Commissioner of Taxation v Northumberland Development Co Pty Ltd

[1996] HCATrans 101

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney   No S112 of 1995

B e t w e e n -

COMMISSIONER OF TAXATION

Applicant

and

NORTHUMBERLAND DEVELOPMENT CO PTY LIMITED

Respondent

Application for special leave to appeal

DAWSON J
TOOHEY J
GUMMOW J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON MONDAY, 15 APRIL 1996, AT 10.07 AM

Copyright in the High Court of Australia

MR I.V. GZELL, QC:   If the Court pleases, I appear with my learned friend, MR K. CONNOR, for the applicant.  (instructed by the Australian Government Solicitor)

MR D.H. BLOOM, QC:   If it please the Court, I appear with my learned friend, MR R.F. EDMONDS, SC, for the respondent.   (instructed by Gadens Ridgeway)

DAWSON J:   Mr Gzell.

MR GZELL:   If the Court pleases, the papers in this matter reveal that the question raised in the case is one of characterisation of a receipt, whether an element identifiable as to amount forming part of an award of compensation is taxable as interest or a receipt in the nature of interest.  The courts below held that the amount of compensation should be characterised as a single amount in this case, but we submit that it should be characterised as two components, an amount referrable to the capital value of the coal at the time it was compulsorily acquired and interest on that amount to the date of the determination.

GUMMOW J:   You do not challenge McLaurin and Allsop, do you?

MR GZELL:   No.  I was about to say that, your Honour.  I was about to simply say that since the interest is identifiable as to amount in this case, the stricture in respect of McLaurin’s Case and Allsop’s Case, in our submission, does not apply and that would enable the Commissioner to take the separate amount and tax it, so that we are outside the ambit of those cases, we say.

TOOHEY J:   But once you identify the question in the way that you do as being the characterisation of the legislation, do you not run into difficulties on a special leave application since this Court has said in the past that the judgments of the Full Court of the Federal Court in tax matters ought ordinarily to be regarded as the end of the line, as it were, unless there is some question of principle?  How do you distil a question of principle from the characterisation of the legislation?

MR GZELL:   The question of principle that we say emerges covers a number of points, your Honour.  I have dealt with one and that is that we distinguish McLaurin and Allsop so that we say that we are not bound by the approach of regarding this as just one composite amount, that it can be regarded as falling into different categories.  The other questions of principle that arise are that the courts below variously took the view that unless there was some pre‑existing amount which was due to the owner of the coal, no element of the compensation could be regarded as interest, and we cavil with that proposition.  Members of the courts below took the view that there was no separate right to interest which emerged under this legislation.

DAWSON J:   That is right, is it not, correct, because what you had was a requirement that compensation be assessed, first of all, as at the date of the acquisition, but that was not satisfactory because, in fact, time had passed since then and to assess the capital loss at that stage would be insufficient.  One had to assess the capital loss at the time that the compensation is being assessed.  A formula was devised in doing that and in the end what was arrived at was a figure for compensation.  It was not a matter of interest, not just because it was not called interest, but because it was an actual attempt to assess the loss, which is a capital loss, of the company whose interest had been acquired at that particular time, namely, the time when compensation was being assessed.  Now, that is quite different to the situation where you have an amount arrived at and then interest is payable on that amount up until the date of payment.

MR GZELL:   Your Honour, we say that the arrangements in this case were no different from the normal type of legislation where you have compulsory acquisition, that legislation proceeding upon the usual basis that you calculate the value of the property which is being acquired at the date of acquisition and then you compensate the former owner for the fact that he has not had the use of those funds at that time.

DAWSON J:   Yes, because he has lost the income during that time from the sum to which he was entitled.  There is no question of that here.

MR GZELL:   But we say that precisely that same structure is provided for ‑ ‑ ‑

DAWSON J:   He has not lost any income in the way of interest from any sum because he was not entitled to anything until there is an entitlement to compensation under the arrangement.

MR GZELL:   But when those arrangements came in, your Honour, they took the form of requiring a determination of an amount according to a formula which we say sought to arrive at the value of the coal at the time it was taken and then by the incremental amount to compensate for the lack of use of those funds ‑ ‑ ‑

DAWSON J:   It was still an amount which was arrived at by reference to income considerations.  That is the only way you can do it.

MR GZELL:   We do not cavil with that, your Honour.  We do not cavil with the proposition that the ‑ ‑ ‑

DAWSON J:   If you do it by one formula in the first instance and another later on, it does not matter, you are still capitalising loss of income.

MR GZELL:   Yes, I accept that, your Honour.  We accept that in arriving at the value of the coal at the time that it was compulsorily acquired the formula in adopting the discounting of a royalty component and a rental component nonetheless arrived at a capital value.  We accept that.  We say that that is the sort of approach that compulsory acquisition legislation usually takes.  It seeks to arrive at the value of the asset dispossessed.

DAWSON J:   Precisely, but this was an unusual situation.  You could not do that here.  You could not say arrive at the value of the coal as at the later date because it had been acquired some years earlier, so you would have to have a formula which allowed you to do in effect that which necessitated a different approach from the approach which you could adopt as at the date of acquisition, but still the whole process is merely capitalising income in one form or another so as to arrive at a sum by way of compensation.

MR GZELL:   We cavil with that proposition, your Honour.

DAWSON J:   I know you do.

MR GZELL:   We cavil with that proposition because we say that the formula adopted in this case in the arrangements took the approach consistent with the normal approach in compulsory acquisition legislation of going back to a value at the time that the asset was taken.  What the first part of the formula did was to discount the revenue flows ‑ ‑ ‑

DAWSON J:   But you have to do that.  You have to go back to that date because that was the date of the acquisition.  What was peculiar about the situation was that there was no right to compensation and you have to assess the compensation at a later date than the right arose.

MR GZELL:   We say that that does not make any difference, your Honour.  The fact that there was no right to compensation at the time of acquisition makes no difference, with respect, because subsequently a right did come into existence.  Might I retract that, your Honour, by saying this:  we had submitted in the court below that there was indeed a right at the time of taking because we submitted that the legislation should be construed as containing a power and a duty.  In the end that may not matter because even in circumstances where you have a voluntary payment the question still arises as to characterisation of the receipt in the hands of the recipient.

In the Squatting Investment Case, which is not on our list, there was a situation in which the Privy Council had to deal with the case where during the Second World War there was a scheme for compulsory acquisition of wool on the basis of an appraised value.  After the war there was a surplus and legislation was passed which distributed that surplus to the former growers of wool in proportion to their appraised value, so that it was a voluntary payment.  It was a payment with respect to which there was no right until that legislation came into being, but nonetheless the Privy Council took the view one had to characterise the receipt in the hands of the recipient and in that case the circumstance that it arose from, the carrying on of the activities of growing wool, was sufficient to treat it as being on income account.

In this case we say that even if there was no right at the time that the coal was acquired to compensation, nonetheless, when the right came into existence, the formula adopted was no different from the usual compulsory acquisition case.  It required the determination of a capital value at the time of taking and the incremental amount was to compensate the coal owner for the lack of use of those funds until the date of determination. 

Your Honours, might I say but one thing before I take my seat and that is that a request for particulars was made of the Commissioner and the Commissioner responded to that request for particulars in the light of which we cannot maintain the contention that this case will determine income tax on amounts aggregating 300 million.  The 300 million was an estimate of the entirety of the incremental amounts payable to former coal owners, but included within the categories of taxpayers are some who are exempt from tax and others who are engaged in mining activities ‑ ‑ ‑

DAWSON J:   But no doubt there is a large amount of money involved.

MR GZELL:   Approximately half if you take those categories out, so we still say that a test case with respect to $150 million and, with respect, a test case which raises a general question of application with respect to the characterisation of elements of compensation or awards of damages and we say that because one of the arguments of our learned friends is that unless and until the calculation is complete one cannot say that there is a separate element which can be characterised in a particular way.  If that argument is

right, the same would apply with respect to any process of determining an award of damages or compensation and, if that were right, there would be no scope, for example, for the application of the rule in Gourlay because one would not look at any element in the process of arriving at the determination as being an amount which would be likely to be subjected to income tax, contrary to the approach that has been taken by this Court.

So that the linchpin of our argument is, of course, that one can regard this statutory formula as containing two separate components, the second being on income account.  If your Honours, are against us on that, then the basis for our application is non‑existent.

DAWSON J:   Thank you, Mr Gzell.  The Court need not trouble you, Mr Bloom.

The Court does not consider that there is sufficient doubt about the correctness of the decision of the Full Court of the Federal Court to warrant the grant of special leave.  We would add, as has been pointed out on a number of occasions, that the Federal Court is to be regarded as the final court for appeal in taxation matters unless some important question of principle is involved and this is not such a case.

MR BLOOMS:   With costs, if your Honours please.

MR GZELL:   I cannot resist that, your Honour.

DAWSON J:   The application for special leave is refused with costs.

AT 10.19 AM THE MATTER WAS CONCLUDED