Premier Automatic Ticket Issuers Ltd v Federal Commissioner of Taxation

50 CLR 268

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(Judgment by: Starke J)

Premier Automatic Ticket Issuers Ltd v Federal Commissioner of Taxation

Court:

Judges: Rich J

Starke JDixon J
Evatt J
McTiernan J

Subject References:
Taxation and revenue
Income tax
Patent rights
Licensee empowered to sell patent rights
Share of proceeds to taxpayer
Income or capital
Profit-making scheme

Legislative References:
Income Tax Assessment Act 1922 (Cth) - Section 4; Subsection 13(1); Section 16C
Income Tax Assessment Act 1930 (Cth) - Paragraph 2(c); Subsection 26(1)

Hearing date: 16 August 1933; 17 August 1933;
Judgment date: 7 November 1933

SYDNEY

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Judgment by:
Starke J

This is a case stated by my brother Dixon for the opinion of this Court. The facts are fully set out in the case. It appears that Julius and Wilkinson were the inventors of a ticket-printer machine for the automatic issue of tickets in connection with totalisator machines and various improvements thereon. The rights to these inventions, and letters patent obtained in respect thereof, both in the Commonwealth and in foreign countries, and the benefit of all agreements in respect thereof, were assigned or made over to the taxpayer, The Premier Automatic Ticket Issuers Ltd , which was incorporated under the Companies Acts of New South Wales. The objects of the company included the acquisition of these and other inventions and the right to use, exercise, develop, grant licences in respect of, or otherwise turn to account, sell or dispose of, any such patents, licences and concessions or all or any part of the property of the company, real or personal. One of the agreements the benefit of which passed under this assignment to the taxpayer was an agreement, dated 14th September 1917, which conferred upon Automatic Totalisators Ltd , a company incorporated in New South Wales, an exclusive licence to use and exercise in connection with totalisator machines in the Commonwealth and the Dominion of New Zealand, for the consideration and upon the terms stated in the agreement, the inventions of Julius and Wilkinson. Automatic Totalisators Ltd , it should be mentioned, had rights or letters patent in respect of inventions relating to totalisator machines. One Setright invented another ticket-printer machine for the automatic issue of tickets in connection with totalisator machines, and terms were negotiated with him for the acquisition of his invention and the rights in connection therewith. These terms are embodied in an agreement, dated 16th November 1922, between Automatic Totalisators Ltd , the taxpayer The Premier Automatic Ticket Issuers Ltd , and Setright. By it the parties agreed that all rights by letters patent or by any other means then held by them respectively as to the use, sale, manufacture or operation in any part of the world of ticket-issuing machines suitable for use in conjunction with totalisators should be governed by the conditions set forth in the agreement. Automatic Totalisators Ltd were granted the sole and exclusive right to manufacture and sell all such ticket-issuing apparatus for which rights had been or might thereafter be secured by letters patent or any other means by the other parties to the agreement, and Automatic Totalisators were to pay the taxpayer a royalty of ten pounds for every machine manufactured and sold by it pursuant to the agreement. Setright agreed to transfer and assign to the taxpayer all patents then or thereafter to be held by him respecting ticket-issuers and all improvements therein, and the taxpayer to transfer to Setright thirty per cent of the total shares fully paid up of the taxpayer and to pay him thirty per cent of the total proceeds arising from the sale of ticket-issuer rights in any country. Important clauses of the agreement were as follows:"5. In the event of Automatic Totalisators Limited disposing of the whole or part of their proprietary rights to the totalisator and/or ticket-issuers in any country Automatic Totalisators Limited shall make payment to The Premier Automatic Ticket Issuers Limited by one of the following methods. The said Premier Automatic Ticket Issuers Limited to have the right to choose the second-mentioned method of payment as against the first-mentioned: 1. Payment by Automatic Totalisators Limited to the Premier Automatic Ticket Issuers Limited of the sum of PD10 ... for each and every ticket-issuing machine manufactured or sold by or for the said Automatic Totalisators Limited. 2. Payment by Automatic Totalisators Limited to The Premier Automatic Ticket Issuers Limited of a sum equal to ten per cent of any cash consideration for the sale of totalisator and issuer rights in any country and a sum equal to five per cent of the total royalties received under the terms of such sale for a period of ten years dating from the receipt of such royalties from each individual installation. 6. In the event of Automatic Totalisators Limited disposing of rights as in the preceding paragraph, Premier Automatic Ticket Issuers Limited and Henry Roy Setright agree to execute all necessary transfers or assignments of patents held by them to effectuate such sales."

Letters patent had been obtained or had been applied for in Great Britain in respect of ticket-printer machines, the inventions of Julius and Wilkinson and of Setright. In May 1928 Automatic Totalisators Ltd agreed to sell and assign to Totalisators Ltd , a company incorporated under the English Companies Acts, the British letters patent for the inventions of Julius and Wilkinson and of Setright in respect of ticket-issuing machines, and the benefit of applications for letters patent in respect of such inventions and any improvements and further inventions in connection with totalisators. The purchase price was PD100,000, and further sums equivalent to an amount calculated at the rate of one-eight of one per cent of the total amount of money passing through any totalisator manufactured, sold or supplied under the letters patent or any improvements thereof or further inventions connected with the subject matter thereof. The purchase money was paid in England to Automatic Totalisators Ltd

The taxpayer in its profit and loss account for the twelve months ending 30th June 1929 included as part of its receipts the sum of PD10,000, "sale of English rights." This sum was paid or credited to it by Automatic Totalisators Ltd as "a sum equal to ten per cent of any cash consideration for the sale of totalisator and issuer rights in any country" under the agreement of 16th November 1922. The Commissioner assessed the taxpayer to income tax in respect of this sum of PD10,000 for the financial year 1929-1930.

The first question stated by my brother Dixon is: Am I at liberty upon the materials included in the special case to find that the sum of PD10,000 is not (a) income of the taxpayer or (b) derived directly or indirectly from sources in Australia?

In my opinion, Question 1 (a) should be answered in the negative. The test is whether the amount in dispute "was a gain made in an operation of business in carrying out a scheme for profit-making" and "not merely a realization or change of investment" (Ducker v Rees Roturbo Development Syndicate ^[F1] ; Commissioner of Taxes v Melbourne Trust Ltd ^[F2] ; Commissioner of Taxes v British Australian Wool Realization Association ^[F3] , at p. 231; Westminster Bank v Osler ^[F4] ; Ruhamah Property Co v Federal Commissioner of Taxation ^[F5] ). The object of the taxpayer here was to exploit the inventions in its hands. It apparently did not itself work the inventions, though it manufactured electro-types in Sydney for supply to Automatic Totalisators Ltd It granted a licence to Automatic Totalisators Ltd to use and vend the inventions in the Commonwealth and New Zealand. It joined in forming or took shares in a company called Automatic Totalisators (France) Ltd , which installed totalisators and ticket machines in France. It appointed an agent and gave him authority to sell its patent rights outside the Commonwealth and New Zealand. The agreement of 16th November 1922 assumes an authority in Automatic Totalisators Ltd to sell issuer rights for a cash consideration and thereby impliedly authorizes such a sale. The taxpayer received its share of the proceeds of sale, and credited the same to its trading or business operations account, that is, its profit and loss account. In so doing the taxpayer "may well be held bound by its own actions" (Commissioner of Taxes v Melbourne Trust Ltd ^[F6] ). Facts such as these preclude any other conclusion than that the sum of PD10,000 was a gain made in an operation of business in carrying out a scheme of profit-making.

Question 1 (b) should also, I think, be answered in the negative. The agreement of 17th May 1928, under which purchase money amounting to PD100,000 was paid to Automatic Totalisators Ltd , was a transaction entered into and carried out in England and in respect of patent rights granted or subsisting in England. It arose from business transacted and wholly carried out in England, and the purchase money paid under it was therefore not income derived directly or indirectly from a source in Australia (Lovell & Christmas Ltd v Commissioner of Taxes ^[F7] ; Studebaker Corporation of Australasia Ltd v Commissioner of Taxation (N.S.W.) ^[F8] ). But was the sum of PD10,000 paid to the taxpayer derived from this transaction, or was it derived from a transaction entered into in Australia and embodied in the agreement of 16th November 1922? That question depends upon the proper interpretation of that agreement. The parties undoubtedly associated themselves together for the exploitation of their various inventions and patent rights. Automatic Totalisators Ltd had totalisator rights, whilst the taxpayer had ticket-issuer rights, which are of no practical use except in connection with totalisators. An exclusive licence was granted to Automatic Totalisators Ltd to use and exercise the ticket-issuer rights, paying a royalty of PD10 for every machine manufactured or sold by it. Clearly these royalty rights arise from the agreement, and from no other transaction. But clause 5 contemplates the event of a disposition of the whole or part of the proprietary rights to totalisator and/or ticket-issuers. One view is that the clause simply determines the proportion in which proceeds of sale shall be distributed, and provides for their distribution through Automatic Totalisators Ltd But that interpretation does not fit the first method of payment, namely, payment by Automatic Totalisators Ltd to the taxpayer of the sum of PD10 for each and every ticket-issuing machine manufactured or sold by or for Automatic Totalisators Ltd This sum is obviously connected with the royalty of PD10 mentioned in clause 2, and it is an obligation which arises from the agreement and from no other transaction. The taxpayer has the right to choose the second method of payment, that is, payment by Automatic Totalisators Ltd to it of a sum equal to ten per cent of any cash consideration for the sale of totalisator and issuer rights in any country, and a sum equal to five per cent of the total royalties received under the terms of sale for a period of ten years. But that choice can only arise, I apprehend, if there be a sale for a cash consideration and royalties. It is noticeable in both cases that the payment stipulated for is payment by Automatic Totalisators Ltd Again, it is noticeable that the taxpayer is not entitled to ten per cent of the whole consideration for the sale, but only to ten per cent of the cash consideration. The totalisator rights were the property of Automatic Totalisators Ltd , and it had the sole and exclusive rights to manufacture and sell the ticket-issuing apparatus for use with totalisator machines. The clause, as it appears to me, treats that company, and not the taxpayer, as the owner and proprietor of the ticket-issuing rights as well as the owner and proprietor of the totalisator rights. It places both those classes of rights unreservedly in its hands for sale and disposition as an owner. But, under the same clause, Automatic Totalisators Ltd convenants to pay the taxpayer ten per cent of any cash consideration for the sale of totalisator and issuer rights in any country. The right to that payment arises and is derived directly from that covenant, and from it alone. Consequently, in my opinion, the sum of PD10,000 paid to the taxpayer does not arise from business transacted and carried out in England, but from an Australian transaction, and is therefore income derived from a source in Australia.

The second question stated in the case is: Is the Commissioner of Taxation entitled as a matter of law upon the materials included in the special case to a finding that the sum of PD10,000 formed part of the income of the taxpayer derived directly or indirectly from sources in Australia? An affirmative answer should be given for the reasons already mentioned.

The third question stated in the case is: Is the taxpayer entitled as a matter of law upon the materials included in the special case to a finding that the sum of PD10,000 (a) did not form part of the income of the taxpayer, or (b) was not derived directly or indirectly from sources in Australia? A negative answer should be given for the reasons already set out.

The fourth question stated in the case is: (a) On the materials included in the special case, ought I, as a matter of law, to find that the income is derived partly from sources outside Australia? A negative answer should be given. The income, for the reasons already set forth, was derived wholly from sources in Australia. (b) Does s. 16C of the Income Tax Assessment Act 1922-1929 apply to the assessment in reference to the inclusion of any part of the said sum of PD10,000? (c) If so, is the determination of the question what part of the income is derived from sources outside Australia the exclusive function of the Commissioner of Taxation? These questions-(4) (b) and 4 (c)-become immaterial in the view I take of the case. But as the case states that the taxpayer did not in fact claim that the income was derived partly from sources outside Australia, but wholly from sources outside Australia, the provisions of the section seem inapplicable, and in any case I should think that, as was conceded at the Bar, the determination of the Commissioner would be subject to review and appeal.