Case F73

Judges:
FE Dubout Ch
N Dempsey M

Court:
No. 3 Board of Review

Judgment date: 20 November 1974.

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F.E. Dubout (Chairman); N. Dempsey (Member) (constituting Quorum): This is another case where the assessability of a profit arising from the acquisition and sale of plant previously under lease is involved. The taxpayer concerned carried on business in partnership with his wife but as is usually the case the conduct of the business and all major decisions relating to it were made by him.

2. The partnership had engaged in business as Carriers and in February 1970 it had entered into a leasing agreement. The vehicle it leased had a cost value of $30,000 and the leasing charges were fixed at $6,460, a total of $36,460. The partnership was to lease the vehicle for 36 months paying a monthly rental for the first twelve months of $1,105.52, for the second period of twelve months a rental of $734.80 per month and for the final period of twelve months a rental of $366.87 per month. These payments after deducting stamp duty would have left $26,460 paid as rental and the residual value of the plant would have been $10,000.

3. When one speaks of the residual value in a leasing agreement this is the sum stated as such in the documents and although it is not committed to writing, it would hardly be disputed that the lessee has the first option at the end of the leasing term to buy the plant for the stipulated residual value. If he does not do so the lessor may sell the plant and deduct any costs he may incur and if such net proceeds do not cover the residual value the lessee is required to pay the difference. If a surplus results in these circumstances, it is the property of the lessor.

4. About February 1971, taxpayer stated he decided that it was no longer economical to continue the business operations and he commenced to take action to wind it up. He states that he rang the company from whom the vehicle was being leased to enquire if he could purchase the vehicle. He stated that he thought it would be in the best interests to buy the vehicle so he could finish up the business and he was advised that he could do so. He states that he did not enquire what it would cost him to purchase the vehicle. He further states he was still making up his mind what he would do about the vehicle.

5. However within three weeks he contacted an acquaintance who was also engaged in trucking operations to see if he would buy the vehicle and after the vehicle had been inspected by this man he agreed to purchase same for $27,000 if taxpayer bore the cost of altering the gear box ratio to suit the requirements of the business of the purchaser.

6. Taxpayer then made enquiries from the distributors of the truck as to the approximate cost of the alteration and was advised it would be $2,500. He again contacted the prospective buyer, acquainted him of the cost and agreement was reached that he would pay $25,500 for the truck and bear the cost of alteration himself. Two days later he states that he rang the lessor from the office of the prospective purchaser and enquired what was, to use his term, ``the payout figure on the vehicle on that particular day''. It seems that this contact was actually made on the 14th April, 1971.

7. He states that he was supplied with the information and whilst he could not recall the exact figure it was in the vicinity of $18,000. The actual figure was $18,658.78.

8. The prospective purchaser had already arranged with another leasing company to provide finance of $27,000 to enable him to acquire the vehicle and an additional item, a trailer for $1,500. It seems however that so far as the partnership of which taxpayer was a member was concerned, the total consideration including the trailer was to be $25,500 and this is in fact all that was received. The higher figure of $27,000 arranged by the purchaser with the finance company was apparently so arranged to assist him in his financial matters.

9. In the events that occurred the finance company from whom the purchaser obtained the $27,000 paid out to the lessor the amount required for the partnership of which taxpayer was a member to acquire the truck. The payment was $18,658.78 and it was made on the 12th May, 1971. The balance of the $27,000, viz, $8,341.22, was apparently paid direct to the purchaser from the partnership. He in turn, according to evidence, paid the partnership the balance of $6,841.22 to complete the sale at $25,500.

10. When the return of the partnership was

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ATC 433

lodged $24,550 was apportioned to the sale of the truck shown to have been acquired for $18,658 a surplus of $5,892 resulting. In assessing the return the Commissioner has included this surplus in the assessable income thereby increasing the share of this taxpayer in such income by one half of this sum $2,946 and taxpayer has objected to this action. The objection being disallowed an appeal has been lodged to the Board. The Commissioner defends his assessment maintaining the amount is properly included in the assessable income of the partnership by virtue of the operations of sec. 25(1) or 26(a) of the Act.

11. Counsel for the taxpayer submitted that the evidence clearly showed that at the date when he decided to sell the vehicle the business activities were uneconomical and he wanted to wind up the business activities. Under such circumstances he maintains the Commissioner cannot rely on sec. 26(a).

12. He further submitted that the business of the company ceased at the time the decision was taken to acquire and dispose of the vehicle and it was no part of the business activity to acquire title to it. He maintained that the business activity was to carry goods and it is difficult to say that entering into an oral agreement outside of that was part of the activity in the business such as would relate to the ordinary revenue aspect of the activities carried on by the transport firm.

13. The leasing of plant, on terms and conditions of the kind herein described and as a commonly adopted commercial practice, is a comparatively modern phenomenon. For those who are legal historians, it may be worthy of note that there were three cases decided by Boards of Review on the question of the assessability of a profit arising from the acquisition and sale by a taxpayer of plant that had previously been held under a lease. Those cases are reported as Case C56,
71 ATC 247; Case C75,
71 ATC 336 and Case F1,
74 ATC 1. In the High Court, Stephen J. had dealt with the assessability of the profits from a number of transactions of the profits from a number of transactions of this kind in
A.L. Hamblin Equipment Pty. Ltd. and A.L. Hamblin Constructions Pty. Ltd. v. F.C. of T., 74 ATC 4001.

14. In a judgment delivered on 4th November, 1974, the Full Court of the High Court, by majority, reversed the decision of Stephen J. in the Hamblin cases. (One transaction, in respect of which Stephen J.'s decision prevailed, can be disregarded for present purposes). In what must now be regarded as the final and definitive treatment of the matter, the Full Court has decided that profits of the subject kind (if indeed they can be regarded as profits at all) do not constitute assessable income pursuant to sec. 26(a), nor can they be regarded as income in ordinary concepts so as to be assessable pursuant to sec. 25(1). In the circumstances, the Board is constrained to follow the decision of the Full Court, and for a statement of the supporting reasons, the reader is referred to the decisions of the majority in A.L. Hamblin Equipment Pty. Ltd. v. F.C. of T.; A.L. Hamblin Constructions Pty. Ltd. v. F.C. of T. 74 ATC 4310.

15. The decision of the Board accordingly is that the taxpayer's objection must be allowed and that the assessment should be amended accordingly.

Claim allowed