ASHGROVE PTY LIMITED & ORS v DFC of T

Judges:
Hill J

Court:
Federal Court

Judgment date: Judgment handed down 31 August 1994

Hill J

Before the Court are applications from five taxpayers, Ashgrove Pty Limited (``Ashgrove''), Mrs Gooch, Mr Davey, Mr Wadley and Mr Swain. These five cases were heard together and are said to be test cases. There are in each both similarities and differences.

In each case the applicant was a party, in the relevant year of income, to one or more agreements for the sale of timber, which agreements were obviously based upon the agreement the subject of the decision of the High Court in
Stanton v FC of T (1955) 11 ATD 1; (1955) 92 CLR 630. In Stanton's case it was held that, notwithstanding that a timber sale agreement contained provision for reducing the lump sum price (payable by instalments) of a specified amount of timber sold should it appear that there was insufficient timber on the land, each instalment was not a royalty within the then s. 26(f) of the then Income Tax and Social Services Contribution Assessment Act (1936-1953) (Cth) now the Income Tax Assessment Act 1936 (Cth) (``the Act''). It was not suggested in that case that the instalments were otherwise of a revenue nature. The case proceeded upon the assumption that they were capital.

Two different standard forms of agreement are to be found in the five cases (although there were some immaterial differences within the two standard agreements). One form was used in the cases of Mrs Gooch, Ashgrove and Mr Davey; the other was used in the cases of Mr Swain and Mr Wadley. Since argument was addressed to the language of these two forms, a copy of relevant parts of that employed in the case of Mrs Gooch's first agreement (Annexure A) and that employed in Mr Swain's case (Annexure B) are attached to this judgment.

There was little dispute as to the facts and although each taxpayer was cross-examined, the cross-examination was somewhat desultory. No question of credit arose and I accept the evidence of each applicant.

In most of the cases the Commissioner treated the consideration received in the relevant year of income (other than a reafforestation incentive payment received by Mr Wadley) as assessable income, applying the provision of Part IIIA of the Act (concerned with capital gains and losses) and/or, s. 26(f) (concerned with royalties). Before me the Commissioner sought to support the assessments both under Part IIIA and on the basis that the amounts received were income in

ATC 4551

ordinary concepts assessable under s. 25, s. 25A or s. 26(f) of the Act.

I turn now to outline the facts relevant to each application.

Mrs Gooch

On 7 April 1992 the respondent, the Deputy Commissioner of Taxation, (``the Commissioner'') issued a notice of assessment to Mrs Gooch for the year ended 30 June 1991. In that assessment he included an amount of $21,800 in assessable income. That figure represented amounts received by Mrs Gooch under a contract made between her and North Broken Hill Limited on 22 October 1990 and an agreement dated 1 January 1991. The amounts received by her were received as to the sum of $40 on 5 December 1990, being for deposit and options, the sum of $19,960 on 6 December 1990, being the consideration payable under the contract of 22 October 1990 and the sum of $1,800 under the contract dated 1 January 1991 received by her on 21 January 1991. There is a marginal discrepancy between these figures and figures which Mrs Gooch said on oath she had received in that she said in her affidavit evidence that she had received on 5 December 1990 a deposit of $10 together with $10 for 10 options when the payment advice indicates she received $40. Nothing, however, turns upon this.

The contract dated 1 January 1991 is in identical terms to that dated 22 October 1990, save that the quantum of timber referred to in cl. 2 is 100 cubic metres rather than 2,000 tonnes and the purchase price is $1,800 rather than $19,960. There are, in the result, as well, consequential alterations which are presently immaterial.

Mrs Gooch acquired by transfer from her father and mother a portion of a property ``Wisedale'' situated at Frankford. The part transferred by her father on 25 July 1985 comprised 1,340 acres. The evidence does not indicate the extent of that part of the property which was transferred to her by her mother. The total area of Wisedale was approximately 5,500 acres.

Since about 1983 the Wisedale property (including since 1985 the property owned by Mrs Gooch) had been leased to a partnership of which she was a member and which partnership conducted a business of primary production, largely wool production. Approximately one- third of the turnover of the partnership came from the sale of beef cattle.

In about 1989 wool returns began to diminish and the partnership looked to other activities such as cropping to provide income. Onions were planted and subsequently potatoes, poppies, barley, wheat and lupins. Of the property owned by Mrs Gooch, two lots are relevant to the present proceedings being Lots 1 and 2 on Plan D44320 which are referred to in the evidence in her case as ``the bush blocks''. When transferred these included substantial stands of timber comprised of old, mature forest. Occasionally the area was burned to reduce litter and promote the growth of grass and was used as a bush run for sheep. Since the mid-1980s no burning had been undertaken. The trees in the bush block varied in girth from more than a metre down to small trees.

In 1989 Mrs Gooch was in need, she says, of ``capital''. This need precipitated her entering into the agreement of 22 October 1990 and the subsequent agreement of 1 January 1991.

As part of the arrangement the purchaser entered into a timber harvesting plan under the provisions of the Forest Practices Act 1985 (Tas) which made provision for regeneration of the timber by way of self-regeneration. The ground itself was only bushland and not, as such, suitable for farming and the regeneration was seen by Mrs Gooch as providing for future generations. As she pointed out in her evidence, the trees would not be mature in her generation because the land was poor land. If the land had not been regenerated it would have looked like a scarred mess of rock.

The agreement of 22 October 1990 was not the first agreement which Mrs Gooch had entered into in respect of the sale of timber. There was an earlier agreement in respect of some part of the land which had been used as a sheep run. That agreement was made in 1986 or 1987 and was similar to the agreements with which the present case is concerned. It contained various options which had not yet expired. Two or three of the options granted in it had been exercised. Having regard to the two agreements, approximately one-tenth of the land was logged and from the amounts payable to her by the purchaser a levy was deducted for payment to the Tasmanian Farmers and Graziers Association Forestry Committee. The levy was voluntary and became payable upon the sale of all commodities including timber.

ATC 4552

In her evidence Mrs Gooch said that the purchase prices payable to her under the agreements were arrived at having regard to the purchaser's standard rate payable per tonne of timber felled.

Ashgrove

On 11 November 1992 the respondent, the Deputy Commissioner of Taxation (``the Commissioner''), issued an amended assessment against Ashgrove increasing the assessable income and, in the result, the taxable income of Ashgrove for the year ended 30 June 1991 from nil to $49,900. The increase related to the receipt by Ashgrove of $49,900 being a payment made to it by Tasmanian Pulp and Forest Holdings Limited (``the purchaser''), pursuant to an exercise by the purchaser on 13 February 1991 of an option granted by Ashgrove to the purchaser in an agreement dated 15 January 1987.

Ashgrove duly objected against the assessment and, that objection being disallowed, it appealed to the Court.

Apart from the transactions, to which reference will hereafter be made, with the purchaser, Ashgrove had no other activity at relevant times other than the owing of land which it leased to a partnership comprised of Mr GV Bresnehan and Mr MJ Bresnehan who carried on the business of primary production on the land leased from Ashgrove. The total holding of Ashgrove as at 1991 was approximately 4,500 acres. Of that area 3,200 acres had been acquired by it at the time of its incorporation in 1965 and the balance had been acquired thereafter by subsequent purchases.

Apart from some selective saw-logging which had occurred prior to 1965, clearing for the extension of a paddock and the cleaning up of bush corners in existing paddocks (one clean up at least involved about three truck loads in the mid-70s), there had been no logging on the land.

The land owned by Ashgrove included some 2,000 acres being land comprised in a series of title volume 2132 folios 26, 28 and 29 referred to in the evidence in its case as ``the bush property'', which, between 1965 and 1987, was used for the running of sheep. Otherwise there was no farming or management of the bush property which comprised substantial stands of mature forest including some timber suitable for saw-logs. Some of the trees were extremely large, up to two metres in diameter at the base and 40-50 metres in height. Some of the trees were small.

Two agreements were entered into by Ashgrove in 1987 with the purchaser. It is the first of these agreements with which the present case is concerned. The second was in similar terms but related to 500 cubic metres of timber and provided for a purchase price of $6,000.

The first agreement was dated 15 January 1987. Clause 20 of the agreement contains the grant to the purchaser of a series of options to purchase additional timber, up to a total further 50,000 tonnes. It was cl. 20 that was activated by the purchaser on 13 February 1991, when it gave notice of exercise of an option to purchase a further 5,000 tonnes of timber defined in the agreement for a purchase price of $50,000. The difference between the purchase price and the amount included in the assessable income in the assessment under dispute arises from an amount of $100 which was deducted from the $50,000 and paid by the purchaser to the Tasmanian Farmers and Graziers Association Forestry Committee, as a voluntary body.

The agreement of 15 January 1987 came about as a result of Mr Bresnehan being approached by the purchaser which was apparently purchasing timber from various sites in the vicinity of Ashgrove's land. The price of $10,250 for 5,000 tonnes was stipulated for by the purchaser. Thereafter the purchaser gave notice, on a number of occasions, of exercise of option (inferentially six such options were exercised before February 1991) and since the exercise of option in February 1991 a further option has been exercised. The purchaser has not yet exercised options in respect of the total of 50,000 tonnes to which cl. 20 refers.

A timber harvesting plan was prepared by the purchaser in relation to the taking of timber under the agreements of 1987. That plan provided for natural regeneration and Ashgrove proposes to use the land that has been logged and is now regenerating for bush stock grazing. The area involved is approximately 160 hectares.

Cross-examined as to the purpose of Ashgrove in entering into the agreement, Mr Bresnehan, a director of the company and holder of half of the shares in it, explained that the purchaser wanted the timber and that Ashgrove had it for sale. No doubt the extra

ATC 4553

cash which it provided was not unwelcome to Mr Bresnehan.

Mr Swain

At issue in the case of Mr Swain are two years of income being the years of income ended 30 June 1988 and 30 June 1989.

On 25 May 1992 two notices of amended assessment were issued by the respondent Deputy Commissioner of Taxation (``the Commissioner''). In the year ended 30 June 1988 the Commissioner included in Mr Swain's assessable income the sum of $3,790 and in the year ended 30 June 1989 the sum of $8,363. These two amounts were received from Forest Resources pursuant, so Mr Swain said, to an agreement dated 7 April 1987 entered into between himself, his wife and that company, hereafter referred to as ``the purchaser''. Mr Swain duly objected to the inclusion of these amounts in his assessable income and upon those objections being disallowed appealed to this Court.

In 1966 Mr Swain purchased 219 acres in Bracknell, Tasmania. Subsequently, with his wife, he acquired adjoining property as well as acquiring property jointly with his brother, sister-in-law and his wife. The total area of all of this property is approximately 500 acres.

Since his marriage Mr Swain has carried on in partnership a primary production business of dairy farming. The partnership also raises sheep and a few beef cattle. It has never engaged in any cropping except for one small crop of barley grown many years ago.

During early 1987 Mr Swain became aware of logging on an adjoining property, not owned by the family, and there was trouble with stock straying into an area of bush bordering the land upon which logging was being undertaken. He also had trouble with shooters frequenting the area and had found some dead stock.

After making enquiries of a logging contractor Mr Swain was approached by a representative of Forest Resources who wanted to know if he was interested in selling trees. Mr Swain indicated that he was and that he would like to clean the land up. After inspecting the land the representative of Forest Resources gave a rough indication of the tonnage involved in a particular area and that, in the result, led to the signing of an agreement of 7 April 1987. It was Mr Swain's understanding that Forest Resources would, in respect of the particular area, take trees except from an area of two acres at the top part of the property. The price payable, pursuant to the agreement, was arrived at by reference to a prevailing tonnage which Mr Swain was told was $2.50 per tonne.

It will be noted that cl. 2 of the agreement entered into by Mr Swain provides for the sum of $18,550 to be paid, subject to a deposit of $5, by monthly instalments which might vary in accordance with the volume of timber moved. In fact payments were made by Forest Resources on a monthly basis. The statements which accompanied the payments referred to them as ``royalties''. The statements demonstrate that the amount payable per tonne varied from an initial rate of $2.50 per tonne to $2.80 per tonne for what may be assumed to be woodchip timber and $15.00 per tonne for what the statements indicate to be sawmill timber. A contribution to the Tasmanian Farmers and Graziers Association Forestry Committee was deducted by Forest Resources from the amount payable to Mr Swain.

Timber has been taken from approximately 80 acres of the overall property and, of the area logged, Mr Swain had cleared one half and wished to clear the balance which at the moment was regenerating naturally but had not yet done so because of lack of funds in the period from the date of the agreement to the present time.

Although the agreement contemplated that Mr Swain would receive only a total of $18,550, it is clear from his evidence that he has received a great deal more than that. In the year ended 30 June 1988 he received approximately $10,300 and in the year ended 30 June 1989, $16,725.03. Not all of the statements from Forest Resources were in evidence, but those that were rather suggest that not only were the instalments greater than the amount Mr Swain was entitled to receive, but so also was the quantity of timber taken.

Mr Wadley

In the case of Mr Wadley, three years of income are involved, being the years of income ended 30 June 1989, 30 June 1990 and 30 June 1991.

On 21 October 1992 assessments for each of the three years in question were issued by the respondent Deputy Commissioner of Taxation (``the Commissioner''). An adjustment sheet showing proposed adjustments discloses that in

ATC 4554

1989 the Commissioner included in assessable income the sum of $17,726 which the adjustment sheet referred to as ``timber royalties received''. An amount of $44,194 was included in the 1990 year of income under the same heading and in the 1991 year of income a sum of $60,381 was included under the appellation ``reafforestation incentive payment''.

The amounts included in the 1989 and 1990 years of income were said by Mr Wadley to have been paid to him pursuant to an agreement (``the Timber Supply Agreement'') with Forest Resources, hereafter referred to as ``the purchaser''. Another agreement (``the Regeneration Agreement'') was entered into between Mr Wadley and Forest Resources on 12 September 1988. That agreement provided for the regeneration of a forest on the land logged and gave to the purchaser a right of first refusal to purchase the regenerated timber. It provided no separate compensation for the right of first refusal. However, a regeneration plan which formed a schedule to that agreement provided that the purchaser would fund 100% of all regeneration costs on the property and would pay to Mr Wadley a reafforestation incentive payment of $1.60 per tonne for conventional pulpwood and 30 cents per tonne for salvage wood removed off the area being regenerated. It is the payment under this plan that was included in the 1991 year of income.

An addendum to a schedule attached to a letter from the purchaser to Mr Wadley dated 14 November 1989 makes it clear that the reafforestation incentive payment is a recognition of the agreement of Mr Wadley ``to manage the area for timber production and to exclude livestock''. In these circumstances counsel for Mr Wadley had difficulty sustaining an argument that the $60,381 paid to Mr Wadley in the 1991 year was other than income in ordinary concepts. It was a reward for services paid periodically and had all the indicia of income. For this reason the appeal, in respect of the 1991 year, must fail.

The property logged was part of a property known as ``Looseleigh'' situated at Selbourne in Tasmania. The property was formerly owned by Mr Wadley's father who then died. Under the father's will Mr Wadley became entitled to the relevant part of the property which comprised some good grazing land and some other land of poor quality but containing substantial stands of timber. The property had been worked by a partnership of which Mr Wadley was a partner for at least 10 years. Farming for wool, beef and cropping had been undertaken. Mr Wadley had not, prior to the agreement with the purchaser being entered into, planted any trees or otherwise been engaged in timber management, although his father had been involved in selective saw-log removal prior to his death. This logging was in association with developing the property, for example, by building a dam or making new pasture.

During 1988 Mr Wadley became concerned to reduce the level of his debt as interest rates were high and he was then negotiating the retirement of his mother from the partnership of which they were both members. It is not clear whether Mr Wadley approached the purchaser or was approached by that company, although the former from his evidence seems more likely. Mr Wadley was concerned to get a particular area of land cleared and reafforested. An employee of the purchaser came to him, estimated the area of land to be logged and arrived at a figure. Mr Wadley was not told how that figure was arrived at.

The area in question was suitable only for grazing some wethers and for growing trees. Mr Wadley desired to reafforest it so that he could leave the land for future generations as he found it. He was aware that future generations might be able to sell the timber. He understood that with reafforestation of the particular land it would take about 4-5 years before the trees would grow to a height which would enable him to use the land for farming purposes. He was not told how long it would take before the trees would be ready for harvesting as mill-logs. By the time his evidence was given some of the regenerated trees were about two feet high but regeneration was slower than he had expected.

As in the cases referred to earlier, the purchaser deducted from the consideration the levy for the Tasmanian Farmers and Graziers Association Forestry Committee. Mr Wadley's understanding was that that levy was automatically deducted unless the vendor of timber indicated that the vendor did not want the deduction to be made.

Although the timber supply agreement refers to a specific quantity of timber (10,000 tonnes) and a purchase price of $24,250, it is clear that since the agreement was executed Mr Wadley

ATC 4555

has been paid considerably more than $24,250, that the purchaser has taken more timber than 10,000 tonnes and that the purchaser has calculated the amount payable to Mr Wadley in a way which is hardly consistent with the agreement. In evidence were statements from the purchaser which showed the amounts payable to Mr Wadley as ``royalties''. The statement showed the weight of timber (that being calculated by the purchaser after the timber was taken to the mill) and the rate payable varying from $3.30 per tonne initially rising to $4.70 per tonne for what may be assumed to be woodchip timber and from $9.00 to $17.00 per tonne for items under the heading ``sawmill royalties'' which, presumably, relate to timber for milling.

It will be noted that the timber agreement provides for the balance payable under it to be paid by monthly instalments varying in accordance with the volume of timber moved. Payments were made to Mr Wadley monthly in accordance with the statements to which reference has already been made. In the years of income payments were received by Mr Wadley from the purchaser as follows (the first eight pursuant to the Timber Supply Agreement of 4 October 1988, the last pursuant to the Regeneration Agreement):

    30 April 1989                603.82
    28 May 1989                7,827.90
    30 June 1989               9,326.22
    30 July 1989               9,588.52
    27 August 1989            13,974.56
    24 September 1989          7,818.56
    29 October 1989           10,050.57
    26 November 1989           2,762.14
    12 May 1991               60,381.01

Apart from the sale of some pines that had been planted as a windbreak when they had become unsafe, Mr Wadley had not been involved in selling any other timber from the property.

Mr Wadley was not asked to explain how it came about that he had received amounts from the purchaser in the years 1989 and 1990 way in excess of the amounts payable to him under the timber supply agreement. It was not put to him that that agreement, or any clause of it, had been a sham.

Mr Davey

The applications in the case of Mr Davey concerned two years of income, being the years of income ended 30 June 1990 and 30 June 1991 respectively.

On 2 March 1993 the respondent Deputy Commissioner of Taxation (``the Commissioner'') issued two amended assessments to Mr Davey reflecting adjustments that had been made by the Commissioner to the net income of a ``partnership'' between Mr Davey and his wife adding, as assessable income of the partnership for the year ended 30 June 1990, the sum of $17,560 and to the assessable income for the year ended 30 June 1991, the sum of $44,000 said to be a capital gain for the sale of timber under options exercised in September and December 1990 and the sum of $34,731 described in the adjustment sheet as ``royalty income received from the sale of timber outside the terms of the contract for selling the timber''. Mr Davey objected against his assessment which included an equal share of the first two amounts. (He did not object to the inclusion of the sum of $34,731 in assessable income.) The objections were disallowed and Mr Davey appealed to this Court from the reviewable decisions of the Commissioner to disallow the objections.

The first two amounts described in the adjustment sheet, to which reference has already been made, represented payments said by Mr Davey, at least in part, to have been received by his wife and himself pursuant to options exercised on 6 September 1990 and 20 November 1990 under an agreement dated 30 August 1988 with North Broken Hill Limited (``the purchaser'').

The purchaser, on 6 September 1990, pursuant to cl. 23 of the agreement, exercised an option to purchase 2,000 tonnes of ``suitable pulpwood'' at the current rate. The notice exercising the option showed the calculation as follows:

    "Clause 23
    2,000 tonnes royalty @ $4.00       $8,000
    2,000 tonnes ATF @ $4.80           $9,600
                                      -------
                                      $17,600"

It appears that no levy was deducted at Mr Davey's request for payment to the Tasmanian Farmers and Graziers Association Forestry Committee. On 20 November 1990 pursuant to cll. 24 and 25 of the agreement, options were exercised for a further $2,000 and 1,000 tonnes respectively of ``suitable pulpwood at the current rate''. $26,400 was paid, the amount

ATC 4556

calculated being according to a letter from the purchaser:

    "Clause 24
    ----------
    2,000 tonnes royalty @ $4.00 =     $8,000
    2,000 tonnes ATF @ $4.80 =         $9,600

    Clause 25
    ---------
    1,000 tonnes royalty @ $4.00 =     $4,000
    1,000 tonnes ATF @ $4.80 =         $4,800
                                      -------
                                      $26,400"

Mr Davey in 1963 purchased two properties, in the same general area although not contiguous, known as ``Clover Hill'' and ``Ngapara''. Since the acquisition of these properties Mr Davey and his wife carried on a primary production business on these properties growing sheep for wool and meat and producing beef. From time to time, as well, they sold small amounts of timber for woodchip or for saw-log.

When Mr Davey acquired the properties they were run down but he has since built up the property and increased stock so that the partnership now runs about 2,000 sheep and 50 breeding cows. The partnership never engaged in any cropping except for the production of fodder for use by the partnership.

On part of their holding were five bush blocks, one of which is the land contained in certificate of title volume 2488 folio 82 which is referred to in the evidence in Mr Davey's case as ``the bush block''. That block is separated from the rest of the property and surrounded by crown land. As at August 1988 there were primarily mature trees on the bush block of varying girth from more than one metre down to small trees.

In around 1988 Mr Davey had entered into two guarantees in relation to his two sons under which he had a potential liability exceeding $150,000. As insurance in case he was called upon to meet a guarantee he decided to enter into an arrangement with the purchaser, to sell all of the timber standing on the bush block. Another factor motivating his decision to sell was the fact that some timber had already been stolen from the block.

Accordingly Mr Davey and his wife entered into an agreement dated 30 August 1988 with the purchaser. Since the agreement was executed the options in cll. 19 to 25 have been exercised. So far as is relevant to the present case, Mr Davey and his wife were paid $17,560 pursuant to cl. 22 in the year of income ended 30 June 1990 and in the year ended 30 June 1991 for the exercise of the options numbered 23, 24 and 25, the sums of $17,600, $17,600 and $8,800 respectively, for the purchase of 2,000, 2,000 and 1,000 tonnes. In the result Mr and Mrs Davey received the sum of $17,600 on 6 September 1990 and $26,400 on 20 November 1990.

Mr Davey was cross-examined about the amount shown in correspondence with the purchaser as ``ATF''. Those initials refer to ``Associated Tree Farmers'' and it seems that the amount of $4.80 was an incentive payment for replanting. The matter was not further explored in evidence.

In addition to the present agreement Mr and Mrs Davey had apparently had an earlier agreement with Forest Resources for woodchip timber on the block, a small portion of which had been logged and which had actually expired. He had also sold mill logs over the years to different saw millers. Since logging under the present agreement the land has been cleared, ridge ploughed, reaped and ridge ploughed again and trees planted so that there is, in Mr Davey's words ``a forest growing there now... which... is 20 or 30 feet high''. Mr Davey had planted ``nitons'', a type of gum tree which is quick growing and capable of being used for timber woodchipping purposes. He described it as ``... a plantation. It's growing timber, yes.''

When asked from the bench when he had formed the view that he wished to start a plantation he said he did so when he sold the timber and agreed that he would replant it. The agreement appears, from his evidence, to be concurrent with signing the timber sale agreement. It was all done at the one time. In contracting for the regeneration of the plantation he had a commercial purpose of selling the timber from it.

The competing submissions

In each of the five cases before the Court it was submitted for the Commissioner, and denied on behalf of each taxpayer, that amounts received pursuant to the timber agreements were both income in ordinary concepts and formed part of assessable income by virtue of the operation of Part IIIA of the Act concerned with capital gains. Any potential double taxation consequences arising from the Commissioner's submission would then be

ATC 4557

resolved by the operation of s. 160ZA(4) of the Act.

It is convenient for present purposes to deal first in these reasons with the issues thrown up by the capital gains provisions before considering the facts of each case to see whether, in the particular circumstances, the proceeds were income in ordinary concepts.

The structure of Part IIIA of the Act is dealt with in the various judgments of the High Court in
Hepples v FC of T 91 ATC 4808; (1991-1992) 173 CLR 492 and most fully in the judgment of Brennan J at ATC 4812ff; CLR 500ff. The difference of views in the High Court as to the operation of s. 160M(6) and s. 160M(7) does not affect that discussion. Suffice it to say here that an amount will be included in assessable income where an asset is disposed of during the year of income and the consideration in respect of that disposal exceeds what the legislation refers to as the ``indexed cost base'' to the taxpayer in respect of that asset: s. 160Z(1). However, that is subject to the provisions of s. 160L(1) which ensure that Part IIIA will have no operation to a disposal before 20 September 1985 of an asset which immediately before the disposal took place was owned, relevantly, by a resident of Australia.

For the taxpayers it was submitted that in each case there was a contract for the sale of goods between the respective taxpayer and the timber company purchaser, that the timber in question had been owned or formed part of realty owned by each respective taxpayer as at 19 September 1985 and accordingly that no liability arose under Part IIIA upon the sale of that timber. Alternatively it was submitted that if any of the agreements created an interest in the land (admittedly owned before 19 September 1985) upon which the timber stood as at the date of the relevant agreements, that interest was merely incidental to the sale of the timber as goods which I should infer to be the significant matter as between the parties to the timber agreements. Alternatively it was submitted that the present was a case for apportionment of consideration under s. 160ZD(4) of the Act and the matter should be remitted to the Commissioner to make such an apportionment.

For the Commissioner, on the other hand, it was submitted that in each case the timber agreement involved the grant of an interest in the land on which the respective timber stood, rather than a contract for the sale of goods, with the result that each agreement amounted to a disposition of property to which either ss. 160M(6) or 160M(7) of the Act referred. On this submission there would be a disposition of property for consideration, being the amounts received under the timber agreements but no relevant indexed cost base with the consequence that the totality of the proceeds would be assessable. Alternatively it was submitted that if the timber contracts were contracts for the sale of goods, the goods in question sold constituted timber rather than trees and as such were new and different assets from the trees which had been owned by the taxpayer as at 19 September 1985 and in the result ss. 160M(6) or 160M(7) would apply with the same consequences.

Was there a sale of goods?

At the heart of the taxpayers' submission lies the question whether each of the timber agreements was properly to be characterised as an agreement for the sale of goods or whether any of them involved the creation in law or in equity of a profit à prendre or other interest in the property upon which the timber stood at the time each agreement was entered into.

The grant of a right to take something out of the soil (a profit à prendre) confers upon the grantee an immediate interest in the land:
In re Refund of Dues Under Timber Regulations [1935] AC 184 at 193;
Reid v Moreland Timber Co Pty Ltd (1946) 73 CLR 1 at 16;
Mills v Stokman (1966-1967) 116 CLR 61 at 77. The interest in land so conferred is an irrevocable licence coupled with an interest and binds not only the person who creates it but anyone taking the land from that person with notice. If created by deed, the interest will be a legal interest; if not, but for consideration, it will be an equitable interest. However, not all cases where there is a right to take away something severed from the land will amount to the grant of a profit à prendre.

As early as 1875 Lord Coleridge CJ, in the leading case of
Marshall v Green [1875] 1 CPD 35 at 38, despaired, both of reconciling prior decisions and laying down a rule which could ``stand the test of every conceivable case''. That case arose in the context of a purported revocation of an agreement for the sale of timber, the agreement being for the sale of a nominated number of trees for a fixed price, the trees to be ``got away as soon as possible''. It

ATC 4558

was held, in the circumstances, that there had been a contract for the sale of goods to which s. 17 of the Statute of Frauds 1677 (29 Car. 2) applied, rather than a contract to which s. 4 of the same Statute applied, the former section being concerned with the sale of goods and the latter with the sale of lands, tenements, or hereditaments or any interest in or concerning them. The test applied in reaching this conclusion was said to depend upon divining the intention of the parties from the language of the contract entered into by them. Surrounding factual circumstances might also be relevant. Both Lord Coleridge CJ and Brett J, with whose reasons Grove J agreed, cited with approval comments of Sir Edward Vaughan Williams (at 39):

``The principle of these decisions appears to be this, that wherever at the time of the contract it is contemplated that the purchaser should derive a benefit from the further growth of the thing sold from further vegetation and from the nutriment to be afforded by the land, the contract is to be considered as for an interest in land; but where the process of vegetation is over, or the parties agree that the thing sold shall be immediately withdrawn from the land, the land is to be considered as a mere warehouse of the thing sold, and the contract is for goods.''

Marshall v Green was in many ways a simple case, such that it was said to seem ``obvious'' that a sale of a small number of trees to be taken away immediately involved not the sale of an interest in land but merely the sale of a particular quantity of timber. But even the judgment itself shows the difficulty which arises if the test is to be taken to be whether the trees themselves derive benefit from the land: see at 38-9. One thing, however, that the case does demonstrate is that, at general law, there is a real dichotomy between a contract (which is for the sale of goods being timber) conferring a mere licence to enter the land and a contract which involves the sale of an interest in land.

The test in Marshall v Green was not enthusiastically greeted by Chitty J in
Lavery v Pursell (1888) 39 Ch D 508, where a contract for the sale of the building materials from a house to be taken down and removed within two months (whereupon the right of access ceased and the materials were forfeited), was held to be not a contract for the sale of goods but rather a contract for the sale of an interest in land to which the formalities in s. 4 of the Statute of Frauds applied. His Lordship expressed the view (at 517) that Marshall v Green:

``... turned upon this, that they considered that as the trees were to be cut down as soon as possible, and were almost immediately cut down, the thing sold was a chattel.''

His Lordship further expressed the view that Marshall v Green might be open to further consideration.

The Sale of Goods Act 1893 (UK) (56 and 57 Vict. c.71) operated to codify the law relating to the sale of goods. For the first time, however, the expression ``goods'' was defined in s. 62(1), a definition which is now repeated in the Sale of Goods legislation throughout Australia: cf Sale of Goods Act 1896 (Tas) s. 3(1). Under the 1893 and later legislation, the expression ``goods'':

``... includes emblements... and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale.''

The definition is expressed in each Act to be for the purposes of that Act. The new definition may explain the decision in
Kursell v Timber Operators and Contractors [1927] 1 KB 298 where, without any discussion or reference to Marshall v Green, an agreement for the sale of all the timber in a forest under which the purchaser was allowed 15 years to cut the timber down was held to involve a sale of goods for the purposes of the Sale of Goods legislation. However, Kursell's case was referred to with apparent approval by McTiernan J (at 248) in
McCauley v FC of T (1944) 7 ATD 427; (1944) 69 CLR 235, without any qualification being made as to its being limited to the context of Sale of Goods legislation.

Few of the Australian cases have found it necessary to decide the categorisation of a contract for the sale of timber to be severed and, in particular, whether such a contract created an interest in land. Those cases which concerned income tax simply did not require an answer to be given to the question whether an interest in land was created; they depended upon whether the proceeds from the contract were assessable income or whether payment under the contract gave rise to an allowable deduction. The Privy

ATC 4559

Council, in the appeal from New Zealand of
Kauri Timber Company Limited v The Commr of Taxes [1913] AC 771, was concerned with deductions. It repeated the comments of Sir Edward Vaughan Williams approved of in Marshall v Green (see at 778-9) without any reference to the provisions of the Sale of Goods legislation. In McCauley v FC of T (1944) 7 ATD 427; (1944) 69 CLR 235 the question arose whether the amount payable under an agreement for the sale of a right to cut and remove standing milling timber calculated by reference to the number of superficial feet of milling timber cut was income as a ``royalty''. To decide this issue it was in one sense irrelevant whether the agreement created an interest in land or not. The agreement in question required the timber to be cut and removed within 12 months with provision for monthly statements of the timber removed. Latham CJ referred to the agreement as being an agreement for the sale of growing timber to be taken away by the purchaser and therefore an agreement for the sale of goods (at ATD 428; CLR 238). His Honour made reference to Marshall v Green in so doing. However, if immediacy of severance were a necessary condition for the agreement to be a sale of goods, it is hard to see how his Honour could have reached the view he did. McTiernan J also appears to have regarded the agreement as being for the sale of goods (see at ATD 434; CLR 248) but made reference to the Sale of Goods Act.

Rich J set out his Honour's view of the law (in this regard it is a minority view) in the following passage (at ATD 431-432; CLR 244):

``A contract by which one person authorizes another to cut and remove timber from land of the former may be of one or other of two different types. It may amount to a sale, as chattels, of all or some specified part of the trees on the land for a price payable in a lump sum, or by instalments determined by the quantity of the timber sold which is removed from time to time. Or it may amount to the creation of a profit à prendre, an interest in the timber, treated as part of the realty, coupled with a right to remove it on payment of sums stipulated for as consideration for the rights created by the profit. The category into which any particular contract falls depends upon its terms. If its scheme is that the timber-getter acquires the right to all or some specified part of the existing timber, and is to cut and remove it immediately, or within so short a time that no benefit from the land in respect of increased growth of the trees could have been contemplated, the contract is one for the sale of the existing trees as chattels, for which the land serves only as a store-house until they are removed [Marshall v Green]. On the other hand, if the contract creates 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, the contract is not one of sale but creates a profit à prendre. [Cf In re Refund of Dues paid under s. 47(f) of the Timber Regulations in Manitoba, British Columbia, Saskatchewan and Alberta.]''

The agreement in Reid v Moreland Timber Co Pty Limited (supra) appears to have been treated, by at least the majority of the Court, as being an agreement creating a profit à prendre rather than an agreement for the sale of timber: see per Latham CJ at 6-7; Starke J at 8; per Williams J at 16. But there again the issue was really not so much whether a grant of an interest in land was created but whether the licence to cut the timber was exclusive of the rights of the vendor.

There was also no reason to resolve the question in Stanton's case. Whether or not there was merely a sale of the timber or in addition a sale of an interest in land would not have affected the outcome. The Court did, however, comment that in substance the agreement amounted to a sale of standing timber but that comment hardly resolves the issue.

More recently in Mills v Stokman (1966-1967) 116 CLR 61 and in
Australian Softwood Forests Pty Ltd & Ors v Attorney- General for NSW (1981) CLC ¶40-734; (1982) 148 CLR 121 the High Court discussed the nature of a profit à prendre. In the former case, a grant (not by deed) of a right to enter and remove slate upon the ground amounted, it was said, in equity, to the grant of a profit à prendre creating an interest in the land upon which the slate rested. In the latter case Mason J, after discussing Marshall v Green and Lavery v Pursell and referring to the definition now contained in s. 5 of the Sale of Goods Act 1923

ATC 4560

(NSW) in similar terms to that of s. 3 of the Tasmanian legislation, said (at CLC 33,285; CLR 131):

``It may be the presence of this definition that has induced Courts in later cases to hold that a contract for the sale of growing timber under which the purchaser has the right to enter the land, cut and remove the timber immediately is a contract for the sale of goods. This is presumably on the footing that the property in the timber passes when it is severed from the land under the contract of sale. See McCauley v. F.C. of T. (1944) 69 C.L.R. 235 at pp. 238 and 248; Kursell v. Timber Operators and Contractors [1927] 1 K.B. 298. In most of the cases the right to cut and remove timber was not created by a deed or formal instrument appropriate to the creation of a profit à prendre. Consequently, the right of the purchaser to enter upon the land to cut and remove timber has been classified as an equitable profit à prendre, something of the nature of a profit à prendre or as an irrevocable licence coupled with an interest. See Mills v. Stokman (1967) 116 C.L.R. 61.''

His Honour on the facts in the case concluded that the grower of timber acquired an interest in land even if not a profit à prendre in the strict sense. The case was one where the evident intention of the parties was that the grower would have a continuing interest in the land culminating in the severance and removal of the trees. The interest of the grower was not a mere chattel interest arising on severance.

A question never resolved by any case is whether the change to the definition of ``goods'' in the Sale of Goods legislation had an impact on the general law wider than its impact for the purpose of that legislation. AH Hudson, in a useful article, ``Goods or Land?'' (1958) 22 Conv. N.S. 137 at 137 catalogues the different views of textbook writers as to the question whether the incorporation of the definition of goods into the Sale of Goods Act had the result that a contract for the sale of timber to be severed, for example, was no longer to be treated as creating an interest in land and thus subject to the formalities prescribed by s. 4 of the Statute of Frauds or comparable provisions. The learned writer points out that Cheshire & Fifoot, Law of Contract 4th ed. at 156, Benjamin on Sale, 8th ed. at 189 and Atiyah, Sale of Goods at 28 all suggest that the definition brought about the result that all contracts containing an agreement to sever goods were to be treated as contracts for the sale of goods and not as contracts for the sale of any equitable interest in land. Sutton & Shannon on Contracts, 5th ed. at 138 takes a contrary view, arguing that the definition of goods in the Sale of Goods Act is a definition only for the purposes of that Act alone. Reference is made as well to Megarry and Wade, Real Property at 512, Dart, Vendor & Purchaser, 8th ed. at 207 and Anson, Contract, 20th ed. at 71, all of which refute the view taken by the learned authors of Cheshire & Fifoot, Benjamin on Sale and Atiyah, Sale of Goods.

If the definition of ``goods'' did not operate to change the general law, the consequence is that a contract could, at the one time, be both a contract for the sale of goods (where it is necessary to determine the application of the provisions of the Sale of Goods Act) but nevertheless a contract creating an interest in land for the purposes, for example, of the application of s. 4 of the Statute of Frauds or modern equivalents. The consequence would be that it would only be in a case to which the principles in Marshall v Green applied that no interest in property would be created for such a contract would truly be for general law purposes and not merely for the purposes of the Sale of Goods Act a contract for the sale of goods. The learned author concludes (at 138):

``Thus the majority of writers, supported by weighty reasons of principle, appear to be opposed to the view that the Sale of Goods Act has made any extraordinary change in the law relating to the sale of the produce of the soil, and therefore think it necessary to have recourse to the pre-1893 case law to determine whether a particular sale is a sale of an interest in land or not.''

The article then continues to discuss the pre-1893 law and the difficulties of the Marshall v Green test.

In no case has it been necessary to decide the question. I find the argument of the majority of textbook writers persuasive. The Sale of Goods Act was only intended to regulate the matters which are dealt with in that legislation, such as the passing of title and the like. It does not appear to have been intended to make a significant change in the law of property. When the legislation came to define ``goods'', it did

ATC 4561

not do so for the purpose of a general law dichotomy between sale of goods on the one hand and sales which created an interest in land on the other, but merely for the purposes of the Sale of Goods legislation. For this purpose the legislation chose to liberalise the Marshall v Green test so that the only relevant matter for determination in any case where the Sale of Goods Act is to be applied is whether there is an agreement that the goods be severed. It, however, left intact for other general law purposes the decision in Marshall v Green.

On this view it thus becomes necessary to analyse each of the timber agreements having regard to the tests proposed in Marshall v Green. It goes without saying that if the matter falls to be determined by reference to the definition of ``goods'' in the Sale of Goods Act, each of the present agreements provide for severance and would be an agreement for the sale of goods.

As has already been noted, two forms of agreement were in use. The first form is that to which Tasmanian Pulp and Forest Holdings Limited and its related company, North Broken Hill Limited, were parties, relevant to the cases of Ashgrove, Mrs Gooch and Mr Davey. The second form of agreement, used by Forest Resources, is applicable in the cases of Mr Swain and Mr Wadley.

Some clauses in the first form of agreement point to the creation of an equitable interest in land; others to there being merely an agreement for the sale of goods conferring upon the purchaser a licence not being an interest in the land. In favour of the view that the agreement creates an interest in land are the provisions of cl. 5 granting access, coupled with the grant of a right to quarry for building purposes (cl. 6(b)) and the provisions of cl. 15 containing an acknowledgment by the parties (apparently) that the agreement creates a caveatable interest. In favour of the position that no interest in land is created are the provisions of the recitals and cl. 2 which demonstrate that the agreement contemplates a purchase and sale of a specific tonnage of timber for a specified price and the fact that the entitlement to remove timber is immediate: cl. 4(a).

In favour of the view that the second form of agreement is to be characterised as an agreement for the sale of goods are again the fact that the agreement is stated to be for the purchase of a specified quantity of timber at a specified price: (cll. 1 and 2), that the creation of the right to fell timber and remove involves the creation of an immediate right, the fact that the grant of a right to enter is specifically stated to be made to give effect to the sale and purchase (cl. 3) and the fact that the right conferred upon the purchaser is a non-exclusive right (cl. 9).

Factors pointing the other way are again the grant of a right to quarry in aid of the timber agreement for road construction: cl. 7 and the reference to the right to lodge a caveat: cl. 10.

The surrounding circumstances make it abundantly clear in each case that the interest of the purchaser in the transaction was to secure a supply of timber to be felled and carried away. As has already been noted, the tests in Marshall v Green involve discerning from the terms of the agreement and the events which in fact happened, whether the contemplation was that the purchaser would derive a benefit from the further growth. The only factor which can be pointed to by the Commissioner in this regard is the period during which each agreement is to continue. Although none of the agreements created an obligation upon the purchaser to remove timber immediately, in all cases it appears that logging began almost immediately the agreements were entered into. The evidence makes it clear that the respective purchasers were involved in logging throughout at least Northern Tasmania and that in each case the timbered area contained mostly mature timber, rather than timber that was still growing to maturity. It must be conceded that some immature timber was on the land. However, I see no reason to conclude that the purchaser desired to obtain a benefit from the land itself rather than to acquire the timber ``warehoused'' on the land.

Although some of the agreements provided for lengthy terms, it does not seem that the length of the term was related to the purchaser looking for further growth of the trees. For example, in the case of Ashgrove the agreement was to continue for a term of 19 years. That term, however, seems to have been more related to the option agreements which were exercisable during the 19 years, rather than to a contemplation that the trees the subject of the actual purchase and sale agreement would remain in the soil yielding the initial 5,000 tonnes of timber throughout that 19 year period.

ATC 4562

In the circumstances I have concluded that each of the agreements should be treated as being an agreement for the sale of goods to which the right to enter and sever the timber was ancillary, rather than as being an agreement for the sale or creation of an interest in land. To the extent that each agreement conferred upon the purchaser a right to quarry for the purpose of building roads through the property and in aid of the timber getting agreement, it did create an equitable profit à prendre, but the grant of the right was ancillary to the timber rights and no separate consideration was payable in respect of it. It may thus be disregarded for present purposes.

Once it is accepted that the agreements are to be characterised as agreements for the sale of goods, most of the difficulties in applying the capital gains tax provisions disappear. Despite an ingenious argument on the part of the Commissioner which sought to distinguish timber (as cut) from trees, the former being apparently new goods which, so it was submitted, were created by the timber agreement (not curiously by the cutting down of the trees), it can hardly be gainsaid that growing trees are part of the realty in which they are rooted. If commonsense does not suffice to support the proposition that a tree is part of the land upon which it grows, reference may be made to the judgment of the High Court in
Thomson v DFC of T (1929) 43 CLR 360 where the Court said (at 363):

``The timber formed part of the asset which the appellant acquired when she took up the land.''

Where a taxpayer disposes of the entirety of an asset and the asset has undergone no change since its acquisition, there is no difficulty in applying the provisions of Part IIIA. Where a taxpayer acquires an asset but disposes of only part of that asset, specific provision is necessary. This is to be found in s. 160R which prescribes that a reference to a disposal of an asset includes a reference to a disposal of part of an asset. Hence in the present case there will be a disposal of that which was part of the realty (the timber) with the consequence that (the asset being the realty having been acquired before 20 September 1985) the provisions of Part IIIA will have no application. Had the land been acquired after 20 September 1985, the provisions of Part IIIA would apply as a disposal of part of the realty and s. 160ZI of the Act would have application to determine the cost to be attributed to the trees.

Had I been of the view that the agreement should be characterised as an agreement for the sale or creation of an interest in land (rather than a sale of that which was formerly part of the land), then I would have had no difficulty in concluding that there was a disposal, within s. 160M(6), which resulted in the total receipts under each of the timber agreements being included in assessable income by the provisions of Part IIIA of the Act.

Whatever the difficulties may be in construing s. 160M(6), there seems no difficulty in that sub-section applying to the creation out of an existing asset of a new proprietary right. This is so notwithstanding that a majority of the High Court did not support the view, which appealed to the full court of this Court in Hepples, that s. 160M(6) was limited to such a case. In this Court I illustrated the case of a grant of a profit à prendre or easement as an example of a case falling within the sub- section: see
FC of T v Cooling 90 ATC 4472 at 4489; (1990) 22 FCR 42 at 63. While no majority can be found in the High Court for the limitation of s. 160M(6) in the way suggested in this Court, equally no judge of the High Court expressed the view that the grant of a profit à prendre did not fall within the section.

Whatever else s. 160M(6) may embrace, its language is apt to treat the grant of a profit à prendre as a disposition. The interest created, if there be a grant of a profit à prendre, is clearly an asset as defined in s. 160A; the interest is an asset which did not exist prior to the grant operated to create that interest. The profit à prendre would have been created by the very act which constituted the disposal and in the result s. 160M(6) would apply. There would be no offsetting amounts of the kind described in the section, with the consequence that the gross proceeds would form part of assessable income. The difficulty suggested by counsel for the taxpayer that s. 160M(6) could not operate if the profit à prendre had never been acquired by the taxpayer is, in my view, overcome, if necessary, by the application of s. 160M(5).

It is necessary now to turn to the application of s. 25(1) of the Act. It will be recalled that on the facts in Stanton's case the receipt by the owner of land of an instalment of a lump sum payment for timber was treated as not being a royalty, notwithstanding that the agreement

ATC 4563

provided that the purchase price could be adjusted should the timber on the land be less than the specified quantity used to calculate the initial purchase price. It was, it would seem accepted and, with respect, correctly, that otherwise the receipt was not assessable income. However, the case clearly did not decide that all receipts under agreements of a similar kind were capital, as the subsequent decision of the full High Court in
EK White v FC of T (1968) 15 ATD 173; (1968) 120 CLR 191 demonstrates. The crucial difference between Stanton's case and White's case lay in the circumstance that, in the later case, the land became devoted exclusively to the sale of standing timber so that there was not a mere realisation by the taxpayer, from time to time, of his asset, but rather the taxpayer embarked upon a trade of selling standing timber, the proceeds of which were income in ordinary concepts.

The question whether in any of the present cases the receipts under the timber agreements were income within ordinary concepts will likewise depend upon whether the recipients were receiving royalties having the character of income or were engaged in a venture in the nature of trade in selling the standing timber. If, on the other hand, there was but a mere realisation of part of the capital asset of the taxpayer, the proceeds will be of a capital nature. The resolution of the question must obviously depend upon the facts of the particular case.

Mrs Gooch

The facts make it clear that the land upon which the timber stood was not acquired by Mrs Gooch for any purpose which involved profit- making from the sale of timber. The land and trees growing upon it were a capital asset.

Although Mrs Gooch did enter into more than one timber agreement, the facts do not, in my view, suggest that she embarked upon a business in the way that the taxpayer in White's case did, rather than merely realise part of her capital asset. Her motivation seems quite clear, she was in need of money. Her insistence that she was in need of ``capital'', in contradistinction no doubt to ``income'' may be put to one side as self-serving.

The Commissioner placed particular emphasis upon the fact that Mrs Gooch entered into a timber harvesting arrangement with the purchaser providing for self-regeneration of the timber on the land logged. That would, of course, be a relevant matter in determining whether or not she had commenced a business. Her explanation, however, satisfies me that this is not the case. I accept her evidence that her desire to promote regeneration was not to permit her to profit from that regeneration but to beautify the land and restore it to its condition for the benefit of future generations. In my view the proceeds were not, in these circumstances, income in ordinary concepts.

Ashgrove

The circumstances in which Ashgrove acquired the land upon which the timber, the subject of the agreements, was grown are such that no suggestion could be made that the land was acquired for the purpose of a timber-selling business. The land was clearly a capital asset of Ashgrove. Ashgrove never intended to continue selling timber and has left the land from which the trees were removed to regenerate naturally. Essentially Ashgrove entered into two agreements each providing for a number of options but I do not think anything turns upon this. If a taxpayer entered one transaction granting a purchaser options to purchase various parts of his land over various periods of time, that fact alone would not warrant the conclusion that the proceeds of sale were income in ordinary concepts. Each exercise of the option is a unilateral act of the purchaser not a separate deliberate act of the vendor. It will be a matter of considering all surrounding circumstances to see whether the transaction which includes the grant of the options involves more than a mere realisation of a capital asset. In my view the proceeds of sale in this case were not income in ordinary concepts, but involved no more than a mere realisation.

Mr Swain

Again there is nothing in the circumstances in which Mr Swain acquired the land upon which the timber in question was grown to suggest that he did so for the purpose of profiting from the sale of timber. The land was clearly a capital asset. The circumstances in which Mr Swain entered into the timber agreements are antithetical to the view that the timber agreements constituted a business undertaken by him. He had had trouble with stock straying and shooters in the area and wanted to clean the land up.

ATC 4564

The fact that the agreement provided that the lump sum was to be payable by monthly instalments, which actual payments could vary in accordance with timber removed, does not, in my view, suggest that the payments received by him were a royalty or otherwise income in ordinary concepts. There is a difference between instalments of a lump sum where the lump sum itself does not vary (although the amount of the instalments might) and a royalty payable by reference to timber removed.

The difficulty I have in dealing with Mr Swain's case is that it was never suggested to him that the agreement with the purchaser was a sham. Yet it seems abundantly clear that the purchaser has paid to Mr Swain amounts considerably different from the amounts that the agreement itself required. Indeed, what happened in fact is, it would seem, Mr Swain was paid on a tonnage basis at variable rates. There is no doubt that, in the absence of any other evidence, amounts received by Mr Swain over and above the initial lump sum provided for in the timber agreement would be income in ordinary concepts as being a royalty. It was submitted by the Commissioner, however, that I should treat the totality of the amounts received, including the $18,550 provided for in the original agreement, as income on the basis that the parties had disregarded the original agreement and entered into some other agreement. This suggestion was never put to Mr Swain. It was never suggested that there had been any later agreement than that of 7 April 1987 or that there had been any agreement in accord and satisfaction of it.

In these circumstances I would find that the method of payment by the purchaser was for its own convenience and not the result of any agreement with Mr Swain, with the consequence that I would treat the first $18,550 as being a receipt pursuant to the agreement and the balance as being income in ordinary concepts. It goes without saying that the characterisation by the purchaser of amounts paid by it as being royalties cannot be treated as an admission against interest by the recipient of the amounts.

Mr Wadley

I have already indicated that the reafforestation incentive payments received by Mr Wadley were income in ordinary concepts.

The circumstances under which Mr Wadley acquired the property on which timber was grown do not suggest that that property was acquired for the purpose of profiting from the timber. The land was again a capital asset. Mr Wadley entered into the timber agreement for the purpose of having a particular area of land cleared. I accept his evidence that he desired to have trees replanted so that he could leave the land for future generations as he found it. The circumstances in my view were not such as to warrant a conclusion that Mr Wadley was carrying on any business of which the sale of timber formed part. Nor can it be said that there was otherwise than a mere realisation of part of Mr Wadley's capital asset.

However, like Mr Swain, Mr Wadley was paid considerably more than the lump sum which the agreement provided and, in a way, not consistent with the agreement. Again it was not put to Mr Wadley that there had been any other agreement with the purchaser of the timber constituting an accord or satisfaction or otherwise for varying the original agreement and it would seem that the payments made by the purchaser were made on a unilateral basis and not by agreement with Mr Wadley. Clearly he did not protest. Nor was it suggested to him that the agreement providing for payment of a fixed sum by instalments was a sham.

I would conclude, therefore, that the payments received by Mr Wadley, up to the amount referred to in the timber supply agreement ($24,250) were instalments on account of the lump sum of $24,250 which he was to receive but that the balance of payments made to him were payments received by way of royalty and accordingly income in ordinary concepts.

Mr Davey

Again it could not be suggested that the circumstances in which Mr Davey acquired the property upon which the timber stood were such as to suggest that he decided to profit from the sale of timber at the time of acquisition. The land was a capital asset. The decision to enter the timber agreement was largely motivated by the fact that Mr Davey had a potential liability under guarantees. That fact does not, of itself, suggest an income-producing purpose.

However, Mr Davey, concurrently with entering into the timber agreements, determined, in my view, to carry on a business of selling timber. This conclusion is reached not only by virtue of the number of agreements which Mr Davey and his wife entered into, but

ATC 4565

also, having regard to his evidence, that he desired to start a plantation and had a commercial purpose of selling the timber. In these circumstances I would be of the view that Mr Davey's case fell on the same side of the line as the facts in White's case did, with the result that the whole of the proceeds under the agreement were income in ordinary concepts. He had embarked upon the sale of an asset in the course of carrying on a business: cf
California Copper Syndicate (Ltd & Reduced) v Harris (1904) 5 TC 159.

Accordingly, the applications will be allowed in the cases of Mrs Gooch and Ashgrove and partly in the cases of Mr Swain and Mr Wadley. I would dismiss the application in the case of Mr Davey.

I direct the parties, other than Mrs Gooch and Ashgrove, to file and serve such written submissions as they may care to make within 14 days of these reasons being delivered on the question of costs. In the cases of Mrs Gooch and Ashgrove, I would order the Commissioner to pay the costs.

ANNEXURE A

AGREEMENT MADE 22nd day of October 1990

BETWEEN M. C. Gooch

of ``Wisedale'' West Frankford

(herein called ``the Vendor'' which term shall include his transferees and successors in title)

of the one part

AND NORTH BROKEN HILL LIMITED of 476 St Kilda Road, Melbourne (herein called ``the Purchaser'')

of the other part

1. The Vendor is the owner of all those pieces of land situate at Frankford as the same is shown on the plan annexed hereto and there surrounded by red lines.

Certificate of Title Volume 4667 Folio 86 & 87

in the County Chart Devon 1B, (herein called ``the Said Land'') on which is certain standing and fallen timber suitable for conversion into woodchips for the production of bleached chemical pulp for fine paper manufacture (herein called ``The Said Timber'' which term shall mean and include all trees so suitable now standing or now fallen on the Said Land other than any trees specified in the Schedule hereto).

2. The Vendor hereby sells to the Purchaser and the Purchaser hereby buys from the Vendor 2000 tonnes of the Said Timber for the sum of $19960.00.

3. The Vendor warrants that he is entitled to sell the Said Timber free of all claims interests or encumbrances and if the Said Land is subject to any mortgage charge or other encumbrance the Vendor will obtain the consent of the person entitled thereto to this Agreement.

4.(a) This agreement shall continue until the 1st day of January 1999 (herein called ``the Termination Date'' which term shall include any other or subsequent date which may hereafter be agreed upon between the parties here for the purposes of this Agreement) and the purchaser shall at any time and from time to time after payment of the deposit payable under Clause (12) hereof and prior to the Termination Date be entitled to fell and remove at its own cost and in such manner whether by its employees, agents or contractors or otherwise as it sees fit, all or such part or parts of the Said Timber as it shall from time to time in its sole discretion decide and any other trees not excluded in the Schedule hereto which the Purchaser or its employees, agents or contractors are of the opinion could form part of the Said Timber.

(b) Any timber felled and removed from the Said Land and not accepted by the Purchaser in its sole discretion as suitable for conversion into woodchips for the production of bleached chemical pulp for fine paper manufacture shall be disposed of as waste and shall not be included in the Said Timber hereby sold.

5. The Said Timber is sold in a standing condition and the Vendor shall not be responsible for any costs in felling or removing the same BUT the Vendor hereby grants to the Purchaser and its contractors and its and their servants, agents and employees together with its or their vehicles, tools and machinery free access at all times during the period of and for the purposes of this Agreement over the Said Land and over any roads or tracks thereon or over which the Vendor may have a right of carriageway and further the right to stack or store on the Said Land any timber felled by the Purchaser.

ATC 4566

6. Without prejudice to the provisions of Clause (5) hereof the Purchaser, its employees, agents or contractors shall during the term of this Agreement have the right:

(a) to construct, maintain and use for the purpose of this Agreement and for the taking of timber from land owned by other persons such roads or tracks over the Said Land or over other land owned by the Vendor as the Purchaser may reasonably require provided that the location of such roads or tracks must be approved by the Vendor who shall not unreasonably withhold such approval.
(b) to quarry, load, transport and distribute road surfacing materials from the Said Land or any other land owned by the Vendor to any road required for use to extract timber from or over the Said Land Provided that such materials shall be quarried from such parts of the Said Land as the Vendor shall reasonably direct.

7. In the event that the Purchaser shall require to construct any road or track through a fence the Purchaser shall erect in such fence an adequate stockproof cattle ramp or gate and shall keep the same in good repair and condition Provided always that upon the expiration or sooner determination of this Agreement the same shall be and become the sole property of the Vendors.

8. The Purchaser, its servants, agents and workmen will not interfere with the stock of the Vendors and will only use those gates which are necessary for the transport of timber and will ensure that such gates are kept closed and fastened at all times when not actually being used for the passage of a vehicle and will immediately at its own expense forthwith repair all fences damaged in cutting down trees and removing timber.

9. On the expiration of this Agreement or any extension thereof the Purchaser, its employees, agents or contractors shall have the right to remove from the Said Land all its or their machinery and plant of every description together with all or such part or parts of the Said Timber hereby sold which shall have been felled by or on behalf of the Purchaser and not removed.

10. During the period of this Agreement the Vendor agrees not to fell or permit to be felled (other than by or on behalf of the Purchaser) the Said Timber or any of it and to take all reasonable precautions and measures to prevent damage or injury to the same and to forthwith notify the Purchaser of anything adversely affecting the Said Timber.

11. The Vendor further agrees during the period of this Agreement not to sell, assign, transfer, mortgage or otherwise charge the Said Land or the Vendor's interest in the same or to enter into any Agreement relating thereto without ensuring that the rights of the Purchaser to the Said Timber or otherwise under this Agreement are in no way affected and to forthwith notify the Purchaser on the making of any such sale, assignment, transfer, mortgage, charge or agreement.

12. The Purchaser shall pay the purchase price to the Vendor as follows:-

(i) a deposit of $10.00 on or before the execution hereof (the receipt of which the Vendor hereby acknowledges) and-
(ii) subject to compliance by the Vendor with the provisions of Clause (13) of this Agreement the sum of $19960.00 within 30 days of the date hereof.

13. Without affecting the Vendor's obligations under this Agreement the Vendor further agrees that he will within 14 days of receipt of a request in writing from the Purchaser or the Purchaser's Solicitors do all such acts, matters and things and or obtain all such consents as the Purchaser or its Solicitors may reasonably consider necessary to establish his title to sell the Said Timber. If the Vendor fails to comply with such request or requests within the said period of 14 days or such further time as the Purchaser may allow the Purchaser may at its option by notice in writing to the Vendor terminate this Agreement whereupon this contract shall be at an end and the property in any of the Said Timber not then felled and removed by the Purchaser shall revert to the Vendor. Any request to be sent by the Purchaser or its Solicitors hereunder shall be sent within 14 days of the date hereof and any legal costs incurred by the Vendor as a result of such request (other than costs that would in the normal course of the Vendor's affairs be or become payable by him apart from this Agreement) shall be borne and paid by the Purchaser.

14. In the event that the carrying out of this Agreement is affected by strikes, lock outs, embargoes, fire, earthquake, storm and tempest,

ATC 4567

flood or other action of the elements, acts of war or the public enemy beyond the Purchaser's or Vendor's control then the Termination Date shall be extended for a period equivalent to the period during which the carrying out of this Agreement is so affected.

15. The Vendor acknowledges that the Purchaser may give public notice of its ownership of the Said Timber on the Said Property either by advertisement or posted notice and shall be at liberty at its own cost and expense either to register this Agreement in the office of the Registrar of Deeds at Hobart or lodge a Caveat against the title of the Vendor at the office of the Recorder of Titles at Hobart and may where the land is partly under the General Law and partly under the Real Property Act do both.

16. The Purchaser shall comply with the requirements of Section 59 of the Forestry Act 1920 and shall be the ``owner'' of the Said Timber for the purposes of the liabilities imposed by that Section and shall at all times hold the Vendors indemnified in respect of the liabilities thereby imposed.

17. If at any time during the term of this Agreement it is found that the quantity of the Said Timber in and upon the Said Land available to and reasonably accessible to the Purchaser for the purposes of felling and removing the same is less than tonnes then the purchase price payable hereunder shall be reduced by a sum which shall bear to the purchase price of $ the same proportion as the quantity of the Said Timber so deficient shall bear to tonnes.

18. This Agreement is subject to the Forestry Commission established under the Forestry Act 1920 or any person or persons to whom the said Forestry Commission has delegated its powers for the purposes hereinafter mentioned granting its approval to a Timber Harvesting Plan in respect of the property and the said timber pursuant to and in accordance with the provisions of Part III of the Forest Practices Act 1986 and the parties hereto shall use and exercise their best endeavours to procure such approval with the least possible delay and the vendor shall then as owner of the land execute a memorandum addressed to the said Forestry Commission or such other person or persons as aforesaid stating that he approves of that plan and shall likewise execute a similar memorandum approving any amendment to that plan and the Vendor hereby appoints the Purchaser its attorney for the execution of any such memorandum in the event that the Vendor shall fail or shall arbitrarily refuse to sign the same.

In consideration of the sum of One Dollar now paid by the Purchaser to the Vendor (the receipt whereof the Vendor doth hereby acknowledge) the Vendor hereby grants to the Purchaser the right or option to be exercised at any time during the continuance of this agreement by notice in writing given to the Vendor and signed by any authorised agent of the Purchaser or the Purchaser's Solicitors of purchasing up to but not exceeding a further 1000 tonnes of timber suitable for the purposes mentioned in Clause (1) hereof standing or fallen on the Said Land other than any trees specified in the Schedule hereto at a purchase price calculated at a rate equal to the rate paid by the Purchaser at the time of the exercise of the said option for similar timber a similar ``road distance along distinguished cart route'' from the mill and which said purchase price shall be paid within a period of THIRTY DAYS from the date upon which the said option is exercised and in the event that the Purchaser shall exercise the said option then it shall have the right to remove the Said Timber at any time between the date of the exercise of the said option upon like terms and conditions are herein contained.

ANNEXURE B

DATED 7/4 1987
---------------------------------------------------
D. & M. SWAIN
---------------------------------------------------
                          and

           FOREST RESOURCES A Division of
           ------------------------------
                H.C. SLEIGH RESOURCES
             (Incorporated in Tasmania)
              TIMBER SUPPLY AGREEMENT
===================================================
                 FOREST RESOURCES
                 ----------------
               LONG REACH, EAST TAMAR
       POST -- P.O. Box 524, Launceston 7250
              PHONE -- 003/94 7303
                TELEX -- AA58555

THIS AGREEMENT made the 7th day of April One thousand nine hundred and eighty

ATC 4568

seven BETWEEN D. & M. SWAIN of LIFFEY (hereinafter called ``the Vendor'') of the one part and FOREST RESOURCES (A Division of H. C. Sleigh Resources Limited) the registered office of which is situate at Long Reach in Tasmania (hereinafter called ``the Purchaser'') of the other part WHEREBY IT IS AGREED as follows:-

1. The Vendor shall sell and the Purchaser shall buy ALL THAT 9,000 tonnes of timber which term shall mean and include all trees now standing or fallen on the land situate at LIFFEY containing 60 acres in the Parish of WALKER and being defined as allotments 30.0.0 12/37 W. Roach Pur. and 30.0.0 J. Roach and J. Roach Jnr. Pur. 9/15

excepting the trees reserved in accordance with Clause 8 hereof and the trees which do not comply with the specifications from time to time prescribed by the Purchaser.

2. THE Purchase price for the timber shall be the sum of 18,550 dollars which shall be paid by deposit of 5 dollars on the signing hereof and the balance paid by monthly instalments which may vary in accordance with the volume of timber removed. The first of such instalments is to be paid within Thirty days of the expiration of the end of the first month after the Purchaser has commenced to fell and/or remove the timber purchased.

3. To give effect to the said sale and purchase the Vendor hereby agrees to make a grant unto the Purchaser until the termination date specified herein of all timber referred to in Clause 1 hereof, of the right to enter the said land for the purpose of felling and carrying away any such timber and of the right to fell and carry them away, subject however to the exception of a power for the Vendor from time to time to select, mark and reserve trees pursuant to Clause 8 hereof which shall not be cut or removed by the Purchaser.

4. THE Vendor undertakes and warrants that he is entitled to sell the timber free from all claim interest or encumbrances thereon and that he will forthwith obtain the consent of any person or company who may have any mortgage or other charge or encumbrance against the land.

5.THE Purchaser will fell and carry away all such timber on or before the 31st day of December One thousand nine hundred and ninety.

6. THE Purchaser shall have the right to construct and use such log tracks and roads to and across the land for the transport of timber and machinery from time to time as shall be necessary PROVIDED always that the Purchaser within its discretion shall keep as far as practicable to defined tracks in lieu of making new roads or tracks.

7. THE Vendor hereby agrees to make a grant to the Purchaser without additional payment the right to quarry, load and move road-surfacing materials from the said land or any other land owned by the Vendor and to move and distribute the same to or upon any track or road whether already defined or newly made required for use by the Purchaser for the movement of equipment or timber for the purpose of exercising rights hereunder.

8. THE Vendor has the right to mark and reserve selected trees which shall not be cut or removed by the Purchaser and may in this way reserve up to 10% of the volume of timber sold under this Agreement PROVIDED that the Purchaser shall not be liable for felling trees not clearly marked AND where the Purchaser has not been duly notified in writing of the markings used.

9. THE Purchaser its servants agents and workmen will not interfere with the livestock of the Vendor and will only use those gates which are required for the transport necessary to enable the Purchaser to carry out the agreement and the Purchaser will take every care that such gates be closed after being used for the passage of a vehicle and the Purchaser will accept financial responsibility for the repair of all fences and gates damaged in felling trees and removing timber PROVIDED that such repair shall be carried out by the Vendor to a standard and at a cost agreed to by the Purchaser but should the parties be unable to agree then such repairs shall be carried out by the Purchaser at its own expense.

10. THE Purchaser may give public notice of its ownership of the said timber on the land either by advertisement or posted notice and shall be at liberty at its own cost and expense either to register this agreement in the office of the Registrar of Deeds at Hobart or lodge a caveat against the title of the land at the office of the Recorder of Titles at Hobart and may where the land is partly under the General Law and partly under the Real Property Act do both and to assist the Purchaser in this effect the

ATC 4569

Vendor shall supply the Purchaser or its solicitors with such particulars as may be reasonably required and obtain such consents (if any) as may be necessary to obtain such registration.

11. If the effective performance hereof is affected by strikes, lock outs, embargoes, fire, earthquakes, storm and tempest, flood or other actions of the elements, acts of war or public enemy, force majeure, machinery breakdown or other event beyond the Purchaser's control including a reduction in sales of woodchips by the Purchaser or the enactment of legislation after the date hereof which in the opinion of the Purchaser makes the purchase of timber under this agreement uneconomic or impracticable (any of which events or causes is hereinafter called ``an impediment'') the Purchaser shall have the right either to require the substitution for the termination date stated herein another date being a date such as to allow a reasonable extension of the term to put the Purchaser as nearly as possible in the same position as it would have been in if the impediment had not occurred (such date being agreed to by the Vendor and the Purchaser or failing agreement being determined by an arbitrator appointed under the Arbitration Act) or to determine the rights and interests granted hereunder. The Purchaser shall not be bound to elect between the right to require the substitution of a date as aforesaid or to determine the rights and interests granted hereunder until a reasonable time after a date shall have been determined by an arbitrator in accordance with the foregoing provision. If more than one impediment occurs the Purchaser shall have the right to require further reasonable extensions of the term and another date or other dates shall be substituted for the termination date stated herein or extended from time to time. If the Purchaser elects to determine, the rights and interests conferred hereby shall cease, the parties shall thereupon become discharged from further performance, and all amounts paid or payable by the Purchaser to the Vendor hereunder shall be recoverable or cease to be payable, as the case may be, but if the Purchaser shall have obtained a valuable benefit herein before the time of discharge there shall be recoverable from him by the Vendor such sum (if any) not exceeding the value of the said benefit to the Purchaser as the parties shall agree (or failing agreement as an arbitrator appointed under the Arbitration Act considers just having regard to all the circumstances) and the Vendor may set off the said sum against the amount recoverable by the Purchaser as aforesaid.

12. THE Purchaser shall remove or cause to be removed all plant machinery vehicles motor traction and other mechanical contrivances and all other assets of the Purchaser used in the felling logging and carting away of all such timber within Thirty days after the expiration of the term hereby granted.

13. THE Purchaser shall have the right to assign the benefits of this agreement.

14. THE Purchaser shall comply with the requirements of Section 59 of the Forestry Act 1920 and shall be the ``owner'' of the said timber for the purposes of the liabilities imposed by that Section.

15. THE Purchaser and the Vendor shall ensure that they their respective servants and agents shall take all statutory and other proper and reasonable precautions to avoid causing uncontrolled fire on the land.

16.ANY notices required to be given by one party to the other shall be sufficiently given and served if delivered to the other party in person or being posted in a prepaid envelope addressed to the other party at his or its last known address and shall be taken to have been served on and received by such other party when the said envelope would in the ordinary course of post have been delivered.

17(a). IF at any time during the term of this agreement it is found that the quantity of such timber in and upon the land available to and reasonably accessible to the Purchaser for the purposes of felling and removing the same and in accordance with its said specifications for conventional pulpwood is less than 8,000 tonnes then the purchase price payable hereunder shall be reduced by a sum which shall bear to the purchase price of 16,800 dollars the same portion as the quantity of such timber as deficient shall bear to 8,000 tonnes.

THE COURT ORDERS THAT:

In matter no. TG13 of 1993 (Ashgrove Pty Limited v Deputy Commissioner of Taxation)

(1) Application allowed.

(2) Objection decision set aside and in place thereof, objection allowed.

ATC 4570

(3) Assessment remitted to respondent to be reassessed in accordance with law.

(4) Respondent to pay applicant's costs.

In matter no. TG14 of 1993 (Marie Celma Gooch v Deputy Commissioner of Taxation)

(1) Application allowed.

(2) Objection decision set aside and in place thereof, objection allowed.

(3) Assessment remitted to respondent to be reassessed in accordance with law.

(4) Respondent to pay applicant's costs.

In matters nos. TG15 & 16 of 1993 (Roderick Arthur Davey v Deputy Commissioner of Taxation)

(1) Application dismissed.

In matter nos. TG22-24 of 1993 (Jeffrey Leigh Wadley v Deputy Commissioner of Taxation)

(1) Application allowed in part.

(2) Objection decision be set aside.

(3) Assessment remitted to the respondent to be reassessed in accordance with law.

In matters nos. TG9 & 10 of 1994 (Daniel Charles Swain v Deputy Commissioner of Taxation)

(1) Application allowed in part.

(2) Objection decision be set aside.

(3) Assessment remitted to the respondent to be reassessed in accordance with law.

THE COURT DIRECTS THAT:

In each matter, other than those in which Mrs Gooch and Ashgrove Pty Limited are the applicants, each party file and serve such written submissions as they may care to make within 14 days of these reasons being delivered on the question of costs.

Disclaimer and notice of copyright applicable to materials provided by CCH Australia Limited

CCH Australia Limited ("CCH") believes that all information which it has provided in this site is accurate and reliable, but gives no warranty of accuracy or reliability of such information to the reader or any third party. The information provided by CCH is not legal or professional advice. To the extent permitted by law, no responsibility for damages or loss arising in any way out of or in connection with or incidental to any errors or omissions in any information provided is accepted by CCH or by persons involved in the preparation and provision of the information, whether arising from negligence or otherwise, from the use of or results obtained from information supplied by CCH.

The information provided by CCH includes history notes and other value-added features which are subject to CCH copyright. No CCH material may be copied, reproduced, republished, uploaded, posted, transmitted, or distributed in any way, except that you may download one copy for your personal use only, provided you keep intact all copyright and other proprietary notices. In particular, the reproduction of any part of the information for sale or incorporation in any product intended for sale is prohibited without CCH's prior consent.