The Federal Coke Company Pty. Limited v. Federal Commissioner of Taxation.
Judges:Helsham CJ
Court:
Supreme Court of New South Wales
Helsham C.J. in Eq.: The appellant appeals against the disallowance by the Commissioner of objections by it to assessments to income tax for years ending 30th June 1972 and 1973. Both assessments treated as income money coming to the appellant from the same source and in the same circumstances, so the appeals were heard together and can be dealt with together.
Bellambi Coal Co. Limited (Bellambi) was at all times material to these proceedings the holding company of a number of coke-producing subsidiaries known as the Bellambi Group. It acquired all the shares in the appellant (Federal) on 21st June 1960 and all the shares in Mount Pleasant Coke Co. Pty. Limited (Mount Pleasant) on 26th January 1962. There was at all material times another coke-producing company in the Port Kembla area, a competitor of the Bellambi group, Corrimal Coke Pty. Limited (Corrimal); this company was, prior to 10th March 1970, the wholly owned subsidiary of Australian Iron & Steel Pty. Limited (A.I. & S.); on that latter date Bellambi acquired all the shares in Corrimal in circumstances that will emerge later.
Bellambi did not itself produce coke, but it produced coal which the various subsidiaries converted to coke. By arrangements with each of the subsidiaries mentioned above, the details of which need not be specified, it acquired the property in the coke that was produced, and it sold that coke, paying a
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service fee to the subsidiaries for the work of conversion.In 1969 a French company, Societe Anonyme le Nickel (Le Nickel) was a buyer of coke from Bellambi and its competitor, Corrimal. At about that time it was in the course of expansion of its nickel treatment plant in New Caledonia, and wanted to ensure the supply of substantial amounts of coke for this purpose. Through its Australian subsidiary, Le Nickel (Australia) Pty. Limited, it entered into discussions with Bellambi and Corrimal (or its parent company) for the supply of 70,000 tons of coke per annum; these discussions went on between about October and December 1969.
At that time Bellambi, through its two subsidiaries, did not have the capacity to supply its existing customers with coke and at the same time supply Le Nickel with 70,000 tons per annum. It saw the possibility of doing so if it acquired Corrimal as well. So it entered into negotiations with A.I. & S. for the acquisition of the shares in Corrimal. It acquired these shares on 10th March 1970, shortly before it entered into an agreement with Le Nickel.
This was the way in which the background picture was painted by Mr. Ryan, the General Manager of Bellambi, in his affidavit filed in support of the appeals.
A somewhat different picture is painted by a report which Mr. Ryan made for the Board of Bellambi on 11th December 1969, a report on ``Future Operations in Coke Manufacture and Distribution by the Bellambi Coal Company Limited''. In that report it was stated that the report was made because the Department of Health, administering the Clean Air Act, had issued a notice requiring extensive works to be carried out at the Federal coke works to mitigate pollution, and because a similar step was likely to be taken as regards the Mount Pleasant works, and because A.I.& S. had offered to sell to Bellambi the shares in Corrimal at an acceptable price, the offer lapsing on 31st December 1969. The report covers in a summary way the running fight that had been going on for years between Bellambi and the Wollongong City Council and the Department of Health about the Federal coke works, which were within 500 yards of the main street of Wollongong; it is unnecessary to do more than mention that the land on which the works were situated, and which was apparently owned by Federal, had been zoned open space, and as such was unsaleable to anyone other than the Wollongong City Council, which was only prepared to pay $100,000 to acquire it on condition that the company vacated the area and cleared the site. Consideration had been given to closing the works, but in the light of the anticipated future market for coke over the next few years, assuming that Bellambi acquired the shares in Corrimal, the report recommended that the minimum work necessary to satisfy the Department of Health be agreed to, and that the Federal company keep operating. It was realised that in relation to the carrying on of the business of a coke works Federal had existing use rights only.
So far as the acquisition of the shares in Corrimal was concerned, the report discloses that negotiations between Bellambi and A.I.& S. to acquire Corrimal were begun in 1964 and terminated in 1965. ``On June 18, 1968 Bellambi re-opened negotiations prompted by increasing pressure from the Department of Public Health, adminstering the Clean Air Act, to achieve compliance of the Federal Coke Works with the provision of the Act and the likelihood that in certain circumstances, the Federal plant would be closed.'' After setting out the reasons for Bellambi's unwillingness to acquire the plant until certain problems of Corrimal were resolved, in September 1969, the report went on:
``On November 20, 1969 at this company's request, A.I.& S. presented a formal offer to sell to this company the shares in Corrimal Coke Pty. Limited for $610,000 plus or minus the nett balance between current assets and current liabilities. The offer is open for acceptance until December 31, 1969.''
The Board of Bellambi on 19th December 1969 resolved:
``Coke Operations.
It was resolved that
- `The recommendation by the General Manager in his report dated December 11, 1969 relating to the expenditure of $1.12 million on the coke works operated by The Federal Coke Company Pty. Limited and The Mount Pleasant Coke Company Pty. Limited to achieve compliance with the requirements of the Clean Air Act and
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to obtain increased capacity and greater efficiency at the Mount Pleasant works and the expenditure of $1.31 million on the acquisition and modification of the coke works operated by Corrimal Coke Pty. Limited be approved subject to the signing of a memorandum evidencing the willingness of Kembla Coal & Coke Pty. Limited to purchase coke for supply to the non-ferrous smelters for a period of 7 years commencing January 1970.'''
The point is that there is no suggestion that any impending agreement with Le Nickel prompted the acquisition of Corrimal or that any increased amount of coke was being sought by Le Nickel. Indeed, in discussing the future Australian market for coke the General Manager in his report said this:
``Following the modifications to Mt. Pleasant and Corrimal, the potential production of the industry is about 345,000 tons per annum. Currently it is about 320,000 tons but until recently has been running at a level of 295,000 tons per annum. Therefore, there is the need to find an export market for between 25,000 and 65,000 tons per year through to 1975.
Negotiations were proceeding with Le Nickel (Australia) Pty. Ltd. to sell this coke to New Caledonia but these negotiations have been temporarily suspended. This user has purchased the Australian beehive oven coke industry's surplus production for more than 15 years and admits to a continuing need of 140,000 tons per annum, some but not all of which it can obtain from B.H.P.
Coke is on offer to a number of other overseas users and the writer is confident that the surplus capacity of the industry can be profitably exported over the next few years. It may not be possible in the immediate future however, to write an export contract for deliveries beyond December 1972.''
Later on in the same report he said:
``In early discussion an increased rate of supply was rejected on the basis that all surplus coke not required on the domestic market could be sold to Le Nickel at an enhanced price. However, on December 9, Le Nickel rejected this company's proposal and the surplus coke is now on offer to a number of other overseas users. However, Le Nickel has admitted a continuing need (sic) of 140,000 tons of coke per annum, some portion, but not all of which it can buy from B.H.P. The performance of such coke is much less satisfactory in its plant than the beehive oven coke. Accordingly, the discussions with Le Nickel are likely to be reopened within the next few days.
...
The writer considers the full capacity of these plants can be profitably sold over the next few years. However, in view of the refusal of Le Nickel (without explanation or counter-price offer) to accept this company's offer, there may be some difficulty in immediately writing an export contract covering deliveries beyond December 1972.''
The minutes of the directors' meeting of 19th December 1969 contain no hint that matters had changed between 11th and 19th December; they contain nothing that would support the reasons for the purchase now advanced by the General Manager.
As I have said, the shares in Corrimal were acquired on 10th March 1970. An agreement between Bellambi and Le Nickel was dated 24th April 1970. It provided that Bellambi would sell to Le Nickel 350,000 long tons of coke after 1st January 1971, delivery to be at the rate of 70,000 tons per annum; there was provision for monthly deliveries. The price was fixed, although there was provision for reduction in the event of the coke containing over a certain amount of impurities or water, and also provision for escalation based upon certain factors.
I should mention that in his affidavit the General Manager went on to explain that the arrangements with Le Nickel made it economic to carry out some modification of the Federal coke works that might not otherwise have been done. I find this odd when the carrying out of these works had been approved on 19th December 1969.
Almost immediately Le Nickel did not accept the quantities of coke that the agreement called for it to accept up to 30th June 1971; the minimum monthly instalments provided for it to take delivery of not less than 30,000 tons during this period, whereas it had accepted only 25,372 tons. It sought cancellation of the contract of 24th April 1970.
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This action prompted a cable from Bellambi's General Manager to Le Nickel on 17th July 1971, in which it was asserted that a coke plant had been purchased ``for the sole and specific purpose of fulfilling our obligation to supply the quantity of coke for which we were committed to you under this contract'', that as there was no alternative market immediately available ``cancellation of the contract would force this company to close its coke plant'' and that it was not possible to agree to a cancellation. But notwithstanding this expressed attitude, discussions took place from July to October 1971 between the two parties, and a settlement was reached on 18th October 1971.That settlement was put in writing and signed by Mr. Ryan on behalf of Bellambi and by a representative of Le Nickel. After reciting the reason why Le Nickel sought variation of the agreement of 24th April 1970, and that ``Bellambi has pointed out that any reduction in the contractual deliveries of coke under the said Agreement would entail not only loss of profit to Bellambi but also other severe financial hardship'' the settlement provided:
``As total compensation for any and all alteration and changes to the said Agreement, hereunder set forth, Le Nickel agrees to pay to Bellambi and Bellambi agrees to receive from Le Nickel a lump sum of 1,000,000 Australian Dollars to be paid in two instalments:
500,000 Australian dollars on 31 December 1971
500,000 Australian dollars on 31 December 1972
Those amounts will be paid to the account of Bellambi at the Commercial Bank of Australia, Head Office, George Street, Sydney, Australia.''
It went on to substitute a new total tonnage of coke in the agreement, in substance 20,000 tons instead of 70,000 tons for years 1972 and onwards, to vary the rate of delivery and to deal with other matters about the price and performance. It concluded:
``The terms of the said Agreement are to remain valid and binding and are hereby confirmed, save in so far as they are varied by these minutes.''
Both Mr. Ryan and the chairman of the Board of Bellambi had been present at the negotiations. They had, on 27th July 1971, been authorised by the Board to negotiate a settlement with representatives of Le Nickel.
This settlement was approved by the Board of Bellambi at a meeting held on 28th October 1971, in the following terms:
``Contract with Societe Anonyme le Nickel:
It was resolved that -
- `The following settlement, negotiated by the Chairman and Managing Director in Paris, be approved.
- A. Le Nickel would pay Bellambi $500,000 on December 31, 1971, and a further $500,000 on December 31, 1972, as compensation for agreeing to reduce the contract tonnage.
- B. Bellambi would agree to reduce the contract tonnage from 350,000 to 132,000 to be delivered as to:
- (i) 52,000 tons in 1971
- (ii) 20,000 tons in each of the four subsequent years.'
It was further resolved that
- `The General Manager obtain the opinion of Mr. D.L. Mahoney, Q.C., regarding taxation aspects of the settlement.'''
It is not made clear from the evidence to what extent the financial impact of any settlement with Le Nickel had been discussed by the Board of Bellambi between April and October 1971. Mr. Ryan at some stage worked out what the effect of the loss of 50,000 tons of coke per annum would be in the light of the world market for coke at the time, and assessed this in terms of cost of production and the alternatives open to Bellambi; he sets out the assessment in terms of the increased cost of production in para. 27 of his affidavit. I think this assessment was probably made after 18th October 1971 and for the purposes of the Board meeting on 28th October 1971. One of the alternatives was to close down the Federal works. The Board resolved to close down the Federal works at its meeting held on 28th October 1971, and they were closed on 19th November 1971. As to this decision Mr. Ryan said in evidence (transcript pp. 3-4):
``MR. LOCKHART: Q: Was the decision preceded by discussion between persons present at the Board meeting?
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A. Yes, the Chairman of the Board had been in Paris with me, and we travelled back from Europe, and on the aircraft back we discussed the problem of the Federal Coke Works and its future and what would follow, we hoped, from the arrangements made with Le Nickel. Inevitably these matters you are now speaking of were extensively dealt with between us, and at the Board meeting the matter was again discussed.
Q. Can you tell his Honour what was said at the Board meeting about these matters?
A. I regret that I cannot put it in precise words after the passage of time, your Honour. It would have been a recommendation by me specifically that the Federal works close because there was no market for its merchandise, its product, that we were not justified in spending the money that was provided by the provisions of the Clean Air Act, without which, even if there had been a market, we could not have kept the plant going, because we would not have had a licence, and been under pressure from the council, and in the light of that I recommended it be closed.
HIS HONOUR: Q: The others were what you say in your affidavit?
A. Yes.
Q. Was the increased cost to Le Nickel of coke production one of those reasons, the 9 cents, was it, instead of somewhere between $23 and $24? Had that been worked out at that stage?
A. Yes, it had been. The Board tended not to go into the detail of that, but was willing to accept a statement by me that it would cost more to do one thing than it would cost to do another thing.
Q. Those figures you refer to in your affidavit, on p. 11, para. 27, were also put to the Board and discussed?
A. They were either put in the report of 28th October or were put verbally by me at the meeting.''
He went on to indicate in his evidence that ``the Clean Air Act problems transcended all others'' so far as the decision of the Board was concerned (transcript p. 4), and when asked why it was Federal's works that were closed and not those of one of the other subsidiary coke companies, he said: ``There were numerous reasons, but undoubtedly the major one was the Clean Air Act'' (transcript p. 7).
There is no doubt that the pollution problems associated with the Federal coke works had caused the Board of Bellambi to consider its continued operation on numerous occasions before October 1971. But there is no evidence that its closure was ever thought about in connection with the settlement that was worked out with Le Nickel in October 1971. Indeed I am satisfied that the matter of closure as the best solution to the problem was not considered by the Board of Bellambi until after settlement with Le Nickel had been reached, and probably not until the Board meeting of 28th October 1971. When I say the problem, I should explain that there were already problems surrounding the Federal works, principally the pressure that was being applied by the Health Department in relation to pollution, but also the general gloomy market situation for its product, metallurgical coke. The decrease in sales to Le Nickel, resulting in the negotiated settlement, brought these to a head, and a decision to close the works was reached after consideration of all aspects affecting continued operation. As it was put by Mr. Ryan (transcript p. 4):
``This was a major decision the company was making, to close a coke works, and the matter was dealt with in very considerable depth. It was quite a searching examination by the Board of all aspects of whether the works should continue to operate or whether they should close, and I feel...''
It was in this context that he added: ``The Clean Air Act problems transcended all others''. Because of what happened later it is necessary to put the decision to close down the Federal works in its proper perspective. It was a decision taken because of the fact that there would be decreased sales to Le Nickel, and a decision made in the light of the problems that that and other matters bearing closely upon its continued operation presented. Again, Mr. Ryan put it thus at transcript p. 7:
``Q. The evidence discloses that the coke works of Federal were closed in the circumstances mentioned in your affidavit, and not those of Corrimal or Mt. Pleasant. Why is it the coke works of Federal were closed and not those of the subsidiaries?
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A. There were numerous reasons, but undoubtedly the major one was the Clean Air Act. Mt. Pleasant was much more advantageously placed than Federal as far as the Clean Air Act was concerned. In the case of Federal there were only 7½ acres of land and in the case of Mt. Pleasant there were 30. Federal was zoned open space, Mt. Pleasant was zoned light industrial. In the case of Federal there were buildings on the south and west and tennis courts and playing fields in the north. In the case of Mt. Pleasant there was residential area on the south, but some distance from the coke works, and separated by a line of trees. In addition the Mt. Pleasant works was a much more economic plant to operate than the Federal plant, and historically it had been subject to less industrial trouble than Federal. The reason why Corrimal was not closed was the capacity of Corrimal was 128,000 tons a year, and we were only seeking to achieve a saving of 50,000 tons a year, and if we had done anything at Corrimal we would have had to close half the plant, which would have been a most uneconomic action to take.''
Three further matters touching upon this aspect should be mentioned. One was that if the works closed, then by reason of the zoning of the land, pollution problems, and the local hostility, the works would never re-open. Another was that the value of the land for resumption by the local council would be much less if the works were closed than if they had to be resumed on the basis of a going concern. The third is that at its meeting of 28th October 1971 the Board of Bellambi resolved to seek senior counsel's advice regarding taxation aspects of the settlement with Le Nickel.
What happened after the closing down of the coke works was this. A draft agreement ``designed'', in Mr. Ryan's words, ``to give effect to the agreement reached between us during our meeting in Paris'' was drawn up in Sydney, no doubt with income tax considerations in mind, as will appear. That was sent off to Le Nickel in Paris on 23rd December 1971. Le Nickel, presumably in pursuance of the agreement of 18th October 1971, sent a draft for $A500,000 in Bellambi's favour to the Banque Nationale de Paris in Sydney. Apparently Bellambi learned of this on 30th December 1971, and the news was not received with joy. Mr. Ryan sent a cable to Le Nickel. So far as relevant it read:
``We are surprised that the French bank is holding a draft of dlrs. Aust. 500,000 in Bellambi's favour. We expected that before remitting this money, your company would require completion of the amending agreement giving effect to the new coke sales contract between us.
The amending contract was sent to you by airmail December 23, 1971. Our legal advisers state that if Bellambi was to accept payment from you, then Bellambi would certainly pay income tax upon full amount.
However, their advice is that, if you agree to sign the amending contract which provides for the money to be paid to the Federal Coke Works Pty. Limited, then it is possible that both Bellambi and Federal will not pay tax on the moneys received.
Accordingly, we would ask you to instruct the French bank to deposit the money in a trust account with the interest being credited to your account until such time as you have decided whether you are willing to sign the amending contract in the form sent to you on December 23.
In the event of signing the contract, it will be necessary for the money presently held by the French bank to be either returned to you or to be paid to Gold Fields, London as agents for the Federal Coke Works Pty. Limited, or alternatively by direct remittance from the French bank, Sydney, to Gold Fields, London.
All expenses associated with such an arrangement to be to the account of Federal.''
On the same day the secretary of Bellambi rang the Banque Nationale de Paris. A bank record of the conversation reveals:
``Phoned Mr. Foley, Secretary.
He advises that the $A500,000 received from Paris, should, in effect, be payable to the Federal Coke Works, and thus Bellambi are unable to accept them as to do so, even in transit, would cause a tax problem.
He adds that the conditions of the original contract with Societe le Nickel had altered so much that a new draft agreement had been drawn up but, because of difficulties in obtaining Counsels' opinions, was only sent to Ste, le Nickel on 23rd December 1971.
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Once approved and signed by SLN, then the payment could be effected along the lines of the new agreement.
It is however preferred that the payment be effected either in France or in the UK.
We advise that in view of Bellambi refusal to accept the funds, we would be obliged to go back to the order givers to obtain their new instructions regarding the disposal of the funds, and that this implied exchange risk and other charges. Mr. Foley stated here that he supposed that SLN would hold Bellambi responsible for all this.
When we asked Mr. Foley to confirm the above in writing to us, he said that this was impossible as, although he had written to Mr. Germenot explaining in brief the reason for the refusal, he did not want to recognise in any way that the funds had been received and were payable to Bellambi through the BNP. We then pointed out to him that we would be obliged to write to him outlining the above, to which he replied that in view of this, he would see if it were possible to write to us. He would ring us later in the day in this connection.''
The secretary wrote to the bank on the same day, stating:
``Acting on advice given to us, we have decided we should not accept receipt of the amount of $A500,000 forwarded by Societe le Nickel of Paris, until an answer has been received from them accepting the draft amended Agreement forwarded to them on December 23, 1971.''
The reason for this concern is not difficult to find when one turns to the agreement which was eventually executed and dated 22nd March 1972, the draft of which had been sent on 23rd December 1971 to Le Nickel. That agreement, in the form of a deed between Bellambi and Le Nickel, recited the agreement of 24th April 1970, the reduction of Le Nickel's requirements for coke, the request of Le Nickel to cut back the supply under the agreement, and then continued:
``D. Bellambi has informed Le Nickel that such reduction as aforesaid can only be achieved in a practical manner if there is a discontinuance of all production of coke by Federal and the closure of Federal's coke works.
E. Bellambi has informed Le Nickel that discontinuance of production at Federal's coke works will involve the closure of those works and that thereby the value of the land and assets owned by Federal comprising such coke works will be directly and immediately reduced by reason, inter alia, of action likely to be taken by authorities of the State of New South Wales and certain local government authorities against the coke works in a non-operating condition which would not be taken against them while operating and by reason of other detriments to Federal.
NOW THIS DEED WITNESSES:
1. In the circumstances aforesaid, Le Nickel hereby agrees to pay to Federal the sum of one million dollars ($1,000,000) to compensate Federal (and consequently Bellambi) for such loss in the value of the land and assets of Federal as aforesaid (and consequently in the value of the assets of Bellambi) and it is agreed that such sum shall be paid by two equal instalments of 500,000 dollars ($500,000) each on the 31st day of March 1972 and the 31st day of December 1972.''
The agreement proceeded then to vary the original agreement substantially as provided for in the document recording the terms of settlement of 18th October 1971, the precise terms are not material.
The sum of $499,134.28 was paid or credited to Federal about 29th March 1972. A further sum in accordance with the deed was paid later, presumably in December 1972. The Commissioner assessed that company to income tax by including the amount of $499,567 in the tax year ending 30th June 1972, and a similar amount in the tax year ending 30th June 1973. Both these sums represented payment of $500,000 in each instance by Le Nickel less some charges relating to bank transfers and variation in exchange rates. The company objected to these two payments being treated as income, and the objections were disallowed. These appeals resulted.
The argument put by Mr. Lockhart on behalf of the appellant Federal is simple enough. He says that the two sums received from Le Nickel are not income according to the ordinary concepts of what is income, and
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in any event were received by Federal as compensation for the closing down of the works. If that be correct then they must be treated as payments on account of capital and not as income.There is no real doubt in my mind that the total sum was negotiated by Bellambi as representing compensation for the loss of profits which otherwise would have been made by Bellambi from its sales to Le Nickel over the ensuing years of the operation of the agreement of 24th April 1970. This is the way the minutes of the meeting of 18th October 1971 indicate it was treated by the Bellambi negotiators, since it is there stated that the payments are to be made to Bellambi as compensation for the changes to the sale agreement, and those changes simply amounted to a reduction in agreed future sales; the agreement was otherwise to remain on foot except as so changed. The Board of Bellambi approved the settlement upon the same basis, namely as compensation for agreeing to reduce the contract tonnage.
The simple position as I see it was this. There was in existence a contract to sell a certain amount of coke per annum for five years from 1971 onwards. The amount to be supplied each year was fixed; so was the price. By an agreed variation the amount to be supplied was reduced, and the contract otherwise continued; a lump sum was agreed to be paid because of the reduction. It seems to me to follow that this sum must be treated as being a reimbursement in lieu of profits. It simply represented what Bellambi was to lose by the contraction of its trading activities so far as this contract was concerned. It was in the coke-selling business, and continued to be in that business, and selling to the same customer, only on a reduced scale. I think the sum is nothing more than a calculation of what the loss of some future sales meant; no other basis of calculation is suggested. As such it was the proceeds of Bellambi's business and would be treated when received as income according to ordinary concepts.
If one turns to the argument that this sum was received as compensation for the closing down of Federal's business, it is clear that that argument cannot be supported on the facts. At no stage prior to approval by the Board of Bellambi of the settlement with Le Nickel was there any decision to close the Federal works. Indeed, as I have said, it was the very fact of having to adjust to a reduced sale potential that caused attention to be given to various alternatives, and the adoption of that considered best for Bellambi, namely closure of Federal. So that at no stage prior to approval of the settlement was the proposed payment of $1,000,000 intended in any way or by either of the two parties involved to be compensation for the loss of a business or as representing the capital value of the works. Its computation, and the agreement to pay the amount arrived at had nothing to do with the closure of the works, nor indeed with the cost of acquiring any new works to replace them, since no replacement was contemplated.
If the matter stopped there I think there would be little hesitation in categorising the payments as representing compensation for loss of profits with an ensuing result of having the sums treated as income for assessment of tax purposes. However, before actual payment was made a plan was devised to try to avoid this result. Eventually, and after a near miss, Le Nickel agreed to make the payments to Federal, and did so. It is not suggested that $1,000,000 represented loss of Federal's profits, and on the other hand the deed of 22nd March 1972 expressly states that the sum was agreed to be paid to Federal to compensate Federal, and hence its parent company, for the loss in value of land and assets owned by Federal. It is said that the Commissioner cannot go behind the deed and must accept that this was what the payments were made for. But, further, whether this be right or not, it is put that the plain fact is that the money was not received by Federal as income in its hands.
It is to be noted that the deed was made between Bellambi and Le Nickel - Federal was not a part to it. So that it could be said that it was not a deed made between payer and payee at all. But assume, as I believe it is correct to assume, that the deed was made between the payer and the company that was in substance the payee, it is my view that the statements in the deed, to which I have earlier referred, cannot affect the nature of the receipt. As it was put by Windeyer J. in
Scott v. F.C. of T. (1966) 117 C.L.R. 514 at p.526: ``Whether or not a particular receipt is income depends upon its quality in the hands of the recipient.'' One does not necessarily find the quality of the receipt by looking at what the parties, the payer and the recipient, say is its quality. And as Kitto J. said in The Squatting
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Investment Co. Limited v. F.C. of T. (1952-53) 86 C.L.R. 570 at p. 627: ``The question whether a receipt comes in as income must always depend for its answer upon a consideration of the whole of the circumstances.'' If the reason for payment and receipt of money has nothing to do with compensation for the loss of a capital asset, in this case the works, then the mere existence of a deed between payer and payee cannot turn that receipt into one that has a different quality or another reason for being received, at least not for tax purposes. And the receipt of this money was not for the sort of compensation that the deed states it was. It was received because there had been negotiation and agreement that it was a sum acceptable to Bellambi as compensation for the loss of part of a profitable contract; compensation for closure formed no part of its assessment or the reason for its acceptance.
I have not overlooked the fact that even though the deed which preceded payment was between Bellambi and Le Nickel, payment was in fact made by Le Nickel to Federal. Perhaps this receipt should be regarded by Federal as a gift, because certainly there was no obligation on Le Nickel to pay anyone but Bellambi; incidentally, no argument was addressed to me on any question of whether Federal would have had any right to sue for the two amounts agreed to be paid. I turn again to Kitto J. in the last mentioned case (p. 627): ``It must be observed at once, however, that even if it were correct to describe the payment as a gift in the strict sense of the word, the question we have to consider would still await an answer; for it is a commonplace that a gift may or may not possess an income character in the hands of the recipient... and even in respect of a true gift it is necessary to inquire how and why it came about that the gift was made.'' How and why payment was made to Federal and not to Bellambi is here easy to ascertain. This is simply a case of a commercial arrangement designed to have the money received by the Bellambi group to the best commercial advantage, that is to say without having to pay tax on it. To my mind that does not alter the character of the receipt or the reason why the money was paid and received. I think it is simply a receipt by one hand instead of another, and it is received into that hand just as much as compensation for the contraction of the contract to supply coke as if the payee had been the parent rather than the subsidiary. The fact that the deed which was eventually brought into being was between Bellambi and Le Nickel and that Federal was not a party to it lends force to this conclusion. I do not consider the situation as being in substance different from there being a payment of this sum of money to Bellambi accompanied by a deed which calls it payment for something which it in fact is not. In my view it falls to be considered for taxation purposes as a payment representing compensation for contraction of the contract to sell coke. The only reason it was labelled as anything else was in an attempt to avoid it being taxed upon its true characterisation. That attempt fails.
The appeals will be dismissed.
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