal'' and ``acquisition'' of assets. Before turning to these concepts it is helpful to state in summary form the scheme of Pt IIIA.

Division 1 of Pt IIIA contains a number of definitions. The word ``asset'' is defined for the purposes of Pt IIIA by sec. 160A broadly to mean any form of property and includes:

  • ``(a) an option, a debt, a chose in action, any other right, goodwill or any other form of incorporeal property;
  • (b) currency of a foreign country; and
  • (c) any form of property created or constructed, or otherwise coming to be owned without being acquired,

but does not include a motor vehicle of a kind mentioned in paragraph 82AF(2)(a).''

Section 160B defines the terms ``personal-use asset'', ``listed personal-use asset'' and ``non listed personal-use asset'' for the purposes of the Part. ``Personal-use asset'' is defined to include assets owned by a taxpayer and used or kept primarily for the personal use or enjoyment of the taxpayer or associates of the taxpayer. ``Non listed personal-use asset'' is an expression defined by sec. 160B(3) as meaning ``a personal-use asset other than a listed personal-use asset''.

Division 2 of Pt IIIA states that that Part applies to the disposal of assets including what is said to constitute the disposal and acquisition of an asset, the treatment of composite assets, part disposal of assets and the treatment of deceased estates.

Section 160L(1) ensures that Pt IIIA applies to every disposal on or after 20 September 1985 of an asset wherever situate which immediately before the disposal was owned by an Australian resident or by a person in the capacity of a trustee of a resident trust estate or of a resident unit trust if the asset was acquired by that person on or after 20 September 1985. This equates the general position under the Act that Australian residents are subject to income tax on income both within and outside Australia.

Section 160L(2) relates to the disposal of taxable Australian assets by non-residents and corresponds generally with the position under the Act that non-residents of Australia are subject to income tax on income from sources in Australia.

Section 160L(3)-(7) relate to certain disposals of assets to which Pt IIIA will not apply.

Section 160M contains provisions to determine what will constitute a disposal and an acquisition of an asset for the purposes of Pt IIIA. Broadly speaking, there is a disposal of an asset and an acquisition of asset when there is a change in the ownership of the asset (sec. 160M(1)). Where a change occurs in the ownership of an asset, the change is deemed for the purposes of Pt IIIA to have effected the disposal of the asset by the person who owned it immediately before the change and an acquisition of an asset by the person who owned it immediately after the change (sec. 160M(1)). This is the general rule which is expressly made subject to other provisions of Pt IIIA.

Section 160M(2) provides that a reference in subsec. (1) to a change in the ownership of an asset means a change that has occurred in any way including a change:

``(a) by the execution of an instrument;

(b) by the entering into of a transaction;

(c) by the transmission of the asset by operation of law;

(d) by the delivery of the asset;

(e) by the doing of any other act or thing;

(f) by the occurrence of any event.''

Section 160M(3) provides that, without limiting the generality of subsec. (2), there are four circumstances where a change shall be taken to have occurred in the ownership of an asset, namely:

``(a) a declaration of trust in relation to the asset under which the beneficiary is absolutely entitled to the asset as against the trustee;

(b) in the case of an asset being a debt, a chose in action or any other right, or an interest or right in or over property - the cancellation, release, discharge, satisfaction, surrender, forfeiture, expiry or abandonment, at law or in equity, of the asset;

(c) in the case of an asset being a share in or debenture of a company - the

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redemption in whole or in part, or the cancellation, of the share or debenture; or

(d) subject to sub-section (4), a transaction in relation to the asset under which the use and enjoyment of the asset was or is obtained by a person for a period at the end of which the title to the asset will or may pass to that person.''

Section 160M(4) contains a proviso to the operation of sec. 160M(3)(d) to the effect that if the period for which a person referred to in that paragraph had the use and enjoyment of an asset terminates without title in the asset passing to that person, no change of ownership will be taken to occur.

Section 160M(5) provides for four situations in which, for the purposes of Pt IIIA, assets are to be taken to have been acquired being:

``(a) an issue or allotment of shares in a company constitutes an acquisition of the shares by the person to whom they were issued or allotted but does not constitute a disposal of the shares by the company;

(aa) an issue of shares in a unit trust by the trustee of the unit trust constitutes an acquisition of the units by the person to whom they were issued but does not constitute a disposal of the units by the trustee of the unit trust;

(b) the construction of an asset by or for a person constitutes the acquisition of the asset by the person; and

(c) the creation of an asset by or for a person constitutes the acquisition of the asset by the person.''

Section 160M(6) and (7) are the crucial provisions for present purposes. Subsection (6) is in the following terms:

``160M(6) A disposal of an asset that did not exist (either by itself or as part of another asset) before the disposal, but is created by the disposal, constitutes a disposal of the asset for the purposes of this Part, but the person who so disposes of the asset shall be deemed not to have paid or given any consideration, or incurred any costs or expenditure, referred to in paragraph 160ZH(1)(a), (b), (c) or (d), (2)(a), (b), (c) or (d) or (3)(a), (b), (c) or (d) in respect of the asset.''

Section 160M(7) also applies, but subject to the other provisions of Pt IIIA, to situations where there is a disposal of an asset created by the disposal. It deems a disposal of an asset to have occurred where a taxpayer receives or becomes entitled to receive an amount of money or other consideration for the forfeiture or surrender of a right or for refraining from exercising the right or receives consideration for the use or exploitation of an asset. The subsection is in the following terms:

``160M(7) Without limiting the generality of sub-section (2) but subject to the other provisions of this Part, where -

  • (a) an act or transaction has taken place in relation to an asset or an event affecting an asset has occurred; and
  • (b) a person has received, or is entitled to receive, an amount of money or other consideration by reason of the act, transaction or event (whether or not any asset was or will be acquired by the person paying the money or giving the other consideration) including, but not limited to, an amount of money or other consideration -
    • (i) in the case of an asset being a right - in return for forfeiture or surrender of the right or for refraining from exercising the right; or
    • (ii) for use or exploitation of the asset,

the act, transaction or event constitutes a disposal by the person who received, or is entitled to receive, the money or other consideration of an asset created by the disposal and, for the purposes of the application of this Part in relation to that disposal -

  • (c) the money or other consideration constitutes the consideration in respect of the disposal; and
  • (d) the person shall be deemed not to have paid or given any consideration, or incurred any costs or expenditure, referred to in paragraph 160ZH(1)(a), (b), (c) or (d), (2)(a), (b), (c) or (d) or (3)(a), (b), (c) or (d) in respect of the asset.''

Section 160M(8), (9), (10) and (11) apply in cases where a resident taxpayer, resident trust estate, resident unit trust, or resident

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partnership ceases to be a resident of Australia. As mentioned earlier resident taxpayers are liable to tax on capital gains on the disposal of assets wherever situated whilst non-residents are liable to tax on capital gains of a disposal of taxable Australian assets only. These provisions are inserted to ensure that tax on gains on assets other than taxable Australian assets that accrued while the owner was a resident of Australia cannot be avoided by the owner acquiring non-resident status. This objective is achieved by the subsections deeming there to have been a disposal of all the assets owned by the taxpayer (subsec. (8)), resident trust estates (subsec. (9)), resident unit trusts (subsec. (10)) and resident partnerships (subsec. (11)), other than taxable Australian assets or assets acquired before 20 September 1985 to which Pt IIIA does not apply, at the time when the taxpayer, trust estate, unit trust or partnership ceases to be resident. Hence, where a resident taxpayer ceases to be a resident of Australia on or after 20 September 1985 sec. 160M(8)(a) deems every asset owned by the taxpayer immediately before the relevant time, other than taxable Australian assets as defined in sec. 160T, assets acquired by the taxpayer before 20 September 1985 and assets to which subsec. (9), (10) or (11) applies, to have been disposed of at the time when the taxpayer ceases to be a resident.

Section 160M(8)(b) applies so that every asset deemed to have been disposed of by the operation of sec. 160M(8)(a) is deemed to have been disposed of for consideration equal to the market value of the asset at the relevant time.

Section 160M(12), (13), (14) and (15) apply to cases where a non-resident taxpayer and certain other persons become residents of Australia. The subsections apply to deem every asset owned by the non-resident taxpayer to have been acquired by the taxpayer at the time of becoming resident.

Section 160N deals with the situation where assets are lost or destroyed in whole or in part; it deems the loss or destruction to constitute a disposal of the asset or the relevant part of the asset as the case may be.

Section 160R provides that, for the purposes of Pt IIIA, a reference to a disposal of an asset includes, unless the contrary intention appears, a reference to a disposal of part of an asset.

Section 160U specifies the rules which govern the ascertainment of the time of acquisition or disposal of an asset for the purposes of Pt IIIA. Section 160U(6) applies in relation to the creation of assets and it provides:

``160U(6) Where the asset was created by a person otherwise than pursuant to a contract under which the person created the asset for another person, the asset shall be taken to have been acquired by the first-mentioned person -

  • (a) if the asset did not exist (either by itself or as part of another asset) before the disposal - immediately before the asset was disposed of; or
  • (b) in any other case - at the time of commencement of work on, or of work that resulted in, the creation of the asset.''

Section 160U(6) does not apply where an asset is created by a person pursuant to a contract for another person. In those circumstances the date of acquisition of the asset is determined in accordance with sec. 160U(3).

The final provision to which reference need be made is sec. 160ZO which requires a net capital gain realised by a taxpayer in any year to be included in the taxpayer's assessable income for that year. It is sec. 160ZC which determines whether there is a net capital gain in relation to the taxpayer in a year of income. Section 160ZO(2) provides:

``160ZO(2) A net capital loss that was incurred by a taxpayer in respect of a year of income shall be taken into account in accordance with section 160ZC but is not otherwise allowable to the taxpayer as a deduction under this Act in respect of any year of income.''

I turn to the definition of ``asset'' in sec. 160A the terms of which are set out earlier. This definition was taken substantially from sec. 19 of the Capital Gains Tax Act 1979 (U.K.). The reference to ``any other right'' in sec. 160A(a) is in my opinion to be construed as a reference to other rights of a proprietary nature; cf.
Commr of Stamp Duties (N.S.W.) v. Yeend (1929) 43 C.L.R. 235 with respect to the word ``property'' in sec. 3 of the Stamp Duties Act 1920 (N.S.W.); and
McCaughey v. Commr of Stamp Duties (N.S.W.) (1945) 46 S.R.(N.S.W.) 192

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which concerned sec. 102(1)(a) of the Stamp Duties Act 1920 (N.S.W.). Jordan C.J. said in McCaughey at p. 201:

``The word `property' is used in different senses. It may denote either objects of proprietary rights, such as pieces of land, domesticated animals, and machines; or the proprietary rights themselves... In common parlance it is usually employed in the former sense, but in the language of jurisprudence in the latter.''

See also
McClure's case (1947) 48 S.R. (N.S.W.) 93 and
Commr of Stamp Duties (N.S.W.) v. J.V. (Crows Nest) Pty. Ltd. 86 ATC 4740 ; (1986) 17 N.S.W.L.R. 529 . But in
O'Brien v. Bensons Hosiery (Holdings) Ltd. (1980) A.C. 562 , which concerned the Capital Gains Tax Act 1979 (U.K.), the House of Lords, in overruling the Court of Appeal, held that the rights of an employer under a contract for personal services were ``property'' and ``assets'' for the purposes of the United Kingdom capital gains tax legislation.

An interesting question arises whether the expression ``any other right'' in sec. 160A(a) can encompass a concept such as a ``human right'' or a ``right to work''. See ``Income Taxation: an Institution in Decay'' (1986) 3 Australian Tax Forum p. 233, a paper presented by Professor Ross Parsons to the Australian Tax Forum Workshop in October 1986. Notwithstanding the wide definition given to the word ``asset'' in sec. 160A in my opinion the expression ``any other right'' in sec. 160A(a) is to be understood as encompassing rights of a proprietary nature and not a broader concept such as a right to work.

The notion of ``disposal'' is critical to the operation of Pt IIIA but, curiously, the term is not defined in the Act. The word ``disposal'' in relation to an asset is of wide import and includes the act or process of transferring something to or providing something for another. It is a very comprehensive term.

The word ``disposal'' according to its ordinary meaning presupposes that there is some proprietary right vested in the disposer at the time of the disposal. Ordinarily the creation of an asset must precede its disposal and would not generally comprehend property which was created by the act of disposal. One talks of disposing of something that one has.

In
Kirby (Inspector of Taxes) v. Thorn E.M.I. plc (1988) 1 W.L.R. 445 the taxpayer was a holding company which had a wholly-owned subsidiary which in turn owned all the issued share capital in three companies that carried on business. A United States company sought to acquire all the issued shares in the capital of the three trading companies and an agreement was entered into between the taxpayer, its wholly owned subsidiary and the United States company whereby the taxpayer agreed to procure the sale of the shares in the three companies by its wholly-owned subsidiary to the United States company and to enter into a covenant in favour of the United States company that none of the companies in the relevant group would compete with the three companies for a period of five years. The United States company agreed to pay to the taxpayer in consideration for this covenant the sum of $575,000 separately from the payment of the purchase price to the wholly-owned subsidiary for its shares in the three trading companies.

The relevant statutory provision was sec. 22 of the Finance Act 1965 (U.K.), now sec. 20 of the Capital Gains Tax Act 1979 (U.K.), which provides that:

``... there is for the purposes of this Act a disposal of assets by their owner where any capital sum is derived from assets notwithstanding that no asset is acquired by the person paying the capital sum, and this sub-section applies in particular to -

  • ...
  • (c) capital sums received in return for forfeiture or surrender of rights or for refraining of exercising rights, and
  • (d) capital sums received as consideration for the use or exportation of assets.''

The learned primary Judge ( Knox J. (1986) 1 W.L.R. 851) held that sec. 22(c) applied only to assets which existed at the time of disposal and did not apply to disposals of assets which consisted of an act of creation of the assets. As the covenant did not exist before the making of the contract it could not be an asset for the purposes of the U.K. Capital Gains Tax Act . His Lordship said at p. 859:

``The freedom of commercial activity of a person or a company is not in my judgment such an asset as is contemplated by [sec.

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22]. There is no discernible chose in action in such a freedom. Nor is there any other right capable of being directly enforced against any other legal person.''

On appeal to the Court of Appeal Nicholls L.J. said at p. 450:

``Thus the basic structure of the tax is of a charge on gains accruing to a person on disposal of an asset by him. There is no statutory definition of disposal but, having regard to the context, what is envisaged by that expression is a transfer of an asset (i.e. of ownership of an asset) as widely defined, by one person to another. The act presupposes that, immediately prior to the disposal, there was an asset and that the disponor owned it. Section 22(2)(a) then deals with the case where only part of an asset is disposed of, and section 22(2)(b) covers the case where, although the disponor owned an asset before the disposal, what he did by the disposal was not to transfer that asset but to carve or create out of it a right in favour of another. The grant of an easement over land is an obvious example. That also is stated to be a part-disposal. In that instance also the disponor owned a relevant asset prior to the disposal. Consistently with this basic structure of an existing asset owned by the disponor, section 22(3) provides that, where a capital sum is derived from assets, there is a disposal of assets `by their owner'.''

As to the view that disposal ordinarily assumes or involves the notion of a dealing with property remaining in existence and is used in the sense of alienation see
Re Levin (Earl) (deceased) I.R. Commrs v. William Deacon's Bank Limited (1954) 3 All E.R. 81 .

Part IIIA contains a number of provisions that deem a disposal to have taken place. The general provisions are found in sec. 160M, predominantly subsec. (1), (2), (3), (6), (7) and (8) mentioned earlier. There are also a number of specific provisions which deem a disposal to have occurred in relation to particular types of assets, for example, sec. 160ZS which applies to leases, sec. 160ZZC(3) (options), sec. 160ZZD(3) (industrial property) and sec. 160ZZI(4) (life assurance policies).

I turn to sec. 160M(6) and (7).

Section 160M(6) is a very obscure statutory provision; but I will do the best I can with it. Read literally, the subsection is concerned with the disposal of an asset that did not exist, either by itself or as part of another asset, before the disposal. The asset is created by the disposal. An asset thus created then falls within the definition of ``asset'' in sec. 160A(c) as ``any form of property created or constructed, or otherwise coming to be owned without being acquired''. There is then a deemed disposal of such an asset for the purposes of the capital gains tax provisions of the Act. The asset is deemed to have a nil cost because sec. 160M(6) excludes from sec. 160ZH all the acquisition costs to the taxpayer of the disposal of the asset.

The essential difficulty with subsec. (6) is that the word ``disposal'' where first used cannot be literally construed in the same sense as it is last used. It must bear either its ordinary meaning or one which can be derived from other provisions of the Act.

Doubtless the draftsman of subsec. (6) sought to overcome the problem to which reference was made by Whiteman and Wheatcroft on Capital Gains Tax 3rd ed. para. 6-50 where the learned authors said:

``Where, however, the asset did not exist (either by itself or as part of another asset) before the disposal but is created by the disposal, it is submitted in the absence of special provisions that there is no disposal for capital gains tax. The word `disposal' must, it is suggested, involve there being some proprietary or beneficial right in the disposer at the time. Hence there will be a distinction between the creation of a contractual right in B's favour, which will not involve a disposal by A, and the creation in favour of B of a right in or over an asset owned by A, which will be a part disposal of that asset....''

See also the 4th ed. at para. 7-07 to 7-10.

It is possible that the draftsman of subsec. (6) intended to say that the creation of an asset that did not exist is deemed to be a disposal of that asset by its creator. But this is not what the subsection says.

There are certain provisions in the Act which deem certain acts or events to be deemed disposals even though there are no pre-existing assets. For example, sec. 160ZS deems the grant of a lease to constitute the disposal by the

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lessor to the lessee of an asset, namely, the lease. An asset did not exist before the disposal but is created by the disposal.

Section 160ZZC deals with options and provides that the grant of an option shall be deemed to have constituted a disposal of the option at the time when the grant took effect and the option shall be deemed to have been owned by the grantor immediately before the disposal took place (sec. 160ZZC(3)).

There is something to be said for the view that sec. 160M(6) will apply only if another provision of the Act deems there to be a disposal of an asset that did not exist before the disposal but is created by the disposal. That work is not done by sec. 160M(6) itself or any other provision of the Act (including in my view sec. 160R and 160U) save those provisions mentioned relating to leases and options. Since, apart from leases and options, the word ``disposal'' where first read in the subsection must bear its ordinary meaning it cannot mean the creation of anything; it can only refer to the disposal of something which already exists.

The explanatory memorandum accompanying the Bill which became Pt IIIA sheds little light on this question, though it does say that subsec. (6):

``would apply for example, to deem there to be a disposal of an asset by a person granting a lease, or giving an option to another person to buy an asset at a future date. The lease or option is an asset created by such a transaction...''

These are the only two examples given in the memorandum, and, so far as my study of the Act reveals, are the only two examples of provisions of the Act that deem there to be a disposal of an asset that did not exist before the disposal, but were created by the disposal. I should say that I find no assistance in resolving this question by sec. 160M(5) which deals with the deemed creation of assets, not their disposal.

I have sympathy with the view that subsec. (6) is incomprehensible. Certainly it is not for the courts to redraft sections of Acts. But as Lord Reid said in
Amp Incorporated v. Utilux Pty. Ltd. (1972) R.P.C. 103 at p. 109 , of a definition in the Registered Designs Act 1949 (U.K.):

``It seems improbable that the framers of this definition could have intended to insert a provision which has virtually no practical effect, so I look to see whether any other meaning produces a more reasonable result.''

Approaching subsec. (6) with these remarks in mind and reading the subsection in the context of Pt IIIA as a whole it seems to me that the draftsman of the subsection was endeavouring to provide principally that, where the same act or event both creates and disposes of an asset which emerges from a larger asset previously in existence, there is a notional disposal of the new-born asset for the purpose of Pt IIIA. But there must be an asset in existence before the occurrence of the act or event which gave birth to the new asset. So far as I can see this is the principal work which subsec. (6) can perform. Thus, to mention one example, the grant of an easement may perhaps fall within the subsection.

Subsection (6) cannot apply in this case because the covenants given by the applicant did not emerge from any previously existing asset.

In my opinion sec. 160M(6) does not support the inclusion in the assessable income of the applicant of the sum of $40,000 or any other sum pursuant to sec. 160ZO(1) of the Act.

Although this is the first case to consider these provisions they have attracted the attention of learned writers, including ``Capital Gains Tax - The Framework'' by Mr K.J. Burgess, Taxation in Australia , May 1987 651; ``Capital Gains Tax'' by D.G. Cominos, Taxation in Australia , November 1986; ``Capital Gains Tax Review'' by G. Leahmann, Taxation in Australia , April 1987 601; Taxation of Capital Gains in Australia by M.P. Dominic assisted by N. Russell; Australian Capital Gains Tax by G.S. Cooper and M.W. Inglis 1986; and see generally with respect to the United Kingdom Act 1979 Whiteman and Wheatcroft on Capital Gains Tax , 4th ed.

I turn to sec. 160M(7), the terms of which appear earlier.

Like sec. 160M(6), sec. 160M(7) excludes from sec. 160ZH all the acquisition cost of the relevant asset and allows to be claimed as a cost only the incidental cost to the taxpayer of the

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disposal of the assets, reduced or indexed as appropriate.

For sec. 160M(7) to apply there must be:

  • • an existing asset;
  • • an act or transaction in relation to that asset or an event affecting that asset;
  • • a person receiving or being entitled to receive money or other consideration by reason of the act, transaction or event.

If these conditions are satisfied, the act, transaction or event constitutes a disposal by the person who received or is entitled to receive the money or other consideration.

Although there must be an existing asset before subsec. (7) can operate, it is not the asset in respect of which the act or transaction took place which is treated by the subsection as having been disposed of. An asset is deemed to have been created by the disposal and it is that asset which is treated as having been disposed of. The subsection thus constitutes a deemed disposal and a deemed creation at the same time that it deems the created asset to have been immediately disposed of and to have no base cost.

Section 160M(7) has excited much interest amongst the writers of learned articles including those to which I referred earlier and the paper by J.W. de Wijn on ``Capital Gains Taxation in Australia'', editor R. Krever, Law Press, Monash University.

Subsection (7) is similar to sec. 20 of the United Kingdom Capital Gains Tax Act . I need not refer to the similarities and differences. They are discussed in Taxation of Capital Gains in Australia by Dominic and Russell at pp. 34-36. I do not see any useful purpose in discussing all the possible sets of facts that could be encompassed by subsec. (7). They will fall to be determined from time to time as various cases arise. The explanatory memorandum gives a number of examples of the acts, transactions or events which it says will be affected by subsec. (7) including ``an amateur sportsman who receives a payment on becoming a professional, the receipt of consideration for entering into exclusive trade tie agreements or restrictive covenants or in connection with the variation, cancellation or breach of business contracts or agency agreements''. I do not propose to discuss whether these beliefs of the draftsman correctly reflect the legislation as properly construed and shall confine my observations to the facts of the present case.

I cannot accept the submission of counsel for the applicant that the existing asset on which subsec. (7) operates, as distinct from the deemed asset which emerges at the end of the operation of the deeming provisions, eo instantur with its own disposition, must be the asset of the person who receives or is entitled to receive the money or other consideration. The subsection itself does not state that this is a requirement. On the contrary, the words used are perfectly general and on their face are intended to encompass the situation of an asset owned by someone other than the person receiving the money subject to taxation. The only indication on the face of the subsection pointing to this restriction is the fact that the examples provided in sec. 160M(7)(b)(i) and (ii) are circumstances in which the asset may be owned by the taxpayer. Plainly these examples are not intended to be exhaustive. If the section was intended to be confined in the manner suggested it would have been simple for the legislature to have said so.

To read into the section a restriction that the asset must be owned by the taxpayer can only be justified if, without it, the section is unworkable, leads to absurd results or otherwise offends what must be the clear intention of the legislature. In my opinion there is not sufficient reason to imply this restriction.

It was argued on behalf of the appellant that one consequence which would be avoided by reading into sec. 160M(7) the suggested restriction is the possibility that sec. 160ZA(4) would be ineffective in ensuring that the taxpayer is not subjected to double taxation.

Generally sec. 160ZA(4) operates to ensure that amounts which are taxable under a section of the Act other than Pt IIIA are not also subject to capital gains tax. However, the wording of sec. 160ZA(4) is such that the section only comes into play if the amount included in assessable income under a provision of the Act other than Pt IIIA was so included ``as a result of the disposal of the asset''. The argument seems to turn on the possibility that sec. 160M(7) could, if interpreted without the restriction, subject to capital gains tax amounts which are also assessable income under

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ordinary concepts but which cannot properly be said to have arisen as a result of the disposal of the asset.

Once it is recognised that the word ``disposal'' as used in sec. 160ZA(4) must have the same meaning as it does in other sections of Pt IIIA the substance of this submission falls away. The act, transaction or event which creates a liability to taxation both under sec. 160M(7) and some other section is deemed by sec. 160M(7) to constitute a disposal. Thus the precondition for the operation of sec. 160ZA(4) is satisfied and there is no real threat of double taxation sufficient to support the adoption of a restricted interpretation of sec. 160M(7).

Subsection (7) assumes the existence of an asset, whether it be owned by the person who receives or is entitled to receive the money or other consideration or any other person.

I do not find it necessary to discuss in detail whether a relevant asset is an asset of proprietary nature or may be a human right or a right to work or a right to trade. I am satisfied that, like subsec. (6) that precedes it, subsec. (7) is talking about rights of a proprietary nature: see Kirby v. Thorn E.M.I. above and see also
Forbes v. N.S.W. Trotting Club Ltd. (1979) 143 C.L.R. 242 at p. 260 .

In the present case Hunter Douglas employed the applicant as the marketing director/general manager of its window furnishings division. There was a written contract of employment made on or about 1 September 1985; and on or about 27 June 1986 the applicant and Hunter Douglas entered into the deed by which Hunter Douglas agreed to pay the applicant $40,000 in consideration of his covenant to observe certain restrictive covenants contained in his earlier written employment contract for the period of two years after the cessation of his employment with Hunter Douglas.

The asset of which sec. 160M(7)(a) speaks (i.e. the asset in relation to which the relevant asset or transaction is said to have taken place) consists of the trade secrets and trade connections and the goodwill attaching to the business of Hunter Douglas. These were not the assets of the applicant. In my opinion that does not prevent the operation of the subsection for the reasons already given. The special case does not refer to the existence of goodwill in Hunter Douglas or any of its subsidiaries but it is obvious that goodwill in fact exists and this Court may draw inferences both of fact and of law (O. 50 r. 3 of this Court's rules).

The grant of the restrictive covenant by the applicant to Hunter Douglas under the deed constitutes an act or transaction that took place in relation to an asset of Hunter Douglas and was also an event that occurred affecting that asset.

The applicant received and was entitled to receive $40,000 under the deed in consideration for his giving the restrictive covenants. The deeming provisions of sec. 160M(7) then operate so as to constitute the giving of the restrictive covenant a disposal by the applicant of an asset created by the disposal. The $40,000 is therefore to be treated as the base cost from which only the incidental cost to the applicant of the disposal of the asset, reduced or indexed as the case may be, may be taken into account.

For these reasons the applicant succeeds with respect to the argument before the Court on sec. 160M(6) but the respondent succeeds with respect to sec. 160M(7).

I would answer the questions submitted to this Full Court as follows:

Question A

Was there, in consequence of the facts recited in the special case, included in the assessable income of the applicant for the year of income ended 30 June 1986:

  • (a) an amount of $40,000; or
  • (b) some other amount and if so, what amount,

pursuant to sec. 160ZO(1) of the Income Tax Assessment Act 1936 ?

Answer

  • (a) Yes.
  • (b) This question does not arise for consideration.

Question B

Who should pay the costs of the proceedings?

Answer

This question does not arise because counsel for the parties informed us that it had been agreed by the parties that each party should pay

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his own costs of the proceeding before this Court.


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