Re Willem Bertus Reuter v the Commissioner of Taxation [1993] FCA 18; (1993) 93 Atc 4037 (1993) 24 Atr 527 (1993) 111 ALR 716 (4 February 1993)

FEDERAL COURT OF AUSTRALIA

Re: WILLEM BERTUS REUTER
And: THE COMMISSIONER OF TAXATION
No. W G155 of 1990
FED No. 14
Number of pages - 43
Income Tax
[1993] FCA 18; (1993) 93 ATC 4037
(1993) 24 ATR 527
(1993) 111 ALR 716

COURT

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
Hill J.(1)

CATCHWORDS

Income Tax - ordinary concept of income - taxpayer with contingent right to sue for payment for personal services - payment by third party for subordination of right - whether payment a product of taxpayer's services - discussion of income from services.

Income Tax - capital gains tax - "asset" - contingent right to sue for payment for personal services.

Income Tax Assessment Act 1936 (Cth): ss.25(1), 160A, 160M(6), 160M(7).

Federal Commissioner of Taxation v Cooling (1990) 22 FCR 42 at 50-57, 52-3, 59; followed.

Federal Coke Co Pty Ltd v Federal Commissioner of Taxation [1977] FCA 3; (1977) 34 FLR 375; discussed and followed.

Hayes v Federal Commissioner of Taxation [1956] HCA 21; (1956) 96 CLR 47 at 55, 57-8; applied.

Jarrold (Inspector of Taxes) v Boustead (1964) 3 All ER 76; referred to.

Riley (Inspector of Taxes) v Coglan (1968) 1 All ER 314; referred to.

Holland (Inspector of Taxes) v Geoghegan (1972) 3 All ER 333; referred to.

Hepples v Federal Commissioner of Taxation [1992] HCA 3; (1991) 173 CLR 492; followed.

Hepples v Federal Commissioner of Taxation (1990) 22 FCR 1 at 9-10, 20-27; followed.

Booth v Federal Commissioner of Taxation [1987] HCA 61; (1987) 164 CLR 159 at 165-6; referred to.

HEARING

PERTH
4:2:1993, SYDNEY

Counsel and Solicitors D.H Bloom QC and C.J. Munro
for Applicant: instructed by Sly and Weigall

Counsel and Solicitors E. Heenan QC with P. Macliver

for Respondent: instructed by the Australian Government Solicitor

ORDER

THE COURT ORDERS THAT:

1. The application be dismissed.
2. The applicant to pay the respondent's costs.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

DECISION

HILL J. The applicant, Mr Willem Bertus Reuter, ("Mr Reuter") applies to the Court to review a decision of the respondent Commissioner of Taxation disallowing Mr Reuter's objection to his assessment of income tax in respect of the year ended 30 June 1988.

2. In issue is whether an amount of $8,000,000 received by Mr Reuter on 19 November 1987 is assessable income of Mr Reuter, pursuant to s.25(1) of the Income Tax Assessment Act 1936 (Cth) as amended ("the Act"), or alternatively made assessable income by virtue of the provisions of Part IIIA of the Act dealing with capital gains.

3. The circumstances surrounding the payment to Mr Reuter were born out of the highly publicised takeover by Tryart Pty Ltd ("Tryart"), a company associated with Mr Warwick Fairfax of John Fairfax Limited ("Fairfax"), a public company. Until February 1987, Mr Reuter, an accountant, had been employed by the Bell Group of Companies, having been, prior to his resignation, Chief General Manager. He had, over the sixteen years in which he had been associated with the Bell Group, gained considerable experience in corporate acquisitions and had been closely involved in some twenty takeovers, or attempted takeovers, of public companies in Australia and the United Kingdom.

4. After leaving the Bell Group, Mr Reuter had no specific occupational plans. However, in late April 1987, Mr Reuter met with Mr Laurie Connell, a Western Australian entrepreneur, who was, at that time, Chairman of Directors of Rothwells Limited ("Rothwells"), a merchant bank operating out of Perth. At that meeting Mr Connell told Mr Reuter that he had been approached by a Mr Martin Dougherty and a Mr Carnie Fieldhouse representing Mr Warwick Fairfax, proposing Mr Connell's involvement on a joint venture basis in a proposed takeover of Fairfax by Mr Warwick Fairfax. Mr Dougherty had been a journalist and editor of various Australian newspapers and worked in the public relations field. Mr Fieldhouse was a solicitor practising in Sydney.

5. Mr Connell secured Mr Reuter's agreement to the proposal that Mr Reuter should work for one month on the project for a fee of $50,000. At that time the proposal was that Mr Fairfax and Mr Connell would each have a fifty percent equity position, should the proposed takeover be successful. Mr Reuter prepared a discussion paper on the proposal and was later duly paid the $50,000 fee.

6. Some time in July 1987, Mr Connell informed Mr Reuter that Mr Fairfax did not wish to proceed with a joint venture takeover, but wished to pursue the takeover alone, albeit still with the assistance of Mr Connell. Mr Connell said that Mr Fairfax was prepared to pay Mr Connell $100,000,000 if the takeover was successful. Mr Connell asked Mr Reuter if he would be prepared to assist. Mr Connell told Mr Reuter that Mr Dougherty would be paid a ten percent fee to compensate him for the work he had done and that the balance of the $100,000,000 fee, after expenses, would be split equally between Mr Connell and Mr Reuter.

7. The matter of a fee being paid by Mr Fairfax was discussed at two meetings on 12 and 14 August 1987, between Mr Fieldhouse, Mr Warwick Fairfax, Mr Connell and Mr Dougherty. At these meetings it was made clear that the fee to be paid to Mr Connell was a success fee only and that Mr Fairfax was to have no financial exposure in the event that the bid was unsuccessful. Mr Fairfax made it clear that he wanted Mr Connell and Mr Reuter to work exclusively on the deal. At a lunch around this same time, at which Mr Dougherty, Mr Connell and Mr Reuter were present, Mr Connell told Mr Dougherty that Mr Connell would be prepared to assist in the takeover exercise in consideration of the fee of $100,000,000 and that Mr Reuter and Mr Dougherty would each have ten percent of the fee. Notwithstanding that conversation, it was always agreed between Mr Connell and Mr Reuter that, in fact, Mr Reuter's share would be approximately forty-five percent of the $100,000,000 fee. The matter of the fee payable to Mr Reuter was to be kept confidential and as will be seen Mr Dougherty did not become aware of the extent of the fee to be paid to Mr Reuter until much later.

8. Up to that time, the discussions with Mr Connell had been in Mr Connell's capacity as a partner in a firm trading as L R Connell and partners. However, on or about 18 August 1987, Mr Connell, at a meeting with Mr Reuter, advised Mr Reuter that a decision had been made to "put the deal into Rothwells". Mr Reuter asked Mr Connell to sketch the outline of the revised deal on a piece of paper, which Mr Connell did. This document, which was in evidence and was in Mr Connell's handwriting, read as follows:

"AGREEMENT ROTHWELLS FAIRFAX
? agreement
Rothwells will employ L R Connell and Partners
as consultants
Rothwells will provide 5-10 million interest
free to Warwick Fairfax for a period of 6 months
secured by commercial security.
Success fee 5 million on either total
acquisition or sell out.
Dougherty is to get 10% of net fee after costs.
LRC and WBR to receive equally the balance."

9. The word represented by a question mark was illegible to all including Mr Connell.

10. Mr Connell's explanation to Mr Reuter for the involvement of Rothwells was that that company had the necessary security licences and the Rothwells name was important to the transaction.

11. Following this meeting, Mr Reuter took steps to have prepared a written contract with Mr Connell. Despite repeated requests of Mr Connell, no such agreement was ever prepared. There was, however, executed on 28 August 1987, an agreement between Rockwood Pastoral Co Pty Ltd, Tryart and Rothwells; this agreement is hereafter referred to as "the Tryart agreement". Under it, Tryart agreed to engage Rothwells and Rothwells agreed to accept appointment to act as consultants and financial advisers in connection with the following matters:

"(a) the Take-over Offer;
(b) instructing solicitors on behalf of the
Offerer... on all matters relating to the
Take-over Offer including, but without
limiting the generality thereof;
(i) the preparation of all documentation
in relation to the Take-over Offer
under a take-over scheme; and
(ii) the making of all disclosures
required to be made by law in
relation to the same;
(c) financing the Take-over Offer;
(d) attaining the Minimum Acceptance Number; and
(e) in the event that the Take-over Offer is
successful, the manner in which in the
future the Offerer may deal with any
indebtedness incurred in respect of the Take-over Offer,
for the term commencing on the date hereof and,
subject to the provisions of Clause 6 hereof,
continuing for such period, not exceeding twelve
(12) months from the date on which the Take-over
Offer is successful as the Offerer may deem reasonable."

12. For its part, Rothwells undertook to do everything necessary to ensure the proper performance of the services it agreed to perform, it being agreed that those services would be furnished through L R Connell and Mr Reuter, or such other consultants as Rothwells should deem necessary.

13. Clause 5 of the Tryart agreement provided, as far as is relevant to the present problem:

"In consideration of and conditional upon
Rothwells properly performing its services
hereunder, the following provisions shall apply:
(a) in the event that the Offerer becomes
registered or is entitled to be registered
as the holder of the Minimum Acceptance
Number, the Offerer shall within one
hundred and eighty (180) days from the
date the Take-over Offer is successful,
pay to Rothwells whichever of the
following amounts the Offerer in its
absolute discretion shall elect within
such period, namely:
(i) the lesser of:
(A) one hundred million dollars
($100,000,000); or
(B) an amount equal to ten (10)
percent of the consideration
paid by the Offerer for the
shares in the target company
acquired as a result of the
Take-over Offer; or
(ii) an amount equal to twenty-five (25)
percent of the net profit from the
sale of the shares in the target
company acquired as a result of the
Take-over Offer calculated by
deducting from the proceeds of sale
of such shares the aggregate of:
(A) the expenses of the Offerer in
relation to such sale; and
(B) the cost to the Offerer of
such shares,
AND IN ADDITION THERETO the Offerer
shall reimburse Rothwells for all
reasonable costs incurred by
Rothwells in relation to the
performance of its services
hereunder, including all fees
payable to any underwriter in respect thereof."

14. The clause continued to deal with the situation should the offerer elect to pay the amount described in cl.5(a)(ii) and what was to happen in the event that the takeover offer was not successful.

15. The Fairfax takeover was made public on 31 August 1987. In the period between September and October Mr Reuter, Mr Connell and Mr Dougherty worked on the takeover from Rothwells' office in Sydney. In that time Mr Reuter continued to make requests of Mr Connell for documentation of the fee arrangement.

16. On 20 October 1987, the stockmarket crashed. Rothwells was in serious financial difficulties. Nevertheless it was decided to proceed with the takeover. In the month of October 1987, it became necessary for there to be launched what was described as a "rescue" of Rothwells in that month. Under the terms of that rescue, National Australia Bank agreed to advance approximately $150,000,000 to assist Rothwells to overcome the liquidity problems caused, inter alia, by a run on moneys advanced to Rothwells. Those bank funds, however, were not available to be immediately drawn down and were not expected to be available until approximately January 1988. With the benefit of hindsight, it can be seen that the rescue attempt ultimately merely deferred the inevitable. Presumably those participating in the rescue, however, expected, or at least hoped, that their efforts would be successful. Nevertheless, Rothwells continued to have liquidity problems.

17. It was in this context that Mr Connell conceived of the idea of discounting the Tryart success fee. He approached Mr Reuter in the first week of November to advise Mr Reuter that Mr Malcolm Turnbull was being employed to discount the Tryart fee and requested Mr Reuter to go with Mr Turnbull to the State Bank as a potential financier to provide backup information on the Tryart bid, which was not yet completed. According to Mr Reuter's evidence, he did not remonstrate with Mr Connell about discounting the fee, notwithstanding Mr Reuter's obvious interest in that fee. Indeed, Mr Reuter went to the State Bank with Mr Turnbull to discuss the possibility of that bank discounting the fee.

18. On 7 November 1987, Mr Reuter arranged to see a Mr Frecker of Dawson Waldron, solicitors of Sydney, to discuss the fee position. Mr Frecker told Mr Reuter that he had a conflict of interest and arranged for Mr Reuter to see a Mr Anderson of Sly and Russell, solicitors in Sydney, the following Monday, 9 November 1987. In between these two meetings, Mr Reuter phoned Mr Connell in Perth to express his concern about the fee position. Mr Connell said to Mr Reuter that Rothwells was in significant financial trouble and that he should bear in mind that if a receiver were appointed Mr Reuter would get nothing. Mr Connell told Mr Reuter that the Western Australian Government was closely involved and asked Mr Reuter to trust him to look after Mr Reuter. Mr Connell indicated that he would be coming to Sydney on Monday, 9 November, and that he would then talk to Mr Reuter about the matter. On 9 November, Mr Reuter instructed Mr Anderson to act for him.

19. In the meantime, on 5 November 1987, the Tryart Fairfax bid was declared free from conditions. As at that date, Tryart was entitled to 84 percent of the fully paid up shares in the capital of Fairfax.

20. Mr Reuter told Mr Anderson the story. Mr Reuter's understanding of the Connell handwritten agreement was that Rothwell's was acting as agent for Mr Reuter and Mr Connell and that Rothwells would hire L R Connell and Partners, which in turn would hire Mr Reuter. Mr Reuter told Mr Anderson of the proposal by Rothwells to assign the benefit of the agreement and expressed his concern that once moneys were paid to Rothwells under the assignment, any chance Mr Reuter had of receiving his share of the fee (which he estimated at $40,000,000) would disappear. Mr Anderson spoke to Mr Vrsakis, a Sydney solicitor advising Rothwells, and told Mr Vrsakis that Mr Reuter wanted some assurance from Mr Connell that the arrangements made between them would be honoured. At that stage Mr Vrsakis indicated that there should be no difficulty about this. Later, Mr Vrsakis telephoned Mr Anderson and indicated that Mr Connell would have no problem with giving the assurance to Mr Reuter, but that Mr Connell would like to discuss the matter with Mr Reuter.

21. On the same day, letters were sent by Mr Anderson to the Fairfax interests, alleging that they were aware that Rothwells was to receive the $100,000,000 fee as trustee for various parties, including Mr Reuter, referring to the proposal that the benefit of the agreement be assigned and requesting confirmation that the Fairfax interests would not consent to any assignment without first notifying Mr Reuter. A letter was also sent to Rothwells setting out Mr Reuter's understanding of the arrangement, seeking an undertaking that there would be an accounting of moneys received by Rothwells to Mr Reuter and requesting an undertaking to that effect the next day. The letter threatened that Mr Reuter would commence proceedings against Rothwells in the Supreme Court of New South Wales seeking an injunction restraining Rothwells from assigning the benefit of the Tryart agreement unless an undertaking were given in a satisfactory form.

22. On the same day, Mr Dougherty went to see Mr Reuter in Mr Reuter's suite at the Regent Hotel in Sydney, at the request of Mr Connell. According to Mr Reuter, Mr Dougherty was in a very agonised state. Mr Dougherty said that he had just come from Mr Connell who had told Mr Dougherty of the letter from Sly and Russell to Rothwells. Mr Dougherty told Mr Reuter that Mr Connell had said that Rothwells would be ruined if the discounting of the Tryart success fee did not take place. By this date the State Bank had dropped out as the potential discounter and discussions were being held with Bond Media Limited. There is a conflict of evidence between Mr Dougherty and Mr Reuter as to what thereafter happened at this conference. According to Mr Reuter, Mr Dougherty told Mr Reuter that there was $1,000,000 available to be offered to Mr Reuter; Mr Reuter said to Mr Dougherty that he would not be overwhelmed by such a small amount. According to Mr Dougherty, this did not take place. It is unnecessary to resolve that conflict.

23. On that same day, there was signed a memorandum of understanding between Tryart, Rothwells and Bond Media Limited, whereby it was recited that Bond Media Limited had agreed, subject to the ANZ Banking Group Limited entering into a credit facility agreement with Tryart to finance the takeover offer, to purchase from Rothwells "all of its rights to payment of fees, costs and other moneys under the Tryart agreement". It was further recited that Rothwells had executed in favour of Bond Media Limited a Deed of Assignment, assigning those rights to Rothwells. Under the memorandum of understanding, Tryart acknowledged the Assignment and agreed with Bond Media Limited to pay any fees payable pursuant to the Tryart agreement to Bond Media Limited on the day after the expiration of the period defined in the agreement as meaning:

"...the period of time being that period which
begins on November 5, 1987 and ends on June 28,
1988 provided that if Tryart repays all of its
liabilities under the ANZ facility on a day
prior to June 28, 1988, then the period shall
end on that day or May 3, 1988, whichever is the later."

24. Tryart, for its part, agreed that it was bound by the Tryart agreement and that that agreement was enforceable in accordance with its terms. Tryart also acknowledged that, so far as it was aware, Rothwells had complied with its obligations under the Tryart agreement.

25. On 10 November Mr Vrisakis spoke with Mr Anderson advising him that additional funding was due to be put in place that day for Rothwells using the Tryart agreement as security. Mr Vrisakis said that if this funding was not put in place Rothwells would go to the wall. He advised Mr Anderson that Mr Connell and Rothwells denied a trust relationship, asserted that Mr Reuter had not fulfilled his role in the takeover and said that, so far as Rothwells was concerned, there was no agreement with Mr Reuter. This conversation was thereafter communicated to Mr Reuter. Later that morning, Mr Anderson met with Mr Reuter, Mr Dougherty and a Mr Bracks, who was Mr Dougherty's solicitor. At that meeting Mr Dougherty said that he had spoken to Mr Connell who was prepared to pay $10,000,000 to Mr Reuter and Mr Dougherty, of which $2,000,000 was to go to Mr Dougherty. That meeting followed two earlier meetings that day between Mr Dougherty and Mr Reuter at which they agreed on accepting the $10,000,000 amount offered by Mr Connell and sharing it on an 80:20 basis.

26. When this matter was discussed with Mr Anderson, according to Mr Anderson's diary note, Mr Anderson explained the "problem with preferences if either Rothwells or Connell go under". Mr Anderson advised that he could give no guarantee that Mr Reuter and Mr Dougherty would be able to resist claims from a liquidator and/or a trustee in bankruptcy.

27. Later that same day, Mr Anderson spoke to a Mr Connolly, a solicitor from Dawson Waldron acting possibly on behalf of Rothwells, but perhaps, either alternatively or additionally, for Bond Media Limited. According to Mr Anderson's diary note of this discussion, Mr Connolly advised that Bond Media Limited would be making a loan to Rothwells secured on the Tryart agreement. He said that Mr Connell did not have the $10,000,000 to pay Mr Reuter and Mr Dougherty and suggested that Bond Media Limited should pay $10,000,000 direct to Mr Reuter as consideration for Mr Reuter and Mr Dougherty agreeing not to enjoin the Bond Media Limited/Rothwells transaction. He disclosed that Bond Media Limited was to make $18,000,000 out of the transaction and said that it was in that company's interest to pay out Mr Reuter and Mr Dougherty. According to Mr Anderson's diary note, Mr Anderson advised he saw a problem with this because:

"...our action would be against Rothwells. We
have no right of action against BML. If trust
relationship between us and Rothwells is
acknowledged by an Acknowledgment of Trust we
can then assign our interest in the (Tryart)
agreement to BML for valuable consideration."

28. In a later conversation, Dawson Waldron advised that a declaration of trust would be liable to New South Wales stamp duty, as would an assignment of the declaration, and that Mr Anderson should reconsider the option of Messrs Reuter and Dougherty entering into a covenant with Bond Media Limited not to sue for a consideration of $10,000,000.

29. Mr Anderson appears at this stage not to have been enthusiastic about the proposal. In discussions with Mr Dougherty's solicitor, the suggestion was made that Rothwells should pay the stamp duty on the acknowledgment of trust and Bond Media Limited should pay the stamp duty on the assignment.

30. Later, Mr Anderson spoke again to Mr Connolly of Dawson Waldron and confirmed to him that Mr Reuter now preferred a Deed of Covenant and did not want to give releases because it might suggest that the claim lay in contract against Rothwells. Mr Anderson discussed with Mr Connolly the potential wording of the Deed of Covenant. Mr Connolly advised that in that matter Dawson Waldron would be acting for Bond Media Limited.

31. On 11 November 1987, Mr Anderson spoke to Mr Reuter and suggested that the opinion of senior counsel be obtained on the documentation, which by then Mr Anderson had drafted. Accordingly, a conference was arranged to see Mr Conti QC at 12.30pm that day to discuss the documentation.

32. The brief to Mr Conti QC was not in evidence. Initially, Mr Anderson suggested that the conference was not called to settle a draft of the agreement. That clearly conflicts with Mr Anderson's own contemporaneous notes. Indeed, Mr Anderson's evidence was far from satisfactory. It would seem that the real purpose of the conference was to discuss whether Mr Reuter's position, and that of Mr Dougherty, who also attended the conference, was protected in the event of a liquidation of Rothwells. It was explained to Mr Conti QC that the purpose of the arrangement with Bond Media Limited was to ensure that, in the event of a liquidation of Rothwells, a liquidator could not succeed in forcing Mr Reuter or Mr Dougherty to disgorge the moneys they had received from Bond Media Limited. Thus, Mr Conti QC's advice, to quote Mr Anderson's contemporaneous note, was that "the Deed of Covenant is the way to go". Mr Conti further advised that an acknowledgment signed by Mr Connell on behalf of Rothwells would assist Mr Reuter's position, but that it was not essential. He advised that that document should be signed in the Australian Capital Territory to minimise stamp duty. Mr Conti QC suggested that after some period, say one or two weeks following the Bond Media Limited payment, Mr Reuter should write to Rothwells asking for the balance of the fee.

33. It seems obvious to me, despite Mr Anderson's denial in evidence, that the whole context of the conference with Mr Conti QC was the perilous financial situation in which Rothwells then found itself. Mr Reuter denied that he believed that Rothwells was in a perilous financial position. He asserted that he believed that Mr Connell was not telling him the truth when Mr Connell warned that a receiver could be appointed to Rothwells. Presumably, if Mr Reuter's evidence be accepted, he took no notice of Mr Vrisakis' warning that if the Rothwells' funding were not put into place, Rothwells would go to the wall.

34. Mr Reuter's evidence, which I do not find credible, was that he did not focus on the financial position of Rothwells. He said that he regarded Mr Connell's comment about a receiver being appointed as "posturing". He said that he appreciated that Rothwells had a financial problem in that it needed liquidity, but was incredulous that a week or so after the Rothwells rescue there was any likelihood that the company would go into receivership. The implication of Mr Reuter's evidence, if it were accepted, was that the possibility of liquidation of Rothwells and matters such as preferences were but hypothetical, of concern perhaps to Mr Anderson but not to Mr Reuter. According to Mr Reuter, he wanted his full entitlement to his fee and the $8,000,000 he was to get from Bond Media Limited was additional to the full entitlement to the $40,000,000 odd which was yet to come. I do not accept Mr Reuter's evidence on this matter. It is, I think, inconsistent with the contemporaneous notes kept by Mr Anderson.

35. According to Mr Anderson's evidence, Mr Anderson and Mr Reuter had discussions concerning Rothwells' financial position. According to Mr Anderson, Mr Reuter told Mr Anderson that Rothwells was sound and good for the fee. Mr Anderson said that Mr Reuter made no mention of the conversation that he had had with Mr Connell advising that Rothwells might go into receivership or that if the discounting did not go through Rothwells might collapse. Mr Anderson said that he had put to Mr Reuter, having regard to what was said about Rothwells in the newspaper, whether there was any doubt about the solvency of Rothwells and that Mr Reuter told him he had no doubts. I do not accept this evidence either.

36. It is inconceivable that if Mr Reuter was so certain of Rothwells' solvency, there would ever have been a conference with Mr Conti QC to discuss the protection of Mr Reuter against just such an eventuality. I formed the decided impression that Mr Anderson was seeking to put his evidence in the best possible light for the benefit of his client. It may well be that this is as a result of a reconstruction of events which occurred a long time ago. However, I have formed the clear view that both Mr Reuter and Mr Anderson were aware that there was a real possibility that Rothwells might go into liquidation and that any settlement made by Mr Reuter of the fee position, whether with Rothwells or any other person, might well be the subject of attack in that event. Ultimately, Mr Anderson conceded that it had occurred to him in November 1987 that, in the event that the Tryart fee was assigned to Bond Media Limited that Rothwells would not be able to pay to Mr Reuter his share of the fee.

37. The original draft of the Bond Media Limited agreement as prepared by Mr Anderson and settled in conference with Mr Conti QC, was in the form of an absolute covenant not to commence legal proceedings against Bond Media Limited and/or Rothwells in respect of the Tryart fee. There was also contemplated an acknowledgment by Rothwells that Rothwells had entered into the Tryart agreement on behalf of Messrs Reuter and Dougherty to hold as to 45 percent for Reuter and 10 percent for Dougherty, the net payments to be received under that agreement. Ultimately, the document as executed was simply a Deed of Covenant. No acknowledgment was signed. Under it, it was acknowledged that Bond Media Limited had paid to Mr Reuter the sum of $8,000,000 and to Mr Dougherty the sum of $2,000,000. Clauses 2 and 3 then provided as follows:

"2. Each of Reuter and Dougherty covenant with
BML that he shall not hereafter and
whether against BML or any other person or
corporation without the prior approval of
BML make any claim or demand whatsoever or
take any action including the institution
of legal proceedings or permit the taking
thereof in his name or on his behalf in
relation to the August Agreement any
alleged interest thereunder or entitlement
to any benefit whatsoever thereof.
3. Reuter covenants with BML at all times
hereafter he will indemnify and hold
harmless BML from and against any and all
claims, demands, causes of action, rights,
actions, proceedings, awards, judgments,
costs, expenses, liabilities, losses and
damages of whatever nature arising out of
or relating to any claim or demand made or
action taken by or on behalf of Reuter or
in relation to his alleged interest in the
August Agreement or entitlement to any
part thereof but only to the extent of an
amount not exceeding $8,000,000."

38. This Deed of Covenant was signed on 19 November 1987. The words "without the prior approval of BML" appearing in cl.2 appear to have been added to the drafts rather late in the piece.

39. Prior to execution of that agreement, Mr Dougherty, on behalf of Tryart, had signed a notice pursuant to s.28(4) of the Companies (Acquisition of Shares) Act 1980 that there were no conditions to its offers to be fulfilled and to its knowledge it had at that date become entitled to 94.2 percent of the total number of ordinary shares on issue. The ANZ Bank facility agreement, to which reference was made in the memorandum of understanding between Rothwells and Bond Media Limited, was executed on 10 November 1987. Under it, the banks and financial institutions named in it represented by Australia and New Zealand Banking Group Limited agreed to provide finance for the Tryart bid, but subject to a number of conditions precedent to the draw down of the facility (see, eg cl.13.1).

40. On 19 November 1987, there was also executed a facility agreement between Bond Media Limited and Rothwells Limited for a facility of $100,000,000. Under that facility, as at the date the money was drawn down, interest of $11,000,000 was to be paid to Bond Media Limited and, in addition:

"A financing fee of $7,000,000 and a procurement
advisory fee of $10,000,000 provided that upon
the Lender's receipt of the procurement advisory
fee, the Lender shall be obliged to thereupon
make paymnet (sic) of such procurement advisory
fee in accordance with Clause 1 of an agreement
dated the 19 November, 1987 between Willem
Bertus Reuter, Martin John Dougherty and the Lender."

41. Put in another way, under the terms of the facility only $73,000,000 was available to be drawn of the $100,000,000. Under the facility agreement, the Tryart agreement was charged as security for the repayment of the $100,000,000 and for that purpose assigned to Bond Media Limited.

42. Evidence was sought to be adduced by the respondent as to the way the actual proceeds of the Bond Media Limited facility were dealt with on completion. Objection was taken to the relevance of this evidence, having regard to the way in which the Commissioner's case had been put in pleadings that had been ordered to be exchanged before the case commenced. I admitted this evidence subject to ultimate argument on the issue of relevance. Having regard to the way the Commissioner ultimately put his case, I agree that the evidence should not be admitted and I, accordingly, do not refer further to it. As the Commissioner puts his case, and as the documentary evidence clearly also reveals, from the $100,000,000 borrowing, $10,000,000 was to be paid as a fee to Bond Media Limited. From that $10,000,000, Mr Reuter received $8,000,000. It is not part of the Commissioner's case that the amount paid to Mr Reuter came in fact from moneys of Rothwells. Rather, it is conceded that the immediate source of the $8,000,000 payment was Bond Media Limited, being the $10,000,000 withheld by that company from the advance of $100,000,000 as a procurement fee.

43. Despite Mr Conti QC's advice, no attempt was made by Mr Reuter, in the period immediately following 19 December 1987, to claim from Rothwells the balance of the Tryart fee, or for that matter the whole or any part of it. On 3 November 1988, Rothwells went into provisional liquidation. In August 1988, a dispute arose between Bond Media Limited and Rothwells on the one part, and the Fairfax interests on the other, in connection with the Tryart fee and proceedings were commenced in the Supreme Court of New South Wales. Tryart, the defendant in those proceedings, cross-claimed, inter alia, against Mr Reuter, claiming that Mr Reuter had acted in breach of fiduciary duty and alleging that the $8,000,000 received by Mr Reuter was held upon trust for Tryart. Ultimately, those proceedings were settled by a Deed of Settlement dated 21 February 1989, to which, inter alia, Bond Media Limited, Rothwells, Tryart, Mr Reuter, Mr Connell and Mr Dougherty were parties, by Tryart agreeing to pay Bond Media Limited $27,000,000 in full satisfaction of the moneys payable under the Tryart agreement. All of the legal proceedings were to be dismissed and relevant to the present proceedings Mr Reuter released, inter alia, Rothwells and Mr Connell from all claims.

44. One final factual matter should here be mentioned. It is agreed between the parties, for the purposes of the present proceedings only, that as at November 1987 Rothwells was, in fact, insolvent. The last published accounts of Rothwells, as at July 1987, however, showed it to be solvent as at that date and there were no public records as at November 1987 which would have indicated to the contrary. Although not a matter of agreement, evidence of Mr Hurley, a former director of Rothwells, showed that as at 13 November 1987 Mr Hurley had presented a paper to directors of Rothwells, which paper was discussed within a few days after 13 November 1987 and which indicated a probable net cash outflow to December 31 of $82,000,000. The ability to fund that outflow required, inter alia, the receipt of $46,000,000 from the Fairfax transaction. This figure arises because, in addition to the $17,000,000 of fees payable to Bond Media Limited, other amounts were owing to that company or other companies in the Bond Group leaving only $46,000,000 net cash to flow to Rothwells out of the $100,000,000 advance.

45. It was Mr Hurley's view that the main cause of Rothwells financial difficulties was the fact that funds advanced to Rothwells at call had been lent by Rothwells, by way of long term loans, a large proportion of which were ultimately either to Mr Connell or companies associated with him. There is no suggestion in the evidence, however, that Mr Reuter had any direct knowledge of these matters.

Whether the amount received was income in ordinary concepts assessable under s.25 (1)
46. For the Commissioner it was submitted that the character of the receipt by Mr Reuter of $8,000,000 should be determined not merely by reference to the terms of the Deed of Covenant with Bond Media Limited, pursuant to which it was paid, but by reference to all of the surrounding circumstances and the entire context in which it was received. Regard, it was said, should be had to the whole factual matrix and not exclusively to the terms of the written contract. Reference was made in support of this proposition to my judgment in Federal Commissioner of Taxation v Cooling (1990) 22 FCR 42 at 52-53 with which Lockhart and Gummow JJ. agreed.

47. When this was done, it was submitted that the payment of the sum of $8,000,000 to Mr Reuter, while "in form" a payment by Bond Media Limited to Mr Reuter was "in reality" a payment by Rothwells to Mr Reuter via Bond Media Limited in settlement of Mr Reuter's claim to a share of the Tryart success fee. While, on the one hand, eschewing any suggestion that the Bond Media Limited agreement with Mr Reuter was a sham and conceding that the payment was made by Bond Media Limited, the Commissioner submitted that "in reality" it was Rothwells who paid the $8,000,000 to Mr Reuter, rather than Bond Media Limited.

48. But, the Commissioner submitted, even if it was found that the payment of $8,000,000 was in substance as well as in form a payment by Bond Media Limited, then that payment was made in consideration of the assignment by Mr Reuter to Bond Media Limited of Mr Reuter's contractual right to receive income which, so it was said, was earned by the date of the Deed of Covenant, so that the receipt of $8,000,000 represented the commercial value of Mr Reuter's entitlement assessable to him pursuant to s.25(1) or s.19 of the Act. This submission depended again upon ignoring the form of the agreement between Bond Media Limited and Mr Reuter and substituting for the real transaction between the parties a transaction involving the assignment by Mr Reuter of what was said to be a revenue asset as distinct from a capital asset, namely Mr Reuter's right to the Tryart success fee.

49. An alternative submission was that Mr Reuter entered into the Deed of Covenant so as to receive $8,000,000 as compensation from Bond Media Limited for the reduction in value of his share of the Tryart success fee so that the payment received by him was accordingly income in ordinary concepts by way of compensation.

50. Another submission was that the payment to Mr Reuter should be seen as analogous to a fee received for the giving of a guarantee and, as such, income. While it may be conceded that, in most cases at least, a fee received for the giving of a guarantee will be income in ordinary concepts (Ryall (Inspector of Taxes) v Hoare (1923) 2 KB 447; Sherwin v Barnes (Inspector of Taxes) (1931) 16 TC 278; Trenchard v Bennet (Inspector of Taxes) (1933) 17 TC 420) it is hard to see why the payment to Mr Reuter from Bond Media Limited should be treated as analogous to the giving of a guarantee. The analogy was never made clear to me.

51. Of greater significance than any of the submissions heretofore mentioned, was the submission that the $8,000,000, while not a direct substitute for the success fee payable ultimately under the Tryart agreement and arrangements with Mr Connell, had such a close connection to services rendered by Mr Reuter in relation to the Fairfax takeover that it had in his hands the character of income. I should say that a submission that the amount of money was a receipt in the ordinary course of Mr Reuter's business as a consultant and for that reason income, having regard to what was said by the Full High Court in Federal Commissioner of Taxation v The Myer Emporium Ltd [1987] HCA 18; (1987) 163 CLR 199, hardly warrants attention. The evidence did not establish that Mr Reuter was carrying on business as a consultant in the sense in which these words were used in Myer Emporium Ltd. Nor could it really be said that this was an amount received by him in the ordinary course of any consultancy activity.

52. At the forefront of the taxpayer's case was the decision of the Full Court of this Court in Federal Coke Co Pty Ltd v Federal Commissioner of Taxation [1977] FCA 3; (1977) 34 FLR 375. In that case, a dispute between the Bellambi Coal Co Ltd and Societe Anonyme Le Nickel had been settled on terms requiring Le Nickel to pay Bellambi an amount of money. Had that settlement been given effect to, a real question would have arisen as to whether the payment was income in the hands of Bellambi. A new agreement was subsequently entered into under which Le Nickel agreed to make a payment to Federal Coke Co Pty Ltd, a subsidiary of Bellambi, under which a like sum, with certain adjustments, was paid to Federal Coke. The Commissioner assessed Federal Coke upon the receipt. The Full Court unanimously was of the view that Federal Coke was not taxable.

53. As stated by Bowen C.J. (at 384), the question before the Court was:

"not what would have been the character of the
receipts in the hands of Bellambi, but what, for
the purposes of income tax, is the character of
the receipts in the hands of Federal".

54. No attempt was made to suggest that the Deed between Le Nickel and Federal Coke was a sham, nor that it was capable of being annihilated by virtue of the provisions of s.260 of the Act. It was accepted, by Bowen C.J., as I would accept in the present case, that the Court was not bound to restrict itself to the Deed pursuant to which the amount in question was paid in characterising whether the payment itself was income. Rather, the Court was entitled to look at the whole of the circumstances pursuant to which the amount was paid: cf Ridge Securities Ltd v Inland Revenue Commissioners (1964) 1 WLR 479.

55. Counsel for the applicant relied heavily upon what was said by Bowen C.J. (at 387):

"However, in taxation matters, the court is
obliged to have regard to the actual facts and
not to their equivalents. In cases where it is
appropriate the court may apply a statutory
provision such as s.260 to get rid of a
contract, agreement or arrangement and deal with
the case in disregard of that element, but,
where there is no statutory warrant for doing
so, the court cannot disregard certain of the
facts or re-arrange the facts or decide the case
according to its view of the substance of the
matter. It is not legitimate to disregard the
separateness of different corporate entities or
to decide liability to tax upon the basis of the
substantial economic or business character of
what was done...".

56. Brennan J (at 401-2) had this to say:

"When a recipient of moneys provides
consideration for the payment, the consideration
will ordinarily supply the touchstone for
ascertaining whether the receipt is on revenue
account or not. The character of an asset which
is sold for a price, or the character of a cause
of action discharged by a payment will
ordinarily determine, unless it be a sham
transaction, the character of the receipt of the
price or payment. The consideration establishes
the matter in respect of which the moneys are
received. The character of the receipt may then
be determined by the character, in the
recipient's hands, of the matter in respect of
which the moneys are received."

57. Federal Coke is not of course directly relevant to the present case. The present is not a case where, after an arrangement has been entered into, a further arrangement is reached resulting in a payment to a person other than the person who rendered the services. In the present case, there is no doubt Mr Reuter rendered services for which, subject to at least Rothwells being paid by Tryart, he was entitled to be paid. It was he who received the payment, not some other related entity. Nevertheless, in resolving the present question, Federal Coke provides guidance in two ways. First, it makes it clear that I am not bound to look solely at the agreement with Bond Media Limited and to confine my attention to that, but I am entitled to take into account all relevant circumstances in determining the character of the receipt of the $8,000,000 in Mr Reuter's hands. Secondly, where consideration is given, ordinarily that consideration will determine whether the receipt is on revenue or capital account. See, too, the decision of the High Court of Australia in Federal Commissioner of Taxation v South Australian Battery Makers Pty Ltd [1978] HCA 32; (1978) 140 CLR 645 at 659-60. It might, however, perhaps be added that the outcome of later cases may cast some doubt upon some of the language used in South Australian Battery Makers.

58. In Cooling (at 50-57), I discussed some of the guiding principles relevant to the question of whether a receipt by a taxpayer is income or capital. As I there said, the authorities make it clear that the question will depend upon the quality of the receipt in the hands of the recipient and the test to be applied will be objective rather than subjective: Hayes v Federal Commissioner of Taxation [1956] HCA 21; (1956) 96 CLR 47 at 55.

59. Income is not a technical concept. As used in the Act the word is to be construed in accordance with the ordinary usages of mankind: Scott v Commissioner of Taxation (NSW) (1935) 35 SR (NSW) 215.

60. Perhaps the most usual usage of the word "income" in ordinary speech is to describe that which comes in as a reward for services. Amounts such as salary, wages, commission, tips and the like, are universally regarded as income and it is immaterial whether they are paid under or pursuant to a contract of service or services on the one hand, or gratuitously on the other. So, too, for income tax purposes, it would be immaterial whether an amount which is a reward for services is paid to the taxpayer in advance of the services being performed (eg, a signing-on fee) or after the services have been performed, or whether the payment is made by the person for whom the services are performed or by some other person. It will also be generally immaterial whether the amount paid is paid periodically or in a lump sum. What will matter is the character of the payment as a reward for services or, as it was put by Fullager J in Hayes v Federal Commissioner of Taxation [1956] HCA 21; (1956) 96 CLR 47 at 57-8, whether the receipt is a "product" of the taxpayer's services.

61. It may also be accepted that a payment made to a person to fetter that person's capacity to perform services will usually be a capital payment: Beak (Inspector of Taxes) v Robson (1943) AC 352; Higgs (Inspector of Taxes) v Olivier (1951) Ch 899 and Jarrold (Inspector of Taxes) v Boustead (1964) 3 All ER 76. The signing-on fee discussed in Jarrold v Boustead (supra), held by the English Court of Appeal to be capital in that case, was a payment to the taxpayer for giving up permanently his amateur status. A restriction of a less permanent nature may not necessarily produce the same result: cf Higgs v Olivier (supra). Ultimately, however, even where a restriction on capacity to perform services is imposed, it will be open to a court to hold that the payment in question is nevertheless a reward in advance: cf Riley (Inspector of Taxes) v Coglan (1968) 1 All ER 314. Each case will depend upon its own particular facts. So Riley v Coglan, for example, depended upon the conclusion reached by Ungoed-Thomas J in that case, that the payment to the footballer, while having a connection with that footballer giving up his amateur status because he was paid a signing-on fee "on signing professional papers", was specifically made for his agreement to serve the football club and was, accordingly, income.

62. There will also be cases where the causal nexus between the payment made and the services may be remote or uncertain, but the payment will necessarily have the character of income. An example is the decision of Foster J in Holland (Inspector of Taxes) v Geoghegan (1972) 3 All ER 333, where a sum paid to a refuse collector for the loss of his salvage rights on the ending of an agreement whereby such collectors were entitled to sell salvage, was assessable as an emolument of employment. On the facts of the particular case, where the main purpose of the London Borough of Lambeth in relation to the payment was to get the taxpayer back to work after a strike, and where the money received was a form of substituted remuneration for the former right to share in the proceeds of sale of the salvage, the amount was assessable.

63. Care must, of necessity, be taken in relying upon decisions of the English Courts in this context. They depend, in part, upon the wording of Schedule E and the requirement that a payment to be subject to assessment must arise from an office or employment of profit: see cf Hochstrasser (Inspector of Taxes) v Mayes (1960) AC 376 and Laidler v Perry (Inspector of Taxes) (1966) AC 16. It does not follow that these cases would have been similarly decided in Australia (cf Smith v Federal Commissioner of Taxation (1987) 164 CLR 513, although the result of that case depended upon the specific wording of s.26(e) of the Act).

64. Counsel for the applicant, while conceding that the Court was entitled to look at all of the circumstances, sought to characterise the payment to Mr Reuter solely by reference to the agreement entered into with Bond Media Limited, that is to say, as being a payment for giving up temporarily the right to sue Rothwells or, put another way, for subordinating that right to the rights of Bond Media Limited. That the giving up of Mr Reuter's rights was temporary, stemmed, it was said, from the fact that, had Rothwells repaid the facility to Bond Media Limited, the consent of the latter company could hardly have been withheld to prevent Mr Reuter prosecuting his cause of action against Rothwells for the approximately $40,000,000 owing to him. The submission pointed also to the fact that the $8,000,000 received by Mr Reuter did not, in law, reduce the $40,000,000 prospectively payable by Rothwells on completion of the work for Tryart and payment by Tryart of the $100,000,000 fee. This was so even if, as a matter of fact, it was unlikely that any such payment would, or for that matter could, be made. With the benefit of hindsight, of course, it is possible to know that there never was any possibility that Rothwells would be able to repay Bond Media Limited.

65. Even if it be accepted for this purpose that Mr Reuter had an asset, being a right to sue Rothwells in the future once Tryart made payment to Rothwells under the Tryart agreement, it is, in my view, too narrow an approach to characterise the payment made to Mr Reuter for the subordination of that asset as the payment of capital. Although the payment to Mr Reuter was not contractually made for his services, nor reduced in law the remuneration payable to him, nevertheless there was a sufficient relationship, not being a merely temporal relationship, between the payment and Mr Reuter's services to give the payment the character of income. The payment was so closely associated with the services which Mr Reuter performed for Mr Connell, or Rothwells, as the case may be, that it may be concluded, as a matter of fact, that that payment was a product of his services.

66. I have reached this conclusion without reference to two matters. First, I have taken no account of the fact that Mr Reuter, in my view, believed that there was a real likelihood that he would never recover the whole, or in any event the greater part, of the remuneration payable to him by Rothwells or Mr Connell. Secondly, I have not taken into account the fact that the question whether the payment should be made by Rothwells or Bond Media Limited was, so it would seem for those companies, a matter of immateriality to be determined by Mr Reuter's advisers. The reason motivating the payment by Bond Media Limited appears to have been the circumstance that, had the payment been made by Rothwells, it might have been capable of being set aside by a liquidator of that company in the event that that company was wound up. But if these two factors are taken into account, the conclusion is more readily reached. In my view, the payment to Mr Reuter was, in his hands, income in ordinary concepts and thus assessable under s.25(1) of the Act. For the same reason, the amount would also have been assessable to him under s.26(e) of the Act, a matter which was not argued.

Was the payment assessable to Mr Reuter within Part IIIA of the Act?
67. For the Commissioner it was submitted that the amount received by Mr Reuter was made assessable income pursuant to the provisions of Part IIIA of the Act, there being a disposal of property within the meaning of either s.160M(6) or s.160M(7) of the Act. Since I have found that the amounts in any event were assessable income within s.25(1) of the Act, it is unnecessary to pursue the Commissioner's submissions in detail. However, in case the matter should proceed further, I will set out shortly the submissions made and my conclusions in respect of them.

68. Part IIIA of the Act includes, in assessable income, a "net capital gain": s.160ZO(1). For present purposes, one can move then to s.160Z of the Act which defines the circumstances when a capital gain will accrue to a taxpayer. Relevant for present purposes will be the case where an asset, other than a "personal-use asset", has been "disposed of" during the year of income and the consideration for that disposal exceeds the indexed cost base to the taxpayer in respect of the asset. The excess is treated by the Act as a capital gain accruing to the taxpayer during the year of income.

69. At the time when the present facts arose, an asset to which Part IIIA applied was defined in s.160A as meaning:

"...any form of property and includes -
(a) an option, a debt, a chose in action, any
other right, goodwill and any other form
of incorporeal property;
(b) currency of a foreign country; and
(c) any form of property created or
constructed, or otherwise coming to be
owned without being acquired,...".

70. Sub-sections 160M(6) and 160M(7) were, at all relevant times, in the following terms:

"(6) A disposal of an asset that did not exist
(either by itself or as part of another asset)
before the disposal, but is created by the
disposal, constitutes a disposal of the asset
for the purposes of this Part, but the person
who so disposes of the asset shall be deemed not
to have paid or given any consideration, or
incurred any costs or expenditure, referred to
in paragraph 160ZH(1)(a), (b), (c) or (d),
(2)(a), (b), (c) or (d) or (3)(a), (b), (c) or
(d) in respect of the asset.
(7) Without limiting the generality of sub-section (2)
but subject to the other provisions
of this Part, where -
(a) an act or transaction has taken place in
relation to an asset or an event affecting
an asset has occurred; and
(b) a person has received, or is entitled to
receive, an amount of money or other
consideration by reason of the act,
transaction or event (whether or not any
asset was or will be acquired by the
person paying the money or giving the
other consideration) including, but not
limited to, an amount of money or other
consideration -
(i) in the case of an asset being a
right - in return for forfeiture or
surrender of the right or for
refraining from exercising the right; or
(ii) for use or exploitation of the asset,
the act, transaction or event constitutes
a disposal by the person who received, or
is entitled to receive, the money or other
consideration of an asset created by the
disposal and, for the purposes of the
application of this Part in relation to
that disposal -
(c) the money or other consideration
constitutes the consideration in respect
of the disposal; and
(d) the person shall be deemed not to have
paid or given any consideration, or
incurred any costs or expenditure,
referred to in paragraph 160ZH(1)(a), (b),
(c) or (d), (2)(a), (b), (c) or (d) or
(3)(a), (b), (c) or (d) in respect of the asset."

71. These provisions were the subject of consideration by the Full Court of this Court in Federal Commissioner of Taxation v Cooling (1990) 22 FCR 42 and by the High Court in Hepples v Federal Commissioner of Taxation [1992] HCA 3; (1991) 173 CLR 492.

72. In Cooling, I expressed the view (at 59) that when the legislation speaks of an "asset":

"what is comprehended is an item of property or
an interest in property rather than rights of a
non-proprietary kind".

73. In part this view was derived from the fact that an asset had to be capable of disposition to give rise to a taxable gain (unless otherwise a deemed disposition arose by virtue of the Statute). Secondly, the words "any other right" and the words "any other form of incorporeal property" in para.(a) of the definition suggested that, in that paragraph at least, it was only proprietary rights or interests that were included within the definition. I referred to the decision of the High Court in Commissioner of Stamp Duties (NSW) v Yeend [1929] HCA 39; (1929) 43 CLR 235 at 241, 244-5 where, in a somewhat different context, language of similar kind was construed as confined to proprietary rights and interests.

74. In Hepples v Federal Commissioner of Taxation (1990) 22 FCR 1, delivered at the same time as Cooling, a similar view was expressed by Lockhart J (at 9-10) and Gummow J (at 20-27).

75. The actual issue in Hepples which gave rise to this discussion was whether the right to work was, within the meaning of s.160A of the Act, an asset. None of the members of the Full Court of this Court thought it was. The most detailed consideration of the matter is to be found in the judgment of Gummow J, who said (at 23):

"In my view, the content of para.(a) of s.160A
is all forms of incorporeal property, not
personal rights which do not answer that
description. Further, incorporeal property
plainly is a technical term and that
consideration supports the conclusion that it is
not attached to the expression 'any form of
property' in s.160A so as to stretch the reach
of that expression to personal rights.
Thus, an equity to have the Court rectify a
written contract of personal services would not
ordinarily be understood to be a form of
incorporeal property. Nor would the right to
maintain an action for recovery of unliquidated
damages in tort for personal injury. Nor
property which by virtue of statute cannot be
effectively assigned... Nor the benefit of a
contractual obligation where the identity of the
person in whose favour the obligation is to be
discharged is a matter of importance to the
party upon whom the obligation rests, as in a
contract for personal services...
In the case of a contract for the provision of
services the person for whom the services were
to be tendered (sic) might, in the case of
breach, have a right to damages or, in a
particular case, seek an injunction to restrain
breach of a negative covenant... But one would
treat the plaintiff in such a case as pursuing
legal and equitable rights which fell short of
any form of incorporeal property and fell
outside para.(a) of s.160A, and thus outside the
definition of 'asset'...".

76. When Hepples' case went on appeal to the High Court, the Commissioner conceded that the right to work was not an asset under s.160A. Indeed, the legislature, in due course, amended the definition of "asset" in s.160A in Taxation Laws Amendment Act (No 4) No 191 of 1992, s.23. Given the concession, a submission that the High Court must be taken to have decided the matter is misconceived.

77. The issue in the present case is whether Mr Reuter's right to be paid out of the Tryart fee, howsoever that may juridically be analysed, was an "asset" for the purposes of s.160A. To understand that issue, it is necessary to characterise the nature of Mr Reuter's rights.

78. For the Commissioner, it was submitted that Rothwells, in entering into the Tryart agreement, did so as trustee for itself, Mr Connell and Mr Reuter. Whether this is so must depend, ultimately, upon the intention of Rothwells. Putting to one side cases involving constructive or resulting trusts, the existence of a trust would be a matter dependant upon the intention of the party said to have created it. For my part, I doubt that the evidence really supports the view that Rothwells, in executing the Tryart agreement, did so as trustee. Rather, I think that Rothwells executed that agreement on its own account, but subject to the contractual relationships which it had with Mr Reuter, Mr Dougherty and Mr Connell. Relevant for present purposes, therefore, I think that Mr Reuter had an agreement with Rothwells, dependent upon contract, that Rothwells would pay Mr Reuter, for services which Mr Reuter agreed to perform, as soon as Rothwells was paid by Tryart under the Tryart agreement. Mr Reuter's right was, accordingly, a chose in action against Rothwells for payment of a fee rather than an action in equity against Rothwells as trustee to account. I do not, however, think that anything turns upon whether Mr Reuter's rights were a chose in action against Rothwells on the one hand, or a right against Tryart as beneficiary under a trust of which Rothwells was trustee. On any view of the matter, the right of Mr Reuter was a personal chose in action. No action, however, could be brought in a court to enforce that chose in action, unless and until the time for payment of moneys under the Tryart agreement arose, that is to say until after all the work to be performed under that agreement had been performed. This is not to say that Mr Reuter was not capable of dealing with the rights which he had. While those rights would not have been capable of immediate transfer, Mr Reuter could deal with them by contract, that contract operating in equity once the rights matured into money to effect a transfer of that money: Palette Shoes Pty Ltd v Krohn [1937] HCA 37; (1937) 58 CLR 1 at 27. As Mason C.J. said in Booth v Federal Commissioner of Taxation [1987] HCA 61; (1987) 164 CLR 159 at 165-6:

"A purported present transfer or assignment of
future property, including a future chose in
action, is construed in equity as a contract to
transfer or assign the property when it is
acquired. In this way a would-be present
assignment of a future chose in action operates
as an assignment of that property when it comes
into existence...".

79. On the view taken by the Full Court of this Court in Hepples, Mr Reuter did not, at the time of executing the Deed of Covenant, have an "asset" as that expression is defined in s.160A. Nor, for that matter, did Rothwells, if a trustee, have an "asset" merely by virtue of the fact that it was a party to the Tryart agreement. This being the case, s.160M(7) could have no application in the present circumstances. On the other hand, if either Mr Reuter's rights against Rothwells or Rothwells rights against Tryart were an "asset" within the meaning of that expression in s.160A, then the amount of $8,000,000 would have been received by Mr Reuter by reason of an act, transaction or event which occurred in relation to, or which affected, the asset with the consequence that the act, transaction or event constituted a disposal by Mr Reuter of the deemed asset created by the disposal pursuant to s.160M(7).

80. Despite the consideration of s.160M(6) by all seven members of the Full Court of the High Court, s.160M(6) has scarcely been elucidated. As is well known, Hepples' case raised, in the context of a payment given to an employee for a restrictive covenant not to compete against his employer, two issues: the application of s.160M(6) and the application of s.160M(7). Separate majorities of the Court found that neither sub-section was applicable. The High Court, in a subsequent claification of the judgment, made it clear that in future cases involving facts which were indistinguishable the appropriate order would be that no disposal arose (at 550 ff). This difficulty arose in determining the ratio of the case because although there was a majority in each case for the non-application of ss.160M(6) and (7), the reasons given by those majorities were in part rejected by a majority differently constituted. With great candour, counsel for the Commissioner expressed his inability to assist me in determining what the ratio of Hepples' Case was. That was a matter which, he submitted, I would have to determine for myself. Counsel for the taxpayer was less hesitant. So far as s.160M(6) was concerned, he submitted that I should endeavour, within the majority who held that s.160M(6) did not apply, to find a majority in number of judges adopting the same reasons. On this basis the judgment of McHugh J, with which Mason C.J. agreed, would become, so far as s.160M(6) is concerned, the majority judgment. On that view, which I think is correct, s.160M(6) is to be confined to a case where the asset disposed of was created out of or over an existing asset. This was the view which the Full Court of this Court had adopted in the Court below. On that basis, s.160M(6) can have no application in the present circumstances, whatever view one may take as to the meaning of the word "asset".

81. It follows that I would dismiss the application and order Mr Reuter to pay the Commissioner's costs of it.