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Gerard Cassegrain and Co Pty Limited and Anor and Commissioner of Taxation [2010] AATA 12 (12 January 2010)

Last Updated: 12 January 2010

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2010] AATA 12

ADMINISTRATIVE APPEALS TRIBUNAL )

) No 2007/2716; 2007/2719

TAXATION APPEALS DIVISION
)

Re
GERARD CASSEGRAIN & CO PTY LIMITED
First Applicant

And
CLOS FARMING ESTATES PTY LIMITED
Second Applicant

And
COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal
Mr J Block, Deputy President
Mr S E Frost, Senior Member

Date 12 January 2010

Place Sydney

Decision
The objection decisions are set aside. Instead the Tribunal allows the first applicant’s objection in part, so as, and in respect of the year ending 30 June 2004 to reduce the assessable income by $1,598,328 for that year. The second applicant’s objection is also, and in consequence, allowed in part. The applications are remitted to the Commissioner to enable further amended assessments to be made, and which reflect the conclusions we express in the reasons which follow.

.................[sgd].............................
J Block, Deputy President

CATCHWORDS

TAXATION AND REVENUE – income tax – capital gain – payment pursuant to deed of settlement and release – consideration in respect of disposal – attribution of disposal consideration being an undissected sum – methodology – identification of assets disposed of – mixture of undertakings and releases by company and managing director – determination of the amount for which each asset might reasonably have been disposed of – decisions under review set aside


Income Tax Assessment Act 1936 Part IIIA, s 160ZD


Gerard Cassegrain & Co Pty Ltd v Commissioner of Taxation [2007] FCA 415

Re G Cassegrain & Co Pty Ltd and Anor and Commissioner of Taxation [2005] AATA 72


REASONS FOR DECISION


12 January 2010
Mr J Block, Deputy President
Mr S E Frost, Senior Member

INTRODUCTION AND BACKGROUND

  1. These applications were originally heard by the Tribunal (constituted by Mr P J Lindsay, Senior Member) over a period of four days in December 2004. In January 2005, Senior Member Lindsay affirmed the objection decisions under review: Re G Cassegrain & Co Pty Ltd and Anor and Commissioner of Taxation [2005] AATA 72 (“the original Tribunal decision”). The taxpayers appealed from that decision to the Federal Court. In March 2007, Lindgren J allowed the appeal, set aside the original Tribunal decision and remitted the matter to the Tribunal to be determined according to law. Lindgren J’s judgment is reported as Gerard Cassegrain & Co Pty Ltd v Commissioner of Taxation [2007] FCA 415 (“the Federal Court judgment”).
  2. The circumstances which led to the dispute between the taxpayers and the Commissioner had their origins in 1987. This is when the first applicant, Gerard Cassegrain & Co Pty Limited (“GCC”), established a relationship with Sirotech Limited (“Sirotech”), a wholly owned subsidiary of the Commonwealth Scientific and Industrial Research Organisation (“CSIRO”), in order to conduct research and development activities in connection with a soil improvement technology known as “slotting”. CSIRO was developing the technology and GCC had land on which the activities could be conducted. The activities would be carried out by a company set up as a joint venture between Sirotech and GCC, and which was called Cassiro Pty Limited (“Cassiro”).
  3. Eventually there was a falling out between GCC and CSIRO. In April 1992, GCC commenced legal proceedings in the Federal Court (No. G3062 of 1992) against CSIRO, Sirotech and Cassiro, in which GCC brought a range of claims against CSIRO and ancillary claims against Sirotech. One month later, in May 1992, CSIRO commenced proceedings, also in the Federal Court (No. G3095 of 1992), seeking to have Cassiro wound up on the just and equitable ground.
  4. In September 1993, and following a mediation conducted by Sir Laurence Street in June and July that year, both proceedings were settled as a consequence of the payment of $9.5 million by CSIRO, on behalf of itself and Sirotech (together referred to in the Deed of Settlement and Release (“Deed”) dated 27 September 1993 as the “CSIRO Parties”), to or at the direction of the “Cassegrain Parties”, identified in the Deed as GCC and Claude Cassegrain. Claude Cassegrain (referred to in the Deed as Cassegrain) is a member of the Cassegrain family, which controls GCC, and was at all relevant times the managing director of GCC.
  5. Clause 2.2 of the Deed explained how, as between the parties to the Deed (the parties being the CSIRO Parties, the Cassegrain Parties and Cassiro), the payment of the sum of $9.5 million would be referable. It is convenient to set out clause 2 of the Deed in its entirety:
    1. CONDITION PRECEDENT
2.1 The provisions of this Deed do not become binding on the parties unless and until CSIRO has paid by cheque to or at the direction of the Cassegrain Parties the sum of $9,500,000.
2.2 If the condition precedent referred to in Clause 2.1 is satisfied, the payment of the sum referred to in Clause 2.1 will be referable:
(a) as to the amount of $8,835,083 – to:
(i) the full and final discharge of any and all liabilities for which any party to this Deed has or, but for the execution of this Deed would have had, to pay costs or damages to any other party to this Deed, whether pursuant to Proceedings 3062, Proceedings 3095 or otherwise; and
(ii) the benefit of the various covenants, releases, indemnities and warranties entered into, given and made by the Cassegrain Parties under the terms of this Deed;
(b) as to the amount of $503,667 – to:
(i) the transfer of the GC&Co Technologies (other than GC&Co’s right, title and interest in slotting machines) as referred to in Clause 4.2; and
(ii) procuring the transfer of the Cassiro Technologies (other than Cassiro’s right, title and interest in slotting machines) and of the right, title and interest of Cassiro in certain contracts and arrangements as referred to in Clause 4.3;
(c) as to the amount of $155,000 – to:
(i) the transfer of the slotting machine referred to in Part 2 of Schedule F; and
(ii) procuring the transfer of the slotting machines referred to in Part 1 of Schedule F,
which transfers are pursuant to Clauses 4.2, 4.3 and 4.4; and
(d) as to the amount of $6,250 – to the net difference between the value of:
(i) the goods, wares and merchandise which are transferred to GC&Co as referred to in Clauses 15.9(a)(ii) and 15.9(a)(iii) (which are valued in aggregate at $3,390); and
(ii) the goods, wares and merchandise which are transferred to CSIRO as referred to in Clause 15.9(b)(i) (which are valued in aggregate at $9,640).

  1. Some words and expressions used in Clause 2 were defined in the Deed. In particular, Recital O to the Deed contained references to “Proceedings 3062” and “Proceedings 3095” (both of which have been mentioned briefly in [3] above). The references in Recital O were as follows:
Proceedings 3062 – Proceedings instituted in the Federal Court by GC&Co, “seeking orders, inter alia, that CSIRO and Sirotech pay damages to GC&Co for oppression, breach of contract and breach of duty. In those proceedings, GC&Co also sought relief by way of injunctions, account of profits, orders for the purchase of its shares and other relief. By the time of the making of the Deed, GC&Co had indicated its desire to raise, in addition, allegations of conspiracy, defamation, false representation, abuse of process, contumelious failure to produce documents as required by law, and breach of tortious duty.”
Proceedings 3095 – Proceedings instituted in the Federal Court by CSIRO “seeking an order that Cassiro be wound up on the just and equitable ground.”

  1. The Deed also defined “GC&Co” as the company, Gerard Cassegrain & Co Pty Limited (to which we refer in these reasons as “GCC”), and “GC&Co Technologies” as “all the right, title and interest of GC&Co in the Slotting Technology, the VFW Technology and Sci-Scan”.
  2. Those expressions used in the definition of GC&Co Technologies were further defined, as follows:
“Slotting Technology” means all Intellectual Property and all other rights of any character connected in any way, directly or indirectly with Slotting (whether in its application to soil amelioration, to the disposal of sewage sludge, to trench digging, or to any other area of activity) including, without limitation:
(a) all rights associated with the items of Intellectual Property identified in paragraphs 15A.2 and 15A.3 of the Further Amended Statement of Claim as supplemented by the information set out in paragraphs 15A.2 and 15A.3 of the Amended Defence;
(b) all rights connected, directly or indirectly in any way with Slotting (including rights connected with actual or proposed grants or funding) claimed or stated to be vested in any or all of a Cassegrain Party, Cassiro or CSIRO, in the Second Further Amended Statement of Claim or in the Cassegrain Letter;
(c) all the right, title and interest in all slotting machines built prior to Completion (including, without limitation, the machine known in the course of Proceedings 3062 as the Pippy Digger, the machine built in substitution for the machine known as the GIRD Slotter and the machines described in Schedule F as the Mark II and Mark III slotters) and their design (including, without limitation, all relevant Intellectual Property); and
(d) all rights of GC&Co or of Cassiro as at the date of this Deed, or of CSIRO (including rights connected with actual or proposed grants or funding) in respect of any research and development, proposal for research and development or results of research and development constituting or said to constitute any aspect of the business of Cassiro or of any relationship between either of the Cassegrain Parties and either of the CSIRO Parties;
whether or not in relation to (a) to (d), at the time when the definition is applied, the right is vested in GC&Co or Cassiro, or is vested before or after Completion in:
(i) CSIRO;
(ii) any nominee of CSIRO under this Deed; or
(iii) any person deriving rights directly or indirectly from CSIRO or its nominee after Completion;
and also includes:
(e) all Intellectual Property connected, directly or indirectly, in any way with Slotting, acquired or developed after Completion by CSIRO, by its nominee under this Deed, or by any person deriving rights directly or indirectly from CSIRO or its nominee after Completion.
“VFW Technology” means all Intellectual Property, and all other rights, of any character connected in any way, directly or indirectly with VFW (as more fully described in Recital G) or with any other form of constructed or natural wetland including all rights in respect of the patent applications, provisional patent applications, and any divisional application or continuation application associated with or derived from any such patent application referred to in Recital G (and in respect of any patent granted as a result of any such application) including, without limitation:
(a) all rights of GC&Co or of Cassiro as at the date of this Deed or of CSIRO, arising, directly or indirectly by reason of the VFW Agreement whether by way of licence, ownership of “New Know-how” as defined in that Agreement, or otherwise;
(b) all rights of GC&Co or of Cassiro as at the date of this Deed or of CSIRO, arising, directly or indirectly, from or connected with the dealings or the relationship to date between GC&Co (or any Associate of GC&Co or of Cassegrain) and CSIRO or Sirotech (or any Associate of CSIRO or of Sirotech) in relation to VFW;
(c) all rights (including rights connected with actual or proposed grants or funding) in respect of any research and development, proposal for research and development, or results of research and development constituting or said to constitute any aspect of the business of Cassiro or of any relationship between either of the Cassegrain Parties and either of the CSIRO Parties connected with VFW, any other form of wetland, or research related to any form of wetland (or any other research using Intellectual Property otherwise comprised in VFW Technology) claimed or stated, in the Further Amended Statement of Claim, the Second Further Amended Statement of Claim or the Cassegrain Letter to be vested in GC&Co or Cassiro; and
(d) all rights of GC&Co or of Cassiro as at the date of this Deed or of CSIRO, connected in any way with the VFW system or the use or proposed use of the VFW system that are vested or claimed to be vested in GC&CO or Cassiro by reason of any other matter referred to in the Further Amended Statement of Claim, in the Second Further Amended Statement of Claim or in the Cassegrain Letter (including, but not limited to, the rights claimed in paragraphs 15B.2(b) and 15C.1 to 15C.10 inclusive of the Further Amended Statement of Claim and paragraphs 15D.1 to 15.D.4 inclusive of the Second Further Amended Statement of Claim);
whether or not in relation to (a) to (d), at the time when the definition is applied, the right is vested in GC&Co or Cassiro, or is vested before or after Completion in:
(i) CSIRO;
(ii) any nominee of CSIRO under this Deed; or
(iii) any person deriving rights directly or indirectly from CSIRO or its nominee after Completion;
and also includes:
(e) all Intellectual Property connected, directly or indirectly, in any way with VFW or any other form of constructed or natural wetland acquired or developed after Completion by CSIRO, by its nominee under this Deed, or by any person deriving rights directly or indirectly from CSIRO or its nominee after Completion;
but does not include:
(f) any rights in respect of any Clos Farm VFWs which are not Intellectual Property.
“Sci-Scan” means all Intellectual Property and all other rights of any character, connected in any way, directly or indirectly, with the computer image analysis technology referred to in Recital P.

  1. “VFW”, referred to in the definition of “VFW Technology”, means vertical upflow artificial wetlands.
  2. For completeness, we should set out at this point two further relevant definitions, these expressions having been mentioned in the definitions above. They are the expressions “Second Further Amended Statement of Claim” and “Cassegrain Letter”, defined respectively as follows:
“Second Further Amended Statement of Claim” means the proposed Second Further Amended Application, Second Further Amended Statement of Claim and letter dated 29 June 1993 referred to in Recital O, true copies of which are contained in Schedule E.
“Cassegrain Letter” means the letter referred to in Recital U.

  1. Lindgren J referred to the Second Further Amended Statement of Claim in the Federal Court judgment at [26]:
In fact, in June 1993 a second further amended statement of claim [in relation to Proceedings 3062] was settled by counsel. It was never filed and no copy of it was given to CSIRO because the legal advisers of GCC took the view that it would be disruptive of negotiations and of the then forthcoming mediation, for a copy to be handed over at that time. The draft second further amended statement of claim pleaded causes of action in conspiracy to cheat and to defraud, abuse of process, and defamation and injurious falsehood. The defamation and injurious falsehood claims were based on letters that Dr Stocker of CSIRO had written to the Minister for Industry, Technology and Commerce concerning the conduct of GCC, and, in particular, its driving force, Claude Cassegrain. However, there was no suggestion of an application to amend to introduce Claude Cassegrain as an additional applicant, and the only allegation was that GCC had suffered loss and damage from the tortious conduct of CSIRO and/or Sirotech.

  1. His Honour referred, at [25], to the letter dated 29 June 1993 (mentioned in the definition of “Second Further Amended Statement of Claim” ([10] above):
On 29 June 1993 Garrett & Walmsley [the solicitors for GCC] wrote to Blakes [Blake Dawson Waldron – the solicitors for CSIRO] advising that they were instructed to seek leave to amend in proceeding NG 3062 of 1992 to include:
“counts in defamation and injurious falsehood in relation to communications between servants and agents of CSIRO and Sirotech on the one hand and the State Bank of NSW on the other.”

  1. His Honour continued, at [27]:
It will be noted that Garrett & Walmsley’s letter of 29 June 1993 to Blakes did not suggest any proposal to introduce Mr Cassegrain as a second applicant or otherwise suggest that the threatened claims of defamation and injurious falsehood were his, as distinct from GCC’s.

  1. At [21] of the Federal Court judgment, Lindgren J provided an explanation of, and some context, to the Cassegrain Letter:
Prior to a mediation referred to below [this is the mediation conducted by Sir Laurence Street, mentioned in [4] above], Claude Cassegrain did not join in or apply to join in as a party to GCC’s proceeding, and he did not institute any separate proceeding against either of them for damages for defamation. However, in a letter dated 5 May 1993 that he wrote as company secretary of GCC to Professor Clarke [the then chairperson of CSIRO] (“the Cassegrain Letter”), he set out details of GCC’s claim “from a practical rather than legal viewpoint”, and included an item reading as follows:
“5. Damage to the name, reputation and standing of GC & Co, Cassegrain Family name, Cassegrain Group of companies, and Claude Cassegrain and his family as a result of being publicly associated with a failed venture involving bitter litigation and disruption to the family and their associated companies’ business activities – $5,000,000. ” [His Honour’s emphasis]
The total amount claimed in the Cassegrain letter was $56,033,000. The concluding sentence in the letter was: “It is always understood that any settlement would involve some adequate means to restore the reputation of the family, the company and myself personally”. No such “adequate means” was referred to in the letter or subsequently. Contrary to the applicants’ written submissions, the Cassegrain Letter did not threaten that Claude Cassegrain, his family and their companies would sue CSIRO for defamation and injurious falsehood, unless such a threat is to be read into the passage from the letter set out above.

GCC’S TAXATION TREATMENT OF THE $9.5 MILLION, AND THE DISPUTE WITH THE COMMISSIONER

  1. GCC considered that, of the $9.5 million paid by CSIRO, only $5.25 million should form part of GCC’s assessable income for the year ended 30 June 1994 (“the relevant year”) by reason of the capital gains provisions of Part IIIA of the Income Tax Assessment Act 1936 (“the 1936 Act”). (The remaining $4.25 million was said to have been derived by Claude Cassegrain personally, in accordance with a purported agreement struck by Mr Cassegrain with his father, Gerard Cassegrain, shortly after the formal mediation in June and July 1993 and which ultimately led to the execution of the Deed in September 1993. That purported agreement between Claude and Gerard Cassegrain was found by Senior Member Lindsay in the original Tribunal decision to have been a “sham”. For a number of reasons we are inclined to the view that that description of the purported agreement was not inapt. In the first instance, we have reservations as to the credibility of Claude Cassegrain in respect of his evidence before us although it is not necessary to go into detail as to our specific reservations. In the second place, the purported agreement was made between Claude Cassegrain and his father Gerard Cassegrain only and notwithstanding the fact that there were other members of the Cassegrain family who were not parties to that agreement and even though they had a very real interest in its subject matter. The manner in which the amount received was reported for tax purposes is also a cause for concern.)
  2. The Commissioner thought that the entire amount of $9.5 million should be included in GCC’s assessable income. The Commissioner accordingly made an amended assessment for GCC for the relevant year. The attribution of a further $4.25 million in assessable income had the effect of absorbing all of GCC’s tax losses, and as a result, it was now liable to pay tax for the relevant year. This had a flow-on effect to the second applicant, Clos Farming Estates Pty Limited, to which GCC had transferred some of its losses. Both taxpayers objected against the amended assessments, and the Commissioner disallowed both objections.
  3. The original Tribunal decision affirmed the Commissioner’s objection decisions but, as noted in [1] above, the taxpayers’ appeals to the Federal Court were successful. At [143] of the Federal Court judgment, Lindgren J stated:
The decision of the Tribunal should be set aside and the matter remitted to the Tribunal to be determined according to law. Determining the matter according to law will require the Tribunal to acknowledge the distinction between the disposals of amounts consisting of the releases and surrenders in respect of potential causes of action on the one hand, and those consisting of the giving of contractual undertakings on the other hand; acknowledging that each of GCC and Claude Cassegrain disposed of assets of both classes; and determining how much of the sum of $8,835,083 may reasonably be attributed to the disposals of the assets by GCC.

  1. It will be seen that the matter remitted by Lindgren J requires the attribution not of the entire $9.5 million settlement amount, but only of the amount of $8,835,083 referred to in clause 2.2(a) of the Deed. This is so because the remaining amount of $664,917 was attributed to specific items referred to in clause 2.2(b), (c) and (d) of the Deed. That this is so has the result that we must, inter alia, assign a value to the claim of Claude Cassegrain for alleged defamation which is particularly difficult having regard to the fact that that claim was threatened but not brought in the sense that proceedings were issued and the fact that publication was limited. This particular issue was the cause of particular difficulty to the experts who gave evidence before us. In the end result we have necessarily relied for this particular aspect on the matters set out in [65](c) of these reasons and even though that result might be thought to be over-generous to Claude Cassegrain.

THE RELEVANT LEGISLATION – PART IIIA OF THE 1936 ACT

  1. Part IIIA of the 1936 Act, for the relevant year, comprised 161 sections, from s 160AX to s 160ZZU. Thankfully, we need to concern ourselves with only one of these provisions – namely, s 160ZD(4).
  2. There is a convenient summary of Part IIIA in the Outline of Respondent’s Submissions (“ROS”), at [10], which we adopt here:
a) Section 160ZO included a taxpayer’s net capital gain for a year in assessable income for that year. Section 160ZC defined net capital gain as the aggregation of capital gains and capital losses accrued to the taxpayer in the year. Section 160Z(1) and (3) relevantly defined capital gain as the consideration in respect of the disposal of an asset minus the asset’s indexed cost base or (if disposed of within 12 months of acquisition) its cost base. Section 160A defined asset in terms that included any right, whether proprietary or personal.
b) Section 160M(1) defined disposal and acquisition by reference to a change in ownership of an asset. Section 160M(3)(b) included in this concept the release or discharge of a chose in action or other right. Section 160M(6) and (6A) deemed the creation by one person of an incorporeal asset in another to constitute the acquisition and virtually instantaneous disposal of the asset by the first person to the second.
c) Section 160ZD defined consideration prima facie as money or money’s worth received or subject to entitlement as a result or in respect of a disposal of an asset. Section 160ZD(4) provided: ‘Where any consideration paid or given in respect of a transaction relates in part only to the disposal of a particular asset, so much of that consideration as may reasonably be attributed to the disposal of the asset shall be taken to relate to the disposal of the asset.’
d) Section 160ZH defined cost base and related concepts. (The Applicants did not attempt to establish any cost base in any relevant asset, other than legal costs.)
e) Section 160ZN(1) dealt with joint ownership of assets in a way that, broadly speaking, equated joint ownership with ownership as tenants in common in equal shares.
f) Section 160ZB(1) exempted capital gains arising by reason of a taxpayer obtaining compensation or damages for wrong or injury to the taxpayer to his or her person or in his or her profession or vocation. (our emphasis)

THE APPROACH TO THE MATTER REMITTED

  1. At [21] of ROS, the Commissioner said:
The remitted task is one of attribution of an appropriate part of the sum of $8,835,053 to disposals of assets by GCC under s 160ZD(4) by reference to what is reasonable. In a case such as the present where mathematical precision is impossible, this is necessarily a matter of judgment and impression. The exercise of such judgment may be assisted by valuation evidence, though the ultimate task for the decision maker is to reach a reasonable attribution overall.

  1. We did not understand the taxpayers to disagree with that general outline. Nevertheless, and not at all surprisingly, the parties are urging upon us different outcomes from the “reasonable attribution” exercise.

THE PROPER INTERPRETATION OF THE DEED

  1. The taxpayers’ principal case is that the question comes down to the proper construction of the Deed. They say, in summary, that:
(a) the apportionment undertaken between the four sub-clauses in clause 2.2 of the Deed “is mandatory and binds the parties to the Deed” (Applicants’ Written Submissions – “AS” – at [8]);
(b) the sum of $664,917 (representing the difference between the total of $9.5 million and the amount of $8,835,083 which remains to be “attributed” on remittal to the Tribunal) has already been apportioned, under subclauses 2.2(b) to (d) of the Deed, solely to GCC (AS at [10]);
(c) those rights, assets and other things that have been disposed of by GCC for the agreed total of $664,917, having been dealt with under subclauses 2.2(b) to (d) of the Deed, cannot also form part of what was disposed of under subclause 2.2(a) (AS [11] and [18]); and
(d) in particular, the definitions of the three GC&Co Technologies and the additional matters transferred by GCC in clauses 4.2 and 4.3 of the Deed in consideration for the $503,667 expressly apportioned to GCC in subclause 2.2(b) are so broad that GCC cannot possibly have been separately and additionally compensated, under subclause 2.2(a)(i), for the surrender of the right to claim unspecified damages from CSIRO, and, as a result, what was disposed of under subclause 2.2(a) must be something other than GCC’s right to damages from CSIRO (AS [18]).
  1. The Commissioner, on the other hand, says that the taxpayers’ interpretation should be rejected for the following reasons (ROS [71]-[75]):
    1. First, cl 2.2(a) explicitly attributes $8,835,083 of the $9.5m settlement to the discharge of liabilities ‘to pay costs and damages to any other party ... whether pursuant to Proceedings 3062, Proceedings 3095 or otherwise’. This explicitly comprehends a discharge of the liability of CSIRO and Sirotech to pay damages to GCC in Proceedings 3062. (The judgment of Lindgren J generally uses the term ‘release’ rather than ‘discharge’; nothing turns on this, and the words may be treated as synonyms.)
    2. Secondly, cl 2.2(b) attributes $507,667 to the ‘transfer’ by GCC of the GC&Co Technologies and to its participation under cl 4.4 with CSIRO in procuring the ‘transfer’ by Cassiro of the Cassiro Technologies under cl 4.3 (excluding chattels dealt with in paras (c) and (d)). The language of ‘transfer’ is inapposite to a release or discharge of liabilities. The Deed distinguishes between releases under cl 2.2(a) and transfers under cl 2.2(b). The Applicants’ reading of the ‘rights’ comprised in the various Technologies transferred by GCC and by Cassiro as including existing causes of action against CSIRO is attenuated, particularly given that the Deed explicitly deals with such causes of action explicitly elsewhere by releasing them (cl 8.1 AB 179-80); also released are any Cassiro Claims against GCC, Claude Cassegrain and their Associates (cl 8.3).
    3. Thirdly, the Applicants’ argument requires cl 2.2(a) to be read as if it were ‘subject to cl 2.2(b)’, but the Deed does not say that. It does not establish an explicit hierarchy of that kind. (By contrast, the slotting machines dealt with in paras (c) and (d) are explicitly excluded from para (b).) Furthermore, as noted above, para (a) deals with releases and undertakings, and paragraphs (b) to (d) with transfers; that distinction, drawn by the Deed, should be respected.
    4. Fourthly, the parties expressly agreed that the value of the Cassiro Technologies was $503,667 (cl 15.11(a)(i), AB190) and that the factual assumptions in the Coopers Report and its analysis of Cassiro’s tax position were correct (cl 15.11(b), AB190-1). The Coopers Report (AB2733ff, being Schedule R to the Deed) includes the present valuation of the slotting technology developed by CSIRO and beneficially vested in Cassiro for the purposes of commercial development as between $270,000 and $490,000 (AB2738, para [33]). It includes valuation of Cassiro’s right in the VFW Technology as zero (AB2739 para [45]). It includes valuation of Cassiro’s interest in Sci-Scan as $13,660. These valuations are not objectively, commercially or realistically reconcilable with the parties having treated the release of GCC’s claims to damages in the litigation as being comprehended in the transfer of the GCC Technologies and procuring transfer of the Cassiro Technologies. The Applicants have not suggested that the valuations in the Deed are incorrect. (Note that the Coopers Report and cl 15.11 also support the valuation approach taken by Dr Ferrier: T405-408.)
    5. Fifthly, GCC’s cause of action for damages was, to the knowledge of the parties, worth considerably more than $503,667, and achieving its release and satisfaction was central to the objective commercial purpose of the settlement. It does not make sense to interpret the parties as having assigned such a major and valuable item in dispute to consideration worth just over 5% of the total settlement sum. It is commercially implausible that the parties would be taken to have intended to comprehend in the ‘transfer’ and procuring the ‘transfer’ of ‘Technologies’, which they valued collectively at $503,667, releases of claims for damages which they recognised were worth considerably more.
...

  1. References in those submissions to “AB” are to pages in the Appeal Book filed in the Federal Court in relation to the appeal from the original Tribunal decision; the Appeal Book was taken into evidence in the remittal hearing as Exhibit A1.
  2. The taxpayers deal with those issues at paragraphs [54]-[70] of their Reply (“AR”). The main points they make are:
...
  1. GCC sued for damage to its reputation: see AB1/123-126 (defamation and injurious falsehood). But its reputation in the water and soil technology industries, divorced from Claude Cassegrain as its controlling mind and as the only person with any experience in those technologies in the company, was worthless: ... Once his reputation is divorced from GCC’s – as it necessarily must be in order to value his reputation – GCC is left with a claim for damages for loss to a reputation of negligible value under cl. 2.2(a)(i) effectively as part of the transfer.
...
  1. As regards ROS [72], no attempt is made to reconcile this analysis with the definitions of ‘the Technologies’ addressed at AS [4]-[65]. Why would the parties provide for a transfer of technologies for an agreed and apportioned sum with liabilities (or ‘encumbrances’ to use the language of the Deed: see cll. 4.1-4.3 (AB1/169-170) attached to them, being the pending dispute in the Federal Court about title to them (and the right to use them), being liabilities which clearly affected their market value, only to leave the compensation for the discharge of those liabilities under a separate heading (i.e. damages)? This analysis is impossible to reconcile with the breadth of the definitions and the assurances that title to the technologies had to pass unencumbered see cll. 4.1-4.3 of the Deed (AB1/169-170). The removal of encumbrances could only occur as an aspect of the promise to transfer the Technologies, including the consideration for it.
...
  1. Returning to ROS [73], the applicants submit that cl. 2.2(a) must necessarily be read as being engaged after cll. 2.2(b)-(d) do their work rather than as being subject to them. This follows because the parties have undertaken an agreed apportionment in cll. 2.2(b)-(d) of part of the $9.5m settlement sum – what is left unapportioned in cl. 2.2(a) is by definition a residual amount left over after cll. 2.2(b)-(d) have done their work. If the consideration in cl. 2.2(a) is residual it stands to reason that the work it must do is also residual to the operation of cll. 2.2(b)(d). If that proposition were not accepted then the Cassegrain Parties would be compensated for some assets twice – under cl. 2.2(a) and also under cll. 2.2(b) or (c) or (d) – leaving inadequate consideration to compensate for assets that could only be compensated for under cl. 2.2(a).
  2. The analysis undertaken in the preceding paragraph has both commonsense and accepted principles of contractual interpretation to support it. One must interpret contracts in the light of their commercial purpose. The parties agreed to limit the consideration passing to GCC for the technologies – all rights to the technologies (including damages for their damage and title to them) – to an agreed amount in cll. 2.2(b)-(d) – the written down amount – because it was tax effective. What passed to GCC under cl. 2.2(a) – reimbursement for its [costs] – was tax effective because there was a deduction to offset the reimbursement (the costs were a [deductible] outgoing). CSIRO went along with that to settle the matter. Any tax payable was payable by it (such as Cassiro’s tax). The $9.5m payment was structured to be tax free. That could only be achieved if GCC received no more than it could offset as tax deductions. Claude Cassegrain received the balance under the mistaken belief that it was all exempt from tax as defamation damages (reputation loss and economic loss). ...
  3. As regards the exclusion of the slotting machines from cl. 2.2(b) (ROS [73]) that submission makes the point the applicants [make] in the previous two paragraphs. The slotting machines necessarily had to be excluded from cl. 2.2(b) to avoid compensating for them two or three times in cll. 2.2(c) and (d) also. This same approach must be applied to cl. 2.2(a). If it is not applied then the assurance that encumbrances and third party interests are compensated for in cll. 2.2(b)-(d) because of the language of cll. 4.1-4.3 is not respected. If it is not respected in cll. 2.2(b)-(d) then the damages payable for claims on the Technologies and for title to them and rights to future profits from them are double-counted (as to which see the summary at AS-Schedule Q. 12).
  4. As regards ROS [74], the reliance placed by the respondent Commissioner on the Coopers & Lybrand report at AB7/2733 is misleading on several grounds. First, it contradicts Dr Ferrier’s approach to the valuation of these kinds of assets (the first ground). Second, it is not a true valuation (the second ground). Third, it relates only to Cassiro and its technologies and has no application to GCC and its assets or sunk costs (the third ground).
...
  1. The submission is ROS [74] that “the Applicants have not suggested the valuations in the Deed are incorrect” is quite untrue. The Deed does not contain any “values”. It contains agreed sale prices for assets transferred. ... The applicants have not suggested any valuations in the Deed are incorrect because their case is that the Deed contains no valuations. It contains agreed consideration for transfers, surrenders, undertakings, etc. That is, the Deed contains agreed sale prices for assets disposed of under the Deed, but not values.
  2. As regards ROS [75], this submission seeks to sidestep the overriding commercial purpose of the Deed, which is that it would not have been entered into in those terms if all the parties to it did not objectively believe it was tax-effective. This is an agreed fact in this remitted application: see the evidence of Mr C Griffiths, GCC and Claude Cassegrain’s former chartered accountant and principal tax adviser (called by the respondent Commissioner in his case) at AB2/633/36; 640/21; 646/9; 675/7-678/27. If tax was payable on the $9.5m as the settlement was structured in the Deed (save for $20,000 in tax payable by Cassiro) there would have been no settlement. The entirety of the submissions made in ROS [75] ignores this central commercial objective of the Deed contrary to the case law on contractual interpretation discussed and cited in par 63 above.
  3. Dr Ferrier, referred to at various points in those paragraphs, is one of the three experts whose evidence as to valuation and the attribution of the clause 2.2(a) amount will be addressed in detail later in these reasons.
  4. Having considered in detail the taxpayers’ arguments, we nevertheless agree with the submissions of the Commissioner, as set out in [24] above. There are two reasons why this is so.. First, in our view the Commissioner’s analysis is consistent with the plain meaning of the words in clause 2.2(a) of the Deed. Second, we think it is fanciful to suggest that the legal proceedings between GCC and CSIRO, which had been going on for so long at considerable expense, and which had been the very thing that had brought the parties to the mediation table in June 1993, might be resolved without the payment of any consideration by CSIRO to GCC except for a portion of the $503,667 dealt with in clause 2.2(b) of the Deed. That simply flies in the face of reality.
  5. To that we would add that, in any event, a careful reading of the Deed as a whole does not support the taxpayers’ contention summarised in [23](d) above. The GC&Co Technologies which GCC agreed under clause 4.2 to transfer, and which make up part of the subject matter in clause 2.2(b)(i) of the Deed, are defined as “all the right, title and interest of GC&Co in Slotting Technology, the VFW Technology and Sci-Scan”. When one inserts into that definition, as an example, the definition of Slotting Technology, it will be seen that what CSIRO paid for under clause 2.2(b)(i) was:
all the right, title and interest of GC&Co in:
(a) all Intellectual Property [in] Slotting; and
(b) all other rights of any character connected in any way, directly or indirectly with Slotting ...
  1. That type of language applies mutatis mutandis in relation to the VFW Technology and to Sci-Scan, since the relevant definitions are similarly structured. In our view, the language we have set out in [29] above does not include within it the right to damages which were being pursued by GCC in Proceedings 3062. It follows that GCC’s right to damages under Proceedings 3062 was compensated for, not under clause 2.2(b)(i) but under clause 2.2(a)(i) of the Deed.
  2. This conclusion appears consistent with Lindgren J’s view of the meaning of clause 2.2(a) as expressed in the Federal Court judgment at [85] (and we note that this view was expressed in the context of his Honour’s discussion of the attribution of the clause 2.2(a) amount of $8.835 million, and not the $9.5 million total):
... Claude Cassegrain, rather than his parents or siblings, had been the driving force behind GCC. Of all of the members of the family, he was the only one who, CSIRO insisted, must be a party to the Deed. Indeed, it [is] interesting to consider what value could be reasonably attributed to the contractual undertakings by GCC alone (I leave to one side its release of its alleged pre-existing causes of action the subject of the Court proceeding)... (emphasis added)

  1. We must now, having decided on the proper interpretation of the Deed, identify those assets that were disposed of under clause 2.2(a) of the Deed, and by whom.

THE ASSETS DISPOSED OF UNDER CLAUSE 2.2(a) OF THE DEED

  1. In conjunction with their closing written submissions, the parties provided responses to specific questions that the Tribunal had put to them in writing after the taking of all the evidence in the remittal hearing. Those questions reflected the language of Lindgren J in the Federal Court judgment, and sought, among other things, the identification of:
(a) the releases and surrenders in respect of potential causes of action disposed of by:
(b) the contractual undertakings given by:
  1. Before turning to the parties’ responses, it is necessary to mention some additional provisions of the Deed. We start with the following definition set out in clause 1.1:
“Cassegrain Claim” means any present or future action, proceeding, claim or demand, which GC&Co, Cassegrain, Cassiro or any Associate of GC&Co or of Cassegrain may bring against CSIRO or Sirotech or against any Associate of CSIRO or of Sirotech, whether or not the action, proceeding, claim or demand is identified or known at the date of this Deed or at Completion with certainty or at all, and whether or not the action, proceeding, claim or demand also involves or may involve some other party, arising directly or indirectly in any way from or referable to:
(a) any matter the subject of Proceedings 3062 (whether referred to in the pleadings, in correspondence, in the course of proceedings in Court or raised in any other manner);
(b) any matter proposed in the Second Further Amended Statement of Claim to be made the subject of Proceedings 3062;
(c) any matter the subject of Proceedings 3095;
(d) the Collaborative Research Agreement;
(e) the MOCI;
(f) the VFW Agreement;
(g) Cassiro;
(h) Hastings 2000 and any services provided in connection with Hastings 2000 by the CSIRO Corporate Planning Office (whether or not referred to in the invoices mentioned in Recital L);
(i) the Slotting Technology;
(j) the VFW Technology;
(k) any collaboration between either of the Cassegrain Parties (or any Associate of either of them) and either of the CSIRO Parties (or any Associate of either of them) relating to the Slotting Technology, the VFW Technology, any Slotting work (actual or proposed), or the construction of any VFW;
(l) any matter referred to in the Cassegrain Letter;
(m) any services provided prior to Completion by a CSIRO Party to a Cassegrain Party, Cassiro or an Associate of a Cassegrain Party, or by a Cassegrain Party or Cassiro to a CSIRO Party or an Associate of a CSIRO Party; or
(n) any dealing, occurrence, transaction or representation occurring prior to Completion;
(no paragraph in this definition operating to limit the generality of any other paragraph),
but does not include any action, proceeding, claim or demand arising from or under a provision of this Deed or from or under the Mediation Agreements, or from or under the Sci-Scan Deed, or which arises solely from dealings, occurrences, transactions or representations occurring after Completion.

  1. The “Collaborative Research Agreement” is the agreement into which GCC and CSIRO entered on or about 10 July 1987 for the conduct of research and development concerning Slotting and associated activities.
  2. The “MOCI” is the Memorandum of Commercial Intent executed by GCC and CSIRO on or about 19 June 1989, which provided for the establishment of an incorporated joint venture. Recital H to the Deed noted:
... The MOCI contemplated the commercialisation of Slotting and also the possibility that arrangements could be agreed for extending the joint venture and for CSIRO to establish a research facility in the Hastings region of New South Wales. There is a dispute between the CSIRO Parties and the Cassegrain Parties as to the interpretation of the MOCI and as to the content of the resulting legal obligations.

  1. We now deal with the parties’ responses to the Tribunal’s questions, referred to in [33] above.

(a)(i) – RELEASES AND SURRENDERS IN RESPECT OF POTENTIAL CAUSES OF ACTION DISPOSED OF BY GCC ALONE

  1. The Commissioner identified only one such release or surrender: the release of the GCC claim under clause 8.1 of the Deed. Clause 8.1 provides:
In consideration of the execution by the CSIRO Parties of this Deed, each of GC&Co, Cassegrain and Cassiro releases and forever discharges, each of CSIRO and Sirotech and each Associate of CSIRO or of Sirotech in respect of all Cassegrain Claims.

  1. The taxpayers identified, in addition to that particular release, a number of other matters referable to clauses 7.1, 13.1, 15.11(g), 15.12 and 16.3 of the Deed. They are all described by the taxpayers as “undertakings” to do, or to refrain from doing, certain things. The Commissioner says that these additional matters (with the exception of that referred to in clause 15.11(g)) are “undertakings”, not releases. We agree. In the context of the instruction given to the Tribunal by Lindgren J in [143] of the Federal Court judgment, we take the view that these additional matters, while perhaps relevant to the attribution of consideration between GCC and Claude Cassegrain, do not properly fall for consideration as “releases” or “surrenders” but should be dealt with elsewhere, as relevant.
  2. As for clause 15.11(g), the Commissioner says:
By cl 15.11(g) GCC agrees that at Completion it releases Cassiro from any loans it may have made to Cassiro prior to Completion. This is not material to the matters before the Tribunal. This release had no material effect as between GCC and CSIRO because, as a consequence of the settlement effected by the Deed, GCC ended up owning all the shares in Cassiro (cl 4.1, AB169). The release of Cassiro from unspecified debts, if any, owed to GCC is therefore not material to the consideration moving from CSIRO. (Clause 15 is headed ‘Consequential Indemnities, Covenants and Warranties’; that is an accurate description of its content.)

  1. We also agree with this characterisation of clause 15.11(g). In our view, the only release or surrender in respect of potential causes of action disposed of by GCC alone is, as described by the taxpayers at page 2 of their responses to the Tribunal’s questions, the release and discharge of CSIRO, Sirotech and their Associates in respect of all the “Cassegrain Claims” as concern GCC’s interest.

(a)(ii) – RELEASES AND SURRENDERS IN RESPECT OF POTENTIAL CAUSES OF ACTION DISPOSED OF BY CLAUDE CASSEGRAIN ALONE

  1. We agree with the parties that the only release or surrender in respect of potential causes of action disposed of by Claude Cassegrain alone is, as described by the taxpayers at page 3 of their responses to the Tribunal’s questions, the release and discharge of CSIRO, Sirotech and their Associates in respect of such of the “Cassegrain Claims” as is referred to in the Cassegrain Letter.

(a)(iii) – RELEASES AND SURRENDERS IN RESPECT OF POTENTIAL CAUSES OF ACTION DISPOSED OF BY GCC AND CLAUDE CASSEGRAIN AS BENEFICIAL OWNERS AS JOINT TENANTS

  1. Neither party identifies any releases or surrenders fitting this description. We agree that there are none.

(b)(i) – CONTRACTUAL UNDERTAKINGS GIVEN BY GCC ALONE

  1. The taxpayers provided an extensive list of references to provisions of the Deed in which, they said, they had been able to identify undertakings given by GCC. The references included the following clauses, and many besides:
3.2 To procure Cassiro to execute the Deed.
4.1 To accept the transfer of CSIRO’s Cassiro share.
5.6 To register Cassiro Charge Releases.
7.1 To have the Federal Court proceeding leading to the Settlement dismissed with no order for costs.
15.2 To indemnify CSIRO and Sirotech and their Associates against all actions, proceedings, claims or demands by anyone in respect of pre-27.9.93 involvement or proposed involvement of them and Cassiro in Slotting on any Clos Farm or any other land owned by GCC.
15.11(c) To direct and pay from the amount of $9.5m paid under clause 2.1 any monies due under any income tax assessment issued on Cassiro together with any other Government Fees, charges or levies, including payroll tax for which Cassiro may be liable to pay up to 27.9.93.

  1. The Commissioner’s list, although not quite as extensive, was nevertheless very detailed.
  2. Ultimately, the GCC undertakings with which the Tribunal is concerned are those that are perceived to be of value, and which are included in the things provided by the Cassegrain Parties in return for the undissected amount in clause 2.2(a). The only relevant such undertakings given by GCC alone are, in our view, the following:
(a) Not to use, promote or develop (without the consent of CSIRO) any of the Technologies or Sci-Scan except as permitted under clause 6.2; and
(b) To lodge the tax returns of Cassiro in relation to all periods up to the date of the Deed, and to pay any tax payable.

(b)(ii) – CONTRACTUAL UNDERTAKINGS GIVEN BY CLAUDE CASSEGRAIN ALONE

  1. The only contractual undertaking given by Claude Cassegrain alone, which is of value and which is included in the things provided by the Cassegrain Parties in return for the undissected amount in clause 2.2(a), is his undertaking not to use, promote or develop (without the consent of CSIRO) any of the Technologies or Sci-Scan except as permitted under clause 6.2.

(b)(iii) – CONTRACTUAL UNDERTAKINGS GIVEN BY GCC AND CLAUDE CASSEGRAIN AS BENEFICIAL OWNERS AS JOINT TENANTS

  1. Neither party identifies any undertakings fitting this description. We agree that there are none.

DISCUSSION OF THE EXPERT EVIDENCE

  1. Three experts gave evidence in an attempt to assist us in carrying out the attribution exercise. The Commissioner’s expert was Dr Rodney Ferrier, the managing partner of Ferriers, Corporate and Forensic Accountants. The taxpayers relied on two experts – Christopher Costello, the chairman and managing director of RPC Group Pty Ltd, a firm of remuneration consultants; and Domenic Quartullo, a director of PKF Corporate Advisory (East Coast) Pty Limited. Dr Ferrier made three written statements, Mr Costello four and Mr Quartullo three. Some of their statements contained formal reports of their opinions; some of those reports were in response to or in clarification of others. Some statements by one or other of the witnesses sought to discredit the approach taken or the opinions expressed by another of them. Each of the experts was briefed separately and in different terms. They were asked different questions and were instructed to make different assumptions. Their approaches to the questions asked of them were different. Each of the witnesses also gave oral evidence and was subjected to extensive cross-examination. In the end we had a bewildering array of information from which we had somehow to decipher exactly how, and to what extent, the expert evidence was meant to assist us.
  2. We deal first with Mr Costello’s evidence. He was specifically asked, he says at [8] of his first report (Exhibit A11), to “value the rights and assets given up under the Deed by Claude Cassegrain”. The main part of this first report explains that he would set about “calculating a reasonable total amount that accrues to Claude Cassegrain for being removed from the commercialisation and employment opportunities in the soil and water technologies outlined in the Deed, by virtue of the restraints undertaken in clauses 2.2(a)(ii) and 6 (‘the Restraints’)”: [52]. He reports at [53] that “it is not possible to limit the value given up by Claude Cassegrain as a party to the Deed to the five year Restraint Period” but instead says that, in practical terms, Mr Cassegrain was restrained for 19 years – from the age of 46 (when he entered into the Deed) until the age of 65. This is on the basis that “[i]n cutting edge technologies such as the technologies the subject of the Deed and the Restraints, to be excluded for five years is equivalent to exclusion for the remainder of the individual’s career ... The opportunities are gone, the head start and market gap achieved by competitors in the start up phase (which is within the 5 year Restraint Period) is insurmountable”.
  3. Several times during cross-examination he described his approach, and also his assessment of a hypothetically successful enterprise operating in one or more of the relevant technology areas, as “conservative”. His valuation must, by definition, also depend on his perception of Mr Cassegrain’s ability to gain and retain employment in such an enterprise.
  4. We do not agree that it is appropriate to value Mr Cassegrain’s restraint undertaking by reference to what is thought to be the remainder of his working career. What CSIRO wanted was for Mr Cassegrain to enter into a five-year restraint. That is what Mr Cassegrain agreed to do. What CSIRO was willing to pay for was that restraint, for that period of time. It is not reasonable to suppose that Mr Cassegrain was expecting to be paid for more than he was agreeing to give up, or to have what he was giving up valued by reference to purported lost income during a period longer than the period that he was giving it up for. Moreover, there are too many unknowns in that alternative calculation – would the business remain successful for that period of time? Would it remain successful to the extent predicted? Might the technology be superseded? Would Mr Cassegrain remain a part of the business?
  5. We do, however, agree with the remainder of Mr Costello’s approach, which was to calculate the income that he notionally “lost” (in 1993-equivalent dollars) because of the restraint undertaking. On the other hand, we see no reason why that figure should be reduced by the amount of income that he actually earned during the corresponding period. A calculation of that nature does not reliably indicate a proper “price” or “value” of what Mr Cassegrain was giving up.
  6. Mr Quartullo’s evidence can be dealt with briefly. His reports proceeded on the basis that GCC was not to be compensated under clause 2.2(a) for its release of CSIRO from the damages claims. We have rejected that interpretation of the Deed. What remains of Mr Quartullo’s reports is his identification of the legal costs expended by the Cassegrain Parties – $2,503,449 by GCC, and $200,000 by Mr Cassegrain (for practical purposes, this latter figure is common ground). Those amounts will be taken into the attribution exercise.
  7. We now turn to Dr Ferrier’s evidence. He described his approach as one of attempting to establish the “relative values” of the assets that the Cassegrain Parties were giving up. He would do this by the use of what he called the “Discounted Cash Flow” method. The methodology he adopted was this:
  1. So, for example, at [4.9] of Exhibit R6, he assessed the “Recovery of past costs and interest” to have a “Claimed Value” of $14,317,468. He applied to that a “Discount” of 0%, on the basis that the amount was quite capable of accurate calculation and, because it was not in any respect “speculative”, it might be expected to be recovered in full. By contrast, he allocated a “Claimed Value” of $36 million to “Future Profit and value”, but applied a “Discount” of 85% (owing to its speculative nature) to arrive at a “Maximum Possible Claim” of $5,400,000. From a total “Claimed Value” of $66,236,526, by allocating different “Discount” percentages to the different components of the total, he arrived at a total “Maximum Possible Claim” of $28,176,244. This process accounts for the first bullet point just outlined, and paragraph (a) of the second bullet point.
  2. But that was not the end of the matter. He then took each line item making up the total and, in respect of each of those line items, made a judgment as to the “probability” of an outcome that would deliver either 100% of the “Maximum Possible Claim”, or, in turn, 75% of the maximum, or 50%, 25% or 0%. The following table, taken from [4.28] of Exhibit R6, illustrates the point in respect of the line item referred to as “Future Profit and Value”:
Value
$
Probability
Expected value
$
Maximum value
5,400,000
1%
54,000
75% of maximum value
4,050,000
3%
121,500
50% of maximum value
2,700,000
5%
135,000
25% of maximum value
1,350,000
51%
688,500
0% of maximum value
0
40%
0


100%
999,000

  1. In this way, by the assessment of the “speculative” nature of the claim such as to justify a discount rate of 85%, and the subsequent assessment of the “probability” of the different possible outcomes as shown in the table above, Dr Ferrier reduced the notional high point of this component, $36 million, to a mere $999,000. That same methodology, applied to each line item of potential head of claim, resulted in a total “Expected Value”, for all claims, of $11,716,121 – a substantial reduction from the starting point in the Cassegrain Letter of a little over $56 million, or Dr Ferrier’s own starting point, based on that letter and other relevant sources, of $66.2 million ([4.1] of Exhibit R6, and [56] above).
  2. We are not persuaded that Dr Ferrier’s methodology is an appropriate one in the circumstances of a case such as this and for this reason we consider it unnecessary to examine his methodology in any further detail.

WHAT IS THE PROPER METHODOLOGY?

  1. It must be remembered that nowadays, for the most part, income tax is “self assessing”, in the sense that the Commissioner will generally accept a return, as lodged by a taxpayer, as correct unless he has reason to believe that there is something in it that is wrong. This casts on taxpayers an obligation to make full and accurate disclosures of their affairs, based on their knowledge of the factual circumstances that led to their derivation of income and the incurring of deductions. Included in that obligation is a requirement that taxpayers convert their knowledge of those circumstances into the appropriate entries, properly quantified, in the various fields of the returns that the Commissioner requires them to lodge. It seems hardly reasonable, in those circumstances, to expect taxpayers to undertake obscure and complex calculations (some of them based on purely subjective assessments) of the kind envisaged in Dr Ferrier’s methodology so as to render a full and accurate picture of their tax position for any given year.
  2. If we were to accept Dr Ferrier’s methodology, then it would follow that taxpayers in similar cases would need to undertake the same process, or something very like it, so as to arrive at a reasonable apportionment of an undissected capital receipt. A process of this kind, beyond the reach not only of the normal run of taxpayers – even those of reasonable sophistication – but also of the normal run of accountants and tax agents on whom the proper and efficient administration of the tax system depends, has little to commend it. There must be an easier way.
  3. The requirement of s 160ZD(4) is simply this: treat only that part of the $8,835,083 that reasonably relates to GCC’s assets, as if it were the price it obtained on the disposal of those assets. In that enquiry, the total amount of consideration received is a given. So are the assets, once they are identified. What is unknown is the relativities between them. Those relativities must be determined. We have decided that the best way to determine the relativities in this case is to proceed in this way:
(a) Step 1 – Identify the assets that were disposed of for the undissected sum of $8,835,083;
(b) Step 2 – Determine the amount for which each of those assets might reasonably have been disposed of;
(c) Step 3 – Determine the relationship that $8,835,083 bears to the total of the amounts determined under Step 2;
(d) Step 4 – Multiply each individual amount determined under Step 2 by the factor determined under Step 3.

OUR ATTRIBUTION

  1. Step 1 is to identify the assets. They are:
(a) The surrender by GCC of the right to claim damages from the CSIRO Parties or any of their Associates;
(b) The surrender by GCC of the right to claim costs from the CSIRO Parties or any of their Associates;
(c) The surrender by Claude Cassegrain of the right to claim damages from the CSIRO Parties or any of their Associates;
(d) The surrender by Claude Cassegrain of the right to claim costs from the CSIRO Parties or any of their Associates;
(e) The undertaking by GCC to pay Cassiro’s tax;
(f) The undertaking by Claude Cassegrain not to work in the area of any of the Technologies (the restraint).
  1. We do not include in that list GCC’s restraint undertaking because the essence of CSIRO’s insistence on restraining GCC was to ensure that Claude Cassegrain himself was restrained. GCC could not operate in the relevant areas without Mr Cassegrain himself, and once he was restrained, then GCC was effectively restrained as well. For that reason there is nothing further of value under this head which is capable of being disposed of by GCC.
  2. Step 2 is to determine the amount for which each of those assets might reasonably have been disposed of. They are (using the same paragraph identifiers as in [63]):
(a) $7,274,000 (Exhibit R6, [4.1]), representing the amount invested by GCC in the joint venture. This might be regarded as a “cut and run” figure, but in the circumstances it is reasonable to fix upon this amount and no other. We find that GCC was under significant financial pressure to end the dispute with CSIRO without delay. In different circumstances a higher amount may be justified, but not here;
(b) $2,503,449 (Exhibit A15, [9.3.4]);
(c) Defamation – $500,000 (Federal Court judgment at [68], supported by the opinion of Mr Rares SC, as his Honour then was; see also original Tribunal decision at [46]);
(d) $200,000 (Exhibit A15, [9.3.4]);
(e) $20,498 (Exhibit R6, [4.1] and AB1/214, Recital H);
(f) Lost income – $1,464,000 (Exhibit A14, Attachment “A”, but only for the first five years – see also the table accompanying the Commissioner’s document “Calculation of after tax income on Costello’s income projections at 1993 dollar values”). Although that latter document is a convenient place to find Mr Costello’s revised figures, we reject the Commissioner’s contention that the quantification should be done on a post-tax, rather than pre-tax, basis. All other figures feeding into the mathematical calculation are provided before tax, and this component should be quantified in the same way.
  1. Step 3 is to determine the relationship that $8,835,083 bears to the total of the amounts determined under Step 2. The total of the amounts at Step 2 is $11,961,947:

(a) $7,274,000
(b) $2,503,449
(c) $500,000
(d) $200,000
(e) $20,498

(f) $1,464,000

TOTAL $11,961,947

  1. The relationship that $8,835,083 bears to that total is:

8,835,083 ÷11,961,947 = 0.738599

  1. Step 4, the final step, is to apply that factor to the amounts that relate to the individual assets disposed of.
  2. GCC’s assets are those at (a), (b) and (e). The total of the amounts at [65] is $9,797,947. That total, multiplied by the factor at [67], is $7,236,753.
  3. Claude Cassegrain’s assets are those at (c), (d) and (f). The total of the amounts at [65] is $2,164,000. That total, multiplied by the factor at [67], is $1,598,328.

CONCLUSION AND DECISION

  1. GCC’s assessable income for the relevant year, as shown in the notice of amended assessment issued by the Commissioner, is overstated to the extent of $1,598,328.
  2. It follows that the Commissioner’s objection decisions must be set aside. Instead the Tribunal allows the first applicant’s objection in part, so as to reduce the assessable income by $1,598,328 for the relevant year. The second applicant’s objection is also allowed in part, as a consequence.
  3. We remit the matters to the Commissioner to enable further amended assessments to be made which reflect these conclusions.

NOTE ON THE PUBLICATION OF THESE REASONS

  1. When the hearing of these applications first commenced on 4 May 2009, a question was raised (on that day) by the Tribunal as to whether the hearing was to be heard in private; a taxpayer is entitled to make such an application under s 14ZZE of the TAA. One of the consequences of a private hearing is that, in consequence of a modification to s 43 of the Administrative Appeals Tribunal Act 1975 by s 14ZZJ of the TAA, “the Tribunal must ensure, as far as practicable, that its reasons for the decision are framed so as not to be likely to enable the identification of the person who applied for the review”. At that early time the Tribunal was informed that the applicants would consider the matter and revert to the Tribunal on this aspect thereafter. The hearing at least on that first day, and having regard to the fact that such an application was at least a possibility, proceeded on the basis that the only persons present in the hearing were the parties or their representatives and otherwise persons entitled, because of their connection with the parties, to be present.
  2. That aspect was not canvassed on the succeeding hearing days, and in the event, no application for a private hearing was, in the result, ever made. It must be remembered that the original reasons given by Senior Member Lindsay were not issued on a confidential basis. Moreover the appeal to the Federal Court was heard as a public hearing and the decision by the Federal Court, referred to earlier in these reasons, was issued in the ordinary way. The Tribunal considers that, even if it could be suggested that the applicants intended to apply for a private hearing (although in the result did not do so) to issue this decision on a confidential basis would in all the circumstances serve no useful purpose, and moreover to do so would, having regard to the Federal Court decision and the fact that this decision must of necessity be framed having regard to that decision, be altogether impracticable. We have accordingly decided to publish this decision in the ordinary way.

I certify that the 75 preceding paragraphs are a true copy of the reasons for the decision herein of Mr J Block, Deputy President, and Mr S E Frost, Senior Member


Signed: ...............[sgd].................................................................

Associate


Dates of Hearing 4 - 8, 11 - 12 May 2009, 12 August 2009

Date of Decision 12 January 2010

Counsel for the Applicants D J Fagan SC and C J Bevan

Solicitor for the Applicants Evangelos Patakas & Associates

Counsel for the Respondent M L Brabazon SC

Solicitor for the Respondent Australian Government Solicitor


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