NORTHUMBERLAND DEVELOPMENT CO PTY LIMITED v FC of T

Judges:
Hill J

Court:
Federal Court

Judgment date: Judgment handed down 26 October 1994

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Hill J

The applicant, Northumberland Development Co Pty Limited (``Northumberland'') is a family investment company which, prior to 1 January 1982, was the beneficial owner of a two-thirds undivided interest in all mines, veins, seams and beds of coal, ironstone and other minerals lying under all the lands described in the Certificate of Title Volume 5504 Folio 110 and Deed of Conveyance No. 350 Book 1958. It had acquired this interest some years prior to that date. There is no dispute between the parties that that interest was a capital asset of Northumberland, which had not been acquired by it for the purpose of profit-making by sale or as part of a profit-making undertaking or scheme.

On 18 December 1981 the Coal Acquisition Act 1981 (NSW) (``the 1981 Act'') was passed to commence on a date to be proclaimed. Section 5 of that Act operated to vest all coal which, but for the passing of the Act would be vested in any person, in the Crown freed and discharged from all trusts, leases, licenses, obligations, estates, interests and contracts. That Act was proclaimed to commence, with certain exceptions not presently material, on 1 January 1982.

The 1981 Act (s. 6(1)) empowered the Governor to make arrangements:

``(a) for the determination of the cases, if any, in which compensation is to be payable as a result of the enactment of this Act; and

(b) if there are any such cases - for the determination of the amount and method of payment of any such compensation.''

It provided, in sub-sec. (2) that except in the cases, if any, determined under sub-sec. (1) compensation was not payable as a result of the enactment of the 1981 Act.

There is no dispute between the parties that as a result of the enactment of the 1981 Act the interest of Northumberland had been forfeited to the Crown and that Northumberland had no right to compensation unless and until the Governor made arrangements in accordance with s. 6(1).

There the matter rested until on 21 June 1985 there was published, in the New South Wales Government Gazette, the ``Coal Acquisition (Compensation) Arrangements 1985'' (``the Instrument'') which took effect on 22 June 1985. The Instrument was stated to have been made pursuant to s. 6 of the 1981 Act and conferred upon an ``eligible person'' a right to be paid compensation by the New South Wales Coal Compensation Board which was established by the Instrument. Those persons who, like Northumberland, had owned what the Instrument referred to as ``saleable coal'' prior to 1 January 1982, became entitled to make a claim to the Board in writing which claim was required to be lodged before 30 April 1986. The Board was required to consider and determine the claim and, where a claim was allowed, to determine the amount of compensation. The compensation payable to persons such as Northumberland (see cl. 11) was to be calculated in accordance with cl. 19 of the Instrument. That clause provides relevantly as follows:

``19(1) If, in the case of a claim made in accordance with clause 11, the Compensation Board is satisfied that the claimant:

• (a) is an eligible person to whom that clause applies; and
• (b) but for the enactment of the Coal Acquisition Act 1981, would have been entitled to the ownership of saleable coal within a colliery holding,

the Board must estimate the number of tonnes of that saleable coal which has been or, in its opinion, will be extracted from within that part of the colliery holding to which the claim relates during each relevant period beginning with the base date and ending with the last day of the relevant period within which saleable coal within that

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ATC 4719

colliery holding has or will, in its opinion, become exhausted.

(2) In respect of each relevant period referred to in subclause (1), the Compensation Board shall, after complying with subclause (1), proceed to determine in relation to the claim an amount calculated in accordance with the following formula:-

                            d(p)                  e(p)
       v(p) = [(n(p) x h) x ----] + [(r x t(p)) x ----]
                            1000                  1000
          

where-

• `v(p)' represents the amount to be determined, expressed in dollars and, where appropriate, a fraction of a dollar;
• `n(p)' represents, in relation to the first relevant period `(p)', the figure 2 and, in relation to each subsequent relevant period `(p)', represents the figure 4;
• `h' represents the area, measured in hectares, of that part of the colliery holding containing the coal that is the subject of the claim;
• `d(p)' represents the amount, applicable to the symbol `n(p)', which, if invested on the base date on terms (including terms as to a rate of interest) determined by the Compensation Board in relation to the particular case, would produce the sum of $1,000 at the median date of the relevant period `(p)';
• `r' represents... 0.9 of a dollar...
• `t(p)' represents the number of tonnes of saleable coal estimated under subclause (1) in respect of the particular relevant period `(p)'; and
• `e(p)' represents the amount, applicable to the symbol `t(p)', which, if invested at the base date on terms (including terms as to a rate of interest) determined by the Compensation Board in relation to the particular case, would produce the sum of $1,000 at the median date of the particular relevant period `(p)'.

(3) If, on making the calculation referred to in subclause (2), no interim payment of compensation has been made in respect of the claim, the Compensation Board must calculate the total amount to be paid in respect of the claim:

• (a) by ascertaining for all relevant periods to which subclause (1) applies the total of the amount represented by `v(p)', as determined in accordance with subclause (2); and
• (b) by multiplying that total by the appropriate incremental factor.

(3A) For the purpose of subclause (3), the appropriate incremental factor is a number equivalent to the amount of money that would be accumulated from and including the base date up to and including the day before the date on which the Compensation Board makes its determination in respect of the claim if $1 were invested on terms (including terms as to a rate of interest) determined by the Treasurer for the purposes of this clause.

(4) For the purposes of the symbol `h' in subclause (2), where the area of that part of a colliery holding containing the coal that is the subject of the claim is a fraction of a hectare or a number of whole hectares and a fraction of a hectare, the fraction of a hectare shall be deemed to be a whole hectare.''

In August 1990 the Board determined Northumberland's claim at $6,473,793. On 3 October 1990 the Board paid to Northumberland a cheque for $6,599,732.32, being the compensation awarded of $6,473,793 together with an amount of interest calculated from the date of the determination on 15 August 1990 to the date of payment.

The present case is concerned with the question whether a part of the sum of $6,473,793 is assessable income under s. 25(1) of the Income Tax Assessment Act 1936 (Cth) (``the Act'') because it is income in ordinary concepts. Northumberland accepts that the interest component of $125,939.32 paid to it on 3 October 1990 is assessable and indeed this amount was returned by it in its income tax return for that year. The amount which is claimed by the Commissioner to be assessable and which, in due course, was assessed to Northumberland, is the sum of $2,919,029. The parties are in agreement that the balance of the compensation is, on any view, capital in the hands of Northumberland and not income in ordinary concepts.

To understand the dispute between the parties it is necessary to understand the formula contained in cl. 19(2) of the Instrument and the effect upon that formula brought about by cl. 19(3).

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ATC 4720

The formula in cl. 19(2), while at first sight formidable, is in reality not difficult to comprehend. The amount which is actually derived as a result of the formula in cl. 19(2), represents the sum of two separate components. The first is a component of rent, the second a component of royalty. The rental component consists of $4 a year for each hectare of the coal holding, except in respect of the initial six months period beginning with 1 January 1982, where the rent is to be $2 per hectare. The second component, the royalty component, is calculated relevantly at the rate of 90 cents per tonne of the saleable coal which is estimated would have been extracted from the forfeited interest from 1 January 1982 until the coal is estimated to have become exhausted.

Each of the two elements of rent and royalty are by the formula made the subject of a discount factor which, if one accepted the rates of interest determined by the Board, would produce a present value of rent or royalty, as the case may be, as at 1 January 1982.

The calculation required to be made under the formula in sub-cl. (2) is required, however, by sub-cl. (3) to be increased by an ``incremental factor''. In other words, after the amount v(p) is calculated in the formula that amount is then to be multiplied by an incremental factor prescribed by cl. 19(3A). That incremental factor is determined by calculating the value of a $1 investment at compound interest at rates determined by the Treasurer from 1 January 1982 until the date of determination.

The Commissioner's submission proceeds upon the basis that there are two separate components to be found in the payment of compensation to Northumberland (excluding the interest paid from the date of determination to the date of payment). The first is the component represented by sub-cl. (2) of cl. 19 which the Commissioner nominates as being the value as at 1 January 1982 of future rent and royalty from the coal interest (ie v(p) in the formula). The second component is identified by the Commissioner as arising under cl. 19(3) and represents, according to the Commissioner, interest payable upon the first component at a rate of interest determined by the Treasurer from 1 January 1982 until the date of determination of the compensation. It is this second component which the Commissioner says is of an income nature, representing in effect interest on compensation, which is income in ordinary concepts and thus made assessable income in accordance with the provisions of s. 25(1) of the Act.

The short submission of the Commissioner is that the essential quality or character of the incremental component determined under cl. 19(3) was to compensate Northumberland for not having received the worth of its coal when that was acquired by the Crown on 1 January 1982 and as such should be seen as interest or a receipt in the nature of interest having the character of income.

In written submissions expanded in oral argument senior counsel for the Commissioner referred to
Riches v Westminster Bank Limited [1947] AC 390;
Federal Wharf Company Limited v DFC of T (1930) 1 ATD 70; (1930) 44 CLR 24; and
Commr of Taxes (NZ) v Marshall (1952) 10 ATD 113; (1952) 5 AITR 424 in support of the Commissioner's submission. He conceded, as indeed he had to, that the facts of those cases and the issues to be decided differed somewhat from the present circumstances. However, guidance was, it was said, to be found in them.

In Riches the question which arose for the purposes of Schedule D of the Income Tax Act 1918 (UK) was whether, in an action or the recovery of damages, where the Court exercised its discretionary power and ordered that there be included in the sum for which judgment was given interest on damages that sum of interest was within the words ``all interest of money'' and thus taxable. Not surprisingly all of their Lordships found the case a simple one. There were two awards, one of damages and the other of interest calculated by reference to those damages. The fact that two amounts were included in the one ultimate award did not destroy the character of the interest as interest and accordingly as income.

Riches' case differs clearly enough from the present case in that there was awarded in that case an amount of interest calculated by reference to an entitlement to principal. In the present case there never was an entitlement to a principal sum, the only entitlement arising from the Instrument was to payment of an amount determined under the Instrument.

This distinction can more readily be seen from the decision of the High Court in Federal Wharf upon which counsel for the Commissioner also relied. That case concerned

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ATC 4721

compensation payable under the Harbors Act 1913 (SA) in respect of property compulsorily acquired. That Act provided for compensation and provided separately for interest at a defined rate to be ``added to the amount of any compensation to be paid''. The question for decision was whether the interest paid to the taxpayer was income in ordinary concepts. In holding that it was, Rich J placed emphasis upon the fact that the sum in dispute was calculated and payable in respect of time, being a time commencing from the compulsory acquisition and ending with the payment of compensation and that it was calculated upon the sum ascertained to represent the capital value of the property of which the owner was deprived.

The distinction between the facts in Federal Wharf and the present case is obvious. In Federal Wharf there was a right to compensation and an independent right to interest calculated upon that compensation. In those circumstances the right to interest was clearly a payment on account of the person whose property had been confiscated being kept out of the compensation from the date of acquisition to the date of payment. It differs from the present case because here there is no independent right of compensation. Rather, the incremental component of the compensation, as calculated under cl. 19(3), is but a component of an overall calculation rather than, as was the case in Federal Wharf, an independent right to interest calculated by reference to some other amount owing.

The third decision relied upon by the Commissioner, Commr of Taxes (NZ) v Marshall, is to similar effect as Federal Wharf. Again there was an award of compensation and separately an award of interest. The amount of the interest award was held to be assessable income. As Northcroft J of the New Zealand Court of Appeal said (at ATD 116; AITR 429), in terms which distinguish Marshall's case from the present:

``In this case interest was claimed as such and was separately and expressly awarded as such.''

The question whether the incremental component in the present case is to be treated as income, must, I agree, be determined by reference to its essential character. That is only another way of saying that the question whether the payment is income or capital will depend upon the nature of the payment or what it is for. What is important is that the question whether the amount is income or capital will depend upon the quality of that amount in the hands of the recipient:
Scott v FC of T (1966) 14 ATD 286 at 293; (1966) 117 CLR 514 at 526;
Hayes v FC of T (1956) 11 ATD 68 at 72; (1956) 96 CLR 47 at 55;
The Federal Coke Co Pty Limited v FC of T 77 ATC 4255 at 4273; (1977) 34 FLR 375 at 402 per Brennan J;
FC of T v Cooling 90 ATC 4472 at 4479; (1990) 22 FCR 42 at 50. In considering the character of the receipt in the hands of the recipient the Court will have regard to all the circumstances which give rise to the receipt without a disproportionate emphasis upon the form in which the transaction was structured:
SP Investments Pty Ltd v FC of T 93 ATC 4170 at 4180; (1993) 41 FCR 282 at 295;
Reuter v FC of T 93 ATC 4037 at 4045-4047; (1993) 111 ALR 716 at 727-730, affirmed on appeal: 93 ATC 5030.

In one sense the present payment might be said to be voluntary in that at the time of the confiscation of Northumberland's interest in the coal no right to compensation existed. While the mere fact that the payment is voluntary prima facie points to its not being income, the surrounding circumstances work to give character to the payment just as in other circumstances they did in
Squatting Investment Company Limited v FC of T (1953) 10 ATD 126; (1952-1953) 86 CLR 570, on appeal (1954) 10 ATD 361; (1953-1954) 88 CLR 413. In that case, although the Commonwealth had no obligation to make a payment to the taxpayer for wool supplied during the war to the Commonwealth, the circumstances of the payment made it clear that the payment was part of the price paid for the wool with the result that it constituted assessable income.

In
Glenboig Union Fireclay Co v Commrs of Inland Revenue [1922] SC (HL) 112 at 115, Lord Buckmaster pointed out:

``There is no relation between the measure that is used for the purpose of calculating a particular result and the quality of the figure that is arrived at by means of the test.''

That statement was thereafter repeated, but with some qualification, by Lord MacMillan in
Van Den Berghs, Limited v Clark [1935] AC 431 at 442 in terms as follows:

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ATC 4722

``But even if a payment is measured by annual receipts, it is not necessarily itself an item of income.''

(emphasis added)

Lord Buckmaster's statement has been accepted as well in Australia. Thus in
Commr of Taxes (Vic) v Phillips (1936) 3 ATD 330 at 335; (1936) 55 CLR 144 at 156 Dixon and Evatt JJ referred to the treatment of a sum as income because it is computed by reference to loss of income as involving ``an erroneous method of reasoning'' and see too
Californian Oil Products Limited (In Liquidation) v FC of T (1934) 3 ATD 10 at 20, 23 and 24; (1934) 52 CLR 28 at 46, 49 and 51.

The question here as to the nature and quality of the payment in the hands of Northumberland must be determined by reference to the Instrument which created in Northumberland the right to the payment. That Instrument created for the first time an eligibility to claim compensation for coal and/or coal mining interests which had been forfeited to the Crown. The integers in the formula used to calculate this compensation are of no assistance in determining the character of the receipt. It is evident from a perusal of the formula that the compensation is determined, inter alia, by reference to the present value of future coal mined. But that does not mean that the formula should be taken to be income as representing deemed receipts from the mining of the coal and indeed so much was accepted by the Commissioner in conceding that the compensation payment (other than the incremental factor) was capital. In my view the fact that another element in the same computation involves, as in cl. 19(3) the multiplication of the figure initially arrived at by application of the formula in cl. 19(2) by an incremental factor does not bring about the result that part of the amount ultimately determined represents compensation to an eligible person under the Instrument by way of interest from the date of forfeiture until the date of determination. The incremental factor remains what it is, namely, an integer in a formula used by the authority to assess a lump sum compensation which is to be paid for the forfeiture of the interest of a person as at 1 January 1982. It follows, in my view, that the essential character of the payment remains that of compensation for a capital asset appropriated by the Crown rather than two elements; one compensation for that capital asset and the other interest.

Reference was made by counsel for Northumberland to the decisions of the High Court in
McLaurin v FC of T (1960) 12 ATD 273; (1960-1961) 104 CLR 381 and
Allsop v FC of T (1965) 14 ATD 62; (1965) 113 CLR 341 which stand as authority for the proposition that where damages are paid by way of a single undissected lump sum which may, in the calculation by the payer, include income items as well as capital items, that single undissected lump sum will be treated as capital.

It is true that McLaurin's case, in particular, lends support to Northumberland's submissions so far as it distinguishes between the case where a payment is received in an undissected way from multiple claims on the one hand and a dissected payment is received in respect of several claims on the other. But the circumstances in McLaurin and Allsop are again quite different to those in the present case. Both cases, while binding on this Court, have been the subject of somewhat trenchant criticism in so far as the High Court rejected the approach of the United Kingdom courts in dissecting amounts into assessable and non-assessable components: cf Butterworths Australian Tax Practice para 25/0457 to 25/0465 and Parsons (1985) Income Taxation in Australia paras 2.559ff and see the discussion in the full court of this Court in
Allied Mills Industries Pty Ltd v FC of T 89 ATC 4365 at 4373; (1989) 20 FCR 288 at 313. Be that as it may, the present case, like Allied Mills, is merely one involving a single payment made and received by way of compensation. It does not involve a payment of a single undissected amount in satisfaction of multiple claims nor does it involve a payment capable of apportionment into different elements. The payment here was made and received as compensation for the coal interest forfeited to the Crown. That being its character it was received as capital and not income. I would accordingly allow Northumberland's application.

It must be added that the parties agree that no question arises in the present case of the application of Part IIIA of the Act which includes in assessable income certain capital gains.

THE COURT ORDERS THAT:

1. Application allowed.

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ATC 4723

2. Objection decision set aside and in lieu thereof ordered that the applicant's objection be allowed.

3. Application remitted to the Commissioner for reassessment in accordance with law.

4. Respondent to pay applicant's costs.