FC of T v CONDELL

Judges:
Kiefel J

Court:
Federal Court

MEDIA NEUTRAL CITATION: [2006] FCA 1047

Judgment date: 15 August 2006

---

Kiefel J

1. The Commissioner appeals from the decision of the Administrative Appeals Tribunal which allowed the objection of the respondent taxpayer and determined that the dividend paid to him by the Hewlett-Packard Company ("Hewlett-Packard") on 2 June 2000, by way of shares in a subsidiary company, was not assessable as income.

2. Hewlett-Packard is a company incorporated in the United States of America. In March 1999 the board of Hewlett-Packard decided to realign the company to create two distinct companies, one focusing upon the company's computing and imaging business and the other upon its Measurement Organization, which included its test and measurement, semiconductor products, chemical analysis and healthcare solutions businesses. On 12 August 1999 Hewlett-Packard entered into a Master Separation and Distribution Agreement with a subsidiary company, Agilent Technologies Inc ("Agilent"). On 1 November 1999 Hewlett-Packard transferred the assets and liabilities of its Measurement Organization to Agilent.

3. On 18 November 1999 Agilent launched an initial public offering (the "IPO") of 15.9 per cent of its common stock. Prior to the IPO Hewlett-Packard owned the share capital in Agilent. Subsequent to the IPO Hewlett-Packard held approximately 84.1 per cent of Agilent's common stock. The net proceeds of the IPO were distributed to Hewlett-Packard. On 7 April 2000 Hewlett-Packard's board declared a stock dividend of substantially all of its shares in Agilent and some 380 million shares of Agilent common stock were distributed on 2 June 2000 to Hewlett-Packard shareholders. A shareholder in Hewlett-Packard was to receive 0.3814 Agilent shares for each Hewlett-Packard share that was held on 2 May 2000. At that date the respondent taxpayer held 3,483 shares in Hewlett-Packard and was therefore entitled to receive 1,327 shares in Agilent. It is agreed that those shares have a market value of $168,961.68.

4. Subsequent to the distribution of shares both the quarterly and consolidated accounts of Hewlett-Packard showed a US$4.2 billion reduction in retained earnings. The quarterly consolidated accounts for Hewlett-Packard and its subsidiaries for the period ended 31 July 2000, to which the Tribunal referred, contained the following note to "discontinued operations":

"On March 2, 1999, Hewlett-Packard Company (HP) announced its intention to launch a new company, subsequently named Agilent Technologies Inc (Agilent

---

ATC 4573

Technologies), through a distribution of Agilent Technologies common stock to HP's stockholders in the form of a tax-free spin-off. Agilent Technologies is composed of HP's former Measurement Systems Organization, which included the test-and-measurement, semiconductor products, chemical analysis and healthcare solutions businesses. Effective July 31, 1999, HP's management and Board of Directors completed the plan of disposition for Agilent Technologies. HP's consolidated condensed financial statements for all periods present Agilent Technologies as a discontinued business segment in accordance with Accounting Principles Board Opinion No 30.

In November 1999, Agilent Technologies completed an initial public offering of approximately 16% of its common stock and distributed the net proceeds of approximately $2.1 billion to HP. HP provided initial funding in November 1999 to Agilent Technologies and retained certain assets and liabilities of Agilent Technologies as of November 1, 1999 which were subsequently liquidated. The aggregate impact of these transactions resulted in cash flows from discontinued operations of approximately $1.0 billion and an increase in additional paid-in capital of approximately $1.4 billion.

HP distributed substantially all of its remaining interest in Agilent Technologies through a stock dividend to HP stockholders on June 2, 2000 resulting in the elimination of the net assets of discontinued operations and a $4.2 billion reduction of retained earnings. …"

5. Similar statements to those in the last two paragraphs set out above appear in the notes to the consolidated accounts forming part of the annual report of Hewlett-Packard and its subsidiaries for the year ended 31 October 2000, which was provided to the United States Securities and Exchange Commission. The earlier quarterly accounts, those at 30 April 2000, refer to the net funding provided by Hewlett-Packard to Agilent being $US1.1 billion. So far as concerns the increase in additional paid-in capital of approximately $1.4 billion, referred to in the notes to the quarterly accounts set out above, the Master Separation Agreement (section 3.2) stated that the net proceeds of the IPO would be distributed to Hewlett-Packard by means of dividend declared prior to the IPO.

6. The following is a summary of some of the entries appearing in the Consolidated Statement of Shareholder's Equity in the annual report:

• • The total shareholders equity reduces from $US18.2 billion to $US14.2 billion in the year;
• • "Retained earnings" are reduced from $US18.2 billion to $14 billion;
• • A figure of $US4.2 billion is deducted from "Retained Earnings" and is attributed to "Initial Public Offering and spin-off of Agilent Technologies";
• • The sum of $US1.3 billion is shown as received in "Additional Paid-in Capital" from "Initial Public Offering and spin-off of Agilent Technologies";
• • Paid-in capital decreases by $US1 million. The explanation given is "repurchase of common stock";
• • A total of $US5.7 billion is reported as "repurchase of common stock". $US2.9 billion is recorded as deduction from retained earnings for this purpose. The balance put towards the repurchase, $US2.5 billion, is derived from three amounts of paid-in capital from different sources: $US1.3 billion (from the IPO and spin-off as earlier referred to); $US741 million (issued common stock); $US495 million (the benefit on employee stock options).

There is a reference in the statement to the payment of $US638 million for "dividends" from retained earnings but it is not suggested that it has any connection with the distribution in question.

7. The consolidated balance sheet for the year confirms that a purchase of common stock is the reason for the reduction of $US1 million in shareholders' equity and that $US4.2 billion has been taken from retained earnings. Net assets of discontinued operations of $US3.5 billion for 1999 have been removed.

8. A document in the bundle of documents which was before the Tribunal is entitled "Taxation on Agilent Technologies dividends -

---

ATC 4574

September 2000". It is not further identified but the parties have proceeded upon the basis that it is part of a memorandum of advice from Hewlett-Packard to its shareowners. It contains the statement that Hewlett-Packard Australia had obtained advice from accountants in relation to the Australian taxation treatment of the shares in Agilent that Australian tax residents had received on the spin-off. The Australian Taxation Office had confirmed that advice in the form of an opinion. This accords with the private ruling provided to the taxpayer in this case. The memorandum contained this reference, which was noted by the Tribunal:

"As stated in HP's quarterly accounts (refer to note 2) filed on 12 September 2000 with the Securities Exchange Commission, the distribution of the Agilent shares was against Hewlett-Packard's retained profits . This is the principal reason as to why the receipt of the Agilent shares was regarded by the ATO as a taxable dividend."

(emphasis added)

9. On 28 October 2003 the Commissioner issued a private ruling by which the taxpayer was advised that the shares in Agilent Technologies Inc were dividends and should be included in his assessable income in the amount of $168,961. The Commissioner issued a notice of amended assessment to the taxpayer for the year of income ended 30 June 2000 that included that amount. The respondent taxpayer objected to the amended assessment and that objection was disallowed by notice from the Commissioner dated 16 June 2004. The Commissioner now appeals from the Tribunal decision setting aside the Commissioner's decision on the objection.

Statutory provisions

10. Section 44(1)(a) provides in relevant part:

• "(1) The assessable income of a shareholder in a company (whether the company is a resident or a non-resident) shall, subject to this section and to section 128D:
  • (a) if he is resident - include dividends paid to him by the company out of profits derived by it from any source ; …"

(emphasis added)

11. Section 6 of the Income Tax Assessment Act 1936 (Cth) defines the word "dividend" to include:

• "(a) any distribution made by a company to any of its shareholders, whether in money or other property; and
• (b) any amount credited by a company to any of its shareholders as shareholders;"

and the word "paid" is defined as:

" paid in relation to dividends or non-share dividends includes credited or distributed."

The Tribunal's determination

12. The question for the Tribunal, arising from s 44(1)(a), was whether the distribution by Hewlett-Packard of the shares in Agilent to the taxpayer was a dividend paid to him out of profits derived by Hewlett-Packard from any source. The Tribunal considered that the distribution of shares to the taxpayer was a dividend which was paid to him by Hewlett-Packard. The Tribunal did not accept that that distribution was paid out of the profits of Hewlett-Packard. It considered that the distribution was not made wholly from profits, as s 44(1)(a) requires, and that apportionment is not possible.

13. The Tribunal first considered the meaning given to the word "profits" by the authorities. It observed that
In Re Spanish Prospecting Co Ltd (1911) 1 Ch 92 at 98, Fletcher-Moulton LJ had held that the word has a well defined legal meaning and that it implies a comparison between the state of a business at two specific dates, usually separated by an interval of one year. Other authority holds that whether a dividend has been paid out of profits is a question of fact, to be determined by reference to the evidence, the circumstances of the case and the nature of the company in question.

14. The Tribunal noted that the Commissioner had put forward the facts that Hewlett-Packard had distributed 380,000,000 Agilent shares and that each share was worth $US77.0068 at the time of distribution. On this basis the Tribunal found that Hewlett-Packard had made a total dividend distribution of Agilent shares of $US29,262,584,000. The Tribunal then turned to the statement in Hewlett-Packard's quarterly accounts. The Commissioner had placed reliance upon the

---

ATC 4575

reduction in the company's retained earnings, appearing in the accounts, and upon statements made by the company that this was the result of the distribution of the Agilent shares to Hewlett-Packard stockholders and that the distribution had been put "against" "retained profits" in the accounts. The Tribunal reasoned:

• "34. The Commissioner also put forward the fact that Hewlett-Packard Company's quarterly accounts, filed with the Securities and Exchange Commission on 12 September 2000, state that the distribution of Agilent shares resulted in a US$4.2 billion reduction in retained earnings and in the elimination of the net assets of the discontinued operation: see Respondent's Further Amended Facts and Contentions, filed 21 February 2005; Fact 8.
• 35. This statement that the distribution of Agilent shares had resulted in the elimination of the net assets of the discontinued operation can be better appreciated by an examination of the quarterly accounts of the Hewlett-Packard Company that were filed with the Securities and Exchange Commission on 12 September 2000 (Exhibit B, s 37 documents, folio 37). Those quarterly accounts disclose that the Hewlett-Packard Company retained certain assets and liabilities of Agilent which were subsequently liquidated. This resulted in cash flows from discontinued operations of approximately $1.0 billion and an increase in additional paid-in-capital of approximately $1.4 billion. It should also be borne in mind that on 1 November 1999, the separation date, the Hewlett-Packard Company had transferred the assets and liabilities of its "Measurement Organization" to Agilent.
• 36. On this basis I find that the distribution of Agilent shares resulted was not wholly derived from profits or retained earnings of the Hewlett-Packard Company. I make this finding on the basis that the retained earnings were of an amount of about US $4.2 billion. The use of the expression 'retained earnings' in the Hewlett-Packard Company's quarterly accounts is, in my opinion, appropriate to refer to profits".

15. The Tribunal then considered the particular circumstances of this case. They were unusual in that they did not involve a distribution to shareholders in the course of Hewlett-Packard's ongoing business. The case involved a corporate reconstruction where the parent company had instructed a new subsidiary company to carry on an enterprise formerly conducted by the parent company and in that process the parent company transferred assets and liabilities to the subsidiary. It acknowledged however that the "demerger dividend" provisions of the Act, which would deem a demerger dividend not to be paid out of profits, did not apply in the present case. The provisions only apply to demergers which occur after 1 July 2002. The Tribunal went on:

• "41. In deciding this matter I have to bear in mind that the Commissioner put forward the facts that at the time of the distribution by the Hewlett-Packard Company of the 380,000,000 Agilent shares, each Agilent share was, at the time of distribution, worth US$77.0068 per share: see (Respondent's Further Amended Facts and Contentions), filed 21 February 2005; Facts 4 & 6. On this basis, it is clear that Agilent is a company having a significant market value. The actual value of the assets of Agilent was not placed before the Tribunal as the quarterly accounts were consolidated. However, there is evidence before the Tribunal that on the separation date, the Hewlett-Packard Company had transferred the assets and liabilities of its Measurement Organisation to Agilent. The net value of these transferred assets would be considerable in view of the fact that the company has a significant market value. The Commission [sic] has now resiled from the previous value which it placed on those underlying assets and liabilities that made up Agilent: See (Respondent's Further Amended Facts and Contentions-Contention 13),
• 42. In these circumstances I find that a significant component of the distribution of Aglient shares was in the nature of a capital receipt on general principles, rather than wholly from profits."

16. There was no accounting or other evidence before the Tribunal concerning the

---

ATC 4576

accounts and their interpretation or as to the dealings between Hewlett-Packard and Agilent.

The appeal

17. There is no dispute concerning the Tribunal's finding that the distribution of shares to the taxpayer in this case was a dividend paid to him within the meaning of s 44(1)(a). I do not understand the Commissioner to take issue with the Tribunal's opinion that apportionment, as between profits and other sources, is not possible under the subsection: see
The Commissioner of Taxation of the Commonwealth v Slater Holdings (1984) 156 CLR 447). The focus of this appeal is upon whether the distribution of shares was paid out of profits derived by Hewlett-Packard.

18. The word "profits" has been described as essentially a business term, denoting the amount of gain made during a certain period:
McFarlane v Commissioner of Taxation (1986) 13 FCR 356 at 361, referring to FB Palmer, Palmer's Company Law, 22^nd edn, Stevens, London, 1976 at p.794. This accords with the definition provided in In
Re Spanish Prospecting which however is to be regarded as a starting point or guide and not of universal application: Slater Holdings (at 460),
Commissioner of Taxation of the Commonwealth of Australia v Sun Alliance Investments Pty Limited [2005] HCA 70 (at [43]).

19. On the appeal the Commissioner relied upon the consolidated accounts of Hewlett-Packard (and its subsidiaries) as conclusive of the question as to whether the distribution had been effected out of profits, as it had before the Tribunal. It was submitted that retained earnings were surplus assets, being the excess of the company's assets over its liabilities and paid-up capital and therefore profits. As support for that proposition the Commissioner referred to statements in
Evans v Deputy Federal Commissioner of Taxation for South Australia (1936) 55 CLR 80 which equates surplus assets with profits in some circumstances. In that case the company Guinea Gold NL had sold certain mining leases to another company, New Guinea Goldfields Ltd and received shares in that company as part of the consideration for the sale. The total of that consideration was exceeded by the amount Guinea Gold NL had expended on the leases. It distributed those shares to its shareholders. Dealing with the statutory predecessor to s 44(1) and its application to the facts of that case, Rich, Dixon and Evatt JJ said (at 101):

"In the first place, the fact that the shares contain no profit on the sales of the leases does not mean that they represent capital and not profit of the company. Actually they represented surplus assets, that is, assets not required to make good issued share capital. This appears from the last preceding balance-sheet. In the second place, s 16(b)(i)(1) brings into charge all dividends and distributions out of profit, whatever be the nature of the profit. The word "derived" does not connote that the profit must be a realized profit. It is enough at least if it is an ascertained profit, ascertained by a proper account. Under the articles [of Guinea Gold], the 5s 6d contained in the share could not lawfully be distributed, except as a dividend satisfied by specific assets, and the dividend must be out of profits. The meaning of profits in s 16(b)(i)(1) is no narrower, and the state of the company's affairs, as disclosed by its balance-sheet, permitted such a dividend. It follows that the whole amount of the 5s 6d per share should be included in the appellant's assessable income."

20. It was explained in Sun Alliance (at [52]) that their Honours' reference to the "surplus assets" of a company was not intended as a definition of the term "profits", rather it was directed to demonstrating the error in the taxpayer's contention that the shares distributed represented a sum on the capital account of Guinea Gold.

21. It is not necessary for the Commissioner to establish that the reference to "retained earnings" in the consolidated accounts equates to profits. The Tribunal has made a finding that it does and its reasoning, that there were one or more sources other than profits for the distribution, proceeds upon that basis. The finding about what retained earnings represented was clearly open. In the submissions for the taxpayer it was suggested that this was an approach which may have been too generous to the Commissioner. I do not think that is so. It was made upon evidence to which no objection was made and in respect of

---

ATC 4577

which no evidence to contradict or explain it was proffered. There was no reason for the Tribunal to doubt that the accounts and their notes accurately reflected what had occurred within Hewlett-Packard and its subsidiaries or to doubt the statements later made by the company about the retained earnings being profits. In these circumstances the only inference to be drawn was that $US4.2 billion by way of profits was applied to fund the distribution of the Agilent shares.

22. The question raised by s 44(1)(a) does not just concern what may be profits. "Profits derived" is, as the High Court pointed out in Sun Alliance, a compound concept, suggesting an amount revealed by some process of computation or accounting (at [61]). Their Honours cautioned against reliance upon past authorities which have considered the content of the words "profits" and "derived" in isolation from each other (at [45]). Their Honours approved the reference in Evans (in the passage set out above) to the ascertainment of profits "by way of proper account" and observed that there was nothing to suggest that accounts are any less proper for being consolidated (at [71]).

23. The Tribunal had regard to the market value of the shares at two points in its reasoning. Why the Commissioner put forward their value as relevant to the case is not clear, but more important is the part it played in the Tribunal's reasoning. In the first place the market value of the shares, some $US29 billion, appears to have led the Tribunal to look for sources other than the $US4.2 billion profits utilised in the distribution. In this process it identified monies received by Hewlett-Packard from the discontinued operations and an increase in paid-in capital. That it considered the amount of retained earnings was by itself insufficient for the distribution may be seen in the explanation for the finding given in par 36, that the distribution was not wholly derived from profits or retained earnings. The other aspect of its reasoning had regard to the transfer of the valuable assets in the Measurement Organization to Agilent in the course of the company reconstruction. From that it concluded that a significant component of the distribution of Agilent shares was in the nature of "a capital receipt on general principles, rather than wholly from profits".

24. A reference to the market value of the shares in Agilent, the subject of the distribution, is not relevant to the enquiry under s 44(1)(a). I do not understand it to be submitted to the contrary for the taxpayer. It may be a matter of consequence to the taxpayer, but it says nothing about whether the distribution was paid out of the profits derived by the company making the distribution. The shares may be viewed as a capital receipt in the hands of the taxpayer, as the Tribunal went on to find, but this says nothing about the position of the company making the distribution, which is the correct viewpoint with respect to s 44(1):
Federal Commissioner of Taxation v Uther (1965) 112 CLR 630 at 639; Slater Holdings, (at 458). Further reference is made to this aspect of the matter shortly.

25. It remains necessary to consider what the Tribunal identified as the capital or non-profit aspects of the share distribution. It is convenient to have regard to the second part of its reasoning first, which was based upon the transfer of the assets from Hewlett-Packard to Agilent. The Tribunal here appears to treat the source of the distribution as what is contained in the subject of the distribution itself, the shares. This was taken up in submissions for the taxpayer as the first of three possible approaches which may be taken to what the distribution was paid out of. It was submitted that in the circumstances of a case such as this the shares themselves provide the answer as to their source for the purposes of the subsection. It will be what they represent.

26. It was submitted that the circumstances of this case were similar to those in
Webb v Federal Commissioner of Taxation (1922) 30 CLR 450. There, in the process of a company reconstruction, a new company had transferred to it all of the assets and undertaking of the old company. An allotment of shares in the new company was agreed to be made to the old company, or its nominees, as consideration for the transfer. The old company then went into voluntary liquidation and, in accordance with the resolution for winding up, the shares in the new company were allotted to shareholders of the old company in proportion with their former shareholding. Section 14 of the Income Tax

---

ATC 4578

Assessment Act 1915 - 1918 provided that "the income of any person shall include…(b) dividends, interest, profits or bonus credited or paid to any …shareholder". It was held that no part of the shares of the new company was "profits or bonus credited or paid" by the old company to the shareholders. The majority said:

"…In our opinion the words 'profits credited or paid' in that sub-section mean moneys detached from the assets of the company suitable for distribution to the shareholders. On distribution such moneys become their income in contradiction to their interest in the remaining assets of the company which continue to be their capital. In this case there was no detachment. The real transaction permitted the shareholders to retain their interest in the assets of the old company, which constructed their capital, but excluded the old business to be carried on under a new constitution."

27. The later decision of
Federal Commissioner of Taxation v Blakely (1951) 82 CLR 388, treated the nature of the receipt in the hands of the taxpayer as relevant to the enquiry under s 44(1)(a) of the Income Tax Assessment Act (Cth) 1936. In that case shareholders had appropriated the assets of the company. Fullagar J, with whom Dixon J agreed, held that what the shareholders had received was not an income receipt but a receipt of a capital nature. Latham CJ disagreed and said (at 397):

"… the criterion of assessability under s 44 is not whether what is received by the shareholder is income to him in the sense of something detached from his capital asset consisting in his shares: the relevant question to ask is whether what is received comes from the profits of the company …"

28. Kitto J, in his dissenting judgment in Uther, criticised the reasons of Fullagar J in Blakely (at 638-640). Gibbs CJ (with whom the other members of the Court agreed) in Slater Holdings found that criticism compelling (at 457). In his Honour's view, Fullagar J had given insufficient weight to the change which had been effected to the law by defining "dividend" to include a distribution made by a company to any of its shareholders. As Kitto J pointed out in Uther (at 634), the effect of the amendments made to the law was to make shareholders, in a company which was a going concern, assessable to tax on a principle fundamentally different from that of previous legislation. The amending Act of 1934 first introduced a definition by which "dividend" was made to include "any distribution made by a company to its shareholders". In that definition appeared the qualifying words "out of its profits". Later amendments excluded a reference to a return of paid-up capital.

29. The Tribunal in this part of its reasons appears to have considered that the nature of the receipt from the taxpayer's perspective was relevant to the enquiry under s 44(1)(a). It proceeded from a wrong premise. The section is concerned with how Hewlett-Packard funded the distribution. That is not answered by reference to what assets of a capital nature it transferred to Agilent in the spin-offs and that they were not profits. Even so, the fact that a distribution is of a capital nature does not mean that it did not have its source in profits: Slater Holdings, (at 458).

30. The second and third approaches, said by the taxpayer to be consistent with those undertaken by the Tribunal, concern what was received by Hewlett-Packard in consequence of transactions associated with the spin-off. They have regard to the first part of the Tribunal's reasons and to its mention of the increase to the cash flow of Hewlett-Packard from the discontinued operations of $US1 billion and the injection of capital. As to the first mentioned, whilst the effect on cash flow is noted in the accounts, there is no suggestion that the monies were utilised in funding the distribution of the shares. The taxpayer did not identify any reason which would compel such a conclusion. The other area identified as a source for payment and funding of the shares distribution was the $US1.3 billion (elsewhere referred to as approximately $US1.4 billion) shown as received to additional paid-in capital in the Consolidated Statement of Stockholders' Equity. It is also identified in the notes to the accounts as resulting from the spin-off transaction. It was submitted that, although its connection to the distribution was not explained by the Tribunal, it justifies the Tribunal's finding that not only profits were utilised in the distribution. The injection of paid-in capital explains why paid-up capital was not reduced in the process of distribution, it was submitted. A

---

ATC 4579

fair reading of the Consolidated Statement of Stockholders' Equity however discloses that that sum was applied, with others, towards the repurchase of common stock. It cannot be seen as connected to the distribution.

31. It was also submitted for the taxpayer that the distribution must be directly, and not indirectly, sourced in profits to come within s 44(1)(a). This might be more readily satisfied when cash is distributed from a fund set aside for that purpose. It may not permit shares held by the distributing company in another company to be funded in some way out of the distributing company's profits. It was submitted that the source of the profits in such a situation must be the transaction itself giving rise to the distribution.

32. The language and purpose of s 44(1)(a) does not support the suggested requirements. They require that where money or property such as shares is distributed that it be paid from "profits derived" by the distributing company from any source. Whilst profits must be utilised in funding the distribution, there is no limitation upon the source of those profits. They may be unconnected with what gave rise to the need for, or the desirability of, a distribution. In the present case it is sufficient that the source was profits by way of earnings retained by Hewlett-Packard from previous years. It is not necessary that the distribution be paid from profits made on the spin-off transaction before they can be said to be derived for the purposes of s 44(1)(a), as the taxpayer submitted. The term "profits derived" in the subsection is a compound concept, as Sun Alliance holds. It is an amount recorded by a process of proper accounting (at [61] and see the passage from Evans at [19] above). There was no reason in the present case to doubt that profits by way of retained earnings had been utilised to fund the distribution. There was no evidence of other assets or sums involved in the distribution.

33. The Tribunal did not properly address the question posed by s 44(1)(a). It introduced into it the irrelevant consideration of the market value of the shares. This led it incorrectly to seek to identify non-profit sources for the distribution. And it had regard to the nature of the receipt from the taxpayer's point of view, when the question posed by the subsection requires only consideration from the company's viewpoint.

34. The appeal will be allowed and the decision of the Tribunal set aside. It is not suggested that there is any basis for remitting the matter to the Tribunal. There can be only one outcome. There will be an order that, in lieu of the Tribunal's determination, it be determined that the Commissioner's objection decision dated 16 June 2004 be affirmed. This is a test case and the Commissioner has agreed to pay the taxpayer's costs regardless of the outcome. There will be orders as to costs in the terms proposed.