Case X82

Members:
P Gerber DP

Tribunal:
Administrative Appeals Tribunal

Decision date: 3 October 1990.

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Dr P. Gerber (Deputy President)

The applicant in this case is a farmer who acquired a farming property with moneys borrowed ``off-shore''. He and the Commissioner of Taxation agreed on the following facts:

• (1) The loan agreement involved the borrowing of overseas currency ($A280,000) arranged by the ANZ Bank St Lucia.
• (2) The purpose of the loan was to purchase another farming property upon which primary production activities were to be carried out.
• (3) The date of the loan was 9 April 1986.
• (4) The loan was secured by a mortgage over the property purchased.
• (5) As further security, against adverse currency fluctuations, part of the proceeds of the loan were to be invested as a term deposit with the ANZ Bank.
• (6) The amount placed on deposit was a fluctuating amount dependant (sic) on currency rates and was a percentage of the loan.

2. The applicant received interest in the sum of $24,184 from the ANZ Bank on the amount thus deposited, which sum he treated as income from primary production, and thus attracting the averaging provisions of the Income Tax Assessment Act (``the Act''). The respondent, on the other hand, claimed that the interest was earned in consequence of investing money with a bank, and was thus not derived from a business of primary production. It says much

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for the ingenuity of the representatives of the parties - whose considerable assistance I gratefully acknowledge - that this case, having commenced at 10.15 a.m., was able to be concluded with an oral decision at 10.42 a.m. on that morning.

3. Section 156(1) of the Act defines ``assessable primary production income'' in relation to a taxpayer to mean:

``... so much of the assessable income of the taxpayer of the year of income as was derived from the carrying on of a business of primary production by the taxpayer or was included in the assessable income of the taxpayer of the year of income in consequence of the carrying on of a business of primary production by the taxpayer;''

(my italics)

4. The term ``in consequence of'' connotes causality - in this case whether the interest was ``caused'' to be derived as the ``predominant'' or ``proximate'' or ``direct'' result of the carrying on of the business of primary production. This is a question of fact.

5. ``Causation'' has bedevilled the law since the time of Henry II and has progressed little since the introduction of the deodand. Thus in their well-known monograph on Causation in the Law 72 L.Q.R. 58, 260, 398, Hart & Honore noted (at p. 61):

``that though the courts insist that their investigations of causal questions are `practical inquiries' not `scientific inquests' (
Weld-Blundell v. Stephens (1920) AC 956), that `the cause of an event is to be decided on common-sense principles' (
Boiler Inspector and Insurance Co of Canada v. Sherwin Williams Co of Canada Ltd (1951) AC 319), and that questions of causation are pure questions of fact which, if they are to be answered by a judge, must yet be answered by him as an ordinary man (
Hogan v. Bentinck Collieries (1949) 1 All ER 588;
Leyland Shipping Co v Norwich Union Fire Insurance Society (1918) AC 350, 363, per Lord Dunedin: (`I think the case turns on a pure question of fact to be determined by common-sense principles. What is the cause of the loss?'), such remarks have never been accompanied by an attempt to explain what are the common-sense principles of causation or how the notion of cause is used in ordinary practical inquiries. Yet the fact that the notion of cause used by the law is a common-sense notion surely does not mean that it stands for something so simple that any elucidation of it is unnecessary, or that it is a merely intuitive notion which cannot be further elucidated. Common sense is not a matter of inexplicable or arbitrary assertions and the notion of cause which it employs, though flexible and complex, is governed by stateable principles even though the ordinary man who uses the notion may not, without assistance, be able to make them explicit.''

6. Not to be outdone in the application of ``common-sense principles'', the Commissioner relied on
Hall Brothers S.S. Co. Ltd. v. Young; The Trident (1939) 1 All E.R. 809 in support of the proposition that the cause of the payment of interest in the instant case was the investment of the money with the bank rather than income derived from primary production. In Hall's case, the plaintiffs were the owners of the Trident who sued the defendant as one of the underwriters of a Lloyd's policy of marine insurance for the due proportion of a sum which they had had to pay in consequence of legal proceedings in France. In those proceedings the plaintiffs were sued by the pilotage authority of Dunkirk for damage done to a pilot-boat engaged by the Trident. The damage was due to a collision between the two vessels, which it was agreed was in no way due to any negligence on the part of the Trident. The plaintiffs counter-claimed in those proceedings for damage done to the Trident, but this counter-claim was dismissed. The evidence of French lawyers showed that the claim of the pilotage authority was in the nature of an indemnity, and could be answered only by showing gross negligence on the part of the pilot-boat, and the claim was not, therefore, of a delictual or quasi-delictual character. The collision clause of the policy provided that the insurers should pay three-fourths of any sum paid by way of damages in respect of a collision. It was held that the sum paid in consequence of the action in the French courts was not paid by way of damages, and, therefore, was not recoverable under the policy.

7. The fact that Hall's case could be relied on by the Crown in this case in seeking to negative a causal connection demonstrates how far the law has distanced itself from the

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proposition that ``the cause of an event is to be decided by common-sense principles''. I must confess that I find Hall's case case singularly unhelpful in resolving the instant question of fact. I find that it decided no more than the words ``by way of damages'' in an insurance contract refer to a claim in tort and are not applicable to a claim in contract or quasi-contract. This is a far cry from the facts now before the Tribunal.

8. The Australian decisions on causality, in relation to the Act, are, with respect, hardly more helpful as an aid to navigation. The fons et origo is the decision in
Reseck v. F.C. of T. 75 ATC 4213; (1975) 133 C.L.R. 45. In that case, a term of an agreement between the employer and the taxpayer's union provided that on satisfactory termination of employment, an employee should receive a severance payment calculated by reference to the work performed during his employment. At the end of each of two periods of employment, the taxpayer was paid the sums to which he was entitled under the agreement on satisfactory termination of employment. The issue in the case was whether or not such payment was a lump sum in consequence of retirement within the provision of sec. 26(d) of the Act. The question for determination came to this: what degree of causality does the section demand before a payment can be said to be ``in consequence'' of retirement? Gibbs J. (as he then was) held (at ATC pp. 4216-4217; C.L.R. p. 51):

``Within the ordinary meaning of the words a sum is paid in consequence of the termination of employment when the payment follows as an effect or result of the termination. In the present case the payment did follow as a result of the termination of the taxpayer's services. It is not in my opinion necessary that the termination of the services should be the dominant cause of the payment. The reasons for holding that `purpose' in sec. 26(a) refers to the main or dominant purpose actuating the acquisition of the property have no place in the different context of sec. 26(d). For example, a retiring allowance is plainly intended to be within sec. 26(d) but such an allowance is made in consequence of the employee's past service as well as in consequence of his retirement and in many cases it could not be said that the retirement rather than the service was the substantial cause of the payment or that the former cause predominated over the latter.''

Jacobs J. took a different view (at ATC p. 4219; C.L.R. p. 56):

``It was submitted that the words `in consequence of' import a concept that the termination of the employment was the dominant cause of the payment. This cannot be so. A consequence in this context is not the same as a result. It does not import causation but rather a `following on'.''

Stephen J. dissented, albeit on grounds not relevant to causation.

9. It is difficult to extract a common principle, relevant to this appeal, from the majority, if only because Gibbs J. required some connection between the termination of employment and the payment (short of the payment being the dominant cause), whereas the test propounded by Jacobs J. imports no causality at all, being satisfied by a mere ``following on''.

10. A similar problem arose in
McIntosh v. F.C. of T. 79 ATC 4325. Again, the issue was whether a lump sum payment, made to the taxpayer, was made ``in consequence of retirement'' within the terms of sec. 26(d) of the Act. In that case, the taxpayer, on his retirement from the bank, received a pension under the bank's superannuation scheme. One week after his retirement, he elected to commute one-half of his pension to a lump sum. This was in accordance with the rules of the particular superannuation fund which required an election to commute a pension to be made no later than one calendar month after retirement.

11. The Commissioner, relying on sec. 26(d), included 5% of the lump sum payment in the taxpayer's assessable income. The taxpayer objected, claiming that the payment was tax free. His objection was disallowed and the assessment was confirmed by the Queensland Supreme Court (Andrews J.). The taxpayer appealed to the Full Federal Court against the Supreme Court's decision.

12. Both Andrews J. at first instance and the Full Federal Court on appeal concluded that the lump sum was paid ``in consequence of retirement''. In the Supreme Court the argument that sec. 26(d) required a dominant

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cause before it comes into operation was rejected, his Honour contenting himself with observing that, without quantifying the degree of causality required, it is ``something more than a mere temporal progression''.

13. In the Federal Court there was again no agreement as to just what degree of causal nexus the section demanded. Brennan J. held (at p. 4328) that the retirement must be the occasion of, and a condition of, entitlement to the payment:

``On and by reason of retirement, a contributor who has earlier elected to require commutation is entitled to payment of a lump sum; on and by reason of retirement, a contributor who has not elected to require commutation, acquires the right to become entitled to payment of a lump sum... Though entitlement awaited the exercise of the taxpayer's election to require commutation his entitlement to payment did not depend upon the occurrence of any other event or upon the act or consent of any other person.''

Lockhart J. proposed a wider test. Dealing with the phrase ``in consequence of'' his Honour concluded (at p. 4336):

``In my opinion, although the phrase is sufficiently wide to include a payment caused by the retirement of the taxpayer, it is not confined to such a payment. The phrase requires that there be a connection between the payment and the retirement of the taxpayer, the act of retirement being either a cause or an antecedent of the payment... It has a wider connotation than causation and assumes a connection between the circumstance of retirement and the act of payment such that the payment can be said to be a `following on' of the retirement.

Sometimes the relevant connection may be that the retirement is a condition precedent to the right to payment of the sum in question.''

The third member of the Court, Toohey J., perhaps wisely, refrained from formulating a firm test, contenting himself with finding the following facts to be material:

• (a) the close temporal relationship between the retirement and the payment of the lump sum;
• (b) the fact that retirement was a prerequisite to payment; and
• (c) the fact that the commutation was a right of the taxpayer and not the result of independent bargaining with trustees.

14. In the present state of uncertainty as to what degree of connexion is required to make the derivation of income sufficiently proximate to come within the ambit of ``in consequence of the carrying on of a business of primary production'', I, too, take refuge in the approach adopted by Toohey J. in McIntosh (supra) rather than resorting to subtle philosophic distinctions between the causa causans and a causa sine qua non. I find the following facts to be material:

• (a) that the taxpayer borrowed money to acquire a farming property, the interest on which is an allowable deduction;
• (b) it was a condition of the mortgage that the taxpayer borrow and deposit with the lender the additional moneys which yielded the interest in dispute;
• (c) ``but for'' the requirement to invest these additional funds with the bank as a hedge against adverse currency fluctuations, there would have been no loan and hence no interest would have been derived.

15. In these circumstances, I find there is a sufficiently proximate causal connection between the derivation of the interest received and the loan to acquire the farm to make the income thus derived ``in consequence of carrying on the business of primary production''. Put another way, I find the loan in this case to be one and indivisible, resulting in a congruence between the interest paid constituting an outgoing incurred in the carrying on of a business of primary production, so that the interest received is income derived in consequence of the carrying on of a business of primary production. A contrary view would result in the Commissioner having the best of both worlds, implying into the Act something akin to the ``doctrine'' of unjust enrichment. I do not believe that Parliament intended such a consequence.

16. For the sake of completeness, I should perhaps add that, notwithstanding the uncertainty relating to the term ``in consequence of the carrying on of a business of primary production''. I rejected - perhaps

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unwisely - an application by the Crown to seek guidance from the explanatory memorandum to the Bill (which became Act No. 123 of 1978) in which the Treasurer, in his Second Reading Speech, dealt with the definitions and mechanics of the averaging provisions.

17. For the above reason the decision on the objection is set aside.