Case X81

Members:
P Gerber DP

Tribunal:
Administrative Appeals Tribunal

Decision date: 4 October 1990.

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Dr P. Gerber (Deputy President)

This matter came before the Tribunal on agreed facts. These are set out below (with relevant textual emendation):

2. (i) The Forsyte Family Trust (``the trust'') was formed by deed dated 1 October 1978, and at all material times the trustee of the trust was and remains Forsyte Transport Pty. Ltd. (``Forsyte Transport'').

• (ii) At all material times Forsyte Transport as trustee of and for and on behalf of the trust has conducted the business of transport contractor from premises located at 6 High Street, Chelmer (N.T.).
• (iii) On or about 10 January 1983 Forsyte Transport agreed with Custom Finance to lease from Custom Finance a Scania heavy truck Model R112H 6x4 Sleeper Cab and Chassis registered number NT1234 for a period of 48 months in accordance with the lease agreement and on or about the date of the agreement and for the purposes of the agreement Custom Finance Limited purchased the truck.
• (iv) On or about 6 January 1983 Forsyte Transport obtained and retained until 27 May 1987 the use and enjoyment of the truck.
• (v) On 4 March 1986 Forsyte Transport acquired the title to the truck for the residual value of $25,722.
• (vi) The truck was at all material times used or utilised for the purposes of the business of the trust until 27 May 1987 at which time it was sold for the sum of $72,000.
• (vii) Pursuant to a resolution of Forsyte Transport dated 18 June 1987 the taxpayer is and was at all material times presently entitled to the net proceeds of sale of the truck.

3. The applicant asserts that the truck was ``acquired'' for purposes of the capital gains provisions of the Income Tax Assessment Act (``the Act'') on the signing of the lease agreement, so that the profit on sale is an exempt capital profit since the asset was ``acquired'' before 20 September 1985, that is before this species of tax came into operation with respect to assets acquired after that date.

4. Section 160M purports to cover the held as to what constitutes a disposal or acquisition of an asset.

``160M(1) Subject to this Part, where a change has occurred in the ownership of an asset, the change shall be deemed, for the purposes of this Part, to have effected a disposal of the asset by the person who owned it immediately before the change and an acquisition of the asset by the person who owned it immediately after the change.

160M(2) A reference in subsection (1) to a change in the ownership of an asset is a reference to a change that has occurred in any way, including any of the following ways:

• (a) by the execution of an instrument;
• (b) by the entering into of a transaction;
• (c) by the transmission of the asset by operation of law;
• (d) by the delivery of the asset;
• (e) by the doing of any other act or thing;
• (f) by the occurrence of any event.

160M(3) Without limiting the generality of subsection (2), a change shall be taken to have occurred in the ownership of an asset by -

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• (a) a declaration of trust in relation to the asset under which the beneficiary is absolutely entitled to the asset as against the trustee;
• (b) in the case of an asset being a debt, a chose in action or any other right, or an interest or right in or over property - the cancellation, release, discharge, satisfaction, surrender, forfeiture, expiry or abandonment, at law or in equity, of the asset;
• (c) in the case of an asset being a share in or debenture of a company - the redemption in whole or in part, or the cancellation, of the share or debenture; or
• (d) subject to subsection (4), a transaction in relation to the asset under which the use and enjoyment of the asset was or is obtained by a person for a period at the end of which the title to the asset will or may pass to that person. [my italics]

160M(4) A change shall not be taken to have occurred in the ownership of an asset by a transaction referred to in paragraph (3)(d) if the period for which the person referred to in that paragraph has the use and enjoyment of the asset terminates without the title to the asset passing to that person and nothing in section 170 prevents the amendment of an assessment for the purpose of giving effect to this subsection.''

Section 160U(7) provides:

``160U(7) Where the acquisition or disposal of the asset occurred as a result of a transaction referred to in paragraph 160M(3)(d), the time of acquisition or disposal shall be taken to have been the time when the use and enjoyment of the asset was first obtained by the person mentioned in that paragraph.''

5. The lease agreement is in standard form. One looks in vain for any provision which confers a right upon the lessee to acquire the goods upon the termination of the lease. Indeed, cl. 16 provides:

``(a) Subject to sub-paragraph (b) hereof the Lessee shall deliver up the goods to the Company on expiration of the term in good order and condition in accordance with the provisions hereof at a time and place nominated by the Company;

(b) If the Company should agree to the Lessee continuing in possession of the goods on expiration of the term such possession shall be on a month to month basis at a monthly rental equal to the rental payable in respect of the last month of the term so expired and subject to the terms and conditions hereof so far as applicable.''

6. The applicant sought to overcome this minor technical flaw by calling parol evidence to the effect that it was the ``practice in the trade'' to allow lessees to purchase goods on lease. Thus a Mr Thackeray, who described himself as ``manager, commercial leasing'' employed by Custom Finance, deposed that it was ``normal practice'' to allow lessees to purchase leased goods at the end of the term. Indeed, in 12 years at the job, he could only recall one instance where a cash register was actually returned to the lessor at the end of the lease, and that because the lessee had gone to Switzerland.

7. If the acquisition of leased goods at the end of the term is indeed the ``normal practice'' of this leasing company (and indeed others; cf. per Neasey J. in
F.C. of T. v. Reynolds 81 ATC 4131 at p. 4143:

``In the present case there was no legal obligation on the part of Esanda Ltd., as a matter of contract or otherwise to make this payment to the respondent, so that the payment was voluntary in that sense. The respondent contended in argument that the payment was a mere gift, but in my view it was not. Although the payment was voluntary in the strict sense, the respondent had a well-founded business expectation that he would receive it should the market price exceed the residual value. The evidence of established business practice in that regard is very strong. The inference is inescapable that the motive of Esanda Ltd. in allowing the respondent to have the surplus after expenses was wholly commercial and had regard to its own business interest)''

one can only marvel that this ``normal practice'' has not been incorporated into the lease agreements. Could it be that such a term would convert what is technically a lease into what is technically a hire-purchase agreement,

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with unfortunate fiscal consequences for the lessee?

8. Whatever the reason, I am not prepared to incorporate into this lease a term which the parties have deliberately and artfully excluded. One need only to pause to examine the consequences of what I am asked to do to see the absurdity of the argument. Thus it is solemnly submitted that this agreement is a lease, enabling the taxpayer to deduct the periodic payments as rent on plant used in the derivation of assessable income. The lessor, of course, continues to have the title in the plant during this time. Lack of title did not prevent the taxpayer from claiming depreciation on both the truck and the 6x4 sleeper cab throughout the four year period of the lease, notwithstanding that sec. 54 only permits such deduction if the plant is ``owned by the taxpayer and used by him during that year for the purpose of producing assessable income...''. Yet when the lease comes to an end by the effluxion of time, it is, somehow, transmuted into something akin to a hire-purchase agreement on the basis that the agreement contains a term which enables the lessee/hirer to acquire the plant at its residual value, not pursuant to the written agreement, but pursuant to a secret term known only to the brotherhood of lessors and lessees - and, hey presto, this agreement is said to have the effect of converting a taxable capital gain into an exempt capital profit.

9. I am satisfied that, as a matter of law, there is no such hybrid as a cross between a lease and a hire-purchase agreement. If the agreement is a lease, the rental payments are deductible, but depreciation by the lessee is not. If the agreement is a hire-purchase agreement because title to the goods passes to the hirer on exercising his option to buy the goods by the payment of the last instalment, then the hire payments are not deductible (save for the interest component) because the outgoings are of a capital nature, involving the acquisition of an asset. It takes courage to submit that an agreement can be a ``lease'' for purposes of sec. 51 deductions (and depreciation) and yet be akin to a hire-purchase agreement for purposes of capital gains tax (and depreciation). This strange animal is said to have been created by sec. 160M(3)(d) of the Act.

10. On the evidence in this case, I am not prepared to find that sec. 160M(3)(d) can come to this taxpayer's rescue on the basis that the leasing arrangement entered into between the parties in this case somehow involved ``a transaction in relation to an asset under which the use and enjoyment of the asset was or is obtained by a person for a period at the end of which the title to the asset will or may pass to that person''. Whatever beast this section is said to have created, it has no more corporeal existence as a cross between a mule and a unicorn.

11. I therefore find that, to the extent that the parties to the agreement have reduced it to writing, they are bound by its terms; to the extent that Mr Thackeray sought, by parol evidence, to add a term to the contract which the parties have gone out of their way deliberately to exclude from their written agreement, I refuse to add such a term, by implication or otherwise. Whilst extrinsic evidence is always admissible, it is limited to establish those facts which the parties had in their minds and were negotiating about, not which they artfully and deliberately excluded. To this extent, the principle of law - if it is a principle - said to be derived from
The Moorcock (1889) 14 P.D. 64, cannot come to the parties' rescue. In that case, Bowen L.J. held:

``Now, an implied warranty, or, as it is called, a covenant in law, as distinguished from an express contract or express warranty, really is in all cases founded upon the presumed intention of the parties, and upon reason. The implication which the law draws from what must obviously have been the intention of the parties, the law draws with the object of giving efficacy to the transaction and preventing such a failure of consideration as cannot have been within the contemplation of either side; and I believe if one were to take all the cases, and there are many, of implied warranties or convenants in law, it will be found that in all of them the law is raising an implication from the presumed intention of the parties with the object of giving to the transaction such efficacy as both parties must have intended that at all events it should have.''

(at p. 68)

This observation received the following gloss by MacKinnon L.J. in
Shirlaw v. Southern Foundries (1926) Ltd. (1939) 2 K.B. 207:

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``I recognize that the right or duty of a Court to find the existence of an implied term or implied terms in a written contract is a matter to be exercised with care; and a Court is too often invited to do so upon vague and uncertain grounds. Too often also such an invitation is backed by the citation of a sentence or two from the judgment of Bowen LJ in The Moorcock. They are sentences from an extempore judgment as sound and sensible as all the utterances of that great judge; but I fancy that he would have been rather surprised if he could have foreseen that these general remarks of his would come to be a favourite citation of a supposed principle of law, and I even think that he might sympathize with the occasional impatience of his successors when The Moorcock is so often flushed for them in that guise.

For my part, I think that there is a test that may be at least as useful as such generalities. If I may quote from an essay which I wrote some years ago, I then said: `Prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying; so that, if, while the parties were making their bargain, an officious bystander were to suggest some express provision for it in their agreement, they would testily suppress him with a common `Oh, of course!''

At least it is true, I think, that, if a term were never implied by a judge unless it could pass that test, he could not be held to be wrong.''

(at p. 227)

Adopting - and adapting - the words of MacKinnon L.J., it seems to me that had an officious bystander suggested to these parties while making their bargain, that they have omitted a term giving the ``hirer'' the right to purchase the plant at the end of the ``lease'', both lessor and lessee would have told him firmly to push off.

12. I therefore find that the evidence, sought to be adduced through Mr Thackeray as to ``normal practice'', is inadmissible and, had it been objected to, the objection would have been upheld. Indeed, I gave counsel an indication of my thinking at the time, but the hint was not taken up.

13. I feel bound to add that it became evident during the hearing that the mechanics of acquiring vehicles at the end of lease agreements for their residual value and subsequently selling them for a profit was part of the taxpayer's normal business operation. Indeed, Mr Forsyte, the principal witness for the taxpayer conceded as much to me when I questioned him about his previous history of truck dealings. In these circumstances, I am as satisfied as I can be without argument by the parties that the profit on sale is ``income'' according to ordinary usage. When I put this to counsel for the Commissioner, he sought further instructions. In the result, I was informed that the Crown resiled from any such proposition. I therefore do not propose to embark on a frolic of my own, although I question whether such a concession is open to a party under a statutory duty to collect such revenue as is lawfully due.

14. For the sake of completeness, I should add that I indicated at the end of the hearing that I had become aware that both
F.C. of T. v. Cooling 90 ATC 4472 and
Hepples v. F.C. of T. 90 ATC 4497 had gone to the High Court by way of special leave applications and that the outcome could possibly assist me in my deliberations in this case. On more mature reflection, I do not believe that the issues in the two cases referred to above can impinge on the outcome in this case. I have therefore handed down my decision before the result of these cases is known.

15. For the above reasons the decision on the objection is affirmed.