Brown v Commissioner of Taxation [2002] FCAFC 75; [2002] FCA 318 (21 March 2002)

Last Updated: 9 May 2002

Brown v Commissioner of Taxation [2002] FCAFC 75

Brown v Commissioner of Taxation [2002] FCA 318

NOTE: CHANGES TO THE MEDIUM NEUTRAL CITATION (MNC)

The Federal Court adopted a new medium neutral citation (FCAFC) for Full Court judgments effective from 1 January 2002. Single Judge judgments will not be affected and will retain the FCA medium neutral citation.

The transitional arrangements are as follows:

* All Full Court judgments delivered prior to 1 January 2002 will retain the FCA medium neutral citation.

* All Full Court judgments delivered between 1 January 2002 to 30 April 2002 have been assigned parallel medium neutral citations in both the FCA and FCAFC series.

* All Full Court judgments delivered from 1 May 2002 will contain the FCAFC medium neutral citation only.

FEDERAL COURT OF AUSTRALIA

Brown v Commissioner of Taxation [2002] FCA 318

INCOME TAX - Assessable income - whether benefits received by the Taxpayer were income or were received as a mere gift.

ADMINISTRATIVE LAW - Whether administrative decision void where decision maker made use of material provided in the course of without prejudice negotiations - whether any material provided by applicant in negotiations claimed to be without prejudice was taken into account by the Commissioner in remitting penalty.

EVIDENCE - common law privilege protecting without prejudice communications - whether the factual foundation of the privilege was made out.

Income Tax Assessment Act 1936 (Cth), ss 223(1), 227(3)

Evidence Act 1995 (Cth), ss 131, 189

Hayes v Federal Commissioner of Taxation [1956] HCA 21; (1956) 96 CLR 47, distinguished

Christie v Federal Commissioner of Taxation [1956] HCA 20; (1956) 96 CLR 59, distinguished

White v Overland [2001] FCA 1835, discussed

Rush and Tompkins Ltd v Greater London Council [1989] 1 AC 1280, considered

Ex parte Hamilton; Re Fagan [1966] 2 NSWR 732, cited

Harris v Minister for Public Works (New South Wales) [1912] HCA 56; (1912) 14 CLR 721, cited

Cornelius v The King [1936] HCA 25; (1936) 55 CLR 235, cited

Albrighton v Royal Prince Alfred Hospital [1980] 2 NSWLR 542, cited

Ex parte Whitelock; Re Mackenzie [1971] 2 NSWLR 534, at 540, cited

Casley-Smith the FS Evans & Sons Pty Ltd (No 2) (1988) 49 SASR 332, cited

Field v Commissioner for Railways (NSW) [1957] HCA 92; (1957) 99 CLR 285, cited

Cutts v Head [1983] EWCA Civ 8; [1984] Ch 290, cited

Scott v Federal Commissioner of Taxation [1966] HCA 48; (1966) 117 CLR 514, discussed

Squatting Investment Co Ltd v Federal Commissioner of Taxation [1953] HCA 13; (1953) 86 CLR 570, discussed

Federal Commissioner of Taxation v Dixon (1952) 85 CLR 540, cited

Seymour v Reed [1927] AC 554, referred to

Midland Railways Co v Sharpe [1961] UKHL 2; [1904] AC 349 cited

Herbert v McQuade [1902] 2KB 631, cited

Halsbury's Laws of Australia

S Odgers, Uniform Evidence Law (4^th ed., 2000)

Parsons, Income Taxation in Australia (1985)

BROWN V COMMISSIONER OF TAXATION

N 946 OF 2001

HILL, SACKVILLE AND FINN JJ

21 MARCH 2002

SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	N 946 OF 2001

BETWEEN:	JOHN JOSEPH BROWN APPLICANT
AND:	COMMISSIONER OF TAXATION RESPONDENT
JUDGES:	HILL, SACKVILLE AND FINN JJ
DATE OF ORDER:	21 MARCH 2002
WHERE MADE:	SYDNEY

THE COURT ORDERS THAT:

1. The appeal be dismissed with costs.

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

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	N 946 OF 2001

BETWEEN:	JOHN JOSEPH BROWN APPELLANT
AND:	COMMISSIONER OF TAXATION RESPONDENT

JUDGES:	HILL, SACKVILLE AND FINN JJ
DATE:	20 MARCH 2002
PLACE:	SYDNEY

REASONS FOR JUDGMENT

HILL J:

1 The appellant, Mr John Joseph Brown ("Mr Brown") appeals against the judgment of a Judge of this Court (Emmett J) dismissing an application made by him to the Court by way of an appeal from an objection decision of the respondent Commissioner of Taxation ("the Commissioner"). The objection was lodged against an amended assessment of income tax for the year of income ended 30 June 1991.

2 At issue in the appeal is the question whether the value of a home unit at Mermaids Beach, Queensland ("the unit") transferred by Ray Development Corporation Pty Ltd ("RDC") to Mr Brown, the stamp duty on that transfer, which was paid by RDC on Mr Brown's behalf and an allowance of $30,000 made by RDC to him for furniture (collectively referred to as "the benefits") represented assessable income of Mr Brown derived by him in the year of income and thus forming part of the taxable income of that year upon which he was liable to pay income tax pursuant to the Income Tax Assessment Act 1936 ("the Act").

3 An amended assessment which included these three amounts was issued by the Commissioner on 28 March 1996. The respective value of each was $920,000, $34,725 and $30,000, with the consequence that further income tax was assessed to him amounting to $475,111.02. Also included in the amended assessment was an amount of additional tax of $343,696.15 assessed on the basis that Mr Brown had made a statement that was false and misleading and which statement had resulted in the avoidance of tax by him. Mr Brown objected against the amended assessment. The objection was disallowed by the Commissioner. It was against that objection decision that Mr Brown appealed.

The Facts

4 Save as to one matter to which reference will later be made, the facts are no longer in issue between the parties. The following statement of facts is therefore taken substantially from the judgment of the learned primary Judge: Brown v Commissioner of Taxation [2001] FCA 366; (2001) ATC 4,294

5 For some time prior to his retirement from Parliament in March 1990 Mr Brown was a Minister in the then government with the portfolio of Minister for Tourism. It was, apparently in that capacity that he met Mr Ray in 1988 on a visit to Queensland, during which he visited a property that Mr Ray and a business associate were developing at Kirra. After that first encounter Mr Brown and Mr Ray became friends and saw each other on a number of occasions, but infrequently. On more than one of those occasions Mr Brown assisted Mr Ray with various charity matters in which Mr Ray was involved.

6 At relevant times a Mr Hambley, who had for some time been a friend of Mr Brown, was the Regional Director of the Australian Tourism Commission in Tokyo. Mr Brown's son, Christopher, and Mr Brown's wife were respectively an employee and consultant of JMA Public Relations Pty Ltd ("JMA"). Among the clients of JMA was the owner of Goodnight Island, an island situated off the south Coast of New South Wales.

7 In late 1989 Mr Hambley contacted Christopher Brown by telephone and told him that representatives of a Japanese company Narui Norin Co Ltd ("Narui Norin"), who were friends of Mr Hambley's father-in-law, were coming to Australia and suggested to him that it could be in his interests to run by the Japanese representatives a copy of the island brochure. In January or February 1990 Mr Brown, his wife and son met the Japanese representatives and went with them to Goodnight Island.

8 While the representatives of Narui Norin were still in New South Wales Mr Brown telephoned Mr Ray at his office on the Gold Coast in Queensland and told him that there were some Japanese visitors who wished to invest in Australian property. He told Mr Ray that the Japanese visitors were loggers who, in Japan, owned forest land, knocked down trees and then used the timber to construct log cabins and built golf courses on the land. He said that they were looking for similar opportunities in Australia. An arrangement was made for Mr Ray to meet the Japanese visitors.

9 There was a conflict of evidence as to whether Mr Ray met the Japanese at the Mirage Resort Hotel together with Christopher Brown, as the latter said, or without him, as Mr Ray said. The primary Judge on this matter preferred the evidence of Mr Christopher Brown. According to that evidence Christopher Brown introduced Mr Ray to the Japanese visitors and made a short presentation about Goodnight Island. Mr Ray spoke to the Japanese visitors of two properties, one of which was a parcel of approximately 2000 acres, known as "the Kings Forest land" in the Tweed Shire in northern New South Wales which could be developed for residential tourist purposes. The Kings Forest land was owned by Monacorp Pty Ltd ("Monacorp"), a company in which Mr Ray, or entities associated with him owned 50% of the shares, with the remainder of the capital being owned by a Mr Ell and a Mr Buist or entities associated with them.

10 Mr Ray showed the Japanese the Kings Forest Land. They were impressed by it and during a meeting with Mr Ray, who travelled with them to Port Douglas in Northern Queensland, heads of agreement were signed by Mr Ray and a Mr Takeo Narui, the President of Narui Norin for the proposed purchase of the land for $A22 million. It was contemplated that a formal contract would be entered into at the expiration of a 45 day period to allow investigations to be made, with completion to take place on 20 July 1990.

11 On 12 March 1990 Mr Ray forwarded to Mr Narui a typed copy of the heads of agreement. The letter which accompanied it noted that an application was being prepared for Foreign Investment Review Board approval which Mr Brown would take to the Australian Treasurer "by Friday" so as to obtain government approval to the acquisition. The letter noted that five townhouses had been completed on the beach, one of these Mr Ray indicated he wished to retain for himself. He said that Mr Brown had indicated that he would like to acquire one. The letter referred to the apartment number four as having been "reserved" for Mr Brown.

12 On 19 March 1990 Mr Ray wrote again to Mr Narui indicating that he had negotiated an agreement with the owner of some beachfront land directly to the east of the Kings Forest land for the purchase of some 15 hectares for $A10 million. There was apparently some misunderstanding with Mr Narui concerning the currency in which the figure of $A10million was mentioned. The next day Mr Ray sent Mr Brown a copy of a letter Mr Ray proposed to send to Mr Narui. Mr Ray asked Mr Brown to call him to discuss the letter. Mr Ray also, at Mr Brown's suggestion, wrote to Mr Hambley who, it would seem, proposed to discuss the misunderstanding with the Narui group. The learned primary Judge inferred that Mr Ray had consulted Mr Brown concerning the best way to deal with the confusion that had arisen over the price of the beachfront land and that Mr Brown had introduced Mr Ray to Mr Hambley.

13 The "confusion" was, it seems, soon overcome, because on 21 March 1990 the solicitors for Monacorp wrote to the Foreign Investment Review Board giving notice that Narui Norin intended to acquire an interest in the Kings Forest land. On 26 March 1990 Mr Brown also signed, as Chairman, a letter to the Board on the letterhead of The Tourism Task Force Limited, ("TTF") enclosing the application for approval of the purchase by the Japanese Company stating that the proposed development was "the kind of magnet the Australian Tourism Industry needs to properly mature and sophisticate". The letter indicated that Mr Brown fully supported the application "from this first class and highly reputable Japanese organisation" and that he looked forward to a speedy resolution of the application. Mr Ray had, he said, contacted Mr Brown to see if he could expedite the procedures of FIRB approval. Although Mr Brown wrote the letter as Chairman, there is no suggestion that Mr Ray was aware of the existence of TTF or had sought Mr Brown's assistance in his role as chairman of TTF.

14 TTF was a company limited by guarantee with objects, inter alia of promoting the benefits of tourism and achieving increased tourism budgets from Federal and State Tourism Commissions. Mr Brown was an original subscriber to the memorandum of association of TTF and was named in the articles as president and chairman of the first board of directors. He was also a member of the initial advisory committee of TTF. While TTF was obliged to apply its income and assets towards the promotion of its objects, Mr Brown acted as a consultant to TTF and received an annual consultancy fee (initially $250,000, although the fee was subsequently reduced) and in the period from March 1990 to June 1990 he received monthly payments of $20,833.33. As a consultant Mr Brown was responsible for lobbying government and acting in the interests of participants in the tourist industry. No charge was made by TTF for services it provided for members. Mr Brown, however, received consulting fees from at least one member of TTF.

15 Formal contracts were prepared specifying a price of $A22 million, subject to FIRB approval with settlement to take place on 20 July 1990, time to be of the essence. In the meantime a decision was made by Narui Norin to purchase the Kings Forest Land in a new company. In the result a new contract was prepared. It was subject to FIRB approval and provision was made for recision of the contract in the event that FIRB approval was not obtained within 60 days of exchange.

16 The original FIRB application was withdrawn and a new application was made to take into account the new purchaser company and the purchase of the adjacent beachfront land. At some stage there was a variation in the original bargain and a reduction in price with settlement to take place on 5 June 1990, subject to FIRB approval having been obtained by then. Agreement was also reached for contracts to be exchanged in Japan. In May Mr Brown went with Mr Ray to Japan for the exchange of contracts and at his own expense. As the learned primary Judge observed, an inference can be drawn that both Mr Ray and Mr Brown perceived some advantage would flow from Mr Brown's involvement in the exchange. Mr Brown's presence, as his Honour observed, suggested that he had "a real interest in the consummation of the proposed transaction." Mr Brown witnessed Mr Ray's signing on behalf of Monacorp on 28 May 1990.

17 On 30 May Monacorp's solicitors wrote to Mr Brown on behalf of Mr Ray asking Mr Brown to expedite a report from the Federal Environment Department and the FIRB approval. It was said to be imperative that approval be obtained by the following Tuesday, 5 June 1990, that being the deadline for completion of the contract for sale.

18 The learned primary Judge concluded that it was probable that Mr Brown made some effort to expedite the FIRB approval. Whether this was so, the approval was received in time to permit settlement to take place on 5 June.

19 Mr Brown had a continuing involvement with the Kings Forest land after its acquisition by the Purchaser. In a letter dated 11 July 1990 to the First Assistant Secretary of the Finance and Investment Division of the Department of Treasury Mr Brown spoke of Narui Norin as "my client". That letter Mr Brown wrote on the letterhead of "John Brown Tourism Advisory Services Pty Ltd". At some stage in 1990 there was an agreement signed by Mr Brown and Mr Ray, although not by others, for profit sharing in sales and purchases of land in Australia and Japan to which Mrs Hambley and perhaps her father were to be parties. Little is known of that agreement. It played no part in the argument before us, nor, it would seem, in the argument below.

20 As earlier noted, Mr Brown had expressed an interest in acquiring a unit in the completed complex of five townhouses at Mermaid Beach. Unit four was "reserved" for him. He had a telephone discussion with a bank officer of the Commonwealth Bank in May 1990 concerning finalising the purchase.

21 The evidence concerning the transfer of that unit to Mr Brown was somewhat confused. It was conceded by Mr Brown that a discussion on the topic of a transfer of the unit took place in March 2000. According to Mr Ray he discussed with Mr Brown in March 1990 that "Mr Brown would be rewarded for the work he had done for us." Mr Ray did not remember the detail of the conversation. He said that he had spoken to Mr Brown about Monacorp paying $1 million for commission. The figure was, he said, firmly established as at 30 April. Mr Brown had agreed that the payment of the commission would be effected by way of a transfer of the title to Unit four and the additional appurtenances to that apartment to bring the value to $1 million. An internal profit forecast of Monacorp referred to a selling cost of "commission payable" in the sum of $1 million. A letter to Mr Brown from Mr Ray in June 1990 was accompanied by a valuation report for mortgage purposes showing a value of $925,000 and referred to a furniture allowance of $30,000, legal costs of approximately $40,000 and re-marbelling of $30,000 bringing the value of the unit to in excess of $1 million. A facsimile of 12 July 1990 from a Mr Dickson, an accountant with RDC, referred to "distribution of commission payable to you pursuant to the sale by Monacorp Pty Ltd of Kings Forest Estate which amounts to $1,000,000". The letter requested that Mr Brown sign an undertaking to authorise RDC to distribute commission "to which you are otherwise entitled" towards the purchase of Unit four. The authorisation, which Mr Brown signed, although he said he had not read it carefully, commenced by referring to the sale of the Kings Forest Estate land "for an amount of $21,000,000 in respect of which Monacorp Pty Ltd owes me $1,000,000 for commission payable for introduction of the purchasers."

22 The learned primary Judge indicated that he was satisfied that Mr Brown understood the document at the time he signed it and was prepared to do so because it was not inconsistent with his understanding of the arrangements in place between Monacorp, RDC, Mr Ray and himself. His Honour said at par 93 (at 4,311):

"His signature of the document without comment indicates that he regarded himself, at that time, as having some entitlement to the Benefits. He may not have regarded the entitlement as legally binding. However, his acceptance of the terms of the document indicate that his discussions with Mr Ray in March led him to have an expectation that he would receive the Benefits."

23 The actual transfer of the unit was effected by and payment of stamp duty and furniture allowance was made by RDC. The precise arrangement between Monacorp and RDC was not clear from the evidence, although the inference was that RDC was reimbursed or given credit by Monacorp in respect of the $1 million and the reimbursement recorded by accounting entries. In fact a journal entry of Monacorp recorded commission payable on the sale of the Kings Forest land as being the sum of $1,150,000.

The substantive case as argued before the Primary Judge

24 In order to understand the judgment appealed from, and the argument on the appeal it is useful, before discussing the judgment to summarise briefly the way the substantive case was argued before the learned primary Judge. By "substantive case" I refer to the question whether the transfer and related benefits formed part of Mr Brown's assessable income.

25 In stating its reasons for disallowing Mr Brown's objection the Commissioner stated that the benefit which Mr Brown derived was commission and, for that reason, income. It was said that the commission was payable as a result of Mr Brown's efforts in introducing a purchaser. The land transfer was, the Commissioner considered, taken in lieu of payment of that commission.

26 The case put on behalf of Mr Brown as and from the time he objected to the amended assessment was that the transfer of the unit was a "mere" gift, not made in discharge of any obligation; a gift "out of the blue" inspired by goodwill. Although that goodwill could be traceable to gratitude engendered by the assistance which Mr Brown had given to Monacorp (or Mr Ray) the transfer was not, Mr Brown argued, remuneration for any personal services which Mr Brown had provided.

The Judgment appealed from.

27 After setting out the facts the learned primary Judge turned to consider the legal principles as stated in the well-known authorities, viz, Scott v Federal Commissioner of Taxation [1966] HCA 48; (1966) 117 CLR 514, Hayes v Federal Commissioner of Taxation [1956] HCA 21; (1956) 96 CLR 47 and Squatting Investment Co Ltd v Federal Commissioner of Taxation [1953] HCA 13; (1953) 86 CLR 570. There was little criticism directed at his Honour's statement of principle, and indeed, it must be said that it was unexceptionable. At the outset, his Honour noted the distinction, which the authorities draw between a simple (or as it is sometimes called, a "mere") gift, on the one hand and the case where, although a payment or transfer is made without legal obligation, something more is to be found. His Honour said at 4,312, paraphrasing what was said by Fullagar J in Hayes at 54:

"On the other hand, further facts may appear which show that, although the payment or transfer was a "gift" in the sense that it was made without legal obligation, it was nevertheless so related to an employment of B by A, or to services rendered by B to A, or to a business carried on by B, that it is, in substance and in reality, not a mere gift but the product of an income earning activity on the part of B, and therefore to be regarded as income from B's personal exertion."

28 His Honour acknowledged that it might be difficult to characterise the relationship between Mr Ray and Mr Brown at the start of 1990 as a business relationship. But, in his view, the relevant relationship was between Monacorp and Mr Brown. Monacorp intended, as his Honour said, to reward Mr Brown for his role in introducing Narui Norin, an introduction which had resulted in the sale of the Kings Forest land. His Honour noted further that Mr Brown had provided assistance to Monacorp in introducing Mr Ray to Mr Hambley and lent his name to the FIRB application. He had not been remunerated for any service he had rendered. Indeed, he had actually incurred expenditure in travelling at his own expense to Japan. The benefits he had received were, his Honour repeated at par 113 (at 4,313), "provided, at the expense and cost of Monacorp, as a reward for the introduction of Narui Norin to Monacorp, an introduction that led to a very beneficial transaction for Monacorp".

29 His Honour then continued in a passage at pars 114-115 (at 4,313-4,314), to which attention was directed in argument:

"There can be [no] doubt that the provision of the Benefits was related directly to the introduction of Narui Norin to Monacorp. There is no evidence of any specific statement that it also related to any further services provided by the Taxpayer. ...

It is an easy inference to draw that the Taxpayer gave the assistance that he did in connection with the transaction in order to ensure its consummation and, therefore, the receipt of the Benefits.

It could not be said that the giving of the Benefits, or the payment of $1 million by Monacorp, was a personal gift to the Taxpayer on personal grounds, irrespective of and without regard to the question of whether services had been rendered or not ... The Benefits came to be provided by reason of the introduction of Narui Norin to Monacorp. They would not have been provided if the transaction had not been consummated. The Taxpayer assisted in that consummation by his introduction of Mr Ray to Mr Hambley and his intervention in relation to the FIRB application. The actions of the Taxpayer were causative of the provision of the Benefits. Those actions consisted of the introduction of the representatives of Narui Norin to Mr Ray, the introduction of Mr Ray to Mr Hambley and the intervention with the FIRB."(Emphasis in original)

30 Ultimately his Honour made no finding as to whether there had been some original discussion with Mr Brown giving rise to a contractual arrangement for the payment of a commission for introducing the Japanese representatives of Narui Norin to Mr Ray, the proceeds of which would clearly have been income. Even without such a finding his Honour said that he was satisfied that the benefits were provided at the cost of Monacorp in lieu of a payment of $1 million and were therefore not a mere gift. Thus his Honour was not persuaded that the amended assessment was excessive so far as it was based on treating the receipt of the benefits as assessable income.

31 His Honour then proceeded to consider whether the Commissioner had erred in exercising his discretion to remit the penalty payable under s 223 of the Act. His Honour held that he had not. Of the four grounds which were raised before his Honour on the question of remission of penalty, only one is relevant on the appeal. That ground was that the Commissioner in remitting a part of the statutory penalty had taken into account irrelevant considerations, these being communications from Mr Brown (or perhaps his accountant) made during the course of discussions which took place between Mr Brown and his accountant on the one hand and officers of the Australian Taxation Office on the other hand and correspondence thereafter. The discussions (and subsequent correspondence) were, it was argued, negotiations directed at settling the taxation dispute between Mr Brown and the Commissioner. Precisely what the content of these communications were which the Commissioner was said, wrongly, to have taken into account does not emerge from the judgment. I shall discuss later why that was so.

32 The submission before his Honour relied upon what his Honour referred to as the "general law principle" that where parties are negotiating to compromise an action, evidence of the content of the negotiations will, as a general rule, not be admissible and can not be used to establish an admission or partial admission - Rush & Thompkins Ltd v Greater London Council [1989] 1 AC 1280 at 1299-1300. It was submitted that that principle applied not merely at trial, but also administratively, with the consequence that an administrative decision maker could not, in exercising a statutory function or discretion, take into account admissions or partial admissions made in the course of these negotiations. Hence, it was said, the Commissioner's discretion in remitting the penalty had miscarried because, in breach of this principle, the Commissioner had taken into account admissions. The penalty should thus, in consequence, be set aside.

33 His Honour rejected this argument, holding that the principle in Rush & Thompkins v GLC applied only to the reception of evidence at trial. It could not be intended to dictate the use of volunteered information inter partes in the course of administrative decision making. Hence, even if the Commissioner had taken into account material volunteered by Mr Brown (or his accountant) in privileged communications, the Commissioner was entitled to do so and the discretion had not miscarried.

The submissions on the appeal.

34 Counsel for Mr Brown submitted:

* That his Honour misapplied the decision of Fullagar J in Hayes and the related case of Christie v Federal Commissioner of Taxation [1956] HCA 20; (1956) 96 CLR 59, by failing to take into account the requirement that for an amount to be income in the ordinary sense of the word it had to be the "product of a revenue-earning activity" on the part of the taxpayer. It was not sufficient that the amount was provided to the taxpayer because he or she had done something for which the person who provided it was grateful.

* That his Honour erred in holding that because the benefits which Mr Brown received emanated from Monacorp, and not Mr Ray they could not have been provided to him on personal grounds.

* That his Honour erred in holding that because the initial introduction of Mr Ray to Narui, the later introduction of Mr Ray to Mr Hambley and Mr Brown's intervention in the FIRB application were causative of the benefits being provided the benefits were, for that reason, income.

* That there was no evidence upon which the learned primary Judge could conclude that the introduction of Mr Ray to Mr Hambley and the intervention by Mr Brown in the FIRB application were causative of the benefits being provided to Mr Brown.

* That his Honour erred in holding that the principle as enunciated in Rush & Thompkins v GLC was limited to the reception of evidence at trial. Rather, his Honour should have held, as Allsop J had subsequently done in White v Overland [2001] FCA 1835, that an administrative decision maker could not, in making decisions, make use of material provided in the course of negotiations that, expressly or by necessary implication were without prejudice.

Whether the benefits received by Mr Brown were income in ordinary concepts.

35 An amount, whether in money or money's worth, which is income in the ordinary sense of that term, or, as it sometimes put, is income in accordance with the ordinary usages of mankind, will, where derived by an Australian resident, and irrespective of the source of that income, be assessable income within s 25(1) of the Act.

36 As has often been pointed out (cf Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215 at 220 and Federal Commissioner of Taxation v Dixon [1952] HCA 65; (1952) 86 CLR 540 at 555 per Dixon CJ and Williams J) s 6(1) contains a definition of "income from personal exertion" and a definition of "income from property", the latter being all income not within the former definition. These definitions had greater significance when there were differential rates for income from property and income from personal exertion and when companies were required to distribute by way of dividend different percentages of income depending upon the character of the income in question or face additional tax under Division 7 of Part III of the Act. They might provide in some cases, as Dixon CJ and Williams J in Dixon observed, a "possible guide" or "test" of whether a particular receipt was or was not income, but they could not provide an exclusive test, if only because no amount could fall within the definitions unless the amount was, in any event, income. As Jordan CJ observed in Scott, (1935) 35 SR (NSW) 215 at 220, the word "income" appears "on both sides of the equation". The definitions, however, did serve to flag the fact that property and personal exertion represented at the least the principal sources from which income may be said to be derived.

37 It was not surprising that the Courts, particularly in the early years of the twentieth century, when considering whether a particular item related to personal services was income turned to English authorities for guidance. However, it must be borne in mind that while the English legislation was accepted to be a tax on income, (cf per Viscount Dunedin in Seymour v Reed [1927] AC 554 at 560, citing Lord Macnaghten) it was a scheduler system which, relevantly, in Schedule E of the Income Tax Act 1918 (UK), brought to tax amounts which were "salaries, fees, wages, perquisites or profits" so long as the amounts were from an office or employment of profit. Not surprisingly, therefore, the English cases place emphasis on the need for the amount to be derived from an office or employment, an emphasis which has no statutory equivalence in the Australian legislation. Some of the comments by Fullagar J in Hayes or for that matter by Windeyer J in Scott, need to be read against the background that a number of the cases cited are indeed English cases. In Australia, the need to find that a payment or benefit accrued to a person by virtue of his or her office or employment has no statutory basis.

38 Economists and lawyers may differ significantly in the way they come to determine whether an amount is income. So much so, that considerable effort is now being directed at a business profits taxation law which avoids the distinction between income and capital and in its place concentrates on increases in values of assets between the beginning and the end of the tax year and matters such as cash flow ("the tax value method"). Nonetheless, there is no real dispute between economists and lawyers that gains which are a reward for services, from employment or from the rendering of services will be income: cf Parsons, Income Taxation in Australia (1985), Chapter 2, proposition 13.

39 A sum which a man or woman earns, a sum which is the fruit of his or her labour, a sum which is remuneration for the services which a man or woman renders, each of these was regarded by Lord Davey in Midland Railways Co v Sharpe [1961] UKHL 2; [1904] AC 349 at 351 as having the character of income. By contrast, a sum which is received as a gift, without more, will ordinarily be seen as not having an income character, although some economists, at least, might argue that gifts should be included in the income tax base: cf Parsons at para 2133. The cases refer, as will be seen, to gifts which are not ordinary income, as being "mere" gifts. This is because clearly some gifts, for example, tips and gratuities, or amounts received by professional cricketers from benefit matches can be income, notwithstanding that they are gratuitous and are derived without consideration: cf Herbert v McQuade [1902] 2 KB 631. Indeed, it is beyond argument that "a voluntary payment may be subject to income tax in the hands of the recipient": Blakiston v Cooper (Surveyor of Taxes) [1908] UKHL 1; [1909] AC 104.

40 The leading Australian cases in the High Court (and they are all referred to by the learned primary Judge) which discuss the distinction between the receipt of a benefit which is income, on the one hand, and a mere gift which is not, on the other hand are Squatting Investment Co Ltd v Federal Commissioner of Taxation [1953] HCA 13; (1953) 86 CLR 570, Hayes v Federal Commissioner of Taxation [1956] HCA 21; (1956) 96 CLR 47 (and the related case of Christie v Federal Commissioner of Taxation [1956] HCA 20; (1956) 96 CLR 59 and Scott v Federal Commissioner of Taxation [1966] HCA 48; (1966) 117 CLR 514. All are well known. Each makes the point, by reference to the particular facts before the Court that a benefit which is given voluntarily will be income if it is the "product "of an income producing activity.

41 Squatting Investment concerned the receipt by a woolgrower who had supplied wool for appraisement under a government scheme of a payment additional to an original payment to which the woolgrower had been legally entitled. The additional payment was made voluntarily by the Commonwealth. The Privy Council held, reversing the High Court (Squatting Investment Co Ltd v Federal Commissioner of Taxation [1954] HCA 2; (1954) 88 CLR 413) that the payment was an income receipt. In arriving at this conclusion it was relevant that the payment was not made to the taxpayer because of any "personal quality" which the taxpayer had but because, with others, they supplied participating wool. Put the other way, a voluntary payment made because of some personal quality which the taxpayer has will more likely to be a mere gift and not income.

42 The taxpayer in Hayes was an accountant who had been employed by a Mr Richardson from 1939 to 1942 as accountant to his business and general advisor. In 1942 Mr Hayes ceased to be a full time employee. Later, when the business was taken over by a private company, Mr Hayes became a director secretary and shareholder of that company. He was remunerated for the work he did as director and secretary. Yet later Mr Hayes sold the shares in the company back to Mr Richardson, reluctantly and at a price Mr Hayes thought did not represent their value. The private company was later taken over by a public company. Mr Hayes was again director, secretary and shareholder and remunerated for his services as such. It was particularly significant to the outcome of the case that Mr Hayes and his wife were on personal terms of friendship with Mr Richardson. They often discussed business matters informally. When the public company was incorporated Mr Richardson gave a parcel of shares in it to Mr Hayes. The Commissioner sought to assess tax upon the value of these shares. It was held by Fullagar J that Mr Hayes had received the shares as a mere gift and that he was not taxable upon them. His Honour said, at 54:

"A voluntary payment of money or transfer of property by A to B is prima facie not income in B's hands. If nothing more appears than that A gave to B some money or a motor car or some shares, what B receives is capital and not income. But further facts may appear which show that, although the payment or transfer was a `gift' in the sense that it was made without legal obligation, it was nevertheless so related to an employment of B by A, or to services rendered by B to A, or to a business carried on by B, that it is, in substance and in reality, not a mere gift but the product of an income-earning activity on the part of B, and therefore to be regarded as income from B's personal exertion."

43 His Honour further pointed out that the motive for making the payment, while not irrelevant was not determinative; personal goodwill could play a part in motivating a payment yet the payment could be so related to employment or business as to be income. The question in each case, his Honour said, was what the character of the receipt was in the hands of the recipient. The test was objective not subjective. Or, to adopt what was said by Kitto J in the High Court in Squatting Investment, at 633, the test was whether the gifts were "made in relation to some activity or occupation of the donee of an income-producing character." Gratitude for services rendered or advice did not, of itself, require the conclusion that the amount was income. Indeed, in Hayes gratitude was neither the sole nor exclusive motive, although it played a part in the decision of Mr Richardson to give Mr Hayes the shares. Motive could not be the decisive factor. What was decisive in Hayes case (at 56-57) was:

"the fact that it is impossible to relate the receipt of the shares by Hayes to any income-producing activity on his part. It is impossible to point to any employment or `personal exertion', of which the receipt of the shares was in any real sense an incident, or which can fairly be said to have produced that receipt. ... there is nothing whatever to suggest that the gift can properly be regarded as money earned by Hayes as director or secretary of the proprietary company. It was not paid to him in any such capacity. It was in no true sense a product or an incident of any employment if which Hayes had engaged or any business which he had carried on."

44 Finally, Fullagar J rejected an argument that the gift of the shares was a reward or recompense for the general advice and guidance which Mr Hayes had given Mr Richardson informally over a long time. Mr Hayes was not employed to give that advice, nor when giving it could it be said that he was engaging in an activity capable of producing income. Accordingly the shares were not the "product of a revenue-earning activity" on the part of Mr Hayes.

45 In Christie the recipient of the voluntary payment was a real estate agent. Mr Christie had informally advised Mr Richardson on a number of cases in connection with real estate dealings. If business eventuated for Mr Christie he received commission in the normal way. Again Mr Christie was on close personal terms with Mr Richardson. The shares received were held not to be income. Fullagar J said, at 61:

"I do not think it can be held on the evidence that the connexion necessary to make the receipt income subsisted between what was given by the donor and anything done by the donee. It is not enough ... that a gift should be motivated, in part or even in whole, by gratitude for services rendered. That mere fact does not supply the necessary connexion, and in my opinion, there was here no other relation between `gift' and `services' than is supplied by the fact that one of several motives inspiring the gift was gratitude for general help freely given in the past, in the course of many informal discussions, and believed by the donor to have been a factor in the amassing by him of a considerable fortune. One feels that the truth and substance of the whole matter is not stated by saying that what was given was remuneration for work and labour done. And, unless that can be truly said, what was received was not `income' of the recipient."

46 The facts in Hayes and Christie are clearly distinguishable from the present case. Neither case stands for the proposition (as is at least implicitly suggested by counsel for Mr Brown) that an amount cannot be income unless it is the product of some profession employment or business. The fact (if it be a fact) that there was no direct relationship in the present case between the benefits and Mr Brown's profession (his income earning activity,) whether that be seen as politician or as a lobbyist for tourism, is not determinative of the issue in the present case. What was said in these cases by Fullagar J has to be seen against the factual circumstances before the Court.

47 There is, more importantly, nothing in either case which necessitates the conclusion that a benefit which is a reward for services (here the services which Mr Brown rendered by introducing the Japanese representatives to Mr Ray, as well as introducing Mr Ray to Mr Hambley and facilitating the FIRB application) is not income in the ordinary sense of that word. Nor does either case stand for the proposition that merely because Mr Brown and Mr Ray became friends the benefits which Mr Brown received as a reward for those services can not be income. The fact is that the unit and related benefits were not provided to Mr Brown because of that friendship. Nor is it the case here, as it was in both Hayes and Christie, that Mr Brown (like Mr Hayes and Mr Christie) had already been appropriately rewarded for the services he had rendered, a matter of some relevance in both Hayes and Christie. No doubt Mr Ray was grateful for Mr Brown's help. I accept that mere gratitude for what a person has done will not convert a mere gift to income. But the present case involves more than mere gratitude. It involves Mr Brown being rewarded for services which he rendered to Mr Ray and the company which he represented.

48 Scott involved a solicitor who had been properly remunerated by his client and who received from the client's widow (he had acted for her also) a large sum of cash by the standards of the day. The widow was motivated by friendship in making the gift. The relation between the gift and Mr Scott's activities was not such that the receipt was, in a relevant sense, the product of those activities. Windeyer J, at 527-528, cited with approval a passage from the judgment of Kitto J in Squatting Investments Co v Federal Commissioner of Taxation [1953] HCA 13; (1953) 86 CLR 570 at 633, discussing the English case law, where his Honour said:

"The distinction those decisions have drawn between taxable and non-taxable gifts is the distinction between, on the one hand, gifts made in relation to some activity or occupation of the donee of an income-producing character ... and, on the other hand, gifts referable to the attitude of the donor personally to the donee personally."

49 In my view there is nothing in any of these cases, which requires the conclusion that the benefits received by Mr Brown were other than of an income nature and in my view there is nothing in the judgment appealed from which reflects any error on the part of the learned primary Judge in applying the principles derived from these cases.

The Relevance of the benefit being provided by Monacorp

50 Counsel for Mr Brown submitted that the learned primary Judge erred in finding that the fact that the benefits to Mr Brown were provided by Monacorp (or at least the cost of them was born by Monacorp) meant that the benefits could not reflect a personal relationship and so be a mere gift to Mr Brown.

51 It is true that the learned primary Judge stated that the relevant relationship to be considered was not that between Mr Ray and Mr Brown, but rather that between Monacorp and Mr Brown. In so saying his Honour was clearly correct. The benefits were not provided by Mr Ray, they were provided, at least, indirectly, by Monacorp. Further, Mr Ray was not the sole shareholder in Monacorp. He had only a fifty percent interest (indirectly) in that company. Mr Ell and Mr Buist owned the remaining fifty percent and through their shareholding bore half the cost of the benefits. There was no suggestion of any relationship of friendship between Mr Brown, on the one hand, and Mr Ell and Mr Buist on the other.

52 I would not take his Honour as having decided as a matter of general principle that, merely because a benefit is provided by a corporation, it follows that the benefit could not be motivated by personal reasons. Clearly, had Monacorp been but the alter ego of Mr Ray, one would easily attribute such personal motivations of Mr Ray as there may have been to Monacorp. Here, however, not only was Monacorp not the alter ego of Mr Ray, but also, his Honour found, as a fact, that the provision of the benefits was related directly to the introduction of Narui to Monacorp and as a reward for so doing. It was, in the circumstances, open to his Honour to find, as he did, that the benefits were not provided for personal reasons dependant upon any personal relationship between Mr Brown and Mr Ray.

Causation - the initial introduction, the introduction to Mr Hambley and the FIRB application.

53 It was submitted on behalf of Mr Brown that the introduction of Mr Ray to Mr Hambley and the intervention by Mr Brown in relation to the application to FIRB were neither determinative of nor even relevant to the question whether the benefits Mr Brown received were income in ordinary concepts. It may be accepted that merely because some matter is causative of a benefit being received will not be determinative, if only because the question whether the benefit is income will require a careful examination of all of the surrounding circumstances. However, in the present case, while it was open on the evidence to find that Mr Ray on behalf of his partners or the relevant corporation had agreed, contractually, to provide the benefits to Mr Brown in consideration of the introduction effected by Mr Brown with the representatives of Narui Norin (but subject to completion of the contract), his Honour stopped short of making such a finding. However, it is clear from his Honour's judgment that his Honour found that the benefits were provided primarily as a reward for the introduction which Mr Brown effected, and, because the benefits were dependent upon the transaction with Narui Norin proceeding, the subsequent steps which Mr Brown took to assist in bringing the contractual arrangements to fruition played a part in the benefits being provided to Mr Brown. In my view his Honour made no error in arriving at the conclusion he did.

54 The alternative submission that there was no evidence upon which a finding of causation could be made can be likewise dismissed. There was evidence that Mr Brown did introduce Mr Ray to Mr Hambley and of Mr Brown's intervention in connection with the FIRB application. Both of these actions contributed to the successful completion of the contractual arrangements with the Japanese purchasers. The finding that there was a causal link between these actions and the benefit ultimately received by Mr Brown is an inference which can readily be made in the circumstances where the benefits depended upon completion of the contract.

The principle in Rush & Thompkins v GLC and its relationship to penalty remission.

55 There was a degree of confusion attendant on this submission. As ultimately formulated the submission appears to be that a meeting took place between Mr Brown, his accountants and solicitor on the one side and officers of the Australian Taxation Office on the other on 9 October 1995, before the amended assessment issued on 28 March 1996. The meeting was followed up by correspondence from Mr Brown's accountants. It is said that the meeting was called in an attempt by Mr Brown to resolve the dispute which had arisen between the Australian Taxation Office and himself concerning the assessibility of the benefits which Mr Brown had received.

56 Section 223 of the Act, at the relevant time, operated to impose additional tax by way of penalty where a taxpayer had made a statement to a taxation officer in connection with the operation of the Act which was false or misleading in a material particular. The penalty was additional tax in the amount equal to double the amount of the tax which was avoided, Subsection (3) of the same section empowered the Commissioner to remit in his discretion the whole or any part of the additional tax payable as a result of s 223.

57 Rush & Thompkins v GLC [1989] 1 AC 1280 concerned an application for discovery in proceedings against a sub-contractor of "without prejudice" correspondence which had led up to the settlement of a building contract dispute between the owner and the head contractor. It was held that the correspondence was inadmissible in the proceedings by the head contractor against the sub-contractor. Lord Griffiths, with whose reasons the other members of the House of Lords agreed pointed out that the "without prejudice rule" depends upon an underlying policy to encourage, so far as possible, parties to settle their disputes without resort to litigation. His Lordship adopted the words of Oliver LJ in Cutts v Head [1983] EWCA Civ 8; [1984] Ch 290 at 306:

"The public policy justification, in truth, essentially rests on the desirability of preventing statements or offers made in the course of negotiations for settlement being brought before the court of trial as admissions on the question of liability."

58 The rule will apply to exclude negotiations, even where the word "without prejudice" are not used, at least where the surrounding circumstances are such that the parties were seeking to compromise an action. However, as Lord Griffiths points out, the rule is not absolute and there are some exceptions, for example, where the material is tendered to prove that the negotiations resulted in a concluded agreement. However, as his Lordship pointed out in that case, the rule is one concerning the admissibility of material in a Court. It is not generally expressed as a rule which would extend beyond admissibility in a Court, so as to preclude an administrative decision maker taking into account admissions that may be made in the course of without prejudice negotiations. However, that does not mean that the rule could have no application in such a case. It means no more than that Rush & Tompkins was not such a case.

59 Since the decision in the present case some consideration was given to the application of the rule in administrative decision making by Allsop J in White v Overland [2001] FCA 1835. So far as the researches of Counsel suggest, no other decision has considered the question. The facts in White v Overland are somewhat complicated. At the risk of oversimplifying them it can be said that the case concerned an application by Mr White, who had been a member of the Australian Federal Police and whose complaint was that he had not been promoted to a SES position with the AFP as a result of a decision made by Mr Overland. Mr Overland had regarded the Mr White's promotion as inappropriate because he was of the view that Mr White had been a party to certain emails sent by another officer. Mr White complained to the Court about a number of decisions, including a decision that was made abolishing the SES position altogether. It seems that without prejudice submissions were made by counsel on behalf of Mr White to Mr Overland and some matters contained in these submissions were taken into account by Mr Overland in making one of the decisions complained of. Mr Overland had withdrawn an original decision on the basis that he had not afforded Mr White natural justice.

60 Allsop J was of the view that to allow a decision maker to make a decision in circumstances where without prejudice communications were taken into account would tend to undermine or risk undermining the public policy. Accordingly his Honour set aside the decision made by Mr Overton and which had been, at least in part, based on matters put to him in the without prejudice submissions.

61 If it be assumed that the "without prejudice rule" does, as Allsop J held in White v Overland, apply not only to the admissibility in Court of statements made in the course of settlement negotiations but also to the field of administrative law, it would be necessary for Mr Brown in the present case to succeed that he show; first, that the meeting in October 1995 was in all the circumstances such that what took place was without prejudice and, secondly, that thereafter the person who made the decision to remit penalty to the level the penalty was in fact remitted, took into account in making that decision some material by way of admission or partial admission which was the subject of the without prejudice negotiation.

62 Subject to the material tendered on the voir dire to which reference will shortly be made there was no evidence led by Mr Brown in the proceedings which related at all to the meeting of October 1995. That is to say, there was no evidence which would permit a conclusion to be reached that in the circumstances, what was said at that meeting was without prejudice. Nor was there any evidence before the learned primary Judge which would permit the conclusion that the relevant decision maker took into account anything at all said at that meeting, or for that matter anything in correspondence which followed it.

63 However, in the course of the hearing counsel for the Commissioner sought to tender evidence from officers of the Australian Taxation Office concerning the meeting and correspondence with Mr Brown's accountants which followed it. Mr Brown objected to the tender of the material on the basis of s 131 of the Evidence Act 1995 (Cth) as being communications made between persons in dispute in connection with an attempt to negotiate a settlement of the dispute. The material in question is summarised in a judgment delivered by the learned primary Judge on 29 May 2001. His Honour held that the material was not admissible having regard to s 131 of the Evidence Act.

64 None of the material rejected by his Honour in any way bore upon the question whether the person who made the decision to remit penalty in any way relied upon anything that was said at the October meeting, or for that matter the correspondence which followed it. There was simply no evidence which counsel for Mr Brown sought to tender which was probative of that question. Hence, in my view, whether or not the negotiations then held were truly without prejudice or were only an attempt on the part of Mr Brown and his advisers to persuade the Commissioner not to assess, or otherwise to remit all or substantially all of the additional tax and whether or not the without prejudice rule has any application in administrative decision making, the foundation for this Court holding that the Commissioner in remitting the penalty to the level he did took into account admissions or partial admissions made in the course of without prejudice negotiations is simply not there. The submission must therefore be rejected.

65 Accordingly I would dismiss the appeal with costs.

I certify that the preceding sixty five (65) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Hill.

Associate:

Dated: 21 March 2002

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	N 946 OF 2001

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	JOHN JOSEPH BROWN APPELLANT
AND:	COMMISSIONER OF TAXATION RESPONDENT

JUDGES:	HILL, SACKVILLE AND FINN JJ
DATE:	21 MARCH 2002
PLACE:	SYDNEY

REASONS FOR JUDGMENT

SACKVILLE & FINN JJ

THE ASSESSABLE INCOME QUESTION

66 On the principal question argued on the appeal we agree generally with the judgment of Hill J. We wish, however, to add a few observations.

67 The appellant ("Taxpayer") attacked the primary Judge's conclusion that the benefits provided to him constituted assessable income in his hands. That attack rested very largely on a view of the facts that, in our opinion, does not accord with his Honour's findings.

68 Mr Christie, who appeared for the Taxpayer, said in argument that no challenge was made to the factual findings made by the primary Judge. When asked to identify the issue of law on the appeal, he replied that it was

"whether a casual introduction or casual advice provided to a friend resulting in the friend acquiring an immense profit because of which the friend provides some reward to the introducer, whether that gives rise to assessable income in the hands of the introducer".

69 The major difficulty confronting this formulation is that it assumes that the "reward" was provided by a grateful friend in recognition of a "casual introduction" or "casual advice". Mr Christie was at pains to characterise the benefits provided to the Taxpayer as a reward by a friend for conduct "of a trifling nature" which led the friend to reap a substantial profit. The facts, if interpreted in this way, perhaps might suggest that the transaction was (in the language of Fullagar J in Hayes v Federal Commissioner of Taxation [1956] HCA 21; (1956) 96 CLR 47, at 54) a "mere gift", motivated (to the extent motivation is relevant) by personal goodwill or friendship.

70 The critical findings made by the primary Judge have been set out in the judgment of Hill J. The primary Judge accepted, at pars 114 and 115 (at 4,313-4,314), that the provision of the benefits to the Taxpayer was related directly to his introducing the representatives of Narui Norin Co Ltd ("Narui Norin") to Monacorp Pty Ltd ("Monacorp"), the vendor of the land at Kings Forest ("Kings Forest land"). But his Honour also inferred from the evidence that the Taxpayer gave the assistance he did in connection with the transaction in order to ensure its consummation and, therefore, the receipt of the benefits. In other words, as Mr Christie acknowledged, the Taxpayer had "every incentive" to ensure that the sale of the Kings Forest land went ahead. Moreover, his Honour found that the actions of the Taxpayer - the introduction of the representatives of Narui Norin to Mr Ray, the introduction of Mr Ray to Mr Hambley (the Regional Director of the Australian Tourism Commissioner in Tokyo) and the intervention with the Foreign Investment Review Board - were causative of the provision of the benefits.

71 These findings were hardly surprising. For example, his Honour accepted Mr Ray's evidence that in March 1990 he and the Taxpayer had agreed (although not necessarily in a contractual sense) that the Taxpayer would be rewarded by way of commission for the work he had done. Mr Ray also gave evidence that Monacorp would not have transferred the unit to the Taxpayer if the purchase of Kings Forest had not been finalised. In addition, the primary Judge regarded the document of 12 July 1990, which the Taxpayer had signed, as of "considerable significance". This document, prepared in anticipation of settlement, acknowledged that the Taxpayer was owed "$1,000,000 for commission payable for introduction of the purchasers".

72 On the findings made by the primary Judge, leaving aside the fact that the benefits were provided by Ray Development Corporation Pty Ltd ("RDC") rather than Mr Ray, this is not a case where the Taxpayer received a reward from a grateful friend for trifling assistance in the form of an introduction that happened to result in the friend yielding a handsome profit. Rather, it is a case where an understanding was reached that the Taxpayer would be rewarded for his introduction of a purchaser of land, contingent upon successful completion of the sale transaction. The Taxpayer's activities were not confined to effecting the introduction; on the contrary, he performed further work in order to ensure that the transaction was consummated (an outcome in which he had a very substantial interest). As Hill J has observed, the present case is clearly distinguishable on the facts from authorities that have held that there was an insufficient nexus between what was done by the donee and the receipt of the "gift" (cf Christie v Federal Commissioner of Taxation [1956] HCA 20; (1956) 96 CLR 59, at 61, per Fullagar J).

73 The primary Judge stated the relevant legal principles correctly. No error has been shown in the application of those principles.

THE PENALTY QUESTION

The Taxpayer's Submissions

74 In his written submissions on the appeal, the Taxpayer contended that the primary Judge had erred in rejecting the Taxpayer's attack on the Commissioner's decision to impose additional tax at the rate of forty-five per cent of the tax avoided. The Taxpayer submitted that the primary Judge should have held that the Commissioner had taken irrelevant considerations into account when exercising the discretion conferred on him by s 227(3) of the Income Tax Assessment Act 1936 (Cth) ("ITAA").

75 Section 223(1) of the ITAA provides that, where a taxpayer makes a false and misleading statement to a taxation officer which leads to an under-assessment of the tax payable, the taxpayer is liable to pay, by way of penalty, additional tax equal to double the under-assessment. The effect of s 227(3) of the ITAA is that the Commissioner has a discretionary power to remit the whole or any part of the additional tax payable under s 223(1). In the present case, the Commissioner exercised his discretion in favour of the Taxpayer, but only to the extent of remitting that portion of additional tax exceeding forty-five percent of the tax avoided.

76 Before the primary Judge, the Taxpayer attacked the Commissioner's exercise of the discretionary power under s 227(3) of the ITAA on a number of grounds. Only one ground is pressed on the appeal. This is that the primary Judge erred in concluding that certain communications between the parties made at, and subsequent to, a meeting on 9 October 1995 ("the October meeting") could be taken into account by the Commissioner in the exercise of his discretion to waive additional tax. The basis for the Taxpayer's submission is the contention that the communications by the Commissioner were subject to the common law rule that "without prejudice" communications are privileged. According to Mr Christie, the common law principle applies not only to forensic proceedings but to preclude a decision-maker from taking into account, in the exercise of an administrative discretion, communications that would be inadmissible in civil litigation by reason of the privilege.

77 Mr Christie relied on the decision of Allsop J in White v Overland [2001] FCA 1835 to support the Taxpayer's contention. In that case, an administrative decision was set aside on the ground that the decision-maker had taken into account "without prejudice" communications. Allsop J said that to allow the decision-maker to do so would be

"to undermine or tend to undermine or risk undermining the public policy supporting, at least in part, the principle of without prejudice communications"

His Honour considered that that public policy would be seen as "protected and vindicated" if an order was made setting the decision aside: [100], [103].

78 In reaching this conclusion, Allsop J adopted the rationale for the privilege stated by the House of Lords in Rush and Tompkins Ltd v Greater London Council [1989] 1 AC 1280. There it was held that the public policy which prevented evidence of genuine negotiations between parties to litigation being admitted into evidence also protected records of the negotiations against discovery to third parties in the same litigation. Lord Griffiths, with whom the other members of the House agreed, said this (at 1299):

"The `without prejudice' rule is a rule governing the admissibility of evidence and is founded upon the public policy of encouraging litigants to settle their differences rather than litigate them to a finish. It is nowhere more clearly expressed than in the judgment of Oliver L J in Cutts v Head [1983] EWCA Civ 8; [1984] Ch 290, 306:

`That the rule rests, at least in part, upon public policy is clear from many authorities, and the convenient starting point of the inquiry is the nature of the underlying policy. It is that parties should be encouraged so far as possible to settle their disputes without resort to litigation and should not be discouraged by the knowledge that anything that is said in the course of such negotiations (and that includes, of course, as much the failure to reply to an offer as an actual reply) may be used to their prejudice by Clauson J in Scott Paper Co v Drayton Paper Works Ltd (1927) 44 RPC 151, 156, be encouraged fully and frankly to put their cards on the table.... The public policy justification, in truth, essentially rests on the desirability of preventing statements or offers made in the course of negotiations for settlement being brought before the court of trial as admissions on the question of liability.'

The rule applies to exclude all negotiations genuinely aimed at settlement whether oral or in writing from being given in evidence."

The Primary Judgment

79 It was common ground that the October meeting in question took place between the Taxpayer, his accountants and solicitor and officers of the Australian Taxation Office. The meeting was followed by correspondence between the Taxpayer's accountants and the Commissioner in December 1995 and January 1996. The amended assessment issued on 28 March 1996.

80 The primary Judge addressed the argument founded on the common law privilege this way (at 4320, [149]-[150]):

"Finally, the Taxpayer contends that the Commissioner was not entitled to take into account the communications that took place at the October meeting and subsequent correspondence between the Commissioner and the Taxpayer's accountants. The Taxpayer relied on the general law principle that, where parties are negotiating to compromise an action, evidence of the content of those negotiations will, as a general rule, not be admissible at the trial and cannot be used to establish an admission or partial admission - Rush & Tompkins v GLC [1989] 1 AC 1280 at 1299-1300. The public policy justification for such a rule rests on the desirability of preventing statements or offers made in the course of negotiations for settlement being brought before the court of trial as admissions on the question of liability.

However, I do not consider that such a principle has application in the present circumstances. The principle as annunciated in Rush & Tompkins v GLC applies to the reception of the evidence at trial. The principle cannot be intended to dictate the use of volunteered information inter partes. Even if the communications adverted to by the Commissioner in his reasons were privileged, I do not consider that that is a basis for concluding that the Commissioner was not entitled to have regard to them in making the decisions recorded in his reasons." (The words "at trial" are emphasised in the original. Otherwise emphasis has been added.)

81 The primary Judge made no findings in these passages to the effect that the communications at the October meeting or in the subsequent correspondence were protected by the common law privilege attaching to without prejudice negotiations. Nor did his Honour make any such findings elsewhere in the judgment. His Honour rejected the Taxpayer's argument on the basis that, even if the communications were privileged, the Commissioner was not precluded from considering them by virtue of the common law rule.

82 It should also be noted that the primary Judge made no finding that the Commissioner had taken into account, in making his determination on the remission of additional tax, statements made at the October meeting or in subsequent correspondence between the Taxpayer's accountants and the Commissioner. The Commissioner's reasons for his decision not to reduce the penalties (the relevant portions of which are annexed to the primary judgment) suggest that, at most, the Commissioner may have taken into account a letter dated 19 January 1996. In that letter, the Taxpayer's accountants requested leniency with respect to the imposition of penalties.

83 The primary judgment refers to the circumstances in which the October meeting and the subsequent correspondence took place only in a section of the judgment headed "Ruling on Evidence". In that section, his Honour gave reasons for rejecting a renewed tender by counsel for the Commissioner, of certain evidence as to what transpired at the October meeting and as to the contents of the subsequent correspondence. The Commissioner wished to rely on that material in support of his case that the "gift" to the Taxpayer constituted assessable income. The letter of 19 January 1996 is extracted in the section of the judgment dealing with the ruling.

84 In that ruling, his Honour pointed out that he had received evidence on the voir dire and that he had permitted cross-examination on the voir dire against the possibility that the material would be admitted into evidence. He noted that the Taxpayer's objection to the tender was based on s 131(1) of the Evidence Act 1995 (Cth) ("Evidence Act"), which provides as follows:

"(1) Evidence is not to be adduced of:

(a) a communication that is made between persons in dispute, or between one or more persons in dispute and a third party, in connection with an attempt to negotiate a settlement of the dispute; or

(b) a document (whether delivered or not) that has been prepared in connection with an attempt to negotiate a settlement of a dispute."

85 In the ruling, his Honour held that, as at the date of the October meeting, the Commissioner and the Taxpayer were "in dispute" for the purposes of s 131(1) of the Evidence Act. The "dispute" was as to whether or not the benefits received by the Taxpayer constituted assessable income and whether the Commissioner should remit all or part of the additional tax pursuant to the power conferred by s 227(3) of the ITAA. His Honour also held that the material tendered, consisting of four communications made by the Taxpayer at the meeting, had been made in connection with an attempt at the meeting and thereafter to settle the dispute. He therefore rejected the tendered evidence by virtue of the exclusionary rule in s 131(1) of the Evidence Act.

86 The ruling in substance reaffirmed a ruling that the primary Judge had given in an interlocutory judgment delivered on 13 March 2001: Brown v Commissioner of Taxation (2001) 46 ATR 393. In that judgment, his Honour rejected an earlier tender by the Commissioner of communications made at the meeting and thereafter. His Honour found on the basis of evidence admitted on the voir dire, as he did in the later ruling, that the Taxpayer and the Commissioner had been "in dispute" at the date of the meeting.

Use of Evidence Admitted on the Voir Dire

87 In the course of argument on the appeal, it was pointed out to Mr Christie that not only had his Honour made no finding that the communications at the October meeting and in subsequent correspondence were privileged under the common law, but it seemed that there was no evidence at the trial upon which such a finding could be made. This seemed to follow because the only evidence relating to the circumstances in which the communications were made had been given on the voir dire. In other words, it seemed that the evidentiary foundation for the argument based on the existence of the common law "without prejudice" privilege communications was lacking. Counsel were invited to make further written submissions on this issue and on the scope of the privilege.

88 It must be said that the Taxpayer's supplementary written submissions did not address the evidentiary difficulty, except in the most general terms. The submissions simply invited the Court to conclude that the primary Judge's factual findings on the voir dire, resulting in the inadmissibility of the relevant communications under s 131(1) of the Evidence Act, necessitated a finding that those communications were privileged at common law. This assertion was not developed by argument and no authorities were cited. It was also said, in the alternative, that an issue estoppel had arisen in respect of the factual findings made by the primary Judge in his rulings on evidence. Again this submission was not developed.

89 For his part, the Commissioner argued in his supplementary submissions that the voir dire evidence never became evidence at the trial and that no finding had been or could be made that the communications the Commissioner was said to have taken into account in relation to penalty were subject to the common law privilege. In any event, so the Commissioner argued, the ruling made in reliance on s 131(1) of the Evidence Act was irrelevant to any question arising in relation to the common law privilege. The Commissioner also submitted that he was bound to use information disclosed to him when discharging the statutory responsibility, imposed on him by s 166 of the ITAA, to make an assessment "[f]rom the returns, and from any other information in his possession"; that to the extent the Commissioner took into account the October 1995 communications he did not err in law; and that White v Overland was distinguishable from the present case since there was a clear use of information given on a without prejudice basis which was determinative of the decision in question.

90 The "voir dire" has been defined as

"a hearing by the judge in the course of, but apart from, the main trial (and in the absence of the jury where the trial is by jury), in order to settle a question raised by either party concerning any fact which has to be assumed for the purposes of the trial proper, e.g. the hostility, expertise, or competence of witnesses, or the voluntariness of confessions."

CCH Macquarie Dictionary of Law (Revised ed 1996). The voir dire has also been described as a "trial within a trial": Ex parte Hamilton; Re Fagan [1966] 2 NSWR 732, at 734, per Collins J.

91 Under the general law, questions of admissibility of evidence are for a judge to determine, whether in a jury or non-jury trial. If the admissibility of the evidence depends upon a question of fact or a factual inference, as where a particular fact must be established as a condition precedent to the admission of a particular piece of evidence, or a factual question arises in connection with a claim for privilege, the relevant fact must be ascertained or the inference drawn by the judge: Harris v Minister for Public Works (New South Wales) [1912] HCA 56; (1912) 14 CLR 721, at 725, per Griffith CJ; Halsbury's Laws of Australia [195-175], [195-190]. A voir dire is the procedure adopted to determine such questions. The parties may call evidence on the voir dire: Cornelius v The King [1936] HCA 25; (1936) 55 CLR 235, at 248, per Dixon, Evatt and McTiernan JJ. In a jury trial, evidence on the voir dire is usually heard in the absence of the jury, although this is not invariably so: Cornelius v The King, at 248-249; Albrighton v Royal Prince Alfred Hospital [1980] 2 NSWLR 542, at 567-568, per Hutley JA.

92 Section 189(1) of the Evidence Act now provides that if the determination of a question whether evidence should be admitted depends on the court finding that a particular fact exists, the question whether that fact exists is, for the purposes of s 189, a "preliminary question". Section 189 provides for the hearing of preliminary questions in criminal proceedings or jury trials. It does not, however, provide for the use that can be made at the trial of evidence adduced only on the voir dire.

93 It might be thought difficult, as a matter of principle, to see how evidence adduced on the voir dire, solely for the purpose of determining the admissibility of evidence tendered at the trial, could be regarded, without more, as evidence at the trial on an issue in dispute. As Dixon, Evatt and McTiernan JJ observed in Cornelius v The King, at 248, the question of fact that must be determined on the voir dire is "collateral and irrelevant to the issues on which the jury is to pass". Of course, there might be special cases where evidence admitted on the voir dire can be regarded as having been admitted for the purposes of the trial. For example, the parties might agree, explicitly or implicitly, that the evidence should be so regarded, as where the trial is conducted on a common understanding that evidence adduced on the voir dire is to be evidence at the trial. Or there may be cases where evidence said to be given on the voir dire is not concerned with any preliminary question, such as whether a condition precedent to the admissibility of evidence has been satisfied, but is relevant only to the substantive issue at the trial. In such cases, it might be held that the evidence was not in truth given on the voir dire at all: cf Ex parte Whitelock; Re Mackenzie [1971] 2 NSWLR 534, at 540, per Meares J.

94 There is, however, authority which suggests that evidence given on the voir dire in a civil case heard by a judge alone may be taken into account on the issues arising at the trial itself. In Ex parte Whitelock, Meares J made these obiter comments (at 539):

"In many cases...an examination on the voir dire takes place before a judge sitting without a jury, or a magistrate. If any of the examination is relevant on any issue in the case, is such a tribunal obliged to disregard such evidence in considering the issues unless it be formally repeated?

In R v Amo [1963] P & NGLR 22, Mann CJ held that in a trial before a judge sitting alone, any evidence necessarily and properly called and admitted during the trial is in fact before the trial judge for all purposes of the trial, and it is the judge's duty, so long as that evidence remains on the record, to give such weight to it on the question to which it may be relevant as is proper; consequently proceedings upon a voir dire, it was held, cannot be regarded as constituting a separate collateral proceeding.

...

I do not find it necessary nor do I consider it desirable to express any concluded view on this interesting question...but I should have thought that evidence given on the voir dire is evidence, if relevant, on any issue if given in the presence of a jury in a jury trial or action and in all cases if given before a tribunal sitting without a jury."

In Casley-Smith the FS Evans & Sons Pty Ltd (No 2) (1988) 49 SASR 332, Olsson J considered (at 335) that the logic of Meares J's reasoning was "unassailable" and that the principle was correct notwithstanding dicta apparently to the contrary: cf Demirock v The Queen [1977] HCA 21; (1977) 137 CLR 20 at 31, per Gibbs J (with whom Stephen and Aickin JJ agreed).

95 The point addressed in Ex parte Whitelock and Casley-Smith v FS Evans is by no means settled and we express no final view on it (the relevant cases were not adverted to in argument). Nonetheless, it appears to be arguable that, at least in a civil trial before a judge sitting alone, evidence admitted on the voir dire may be taken into account on the issues arising at the trial even without being formally re-tendered. At the very least, however, the evidence must be relevant to the issues arising at the trial and must not be subject to any exclusionary rule.

96 In this case, the primary Judge, in his interlocutory judgment of 13 March 2001, characterised (at 397) the evidence admitted on the voir dire concerning the circumstances leading to the October meeting as "not satisfactory". He found, nonetheless, that the meeting was requested by the Taxpayer, or his advisers, in response to an invitation by officers of the Australian Taxation Office ("ATO") to make a submission as to why the value of the unit received by the Taxpayer should have been treated as partnership income rather than as his income. His Honour referred to an affidavit by the Taxpayer, which had been read on the voir dire without objection, in which the Taxpayer said that he participated in the meeting because he wanted to resolve "the dispute" with the ATO concerning the value of the unit and the imposition of penalties. The primary judge also referred to evidence suggesting that officers of the ATO, at the date of the meeting, considered it likely that the value of the unit would be treated as the Taxpayer's assessable income, although they had not then formed any final view. His Honour was prepared to infer that the Taxpayer and the Commissioner were "in dispute" as at 9 October 1995 and that the communications at the meeting were made in connection with an attempt to negotiate settlement of that dispute. This was so whatever might have been the intention of the ATO's officers in attending the October meeting.

97 As we have noted, the primary judge did not make any finding that the communications made at the October meeting were subject to the common law privilege attaching to without prejudice communications. Nor did his Honour make a finding that the Commissioner had in fact taken into account communications made at the October meeting, or in the subsequent correspondence, when exercising his discretion under s 227(3) of the ITAA.

98 The Taxpayer's submissions seemed to assume that

* the findings made on the voir dire conclusively established that the preconditions for the common law without prejudice privilege had been satisfied in relation to communications at the October meeting and in subsequent correspondence; and

* there was admissible evidence, given either on the voir dire or at the trial itself, capable of establishing that the Commissioner had taken into account privileged communications when exercising his statutory discretion.

99 It is by no means clear that either of these assumptions is correct. As to the first, the primary Judge placed considerable weight upon the Taxpayer's evidence (given on the voir dire) that he attended the October meeting because he wanted to resolve the "dispute" with the ATO. His Honour thought that this evidence strongly supported the inference that the parties were "in dispute", even though no amended assessment had then been issued and the ATO had not then formed a final view as to whether the unit should be included in the Taxpayer's assessable income or penalties imposed. It is not necessary to determine whether his Honour was correct in taking this approach. The point is that evidence of subjective intention may well be given less weight in determining whether, for the purposes of the common law privilege, communications were made "in the course of negotiations to settle litigation" (Field v Commissioner for Railways (NSW) [1957] HCA 92; (1957) 99 CLR 285, at 291 (joint judgement)), or in the course of negotiations to settle disputes (cf. Cutts v Head (see [13] above)). Moreover, the language of s 131(1)(a) of the Evidence Act ("in connection with an attempt to negotiate the settlement of a dispute") appears to extend the scope of the common law privilege: S Odgers, Uniform Evidence Law (4^th ed., 2000), at 349. It follows that, even if the evidence adduced on the voir dire can be taken to have been admitted at the trial on the question of whether the Commissioner had taken into account irrelevant considerations, that evidence may not have established that the common law privilege attached to all or any of the communications made at the meeting or in subsequent correspondence between the Taxpayer's accountants and the Commissioner.

100 In relation to the second assumption, so far as we have been able to ascertain the only admissible evidence of the material taken into account by the Commissioner on the penalty question was his statement of reasons. As we have noted, the only communications at the October meeting, or in the subsequent correspondence, specifically referred to in the statement was the letter of 19 January 1996. It is not apparent from the Commissioner's reasons that he took into account any other communications; indeed, Mr Christie never identified precisely what privileged communications the Commissioner was said to have taken into account. Nor is it apparent whether the Commissioner drew any inference adverse to the Taxpayer from the letter of 19 January 1996 (assuming that the letter itself was admissible at the trial), since the letter seems mainly to be a plea on the Taxpayer's behalf for leniency. In short, it is difficult to see how the Taxpayer could establish that the Commissioner did take into account any of the communications said to be privileged.

101 If the Taxpayer, on the appeal, wished to rely on evidence admitted on the voir dire for the purpose of supporting a contention that the primary Judge should have found that the Commissioner took into account privileged communications on the question of remission of penalty, more was required than an assertion that the factual issues had been resolved on the voir dire. Assuming that evidence on the voir dire could be taken into account at the trial, the Taxpayer should have identified precisely the evidence on which he relied; demonstrated that the evidence was admissible at the trial; formulated the conditions that must be satisfied in order for the common law "without prejudice" privilege to apply; explained why the evidence showed that the preconditions were satisfied; identified precisely the privileged communications that he claimed had been taken into account by the Commissioner on the question of remission of penalty; explained how the evidence established that those communications had indeed been taken into account; and pointed to evidence establishing that each communication was within the scope of the common law privilege. Only when the Taxpayer had addressed these issues would the issue raised by him on the appeal, namely whether the common law without prejudice privilege applies to communications used by administrative decision makers, require resolution.

102 The Taxpayer has not addressed the evidentiary or legal questions we have identified. In these circumstances, we do not think that the Taxpayer has shown that the primary Judge ought to have found that the Commissioner took into account communications made at the October meeting or in subsequent correspondence; nor has the Taxpayer shown that the primary Judge should have found that any such communications were subject to the common law privilege. Accordingly, there is no occasion for us to address the argument concerning the scope of the common law "without prejudice" privilege.

103 We would, however, add these observations. The issue raised by the Taxpayer as to the scope of the common law privilege is of no little importance to administrative decision makers, especially to those empowered by statute to impose or waive penalties, disciplinary sanctions and the like. If the common law principle is to be extended to administrative decision making, a very real question may arise as to whether the particular statutory discretion (such as that conferred in the present case by s 227(3) of the ITAA when read in the light of s 223(1)) might override any privilege that otherwise applies to without prejudice communications. A further question is whether the law of breach of confidence (which deals with use as well as disclosure of information imparted in confidence for a particular purpose and which is subject to well known exceptions), rather than an extension of the common law without prejudice principle, may not be the more appropriate vehicle for determining the information that may properly be taken into account by administrative decision makers.

CONCLUSION

104 In our view the appeal should be dismissed. We agree with the orders proposed by Hill J.

I certify that the preceding thirty-nine (39) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Sackville and Finn.

Associate:

Dated: 21 March 2002

Counsel for the Appellant:	Mr M Christie
Solicitor for the Appellant:	Blake Dawson Waldron
Counsel for the Respondent:	Mr D McGovern
Solicitor for the Respondent:	Australian Government Solicitor
Date of Hearing:	25 February 2002
Date of Judgment:	21 March 2002