Commissioner of Tax v Montgomery

[1999] HCATrans 59

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne  Nos M86 and M87 of 1998

B e t w e e n -

THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Appellant

and

PAUL MONTGOMERY

Respondent

GLEESON CJ
GAUDRON J
McHUGH J
GUMMOW J
KIRBY J
HAYNE J
CALLINAN J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON MONDAY, 22 MARCH 1999, AT 2.18 PM

(Continued from 11/3/99)

Copyright in the High Court of Australia

GLEESON CJ:   Yes, Mr Young.

MR YOUNG:   May it please the Court.  There are some matters we wish to address by way of completion of our submissions and there were some matters that we, in the time available on the last occasion, rather lightly touched upon.  We have submitted that the Commissioner’s primary argument – the relationship or reimbursement argument – is one that has been rejected in a number of cases in this Court including recently Rowe, GP International, and earlier than that, Dickinson.  We wanted to take the Court to a decision of the Full Federal Court where there is a similar rejection of the proposition.  The case is the Federal Commissioner of Taxation v National Commercial Banking Corporation of Australia Ltd 50 ALR 322 which, of course, the bank in the name is the forerunner of the National Bank.

The argument now advanced by the Commissioner was rejected by the court.  That appears from several passages at pages 328 and 329.  Can I take the Court to page 328.  At about line 7, the Commissioner’s primary intention is identified by the court, namely, “that the lump sum joining fee paid by the five new” banks joining the bankcard scheme to the existing banker members of the scheme, “wholly represented expenses paid on revenue account” and previously “allowed as deductions” and, therefore, it was urged that given that relationship or element of reimbursement the receipt of the joining fee by the existing banks should be treated as on revenue account.

That argument was rejected by the court.  That appears in the next paragraph but effectively that is summed up in the paragraph at about line 30.  The premise of the argument could not be maintained, namely, that:

the lump sums comprised exclusively amounts paid on revenue account and that they were allowable deductions.  This was, in our opinion, a finding of fact by the trial judge which was not successfully challenged before us and which destroys the foundation upon which the Commissioner based his primary submission –

The Commissioner pressed on and put an argument to the effect described in the next paragraph:

even if the joining fees are not properly characterized as wholly representing expenses paid on revenue account –

and previously claimed as deductions –

nevertheless the payments received by the taxpayer are income according to ordinary concepts.  It was not a capital asset sold by the taxpayer but merely a sum received on revenue account in the course of the taxpayer’s participation in the business of conducting the Bankcard Scheme.

Then there is a reference to the concept or metaphor of filling the hole.  The court rejected that modified form of the argument at page 329 in a passage that runs from lines 17 to 39.  That dealt with a modified form of the argument that the Commissioner has not yet put in this appeal.  The Commissioner’s argument remains one that persists in asserting that the whole of the payment to Freehills was assessable because the whole represented an offset against a future inflated rent.

In our submission, this case is a useful analysis because it rejects the relationship or reimbursement way of approaching things and takes one back to the necessity of characterising the expenditure by reference to the advantage gained.  There are parallels between the National Bank Case and the present case, primarily in the Commissioner’s insistence that the only relevant reason for the payment was the incurring of future rental obligations and one should dismiss all of the other costs associated with the move or incurred because of the agreement to lease.  The Commissioner simply dismisses them as not relevant, not that they do not exist or that they were not incurred but that they are not relevant and the characterisation should be driven by this reimbursement theory.

There are some specific answers we wanted to address to that contention of the Commissioner.  First, it is our submission that there is no evidence at all that the rent for 101 Collins Street was in any way above the market rent.  On the contrary.  That proposition is rejected by the evidence.  Can I ask the Court to go to volume 2 of the appeal book, to Mr Dohnt’s affidavit.  Mr Dohnt is the agent for the developer who negotiated the agreement for lease and the inducement agreement.  Page 385.  At that page we find Mr Dohnt’s affidavit.  In paragraph 8 there is a passage to which attention has already been drawn but it continues to say in the middle of the paragraph, about line 7:

At this point in time, asking rents were still regarded as market rents by the market in general.  It was my understanding that the basis for this position, that is, a lessor preserving the asking rents by offering incentives, was to maintain the capital value of the building.

And Mr Dohnt’s evidence at pages 357 to 365, to which I have already taken the Court, confirms that the rents were the forward projections of the current market rents.  And, logically, what is said there by Mr Dohnt must be correct.  The capital value of the building would not be maintained unless the marketplace, including valuers, generally accepted at that time that the rent covenants were what was to be taken into account in valuing the building and ascribing a market value to the capital asset of the building.  Indeed ‑ ‑ ‑

McHUGH J:   But it would be a misleading capital value, though, would it not?  I mean, it would have to be an artificial value.  If the valuer knew that was what was going on, it would not be valued on the face value, and I suppose that is the reason why the valuers, as a class, seem to have been very much against the hiding of these ‑ ‑ ‑

MR YOUNG:   Your Honour is correct but the answer is, to a greater or a lesser extent, the incentive might be seen as something that affects the true market rent of the premises, depending on the circumstances of that building and that rent and the nature of the allowance.  And that is exactly what the Australian Valuation Standards Board paper, published in April of 1992, at page 836 says.  It says that in some instances, because of the large capital costs associated with moving buildings, tenants will have to be offered an offset to those moving costs and consequential costs on moving.  It will be a matter of judgment for the valuer to determine whether that is simply an allowance to address the costs of the move or whether, in a proper valuation exercise it is, to some extent, to be offset against the rent to find a true market rent.

CALLINAN J:   Mr Young, I do not know whether it is as simple as that, though, because once the owner of the building has absorbed and payed out the incentives, if the owner then goes to sell it, the owner will sell it for a price which is based upon capitalisation, capitalisation of the face value of the rents ‑ ‑ ‑

MR YOUNG:   Yes.

CALLINAN J:   And would not accept any less.  It might well be that in realistic terms the owner would not be receiving as much or might not have as much in his or her hands because there would be an offset perhaps in the books for what has been paid out by way of incentives, but the actual market price to any purchaser would surely have to be a price based upon the capitalisation of the face value of the rents.  I do not know whether that is correct.

McHUGH J:   There are a lot of problems involved in it.  A lot depends upon how many people are already in the building, what is the length of their lease.  What are we valuing it for; some long‑term basis or as a security for a loan for a few years?  It all depends.  There are so many variables.

MR YOUNG:   Can I accept ‑ ‑ ‑

HAYNE J:   In truth, are we valuing market rent, the capital value of the building?  What are we valuing?  To speak of market rent as something separate and distinct from the arrangement struck apparently between two arm’s length neither willing nor anxious parties, as divorced from one of its elements seems to me to be entirely unreal.

MR YOUNG:   Can I accept firstly what Justice Callinan and Justice McHugh have put to me.  With respect, your Honours are correct and what I said was something of an overstatement.  It does depend upon a whole range of considerations including what you are valuing and whether it is the capital value of the future rent covenants rather than the past expenditures in filling the building with anchor tenants.  But to take your Honour Justice Hayne’s point, what we are addressing is the Commissioner’s assertion that this payment to induce Freehills to move and incur all the costs associated with the move is to be characterised on the assumption that it is an offset against some inflated component of the future rent.

That is what we are trying to address.  The very concept has difficulties because we are not talking about a present prevailing rent; we are talking about an arm’s length commercial negotiation that fixed a rent whose inception date lay two years into the future.  So we are not talking about current market rents; we are talking about an arm’s length negotiation to fix a rent that was to come in on the completion of the building and the completion of the fit out roughly two years after the negotiation.  Moreover, the leasing proposals from 101 Collins Street on the evidence say that the rent was to be reviewed to market every two years through the life of the lease.

GLEESON CJ:   I wondered if there was any evidence in this case about the significance for lessors of these rental payments by reason of the rent review provisions in leases.  Keeping the rents up or, depending on which way you look at it, not letting the rents drop had an ongoing significance, as I would understand it, because of the scheme for reassessment of rent over the period of long leases.

MR YOUNG:   Your Honour, the only evidence was that of Dohnt who gave evidence that developers wanted to maintain rents, offered incentives for a variety of reasons including the need to fill the building, to compete with developers of other landmark buildings and to secure anchor tenants, and it was Mr Dohnt who mentioned the maintenance of the capital value of the buildings being an objective of the developers.  But beyond that, there was no evidence dealing with the ongoing significance of rent reviews and how that impacted upon the objectives of the developers.

GLEESON CJ:   There has been quite a deal of litigation about those rent review clauses.

MR YOUNG:   Well, that came later, your Honour.  That is referred to in Mr Sully’s report and he traces that to 1992 and that is really Mr Dohnt’s point in his evidence, that as at August 1989 this discrepancy between market value for the square metreage of office space and whether or not you take incentives into account in forming a valuer’s view of market rental for like office space at a particular day, was something that Mr Dohnt said was not the perceived view of the market place.

McHUGH J:   That is contrary to Sully’s evidence at 389, is it not?  Did not Sully say that in 1989 the face rent was in excess of the fair market rent?

MR YOUNG:   That is so.  Your Honour is correct but that is not addressing this building and it is not addressing the particular rent for a particular building.

McHUGH J:   No.

MR YOUNG:   It is a general observation about the concept of a valuation concept ‑ ‑ ‑

McHUGH J:   I thought Dohnt’s evidence also was very general, was it not?  It was not directed to this building, was it?

MR YOUNG:   No – it was directed to this building.  He said that this rent was set by projecting current rents forward.

CALLINAN J:   Mr Young, it depended, I think, as the Chief Justice is really saying, upon the rent review clauses and some of them were very ingeniously drawn and designed to require the valuers to disregard the incentives.  Was there any evidence about what the rent review clause here said?

MR YOUNG:   No, there is none, your Honour.

GUMMOW J:   That is because we do not have the lease.

MR YOUNG:   We do not have the lease or the proforma, your Honour.  The closest one gets are the exchanges of correspondence between 101 Collins Street and Freehills that appear at these pages of the appeal book:  544, 627 (a), (b) and (d), and 923.  But even if we assume for the sake of argument, your Honour, that there is a wondrously drawn rent review clause that protects the position of the developer against any fall in rent in the future, that does not gainsay the fact that the rent had to be reviewed to market every two years.  There may be a flaw, but over the 12 year life of the lease it cannot be said that there is going to be some discrepancy between prevailing market rents and the rental agreed to be paid by Freehills that is going to be ongoing.

CALLINAN J:   There was some term that was used.  Was it “a closed rental basis” or a “closed valuation basis”?  I can remember the industry invented a term which was designed to exclude reference to incentives.

MR YOUNG:   Yes, your Honour, that is what Mr Sully addresses and what the Australian Valuation Standards Board paper addresses, namely, that there was for a time, either by virtue of rent review clauses or by virtue of a culture amongst valuers, that incentives were not taken into account in reviewing rents and setting a market rent for particular premises.  That had its demise, according to Mr Sully, in about 1992, but the Australian Standards Board paper in April 1992 says that it is for a valuer in the circumstances of each particular case to make a proper judgment as to whether any incentive or allowance to the tenant was solely to address the costs of moving with no impact upon the rent by way of any inflationary component or whether the converse was the case and if so, to what extent.

So, it cannot be asserted, in our submission, as the Commissioner does, that it is beyond question and unarguable that the entirety of the inducement payment is to be characterised as exactly offsetting some inflated future component of the rent.

GUMMOW J:   It would be unhappy if this came down to some onus of proof question.  It seems to me that the rent clause is crucial to all of this.

MR YOUNG:   Well, as your Honour said to me the other day it is not a matter that we can cure.  We made the offer we did, but that simply seems to be the way things went at trial.

GUMMOW J:   All I am saying to you is, in so far as there is any ambiguity left it may be one that runs against you, not for you.

MR YOUNG:   Well, no, with respect, there is no ambiguity, on the evidence.  The position, on the evidence, is that the rent was reviewable to market every two years.  That is what the offer and acceptance letters say at page 627 which are attached to the partners papers that I took the Court to, and moreover, the inducement agreement itself, on its face, could not be plainer but that the inducement payment was available to meet and could be drawn down to meet the termination payment of the BHP House lease and the costs of the fit out.  Let me give your Honour another example.  Stamp duty is one of the authorised expenses that the inducement payment could be drawn down against.

Now, stamp duty on a lease that is to be the profit-yielding structural foundation of a business, one might think, would take its character from the lease and perhaps be capital but it is one of those expenditures which the Income Tax Assessment Act in section 68 says is to be an allowable deduction and as Rowe points out there are many capital expenditures which the Income Tax Assessment Act allows to be deducted, and that is one of them.

GLEESON CJ:   Especially for primary producers.

MR YOUNG:   Yes, your Honour, and if I can conclude the submission:  in allowing money to be drawn down for the inducement payment specifically for the purpose of paying stamp duty, that is a deductable expense.  The Commissioner asserts because it is a deductable expense, that means you characterise the whole thing as on revenue account.  In our submission, that would be a travesty of the Court’s opinion Rowe to reach that conclusion.

HAYNE J:   You referred to the correspondence annexed to the documents that went to the partners as founding the submission about two year rent reviews to market.  Is that page 627(b) that you refer to?

MR YOUNG:   Yes, your Honour.

HAYNE J:   Which refers specifically to as per 101 Collins Street lease document.  What are we to make of that?

MR YOUNG:   That there was a lease document in existence at that time, dealing with rent review, which is not in evidence.

HAYNE J:   And that the clause otherwise is unqualified by that expression.  Is that what we are to conclude from it?

MR YOUNG:   No, your Honour.  But your Honour will see in the other pages I mentioned that in each of those occasions where rent review is mentioned, there is a straightforward reference to “2 yearly to market”; page 544, line 20; page 923.  But the point we were endeavouring to make is let it be assumed against us that there is a flaw in the rent review clause.  That does not alter our submission.  Our submission is it cannot be said that through the life of the lease this payment is going to offset each and every month or each and every year some inflated component of the rent because over the 12-year life of a lease it is likely, at least as a matter of reasonable apprehension by the parties back in August 1989, that the rent level, reviewed every two years, will, at some point of time correspond to the market rent and be so fixed at a review date regardless of whether there was any flaw. 

So, whatever assumption one makes about the true rent review clause, flaw or no flaw, quasi flaw or no flaw, the Commissioner’s assertion cannot be sustained when it says there is an inflated component that is going to continue through the life of the lease.  One might take it further:  for the life of the use of the premises by Freehills.  They have an option.

CALLINAN J:   Mr Young, I asked you the last time about a finding that was made to the effect, as I thought, that it was unlikely that there was any gain in profit.  Do you remember that?

MR YOUNG:   Yes, your Honour, in the - - -

CALLINAN J:   And you said at the time that you thought that that view probably depended upon looking at the rent which would be paid over a number of years.  But I see you have done some calculations on page 6 of your supplementary submissions which indicate that in the year of receipt of the incentives the total amount of the incentive was actually spent.

MR YOUNG:   Yes, your Honour, that is so.

CALLINAN J:   Indeed, perhaps somewhat more.  You have a figure of just over $28 million.  It may have been a little less in the year, is that right?

MR YOUNG:   Yes.

CALLINAN J:   About $1.25 million, is that correct?

MR YOUNG:   Yes, your Honour, that is all that could be said in relation to two years of income that would remain as an arguable gain, having regard to all the incomings and the outgoings over those two years.

CALLINAN J:   It is about $1.25 million and that might have, perhaps been accounted for by a loss of site duty or something of that kind.

MR YOUNG:   Yes, your Honour, it could be.

CALLINAN J:   You do not assert that but you say there is no dissection which would enable you to say that it either was or it was not.

MR YOUNG:   No.  Can I make one other point in that regard, and I believe I have made it.  When the partners looked at the incentive payment, it was $15.89 million if paid immediately.  They were then looking at costs that were going to be incurred by reason of the agreement for lease that far exceeded $15.89 million.  The costs they were going to incur were then estimated to be $11.4 million on fit out, $6.46 million was their residual liability on the leases of BHP House and Nauru House, and they had their $2.1 million loss on the write‑off of the fit out at BHP House.  So, standing there looking at the specified amount, it was more than exhausted by the costs that were going to be incurred by entering into the agreement for lease.  Ultimately it was not drawn down to meet those costs immediately.  It was allowed to compound at the agreed rate of 16.5 per cent for several years.

CALLINAN J:   You need to take into account one year’s rent, do you not, for Collins Street to get a sum in excess of the total of the incentives though?

MR YOUNG:   That is so, your Honour, yes.  The Commissioner of course would say although that is in the relevant year and is an outgoing in that year, you ought to disregard it because it is deductible.  There is no principle if you are looking for what is a profit or a gain in a transaction that you only take into account those outgoings which are not deductible under section 51(1).  If you are truly looking for a profit or gain, you take into account all the incomings or outgoings over that transaction.

CALLINAN J:   But there is no evidence as to how much less than $8.47 million the rent would have been had the incentive been less.

MR YOUNG:   No, exactly, your Honour.  Sully gave no evidence of what a market rent was as at 14 August 1989 for 101 Collins Street.  He gave no evidence of what a market rent could reasonably be projected to be for 101 Collins Street as at mid-1991.  If one asks oneself the question your Honour just did, “What is the inflated component of the rent?”, there is no evidence quantifying it or supporting the existence of any such amount.  Sully certainly gave no evidence and, in our respectful submission, it is rejected in the evidence of Dohnt.

HAYNE J:   In answer to Justice Callinan you gave an answer which suggested to me that you were equating profit and gain.  Is that right – using the terms interchangeably?

MR YOUNG:   To this extent, the answer is yes, your Honour.  I was using them both as net concepts.

HAYNE J:   What then is the best authority you would point us to that shows that gain when used in the field of discourse, gain from business – not gain from a profit-making scheme – but gain from business, is a net concept?

MR YOUNG:   I think, perhaps, the best example I can give your Honour of a net concept is that of exchange gains.  That is a gain.  It is the only context I am aware of in the income tax field of discourse where gain has been the subject of decisions and there, of course, the gain is the difference between the amount of currency required to discharge an obligation that might be expressed in US dollars or some other foreign currency from one point of time to another, and there may be a gain or loss depending on currency movements and there you ascertain the amount of the gain in a net way.

GLEESON CJ:   There is another context in this Act in which gain is now used and that is in relation to capital gains, is it not?

MR YOUNG:   Yes, that is certainly a net concept in the CGT provisions.

HAYNE J:   No doubt there, because statutorily it is, but in the context of ordinary usage, that is, income in the sense of gain from business which is a usage I think you will find in the older English cases, is there anything in any of those authorities that you can point us to that shows that gain is used there as a net concept, that you net off before you bring it to account?

MR YOUNG:   In cases such as Californian Copper  and Rees Roturbo, gain is used in English cases in a net concept and there, of course, they are not used in the broad concept of in business, but the concept of what is truly an operation of business or truly the carrying on of a business, and there, again, a net return might be assessable under the English Act which, of course, differs.  It is based on assessing the net outcome of business operations.

HAYNE J:   But, relevantly, in that context, is driven, is it not, by the notion of income according to ordinary concepts?  True, it is then income of a particular kind.  Income from business or adventure in the nature of trade but part, at least, of it, as Lord MacNaghten reminded us, is income.

MR YOUNG:   Your Honour, I would not wholly embrace what your Honour says.  True it is those cases talk about income according to ordinary conceptions, but it is for the purpose of legislation that has a different foundation to ours.

HAYNE J:   Bringing to tax profit rather than income?

MR YOUNG:   Profit from a business, yes, in the same way that Canada does.  There, it allows one, for instance in the Ikea Case, to say this, that if you specify that the inducement payment is to be spent on fit out, that specification will ensure that it is not a business profit for the purposes of the Canadian legislation because it will be treated as capital, whereas, if you make no specification at all and it falls into the general pool of funds available to the company and there is a net gain, that will be treated as a profit from business.  Now, with respect, it is a very different concept when you start from that legislative base.

HAYNE J:   The authority that I had in mind lying behind this, is the US Supreme Court in Eisner v Macomber which is 252 US 189, particularly at 207, which is a case concerning the Sixteenth Amendment where income was defined as being the gain derived from capital, from labour or from both combined. There was then debate about what was meant in that context by gain, particularly gain derived from capital. That is to say, severed from capital, emerging out of capital, that is, as opposed to gain accruing to capital and I wonder whether, in the field of discourse with which we are now concerned, at least in part, income according to ordinary concepts equals, or rather, includes income from business, includes gain from business, includes something that is to be a distinction to be drawn derived from capital or accruing to capital.

MR YOUNG:   Well, your Honour, I am not sure I understand the distinctions drawn by the US Supreme Court of different sorts of gains and their relationship to capital, but let me say this, the reference to profit or gain derives in our jurisprudence in this area of discourse from Myer and its purported application in Cooling.

HAYNE J:   No, it is much older than Myer.  You can trace it back much beyond Myer and it is a term that you can find traced back through, as far as I can tell, into the early 20th century English cases, in their discussion of income according to ordinary concepts.

MR YOUNG:   Yes, your Honour, and it finds voice here in cases like Australasian Catholic Assurance, Avco, London Australia and so forth, but it has always been used in this country to address the net return from what is truly a business operation.

HAYNE J:   Well, as I began the debate with you on it, in one field of discourse, profit from a profit‑making scheme, that I understand and, as I say, it is at that point that I am looking for help.  Where in the field of discourse of gain from business - firstly, is that a relevant or appropriate way of describing it.

MR YOUNG:   When you are dealing, your Honour, with something other than a temporal connection with business, so, we are dealing with what is something that is truly an operation of business, part of the regular returns by which a firm earns income, then, in that context, as I would follow it, gains being used in our jurisprudence, London Australia, the Foreign Exchange Gain Cases, to bring to tax a net return from what is truly an operation of business.  Now, if we leave aside those cases, there is no case that treats gain as a peculiar or special head of income to which different or special principles apply.

HAYNE J:   No, the point I am putting to you is not that it is special or different but that at least one view of what has been said in the cases suggests that it is at the very core of income, not that it is a special addition to the definition, it is at the very essence of what income is, a gain received in this context in business not necessarily from the ordinary course of or regular conduct of, but in business with a view to distinguishing ‑ ‑ ‑

MR YOUNG:   No.  Well ‑ ‑ ‑

HAYNE J:   If I can just complete it and then let you have your answer – with a view to distinguishing between the one-off adventure not properly classified as business and something that occurs in business.

MR YOUNG:   Well, your Honour, we would submit that any such conception of gain is rejected by this Court’s decision in Orica, amongst others.  Let me explain why I say that.  Orica was a case in which a taxpayer entered into an agreement which produced a difference between the outlay and the benefit received.  In Orica the taxpayer entered into a principal assumption agreement in business in the broad temporal sense of those words.  It payed out $62 million in, I think, 1986 in order to get the covenants from MMBW.  MMBW undertook to make payments directly to debenture holders of Orica in future years, paying out the indebtedness under those debentures over a series of years. The Commissioner asserted that a gain or income was made, namely the difference between the outlay in one year and the monetary benefits gained in future years.

Now, that was in a broad sense in business.  It was not held to be a profit or gain by this Court.  This Court rejected that conception of gain.  It held, at page 987 that:

the accounting difference between the amount outlaid in a singular transaction to acquire the rights to have another pay sufficient to meet existing capital liabilities of the taxpayer in the future is not a profit or gain to the taxpayer –

And one key to the holding is that this transaction, whilst in business in that broad sense, was a singular transaction, not part of the regular means whereby the taxpayer obtained returns.

A virtually identical debt defeasance transaction in Unilever was held to be one that resulted in income on ordinary conceptions, the difference being that the Unilever subsidiary that engaged in the transaction was a finance company and it did it as part of its regular means of earning income, albeit something of a departure from the ordinary course of those activities.

Now, if any such conception that your Honour advances of gain that attracts our Act simply because a transaction is undertaken in business were available, then Orica would have been decided differently.  It was not because our law adheres to a requirement that a return is only taxed as income of a business or of a business operation if it is truly that, it is truly the carrying on of a business in the sense of part of the regular means whereby the taxpayer obtained returns.  That cannot be said of this transaction.  This transaction for Freehills was not part of its regular means of deriving income, it was a singular transaction by which it acquired premises for the long term.  And one of the terms and conditions of that acquisition was that it received a sum of money.

GLEESON CJ:   If you have passed from that subject, to return to the question that Justice Callinan asked you, an example of a case concering the construction of a provision in a rent review clause of the kind that Justice Callinan referred to on which the Court of Appeal of New South Wales divided was Perpetual Trustee Company v Crooks Mitchell Peacock Stewart Pty Ltd 5 Butterworth’s Property Reports 11,868 where the rent review clause contained a provision that the valuer should make no reduction on account of any concession otherwise required to secure a tenant.

MR YOUNG:   There is an Australian Valuation Standards Board paper in fact says in its opening passages that it is being issued to resolve the controversy that had existed up until that point of April 1992 as the proper way of treating incentives.

CALLINAN J:   I do not see how the standards could deal with it, frankly.  It had so many different clauses.

MR YOUNG:   At the end of the day your Honour is correct, because the standard in paragraph 3.1 reduces it to saying it is a matter of judgment for the individual valuer depending on the circumstances of the particular case.

CALLINAN J:   Which is, I think, exactly what the Full Court of Queensland said in In re McCafferty, (1994) 2 Qd R 538 which is another of those cases. There was another one, a much earlier one. Do not worry about that. It was just that McCafferty was such a case.

MR YOUNG:   Yes.  It is against the backdrop of that sort of issue, your Honour, and those sorts of cases that we would say it is flawed logic to assert that you mathematically subtract the amount of the inducement from the negotiated rent whose inception date is mid-1991 and then assert that that subtraction gives you the market rent as at the inception date of the lease.  I did want to say something specific about the fit out.

GLEESON CJ:   Just before you pass on to that, would not a simple example of a gross, as distinct from netted, gain coming to your clients at the heart of their business be their gross fees which constitute assessable income?

MR YOUNG:   Yes, that is income on ordinary conceptions and, as his Honour was putting to me, one could call it a gain, although that would not be the normal terminology applied in Australia to such a gross receipt.  It is gross income, it is assessable income against which there may be allowable deductions.

But retainer fees would be another example of the gross receipt, a fee not for doing work against which expenses might have to be allowed but simply a fee paid to the firm of solicitors for holding themselves ready and available to act for a particular client and not accepting any work against that client.  That would be a gross receipt, again, but arising directly as part of the regular means of earning income.

HAYNE J:   Other than the profit-making scheme and the currency exchange gains, do you point to any other sort of transaction in which there is a netting off of the kind that you say is required here?

MR YOUNG:   Netting off in this country, because we work on a gross income concept, arises principally in the decided cases in two areas.  One is the old section 26(a), section 25(a) as it now is, you net off both for the purposes of making a profit on sale or for the purposes of gains derived through a scheme, and the other area is the area of business operations, London Australia and so forth.

GLEESON CJ:   Would not another example be the way the law deals with trading stock where you have an opening value and a closing value?

MR YOUNG:   That is so, your Honour.  That depends, though, perhaps, on specific provisions of the Act which requires trading stock to be treated in that way.  I was looking really for more general conceptions within the framework of the legislation.  Others may occur to me but at the moment I think they are in those two main areas.  One area where there is perhaps a netting off is where depreciated plant is sold.  Of course, you have to bring to account as income a balancing adjustment that takes into account of the depreciation claimed against the receipt from the sale, but, again, that is a specific statutory provision.

What I wanted to say about fit out, if the Court pleases, is really this:  the Commissioner seems to dismiss the obligation to fit out the building in the agreement to lease as an irrelevancy.  It seems that this is done partly on the basis that you have regard to certain covenants of the agreement for lease and not others, which cannot be right, but alternatively, it seems to be on the basis that the fit out was subsequently sold and leased back.  The evidence is that the fit out was paid for out of the inducement sum in Freehill’s general account.

GUMMOW J:   Yes, but I think the Commissioner’s point is it need not have been.  You seem to have some tracing exercise going on here.

MR YOUNG:   No, your Honour.  If I can finish what I was about to say and then I will deal with your Honour’s point?  It was paid for out of the inducement sum in Freehill’s general account.  The evidence for that is at page 201, 251, 269 and 456.  It was sold to the ANZ Bank and leased back 12 months later in June 1992.  Now, that makes this case, in this respect, indistinguishable from Selleck.  Indeed, this is a stronger case than Selleck because there was a greater distance between the sale of lease back and the expenditure on the fit out, but we would submit that the subsequent sale and lease back cannot affect the character of the receipt in Freehill’s hands.  Now, can I turn to your Honour’s point that there was no obligation?

GUMMOW J:   Well, I thought that was the point against you.  It is not my point.

MR YOUNG:   No, your Honour.  With respect, it is not the point that is put against us or not the only point that is put against us about the fit out.  As to the absence of any obligation, we make several submissions.  First, we submit that that is a rather artificial and unreal view of the transaction.  The building was being leased, or the agreement to lease dealt with a building that was under construction and which was to be leased in a shell and poor state; not capable of being occupied in that state.  The agreement to lease obliged Freehills to fit out the building before it could be occupied.

GUMMOW J:   It that right.

MR YOUNG:   Yes.  Clause 3.5 of the agreement to lease.

GUMMOW J:   Well, I was looking at that.  What page is it?

MR YOUNG:   It is in volume 3, your Honour, and it commences at page 632.  I gave the wrong clause number, your Honour:  3.6(b).

GUMMOW J:   That is right, “the Lessor will make the Demised Premises available” - - -

MR YOUNG:   - - - “during which the Lessee will carry out and complete the Lessee’s Work.”

GUMMOW J:   Yes.  It does not oblige them to carry out the work though, does it?  If they want to carry it out, they have got to carry it out within that period.

MR YOUNG:   No, your Honour.  We would submit that the proper construction of 3.6(b) is somewhat stronger than that.  “The Lessor will make the demised Premises available”.  We would say, “will”, in that context imposes an obligation to make the demised premises available.  The same word “will” is then used to impose an obligation on the lessor “to carry out and complete the Lessee’s work” within stipulated periods.

CALLINAN J:   Plus, you have 1.18 and 3.5 also which contemplate that the landlord will give a notice.

MR YOUNG:   Yes.  Clause 1.24, in defining “Lessee’s Work” speaks of:

the work to be carried out by the Lessee during the Fitting Out Period being work which is specified in Schedule 2.

GUMMOW J:   Yes, and what consequences attach, though?  What happens if they do not carry it out?

MR YOUNG:   If they do not carry it out they will be in breach of obligations under the lease.  I have not traced through what consequences result but, in our submission, it is clear that there is an obligation imposed by the agreement to lease to carry out the fit out.

GUMMOW J:   There are provisions about where the lease commences, are there not?

MR YOUNG:   Yes, there are.

GUMMOW J:   That is a different matter though, is it not?  It is on the lessee’s head if it does not achieve a state of affairs at the achievement of which the lease commences.  It has every incentive to do it because it wants the lease to commence.

MR YOUNG:   Yes.

GUMMOW J:   That is a different thing.

MR YOUNG:   But the fit-out period expires in a stipulated number of weeks whether or not the fit-out work is completed, so that is the lease commencement date.  So, if the work is not completed within the stipulated period, the premises are going to be not capable of being occupied and there is going to be no right to carry on business there but the lease will commence and rent will have to be paid.  So, if there is any incentive, it is an incentive on the lessee to perform its obligation.

GUMMOW J:   No, to do it – not to perform its obligation but to put itself in a position where it is getting something for money.

MR YOUNG:   With respect, your Honour, in our submission, the lease imposes an obligation to carry out the fit out.  Can I come to your Honour’s point.  We would say these things should be looked at as a matter of substance in any event and the substance of the position was that the premises were not capable of being occupied unless the lessee carried out that fit out and it would be enormously costly to the lessee no doubt to default in that obligation to carry out the fit out.  In dealing with it as a matter of substance, that is how one should address the situation.  Your Honour asks me what we say of the fact there is no obligation to expend the specified amount of the inducement payment on the fit out.  First we say there is a power to draw down on the specified amount and expend it on the fit out under the inducement agreement.  That in fact was done.

Secondly, the absence of that obligation cannot in our jurisprudence be a factor used in characterising the receipt, otherwise GP International and what it said would no longer be good law.  You do not characterise a receipt according to what you are obliged to expend the receipt on.  That is the very point that was addressed in GP International.  So the absence of that obligation to expend the money on the fit out is, on a recent decision of this High Court ‑ ‑ ‑

GUMMOW J:   I realise that, but why are we talking about what expenditure there was on fit out?  How does it come into the equation at all?  That is what I am mystified about.  I know all about GP Pipecoaters, I hope.

MR YOUNG:   It comes in this way, your Honour.  The Commissioner’s submission is that Ikea is good law and should be adopted by this Court.  Ikea says exactly that and that is why we say it is wrong.  Ikea says you look for an obligation:  if there is an obligation to expend it on fit out, it is not income, that receipt; if there is an obligation to expend it on general business purposes, that involves revenue expenses, then characterised accordingly.  That is the Commissioner’s argument.  He embraces Ikea and says, against us, that you ought to characterise the receipt, not by reference to the Sun Newspaper tests, but by reference to what it is going to be spent on, what it is available to be spent on and what you are obliged to spend it on.

And here they say, because it is available as an offset against future rent, let that drive the characterisation.  It is our submission that that is heresy.  You should not enter upon that approach at all.  In our submission, the Court should apply the correct principles set out in GP International.  So, with respect, your Honour, we only get there because that is the foundation for the Commissioner’s argument.

Indeed, that is the very point that the Commissioner puts in his further written submissions.  He says that 2.1 of the inducement agreement does not refer to the lessee’s works.  Well, it does not, it refers to the entire agreement for lease.  It does not refer to future rent either.  And his next point is that the inducement agreement and the agreement to lease contains no obligation to expend the incentive on fit out, as if that mattered.  Likewise, there is no obligation to expend it on future rent.  And those matters are really beside the point in a proper approach to characterisation.

And just dealing with that matter of what it was expended on, and to some extent going back to profit or gain, the Commissioner has, it appears, not ever comes to grips with the 1991 year in which $2.9 million was drawn down and expended as authorised expenses on fit out, stamp duty and so forth.  There is no gain, on any view of things, no profit in the 1991 year.  No part of it is referable to rent.  It was all drawn down as the agreements provided in respect of authorised expenses.  Yet he conveniently ignores that when he advances his primary argument.

There is one point specifically I wanted to deal with in the way in which the Commissioner puts his primary argument.  It appears in paragraph 16(f) of the Commissioner’s further submissions.  What is asserted there, 16(f):

the only consideration which flowed to the lessor by virtue of the agreements was the rent.

Now that, of course, is not the case.  Indeed, no rent flowed.  The consideration was the entering into of the agreement for lease and the immediately required obligation was to agree to take a lease at a future date and, in the meantime, fit out the premises.  But what is said there ignores this finding by the trial judge at page 1021, point 10, where his Honour found that the “consideration” flowing to the lessor was the “public commitment” to lease.  We would add not just a public commitment to lease but a legally binding commitment to lease.

Now, that is reinforced by other documents.  Can I go to page 925 in same volume to 101 Collins Street’s opening proposal, and the last page of their proposal to Freehills they say this, line 6 at page 925:

We are aware of the strong covenant Freehill Hollingdale & Page would present to this development and the Joint Venture Partners’ financial commitment in assisting Freehill Hollingdale & Page to relocate –

we emphasise those words –

in assisting Freehill Hollingdale & Page to relocate we feel warrants your serious consideration before any final decisions are made.

Upon the signing of the Agreement for Lease, we would wish to publicise the fact that Freehill Hollingdale & Page would be relocating to 101 Collins Street.

Now, that proposal is agreed to by Freehills ‑ ‑ ‑

GAUDRON J:   Does that not, however, take you closer to the ordinary concept of income?  Let it be assumed that a sports star, as frequently happens, allows his or her name to be associated with a particular brand of milk, or the like, for which he/she receives very substantial payments.  Surely that is income.

MR YOUNG:   I do not quibble with your classification of the sportsman and the milk example ‑ ‑ ‑

GAUDRON J:   Why is it different here?  Freehill Hollingdales are allowing their name to be used really to publicise the desirability of a particular building.

MR YOUNG:   No, with respect, what is being publicised is the fact that Freehills has committed to take a lease of the premises which, as the documents show, the partners meeting documents, in particular, there was a commitment made by Freehills to obtain premises from which they could conduct their practice in the long term.  Freehills, in exchange for this payment - and these are the lessor’s reasons for making the payment ‑ ‑ ‑

GAUDRON J:   But the lessor’s reasons may well be relevant.  In Rowe - is that not the case, that an employer’s reasons may be relevant in the case of an employee who gets some additional benefit?

CALLINAN J:   But also, Mr Young, there is something on your side to the same effect, I think, as that statement that appears in the lessor’s document.  Somewhere, I think, in that memorandum Freehills say that they are entitled, as it were, to exploit the fact that they would be a tenant of some prestige – that is not the language that is used but it is a clear effect of it – which does really look as if both parties are agreeing upon an endorsement fee for the building.

MR YOUNG:   The passage your Honour Justice Callinan has in mind is at 617 where the language was, it:

reflects no more than the firm’s importance as a potential tenant to any owner or developer.

But the point we make is that the developer had its own reasons for making the payment that had nothing to do with rent or future rent for some offset.

GLEESON CJ:   But the significance of this is that from one point of view it may be that this entire argument about inducement to pay an inflated rent is a red herring.  Suppose you had a shopping centre that was developed and the developer first of all negotiated with Woolworths on the basis that if they could attract Woolworths to the shopping centre then they would thereafter be likely to attract a whole lot of minor tenants, and suppose the evidence showed that what Woolworths agreed to pay as rent was the market rent, no question of any inflated rent at all.  But suppose the evidence showed that the developer paid Woolworths an amount of money by way of an inducement to get them in first, so that they could then make their premises more marketable to other people, I think what is being put to you for your comment is that that might be income according to ordinary concepts of Woolworths.

GAUDRON J:   Can I add to that just to indicate what I am thinking, if you approached it from that angle, as it were, the fact that it was a one off would really be irrelevant because, as one knows, if a person has a particular value as a name, if you like, there are situations in which the more often you let your name be used, the less value it has.

MR YOUNG:   Yes, but Freehills was not lending its name in that sense.  One needs to keep firmly in mind that the transaction ‑ ‑ ‑

GUMMOW J:   No, I think what it was doing in one way was turning to a particular account its goodwill.

HAYNE J:   Its capital.

MR YOUNG:   No, we would say, with respect, not.  What it was doing was entering into an agreement to lease.  Mr Dohnt put it well, at I think page 364, when he said you have to move to get the incentive.  This payment was something the developer insisted on as the negative price for getting Freehills to move.  They were not in the business and it was not part of any aspect of their business, ordinary or otherwise, to go about moving in order to get payments of this kind.  What was critical was the move.  They were moving premises.  They were acquiring a new lease, part of their profit‑yielding structure for many years to come.  It had to be the right lease in the right building.  If the developer says, “Our terms and conditions for granting you this lease are that you receive this payment and you let us” – because that is their proposal – “publicise the fact that you’ve become an anchor tenant of this building”, that is simply the result or product of that transaction by which Freehills acquired the lease.

GAUDRON J:   But if I could come back to what I put to you a little bit earlier, it is perhaps in a situation like this a little ridiculous to inquire about Freehill’s motives in this.  They took the inducement because it was there and because they would be fools not to.  I mean, it really is as simple as that.  In this situation why do you not, as in the employment type cases, look to the purpose, the motive of the payer?

MR YOUNG:   That has been said in gift cases but it may be helpful, although of limited assistance, to look to the motive of the donor.  But where you have the consideration squarely stated in an agreement that has been negotiated, that is not attacked as a sham, then, as Sir Gerard Brennan said in Federal Coke, it is to the agreement that you look to ascertain what the recipient of the payment got in exchange for that receipt.

GAUDRON J:   Well, the recipient of the payment got the payment.  You are borrowing concepts, I think, from an area where you are looking to characterise the payment out.

MR YOUNG:   Your Honour, we would submit, only has difficult because the transaction is running the other way.  Let me reverse the transaction.

GAUDRON J:   I have no difficulty if you reverse the transaction.  What I am asking is, why do you assume that the converse is equally true, and that is what you seem to do.

MR YOUNG:   No.  The reversal I have in mind is this:  we will move geography because it is more credible if we place the building in Sydney, but if we make ‑ ‑ ‑

GAUDRON J:   Not to me.

MR YOUNG:    ‑ ‑ ‑if we make the assumption that a bank in Sydney wants the most prestigious and highest piece of office space available that is just being developed in Macquarie Street and the developer’s terms to the banker, “Yes, we will enter into an agreement for lease on completion of the building in three years time but you have to pay us a premium”.  Now, our proposition is that the same tests apply to the characterisation of a payment and receipt.

GAUDRON J:   That I have always understood.

MR YOUNG:   Yes.

GAUDRON J:   What I do not yet understand is why, as I said, the converse is equally true.

MR YOUNG:   But the question we put, your Honour, is if the analyses you put to me were correct, that payment by my notional prospective tenant would be on revenue account and deductable.

GAUDRON J:   No.  If you go back to the page you took us to, 925, there is a purpose, or at least one of the purposes attached to the payment, that being the purpose of the payer.

MR YOUNG:   Your Honour, what 925 says is that the purpose communicated to Freehills is to assist Freehills “to relocate”.

GAUDRON J:   And to publicise the fact.

MR YOUNG:   No.  Your Honour, with respect, what it goes on to say is to make a request:

Upon the signing of the Agreement for Lease, we would wish to publicize the fact.

The developer, for its own purposes, would wish to publicise that fact, because, of course, as Dohnt said, Freehills were regarded as a highly desirable tenant, an anchor tenant, that would assist the letting up of the building.

GAUDRON J:   They were agents for the lessor?

MR YOUNG:   Mr Dohnt is the agent for the lessor.

GAUDRON J:   Yes.

CALLINAN J:   Would not Freehills also have an interest in publicising the fact of their move and their occupation of a rather grand building?  That was very much the practice at the time, was it not?  These were the eighties, after all.

MR YOUNG:   Yes.  Your Honour, any business, if it is relocating its premises from in this case the legal precinct of William and Bourke to the other end of town, no doubt would wish to publicise its relocation in the most favourable light.

CALLINAN J:   And so that there would be the least possible damage to their goodwill in making a move.

MR YOUNG:   Yes.

McHUGH J:   What is the distinction in principle between a payment made by a developer to take advantage of the goodwill or good name of a particular firm and the gift cases to the professional sportsmen?  Take a case like Doolan’s Case.  Doolan’s cricket career is over.  He is retired and they hold a benefit match for him, all the proceeds go.

MR YOUNG:   But the question is, your Honour, this:  you are trying to characterise the receipt in the hands of the recipient by asking what is that connected with from the viewpoint of the recipient?  What advantage did he gain by entering into the transaction of which the receipt is one part?

McHUGH J:   He did nothing except accept the money.

MR YOUNG:   That is not this case because Freehills committed itself to the agreement for lease.  It did not simply get a receipt for its name.  It had to move to get the receipt, and it was the moving and the costs associated with it to be defrayed from that assistance payment that were the core of the transaction.  Can I make the point by reference to Dickenson.  I think it is helpful to do that.  If I could ask the Court to go to Dickenson.

McHUGH J:   Is this the petrol station case?

MR YOUNG:   It is the petrol station case and that is a receipt case.  Dickenson v Federal Commissioner of Taxation is 98 CLR 460. The Commissioner attempts to distinguish Dickenson on the basis that it was concerned with the sterilisation of an asset.  In our submission, that is simply playing semantics.  The case is not distinguishable.  Let me explain why and in doing so try and deal with some of the matters just raised.  Dickenson concerned five agreements.  They are discussed at pages 463 to 464 in the judgment of the trial judge, Justice Taylor.  They were an agreement of 11 June by which the garage operator covenanted to purchase his products – that is motor spirit and other fuel oils – exclusively from Shell.

Then there were two deeds on slightly later dates, 30 June and 1 July, providing for in each case the payment of £2,000 in each case in return for a covenant not to conduct other garage businesses within a certain area.  Then there was a lease by which the garage owner leased his garage to Shell for 10 years and then there was a sublease where he subleased it back for the same term.  So a compact of five agreements.  Each member of the Court viewed it as a single transaction; did not simply isolate the receipt and said that the garage owner got the receipt; looked at the transaction as a whole and applied the Sun Newspaper tests.

I have taken the Court to the passages in the judgment of Chief Justice Dixon at pages 474 to 475.  The other important passages appear in the judgment of Justice Williams at page 483, the bottom half of the page, and it is to the same effect as the Chief Justice, and likewise, the judgment of Justice Kitto is at page 492 from about point 6 to the bottom of the page.

Each of the Judges make this point:  there was no sterilisation of any asset.  What happened was that the garage operator, in Sir Owen Dixon’s words, changed a feature of his profit-yielding structure.  That is at 474 point 5.  In the language of Justice Williams, at 483 point 7, gave up a substantial sphere of activity which would otherwise be open; and likewise, in the language of Justice Kitto, 492, there was a restriction “of the ordinary scope of business to which otherwise the appellant might apply himself”.  So, effectively, rather than being free to take supplies from a number of different oil companies, the core of the transaction that generated a receipt was that the garage operator restricted his freedoms to go to other suppliers and tied himself to Shell.  No sterilisation of any asset.

In this case, we say it is a much stronger case then Dickenson.  If you look at the entire transaction, as the Court did in Dickenson, Freehills lost the value of their existing lease at BHP House and their existing lease at Nauru House over the period from 1991 to 1993 or 1994, depending on the particular lease, which would inflict on them costs of $6.461 million.  So, they sterilised real assets, actual assets.  They gave up their leases and took on a parallel lease.  They gave it up in the sense that they were not going to occupy the two sets of premises.  They were taking new premises and giving up the value of the other premises.

As well, they lost the value of the fit out at BHP House, causing them a loss of $2.191 million.  So, in a real sense, Freehills, by this transaction, sterilised assets of undoubted worth and undoubted cost to them.  On the other side of the transaction, they committed themselves to conduct their practice at 101 Collins Street, 12 years from 1991 and, in all likelihood, longer and thereby acquired an asset of enduring advantage.  They committed themselves to complete the lessee’s works and they closed off their options of moving elsewhere including the Lend Lease proposal at the adjacent corner of Bourke and William Street where the incentives were greater.

CALLINAN J:   Mr Young, there is a passage in the judgment of the Chief Justice at page 474 where his Honour said, at about point 8, after referring to the nature of the amount of £4,000:

It may be that it was meant as present payment by way of incentive to promote sales of the product derived from the single source.  But if either or both of these elements formed part of the rationale of the payment, it amounted to a capitalisation of these elements.

Say, here, the position were that the sum of $29 million amounted to a capitalisation of a notional annual reduction in the face value of your rent.  That may be a possible view.  If that were so, what is the significance of it?  Could you bring yourself within that statement?

MR YOUNG:   Yes, we can, your Honour.  In our submission Dickenson is indistinguishable.  There was a receipt paid in connection with the transaction whereby the garage operator tied himself to one supplier for a term of years and changed a feature of his business structure where without that tie you had various freedoms to go to various suppliers, and he compounded it with a lease and sublease back.

McHUGH J:   But that is not the point Sir Owen Dixon was making.  What was capitalised was the future loss of profits.  You have nothing here like that.

MR YOUNG:   Well, what is said to us is that this is a payment representing perhaps a capital fund by way of amortisation of future rental outgoings that will have to be expended.  There is an analogy that can be made.

CALLINAN J:   The Commissioner really, in effect, says that, does he not?  He says that you have this – on the basis that it has to be related to an increased rent.  Once you relate it to an increased rent, it has to be regarded as compensation, as it were, for the increased rent, compensation which is a capitalisation of the increase over the term of the lease.

MR YOUNG:   Exactly, your Honour, and those words, “a capitalisation”, a capital payment to provide a fund which can be used to amortise future rental payments would apply equally.  That is why we say Dickenson, as Justice Beaumont said in Selleck, is indistinguishable.  This is a receipt paid as part of a transaction where the proper characterisation of the transaction is that Freehills changed its profit-yielding structure and sterilised part of the old profit-yielding structure for many years to come.

CALLINAN J:   Is there any evidence as to how the money was divided up among the partners?

MR YOUNG:   Yes, there is a resolution ‑ ‑ ‑

CALLINAN J:   What the basis of it was.

MR YOUNG:   It was not divided up, is the simple answer.  There is a resolution passed in August 1989 ‑ ‑ ‑

CALLINAN J:   It said it was not going to be provided to the partners, was it not?  Was that not said?

MR YOUNG:   Yes, it would not be distributed to the partners and that indeed is what happened.  It was not distributed to the partners.

CALLINAN J:   Well, how did the Commissioner make his assessment?  He must have made it ‑ ‑ ‑

MR YOUNG:   The Commissioner took the ‑ ‑ ‑

CALLINAN J:   Because the partnership does not pay income tax, does it?

MR YOUNG:   No, the Commissioner took the income of the partnership and assessed each partner on his pro rata share of the gross income of the partnership, including the sum in it.

CALLINAN J:   Pro rata.

MR YOUNG:   Yes.  Our learned friend, Mr Nettle, went to some resolutions that were passed years after the event about fund A and fund B.  Well, they were not passed until well after the receipt of the inducement payment.

CALLINAN J:   Well, were they the basis of the distribution that was made, albeit that they were resolved, the resolutions were passed much later?

MR YOUNG:   No, your Honour, there was no distribution of the money.  The resolutions that were passed in August 1989 appear at page 630 of volume 3.  Relevantly, the resolution was:

that they be maintained for the benefit of the firm as working capital and are not to be regarded as a divisible asset of the partnership.

That remained the position.  Mr Nettle referred to minutes that were passed after the receipt of the inducement sum, in later years, but appropriated some part of the payment as the payment of tax assessed on the sum.

GLEESON CJ:   How long do you expect to require to complete your submissions, Mr Young?

MR YOUNG:   I am going to finish within a minute or two, your Honour.

GLEESON CJ:   Thank you.

MR YOUNG:   Can I give the Court, without going to it, a reference to a case discussed in Strick.  Strick is the House of Lords decisions which is dealing with a similar sort of fact situation as in Dickenson, the same result.  The case I want to mention is an English tax case, IRC v Coia 38 TC 334. It is referred to at page 350, point 8 of Strick and it is a like fact situation to that in Dickenson.  A receipt in the hands of a garage operator is held under the English legislation to be a capital receipt, just as it was in Dickenson.  It is our case that Dickenson is a true guide for another reason and it is another reason why this is a stronger case.  In Dickenson the contracts, the tie contracts that involve the adjustment of the business structure were contracts relating to the supply of trading stock to the garage operator and that is much closer to the contract that generates profit in the ordinary course.  The garage operator was tying itself to one supplier of trading stock, rather than a plurality, nonetheless, the High Court held that it was the change of profit-yielding structure which characterised the receipt as capital.  Here the agreement for lease is, in our submission, in no way could it be said to be a trading contract or a trading stock contract that would generate profit in the ordinary course.

The Commissioner likewise seeks to distinguish Tucker 53 TC 92 as being a relinquishment of a disadvantageous asset. There is nothing of the sort. It is a lessee of a freeway garage facility in England making a payment in order to eliminate a covenant of the lease that involved paying an additional amount to the lessor that varied with gross receipts. That was eliminated. The onerous clause was removed from the lease. As an asset, the lease was improved, and the payment was held to be a capital payment. The relevant pages are 101(a) to (b), 103(e) to (g) and 108(g) to (i).

In our submission, the critical question that has to be asked at the end of the day is that which arises from Sun Newspapers, GP International and Dickenson.  What role did the agreements play in the taxpayer’s business is

one question.  Another question is:  what is the consideration stated in the contract in clause 2.1?  And if it is the entry into an agreement for lease, the question is:  what role or advantage does that agreement for lease confer upon the taxpayer to explain the character of the receipt?  The other question is the one I have harped upon which is the advantage test arising from Sun Newspapers. 

In our submission, the Court ought to adhere to those established tests and not entertain the Commissioner’s submissions which, in our submission, involve a distortion of the established tests for characterising capital and income.  And that is all the more so where, if such receipts are to be taxed, the proper area for taxation is the capital gains provisions of the Act.  Here, the Commissioner abandoned reliance upon the capital gains tax provisions and sought to say that this was a straight application of Cooling, rather than rely on capital gains tax provisions. 

If the Court pleases, those are our submissions.

GLEESON CJ:   Thank you, Mr Young.  Yes, Mr Nettle.

MR NETTLE:   If the Court please, may I deal first and briefly with the question of what happened to the incentive payment about which Justice Callinan asked?  The matter is dealt with at some little length in paragraph 28 of the appellant’s original written submissions where your Honours will find the references to the various pieces of evidence.  Might we again draw your attention in particular to pages 232, at page 735 where there is the partners resolution to distribute, page 982 to 987 where there is the variation of the partnership agreement to provide for the distribution, to the finding of Justice Jenkinson at 1019 that it was distributed, and to Mr Montgomery’s evidence in-chief in his affidavit at page 460 in paragraph 6 where he deposes that:

From time to time, various amounts were debited…..In addition, from time to time –

they were used to fund the payments of income tax and were debited to the reserve account.

GLEESON CJ:   Mr Nettle, do paragraphs 3 of your original written submissions and 10 of your supplementary submissions continue to state the essence of the Commissioner’s case?

MR NETTLE:   They endeavour to, your Honour.  May I say, however, it is apparent from what has fallen from the Bench this afternoon that they may not do so adequately.

GLEESON CJ:   I wanted to ask you whether it would make a difference to the Commissioner’s case if you looked at paragraph 3 of your original submissions and of the four cumulatively expressed items there referred to, deleted the second and the third?  What would then be the position?  Another way of asking the question is, how important to your case is it to establish any relationship at all between the incentive payment and what you refer to as the inflated rents?

MR NETTLE:   Its importance is depended upon which of the three arguments we advance is ultimately, if at all, to be found to be one that appeals to the Court.

GLEESON CJ:   Well, take the example I gave of Woolworths.  Suppose that Woolworths ‑ ‑ ‑

MR NETTLE:   Submitted it is clearly to be income in the circumstances which are postulated and so too might it be here if it be accepted that there is a -–indeed, the matter arose last time in the course of an exchange with her Honour Justice Gaudron when she asked why it would not be income in the case of Dickenson and I made the submission, well, if one can conceive of what is being done as the use of capital or turning it over to best advantage from time to time as with the petrol pump on the forecourt, clearly it would be income.  It is only when the view of the facts which is taken is one that there is a sterilisation or a disposition or a loss or a structural undermining of the capital structure that the receipt might be conceived of as capital.

So, ordinarily, yes.  If there is just a turning to account in the course of business, even if it not be recurrent business, but in the course of business, the turning to account of capital will generate a revenue receipt and thus we would submit, your Honour, yes, on that analysis or leg of the argument, it would make no difference to take out those parts of the propositions expressed there.

GLEESON CJ:   To which of the three ways in which you put your case is the asserted relationship between the incentive payment and the inflated rents relevant or not?

MR NETTLE:   It goes to the third leg of the argument or third argument which we advanced last time, that is to say, to ascertain the nature of a receipt one looks to that for which the receipt was given or for which it was received.  One conducts a broad survey and an exacting scrutiny in accordance with the sorts of principles which were described by all the Justices in Rowe’s Case.  When one does that, one can see that this agreement was an inducement agreement to pay a higher rent that the tenant would otherwise have been agreeable to pay.  Once that is seen, as it must be and I can go back to show why if need be, it follows inextricably, it is submitted, that the how and the why of the payment is an inducement to pay a revenue obligation of greater amount, whatever it be, than would otherwise have been the case and thus it must be revenue.

GLEESON CJ:  What difference would it make if you could relate, perhaps even precisely relate, the incentive payment to the items of fit out, the loss associated with the old BHP obligations and one other item that has passed from my recollection at the moment?

MR NETTLE:   I know what your Honour means, with respect.  It makes absolutely no difference.  Can I give an example, at an extreme, to demonstrate the point.  Let us assume there was no cash in this case at all.  Let us assume, against all the evidence, that there was a binding legal obligation on the tenant to fit out the premises, even to a specified standard and a specified cost, and let it be assumed that for that sort of lease it was shown that the tenant was prepared to pay a certain amount of money and no more by way of rent without an incentive, and let it then be assumed that the landlord, in order to get that tenant into the premises, was prepared to do a backdoor incentive agreement – that is to say one which is not within the lease document itself – under which the landlord said, “I will build the whole of the fit out for you as the incentive for you to go in”.  Now, if, in those circumstances, as here, the title in the fit out were to vest in the tenant, then it would matter not that the obligations which were met by the landlord were not cash.

GLEESON CJ:   And what would be the amount brought to assessable income?

MR NETTLE:   If one could not bring it to accordance with the cost, one would use sections 21 and 21(a) of the Act to quantify the amount.  It would be the arm’s length value.  In this, of course, however, you can quantify it because it was sold for full value to the ANZ Bank.

GLEESON CJ:   Does that mean you disagree with Ikea?

MR NETTLE:   To the extent that it is contended or said in that judgment that when moneys are received under a contract which requires them to be applied to the discharge of capital obligation they will be capital.  Under Australian revenue law that is not the law, GP Pipecoaters says otherwise.  The part of Ikea which we seek to embrace and put forward as supportive of conceptions which have long been held to be the law in this case is that in looking at the how and the why of the payment, if one can see that what the payment is given for is the discharge of a revenue obligation or as consideration for the incurrence of a revenue obligation the nature of the receipt will itself be income.

This case, of course, is stronger than Rowe’s Case.  The thing which made Rowe miss out in the mind with respect of the majority was that it was a gift.  There was no obligation upon the State of Queensland to pay the money, and, indeed, there also there was a separation between the employers and it was, of course, sought to bring home the payment to the obligations of an employer and that State which actually paid them.  In this case, the party to the incentive payment is the same party as the party to the lease agreement, and in this case there is a contractual obligation on the landlord to pay it.  So it is a powerfully stronger case than Rowe, albeit that it rests upon the same principles.

GUMMOW J:   Just before you leave paragraph 3 of your first submissions, how would Orica fit in with paragraph 3 if it were reformulated by omitting the second and third elements?

MR NETTLE:   Perfectly well, for the reason that in Orica the reasoning, at least at one level, which led to the conclusion that that which came in or the gain was not income, was that the service to be performed by the debt defeasee was the discharge of a capital obligation.  Thus, whilst it could be said that things came back from time to time over a period, it was capital coming back.  In this case what is paid is paid as compensation or consideration for the incurrence of a revenue obligation.

HAYNE J:   But the proposition put to you by Justice Gummow was that items 2 and 3 in paragraph 3 were omitted.  I understood your answer to include injecting at least one of them back into the position.  Is that not so?

GUMMOW J:   I thought you reinjected 3.

MR NETTLE:   The deductibility?

GUMMOW J:   Yes, rental payment is a deductible expense.

MR NETTLE:   No, I suppose that is a consequence of what I am submitting.

GUMMOW J:   I am just wondering if you say that Orica can stand comfortably with reformulated 3 from which are omitted elements 2 and 3.

MR NETTLE:   Your Honour, it can sit comfortably with it provided one adds the proviso that it is received in business and is not for other reasons a receipt on capital account.

GUMMOW J:   Yes, you have to add that somehow, do you not, to your reformulated 3?

MR NETTLE:   Yes, it has to be recognised that if BHP headquarters, being a freehold - a State asset, is sold, albeit that it is sold in business, the money which comes in would be received as capital.  I suppose that is why, if it be called a slide, I make the slide to say of course you have to understand that this is received on revenue account for a number of reasons, but one reason is that it is received in consideration of incurring a revenue obligation.

GAUDRON J:   But there was no receipt in Orica, was there?

MR NETTLE:   None at all.

GAUDRON J:   It was a gain case.

MR NETTLE:   Well, it was a notional receipt.

GAUDRON J:   Yes.

MR NETTLE:   Your Honour knows better than I do, with great respect, but the argument I was endeavouring to speak about was the one which was put that because the debt defeasee paid off the principal debt by instalments over time, there was money or value or worth coming back over time and that should be seen as a derivation of income.  The answer which was given by the Court to that proposition was that it could not be because it was the discharge of the capital obligation of the defeasor, not a revenue obligation.  Indeed, your Honour, as I endeavoured to submit to your Honour Justice Gummow on the last occasion, it is in part in reliance upon that distinction that we base the argument to this Court.

GUMMOW J:   Yes, I understand, thank you.

MR NETTLE:   Your Honours, may I say one point is of critical importance, in our submission, to understand about this case, and that is the nature of the lease.  It is a shell and core lease.  Whilst it might be assumed or inferred that there is an obligation upon the lessee to fit out the demised premises to a standard which is not ascertainable but which is dependent upon the lessor’s acceptance ‑ ‑ ‑

GUMMOW J:   Do we know what would happen to the fit out in the course of the lease?

MR NETTLE:   We know what happened to the fit out.

GUMMOW J:   No, but as a matter of legal obligation.  Who would, as between lessor and lessee, end up with the fit out?  Are they tenants’ fixtures, landlord’s fixtures, not fixtures, what?

MR NETTLE:   I hope this is the answer to your Honour’s question.  We know in this case that property in the fit out vested in the tenant.  We know that because the tenants sold the fit out to the ANZ Bank.

GUMMOW J:   Yes.  But what would the lease provide on the end of the lease.  What would happen to the fit out?

MR NETTLE:   Well, it would depend.  I mean, some of these leases ‑ ‑ ‑

GUMMOW J:   We do not know, do we?

MR NETTLE:   We do not.  As your Honour knows, some of these leases provide it is to vest in the landlord.  Some of them provide it is to vest in the tenant.

GUMMOW J:   Yes, I know.  That is another question in this case one does not know the answer to.  I know what you say happened in fact.  I understand that.

MR NETTLE:   Can I meet the point in another way.  Your Honours, put aside, as it were, the question of whether there is an obligation which requires the expenditure of money by the tenant to meet this assumed obligation to fit out.  Let it be assumed against the Commissioner that it is clear beyond doubt that there is such an obligation in the agreement for lease.  Still, it is submitted that it is clear on the evidence that the lease incentive payment was given in order to induce the tenant to pay a greater amount than it otherwise would have been agreeable to paying.  That can be seen, amongst other places, first in Mr Dohnt’s affidavit at page 385 and in Mr Montgomery’s cross‑examination at page 192 at lines 21 to 28.  At page 385 it is remarked that what the purpose of the lease incentive payment was for was to keep the rent level at the price which was being asked by the landlord.  Then there is Mr Montgomery at page 192 in his cross‑examination.

CALLINAN J:   Before you leave that, Mr Nettle, is not Mr Dohnt just speaking generally though?  There is no evidence as to the owner’s actual subjective intention, is there?

MR NETTLE:   No, Mr Dohnt’s evidence, as our learned friends have said to your Honour already, is directed to this lease.

CALLINAN J:   But Mr Dohnt – he is a real estate agent, is he not?

MR NETTLE:   Yes, the agent of the lessor.

CALLINAN J:   I know that is what Mr Young may have said but that passage in paragraph 8 does not strike me as being very good evidence of what this landlord’s intention was in this case.

MR NETTLE:   I understand that.  Could I ask your Honour then to go to 192 where better evidence of the tenant’s intention is found?

CALLINAN J:   You may not need direct evidence.  It may be a matter of inference but I have trouble of getting it out of 385.

MR NETTLE:   I understand, your Honour.  If your Honour goes to 192 at line 21 and reads through to line 29 the critical words are the last 25 to 27:

once the rent deal was stated or fixed in the negotiations as it tended to be, as I understood it, we then had to resort to discussing the quantum of the incentive.

They started off trying to get lower rent.  It was fixed by the landlord, for all the reasons that your Honours have seen, in order to maintain the capital value of the premises and the CPI accelerator, and once it was so fixed and not negotiable, discussions had then to turn to the incentive.  Now, your Honour Mr Justice Callinan, whether that be direct evidence or inference, it is submitted that it cannot be found other than that the incentive in those circumstances is given to the tenant for one thing only, that is to say, to induce the tenant to pay the greater amount of rent than that which it would have been prepared to pay in the absence of that incentive.

CALLINAN J:   Was the matter directly put at any stage?  Well, it was put there and it was put at 183, line 3, to Mr Montgomery:

Do you know how that was calculated?---It was calculated in reference to the amount of rent payable.

We have, in addition, your Honour Mr Justice Callinan, attached to the most recent written submissions in reply references to – it is a type-out of all the references to the passages of the transcript which it is submitted establish clearly that the whole of the case was conducted on the assumed basis that the incentive payment was calculated by reference to the rent as an incentive to get the tenant to agree to pay more than that which it would otherwise have been prepared to pay.  There is also Mr Dohnt’s evidence at page 363, in lines 5 to 9.

CALLINAN J:   Was anybody asked to say what the actual relationship was and the extent to which a component, a rental component, was reflected in the incentive?

MR NETTLE:   Yes, they were, and as you will see in the type-up which is attached to the most recent submissions in reply, both Mr Dohnt at pages 357 to 358, lines 9 to 35 and 1 to 17, respectively, gave evidence in cross‑examination that there were methods that the owners of the time used to say how the incentive would work.

CALLINAN J:   No, but in this case, Mr Nettle, is there any evidence to relate the $29 million to the $11 million that was being paid?

MR NETTLE:   Yes, there is – can I just finish – you will find it going over later, the reference to that there was a specific formula, for example, one that we had joint venture partners as the owners of the building and they came at the problem a different way, but they certainly set limits on us to say, “We had a flexibility with the way we could structure the incentive”, he goes on to say, not the way that they could structure the rent.

CALLINAN J:   In a word or in a sentence, what is the relationship on the evidence?  To what extent was the rent increased, as it were, to what extent could you say the rent was higher because of the payment of the $29 million incentive?

MR NETTLE:   You cannot and you do not need to, and can I tell you why?  One starts with this, that the landlord fixed a rent below which he would not go which he ascertained by reference to the capital value of the property that he wanted.  Having set that rent, he was prepared to negotiate an incentive to get the tenant to agree to pay it.

CALLINAN J:   But that is circular, is it not?

MR NETTLE:   No, it is not.  In the absence of that incentive, the tenant would not have been prepared to pay that high level of rent.  As Mr Montgomery himself says, we started by trying to get the rent down, when that would not go down we then turned to negotiating an incentive.  In a sense it answers itself.  This is a lease with all its obligations which the landlord wishes to put forward to the world as attracting a particular amount of rent.  The landlord knows that in order to make good that representation to the world, the lease must be put forward as one which has the obligations in it for which it provides, namely, for example, that the tenant do the fit out.

In order to be able to do that and yet get the tenant to agree to pay an amount of rent which is above that which the tenant would regard as being its worth, he must – he, the landlord – must enter into a separate agreement to pay an incentive to get the agreement of the tenant to pay that higher amount of rent.  Whatever the correlation, whether it be present discounted value, whether it be a multiple, whether it be a fraction or whether it bear no mathematical or other relationship whatsoever, is not to the point.  The point is that the amount was paid for one thing only, to get the tenant to agree to pay that amount of rent which the landlord would otherwise not have paid.

It may safely be assumed that there would have been a lower level of rent which, without incentive, the tenant would have been prepared to pay and to accept all the obligations of fit out and whatever else might have gone with the lease.  That was the level to which Mr Montgomery wished to negotiate down, but because of the structures which operated at the time of maintaining or attempting to maintain capital values, the landlord fixed the rent, if you like, artificially, above that level and then had to pay an incentive to get the tenant to agree to pay it.

That is why it is submitted, your Honour, it does not matter whether the incentive is given in cash, with or without strings; whether it is given in the form of constructing the fit out; whether it is given in the form of a free car or a holiday abroad.  None of it matters; what matters is that it is given as an incentive to make that tenant agree to pay a higher level of rent than otherwise he would have been prepared to pay.

If I just answer an earlier question you asked.  At page 357 Justice Callinan, there is at line 14 the question:

You mean the owners of 101?

And the answer given by Mr Dohnt is:

The owners of 101 Collins Street.

CALLINAN J:   I am sorry.

MR NETTLE:   I beg your pardon.  Beginning at line 9, page 357 ‑ ‑ ‑

CALLINAN J:   Yes.

MR NETTLE:   - - -the propositions are put to Dohnt that there were methods for calculating the incentive.  The answer is:

No, there were certain methods that the owners at that time used ‑ ‑ ‑

And the question then is:

You mean the owners of 101?

And the answer is given:

the owners of 101 Collins Street.

CALLINAN J:   But what about the rest of the answer:

well let us try and work out what he incentive would be worth, yes.

Did anybody work that out?

MR NETTLE:   Well, no one worked it out arithmetically or mathematically; I mean, there is the evidence given later on there, about line 18 through 21, and further on at line 30 that:

there was a formula.

CALLINAN J:   Everybody seemed to be very reticent about saying what the formula was in this case and how it was applied.  There is no evidence, is there, of what the formula was?

MR NETTLE:   Well, there is no evidence of what it was; just that there was a formula.

CALLINAN J:   But as a formula in the mind of the owner.

MR NETTLE:   And there was also a formula in the mind of the tenant, because Mr Moses gave evidence that he had a model in his computer through which he would punch each of the proposals in order to assess their relative worth.

CALLINAN J:   And that is one of the references you have given us in.

MR NETTLE:   Yes it is.

CALLINAN J:   I do not want to take up time now, but you have given us a number of references in writing and that is one of them, is it not?  I do not want to distract you, I am sorry.

MR NETTLE:   What I did want to say was, if it is accepted, as it is submitted that it should be, that the incentive is one given in order to induce the tenant to pay more than it would otherwise be prepared to pay, then it follows that it matters not whether the incentive is given by way of a pay out of BHP, by way of building the fit out, by way of a contribution to fit out or by way of cash, it is all an incentive, and one can see that so long as that benefit comes home to the taxpayer, there has been a gain which is at the base of the conception of the derivation of income.  Mr Justice Hill in Lees & Leech73 FCR 136 at 151, to which I took the Court last time, explains why it is so. That is an analysis that we would put forward, with respect, as wholly supportive of that arguments which we advance here. His Honour explains why, in a case of that kind, if the fit out title vests in the tenant, there is a benefit which comes home to the tenant, which is to be regarded as income.

The last point we wish to make, as a general nature, was that, if those three propositions are accepted, then this is a case which is identical in terms of principle to that which was dealt with in Wattie’s Case and that the judgment of Mr Justice Thomas, in dissent, in the Court of Appeal, is directly on point.  In that case, Justice Thomas made five points, all of which would be applicable.

GLEESON CJ:   Well, Justice Thomas’ judgment was founded very heavily on a relationship between the incentive and the rents, was it not?

MR NETTLE:   Exactly so, and that is why it is submitted that once it is accepted, as it ought to be, that the reason that this is paid and the reason that it is taken, is because the rent which is being asked is greater than that which the tenant would otherwise have been prepared to pay, the facts of this case, logically speaking, equate exactly with those which were dealt with by Mr Justice Thomas.

It was said last time, I think with respect, by Justice McHugh that that case was a better case because there was not the need for fit out or some such consideration.  The point we wish to make, in answer to that if we may, is that it does not matter that it is fit out.  If the fit out is provided and comes home to the tenant as a benefit, then it is an incentive payment as much as if it were cash without strings.  Once you look at section 21 and 21(a), it is a benefit which comes home.

I wanted to make two other points which had arisen as a result of what had been said in the course of argument between the Court and my learned friend.  The first is this question of gain.  It is submitted that the conception of gain is a fundament of the Australian concept of income.  The whole problem or analysis is dealt with by Professor Parsons in his work, beginning at page 123, in which he enunciates or articulates the propositions as to what is income.  Each of those substantively is dependent upon gain.

HAYNE J:   Gain in the sense of net gain or gross gain?

MR NETTLE:   Gain in the sense of gross gain, your Honour, that is to say that which comes home.  I should say in particular, that Professor Parsons at pages 123 and 140, that leads in turn to the authorities which guide the view that ordinarily it is gross gain rather than net gain which is to be taken into account.

One particular useful case or decision, it is submitted, is that of the Full Court of the Federal Court in Commissioner of Taxation v Citibank (1993) 44 FCR 434 which is in Part B of our authorities, and in particular in the judgment of Mr Justice Hill at page 446, where his Honour makes the point based upon what had been said by Mr Justice Mason in CAGA that ordinarily under the Australian Income tax Assessment Act, it is gross gain which is taken into account.  It is only when the gain which is sought to be assessed is one which is not income according to ordinary concepts that one then turns to, in effect, the British notion of adventure in trade, and thus to the net gain in order to say whether that which has come in, albeit capital in nature, is still to be regarded as income because there is a net gain on that transaction.

McHUGH J:   Mr Nettle, I have difficulty understanding this notion of gross gain.  I can understand the term gross receipts, gross ‑ ‑ ‑

MR NETTLE:   I can remember your Honour said that to me on the first day, with respect, and the answer is – as it was then I hope – and we are happy to submit to your Honour that that which comes in is income unless it is capital.  Whether that be regarded as a receipt or a gain probably does not matter a lot.  It is what comes in, the gross incoming amount which is to be assessed, unless it is capital, and even when it is capital, it will be assessed but only on a net basis, whether it be a profit-making undertaking or scheme or venture in the nature of trade.

McHUGH J:   What is the principle upon which regular payments made by a husband or a wife, or a wife to a husband are not income?

MR NETTLE:   It is said – at least it is said by Professor Parsons – to rest upon the view that when one pays one’s wife the amount which she might have spent in shopping, one is simply recouping her for an obligation which you as the husband owed to provide for the household, or vice versa.

GLEESON CJ:   Alternatively, gifts are not regarded as income, are they?

MR NETTLE:   Gifts can be regarded as income.

GLEESON CJ:   They can be, but ordinarily are not.

MR NETTLE:   Well, a lump sum one-off gift is certainly not.  On the other hand if, by way of gift ‑ ‑ ‑

GLEESON CJ:   Or pocket money to a child.

MR NETTLE:   Exactly so.  But if, on the other hand, I set up for a relative, a child, for example, a trust which provides for regular, recurrent payments, then that which the child receives will be income.

GLEESON CJ:   So, that if – what always struck me as an extremely fine distinction – a solicitor receives a legacy from a grateful deceased client the theory, as I understand it, is that whether that will constitute assessable income depends on whether someone can show that it was an additional consideration for work performed in the past, or whether it was an expression of gratitude on a personal basis.

MR NETTLE:   But if, of course, the grateful client, although not wishing to recompense the solicitor for work done in the past, nonetheless liked him or her so much they set up a trust fund to provide income instalments to the solicitor, still that which the solicitor received would be income.

GLEESON CJ:   Well, some spouses like one another and that may be the reason or explanation for the payments.

MR NETTLE:   To the solicitor?

GLEESON CJ:   No, to the spouse.

MR NETTLE:   To the spouse, well, I know what you mean by that.

McHUGH J:   What does that say about maintenance payments?

MR NETTLE:   Well, we would…..by force of law, I think, your Honour.

GLEESON CJ:   What if, however, a group of junior barristers wanted to establish a new set of chambers and in order to attract a leading senior counsel to their group they arrange to provide rent-free accommodation to the senior counsel for a certain period of time, is that assessable income in the hands of the senior counsel?

MR NETTLE:   Yes, it is a non-cash business benefit received by the solicitor.

GLEESON CJ:   By the barrister.

MR NETTLE:   I beg your pardon, by the barrister.

McHUGH J:   What is the distinction between money received by the prostitute from clients and the mistress who has a very wealthy lover who gives her large sums of money on a very regular basis?  Is it income in her hands?

MR NETTLE:   It is certainly income in the hands of the prostitute because what she is paid is paid in return for her services and one judges the receipt by the character of that which is given for the receipt, in her case, services.  In the case of the mistress, depending on the facts, I suppose he could be but ordinarily one would expect not, the amount of money would be given out of love or affection or, some such thing ‑ ‑ ‑

GUMMOW J:   Or to buy silence.

MR NETTLE:   Well, in that case there might be a further consideration, but putting that to one side, assuming the mistress would be like a wife, one would just give it because one liked her.  That would be a gift unless it were set up in order to provide a fund with recurrent payments of the kind about which the Chief Justice asked.

CALLINAN J:   The distinction between a prostitute and a courtesan, is that what you mean?

MR NETTLE:   I suppose that is right, your Honour.  The last thing that we wanted to make a submission to the Court, and I am aware of the time, is concerning Dickenson.  Dickenson is a difficult case because of the way in which the three judgments proceed differently but there is at bottom, it is submitted, a fundamental distinction between Dickenson and a case like this and it adheres in what the Full Court in Cooling perceived to be the distinction between an incentive payment and a lease premium.  In Dickenson, money was paid, as Mr Justice Williams and Mr Justice Kitto perceive, in effect, to a Tulk v Moxhay covenant.  That is to say, the recipient of the monies was prepared to bind his profit-earning structure – the land – in a particular way so that thenceforth for the period of the arrangement, it could not be used in another way to earn income.

It is in that sense that it is wholly apposite to speak of what was done as sterilising capital, in a sense of committing it to one course.  There is no such consideration involved here.  Here, Freehills are not agreeing only to serve a particular class ‑ ‑ ‑

GUMMOW J:   Actually, what was created was an interest in land.

MR NETTLE:   Exactly so.

GUMMOW J:   That is what a Tulk v Moxhay covenant is.

MR NETTLE:   That is what it was in Cooling.

GUMMOW J:   No, we are talking about Dickenson, and what I am saying to you is, Dickenson involves creation of a Tulk v Moxhay covenant.

MR NETTLE:   Yes, it does.

GUMMOW J:   That is an interest in land.

MR NETTLE:   That is the answer.

GUMMOW J:   It is not just a covenant.

MR NETTLE:   I agree, with respect; that is why it is like Cooling.  It is exactly the same analysis.  There is payment for a capital estate.  There is the carving out of a capital estate.  There is the giving up of capital.

If the Court pleases, those are our submissions in reply.

GLEESON CJ:   Thank you, Mr Nettle.  We will reserve our decision in this matter.

AT 4.26 PM THE MATTER WAS ADJOURNED