Blank v Commissioner of Taxation

[2016] HCATrans 182

[2016] HCATrans 182

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S144 of 2016

B e t w e e n -

VAUGHAN RUDD BLANK

Appellant

and

COMMISSIONER OF TAXATION

Respondent

FRENCH CJ
KIEFEL J
GAGELER J
KEANE J
GORDON J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON WEDNESDAY, 24 AUGUST 2016, AT 10.19 AM

(Continued from 23/8/16)

Copyright in the High Court of Australia

FRENCH CJ:   Yes, Mr Solicitor.

MR GLEESON:   Your Honours, if I could then move to the eligible termination payment part of the claim.

KIEFEL J:   Just before you do, Mr Solicitor, may I ask you just about some evidence in this matter?  A large question here concerns the nature of what was given by the – we have been referred to the 2005 agreement in relation to the PPUs.  One would ordinarily think that that could raise a question about what Swiss law would have regarded as arising under the agreement and how questions of enforceability were approached because we have been talking about rights, vesting, all of those things.  But I see that a large part of – I think it is Professor Nobel’s expert evidence potentially on this topic, looking at the index, was excised.  There is no ruling by the court.  Was this a party decision not to rely upon Swiss law?

MR GLEESON:   I am told the latter, your Honour, namely, certain parts of it were not read, they were not ruled inadmissible as such.  So the result is there is a little bit of Swiss ‑ ‑ ‑

KIEFEL J:   Only in relation to what Article 657 says, I think.

MR GLEESON:   Yes, that is ‑ ‑ ‑

KIEFEL J:   But, insofar as what if any interests or promises – how promises were made could be enforced, how Swiss law approaches it, the parties put the matter before the court on the basis that the court should assume that the relevant law governing the contract is the same as that of Australia.

MR GLEESON:   I think that is largely correct, your Honour.  It is true that in the material that did get in – for instance, volume 3.

KIEFEL J:   The excised parts are taken out so I do not know what Professor Nobel said.

MR GLEESON:   For example, in volume 3 at page 1017, some material was received into evidence.  But it is more directed to what your Honour raised, namely, the scope of the articles rather than the ‑ ‑ ‑

KIEFEL J:   And the nature of the Genussscheine ‑ ‑ ‑

MR GLEESON:   Yes.

KIEFEL J:   ‑ ‑ ‑ and the dividend rights and things like that.

MR GLEESON:   Yes, particularly paragraph 25 on page 1023.

KIEFEL J:   But none of it is directed to the nature of what would arise under the agreements according to Swiss law.

MR GLEESON:   That is so, your Honour.  So essentially by default it is an Australian law approach to a document that would be governed by Swiss law which was partly why we did not want to raise construction arguments here that had not been raised at trial because it may have meant there could have been Swiss law directed to them but there was not.  We may be overly cautious in that but that is why we did it.

GORDON J:   Can I raise one factual matter with you that neither Mr Richmond nor you addressed yesterday and that is the Articles of Association of AG which start at page 514?  Am I right to conclude that what appears at 516 under clause III dealing with bonus papers is dealing with the GS that were issued by AG and that they are the provisions that govern it?

MR GLEESON:   Yes, your Honour is correct.

GORDON J:   Is it the position that the language there used – where it talks about the fact that when the GS “is handed back to the company” it is on the handing back that the “bonus paper gives an entitlement to a cumulative share” – is to be read in the same way, on your construction, as upon restitution under the other articles and provisions?

MR GLEESON:   Yes, your Honour.  Mr Hmelnitsky is desperate to address you on the German version at 506, but the loose English translation of 516 is to the effect your Honour has said.

GORDON J:   Thank you.

MR GLEESON:   Your Honours, if it is then convenient to move to the ETP claim, could I ask you to go to Mr Richmond’s outline so we have some focus on what is the legal argument he is advancing, at paragraphs 8 and 9 of his outline.  He says in paragraph 8:

For a payment to be “in consequence of” the termination of employment, it must follow on from –

the termination – we agree with that much.  He also says it must be:

an effect or result in a causal sense of the termination.

That is where the difference starts to emerge because we would submit that while cause is one way of establishing a consequence of, it does not exhaust the expression.  Then we disagree with the next part that it is a so‑called commonsense March v Stramare causation test and we certainly disagree that it is a search for “an effective or operative cause”.  Now, those terms have not really been unpacked yesterday, but they look very much like a search for a dominant cause or a proximate cause as per the common law of tort, prior to statutory amendment, or as per insurance law.  We certainly disagree that that is the appropriate test.  He then says:

It is not sufficient that the payment would not have been made but for termination of employment -

We would submit that where the payment satisfies a “but for” test in the sense that the termination is both the occasion of the payment and a condition precedent of it, that will be one way of satisfying the statutory language.

He then refers to some cases, of which I will come to some, and his proposition seems to be in two areas, firstly that the cases on similar statutory provisions support his contention of law.  They do not.  Secondly, he seeks to extrapolate from cases in other areas of law and we would submit those cases do not provide guidance on the present statute.

In terms of paragraph 9, he asserts termination “was not an effective or operative cause”.  We submit that is not the question.  He then says termination was not necessary to generate the receipt.  We dispute that.  It was essential to generate the receipt.  It was the condition precedent to be able to issue the – to make restitution, to make the claim and get payment.  He says it was not sufficient.  It was certainly one of a set of sufficient conditions to generate the receipt of payments.

FRENCH CJ:   You mean one of a sufficient set of conditions?

MR GLEESON:   Yes, sorry, your Honour, yes, one of a set of sufficient conditions.  He goes on to say it was:

merely an occasion which provided the appellant with the opportunity to realise the benefits earlier granted –

We would submit it was not only the occasion, but it was a condition precedent to making the claim and receiving the benefit, and that is enough.  Your Honours, in terms of the cases, could I ask the Court to go to Reseck v Federal Commissioner of Taxation (1975) 133 CLR 45? The language of the then section 26(d) is relevantly the same as the current provisions. It speaks of an amount:

paid in a lump sum in consequence of retirement from, or the termination of, any office or employment -

The discussion of Justice Gibbs at page 51 includes at about point 3 the statement:

Within the ordinary meaning of the words a sum is paid in consequence of the termination of employment when the payment follows as an effect or result of the termination. 

What his Honour means by “effect or result” is then expanded in the rest of that paragraph.  He rejects a search for the main or the dominant purpose, which appears to be very much Mr Richmond’s effective or operative cause, and he observes that, in many cases, the payment will be in consequence of a range of matters.  So, retiring allowance would be in consequence of both past service and retirement.  That comes within the language.  In many cases, it could not be said that the retirement rather than the service was the substantial cause or that the former cause predominated over the latter.  We would submit Justice Gibbs is rejecting the appellant’s approach.  A little further down he says:

In the present case the allowance was paid in consequence of –

three circumstances, the first was:

the fact that the taxpayer’s service had been satisfactory –

the second was:

the industrial agreements provided for the payment –

and the third was it was:

in consequence of the termination –

and that was enough to satisfy the language.  So, we would submit that Mr Richmond’s proposition is directly contradicted by authority in this Court, and when Justice Jacobs discussed the same matter at page 56 at about point 3 he rejected the argument that it is a search for “the dominant cause”.  He then said in a sentence which has caused some discussion later:

A consequence in this context is not the same as a result.  It does not import causation but rather a “following on”.

Now, the other case that is critical, which I do not think you were taken to yesterday, is McIntosh v Federal Commissioner of Taxation (1979) 45 FLR 279. This, we submit, is the key case to consider because the factual circumstances are relatively similar to the present and a very strong Federal Court appellate bench grappled with the observations of Justice Gibbs and Justice Jacobs and provided a rationalisation of them.

The payment was on retirement as an annual pension, which was then commuted to a lump sum.  In Justice Brennan’s judgment at 283, discussing Justice Gibbs in Reseck, his Honour reaches the result in the second full paragraph that if a payment is made to satisfy a payee’s entitlement, as is the case here because of the agreement ‑ ‑ ‑

FRENCH CJ:   I am sorry; some of us are working off an ALR.  Is this the paragraph beginning “It was argued that”?  Or is it a quote from Reseck at page 559 of the ALR?

MR GLEESON:   In the ALR, it is page 560.

FRENCH CJ:   Thank you.

MR GLEESON:   The first paragraph quotes Justice Gibbs.  Then, his Honour says – this is Justice Brennan now:

To say that a payment “follows as an effect or result of the termination” imports causation as the relevant nexus . . . but it is clear that termination need not be the dominant cause of the payment.

He then refers to Justice Jacobs.  Then the paragraph I wish to come to is near the foot of 560 of the ALR, the middle of 283 of the Federal Law Reports, to this effect:

It may not be appropriate to speak of conditions if a payment is made voluntarily, but if a payment is made to satisfy a payee’s entitlement, the phrase “in consequence of retirement” requires that the retirement be the occasion of, and a condition of, entitlement to the payment.  A sufficient causal nexus between the payment and the retirement is thus established.

So, that is not an exhaustive statement of the statutory concept but it is an illustration of something which falls within it, and it is correct and it covers our case.

FRENCH CJ:   What do the words “the occasion of” add to the proposition that retirement is a condition of?

MR GLEESON:   The element of “condition of” makes more specific the concept of “occasion”.  If it is a condition, it will also be an occasion, but it is requiring a little more than a mere occasion.  But, where the payment is made under legal obligation – provided it is a condition of entitlement that there be retirement or termination – on Justice Brennan’s approach, that is a sufficient way to satisfy the test and that is our case on the facts.

KIEFEL J:   The event, I suppose – the occasion is the event which triggers the entitlement.

MR GLEESON:   Yes.

KIEFEL J:   So, it might not be expressed, necessarily, as a condition.

MR GLEESON:   Yes.  His Honour applies that approach at page 561 of the ALR.  So, on that approach, that rationalisation of Justice Jacobs and Justice Gibbs, our case falls within the statute.  Then, next if I could go to Justice Toohey which is 287 FLR and the top of 564 ALR, his Honour says, on the facts of that case:

the immediate cause of the payment . . . was the exercise by him of the right to commute –

But:

To say that is not to exclude the notion that the payment was in consequence of the taxpayer’s retirement or that it followed on his retirement.  In my view, the payment followed on the taxpayer’s retirement, the only intervening event being the exercise of the option to commute.  The connection was not simply temporal; retirement was a prerequisite to payment and in that sense there was a “following on” –

That is very similar to Justice Brennan – that one way of satisfying the “following on” or the “in consequence” requirement is to see whether the retirement or the termination was a prerequisite to payment and that is satisfied in the present case.

Finally, Justice Lockhart grappled with the same questions and at 295 of the FLR and at 571, 10 to 15 of the ALR, in discussing Justice Gibbs, Justice Lockhart says:

In my opinion his Honour was saying that the phrase includes the case where retirement or termination is a cause of the payment in question; but he was not excluding from the ambit of the phrase, payments which, although not following as a matter of causation from the termination of employment, nevertheless followed on the termination of employment and had connection therewith.

FRENCH CJ:   It is a bit broader, is it not?

MR GLEESON:   It is and this, we would submit, is perhaps closest to the mark, that the language “in consequence of” is sufficiently broad to cover a case of causation but also to cover a case where there is a temporal connection and there is a sufficient connection in some sense between (a) and (b) to satisfy a following on, and that is what his Honour elaborates further on on that page.  So it is a little broader and we would submit Justice Lockhart is a good guide, but on any of those three approaches the present case satisfies the test.

GAGELER J:   Mr Solicitor, how does your notice of contention point 2 that you are now addressing relate to your notice of contention point 1?  If we were to accept this argument, is there any need to determine whether this was income according to ordinary concepts?  Not so much Myer.  I am sorry; just general concepts.  It is point 1 and also the point in the appeal.

MR GLEESON:   Yes.  If it is an ETP, which originally had been the primary basis of the assessment, the decision of the court below is correct and one does not even need to decide deferred compensation for services rendered or Myer.  So in one sense this is the most obvious way to decide this case.  It is a payment in consequence of termination, but we do not step away from the basis on which the majority has found it below but this is the easiest way home.

Your Honours, the only matters I want to include on the authorities were, if you look at Mr Richmond’s second group of authorities in paragraph 8 – I will not go to them all – but in the passage he took you to from Banque Bruxelles Lambert [1995] QB 375 at 406, apart from the necessary observation that it is a completely different field of discourse ‑ namely ascertaining causation in the context of responsibility for wrongdoing, so one would need to be extremely careful carrying over this material ‑ in the passage at 406 where March v Stramare is cited, and it is said you need to have more than a mere occasion, the example given is the one that I think Professor Hart and Professor Honoré used to give – that if I invite Mr Hmelnitsky and Mr O’Meara to a dinner party at my house and Mr Hmelnitsky assaults Mr O’Meara, within the law of tortious responsibility I did not cause the injury.

Now, there is no difficulty with that proposition if one is doing the sort of causation approach that Professors Hart and Honoré spoke about and that March v Stramare spoke about, but it really has no assistance to offer in

a case like the present and on no view could one regard the termination here as merely some sort of background matter which enabled something quite separate to occur which was the true cause.  So that, we would submit, is of little assistance.

The last case I wanted to go to was Halloran v Minister, a decision of this Court (2006) 229 CLR 545. This is said to be a transferrable approach to similar statutory language. The language is, in fact, different and different in text and context. In paragraph 78 the Court sets out what was section 44(2) of the Stamp Duties Act.  This provided a qualification to the earlier provision referred to at paragraph 69.  But the language of 44(2) is to exclude from “a change in beneficial ownership”, any change “occurring as the consequence” – note the definite article – of one of seven listed events.

In the context of that provision the plurality at paragraph 81 found that it did not fall within item (d) because the change in beneficial ownership was due to the operation of constructive trust and equity upon a set of steps in which consideration was paid.  And the issue or redemption of units was treated as the mere form of the consideration but it was the doctrine of equity which caused the change of beneficial ownership to occur.  Nothing can be translated from that very specific context to the present question.

Mr Richmond also referred to Justice Heydon at paragraph 96 where we do see the language “operative cause” and that perhaps is the high point of this part of his argument.  It is unclear whether Justice Heydon was posing a different test to the plurality, and he acknowledges that in the first sentence of paragraph 97 but, in any event, different statutory language, different context, different purpose and of little assistance in the present case.

Unless your Honours had questions on our argument thus far, I was going to hand over to Mr Hmelnitsky at this point.

FRENCH CJ:   Yes, thank you.  Yes, Mr Hmelnitsky.

MR HMELNITSKY:   Your Honours, the issue that is raised by the first ground of cross‑appeal is as to whether the first two instalments that your Honours have seen were otherwise due and payable during the 2007 year were derived by the appellant because they were taken by reason of section 6‑5(4) of the 1997 Act, which I will come to in a moment, to have been received by him in that year because they were applied or dealt with in any way on his behalf.  It is a point in respect of which we need leave, but before I come to the reasons why the Court, in our submission, ought to grant leave in relation to it, can I just indicate to the Court by reference to the material that the Court has already seen just how it is that the issue arises and specifically what the issue is.  The Court was taken yesterday to some material at the very end of the first volume of the appeal book.

Your Honours may recall the document that appears at page 422.  On the evidence this was a letter and some attachments that were forwarded to the appellant in March 2007, importantly, during the 2007 year.  Your Honours see on page 423 the table that the Solicitor‑General took the Court to showing, in accordance with the terms of the 2005 profit participation agreement, what was due and payable to Mr Blank over the course of the subsequent four years.  Your Honours see there the 20 instalments of profit participation payments that under the terms of the 2005 agreement are due and payable.  Your Honours also see the dates that they become due and payable. 

The reason that there is an issue in relation to the first two of these payments is because of what appears on page 422 which is the covering letter.  What was agreed in March 2007 was that instead of the payments being made to Mr Blank in this way, that is, the way that is set out on page 423, that he would receive different amounts.  He would deal with his withholding tax liability in Switzerland in a different way.  Specifically, in the last bullet point on the letter on page 422, your Honours see exactly what that was and that was that:

Deduction of Swiss withholding tax in the amount of US$30,806,415.70 as agreed with the Swiss Tax Authorities from your first four quarterly instalments -

That had the consequence and, your Honours, this happened, that as each of those first four instalment dates came and went and, critically, for these purposes, “January 31, 2007” and “June 30, 2007”, the amounts that your Honours see there in the table that were otherwise due and payable to the appellant, were not paid.  Instead, what happened in circumstances that I will come to in a moment and explain by reference to the primary judge’s reasons why this was so and how it happened, that amount of US$30 million was paid directly by Glencore to the Swiss authorities on account of the appellant’s entire withholding tax liability over the whole of the 20 payments. 

He then received a refund of some US$20 million directly from the Swiss authorities within a couple of weeks of that because under the Swiss/Australian treaty he was entitled to the protection of that treaty which meant that he was entitled to a refund which he got and there is a finding in relation to that.  That had the consequence that the balance of the payments which were actually received by Mr Blank throughout the balance of the period were not subject to any withholding whatsoever.

Now, that is how the issue arises but the particular issues arises here in relation to the 2007 year because of the terms of section 6‑5(4) of the 1997 Act which, if your Honours have that available – that section which has been in the Act, or something like it has been in the Act for quite some time, provides that:

In working out whether you have derived an amount of ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.

So, the question that is raised on this first ground of cross‑appeal is whether what occurred during the 2007 year in respect of these first two payments is something that has the consequence that the appellant was taken to have derived those first two payments that I identified during the 2007 year.  So, that is the issue and that is the statutory provision that gives rise to particular issue.  As I say, it is a point that requires leave and we have addressed in our written submissions why, in our submission, it is a point that is appropriate for leave, and we have done so at paragraph ‑ ‑ ‑

FRENCH CJ:   You can address us on the leave and the substantive arguments in an integrated way on both matters.

MR HMELNITSKY:   I will do that, thank you, your Honour.  The resolution of the issue, and just to round out the facts in relation to this just a little bit beyond what I have taken the Court to already, the resolution turns on really a couple of key documents.  The first of those is the document that I have just taken your Honours to, which is the letter of March 2007.  The short submission that we make about that letter and what it provides for is that, in our submission, it is squarely within what section 654 of the 1997 Act is directed to because what one sees in the letter of March 2007 is a direction by the appellant and an agreement with the debtor, Glencore, as to what is to be the fate of these funds come “January 31, 2007” and come “June 30, 2007”.

But the findings of the primary judge that the Court needs to have regard to in relation to this point, your Honours see in volume 4 of the court book.  If your Honours would go first to page 1120 of the court book to where it is that the primary judge dealt with what actually happened.  At paragraph 42 your Honours see the finding that “On 31 January 2008” ‑ so now into the following tax year – “GI paid” some USD30 million to the Swiss tax authorities:

in respect of the applicant’s dividend withholding tax liability on his IPP entitlement.

And it is uncontroversial that that is in respect of his entire withholding liability for all payments.  Then:

On or shortly after 10 March 2008, the applicant claimed relief from the FTA under the double taxation agreement between Switzerland and Australia which, relevantly, limited Swiss withholding tax on dividends . . . payable by the applicant to 15%.

That had the consequence – and it is set out in paragraph 44 that:

On 19 May 2008, the applicant received a refund –

of some CHF20 million or AUD20 million from the Swiss tax authorities.  There is then the finding in paragraph 46 as to what the applicant actually received on and after that date.  It is only a finding as to what was received during the years in issue.  There were further payments in later years that are not in issue.  But, if your Honours see that table on page 1121 – it may be difficult to read, your Honours, but the heart of it is this.  Your Honours will see on the left, columns headed “Payment” and “Instalment” and a little further over under “US dollar”, a “Principal” component that is paid. 

Payments 1 to 3 there are blank in the sense that there is no principal component that is actually paid, notwithstanding the entitlement that the appellant had, as I showed your Honours on page 423 of the book.  The $30.8 million in globo Swiss withholding tax amount, your Honours see, is paid to the Swiss authorities on 31 January, 2008 – so, in the year following the year in which he has made an agreement with Glencore that this should happen. 

Then what is paid to the taxpayer, having paid all of his withholding tax liability and, of course, having gotten the refund back from the Swiss authorities in the amount of 20 million, are amounts of instalments in the realm of $8 million per instalment and not the lower amount that was provided for in the original schedule.  The reason they are higher is because he has, by this stage, paid all of his Swiss withholding liability, got the refund and now receives the balance of the instalments without any deduction whatsoever.  That is, in fact, what occurred. 

So if your Honours – I do not think your Honours need to turn it up again – but the table of instalments on page 423 of the appeal book which, on any view, was a statement of his contractual entitlement following termination of employment and delivery of the declaration to Glencore ‑ ‑ ‑

GORDON J:   The difficulty is though, is it not, that the obligation to pay the withholding tax did not arise until the payment was made?  Is that right for Swiss law purposes, i.e. the obligation to, in effect, deal with the money did not arise until the payment was made.

MR HMELNITSKY:   But that is subject to agreement with the Swiss tax authorities which is the very thing that is referred to on page 422.  Whether the liability arose by way of agreement then, or later, what is certain is that by March 2007, when he has reached agreement with Glencore as to how they are to deal with the payments that are otherwise due to him, it is clear that he is doing more than saying “Don’t pay me that amount now, pay me later”, he is saying take the lot of it – take the lot of those first four instalments and devote them to a new purpose, for my benefit, but in a way that discharges you from your obligation to deduct withholding tax from the balance of the payments and which has the benefit to me of discharging the whole of my liability over the next four years. 

So, it is true, and we accept that if that agreement had not been reached then there would have been a withholding liability that arose as each instalment fell due.

GORDON J:   But is that not what the last bullet point says, that is, there would be a deduction from your first four quarterly instalments?

MR HMELNITSKY:   Of the whole amount, that amount of $30 million is an amount that would be the amount of withholding on all 20 payments in the ordinary course and instead of paying his tax that way he is paying it up front.  That is something that is achieved by agreement with Glencore in a way that, on the authorities and I will come to what the Court said about this in Brent in just a moment, but what the appellant was not doing in March 2007 was simply saying to Glencore “Just hold on, don’t pay me those payments yet”.  He was saying - and this is precisely what came to pass – “Take all of those funds that are otherwise due to me between January 2007 and December 31, 2007 and apply them to a new purpose for my benefit” and it is what happened.

The reason that the Commissioner has thus far lost this point is because of something which did not occur in the 2007 year, it is because of something that occurred in the 2008 year.  What occurred in the 2008 year is that Glencore actually paid the funds over to the Swiss tax authorities.  That can be seen from the document that the appellant particularly relies on being the further agreement that was reached between the appellant and Glencore in January 2008.  Your Honours see that starting in the appeal book at page 428.  There is a covering letter:

Please find enclosed a copy of the above mentioned agreement, which has been confirmed by both the Federal Tax Authority and the Tax Authority of the Canton of Zug –

Then there follows the agreement, the English version is at page 433.  What this agreement provides is for what I just showed the Court happened which is that there is a recital in C on page 433 of what the liability would otherwise be but for agreement with the Swiss tax authorities, that is, to withhold an amount each time there is an instalment payment to him.  Then there is an agreement to alter the terms of the schedule of payments under the 2005 Act – I am sorry, the 2005 profit participation agreement to reflect the fact that all of the withholding is being paid up front.  Then there is a new instalment regime which is precisely the one that the primary judge found.  In the course of that, your Honours see the agreement in clause 2 of the terms agreed on page 434 towards the bottom. 

The withholding tax in the total amount of USD 30,806,415.70 will be paid by GI within 30 days after due date as per sect. 1. above to the federal tax authorities using –

that particular exchange rate.  Now, it is that circumstance that the appellant has fastened on and that the courts below have had regard to to say all that happened here was that there was a payment during the 2008 year, nothing that happened in the 2007 year bears on this because all that Mr Blank ever did during the 2007 year was ask his employer to withhold payment from him.  Support for that approach ‑ ‑ ‑

GORDON J:   Is there evidence for that proposition that, other than the letter you have taken us to, he directed that payments not be made to him?

MR HMELNITSKY:   We say that is what the letter is.  It is evidence of not only his direction but his agreement that those payments not be made to him.  In terms, that is what it is and in fact, that is what happened.  We know that that is what happened because the findings in the primary judge’s reasons as to when he received payments, when payments were made, are precisely in accordance with the 2007 agreement.  There were no payments made to him during 2007.  Why?  We say because it was agreed they would not be.  What was the fate of them?  They were paid over the Swiss authorities, as had been agreed in 2007.

GORDON J:   This is a question of the primary judge misconstruing the letter at 422?

MR HMELNITSKY:   The primary judge does not refer to that letter of 422 and neither does any member of the Full Court.  All that is said in relation to this is that there was a mere withholding during the 2007 year.  We say that has come about because of what we would see as an error of construction of section 654, and that appears most clearly from paragraph 95 of the Full Court’s reasons. 

I will not read the whole of paragraph 95 to your Honours.  It is the critical passage in the Full Court’s reasons dealing with the issue.  There are two points there in particular where it is clear that the majority have approached the construction of section 6‑5(4) on the basis that the dealing or application that it refers to is a dealing or application of funds as between in this case Glencore and a third party.  That appears particularly from about line 28, where their Honours said:

An amount representing the two payments in question was not in fact dealt with on the appellant’s behalf until January 2008 . . . The applicant derived the first two instalments as income when, in January 2008, they were paid, with his agreement, to the FTA by GI on his behalf.

Your Honours see in the middle there a reference to Brent v Federal Commissioner of Taxation (1971) 125 CLR 418. Can I ask the Court to go to that? That is in fact the only authority that is cited by any judge below in support of the conclusion reached in relation to this point.

This is a case involving Ms Brent who was or had been the wife of Ronnie Biggs.  Your Honours see in the headnote, on page 418 of the report, the facts, that she essentially sold her story to a news organisation and she did so in consideration of payment to her of:

$10,000 forthwith, $40,000 on the signing by her of the manuscript, and $15,250 thirty days later –

bringing it to a total of $65,250.  But, as your Honours see from the second paragraph of the headnote in the middle there:

The company paid $10,000 at once, but although the remaining $55,250 became due and payable in 1969 it was not paid until July 1970.

So there were two issues in the appeal.  The first is not relevant for present purposes, which is whether or not the amount was capital or income.  The Court held that it was income and so the question arose as to when those amounts had been derived and how much had been derived during the 1970 year.

Before your Honours come to the reasoning specifically in relation to that, can I just draw attention to what the actual evidence was in relation to why the money was not paid during the 1970 year.  It is at page 422 of the report.  At about point 2 of the page Justice Gibbs says:

Although the sum of $40,000 mentioned in cl. 2(b) fell due for payment on or about 30th October 1969 and the further sum of $15,250 fell due on or about 20th November 1969, those sums were not paid on those dates and no explanation was given of this failure to observe the contractual requirements; the appellant’s solicitor simply said in evidence:  “The payments were not made and we did not ask for them.”

That was the evidence in Brent as to how it came about that funds due and payable were not in fact paid to her. Their Honours dealt with the question of principle, starting at page 427. The first basis on which the Commissioner put his case was that Ms Brent was to be taxed on an accruals basis. That was an argument that was rejected. It is the alternative argument that starts at about point 3, on page 430, that is relevant. Your Honours will see, critically, the argument that is put by the Commissioner in support of his case that the whole of the $65,250 should be brought to tax in the 1970 year and also the reasons why the proposition is rejected. There is reference to section 19, which is in material respects the same as section 6‑5(4) of the 1997 Act:

“Income shall be deemed to have been derived by a person although it is not actually paid over to him but is reinvested, accumulated, capitalized, carried to any reserve, sinking fund or insurance fund however designated, or otherwise dealt with on his behalf or as he directs.”

Your Honours then see the submission that the Commissioner made, and his Honour says:

However, the evidence is simply that the appellant did not ask for payment and that the company refrained from making payment.  On the evidence I decline to hold that the company held the balance of the money pursuant to a request by the appellant not to pay it.  However, even if the company had deferred payment at the request of the appellant, s. 19 would not have applied.  Income is not “dealt with”, under s. 19, when all that happens is that a debtor refrains from paying his debt at the request of the borrower.

We obviously would emphasise it is the last part of that reasoning that is of particular significance here.  It is where all that happens is that a debtor refrains from paying his debt at the request of the borrower.

So, the majority, in our submission, were right to say in paragraph 95 of their reasons that more is required than simply that a payment be withheld and we would agree with that.  That is consistent with the way it was approached in Brent by Justice Gibbs.  But, the short point is that – well, there are really two of them.  One, on the evidence, there was more.  There was the withholding – not withholding from payment to the appellant but an agreement that instead of the funds being paid to him in the manner set out in the 2005 agreement and, in accordance with the schedule, but that agreement created that they would be applied to this different purpose.

Having reached that agreement with Glencore as to how the funds would be dealt with, come 31 December and come 30 June of 2007 – come the due dates – that is what would happen and that is what did happen, absent some other agreement and there was no such other agreement at that time or even during the currency of the 2007 year.

What we say is the error of construction that arises in relation to the point is apparent, we say, from the language that appears in paragraph 95 of the majority’s reasons, particularly those passages that I emphasised which is that their Honours saw the application or dealing with funds in order to be of such a kind as to come within the section as being an application or dealing between Glencore and the third party, here the Swiss tax authorities.  And, it was only when that occurred, on their Honours’ reasoning, that section 6‑5(4) had the effect of treating those amounts as having been received and, therefore, derived by the appellant.  In our submission ‑ ‑ ‑

GORDON J:   There are two questions I have for you.  One is we are dealing with a receipts‑based taxpayer ‑ ‑ ‑

MR HMELNITSKY:   Yes.

GORDON J:   ‑ ‑ ‑ and 6‑5(4) extends to include, in relation to those taxpayers, additional amounts in order for them to avoid something.  When you look at, as I understood, the purpose of what was the old section 19 which has arguably been carried over which is set out at the foot of page 430 in Brent, where Justice Gibbs refers to Justice Rich.  Is it that the Commissioner says that that object is a different object now in 6‑5(4) and, if not, what is it that has permitted to be escaped which has brought about an increase in the accrual of his income and the transformation into some other form.

MR HMELNITSKY:   The object here, it is to be borne in mind, is only as between – is only as to year to year because anything that has escaped ‑ can I give your Honour an example, perhaps answer your Honour’s question by reference to an example.  If I sent a fee note to my solicitors and it is due and payable and I am told that it is due and payable and it is about to be paid and I say – and it is June – and I say, I would prefer you reach an agreement with my kids’ school that you just pay those school fees in July please.  It is a question of timing, it is true, and it is only a question of timing.  The appellant does not say in relation to this argument that these amounts are not income – it is a confess and avoid argument.  He says, all right if they are income, then they should have been income in the 2008 year which you are out of time to assess; that is his point.

GORDON J:   That is because he is a receipts‑based taxpayer and you need to rely on 6‑5(4).

MR HMELNITSKY:   Yes.

GORDON J:   What I am trying to work out is, what is the transformation that is identified by Justice Rich regarding the purpose that occurred here?  Is it that you say that 6‑5(4) is broader?

MR HMELNITSKY:   No, your Honour, and we would say that the object is the same but in the circumstances here these are circumstances within the object of the provision because the appellant, by reason of the agreement together with the circumstance that is undeniable which is that he was due and that amounts were due and payable to him during the 2007 year, reached a new agreement with his employer as to how those funds were to be devoted.  That was different to paying them to him at any point.  They were never to be paid to him and in fact they were not. 

Just finally in relation to this point, your Honours, can I just address – it may seem a short point and perhaps a small point but there is a suggestion in the appellant’s submissions in reply that, as they put it in footnote 12 of their submissions, that the better view is that this letter, which your Honours may recall was only dated 2007, may not have been sent during the 2007 year of income.  That is as we read footnote 12 of the submissions. 

The intent of that seems to be that, well, if account is to be taken of this correspondence and the agreement that it evidences, then that is an agreement that was reached not necessarily during the 2007 year.  That is a submission, if that is the submission, that really does need to be rejected by reference to the evidence of Mr Blank which your Honours see at page 266 of the first volume of the appeal book which is that:

On about 17 March 2007, I was provided by GIAG with a document summarising my entitlements under the Profit Participation Agreement.  A copy of the document is behind tab 25 –

and that was the document that was exhibited.  So there is no issue on the material that in fact the agreement that that document, in our submission, evidences was one that was in place during the 2007 year and critically was in place as at those first two due dates that occurred during that tax year.

GAGELER J:   This argument relies on the payments being income according to ordinary concepts.

MR HMELNITSKY:   Not necessarily, your Honour, because what appears in section 6‑5(4) in relation to ordinary income, that there is a provision to virtually identical effect in relation to statutory income which would include the ETP.

GAGELER J:   I see.

MR HMELNITSKY:   So if your Honours were of the view that the payments were eligible termination payments, section 6‑10(3), the wording is slightly different but the provision is in substance the same.  So it is an issue that arises on either view of the case and we say on either view ought be decided in favour of the Commissioner.  Your Honours, that is what I wish to say in support of the first ground of the cross‑appeal. 

The second ground of cross‑appeal raises a different issue and again, as the Solicitor‑General acknowledged yesterday, it also is an issue that strictly speaking requires a grant of leave in order for us to raise it and I will approach the matter in the same way as I have approached the first ground of cross‑appeal.

The issue here, if I can just get to the heart of it, is what was the actual value of the profit participation units or the Genussscheine as at 2 January 2002 if the Court is of the view that the correct analysis is the one that the appellant propounds, namely, they were capital assets and what occurred in 2007 was that derivation of an assessable capital, what is the cost base of them?  It is common ground that one works out the cost base of those assets as at the date they became an Australian resident and that, broadly speaking, is the issue that divides the parties, what was the cost base of these assets if that is the proper approach. 

It in a sense arises on the appellant’s notice of appeal because if your Honours see page 1259, the last volume of the court book, the error that is contended for – this is really the error that the appellant ultimately is asking this Court to identify in the reasoning below is that the Full Court:

erred in failing to hold that the appellant derived a capital gain in the year ended 30 June 2007 on realising the rights previously granted to him, calculated on the basis that the amount of AUD$77 million was the cost base of the CGT assets disposed of.

So, the error that is contended for is one that, we would say, in a sense, brings into play the correctness of that proposition that the $77 million is the cost base.  There never was a finding, certainly not a finding as to $77 million specifically.  What the primary judge said about this issue can be seen at page 1139 of that same court book.  Remembering that the primary judge had found that the amounts were assessable income and, therefore, had no need to determine strictly what the cost base was because it just did not arise and his Honour says so in paragraph 106 of his reasons on 1138.  But, his Honour then refers to one debate that was had between the experts as to whether or not in valuing the Genussscheine or the profit participation units one would have regard to ‑ ‑ ‑

FRENCH CJ:   It is not even really a finding, his Honour has just made some summary comments and said a likelihood is that I would have arrived at.

MR HMELNITSKY:   That is not to criticise his Honour, of course, because his Honour did not actually ‑ ‑ ‑

FRENCH CJ:   That is right, he determined the matter otherwise.

MR HMELNITSKY:   Yes, but your Honour has come directly to where I was going to take the Court, paragraph 110:

his valuation would more likely approximate a maximum of AUD77 million –

GORDON J:   Well, is that right, at 111 he says I probably would have likely got closer to 77 than 103.

MR HMELNITSKY:   Yes, but it is difficult to know what to make of it all but it is a point, we say, that just has not been resolved.  If the Court were to be of the view that the appeal succeeds and it is necessary to work out the cost base, that is the state of the findings by the primary judge.  The majority in the Full Court because of their conclusion in relation to ordinary income, did not have to deal with the point either.

FRENCH CJ:   Would not the appropriate response then be simply to remit it?

MR HMELNITSKY:   Yes, your Honour, that is so.  Justice Pagone, who was of the view that the relevant analysis was – the capital gains analysis did need to deal with it, and dealt with it, and he came to the conclusion at 1245 that, in his view ‑ in paragraph 144 and following ‑ that he would regard it as appropriate to value these instruments or interests on the basis that value could be attributed to the future element of them, so the extent to which they will produce profits in the future.  I will just skip over for a moment the reason why his Honour reached that conclusion, but that led

him to conclude at the end of that quite long paragraph 145 over on page 1246 that:

the figure of $AUD77 million can be taken as the cost base on the evidence before the Court.

Now, as I say, I completely skip over, at least for the moment, unless your Honours wish to hear me, in relation to the reasons why we would contest his Honour’s reasoning in reaching that conclusion as to $77 million being the cost base, but the point is that neither at trial has it been determined conclusively and certainly at an appellate level and an intermediate appellate level, it has not been considered at all except by the one dissenting judge.

In those circumstances, if the Court were minded to allow the appeal the appropriate order would simply be that this aspect of the matter go back to be determined and the parties can thrash out not only the whole of the expert evidence, but the issue of principle that on one view arises in relation to whether or not one can have regard to a forward‑looking component in relation to these instruments at all.  That is our primary position, that the Court, if it were otherwise minded to allow the appeal, would do that.  It would be a matter for the Federal Court as to ‑ ‑ ‑

FRENCH CJ:   Just bear with me.  We would see it as a remitter issue if the occasion arises, so I do not think we need to get into the merits.

MR HMELNITSKY:   If the Court pleases.  They are the submissions of the respondent, if the Court pleases.

FRENCH CJ:   Yes, all right, thank you.  Yes, Mr Richmond.

MR RICHMOND:   Thank you, your Honour.  If I come first to this time of derivation issue for the 2007 year, the way it has been put is that there was a derivation under section 6‑5(4) by reason of there being an agreement in the 2007 year that the amounts would be withheld and paid over to the Swiss authorities, and that is contrary to the finding of the trial judge and the way in which the Full Court approached it.

So the first point we would say is that the basis of this ground of appeal is a dispute about finding of fact, which makes it an inappropriate issue to be dealt with on appeal to this Court.  We find the finding of fact by the primary judge in volume 4 at page 1156, paragraph 44.  At point 40 on the page his Honour says:

There must be an agreement, direction or other conduct by the creditor –

to engage section 6‑5(4).  Then his Honour makes this finding:

The agreement to vary the payment terms was not entered into until 24 January 2008.

That is the finding by the primary judge, which is contrary to the submission that has been put by the respondent.  Then the Full Court deals with the matter and the majority deal with it at page 1214, at paragraph 95.  The first sentence makes clear the basis upon which they do so, which is that the primary judge had made a finding that the relevant agreement upon which the respondent relies was made in January 2008.  Justice Pagone reaches the same conclusion at paragraph 146 on page 1247, at about point 5 of the page:

His Honour found that there was no such agreement –

et cetera.  So there is a finding of fact which is contrary to the submission.  That was challenged on appeal and all judges agreed that the finding of fact of the primary judge was correct.

On that basis, we submit that special leave should not be granted.  But if necessary I will take your Honours to the evidence to deal with the reasons why that finding was correct and the evidence is found in volume 1 of the appeal book at page 266 and it is at paragraphs 36, 38, 39 and 40 which are relevant.  Paragraph 36 is the statement that he received a letter.  It does not say when he received it but he says he received a letter which is found at page 417. 

This is the same letter that is also found at page 422, which is the letter relied upon, and the reason why it is also at that page is that it is within the document referred to in paragraph 39.  Paragraph 39 is a statement that on 17 March 2007 he was provided with a document summarising his entitlements, and tab 25 of the exhibit is found at pages 422 through to 426, and the first page of that tab is the letter which we have seen earlier at page 417. 

Before the Full Court, his Honour Justice Robertson put to my learned friend, Mr Hmelnitsky, that it is the same document and Mr Hmelnitsky agreed with that proposition, that the second document is the same as the first.  Therefore, we would say, and I will take your Honours to it in a moment, it is actually there by mistake.  It is not actually a document that accompanied the schedule, but I will explain in a minute why that is clearly so on the face of the documents.

But then we come to paragraph 40 of the affidavit at page 267 and there the evidence is that it is in January 2008 that Mr Blank reached the agreement with Glencore International:

to vary the schedule of payments –

That agreement is at tab 26.  You were taken to that agreement which starts at page 428.

KIEFEL J:   Was Mr Blank cross‑examined on that statement?

MR RICHMOND:   I was about to say, your Honour, no, he was not.  He was not cross‑examined on paragraph 40.  In fact, he was not cross‑examined at all.  But he was not cross‑examined on paragraph 40.  So his uncontroverted evidence was that the agreement was made in January 2008.  That accords with the agreement which is found at page 428 and following.

So the only basis upon which the uncontroverted evidence, evidence which was not tested, at paragraph 40 could be somehow undone is by reference to the document which is found, we would say mistakenly, at page 422.  When you go to the document itself, you see it is mistaken.  It does not have a date on it.  It just says, “Baar, 2007” and, as we say in our submissions that does not mean to say that that is the date upon which it was sent.  It is quite open to construe it as being the date referable to the – the year referable to the termination and payment.  Then, when you look at the statements which are made, the third dot point is a statement that:

Deduction of Swiss withholding tax –

in a particular amount: 

as agreed with the Swiss Tax Authorities from your first four quarterly instalments -

That agreement for deduction of that amount was not agreed until January 2008.  So this letter could not be setting out an agreement as to a deduction of that amount in 2007 because that agreement had not been reached until 2008.

KEANE J:   Well, would it not be true to say that on any view it was reflecting an agreement not to pay the instalments on the basis that they were earmarked for the purpose of paying the withholding tax?

MR RICHMOND:   There was such an agreement in 2008, your Honour.

KEANE J:   So what does the third dot point on page 422 mean?

MR RICHMOND:   Well, what it is a reference to is the actual agreement reached in 2008 indicating that this document we have at 422 could not have been sent before that agreement because that agreement had not been reached until 2008.

KEANE J:   Sorry, are you saying that the document at 422 was not sent until 2008?

MR RICHMOND:   Yes.

KEANE J:   Your client swore, page 266, that he was provided with - at paragraph 39 – he was provided with this document.

MR RICHMOND:   Your Honour, that is a reference to, what is it, 423 to 426.  I do not dispute that the document is behind the tab referred to in that paragraph but the actual document that was provided to him in 2007 is at pages 423 to 426 and this particular document at 422 could not have been supplied to him in 2007 because the agreement to which it refers was not reached.

KIEFEL J:   Was there any direct evidence about when this letter at 422 was received?  Was it just left on the basis of mere surmise?

MR RICHMOND:   Well, yes, your Honour, that is correct.

KIEFEL J:   That is the basis upon which you would say special leave should be refused.

MR RICHMOND:   No, your Honour, I make the submission on the basis that the courts below have made a finding of fact as to when the agreement was reached which is that it was reached in 2008.

KIEFEL J:   But insofar as the applicant for special leave relies upon a document about which there is no evidence.

MR RICHMOND:   Your Honour, it is one of the documents that was taken into account by the courts below, particularly the primary judge, in making the finding that the agreement was not reached, and it is the agreement ‑ ‑ ‑

KIEFEL J:   Does his Honour refer to this document?

MR RICHMOND:   Your Honour, it was before him.

KIEFEL J:   That does not mean amongst the thousands and thousands of pages that a primary judge is thinking of that document when they are making a finding.

MR RICHMOND:   He refers to a document which is the agreement itself, I believe – that paragraph I took your Honours to.  But he had before him this as part of the evidence and certainly the Full Court had before it this letter because ‑ ‑ ‑

KIEFEL J:   Were submissions addressed to it?

MR RICHMOND:   Yes, they were.

KIEFEL J:   In the way we are hearing it today?

MR RICHMOND:   Yes, in the same terms as we are hearing it today and, as I said, Justice Robertson made the observation, which my learned friend, Mr Hmelnitsky, accepted which is that the letter is the same as the earlier letter and the submission was put that it was evidence of the agreement in 2007 and in those two paragraphs I took your Honours to the Full Court accepted that the primary judge’s finding was correct.

KEANE J:   Do any of the judges below deal with the proposition that I think you accept was put to them – I am not sure about this, but is it the case that it was put to the judges below that on or about 17 March 2007 your client was provided with the document at page 422?

MR RICHMOND:   Well, it was certainly addressed by the Full Court that this document is the same document as the one earlier, at 417, for which there is no evidence as to when it was received and when you look at the document itself ‑ ‑ ‑

KIEFEL J:   Who tendered the document?

MR RICHMOND:   It was part of the evidence of the applicant.  But when you look at the document it does not refer to the schedule, which is found at 423 and following.  It is inconsistent with the schedule in that it is talking about the deduction of Swiss withholding tax of $30 million and there is no mention in the schedule of any deduction of Swiss withholding tax of that amount.

KIEFEL J:   Forgive me for interrupting, but you said before that at paragraph 39 Mr Blank is only referring to having been provided with the documents from 423 onwards.  That is not what the document before the Court says, because it says:

A copy of the document –

I was provided with:

is behind tab 25 –

and that includes the letter at AB 422.  That is his evidence.  “I had received this letter.  I was provided with this letter.”

MR RICHMOND:   Yes, your Honour, but you must, with respect, read paragraph 39 with paragraph 40.  Paragraph 40 is a statement as to when the agreement was made.

KIEFEL J:   Yes, but it is up to the Court to work out what that means in light of the letter, unaided by helpful cross‑examination, I suppose.  But it is nevertheless his evidence that he was provided with that letter in March 2007.  That is it.

MR RICHMOND:   Well, your Honour ‑ ‑ ‑

KIEFEL J:   What one makes of the two paragraphs is another thing, but that is his evidence.

MR RICHMOND:   Well, his evidence is, yes, that that is part of the document referred to at tab 25.  But when you go to the document you see that it cannot be correct because it is talking about in the third dot point ‑ ‑ ‑

KIEFEL J:   Well, it cannot be correct if you assume as your premise that the agreement did not take place until January 2008, but if one accepts that, as he says at paragraph 39, that he received the letter in March 2007, it may reflect an oral agreement that was nevertheless reached earlier but which was reduced to writing in 2008.

MR RICHMOND:   Well, your Honour, the third dot point is referring to an agreement with the Swiss tax authorities.  Whatever one says about that dot point it is only – and on the premise that it was provided in 2007, it is referring to an agreement which has not yet been reached.

FRENCH CJ:   Mr Richmond, I may be able to come up with something obvious, but the schedule of instalments shows payments due in June, September and December of 2007.  Were they made?  They were not made, were they?

MR RICHMOND:   No, your Honour, these are the original – these are the instalments as per the original agreement.

FRENCH CJ:   Yes, so he was going to be entitled to payments in June, September and December.

MR RICHMOND:   Yes.

FRENCH CJ:   Now, they were not made, were they?

MR RICHMOND:   They were not made and ‑ ‑ ‑

FRENCH CJ:   So that must be the result of something because he signed his declaration in March.

MR RICHMOND:   Yes.  Well, he did not sign – he signed the declaration in March, that is right, and as a consequence of that declaration these were the amounts that would become due and the dates on which they would become due and withholding tax ‑ ‑ ‑

FRENCH CJ:   Yes, and they were not paid.

MR RICHMOND:   And the dates on which they would be paid and withholding tax would have to be deducted from each one.  It was not until an agreement was reached later with the Swiss tax authorities – the uncontroverted evidence about that is that that was in January 2008, as evidenced by paragraph 40 and the terms of the agreement, and ‑ ‑ ‑

FRENCH CJ:   I am sorry, why were these instalments not paid?  What does the evidence tell us about that?

MR RICHMOND:   Well, the evidence about that is – well, it is limited to – well, one can infer from the evidence – in the evidence as to when the agreement was made – that nothing occurred in the interim pending the agreement.

GORDON J:   This is the question I asked Mr Hmelnitsky, what evidence was there as to the reasons why the payments were not made?  That is, if the judges do not make – one of the judges makes a finding that payments are not to be made but why?

MR RICHMOND:   Well, your Honour, there was no evidence as to why.  The only evidence is the evidence I have taken your Honours to, and in particular the evidence at paragraph 40 and the agreement itself, that the agreement with the Swiss tax authorities was not reached until ‑ ‑ ‑

GORDON J:   A formal agreement, that is, the written contract, but Justice Kiefel’s point is that may very well have been – I mean, we are surmising here because there are no findings but there is a period between the date on which the payments are due and payable on the ultimate agreement is unexplained.

MR RICHMOND:   Well, your Honour, that is true subject to this, that the primary judge determined that matter as a finding of fact by reference to all of the evidence before his Honour and the Full Court has confirmed.

KIEFEL J:   But if one looks at paragraph 40 of the written statement, the words “I entered into an agreement” could simply be read “I executed, I formally made an agreement with the written agreement”, and that approach makes sense of the rest of the facts.  That is usually how one might approach findings of fact.

MR RICHMOND:   Your Honour, as I said before, our submission is that the third dot point is inconsistent with what follows in the following pages.

KIEFEL J:   Only on your assumption that there is an agreement only which commences in January 2008.  Without that assumption, the rest makes sense, does it not?

MR RICHMOND:   If your Honour looks at the first four instalments, you could not deduct $30 million from the first four instalments.  You see, the agreement that was actually reached provided for a change to the instalments.  The first instalments were the two amounts, the amounts totalling the figure of $30 million referred to at page 422.  You see that at page 437.  So at page 437, payment number 4 is shown as being $30 million, which is the sum of the first four instalments, but that is a different amount from what appears at page 423 – 423 does not amount to $30 million.

KEANE J:   But at 437 at entry four is “Withheld & paid to FTA”.  That makes sense of the notion that dot point 3 is reflecting an agreement in March 2007 that this money will be withheld from payment to him on the footing that it will be used to pay the withholding tax. 

MR RICHMOND:   Your Honour, with respect, no, because the statement in the third dot point is that there will be deducted from the “first four quarterly instalments” an amount which is greater than those four quarterly instalments.  So, the statement cannot be consistent with the document which appears at 423 and following.  It could only be consistent with the revised instalments, and we find that at page 437, which has the first four instalments being an amount of $30 million.  This is an explanation for why the document at page 422 cannot have been signed in the 2007 year because it is, on its face, inconsistent with the schedule which is following it.

GORDON J:   Is that right?  I thought that the point that Mr Hmelnitsky was making is that the payments would become bigger because the withholding tax would have been paid upfront so that you would take the whole of the amount.

MR RICHMOND:   Indeed, your Honour, that is what occurs but my point is ‑ ‑ ‑

GORDON J:   So, it would not be 6 million, it would be 8 million, so the subsequent ‑ the three instalments would not be the 6, it would be the higher amount.

MR RICHMOND:   Yes, your Honour, but that is inconsistent with page 423.  The proposition is you cannot from the first four instalments – even taking into account withholding tax that is deducted from them under the original regime – get to an amount of $30 million.  You have to change the instalments to achieve that result.  That is what occurs at a later time following the agreement that is reached in January 2008.  Your Honour, ultimately, it is a finding of fact below – by reference to all the material that was before the Court – and there is no issue of principal involved ‑ ‑ ‑

KEANE J:   It is a finding of fact that appears without any suggestion that their Honours have grappled with the kind of difficulty that we have been grappling with in the last few minutes.  It just looks like the point has not been addressed.

MR RICHMOND:   Your Honour, it was addressed.  It was addressed in the transcript starting at page – perhaps I can hand up to your Honours copies of the transcript from the Full Court, pages 81 to 82.

KIEFEL J:   Is this the comment about the document being the same?

MR RICHMOND:   Yes, your Honour, yes.

KIEFEL J:   By one member of the court, in passing.

MR RICHMOND:   Your Honour, it is not so much in passing, it is in the course of submissions that were being made about the import of the document.  The very point that is now before your Honours was being dealt with.

KEANE J:   What his Honour says there by way of observation is plainly true, as far as it goes.

MR RICHMOND:   Yes.

KEANE J:   But it just does not go very far.

MR RICHMOND:   That is what Mr Hmelnitsky says at lines 44 and 45, which his Honour then accepts, that it is the same document, and so the issue is for the consideration of the Court, that it is the same document.

GAGELER J:   As I understand the case against you on this point, it turns on reading the third dot point, at page 422, as evidence of a prior agreement.  Was that ever put to your client?

MR RICHMOND:   No, it was not, your Honour.  As I mentioned earlier, he was not cross‑examined about his statement at paragraph 40 of his affidavit that the agreement was reached in 2008.

GAGELER J:   It could be that the words “as agreed” there could be read in different ways, but I understand your point being that it is all a question of fact.

GORDON J:   This derivation question in terms of timing is only concerned with the two instalments, is it not?

MR RICHMOND:   Yes.

GORDON J:   So the receipt of the interest that was set out in the judgment of Justice Edmonds is not in contention?

MR RICHMOND:   That is correct, your Honour.  Interest was declared and returned.  The only issue here is those first two instalments for 31 January and 30 June, referred to at page 423, and the middle column there is setting out a net amount after deducting withholding tax.

GORDON J:   Then, just so that I am clear, it is the net amount that is to be brought to account.

MR RICHMOND:   It is the net amount which he is to receive after deduction of withholding tax.  The column second from the right is the net amount he is to receive after deducting withholding tax from each payment and this schedule is positing that each instalment will have deducted from it the relevant withholding tax, which is 19.25 per cent of the payment, and that is inconsistent with the third dot point, which is saying something quite different.

The only way to reconcile that inconsistency is to accept that the agreement referred to is one that does not occur until January 2008 ‑ on that the evidence is clear and he was not cross‑examined on that evidence ‑ and that the document at 422 is there by mistake.  When I say “by mistake”, it was not a document that he received at the time referred to in paragraph 39 of his affidavit.

GAGELER J:   Do you have to go that far?

MR RICHMOND:   Well, I suppose our secondary submission, if this letter is to be taken as being a document that was sent to him in the 2007 year, it does not indicate anything done by him, which is a dealing which brings into play section 6‑5(4).  Section 6‑5(4) requires something done by the taxpayer.  At its highest, this is just a letter from Glencore informing him about something; it is not evidence that he has done anything to bring about that result.

KIEFEL J:   It implies an agreement with him, does it not, in each of those respects?

KEANE J:   “We confirm the following”.

MR RICHMOND:   Well, your Honour, there is no evidence that he has actually reached that agreement beyond the statement made which, as I have submitted, is not in fact support for that proposition ‑ ‑ ‑

KEANE J:   It says “we confirm the following” in the letter and your client put the letter in.

KIEFEL J:   And the only person who could have made an agreement with the Swiss tax authorities about deduction of the withholding tax is your client.

MR RICHMOND:   No, the person who is required to make the deduction, your Honour, is Glencore.

KIEFEL J:   Is the employer.

MR RICHMOND:   Yes, the employer, the person making the payment.

KIEFEL J:   But there must have been an agreement with him for deduction from the amounts.

MR RICHMOND:   Your Honour, even if you are not with me on those submissions about the letter, it is still not sufficient that he has agreed – we say he has not agreed but even if he has agreed with Glencore that there will be no payment made to him, that is not sufficient to engage section 6‑5(4) as his Honour Justice Gibbs said in Brent at page 430.

Income is not dealt with under section 19 when all that happens is that a debtor refrains from paying his debt at the request of the borrower.  At most what we have here is an agreement to refrain from paying the amounts until an agreement is reached with the Swiss tax authorities for a payment at a later time.

Now, if I can turn to the – perhaps I will deal with the deferred compensation argument first and I will address it by reference to the Commissioner’s points of oral argument, so starting at paragraph 2 of the Commissioner’s oral outline.  In relation to Reseck’s Case, the passage at paragraph 56, the test stated by Justice Jacobs is whether the amount was received as:

part of the consideration for the services rendered in the office or employment –

and we emphasise the words “consideration for the services rendered”.  Here no part of the amount was consideration for services rendered because he was not required to perform services in return for the payments that were made.  I made those submissions yesterday.  I gave your Honours the seven reasons why these payments were not payments as deferred compensation.

What the payments are consideration for is made clear by the declaration.  The declaration in the case, what the payments are for, and when you see the declaration, you see it is for the disposal of rights granted at the earlier time.  The mere fact that he was required to be in employment when he exercised his rights is not sufficient to make the payment as consideration for services rendered as shown by Abbott v Philbin where the taxpayer was required to be in employment at the time he exercised his rights. 

Now, in relation to the decision in Tagget’s Case, if I can just take your Honours back to Tagget, there were two passages referred to. So there is 188 FCR 128, paragraph 21 is relied upon and going up to the top of page 136, and the submission was made that the observations made there about the need for the rights in question to have come home is not satisfied in this case. In relation to that we say two things. It is accepted that where the income is rights to receive something, money or we would say, property – or we would say money as well, is sufficient if a distinct set of legal relations has come into existence.

That was said by Justice Edmonds in the Ashwick decision which we have given the reference to at paragraph 1(b) of our outline.  So, whilst the principle is coming home, as per Carden’s Case, it is accepted that where the property concerned is rights to receive property and we would say also money, the test is ‑ that requirement is satisfied by options and similar things so long as what the taxpayer has is a distinct set of legal relations.

But, secondly, and more importantly, section 26(e) overcomes any requirement that something has come in because the derivation rule there is not the derivation rule being referred to at paragraph 21.  It is a different one which is whether the benefit to which section 26(e) applies has been allowed, given or granted to the taxpayer.  That is the derivation rule under section 26(e) and that is clear from what Sir Nigel Bowen said in Donaldson’s Case at page 643G.  We make that point in our submissions at paragraph 44.  So, it is not relevant that the – it is not a sufficient reason to deny the character of income under section 26(e) that the benefit has not come home, in a sense, which applies to other forms of income. 

Now, the next passage that your Honours were taken to was that at 30 through to 31 on page 138 and some emphasis was placed upon the last four lines of paragraph 30.  We distinguish ourselves from a conditional executory promise.  We say this is not a case of conditional executory promise.  Tagget’s Case was, because of the nature of the conditions there, this case is not.  Paragraph 31 refers to the general rule.  The general rule is that a cash basis taxpayer does not derive income where he or she merely has a right to receive income in the future, but the issue which is not dealt with in that paragraph, and which Justice Pagone accepted at 139 of the Full Court’s reasons, is that one has to identify what is the income. 

If the income is the right, then the fact that it is not received until a later time does not detract from the proposition that there has been the receipt of something which is income and which can be derived at that earlier time.  The important issue is to determine, or identify, what is the income in any particular case.  Is it the right to receive property, shares or options in the future, or is it a right to receive money in the future?  If that is the income amount, and our submission is that it is in this case, then that is a case where what is derived at the earlier time, or made assessable under section 26(e), is the right and not the money or property that is received at the later time.

Abbott v Philbin is an example of that.  It is an example of a case where a right to receive property is brought to account at the earlier time when the right is granted.  McNeil’s Case, we would say, and Justice Pagone so concluded, is an example of a case where a right to receive income in the future is assessable at the time of grant, even though it is merely a right to receive money in the future, and so is, we would say, the UBS Case concerning the grant of shares which were a right to receive money in the future in the form of redemption proceeds and dividends.

We would say that one must distinguish salary.  My learned friend sought to say that our argument is analogous to a salary situation when it is not because in the case of salary the income is the money because the contract is that it is only when the services are performed that the money becomes due.  So it is appropriate in that situation to say the right that is granted is not a right which is of an income nature.

If I can turn to paragraph 3, which is the outline of the respondent, which indicates the factors that are said to indicate that the payments here were deferred compensation.  Paragraph a. of paragraph 3 is relying upon the label used in the agreement.  Deferred compensation is a label that is used.  A label does not determine the character of the payment.  The question is whether the right to receive the payments in the future is the income from services or is it the money and we submit that the compensation is the right.

When I say right, I mean the bundle of rights being shares and associated rights, including contractual rights under the two agreements; the shareholders agreement and the PPAs.  Paragraph b. refers to the recital, referring to consideration and we have made submissions at paragraph 62 of our written submissions as to why the recital cannot determine whether what is granted in the agreement itself is for services to be rendered.  Paragraph c. relies upon clause A.5.

We emphasise that whilst cessation of employment was one occasion when the amount would become due, it was not the only one, and I referred your Honours to paragraph (c) of the definition of “Notice Date”.  Now, in relation to paragraph (c), this is clause 13 of the IPPA 2005, clause 13, paragraph (c) has the third category which is a date to be agreed.  My learned friend said that we had not raised this below but we certainly did raise it below before the primary judge and I will just hand up to your Honours two documents.  The first is an extract from my written submissions below where we squarely raise the potential relevance of clause 13(c) to the ETP argument.

The second document is transcript from the hearing before his Honour Justice Edmonds, page 25 to 26 is the opening, part of the opening, and the relevant part is found at the bottom of page 25 starting at line 46 going over the next page to line 10.  The second extract is at page 59 starting at line 45 and down to line 30 on page 60 is submissions made as to why certain parts of Mr Hubmann’s affidavit should be admitted into evidence.  Both indicate that we put at the forefront of our argument that paragraph 13(c) was relevant to the determination of whether the payments were to be regarded as an ETP and if you put it into play for that issue, it is clearly relevant to the other issue, we would submit.

So, our submission is that it is clear from paragraph 13(c) that termination is not the only occasion on which the payment could be made and that was confirmed by the evidence of Mr Hubmann to which I have referred where he indicates that over a number of years, redemptions did occur even though the employee remained employed.  So, our submission would be it is not correct to characterise these shares and associated rights as golden handcuffs, they were not golden handcuffs, they were rather incentives to performance in the future and should be characterised in that way.

Now, turning to paragraph 4 of the respondent’s outline, where six grounds are given as to why our characterisation of the amount is said to be incorrect.

FRENCH CJ:   I take it that when you are doing this exercise you are going to the respondent’s outline but some of what you are saying is really just repetition of what you put in submissions.  I mean, you need to really direct it to something which has come up.

MR RICHMOND:   Your Honour, all these points came up because my friend was careful to go to each one so I am responding to each one.

FRENCH CJ:   But not by repeating what you said in your submissions in‑chief.

MR RICHMOND:   Your Honour, I am engaging – with respect, your Honour, I am seeking to engage with what is said against us and I will do so as quickly as I can.

KIEFEL J:   But the point of a reply is that you deal with issues that you have not dealt with in‑chief and that have arisen in the course of argument and you need to deal with them.

MR RICHMOND:   All right, your Honour, thank you.  Perhaps, paragraph 4c. – I will focus on paragraph 4c. because there it said that we merely have an indivisible executory promise.  When I say “we”, the taxpayer merely has:

a single, indivisible, executory promise to pay an amount of money –

in the future.  My submission is it is not executory.  But, importantly, what is elided here is the distinction between an expectancy on the one hand and a right to the payment of money in the future on the other which is uncertain.  That distinction is at the heart of this Court’s decision in Shepherd’s Case.  We have mentioned Shepherd’s Case in submissions but I did not take your Honours to it.  It is, we would submit, an answer to the way in which the respondent seeks to characterise the taxpayer’s rights in this case. 

Your Honours will recall that Shepherd’s Case was a case where the taxpayer had granted a licence of a patent to a third party and then sought to assign 90 per cent of the royalties to be received under the licence.  One of the arguments put by the Commissioner was that it was a mere assignment of an expectancy – the royalties to be produced in the future.  The Court concluded that that was not correct.  There was a present right to receive royalties in the future, notwithstanding that the amount of those royalties might be uncertain and, indeed, might be nil because the actual receipt of royalties depended upon contingencies, including the extent to which the licensee used the patent.

So, we find at page 393 at point 2 of the page observations by the Chief Justice, and at page 396 about point 4 through to point 6 of the page where those Judges characterise that agreement, that is, a licence of patent on terms that royalties will become payable on contingencies in the future as a presently existing chose in action, that is, a presently existing contractual right to receive money in the future.

Our submission is that our situation is on all fours, that is to say, that the taxpayer has as part of his bundle of rights contractual rights conferring a present right to the payment of money in the future, albeit that the proceeds of the right or the fruits of the right might be uncertain or, indeed, nil.  That does not detract from the proposition that he has a presently existing right at the time of grant.

Now, paragraph 4d., it was put against us that clause C.2 of the IPPA 2005 did not allow for the first way of turning to account – to pecuniary account the rights, and we make the observation that there is an alternative construction which we submit is the correct construction of clause C.2.  Clause C.2 restricts the employee from giving any rights in connection with the rights and claims granted.  We submit it does not restrict the employee from giving rights in connection with the proceeds of the rights.  That is what the first alternative method of turning to a pecuniary account would involve, dealing with the proceeds of the rights themselves.

If I can now come to the ETP issue, which is at paragraph 8 of the respondent’s outline.  As I said, we did raise clause 13(c) at the trial.  One of the two cases relied upon by my learned friend is McIntosh’s Case and we would submit that what his Honour Justice Brennan said at page 560 in the last two paragraphs is of assistance here.

When reading this judgment, one has to be aware that the article under which the pension became payable, which Justice Toohey summarises at page 561 at around point 40, that that is a summary of the article. The rule under which the pension became payable, which is rule 17a, is found in the decision of the primary judge, Justice Andrews, [1978] QR 354 at 356, at lines A to B.

The rule said that a contributor – that is, an employee who has contributed to the fund – who has completed 15 years’ service and attains the age of 62 years and thereupon or thereafter retires, shall become entitled to a normal pension, calculated in accordance with appendix 2.  That was a rule which had two contingencies which were conditions precedent to the employee becoming entitled to the pension.  They were that he had completed 15 years’ service and had attained the age of 62 years and retired.  They were conditions precedent because the wording was that if those circumstances were present “the employee shall become entitled to”, and so it was able to be construed on the basis that those were preconditions to an entitlement arising.

Now, it is in that context that Justice Brennan gives a test, at the bottom of page 560, which is whether retirement is the occasion of, or a condition of, entitlement to the payment.  His Honour says if that is so – and he is positing the case where the payment is made to satisfy a payee’s entitlement so that is the context in which his Honour is positing this test and the test is is the retirement the occasion of, and a condition of, entitlement to the payment.

We would submit that is a helpful test and response to your Honour Justice Gageler’s question to me yesterday:  is there some help that one can obtain from the authorities as to how the cause or nexus is to be ascertained?  We would submit this is a helpful statement by his Honour in a context where the payment is made to satisfy an entitlement.  And the question is whether retirement is the occasion of and a condition of entitlement to the payment?

In this case it was not a condition or occasion of entitlement, it was merely an occasion of a payment in satisfaction of the entitlement.  That is a way of explaining the way in which we put the case about a causal nexus here.  We would say it is an operative cause one is looking for on a commonsense approach but in a case where the money is being paid to satisfy an entitlement on a contract or otherwise then one asks whether the retirement was the occasion of or a condition of the entitlement arising, not the payment arising.

Here the payment arose merely by reason of the occasion of the retirement.  The entitlement had arisen over a long period of time by reason

of the grants that had been made.  Put another way, the taxpayer in this case did not become entitled to the amount because of his retirement.  He already had that entitlement.  Retirement was merely the occasion for the payment of the amount which had been accrued to him and that is not enough, as Justice Goldberg said in Le Grand and the primary judge accepted below.

If your Honours decide the case on the basis of the ETP point rather than the deferred services point, then it will be necessary, we would submit, for the matter to be remitted back to the Full Court to deal with the apportionment issue we raised in the extract that I handed up to your Honours of our submissions before his Honour Justice Edmonds – we raised the question of whether there should be an apportionment of the ETP, if it is an ETP, on the basis of the foreign service.

His Honour did not need to deal with that because the issue did not arise, but if this Court decides ultimately that the answer is to be found on the ETP analysis, then, as we say in our reply at paragraph 23, it will be necessary to remit the matter back to have that issue determined, which is whether some part of the eligible termination payment – or employment termination payment, as the case may be – should be apportioned and treated as exempt as attributable to the prior period of foreign service.  If there is nothing further, those are our submissions.

FRENCH CJ:   Yes, thank you, Mr Richmond.

MR HMELNITSKY:   I am so sorry, your Honour.  I wonder if, very briefly, I might just address in reply as briefly as I may the points that were raised in response to the first ground of cross‑appeal?  I am very much in the Court’s hands as to whether or not you would be assisted by it.

FRENCH CJ:   Yes, Mr Hmelnitsky.

MR HMELNITSKY:   Your Honours, as briefly as I can be, the facts we see as being uncontroversial, paragraphs 39 and 40 of Mr Blank’s affidavit sit neatly with one another.  There were two agreements; the one that appears on page 422 of the book of March 2007, and the later agreement at 428 of the book reached 24 January 2008.

GAGELER J:   Well, 422 cannot be an agreement in itself.  It could be evidence of an agreement.

MR HMELNITSKY:   Quite so.  I accept that, your Honour, yes.

GAGELER J:   But a prior agreement, perhaps.

MR HMELNITSKY:   Yes.  I am just addressing the proposition that there was only ever one agreement.  Well may there have been ultimately a single agreement, but in March 2007, that letter was sent evidencing, on our view – and we say consistently with the appellant’s affidavit – an agreement or understanding as between him and his employer; never mind as between Glencore and the Swiss tax authorities, but as between him and his employer as to how the payments were to be dealt with.

It is next said that there are concurrent findings of fact that preclude the argument.  Critically what is said by the majority in the Full Court at paragraph 95 is that the relevant agreement was not reached until 2008 and that, in a sense, is what we say is the error.  It is in seeing only what happened in 2008 as being relevant to the question and failing to consider that the circumstances of March 2007 and that, we say, is for the reasons that I have already addressed. 

It is then said that the first four amounts could not have been withheld such as to produce an amount of in excess of $30 million.  That could be because it was the gross amounts to be withheld, not the net amounts that appear on page 423.  Lastly, to the extent it is said that this issue may have been illuminated by cross‑examination, your Honours will see that it is an issue dealt with subsequent to his Honour’s judgment in the principal proceedings because it only arose when it came time to present the court with consent orders giving effect to the judgment.  It was dealt with on the papers only after the proceedings – the principal proceedings had concluded.

KIEFEL J:   How does that explain why the evidence was not cross‑examined?

MR HMELNITSKY:   I had no need, your Honour, to cross‑examine Mr Blank on this because there was evidence referred to at paragraph 39 of his affidavit that he had received a letter.  Whether or not ‑ ‑ ‑

KIEFEL J:   Well, your answer is that the evidence was clear enough.

MR HMELNITSKY:   Yes.  If the Court pleases, they are what we would wish to say in reply.

FRENCH CJ:   Yes, thank you.  The Court will reserve its decision.  The Court adjourns until 2.15 pm this afternoon.

AT 12.23 PM THE MATTER WAS ADJOURNED