CASE 57/94

Members:
Purvis J

Tribunal:
Administrative Appeals Tribunal

Decision date: 13 October 1994

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RN Purvis (Presidential Member)

The matter for decision

1. This application is concerned with the assessability or otherwise of an amount of $275,000 received by the applicant from the University of Sydney upon the applicant vacating office premises in Sydney, previously occupied by him as a solicitor.

2. The Commissioner contends that the amount so received by the applicant should be brought to tax as income under s. 25(1) of the Income Tax Assessment Act, or alternatively, as a capital gain derived by him and taxable as such under the provisions of Division 5 of Part IIIA of the Act.

The factual situation generally

3. The matter for decision arises in the following circumstances:

4. The applicant, at all relevant times, was a solicitor carrying on the practice of his profession in Sydney. In 1988, consequent upon his previous landlord obtaining possession of the applicant's office accommodation - in consideration of the payment of a sum of money for the surrender of the lease, on which sum the applicant was assessed for and paid capital gains tax - the applicant acquired by way of assignment the benefit of the remainder of the term of a lease over office premises owned by the University of Sydney. The lease agreement contained within it an option provision enabling a lessee, on the exercise of such option, to extend the term of the lease for a further three years to 30 June 1993.

5. The lessor, the University of Sydney, was in 1989 and thereafter, seeking vacant possession of the whole of the building in aid of refurbishment and upgrading of the office suites and facilities.

6. On 6 December 1989, the University notified the applicant in writing that it desired to have vacant possession of the building by not later than 30 September 1990.

7. The option for renewal was to be exercised not later than three months prior to the expiry of the then current lease, that is, 30 June 1990. The applicant exercised the option on 21 February 1990, thus ensuring his right to occupy the premises under the lease to 30 June 1993.

8. Thereafter, and up until 1 February 1991, the applicant and the University negotiated as to the amount that would be paid to the applicant in the event of his vacating the premises before 30 June 1993 and the terms and conditions of such payment. In due course, on 1 February 1991, the parties entered into a ``Variation of Lease'' agreement, whereby the term of the lease was varied so as to expire on 30 April 1991 instead of 30 June 1993, the applicant to receive the amount of $275,000, the same to be paid on or before 1 May 1991. On the same day, that is, 1 February 1991, the parties executed a further agreement whereby the University acquired the partitions, fittings and fixtures of the applicant for $10,000.

9. On or about 16 April 1991, the applicant having vacated the premises, there was paid to him the amounts of $275,000 and $10,000 abovementioned.

10. It is this amount of $275,000 that is sought to be brought to tax.

As to the receipt of moneys by the applicant

11. At the hearing, the respondent contended that whilst the derivation of the $275,000 may not have been from the carrying on by the applicant of his ordinary course of business as a solicitor, nevertheless it arose from a transaction entered into with the intention or purpose of making a profit or gain. Hence it may well, it was said, constitute income even be it that on its face it would constitute the realisation of an asset. If the factual situation was such as to give rise to a finding that the intention or purpose of the applicant taxpayer in entering into the ``variation'' transaction was to make a profit or gain, the amount received would be income notwithstanding the isolated or extraordinary nature of the transaction (see
FC of T v The Myer Emporium Ltd 87 ATC 4363, 4366-4368;
FC of T v Spedley Securities Ltd 88 ATC 4126;
FC of T v Cooling 90 ATC 4472 at 4481, 4484).

12. In respect of the exercise of the option and the ``variation'' of the lease, the applicant, it was submitted, intended to and did engage in a profit-making undertaking or venture. This intention, ``purpose, expectation or contemplation'' was said to be evidenced by the factual circumstances which surrounded the applicant entering into the transaction.

13. The factual situation generally has been earlier set forth in these reasons. More specifically, the evidence showed that, in respect of the lease held by the applicant prior to his becoming a tenant of the University, he

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had, before surrendering it, also exercised an option for renewal granted under the lease, and in due course, after negotiations extending over a three to six months period, accepted a payment for surrender of the lease. Capital gains tax was assessed and paid by the applicant on the amount so received.

14. After being in occupation of the newly acquired accommodation for less than two years, the applicant, even prior to the letter of 6 December 1989, had by reason of signs of being erected and offices being vacated, become aware of the intent of the University to obtain vacant possession of and refurbish the building. He said that he did not want to again relocate, ``there is an awful lot of work in moving, I was happy to stay where I was''. However, at a meeting with a Mr Gates of Messrs Raine and Horne, Estate Agents, acting for the University in December 1989, the applicant was asked to set forth in writing the costs anticipated to occur in the event that he did vacate the premises. In January and February 1990, the applicant had further discussions with Mr Gates. Consequent upon a meeting held on 19 February 1990, he wrote to Messrs Raine and Horne on 21 February 1990 referring to the ``recent conference in respect of the premises and the discussion regarding compensation''. He then estimated expenses that would be incurred in changing offices at $121,375. On the same day as he sent the letter, and about five weeks before he had need to, the applicant gave notice of his exercise of the option for a ``renewed lease'' for a further term of three years. The applicant said that he had made up his mind to exercise the option ``well before'' the December 1989 letter from Messrs Raine and Horne.

15. By 21 February 1990, about one-half of the monthly tenants had vacated the building, the air conditioning, according to the applicant, was ``appalling'' and the corridors and vacant offices were not being kept presentable. When tenants left, the landlord removed doors and ceilings and ``put up red mesh''. A report had indicated the presence of asbestos. The applicant said in his evidence that by this time, he wanted to settle the matter quickly and ``get out''. The condition of the premises was having an adverse effect on the applicant's practice. Some clients complained thinking the applicant had left and the building was being demolished. Some clients, according to the applicant, said they ``would not come back''. The refurbishment work had commenced.

16. Nevertheless, the applicant went ahead with the exercise of the option, putting in train at the same time negotiations for payment of a sum of money.

17. Thereafter, the applicant negotiated with the lessor and its agents in order to arrive at an amount that would be acceptable to both parties. The letter from the agents of 6 December 1989, whilst indicating that vacant possession would be required by 30 September 1990, continued by saying, ``and to that end, discussions are being commenced with those tenants whose leases and options extend past that date''.

18. On 7 March 1990, the agents wrote to the applicant acknowledging the applicant's letter of 21 February 1990 and inter alia saying:

``As you know, the University is looking to vacant possession of the whole building by 30 September 1990. We note from the file the original lease term expires on 30 June 1990 and that a rent review is due with effect from 1 July 1990.

However, subject to mutually agreeable terms being reached to yield up the premises no later than 30 September 1990, we propose that the present level of rental set just twelve months ago remain unchanged due to the relatively short period involved after 1 July 1990.

Kindly advise then if you wish us to proceed with the preparation of fresh lease documents, or elect not to incur this cost, together with a stamp duty fee payable.''

19. On the same day, under separate cover, the agents on behalf of their principal, offered $65,000 as ``vacant possession compensation''. The offer was rejected by the applicant, and in the letter of rejection, he said inter alia:

``We also confirm our verbal advice that since our offer there are further matters that will have to be taken into consideration in any offer that you might wish to make for us to vacate the premises namely:

• ...
• 2.... as far as we are concerned, we would refer to remain in the present premises to avoid the double move.
• 3. You have given no consideration to the capital gains tax that we will be

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  obliged to pay in respect of moneys received from the lessor and this will have to be taken into account.''

20. The respondent replied to the letter of 16 March, inter alia saying:

``...

2.00 We respect that you would like to remain in occupation of suites... as no doubt all other lessees would like to and have expressed that view. However, as explained to them and to yourself, the work planned is of a major nature, cannot be undertaken on a floor by floor basis, and will require total vacant possession, hence the reason we are negotiating financially for an early lease surrender.

3.00 With regard to capital gains tax, if you believe tax is payable, in an effort to limit the payment by your company, we suggest we adopt the same principle as we have with some others, who on advice from their accountants asked the University that they pay the removalists, Telecom... direct so that it is not seen as an income from your end...''

21. The agents on behalf of their principal in the lattermentioned letter increased the offer made to the applicant to $80,000. An offer of alternative accommodation was also made.

22. The assessability of any compensation to capital gains tax was referred by the applicant to Messrs Greenwood Challoner & Co, Chartered Accountants, which firm in due course gave advice. Consequent upon further correspondence, and in September 1990, the agents wrote again to the applicant, saying that they were pleased to advise that the University had reconsidered the financial consideration and agreed to increase the amount from $80,000 to $140,000 ``all inclusive''. ``We are aware of your personal concern re CGT. However, there are views held by others that this can be dealt with in the documentation''. The applicant replied to the lattermentioned letter of the agents, inter alia saying:

``As previously advised, it is my opinion that I would be liable to pay capital gains tax and the opinion that I have received from others confirms this belief.''

23. The agents were authorised to increase the offer for ``lease surrender'' to a maximum of $200,000 subject to vacant possession by 31 December 1990, but before this increase was communicated to the applicant, he wrote to the agent saying inter alia:

``In an effort to bring this matter to completion, we would be willing to accept $450,000 to surrender the lease. I believe this to be a responsible approach to bring this matter to a conclusion.

As advised on the phone, however, we are of the opinion that it would be impossible to give vacant possession by 31 December and we would require at least three months from the date of signing the agreement to surrender the lease.''

24. On 2 November 1990, the solicitors for the lessee then made the offer of $200,000 on their client's behalf, and in relation to capital gains tax, said:

``Insofar as the capital gains tax question is concerned various outgoing tenants obtained opinions which they believe will avoid any obligation to pay capital gains tax or, at the very least, avoid the obligation to pay it on a significant proportion of their payment. We have already said that the University is prepared to accommodate you in any proper way in relation to this tax.''

25. A draft deed of surrender was enclosed with the letter.

26. In November 1990, the applicant withdrew his offer indicating that even if agreement could be reached in relation to ``surrender of lease'', vacant possession could not occur before February 1991. The matter was again referred for advice to Messrs Greenwood Challoner & Co. The solicitors for the lessor on 9 November 1990 again wrote to the applicant, stating inter alia:

``Questions relating to the period you would require to vacate the premises once an agreement is made should only be considered secondary. I am sure that the University can accommodate you in relation to such matters. Subject to the matter not dragging on indefinitely. It seems to me the essential element is simply to determine an amount for compensation for surrender of the lease.

I would appreciate hearing from you once you have had an opportunity to obtain the advice of Greenwood Challoner and review your position.''

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27. In December 1990, the solicitors made an offer of alternative accommodation on a favourable rent basis, together with a lump sum of $50,000.

28. Messrs Greenwood Challoner & Co advised the applicant that on the basis of arrangements then proposed, except for the purchase of existing partitions, the applicant would be assessable on all payments made. On 24 December 1990, the solicitors for the University advised, following further discussions with the applicant, that:

``We refer to our discussion on Thursday, 20 December last and advise that the University is prepared to make an offer to you of $275,000 on condition that you agree to shorten the term of your lease to expire on 1 March 1991.

In addition, the University will acquire your partitioning in the premises for $10,000. Both sums will be paid on you vacating the property.''

29. Enclosed with their letter was an ``appropriate document'' prepared by the solicitors. The applicant amended the lattermentioned document and on 14 January 1991, by letter to the solicitors for the lessor, stated inter alia:

``... we have perused your agreement and enclose an amended agreement which we would be willing to accept.

In respect of the petitions [sic], there will have to be a separate agreement, the amount of $10,000 to be paid on the giving of vacant possession. Do you wish us to prepare this agreement or will you attend to this matter.

The urgency with this matter is that if vacant possession is to be given on 10 April, I have to arrange for the new petitions [sic] within the next week...''

30. The amended agreement comprised a ``deed of variation'' and a deed of transfer of partitions, fittings and fixtures, the same being in due course executed and exchanged on 1 February 1991. According to the solicitors for the University, the documents ``effectively provide for termination of the lease on 30 April 1991 in consideration of payment of the sum of $275,000 plus an additional sum of $10,000 for partitions, fittings and fixtures''.

31. By way of deed of 1 February 1991, the applicant effectively terminated the lease that he had taken on assignment, about eleven months after exercising the option, and seven months into the term of the three year lease.

As to the amount received being income

32. The $275,000 received by the applicant from the University of Sydney was assessed to tax, the Commissioner contending that the same fell within the purview of s. 25(1) as income, or alternatively, as a net capital gain pursuant to s. 160ZO(1) of the Income Tax Assessment Act.

33. I shall turn to consider the position under s. 25(1).

34. The distinction to be drawn between a receipt on account of income and a receipt on account of capital has been the subject of many decisions over the years. It has been said that the test to be applied is to be objective rather than subjective (
Hayes v FC of T (1956) 11 ATD 68 at 72; (1956) 96 CLR 47 at 55) and whether an amount is income in ordinary concepts, depends upon its quality in the hands of the recipient (FC of T v Cooling 90 ATC 4472 at 4479).

35. In
FC of T v The Myer Emporium Ltd 87 ATC 4363, the High Court was called upon to consider the nature in the context of the taxation laws, of an amount received by the taxpayer by way of a lump sum as consideration for the assignment of a right to receive future interest under a loan. The Full Court, in the course of its joint reasons for decision, held that the assignment of the right to interest was an integral part of a group reorganisation carried out by the taxpayer.

36. The Commissioner submitted that ``a gain made by a tax payer as a result of a business deal or a venture in the nature of trade is income of the taxpayer, even if the transaction that yields the gain is outside the ordinary course of business''. The taxpayer made response to this argument, submitting (1) that a gain made as the result of a business deal or a venture in the nature of trade is not income unless it is made in the ordinary course of carrying on business; and (2) that the realisation of a capital asset is capital not income, the amount received by Myer representing the receipt of a capital asset.

37. The following statements of principle relevant to the present matter emerge from the reasons for decision of the Court in Myer. At 4366-4367, it was said:

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``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.''

38. Their Honours continued by saying:

``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 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.''

39. The fact that a profit or gain results from an isolated venture or a ``one off'' transaction does not preclude it from being properly characterised as income (
FC of T v Whitfords Beach Pty Limited 82 ATC 4031 at 4036-4037, 4042).

40. 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 (see Myer 4367).

41. The Court in Myer, after referring to the decisions in
Californian Copper Syndicate v Harris (1904) 5 TC 159 and
Ducker v Rees Roturbo Development Syndicate Limited (1928) AC 132 at 140, reiterated by saying that a receipt of moneys may constitute income if it arises 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. At 4368-4369, it said:

``... profits made on a realization or change of investments may constitute income if the investments were initially acquired as part of a business with the intention or purpose that they be realized subsequently in order to capture the profit arising from their expected increase in value... It is one thing if the decision to sell an asset is taken after its acquisition, there having been no intention or purpose at the time of acquisition of acquiring for the purpose of profit-making by sale... But it is quite another thing if the decision to sell is taken by way of implementation of an intention or purpose, existing at the time of acquisition, of profit- making by sale, at least in the context of carrying on a business or carrying out a business operation or commercial transaction.''

and again at 4370:

``If the profit be made in the course of carrying on a business that in itself is a fact of telling significance. It does not detract from its significance that the particular transaction is unusual or extraordinary judged by reference to the transactions in which the taxpayer usually engages, if it be entered into in the course of carrying on the taxpayer's business.''

42. But as was held in
FC of T v Spedley Securities Ltd 88 ATC 4126 at 4130, Myer does not establish that all gains made by a business entity are assessable, or that any receipt by business would necessarily be of an income nature. ``The purpose of profit-making must exist in relation to the particular operation''.

43. In FC of T v Cooling (supra), the Federal Court was called upon to consider the assessability or otherwise of an amount received from a lessor as incentive to move to new premises. In the course of his reasons for decision, with which the other two members of the Court, in this regard, concurred, Hill J, seeking to direct himself as to the course appropriate in order for the payment to be characterised, spoke of looking at all the circumstances surrounding the payment, ``which provide the real context in which the task of characterisation is to be assayed'' (4482). Regard may be had to the ``whole factual matrix of which the contract forms part... the whole context in which the agreement

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was made to determine the character of a receipt'' (4481).

44. As in Cooling, so in the present case the applicant contended that his business was the performance of professional services and not as there (vis: Cooling) the receipt of incentive payments and here, (vis: the present application) the receipt of an amount following the vacating of office premises on the termination of a lease varied to bring forward the date on which it was to expire. Hill J, in Cooling, said that the submission ``while in one sense true, disguises the true nature and extent of the firm's business... where a taxpayer operates from leased premises, the move from one premises to another and the leasing of the premises occupied are acts of the taxpayer in the course of its business activity just as much as the trading activities that give rise more directly to the taxpayer's assessable income''.

45. It is competent for consideration then to be given as to whether the transaction which gave rise to the payment of the $275,000 can properly be characterised as a profit-making scheme. But a scheme may be a profit-making scheme notwithstanding that neither the sole nor the dominant purpose of entering into it was the making of the profit. The assignment of the right to the receipt of interest was in Myer held to be an integral part of the total reorganisation entered into by the Myer Group. The transaction entered into by the firm in Cooling was held to be a commercial transaction, ``it formed part of the business activity of the firm and a not insignificant purpose of it was the obtaining of a commercial profit by way of the incentive payment''.

46. The Tribunal is satisfied in the present matter that on looking at the ``entire context'', the whole ``factual matrix'', the exercise of the option and the receipt of the money on vacating the premises was all part of a commercial transaction forming a part of the business/ professional activity of the applicant taxpayer. The whole series of decisions, acts, negotiations and agreement was carried out as an integral part of the conduct by the applicant of his practice.

47. But what as to the purpose of the applicant in relation to the exercise of the option, be it not the sole or dominant purpose? It may have formed a part of the business activity of the applicant, but can it be said that a not insignificant purpose of the exercise of the option was the obtaining of a commercial profit by way of a payment on vacating the premises. Did the gain, the payment, arise then from a transaction entered into with this intent or purpose of making a profit or gain? Thus the question is, are the circumstances, the whole matrix, such as to give rise to the inference that an intention or purpose of the taxpayer, in exercising the option agreement, was to make a profit or gain? If so, the profit or gain is income.

48. The Tribunal, on the basis of the evidence tendered before it and as it is earlier set forth in these reasons, is satisfied and so finds that the intent of the taxpayer and his purpose in exercising the option to continue the lease for a period of three years, he knowing that the lessor was at that time seeking vacant possession, was to make a profit or gain. The exercise of the option was done with the intent that on his vacating the premises at the request of the lessor and to enable it to carry out renovations, he would receive a monetary consideration. The Tribunal is satisfied that the taxpayer did not intend at the time of exercising the option to remain in possession for the term of the renewed lease, but rather to vacate on the amount of a monetary consideration being agreed between landlord and tenant.

49. In all the circumstances surrounding the payment, the Tribunal is satisfied that the act of the taxpayer in exercising the option was done in the course of his business activity and with the intent of vacating the premises during the currency of the renewed lease, but on obtaining a commercial profit. The gain, the payment, arose from the exercise of option entered into with the required intent.

50. Accordingly, the Tribunal is satisfied that the amount in question was properly brought to tax pursuant to the provision of s. 25(1) of the Act.

51. It is not necessary for the Tribunal to consider the question assessability of the amount received as a capital gain under Part IIIA of the Act.

52. The decision under review is affirmed.