AB v FC of T
Judges:Foster J
Court:
Federal Court
Foster J
This is an appeal under s 44(1) of the Administrative Appeals Tribunal Act 1975 (Cth) from a decision of the Administrative Appeals Tribunal (``the Tribunal'') given on 8 November 1996. By that decision the Tribunal affirmed a decision of the Commissioner of Taxation for the Commonwealth of Australia (``the Commissioner'') given on 29 January 1996. The Commissioner had disallowed the applicant's objection to the assessment of his income tax liability for the year ended 30 June 1988. The applicant objected to the assessment on the basis that the Commissioner wrongly assessed as taxable income certain payments totalling $1,365,000 which he had received in 1987. The appeal is confined to questions of law.
Factual background
The applicant was admitted as a barrister in the Supreme Court of New South Wales in 1966. He did not, however, commence practise at the Bar until 1977. During the intervening eleven years he was engaged by a number of employers as a legal officer.
The applicant's practice was not as successful as he had hoped. In his written statement, part of his evidence before the Tribunal, he says that by 1983 he had failed to establish a financially viable legal practice, was operating at a loss, and was becoming ``progressively insolvent''. In these circumstances the applicant began to conduct research into a second major transport crossing of Sydney Harbour. This research was carried out in public libraries in the evening or on weekends and public holidays.
By August 1984 the applicant had developed a concept for a tunnel under Sydney Harbour, selected a route, drawn-up a cross-section plan of the tunnel, and selected what he considered
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to be the optimum engineering method for tunnel construction. The nature and quality of this work would reasonably have reflected his lack of any engineering or related qualifications. The plans were never in evidence.At this stage he decided that he would need professional assistance. Accordingly, he approached Mr R Hornibrook, who was known to him as a building litigation expert with contacts in the engineering profession. The details of the relationship between the applicant and Mr Hornibrook are not clear but it appears that during the month of August 1984 they considered a joint venture to further the plan for the Sydney Harbour Tunnel. Later that year, in October, Mr Hornibrook made contact with Wargon Chapman Partners Pty Limited (``Wargon Chapman''), a firm of engineering consultants, to assist in the matter.
Early in 1985 the applicant and Mr Hornibrook apparently discussed the incorporation of a joint venture. A shelf company was procured for this purpose but it was never used. According to the applicant, the company was to have been the means by which his control over the development of the venture was secured. He claims that Mr Hornibrook had agreed that he should hold 60 per cent of the shares in the company. The failure to use the company was indicative of a dispute between them over the conduct and control of the venture. Although work continued at least until March 1985, this dispute was not resolved and by August Mr Hornibrook had instituted proceedings against the applicant, Wargon Chapman, and one other party (not presently relevant) in the Equity Division of the Supreme Court of New South Wales. The exact nature of his dispute was not in evidence. I shall refer later to such material as there is relating to it.
On 18 August 1985, Mr Hornibrook obtained interlocutory injunctions against the applicant restraining him from proceeding any further until the case was finalised. The applicant subsequently appealed against the decision granting these injunctions but was unsuccessful. Then, on 29 November 1985, terms of settlement were filed. The applicant claims that he agreed to this settlement because Mr Hornibrook had threatened to bankrupt him by enforcing the certificates of taxation for costs which he had obtained in the Supreme Court proceedings. I shall make further reference to this later. The terms of settlement involved entry into an agreement, referred to hereafter as ``the Joint Venture Agreement'', on 29 November 1985.
The Joint Venture Agreement was executed by Wargon Chapman, Mr Hornibrook, and the applicant on the one hand (referred to as ``the Initiators'') and Kumagai Gumi Co Limited (``Kumagai'') and Transfield Pty Limited (``Transfield'') on the other (two construction companies). There is no explanation of how Kumagai and Transfield came to be involved although it is clear that they were not introduced by the applicant. The recitals are as follows:-
``A. The Initiators own the property referred to in Schedule 1 herein in the proportions Wargon Chapman 30%, Hornibrook 35% and [the applicant] 35%.
B. The Initiators, Kumagai and Transfield 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 Kumagai and Transfield upon such terms and in such manner as Kumagai and Transfield mutually agree upon.''
The Joint Venture Agreement provided for the remuneration of the Initiators as follows:
``2. The Initiators, Kumagai and Transfield 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. Transfield and Kumagai shall have the right of access to Schedule 1 and may use it in accordance with the terms of this agreement.
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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 Kumagai and Transfield 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 Kumagai and Transfield 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 Kumagai and Transfield.
...
9. INITIAL REMUNERATION TO INITIATORS
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 that such consideration is to be paid for jointly by Kumagai and Transfield.
...
SCHEDULE 1
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 second harbour crossing for Sydney between the vicinity of Hickson Road, and the vicinity of Warringah Expressway, North Sydney 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.
SCHEDULE 2
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 Wargon Chapman 30%, Hornibrook 35% and [the applicant] 35% subject to any adjustment necessary taking into account the provision of paragraph (i) above.''
Upon the execution of the Joint Venture Agreement the amount referred to in par (i) of
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Schedule 2 was paid to the applicant. After this he took no further part in the Project.On 18 June 1987, the applicant commenced proceedings in the Common Law Division of the Supreme Court of New South Wales against the parties to the Joint Venture Agreement and three others (who are not presently relevant). The applicant claimed the immediate payment of $1,365,000 - the sum provided for by cl 3 of the Joint Venture Agreement as read with par (ii) of Schedule 2. According to the applicant's statement of claim, this sum was owing because the condition precedent specified in cl 3 had been satisfied. Specifically, the applicant alleged that the Crown in right of New South Wales had given the necessary ``Approvals'' for the Performance of Works in December 1986.
The action was settled on 25 June 1987. The effect of the settlement was that, subject to certain conditions, Kumagai and Transfield would pay to the applicant the sum of $1,365,000. The relevant provisions of the terms of settlement read as follows:
``1. U pon the First Defendant and the Second Defendant undertaking to the Court and to the Plaintiff to make the payments set out in the Schedule hereto on the occurrence of the events or dates set out in that Schedule and subject to the matters noted or ordered in the following paragraphs of these orders, these proceedings are stayed and upon the due payments of the amounts required to be paid in the Schedule hereto, these proceedings are discontinued with leave of the First Defendant, Second Defendant and Seventh Defendant.
...
7. N ote that upon payment of all monies due and payable consequent upon the occurrence of the events set out in the Schedule hereto the Plaintiff agrees that all of the Plaintiff's interest in all of the property (as `property' is defined in the Agreement) or property of a like nature which is the subject of the Agreement and of all of the Plaintiff's right in such property of whatever nature arising out of the Agreement shall unconditionally vest in and become the exclusive property of the First Defendant and the Second Defendant jointly and further any other rights or interests of the Plaintiff existing or arising out of the Agreement shall be extinguished.
...
SCHEDULE
(1) On 24th June, 1987 the First Defendant and the Second Defendant shall jointly and severally pay to the Plaintiff the sum of One hundred thousand dollars ($100,000.00).
(2) The First Defendant and the Second Defendant jointly and severally shall pay to the Plaintiff the sum of One million two hundred and sixty-five thousand dollars ($1,265,000.00):-
- (a) on the day of execution of an agreement authorised by the Act in terms of or substantially conforming to either Schedule 5 or 6 to the Act;
- or (b) on the day of execution of the `Lease' referred to in paragraph 1.1 of Schedule 6 to the Act;
whichever event first occurs.''
The ``Act'' referred to in the Schedule is the Sydney Harbour (Private Joint Venture) Act 1987 (NSW). The payments provided for by the Terms of Settlement were duly made by the first defendant (Kumagai) and the second defendant (Transfield). The amount of $1,365,000, thus paid, is the amount in question in these proceedings.
The disputed assessment
On 23 May 1994 the applicant's accountants sent his income tax returns for the period 1977 to 1993 to the Deputy Commissioner of Taxation. The applicant's tax return for the year ended 30 June 1988 stated that during the relevant period he had earned $175,000 in taxable income. On 8 May 1995 the Commissioner issued a notice of assessment for the year ended 30 June 1988. That notice stated that the applicant's taxable income had been assessed at $1,540,000. The difference reflects the Commissioner's inclusion in the applicant's taxable income of the $1,365,000 paid to him by Kumagai and Transfield. The applicant had disclosed the receipt by him of this sum in his 1987/1988 return but had claimed that it was a capital receipt. The grounds for so claiming were set out in the return as follows:-
``(1) The amount is not income according to ordinary concepts and is therefore not
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assessable as income under Section 25(1) of the Income Tax Assessment Act (ITAA) as
- (a) The receipt bears no resemblance to any services rendered to the purchasers of the intellectual property.
- (b) The taxpayer was a practicing barrister at the time of the research into the SHT project and was not carrying on a business of engineering or project development.
- (c) The amounts received were not regular and were paid as a capital sum by three instalments under a contract.
- (d) The amounts received were not compensation for a loss of income.
- (e) The lump sum received was not paid to replace any income stream in the future.
- (f) The project was a `pipedream' of the taxpayer and there was no expectation that any income, capital or otherwise, would be earned from the development of the taxpayer's intellectual property.
(2) The amount is a receipt of capital and therefore not assessable as
- (a) The consideration received was to restrict the future earning capacity of the taxpayer.
- (b) The amount received was a lump sum for the transfer of rights to the project and amounts to a sale of the intellectual rights and is not income.
- (c) The Capital Gains Tax legislation does not apply to this receipt as the CGT provisions only apply to assets as defined acquired after 19 September 1985. As the taxpayer commenced his research in 1983, the `asset' was acquired at that time, being the date work commenced on the creation of the asset (Section 160U).''
On 21 July 1995 the Commissioner received from the applicant's accountants a Notice of Objection Against Assessment. The Commissioner replied on 29 January 1996 disallowing the objection. Accordingly, on 27 March 1996, the applicant applied to the Tribunal for review of the Commissioner's decision. The Tribunal hearing was held on 11 October 1996. The decision of the Tribunal was delivered on 8 November 1996. The Tribunal affirmed the Commissioner's decision.
The case before the Tribunal
The applicant conducted his own case. He filed a number of documents. Among these was a statutory declaration which set out the facts upon which he relied and which were affirmed by him in his evidence before the Tribunal. To a large extent they traverse factual areas already set out in these reasons. However, as they do not appear to have been the subject of dispute, it is convenient to set them out in the form that they were provided to the Tribunal. After indicating that during the period December 1977 to October 1987 he practised as a barrister and that he had no engineering or related qualifications, the applicant made the following statements:-
``4. I alone initiated the Sydney Harbour Tunnel project (`the project') by personally carrying out private research, investigation and preliminary design work during the period of twelve months or thereabouts, prior to August 1984. This was carried out as a spare time exercise outside normal business hours.
5. In or about the month of August 1984, I formed a joint venture with Mr R Hornibrook to implement the project ie. to have the project carried forward to completion and open for public use of the proposed tunnel (the `G-H joint venture').
6. In the G-H joint venture, it was always intended by myself and Mr Hornibrook that additional parties (being large publicly credible companies) would be brought into the venture at an appropriate time (upon terms to be negotiated) but with myself and Mr Hornibrook retaining an active on-going role.
7. Under the terms of the G-H joint venture, it was agreed between myself and Mr Hornibrook that I was to have legal control of that joint venture, exercised through my possession of sixty percent (60%) controlling interest (unless and until otherwise agreed). No variation to the original agreement as set out in this paragraph 7 was ever reached between myself and Mr Hornibrook.
8. During the period from March 1985 to June 1985 (or thereabouts) a dispute arose between Mr Hornibrook and myself as to the best method of proceeding with the project and as to the exercise by me of my control
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over the G-H joint venture. As a consequence of that dispute Mr Hornibrook instituted Supreme Court equity proceedings against me (and one other party)... (the said legal action).9. On 27th day of November, 1985 terms of settlement were filed in the said legal action.
10. The said terms of settlement created and incorporated, as an attached document filed in court, the joint venture agreement between the said parties to those proceedings. Transfield Pty Limited and Kumagai Gumi (NSW) Pty Limited were also parties to that agreement as filed in Court (hereafter called the `Transfield JV agreement').
11. The Transfield JV agreement constituted a compromise by me of my legal rights:-
- (a) to continue to defend the plaintiff's (Mr Hornibrook's) claim that a joint venture existed between three parties namely, Mr Hornibrook, myself and Wargon Chapman Partners Pty Limited (WCP) in relation to the project;
- (b) to bring a cross-action (or independent legal proceedings) against Mr Hornibrook and WCP, to prove my claim that a joint venture in relation to the project, existed between two parties only namely myself and Mr Hornibrook, (with myself holding the controlling sixty percent (60%) share of that joint venture).
12. As a result of orders made against me in the said legal action, Mr Hornibrook 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 Mr Hornibrook's appointed agents.
14. After entering into the said terms of settlement I took no further part in the project.''
In a supplementary witness statement the applicant indicated that the ``preliminary design work'' referred to in paragraph 4 of his statutory declaration ``included sketch plans showing the route of the proposed tunnel across the harbour and the approach roads and tunnel portal locations''. The applicant claimed copyright in the material personally created by him. He also asserted that he had procured ``additional copyright material'' for the ``G-H Joint Venture'' consisting of:-
- ``(a) Financial : a detailed financial report prepared by the Bank of New South Wales (now Westpac).
- (b) Civil Engineering : a detailed civil engineering report prepared by Christiani and Neilson of Denmark, on civil engineering aspects of the project (including preliminary cost estimates).
- (c) Civil Engineering : detailed civil engineering plans of the proposed tunnel, approach roads and portals, prepared by Wargon Chapman Partners Pty Ltd.''
The applicant asserted that the ``G-H Joint Venture'' had an implied exclusive (copyright) licence to use this material for the purposes of the Project. He further asserted that all the ``copyright material was assigned to Transfield and Kumagai Gumi by the Transfield JV Agreement''.
At the outset of the hearing Mr McMillan, who appeared for the Commissioner, indicated that the Commissioner's case turned principally upon whether the amount in dispute was income according to ordinary concepts under s 25(1) of the Income Tax Assessment Act 1936 (Cth) (``the Act''). Alternatively, it was asserted that the amount was assessable as a profit arising from the carrying on or carrying out by the applicant of a profit-making undertaking or scheme (s 25A(1)). The Commissioner also sought to rely upon s 26(e) and the relevant capital gains tax provisions of the Act. These claims were not made the subject of decision by the Tribunal although some reference was made to them in argument and in the Tribunal's reasons. They are not involved in the present appeal, the Tribunal having given no decision in respect of them.
The applicant gave evidence and was cross- examined. It is convenient to refer to certain parts of his evidence. He testified that his dominant purpose in forming a commercial association with Mr Hornibrook was:-
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``to form a publicly credible consortium involving other companies as well as ourselves... which consortium would be in a position to present the project or the concept of the project to the New South Wales government and with a view to obtaining from the New South Wales government an exclusive mandate in favour of our consortium to implement the project - obviously on contractual terms to be negotiated with the government. Once the exclusive mandate had been approved - at least in principle - the project then quite clearly had a definite and reasonably ascertainable commercial value.''
He then spoke of the dispute which had occurred, the litigation which resulted, and the settlement of that litigation involving his entering into the Joint Venture Agreement. He abandoned any claim that his entry into that agreement was as a result of vitiating duress. Indeed, of course, he actually sued upon it. However, in relation to the Agreement he had this to say:-
``I wish to say this, that the agreement was created in the final stages of a major court dispute. So far as I was concerned, I was not on speaking terms with Mr Hornibrook, nor with Wargon Chapman, nor with Kumagai Gumi, nor with Transfield. We were effectively commercial enemies. The idea that I would provide services, skills, or ongoing input into the joint venture, after that agreement was signed, was not contemplated by me and was not, in my perception, contemplated by any of the other parties to the agreement. I wish to point out that I had no skills to contribute to the joint venture once it had been established, because I am not an engineer, I am not a draftsman, I am not a politician, and I am not a multi-millionaire. So all the necessary ingredients that needed to go into coming to a commercial arrangement with the New South Wales government, I had none of the attributes necessary to contribute to the project. My work effectively had been done in conceiving the project, putting it into some form of documentation, and having the ideas and the financial structure of the project confirmed by independent experts. Once I had done that I just had no further capacity, skills or finances or resources or anything else to put into the project. And as I have said in my statutory declaration, once the agreement was signed I took no further part in the project whatsoever. I had no conversations with any of the parties. I did not meet any of the parties. I was not asked to meet them and I was not asked to contribute. All I did was effectively sit back and wait until the conditions set out in that agreement were satisfied for me to receive payment of my share of the initiators' moneys. Ultimately as a result of bringing an action, I was paid the proper amount set out in that document. I wish to say that the amount that I received under the agreement with Transfield and Kumagai was an amount that was assessed as contingently payable as at 27 November 1984. It was in no way contingent upon or dependent upon further input of services of any description, or resources or whatever, or anything else. So it was an amount of money payable to me and the other two initiators, ascertained and commercially valued and written into the agreement as at 27 November 1984. The only condition being that the project had to receive all necessary approvals to go ahead for construction and that was the trigger for the payment of the money...''
[The date 27 November 1984 was corrected by the applicant to 29 November 1985.]
In cross-examination the applicant was asked a number of questions relating to his intentions when he commenced working on the project and during its development. The following passages were referred to in argument:-
``MR McMILLAN: 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?
APPLICANT: That is correct.
MR McMILLAN: What happened - if I put aside for one moment the joint venture agreement and the disputes that you have alluded to - is that you did that and you received a sum of money for it. Is that right?
APPLICANT: I received a sum of money pursuant to that agreement. That is-
MR McMILLAN: Yes. I am sorry, I should have been more accurate in fairness to you - pursuant to the agreement. But you received that sum of money -?
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APPLICANT: That is correct. I in fact received three separate amounts of money under that agreement and under a subsequent court settlement that I had with Kumagai Gumi and Transfield.
MR McMILLAN: But at all times when you were working on this project, prior to the entry into the agreement of 29 November '85, you were directing your energies to ultimately getting a profit for yourself?
APPLICANT: I don't think I would agree with that in the bald terms that you have framed the question because I have just given evidence in chief that I knew that no- one - me or anyone else - would get any money out of this project until we set up a publicly credible consortium. Until that time my efforts and energies and input were of no commercial value. So to suggest that I was working to obtain a large sum of money as I was researching in the library, I don't really agree that that is a proper assessment of what I was doing in the library or elsewhere in the early stages of developing the project.
MR McMILLAN:... [Y]ou intended to, as you recognised, take the matter so far as you could and to involve other parties who would have the funds once you had developed the matter and the idea as far as you could -?
APPLICANT: Well, who'd have the public credibility and resources, yes.
MR McMILLAN:... You anticipated and directed your energies towards ensuring that you would receive, if at all possible, an amount of money to recompense you for the time that you spent in the matter?
APPLICANT: The payment of money would flow - it was my intention and assumption that it would flow once we had a publicly credible consortium set up but not until then. I knew I wouldn't get a cracker out of the project if we didn't reach the - didn't get established a publicly credible consortium.
...
MR McMILLAN: You would realise the fruits of your labour... in the best possible commercial fashion for you? In other words, to maximise the financial return?
APPLICANT: It was my desire and intention that that would happen as a natural consequence once we had the publicly credible consortium set up.
MR McMILLAN: As events transpired, there was a dispute between you and Mr Hornibrook?
APPLICANT: That is correct.''
The Tribunal also addressed some questions to the applicant in the following passage:-
``MR BLOCK: At some time in the eighties, it occurred to you that a tunnel underneath the harbour was a good idea?
APPLICANT: Indeed it did.
MR BLOCK: What led you to think that way? I know of no other lawyer who would ever have the skill to think in terms of so major a project.
APPLICANT: Well I was born in Sydney, I have never lived anywhere else in the whole of my life with very minor exceptions which are hardly worth mentioning. I love Sydney. Sydney has - the harbour does create transport problems. I am basically a North Shore person and I felt there was a need for a project of this nature and there was a need for me to try and work out some means of re-establishing myself financially and when my practice at the bar started to decline I thought that I would spend my spare time when I was not required at the bar - to practice at the bar, to see if I could develop this. It turned out effectively - speaking colloquially, I was able to make a pipedream a commercial reality.''
The applicant also indicated that he had received legal advice in relation to his execution of the Joint Venture Agreement. However, he said, ``but when I say advice I want to just point out that I was given twenty- four hours to sign the document and they advised me to sign it on commercial grounds, which I did''. He abandoned any suggestion that the document was signed under duress. He also accepted that it was not a sham. However, as to what he described as ``intellectual property rights'' in relation to the tunnel concept and other matters set out in his supplementary witness statement he said:-
``I disputed that the property was owned jointly by myself, Mr Hornibrook and Wargon Chapman. That was a dispute in the
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legal proceedings and because of the threats that I have mentioned I signed a document giving them proprietary rights in the property that I had created, but I did - to this day I deny that they had any just entitlement to the property I created up to 29 November 1985.''
There would appear to be no dispute on the evidence before the Tribunal that the applicant entered into the Joint Venture Agreement because of the situation in which he was placed, having cost orders against him which he could not satisfy and the arrangements between himself and the other ``Initiators'' having completely broken down. Any expectation of gain from the project rested, from that point onwards, upon the terms of the Joint Venture Agreement which not only involved significant contingencies but also two major construction companies with whom he had had no dealings and whose introduction into the Agreement had, clearly enough, been arranged by others.
The decision of the Tribunal
I shall now refer to the Tribunal's decision, making, where it appears convenient, certain comments in relation to aspects of it.
The Tribunal found that the applicant had undertaken his work ``in the hope that it would be financially rewarding''. It placed some emphasis upon his statement in evidence, set out above, that the applicant intended to receive as much money for himself as he could from the development of the project. The Tribunal also referred to the fact that the applicant was currently working on another major project, although it is apparent that no reliance was placed upon this fact in the Tribunal's reasons. It may be remembered that the applicant's undisputed evidence was that he had received no financial reward from any other project.
It should be noted that the Tribunal uses the term ``the Project'' quite frequently in its reasons. At their outset the ``Project'' is described as ``a certain large infrastructure project''. It is also said, in the reasons, that the Project when completed was ``by any standards, one of the largest infrastructure projects in Australia''. It does not appear that the concept of ``the Project'' was ever the subject of closer analysis than this. In particular, there are no findings as to what ``the Project'' was in the mind of the applicant at the time he conceived of it or formed any relevant intention in respect of it. The applicant used the term himself but had described it as a ``pipe dream'' which became a ``commercial reality''. He had also insisted, in the evidence referred to, which was not disputed, that there was no prospect of any financial gain unless there was a ``consortium'' in the future with some large commercially credible organisation or organisations involved in it.
The Tribunal in its reasons traced the history of the applicant's involvement with ``the Project'' until the time of his entering into the Joint Venture Agreement. It referred to the applicant's association with Mr Hornibrook and its collapse in litigation. The Tribunal stated that there was no evidence given as to the circumstances in which the ``Initiators'' came to be in dispute or the reasons why Mr Hornibrook instituted legal proceedings against the applicant. However, it does not appear that there was a total absence of evidence on this topic. The evidence was not detailed but the applicant indicated that there was disagreement as to the shares which he was to receive in the shelf company which was to become the vehicle for the promotion and also as to the inclusion in the venture of Wargon Chapman.
The Tribunal continued by stating that the legal proceedings ``culminated in the execution on 29 November 1995 of an agreement entitled Joint Venture Agreement (the Joint Venture Agreement) between the Initiators and two large construction companies''. It further stated that ``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''. With respect, this does not appear to be a correct summation of the applicant's evidence in this regard. There is, so far as I can see, no suggestion in the evidence that he was legally represented in respect of the preparation of the Agreement. He says, in evidence that is not disputed, that he took no part in settling or negotiating the document. He said ``the document was negotiated in my absence, was prepared in my absence by solicitors that I had no contact with and was suddenly produced at an appointment arranged between the solicitors at which certain statements were made directed towards procuring my signature on the document and that attempt to procure my signature on the document was, of course,
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successful''. In fact, he asserted in argument that his entry into the Joint Venture Agreement was ``an accident''. He submitted that ``it involved litigation which I did not institute. I was the defendant, I did not procure the litigation. It was litigation that I defended right up in fact to the Court of Appeal and fought with every resource I had at my disposal. The terms of settlement were not of my instigation nor was the Joint Venture Agreement of my instigation''.I am not entirely clear, with respect, as to what the Tribunal intended to convey in the passage under consideration. However, I can see no basis in the evidence for a finding that the applicant and his solicitors were engaged in negotiations for or preparation of the Joint Venture Agreement. The evidence all points to its having been presented to the applicant on a ``take it or leave it'' basis and his having been advised that, in the circumstances in which he was placed, he should execute it. Indeed, the applicant's initial position in relation to his entering into the Agreement was that he did so under legal duress. This approach was abandoned during argument before the Tribunal, apparently on the basis that he could not seek to avoid an agreement in respect of which he later sued.
The Tribunal then indicated that the terms of the Joint Venture Agreement were clearly of critical importance. It set out the passages which appear earlier in these reasons. The Tribunal then continued as follows:-
``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 [ sic] 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 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.''
The comment should be made in relation to paragraph 11(a) that the tenor of the applicant's evidence was not that the Project might have little commercial value in the absence of the grant of the approvals referred to but rather that it could have no commercial significance until a publicly credible consortium was established. There is no suggestion in the evidence that the applicant was pinning his hopes for financial gain upon the granting of the approvals contemplated in the Joint Venture Agreement. His work had come to a halt because of dispute and litigation before the Joint Venture Agreement was even in contemplation.
The Tribunal then said that ``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. It also referred to the decision of a Full Court of this Court in
Westfield Limited v FC of T 91 ATC 4234; (1991) 28 FCR 333. It is convenient to set out the passage from Myer Emporium (at ATC 4366-4367; CLR 209-210) relied upon, as reference will be made to it later in these reasons:-
``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
ATC 4956
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 taxpayer'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: FC of T v. Whitfords Beach Pty. Ltd. 82 ATC 4031 at pp 4036-4037, 4042; (1982) 150 CLR 355 at pp. 366-367, 376. 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.''
In relation to Westfield the Tribunal said as follows:-
``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 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.''
Reference was also made to a Tribunal decision in which Westfield was applied. It was a case in which the taxpayer was engaged in a business and the profit-making transaction in question, although isolated, was ``nevertheless entered into 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''.
The Tribunal then continued by recording that a particular exhibit indicated ``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''. I should state that I am not clear what this passage is intended to convey. If it is a finding that at the time when the applicant commenced his work upon the tunnel project, he did so as part of a business conducted by him in the production of major infrastructure plans, then the evidence simply does not support such a finding. It simply cannot be said that the applicant at that time, nor, so far as I can see on the material placed before me, at any time was engaged in such a business. It would appear that this passage is intended only to be supportive of the statement, already made, that ``from inception the applicant researched and worked on the Project specifically in order to profit from it''.
The Tribunal went on to say that ``the applicant's position is, in our view, clearly distinguishable from that of Westfield in that the taxpayer in Westfield lacked the necessary profit-making purpose at the time of acquisition''. Whereas ``the applicant intended from the outset to profit from his research''.
The Tribunal then considered the argument relied upon by the applicant before it (but not before this Court) that the Joint Venture Agreement amounted to nothing more than a sale of the property referred to in Schedule 1. It held that it could not be so categorised. It then referred to the admitted fact that the Agreement was ``in no sense a sham''. The Tribunal then had regard to the terms of the agreement stating that ``the question of whether a receipt has the character of income is to be ascertained by consideration of the true character of the receipt (in the hands of the recipient) and the circumstances in which it was received''. Reference was made to authority and certain passages were set out as being of particular relevance to the problem in hand. Reference was made to a passage from the judgment of Gummow J in
ATC 4957
JB Chandler Investment Co Ltd
FC of T v Cooling 90 ATC 4472; (1990) 22 FCR 42 [93 ATC 5190-5191]:-
``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 focussing 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 proved 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 recipient's hands, of the matter in respect of which the moneys are received.'''
The Tribunal then referred to the fact that the payment of $1,365,000 was received by the applicant as a result of his bringing legal proceedings. It said that this did not affect the character of the receipt, a proposition which is not disputed in this appeal.
The Tribunal next expressed some doubts, but made no finding, as to whether s 26(e) of the Act might apply. As no decision was made I shall not consider this portion of the reasons.
The final conclusion of the Tribunal was that the amount in question was ``properly brought to tax pursuant to the assessment, under either s 25(1) or s 25A of the Act''. This decision was supported by the following findings:-
- ``(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.
ATC 4958
- (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 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.''
The Tribunal also said that the present case was the type of case to which Hill J referred to in Westfield (at ATC 4243; FCR 344) where his Honour said ``there may be a case... where the evidence establishes that the 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: cf
Steinberg v FC of T 75 ATC 4221; (1972-1975) 134 CLR 640''.
The Tribunal then found that the amount of $1,365,000 ``was properly brought to tax under s 25 or alternatively s 25A of the Act''.
The reasons for decision do not deal separately with these two bases for the imposition of income tax. I take it that the reference to s 25A means s 25A(1) insofar as that section includes in the assessable income of a taxpayer ``profit arising... from the carrying... out of any profit-making... scheme''. No reference is made in the judgment to any ``profit-making undertaking'' as referred to in the section. Having regard to what is said in (c) above, it would appear that the Tribunal regarded what they called ``the Project'' as being a ``profit-making scheme'' within the meaning of the section. I have already adverted to the difficulty of determining precisely what is meant by the term ``Project''. I do not follow what the Tribunal means in (c) when it speaks of ``a scheme for the derivation of assessable income''. Such a scheme is not contemplated by s 25A(1) of the Act. It would appear that the Tribunal has failed to make a positive determination which would bring s 25A(1) into play. The finding in the alternative in (c) would appear to be incapable logically of producing this result. It may be, perhaps, that no more was intended by reference to the alternative ``scheme'' than that the applicant, when undertaking the research and other work in relation to the tunnel, intended to derive some form of income from it at some time in the future. The nature of the finding is not clear to me.
Again, I have difficulty in ascertaining in what way the Tribunal has found that the receipt was taxable under s 25 as being income in accordance with ordinary concepts. The references to Myer Emporium and Westfield suggest that the Tribunal regarded the receipt as a ``profit or gain'' made as a result of a ``one- off'' transaction entered into otherwise than in the ordinary course of carrying on the taxpayer's business, the transaction in question having been entered into by the taxpayer with the intention or purpose of making a profit or gain. If this be the course of reasoning, I can find no identification of the ``business'' in respect of which this was relevantly an extraordinary one-off transaction. The only business conducted by the taxpayer was a barrister's practice. The Tribunal does not identify the link between that business and any transaction which relevantly produced the receipt. I have difficulty in seeing, in these circumstances, the relevance of Myer Emporium to the Tribunal's deliberations.
The reference to Chandler and to the terms of the Joint Venture Agreement would appear to suggest that the Tribunal considered that the receipt was income as being a payment received for services in accordance with the terms of the Agreement. I have difficulty in determining whether this was the deciding factor in the Tribunal's reasoning or whether the entry into the Agreement was seen simply as the means of realising a profit or gain intended to be achieved by a prior entering into a profit- making scheme. The Tribunal's reference to the passage from Hill J's judgment in Westfield at ATC p 4243; FCR p 344, relating to ``making a profit by turning an asset to account'', supports the latter.
Further, although there is a finding of ``a scheme for profit-making'' I cannot discern in
ATC 4959
the Tribunal's reasons any identification of the ``scheme'' nor of the steps involved in reaching the finding, a matter to which I shall make reference later. In my view, there is a failure on the part of the Tribunal to spell out the reasons which lead it to treat the amount in question as taxable either under s 25 or s 25A of the Act. Having voiced these concerns, I turn to the case on appeal.The case on appeal
The respondent supported the Tribunal's decision. It was submitted that the receipt of $1,365,000 was either a revenue receipt as being income in accordance with ordinary usage pursuant to s 25(1) of the Act or ``profit arising from the carrying out of a profit-making scheme'' within the meaning of s 25A(1). Although particular emphasis was placed by counsel upon the Joint Venture Agreement as indicating that the amount was received as a reward for services, reliance was also placed upon the other bases adduced by the Tribunal in holding that the amount was income in accordance with ordinary concepts, namely that the amount was received by the applicant as a result of an ``adventure in the nature of trade'' or as a profit-making scheme in the nature of a business deal. The submission in respect of s 25A(1) was alternative to the latter submission and involved, of course, the proposition that the arrangements into which the applicant had entered and the work done by him in relation to the project of the Sydney Harbour Tunnel could properly be described as a ``profit-making scheme'' and that his receipt of the sum in question arose from the carrying out of the scheme.
The applicant's case was, apparently, simpler than that presented to the Tribunal. It was not asserted that the money was received as a result of a sale by the applicant of intellectual property, as had been a major part of the applicant's submission to the Tribunal. However, a submission of the applicant was repeated, elaborated, and made the main attack upon the Tribunal's reasoning. The applicant had described his concept of the creation of a Sydney Harbour Tunnel, in which he was to play a major role, as being ``a pipe dream'' which became a ``commercial reality''. His senior counsel, Mr Bennett QC, changed the metaphor. He described the chain of events from the applicant's conception of the idea to his receipt of the money as being properly characterised as ``a fairy tale that came true''. As such, the receipt could not be characterised as income in accordance with ordinary concepts.
In the alternative, he submitted that if the applicant's efforts could properly be characterised as the carrying on of a profit- making scheme either as an aspect of a business or as an isolated transaction of the type covered by s 25A(1), then the receipt was not a profit or gain ``acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit'' (Myer Emporium at ATC 4367; CLR 210). As the appeal is, of course, restricted to questions of law only, it was necessary for counsel to establish that, on the facts expressly or implicitly found by the Tribunal, these characterisations of events were the only ones properly open. Conversely, the Tribunal's characterisations referred to above could not arise on the evidence before it. Basically, the applicant's submission was that, on the evidence, no finding was open other than that the receipt was a mere windfall gain, equivalent to the winning of a prize in a lottery and, accordingly, could not form part of the applicant's assessable income.
I have already made some comments in relation to the Tribunal's characterisation of the essential events and the reasoning which led to them. I shall now consider these matters in more detail.
In the first place, as has been seen, the Tribunal found that ``the present circumstances can... fairly be described as an `adventure in the nature of trade'''. It is apparent that this phrase was used because it also appeared in an earlier decision of the Tribunal to which reference had been made in the Tribunal's reasons. The phrase itself did not, of course, have its origin in that case, it being an expression of some antiquity in revenue law. It is useful, in this discussion, to make some reference to its origins. This may conveniently be done by citing a passage from the judgment of the High Court in Myer Emporium which refers to the origin of the expression and also discusses its meaning and the role that it plays in revenue law. The passage is as follows (at ATC 4367-4368; CLR 211-212):-
``The important proposition to be derived from Californian Copper and Ducker is that a receipt may constitute income, if it arises
ATC 4960
from an isolated business operation or commercial transaction 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.Several different strands of thought have combined to deter courts so far from accepting the simple proposition that the existence of an intention or purpose of making a profit or gain is enough in itself to stamp the receipt with the character of income. The first was the notion that the realization of an asset was a matter of capital, not income. The second was the apprehension that windfall gains and gains from games of chance would constitute income unless the concept of income, apart from income from personal exertion and investments, was confined to profits and gains arising from business transactions. And the third notion, itself associated with the idea that the carrying on of a business involves a systematic series of recurrent acts or activities, was that a gain generated by recurrent transactions is income, whereas a gain generated by an isolated transaction is capital.
In the United Kingdom, Schedule D of the Income Tax Act 1918 (U.K.) reinforced these notions. The Schedule seemingly confined the concept of income to (a) profits or gains from any trade, profession, employment or vocation, and (b) annual profits and gains from investments, though `trade' is defined so as to include every `manufacture, adventure or concern in the nature of trade'. These provisions naturally provoked the question: Was a profit made on an isolated transaction of purchase and sale income, if the purchase was made with the intention, or for the purpose, of making the profit, even though the transaction was not one entered into in the course of carrying on a business?
In
Jones v. Leeming (1930) A.C. 415, the House of Lords answered this question in the negative. There was a finding that the taxpayer never meant to hold the land bought as an investment. Nevertheless it was found that the transaction `was not a concern in the nature of trade'. This led to the conclusion that a profit on an isolated sale, not being an adventure in the nature of trade, was a capital accretion (at p. 430). Central to the reasoning was the view that in order to constitute a trading or business transaction, an element of recurrence or repetition is needed and that the intention or purpose of making a profit or gain, is not enough. Viscount Dunedin said (at p. 423):`The fact that a man does not mean to hold an investment may be an item of evidence tending to show whether he is carrying on a trade or concern in the nature of trade in respect of his investments, but per se it leads to no conclusion whatever.'
And Lord Buckmaster (at p. 420) discounted the suggestion that a profit made on the sale of an asset acquired in the expectation that it would rise in value (and presumably result in a realized gain) is income. To him all that was involved in such a case was the realization of a capital asset.
On the other hand in
Edwards (Inspector of Taxes) v. Bairstow (1956) A.C. 14 joint venturers who engaged in an isolated transaction of buying and selling a complete spinning plant, with a view to making a profit, having no intention of using the plant or deriving income from it, were held liable to income tax on the profit made on resale. Lord Radcliffe concluded (at pp. 36-37) that it was a profit from an adventure in the nature of a trade because the joint venturers had no intention of using the machinery and therefore did not buy it to hold as an income-producing asset or to consume it or for the pleasure of enjoyment; and, instead of having any intention of holding the plant, they planned to sell it even before they bought it. This they did, making a net profit, as they hoped and expected to do. In his Lordship's opinion this was `inescapably, a commercial deal in second-hand plant'.In rejecting the argument that the profit was not income because it arose from an isolated transaction, Lord Radcliffe observed (at p. 38):
`... that circumstance does not prevent a transaction which bears the badges of trade from being in truth an adventure in the nature of trade. The true question in
ATC 4961
such cases is whether the operations constitute an adventure of that kind, not whether they by themselves or they in conjunction with other operations, constitute the operator a person who carries on a trade. Dealing is, I think, essentially a trading adventure, and the respondents' operations were nothing but a deal or deals in plant and machinery.'''
See also the discussion in R.W. Parsons Income Taxation in Australia (The Law Book Company Limited, Sydney, 1985) at pp 159-163 in which the learned author expresses the view that ``an adventure in the nature of trade'' is equivalent to an ``isolated business venture'' as opposed to a continuing business. I respectfully agree. I also accept that such a transaction must ``exhibit features which give it the character of a business deal'' (
McClelland v FC of T 70 ATC 4115 at 4120; (1970) 120 CLR 487 at 495).
As I have already indicated, the Tribunal, in my respectful opinion, has failed to identify with precision what, in the circumstances of this case, is the relevant trading adventure. References to ``the Project'' only obscure the position, as does the use of the phrase ``the present circumstances'' in the passage currently being considered. It is clear, in my view, that before the label of ``adventure in the nature of trade'' can be applied it is necessary to isolate with clarity the particular matters which are the subject of its application. This would involve the making of findings of fact which do not appear to have been made. Accepting, as I do, that the phrase means ``an isolated business venture'', questions must be asked as to what was the venture and what gave it its commercial character. It is apparent that the Tribunal did not regard the Joint Venture Agreement between the Initiators and the two construction companies as being the relevant adventure in the nature of trade. It was this agreement that gave the receipt its alternative character as being a reward for services. There are, in my opinion, only two possible sets of circumstances which can qualify for consideration.
The first is the work done by the applicant by way of creating the concept of a harbour tunnel crossing and the research done in relation to its feasibility, including the materials that he gathered and the plans etc that he developed within the ambit of his very limited expertise. In my view, the evidence does not permit the attribution to these efforts of the description either of ``an adventure in the nature of trade'' or ``an isolated business venture''. Although the evidence shows that the applicant entertained some hope of ultimate gain from his efforts, his testimony makes it quite clear that he foresaw no possibility of commercial return unless persons or organisations equipped with the necessary technical expertise and financial worth could be interested in joining with him in an appropriately structured business venture. I am satisfied that his endeavours, now under consideration, could not qualify, as a matter of law, for the relevant description. They were aptly and properly described as being in the category of ``pipe dream'' or ``fairy tale''.
The second relates to the situation when the applicant had taken the concept as far as he could and then sought expert help. This resulted in the introduction of Mr Hornibrook and then Wargon Chapman into the operations. Could it be said that at this stage a relevant ``business venture'' came into existence? Again, in my view, the evidence is not capable of justifying such a conclusion. It is clear that although the applicant entertained a hope that his ``pipe dream'' might advance towards commercial reality through the assistance of these gentlemen, there was a total failure to enter into anything that could reasonably be described as a business venture with them. It is apparent that the applicant had in mind that he should have something in the nature of a partnership or joint venture arrangement with Mr Hornibrook in which he would retain control. A shelf company, it will be remembered, was acquired for this purpose, his object being that he should have a 60 per cent shareholding which would provide this result. These business arrangements, however, never reached fruition. They dissolved in dispute and litigation, the outcome of which was the applicant's entering into the Joint Venture Agreement in the circumstances with which he has dealt in evidence. The evidence is not capable of establishing any relevant business or trading adventure between him and the other gentlemen.
Nor, in my view, do the principles enunciated in the passage cited from Myer Emporium further advance this aspect of the case. As I have already intimated, I cannot accept that Myer Emporium has any relevance to it. The
ATC 4962
applicant had no relevant existing business to which his efforts in relation to the harbour tunnel concept could be said to be related. The receipt of $1,365,000 could not, in my view, conceivably be described as ``a gain made otherwise than in the ordinary course of carrying on'' a business in which the applicant was engaged. Nor was there, relevantly, any ``transaction entered into by the taxpayer with the intention or purpose of making a profit or gain'' within the meaning of the passage cited. Myer Emporium, in my view, cannot be called in aid of establishing that the receipt was income according to ordinary usage. Nor, indeed, does the evidence disclose anything that could properly be described as a ``transaction''. Nor can the evidence establish that the applicant was seeking profit or gain from a business deal. He entertained a hope of ultimately sharing in an income producing venture. Nothing more.In Myer Emporium, the receipt in question was held by the High Court to form part of the assessable income of the taxpayer both under s 25(1) of the Act and also under s 26(a), the then equivalent of the present s 25A(1). Clearly, it was held to be income pursuant to s 25(1) as it was relevantly ``an isolated business operation or commercial transaction entered into otherwise than in the ordinary course of the carrying on of the taxpayer's business'' the taxpayer having ``entered into the transaction with the intention or purpose of making a relevant profit or gain from the transaction'' (ATC p 4367; CLR p 211). So far as concerns its assessability under s 26(a), the Court did not spell out in detail its chain of reasoning, but dealt with that question only in the following passage (at ATC 4372; CLR 220):-
``What we have said leads to the conclusion that the amount in question formed part of the income of Myer under sec. 25(1) of the Act. A similar chain of reasoning would have led to the conclusion that the amount constituted assessable income under the second limb of sec. 26(a). The relationship between sec. 25(1) and 26(a) has been the subject of much previous discussion involving considerable differences of opinion about the extent (if any) to which the provision of the second limb of sec. 26(a) supplemented the provision of sec. 25(1) (see, e.g., Whitfords Beach at ATC pp 4044-4045; CLR pp. 379-381). It is, however, unnecessary that we examine that question here since, as we have indicated, we consider that the amount in question in the present appeal constituted income of the taxpayer both pursuant to sec. 25(1) and 26(a).''
I have, with respect, some difficulty in reconciling this passage with the reasoning in Whitfords Beach which seems to establish that where a relevant profit-making scheme was entered into as part of the overall business operations of the taxpayer, then profits from the scheme fell to tax under s 25(1) to the exclusion of s 26(a), the role of which was confined to profits made outside the context of such a business. However, in light of this passage I must, of course, accept that Myer Emporium is an authority bearing on the application of s 25A(1) as well as s 25(1). To this extent the Tribunal's statement that ``the principles to be considered in a matter such as this were authoritatively stated by the High Court'' in Myer Emporium contains an error of law only insofar as it would appear that the Tribunal relied upon the passage set out above as authority for bringing the receipt in the present case to tax under s 25(1). As already stated, in my view, it clearly is not, there being no relevant business in which the taxpayer was engaged. However, it would appear that no error of law was involved in having recourse to this passage in determining whether or not the receipt formed part of the applicant's assessable income pursuant to s 25A(1). It is convenient to deal with this aspect of the case now before considering the question whether the payment can be treated as income according to ordinary concepts as being a receipt for services pursuant to the Joint Venture Agreement.
Has error of law been demonstrated in the Tribunal's finding that the receipt was assessable income pursuant to s 25A(1)? This finding is dependent upon the applicant having entered into and carried out a ``profit-making scheme''. The Tribunal held that he had. However, the steps by which it arrived at that conclusion are not exhibited in its reasons. To a considerable extent the comments which I have already made in relation to the question whether an ``adventure in the nature of trade'' has been demonstrated are also applicable here. So far as possible I shall avoid repetition.
Although the Tribunal speaks only of the receipt being ``properly brought to tax under...
ATC 4963
s 25A of the Act'', it must be taken as referring only to what is ordinarily called ``the second limb'' of s 25A(1). This provides, relevantly, ``that the assessable income of a taxpayer shall include profit arising... from the... carrying out of any profit-making... scheme''. It must be taken from the Tribunal's decision that the full amount of the receipt in question, $1,365,000, was regarded as ``profit''. This term is ordinarily used in connection with buying and selling of property, as it is in the ``first limb'' of the section. In a broader way it can relate to a financial surplus achieved as a result of receiving a return from a financial venture which is greater than expenditure in obtaining it. It is to be contrasted with the concept of income from personal exertion or investment.As did Hill J in
First Provincial Building Society Limited v FC of T 95 ATC 4145 at 4152; (1995) 56 FCR 320 at 330, I adopt, with respect, the views expressed by Mason J in
FC of T v Whitfords Beach Pty Ltd 82 ATC 4031; (1981-1982) 150 CLR 355 (at ATC 4046; CLR 382) where his Honour said:-
``One view is that sec. 26(a) should be applied to the cases which fall within its terms to the exclusion of sec. 25(1) - see
Reseck v. FC of T 75 ATC 4213 at pp 4215, 4220; (1975) 133 CLR 45 at pp. 49, 57. After all, sec. 26(a) is a specific provision introduced for the purpose of catching profits yielded by the transactions which it describes. Moreover, it has generally been applied to cases falling within its terms without the Court examining in detail whether sec. 25(1) might also have had an application [citations omitted].The second view is that sec. 26(a) will only operate when sec. 25(1) does not do so [
Investment and Merchant Finance Corp Ltd v FC of T 71 ATC 4104 at 4147; (1971) 125 CLR 249 at 255, 264; Steinberg (1975) 134 CLR 640 at 688]. This is the view which I have been disposed to favour in the past [see
FC of T v. St Hubert's Island Pty. Ltd 78 ATC 4104 at 4113-4114; (1978) 138 CLR 210 at 229-230;
FC of T v Bidencope 78 ATC 4222 at 4228; (1978) 140 CLR 533 at 555]. Its rationale is that sec. 26(a) should be considered as supplementary to sec. 25(1) which continues to operate as the principal statutory provision on the revenue side. As I have already indicated, it was no part of the purpose of sec. 26(a) to limit the operation of sec. 25(1). Indeed, in large measure its object was to ensure that the revenue did not suffer in the event that sec. 25(1) received a more restricted application than it was then thought to have. I am still inclined to think that this is the preferable view and that, accordingly, the second limb of sec. 26(a) applies only to `profits not attributable to gross income that has already been captured by sec. 25' [Bidencope 78 ATC 4222 at 4234; (1978) 140 CLR 533 at 555).''
(See also per Barwick CJ
EK White v FC of T (1968) 15 ATD 173 at 174-175; (1968) 120 CLR 191 at 216 where the distinction is drawn between ``money-making'' and ``profit- making''.)
It must be noted that in the present case the Tribunal has accepted the whole of the receipt as being ``profit'' for the purposes of s 25A(1). No attention has, apparently, been directed to the question of what expenditure should properly have been taken into account in the striking of the profit. This tends to underline what appears to be clearly the fact that the amount in question is simply a gross receipt to be characterised either as income in accordance with ordinary usage or capital.
Regard must also be paid to the import of the word ``scheme''. This was the subject of judicial consideration in
Steinberg v FC of T 75 ATC 4221; (1972-1975) 134 CLR 640, where the High Court was concerned with the second limb of the previous s 26(a). Gibbs J (at ATC 4234; CLR 699) said:-
``... A profit-making scheme within sec. 26(a) is a plan, design or programme of action devised and put into effect for the purpose of making a profit. It must be a scheme carried out by the taxpayer himself or on his behalf. It appears that it should - at least where the transaction is one of acquisition and resale - exhibit features which give it the character of a business deal. The mere realization of a capital asset, albeit in an enterprising way, would not amount to the carrying out of a profit- making scheme.''
His Honour also said at (ATC 4234; CLR 699-700):-
``... I am in agreement with the view expressed by Mason J. that `it is not an essential element of a profit-making scheme in sec. 26(a) that every step which
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culminates in the making of a profit should be planned or foreseen before the scheme is put into operation'. Schemes may be precise or vague; every detail may be arranged in advance, or the working out of the plan may be left for decision in the light of circumstances as they arise. It is no objection to a plan that it allows room for manoeuvre. When property is bought with the purpose of making a profit in the easiest or most advantageous way that may present itself, and the taxpayer adopts `one of the many alternatives' that his plan leaves open, thereby returning himself a profit, he will rightly be said to be carrying out a profit- making scheme:...''
The reference by the Tribunal, in its findings, to its not being relevant ``that the applicant did not know when he commenced research on the Project how that research would be exploited or completed'' appears to reflect this qualification.
I have already expressed the view that the evidence is not capable of supporting a finding of an ``isolated business venture''. A fortiori, it will not support the finding of a profit-making scheme. I am satisfied that far more by way of focussed preliminary planning would have been necessary to elevate the applicant's part-time research work into the category of a ``scheme''. His subsequent endeavours to involve others came to nothing. They may have contained the seeds of a scheme but the seeds did not take hold. Even if, contrary to this view, it could have been described as a ``scheme'', it remained inchoate and never reached the stage of being ``put into effect for the purpose of making a profit''.
I should add that, even if the above analysis be wrong and there is room for a finding of fact that the applicant entered into a profit-making scheme, I am persuaded by the submission of Mr Bennett QC that the receipt could not in law be a profit or gain arising from the scheme as it would not have been generated in an operation undertaken for ``the purpose of profit-making by the means giving rise to the profit'' (Myer Emporium at ATC 4367; CLR 210; see also per Hill J Westfield at ATC 4243; FCR 344-345, emphasis added). If there were an original commercial purpose on the part of the applicant, it was to the effect that, if a large number of remote contingencies eventuated, he would have an ongoing role in a ``credible consortium'' which would produce income for him. It could not conceivably have been part of any such purpose that he would end up in litigation as to whether he was in partnership and, if so, with whom and with what share; that he would be unsuccessful in that litigation and that thereafter, without any planning on his part and, indeed, against his real wishes, would be put in a position of entering into an agreement with strangers which provided for his being paid money on remote contingencies after giving up all interest in the project; and that he would receive that money only after further litigation. I am satisfied that the receipt so lacked connection with any profit-making purpose (assuming that there was one) that it could not conceivably be described as arising from the carrying out of a profit-making scheme.
I am, therefore, satisfied that the evidence cannot support the finding that the receipt of $1,365,000 can be brought to tax under s 25A(1) of the Act.
I turn then to the final question. Has there been any error of law demonstrated in the finding that the receipt was relevantly a reward for services and, accordingly, income within ordinary concepts?
This involves a consideration of the Tribunal's approach to the effect of the provisions of the Joint Venture Agreement which have been set out above. The Tribunal, of course, relied upon these provisions as stamping the receipt as being for services rendered. I have already set out the passages from Chandler Investment which were relied upon in reaching this result.
It would appear that the Tribunal regarded these passages as inevitably requiring that the ``true character of the receipt [in the hands of the recipient] was payment for services and therefore income in accordance with ordinary usage''. I am satisfied that the judgments of Gummow J and Hill J do not produce this result and that, insofar as the Tribunal proceeded on the basis that they did, relevant error of law occurred.
It is clear, in my view, that their Honours in Chandler Investment were not, in any way, seeking to overrule the previous decision in Cooling but were merely explaining and distinguishing it.
The passage in Cooling to which reference is being made in the cited passages from Chandler
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Inland Revenue Commissioner v Duke of Westminster [1936] AC 1''. His Honour then considered that case at some length in a portion of his judgment which I will not set out in these reasons. His Honour then went on the say (at ATC p 4481; FCR p 53)-
``This however does not mean that in determining the legal effect of a contract between parties (and therefore the characterisation of the payment made under it as being income or capital), regard may not be had to the whole factual matrix of which the contract forms part.
Nothing in what his Lordship said requires the conclusion that regard cannot be had to the whole context in which the agreement was made to determine the character of a receipt. In
WT Ramsay Ltd v IR Commrs (1982) AC 300, Lord Wilberforce with whom Lord Russell of Killowen, Lord Roskill and Lord Bridge of Harwich agreed, said of the principle in the Duke of Westminster case at p 323:`This is a cardinal principle but it must not be overstated or overextended. While obliging the court to accept documents or transactions, found to be genuine, as such, it does not compel the court to look at a document or a transaction in blinkers, isolated from any context to which it properly belongs....'''
His Honour went on the say, dealing with certain facts of the case which it is unnecessary to set out, that:-
``When one looks at the entire context in which the payment was made including the interrelationship between the firm and Bengil (the latter being but the alter ego of the former), his Honour was in my view entitled to find as he did that the payment was an incentive to the firm to cause it to move rather than a payment for services to be rendered by the firm. This being the case, the character of the payment as income is not to be determined by focusing upon the words of the letter of 29 November to the exclusion of all the circumstances surrounding the payment which provide the real context in which the task of characterisation is to be essayed.''
Nothing in Chandler Investment is, in my opinion, to be taken as having overruled the principles stated and illustrated in these passages. Chandler Investment was distinguished from Cooling on the basis that the agreement in the former case was ``a bargain hammered out in negotiations'' (per Gummow J) and was arrived at ``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'' (per Hill J).
I have already indicated that, in my opinion, there was no evidence in the present case upon which a finding could have been made that the Joint Venture Agreement was, so far as the applicant was concerned, arrived at through a process of hard bargaining in arm's length negotiations. The evidence is all one way on this subject. The applicant was, as a result of his inability to meet the cost orders obtained against him, in no position to bargain. Although the Agreement with which he was presented was fundamentally different in its terms and effect from what he had had in mind originally as the possible commercial outcome of his endeavours, he had no real option other than to sign it. As he said, in undisputed evidence, he was advised to sign it on commercial grounds. His so doing, in my opinion, did not preclude him, as a matter of law, from seeking that the decision-maker should look to the ``entire context in which the payment was made'' in determining the character for revenue purposes of the amount ultimately received under it. Insofar as the Tribunal has not looked beyond the wording of the Agreement to the ``whole factual matrix'' of which it formed part, its finding that the receipt was for ``services'' under the Agreement was, in my opinion, vitiated by error of law.
What is the result of my so finding? Should the matter be remitted to the Tribunal so that it can be considered afresh or should I deal with it
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on the basis that the evidence mandates the conclusion that the receipt was not income of the applicant?It is the submission of Mr Bennett QC that there is, on the evidence, only one way to characterise the payment, namely that it was a figure arrived at by the two construction companies for the purpose of buying the applicant out of the whole Project. If the Project went ahead his continued presence in it, and the ongoing possibility of his involving it in litigation, would be a significant nuisance. Accordingly, he had ``nuisance value'' and the payment, if it were ultimately required, would be designed to remove that nuisance. A payment made on such a basis would be properly characterised as a windfall gain and, as such, not form part of assessable income. The fact that it was described as a payment for services in the Agreement must reasonably yield to the overall effect of the evidence surrounding the entry of the applicant into the Agreement and the absence of any requirement in fact that he should render any services.
In my opinion, I can accept the ``windfall'' characterisation only if I am satisfied that the evidence can admit of no other. I should indicate that, were I deciding the question myself, as one of fact, I would agree with this characterisation. At the point when the applicant entered into the Agreement, the evidence indicates that any prospect of his achieving what he originally hoped for, namely a controlling role in a credible consortium which would provide him with a future income stream, had been irretrievably lost. Relations with his intended co-venturer had irrevocably broken down. He had never recognised Wargon Chapman as a co-venturer, although that entity was included as an ``Initiator'' in the Agreement that was presented to him. According to his undisputed evidence he would not have contemplated Transfield as a member of the consortium. He had no role in selecting either of the construction companies who, in remote circumstances, could have an obligation to pay him an amount calculated in accordance with the Agreement. That amount bore no obvious relation to the value to the companies of any services he might render. Indeed, his undisputed evidence was that no further services were expected of him and there were in fact none that he could then provide. He in fact provided none. The first payment of $35,000 was described as having been made in respect of services. This description was incorrect. Clearly he had rendered no services to the construction companies as all the work he had previously performed was done in circumstances where those companies were not even in contemplation as contracting parties. It was a capital payment. The description in the Agreement of that payment as being in consideration of services is strongly suggestive that likewise no subsequent payment that might be made under the Agreement was truly intended to be for the rendering of services.
These considerations point cogently towards a finding that the receipt was no more than a windfall gain, notwithstanding the description of the payment in the Agreement. However, I must bear in mind that this area of fact has not been considered by the Tribunal because it has erroneously precluded itself from so doing. I have reluctantly come to the view that if I was to take the course submitted on behalf of the applicant I would be trespassing into the fact- finding area which the legislation reserves for the Tribunal. Despite the views that I have expressed I do not find myself able to hold that the facts inevitably point to a finding of ``windfall'' gain, requiring that such a finding be made as a matter of law. It is necessary that the case be returned to the Tribunal so that it can consider this fairly limited factual area and make appropriate findings.
As I have earlier indicated I have not considered any question that might arise under s 26(e) of the Act nor under the capital gains provisions as I do not regard these matters as being before me.
THE COURT ORDER THAT:
1. The decision of the Tribunal be set aside.
2. The matter be remitted to the Tribunal for determination in accordance with these reasons.
3. The respondent pay the applicant's costs of the appeal.
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