JB Chandler Investment Company Limited (In Voluntary Liquidation) and Chandlers Rental Pty Limited (In Voluntary Liquidation) v Federal Commissioner of Taxation [1993] FCA 449; (1993) 93 Atc 4810 (1993) 26 A (10 September 1993)

FEDERAL COURT OF AUSTRALIA

J.B. CHANDLER INVESTMENT COMPANY LIMITED (IN VOLUNTARY LIQUIDATION) and
CHANDLERS RENTAL PTY. LIMITED (IN VOLUNTARY LIQUIDATION) v. FEDERAL
COMMISSIONER OF TAXATION
No. QG20 of 1993
FED No. 630
Number of pages - 13
Income Tax
[1993] FCA 449; (1993) 93 ATC 4810
(1993) 26 ATR 443

COURT

IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
DRUMMOND J

CATCHWORDS

Income Tax - sale of the customer finance arm of a company Group - sale price includes "premium" expressed to be in consideration for an unconditional promise by the taxpayers (the customer finance arm) to procure the retailers in the Group to enter into an agreement with the purchaser to recommend it to the retailers' customers for their finance requirements - contract of sale deliberately so structured after negotiation between the parties - character of premium determined by the contractual provisions - that taxpayers would have preferred a different structure irrelevant - premium payment income according to ordinary concepts.

Income Tax Assessment Act - s. 25(1)

Allied Mills Industries Pty. Ltd. v Commissioner of Taxation [1989] FCA 110; (1989) 20 FCR 288

Californian Oil Products Limited v FCT [1934] HCA 35; (1934) 52 CLR 28

Commissioner of Taxation v Cooling (1990) 22 FCR 42

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

Statham v FCT (1988) 88 ATC 4070

HEARING

BRISBANE, 25 August 1993
10:9:1993

Counsel for the appellants: D.G. Russell QC and J.A. Logan

Solicitors for the appellants: Mallesons Stephen Jaques

Counsel for the respondent: D.J. McGill

Solicitors for the respondent: Australian Government Solicitor

ORDER

THE COURT ORDERS THAT:
1. The appeal is dismissed.

2. The applicants pay the respondent's costs of and incidental
to the appeal to be taxed.

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

DECISION

DRUMMOND J This is an appeal under s. 44 of the Administrative Appeals Tribunal Act 1975 from a decision of the Deputy President who constituted the Taxation Appeals Division of the Tribunal. The litigation arises out of the inclusion by the Commissioner of sums totalling $500,000.00 in the 1988 year assessments of the appellants, assessments which the Tribunal upheld.

2. The only question I have been asked to determine is whether, on the findings made by the Tribunal, payments of $400,000.00 and $100,000.00 made by HFC Financial Services Pty. Ltd. ("HFC") to the first and second appellants respectively pursuant to an Offer Agreement were income within s. 25(1) of the Income Tax Assessment Act 1936, as the Tribunal held. This is a question of law: Statham v FCT (1988) 89 ATC 4070 at 4074.

3. The Deputy President made some findings of fact. Although he recited at considerable length portions of the evidence of various of the witnesses, in some respects it is not possible to identify what parts of this evidence he accepted. However, it is possible to dispose of the question raised on the appeal on the basis of the findings that were made and the undisputed evidence which was before the Tribunal, an approach adopted in similar circumstances in Statham v FCT, supra, at 4072.

4. The Chandlers Group is a major discount retailing chain. The appellants were the main financiers within the Group. They provided credit facilities to the customers of the retailer members of the Group which included loans, higher purchase arrangements, continuing credit arrangements, 30 day trading accounts and lay-bys. In July 1987, Billy Guyatts Ltd. acquired 100% of the shares in Chandlers (Australia) Ltd. and its subsidiaries. Guyatts did not, however, alter the nature of the operations, or corporate structure of the Group, save that on 30 September, 1987 it agreed to sell the businesses of the two appellants.

5. The events leading up to the sale of those businesses included the delivery by HFC, the ultimate purchaser of these businesses, of a written offer dated 28 August, 1987 addressed to the Board of Directors of Chandlers (Australia) Ltd.. The offer was in these terms:

"Further to our discussion, here is our formal offer for the
purchase of the receivables of the Chandlers Finance
portfolio as follows:
1. 100 cents in the dollar (nett) of the receivables less
the 90 day delinquency as discussed.
2. A premium of $500,000.
3. Proposed date of take up September 15, 1987.
4. We would employ applicable Chandlers Finance staff on
conditions discussed.
5. Ongoing business would be in accordance with our offer
to the Billy Guyatts Group, including 7% of amount
finances on our revolving product plus the other
benefits in that offer. If you wished, we could
discuss with you a closed-end.
As we discussed, we have priced this on the basis of ongoing
business and therefore we would want an exclusive
relationship for a period of 3 years.
While we believe this meets your requirements, we are always
prepared to discuss further details and will meet with you
to document final arrangements.
Yours sincerely
(sgd) PI Ezzy
Divisional General Manager"

6. The Tribunal found that the offer contained in this letter "accurately reflects the state of mind of the parties as to just what was being acquired by HFC".

7. After protracted negotiations with prospective purchasers, the two appellants (together with another member of the Chandlers Group) entered into an agreement with HFC. The terms of the agreement are contained in a document, called the Offer Agreement, dated 30 September, 1987 executed by the two appellants and the other Chandlers company. It was in the form of an offer by them to HFC, which the latter accepted. Pursuant to this Offer Agreement, the appellants, on 30 September, 1987, took, in the form of a loan by HFC, an immediate payment approximately equal to the total then outstanding under the existing customer credit agreements (other than certain non-performing agreements) which the appellants had entered into with customers of the Chandlers Group retailers; they sold the whole of their interest in those agreements and certain associated rights to HFC, with payment of the price being deferred to 15 June, 1988. The appellants agreed to repay the loan by paying over to HFC all principal and interest moneys received by the appellants prior to 15 June, 1988 from the credit customers, immediately upon receipt of those moneys. The payment the appellants were to receive from HFC on 15 June, 1988 as the price for their interests in these customer credit agreements was an amount equal to the balance then outstanding under those agreements that were then still on foot. That is, on 15 June, 1988 no money changed hands because the appellants were then entitled to receive, on account of the price, a payment exactly equal to the balance then outstanding under the loan the appellants had received in September 1987, the one cancelling out the other. There were apparently stamp duty advantages to HFC from structuring the transaction in this way.

8. The Tribunal found that the effect of the Offer Agreement of 30 September, 1987, so far as HFC is concerned, was that it received an existing customer base and, by operation of the Merchant Agreement (between HFC and the five retailer members of the Chandlers Group), it obtained an on-going association with those retailers.

9. There was evidence from various of the witnesses called for the appellants to the effect that this existing customer base comprised more than the appellants' interests in the customer credit agreements and associated rights and the goodwill, which the appellants also contended the appellants had sold to HFC. Mr. Reed, a director of Guyatts and of the appellants, said:

"By payment of the premium of $500,000.00 HFC was able to
purchase the existing credit portfolios of the taxpayers,
obtain an ongoing relationship with the Chandler retailers
and the customer book of the Chandlers finance companies.
The customer book was valuable because it gave HFC access to
several hundred thousand names of credit customers of the
Chandler retailers."

10. Mr. Fischer, the Chandler Group Secretary and Group Financial Controller, said:

"The Chandlers finance companies were in a position to
provide to HFC on computer tape the names and addresses of
all customers (perhaps even back for the previous six month
period) and a check of all customers."

11. The Tribunal also referred to Mr. Fischer's evidence to the effect that this customer list had a great deal of value since the appellants used it from time to time to send out direct mail letters offering special deals. Mr. Wells, the Financial Controller of the parent company of the Chandler Group and Secretary of the appellants, said that HFC's acquisition of the appellants' existing customer base meant that HFC could obtain repeat finance with continuing customers who were already on the Chandler finance books.

12. The Offer Agreement itself deals with this body of information, so far as it relates to existing customer credit agreements, in clause 7.3(b) and (c) and, so far as it relates to customer credit agreements that had been satisfactorily completed prior to 30 September, 1987, in clause 16. However, it was not suggested that in the proceedings in the Tribunal any attempt was made to apportion the $500,000.00 between the body of information I have referred to and the value of the appellants' promise to procure the retailers to enter into the Merchant Agreement, in support of an argument that the part attributable to the former was not assessable to income tax, even if the part attributable to the promise may have been assessable to tax. The appellants' case there and here was that no part of the $500,000.00 was assessable.

13. It is clause 19 of the Offer Agreement which is of critical importance in this appeal. It is headed "premiums" and provides:

"19.1 The Offeree shall pay to the Company the Premiums for
entering into this Agreement and for procuring each of
John Martin Pty Limited, Chandlers Appliance Stores
Pty Ltd, Chandlers Appliance Stores (Northern) Pty
Ltd, Chandler Piesse Pty Ltd and Chandler Derrick Pty
Ltd (each of which is associated with the company
within the Chandler Group) to enter into a certain
Merchant Agreement of even date herewith with the
Offeree, which Agreements will hereinafter enable the
Offeree to provide credit facilities or other
facilities to persons (whether or not presently Hirers
and Borrowers) wishing to purchase the goods and
merchandise offered for sale by the Company or other
associated companies within the Chandler Group.
19.2 The Premiums payable to the Company
contemporaneously with the acceptance of this
Offer shall be:
JB Chandler Investment Co Ltd - $400,000
Chandlers Rental Pty Ltd - $100,000
19.3 Should the Merchant Agreement be terminated at
any time prior to the 30th day of September,
1990, then the Company shall effect a pro rata
refund of the sum of TWO HUNDRED THOUSAND
DOLLARS ($200,000.00) of the Premium for that
period from the date of termination to the 30th
day of September 1990."

14. The Merchant Agreement referred to in clause 19.3 was executed on 30 September, 1987, the same day as the sale agreement between HFC and the appellants. It appears to have been delivered to HFC where settlement of the sale agreement took place. It takes the form of a series of promises under seal, made to HFC by the five named members of the retail arm of the Group. By this Deed of Covenant, each member of the retail arm of Chandlers Group promised HFC as follows:

"Should any of our customers wish to purchase any of our
goods and merchandise using a new source of finance, we will
recommend and promote HFC as our first preference source.
During the course of our business we will from time to time
receive from a customer ("the Buyer") in relation to an HFC
revolving credit facility ("the Facility") (defined to mean
a revolving credit facility constituted by acceptance by HFC
or the acceptance by one of the retailers, of a request for
such a facility by a customer) a request to purchase goods
... and associated services ("the Goods") upon the terms of
the Facility. We will require the Buyer to execute a Sales
Voucher ... containing such terms as you stipulate from time
to time ... We will submit such Sales Voucher to you only
after the Goods have been delivered to the Buyer."

15. The Deed recorded the following as arrangements agreed between HFC and each retailer:

"1. We shall sell the Goods to the Buyer at the purchase
price mentioned in the Sales Voucher
...
6. You agree to pay us the full amount on each and every
Sales Voucher submitted by us without any discount,
fee or other deduction and, in addition, you will pay
us a commission at the rate (of 7%) ... on each amount
advanced by you pursuant to such a submission by us
...
7(a) We shall act as your agent solely for the purpose of
providing to the Buyer documentation and publicity
brochures for the Facility and for such other HFC
facilities as we may agree to publicise but nothing
contained herein shall constitute us your agent for
any other purpose.
...
13. At any time up to and including 30 September, 1990
this Merchant Agreement can be terminated by either of
the parties to it giving the other six (6) calendar
months written notice stating the date on which this
Merchant Agreement is to terminate."

16. In their notices of objection to the inclusion in their 1988 year assessments of the premium payments given under the old s. 185, the taxpayers said:

"(T)he wording of clause 19.1 may suggest that the amounts
payable under this clause represent a procurement fee
payable to (the appellants) in exchange for their procuring
various other companies in the Chandler Group to enter into
Merchant Agreements - the purpose of such agreements being
to ensure HFC of obtaining all credit provision contracts in
relation to customers of the Chandlers Group.
However, we submit that that was not the true intention of
the parties to the agreement. The intention, as supported
by correspondence and discussions between the parties, was
for HFC to pay the premium in order to be in a position
where it could receive the referrals from Chandlers'
customers and to provide to them the financing arrangements
previously provided by the Chandler Group. That is, it
represented a payment to the vendors, in addition to
consideration for the existing debt portfolio, for the
transfer of the future right of access to a particular group
of potential credit clients. The Merchant Agreements to be
signed between the various Chandler Group companies and HFC
was merely a formality to give effect to the transfer of the
rights of access to that customer base to HFC. The premium
did not relate to any services performed in relation to the
physical act of arranging the Merchant Agreements but rather
to the vendor companies surrounding their rights of access
to those potential credit customers."

17. Much the same arguments were put to me by the appellants. This case is a little unusual. Here it is the appellant-taxpayers who say that the characterisation of the nature of the premium payments for taxation purposes depends not on clause 19 of the agreement, which provides for the making of those payments and which is a provision, as the Tribunal said, carefully constructed by an experienced tax lawyer acting for the Chandlers Group who was at all times mindful of the potential fiscal consequences of the arrangement, but rather on the true nature of the payments as revealed by the entire commercial context in which they were made. In this sort of case it is generally the Commissioner who relies on this sort of argument.

18. There was much evidence from the appellants' witnesses to the effect that the $500,000.00 paid by HFC to them was always intended by the appellants as payment for the goodwill of their businesses. There was also much evidence that HFC, for its own tax accounting reasons, would not agree to a provision in the contractual arrangements requiring it to pay this sum for goodwill.

19. Typical of the evidence on both matters to which the Tribunal referred is that given by the Chandlers Group General Manager, Mr. Turner, by a director of the Chandler Group's parent company, Mr. Reed, and by the solicitor for the appellants who drafted the agreements, Mr. Mann. Mr. Turner said:

"The Offer Agreement was finally signed on 30 September
1987. I was heavily involved in discussions with HFC,
Messrs Geoff Mann (Chandler's solicitor), Ray Fischer (the
Chandlers Group Secretary and Financial Controller) and
Maurie Maughan (the Chandlers Group external accountant) on
finalising the terms of that Offer Agreement. A
considerable amount of time was spent discussing the wording
of clause 19 of the Offer Agreement which dealt with the
payment of the $500,000.00 premium by HFC. The Offer
Agreement did not mention that the premium was paid for
goodwill because of the heavy discussions which took place
between the Chandlers finance companies and HFC. The term
goodwill was not allowed to be used as HFC wanted to create
a situation where they could at least have a claim for a
deduction for the payment of the premium. There was much
discussion on the wording of the clause as it was hard to
get an agreement which would not compromise the whole deal.
In the end, clause 19 was settled in terms which was
intended by the appellants to show that the payment was for
the goodwill of the finance portfolios of the taxpayers and
CPL (one of the three finance companies in the Chandlers
Group) without making an express reference to the word
goodwill to allow HFC to have a claim for deductibility of
the premium."

20. As appears from the Tribunal's reasons, Mr. Turner was also cross-examined on the letter of 23 November, 1987 written to him by the solicitor in which the latter recorded how clause 19 of the Offer Agreement came to take the form it did as a result of the negotiations between the Chandlers Group and HFC with respect to the description in the Offer Agreement of the premium payments. The Tribunal set out in its reasons Mr. Turner's evidence here, which includes the following exchanges:

"Well, would it be a fair summary of the disagreement
between Chandlers and HFC, that Chandlers wanted the written
document expressly to refer to the payment as being a
payment for goodwill, and HFC would not agree to that
course?---That is correct.
...
Would you turn over then to the third page, the second-last
paragraph which commences with the words, 'in the end,' if
you just have a look at that first sentence please?---Yes,
I've read the first sentence.
All right. Now were you a party to those negotiations with
Mr Ezzy?---I suspect that I was.
...
All right. Well, you see I would suggest that the way that
first sentence reads is to the effect that what was finally
agreed between Chandlers and HFC was that clause 19 would be
drafted so as to correctly record the actual transaction.
In other words, the document was actually intended by the
parties to mean what it said?---It was drafted in such a way
as to satisfy the requirements of both parties.
Well, was it agreed in any oral negotiations with HFC that
you were a party to that it would be drafted in such a way
as to mean what it said, in effect?---I would say - yes.
...
All right. Now again, do you - does that accord with your
recollection of what was orally agreed to between Chandlers
and HFC in the course of those negotiations?---Yes, that is
correct."
Mr. Reed said:
"The issue of the premium to be paid by HFC was an important
point in the negotiations between HFC and the Chandlers
finance companies. The Offer Agreement (Document C7) did
not mention that the premiums were paid for goodwill because
that was a matter of contractual negotiations with HFC. The
transaction would not have been able to proceed if the
taxpayers and CPL did not relent in removing the term
'goodwill' from the relevant clause."
Mr. Mann said:
"After the offer made by HFC for the finance portfolios of
the taxpayers and CPL was accepted, the characterisation of
the $500,000.00 premium to be paid on settlement then became
the subject of further considerable discussion between the
taxpayers, CPL and HFC. The vendors were of the view that
the payment of the $500,000.00 premium was for the goodwill
of their finance businesses meaning the custom and
profitability of the businesses which was being transferred
to HFC and also the access which HFC would get to the
existing and future clients of the Chandler retail
companies. HFC were of the view that the payment was a
premium of a revenue character.
...
The taxpayers wished to stipulate in clause 19.1 that the
premiums were paid for the goodwill of the Chandlers'
finance companies' portfolios which were being sold to HFC.
HFC resisted the drafting of the clause to state that the
premiums were paid for the goodwill of the finance
portfolios of the Chandlers' finance companies.
To allow the sale to HFC to proceed, it was agreed to delete
any reference to the statement that the premium was paid for
goodwill. ..."
The solicitor added:
"I was then asked to draft clause 19.1 to show what the
premiums were in fact paid for goodwill without making any
express reference to the goodwill of the taxpayers'
portfolios."

21. It should be noted that the solicitor always referred to these instructions on Chandlers' side being the instructions of "the vendors" or of "the taxpayers", i.e., of the two appellants (and the third Chandler company that was party to the sale agreement). However, the Tribunal did not, I think, accept what the solicitor said in this regard. The Tribunal recorded the background to the transactions now in question in paragraph 1 of its reasons, referring to the decision in September 1987 to sell the businesses of the appellants being the decision of the new owner of the Chandlers Group. Consistently with that recitation, the Tribunal then found, at paragraph 53:

"What occurred was that the Chandler Group, having decided
to rid itself of its finance arm, sold a 'package' which
included a premium/'upfront' payment."

22. Nor did the Tribunal accept the evidence on behalf of the appellants that the appellants, as distinct from the other members in the Chandlers Group, had anything in the way of goodwill to sell. At paragraph 49 the Tribunal referred to a submission that the sale of the business of the appellants contained an element of goodwill because the Merchant Agreement provided some security from competition by virtue of treating the purchaser, HFC, as the recommended financier for future credit sales by the Group and that, so it was submitted on behalf of the appellants, was an asset of the appellants' businesses. The Tribunal rejected this argument and found in paragraph 50:

"... Whatever 'the asset of the business', it vests in the
retail arm of the Group, a separate corporate entity (from
the appellants). Thus the Group was so structured that, as
part of its overall trading strategy, it included separate
corporate entities willing to provide finance to customers
of the Group's retail arm who sought financial assistance
(i.e., the taxpayers now before the Tribunal). Thus, when
one asks what did these taxpayer companies have to sell in
terms of 'goodwill'? The answer is 'nothing'. These
companies were merely the inert recipients of the benefit
conferred upon them by another arm in the Group." (emphasis added)

23. Somewhat surprisingly, in view of what the Deputy President had to say in paragraph 47 of his reasons, he observed, in a passage following immediately upon paragraph 50: "Fortunately I do not have to come to a final determination on the issue since I am satisfied that even if there was some 'goodwill', the idea of its sale came merely as an after thought ..." Nevertheless, I regard the conclusion expressed in paragraph 50 to be sufficiently definite to amount to a finding of fact.

24. There is no inconsistency between this finding and that in paragraph 52, upon which the appellants placed much reliance. There, the Tribunal said:

"I am also satisfied that the offer contained in Mr. Ezzy's
letter of August 28, 1987 ... accurately reflects the state
of mind of the parties as to just what was being acquired by
HFC".

25. The Tribunal also there said that that view was supported by the letter dated 23 November, 1987 to which I have already referred, from the solicitor to Mr. Turner. The Tribunal then quoted the following passage from the solicitor's letter:

"In the end, you will recall in our discussion with Phil
Ezzy (of HFC) that the clause, which finally became clause
19 of the offer document, would be drafted in such a way as
to correctly record, in the context of the correspondence
and discussions which had already passed and taken place,
the description and reason for the payment. It was agreed
that the reason why the premium was being paid was to enable
HFC to be in a position where it could receive the referrals
from customers and to provide to them the financing
arrangements previously provided by the Chandler Group."
(The Tribunal's underlining.)

26. The finding in paragraph 52 is a finding that the HFC letter of 28 August, 1987 sets out what HFC and the Chandler Group each wanted to achieve by the transaction comprising the sale to HFC of "the Chandlers finance portfolio". It is entirely consistent with what the Tribunal had to say in paragraphs 1 and 53 about the Group having decided to dispose of its finance arm. The term used by HFC in its letter of 28 August, 1987 "the Chandlers Finance portfolio" has, I think, a wider meaning than that given to the term "portfolio" in the Offer Agreement by clause 1.1. For this "portfolio", which according to the letter comprised the Chandler Group's interest in its existing finance agreements with retail customers of the Group, plus the finance business that the retail arm of the Group would be likely to generate for a financier over the next three years, HFC was to pay:

(a) 100 cents in the dollar for the Group's interest in
the existing finance agreements with retail customers
- i.e., for the "receivables"; and
(b) a $500,000.00 premium plus 7% commission on new
finance business, in return for an exclusive
relationship as preferred financier to the Group
retail arm for three years.

27. The Chandlers Group was not, of course, in a position to guarantee every one of its retail customers who wanted finance would go to HFC. But its retailers were in a powerful position to direct to the financier that the retailers might recommend a lot of their customers who needed finance to acquire goods from those retailers.

28. No appeal lies to this Court from the findings of fact made by the Tribunal. But the conclusion the Tribunal reached in paragraph 50 about the appellants' connection with the retailers being entirely within the retailers' control is consistent with the finding in paragraph 52 as to the state of mind of both sides as to what HFC was acquiring and what the Chandlers Group was selling and consistent also with the contractual documentation that was devised to achieve that:

(a) The offer document of 30 September, 1987 covered the
sale by the appellants to HFC of all their interest in
existing hire purchase and other finance agreements
between the appellants and the Group's retail
customers and associated items, such as the
appellants' interest in the goods the title to which
had not passed to customers, insurance policies on
those goods, manufacturer's warranties in respect of
those goods and securities provided by those retail
customers with respect to the goods;
(b) The findings made by the Tribunal show that HFC wanted
to acquire a connection with the retail members of the
Group as their preferred financier. As the Tribunal
found in paragraph 50, it was the retailers who
controlled the capacity to direct their customers to a
source of finance, not the appellants as providers of
finance. The appellants had no asset of any value in
that regard to sell to HFC and the retailers were not
party to the sale agreement with HFC. But it was just
that connection which HFC did acquire once those
retailers entered into the Merchant Agreement,
something which the appellants undertook contractual
liability to HFC to arrange. Consistently with the
finding in paragraph 50, that the appellants had
nothing of any value to sell to HFC in respect of a
tie between themselves as financiers and the retail
members of the Chandlers Group, the appellants did not
purport to sell anything to HFC apart from the
property referred to in paragraph (a) above (and apart
also from the information referred to in clause 16).
Instead, the appellants made a promise to procure each
member of the Group's retail arm "to enter into a
certain merchant agreement ... with (HFC), which
agreement will hereinafter enable (HFC) to provide
credit facilities or other facilities to persons
(whether or not presently hirers and borrowers)
willing to purchase the goods and merchandise offered
for sale by the (appellants) or other associated
companies within the Chandler Group". This promise
was a valuable one: it was not merely a promise that
the appellants would use their best endeavours, but an
unconditional promise to procure entry by the named
retail members of the Group into the merchant
agreement. If the appellants failed to perform this
promise, then, apart from a possible restitutionary
claim, HFC would at the very least have a good action
in damages against them for the loss of the valuable
chance to capture a significant proportion of the
finance business flowing from sales by members of the
retail arm of the Chandlers Group to consumers.
(c) The Tribunal said in its reasons that it was for this
promise that HFC paid the appellants $500,000.00
between them. It was submitted that the Tribunal was
here in error because it read the words I have quoted
from the clause out of context: the clause stipulated
that the premiums were the consideration for, firstly,
the appellants entering into the Offer Agreement and,
secondly, for them procuring the retailers to enter
into the Merchant Agreement. It was said that by so
reading the clause, the Tribunal showed that it failed
to have regard to the whole factual matrix of which
the Offer Agreement formed only a part and that the
Tribunal's characterisation of the payment as a
procuration fee, based on this incorrect reading of
clause 19.1, was inconsistent with its acceptance of
the evidence that the reason it was paid "was to
enable HFC to be in a position where it could receive
the referrals from customers and to provide to them
the financing arrangements previously provided by the
Chandler Group". I do not accept this last
submission: there is no such inconsistency, for the
reasons I have already given, and the finding made by
the Tribunal seems to me to be a perfectly apt
description of a fee paid to a payee for procuring a
benefit for the payer of the kind there identified.

29. No argument was put to me that because clause 19.1 identified entry into the agreement, as well as the promise to procure the retailers' execution of the Merchant Agreement, as the consideration for the payments of $400,000.00 and $100,000.00 which were described as "premiums", those premiums were receipts of a mixed nature and that insofar as the premium was paid for the appellants' entry into the Offer Agreement, it was a payment for the whole of the appellants' income producing business and, to that extent, a capital receipt by the appellants. If such an argument were well-founded, its consequences might be that the whole of the $500,000.00 was not assessable, if the case was like FCT v Spedley Securities Ltd. (1988) 88 ATC 4126 at 4131, or that only that part of the $500,000.00 attributable to the procuration promise was taxable, as is more likely: cf. McLaurin v FCT [1961] HCA 9; (1961) 104 CLR 381 at 391. But before any question as to whether a dissection should be made could arise, the appellants would have to show that the premiums, considered in the whole context of the transaction, were truly intended to have this dual character. That conclusion does not automatically flow from the opening words of clause 19.1. I was not directed to any attempt made at the hearing before the Tribunal to characterise part of the premium as having been paid as something additional to the price for the appellants' "receivables", i.e., as being a capital receipt for that reason, with the balance only being attributable to the promise in clause 19.1. Moreover, no such argument was put to me. It was not suggested that the matter should go back to the Tribunal for re-hearing with further evidence to enable such an apportionment of the premium payments to be made. The appellants instead joined with the respondent in submitting that the appeal should be finally disposed of by me, the only issue being whether the entirety of the $500,000.00 was or was not assessable as income of the appellants.

30. The appellants relied upon Californian Oil Products Limited v FCT [1934] HCA 35; (1934) 52 CLR 28 in support of a submission that even if the premium could not be said to have been paid for the appellants' businesses or goodwill, it was paid in return for the appellants giving up their business to HFC and was thus a payment on capital account in the hands of the appellants. The submission is inconsistent with the finding in paragraph 50 that the appellants were merely the inert recipients of the benefit conferred upon them by the retailers, i.e., that their business comprised only their interest in the "receivables" (the existing finance agreements with customers of the retailers). It is also inconsistent with the realities of the situation as reflected in the Merchant Agreement. The cessation of business by the appellants was an irrelevant adjunct to the transaction recorded in the Offer document. As the Merchant Agreement itself shows, what HFC wanted was the retailers' recommendations to their future customers to look to it for their finance requirements. Far from being something of value to HFC, the cessation of business by the appellants was of no concern to it, subject to one presently irrelevant qualification: it was a term of the agreement between them that the appellants in effect promised that no action would be taken to dissolve them until the expiry of the last of the hire purchase agreements which HFC took over. But that was only an assurance to HFC that there would be no difficulty in enforcing these hire purchase agreements, should that become necessary, similar in kind to the assurances given to HFC by clause 5.3.

31. It was also submitted on behalf of the appellants that the findings in paragraph 52 establish the state of mind of the parties as to just what was being acquired by HFC and that, as a result of commercial pressures, clause 19.1 did not reflect that reality and is therefore liable to be rectified at the suit of either party. I have already indicated how I read the finding in paragraph 52 as not being in any way inconsistent with the documentation drawn up to give effect to that intention. If it is open to me to entertain the submission in these proceedings, it seems to me that, for this reason, a rectification claim at the suit of the appellants could not succeed. The evidence of Mr. Turner, Mr. Reed and Mr. Mann to which I have already referred is, in any event, sufficient to destroy any chance of the appellants obtaining rectification of the Offer Agreement to record that it was the parties' mutual intention that the premium was paid for the appellants' goodwill or for some other capital item.

32. Having made the findings I have referred to, the Deputy President then had to resolve the question whether the $500,000.00 payments were income or capital. He did this by holding, in paragraph 54, that he should simply give the wording of clause 19 its natural meaning. He went on to say:

"Both taxpayers were part of the Chandler Group and thus in
a strong position to persuade its retail arm to enter into
the Merchant Agreement. That can properly be described as
rendering a valuable service for which the procurers were
entitled to be paid ... At its highest HFC acquired the
right to have referred to it those customers who sought
credit from the Group's retail outlets. On that
characterisation, the payment constitutes simply a
procurement fee for entering into the merchant agreement.
It thus constitutes a payment for services rendered and, on
that basis, is income according to ordinary usages and
concepts; cf. Austrotel Corp. Pty. Ltd. v FCT 76 ATC 4245."

33. The Deputy President here seems to suggest that it was because clause 19.1 was in terms a promise to provide a valuable service and because the appellants were able to, and did in fact, provide that service that the premium receipts have a revenue character. It was said that this case was distinguishable from Austrotel in that it was clear from the evidence before the Deputy President that the appellants did not in fact do anything to persuade the retailers to enter into the Merchant Agreement, which was executed by those retailers on the same day as the Offer Agreement was executed by the appellants and accepted by HFC. It was said that there was no evidence that the appellants lifted so much as a finger to persuade the retailers to enter into the Merchant Agreement. While this submission is inconsistent with the finding I have referred to about the strong position that the appellants were in, I think that this finding by the Tribunal probably has no evidentiary foundation. It is, however, unnecessary to examine this aspect of the matter further.

34. In Federal Coke Pty. Ltd. v Federal Commissioner of Taxation [1977] FCA 3; (1977) 34 FLR 375, Brennan J, in a passage approved by this Court in Allied Mills Industries Pty. Ltd. v Commissioner of Taxation, supra, at 309, said, at 401-402:

"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." (emphasis added)

35. It is also well established that in characterising payments made under an agreement, the terms of the agreement must be examined, but so must the whole of the circumstances surrounding its execution, its operation and the receipt of the money in question. Allied Mills Industries Pty. Ltd. v Commissioner of Taxation [1989] FCA 110; (1989) 20 FCR 288 at 309; Commissioner of Taxation v Cooling (1990) 22 FCR 42 at 53.

36. An examination of this provision in the setting of the circumstances surrounding the making and implementation of the agreement of which it forms part and to which I have referred requires the receipt of the $500,000.00 in the hands of the appellants to be characterised as the receipt of income. It does not matter that the appellants did not actively render any services in that regard. It is enough that they assumed liability to HFC under an unconditional promise to perform a service for HFC, viz., to procure the entry by the retailers into the Merchant Agreement, and that that promise was effective to implement the arrangement the parties in fact together intended to effect. That is sufficient to give the receipt by the appellants of the premium moneys the character of income. Here, it was an essential element of the transaction that HFC would obtain the right to require the retailers to refer to it, for a period of three years, all their customers who wanted finance to fund their purchases of goods from those retailers. The appellants did not have this right to sell. The retailers were not themselves party to the Offer Agreement between HFC and the appellants. HFC's objective was, however, achieved by the appellants giving HFC an unconditional promise, enforceable by HFC against the appellants should it not be performed, to procure from the retailers their binding commitment to HFC as the retailers' preferred financier. This promise was a legally effective means of ensuring that HFC got the all important connection with the Chandlers retailers that it desired. The basis upon which the appellants became entitled to the $500,000.00 was accurately set out in clause 19 of the Offer Agreement. The form this promise took was the result of arms' length negotiations between HFC and the Chandlers Group representatives acting for the appellants. It was ultimately agreed upon as a clause that met the requirements of both parties. Although the appellants would have preferred the clause to expressly refer to the sale by them of a capital asset, they agreed upon the clause in the form in which it stands in the Offer Agreement because they would not have concluded any agreement with HFC, if they had insisted on the contract being worded to meet their preferred position.

37. That HFC would in all probability not have been content with the appellants' promise to procure the retailers' execution of the Merchant Agreement but for the fact that the appellants and the retailers were subsidiaries of Chandlers (Australia) Limited and HFC could therefore be confident that the appellants' promise would be performed only serves to show that when clause 19.1 is considered in the commercial context in which the agreement was made, it provides a reliable touchstone for ascertaining the true character of the receipts in the appellants' hands.

38. It does not matter that the appellants reluctantly agreed, for fear of losing the arrangement with HFC, to frame their agreement in the terms appearing in clause 19 or that they would have preferred that clause to have been couched in a different form. If the wishes of one party to a transaction implemented by contractual documentation that accurately reflects the arrangement jointly agreed upon, but which does not reflect that party's own wishes, could determine whether a payment made pursuant to the arrangement is taxable, the Commissioner would be handling very small amounts of tax moneys indeed. Nor does the fact that the payment was received as a one-off lump sum prevent it having the character of income in their hands. Commissioner of Taxation v Cooling, supra, at 51 and Brent v Commissioner of Taxation [1971] HCA 48; (1971) 125 CLR 418.

39. While I agree with the Deputy President that clause 19 operates to characterise the premium payments to the appellants as income, I do so for somewhat different reasons. But the appeal must still be dismissed.