Californian Oil Products Ltd (In Liq) v Federal Commissioner of Taxation [1934] HCA 35; (1934) 52 CLR 28 (24 August 1934)

Californian Oil Products Limited (In Liquidation) Appellant; and The Federal Commissioner of Taxation Respondent.

The taxpayer is a company incorporated under the laws of New South Wales. It was registered on 31st August 1925 and went into liquidation on 11th December 1928.

Its directors resolved upon a winding up on 17th October 1928 after entering into an agreement with the Atlantic Union Oil Co. Ltd., by which, in consideration of £70,000 payable in ten equal half-yearly instalments, it cancelled an agreement with that company appointing the taxpayer company its exclusive agent for five years in New South Wales for the sale of petrol, kerosene and lubricating oils and greases. The agreement of cancellation contained provisions under which the Atlantic Union Oil Co. agreed to pay the taxpayer company a sum of £715 as the surrender value of the lease of the latter's office and another sum of £735 as the price of a local service station. It also contained a provision by which the taxpayer company covenanted that it would not thereafter directly or indirectly handle, trade or deal in petroleum products of any kind.

The question for decision is whether instalments of the sum of £70,000 form part of the assessable income of the taxpayer in the year in which they are received.

In our opinion they do not form part of its assessable income because they are not of an income nature and they do not fall within any of the special provisions of the Income Tax Assessment Act 1922-1932 making liable to taxation receipts, which, otherwise, would not be considered income. This conclusion is based upon the substantial nature of the transaction which produced the sum of £70,000. It was, in our opinion, not an incident in the carrying on of the taxpayer company's trade, but the relinquishment and abandonment of the only business which the company conducted. That business consisted in substance of the distribution in New South Wales of petrol and other mineral oil commodities produced by the Union Oil Co. of California. When the taxpayer company was brought into existence, a New South Wales company called "F. W. Williams & Co. Ltd." had acquired the right to exercise the agency of the Union Oil Co. of California in New South Wales and two other States. Another company, called Construction Co. of Australia, appears to have arranged to find £10,000 for the carrying on of the agency upon terms of receiving a share of the profits. The immediate purpose of forming the taxpayer company was evidently the effectuation of this arrangement. The relations of these companies with one another and with the new company were regulated by an agreement and by the new company's articles of association. Its shares were divided into two classes. Ten thousand £1 shares of one class were allotted to the Construction Co. and fully paid for in cash. Ten thousand shares of the second class were allotted to F. W. Williams & Co. Ltd., but not more than 1s. a share was payable thereon except in the event of a winding up. The profits of the company were made divisible, not in proportion to the amount of capital paid upon the shares but in proportion to the number of shares held. The directors consisted of a representative of the Construction Co. and a representative of F. W. Williams & Co. Ltd.

The agreement required the taxpayer company to advance £10,000 to F. W. Williams & Co. Ltd. to enable it to carry on the agency which F. W. Williams & Co. Ltd. was to exercise as trustee for the taxpayer company. The net proceeds were to be paid over to the taxpayer company and were to be applied in the first instance in discharge of the advance and of any subsequent advances. The agency was carried on under these arrangements for a short time only. On 1st April 1926, the taxpayer company entered into a direct agreement with the Union Oil Co. of California by which for a period of five years from 1st June 1926, the Oil Co. agreed to sell to it exclusively its products for delivery into New South Wales and the two other States and the taxpayer company agreed to purchase from the Oil Co. its entire requirements of gasoline motor spirit and kerosene and at least half its requirements of lubricating oil and grease. Before this agreement had been in operation for two years, the Oil Co. decided to form a company in New South Wales for the importation of its products from America. A company was incorporated under the law of New South Wales on 4th October 1927. It was called the "Atlantic Union Oil Company Ltd." Before its formation an agreement was made between trustees on its behalf and the taxpayer company, by which the Atlantic Union Oil Co. Ltd. was to appoint the taxpayer company its sole agent for its merchandise in New South Wales for five years from 1st April 1928. The terms of the agency, which was del credere, entitled the agent to a percentage remuneration but precluded it from dealing with merchandise manufactured or supplied by any other person unless in specified exceptional circumstances.

After its incorporation the Atlantic Union Oil Co. Ltd. adopted this agreement, which came into operation on 1st May 1928. An agreement was made between the taxpayer company and F. W. Williams & Co. Ltd., which had continued to supply its working organization, that when the new agency came into operation the taxpayer company should provide its own staff and organization and that 10,000 more shares of £1 should be allotted to F. W. Williams & Co. Ltd. on the same terms as before. Apart from the 20,000 £1 shares paid up to 1s. thus issued, the company appears to have issued 43,000 £1 shares fully paid up in addition to the 10,000 £1 shares issued on its foundation to the Construction Co.

After the new agency agreement had been in operation for six months, the Atlantic Union Oil Co. Ltd., presumably because it wished to undertake the distribution as well as the importation of its parent company's products, negotiated with the taxpayer company the agreement by which in consideration of the sum of £70,000 the agency agreement should be cancelled.

The powers taken by the taxpayer company in its memorandum of association were ample to enable it to undertake other activities besides the selling of petrol and petroleum products, but, admittedly, it did not do so. The actual business which it established and carried on was confined to dealing, under the successive arrangements we have described, with the goods produced by the Union Oil Co. of California. The contract of agency conferred for a term of years upon the taxpayer company rights by the exercise of which it might or would have been able to earn profits. But the profits would have arisen from the exertions of the taxpayer company in disposing of the Union Oil Co.'s merchandise. They would have consisted in the net amount of the percentage commission paid as remuneration for the services that it actually performed as agent. The contract operated to secure to the taxpayer company definite advantages. It gave an opportunity of performing those services for a period of time which was both certain and lengthy at a fixed remuneration likely to be profitable. But the company did not, as consistently with its objects it might have done, carry on a business of making contracts with customers and performing them. Its business consisted exclusively in marketing in parts of Australia the products of the Union Oil Co. The cancelled contract of agency constituted its authority for five years to carry on that business.

It may be assumed that, in estimating the sum to be paid to the taxpayer company for the cancellation of the contract, both it and the Atlantic Union Oil Co. were guided by their opinion of what the future profits would be. But it is fallacious to treat a sum as income because it is measured by reference to a loss or deprivation of future income or earnings (cf. Glenboig Union Fireclay Co. v. Commissioners of Inland Revenue[1]; Burmah Steam Ship Co. v. Commissioners of Inland Revenue[2]). Lord Buckmaster said in the Glenboig Union Fireclay Co.'s Case[3]: "There is no relation between the measure that is used for the purpose of calculating a particular result and the quality of the figure that is arrived at by means of the application of that test." Sums of money paid by way of damages, compensation or indemnity for a loss of profit incurred in the course of carrying on an enterprise or undertaking may, no doubt, be considered income, because they are part of the profits derived from carrying on the business, although they are occasioned by unusual or exceptional circumstances or events (see R. v. B.C. Fir and Cedar Lumber Co.[4]). In Short Bros. Ltd. v. Commissioners of Inland Revenue[5], sums of compensation were paid to shipbuilders' firms for the cancellation of contracts for ship construction and these sums were held to be profits of the trade. Lord Hanworth speaking of one such sum said:—"The element of futurity, the postponement of payments, may have a reflex effect upon the actual sum to be paid, but it seems to me a refinement to describe the operation in respect of which the £100,000 was paid as being for the purpose of liquidating or giving the present value of a future prospective profit. It seems to be simply the sum paid in order that, as a matter of business, the responsibility and liability under the contract should be terminated and the business should be free to engage in others. Looked at from this point of view it appears clear that the sum received was received in ordinary course of business, and that there was not in fact any burden cast upon the company not to carry on their trade. It was not truly compensation for not carrying on their business: it was a sum paid in ordinary course in order to adjust the relation between the shipyard and their customers"[6].

In the present case the sum in question was paid as the consideration for the termination of the agency which constituted the only business carried on by the taxpayer company. It was "truly compensation for not carrying on their business." It comes within the principles expressed by Rowlatt J. in Chibbett v. Joseph Robinson & Sons[7] when he said: "A payment to make up for the cessation for the future of annual taxable profits is not itself an annual profit at all." It is not within the qualification of that statement made by Lord Macmillan in Dewhurst's Case[8], which, in effect, was that, if the payment represents deferred or contingent remuneration for services performed, the payment "does not necessarily cease to be remuneration for services because it is payable when the services come to an end."

Like Short's Case[9], Commissioners of Inland Revenue v. Northfleet Coal and Ballast Co.[10] related to compensation for the loss of profits incurred in the course of carrying on the business by the termination of one particular, although a very important, contract of a kind which it was the company's business to make. (Cf. Burmah Steam Ship Co. v. Commissioners of Inland Revenue[11].)

In our opinion the payments on account of the sum of £70,000 are of a capital nature. They are not part of "the proceeds of any business carried on by the taxpayer" within the definition of in sec. 4 of the Income Tax Assessment Act 1922-1932. We think such payments are not a profit arising from the carrying out of any profit-making undertaking or scheme within par. (ba) of the definition of "income" in that section; and cf. Premier Automatic Ticket Issuers Ltd. v. Federal Commissioner of Taxation[12]. We are altogether unable to agree with the argument made for the Commissioner of Taxation upon sec. 16 (d) to the effect that the consideration for the cancellation of the contract of agency was an amount received for surrendering a goodwill or licence. The contract of agency is neither goodwill nor a licence. Sec. 93A, which was also relied upon, does not appear to us to have any application to the transaction.

In our opinion the questions in the special case should be answered as follows:—(1) Yes. (2) No. (3) Yes. Costs in the appeal.

The facts are fully set out in the case stated by Rich J. for the opinion of this Court. The substance of the matter is that by force of an agreement dated 16th November 1927, adopting and ratifying an agreement of 30th June 1927, the Atlantic Union Oil Co. Ltd. (hereinafter called the principal) appointed the Californian Oil Products Ltd. (hereinafter called the agent) sole agent for the sale of petroleum products and lubricating oils and greases from time to time manufactured or acquired or dealt in by the principal, during a period of five years from 1st April 1928 to 31st March 1933, in the territory of New South Wales, excepting certain specified areas. The remuneration payable to the agent, and the other terms and conditions of the agency, are set forth in detail in the agreements, and need not be here repeated. By an agreement dated 11th October 1928, between the principal and the agent, the agreement of 16th November 1927 was cancelled. In consideration of such cancellation, the principal agreed to pay to the agent the sum of £70,000, payable by ten equal half-yearly instalments, without interest, of £7,000 each, the first of such instalments to be paid on 1st May 1929, and the remaining instalments to be paid at successive intervals thereafter of six months each. The agent covenanted that, as from the date of the signing of the cancellation agreement, it would not directly or indirectly handle or deal in petroleum products of any kind. And each of the parties released the other from all claims of every kind other than those arising under and by virtue of the provisions of this agreement. The Commissioner of Taxation assessed the agent to income tax in respect of the sum of £14,000 received by it under the agreement of 11th October 1928 during the year which ended on 30th June 1931. The question is whether he was right in so doing.

It is now well enough settled that the profits arising from carrying on or carrying out any trade or business by a taxpayer, or any scheme of profit-making, are assessable to income tax (Ruhamah Property Co. v. Federal Commissioner of Taxation[13]; and cf. Commissioner of Taxes v. Melbourne Trust Ltd.[14]; Commissioner of Taxes v. British Australian Wool Realization Association Ltd. (In Liquidation)[15]). The argument for the appellant is that the sum of £14,000 assessed to income tax did not accrue to the agent in carrying on or carrying out any trade or business or any scheme of profit-making, or as a reimbursement of or damages in lieu of the profits which the agent would have earned under the agreement, but was compensation for a loss of opportunity to earn profits; in other words, that the sum of £14,000 did not represent a receipt in the nature of profits or income, but a receipt in the nature of capital. Now the £70,000 mentioned in the agreement is payable on the terms that the agent shall not pursue its agency; it is deprived of its right to carry on its agency and earn remuneration or income therefrom; its right under the agreement of 16th November 1927 has been "sterilised and destroyed." The case of Glenboig Union Fireclay Co. v. Commissioners of Inland Revenue[16], makes it clear, I think, that a payment made in such circumstances cannot be regarded as a profit or income earned in the course of business, or as part of a profitmaking scheme. It represents a capital and not an income receipt. It may be that the sum was calculated on a basis of profits, but, as Lord Buckmaster observed in the Glenboig Union Fireclay Co.'s Case[17], "it is unsound to consider the fact that the measure, adopted for the purpose of seeing what the total amount should be, was based on considering what are the profits that would have been earned." The line of demarcation between cases on the one side and the other is neatly stated in the report of the argument in the case of Burmah Steam Ship Co. v. Commissioners of Inland Revenue[18], and the important cases are there collected in a footnote. But the decision in the Glenboig Union Fireclay Co.'s Case[19] renders further consideration of the matter unnecessary.

In our opinion the questions should be answered as follows:—(1) Yes. (2) No. (3) Yes.

Although the objects for which the appellant was incorporated covered a very wide scope, the only business which it carried on was the distribution of products for the propulsion and lubrication of motor vehicles under the terms of the agreements, described in the special case, which it entered into from time to time. By these agreements it procured the right to sell the products of the Union Oil Co. of California. It is unnecessary to set out in detail the terms of the various agreements under which the appellant carried on such business, nor the terms of the agreement of 11th October 1928 whereby the last of such agreements was cancelled. The agreement which was thereby cancelled was entered into on 16th November 1927 between the appellant and the Atlantic Union Oil Co., which had been incorporated in New South Wales to import and distribute the products of the Union Oil Co., and by this agreement the Atlantic Union Oil Co. appointed the appellant as its sole agent for a defined area in New South Wales for a period of five years from 1st April 1928.

The agreement of 11th October 1928 provided for the cancellation of the earlier agreement in consideration of the payment by the Atlantic Oil Co. of £70,000 by ten half-yearly instalments of £7,000 and the appellant covenanted that, as from the signing of the agreement it would not directly or indirectly handle, trade or deal in petroleum products of any kind. The main contention of the Commissioner is that two sums of £7,000 which the appellant received in the year ended 30th June 1931 pursuant to the agreement of cancellation answer the description of "the proceeds of any business carried on by the taxpayer," which is contained in sec. 4 of the Income Tax Assessment Act 1922-1932 The Commissioner also relied upon par. (ba) of the definition of "income" in the Act These sums are part of the moneys paid in consideration of the appellant's agreeing to cancel the agreement under which it carried on its business. In our opinion neither description relied on by the Commissioner includes the moneys now in question. Such moneys are not the proceeds of the business carried on by the appellant. The only business which it carried on was the disposal of the commodities mentioned in the agreement of 16th November 1927 pursuant to the terms thereof. There is no evidence that the appellant ever carried on the business of making and disposing of agency contracts, and the case is therefore distinct from Premier Automatic Ticket Issuers Ltd. v. Federal Commissioner of Taxation[20]. (Cf. Chibbett v. Joseph Robinson & Sons[21], per Rowlatt J.)

If it be true, as contended, that the sum of £70,000 is the estimated amount of profits which would have been derived by the appellant from carrying on its agency business for the remainder of the agreed period, it does not follow that such money represents the proceeds of carrying on such business. The adoption of this method of calculating the value of the agency is insufficient to impress the sum with the character of income. In truth and in substance the sum of £70,000 is the amount agreed to be paid in consideration of the termination and liquidation of the agency as distinct from the mere restriction of the appellant's trading activities. No part of the £70,000 is therefore assessable income within the meaning of sec. 4 (Glenboig Union Fireclay Co. v. Commissioners of Inland Revenue[22]; Burmah Steam Ship Co. v. Commissioners of Inland Revenue[23]).

There is no substance in the argument that sec. 16 (d) of the Income Tax Assessment Act can operate to bring the sum in question within the definition of assessable income.

Questions in the special case answered as follows:—(1) Yes. (2) No. (3) Yes. Costs in the appeal.

[1] (1922) 12 Tax Cas. 427, at p. 463.

[2] (1930) 16 Tax Cas. 67, at pp. 72, 75; (1931) S.C. 156.

[3] (1922) 12 Tax Cas., at p. 464.

[4] (1932) A.C. 441.

[5] (1927) 12 Tax Cas. 955; 136 L.T. 689.

[6] (1927) 12 Tax Cas., at p. 973.

[7] (1924) 9 Tax Cas., at p. 61.

[8] (1932) 16 Tax Cas., at p. 653.

[9] (1927) 12 Tax Cas. 955; 136 L.T. 689.

[10] (1927) 12 Tax Cas. 1102.

[11] (1930) 16 Tax Cas. 67; (1931) S.C. 156, and see particularly Lord Sand's judgment.

[12] [1933] HCA 51; (1933) 50 C.L.R. 268.

[13] (1928) 41 C.L.R., at p. 151.

[14] (1914) A.C. 1001, at p. 1009.

[15] (1931) A.C. 224, at p. 231.

[16] (1921) S.C. 400; (1922) 12 Tax Cas. 427; (1922) S.C. (H.L.) 112.

[17] (1922) S.C. (H.L.), at p. 115; 12 Tax Cas., at p. 463.

[18] (1930) 16 Tax Cas. 67; (1931) S.C. 156.

[19] (1922) S.C. (H.L.) 112; 12 Tax Cas. 427.

[20] [1933] HCA 51; (1933) 50 C.L.R. 268.

[21] (1924) 9 Tax Cas., at p. 61.

[22] (1922) 12 Tax Cas., at p. 463.

[23] (1930) 16 Tax Cas. 67, at pp. 72, 75.

High Court of Australia

Californian Oil Products Ltd (In Liq) v Federal Commissioner of Taxation [1934] HCA 35; (1934) 52 CLR 28 (24 August 1934)

HIGH COURT OF AUSTRALIA