Comm of Taxation v Montgomery

[1998] HCATrans 314

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne  Nos M15 and M16 of 1998

B e t w e e n -

THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF        AUSTRALIA

Applicant

and

PAUL MONTGOMERY

Respondent

Applications for special leave to appeal

GUMMOW J
HAYNE J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 11 SEPTEMBER 1998, AT 11.03 AM

Copyright in the High Court of Australia

MR G.A.A. NETTLE, QC:   May it please the Court, I appear with my learned friend, MS A. RICHARDS, for the appellant. (instructed by the Australian Government Solicitor)

MR N.J. YOUNG, QC:   May it please the Court, I appear with my learned friends, MR J.W. de WIJN, QC and MR T.P. MURPHY, for the respondent. (instructed by Freehill Hollingdale & Page)

GUMMOW J:   Yes, Mr Nettle.

MR NETTLE:   If the Court pleases.  Your Honour, it is now some six months ago that the Commissioner sought unsuccessfully to obtain special leave in Selleck’s Case, which, in a sense, raised a point very similar to the one the subject of this application.  The question of principle which is submitted arises, and which warrants the grant of special leave, is a question of the principles by reference to which there is to be decided whether an incentive payment made to a business taxpayer to induce it to pay out a greater amount of tax deductible outgoings is or is not assessable. 

Your Honours, until the decision of the Full Court in Selleck, that question would not have been difficult to decide.  Until then, because of this Court’s decision in Myer and the Federal Court’s application of Myer in Cooling, there was certainty that where a taxpayer carries on business at leased premises and is paid an incentive payment upon movement from one set of leased premises to another ‑ ‑ ‑ 

GUMMOW J:   Well that assumes some fixed meaning to incentive payment, I suppose.

MR NETTLE:   Certainly it does.  The question which arises, to go straight to the end of it, is whether, where an incentive payment is made and it is clear from the circumstances that the incentive payment is the inducement to pay a greater amount of tax deductible rent or other outgoing than would have otherwise have been the case, is the incentive payment to be regarded as tax deductible.  Cooling’s Case, in an application of Myer, got to the conclusion that it was because it was said it was an ordinary incident of the business of a taxpayer who carries on business from leased premises from time to time to move.

GUMMOW J:   Yes, can I just ask you this, Mr Nettle?  If one goes to Justice Lockhart’s judgment in the Full Court here, at page 60, he seemed to say at line 21 that he was approaching the case as involving:

no new questions of principle.

MR NETTLE:   Yes, he did say that.

GUMMOW J:   And he was more concerned with a different view of the facts.  And then, at page 61, he comes back to principle, line 30.  Do you disagree with the statement then, going over to page 62, where there are three propositions of law?

MR NETTLE:   No, I do not.  What we submit, however, has occurred in this case is that Justice Davies has decided the case by departing from
Cooling on the incorrect basis, in effect, that it needed to be shown that there was a dominant purpose of obtaining the receipt and Mr Justice Lockhart, in effect, did the same by holding at page 60 in the passage to which your Honour refers, but more importantly at page 65 beginning at line 18 and through to the end of that page, that there could be no sufficient purpose, in the sense of one not insignificant purpose, but if the taxpayer had to move in any event. Now that, it is submitted, is the departure from Cooling.  What Cooling held, and held in our submission correctly, was that where it is demonstrated that one and not insignificant purpose of the entry into the composite transaction is ‑ ‑ ‑ 

GUMMOW J:   Well, the judge deals with Cooling at page 66 line 20.

MR NETTLE:   Yes, but there is the point.  At line 20, as in Cooling, his Honour Mr Justice Lockhart distinguishes Cooling, it is submitted, on the incorrect basis that Cooling is incapable of application where there is no choice as between lease incentive payment or rent-free period or where tenant must move anyway from one set of premises to another for extraneous purposes.  We accept, as indeed it may well have been the case in Cooling, that a tenant may have to move from one set of premises to another, quite apart from incentive payments, but the point remains that where it is demonstrated on the evidence that the tenant enters into this specific transaction, as opposed to another, but one not insignificant motivation in entering into this transaction as opposed to another is the receipt of the incentive payment, it comes immediately within the Cooling application of the Myer principles and what he has done - by his Honour Justice Lockhart at page 66 line 20 - is to fail to adhere to that conclusion. 

Justice Davies had earlier dealt with the matter at application book page 39 at line 12, but in a fashion which is not dissimilar, although more shortly expressed.  The first couple of lines of the first full paragraph, where the observation is made by his Honour, that because the taxpayer was not given the opportunity of choosing between incentive payment or lower rent, Cooling was inapplicable.

Now it does not matter whether one comes from the point of view that there is no choice as between incentive payment or lower rent or no choice as between staying in the old premises or moving to the new premises, the point which is fundamental is that, regardless of the ultimate and overriding compound of motivations for moving, if there is one and not insignificant purpose in the entry into the specific transaction of obtaining the incentive payment, there is, according to Cooling, sufficient profit‑making purpose to bring the transaction within the Myer principle.

HAYNE J:   And how do you relate that to what choices were available to the taxpayer?

MR NETTLE:   In this case?

HAYNE J:   More generally.

MR NETTLE:   The choices available to any taxpayer, put generally, might be these:  it can stay where it is, unless there are compelling extraneous reasons to get out; it can move to new premises and be given the option of taking either lease incentive payment or lower rent or outgoings; or it can choose between two offerings of incentive payment at different premises and choose that which is more preferable to it because of economic motives.  Now, in this case, it is clear from the evidence, some of which is extracted in the judgment, which is at page 11 and following in the application book, that there was considerable consideration given to the three or four proposals which were on the table in the city of Melbourne, and what was taken into account as one not inconsiderable consideration in the selection of these premises, was the fact that the incentive payment was a large one and which, having regard to other considerations, made it attractive.

It is submitted, beyond doubt, that but for the incentive payment, this firm would not have been prepared to pay the artificially inflated level of rentals which was being maintained in premises of this kind at that time, by the use of incentive payments.  If the incentive payment had not been available, this firm would not have agreed to pay the rent.  Thus one comes back to this point:  if a not insignificant purpose of entering into the transaction is to get the lease incentive payment, and I add, if that lease incentive payment can, as a matter of substance, having regard to all the circumstances and, in accordance with Federal Coke principles, any understanding between the landlord and the taxpayer be seen as recompense or consolation for an increased level of tax deductible outgoings, then that receipt is properly to be seen as being on revenue account.

Both Justices Davies and his Honour Justice Lockhart departed from the Cooling principles on incorrect basis, further and worse Justice Heerey, the third judge of the court, not only departed from the principles, but took it upon himself with respect to throw them away as being incorrect and preferring instead to follow the line of reasoning, which had been articulated by the majority of the New Zealand Court of Appeal in Wattie’s Case, to the effect that Myer was to be confined to its own facts, Cooling was wrongly decided and, where one finds a case in which a lessee is entering into a lease, the lease must be seen as being a transaction on capital ground ‑ ‑ ‑ 

GUMMOW J:   Just where are these particular heresies by Justice Heerey laid out?

MR NETTLE:   Page 72, your Honour, Myer contrast.  Then Cooling is dealt with on page 75, beginning at the first full paragraph, and the second full paragraph, the refusal or choice not to follow.

GUMMOW J:   Yes.

MR NETTLE:   And then, at page 77, first full paragraph, with the adoption from the majority judgment in the New Zealand Court of Appeal in Wattie of the difficulty which one is supposed to have in understanding what was meant by Cooling.

GUMMOW J:   Yes, thank you.

MR NETTLE:   Now, your Honour, the result in Justice Heerey’s judgment is to approach the matter ultimately on the basis, either that because a lease is a capital transaction, that which is paid in connection with the entry into it must be capital or, alternatively, if it be any different, that a lease incentive payment is to be equated to a lease premium and because a lease premium is on capital account, so too must the lease incentive payment be seen as being on capital account. 

In that latter respect, Mr Justice Heerey again refuses to follow the unanimous judgment in Cooling’s Case, where it was pointed out, with respect correctly, that there is all the difference in the world between a lease incentive payment and a lease premium, for the reason that a lease premium is paid for a capital asset, that is to say, the grant of an estate, whereas a lease incentive payment is in truth and substance paid not for the lease, the rent covers that; it is paid for an agreement to pay a higher amount of rent than would otherwise be the occasion.  The problem, or if not be the problem, the question and the correct answer to it, as we would submit, is no better demonstrated than in the minority judgment of Mr Justice Thomas in the New Zealand Court of Appeal in Wattie’s Case, copies of which your Honours have, in which his Honour points out that ‑ ‑ ‑ 

GUMMOW J:   Does Mr Justice Lockhart refer to Wattie?

MR NETTLE:   No, your Honour, he does not.  May we briefly refer your Honours to what was said by Mr Justice Thomas, who is the dissenting judge in Wattie, especially at page 13,313 of (1997) 18 NZTC.

GUMMOW J:   What is the statutory provision they were construing in Wattie?

MR NETTLE:   It is the general provisions which are set out at the front.

MR NETTLE:   Yes, where are they set out?

MR NETTLE:   At page 13,300 there is summarised, the bottom right corner ‑ ‑ ‑

GUMMOW J:   Yes, thank you.

MR NETTLE:   Your Honours, may I direct your attention to what was said by Justice Thomas at page 13,313, in the left column towards the bottom, the second-last paragraph.  After observing that:

No departure is required from the approach taken by this Court in C of IR v McKenzies New Zealand Ltd

his Honour continues:

The “starting point” can still be to consider whether a lease is a capital asset of the lessee’s business.  While that may be taken as the starting point in this case, however, it does not obviate the need to go further and determine whether the inducement payment in Cooper & Lybrand’s hands relates to the firm’s capital structure or its business operation.

And then at page 33,313 in the right column in the last five lines before the subheading in the middle of the page:

Hence, the fact a lease is a capital asset should not be permitted to screen the integral relationship of the inducement payment and the rent in the production of the firm’s income -

And to same effect at page 13,3l6, left column, heading, “A revenue receipt”, second paragraph, that section:

My preference for the view that the receipt is revenue is founded on the requisite “rigorous and objective examination” of the contractual arrangement between the parties.  The lessor paid Coopers & Lybrand $5 million, along with other inducements, to enter into the lease and pay rent at a figure substantially in excess of the market rent or the rent which Coopers & Lybrand would otherwise have been prepared to pay.

He says:

That is the commercial reality.

And then, in the right column, last paragraph:

The link between the inducement payment and the rent is then patent.  The payment is the consideration paid by the lessor to the lessee for the rental stream which the lessee is obliged to pay for the term of the lease.  The consideration moves from the lessor to the lessee in return for an obligation to pay rent at a level which is inflated.

If your Honours please ‑ ‑ ‑ 

HAYNE J:   Just before you go on, can I take you back, can I see if I understand the argument?  Income to be determined according to purpose; purpose to be ascertained according to whether choice was open; choices that are to be considered are not just choice to move or stay.  Stopping there, do I capture part of your argument?

MR NETTLE:   Yes, your Honour, you do.

HAYNE J:   The choices that are relevant, do you say those are choices open with respect to the one set of premises in fact taken, or do they include choices between premises?

MR NETTLE:   It will depend upon the facts, but the range of choices will always cover all facts.  That is to say ‑ ‑ ‑ 

HAYNE J:   And, in this case, which set of choices is the relevant set?

MR NETTLE:   Either take this building with the incentive payment which was offered or go to another of the four buildings on offer, with different terms and different incentive payments, if any.

HAYNE J:   So it is a choice between premises, not choice between deals or this set at least.

MR NETTLE:   In this case that is correct, because only one deal was offered.  Nonetheless, what we wish to urge upon the Court is that, where the choice is between this set of premises and another, it cannot be gainsaid that in choosing this set of premises, the fact that it comes with an incentive payment means that the incentive payment is one and not inconsiderable purpose in entering into this transaction.  It is to get that payment, for otherwise they would not enter into this transaction, they would have gone elsewhere.

HAYNE J:   Yes.

MR NETTLE:   If your Honours please.  I was about to submit to your Honours that what is said by Mr Justice Thomas, in dissent, accords wholly with what the position would have been before Selleck, because it is consistent with the principles long laid down in this Court, and no more longer ago restated comprehensively than in the minorities judgment in Rowe’s Case, that when the court looks at the question of income and capital, it is to have regard to all of the circumstances, not placing undue emphasis upon the form of the transaction adopted and having regard to any arrangement between the payer and the recipient, as to what the payment was intended to cover.  Had those principles been adhered to in this case they would have led ineluctably to the conclusion that the incentive payment was received upon revenue account, as in effect a consideration to agree to pay a larger amount of tax deductable outgoings.  

Because those principles were not observed, and because the Cooling interpretation of Myer was thrown over, there was substituted instead for correct principle a rule that, wherever one finds a capital transaction, then, that which is paid as consideration for inducement to enter into it should be seen as on capital account.  The truth is that one must look to what the payment is paid for and correctly it is seen to be paid as consideration or inducement to pay a higher stream of revenue outgoings.  If your Honours please, there are 760 assessments worth some $80 million standing on this case.

GUMMOW J:   Yes.  That sounds a terrifying figure, but these are individual assessments of some large partnerships, I suppose, are they, these taxpayers?

MR NETTLE:   They range from the smallest firms to what might be described as the larger firms.

GUMMOW J:   Yes.

MR NETTLE:   Your Honours, there having now been a departure from a decision of the Full Federal Court, which was, for a number of years, relied upon and which, in our submission, correctly adapted principles stated by this Court, there having now been put upon the decision of this Court in Myer questions as a result of what has been said by the New Zealand Court of Appeal and adopted in the Full Federal Court, and there being the not inconsiderable amount of revenue and difficulty attended upon the confusion which has now been created, it is submitted that this case is worthy enough of a grant of special leave.

GUMMOW J:   Yes.  Yes, Mr Young.

MR YOUNG:   If the Court pleases.  My learned friend’s starting point is that Cooling was but an application of Myer, but Cooling erected something called “the Cooling principles”, which have been departed from.  The fact is that Cooling, as the Full Court said, was a case that turned on its own facts, as all of these cases do, indeed as do all cases on income and capital and the respective characterisations to be adopted.

GUMMOW J:   Now, Mr Nettle naturally does not put it so crudely, but there is an inference one gets from the thrust of his submissions that whilst the Full Court may be, as it were, saying one thing in terms of principle, it may be doing something else in the way it is applying it, and something is going wrong.

MR YOUNG:   Well, with respect, your Honour, the proposition he contended for as the Cooling principle is this:  an incentive payment to a business taxpayer, which leads to the entry into a lease, will always be assessable income, because the lease has as one of its components the payment of rent as a deductable outgoing.

HAYNE J:   I do not think he put quite as high as that, did he, Mr Young?

MR YOUNG:   Well that is as I wrote it down as he opened, your Honour.

HAYNE J:   Well there was, in at least the second of the formulations, reference to “not insignificant purpose” being to obtain the incentive.

MR YOUNG:   That is so, your Honour, but what my learned friend does is to isolate out of the transaction the rent covenant, and he says, “The incentive was paid in order to induce the prospective tenant to assume the rent covenant” and he isolates that element of the transaction, and indeed he said, “But for the incentive, there was a finding that the firm would not have been prepared to pay the rent.”  There was no such finding, ever, by the trial judge or by the Court of Appeal.  All of the evidence was to the contrary, namely that there was confronting the firm an invidious choice in the end, between staying at BHP House and ‑ ‑ ‑ 

GUMMOW J:   But on another floor?

MR YOUNG:   On another floor, well progressively moving from floor to floor, and suffering refurbishment and the removal of asbestos going on for four years around them.  That was choice A.  Choice B was moving to the only other building in Melbourne that suited their purposes, then under construction, 101 Collins Street.  The finding ‑ ‑ ‑ 

HAYNE J:   Do you say that the primary judge’s finding was, it was BHP or 101, and that is it; no other matter for consideration?

MR YOUNG:   He did not find it in those express terms, but when his Honour at trial recounted the facts, his Honour accepted that there was no alternative means of going to 101 Collins Street ‑ ‑ ‑ 

HAYNE J:   I understand that, but is the choice limited to 101?

MR YOUNG:   Well, I am coming to the combination of the two findings that his Honour recounts.  What his Honour recounts are the minutes and documents that were before the partners’ board meeting on 9 August 1989, as indeed does Justice Lockhart at trial.  They both recount the facts, and the facts include the fact that it came down to a choice between 101 and staying at BHP House.

HAYNE J:   What does page 15, line 22 on, on page 15, over to page 16 mean?  I have read it as meaning there were several choices, of them 101 emerged as the choice, for reasons A to ZZZ, but there were more than one open; Grand Central and BHP elsewhere.

MR YOUNG:   But if your Honour reads what is said about Grand Central in (d), at the top of page 16, there are increasing doubts as to whether that project will proceed.

HAYNE J:   That “As to BHP”.  So there is BHP 1, BHP 2, and maybe Grand Central ‑ ‑ ‑ 

MR YOUNG:   I am sorry, your Honour; what does your Honour mean by BHP 1 ‑ ‑ ‑ 

HAYNE J:   BHP stay where you are; BHP move.

MR YOUNG:   No, there was no stay where you are; that was the finding of the trial judge and the finding of the Full Court.  They had to move to other floors and suffer refurbishment over four years.

HAYNE J:   Yes.

MR YOUNG:   Now, at the end of the day, your Honour, there was that choice or 101 Collins Street was the only choice that they seriously considered, for the reasons given at pages 15 and 16, and accepted by the Full Court, but if I can accept your Honour’s proposition that Grand Central, the vacant bombed site at the corner at Burke and Williams Street ‑ ‑ ‑ 

HAYNE J:   It is not my proposition, Mr Young; it is understanding what the primary judge meant.

MR YOUNG:   Well, if I can accept my learned friend’s proposition, your Honour, that that was a viable choice at the time the department made their decision, that does not gainsay the fact that you have to identify what the transaction was, apply what the courts have always said, a wide and exact scrutiny of all the facts including, what was the transaction and what was the advantage sought to be gained by entering into the inducement agreement. 

The inducement agreement is plain on its face; you never get to common understandings as in the Coke Case.  The inducement agreement said the inducement payment is paid, in consideration for entering into the agreement for lease, and that means, assuming all of the obligations of the lease, return of, I think it was 12 years with an option for renewal.  It is not just the rent covenant.  The transaction was, entering into a new lease for a long term and thereby getting new premises, getting the new profit-yielding structure for the business and the style of premises was absolutely fundamental to the firm.  The court all the way through has found that the landlord did not just get the rent covenant.  There are repeated findings that what the landlord ‑ ‑ ‑ 

GUMMOW J:   There is a problem in all of this, though, and it is the passage which appears at page 67 of the application book and it comes out of Myer itself, I think, that Justice Lockhart virtually was alert to it.  “The debate” he refers to there.

MR YOUNG:   Your Honour, we would say this, that ‑ ‑ ‑ 

GUMMOW J:   “The” or “a” purpose.  People bug you over this all the time, do they not?

MR YOUNG:   But the question comes down to a purpose of what?  What my learned friend advanced was the same argument advanced on the special leave application in Selleck.  All you have to ascertain is that there was an intention to get the receipt of the inducement payment.  Our learned friend’s argument is that the proposition is so limited, and he said it a number of times, “a not insignificant purpose of obtaining the incentive payment”.  That is, with respect, is not the question, and it is not the question sanctioned by any of the High Court authorities.  The question is the objective one, what was the purpose of the transaction relevantly identified, and the transaction was the obtaining of a new long term lease.  If you apply what was said in GP International, what was the advantage obtained in exchange for the receipt of the payment?  The answer is, a new long term lease, a capital asset. 

Let me accept that is not the end of the inquiry, but that is a significant part of it on all of the High Court authorities dealing with receipts.  Now my learned friend slides over that.  And it is not answered by simply saying, well, you entered into the agreement of the lease, therefore you must have intended to get this payment.  That is not the relevant inquiry.  The inquiry is to examine the business of the partnership and to ascertain what role the lease pays in the operations of the partnership.  If it plays the role of a capital asset, that, to use Chief Justice Brennan’s words - Justice Brennan as he then was in Coke - is the basic touchstone for the characterisation process.  But, the next step though, let us go further and do what Justice Lockhart did, which is to consider the three questions our learned friend accepts, at page 62 his Honour’s reasons.  Now, let me deal with each of them.

It is plain that the transaction, that is the obtaining of the new lease and the getting in of the incentive payment, did not form part of the ordinary course of its business.  All of the cases would say that, and the applicant accepts that at paragraph 40 of its outline of argument. 

The next question is, was it an ordinary incident of the business activity of the firm.  Justice Jenkinson made no such finding that it was; nor did the Full Court.  On the contrary, each of the four judges found on the facts that this was not an ordinary incident of the business of the firm, to move in this fashion and to receive the incentive.  Now what the applicants do in their outline, if I can just hold page 62 and turn to the outline of the applicant’s summary, at paragraph 41 page 98, is to say this, and this is the point they are advancing now:

The Full Court erred in distinguishing Federal Commissioner of Taxation v Cooling (1990) 22 FCR 42 from the facts of the present appeal: the incentive payment was an ordinary incident of leasing premises in a new city building -

Could we just stop there.  That is the characteristic of the marketplace at that point of time.  It is an incident of the marketplace.  Landlords are insisting that incentives be taken and giving prospective tenants no option about it.  You must take the incentive and accept this lease if you want new premises.  And they carry on:

and the lease incentive payment was inherently income in nature:

They did not slide from saying, it is an incident of the marketplace to saying, therefore it is inherently income, because you have no option but to take it.  So we say the second test, not satisfied, and just looking on to where they wound off that part of their argument ‑ ‑ ‑ 

HAYNE J:   It has a certain piquancy about it, does it not; the argument that the taxpayer have pressed upon it a large sum of money so that its deductions might be increased over subsequent years.  Is that not the rather tendentious way in which the argument might be characterised?

MR YOUNG:   No.  The fact that deductable outgoings follow in future years when rent is paid is beside the point.  To argue that there need be some symmetrical relationship between the two is a heresy that has been exposed in this Court on a number of occasions as an erroneous train of reasoning.  That was said in Rowe and it was said in Myer itself, so let me eliminate that from the contest.

The position of the prospective tenant, its need for a new lease and the role the lease played in its business cannot be avoided by saying that it got a benefit out of the incentive payment.  The question is, according to all of the authorities, what was the character of the advantage gained as the quid pro quo for the incentive payment, and it was not deductable outgoings in the future; it was a new set of business premises for the long term, and that is the way in which the Full Court approached it; indeed, each member of the Full Court.  And it arises in every case. 

Our learned friends refer to Allied Mills, the termination of a distribution contract.  How did the court approach it.  They asked, what role did that contract play within the framework of the business and since it was a distribution contract by means of which they generated income, it was then seen that the termination payment had the character of a revenue receipt, not a capital receipt.

When our learned friend sets up these choices, or alleged choices we say were not real, the consequence really is to set up this situation:  you must move, BHP House is not an option, realistically.  There are only two other suitable sets of premises in Melbourne.  Because of the state of the market both landlords are insisting that any prospective tenant take an incentive as the price of a new lease.  There is no choice there.  Our learned friend’s case is, well despite the fact that you have to get the incentive as the quid pro quo for getting new premises, and that is a capital asset, there is no choice. 

Our learned friend’s case is that, in each instance, whatever incentive is received and whatever choice you make is going to be on revenue account.  It only serves to demonstrate that the case really turns on its own facts and the words “a not insignificant purpose” really were not central to the decision of the Full Court in this case, any member of the Full Court.  They looked at the entirety of the transaction, as the cases say you should, and they asked the right question in an objective frame.  It is an objective question; not a question about motivation. 

The question is, what was the purpose of the firm in entering into an agreement for lease by which it obtained premises for the long term?  And if the answer is, the objective of the firm was to get a new capital asset as part of their profit yielding structure, then the payment has the character of capital.  And that, in a nut-shell, is what each member of the Full Court did, and that is a conclusion depending upon a wide, but objective assessment of the evidence in the case and the facts. 

Our learned friend slides to motive; indeed he slides away from the agreement for lease: he talks about a common understanding; he talks about an intention of getting the payment in exchange for the rent covenants.  Now those are departures from principles.  That is not an application of the law; that is a significant departure from it.  It is a departure from Myer.  All of the cases have said the test is objective, and that was recently reiterated in the Orica Case; it is an objective assessment of all the circumstances.

What, in the end, my learned friend slides to is to say, one of the reasons that were weighed up in the balance for going to 101 Collins Street was the size of the incentive, and of course it was one of the factors considered, it was one of the reasons, but that is not the purpose of the transaction; that is not the purpose of taking the agreement for lease.        Now, what my learned friend seems to say as well is that ‑ ‑ ‑ 

GUMMOW J:   He seems to want to introduce the dissenting judgment of Justice Thomas in Wattie too, from the written submissions.

MR YOUNG:   Yes, your Honour.

GUMMOW J:   You seem to be dismayed by that.

MR YOUNG:   Well, it is more helpful to, say, go to the judgment of the majority, which accords with the law in this country in Myer.  What Justice Thomas did was to do two things:  he applied, initially, the approach we have said is appropriate, which our learned friend says is inappropriate.  You ought not to look at the capital nature of the occasion, and the nature of the asset gotten, by virtue of the agreement for lease.  His case is, you never need to look at that, Cooling says you do not look at it.  Indeed, Justices Davies and Lockhart were in error in looking at the nature of the asset you got in exchange for the payment.  Justice Thomas says, that is a starting point only.  Then Justice Thomas rejects an analogy with the lease premium.  With all respect, none of the judges in the Full Court treat the lease premium analogy as decisive; only one judge relied upon it, Justice Heerey.  Even then it was not essential to his decision.

Accepting all that, there is nothing wrong with making an analogy with a lease premium, just as the taxpayer may, as Justice Hill pointed out in the Westfield Case, own its own premises and, if it decides to sell those premises in order to obtain the sale price, and that is a business occasion, our learned friend would say a not insignificant purpose of selling the business premises and moving to new premises, because they had the choice of staying there, was to obtain an attractive sale price, therefore it is income.  The Commissioner has, on repeated occasions, made an attempt, first, to generalise Myer; to say, any business receipt made with the intention of getting that receipt is taxable income.  He tried that in Spedley and in Westfield.  The Full Federal Court rejected it on both occasions saying that Myer does not run so far; as the High Court said, you must carefully examine the facts in each case.

Since Cooling, the Commissioner has tried on several occasions to say, Cooling did not turn on its own facts; it did not turn on the fact that there the tenant had the option of taking the premises with or without incentive, and it was not really interested in moving until it was lured by the incentive.  They were the critical facts in Cooling.  So, for those reasons, in our submission, the Commissioner is trying to erect a general principle where none exists and by ignoring the fact that this case, as with others, turned on their own facts.  If the Court pleases.

GUMMOW J:   Thank you, Mr Young.  Yes, Mr Nettle.

MR NETTLE:   If the Court pleases, we make five points in reply:  the first is the most fundamental of them.  The question is not what was the objective for entering into a lease; the question is, what was the objective for entering into this transaction.  The second point is Cooling.  Cooling (1990) 42 FCR at page 57 sets out the proposition which is agreed in by all three judges, which is to say, where there was the commercial transaction and the leasing of premises or the carrying of business from leased premises:

formed part of the business activity of the firm and a not insignificant purpose -

of entering into this one:

was the obtaining of a commercial profit -

the incentive payment was accessible.  It is page 57 and it is in the paragraph just above centre.  Now, that is the test which thereafter was repeatedly applied and that is the test which de facto has been departed from.

The third point we would make, if we may, is that it is clear, as I submitted earlier from the findings of the trial judge, that it was a not insignificant purpose of this transaction to get the payment.  Go, if your Honours will, to pages 18 and 19 of the application book, beginning at line 7, at which point the judge holds that it was not a circumstance which motivated the firm that there was asbestos and then, to the bottom, where there is set out the internal memorandum, and in the last three lines of that, that is, the last three lines, lines 35 or thereabouts:

They are all currently attempting to attract major leasings and therefore the inducements are attractive.  Once the major pre-commitment phase has passed we do not believe the inducements will be as attractive -

Then I go on with his Honour’s words:

The applicant agreed in evidence that the urgency to which reference is made in the latter of the two paragraphs quoted was occasioned by a desire not “to lose the opportunity for the best financial incentive”.  The following question, and answer by the applicant, followed:

“And indeed that was why on 14 August you entered into the transaction with 101 rather than wait for the AMP -

GUMMOW J:   It may be, you know, that an appeal would turn upon the question of whether the Full Court dealt, in the right way, with

Justice Jenkinson’s finding of fact, which are pretty strong in your favour, really, in a way.

MR NETTLE:   Very strong in our favour, your Honour, but it is obviously not solely or indeed dominantly on that basis that we come to this Court asking for leave; we come asking because there has been a departure, however described, from principles which were clearly established by the Full Federal Court and based correctly on Myer and that departure, having now been made, if not arrested by this Court, will be grafted upon and grafted upon by subsequent courts.  The last point simply was to concern the deductibility ‑ ‑ ‑ 

GUMMOW J:   Yes, thank you.  Yes, there will be a grant of leave in this matter.

AT 11.47 AM THE MATTER WAS CONCLUDED