Colonial Mutual Life Assurance Society Ltd v. Federal Commissioner of Taxation (13 October 1953)

89 CLR 428

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(Judgment by: Fullagar J)

Between: Colonial Mutual Life Assurance Society Ltd
And: Federal Commissioner of Taxation

Court:

Judges: Williams ACJ
Webb J

Fullagar JKitto J
Taylor J

Subject References:
Taxation and revenue
Income tax
Assessment
Capital or income
Deduction
Outgoings incurred
Transfer of land
Outgoing of capital nature

Legislative References:
Income Tax Assessment Act 1936 No 27 - s 51(1)

Hearing date: 9 June 1953; 10 June 1953
Judgment date: 13 October 1953

MELBOURNE

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Judgment by:
Fullagar J

This is a case stated for the Full Court in an appeal by the taxpayer company from a decision of the board of review. The question raised is whether the company is entitled to deduct from its assessable income of the accounting period ended 31st December 1942 a sum of PD1,100 paid by it during the accounting period to William Just and Herbert Fritz Just, whom it will be convenient to refer to as Just Brothers. The commissioner by an amended assessment disallowed the deduction, and the board of review by a majority upheld the amended assessment.

The sum of PD1,100 in question was paid in pursuance of a contract dated 16th February 1934, the parties to which were the appellant company, Just Brothers, and a company named Turners Ltd  The circumstances in which this contract was made may be very briefly stated. The appellant company was the owner of a piece of land, on which buildings were erected, at the corner of King William Street and Hindley Street in the city of Adelaide. Just Brothers were the owners of a block of land, on which also a building stood, having a frontage to King William Street and adjoining the company's land. The company desired to acquire the land of Just Brothers, and to erect on the land already owned by it and on that land a large modern building which would include office accommodation for itself and a large number of shops and offices which it proposed to let to tenants carrying on businesses or professions. Turners Ltd  was in occupation of a shop on the company's land under a lease from the company, and the company desired to obtain possession of that shop. The contract provided that the lease should be surrendered and possession of the shop given by Turners Ltd  to the company. The position of Turners Ltd  does not affect in any way the question which now arises, and it need not be further considered.

It would appear from a letter written in January 1945 by the public officer of the company to the commissioner that in October 1933 Just Brothers had expressed their willingness to transfer their land to the company, the proposal at that time being that the company should grant to Just Brothers a lease for fifty years of certain shops and a basement in the proposed new building at a nominal rent of PD1 per annum. This proposal was abandoned because Just Brothers decided to discontinue their business, and the terms ultimately agreed upon were embodied in the contract of 16th February 1934.

The essence of the contract of 16th February 1934, so far as the company and Just Brothers are concerned, is that Just Brothers agree to transfer their land to the company in consideration of a promise by the company to pay to them for a period of fifty years from 1st January 1935 or from the completion of the building, whichever is the later, an amount equal to ninety per cent of all rents as and when received from lessees or tenants of three shops and a basement in the new building. The document, of necessity, contains a number of subsidiary provisions. It provides for the execution by Just Brothers forthwith of a transfer of their land to the company. The transfer is to be held in escrow with the certificate of title until the completion of the building, when it is to be delivered to the company for registration. Possession is to be given forthwith, outgoings being adjusted as at 30th June 1934. The company undertakes to commence forthwith, and to complete with all reasonable speed, the erection of a building in accordance with certain plans and specifications, which are identified. The building is to contain (inter alia) three shops and a basement situated on the corner of King William Street and Hindley Street, the shops having a frontage of thirty-seven feet to the former street and eighteen feet six inches to the latter street. The company is to use its best endeavours to let the shops and basement to reputable tenants at the best rental obtainable, and to collect all rents of the shops and basement, but it is not to be responsible for non-payment of rent by any tenant. It is to render to Just Brothers at the end of each month an account of all rents collected, and at the same time to pay to Just Brothers the amount shown to be due to them without any deduction. There are one or two other stipulations of minor importance, including a provision for prompt restoration in the event of total or partial destruction by fire of the shops or basement. The provisions which I have mentioned were, of course, designed to ensure that the premises whose rental was to provide the measure of the company's obligation should come into existence and be let as advantageously as possible, and to prescribe the time and manner of the performance of the company's obligation. But the whole essence and substance of the contract is, as I have said, that the company is to acquire the land of Just Brothers in consideration of a series of payments to Just Brothers extending over a period of fifty years. Two points may be noticed at this stage, though I do not know that I attach vital importance to either. In the first place, the shops and basement mentioned in the contract were to be erected not on the land to be purchased from Just Brothers but on part of the land originally owned by the company. In the second place, there is no assignment of the rentals of the shops and basement or of any part thereof, or even a promise to pay those rentals or a part thereof to Just Brothers. The position is simply that the rents actually received by the company in respect of the shops and basement provide the measure of the amounts which are to be paid monthly by the company.

If the matter had rested with the contract which has just been considered, the company's obligation to pay money would have been unsecured, though not, one would suppose, in any serious peril of non-performance. But on the same day the company executed a document, which is described as a "rent charge", and which purported to give to Just Brothers security over the land on which the shops and basement were to be constructed for due payment of the moneys which the company was contracting to pay. This document recites (what is, I think, clearly correct) that Just Brothers have agreed to transfer their land to the company in consideration of the payment by the company to them of a sum equal to ninety per cent of the whole amount of the rents received by the company during the period of fifty years in respect of the three shops and the basement. The document then declares that the company "doth hereby encumber the said land" (i.e. the land on which the shops and basement are to be constructed) "for the benefit of the chargees" (i.e. Just Brothers) "as tenants in common with a rent charge to be issuing and payable out of the three shops and basement on the said land". The "said rent charge" is to be "for a period of fifty years from the 1st January 1935" and is to be "for an amount equal to ninety per cent of the whole amount of the rent to be received ... in each year during the said period of fifty years in respect of the three shops and basement".

Nothing turns, so far as I can see, on the precise effect at law or in equity of the so-called rent charge. The building contemplated, including the three shops and basement, was in due course erected by the company, and the transfer of Just Brothers' land to the company and the "rent charge" over the land on which the shops and basement stood were registered under the Real Property Act 1886-1929 (S.A.). Presumably the remedies given by that Act to a "mortgagee or encumbrancee" would be available to Just Brothers in the event of default by the company. But all that seems to me to matter for present purposes is that the moneys which the company has undertaken to pay are simply the price of the land which the company is purchasing from Just Brothers. This is made very clear by both documents, and whether the indebtedness of the company, as it accrues from time to time, is secured or unsecured seems irrelevant for present purposes.

For the purposes of income taxation, such payments as the company engaged to make in this case have commonly a double aspect. In Australia the form which the questions take is conditioned by the fact that the tax is imposed on assessable income less specific categories of allowable deductions. The first question which is raised is whether the amounts paid constitute, as and when received, assessable income in the hands of the payee. The second is whether, for the purpose of ascertaining the taxable income of the payor, the amounts paid are allowable deductions from assessable income. Although it will not seldom happen that payments which are assessable income of the payee will be allowable deductions from the assessable income of the payor, this is by no means necessarily so, and the truth is that different considerations govern the two questions. In the first case, the question will generally be simply whether the receipt in question is of an income nature or of a capital nature-a constantly recurring and often very difficult question, which depends on general principles which have been laid down by the courts. In the second case, the question will generally be whether the case falls within s. 51 of the Act, which, so far as material, allows the deduction of all losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income except to the extent to which they are losses or outgoings of capital or of a capital nature. The issue of the "capital nature" of the payments is seen to be possibly relevant to both questions, but the considerations which must guide one to an answer are themselves different in the two cases.

The transaction between the company and Just Brothers came in its first aspect before Webb J. on appeals by Just Brothers against the inclusion in their respective assessable incomes of amounts received from the company. Webb J. held that those amounts constituted assessable income in their hands: Just v  Commissioner of Taxation. ^[F38] The correctness of this decision is in no way in issue in the present case. The principles applicable in such a case as Just's Case ^[F39] have been considered notably in Foley v  Fletcher; ^[F40] Secretary of State in Council of India v  Scoble; ^[F41] Chadwick v  Pearl Life Insurance Co; ^[F42] Jones v  Commissioners of Inland Revenue ^[F43] and Egerton-Warburton v  Deputy Federal Commissioner of Taxation: ^[F44] see also Dott v  Brown ^[F45] (noting the observations of Scott L.J. on what was said by Walton J. in Chadwick's Case ^[F46] ) and cf. Atkinson v  Federal Commissioner of Taxation. ^[F47] The considerations which led Webb J. to his conclusion may perhaps be summarized as follows. The payments were periodical and extended over a long period of years. They were uncertain in amount; they depended on the amounts received by the company from time to time by way of rent of certain premises: those rents would almost certainly vary to some extent over the years, there being no rent-controlling legislation in 1934: it was not impossible that the premises or a part thereof might be unoccupied for periods: in the case of damage by fire, no rent or a reduced rent might be receivable by the company. From the point of view of Just Brothers, the recipients, the analogy is to a sale of land for an annuity (which is income in the hands of the payee), not to a sale of land for a fixed sum payable by instalments (which are capital).

It is, however, the second aspect of the transaction of 1934 that is material for present purposes, and the present question is whether the monthly payments to Just Brothers are allowable deductions from the assessable income of the company. Considerations which are relevant on the other aspect of that transaction appear to me to be irrelevant here. For it is incontestable here that the moneys are paid in order to acquire a capital asset. The documents make it quite clear that these payments constitute the price payable on a purchase of land, and that appears to me to be the end of the matter. It does not matter how they are calculated, or how they are payable, or when they are payable, or whether they may for a period cease to be payable. If they are paid as parts of the purchase price of an asset forming part of the fixed capital of the company, they are outgoings of capital or of a capital nature. It does not indeed seem to me to be possible to say that they are incurred in the relevant sense in gaining or producing assessable income or in carrying on a business-any more than payment of a lump sum would have been so incurred if the purchase price had been a lump sum payable on transfer. The questions which commonly arise in this type of case are (1) What is the money really paid for?-and (2) Is what it is really paid for, in truth and in substance, a capital asset? Examples could, of course, be multiplied. One example of a case which turned on the answer to the first of these questions is a case on which the appellant company relied in this case, Ogden v  Medway Cinemas Ltd. ^[F48] Whatever may be thought of the decision in that case, it seems to me to have no bearing on the present case. Contrast Commissioners of Inland Revenue v  Adam ^[F49] and Green v  Favourite Cinemas Ltd. ^[F50] Another example is Egerton-Warburton v  Deputy Federal Commissioner of Taxation, ^[F51] but I will refer specially to this case a little later. An example of a case which turned on the answer to the second of these questions is the recent case in this Court of Broken Hill Theatres Pty  Ltd  v  Federal Commissioner of Taxation. ^[F52] The nature of the problem which often presents itself is analysed by Dixon J. in Sun Newspapers Ltd  v  Federal Commissioner of Taxation, ^[F53] at pp. 359-361. In the present case the first question is readily answered by reference to the documents. The money is paid for the land. And, as for the second question, it is obvious that the land is a capital asset. In essence the case is very like Tata Hydro-Electric Agencies Ltd , Bombay v  Commissioner of Income Tax, Bombay Presidency and Aden. ^[F54] In that case the relevant enactment authorized the deduction of expenditure "incurred solely for the purpose of earning profits or gains", but there is nothing in the judgment of Lord Macmillan to suggest that anything turned on the word "solely". Their Lordships were of opinion that the proper question to ask was that propounded by the Lord President (Clyde) in Robert Addie & Sons' Collieries Ltd  v  Commissioners of Inland Revenue, ^[F55] at p. 235, "Is it a part of the Company's working expenses; is it expenditure laid out as part of the process of profit earning?" That question is not less appropriate to s. 51 of the Commonwealth Act, and in this case it must clearly, in my opinion, be answered in the negative.

There are certain English and Scottish cases which do, at first sight, suggest that the same considerations are appropriate whether the question be as to the income character of payments in the hands of the payee or as to the deductibility of those payments from the gross income of the payor. In other words, they suggest that the very considerations which support the decision of Webb J. in Just v  Commissioner of Taxation, ^[F56] compel an answer in favour of the taxpayer company in the present case. Those cases are, or include, Inland Revenue Commissioners v  Ramsay; ^[F57] Inland Revenue Commissioners v  Ledgard; ^[F58] Commissioners of Inland Revenue v  Hogarth; ^[F59] Inland Revenue Commissioners v  Mallaby-Deeley; Personal Representatives of Mallaby-Deeley v  Inland Revenue Commissioners ^[F60] and Executors of Peters, deceased v  Inland Revenue Commissioners. ^[F61] But, when those cases are properly understood, they have, in my opinion, no relevance to the present case. The key to them is to be found, I think, in the judgment of Greene M.R. (as he then was) in the Mallaby-Deeley Case, ^[F62] at p. 822. Each of them is concerned with liability to surtax under the English statutes.

Surtax in England is charged only upon an individual's "total income from all sources" as diminished by certain kinds of interest, annuities, and annual payments, from which, under the system of collection "at the source", which is in operation with respect to ordinary income tax (but not with respect to surtax), he is entitled to deduct income tax as against the recipient: Konstam on Law of Income Tax, 12th ed. (1952), par. 331. Thus in Earl Howe v  Commissioners of Inland Revenue, ^[F63] Scrutton L.J. said: "The `annuities interest and other annual payments' which can be deducted in order to obtain exemption" (i.e., from super-tax, now surtax) "are those from which the claimant can deduct tax on behalf of the recipient". ^[F64] In each of the cases I have mentioned, an annual payment was alleged by the payor to be deductible in the assessment of his surtax on the ground that it was of such a character that he was entitled to deduct income tax from it as against the payee. Now, the ordinary income tax which a payor is given the right to deduct when making his payment is a tax on the income of the payee, as Scrutton L.J. recognized in the passage above quoted. The amount is recovered by the Crown from the payor by charging the payor with income tax on his own income without making any allowance for the payment, but that is only the means of collection: see the explanation of the system by Viscount Simon in Allchin v  Coulthard, ^[F65] at pp. 618-619. Consequently a payment from which the payor is entitled to deduct income tax must be a payment which would be subject to income tax in the hands of the payee if it were paid to him in full: see Earl Howe v  Commissioners of Inland Revenue, ^[F66] and cf. Watkins v  Commissioners of Inland Revenue. ^[F67] In other words, such a payment must be in his, the payee's, hands, a receipt of an income and not of a capital nature. The point at issue in each of the cases now being discussed was thus simply whether the payment in question was of an income or a capital nature from the point of view of the payee. If, so regarded, it was of an income nature, it was deductible for the purposes of the payor's surtax: if, so regarded, it was of a capital nature, it was not deductible for the purposes of the payor's surtax. Its nature as an outgoing from the point of view of the payor had no relevance to the question of its deductibility, and none of the judgments was directed to that topic. Such cases deal with a position which has no analogy in this country, and they have no bearing on the question now under consideration. This is well illustrated by the case of Commissioners of Inland Revenue v  Duke of Westminster. ^[F68] The object of the Duke's ingenious plan was to reduce his surtax: in Australia the labours of his legal advisers would have produced no result by way of relief from taxation.

It remains only to refer to the decision of this Court in Egerton-Warburton v  Deputy Federal Commissioner of Taxation ^[F69] on which counsel for the taxpayer strongly relied. This was a case of a very exceptional character. The appellants were a father and two sons, and the controversy related to a sum of PD659, which during the year of income was paid by the sons to the father. The transaction in pursuance of which that payment was made is thus summarized in the joint judgment of Rich, Dixon and McTiernan JJ.: "the father was the proprietor of an estate in fee simple in land upon which farming and orcharding was carried on. His two sons formed a partnership for the purpose of carrying on the enterprise. The father entered into an agreement with them in which he was described as the vendor, and they were described as the purchasers. He agreed to sell to them, on a walk-in-walk-out basis, the land together with all stock, chattels and effects thereon. Briefly stated, the consideration for the sale was as follows. The sons were required to pay (a) an annuity to the father during his life of PD1,200 by quarterly payments; (b) after his death an annuity to his widow of PD1,000 by quarterly payments; (c) after the death of both the father and his widow, the sum of PD10,000 to his three daughters and the children of a deceased daughter in such shares and upon such terms as he might by deed or will appoint, and, in default of appointment, in shares of one quarter to each of the three daughters, and one quarter to the children of the deceased daughter. The father reserved under the agreement the right to use and occupy a dwelling-house upon the land. The sons agreed upon the completion of the purchase to execute a mortgage over the land to secure the payment of the annuity and of the sum of PD10,000. In part performance of this obligation, the sons secured the annuity to the father by a registered instrument of charge over the land. In the year of income upon which the assessments are based, the sons paid on account of the father's annuity the sum of PD659 already mentioned". ^[F70] The commissioner treated the sum of PD659 as assessable income of the father, and refused to allow any part of it as a deduction in the assessments of the sons, who had borne the payment in equal shares and claimed that one half was deductible from the assessable income of each.

The first aspect of the case would appear to create no difficulty. The annuity was held to be income in the hands of the father. The second aspect of the case seems more difficult. The Court decided that one half of the sum in question was deductible from the assessable income of each of the sons. The sum was held, in the first place, not to be an outgoing of capital or of a capital nature, and the Court then went on to hold that it was an expenditure incurred "wholly and exclusively for the production of assessable income", that being the language of the then existing provision which corresponds to the present s. 51. With regard to the first point all that was said by their Honours was:"We do not think the annual payments made by the sons are outgoings of their capital. The payments may properly be considered as made by them on revenue account". ^[F71]

It is not to be supposed that in this brief passage their Honours intended to convey that, because the money would normally and naturally be paid out of revenue, it could not be an outgoing of a capital nature. As Lord Greene M.R. observed in Associated Portland Cement Manufacturers Ltd  v  Inland Revenue Commissioners; Associated Portland Cement Manufacturers Ltd  v  Kerr, ^[F72] "Whether or not an item of expenditure is to be regarded as of a revenue or capital nature must in many, and, indeed, in the majority of cases, ... depend upon the nature of the asset or the right acquired by means of that expenditure. If it is an asset which properly appears as a capital asset in the balance sheet, then that is an end of the matter. But it must never be forgotten that an asset which may properly, and quite correctly, appear, ... in the balance sheet as an asset may be acquired out of revenue ... It is, therefore, no sufficient test to say that an asset has been paid for out of revenue". ^[F73] In Grant v  Commissioner of Taxes, ^[F74] at p. 882, O'Leary C.J. seems to have been disposed to think that the decision in the Egerton-Warburton Case ^[F75] was inconsistent with what was said by the learned Master of the Rolls and also inconsistent with the decisions in the Tata Hydro-Electric Case, ^[F76] and in a South African case of Lambson v  Commissioner for Inland Revenue. ^[F77] See also Bern v  Commissioner of Taxes. ^[F78] But it seems to me reasonably clear that the correct explanation of the Egerton-Warburton Case ^[F79] is that which was suggested by my brother Taylor in the course of argument in the present case. It is simply that in the particular circumstances the annuity was not regarded as part of a purchase price payable by the sons to the father for the land. The nature of the transaction itself had been closely examined by the Court in the course of considering the first aspect of the case, and it was unnecessary, when the second aspect of the case came to be approached, to repeat what had been said. It had been pointed out ^[F80] that the transaction was not an ordinary business transaction but bore "all the marks of a family settlement". There was nothing to show that the full value of the property transferred was represented by the consideration constituted by the various payments. The sum of PD10,000 evidently amounted to a post mortem distribution to children as beneficiaries of the father's property. It may well have been that the effect was to invest the sons with a substantial interest which was not exhausted by the payment of the charges upon it. Seen as being in substance a family settlement, the transaction in spite of its form, could not be treated as meaning that the sons were paying for the land a true price which was represented in part by the annuity payable to the father. It resembled rather a gift of the land to the sons charged during the father's lifetime with an outgoing analogous to interest on a mortgage and charged with a capital sum payable at the father's death. So regarded, the case is not out of line with the New Zealand cases or with the authorities cited by O'Leary C.J.

No such considerations are present in the case now before us. Here we have a transaction of a purely business nature, in which it may be safely assumed that two parties, bargaining on equal terms, had full regard to the value of the land and the probable value of the consideration. According to the documents the periodical payments are the price for which the land is being bought, and no reason can be suggested for not giving to the documents their full literal effect. The transaction might perhaps have taken a form under which parts of the total payments to be made were, or could be, treated as interest on deferred payments of a price. But it did not take any such form. As matters stand, the total of the payments is simply the total price of the land.

In my opinion, the question asked by the case stated should be answered: "No".