Stanton v Federal Commissioner of Taxation

92 CLR 630
1955 - 1024A - HCA

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(Judgment by: Dixon CJ, Williams J, Webb J, Fullagar J, Kitto J)

Between: Stanton
And: Federal Commissioner of Taxation

Court:

Judge:
Dixon CJ, Williams J, Webb J, Fullagar J and Kitto J

Subject References:
Taxation and revenue
Income tax
Assessable income
Royalty

Legislative References:
Income Tax and Social Services Contribution Assessment Act 1936 (No 27) - s 26

Hearing date: MELBOURNE 17 October 1955; 18 October 1955
Judgment date: 24 October 1955

MELBOURNE

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Judgment by:
Dixon CJ, Williams J, Webb J, Fullagar J, Kitto J

This is a case stated under s. 198 of the Income Tax and Social Services Contribution Assessment Act 1936-1953. The appeal in which the case is stated is against an assessment based on income derived by the taxpayer during the twelve months ended 30th June 1953. The commissioner included in the assessable income a sum of PD2,832 on the footing that it was received by the taxpayer as or by way of royalty paid in respect of certain timber.

Section 26 (f) of the Assessment Act provides that the assessable income of a taxpayer shall include any amount received as or by way of royalty. The word "royalty" is not defined by the Act and the question in the case is whether the payments which the commissioner has included in the assessment of income possess the attributes connoted by that word as it stands in the Act.

The facts upon which the matter depends may be briefly stated. It appears that the taxpayer who is a grazier was entitled as tenant in common with another grazier to a piece of land upon which stood a quantity of pine timber and of hardwood timber. On 12th September 1951 they entered into an agreement in writing with a sawmiller who was desirous of purchasing certain of the timber. In the agreement they were described as the vendors and the sawmiller as the purchaser. The first clause stated that the vendors thereby sold and the purchaser thereby purchased five hundred thousand super feet of millable pine timber and two million five hundred thousand super feet of millable hardwood timber with the right to cut and remove the timber from the land. If trees were less in girth than certain measurements they were excluded. The second clause provided that the price should be PD17,500, of which PD7,500 was apportioned to the pine timber and PD10,000 to the hardwood timber. Of the price PD500 was to be paid as a deposit and PD17,000 by equal quarterly payments of PD1,416 13s. 4d. without interest. The amount of PD2,832 which the commissioner claims to be a royalty and has included in the taxpayer's assessable income forms his proportion (no doubt half) of the payments made under the agreement by the purchaser during the year of income.

Upon the question whether the payments fill the character of a royalty there are some other provisions in the agreement that have some importance. They make it quite clear that the moneys are not calculated by reference to nor payable in respect of the timber actually cut or removed and that cutting or removal is not the occasion of the payments. Further, there are certain general provisions which form part of the consideration for the lump sum payments. A provision for default says that if the purchaser should at any time fail in the quarterly payments the vendors should be at liberty to cancel the agreement and in that event the deposit and any other moneys which might be standing to the credit of the purchaser were to be forfeited and the property in the timber or such parts as should not have been removed should revert to the vendors. The word "revert" is of course not technically appropriate. For as need hardly be said, in no proper sense could the agreement vest the property in the timber in the purchaser. But the clause does mean that the purchaser lost in the case of default all right to obtain further timber whilst the vendors retained whatever instalments he had paid.

Another clause provided that if it should be found that there was not five hundred thousand super feet of millable pine timber or two million five hundred thousand super feet of millable hardwood timber respectively standing upon the land then there should be a proportionate rebate of the price. The proportionate rebate was to be the sum which bore the same proportion in the case of pine timber to the price (PD7,500) as the quantity of millable timber found to be short or deficient upon the said land bore to five hundred thousand super feet. A similar proportion mutatis mutandis was fixed for hardwood timber.

The agreement contained a number of ancillary clauses. Some regulated the manner in which the purchaser was to do his part. For example the measurement of the timber was to be made upon the land and the purchaser was to cut into the tops of the pine trees to the fullest extent in accordance with the custom prevailing. Others amplified the rights of the purchaser. Thus he, his agents, servants and contractors and all persons doing business with him were given full and free right of ingress etc. with vehicles, plant and equipment. He was to have the right to undertake and provide all necessary and reasonable facilities for falling timber and hauling it and the right to erect and move upon and remove from the land temporary structures or buildings which in his, the purchaser's, opinion were necessary for his operations.

It will be seen that in substance the agreement amounts to a sale of standing timber, with a limitation as to quantity, at a lump sum price based in the end upon the amount of timber found to be standing upon the land whether the timber was cut or removed or not. It will be seen too that the price was payable in quarterly instalments which became due independently of the amount of timber removed, so that the full price remained payable without regard to the extent to which the purchaser might exercise his right to cut and remove the timber.

At first sight it is not easy to see in this any of the essential characteristics of a royalty. It is said, however, that the definition of a royalty given in McCauley v Federal Commissioner of Taxation ^[F1] governs the matter and requires us to hold that the quarterly payments are in the nature of royalties.

In that case the landowner entered into an agreement to sell to the purchaser and the purchaser to purchase a right to cut and remove standing timber growing on the land at or for the price or royalty of three shillings for each and every hundred superficial feet of such milling timber so cut. The purchaser agreed to cut and remove all milling timber within a period of twelve months from the specified date. It will be seen at once that a marked difference exists between the agreement in McCauley's Case ^[F2] and the present. The amount payable in McCauley's Case ^[F3] was in respect of the timber cut and it was calculated thereon by reference to the quantity cut. There was no sale of a stand of timber and no price based on the amount of timber standing. There was a right to proceed to cut timber and obligation to do so but the liability to make payments arose if and when the timber was cut and then it was to pay an amount calculated at a specified rate upon the quantity cut. The parties described the amount as a royalty and the majority of the Court (Latham C.J., McTiernan J., Rich J. dissenting) adopted the view that it had been correctly described. Latham C.J. discussed the meaning of the word "royalty" and referred to the senses in which it had been defined and used. For the purpose of showing that the word might be applied to payments for timber cut under licence, his Honour relied in particular upon the manner in which it was used in certain State statutes. The learned Chief Justice went on to say: "In my opinion the word 'royalty' is properly used for the purpose of describing payments made by a person for the right to enter upon land for the purpose of cutting timber of which he becomes the owner, where those payments are made in relation to the quantity of timber cut or removed. Thus I am of opinion that the moneys received by McCauley were royalties and accordingly were part of his assessable income". ^[F4] It will be noticed that the facts of the present case do not satisfy the condition stated in his Honour's definition by the words "where those payments are made in relation to the quantity of timber cut or removed". When his Honour speaks of "payments made by a person for the right to enter upon land for the purpose of cutting timber of which he becomes the owner" his Honour is obviously not emphasizing the right to enter upon the land as opposed to the right to remove the timber. The point of the definition appears rather to lie in a requirement that the payments should be made to the landowner in relation to the quantity of timber cut or removed in pursuance of a right to do so.

In the course of his judgment McTiernan J ^[F5] pointed out that the consideration in McCauley's agreement was described as a price or royalty and that it was based on a specified number of superficial feet of the milling timber cut in the exercise of the rights and privileges granted by the agreement. There followed a passage which brings together the grounds on which his Honour decided that the payments were royalties. His Honour said: "In form and effect the taxpayer granted a right to the sawmiller, which he covenanted to exercise, to cut and remove the milling timber, above the specified girth, from the taxpayer's trees growing on his land, in consideration of three shillings for every hundred superficial feet of milling timber which the sawmiller cut. The parties described this sum as a price or royalty. As the consideration for the sale of the milling timber when it was turned into 'corporeal moveables' it was apt to describe this sum as a price. But as the moneys there described were the consideration for the right which the taxpayer granted to cut and remove the milling timber from the trees growing on his land it is, in my opinion, in accordance with the ordinary business usage of the expression 'royalty' to say that the taxpayer received such moneys 'as or by way of royalty."' ^[F6] In his judgment Rich J. drew a distinction between on the one hand a contract amounting to the sale of existing trees as chattels and on the other hand a contract creating a right to enter the land whenever the party is disposed to do so and to cut and take therefrom such timber or such timber of a specified class as he may from time to time desire to obtain on payment of a sum determined by the quantity taken. His Honour described a contract of the latter description as not one of sale but as creating a profit a prendre. "In the former case, the amounts paid are instalments of a price; in the latter, they are royalties paid in respect of the enjoyment of a profit a prendre". ^[F7] His Honour regarded McCauley's contract as amounting to no more than the sale of standing timber and on that ground he dissented.

The definition of royalty is widely expressed in the passages cited from the majority judgments, more widely than the decision of the case required, but it may be that it has received an interpretation even wider than their Honours contemplated. Little assistance is to be obtained from the history of the word. For, as Lord Selborne L.C. said in Attorney-General of Ontario v Mercer ^[F8] "in its primary and natural sense 'royalties' is merely the English translation or equivalent of 'regalitates', 'jura regalia', 'jura regia'". ^[F9] To say that the uses of the word are now figurative and represent analogies to the revenues which some jura regalia were seen to yield to the Crown does not help much to ascertain the scope of present usage. It may be noted, however, that the modern applications of the term seem to fall under two heads, namely the payments which the grantees of monopolies such as patents and copyrights receive under licences and payments which the owner of the soil obtains in respect of the taking of some special thing forming part of it or attached to it which he suffers to be taken. It is not fanciful to trace the extension of the word by analogy from the kind of payments which some of the jura regia enabled the Crown to obtain. We are not concerned with that application of the word which relates to payments to a patentee owner of a copyright or even of a secret process in respect of articles produced or sold, or books printed or sold or works performed or exhibited under his licence. What matters here is the parallel though distinct development of the meaning of the word which seems to arise from payments made to the Crown in respect of metals and the like won or taken from the soil. Similar payments to the owners of mines are regarded as royalties and by an extension not difficult to follow payments made in respect of the taking under the agreement or licence of the owner of land of anything which may be considered part of or naturally attached to the soil such as coal, stone, sand, shells, oil and standing timber came to be spoken of as royalties. Warren and piscary and such rights are not heard of amongst us but conceivably there may be things made the subject of royalty which belong to ownership of land that cannot be considered actually to be part of the soil. In the case of monopolies and the like the essential idea seems to be payment for each thing produced or sold or each performance or exhibition in pursuance of the licence. In the same way in the case of things taken from the land the essential notion seems to be that the payment is made in respect of the taking of something which otherwise might be considered to belong to the owner of the land in virtue of his ownership. In other words it is inherent in the conception expressed by the word that the payments should be made in respect of the particular exercise of the right to take the substance and therefore should be calculated either in respect of the quantity or value taken or the occasions upon which the right is exercised.

In the present transaction between the graziers and the sawmiller this element is lacking. The transaction enabled the sawmiller and indeed bound him to take stands of timber for defined prices which were payable whether he exercised the right or not and the price was not calculated upon the amount taken but only upon the amount of timber of the described kind and girth found to be standing upon the land.

It follows that the payments were not royalties and ought not to have been included in the assessable income. The question in the case stated should be answered: No.