INTEGRATED INSURANCE PLANNING PTY LTD & ANOR v FC of T

Judges:
RD Nicholson J

Court:
Federal Court

MEDIA NEUTRAL CITATION: [2004] FCA 35

Judgment date: 30 January 2004

RD Nicholson J

Before the Court are applications against objection decisions made by the respondent. These applications were filed under s 14ZZ of the Taxation Administration Act 1953 (Cth) and O 52B of the Federal Court Rules.

2. For Integrated Insurance Planning Pty Ltd (``Integrated Insurance'') the relevant applications are:

(a) W24 of 2000 filed on 11 February 2000 against the objection decision of 10 December 1999 in respect of the notice of assessment issued on 3 June 1999 to Integrated Insurance for the income year ended 30 June 1995. This application seeks to establish that the 1995 assessment is excessive because a loan debt waiver of $105,000 or part thereof is not assessable income under s 25(1) and s 26(e) of the Income Assessment Act 1936 (Cth) (``the 1936 Act'').
(b) W16 of 2002 filed on 11 February 2002 against the objection decision of 15 November 2001 in respect of the notice of assessment issued on 21 February 2000 to Integrated Insurance for the income year ended 30 June 1999. This application seeks to establish that the 1999 assessment is excessive because a loan debt waiver of $795,000 or part thereof is not assessable income under s 6-5, s 26(e) and Pt 3-1 of the Income Tax Assessment Act 1997 (Cth) (``the 1997 Act'').

3. For Michael van Rens Financial Services Pty Ltd (``MVR Financial'') the relevant applications are:

(a) W26 of 2000 filed on 11 February 2000 against the objection decision of 10 December 1999 in respect of the notice of amended assessment issued on 10 June 1999 to MVR Financial for the income year ended 30 June 1995. This application seeks to establish that the 1995 assessment is excessive because a loan debt waiver of $88,125 or part thereof is not assessable income under s 25(1) and s 26(e) of the 1936 Act.
(b) W17 of 2002 filed on 11 January 2002 against the objection decision of 16 November 2001 in respect of the notice of

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assessment issued on 24 February 2000 to MVR Financial for the income year ended 30 June 1999. This application seeks to establish that the 1999 assessment is excessive because a loan debt waiver of $136,875 or part thereof is not assessable income under s 6-5, s 26(e) and Pt 3-1 of the 1997 Act.

Grounds of objection

4. At the hearing leave was given, in the absence of opposition from the respondent, to the grounds of objection being extended where necessary to the matters referred to in the statement of grounds. The consequence is that there are five mutually exclusive possibilities to be considered. They may be broadly expressed as follows:

(1) The applicants contend that the debt waivers, which related to agency development loans (``ADLS'' and ADL in the singular) are a form of restraint of trade so that the debt waivers were a disposal of a capital asset.
(2) The respondent counters with the following four alternatives:
- (a) The amount of the forgiveness in the debt waivers is assessable income according to ordinary concepts.
- (b) The amount of the forgiveness is income according to the principles in
  FC of T v The Myer Emporium Ltd 87 ATC 4363; (1987) 163 CLR 199 in that the amount forgiven from the ADL was ordinary income ``being part of a profit- making undertaking or plan and notwithstanding that the transaction was extraordinary.''
- (c) The amount of forgiveness is a bonus arising from a provision of services that the applicants provided and therefore is assessable income according to s 26(e) of the applicable Act.
- (d) The amount of the forgiveness is a capital gain on the basis that the applicants' right to enforce the debt waiver was a CGT asset that was subsequently disposed when the right was satisfied when the loan was forgiven: see
  FC of T v Orica Limited (formerly ICI Australia Limited) 98 ATC 4494; (1998) 194 CLR 500.

Taxation history of ADLS

5. On 19 May 1994 the Commissioner of Taxation issued a Draft Taxation Determination TD 94/D47 on the issue of ``Income tax: Can a life assurance company claim a deduction or loss for Agency Developments Loans it has written off?'' The question in the title of the determination was answered in the negative because ``the circumstances of the principal business of the life assurance company and the making of Agency Development Loans (`ADLS') and the nature of the amounts written off prevent the allowance of a deduction or a loss under either subsection 51(1), the former sections 111A and 111AA, paragraph 63(1)(b) or paragraph 160M(3)(b) of the Income Tax Assessment Act 1936...''. The draft determination was withdrawn in January 2003. In the course of the draft determination it was stated that ADLS were generally an ancillary part of the business of life assurance companies and not the essence of its business.

6. The next public statement of the Australian Taxation office was the release of a Taxation Ruling TR 2001/9 in September 2001 on ``Income Tax: Agency Development Loans'', well after the commencement of two of the four present actions. The terms of that ruling follow fairly closely the reasons for the respondent's disallowance of the notices of objection against the assessments here in issue.

7. The applicants' case points to the reference in par 76 of this latter ruling where it is stated that ``the amount of an ADL will usually be determined by a formula linked to sales and may be reviewed periodically''. It is said that this is the only reference in the ruling to the purpose or background concerning ADLS. Significantly for the applicants' case, it makes no mention of the notion that an ADL may be a form of control over an agent or a device to control a distribution unit (a matter to be further discussed below).

Background in case law on ADLS

8. The case for the applicants raises the question as to why Colonial, a company not in the business of lending money, lent money on what appear to be non-commercial terms, that is, interest free and no repayment for a long period. For the applicants it is submitted that Colonial have been coy about saying why they would make such loans. Apart from attention to the evidence in the present case which will be determinative and to which attention will

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ultimately turn, the case for the applicants draws attention to prior decisions which are said to illustrate that it suited Colonial's commercial purposes to control or, to an extent, to have absolute control over its distribution network. This, it is said, is illustrated by reference to four cases in particular. The first is
Alderton & Anor v The Prudential Assurance Company Limited (1993) ATPR ¶41-230; (1993) 41 FCR 435. There, Heerey J found that the ADL in issue was ``not a routine commercial document the general nature of which should be known to persons of ordinary business experience not connected with the life insurance industry''. He said that ``its true commercial value to Prudential was that it became a golden handcuff on the agent''. Additionally he said that ``a five-year interest free loan is indeed an attractive proposition, but the ability to call it up on seven days notice and to impose high interest rates if sales targets were not met gave Prudential a powerful hold over the agent and a healthy incentive to performance''.

9. The second case was
Paviour-Smith v National Mutual Life Association of Australasia Limited (1999) 91 IR 8. Evidence given in that case and referred to at 22 described a period of intense competition in the insurance industry in Australia and intense competition for distribution capacity as between NML and AMP. It was said in the evidence given there that ADLS were ``one way of securing and retaining an agency force in a highly competitive environment without necessarily increasing the cost of running an agency force in any significant fashion''.

10. The third case referred to was
AVIS v Australian Mutual Provident Society [1995] NSWIRC 238. There, a package called ``New Horizons and Agents Remuneration Package'' had been negotiated over a period of months between AMP and the Agents Association and was implemented on 1 January 1997. It was said in the reasons for judgment on an interlocutory application by Schmidt J that ``AMP wish to retain the loyalty of its agents and in order to do so, set about to create a package of benefits which would be a financially attractive inducement for agents to remain with AMP''.

11. The final case was
National Mutual Life Association of Australasia Ltd v SH Hallas Pty Ltd [1992] 2 Qd R 531. There, in the reasons of the Full Court delivered by McPherson J it was said:

``In or before 1986 the plaintiff's principal competitor in life insurance business in Australia was the A.M.P. Society. There was rivalry between the two companies to secure the services of suitable agents. In order retain its agents, the A.M.P. Society introduced a scheme for making interest-free loans to them. The plaintiff learned of the details of this scheme, and came under pressure from its agents to do the same for them.''

12. It is apparent from these authorities that ADLS have been a feature at a certain period of the life and general assurance business in Australia. However, the aspects of the cases relied upon are entirely dependent on evidence in those particular cases and cannot be more than illustrative by way of background to the determination of the issues in this case, which must depend on the evidence given here.

Evidence

13. The case for the applicants relies upon an affidavit of Mr van Rens in each matter as admitted into evidence subject to some limitations. The affidavits comprise part of exhibits constituted by court documents and further documents. Mr van Rens was subject to extensive cross-examination in relation to his affidavits and the documents referred to in them. His evidence in cross-examination was almost totally confirmatory of the matters put to him on behalf of the respondent.

14. The case for the applicants also relied upon affidavits in each matter by Mr L Reid. These were admitted into evidence following deletions as a result of successful objections. No cross-examination occurred on those affidavits.

15. There was no witness evidence for the respondent.

Outline of background circumstances in relation to Integrated Insurance as apparent from documentary evidence

16. In the course of his opening, counsel for the applicants made the point that this case is not to be resolved only by looking at the documents; rather it is necessary to look behind the documents to the way in which the business of the applicants was conducted. Without in any way seeking to minimise that submission it is helpful to commence by examination of the

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documentary evidence and then to proceed to an examination of the effect of the oral evidence.

17. The circumstances referred to are common to each of the matters save as where otherwise indicated. For that reason it was accepted in the course of the hearing that the evidence would relate to the circumstances arising in matter W16 of 2002. The consequence is that the reference to, for example, ``the applicant'' is a reference to Integrated Insurance as the applicant in matter W16 of 2002.

Incorporation of applicant

18. Integrated Insurance was incorporated on 23 March 1988, its directors being Richard Mead and Michael van Rens.

First agency agreement

19. On 6 July 1988 Integrated Insurance entered into an agency agreement (``the first agency agreement'') with Colonial Mutual General Insurance Company Ltd (``Colonial General''), a company stated therein to be carrying on insurance business under the Insurance Act 1973 (Cth). Integrated Insurance was by that agreement appointed an agent of Colonial General.

20. By terms of the first agency agreement:

(a) the agency was exclusive (art 2.6);
(b) Integrated Insurance agreed to obtain insurance business for the benefit of Colonial General (art 3.1);
(c) Procedures and documentation were determined by Colonial General (arts 5-13);
(d) Colonial General agreed to pay Integrated Insurance commissions, fees or other amounts on insurance business transacted on behalf of Colonial General (art 10);
(e) Integrated Insurance was at liberty to sell its agency and portfolio of insureds subject to Colonial General having the final and conclusive determination of the proposed assignee and the assignee entering into an agency agreement with Colonial General (art 14a).

Further agency agreement

21. On 23 September 1988 (but effective as of 1 September 1988) Integrated Insurance entered into a further agency agreement (``the further agency agreement'') with Colonial Mutual Life Assurance Society Ltd (``Colonial Life'') whereby Integrated Insurance were to carry on the business of Colonial Life and in doing so deal with the authorised officers of Colonial Life and observe the administration requirements, policy and procedure of Colonial General (cl 2). The oral evidence of Mr van Rens was that this agreement and the first agency agreement operated in tandem to give Integrated Insurance agency over the full range of Colonial's general and life insurance business. References to ``Colonial'' therefore embrace both ``Colonial Life'' and ``Colonial General'', subject to context.

22. Clause 5 of this further agency agreement provided for the payment of commission. Colonial was to establish a commissions and advances account into which commissions, bonuses and allowances were to be credited (cl 5.1). Rates of remuneration were specified in sch A and sch B of this agency agreement and were subject to variation by Colonial (cl 5.2 and cl 5.4). In the discretion of Colonial, moneys would be advanced to Integrated Insurance against the prospective commissions credited to the account (cl 5.3). Provision was also made by cl 5.10 for Colonial in its absolute discretion to credit the account with special bonuses, allowances or other ex gratia payments. Pursuant to cl 7.2(e) Colonial could terminate the agency agreement by written notice, taking effect immediately in the event that there was a failure to meet and comply with the requirements of Colonial including the failure to observe any proper instructions from Colonial's duly authorised officer.

23. By the further agency agreement, Integrated Insurance was at liberty to sell its agency and portfolio of insureds subject to Colonial having the final and conclusive determination of the proposed assignee and the assignee entering into an agency agreement with Colonial (cl 9.1). Further, liberty to sell was subject to Colonial's right to receive the first offer for sale and to Integrated Insurance accepting that offer in the event that it wished to dispose of the agency business it conducted with Colonial (cl 9.2). Clause 3.8 provided that neither Integrated Insurance or any employee or person acting on its behalf shall after termination of the agency agreement influence any of Colonial's representatives to sever their agency agreement with Colonial. If cl 3.8 was breached, Integrated Insurance was liable to pay Colonial $10,000 as liquidated damages.

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First loan agreement

24. In February 1990 the applicant applied to Colonial for an ADL in order to develop its business. By letter dated 18 February 1990 Integrated Insurance set out its plan for development and expansion.

25. On 30 June 1990 an agency development agreement was entered into between Colonial Life and Integrated Insurance as borrower (``the first loan agreement''). In recitals to this agreement it was stated that Integrated Insurance had requested Colonial for a loan in the principal sum of $150,000 which was to be applied for the purposes of developing the agency business which Integrated Insurance has with Colonial and Colonial had agreed to advance the principal sum.

26. The due date for repayment of the principal sum was 10 years from the date of the advance (cl 2, sch item 4). By cl 3 interest was payable on demand or termination of the further agency agreement. This date is the effective date on which Integrated Insurance was appointed an agent for Colonial Life. Clause 5 provided for interest to be paid on the principal sum, but interest payable could be waived by Colonial depending upon the borrower's earnings. Integrated Insurance irrevocably authorised Colonial to deposit the $150,000 with Colonial Mutual Deposit Services Ltd (CMDS) at the interest rate offered by CMDS (cl 1(2)). The loan was secured by a mortgage over the CMDS account into which the $150,000 was placed and personal guarantees were provided by the directors and shareholders.

27. At the option of Colonial the $150,000 could become immediately due and payable for one or more of a number of specified commercial events (cl 3(a)-(p)) including the termination of the further agency agreement (cl 3(n)). By cl 4 the principal sum to which Integrated Insurance was entitled under the principal loan agreement was to be reviewed after 31 December 1990 by reference to the average yearly earnings of Integrated Insurance, set at $100,000. Depending on whether the average yearly earnings of Integrated Insurance exceeded the scale provided in the principal loan agreement, it could apply to Colonial to increase the principal sum. Where the average yearly earnings were lower than the scale, Integrated Insurance was required to reduce the principal sum outstanding after receiving notice from Colonial requiring repayment. Alternatively, Colonial could in its absolute discretion elect to accept interest on the amount to be repaid.

28. The principal sum under the first loan agreement was advanced by Colonial Life to the applicant on or about 30 June 1990 and was due to be repaid on 30 June 2000.

Second loan agreement

29. On 26 April 1991, a second loan agreement was entered into whereby a further advance of $750,000 was made by Colonial Life to Integrated Insurance (``the second loan agreement''). After reciting the loan agreement of 30 June 1990 as the principal loan agreement and that Integrated Insurance had requested Colonial to make a further advance, it was agreed that Colonial would make a further advance of $750,000 on 29 April 1991 to be deposited into the same CMDS account as the first advance of $150,000 was held. The further advance was secured by the mortgage and further guarantee from the directors and shareholders (cl 1). The terms for repayment of the principal sum (including the further advance) and the payment of interest, as set out in the principal loan agreement,continued to apply (cl 4). However, for the purpose of making the total earnings adjustments to the loan, the minimum earnings required of Integrated Insurance were increased to $600,000 (cl 3, item 8 sch).

30. The principal sum from the second loan agreement was advanced by Colonial Life to Integrated Insurance on 29 April 1991 and was due to be repaid on 28 April 2001.

Actions under loan agreements

31. Colonial and Integrated Insurance proceeded in accordance with the terms of these ADL agreements. Integrated Insurance was required to reduce the loan in accordance with the provisions of the loan agreement and release moneys to Colonial from the CMDS account. Interest was paid by Colonial on the funds in the CMDS account, and on one occasion Colonial agreed to release funds of $80,000 from the account to Integrated Insurance, which utilised the funds to acquire new premises for its business.

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Colonial's New World initiative

Outline of proposals

32. On or about 31 August 1993 Colonial hosted a conference in New York which included among its attendees the directors of Integrated Insurance. The effect of the oral evidence on the contents of that conference and whether there was prior knowledge of the so- called Colonial New World initiative announced on that occasion is a matter dealt with under heading ``Oral Evidence''.

33. So far as the documentary evidence is concerned, the broad outline of the intended position was set out in a letter dated 2 February 1994 from Colonial to Integrated Insurance in which it was stated:

``... over recent months we have been developing a plan, including input received from the members of the Agents Forum, for dealing with ADL's now and into the future.

While the individual proposals have yet to be finalized, I would like to provide a broad outline of our intended position:

• In general terms, be a partial write off of ADL's, depending upon prior year successful validation, to be effective immediately upon the signing of any appropriate new legal documentation. The value of the write off will be subject to a set scale (refer attached) dependent upon when each loan was advanced and on the achievement of full annual validation of each loan advance. (emphasis added)

• With respect to 1993, all Agents who have an Agency Agreement with Colonial as at 31st December 1993 will be deemed to have validated the ADL for that year.

• The loan agreements will be amended to have a common end date of 31st December 1999.

• For validation purposes, a Net Retail Validation Budget will be established for each Agency to encompass income generated in respect of all areas of the Colonial Retail business. This Validation Budget will be for the six year period in total i.e. 1st January 1994 to 31st December 1999.

• If the Agency successfully achieves the Validation Budget and is still with Colonial at the loan end date the outstanding loan (i.e. the balance after partial write off) will be fully written off.

• An offer to vary the ADL Agreement will not be made to an Agent which has ceased to hold an Agency with Colonial or to an Agent where its ADL is subject to a legal dispute...''

Deed of debt reduction

34. On 8 March 1995, consistently with what was foreshadowed in Colonial's letter of 2 February 1994, a Deed was entered into by Colonial Life and Integrated Insurance.

35. The Deed recited the principal loan agreement of 30 June 1990 and the supplemental agreement of 26 April 1991 specifying the initial advance of $150,000 and stated at cl 2, item 9 sch, that the amount owing to Colonial pursuant to these agreements at the date of the Deed was $795,000.

36. By this Deed the parties amended the principal loan agreement, the supplemental agreement and any other agreement or understanding between Colonial and the borrower in connection therewith (recital E). By cl 1 of the Deed the repayment date for the moneys now owing to Colonial was 31 December 1999.

37. By cl 2 of the Deed the parties acknowledged that:

(a) the amount specified in the Deed as owing under the loan agreements (i.e. $795,000 was less than the amount that would have been owing under the existing loan agreements but for the Deed, namely the sum of $900,000 comprising the $150,000 initial advance and the $750,000 further advance; Colonial had agreed to such reduction (i.e. $105,000) ``to ensure the continuing performance of Integrated Insurance in its efforts to meet its retail sales budget''; Colonial had agreed to the waiver referred to in cl 4 of the Deed ``to ensure the continuing performance of Integrated Insurance in its efforts to meet its retail sales budget''.

38. By cl 4 of the Deed the parties agreed that if, during the period commencing on 1 January 1994 and ending on 31 December 1999, Integrated Insurance achieved a retail sales budget equal to or exceeding the amount of $3,816,000 (item 10 sch) and the agency agreement was in force as at 31 December 1999

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then on 1 January 2000 Colonial would waive its right to require Integrated Insurance to repay the amount of $795,000. By cl 4(3) of the Deed, Integrated Insurance acknowledged that if it failed to achieve this retail sales budget within the time specified it was not entitled to require Colonial to waive the repayment of the principal sum as defined, i.e. the $795,000.

39. Colonial and Integrated Insurance proceeded in accordance with the terms of the Deed. The progress of Integrated Insurance towards achievement of the required retail sales budget was reviewed by Colonial on a regular basis.

40. In March 1995 Colonial agreed to release to Integrated Insurance part of the funds in the CMDS account for the acquisition of premises, and a new mortgage was executed.

Franchise and distribution agreements

41. As foreshadowed as part of Colonial's ``New World'', on 24 July 1995 a franchise agreement and distribution agreement were entered into by Colonial Financial Services Pty Ltd and Integrated Insurance. Another franchise agreement and distribution agreement were executed by the parties on 6 March 1998.

42. Under the franchise agreements Colonial granted to Integrated Insurance the right to operate the franchise using Colonial's system and image, and to sell and supply approved products and services supplied by the Colonial company (cl 2.1). Colonial agreed to pay commissions and allowances and other entitlements pertaining to the status level of Integrated Insurance as a franchise owner (cl 5.1). By cl 2.3(g) Colonial reserved the right to review the status level of the franchise owner from time to time on the basis of performance and to redesignate status where minimum performance criteria had not been met.

43. By cl 8 of the franchise agreements Integrated Insurance were to strictly comply with Colonial standards and the Colonial system for the franchised business. Integrated Insurance also committed to meet or exceed the minimum performance criteria relevant to maintaining the franchise and its status level as a franchise owner. By cl 14 Integrated Insurance could assign the franchise agreement with the consent of Colonial but not otherwise deal with the franchise. The collateral and supplementary distribution agreements appointed Integrated Insurance as agent to sell and supply various approved products and services.

Waiver and security release

44. Integrated Insurance reached the required retail sales budget prior to 31 December 1999 and Colonial agreed to waive the $795,000 and consequently Colonial Life and Integrated Insurance entered into an agreement dated 13 August 1998 for the release of the securities held by Colonial in respect of the amount owing.

Outline of background circumstances in relation to MVR Financial as apparent from documentary evidence

Incorporation of applicant

45. MVR Financial was incorporated in Western Australia on 30 October 1986.

Third agency agreement

46. On 27 January 1987 MVR Financial entered into an agency agreement (``the third agency agreement'') with Colonial Life. It was accepted by Mr van Rens in cross-examination that the agreement was in similar form to the first agency agreement made on 23 September 1988 between Colonial and Integrated Insurance.

Third loan agreement

47. On 11 February 1987 an agreement was entered into between Colonial Life as lender and MVR Financial (then named Newil Pty Ltd) as borrower (``the third loan agreement''). In recital A of this agreement it is stated that the borrower has achieved the status of ``The Internationals Club'' member within the guidelines prescribed by Colonial and has requested Colonial for a loan in the principal sum of $150,000.

48. The due date for repayment of the principal sum was 20 March 2019 (sch item 4). At the option of Colonial the $150,000 could become immediately due and payable if one or more of a number of specified commercial events (including the termination of the agency agreement and failure to maintain the Internationals Club status) occurred: see cl 3(n) and (q). The loan was guaranteed by the directors and shareholders of MVR Financial.

49. By cl 4 the principal sum to which MVR Financial was entitled under the first loan agreement was to be reviewed after 31 December in each year by reference to the average yearly earnings of MVR Financial.

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Depending on whether the average yearly earnings of MVR Financial exceeded the target provided in the loan agreement, it could apply to Colonial to increase the principal sum. If the average yearly earnings were lower than the scale, MVR Financial would be required to reduce the principal sum outstanding after receiving notice from Colonial requiring repayment. Alternatively, Colonial could in its absolute discretion elect to accept interest on the amount to be repaid. Colonial was not entitled to charge interest on the principal sum except where it elected to do so on any reduction of the principal sum.

Fourth agency agreement

50. On 18 November 1987, Colonial General and MVR Financial (then known as Mike van Rens Insurance Advisors Pty Ltd) entered into an agency agreement (the fourth agency agreement) whereby MVR Financial was appointed as an agent for Colonial. Mr van Rens testified this document is in similar form to the further agency agreement made on 6 July 1988 between Colonial and Integrated Insurance and provides at art 14(a) that MVR Financial was at liberty to sell its agency and portfolio of insureds subject to Colonial having the final and conclusive determination of the proposed assignee and the assignee entering into an agency agreement with Colonial. The oral evidence of Mr van Rens was that the third and fourth agency agreements operated in tandem to give MVR Financial agency over the full range of Colonial's general and life insurance business.

Fourth loan agreement

51. On 22 February 1988 following a review of the loan, Colonial informed MVR Financial that it had qualified for an additional loan of $75,000.

52. As recited, it was at the request of MVR Financial on 18 March 1988 that a further loan agreement was entered into whereby a further advance of $75,000 was made by Colonial Life to MVR Financial (then Mike van Rens Insurance Advisors Pty Ltd) (``the fourth loan agreement''). After reciting the third loan agreement and that MVR Financial requested Colonial to make the further advance, it was acknowledged that MVR Financial had received the further advance of $75,000 on 18 March 1988. The terms of the payment of interest and the repayment of the principal sum (including the further advance) set out in the third loan agreement continued to apply. The advances under the third loan agreement and the fourth loan agreement were secured by mortgage and the guarantees of the directors and shareholders.

Colonial's new world initiative

Deed of debt reduction

53. On 8 March 1995, consistently with what was foreshadowed in Colonial's letter of 2 February 1994, a Deed was entered into by Colonial Life and MVR Financial (then known as Mike van Rens Insurance Advisors Pty Ltd). It recited the third and fourth loan agreements specifying the initial advance of $150,000 and the further advance of $75,000 and stated at cl 2 and item 9 sch, that the amount owing to Colonial pursuant to these agreements at the date of the Deed was $136,875.

54. By this Deed the parties amended the third and fourth loan agreements and any other agreement or understanding between Colonial and MVR Financial in connection therewith (recital E). By cl 1 of the Deed the repayment date for the moneys now owing to Colonial was 31 December 1999.

55. By cl 2 of the Deed the parties acknowledged that:

(a) the amount specified in the Deed as owing under the loan agreements i.e. $136,875 was less than the amount that would have been owing under the existing loan agreements but for the Deed which was $225,000 comprising the $150,000 initial advance and the $75,000 further advance.
(b) Colonial had agreed to such reduction (i.e. $88,125) ``to ensure the continuing performance of MVR Financial in its efforts to meet the retail sales budget'';
(c) Colonial had agreed to waive its right to require repayment of the $136,875 referred to in cl 4 of the Deed ``to ensure the continuing performance of MVR Financial in its efforts to meet its retail sales budget''.

56. By cl 4 of the Deed the parties agreed that if, during the period commencing on 1 January 1994 and ending on 31 December 1999, MVR Financial achieved the retail sales budget equal to or exceeding the amount of $657,000 and the agency agreement was in force as at 31 December 1999 then on 1 January 2000 Colonial would waive its right to require MVR Financial to repay the amount of

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$136,875. By cl 4(3) of the Deed, MVR Financial acknowledged that if it failed to achieve this retail sales budget within the time specified it was not entitled to require Colonial to waive the repayment of the principal sum as defined, i.e. the $136,875.

Franchise and distribution agreements

57. As foreshadowed as part of Colonial's New World initiative, on 28 November 1995 a franchise agreement and distribution agreement were entered into by Colonial Financial Services Pty Ltd and MVR Financial (still known as Mike van Rens Insurance Advisors Pty Ltd). Another franchise agreement and distribution agreement were executed on 16 March 1998.

58. Under the franchise agreements Colonial granted to MVR Financial the right to operate the franchise using Colonial's system and image, and to sell and supply approved products and services supplied by any Colonial company (cl 2.1). Colonial agreed to pay commissions, allowances and other entitlements pertaining to the status level of MVR Financial as a franchise owner (cl 5.1). By cl 2.3(g) Colonial reserved the right to review the status level of the franchise owner from time to time on the basis of performance and redesignate a status where minimum performance criteria had not been met.

59. By cl 8 of the franchise agreements MVR Financial were to strictly comply with Colonial standards and the Colonial system for the franchised business. MVR Financial also committed to meet or exceed the minimum performance criteria relevant to maintaining the franchise and to its status level as a franchise owner. By cl 14 MVR Financial could assign the franchise agreement with the consent of Colonial but not otherwise deal with the franchise. The collateral and supplementary distribution agreements appointed MVR Financial as agent to sell and supply various approved products and services.

Waiver and security release

60. MVR Financial reached the required sales budget prior to 31 December 1999 and Colonial agreed to waive the $136,875. Consequently, Colonial Life and MVR Financial entered into an undated agreement for the release of the securities held by Colonial in respect of the amount owing.

Oral evidence

61. As has been said, the oral evidence of Mr van Rens was very largely confirmatory of what was put to him on behalf of the respondent concerning the content of the relevant documentation. He stated that the loans from Colonial were sought and made for agency development purposes. He also stated that the loans provided funds to the applicants on interest free, delayed repayment terms and that this was beneficial to the applicants and was the reason why they took up the loans when the facility was extended by Colonial.

62. In relation to the recitals in the loan agreements and other documentary evidence that the applicants applied for loans which were approved by Colonial, Mr van Rens said that did not accurately state the position. Rather, he said the possibility of the loan was a matter initiated by Colonial. He could offer no explanation as to why the loan agreements were cast in the form in which they appeared in these recitals. Counsel for the applicants invited the Court to infer from the fact that the documents were Colonial's documents that Colonial had its own agenda.

63. Mr van Rens agreed in the course of his evidence that upon the earnings requirements being met, Colonial informed the applicants that they had qualified for an ADL. The applicants then informed Colonial that they wanted a loan and the loans were documented. In the case of the second loan of $750,000, Integrated Insurance was asked to first submit a business plan to support the application.

64. It also appears from the evidence of Mr van Rens that in the case of the loan advances to MVR Financial, they were not required to be deposited in the CMDS account but rather were paid over to MVR Financial by cheque. Mr van Rens was unable to state whether he executed any or all of the loan documentation to MVR Financial before or after receipt of the cheques for the loan advances. The documentation itself indicates that the cheque for the funds was issued once the documentation had been prepared and signed, although the evidence on this is equivocal.

65. In his oral evidence Mr van Rens agreed that the applicants had qualified for the first round of waivers by meeting existing production levels. He also agreed that the first round of waivers were made to ensure the continuing performance of the applicants in

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their efforts to meet their retail sales budgets. As for the second round of waivers, Mr van Rens agreed these were made to ensure the continuing performance of the applicants in their efforts to meet their retail sales budgets and the waivers occurred once those budgets were met as set out in the Deeds.

66. Mr Reid's evidence added nothing to knowledge of Colonial's system of agency loans.

ADL as restraint on trade

Applicants' submissions

67. For the applicants it is submitted that the respondent has misunderstood the true nature of the ADLS and the character of the benefit that Colonial sought to confer on any of the applicants by forgiving the ADLS. The submission for the applicants is that the ADLS were a ``golden handcuff'' designed to ensure that the applicants did not abandon Colonial by either transferring their existing books of business to another insurance company or selling another insurance company's products which were in direct competition with Colonial. It is said that in effect the ADLS were the hurdle that Colonial put in place to increase the cost to its competitors to lure the applicants away from Colonial's agency force. This was because if another insurance company wanted to the recruit the applicants, it would have to pay out the applicants' ADLS as part of its recruitment package. Additionally, it is said that the ADLS were designed to restrict the applicants' legal right to fairly contract with other insurance companies.

68. Further support for these submissions is sought by contrasting the position of the applicants before they received the ADLS from Colonial with that which they were in after they received the ADLS. In the former position, it is said, the applicants had the freedom to determine which insurance companies' products that applicants would sell. It would not suffer any opportunity cost if they were to terminate their engagement with Colonial and shift their business over to another insurance company. In the latter position the applicants lost the freedom of choice and had fettered their right to contract with other insurance companies. If they wanted to deal with such companies they would need to repay the ADLS to Colonial or have the new insurance company pay the ADLS on their behalf to buy back the applicants' freedom of choice and right to freely contract with other insurance companies. It is these features which the case for the applicants contends made the ADLS different to ordinary loans and results in them being properly characterised as in substance a restraint of trade.

69. It is additionally submitted that all of the aspects of the ADLS were consistent with its function as a restraint for trade. For example, it is said that the provisions for annual validation of the ADLS were a valuation mechanism for the restraint of trade of the applicants. The second and fourth loan agreements were further consideration that Colonial believed it had to pay to the applicants to ensure that the price for the applicants to walk away or to be bought out by another insurance company came at too high a price. In this respect, it is said, it is clear that it was Colonial who went to Integrated Insurance and MVR Financial offering the loans rather than, as recited, the other way round.

70. Conversely, it is said that if an applicant failed to validate the ADL, the performance criteria operated to value that applicant's restraint of trade for less than the amount advanced under the ADL. Consequently, Colonial would seek repayment of such part of the ADL as would recover the excess cost of maintaining of restraint of trade which had become less valuable to Colonial. It is said this should be understood as effectively meaning that the devaluation of the restraint of trade had the consequence that the corresponding hurdle for the applicant or another insurance company to release the applicant from restraint of trade was lowered.

71. In similar vein it is submitted that the repayment provisions of the ADL arrangement constituted a liquidated damages clause if an applicant breached the restraint of trade. Furthermore, it is said, the liquidated damages clause was on more favourable terms than if Colonial entered into a pro forma restraint of trade because Colonial would have to prove that the damages recovered were commensurate to Colonial's loss. As a ``loan'', the whole of the ``principal'' could be recovered together with a higher interest rate without becoming a penalty. It also was said to have given Colonial the ability to obtain security for its liquidated damages from the very start of the arrangement.

72. In this context it is said that the arrangements involving the forgiveness of the

ATC 4065

ADLS revolved around Colonial's need to maintain the restraint on the applicants particularly during the transition to Colonial's New World model.

73. In development of this submission it is said that had the original terms of the ADLS been carried out to their conclusion, the applicant in W16 of 2002, for example, would have had to repay the first ADL of $150,000 on 30 June 2000 and the second ADL of $750,000 on 26 April 2001. Under that arrangement, the applicant would not have received any capital from Colonial for agreeing to restrain itself from dealing with other insurance companies. However, the price that another insurance company would need to pay to recruit the applicant, being the face value of the amount outstanding on the ADL, remained constant while the benefit that the competitor would receive from recruiting the applicant diminished as the applicant depleted its effective business life in the service to Colonial. On the other hand, the value of the incentive to the applicant was the benefit the applicant obtained from the use of moneys over the period of the restraint. As time passed, the value of the benefit decreased as the applicant realised the benefits from the use of the money. Accordingly, the disincentive for the applicant against breaching the restraint of trade was said to have diminished over time.

74. On behalf of the applicants it is submitted that when Colonial shifted to the New World model it was under-performing in the market and needed its elite agency force to realise the benefits of that change. Colonial was, therefore, in the position it could only apply pressure on those agents who had tied up their ADLS and who were unable to repay the ADL immediately. In the case of agents who could afford to repay the ADL or were prepared to suffer the inconvenience of liquidating assets to repay it, there is no power of compulsion by Colonial. Additionally, it is submitted that Colonial could not rely on the existing ADLS as a sufficient incentive for the elite agents to remain with Colonial because the strength of the restraint had been undermined by the diminishing hurdle inherent in the original system.

75. It is also submitted that the ADL's purpose as a restraint of trade was not materially altered by the variations to the terms of the ADL in 1995. This, it is said, is because the applicant was at all material times subject to a restraint which restricted the applicant's ability to transfer its existing book of business to another insurance company and sell another insurance company's products which competed directly with Colonial's products.

76. Rather, it is submitted, the variations to the ADL were designed to overcome the devaluation and the benefit conferred for the restraint of trade from the perspective of the agent which reduced the disincentive for the agent to breach the restraint of trade. This, it is said, was achieved, first, by Colonial bringing forward the repayment date of all ADLS to 31 December 1999; by Colonial's introduction of performance criteria; and the forgiveness of the ADL conditional upon achieving those performance criteria. The first of these mechanisms standardised the valuation mechanism for all the elite agents with ADLS. The consequence was that at the time of the transition to the ``New World'' model, it is said, the value of the restraints of trade became the value from the use of the ADL moneys up to 31 December 1999 and the value from the conditional forgiveness of the ADL on that date. In this sense, it is said, the performance criteria was used by Colonial to determine which of its agents were ``elite'' agents whose restraints of trade were worth more than the value from the use of the ADL moneys. It is said that this explains why the sales targets set by Colonial exceeded the sales targets under the franchise agreements. Only those agents who could achieve their performance targets could assert they were ``elite'' agents whose restraint of trade had any value over and above the benefits already obtained from the use of the ADL moneys.

77. Nevertheless, it is submitted that this arrangement was not a win-win situation for the applicant. While Colonial's decision to bring forward the repayment date of the ADLS to 31 December 1999 brought forward the end of the restraint period for the applicant, it also reduced the benefit the applicant originally expected to obtain from the use of the moneys. Hence, it is submitted, there was an actual diminution in the value that the applicant received from having granted the restraint of trade which the applicant had previously bargained for. Accordingly, it is said, the benefit the applicant obtained from the forgiveness from the ADL was not a ``new'' benefit. The benefit that

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Colonial sought to confer on the applicant was still a benefit conferred in exchange for the restraint of trade, so it is submitted. The only difference was that Colonial had decided to change how it valued the restraint of trade in determining how much the applicant was entitled to.

78. The result, it is submitted for each of the applicants, is that the forgiveness of the ADL was not remuneration for the services that the applicant rendered to Colonial. Rather, the ADL should be seen as having been waived by Colonial as recognition that Colonial had received the benefit from the restraint of trade over the applicant's ability to contract with other insurance companies. The position being that benefits received in consideration for a grant of restraint of trade are a capital receipt -
Dickenson v FC of T (1958) 11 ATD 415; (1958) 98 CLR 460 - and therefore there is no case for assessability of the amount forgiven as remuneration for services.

Respondent's contentions

79. For the respondent it is submitted, there is no evidence that agency developments loans were made in restraint of trade or as ``golden handcuff'' on the applicants. It is said that all the evidence is to the contrary. In particular, it is said that all documentation from Colonial in evidence indicates that the ADLS were made available to Colonial's agents as part of the scheme or package of rewards and remuneration available to them and were expressly linked to the earnings of the agents. It is said that at all times the agency with Colonial was to be an exclusive one but that terms giving effect to that arose out of the agency agreements and not the loan agreements.

80. Additionally, it is submitted, it is an artificial reading of the terms of the loan agreements to say that the process set out in them for the validation of the loans by earnings was in the loan agreements as a restraint of trade on the applicants to be used either to raise or lower the hurdle by which another insurer could entice the applicants away from Colonial or as a liquidated damages clause. Here the case for the respondent again relies on the documentation. It is submitted that the documentation demonstrates clearly that the facility made available by Colonial to its agents was an ADL facility. It is submitted that agents sought loans by making application to Colonial. When granted, the loans were secured. The loans were to be applied for the purposes of developing the agency business that the agent had with Colonial. The loans were subject to review by validation, that is, by the agent reaching pre-determined earnings for Colonial. If an agent failed to validate the loan was to be repaid the extent it had not been validated. If the loan was validated then to the extent that it exceeded the earnings target further advances could be applied for by the agent. Payments of interest and principal (where validation had not been achieved) were postponed at the discretion of Colonial.

81. Then, it is submitted that in any event it is the character of the loan waivers in the hands of the applicants that is determinative and not speculation and hypothetical analysis concerning the possible motives of Colonial. It is said that even if the loans and the loan waivers had the effect of a restraint and provided enhanced rewards to induce and encourage agents to maintain a continuing agency relationship with Colonial, from February 1987 and June 1990 when the first loan agreements were entered into by the applicants, this was a normal incident of the agency and was part of the scheme or package of remuneration. It is submitted, there is no evidence the loans were a means of compensation for the applicants for giving up rights to move away from Colonial. Further, it is said, the loans presented nothing more than a disincentive in that the agent would suffer a lost opportunity for a bonus or getting a loan forgiven should they decide to leave Colonial.

82. Additionally, it is submitted that the loans should not be characterised as damages payable for a breach of contract. On the contrary, it is submitted, they were given for performing at and above the earnings requirement set under the agency contracts. Therefore, properly characterised, the loans and waivers were a deferred bonus, reward, remuneration or gain for achieving earnings targets as agents for Colonial's products, a matter developed further below.

Reasoning

83. The starting point for the consideration of these submissions is that there is no direct evidence from which to make any findings of fact concerning the intentions or purpose of Colonial in introducing the ADLS or the variations to them as a consequence of the introduction of the New World arrangements.

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So far as the submissions for the applicants rely on such intentions or purpose, they have no support in direct evidence. The most that can be said is that support would have to be found by way of inference from the admitted evidence and in particular the nature of the documentation.

84. The submissions to the Court did not touch on what was meant by restraint of trade in the circumstances. I rely on the decision of the High Court in
Peters (WA) Ltd v Petersville Ltd (2001) ATPR ¶41-830; (2001) 205 CLR 126 and the decision of the Full Court in
Australian Capital Territory v Munday (2000) ATPR ¶ 41-771; (2000) 99 FCR 72 as stating the relevant notions of the restraint of trade doctrine.

85. Those authorities refer to three concepts of restraint of trade. The first is the ``pre- existing freedom test''. The second is the sterilisation of capacity test. The third is the trading society test: see Peters at ATPR 43,227; CLR 138, Munday at ATPR 41,101-41,104; FCR 79-82.

86. Those authorities examine situations where there are covenants and which are distinguishable from the present. Nevertheless, the common point among them is that there is a restriction. In my view there is no such restriction arising from the ADLS. In cross- examination counsel for the respondent obtained the agreement of Mr van Rens to the fact that the ADLS universally provided for Colonial to call for early repayment of the loan if the applicant company entering into the ADLS ceased to be an insurance representative for Colonial or terminated the agency. Far from restricting the capacity of the applicants to do that, the ADLS admitted of those possibilities.

87. Furthermore, I do not consider that the ADLS were constructed in such a way as to constitute ``some artificial use of an accepted legal technique'' bringing restriction to the applicants' right to trade:
ESSO Petroleum Co Ltd v Harper's Garage (Stourport) Ltd [1968] AC 269 at 335 per Lord Wilburforce. There is no contention here that any provisions of the ADLS were unreasonable or in breach of public policy.

88. In my opinion it may be inferred from the evidence and particularly the documentation that the ADLS when introduced had the effect of acting as a disincentive ensuring that an agent did not abandon Colonial by either transferring its existing book of business to another insurance company or selling another insurance company's products which were in direct competition with Colonial. That was a normal incidence of the terms of engagement of an agent. Whether it can lead to the description of the ADLS as giving rise to a ``golden handcuff'' is dependent upon ascribing a meaning to that characterisation. By characterising the ADLS as a disincentive, I mean that they acted commercially against the agent making any of those moves but did not prevent those moves and hence did not restrain them. There was no restraint if the commercial terms of the ADLS could be met by a competitor of Colonial seeking the relevant transfer of the agent and its business. There is no evidence that the commercial terms were so unreasonable that no competitor would be likely to meet them.

89. In reaching that conclusion I do so on the basis more favourable to the applicants that the evidence establishes on the balance of probabilities that it was Colonial which offered the ADLS to the applicants and not, as the loan agreements recite, the applicants who applied for the loans.

90. I agree with the submission for the respondent that there is no evidence that the ADLS were a means of compensation for the applicants giving up rights to move away from Colonial. Further I do not consider there is any foundation upon which to accept that the ADLS should be characterised as damages payable for breach of contract in circumstances where they were given for performing at and above the earnings requirement set under the agency contracts.

91. For these reasons I do not accept the submissions for the applicants that the ADLS were a restraint of trade so that their forgiveness should be seen as having given rise to a capital receipt.

Amount of forgiveness as income according to ordinary concepts

Respondent's contentions

92. For the respondent it is submitted that whether the waived amounts are income according to ordinary concepts depends on the quality of the amounts in the hands of recipient applicants. For this purpose the motive of Colonial is said not be determinative because the test of whether an amount is income is

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objective:
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 72-73; (1956) 96 CLR 47 at 55-56;
Cooper (Surveyor of Taxes) v Blakiston [1907] 2 KB 688 at 703; and
FC of T v Cooling 90 ATC 4472 at 4479; (1990) 22 FCR 42 at 50.

93. The respondent's submissions then rely on the contention that important to determining the character of a receipt is the ascertainment of the scope of the business in question and the taxpayer recipients purpose in engaging in the business:
Squatting Investment Co Ltd v FC of T (1953) 10 ATD 126 at 141-142; (1952-1953) 86 CLR 570 at 620;
FC of T v The Myer Emporium Limited 87 ATC 4363 at 4366; (1987) 163 CLR 199 at 209;
GP International Pipecoaters Pty Ltd v FC of T 90 ATC 4413 at 4420 and 4422; (1989-1990) 170 CLR 124 at 138 and 141.

94. In application of this principle it is said that it is not contentious that each of the applicants carried on business as agents for Colonial and rendered services to it in that capacity and for its benefit by marketing Colonial is insurance products.

95. Associated with this, it is submitted, that it is correct to see the ADLS were a facility made available by Colonial to its agents.

96. So it is submitted for the respondent that the loan waivers ``came home'' to the applicants upon the waiver by Colonial at which point the funds were no longer subject to legal and commercial restrictions and were then derived and properly characterised as income in the hands of the applicants:
Commissioner of Taxes (SA) v Executor Trustee and Agency Co of South Australia Ltd (1938) 5 ATD 98 at 132 and 123; (1938) 63 CLR 108 at 155 and 143;
Arthur Murray (NSW) Pty Ltd v FC of T (1965) 14 ATD 98 at 99; (1965) 114 CLR 314 at 318. This derivation is said to be so closely connected to the applicants' income producing activity that the fact that the loan waivers were infrequent or irregular does not alter their characterisation as income:
Warner Music Australia Pty Limited v FC of T 96 ATC 5046 at 5056; (1996) 70 FCR 197 at 211; Cooling at ATC 4484; FCR 56;
FC of T v Montgomery 99 ATC 4749 at 4769 [114]; (1999) 198 CLR 639 at [114].

97. Then it is submitted, even if the 1995 waivers could be construed as the gratuitous provision of a benefit by Colonial, that does not preclude the characterisation of those waivers as the proceeds of a business and income provided the benefit can be converted into money value. Here, the waivers were in moneys worth and are, it is said, convertible:
FC of T v Cooke & Sherden 80 ATC 4140 at 4149-4150; (1980) 29 ALR 202 at 213-214; Squatting at ATD 141-142, 145-146; CLR 620, 627-628.

98. A further aspect of the contentions for the respondent is that the release from the debt or the reduction in the liabilities that had been incurred by the applicants in taking the ADLS in the course of their business or as an ordinary incident of their businesses should correctly be seen as a derivation of income. It is said that the waivers were intimately connected with each applicant's continuing business as an agent for Colonial and the waivers were an incidence of the businesses and had the character of income:
International Nickel Australia Limited v FC of T 77 ATC 4383 at 4387 and 4394; (1977) 137 CLR 347 at 354 and 366; Warner Music Australia at ATC 5055-5056; FCR 210-211; Cooling at ATC 4484-4485; FCR 56-58; Montgomery at ATC 4769 [113]; CLR [113].

Applicants' contentions

99. The applicants' submissions address only the respondent's characterisation of the ADLS as a performance bonus, the submission is not consistent with the relationship between Colonial and its agency force that was selling its products. ADLS were not part of the standard commission and fee structures. Not all agents received ADLS. Further, ADLS were not used as a system to advance remuneration to the insurance agents in expectation of the insurance agents setting off its commissions against the ADL. Therefore, an agent who did not receive an ADL would not receive the ``bonus'' even though the agent may achieve similar sales levels.

100. In these circumstances it is submitted for the applicants that the reason why the agent who does not have an ADL does not receive the ``bonus'' is that the agent is not elite to the insurance company. That is, it is said, the agent has not ``sold their soul'' and retains their freedom to shift to another insurance company. Therefore, the submission is that the forgiveness is not consideration for services but consideration for that additional element, namely, the restraint of trade on the applicants.

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Reasoning

101. If by ``selling their soul'' the submissions for the applicants mean that the ADLS had about them the character of a restraint of trade, I have already found that not to be the case. Further, the existence of agents without ADLS achieving sales targets equivalent or better than agents with ADLS is equally consistent with the agents having ADLS as being those whom Colonial wished to retain in its services as it is with the ADLS being in the nature of a restraint. This further contention does not therefore occasion a different characterisation of the ADLS than that previously reached above.

102. Furthermore I accept the submissions for the respondent that the loan waivers were not made for any reason extraneous to having provided agency services to Colonial at the standard acceptable to Colonial. Whatever Colonial's reasons for making the waivers, when the waived amounts of the ADLS came to the hands of the agents they were entitled to them because they were an incident of that business which they had carried on as such agents. By their intimate connection with that business and although they were infrequent and irregular they were therefore in the character of income. For this position to be reached it is not necessary to be able to characterise the waiver amounts as in the nature of commissions. In reaching this view I rely on the reasoning of Hill J in Warner at ATC 5056; FCR 211 which I regard as particularly applicable in the circumstances here.

Amounts of forgiveness as gains from a commercial transaction: the Myer principle

Respondent's contentions

103. For the respondent it is contended that the loan waivers are characterised as the derivation of income from a commercial transaction entered into with the intention or purpose of making a gain. It is submitted that under Colonial's New World scheme the applicants entered into the Deeds of 8 March 1995 to make commercial gains from the waivers promised by Colonial for achieving retail sales earnings in the past and for continuing performance over the following five year period to meet the specified retail sales budget. It is said that in each case the agency development loan debt was waived in accordance with the terms of the Deeds, with the result that the applicants received an assessable gain and the amount waived: see Myer; Montgomery and GP International Pipecoaters at ATC 4420; CLR 138.

Applicants' contentions

104. On behalf of the applicants it is not disputed that they received a benefit from Colonial when Colonial waived the requirement to repay the ADLS. Furthermore, it was accepted for the applicants that such transaction was not in the ordinary course of the applicants' business and was an isolated transaction which related to the applicants' business.

105. However, it is submitted that these facts alone are not sufficient to establish a profit- making scheme. In this respect it is submitted that Myer is not authority for the proposition that all gains or profits made by a business entity are accessible as ordinary income: cf Cooling;
FC of T v Spedley Securities Limited 88 ATC 4126. It is said for the applicants that the respondent's application of the principle in Myer here is misconceived because the respondent has only examined part of the arrangement and, in doing so, has missed the true nature of the transaction. To characterise that nature, it is said, it is necessary to examine the whole of the arrangement and not one isolated part of it. What is missing here in the respondent's analysis, say the submissions for the applicants, is examination of how the taxpayers positioned themselves to begin with. What is necessary is that all the elements of the isolated transaction - the beginning, the middle and the end - are carried out with a consistent motive of deriving the profit, or type of profit, that was sought by the taxpayer from the commencement. This, it is said, was really the decisive point in the High Court's decision in Myer, namely, that the taxpayer there would not have made the loan to the subsidiary in the first place without the arrangement to assign its rights to the interest to the third party. Support for this is also in Orica and
Westfield Ltd v FC of T 91 ATC 4234.

106. In the present cases it is contended for the applicants that the transaction began when the applicant accepted the ADL in exchange for agreeing to restrain its trade for the benefit of Colonial. Therefore, it is submitted, the starting point in determining whether there is a profit- making scheme is whether the applicant's conduct prior to the grant of the ADL arose in

ATC 4070

the pursuit of an ADL or for some other purpose.

107. The submission on this is that everything that the applicant had done to run a successful business was done to maximise the profit the applicant earned from commission and fees on the sale of insurance products, whether from Colonial or from another insurance company that offered better fees and commissions. It is said that the applicant did not start with the intention of subjecting itself to a restraint of trade to derive a profit. Therefore, the grant and forgiveness of the ADL should be seen as merely an opportunity for the applicant to realise a different type of profit from that which it had originally pursued. Accordingly, it is submitted for the applicants that there were no profit-making schemes within the meaning of Myer. The consequence is that the gain the capital made, it is said, remains a capital receipt and not income under ordinary concepts.

108. Alternatively, it is put that the respondent's assertion that there is a profit- making scheme does not fare any better when looked at in the circumstances con- temporaneous to the variation to the applicants' ADLS in 1995. Looked at from the perspective of Colonial's decision to shift its agency force to the New World model, it is submitted for the applicants that it is clear that they did not have the requisite profit motive at the beginning of the transaction for there to be a profit-making scheme. That is because, it is said, that prior to Colonial's decision to introduce the New World model the applicants had no intent or expectation of deriving a profit from a structural change in Colonial. Furthermore, it is submitted, the applicants had no hand in Colonial's decision to shift to the New World model. Therefore, the benefits the applicants derived from Colonial's package to shift to the New World model can, it is said, only be characterised as opportunities that presented themselves to the applicants which were distinct from any expectation or profit motive that the applicant had previously held. Accordingly, there is no basis for finding a profit-making scheme within the meaning of Myer from that starting point.

Reasoning

109. So far as the submissions for the applicants are dependent on the concept of restraint of trade, they cannot succeed for the reasons given earlier.

110. The principle in Myer is not, in my view, made applicable by the entry of the applicants into the ADLS. This is because when they entered the ADLS they had no contemplation that the ADLS may be forgiven. The subsequent waivers by Colonial were not related to and were independent of the ADL agreements: cf Myer at ATC 4370; CLR 216. The entry into the ADLS was not therefore entry into a profit-making scheme attracting taxability to the later unanticipated waivers.

111. However, the position is otherwise concerning the entry into the Deeds of 8 March 1995. Such entry was otherwise than in the ordinary course of carrying on the business: Myer at ATC 4366; CLR 209. However, the only inference from the applicants' entry into those Deeds is that they intended and had the purpose by so doing of making a profit or gain. In these circumstances, the general rule applies and such profit is income: Myer at ATC 4366-4367; CLR 209-210. This is so notwithstanding that the transaction was extraordinary when judged by reference to the ordinary course of the taxpayer's business or was an isolated or one-off transaction: Myer at ATC 4367; CLR 210.

Forgiveness amounts as benefits for services rendered: s 26(e)

Respondent's contentions

112. Next, the case for the respondent contends that the waiver of the loans by Colonial was a benefit received and assessable to the applicants in the 1995 income year under s 26(e) of the 1936 Act for services rendered by the applicants to Colonial. It is said that the applicants were rendering services to Colonial under the terms of their agency arrangements with it: Cooke & Sherden at ATC 4150-4151; ALR 214-215;
Smith v FC of T 87 ATC 4883 at 4886; (1987) 164 CLR 513 at 519. Reliance is placed on the fact that the paragraph brings in as assessable income discretionary or voluntary payments that enhance remuneration for services rendered, the relationship with the services being either direct or indirect:
FC of T v Dixon (1952) 10 ATD 82 at 83-84, 86 and 89; (1952) 86 CLR 540 at 553-554, 558 and 563; Smith at ATC 4885, 4888-4889, 4892 and 4895-4896; CLR 517, 523-524, 530 and 536.

113. Here it is said for the respondent that the applicants would not have received the benefit of the waiver of the loan advances but for their

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agency relationship with Colonial. It is said that the quid pro quo under the terms of the loan agreements and the Deeds was the validation of the loans by rendering the services required under the agency agreements and achievement of the specified retail sales budgets. Further, it is submitted that the necessary relationship exists directly and indirectly between the waivers and services rendered by the applicants to Colonial under the terms of the agency and franchise agreements. That is, it is said, the waivers were made as a direct consequence of the applicants putting in the required services in an effort to achieve and by achieving the retail sales budgets set by Colonial under the agreements.

Applicants' contentions

114. Here the submissions for the applicants repeat that Colonial forgave the ADLS as consideration for the restraint of trade imposed on them. It is said the grant of the restraint of trade by each of the applicants was the grant of a legal right to Colonial. Such a grant, it is submitted, does not constitute the rendering of services. Therefore, s 26(e) has no application: cf Scott at ATD 292-293; CLR 525.

Reasoning

115. Consistently with the views already reached on the submissions of the parties, I cannot accept the submissions for the applicants on this aspect and agree with the submissions for the respondent.

Amounts forgiven as capital gains

116. This contention addresses only the 1999 waiver amounts.

Respondent's contentions

117. For the respondent it is contended that the 1999 loan reductions are assessable capital gains: s 108-5(1) of the 1997 Act. It is submitted that pursuant to that section CGT event D1 occurred and the applicants acquired an asset when they entered into the Deeds of 8 March 1995 whereby Colonial vested in the applicants a valuable enforceable right, that is, to have Colonial waive the loan amounts owing of $795,000 for Integrated Insurance and $136,875 for MVR Financial provided certain conditions were met.

118. Further, it is said, the assets were brought to an end by the Deeds being performed according to their terms and Colonial making the loan waivers for the applicants: see CGT event C2 as set out in s 104-25 of the 1997 Act. By operation of s 103-10 of the 1997 Act, the loan waivers are, it is said, treated as if the capital proceeds were received. Alternatively, if there were no capital proceeds from bringing an end to the asset, then s 116-30 of the 1997 Act provides that the applicants are taken to have received the market value of the loan waivers, that is, the amount of each waiver.

119. Accordingly, it is submitted the amount of each loan waiver is the capital proceeds from bringing the enforceable obligation to an end. The amount of capital gain made by each applicant is that specified in s 104-25(3) of the 1997 Act. As there is no cost base for the assets, the value of each loan waiver, namely, the above figures, is said to be assessable under s 102-5 of the 1997 Act as the capital gain. Reliance is placed in support on Orica at ATC 4506 [38], 4507 [39] and 4515-4516 [89]-[100]; CLR [38], [39] and [89]-[100].

Applicants' contentions

120. The submissions for the applicants characterise the respondent's contentions under this head as analogous to the reasoning adopted by the High Court in Orica and seek to distinguish Orica for two reasons. The first is that the arrangement in Orica was a debt defeasement arrangement, not an arrangement to forgive a debt. Second, the right the applicants obtain when the applicants entered into the agreement to vary the terms of the ADL was a contingent right whereas the taxpayer's right in Orica was an enforceable right from the beginning of the arrangement.

121. The submissions for the applicants also rely on the view that a debt is not an asset of a debtor so that the extinguishment of a debt may be a gain in the hands of a taxpayer. It is not a gain made on disposal by the applicants of a CGT asset. Accordingly, there can be no assessable gain in the hands of the applicant to which Pt 3-1 of the 1997 Act would apply. Indeed, reliance is placed on the fact that this is the respondent's own view expressed at par 165 of TR 2001/9.

122. It is also submitted for the applicants that there is artificiality in applying the Orica rationale to the forgiveness of debt made manifest because it completely contradicts the commercial debt forgiveness provisions in Div 245 of the 1936 Act. Those provisions are not applicable to the present proceedings because

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the debt was forgiven pursuant to an agreement made before the Division came into force. Nevertheless, it is said that the Division is instructive in that the introduction of it clearly demonstrates that the forgiveness of a debt is not to be treated as an assessable capital gain under Pt 3-1 of the 1997 Act. It is submitted that if the rationale in Orica applied to arrangements involving the forgiveness of debt, then Div 245 would be nugatory. This would be because all debts which were forgiven would be assessable for CGT because of the artificial creation of a right to the waiver, which is subsequently disposed of when the debt is extinguished.

123. Additionally, it is contended for the applicants that if there has been a disposal of a CGT asset, it is that the applicants created and disposed of a legal right when it granted Colonial the benefit of the restraint of trade on 30 June 1990 after receiving the first ADL. Accordingly, if there is a taxation consequence it is that the applicant made a capital gain of $795,000 on 13 August 1998 (in the case of W16 of 2002). The submission is that the second ADL did not constitute a second disposal but rather was further consideration that Colonial paid for the restraint of trade it acquired on 30 June 1990.

124. In respect of the income tax assessments of the applicants in 1990 it is said there has been no fraud or attempt to evade taxation which would warrant an amendment of that assessment because at the time the ADLS were granted the taxation consequences of the transactions were not contemplated by the parties.

125. Again, it is asserted for the applicants that they did not have a hand in how the ADLS were structured and that they were unsolicited payments subsequently documented by Colonial as ADLS. It is submitted that the applicants have not engaged in any exercise to organise the arrangements for the purpose of minimising tax liabilities of any of them. Rather the arrangement, it is said, was imposed by Colonial.

Reasoning

126. The determinative point is not so much what distinguishes the facts in Orica from the present circumstances as whether the relevant statutory provisions relating to capital gains capture the waiver in the 1999 income year within the statutory requirements necessary to constitute the disposal of an asset.

127. The starting point is to identify the relevant asset. Here the waiver of the ADLS by the Deeds of 8 March 1995 in matter W16 and W17 of 2002 constituted forgiveness of a debt. The debt was a chose in action whereby Colonial as creditor could have sought to enforce its right to recovery of the debt. The effect of the relevant Deeds was to contingently waive that right. The right which the applicants acquired by the Deeds was the right to compel Colonial to make the waiver provided for in the Deeds upon the fulfilment by the applicants of the contingency, namely, the achievement of the relevant retail sales budget.

128. An ``asset'' for the purposes of capital gains is defined in the relevant Act to mean ``any form of property and includes... a chose in action... (and) any other right'': s 160A(a). The rights which the applicants acquired as a consequence of the Deeds were a chose in action and/or a right and hence an asset. The position referred to in TR 2001/9 and CGT Determination Number 3 related only to a simple debt in which the taxpayer had no contractual right to a waiver upon achievement of the relevant contingent. The present position is therefore different because the taxpayer's rights gave them a CGT asset: s 105-5(1). They arose as the consequence of a CGT event D1.

129. When the waivers occurred, s 116-30 applies so that the applicants were taken to have received the market value of the loan waivers and it is this which attracts liability to CGT. (I have considerable doubt whether the alternative submission that s 103-10 applies is correct because it does not seem to me that a waiver in the circumstances involves the receipt of money or property and the application of the same. For the same reason, I do not consider s 160D(1) and (2) can be called in aid).

130. Therefore I accept the submissions for the respondent that the value of each loan waiver is assessable as a capital gain.

Conclusion

131. For these reasons I do not consider the assessments have been shown to be excessive as required by s 14ZZO(b)(i) of the Taxation Administration Act 1953 (Cth). Consequently the respondent's appealable objection decisions for each of the applicants should be affirmed

ATC 4073

and the applications dismissed with costs, including any costs reserved.

THE COURT ORDERS THAT:

(1) Application W24 of 2000 filed on 11 February 2000 against the objection decision of 10 December 1999 in respect of the notice of assessment issued on 3 June 1999 to Integrated Insurance Planning Pty Ltd for the income year ended 30 June 1995 be dismissed.

(2) Application W16 of 2002 filed on 11 February 2002 against the objection decision of 15 November 2001 in respect of the notice of assessment issued on 21 February 2000 to Integrated Insurance Planning Pty Ltd for the income year ended 30 June 1999 be dismissed.

(3) Application W26 of 2000 filed on 11 February 2000 against the objection decision of 10 December 1999 in respect of the notice of amended assessment issued on 10 June 1999 to Michael van Rens Financial Services Pty Ltd for the income year ended 30 June 1995 be dismissed.

(4) Application W17 of 2002 filed on 11 January 2002 against the objection decision of 16 November 2001 in respect of the notice of assessment issued on 24 February 2000 to Michael van Rens Financial Services Pty Ltd for the income year ended 30 June 1999 be dismissed.

(5) The applicants pay the respondent's costs in each of the above matters.

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