Commissioner of Taxation v Kiwi Brands P-L

[1999] HCATrans 124

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne  No M7 of 1999

B e t w e e n -

THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Applicant

and

KIWI BRANDS PTY LTD

Respondent

Application for special leave to appeal

McHUGH J
KIRBY J
CALLINAN J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 14 MAY 1999, AT 9.28 AM

Copyright in the High Court of Australia

MR R.A. BRETT, QC:   If it please the Court, I appear with MR S.J. SHARPLEY for the applicant.  (instructed by the Australian Government Solicitor)

MR B.J. SHAW, QC:   If the Court pleases, I appear with my learned friend, MR J.W. de WIJN, QC, for the respondent.  (instructed by Arthur Robinson & Hedderwicks)

McHUGH J:   Yes, Mr Brett.

MR BRETT:   If it please the Court.  This case, your Honours, concerned the sale of assets under a contract and the question was when the contract under which the disposal of those assets took place was made.  The particular fact, as your Honours will know, which gave rise to the dispute was that the contract which was originally made between the parties in May 1991 was varied by agreement in August 1991 and the question thus ultimately became whether the contract under which the disposal took place was made in May, which was the Commissioner’s contention, or in August, which was the respondent taxpayer’s contention.

CALLINAN J:   Was the variation to the extent of about $1 million?  Is that correct or was it some other - - -

MR BRETT:   The total variation to the consideration was in fact $US296,000.  The total consideration payable under the contract was $US597 million.  The effect of the variation was to reduce the consideration by $US296,000.  The contract allocated that consideration between various assets and companies.  The amount allocated to the assets owned by the respondent, Kiwi Brands, increased from $61 million to $62 million.

CALLINAN J:   So, that was the only effect of the variation, is that right?

MR BRETT:   There were numerous other effects of the variation but that was the only one which the Full Court regarded as material.

KIRBY J:   Your special leave point is that if the decision below is right, then a relatively small variation of that kind can get a taxpayer into a different financial year?

MR BRETT:   That is one of the special leave points, yes, your Honour.

KIRBY J:   What is the other?

MR BRETT:   The other is, your Honour, that the case raises the basic principles of what a variation is and how it operates.

KIRBY J:   Yes, but upon that, views might differ and there might be a better vehicle in a tax case but the tax case presents the significant possibility that a person could alter their tax year by a small variation, depending on the principles of variation, and get themselves into a different tax regime.

MR BRETT:   Yes, your Honour.  That is the practical effect of the decision in this tax context and we do not resile from the fact that this arises in their tax context but we say this is not basically a tax case, this is a contract case and it is about variations of contract.  It is not about the interpretation of the income tax laws.

CALLINAN J:   Although it has obviously significant revenue ramifications in this case, and could presumably have them in other cases.

MR BRETT:   We believe it would, yes, your Honour.

KIRBY J:   We do not seem to see many contract cases.

MR BRETT:   Well, that is a very good reason for taking this one, if I may make that submission, your Honour.

The basic difference of principle between the parties, as we understand it, is this:  the variation was made in August; the original agreement was in May.  The principles can really be found encapsulated in the judgments of Chief Justice Dixon and Justice Fullagar in Tallerman’s Case, on the one hand, and Justice Williams in the same case, on the other hand.

The view taken by Justice Williams in Tallerman at pages 127 and 128 was that where there is a variation of a contract, then the position after that variation takes effect is that the two contracts, that is to say, the original one and the amending one – and presumably there could be more than one amending one – operate in tandem, as it were.  So that some obligations have their source in the original agreement and….original agreement cease to have any operative effect, and other obligations have their source in the amending agreement.

That was the view explained by Justice Williams in Tallerman at pages 127 and 128.  It seems to have been – although this Full Court did not expressly say so – the view that they took in this case.  It is implicit, we would say, and their finding which can be seen at page 53 of the application book on the first line, that the May agreement, the original agreement was not rescinded.  So, it was common ground between the parties and the Full Court did not have any difficulty with it.

So, the May agreement continued to operate and was not rescinded.  They also found, at about line 14 on the same page, that the disposition of assets took place under the August variation and not under the May agreement.  Now, those two findings can only stand together if the two contracts are viewed as operating together to continue to impose obligations upon the parties.

Now, the contrary view which the Commissioner puts and which we would say is that put forward by the Chief Justice and Justice Fullagar in Tallerman’s Case is explained at 112 of that case where their Honours said about halfway down the page, after the reference to Anson on Contracts:

The rule with regard to contracts made by correspondence is indeed only a particular application of a more general rule that a contract is to be regarded as made at the place where the act or thing was done or said which finally created the contractual obligation –

and they refer to Muller’s Case.

But what is the position where a contract is concluded in one place and subsequently varied by agreement in another place?  There is only one contract, and one would think it clear that that contract must, if it ever becomes material to inquire where it was made, be regarded as made at the place where it was originally concluded.  The variation affects the content of the obligation but not the obligation itself.  The place where the parties assumed that obligation, and became bound to one another, is the place where their contract was really made.

Now, if I could just say a couple of things about that.  First of all, that passage was concerned with the place where the contract was made rather than the time, but the same principles must apply to both because otherwise, as we said in our outline of submissions, you could have certain results following with a contract being made at one place in a time when the parties were not there.

A point that is made against us in the respondent’s submissions is that the - - -

KIRBY J:   Would there necessarily be a rigid rule that place and time must be the same?  One could imagine that might vary with the significance for time or significance for place of the variation, may it not?

MR BRETT:   Yes, your Honour.  In fact, in Tallerman’s Case it was accepted that - whether a variation affects a rescission or not is a matter of degree.  One has to look at the significance of the variation to decide whether or not its effect was to rescind the original contract but Tallerman’s Case was decided on the basis that there was not a rescission of the original contract, and the present case is one where it is agreed that there was not a rescission of the original contract.  So, yes, it is a matter of degree but in this case it is common ground that the degree was not such as to rescind the original contract.

McHUGH J:   But is this case a suitable vehicle for this issue to be determined?  Is it not possible that we will never reach the issue, on one view of the facts?  Is it not the respondent’s case there was no disposal under a contract but that subsection (4) applied to place the transaction in the 1992 year and that that was so because the contract did not directly effect the disposal but that was performed by the deeds of assignment and the assumptions of liabilities under contract.  They also put an argument that the purchase and sale agreement was subject to a condition precedent in that there was a requirement for approval of government bodies in respect of foreign investment and that the contract was not specifically enforceable as at 31 May.  Now, supposing we were of that view, that there was some substance in that point, it would mean that we might not reach the issues of principle that you seek to ventilate.

MR BRETT:   Your Honour, I would have to concede - - -

McHUGH J:   Am I wrong in what I just put as to the way the respondent put the case?

MR BRETT:   They did put it that way, your Honour, and I would have to concede that it is a possibility that the Court could dispose of the case on that ground without getting to this issue of principle but that ground was not one which found favour before Justice North at first instance and the Full Court did not think it necessary to embark upon it at all.  It is, we would submit – and your Honours do not have the material before you, but it is a ground which we would be submitting would not last very long.  Ultimately, yes, we do get to this question of principle and, indeed, the question of principle is - - -

McHUGH J:   I have been on this Court long enough now to see that cases which seem to have a special leave point in them sometimes just disappear, or the points disappear when one really gets into the issues in the case, that one does not reach the great point of principle.

KIRBY J:   Sometimes new points are discovered.

CALLINAN J:   There are very few cases, I think, that come here of pristine purity in respect of one point.

MR BRETT:   That is my submission, with respect, your Honour.  There is no case that is going to come here which raises one question of principle and one question only, that being a question which requires the consideration of this Court.  All cases have subsidiary issues.

McHUGH J:   If you are patient, they come along from time to time.

MR BRETT:   We would urge your Honours not to be too patient at the moment.  This case was decided at first instance and on appeal on this question of principle which we have identified.  We would submit that that is the main issue in the case.  That is the way it was argued and, although other issues can arise, they are essentially subsidiary.

There are other issues in the case and I would again concede that these are more specific to the facts of this particular case and, indeed, to tax law.  The other main point is this:  the Full Court defined the relevant question which arose as being – and this appears on application book page 53 as well at the top of the page.  The question which they addressed was:

whether the obligation of the Appellant to transfer certain assets for a specified price arose under the May Agreement or under the Amending Agreement made in August –

and thus they tied together the obligation to transfer and the consideration for that transfer.  Their decision was that because the specified price was not fixed until a later time, therefore the obligation to dispose at that price did not arise until the later time.

Now, we would submit that that was, with respect, wrong.  The relevant provisions of the Income Tax Assessment Act – and the relevant provision at the time was section 160M and it has its equivalent in Division 104 of the present Act.  In both cases, the relevant provision directs attention only to the obligation to transfer assets.  A disposal is defined as a transfer of ownership.  It is not defined in any way which brings into purview the consideration for which the disposal took place – for which the transfer took place.

Calculation of the consideration and, thus, calculation of the amount of gain or loss incurred is dealt with by a separate section, 160ZD, which again has its counterpart in the later legislation.  It has a separate operation from the provision relating to the transfer of assets, that is to say, the definition of the disposal.  So, our submission is that the Full Court asked themselves the wrong question and by asking themselves that question, then reached the wrong conclusion.  We say that because if one looks at the provision of the contract which required the respondent to dispose of its assets, that was clause 2.2 of the original May agreement, and that obligation to transfer assets did not change in any respect whatsoever at any time after that.

McHUGH J:   You say the error most clearly appears at page 53, line 14.

MR BRETT:   Yes, your Honour.  We would say, your Honours, that question itself, although it is a tax question, is a very important tax question and one which would, on its own, justify the grant of special leave purely on that point.

I should say, however, that that question is not, on its own, enough to dispose of the case without also disposing of the question of principle of contract law which I identified earlier.  We say that for this reason:  the respondent’s contention is essentially that any variation of any part of the contract whatever will postpone the date of the making of that contract until, in effect, the final amendment is made. 

McHUGH J:   I am not sure of that.  Does not the respondent say that the operation of section 160U(3) will always depend upon the particular facts and circumstances of the disposal and that they point out that the nomination of Nicholas Products as the new purchaser in the price allocation schedule altered the ordinary principle that might apply?

MR BRETT:   They do put that, your Honour.  That is essentially the same point as I think your Honour adverted to earlier about whether the ultimate transfer, the ultimate disposition, took place under the entirely separate later deeds of assignment which were executed.  So, yes, I would agree, with respect, that is what they put but I would repeat the submission that that is something which will have to be decided but we will, ultimately, get back to the major question of principle which I identified earlier.

Just to finish what I was saying in relation to that particular point.  Our submission is that even if the August variation had affected the content of the obligation to transfer, then provided it did not rescind the original contract, which it did not, then it is still the original contract which

governed the rights and obligations of the parties, that being a contract made in May.

McHUGH J:   Yes.  Well, I think your time is up.

MR BRETT:   If your Honour pleases.

McHUGH J:   Yes, Mr Shaw.

MR SHAW:   If the Court pleases.  My learned friend, in answer to a question from your Honour Justice Callinan, said that the only change affected by the amending contract was a change in the amount of consideration payable to Kiwi Brands, that is to say, the only change that was regarded below as relevant.  It is submitted that that is not so.  It is not true that is the only change and it is not true, it is submitted, it was the only change that was regarded as relevant.  What the amending contract did was provide for the first time that the assets would be transferred to Nicholas Products.  In fact, the disposal which took place was a transfer to Nicholas Products.  It was a transfer for a new amount of money - $62 million as opposed to $61 million – and it was a sum - $62 million was paid to Kiwi Brands by Nicholas Products. 

In May, at the time the original contract was entered into, Nicholas Products had not been incorporated.  So, there was a change both as to the destination of the assets - they were no longer to go to Roche, they were to go to Nicholas Products – and there was a change in the amount of the consideration.  At page 48 of the application book, at line 18, the court says:

It was only as and from the time of the Amending Agreement that there was a contract providing for the disposition of the Australian assets to a Roche company, by then nominated as Nicholas Products for the consideration which formed the basis of the assessment of the capital gain which is the subject of the two objection decisions.

Now, that being so, it is submitted that it is wrong to look at the questions which arise here as if they were questions whether the parties can, by a small alteration to a contract, affect the date of a taxing point because there was not any suggestion that this alteration had been done for that purpose.  If anybody ever did do that, then, no doubt, anti-avoidance questions might arise.

CALLINAN J:   Mr Shaw, was there always provision though in the contracts for the possibility of a nomination by the purchaser?  It was always contemplated that the purchaser would nominate a transferee actually to take the assets, is that the position?

MR SHAW:   No.  There was provision in the contract for assignment of some of the obligations or of the rights, but that is all.

CALLINAN J:   I was just looking at the foot of page 47:

The Amending Agreement introduced for the first time, although only in Schedule 9, an allocation, not merely of purchase price among the assets by country but also a nomination of the companies –

Was the provision for a nomination first introduced in the amending agreement or was there provision for nomination in the original agreement?

MR SHAW:   There was not introduced, in the amending agreement, a provision for a nomination.  What happened in the amending agreement was that, in the case of Kiwi Brands, a particular company was named as the person to take the transfer.

CALLINAN J:   Exactly, so it was always contemplated that there would be a nomination?

MR SHAW:   No, your Honour.

CALLINAN J:   It was not?

MR SHAW:   No.

CALLINAN J:   So, was there no provision at all for a nomination in the first agreement?

MR SHAW:   There was provision in the contract for assignment but not for nomination.

McHUGH J:   Nicholas had certain rights assigned to it, had it not, prior to the August agreement?

MR SHAW:   Well, the court said that the evidence of that was very slight but things did proceed on the basis that there had been an assignment, your Honour.  They did, but there was no particularly convincing evidence that there was.  It proceeded on the basis that there was one, yes.

McHUGH J:   But is not the critical issue whether the Full Court was right at page 47, lines 25 through to 28, when it said the question was:

whether the disposition which the Commissioner in fact assessed as resulting in a capital gain –

was the disposition for $US62,461,000 to Nicholas Products - - -

MR SHAW:   Yes.

McHUGH J:   That is the critical question?

MR SHAW:   Yes, and it was.  It was.  He did.  He was not going to let a million escape, your Honour.  But it is said that here one has an important question of principle, both of tax law and of contract law.  So far as tax law is concerned, there are now new capital gains tax provisions in which the same terms are not used as the provisions that are used in section 160U(3).

McHUGH J:   It is plain English tax law, is it not?

MR SHAW:   Different English. 

McHUGH J:   Does that mean it is not plain?

MR SHAW:   Whether plainer or not is a question which, no doubt, might arise in time but this is now, as it were, a dead question so far as tax law is concerned and the Court has not been told that here are these millions of cases around about which all depend on this question.

KIRBY J:   What do you say about the suggested distinction in Tallerman between the principle established in that case?

MR SHAW:   You mean the contract point, your Honour?

KIRBY J:   Yes.

MR SHAW:   If I could come to that in a minute after I have demolished the tax point.  So far as the tax point is concerned, not only is there no statement that any other case depends on the determination of this case but the position is, it is submitted, as was put by your Honour Justice Kirby, that it all depends – likely to depend on what the particular variation is and how it affects the particular circumstances.  You are never going to get a general rule because it is all going to depend on what the particular variation is.  One has to remember that whatever is the position about a variation, it is perfectly plain that if the parties agree to bring the original contract to an end and enter into a new contract at the same time, unless there is an anti‑avoidance provision, the disposal will take place under the new contract, not the old.  So, the point about the parties might do something is neither here nor there.

McHUGH J:   I was wondering about that.  If the parties rescind the contract, has not the asset been disposed of and then transferred back, in effect, when it is rescinded?

MR SHAW:   No, your Honour.

CALLINAN J:   Is it not the purchaser’s property in equity, until a rescission?

MR SHAW:   Your Honour, if that were so, then there was an original disposal to Roche here and a subsequent disposal to Nicholas Products and what is being taxed is the disposal to Nicholas Products.             If I might turn to your Honour Justice Kirby’s question. 

KIRBY J:   Yes.  There does seem to be a difference between what Chief Justice Dixon and Justice Fullagar said, and what Justice Williams said.  It has been lurking away there in the Commonwealth Law Reports since 1956.

MR SHAW:   If the Court pleases.  First of all, that case was a case which arose out of the question of the jurisdiction of the New South Wales or Victorian courts.  It was not really a question of contract.  The jurisdiction depended on what the contract was.  It is submitted there is not a difference because if your Honours look at page 113 of the report in Tallerman, at about point 5 of the page, their Honours Justice Dixon and Fullagar said, in the second sentence of that paragraph in the middle of the page:

On the conventional basis on which the action was tried, it could not succeed unless it established a new and independent contract made in 1952.  It proved, at most, a contract made as to some of its terms in 1951 and as to some of its terms in 1952.

Now, here, you have a contract made as to some of its terms in May and as to other of its terms in August and it was the terms that were introduced into the contract in August which provided for a disposal to Nicholas Products for $62 million and that was what was taxed, that disposal that took place pursuant to that. 

My learned friend says this is an important question of contract law but he has not demonstrated or even attempted to demonstrate how this important question is ever going to have any significance for anybody, tax apart.  When will it matter which is the contract under which the disposal took place, if a contract has been varied?  He did not suggest any - - -

KIRBY J:   It could be issues of insolvency that could arise between the original contract and the variation.

McHUGH J:   It may affect statutes of limitation.

MR SHAW:   Unlikely, your Honour, because - - -

McHUGH J:   Breaches.

MR SHAW:   - - - that would date from either the breach or the …..date or whatever.

KIRBY J:   I suppose you can say that if it had been a hot issue, it would have arisen between 1956 and now.

MR SHAW:   One would have thought so, your Honour. 

McHUGH J:   Well, not every issue that arises in the law gets into the Commonwealth Law Reports or the Law Reports. 

KIRBY J:   Too many do, but we do not tend to get very many contract cases.  They do not seem to come up as they did in the old days.

MR SHAW:   But this is a silly one, your Honour.

McHUGH J:   It also seems a new ground for special leave to appeal.

MR SHAW:   Yes, “I haven’t had oysters recently”.  It is submitted that in fact there is no question of public importance here, either as to tax law or as to the contract law and it is submitted that the question so far as tax is concerned is always going to depend on the particular nature of the particular variation.  Here, the variation, for the very first time, provided for the very disposal which took place to a company which did not exist at the time the original contract was entered into. 

The assets were transferred to this new company in August, pursuant to the contract variation which took place in August and it took place for a sum of $62 million which was paid by the new company, Nicholas Products, to Kiwi Brands.

CALLINAN J:   These were assets that were always going to be transferred though, were they not?

MR SHAW:   Yes, your Honour, they were.

CALLINAN J:   And the vendor was always going to get the benefit of the purchase price?

MR SHAW:   Whatever it was, yes, your Honour.  But the question is what is the disposal which is being taxed, and it is the disposal to Nicholas Products for $62 million, and that was for the first time.

CALLINAN J:   But had there been no variation, the vendor would have got within the preceding year $61 million or whatever the sum was.  Is that correct?

MR SHAW:   Yes, for a disposal to Roche.

CALLINAN J:   But it is the same assets?

MR SHAW:   The same assets but it depends on the disposal and the disposal was a disposal to Nicholas Products which did not exist in May.  It is submitted that this is an inappropriate case also because there are, although I have only addressed one of the points which arise, a whole series of other points.  Your Honour Justice McHugh has referred to some of them.

KIRBY J:   Yes, but they did not seem to take too much time below.  You would be trying to beef them up in our Court, would you?  That is what you are saying in an intimidating way?

MR SHAW:   Your Honour, can I perhaps say this:  if special leave were granted, I should only not take a long time about them if it were conceded they were right and I do not expect that will be so.  If the Court pleases.

KIRBY J:   My point about contract cases is that when appeals came as of right, they tended to come in cases involving a lot of money and they tended to, quite more regularly than now, involve contract points, whereas now, where it has to get through this hurdle, they are less frequent visitors.

MR SHAW:   That is true, your Honour, but - - -

KIRBY J:   You have got to find the suitable vehicle?

MR SHAW:   Indeed, your Honour.  If the Court pleases.

McHUGH J:   Yes, Mr Brett.

MR BRETT:   Just very briefly on one point, if I may, your Honours.  Our learned friend has, if I may say so with respect, put a lot of eggs in the basket which was that Nicholas Products did not exist at the time the original agreement was made and did not come under any obligation to acquire the assets until the variation was entered into.  In fact, your Honours, Nicholas Products did not come under any such obligation at all ever.  The amending agreement was made between the vendor companies and - - -

McHUGH J:   Roche.

MR BRETT:   - - - one company, Roche.  They were the parties to the original agreement.  They were the parties to the new agreement.  The obligation to pay the whole of the purchase price was at the beginning and remained at the end on Roche.  I do not know but, in any event, it is not material, whether Nicholas Products, the eventual recipient of the assets, actually paid the purchase price as our learned friends said.  They may have done so.

McHUGH J:   But they did pay an extra $1 million, did they not?

MR BRETT:   Yes, they did.  Well, an extra $1 million was paid.

KIRBY J:   What do you say about the change in the language of the Act?  Is there any substantive change?

MR BRETT:   No, your Honours.  The language of the Act is slightly different.  It speaks about not so much disposal “under a contract” but it speaks of “the time when you enter into the contract for the disposal”.  Our submission is that is a change of wording without a difference of meaning.  The decision that this Court makes, if the Court takes this case, will be just as applicable under the new legislation as it was under the old.

The only other matter was to point out, in answer to something which your Honour Justice Callinan raised, that the Full Court said at the top of page 49 of the application book, after criticising the terms of the deeds of assignment and assumption of liabilities that were ultimately entered into, in the last line of the paragraph which continues over from the previous page, they describe that as:

the assignment for which the contractual obligation themselves provided.

So, we would submit, it was, in effect, a nomination clause.  The clause itself can be seen at page 9 of the application book in the judgment of Justice North.  If your Honours please.

McHUGH J:   Yes, thank you.  The Court might retire for a short adjournment.

AT 10.06 AM SHORT ADJOURNMENT

UPON RESUMING AT 10.07 AM:

McHUGH J:   Yes, there will be a grant of special leave in this case.

MR BRETT:   If the Court pleases.

MR SHAW:   If your Honour pleases.

AT 10.07 AM THE MATTER WAS CONCLUDED