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High Court of Australia |
COLONIAL MUTUAL LIFE ASSURANCE SOCIETY LTD. v. FEDERAL COMMISSIONER OF
TAXATION [1953] HCA 68; (1953) 89 CLR 428
Income Tax (Cth.)
High Court of Australia
Williams A.C.J.(1), Webb(2), Fullagar(3), Kitto(4) and Taylor(5) JJ.
CATCHWORDS
Income Tax (Cth.) - Assessment - Capital or income - Deduction - Outgoings (not being of capital or of capital nature) incurred in gaining or producing assessable income or necessarily incurred in carrying on business for the purpose of gaining or producing such income - Transfer of land - Consideration - Payment to transferor for period of years of percentage of rents actually received by transferee from building erected on transferred land and other land - Outgoing of capital nature - Income Tax Assessment Act 1936-1943 (No. 27 of 1936 - No. 10 of 1943), s. 51 (1).
HEARING
Melbourne, 1953, June 9, 10; October 13. 13:10:1953DECISION
October 13.2. The sum referred to was part of an amount of 1,183 pounds paid by the appellant in the accounting period to William Just and Herbert Fritz Just, called in the case the Just Brothers. The payment was made in accordance with the terms of two documents, an agreement entered into on 16th February 1934 between the appellant, the Just Brothers and a company called Turners Limited, and an instrument of encumbrance executed by the appellant in pursuance of the agreement. The appellant bases its claim to have the 1,100 pounds treated as an allowable deduction upon s. 51 (1) of the Income Tax Assessment Act, contending that that is the proportion of the 1,183 pounds which should be held to have been incurred in gaining or producing the appellant's assessable income and not to have been an outgoing of capital or of a capital nature, or incurred in relation to the gaining or production of exempt income. (at p439)
3. The appellant is a life assurance company. At the time of the agreement of 16th February 1934 it owned a block of land in Adelaide, situated at the corner of King William Street which bounded it on the east, and Hindley Street which bounded it on the north. It desired to erect a modern building occupying not only its own block but also a block owned by the Just Brothers which adjoined it on the south. The new building was intended to provide the appellant with office accommodation for the carrying on of its business, and also, as to a substantial part of it, to provide, for renting to tenants, basement space, shops and approximately 120 offices or professional rooms. Turners Limited was in occupation of a shop on the appellant's land under a lease, and of course that lease had to be got rid of before the building project could be proceeded with. Turners Limited were apparently alleging that there was an agreement of some sort existing between the appellants and themselves, and, in addition, litigation was pending in the Supreme Court of South Australia between the Just Brothers and Turners Limited as plaintiffs and the appellant as defendant. (at p440)
4. To deal with this situation the agreement of 16th February 1934 was made. It provided for the four essential matters, the purchase of the Just Brothers' land by the appellant, the termination of Turners Limited's lease, the rescission of the agreement alleged by that company to exist, and the discontinuance of the pending litigation. Its provisions are material in so far only as they deal with the first of these matters. The vendors were to execute forthwith a registrable transfer of their land to the appellant and deposit it with a bank to be held in escrow until the completion of three shops, with a basement beneath them, on the corner of King William and Hindley Streets, being part of the proposed new building. Upon such completion, the transfer and certificate of the title were to be delivered to the appellant for registration, and the appellant was to deliver to the vendors contemporaneously "a rent charge over the rents of the said shops and basement" in an agreed form. The appellant was to commence forthwith and complete with all reasonable speed the new building, which was referred to as being depicted and described in certain plans, elevations, sections and specifications. It was to use its best endeavours to let the three shops and basement and to collect the rents of them, and during the period of fifty years from 1st January 1935 it was to pay to the vendors an amount equal to ninety per centum of all the rents "as and when received" from tenants of these shops and basement. It was to have full control of the letting of the shops and basement, but no lease for longer than five years should be granted without the consent in writing of the vendors. (at p440)
5. These provisions were duly carried into effect, and in due course the appellant gave the so-called rent charge to the vendors. It was in the form of a registered encumbrance under the Real Property Act 1886-1929 (S.A.), and it was expressed as encumbering the land occupied by the three shops and basement with a rent charge for the amount, and to be raised and paid, as therein set forth. It provided that "the said rent charge" should be for a period of fifty years from 1st January 1935 and should be for an amount equal to ninety per centum of the whole of the amount of rent to be received by or on behalf of the appellant in each year during the said period in respect of the three shops and basement. The amount was to be paid to the chargees on the first day of every month, the first of such payments "if any rents have then been received" to be made on 1st February 1935. Other provisions corresponded substantially with the agreement of sale. (at p441)
6. The building having been erected, a proportion of it, which has been agreed at ninety-three per centum of the whole, was let to tenants during the accounting period now in question, and the remaining seven per centum was occupied by the appellant itself. In that period the rents received by the appellant in respect of the three shops and basement amounted to 1,314 pounds and the appellant duly paid to the vendors ninety per centum of that sum, viz., 1,183 pounds. In its income tax return, the appellant included the 1,314 pounds in its assessable income, and claimed as an allowable deduction ninety-three per centum of the 1,183 pounds, viz., 1,100 pounds. It is the last-mentioned sum which is the subject of the question asked in the case. (at p441)
7. It is incontestable on the facts before us that the appellant acquired the Just Brothers' land for the purpose of retaining it as part of a fixed capital asset, producing rents and providing facilities for the conduct of its life assurance business. The court was invited by counsel for the commissioner to hold that this is enough to impart a capital nature to every payment made by the appellant to the Just Brothers in performance of the obligation which formed the consideration for the purchase. A payment for the purchase of an asset acquired for a capital purpose, it was said, must necessarily be an outgoing on capital account. It is unnecessary to decide whether this proposition is universally true for I am satisfied that on the facts of this particular case the payment under appeal is an outgoing of a capital nature within the meaning of s. 51 (1) of the Income Tax Assessment Act. The payment represents one of a series of annual payments which the appellant agreed to make to the Just Brothers for the acquisition of their land. In Just v. Commissioner of Taxation (1949) ALR 438 , Webb J. held that the sums received by the Just Brothers from the appellant each year formed part of their assessable income. No doubt this decision was correct. (at p441)
8. That the sale of a capital asset may result in the seller receiving either capital or income has long been clearly established. The classic statement on the subject in the judgment of Rowlatt J. in Jones v. Commissioners of Inland Revenue (1920) 1 KB 711, at pp 714-715 , need not be repeated here; it was quoted with approval and applied by this Court in Egerton-Warburton v. Deputy Federal Commissioner of Taxation [1934] HCA 40; (1934) 51 CLR 568, at p 572 . In the simple case of a sale of an asset for a lump sum price, the character of the asset naturally determines the character of the receipt; but where the sale produces a series of payments it is a question to be decided upon an examination of the particular transaction whether those amounts come to the seller as instalments of an agreed principal sum constituting the price, or as income the right to which has been acquired by the sale. In the former case, the character of the asset sold must again be the decisive consideration, for parts of a principal sum must have the same nature as the sum itself would possess if paid in one amount. In the latter case, however, the payments received have the intrinsic character of income notwithstanding that the right to receive them has been acquired as the consideration for the disposal of a capital asset. Romer L.J. put the matter in these words in Inland Revenue Commissioners v. Ramsay (1936) 154 LT 141 : - "If a man has some property which he wishes to sell on terms which will result in his receiving for the next twenty years an annual sum of 500 pounds, he can do it in either of two methods. He can either sell his property in consideration of a payment by the purchaser to him of an annuity of 500 pounds for the next twenty years, or he can sell his property to the purchaser for 10,000 pounds, the 10,000 pounds to be paid by equal instalments of 500 pounds over the next twenty years. If he adopts the former of the two methods, then the sums of 500 pounds received by him each year are exigible to income tax. If he adopts the second method, then the sums of 500 pounds received by him in each year are not liable to income tax, and they do not become liable to income tax by it being said that in substance the transaction is the same as though he had sold for an annuity. The vendor has the power of choosing which of the two methods he will adopt, and he can adopt the second method if he thinks fit, for the purpose of avoiding having to pay income tax on the 500 pounds a year. The question which method has been adopted must be a question of the proper construction to be placed upon the documents by which the transaction is carried out" (1936) 154 LT, at p 147 . (at p442)
9. But it does not follow that the converse proposition is also true - that is to say it does not follow that, because the payments are assessable income of the seller, they are outgoings which qualify as allowable deductions for the purposes of s. 51 (1). This sub-section has two limbs the meaning of which has been discussed in Ronpibon Tin (N.L.) v. Federal Commissioner of Taxation [1949] HCA 15; (1949) 78 CLR 47, at pp 55-57 ; Federal Commissioner of Taxation v. Green [1950] HCA 20; (1950) 81 CLR 313 ; Broken Hill Theatres Pty. Ltd. v. Federal Commissioner of Taxation [1952] HCA 75; (1952) 85 CLR 423, at pp 428-429 , and particularly in the first of these cases. There can be no doubt that the payments which the appellant agreed to make to the Just Brothers for fifty years are payments which fall within both limbs of s. 51 (1) if they are not of a capital nature. The rents which the appellant receives from the portion of the building which is let are part of its assessable income from property and the appellant was only able to erect the building and let this portion because it was able to acquire the land on which part of the building stands from the Just Brothers. The payments it has agreed to make to the Just Brothers can therefore be said to be incurred in gaining or producing the assessable income in the sense that the occasion of the outgoing is to be found in what is productive of the assessable income. The payments are also outgoings within the second limb because they are in this sense appropriate or adapted for producing assessable income. But all this could be said of many payments which are clearly of a capital nature. It could be said of all instalments of purchase money paid for the purchase of a fixed capital asset which the purchaser acquired and used to produce assessable income. No assistance in solving the present problem is really derived from the English cases which were cited to us relating to the right of a payer of an annuity or other annual payment to deduct income tax from the annuity or annual payment before making the payment to the payee and retain the deduction for himself, or to deduct such payment from his total income for the purposes of super-tax or surtax. This is because the annuities or other annual payments are in effect the profits of the recipient who bears the tax, and they are not also to be treated as profits of the person paying them. If no tax can be deducted on behalf of the recipient, the payments cannot be treated as profits of the recipient and must be treated as paid out of the profits of the person paying them who is therefore to be taxed thereon: Sugden v. Leeds Corporation (1914) AC 483, at pp 490-491 ; Earl Howe v. Commissioners of Inland Revenue (1919) 2 KB 336, at p 352 ; Allchin v. Coulthard (1943) AC 607, at p 619 . Under Schedule D Case 1 the tax is computed on the full amount of the balance of the profits or gains. Rule 1 provides that the tax shall be charged without any other deduction than is by the Act allowed. Rule 3 provides that in computing the amount of the profits or gains to be charged, no sum shall be deducted in respect of (a) any disbursements or expenses, not being money wholly and exclusively laid out or expended for the purposes of the trade, profession, employment, or vocation; or (1905) 92 LT 682 any annual interest, or any annuity, or other annual payment payable out of the profits or gains. In Delage v. Nugget Polish Co. Ltd. (1905) 92 LT 682 , by an agreement between the plaintiffs and the defendants, the defendants acquired the exclusive right of selling and manufacturing articles by a secret process and agreed to pay to the plaintiffs for forty years a sum equal to eight per cent of the amount of the gross receipts received by them on the sale of these articles. The question at issue was whether the defendants could deduct income tax from the sums payable to the plaintiffs under the agreement. Phillimore J., as he then was, decided that they could. He held that these payments were annuities or annual sums payable out of the profits or gains brought into charge and were income in the hands of the recipients. Accordingly the defendants could deduct the income tax payable on these sums. But his Lordship also considered the character of the payments as outgoings and held they were of a capital nature. He said: "In the year 1903, which is the year in question in this case, the defendants made a very large sum of money in the form of gross takings, and they made also, as is agreed between the parties, a considerable sum of money in the form of net profits larger than 8 per cent. of the gross takings. They were compelled by the Crown, and as it seems to me rightly compelled by the Crown, to pay on their net profits without deducting the sum of money which they had to pay away as the 8 per cent. Rightly were they so compelled because that sum of money was at any rate as between the Crown and the taxpayer to be viewed as no deduction from profits, but as part payment in the way of capital expenditure for the article originally bought, out of which they made their profit" (1905) 92 LT, at p 683 . (at p444)
10. A similar point arose in Tata Hydro-Electric Agencies Ltd., Bombay v. Commissioner of Income Tax, Bombay Presidency and Aden (1937) AC 685 . There the appellant company, which carried on the business of managing agents of A. company, had acquired the agency from B. company under an assignment whereby B. company transferred to the appellants their whole rights and interest as agents of A. company, subject, however, to the obligations of B. company to pay to both D. and E. companies twelve and one-half per cent of the commission earned by B. company under their agency agreement with A. company. The question at issue was whether this twenty-five per cent commission was expenditure incurred "solely for the purpose of earning . . . profits or gains" within the meaning of s. 10 (2) (ix) of the Income-tax Act, 1922 (India), so as to entitle them to deduct it in computing their profits or gains for tax purposes. It was contended by counsel for the Crown that the obligation to make the payments in question was taken over by the appellants as part of the transaction whereby they acquired the agency business and the payments were therefore made not for the purpose of earning profits in the conduct of the agency business but in fulfilment of the terms on which they purchased the business. Their Lordships upheld this contention. They said: "In short, the obligation to make these payments was undertaken by the appellants in consideration of their acquisition of the right and opportunity to earn profits, that is, of the right to conduct the business, and not for the purpose of producing profits in the conduct of the business" (1937) AC, at p 695 . (at p445)
11. This is, it would seem, another way of saying that the expenditure was of a capital nature. It is impossible to distinguish the facts of the present case from those in Delage's Case (1905) 92 LT 682 and the Tata Case (1937) AC 685 . The application of the principles laid down in these decisions indicates that the present expenditure is of a capital nature. If we apply the principles stated by Dixon J., as he then was, in Sun Newspapers Ltd. v. Federal Commissioner of Taxation; Associated Newspapers Ltd. v. Federal Commissioner of Taxation [1938] HCA 73; (1938) 61 CLR 337 , the same result follows: He said: - "The distinction between expenditure and outgoings on revenue account and on capital account corresponds with the distinction between the business entity, structure, or organization set up or established for the earning of profit and the process by which such an organization operates to obtain regular returns by means of regular outlay, the difference between the outlay and returns representing profit or loss" (1938) 61 CLR, at p 359 . (at p445)
12. The only authority cited to us that may appear at first sight to support the appellant's case is Egerton-Warburton v. Deputy Federal Commissioner of Taxation [1934] HCA 40; (1934) 51 CLR 568 . There the appellants were a father and two sons. The father had been the owner of land upon which farming and orcharding were carried on. His two sons formed a partnership to take over the enterprise. The father entered into an agreement with them in which he was described as the vendor and they were described as the purchasers. In the joint judgment of Rich, Dixon and McTiernan JJ. it is said: - "He (the father) agreed to sell to them, on a walk-in walk-out basis, the land together with all stock, chattels and effects thereon. Briefly stated, the consideration for the sale was as follows. The sons were required to pay (a) an annuity to the father during his life of 1,200 pounds by quarterly payments; (b) after his death an annuity to his widow of 1,000 pounds by quarterly payments; (c) after the death of both the father and his widow, the sum of 10,000 pounds to his three daughters and the children of a deceased daughter in such shares and upon such terms as he might by deed or will appoint, and, in default of appointment, in shares of one quarter to each of the three daughters, and one quarter to the children of the deceased daughter" (1934) 51 CLR, at p 571 . (at p446)
13. It was held that the annuity paid by the sons to the father formed part of his assessable income. It was also held that the sons were entitled to deduct the payment from their assessable income as representing money laid out in the production of that income. It is with the views expressed in the joint reasons with respect to this deduction that we are here concerned. The question arose under ss. 23 (1) (a) and 25 (e) of the Income Tax Assessment Act 1922-1933. The first of these provisions authorized the deduction from the assessable income of all outgoings (not being in the nature of outgoings of capital) actually incurred in gaining or producing the assessable income. Section 25 (e) forbad the deduction of money not wholly or exclusively laid out for the production of assessable income. Their Honours said: - "We do not think the annual payments made by the sons are outgoings of their capital. The payments may properly be considered as made by them on revenue account. But it is another thing to hold that the sums paid are expended wholly or exclusively for the production of assessable income" (1934) 51 CLR, at pp 575-576 . (at p446)
14. Their Honours then proceeded to discuss at some length the question whether the payments were expended wholly or exclusively for the production of assessable income. They said: - "In such a case as the present, the land is a necessary implement for the production of income, and an expenditure, not being an outgoing of capital, which the taxpayer incurs in order to obtain the implement, seems naturally to fall under the description of money laid out for the production of income. So far as the taxpayer is concerned it is an expenditure incurred to create his assessable income" (1934) 51 CLR, at p 580 . (at p446)
15. The only portion of this reasoning which applies to the present problem is the statement (1934) 51 CLR, at p 575 that the annual payments made by the sons might properly be considered as made by them on revenue account. After that the whole of the reasoning is directed to the question whether the expenditure was actually incurred in gaining or producing the assessable income. As I have already said, if this was the only question, the payments which the appellant agreed to make to the Just Brothers would qualify as deductions. But the crucial question is whether the payments are of a capital nature. On this question the opinion expressed in the Egerton-Warburton Case [1934] HCA 40; (1934) 51 CLR 568 that the payments made by the sons to the father were made on revenue account would seem to depend on the particular facts of the case. Weight must be given to the statement (1934) 51 CLR, at p 574 that the transaction bore all the marks of a family settlement. Under the agreement the father reserved the right to use and occupy a dwelling house upon the land. The sons agreed upon the completion of the purchase to execute a mortgage over the land to secure the payment of the annuity and of the sum of 10,000 pounds. So the annuities and the sum of 10,000 pounds were charged on the land which it was necessary for the sons to occupy in order to carry on their business. They could not complete the payment of the purchase money until their father and mother had died and the post mortem distribution of the 10,000 pounds had been made. In these circumstances their Honours evidently considered that the annuities, being charged on the land and payable during the lives of the father and mother, were in the nature of rents which the sons had to pay during this period in order to occupy the land and carry on their business. So considered the payments were not outgoings of capital and qualified as deductions under ss. 23 (1) (a) and 25 (e) of the Income Tax Assessment Act 1922-1933. (at p447)
16. In the present case the payments to the Just Brothers are dependent upon the appellant receiving rent for the three shops and basement. The Just Brothers are to receive amounts equal to ninety per cent of the whole amount of this rent. It may be that, as a matter of accountancy, the appellant would debit these payments to revenue account. But this does not necessarily make the outgoings of a revenue nature. In Associated Portland Cement Manufacturers Ltd. v. Inland Revenue Commissioners; Associated Portland Cement Manufacturers Ltd. v. Kerr (1946) 1 All ER 68 , Lord Greene M.R. said: "it must never be forgotten than an asset which may properly, and quite correctly, appear, and only appear, in the balance sheet as an asset may be acquired out of revenue" (1946) 1 All ER, at p 70 . The payments to the Just Brothers are recurring payments but recurrence of a payment does not mean that it is necessarily of a revenue and not of a capital nature: the Sun Newspapers Case [1938] HCA 73; (1938) 61 CLR 337, at p 362 ; Grant v. Commissioner of Taxes (1948) NZLR 871, at p 880 . In Southwell v. Savill Brothers Ltd. (1901) 2 KB 349 and Oswald v. Magistrates of Kirkcaldy (1919) SC 147 , the payments were of indefinite amounts and for indefinite periods but they were held to be of a capital nature. The present case seems to be one in which it is proper to apply the test laid down by Lord Clyde in Robert Addie & Sons' Collieries Ltd. v. Commissioners of Inland Revenue (1924) SC 231 : Are the sums in question part of the trader's working expenses, are they expenditure laid out as part of the process of profit-earning; or, on the other hand, are they capital outlays, are they expenditure necessary for the acquisition of property or of rights of a permanent character the possession of which is a condition of carrying on the trade at all? (1924) SC, at p 235 . The acquisition of land is an acquisition of property of the most permanent character and the acquisition of the Just Brothers' land was a condition of erecting the new building and carrying on there the business of letting shops and offices and other space. (at p448)
17. For these reasons the question asked in the case stated should be answered in the negative. (at p448)
WEBB J. The payments made by the appellant taxpayer to the Justs are required by their agreement to be measured by the rents from the three shops and basement situate on land of the appellant not acquired from the Justs, but still part of a building erected on both the appellant's and the Justs' land. These payments represent the consideration for the land acquired from the Justs, and the only purpose of the payments is to provide that consideration. They are not to any extent designed and they do not tend to make the shops and basement rent-producing. They have, and can have, no effect on the amount of rent from the shops and basement, or indeed from any other part of the building, as would, say, expenditure on repairs to the building. They cannot then be said to be "outgoings actually incurred in gaining or producing the assessable income". Taking the most favourable view for the appellant the payments are in substance part of the revenue from the building; but they are also expenditure for the acquisition of a capital asset, i.e. the Justs' land, and not expenditure in the working of that or any other asset with a view to making it income-producing, although this asset is to be used for rent-production. (at p449)
2. But deductions under s. 51 (1) of the Income Tax Assessment Act 1936-1943 also include "outgoings . . . necessarily incurred in carrying on a business for the purpose of gaining or producing such income". I confess I cannot see how this expenditure could be an outgoing under this part of s. 51 (1) and not also be at the same time an outgoing actually incurred in gaining or producing the assessable income. But in any case s. 51 (1) excepts all outgoings of a capital nature, and it seems to me that the payments to the Justs are necessarily that. It is beyond question expenditure to acquire a capital asset, and, in my opinion, it is nothing else. It would be remarkable if the payments could at the same time be the consideration for the purchase of a capital asset and expenditure for the working of that or any other capital asset. Egerton-Warburton v. Deputy Federal Commissioner of Taxation [1934] HCA 40; (1934) 51 CLR 568 , is not, I think, a decision that the same payments might serve both purposes. Although the written arrangement in that case referred to the arrangement as a purchase, the court pointed out that the transaction bore "all the marks of a family settlement" (1934) 51 CLR, at p 574 , and that there was nothing inconsistent with the supposition that the transaction might have resulted in an immediate benefit to the sons in the nature of a gift. The Court thought then that it was impossible to treat the annuity payable to the sons as mere instalments of purchase money. It will be observed that the court appreciated the difficulty of treating the annuity as purchase money and at the same time as outgoings in producing income. (at p449)
3. The fact that these payments to the Justs represented assessable income to them, as I held in Just v. Commissioner of Taxation (1949) ALR 438 has, I think, no bearing on the question whether such payments are outgoings of the appellant within s. 51 (1). The scope of s. 51 (1) was not considered in that case, and, in my opinion, was not relevant in any event. (at p449)
4. I would answer the question in the case: "No". (at p449)
FULLAGAR J. This is a case stated for the Full Court in an appeal by the taxpayer company from a decision of the board of review. The question raised is whether the company is entitled to deduct from its assessable income of the accounting period ended 31st December 1942 a sum of 1,100 pounds paid by it during the accounting period to William Just and Herbert Fritz Just, whom it will be convenient to refer to as Just Brothers. The commissioner by an amended assessment disallowed the deduction, and the board of review by a majority upheld the amended assessment. (at p450)
2. The sum of 1,100 pounds in question was paid in pursuance of a contract dated 16th February 1934, the parties to which were the appellant company, Just Brothers, and a company named Turners Ltd. The circumstances in which this contract was made may be very briefly stated. The appellant company was the owner of a piece of land, on which buildings were erected, at the corner of King William Street and Hindley Street in the city of Adelaide. Just Brothers were the owners of a block of land, on which also a building stood, having a frontage to King William Street and adjoining the company's land. The company desired to acquire the land of Just Brothers, and to erect on the land already owned by it and on that land a large modern building which would include office accommodation for itself and a large number of shops and offices which it proposed to let to tenants carrying on businesses or professions. Turners Ltd. was in occupation of a shop on the company's land under a lease from the company, and the company desired to obtain possession of that shop. The contract provided that the lease should be surrendered and possession of the shop given by Turners Ltd. to the company. The position of Turners Ltd. does not affect in any way the question which now arises, and it need not be further considered. (at p450)
3. It would appear from a letter written in January 1945 by the public officer of the company to the commissioner that in October 1933 Just Brothers had expressed their willingness to transfer their land to the company, the proposal at that time being that the company should grant to Just Brothers a lease for fifty years of certain shops and a basement in the proposed new building at a nominal rent of 1 pound per annum. This proposal was abandoned because Just Brothers decided to discontinue their business, and the terms ultimately agreed upon were embodied in the contract of 16th February 1934. (at p450)
4. The essence of the contract of 16th February 1934, so far as the company and Just Brothers are concerned, is that Just Brothers agree to transfer their land to the company in consideration of a promise by the company to pay to them for a period of fifty years from 1st January 1935 or from the completion of the building, whichever is the later, an amount equal to ninety per cent of all rents as and when received from lessees or tenants of three shops and a basement in the new building. The document, of necessity, contains a number of subsidiary provisions. It provides for the execution by Just Brothers forthwith of a transfer of their land to the company. The transfer is to be held in escrow with the certificate of title until the completion of the building, when it is to be delivered to the company for registration. Possession is to be given forthwith, outgoings being adjusted as at 30th June 1934. The company undertakes to commence forthwith, and to complete with all reasonable speed, the erection of a building in accordance with certain plans and specifications, which are identified. The building is to contain (inter alia) three shops and a basement situated on the corner of King William Street and Hindley Street, the shops having a frontage of thirty-seven feet to the former street and eighteen feet six inches to the latter street. The company is to use its best endeavours to let the shops and basement to reputable tenants at the best rental obtainable, and to collect all rents of the shops and basement, but it is not to be responsible for non-payment of rent by any tenant. It is to render to Just Brothers at the end of each month an account of all rents collected, and at the same time to pay to Just Brothers the amount shown to be due to them without any deduction. There are one or two other stipulations of minor importance, including a provision for prompt restoration in the event of total or partial destruction by fire of the shops or basement. The provisions which I have mentioned were, of course, designed to ensure that the premises whose rental was to provide the measure of the company's obligation should come into existence and be let as advantageously as possible, and to prescribe the time and manner of the performance of the company's obligation. But the whole essence and substance of the contract is, as I have said, that the company is to acquire the land of Just Brothers in consideration of a series of payments to Just Brothers extending over a period of fifty years. Two points may be noticed at this stage, though I do not know that I attach vital importance to either. In the first place, the shops and basement mentioned in the contract were to be erected not on the land to be purchased from Just Brothers but on part of the land originally owned by the company. In the second place, there is no assignment of the rentals of the shops and basement or of any part thereof, or even a promise to pay those rentals or a part thereof to Just Brothers. The position is simply that the rents actually received by the company in respect of the shops and basement provide the measure of the amounts which are to be paid monthly by the company. (at p451)
5. If the matter had rested with the contract which has just been considered, the company's obligation to pay money would have been unsecured, though not, one would suppose, in any serious peril of non-performance. But on the same day the company executed a document, which is described as a "rent charge", and which purported to give to Just Brothers security over the land on which the shops and basement were to be constructed for due payment of the moneys which the company was contracting to pay. This document recites (what is, I think, clearly correct) that Just Brothers have agreed to transfer their land to the company in consideration of the payment by the company to them of a sum equal to ninety per cent of the whole amount of the rents received by the company during the period of fifty years in respect of the three shops and the basement. The document then declares that the company "doth hereby encumber the said land" (i.e. the land on which the shops and basement are to be constructed) "for the benefit of the chargees" (i.e. Just Brothers) "as tenants in common with a rent charge to be issuing and payable out of the three shops and basement on the said land". The "said rent charge" is to be "for a period of fifty years from the 1st January 1935" and is to be "for an amount equal to ninety per cent of the whole amount of the rent to be received . . . in each year during the said period of fifty years in respect of the three shops and basement". (at p452)
6. Nothing turns, so far as I can see, on the precise effect at law or in equity of the so-called rent charge. The building contemplated, including the three shops and basement, was in due course erected by the company, and the transfer of Just Brothers' land to the company and the "rent charge" over the land on which the shops and basement stood were registered under the Real Property Act 1886-1929 (S.A.). Presumably the remedies given by that Act to a "mortgagee or encumbrancee" would be available to Just Brothers in the event of default by the company. But all that seems to me to matter for present purposes is that the moneys which the company has undertaken to pay are simply the price of the land which the company is purchasing from Just Brothers. This is made very clear by both documents, and whether the indebetdness of the company, as it accrues from time to time, is secured or unsecured seems irrelevant for present purposes. (at p452)
7. For the purposes of income taxation, such payments as the company engaged to make in this case have commonly a double aspect. In Australia the form which the questions take is conditioned by the fact that the tax is imposed on assessable income less specific categories of allowable deductions. The first question which is raised is whether the amounts paid constitute, as and when received, assessable income in the hands of the payee. The second is whether, for the purpose of ascertaining the taxable income of the payor, the amounts paid are allowable deductions from assessable income. Although it will not seldom happen that payments which are assessable income of the payee will be allowable deductions from the assessable income of the payor, this is by no means necessarily so, and the truth is that different considerations govern the two questions. In the first case, the question will generally be simply whether the receipt in question is of an income nature or of a capital nature - a constantly recurring and often very difficult question, which depends on general principles which have been laid down by the courts. In the second case, the question will generally be whether the case falls within s. 51 of the Act, which, so far as material, allows the deduction of all losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income except to the extent to which they are losses or outgoings of capital or of a capital nature. The issue of the "capital nature" of the payments is seen to be possibly relevant to both questions, but the considerations which must guide one to an answer are themselves different in the two cases. (at p453)
8. The transaction between the company and Just Brothers came in its first aspect before Webb J. on appeals by Just Brothers against the inclusion in their respective assessable incomes of amounts received from the company. Webb J. held that those amounts constituted assessable income in their hands: Just v. Commissioner of Taxation (1949) ALR 438 . The correctness of this decision is in no way in issue in the present case. The principles applicable in such a case as Just's Case (1949) ALR 438 have been considered notably in Foley v. Fletcher [1858] EngR 1107; (1858) 3 H & N 769 (157 ER 678) ; Secretary of State in Council of India v. Scoble (1903) AC 299 ; Chadwick v. Pearl Life Insurance Co. (1905) 2 KB 507 ; Jones v. Commissioners of Inland Revenue (1920) 1 KB 711 and Egerton-Warburton v. Deputy Federal Commissioner of Taxation [1934] HCA 40; (1934) 51 CLR 568 : see also Dott v. Brown (1936) 1 All ER 543 (noting the observations of Scott L.J. on what was said by Walton J. in Chadwick's Case (1905) 2 KB 507 ) and cf. Atkinson v. Federal Commissioner of Taxation [1951] HCA 64; (1951) 84 CLR 298 . The considerations which led Webb J. to his conclusion may perhaps be summarized as follows. The payments were periodical and extended over a long period of years. They were uncertain in amount; they depended on the amounts received by the company from time to time by way of rent of certain premises: those rents would almost certainly vary to some extent over the years, there being no rent-controlling legislation in 1934: it was not impossible that the premises or a part thereof might be unoccupied for periods: in the case of damage by fire, no rent or a reduced rent might be receivable by the company. From the point of view of Just Brothers, the recipients, the analogy is to a sale of land for an annuity (which is income in the hands of the payee), not to a sale of land for a fixed sum payable by instalments (which are capital). (at p454)
9. It is, however, the second aspect of the transaction of 1934 that is material for present purposes, and the present question is whether the monthly payments to Just Brothers are allowable deductions from the assessable income of the company. Considerations which are relevant on the other aspect of that transaction appear to me to be irrelevant here. For it is incontestable here that the moneys are paid in order to acquire a capital asset. The documents make it quite clear that these payments constitute the price payable on a purchase of land, and that appears to me to be the end of the matter. It does not matter how they are calculated, or how they are payable, or when they are payable, or whether they may for a period cease to be payable. If they are paid as parts of the purchase price of an asset forming part of the fixed capital of the company, they are outgoings of capital or of a capital nature. It does not indeed seem to me to be possible to say that they are incurred in the relevant sense in gaining or producing assessable income or in carrying on a business - any more than payment of a lump sum would have been so incurred if the purchase price had been a lump sum payable on transfer. The questions which commonly arise in this type of case are (1) What is the money really paid for? - and (2) Is what it is really paid for, in truth and in substance, a capital asset? Examples could, of course, be multiplied. One example of a case which turned on the answer to the first of these questions is a case on which the appellant company relied in this case, Ogden v. Medway Cinemas Ltd. (1934) 18 Tax Cas 691 . Whatever may be thought of the decision in that case, it seems to me to have no bearing on the present case. Contrast Commissioners of Inland Revenue v. Adam (1928) SC 738 and Green v. Favourite Cinemas Ltd. (1930) 15 Tax Cas 390 . Another example is Egerton-Warburton v. Deputy Federal Commissioner of Taxation [1934] HCA 40; (1934) 51 CLR 568 , but I will refer specially to this case a little later. An example of a case which turned on the answer to the second of these questions is the recent case in this Court of Broken Hill Theatres Pty. Ltd. v. Federal Commissioner of Taxation [1951] HCA 37; (1952) 85 CLR 423 . The nature of the problem which often presents itself is analysed by Dixon J. in Sun Newspapers Ltd. v. Federal Commissioner of Taxation (1938) 61 CLR 337, at pp 359-361 . In the present case the first question is readily answered by reference to the documents. The money is paid for the land. And, as for the second question, it is obvious that the land is a capital asset. In essence the case is very like Tata Hydro-Electric Agencies Ltd., Bombay v. Commissioner of Income Tax, Bombay Presidency and Aden (1937) AC 685 . In that case the relevant enactment authorized the deduction of expenditure "incurred solely for the purpose of earning profits or gains", but there is nothing in the judgment of Lord Macmillan to suggest that anything turned on the word "solely". Their Lordships were of opinion that the proper question to ask was that propounded by the Lord President (Clyde) in Robert Addie & Sons' Collieries Ltd. v. Commissioners of Inland Revenue (1924) SC 231, at p 235 , "Is it a part of the Company's working expenses; is it expenditure laid out as part of the process of profit earning?" That question is not less appropriate to s. 51 of the Commonwealth Act, and in this case it must clearly, in my opinion, be answered in the negative. (at p455)
10. There are certain English and Scottish cases which do, at first sight, suggest that the same considerations are appropriate whether the question be as to the income character of payments in the hands of the payee or as to the deductibility of those payments from the gross income of the payor. In other words, they suggest that the very considerations which support the decision of Webb J. in Just v. Commissioner of Taxation (1949) ALR 438 , compel an answer in favour of the taxpayer company in the present case. Those cases are, or include, Inland Revenue Commissioners v. Ramsay (1936) 154 LT 141 ; Inland Revenue Commissioners v. Ledgard (1937) 2 All ER 492 ; Commissioners of Inland Revenue v. Hogarth (1941) SC 1 ; Inland Revenue Commissioners v. Mallaby-Deeley; Personal Representatives of Mallaby-Deeley v. Inland Revenue Commissioners (1938) 4 All ER 818 and Executors of Peters, deceased v. Inland Revenue Commissioners (1941) 2 All ER 620 . But, when those cases are properly understood, they have, in my opinion, no relevance to the present case. The key to them is to be found, I think, in the judgment of Greene M.R. (as he then was) in the Mallaby-Deeley Case (1938) 4 All ER 818, at p 822 . Each of them is concerned with liability to surtax under the English statutes. (at p456)
11. Surtax in England is charged only upon an individual's "total income from all sources" as diminished by certain kinds of interest, annuities, and annual payments, from which, under the system of collection "at the source", which is in operation with respect to ordinary income tax (but not with respect to surtax), he is entitled to deduct income tax as against the recipient: Konstam on Law of Income Tax, 12th ed. (1952), par. 331. Thus in Earl Howe v. Commissioners of Inland Revenue (1919) 2 KB 336 , Scrutton L.J. said: "The 'annuities interest and other annual payments' which can be deducted in order to obtain exemption" (i.e., from super-tax, now surtax) "are those from which the claimant can deduct tax on behalf of the recipient" (1919) 2 KB, at p 352 . In each of the cases I have mentioned, an annual payment was alleged by the payor to be deductible in the assessment of his surtax on the ground that it was of such a character that he was entitled to deduct income tax from it as against the payee. Now, the ordinary income tax which a payor is given the right to deduct when making his payment is a tax on the income of the payee, as Scrutton L.J. recognized in the passage above quoted. The amount is recovered by the Crown from the payor by charging the payor with income tax on his own income without making any allowance for the payment, but that is only the means of collection: see the explanation of the system by Viscount Simon in Allchin v. Coulthard (1943) AC 607, at pp 618-619 . Consequently a payment from which the payor is entitled to deduct income tax must be a payment which would be subject to income tax in the hands of the payee if it were paid to him in full: see Earl Howe v. Commissioners of Inland Revenue (1919) 2 KB, at pp 344, 347 , and cf. Watkins v. Commissioners of Inland Revenue (1939) 2 KB 420 . In other words, such a payment must be in his, the payee's, hands, a receipt of an income and not of a capital nature. The point at issue in each of the cases now being discussed was thus simply whether the payment in question was of an income or a capital nature from the point of view of the payee. If, so regarded, it was of an income nature, it was deductible for the purposes of the payor's surtax: if, so regarded, it was of a capital nature, it was not deductible for the purposes of the payor's surtax. Its nature as an outgoing from the point of view of the payor had no relevance to the question of its deductibility, and none of the judgments was directed to that topic. Such cases deal with a position which has no analogy in this country, and they have no bearing on the question now under consideration. This is well illustrated by the case of Commissioners of Inland Revenue v. Duke of Westminster (1936) AC 1 . The object of the Duke's ingenious plan was to reduce his surtax: in Australia the labours of his legal advisers would have produced no result by way of relief from taxation. (at p457)
12. It remains only to refer to the decision of this Court in Egerton-Warburton v. Deputy Federal Commissioner of Taxation [1934] HCA 40; (1934) 51 CLR 568 on which counsel for the taxpayer strongly relied. This was a case of a very exceptional character. The appellants were a father and two sons, and the controversy related to a sum of 659 pounds, which during the year of income was paid by the sons to the father. The transaction in pursuance of which that payment was made is thus summarized in the joint judgment of Rich, Dixon and McTiernan JJ.: "the father was the proprietor of an estate in fee simple in land upon which farming and orcharding was carried on. His two sons formed a partnership for the purpose of carrying on the enterprise. The father entered into an agreement with them in which he was described as the vendor, and they were described as the purchasers. He agreed to sell to them, on a walk-in-walk-out basis, the land together with all stock, chattels and effects thereon. Briefly stated, the consideration for the sale was as follows. The sons were required to pay (a) an annuity to the father during his life of 1,200 pounds by quarterly payments; (b) after his death an annuity to his widow of 1,000 pounds by quarterly payments; (c) after the death of both the father and his widow, the sum of 10,000 pounds to his three daughters and the children of a deceased daughter in such shares and upon such terms as he might by deed or will appoint, and, in default of appointment, in shares of one quarter to each of the three daughters, and one quarter to the children of the deceased daughter. The father reserved under the agreement the right to use and occupy a dwelling-house upon the land. The sons agreed upon the completion of the purchase to execute a mortgage over the land to secure the payment of the annuity and of the sum of 10,000 pounds. In part performance of this obligation, the sons secured the annuity to the father by a registered instrument of charge over the land. In the year of income upon which the assessments are based, the sons paid on account of the father's annuity the sum of 659 pounds already mentioned" (1934) 51 CLR, at pp 571-572 . The commissioner treated the sum of 659 pounds as assessable income of the father, and refused to allow any part of it as a deduction in the assessments of the sons, who had borne the payment in equal shares and claimed that one half was deductible from the assessable income of each. (at p458)
13. The first aspect of the case would appear to create no difficulty. The annuity was held to be income in the hands of the father. The second aspect of the case seems more difficult. The Court decided that one half of the sum in question was deductible from the assessable income of each of the sons. The sum was held, in the first place, not to be an outgoing of capital or of a capital nature, and the Court then went on to hold that it was an expenditure incurred "wholly and exclusively for the production of assessable income", that being the language of the then existing provision which corresponds to the present s. 51. With regard to the first point all that was said by their Honours was: - "We do not think the annual payments made by the sons are outgoings of their capital. The payments may properly be considered as made by them on revenue account" (1934) 51 CLR, at p 575 . (at p458)
14. It is not to be supposed that in this brief passage their Honours intended to convey that, because the money would normally and naturally be paid out of revenue, it could not be an outgoing of a capital nature. As Lord Greene M.R. observed in Associated Portland Cement Manufacturers Ltd. v. Inland Revenue Commissioners; Associated Portland Cement Manufacturers Ltd. v. Kerr (1946) 1 All ER 68 , "Whether or not an item of expenditure is to be regarded as of a revenue or capital nature must in many, and, indeed, in the majority of cases, . . . depend upon the nature of the asset or the right acquired by means of that expenditure. If it is an asset which properly appears as a capital asset in the balance sheet, then that is an end of the matter. But it must never be forgotten that an asset which may properly, and quite correctly, appear, . . . in the balance sheet as an asset may be acquired out of revenue . . . It is, therefore, no sufficient test to say that an asset has been paid for out of revenue" (1946) 1 All ER, at p 70 . In Grant v. Commissioner of Taxes (1948) NZLR 871, at p 882 , O'Leary C.J. seems to have been disposed to think that the decision in the Egerton-Warburton Case (1934) 51 CLR 568 was inconsistent with what was said by the learned Master of the Rolls and also inconsistent with the decisions in the Tata Hydro-Electric Case (1937) AC 685 , and in a South African case of Lambson v. Commissioner for Inland Revenue (1945) 14 SAfr Tax Cas 57 . See also Bern v. Commissioner of Taxes (1950) NZLR 632 . But it seems to me reasonably clear that the correct explanation of the Egerton-Warburton Case [1934] HCA 40; (1934) 51 CLR 568 is that which was suggested by my brother Taylor in the course of argument in the present case. It is simply that in the particular circumstances the annuity was not regarded as part of a purchase price payable by the sons to the father for the land. The nature of the transaction itself had been closely examined by the Court in the course of considering the first aspect of the case, and it was unnecessary, when the second aspect of the case came to be approached, to repeat what had been said. It had been pointed out (1934) 51 CLR, at p 574 that the transaction was not an ordinary business transaction but bore "all the marks of a family settlement". There was nothing to show that the full value of the property transferred was represented by the consideration constituted by the various payments. The sum of 10,000 pounds evidently amounted to a post mortem distribution to children as beneficiaries of the father's property. It may well have been that the effect was to invest the sons with a substantial interest which was not exhausted by the payment of the charges upon it. Seen as being in substance a family settlement, the transaction in spite of its form, could not be treated as meaning that the sons were paying for the land a true price which was represented in part by the annuity payable to the father. It resembled rather a gift of the land to the sons charged during the father's lifetime with an outgoing analogous to interest on a mortgage and charged with a capital sum payable at the father's death. So regarded, the case is not out of line with the New Zealand cases or with the authorities cited by O'Leary C.J. (at p459)
15. No such considerations are present in the case now before us. Here we have a transaction of a purely business nature, in which it may be safely assumed that two parties, bargaining on equal terms, had full regard to the value of the land and the probable value of the consideration. According to the documents the periodical payments are the price for which the land is being bought, and no reason can be suggested for not giving to the documents their full literal effect. The transaction might perhaps have taken a form under which parts of the total payments to be made were, or could be, treated as interest on deferred payments of a price. But it did not take any such form. As matters stand, the total of the payments is simply the total price of the land. (at p459)
16. In my opinion, the question asked by the case stated should be answered: - "No". (at p460)
KITTO J. I am of the same opinion, and I have nothing to add to the reasons stated by my brother Fullagar. (at p460)
TAYLOR J. I also agree with the answer to the question and with the reasons given by Fullagar J. (at p460)
ORDER
Question in the case stated answered: No.Costs of the case stated reserved for the judge disposing of the appeal.
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