Re Australia and New Zealand Savings Bank Limited v the Commissioner of Taxation of the Commonwealth of Australia [1991] FCA 13; 91 Atc 4107/21 Atr 1258 (6 February 1991)

FEDERAL COURT OF AUSTRALIA

Re: AUSTRALIA AND NEW ZEALAND SAVINGS BANK LIMITED
And: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
No. V G314 of 1989
FED No. 10
[1991] FCA 13; 91 ATC 4107/21 ATR 1258

COURT

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
Jenkinson J.(1)

HEARING

MELBOURNE
6:2:1991

Counsel for the Applicant: Mr D.H. Bloom QC and Mr D.J. O'Callaghan

Solicitors for the Applicant: Freehill Hollingdale and Page

Counsel for the Respondent: Mr G.A.A. Nettle

Solicitor for the Respondent: Australian Government Solicitor

Solicitors for the subpoened: Blake Dawson Waldron
Corporations

Counsel for the subpoened Mr K.M. Hayne QC and Mr W.T. Houghton

Corporations:

DECISION

Motion for particular discovery and motions to set aside subpoenas.

2. The proceeding in which the respondent moves, pursuant to O.15 R.8, for an order that the applicant discover each document, now or formerly in its possession, custody or power, of any of several specified classes is an appeal against the respondent's decision on an objection against the respondent's assessment of the applicant's tax in respect of the year of income ended 30 September 1986. It appears to be common ground that on 30 April 1986 the applicant and Australia and New Zealand Banking Group Limited ("ANZ") formed a partnership, by executing a written agreement of that date, for the purpose of subscribing for certain investment units to be issued by Narvaez Ltd. to the partnership pursuant to a trust deed dated 29 April 1986 between Narvaez Ltd. and FAI Financial Resources Ltd.. Narvaez Ltd. by the trust deed covenanted, inter alia, to hold a fund called "the B Class Fund" on trust for persons for the time being registered under the provisions of the deed as holders of "B Class Investment Units", into which the beneficial interest in the B Class Fund was to be divided. Narvaez Ltd. in the deed appointed FAI Financial Resources Ltd. manager of the fund. On 1 May 1986 the partnership subscribed for 50 million units in the fund at $1 per unit. $7,630,544 came from partnership capital and $42,369,456 was borrowed from Fazen Pty. Ltd.. Narvaez Ltd. made three agreements in writing, each dated 30 April 1986, with New South Wales Treasury Corporation. Each agreement is expressed to be for the purchase by Narvaez Ltd from New South Wales Treasury Corporation of an annuity for a price, in the case of the agreement called "First B Class Annuity Agreement" of $22,350,000, in the case of "Second B Class Annuity Agreement" of $13,500,000, and in the case of "Third B Class Annuity Agreement" of $14,150,000. It is apparent from the terms of the agreements that Narvaez Ltd. made them as trustee of the B Class Fund. In each agreement provision is made for half yearly payments therein described as annuity payments, the first on 1 November 1986. Narvaez Ltd. and the applicant accordingly disclosed no income for the year ended 30 September 1986 in respect of any of the three agreements or in respect of any transaction under any of the three agreements. But the respondent in an amended assessment and in his decision on the applicant's objection gave effect to the opinion he had formed that each of the B Class Annuity Agreements was a security of such a character that Division 16E of Part III of the Income Tax Assessment Act 1936 operated to require an amount to be included in the net income of the B Class Fund and, by reason of the provisions of Divisions 6 and 5 of that Part, to produce an increase in the assessable income of the applicant as a beneficiary of that trust estate. The appeal involves resolution of the question whether Division 16E does apply to the B Class Annuity Agreements. One of the submissions which the respondent desires to advance in support of his decision on the objection is that none of the B Class Annuity Agreements provides for any payment to Narvaez Pty. Ltd. which is an "annuity" within the meaning of that word in s.27H of the Income Tax Assessment Act 1936. (That section did not at any time relevant for the purposes of the appeal provide, but does now provide, that the word "annuity" in that section "does not include an annuity that is a qualifying security for the purposes of Division 16E".) To that "matter in question in the proceeding" certain classes of documents were claimed by the respondent to relate. Those classes were described by the respondent thus:

"I. Minutes of Meetings of the Partnership*
from the formation until 31 October 1986;
II. Records of the partnership and/or the ANZ
Savings Bank Ltd of dealings with any officer of Fazen
Pty Ltd and/or the State Bank of New South Wales
relating to the granting of the loan by Fazen Pty Ltd
to the partnership in the sum of $42,369,466.00
including discussions relating to the purchase of the
annuity agreement;
III. Memoranda and other documents relating to
the negotiation and execution of partnership documents;
IV. The partnership books of account from the
date of establishment of the partnership until 31
December 1986;
V. All of the ANZ Savings Bank Ltd and all of
the partnership's records relating to the purchase of
the annuity agreements from the NSW Treasury
Corporation, including promotional and marketing
material;
VI. All records of the ANZ Savings Bank Ltd
and/or the partnership records relating to discussions
leading to and the signing of the management agreement
with FAI Financial Resources Ltd (now Quantative
Management Ltd) from the point of entering discussions
until 31 October 1986 including any records of
promotional and marketing material.
* A reference to the partnership means the
ANZ-ANZ Savings Bank New South Wales Treasury
Corporation Annuities Partnership No. 17."

The partnership to which I have referred was known by the name assigned in what has just been quoted. What is therein described as "the management agreement with FAI Financial Resources Ltd." is an agreement in writing dated 30 April 1986 between the applicant and ANZ of the one part and FAI Financial Resources Ltd. ("FAI") of the other for the appointment of FAI "their sole and exclusive manager for the purposes only of" certain specified transactions, being the transactions described in or contemplated by the B Class Annuity Agreements, the trust deed to which I have referred, the partnership agreement, the agreement dated 30 April 1986 for the loan by Fazen Pty. Ltd. to the applicant and ANZ of money for purchase of units in the B Class Fund, and several other, ancillary contractual instruments. All these documents have been discovered.

3. It was submitted on behalf of the respondent that, virtually no document of a description included in the classes of documents in respect of which the order was sought having been discovered by the applicant on general discovery, a confident belief might be formed that there were documents of those descriptions in the applicant's possession, custody or power which had not been discovered. Counsel for the applicant did not submit to the contrary.

4. Counsel for the respondent submitted that the distinction between what is and what is not an annuity, which was said to turn on the question whether the capital sum in the transaction has gone and has ceased to exist, the consideration for a promise of periodical payments, or is to be repaid by instalments, the subsisting subject of periodical diminution, may be truly drawn only upon a discernment of "the real substance of the total transaction", which is said to be disclosed by examining not only the terms of the agreements made by the parties, but also what was described in submission as "the underlying substance" and "the true commercial nature" of that transaction. Thus stated, the submission might be thought not inconsistent with the reasoning in Egerton-Warburton v. Deputy Federal Commissioner of Taxation [1934] HCA 40; (1934) 51 CLR 568 at 571-575 or in Atkinson v. Federal Commissioner of Taxation [1951] HCA 64; (1951) 84 CLR 298, upon both of which counsel for the respondent placed reliance. But it is in my opinion another question whether the information sought to be gained by the discovery claimed is of a kind by reference to which a court makes that discernment. The terms of the claimed order, which I have quoted, suggest what paragraphs 19 and 20 of the affidavit in support of the motion make plain, that the information sought by this claimed discovery is as to communications between agents of parties to the written instruments about the agreements and other transactions embodied and contemplated in the instruments, and reflections and communings and decisions of officers and servants of each of the two partners about those agreements and transactions, occurring before each agreement or instrument respectively was made. Those two paragraphs read:

"19. The Applicant's List of Documents
lists 28 documents. But an examination
of the List discloses that the documents so far
discovered are limited to the formal legal documents
evidencing the ostensible nature of the transaction and
exclude all records which might bear upon the real
substance of the transaction. The Applicant has not
discovered any internal working documents or other
documentary record of any discussions or negotiations
with the other entities involved in the transaction,
nor any documentary record of the internal
considerations which informed the Applicant's entry
into the transaction.
20. However, given the nature and magnitude of
the transaction, and the identity of the participants,
the Respondent's experience is that it is likely to a
point of near certainty that before entering into the
transaction the Applicant undertook a detailed analysis
of the transaction and obtained detailed accounting and
legal advice. Ordinary banking practice suggests that
the Applicant would have written records of all of
those matters as well as a file recording the
negotiations and considerations leading to the loan of
$42,369,456.00 obtained from Fazen Pty Ltd. Thus it
appears to the Respondent to be extremely likely that
the Applicant has failed to discover, at the least, all
documents relating to the transaction of the following
classes:-
i) Minutes of Meetings, both internal and external;
ii) Reports, advisings;
iii) File notes, correspondence, memoranda;
iv) Applications for loans;
v) Bank statements, accounting records;
vi) Promotional materials;
vii) Calculations and other accounting records and data;
viii) Partnership records."

The respondent expressly disavows any intention to submit that any of the transactions in question is a sham, and disavows any intention to invoke a provision of Part IVA of the Income Tax Assessment Act 1936 on the hearing of the appeal.

5. It was submitted by counsel for the respondent that, if on the hearing of such a motion as this is the court were in doubt as to whether for the purpose of classifying a payment as within or without the meaning of the word "annuity" in s.27H regard could be had to circumstances of the kind which the discovery claimed might be expected to disclose, it was sufficient to justify the order sought that the court considered it fairly arguable that regard could be had to such circumstances.

6. The submission can, I think, best be considered by first supposing that the proceeding were regulated by pleadings. In such a case the respondent would be required to state among the ultimate facts by reason whereof it was to be concluded that such a payment was not an "annuity" within the meaning of the section each of those circumstances which disclosed that "underlying substance" of the transaction in performance of which the payment was to be made. While those allegations, of what for convenience I will call "underlying substance circumstances", stood in the pleading and were not admitted, discovery relevant to them must have been given, and given by reference to a measure of relevancy so expressed as to comprehend a document leading to a train of inquiry which might either advance the case of the party to whom discovery is being given or damage that of his adversary. If the applicant desired to avoid giving discovery relevant to the underlying substance circumstances he could do so only by admitting the allegation of the existence of those circumstances or by moving for an order which would operate to remove that allegation from the respondent's pleading. In my opinion the principle is stated and explained in Section I of Chapter 1 of Book I of Bray on Discovery, and may be summarised in a sentence from that Section: "If the party does not choose to raise any objection which he might raise to the issue itself, he cannot raise such objection to giving the discovery relevant to the issue". In my opinion the submission of the respondent, that an order for discovery of documents relevant to an issue of fact may be grounded on an opinion that the issue may, or will probably, or will arguably, have to be determined by the judge in the course of reaching a decision of the case, is contrary to principle and cannot be accepted.

7. In this appeal there has been no pleading. The practice in this court, as was pointed out by Aickin J. in Bailey's Case [1977] HCA 11; (1977) 136 CLR 214 at 226 of the practice in the High Court, has been not to require pleadings in taxation appeals. The particulars furnished by the respondent of the grounds of his disallowance of the applicant's objections to the assessment were in response to a written request which did not require, and did not evoke, a statement that the respondent intended to support his case by the contention that none of the B Class Annuity Agreements provided for any payment to the applicant which was an "annuity" within the meaning of that word in s.27H. Accordingly there is found in those particulars no reference to underlying substance circumstances.

8. During the course of argument on the motion it became quite apparent that the respondent did intend to advance the contention that the agreements and other transactions to be considered on the hearing of the appeal would result in no payment of an "annuity" within s.27H, and the further contention that the existence of certain underlying substance circumstances justified, or alternatively contributed to the justification of, the former contention. But it would not in my opinion be right to make the order for discovery sought, in anticipation of the expected amendment of the respondent's particulars to comprehend those contentions. First, when the amendment has been made the applicant may move the court for an order having the effect of eliminating the issues of fact which the amendment raises, by recourse to O.11 R.16 or O.29 R.2(a). Second, there is perhaps ground for hope that, if the underlying substance circumstances were identified in particulars to be furnished by the respondent, any order for further discovery could be more precisely formulated than is presently possible.

9. The reason I have for the hope last expressed can be explained by reference to a passage from the judgment of Megarry J. in I.R.C. v. Church Commissioners for England (1975) 1 WLR 251 at 265-270. Megarry J. was considering whether annual rentcharges aggregating $96,000 per annum were wholly income for the purposes of the English Income Tax Act 1952 or part capital. Each rentcharge was reserved in consideration of the sale by the taxpayers of a reversion in land let or underlet to the purchaser of all those reversions at the one time. Each rentcharge was payable for ten successive years. A submission for the Crown was that the aggregate of those payments, $960,000, consisted of the price payable for the capital assets purchased, namely the reversions, and interest on that price. The parties had treated $720,000 as the present value, as at the time of sale, of the ten annual payments of $96,000. The price, according to the Crown, was $720,000, and the balance only was income. The taxpayers contended that the whole of each annual receipt of $96,000 was income. After discussing a number of authorities Megarry J. propounded some general observations concerning the characterisation of a payment as of capital or of income, before considering a question of evidence. It is desirable to set out those general observations so that the analysis of the evidentiary question may be more easily understood. The passage reads:

"Running through the cases, there seems to me to be a
clear recognition of the importance in this field of
the existence of some capital obligation. Such an
obligation may have arisen under some pre-existing debt
which is to be discharged, or it may be brought into
being by the very transaction in question: but
whichever it is, the courts are slow to recognise any
arrangements for paying the debt by means of a
succession of payments as constituting anything except
an arrangement for discharging a capital obligation by
making capital payments. He who is obliged to pay a
capital sum will readily be taken to have performed his
obligation, whatever the manner of payment. In the
phrase of Rowlatt J. in Perrin v. Dickson, 14 TC
608,615:
`If the principal sum has gone and been converted into
something else, there is an annuity; but if you are
liquidating a principal sum it is not an annuity.'
The discharge of a capital obligation must, I think, be
contrasted with other transactions with a capital
aspect. Thus I do not think that the purchase of a
capital asset falls within the same category as the
discharge of a capital obligation. If a capital
obligation is discharged, it ceases to exist, and the
courts appear to have found it easy to treat the means
of discharging the obligation as bearing the same
capital nature as the obligation that they discharge.
But if a capital asset is acquired, there is merely the
exchange of one form of property for another; and there
is no reason why capital should not be exchanged for
income or vice versa. No doubt, as Mr Potter
contended, from the creditor's point of view a debt
that is owed to him is as much of an asset as his land
or his shares are: but the nature of the transaction is
quite different, and it is the nature of the
transaction that matters. Payments in discharge of a
debt readily take the nature of the debt they
discharge, whereas a capital asset may be purchased in
exchange for a capital payment, or income payments, or
a mixture of capital and income, or some other
consideration. After some hesitation, Mr. Potter
finally accepted that he could not contend that a
rentcharge in perpetuity or for life was of a capital
nature merely because it was given in consideration of
the purchase of a capital asset, though he contended
that the capital asset played an important part in
determining that the payments were of a capital nature.
Yet I can see little or no reason why the nature of
what is transferred should colour the nature of what is
being paid. At most, the fact that a capital asset is
being acquired can be said to be a factor to be taken
into account.
Again, I think that the mere existence of a capital sum
of money in the minds of either or both of the parties
must be contrasted with the actual existence of a
capital obligation. As a matter of valuation, all
capital can be expressed in terms of income, and all
income can be expressed in terms of capital. An
annuity or rentcharge, whether in perpetuity, for an
uncertain period such as life, or for a fixed term of
years, may readily have its capital equivalent
ascertained by valuers and others: yet such capital
equivalents though useful on either side as a means of
appraising the effect of a proposed transaction, and
perhaps as an aid to bargaining, remain mere units of
calculation so long as they form no part of the bargain
that is struck, and never represent any true
obligation, existing or past. The comments of Sir
Wilfrid Greene M.R. in Sothern-Smith v. Clancy (1941) 1
KB 276 to which I have already referred seem to me to
be in point.
For somewhat similar reasons, I cannot attach any great
weight to the question whether, without there being any
obligation to pay a capital sum, such a sum appears in
some way on the face of the transaction or can by due
diligence be detected on it. I cannot see why the bare
inoperative mention of a capital sum should affect the
nature of what is being paid under the contractual
obligation. Mr Potter contended that in the present
case the transaction itself did mention a lump sum, at
least by implication, in that one had only to add
together the annual rentcharges and multiply by 10
(their duration in years) in order to discover that the
transaction was for an expressed lump sum of 960,000.
On this footing, almost any transaction could be
regarded as being for a lump sum; the argument is one
that might cost the Crown dear in a multitude of other
cases. Further, Mr Potter accepted that if annual
payments were to be made for an uncertain period, such
as life, they might well be income in their nature; but
he drew a sharp distinction between these and annual
payments for a fixed period of years, which he said
were capital in nature. Yet each may be reduced to a
capital equivalent, and I cannot see why their nature
should depend on whether that reduction can be achieved
by simple arithmetic or whether it involves the
additional complication of actuarial expectations of
life.
I am also unable to see the relevance of what the
recipient of a sum of money intends to do with it.
Money that is income when received does not become
capital because the recipient has decided, or later
decides, to use it for some capital purpose, as by
purchasing a capital asset; nor does money that was
capital when received become income by reason of a
decision of the recipient to spend or apply it as
income. What matters is the character of the payment
when made, and not the intention of the recipient,
which in any case may be indefinite or fluctuating. In
short, for this purpose I would distinguish between
capital of obligation, which normally is of great
significance, and capital of acquisition, or of
calculation, or of intention, all of which will
normally have little significance, if any.
Turning from the cases, I must refer briefly to certain
statutory provisions that were discussed in argument.
Mr Potter contended that sections 49 to 51 of the
Improvement of Land Act 1864, and sections 39 and 84 of
the Settled Land Act 1925, showed that rentcharges for
fixed terms could be wholly or partly capital in
nature. On the other hand, Mr. Nolan relied on the
Income Tax Act 1842, section 50 and schedule A, Rule
No. IV, rules 9 and 10, and section 42 of the Income
Tax Act 1853, and contended that the provisions of the
latter showed that for the purpose of income tax the
assumption was that, apart from transactions to which
such provisions applied, a rentcharge was wholly
income. I do not think that either these or certain
other statutory provisions that were mentioned are of
any great cogency on what arises for decision in this
case. In so complex a subject as this, there are bound
to be inconsistencies and loose ends of one kind or
another, and I would hesitate to put any great weight
on assumptions and inferences drawn from enactments
made with other objects in mind.
Before considering any further the substantive law
established by the authorities, I propose to turn to
the question of evidence: for in determining the nature
of the payments I must decide what is admissible for
the purpose. As a matter of principle, I cannot see on
what ground it would be right on tax questions to
exclude all evidence of negotiations between the
parties or other matters extrinsic to the documents
that create the contractual obligation. In determining
what is the true meaning of the contract between the
parties, no doubt many such matters may be
inadmissible. But although the true construction of the
bonds which bind the parties to each other is a factor,
and a very important factor, in determining their
liability to tax, it cannot be decisive. The parties
are at liberty to make whatever bargain they please
within the law. I see no reason why they should not,
as a matter of contract, bind themselves to each other
to treat a capital payment as if it were income or an
income payment as if it were capital. But they have no
power to alter the law or to bind the revenue
authorities. If they strike a bargain for making a
payment of an income nature within the taxing Acts and
also agree that the obligation to make this payment is
to be imposed by a written contract which not only
binds them to treat the payment as being a capital
payment but also does all that skilled drafting can do
to give it a capital nature, then I do not think the
parties can point to the resulting product of
pluperfect draftsmanship and say to the inspector of
taxes: `That is conclusive: you can look no further in
determining the tax liability of either of us'. For
the purposes of taxation, the question is always what
is the true nature of the payment, paying due respect
to the contractual obligations of the parties on their
true construction, but not according them conclusive
effect.
Looked at as a whole, the authorities seem to me to
support this view. I have already mentioned a few
instances in passing, and I do not propose to discuss
these or any others in detail. I think it will be
enough if I give a sufficiency of references. First, I
must say that it is plain that extrinsic evidence
cannot be looked at for the purpose of treating a
transaction of one legal character as if it were a
transaction of another legal character, thereby
bringing into operation the discredited doctrine of
substance as against form. Such evidence is admissible
not for that purpose, but in order to discover what is
the true character in law of the transaction in
question: see Mallaby-Deeley v. Inland Revenue
Commissioners, 23 TC 153, 167 per Sir Wilfrid Greene
M.R. Subject to that, it seems to me that support for
the admissibility of extrinsic evidence is to be found
in the Mallaby-Deeley case at pp 166 and 167, Perrin
v. Dickson (1930) 1 KB 107, 118, 124, 125 (with which
Sothern-Smith v. Clancy (1941) 1 KB 276, 284 should
be contrasted), Inland Revenue Commissioners v. British
Salmson Aero Engines Ltd. (1938) 2 KB 482, 495, 499,
Lomax v. Peter Dixon and Son Ltd. (1943) KB 671, 677,
Goole Corporation v. Aire and Calder Navigation Trustees
(1942) 2 All ER 276, 278, and Vestey v. Inland
Revenue Commissioners (1962) Ch 861, 879, 880. In the
Lomax case Lord Greene M.R., I may say, put the matter
succinctly when he said, at p 677:
`... evidence dehors the contract must always be
admissible to explain what the contract itself usually
disregards, namely, the quality which ought to be
attributed to the sum in question.'
References to the question being one of `the proper
construction to be placed upon the documents by which
the transaction is carried out' (as in the Ramsay case,
20 TC 79, 98, per Romer L.J.) cannot, I think, be
said to indicate any different rule by suggesting that
the only question is one of construction and that
therefore extrinsic evidence is admissible only to the
limited extent permissible in the construction of
documents. The construction of any document is, of
course, an important factor, and in some cases it may
be conclusive: but for fiscal purposes evidence of
other matters may be admissible and, indeed, important.
I turn, then, to the extrinsic evidence in this case.
The special commissioners held that it should be
excluded on the ground that it was admittedly the case
that the preliminary negotiations leading up to the
formal contract had not created `any legally
enforceable contract and, therefore, did not bring into
being a price or lump sum capital obligation.' This
seems to me to be too strict a view. If the whole of
the negotiations for a sale are on the basis of, say,
the price being a lump sum payment which finally
becomes settled at 100,000 pounds, and then at the last
moment the transaction is cast into the form of the
payment of a rentcharge of 10,000 pounds a year for a fixed
term of years, I doubt whether it would be right in a
fiscal case to exclude all evidence of the negotiations
merely because they had never amounted to a legally
enforceable contract. A bargain struck `subject to
contract' creates no legally enforceable contract, yet
I cannot think that it would be right to exclude all
evidence of such a bargain in arriving for fiscal
purposes at what is the true nature of the contract
subsequently made.
The excluded extrinsic evidence in this case consists
of certain correspondence, internal memoranda and
communications of the taxpayers, and the findings of
fact made by the special commissioners as a result of
considering these documents and the oral evidence of
Mr K.S. Ryle, the secretary of the taxpayers. These
findings show that in 1956 the taxpayers offered to
sell the properties in question to the company, but the
company was not prepared to buy. Later the chairman of
the company said that `he was prepared to purchase the
properties in exchange for rentcharges. He would on no
account buy them for a lump sum.' The taxpayers then
considered various aspects of this proposal, and came
to favour it if the rentcharges were large enough to
maintain the existing income of the taxpayers from the
properties and also to provide a sinking fund which,
when the rentcharges ended, would then at least suffice
to maintain that income. In the course of considering
the proposal, various capital values of the properties
were assumed by officers of the taxpayers and also
various properties were assumed by officers of the
taxpayers and also various interest rates, these being
important, of course, in relation to building up the
sinking fund and to the yield to be obtained from it.
Thus one calculation showed that if a 6 per cent. basis
was adopted, the total rentcharge would be 90,000 a
year and the equivalent capital value was 666,666,
whereas on a 5 per cent. basis the figures were
103,000 pounds a year and 800,000 pounds, and on a 4 per cent.
basis 112,000 poinds a year and 888,888 pounds. These percentages
could, as a matter of valuation, also be expressed in
the form of a number of years' purchase, and in the end
the deal settled down to being on an 18 years' purchase
basis, which is the equivalent of an interest rate of
5.55 per cent., yielding rentcharges of 96,000 a year
and an equivalent capital value of about 720,000.
These figures did not remain within the four walls of
the taxpayers but appeared in correspondence with the
company. There was also a tabular statement which set
out in separate columns for each property various
details of the rents, the `purchase price,' the
`rentcharge' and so on; and a copy of this was sent to
the company. There were other matters, too.
Nevertheless, I cannot see anything in the evidence
which indicates that references to capital sums were
ever to anything except capital of calculation or
intention, as distinct from the capital of obligation.
From first to last, the whole basis of the transaction
was one of selling the reversions in return for
rentcharges for 10 years, and there never was any
obligation, even inchoate, to pay any capital sum.
I may now attempt to summarise the position. First, the
starting point is the ascertainment of the true
character in law of the actual transaction, and not of
some other transaction that might have been effected
but was not. Second, to do that involves construing the
documents; but the true construction of the documents,
though important, is not always conclusive. In respect
of the revenue authorities, extrinsic evidence is
admissible if it tends to show the true character of
the transaction. Third, the consideration given for an
asset may, on the true character of the transaction, be
wholly capital, wholly income, or partly one and partly
the other: and any consideration in the last category
(though not consideration in the other two categories)
must be dissected for tax purposes. Fourth, in
determining the nature of any consideration, the true
nature of the bargain is of high importance. Subject
to any overriding considerations, if the true bargain
is to discharge a capital obligation (whether
pre-existing or new) by instalments, those instalments will
be either capital or else a mixture of capital and
interest, depending on whether or not there is any
express or implied obligation to pay interest: but if
the only obligation is to pay periodical sums and there
is no capital obligation, the payments will normally be
income. Fifth, the nature of the payments will
normally not be affected by the existence of any
capital of acquisition, of calculation or of intention;
and similarly as to the corresponding income
equivalents. If during the negotiations any such
equivalents come into existence, expressing capital in
terms of income, or vice versa, they will normally have
no effect, unless, of course, they play such a part in
the transaction as to affect its true nature, or
demonstrate that the transaction is a sham or is using
false labels. Sixth, if the true character of the
transaction is that payments consisting partly of
income and partly of capital are to be made, then they
must be dissected in order to discover how much falls
under each head. But payments will not be dissected if
according to the true character of the transaction they
are wholly income or wholly capital, even if the
transaction might have been carried out in some
different way which would have yielded mixed payments
of this kind. Putting the matter even more shortly, I
would attempt to summarise the matter by saying `Look
at the contract and any evidence that is admissible to
discover what the true bargain between the parties
actually is. Then look at what is to be paid in
accordance with that bargain. If it is all capital or
all income, leave it alone; if it is partly one and
partly the other, dissect it. Ignore any other bargain
that the parties might have made but did not.'
If I apply these principles and the law that I have
attempted to discern in the cases, the true nature of
the transaction in this case appears to me as being a
conveyance of capital assets in return for the grant of
rentcharges. I can see nothing either in the
transaction itself or in the extrinsic evidence which
provides any real indication that any part of those
rentcharges is of a capital nature. In my judgment, a
capital nature is not conferred on any part of these
rentcharges either by the capital nature of the assets
acquired, or by the fixed period for which the
rentcharges were to be paid, or by the calculations
that expressed the capital equivalents for the
rentcharges, or by anything else, either individually
or collectively.
I do not say that all rentcharges are inevitably of a
wholly income nature; it is not necessary to say this.
Mr. Potter contended that there was no magic in the
word `rentcharge' in section 177, and that the section
did nothing to convert capital into income, but only
charged rentcharges to income tax so far as they were
of an income nature. He also said that the word
`rentcharge' stood neutral on whether the payments were
in their nature income or capital or a mixture of the
two. I do not need to decide any of these things,
though I may say that I would respectfully prefer the
view taken by the court of Appeal in the Land
Securities case (1968) 1 WLR1446 that rentcharges
are at least prima facie entirely of an income nature.
However that may be, I decide none of it. What I do
decide is that in my judgment there is nothing in the
circumstances of this case to give any part of these
rentcharges a capital nature. In a sentence, the case
is one in which the taxpayers sold their capital assets
in return for an income. I think that the rentcharges
are wholly of an income nature in the hands of the
taxpayers, and that the taxpayers are accordingly
entitled to recover the income tax deducted by the
company in making the payments. Even if in some
respects I have erred in my perilous task of attempting
a summary of the law (and perhaps I may add that, of
course, no judicial summary is ever intended to be
construed as if it were an Act of Parliament), I still
find it difficult to perceive any capital element in
the rentcharges to which the taxpayers are entitled.
As I have indicated, I do not think that the special
commissioners ought to have excluded the extrinsic
evidence, but I do not consider that this evidence,
when admitted, alters the conclusion which the special
commissioners reached."

The conclusion of Megarry J. that the evidence was admissible has been approved by high authority (see I.R.C. v. Church Commissioners for England (1977) AC 329 at 344, 354, 358) and I was not referred to any Australian judicial dissent from the conclusion. Mr. Bloom QC, who appeared with Mr. O'Callaghan for the applicant, submitted that the exposition by Mason J. in Codelfa Construction Pty. Ltd. v. State Rail Authority of N.S.W. 91982) [1982] HCA 24; 149 CLR 337 at 347-353 of the conditions of admissibility of extrinsic evidence in relation to the construction of a written contract contradicted the conclusion expressed by Megarry J. But the reasoning in support of that conclusion expressly confesses and seeks to avoid the principle enunciated by Mason J. by declaring that the proper construction of the written agreement is in a revenue case only one step in characterising a payment made under the agreement as capital or income.

10. It was further submitted by Mr. Bloom that the question whether a payment to Narvaez Ltd. under a B Class Annuity Agreement would be an "annuity" within the meaning of s.27H(1) was not the kind of question to the resolution of which extrinsic evidence is admissible. The question was of the kind to which the principle expounded I.R.C. v. Duke of Westminster (1936) AC 1, it was submitted. The adoption of a legal form of transaction within a statutory description was in that case said to be, if the form were not a sham, determinative of the question whether a payment in performance of the transaction should have for revenue purposes the consequences prescribed by the statute. Mr. Bloom submitted that what has been described as "the Duke of Westminster doctrine" was applicable to the question whether a payment to Narvaez Ltd. under a B Class Annuity Agreement would be an "annuity" within s.27H. He adopted, and he submitted that the Full Court of this court had in Federal Commissioner of Taxation v. Cooling (1990) 90 ATC 4473 adopted, an analysis of the circumstances in which that doctrine was applicable which is propounded by Professor Parsons in his Income Taxation in Australia, thus:

"2.421 There would appear to be no role for the Duke
of Westminster doctrine of form in this context. The
doctrine remains part of United Kingdom law, though it
has been explained recently in a way that may make it
less of a support in tax planning than formerly: W.T.
Ramsay Ltd v. I.R.C [1981] UKHL 1; (1982) AC 300; I.R.C. v. Burmah
Oil Co. (1982) STC 30; Furniss v. Dawson (1984) 2
WLR 226. The doctrine continues to be applied in
the High Court: Westraders [1980] HCA 24; (1979) 144 CLR 55. But
its role should be confined to the context of a
specific statutory provision which attaches tax
consequences to the adoption of a legal form. The
doctrine does no more than say that a taxpayer, who
has, in a transaction which is not a sham, adopted that
legal form, is benefited or burdened by those tax
consequences. The question in Duke of Westminster was
whether the payment was an `annuity or ... annual
payment ... payable wholly out of profits or gains
brought into charge'. There was room for debate about
the meaning of the words `any annuity or annual
payment', but if the taxpayer's actions were within
that meaning he was entitled to the tax consequences.
Where the context is the ordinary usage meaning of
income and the only relevant statutory provision is the
word `income' itself in s.25, there is no role for the
Duke of Westminster doctrine. The question is whether
the facts come within some rather vague notions which
the courts have sought to express in principles and
rules. A formulation in a judgment of a court of a
rule that a receipt for a restrictive covenant is not
income as a reward for services, is very different from
a specific provision in the Assessment Act. In this
context a conclusion that the receipt was not `really'
or `in substance' for the restrictive covenant, though
it was such in form, involves an assertion that the
idea of receipt for a restrictive covenant expressed in
the rule transcends the legal forms that have been used
in expressing it. That idea may require reference to
the intentions of the parties: could it have been
expected that the taxpayer would have received the
amount in any event, under the form of a payment of
services, if he had not entered into the restrictive
covenant? Reference to these intentions may require a
conclusion that the `substance' of the transaction was
a reward for services, or, which amounts to the same
thing, that the transaction was within the substance of
the principle that a reward for services is income.
Tax law which is made to operate mechanically through
legal forms must invite defeat of any principles it may
seek to express.
2.422 The doctrine of form is as irrelevant in the
characterising of a receipt as income within the
ordinary usage notion of income as it is in the
characterising of an outgoing as deductible under the
general deduction provision in s.51. The chaos that
has resulted from importing the doctrine of form into
that context is considered at length in Chapter 9,
(9.17) below. Thus a rule that interest on money
borrowed to invest in income producing property is
deductible may be a useful judge made rule expressing
the broad principle in s.51. But to treat a payment
which is in form interest on such money as deductible
simply because it has that form, is to mechanise the
tax system and confound principle.
2.423 A distinction may be drawn between a doctrine
of primary form and a doctrine of secondary form.
Primary form concerns only those provisions of the
Assessment Act that attribute tax consequences to
actions which are within specific words that have a
definitive legal meaning. Thus the courts have found a
definitive meaning for the word `royalties' and a
taxpayer who enters a transaction of the kind adopted
by the taxpayer in McCauley [1944] HCA 18; (1944) 69 CLR 235 must
accept the consequence that he derives income, though
the adoption of another transaction which followed the
precedent of Stanton [1955] HCA 56; (1955) 92 CLR 630 might have
enabled him to avoid that consequence. A taxpayer
whose transaction fits the words of legal art in the
phrase `subscriptions for shares' in a mining company
is entitled to the deduction that the law may give for
such a subscription. The doctrine of primary form will
support him. Mullens [1976] HCA 47; (1976) 135 CLR 290, a case
mentioned again in Chapter 16, involved an attempt by
the Commissioner to overcome the primary form doctrine
by resort to the general provisions of s.260 (now
displaced by Pt IVA), in circumstances of a
subscription for shares. There are those who would say
that the primary form doctrine should prevail over any
attempt to defeat it by reference to a policy of the
Act, whether by a direct application of a policy or by
means of a general anti-avoidance provision. Values
expressed in the phrase `the rule of law' are at stake.
The matter is considered again in Chapter 16.
2.424 A doctrine of secondary form ought not to
attract the same support. Such a doctrine concerns,
not definitive words of the Assessment Act, but
definitive words that may have been adopted in judicial
interpretation in expressing a broad principle
reflected in words of the Act that are not in
themselves definitive. That interpretation will most
often have concentrated on the ordinary usage concept
of income that is attracted by the word `income' in
s.25(1), and the broad concept of deductibility
expressed in the words `incurred in gaining' in
s.51(1)."

11. The difficulty I have with the submission Mr. Bloom grounded on the foregoing passage from Professor Parsons' work is that I cannot think that in s.27H, or elsewhere in the Income Tax Assessment Act 1936, the word "annuity" now has what Professor Parsons called "a definitive legal meaning". The conceptual distinction propounded in the authorities on the word in revenue statutes, between periodical instalments by way of payment or repayment of a capital sum and a fixed sum by way of income terminating at a time certain or on an uncertain event, leaves for judicial discovery "a satisfactory test" for making the distinction, as the High Court observed in Atkinson v. Federal Commissioner of Taxation (19510 [1951] HCA 64; 84 CLR 298 at 304. While legal form will not be ignored in the search for the distinction in a particular case, the reasoning in the Atkinson's Case and in Egerton-Warburton's Case, supra discloses that the search is certainly not confined to legal form. The content of meaning to be judicially assigned the word "annuity" in the Income Tax Assessment Act 1936 derives not just from usage, vulgar or technical or legal, but from conceptions analogous to those which have contributed to give a content of meaning to the word "income". If the propositions advanced by Professor Parsons be accepted, the word "annuity" in s.27H in my opinion falls into the class of which he has chosen the word "income" as the exemplar.

12. As at present advised I think that I should accept and apply the reasoning of Megarry J. on the evidentiary question. It would follow that documents disclosing negotiations, between agents of the parties, preceding the making of the B Class Annuity Agreements would in my opinion be discoverable. I am not presently convinced that a document disclosing a conception, whether arithmetical or semantic, entertained by a party's directing mind about the transaction which was subsequently embodied in a B Class Annuity Agreement would be discoverable, except for the reason, if such were the case, that the document would lead to a train of inquiry which would tend to show that the conception found expression in negotiations for that B Class Annuity Agreement. I am not persuaded, that is to say, that such conceptions which were not communicated by one party to the other may be taken into account in characterising the payments here in question. It is, however, unnecessary that I express a concluded opinion at this stage, as it is also unnecessary that I express a concluded view now concerning extrinsic evidence relating to the other agreements and instruments to which I have referred. When the underlying substance circumstances on which the respondent desires to rely have been stated, it may be possible more precisely to describe the documents to be discovered.

13. It would be to close one's eyes to the obvious to ignore the possibility that the respondent simply has no knowledge, as to whether there was a communication, between agents of the parties to a B Class Annuity Agreement, or between agents of the parties to any transaction of which such an agreement formed part, which preceded the making of the agreement and constituted an underlying substance circumstance, or no knowledge as to the content of such a communication. It is of course for the respondent to judge what allegations he will make by way of particulars of underlying substance circumstances. No submission was advanced to me by counsel for the respondent that the respondent should have discovery before pleading those allegations, so that by discovery he might learn what to allege. It did not appear in evidence before me whether information concerning underlying substance circumstances had been sought before assessment, whether by recourse to ss. 263 and 264 of the Income Tax Assessment Act 1936 or by other means.

14. After the motion had been heard and while it stood for judgment a document entitled "The Respondent's Additional Grounds of Disallowance of The Applicant's Notice of Objection Dated 29 May 1987", a document entitled "Amended Grounds of Disallowance of the Applicant's Notice of Objection dated 29 May 1987" and a document entitled "Further Particulars of Grounds of Disallowance of Objection Provided by the Respondent in response to a Request of the Applicant by Letter Dated 5 September 1990" were filed. I have disregarded those documents in considering the motion.

15. My conclusion is that no order for discovery of the kind now sought should presently be made.

16. Subpoenas caused to be issued by the respondent have been served on six persons, requiring in each case production to the Court now of specified documents. One is directed to the applicant and the other five to Australia and New Zealand Banking Group Ltd., New South Wales Treasury Corporation, Quantitative Management Ltd., Fazen Pty. Ltd. and Narvaez Pty. Ltd. The subpoena directed to the applicant is best considered with the motion for discovery and for that reason the applicant's motion to set the subpoena aside as an abuse of process will be adjourned to a date to be fixed. Each of the other five persons has moved the Court to set aside the subpoena served on it as an abuse of process. I have heard counsel for those persons and counsel for the respondent on the several grounds assigned for the orders sought. The determination of some of those grounds should wait upon the resolution of questions likely to be decided in the course of determining whether the respondent should have further particular discovery. None of the five subpoenas was said to have been issued for any forensic purpose except procurement of documents for use on the hearing of the appeal. The appeal will not be heard until after questions of pleading (by way of particulars) and discovery have been resolved. The appropriate course is, I consider, to stand over the further hearing of the motions until a date to be fixed. (Cf. R. v. Commissioner of Taxation; Ex parte Swiss Aluminium Australia Ltd. (1986) 13 FCR 66.)