CASE 65/96
Members:J Block SM
J Shead M
P Greenwood M
Tribunal:
Administrative Appeals Tribunal
J Block (Senior Member), J Shead and P Greenwood (Members)
The Applicant sought the review of a decision by the Respondent dated 29 January 1996 disallowing an objection dated 26 July 1995 against an amended Assessment by the Respondent, in respect of the year ending 30 June 1988 and in terms which the Respondent included an amount of $1,365,000 received by the Applicant in respect of a certain large infrastructure project and which is referred to in these Reasons as the ``Project''.
2. The Applicant, who is a lawyer of some considerable experience (see his Statement of Facts which is Document No. T8 of the T Documents) appeared in person, and the Respondent was represented by Mr S McMillan of Counsel. The Tribunal accepted into evidence the documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 and also certain exhibits, some of which are particularised as follows:
Exhibit A1 - which is a copy of a letter by the Applicant to Mr D Stokes dated 10 October 1996.
Exhibit A2 - which is a copy of a letter dated 13 August 1994 addressed by the Applicant to B.
Exhibit R1 - which consists of copies of the two executed counterparts of the Joint Venture Agreement referred to later in these Reasons, and being the counterpart executed by the Applicant, and the counterpart executed by the other parties to the Joint Venture Agreement.
Exhibit R2 - which is a copy of a letter dated 5 June 1996 addressed by the Applicant's accounting advisers to the Deputy Commissioner of Taxation.
Counsel for the Respondent also furnished a helpful written submission.
3. Evidence was given by the Applicant both orally during the course of the hearing and also in writing; his written evidence (apart from his Statement of Facts included in the T Documents as Document T8) consisted of a statutory declaration dated 9 July 1996 (the ``Statutory Declaration'') and a supplementary witness statement dated 10 October 1996.
4. (a) It became clear at the commencement of the hearing that there was some confusion on the part of the Applicant as to the position of the Respondent in respect of the applicability of Part IIIA of the Income Tax Assessment Act (the ``Act''). That confusion arose in the following circumstances:
(1) the Commissioner in the final part of his statement entitled ``Statement of Findings on Material Questions of Fact, Evidence and Reasons for the Decision'' dated 19 April 1996 [T2] stated:
``Ground B alleges that the capital receipt is a disposal of a pre-CGT. Sections 160A, 160M(5)(c) and IT 2484 are referred to. As it has been determined that there has not been a sale of a capital asset these sections are not in issue.''
(2) However in paragraph 3 of the Respondent's Amended Statement of Issues, the Respondent contended that if the sum of $1,365,000 was not assessable income of the Applicant under sections 25(1) or 25A of the Act, that sum fell to be taxed under Part IIIA of the Act.
(3) During the course of a telephonic directions hearing which took place on 27 September 1996 Counsel for the Respondent was asked whether the Respondent intended to argue the applicability of sections
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160M(6) or 160M(7); Mr McMillan answered that these sections would not be in issue.(b) The Applicant stated that in the circumstances he was under the impression that the Respondent did not intend to argue the applicability of capital gains tax provisions of the Act and that accordingly he was not in a position to argue the law on this aspect. The Tribunal considered that the Applicant's confusion in this regard was understandable, and this notwithstanding the fact that as appears from the T Documents, the Applicant contended that the payments were received in respect of a capital asset, exempt from taxation because it predated the coming into force of Part IIIA of the Act.
(c) With the consent of the parties, this aspect of the matter was dealt with on the basis that the Respondent would not argue the applicability of Part IIIA of the Act (and in particular sections 160A, 160M(1) and 160M(3) of the Act) at the hearing, but would be entitled to do so if the Tribunal came to the conclusion that the relevant payment did not constitute income, or if the Tribunal found that the payment did constitute income, that finding should at any time in the future be challenged or reversed.
5. By facsimile dated 10 October 1996 the Respondent advised the Tribunal and the Applicant that it intended also to argue the applicability of section 26(e) of the Act. The Respondent's Submission refers to a number of authorities on this point, and this aspect of the law was argued at some length by Mr McMillan. At the conclusion of the hearing, the Tribunal ruled that the Applicant would be entitled within a period of 21 days to furnish a written submission in writing as to the applicability of section 26(e) of the Act. However, the Tribunal has come to the conclusion that it is not necessary for it to rule on the applicability of section 26(e) of the Act; see in this context clause 16 below.
6. Although the hearing in this matter lasted for a full day and although the transcript, and the documents tendered are comparatively lengthy, the factual position is not complicated.
7. (a) The Applicant commenced research on the Project in late 1983. His written statement (document T8 of the T Documents) set out that his legal practice was unsuccessful and ``The taxpayer was not successful in establishing a financially viable legal practice. From about 1983, the taxpayer was operating at a loss and becoming `progressively insolvent'.'' He stated:
``Well first of all I did not know I had the expertise until I desperately started looking around for a means of restoring my financial fortunes which had somewhat deteriorated at the bar, and I probably had skills I didn't even know I possessed.''
(p 32 of transcript)
The Applicant confirmed in his oral evidence that his work on the Project was undertaken in the hope that it would be financially rewarding. See in this context the following passage from page 25 of the transcript:
``You intended when you started this project to, at the end of the day, receive as much money for yourself as you could from the development so far as you could of the project?
That is correct.''
It may be noted in this context that, as the Applicant stated in his oral evidence, he is not an engineer. The Project was eventually completed some years later and is, by any standards, one of the largest infrastructure projects in Australia.
(b) Nor were the Applicant's efforts in this area confined to the Project. Exhibit R2 (all of the content of which was expressly confirmed by the Applicant in his oral evidence) stated in the fourth paragraph (edited only for purposes of anonymity) that
``The Applicant has no personal assets and yet he is currently engaged in a major infrastructure project - the X Airport proposal - which is receiving close scrutiny by the Federal Government. His involvement in this project, his naming in the media and his involvement in the Project have attracted the attention of other proponents of major infrastructure projects and he has been approached to assist one of these to date with others to follow.''
(c) The Applicant recognised that he would need the assistance of suitably qualified experts, and his Statement of Facts (document T8 of the T Documents) sets out in brief terms the manner in which he formed an association with B (a building consultant) and C (a corporate engineering consultant). The Applicant, B and C are collectively referred to in the Joint Venture Agreement, and in these Reasons, as the ``Initiators''.
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(d) Evidence was given by the Applicant as to the intention of the Applicant and B to incorporate the venture through the medium of a joint venture company and in which the Applicant was to have a 60% interest. (See also in this context clause 7 of the Statutory Declaration). A suitable shelf company was apparently procured but it was not used. The reason why the shelf company was not used and the precise nature of the relationship between the Applicant, B and C (and more particularly their respective entitlements in the venture) were not made clear. Assuming that, as stated in the Statutory Declaration, it was intended as between the Applicant and B, the Applicant was to have a 60% interest, it is not clear whether and in what circumstances and to what extent C would have an interest. The Statutory Declaration focuses on the business relationship between the Applicant and B, and notwithstanding the fact that C was apparently an interested party. It may be noted that evidence was not given by any other party to the Joint Venture Agreement (hereinafter referred to). Furthermore, no documentation as to the relationship between the parties to the Joint Venture Agreement was tendered in evidence.
8. Nor was evidence given as to the circumstances in which the Initiators came to be in dispute or the reasons why B instituted legal proceedings against the Applicant. It may be noted that:
- (a) as appears from Document T8 of the T Documents, C was apparently a party to those proceedings; clause 8 of the Statutory Declaration refers to those proceedings instituted in the Supreme Court against ``me and one other party''; that other party is presumably B;
- (b) the legal proceedings referred to in subclause (a) culminated in the execution on 29 November 1985 of an agreement entitled ``Joint Venture Agreement'' (the ``Joint Venture Agreement'') between the Initiators and two large construction companies, who are referred to as D and E respectively; D and E are in turn collectively referred to as the ``Construction Companies''. The Applicant in his oral evidence stated that the Joint Venture Agreement was drawn up by solicitors and that the parties (and in particular the Applicant) were legally represented in respect of the preparation and execution of the Joint Venture Agreement;
- (c) there was no evidence before us as to the nature of the litigation brought by B against the Applicant and C; however the fact that B received orders for costs would seem to indicate that he was at least to some extent successful.
9. (a) Clauses 12 and 13 of the Statutory Declaration read (edited for reasons of anonymity) as follows:
``12. As a result of orders made against me in the said legal action, B had the benefit of certificates of taxation for legal costs against me exceeding sixteen thousand dollars. These certificates were immediately enforceable as a judgement debt against me and I was not in a position to pay or satisfy the same.
13. I entered into the said terms of settlement (referred to in paragraphs 9 & 10 above) under duress namely the immediate and overt threat of bankruptcy communicated to me by B's appointed agents.''
(b) Indeed Exhibit A1 (dated 10 October 1996) indicated that the Applicant persisted with his claim that the Joint Venture Agreement was signed by him under duress.
(c) The Applicant's contention that the Joint Venture Agreement was executed under duress was demonstrably not tenable, more particularly having regard to the fact that he instituted legal proceedings against the Construction Companies and others relying on the terms of the Joint Venture Agreement, and received payment in full of the amount claimed under it; see in particular the Statement of Claim dated 18 June 1987 in respect of proceedings instituted in the Supreme Court of New South Wales, Sydney Registry, Common Law Division, under case No. 15238 of 1987 which is Document T5 of the T Documents, and the Terms of Settlement dated 29 June 1987 which is Document T6 of the T Documents. These two documents indicate that the Applicant, relying on the terms of the Joint Venture Agreement, sued for an amount of $1,365,000 and received payment in full. In accordance with the Joint Venture Agreement, a first amount of $35,000 was received by the Applicant on execution of the Joint Venture Agreement.
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(d) Exhibit R2, previously referred to, indicates in the third paragraph that the Applicant was in June 1996, rather uncertain of his position; that letter indicates the Applicant had to enter into the Joint Venture Agreement, but does not allege duress. The relevant paragraph reads (edited for the reasons set out previously) as follows:
``During the course of our meeting it became clear that the Applicant acknowledges that the weight of argument is with the Tax Office and yet he is clearly concerned that the circumstances which resulted in the receipt by him of payments from D arose from actions into which he was forced by circumstances beyond his control.''
(e) During the course of his evidence, the Applicant agreed that although there were compelling commercial reasons for the execution by him of the Joint Venture Agreement, those commercial reasons could not and did not constitute duress in any relevant legal sense.
10. The terms of the Joint Venture Agreement are clearly of critical importance; we set out in this clause 10 those provisions which are most relevant for the purposes of this matter, in all cases edited only to the extent necessary to preserve anonymity:
(a) the recitals read as follows:
``A. The Initiators own the property referred to in Schedule 1 herein in the proportions C 30%, B 35% and the Applicant 35%.
B. The Initiators, D and E hereby agree to enter into a joint venture (`the Joint Venture') to co-operate and jointly prepare and submit to the Relevant Authorities all necessary applications, studies, reports and determinations necessary to receive all requisite Approvals for the Performance of the Works on the terms and conditions set out in this Agreement.
C. The parties agree that if all such requisite Approvals are received by the Joint Venture then subject to the terms and conditions set out in this Agreement, the Performance of the Works shall be carried out by D and E upon such terms and in such manner as D and E mutually agree upon.''
(b) clauses 2, 3 and 4 read as follows:
``2. The Initiators, D and E hereby enter into a Joint Venture to co-operate and jointly prepare and submit to all Relevant Authorities all necessary applications, studies, reports and determinations necessary to receive all requisite Approvals for the commencement of the Performance of the Works on the terms and conditions set out in this Agreement. D and E shall have the right of access to Schedule 1 and may use it in accordance with the terms of this agreement.
3. The parties agree that upon receipt of all such relevant Approvals for the commencement of the Performance of the Works, the parties will agree on some form of compensation to the Initiators and if they fail to agree within seven (7) days the consideration referred to in paragraph (ii) of Schedule 2 is payable immediately thereafter by D and E to the Initiators and this Agreement shall continue to operate until the said consideration referred to in paragraph (ii) of Schedule 2 hereto is paid to the Initiators.
4. Upon such payment to the Initiators this Agreement shall automatically terminate and the Performance of the Works shall be carried on by D and E and all of the property of the Initiators referred to in Schedule 1 and any property of a like nature existing with the Joint Venture will pass to D and E.''
(c) clause 7 (which need not be quoted in full) provides for the establishment of a Management Committee, with representatives on it of each of the Initiators and each of the Construction Companies.
(d) clause 8 (which also need not be quoted in full) provides for the appointment by the Management Committee of a Project Manager.
(e) clause 9 (which relates to the first payment) reads as follows:
``9. In consideration of the work undertaken by the Initiators up to the date of and including the entrance into this Agreement by the Initiators, the parties hereto agree and hereby give to the Initiators the consideration referred to in paragraph (i) of Schedule 2 herein and
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that such consideration is to be paid for jointly by D and E.''(This clause relates to an amount of $35,000 paid to the Applicant on the execution of the Joint Venture Agreement.)
(f) Schedule 1 reads as follows:
``All that property of the Initiators being:
- (a) all plans, sketches, memoranda, submissions, reports, calculations, drawings and correspondence and all other documents which:
- (i) relate to or describe a (project) for Sydney between (deleted); and
- (ii) which have been prepared or created in whole or in part by the parties to these proceedings, or any one of them or by any person or persons or corporation or at the request of the parties to these proceedings or any one or more of them;
- (b) all copyright existing in all or any of the above documents referred to in paragraph (a) above;
- (c) the information contained or depicted in any or all of such documents together with information not depicted or reduced to writing but referred to or relating to means of achieving the completion of the proposal so described or depicted.''
(g) Schedule 2 reads as follows:
``The consideration referred to in Clause 3 and Clause 9 respectively is a sum calculated as 1.5% of the FINAL ESTIMATED TOTAL COST of the Performance of the Works as calculated pursuant to Clause 7.4 or failing agreement between the parties then by reference to the figures and amounts given by the Joint Venture to the Government as being the final estimated total cost of the Performance of the Works with such adjustments that may be necessary to calculate the FINAL ESTIMATED TOTAL COST of the Performance of the Works. Notwithstanding the foregoing, the consideration shall not exceed $4,000,000 and shall be payable as follows:
- (i) upon the signing of this Agreement any or all of the Initiators have the right and may call upon the Joint Venture to pay forthwith to any or each of the Initiators a sum not exceeding $35,000.00 per Initiator PROVIDED NEVERTHELESS that in the event that one or all of the Initiators make a claim for the payment of the said sum not exceeding $35,000.00 then any payment due to that or those Initiators referred to in paragraph (ii) below will be reduced by the amount already paid.
- (ii) that within fourteen (14) days of the requisite Approvals to Perform the Works, the Joint Venture shall pay to the Initiators the balance of consideration due to each of them in the proportions C 30%, B 35% and the Applicant 35% subject to any adjustment necessary taking into account the provision of paragraph (i) above.''
(The amount of $1,365,000, which is the subject to the proceedings, was paid under clause 3 of, as read with paragraph (ii) of Schedule 2 to the Joint Venture Agreement.)
11. (a) It is clear to us that from inception the Applicant researched and worked on the Project specifically in order to profit from it. The fact that he is not formally qualified as an engineer is not to the point. He is clearly a man of some considerable ability (whose skills are by no means confined to the law) and imagination; he was moreover possessed of the determination to persevere with the Project, notwithstanding that, as the evidence revealed, his work on the Project might have had little commercial value in the absence of the grant of this Approvals referred to in the Joint Venture Agreement.
(b) As to how precisely and more specifically by whom the Project would have been brought, in the end, to fruition, could not in the nature of things have been known to the Applicant when he commenced research on it. It is clear that, from the point of view of the Applicant, the period from commencement of research to the date of the Joint Venture Agreement was not free of problems. His relationship with B and C became stormy, resulting in litigation and the
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conclusion of the Joint Venture Agreement (between the Initiators and the Construction Companies) which in turn resulted in the payment to the Applicant of two payments, one of $35,000 and the other (later) of $1,365,000.12. (a) The principles to be considered in a matter such as this were authoritatively stated by the High Court in
FC of T v The Myer Emporium Ltd 87 ATC 4363; (1986-1987) 163 CLR 199. At ATC pages 4366-4367; CLR pages 209-210 the Court said:
``Although it is well settled that a profit or gain made in the ordinary course of carrying on a business constitutes income, it does not follow that a profit or gain made in a transaction entered into otherwise than in the ordinary course of carrying on the taxpayer's business is not income. Because a business is carried on with a view to profit, a gain made in the ordinary course of carrying on the business is invested with the profit- making purpose, thereby stamping the profit with the character of income. But a gain made otherwise than in the ordinary course of carrying on the business which nevertheless arises from a transaction entered into by the taxpayer with the intention or purpose of making a profit or gain may well constitute income. Whether it does depends very much on the circumstances of the case. Generally speaking, however, it may be said that if the circumstances are such as to give rise to the inference that the taxpayer's intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taypayer's business. Nor does the fact that a profit or gain is made as the result of an isolated venture or a `one-off' transaction preclude it from being properly characterised as income (
F.C. of T. v. Whitfords Beach Pty. Ltd. 82 ATC 4031 at pp. 4036-4037, 4042; (1982) 150 C.L.R. 355 at pp. 366-367). The authorities established that a profit or gain so made will constitute income if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit.''
(b) Their Honours then referred to the Californian Copper test for support at ATC page 4367; CLR pages 210-11:
``This test was approved by the Privy Council in
Commissioner of Taxes v. Melbourne Trust, Limited (1914) A.C. 1001, at p.1010 and was applied by the House of Lords in
Ducker v. Rees Roturbo Development Syndicate Ltd. (1928) A.C. 132 at p. 140. There a company was formed primarily for the purpose of acquiring, developing and exploiting an invention relating to a centrifugal turbine pump by way of granting manufacturing licences under patents. In the course of its business the company acquired additional English and foreign patents in connection with the invention. Although its main business was the grant of manufacturing licences, the company always contemplated the possibility of a sale of its interest in the foreign patents. Receipts from the sale of that interest were held to constitute income. Lord Buckmaster stated (at pp. 141-142) that this was not `a mere accidental dealing with a particular class of property' but `was part of their business which, though not of necessity the line on which they desired their business most extensively to develop, was one which they were prepared to undertake'.The important proposition to be derived from Californian Copper and Ducker is that a receipt may constitute income, if it arises from an isolated business operation or commercial transactions entered into otherwise than in the ordinary course of the carrying on of the taxpayer's business, so long as the taxpayer entered into the transaction with the intention or purpose of making a relevant profit or gain from the transaction.''
(c) In
Westfield Ltd v FC of T 91 ATC 4234, the court pointed out that it did not follow from the decision in Myer Emporium Ltd that every profit made by a taxpayer in the course of his business activity would be of an income nature. Their Honours said that to so express the proposition would eliminate the distinction between an income and a capital profit. It was necessary, they said, that the purpose of profit- making must exist in relation to the particular operation. However, Hill J at page 4243 specifically adverted to the situation where the
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taxpayer has the purpose or intention of making a profit by turning an asset to account, although the means to be adopted to generate that profit have not been determined.13. (a) The Tribunal refers also to the decision of Deputy President B.J. McMahon in Case 21/93,
93 ATC 272; Deputy President McMahon was obliged to consider a case in which the taxpayer exploited certain commercial technology. In that Case Deputy President McMahon having referred to the authorities set out in clause 12 categorised the venture with which he was concerned, in the following terms [ATC p 279]:
``The present circumstances can fairly be described as an `adventure in the nature of a trade'. The Applicant may have wished to continue his business in medical research. Nevertheless the acquisition and disposal of licensing rights was an essential element in its planning. The fact that it did not know when it acquired the rights, how those rights were finally to be disposed of, is irrelevant. The fact that they were disposed of in a one- off transaction is also irrelevant. What has been examined, relevantly, is a scheme of profit-making...''
(b) Deputy President McMahon then referred to the decision in Westfield (referred to in clause 12(c) above), and in particular the statement by Hill J at p. 4243 and then continued:
``In my view, this present case is exactly the type of case to which His Honour referred. The granting of a specific sub-licence to adviser two's company may not have been in the contemplation of the Applicant at the time it acquired the principal licence from the University. The granting of some sub- licence of some nature, however, was clearly within its contemplation. If the transaction was isolated, it was nevertheless entered into in the ordinary course of the carrying on of the Applicant's business as the Applicant entered into the series of transactions with the benefit or purpose of making a relevant profit or gain.''
(c) Exhibit R2 indicates that the Project was the first of a number of infrastructure projects upon which the Applicant embarked, and the fact that so far the Project is the only one which has been successful in the sense that it produced a return for the Applicant is beside the point. The Applicant embarked upon the Project for the purposes of gain, and more particularly because his legal practice was not successful. The Applicant's position is, in our view, clearly distinguishable from that of Westfield; in the first instance, the taxpayer in Westfield acquired real property with the intention of developing that property itself; the taxpayer in Westfield (it was held) lacked the necessary profit-making purpose at the time of acquisition. Although in this case the Applicant's research may have generated some asset of a proprietary nature (and see paragraph (b) of Schedule 1 to the Joint Venture agreement), (and as the Applicant did not furnish us with any evidence as to the nature and extent of it) the property in question was merely an incident of the Project; moreover the Applicant intended from the outset to profit from his research.
14. (a) The Applicant argued that the Joint Venture Agreement, properly construed amounted to nothing more or less than a sale of property, and being the property referred to in Schedule 1 to the Joint Venture Agreement.
(b) The Tribunal considers that the Joint Venture Agreement cannot be categorised, as contended by the Applicant, as a sale agreement and that to do so would contradict its express terms. While the payment referred to in clause 4 of the Joint Venture Agreement, had the effect of transferring the items referred to in Schedule 1 ``and any property of a like nature existing with the Joint Venture'' to the Construction Companies that was merely an incident of the operation of the Joint Venture Agreement. Schedule 1 to the Joint Venture Agreement while it includes any copyright (pursuant to paragraph (b) in any of the documents referred to in paragraph (a)), it also refers in paragraph (c) to the information referred to in that paragraph and in other words to information (presumably confidential) which was not proprietary in nature.
(c) The Applicant admitted that the Joint Venture Agreement was in no sense a sham; accordingly regard must be had to its terms; the question of whether a receipt has the character of income is to be ascertained by a consideration of the true character of the receipt (in the hands of the recipient) and the circumstances in which it was received. See in this regard
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GP International Pipecoaters Pty Ltd v FC of T 90 ATC 4413; (1990) 170 CLR 124;
First Provincial Building Society Limited v FC of T 95 ATC 4145 and
J.B. Chandler
``What was decided in Cooling is no support for the proposition that where the circumstances show that what appears to be a formal written agreement between the parties represents a bargain hammered out in negotiations, the terms of the agreement are to be disregarded in determining the revenue or other character of payments made pursuant to the agreement. In the present case, the surrounding circumstances supported rather than gainsaid the proposition that, as indicated on its face, cl 19 represented that which the parties were prepared to accept as their bargain.''
And again in the Chandler Investment case, Hill J said at ATC page 5190-5191; FCR page 598:
``In considering the entire context in which the payment was made and that context included the relationship between the firm and its service company, I expressed the view that the character of the payment in the hands of the recipient as income was not to be determined by focusing upon the words of the letter of the payer to the exclusion of all surrounding circumstances. My judgment in this respect was agreed to by the other members of the Court, Lockhart and Gummow JJ. But to accept that the circumstances in which a payment is made will be relevant to a determination of the character of that payment in the hands of a recipient is not to say that surrounding circumstances can be used to contradict the words of an agreement reached between parties bargaining at arm's length as to what the consideration for a particular payment is to be, except in a case (and the present is not such a case) where it is claimed that the agreement is a sham and does not represent the true intention of the parties to it.
The present is a case where negotiations between arm's length parties resulted in an agreement being reached between them, couched in language that was the subject of hard bargaining. That language clearly represented the intention of the parties to the agreement.... Here, for their own purposes, the parties have cast the transaction between them into the form of a payment made as consideration for entering an agreement and for procuring the execution of the merchant agreement. The parties did so quite deliberately and the taxation consequences which flow will be determined by the form which they have adopted. The surrounding or accompanying circumstances, however much they might explain the transaction, do not change it.
I would, with respect, adopt, as Drummond J did, what was said by Brennan J in Federal Coke, in a passage approved by this Court in
Allied Mills Industries Pty Ltd v FC of T 89 ATC 4365 at 4369-4370; (1989) 20 FCR 288 at 309:`When a recipient of moneys provides consideration for the payment, the consideration will ordinarily supply the touchstone for ascertaining whether the receipt is on revenue account or not. The character of an asset which is sold for a price, or the character of a cause of action discharged by a payment will ordinarily determine, unless it be a sham transaction, the character of the receipt of the price or payment. The consideration establishes the matter in respect of which the moneys are received. The character of the receipt may then be determined by the character, in the recipients hands, of the matter in respect of which the moneys are received.'''
15. The payment of $1,365,000, which was the subject of the assessment was received in consequence of the institution of the Applicant of legal proceedings. That factor does not, however, affect the character of the receipt, and it retains the same character as it would have done had the payment had been made directly under the agreement.
Burmah Steamship Co v IRC (1930) 16 TC 67 and
Heavy Minerals Pty Ltd v FC of T (1966) 14 ATD 282; (1966) 115 CLR 512.
16. (a) In this clause 16, we refer in brief terms to section 26(e) of the Act.
(b) The Tribunal accepts having regard to the authorities quoted (and in particular
Brent v FC of T 71 ATC 4195; (1971) 125 CLR 418,
Smith v FC of T 87 ATC 4883; (1987) 164 CLR 513,
FC of T v Holmes 95 ATC 4476 and
FC of T v Dixon (1952) 10 ATD 82; (1952) 86 CLR 540) that a payment may be caught under section 26(e) of the Act, notwithstanding that it does not constitute income in accordance with
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ordinary concepts. The Tribunal also accepts that a payment may be caught under section 26(e) of the Act, notwithstanding that it is made by a person who is not the recipient's employer.(c) The Tribunal has doubts (not explored or canvassed in depth) as to whether section 26(e) applies on the facts, having regard in particular to the fact that:
- (1) $35,000 was paid (to the Applicant) in consideration of work undertaken by the Initiators up to and including the date of execution of the Joint Venture Agreement and thus at a point in time prior to the coming into existence of the Joint Venture Agreement pursuant to which that payment was made, and thus prior to the existence of any form of employment or quasi- employment arrangement; (see clause 9 of the Joint Venture Agreement);
- (2) the balance of $1,365,000, which was the subject of the assessment, was paid by way of compensation in accordance with clause 3 of, as read with paragraph (ii) of Schedule 2 to, the Joint Venture Agreement; clause 3 of the Joint Venture Agreement makes it clear that the compensation would be payable upon receipt of the approvals, the parties to the Joint Venture Agreement having contracted under clause 2 to enter into the venture for the purpose of preparing and submitting applications (and the like) for the purpose of obtaining the requisite approvals. (Under the last sentence of clause 2, the Construction Companies were entitled to ``the right of access to Schedule 1 and may use it in accordance with the terms of this agreement''. The Joint Venture Agreement clearly requires the provision of all parties of the services. The Applicant gave evidence, which was not disputed, that in fact he performed no services after the date of the Joint Venture Agreement. He said that he received notices of meetings of the Management Committee referred to in clause 7 of the Joint Venture Agreement, but did not take any notice of them. It is conceivable that services were performed by the Initiators (of whom the Applicant was one) after the date of the Joint Venture Agreement, that in effect those services were the services of the Initiators, as a group, and which included the Applicant, and so that those services were performed by the other Initiators on behalf of all Initiators; however, there was no evidence before us as to what precise services were provided by which parties under the Joint Venture Agreement.
(d) The Tribunal has concluded relevant payment (and being the amount of $1,365,000) was properly brought to tax pursuant to the assessment, under either section 25(1) or section 25A of the Act, and that it is not necessary for the Tribunal to rule on the applicability of section 26(e) of the Act. It is thus not necessary for the Tribunal to consider any submissions made by the Applicant in respect of section 26(e) of the Act.
17. We do not consider that it is necessary for us to refer specifically to any of the other cases quoted to us; some of them relate to section 26(e)(as to which we do not need to come to a conclusion) and some were referable to Part IIIA of the Act, which was for reasons set out previously not argued by the Respondent.
18. Having regard to the opening sentences of paragraph 34 of the decision by Deputy President B.J. McMahon in Case 21/93, we consider:
- (a) The present circumstances can also fairly be described as an ``adventure in the nature of trade''.
- (b) The fact that the Applicant did not know when he commenced research on the Project how that research would be exploited or completed is not relevant.
- (c) The Project was relevantly a scheme for profit-making or a scheme for the derivation of assessable income.
- (d) The Tribunal finds that the Joint Venture Agreement does not (as contended by the Applicant) relate to a sale of property, but rather the provision of services. That some property may have been created in connection with those services is incidental. There was in any event no evidence before the Tribunal as to the nature and extent or value of any such property (and whether falling within paragraph (b) of Schedule 1) or otherwise. Where by way of analogy, an architect undertakes a design contract for a client, he receives a reward for his services, and the fact that his work may include the production of plans, which are subject to copyright does not produce any different result. The end result does not differ furthermore. Where work of a design nature
ATC 596
is performed in the hope that it will be put into effect, or in other words as a speculation, and without at commencement a commitment from a specified client. Again referring to the decision in Case 21 of 1993, this case also is the type of case to which Hill J referred in the statement (previously quoted) which appears at p. 4243 of the Westfield case.
19. We find, therefore, that the amount of $1,365,000 the subject of the assessment was properly brought to tax under section 25 or alternatively section 25A of the Act. The penalty aspect of the relevant assessment was not addressed by either party. Accordingly, the assessment is confirmed.
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