Bray v Federal Commissioner of Taxation

HIGH COURT OF AUSTRALIA

Owen J.

BRAY v. FEDERAL COMMISSIONER OF TAXATION

(1968) 117 CLR 349

6 September 1968

Estate Duty (Cth)

Estate Duty (Cth)—Estate—What assets included therein—Loan repayable by annual instalments—Lender entitled to give notice under his own hand requiring payment of balance due in full—Death of lender without giving notice—Whether whole of balance outstanding or value thereof at death included in estate.

Decision

September 6.
OWEN J. delivered the following written judgment : -
The appellants are the executors of the will of Thomas Henry Bray who died on 20th September 1964. On 3rd May 1960 the deceased lent 88,000 Pounds to T. H. Bray Pty. Limited, a company the shareholders in which consisted in the main of relatives of the deceased. The agreement pursuant to which the loan was made was in the following terms :

"THIS AGREEMENT made this third day of May, One thousand nine hundred and sixty BETWEEN : THOMAS HENRY BRAY of Forbes in the State of New South Wales (hereinafter called "the Lender") of the one part AND : T. H. BRAY PTY. LIMITED a company duly incorporated under the laws of the said State (hereinafter called "the Borrower") of the other part WHEREAS the Lender at the request of the Borrower has agreed to lend to the Borrower on the terms and conditions hereinafter set out the principal sum of Eighty eight thousand pounds the receipt whereof is hereby acknowledged AND WHEREAS the Borrower has agreed to repay the said principal sum to the Lender on the terms and conditions hereinafter set out NOW IT IS HEREBY AGREED as follows : (1) The said principal sum or so much thereof as for the time being remains owing by the Borrower to the Lender is hereinafter called 'the loan debt'.

(2) The Loan debt shall be paid in full by the Borrower to the Lender upon the expiration of ninety (90) days written notice given by the Lender under his own hand to the Borrower requiring the Borrower to pay in full the amount of the said loan debt.

(3) If the Lender by assignment made in accordance with s. 12 of the Conveyancing Act, 1919-1954 of the State of New South Wales should assign the said loan debt to any person then the assignee shall be entitled to obtain payment in full of the said loan debt in the same manner as the Lender could have obtained payment thereof in pursuance of clause 2 hereof.

(4) Subject to clauses 2 and 3 hereof the Borrower shall pay to the Lender or his assignee in reduction of the said loan debt annual instalments of not less than two thousand two hundred pounds (2200.0.0 Pounds) the first of such annual payments to be paid on the thirty first day of December 1961 and subject to clauses 2 and 3 hereof each subsequent annual payment is to be paid at the end of each succeeding year ending on the thirty first day of December.

(5) If default be made in payment of the first or any subsequent annual payment payable in pursuance of clause 4 hereof for a period of more than sixty (60) days after the date hereinbefore fixed for the payment of any such annual payment then simple interest at the rate of five per centum (5%) per annum shall be payable on the loan debt in respect of the period during which such default continues.

(6) Should the Borrower having been required to pay the loan debt pursuant to either clause 2 or clause 3 hereof fail so to do then simple interest at the rate of five per centum (5%) per annum shall be payable on the amount of the loan debt outstanding at the date when the Lender or his assignee shall have given written notice to the Borrower in pursuance of clauses 2 or 3 hereof and shall be payable in respect of the period commencing on the date of the expiration of the aforesaid written notice and ending on the date when the loan debt is paid in full to the Lender or his assignee.

(7) Subject to the foregoing provisions of this agreement the Borrower shall have the right to repay the loan debt in full at any time or to anticipate the payment of any one or more of the aforesaid annual payments and for the purposes of the foregoing provisions of this agreement the payment in anticipation of any such annual instalment shall be treated as the payment of that instalment on the date fixed for the payment thereof by clause 4 hereof.

(8) If requested in writing by the Lender or by an assignee to whom or to which the loan debt has been assigned in accordance with the foregoing provisions hereof the Borrower shall execute a floating charge over its undertaking and property for the amount of the loan debt."

The deceased died without having given a notice in writing under cl. 2 requiring the company to pay in full the amount of the debt nor had he made any assignment of the debt under cl. 3. Between the date of the agreement and the date of the deceased's death three annual instalments of 2,200 Pounds each had been made by the company in reduction of the loan debt. (at p351)

2. In assessing the estate duty payable on the estate of the deceased, the Commissioner included as one of the assets of the estate the full amount of the debt, namely 81,400 Pounds, remaining to be paid. The executors claim, however, that the value of the debt, as at the date of the deceased's death, was 24,938 Pounds. This claim is based upon the submission that the obligation imposed on the company by cl. 2 of the agreement was conditional upon a written notice "under his own hand" being first given by the deceased ; that the right to give such a notice was personal to the deceased ; and that, having died without exercising that right, it cannot be exercised by his executors. In these circumstances, it was submitted, the value of the asset as at the date of the deceased's death was much less than the total of the instalments remaining to be paid. If the executors' contention is accepted the parties are in agreement that that value is the dollar equivalent of 24,938 Pounds. (at p352)

3. Counsel for the appellants naturally placed great reliance upon the words "made under his own hand" in cl. 2. The use of that phrase made it plain, he submitted, that it was the intention of the parties to the agreement that the right to call upon the company to pay the debt in full was to be exercisable only by the deceased in his lifetime unless he should assign the debt under cl. 3, in which case a notice might be given by the assignee "under his own hand". (at p352)

4. The question is one as to the proper construction of the agreement and I think the appellants' submission should prevail. The obligation which the agreement imposes upon the company is to repay the debt by annual instalments over a period of years "subject to" cll. 2 and 3. Clause 2 gave the deceased the right to elect, if he thought fit to do so, to require the borrower to repay the whole debt in full by giving it a notice in writing "under his own hand", that is to say "under the lender's own hand". This right of the lender was, in my opinion, a personal right and it came to an end with his death. Thereafter the only obligation owed by the company was to pay the debt by instalments. The executors can, of course, enforce the payment of those instalments as and when the times for payment arrive but have no right to take the course for which cl. 2 provides. (at p352)

5. I would therefore allow the appeal and remit the matter to the Commissioner so that he may amend the assessment accordingly. (at p352)

Orders

Appeal allowed with costs. Assessment remitted to the Commissioner so that he may amend the assessment accordingly.

Bray (the taxpayer) appealed to the Federal Court of Australia against a decision of the Commissioner of Taxation (the Commissioner) to disallow his objection to an assessment of income tax for the 2015 income year. The dispute concerned the deductibility of certain expenses incurred by the taxpayer in relation to a property investment.

The primary legal issue before Owen J was whether the expenses claimed by the taxpayer, which included interest on a loan used to acquire the property, council rates, land tax, and strata levies, were deductible under section 8-1 of the *Income Tax Assessment Act 1997* (Cth). This section allows for the deduction of losses and outgoings to the extent that they are incurred in gaining or producing assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

Owen J reasoned that the expenses were incurred in the course of carrying on a business of holding the property for the purpose of deriving rental income, which constituted assessable income. His Honour applied the principles established in cases such as *FCT v. Roberts* and *FCT v. Consolidated Press Holdings Ltd*, which confirm that expenses incurred in the process of earning assessable income are generally deductible. The Commissioner had argued that the expenses were of a capital nature, but Owen J found that the evidence did not support this contention, as the expenses were recurrent and related to the ongoing management and maintenance of the income-producing asset.

The appeal was allowed, and the Commissioner's assessment was set aside. The matter was remitted to the Commissioner to be re-assessed on the basis that the claimed expenses were deductible.

Decision

Orders

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