Cooling v Commissioner of Taxation

[1990] HCATrans 283

_il,,r	-!J, AUSTRALIA, 1.:-
->-»>)~~~, ....

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Brisbane No B32 of 1990

B e t w e e n -

CAMERON RICHARD COOLING

Applicant

and

COMMISSIONER OF TAXATION

Respondent

Application for special

leave to appeal

MASON CJ
BRENNAN J

GAUDRON J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 16 NOVEMBER 1990, AT 9.40 AM

Copyright in the High Court of Australia

Cooling 1 16/11/90.

MR A.R. CASTAN, QC:  May it please the Court, I appear with

my learned friend, MR T.P. MURPHY, for the

applicant in this matter. (instructed by Kinsey

Bennett & Gill)

MR B.J. SIIAW, QC: If the Court pleases, I appear with my

learned friend, MR J.A. LOGAN, for the respondent

Commissioner. (instructed by the Australian

Government Solicitor.

MASON CJ: Mr Castan.

MR CASTAN:  If it please the Court, this matter raises

fundamental questions concerning, on the one hand,

the distinction between capital and income under
the Income Tax Assessment Act and, on the other

hand, the operation and effect of the Capital Gains

Tax provisions. In dealing with the first matter,

it is our respectful submission that Their Honours,

in the Full Federal Court, in their attempt to

paraphrase the principles that have been expounded

in the Myer case, expressed the principles with a set of words which led them inexorably into error by not strictly adhering to the terminology that

the Court had laid down in that case and the effect

of restating the principles in that way is to cast

significant doubt on the overall application of the

Myer principle to cases generally, and before going

to the detail of why it is put that way, we would

respectfully submit the affect of the error of

principle that has been made is to, in effect, mean

that, applying the test as Their Honours applied

it, a disposition of a capital asset, a piece of

machinery, in the course of operating a business

would be.picked up as a receipt of income if the

disposition of machinery, a capital item, was

profitable, a result which clearly the Court could

not have intended and did not intend in Myer.

Now, the way in which we put that in relation

to the question of income arises because Their

Honours at page 67 of the appeal book, and it is in

the judgment of His Honour Mr Justice Hill with

which the rest of the court agreed, correctly refer

to the principles laid down in the Myer case, and

to summarize for Your Honours generally before

turning to precise words, what has happened as a

result of Myer, we would respectfully submit, is

that the Court, in effect, has brought into the

concept of "income" generally for the purposes of
section 25 of the Income Tax Assessment Act the
notion of what we might call income or gains made
in the ordinary course of carrying on a business
and also gains made otherwise than in the ordinary
course of carrying on a business but resulting from
profit-making transactions, if we might use that

general term.

Cooling 2 16/11/90

The terminology of the old second limb of what

used to be 26(a) of the Act is now, so to speak,

picked up by Myer, and that appears in the extract

towards the foot of page 67, where, starting at

line 25, the court sets the two - what we might

call the new two-pronged test:

Because a business is carried on with a view

to profit, a gain made in the ordinary course

of carrying on the business is invested with
the profit-making purpose, thereby stamping
the profit with the character of income.

And in the second category, which is the one that gives rise to difficulty in the Cooling case:

But a gain made otherwise than in the ordinary course of carrying on the business which nevertheless arises from a transaction entered into by the taxpayer with the intention or purpose of making a profit or gain may well

constitute income. Whether it does depends

very much on the circumstances of the
case ..... it may be said that if the
circumstances are such as to give rise to the
inference that the taxpayer's intention or

purpose in entering into the ·transaction was

-to make a profit or gain, the profit or gain

will be income, notwithstanding that the
transaction was extraordinary.

Now, of course, the court did not intend, in

bringing in to the concept of "income" in
section 25 of the Income Tax Assessment Act to
override all of the distinctions between income and

capital. It might be more properly described as

bringing into the category of section 25 those kinds of gains that were previously within the second limb of section 26(a).

MASON CJ: You state that somewhat dogmatically. It really

is a question of how you apply the principle that

is enunciated in the passage that you have
identified.	Now, certainly, it is not expressed as
an absolute principle.	It is prefaced by the words

"generally speaking", but the significant feature

of what was said in Myer is that the Court quite
clearly identified intention and purpose or

intention or purpose as something which would

enable the Court to arrive at the conclusion that

the receipt was an income receipt, not a capital

receipt, if there was, in the course of the

business an intention or purpose of making a profit

notwithstanding that the transaction could be

characterized as an extraordinary transaction,

having regard to the ordinary course of the

company's business.

Cooling 3 16/11/90

MR CASTAN: Certainly, Your Honour, and we do not seek to

challenge or question that principle. The

difficulty with it, expressed as it was and

expressed as Your Honour has expressed it, is that

!t may easily, perhaps, when expressed in that way

be extended to cover what we might term ordinary or

conventional capital transactions if one is not

careful about the use of the term "profit or gain"

in that extraordinary situation. I gave the

example earlier and one could give any number of

examples: if Mr Cooling and his partners, the firm
of solicitors, had owned the building for 40 years

in which they had carried on their firm and

ultimately it became sensible to sell it and to

move·into new premises, and they had simply sold
the building, presumably profitably because land in

Brisbane where that building was located was now in

demand, and moved to the Blue Tower, which is the

place, and there were no incentive payments of the

kind that we are concerned with here, but simply a

profit on the realization of a long-held capital

asset, the building in which they carried on their practice, one would assert that the Myer principle

would not be intended to cover that kind of a gain, notwithstanding that unless very carefully applied, the principle in Myer, if interpreted in a loose

way, might lead one to say, "Well, yes, this was part of the business; yes, it was extraordinary

but, yes, they intended to make a profit because

there they had the building; the building could be

sold after having occupied the premises for a legal

firm for so many years." Now, if Myer means that,

then it does, so to speak, obliterate totally the

distinction between capital and income.

Now, there is a very difficult question in

ensuring that when applying Myer, and particularly

this principle as developed in the case and as

Your Honour has just put it to me, that one does

not fall into the trap, so to speak, of then

expounding a principle that catches every

conceivable capital gain because in business there

will be capital transactions - the classic case

that I gave - or, to take an ongoing business, the

disposal of surplus machinery that has been used

for production. Manufacturing machinery is sold.

It may be sold and scrapped but, of course, it may

be sold profitably if an underdeveloped country is

interested in what is, for Australia, an obsolete

machine. If it is sold profitably, one has

depreciation provisions which provide for it on the

basis that it is capital. One does not then say,

"But that's a profit made extraordinarily and

therefore we'll treat it as income" otherwise one

would drive a coach and four through the hole of

the Tax Act.

Cooling 4 16/11/90

MASON CJ: Yes, but the proposition for which you seem to be

contending appears to be this, that there are

certain dispositions of property that must always

be regarded as yielding capital rather than revenue

thus, to take your example, if a business is

carried on in a building and the taxpayer does not

ordinarily carry on the business of selling

buildings for profit as a regular activity, moneys

received on the sale of a building must invariably,

immutably be characterized as a capital receipt.

MR CASTAN:  No, we would - - -

MASON CJ: And the whole point about the second limb of the

old section which, in effect, is reflected in the

statement taken from Myer, was to recognize that

the existence of intention or purpose of profit

making in relation to, say, the acquisition and the

sale of a business or the sale of a building, or real estate, converted what otherwise would have

been a capital receipt into a revenue receipt.

MR CASTAN: Precisely, Your Honour, and we do not go so far

as to say that there is an immutable rule that

certain transactions must always be capital. We

rather put it the other way, as restated at the top

of page 70 by His Honour and then the principle is

stated again at about line 10 to 15 at page 71,

what His Honour has done is instead of restating

carefully the two-pronged test and restating that

second test in the terms that, so to speak, reflect

the old 26(a) - what His Honour has done is

endeavour to wrap up a one-sentence phrase that

encompasses the whole of the principle and the

danger with that is that unless the second

principle that we have been discussing,

Your Honour, is clearly stated and unless the kind

of distinction that Your Honour has just put to me

is clearly maintained, one may easily fall -

perhaps I should put it no higher than that - into

the trap of treating every gain made in a business

as assessable without regard to whether it actually

has that characteristic of the relevant kind of

profit-making transaction, and some have called it

in some of the cases that there was a "deal" of

some kind involved.

Now, His Honour has fallen into that danger by

attempting to use a one-sentence phrase at the top

bf page 70 and it is illustrated by the passage at
page 71 at line 10 where he says:

Why then should a profit received during the course of business where the making of such a profit was an ordinary incident of part of the business activity of the firm not be seen to

be income in ordinary concepts?

Cooling 16/11/90

This, after having said that for a firm of

solicitors it is an ordinary incident to move

premises. Now, as expressed that way, and that is

a misstatement, we would respectfully submit, of

the principle that Your Honour and I have just been

debating, and it too easily slurs over that

fundamental question that has to be addressed that

Your Honour has put to me that is, in effect,

brought in from the second limb of section 26(a)

and, having done it, what happens is that

transactions which are properly to be characterized

as capital and which do not have that profit-making

scheme notion about them as distinct from merely

yielding a profit in business, can be caught.

Many, many disposals, in the course of business,

yield profit but which are not the result of a

profit-making scheme and the maintenance of that

distinction is critical. If this decision stands

then the effect of it will be to lead to, we would

respectfully submit, enormous uncertainty and

difficulty and the Commissioner will have succeeded

in achieving in this case, by a round about way,

what he sought to achieve directly and failed to

achieve in Spedley, the case which asserted that,

of course, that is not the correct result.

His Honour, Mr Justice Hill, in this case

referred to Spedley, referred to the difficulty,

but then notwithstanding that, we would

respectfully submit, in an endeavour to use words

which, so to speak, neatly encompassed the

principle, restated the principle in a way that

leads to the very trap, we would respectfully

submit, that he himself adverted to in summarizing

Spedley, at, I think it was page 70.

MASON CJ:  What page was that, Mr Castan?

MR CASTAN: Page 69, I am sorry, Your Honour. At page 69

His Honour summarizes the position following Myer.

He says:

Commissioner sought to argue that the case Following Myer it would seem that the

established a new principle that all gains

made by a business entity were assessable.

That the case did not stand for such an

extreme proposition was made clear by the Full

Court of this Court in Federal Commissioner of

Taxation v Spedley Securities Ltd -

and then he sets out the passage and there is no

need to read it.

So, His Honour was conscious of the danger

that the Commissioner was aiming to, so to speak,

achieve this result. But in restating the question

Cooling 6 16/11/90

then at the top of page 70, instead of stating the question in terms of the two separate sentences in

the way that the Court had done in Myer, he used

the single sentence, from lines 1 to 8 at the top

of page 70, trying to restate it in a turned-around

way:

If the transaction can properly be said to have been entered into by the firm in the course of carrying on its business and if it

can be said that the arrangement is a profit-

making scheme in the sense that those words
are used by the High Court in Myer then it

will follow that the amount received by the

parties will be income and it will matter not

that vis a vis the firm, the transaction was

extraordinary.

That is not the same as saying, "There are two

classes of cases: the ordinary carrying on a

business" and that, of course, preserves the

possibility of there being capital realizations of

capital assets, "and then the extraordinary

situation it may be taxable because there is a

profit-making undertaking or scheme."

Now, the reason why His Honour fell into that

trap emerges at the foot of page 70 - I should say

about half-way down page 70 because what His Honour

did was to then examine the question of whether or not it was in the course of business for a firm of

solicitors to move premises by looking at Lister

Blackstone and, regrettable, Your Honours,

His Honour actually misstated, erroneously stated

the result in Lister Blackstone. At line 21

His Honour actually stated the principle in Lister

Blackstone in reverse in so far as it applies to

plant.	Your Honours will see that at line 18, he
says:

That case held that the cost of moving from leased premises to other premises acquired when the first premises became inadequate, to

the extent that it was necessary to move stock

and plant, was an allowable deduction to a

distributor of imported agricultural

equipment.

Your Honours, Lister Blackstone did not decide

that. It decided that one had to distinguish

between the stock and the plant. It was conceded

by all parties that plant was on capital account

and the argument was whether the movement of stock

was on revenue account and ultimately it was

resolved that costs of moving stock are on revenue

account when moving premises.

Cooling 16/11/90

GAUDRON J: But, even so, does that not point up in this

case, Mr Castan, that the real question is whether

this receipt could be said, in any event, to be of

capital nature - even to resemble capital?

MR CASTAN:  That may be the question but it is not the question that His Honour addressed.

GAUDRON J: But it is the question you must go to even if

you were correct in saying that His Honour was

wrong in his analysis of this matter.

MR CASTAN:  We would have no difficulty then in confronting

that. We would submit that, on the face of it, it

is manifestly capital to receive - - -

GAUDRON J:  I would have thought, on the face of it, that it

was manifestly not.

MR CASTAN:  We would respectfully submit that where there is

a transaction in which a firm that has moved

premises only rarely and moves after a long number

of years, a firm of solicitors who move premises after many, many years in the same premises, and

are offered a lump sum payment as an incentive,

that is a simple reverse premium. Instead of a

premium moving to the landlord, it moves from the

landlord to the tenant and the tenant is given

consideration for undertaking a capital asset for

taking an interest in land. We would respectfully

submit that if one looks at it in, so to speak,

general principle, it both has the characteristic

of being isolated; it does not bear any

relationship to a profit-making undertaking or

scheme in any sense in which that has certainly,

traditionally, in the cases been analysed and, in

our respectful submission - - -

GAUDRON J: It is the same as a tip or a gratuity, is it

not?

MR CASTAN:  If one is in the business of waiting, one

receives tips. If one is not in that

enterprise - - -

GAUDRON J:  You might put it in other terms which are less

flattering than a gratuity or tip.

MR CASTAN: Well, if it is a bribe - and that is perhaps the

term that Your Honour had in mind - a bribe,

ordinarily, if it is an isolated bribe, would be

received on capital account if it relates to a

capital transaction. It may well be received - - -

GAUDRON J: Is there authority that an isolated bribe is a

receipt of capital?

Cooling 8 16/11/90

MR CASTAN:	It would entirely depend on what the bribe is in consideration for. Accepting that the ordinary
principles of tax apply to unlawful receipts, as
they do, we would respectfully submit that an
isolated bribe - it would depend, of course, on
what the particular improper conduct was that it
related to.  If it was paid in the course of
providing in the form of secret commissions, say,
to a salesman who improperly receives bribes on
secret commissions, it would be on income account.
If it was an isolated transaction relating to a
particular deal where somebody implemented some
particular transaction, it may well be on capital
account. In this particular case, these solicitors
are moving, in an isolated way; they take an
interest in land which they did not previously have. That take a leasehold interest. They are paid a consideration for taking the transfer of a leasehold interest and the landlord conveys a leasehold interest and, in our respectful
submission, it is manifestly on capital account.
It is no different than the classic old premiums that used to be so commonly dealt with when
premiums were the fashion because the money moved
the other way.

One might, of course, equally have said that

landlords used to get bribes, or tips or

consideration and unless one was in the business of

regularly receiving premiums, premiums have always

been held to be on capital account. It has never

been, really, a matter of serious controversy

except in the case of those who are in the course

of regularly receiving them.

MASON CJ:  Mr Castan, I should perhaps say for my part I

would not think it appropriate to liken this

payment to the receipt of a bribe but that really

does not affect the substance of your argument at

all.

MR CASTAN:  No, of course, Your Honour and I took the

question in terms of a hypothetical principle, the

way in which one would apply the principles to

those sorts of payments.

MASON CJ: Yes.

MR CASTAN:  So, what we respectfully submit is that what has

occurred here in this case is a misapplication - a

restatement of the principle in Myer, and having

misstated it, an erroneous statement of what was

held in Lister Blackstone. It is simply wrong, we

would respectfully submit. It is clear from the

passages of Lister Blackstone that it was actually

agreed between the parties that plant was on

capital account. His Honour has then gone forward

Cooling 9 16/11/90

on the basis that shifting premises is an ordinary

incident of business on the basis that Lister

Blackstone stands for that principle which it manifestly does not. That, in turn, means that this decision of the Full Court of the

Federal Court has thrown significant doubt on

whether or not now all tenants who incur all sorts

of capital expenditure in transferring premises are

now to claim deductions for those capital expenses

because, of course, this can work adversely to the

Commissioner since it would mean that all the

expenses are deductible, a principle the

Commissioner would no doubt resile from. So that

we would respectfully submit that on those bases

this Court has gone significantly wrong and has

laid down a test and applied it in this case in a

way which will lead to enormous difficulty in the

future.

The second matter, Your Honours, relates to

the operation of the capital gains tax.

MASON CJ: Well, we need not come to that for the time

being. You have got to persuade us, Mr Castan,

that you have a sufficiently arguable case to

justify the grant of leave in relation to the

decision so far as it was based on section 25

before it is necessary for us to consider your

submissions in relation to the capital gains tax point. Now, of course, you would be on stronger

ground there because the Court has already granted

special leave in Hepples' case.

MR CASTAN:  Yes.

MASON CJ: But the section 25 point stands apart.

MR CASTAN:  Yes, it does. I should mention, Your Honours,

in relation to Hepples one matter that has come to

our attention and we should mention it to the

Court. It would appear from the transcript of the

special leave application - Hepples - that the

Court's attention was not drawn to the fact that

that application was an application for special

leave from a case stated in the Full Federal Court.

This Court has, just last week, handed down its

decision in O'Toole and expounded in some detail on

the difficulties and complexities - - -

MASON CJ:  One would not think that the judgments in O'Toole

present a very great obstacle to the appellant in

Hepples' case.

MR CASTAN: Well, Your Honour, that perhaps depends on what

the correct principle or test is that emerges from

O'Toole as to how one decides whether or not, given

that the Fisher v Fisher principle remains - how

Cooling 10 16/11/90

one then decides or what test one applies to

determine whether a determination of a case stated

amounts to a final judgment or order. The

principles to apply, the test - the Court seems to

have divided significantly on what the test is, not

just on the question of whether or not the Fisher v

Fisher requirement should be imposed.

MASON CJ: But what test are you talking about? Are you

talking about the test in relation to the Court's

jurisdiction on removal or are you talking about

the jurisdiction in terms of appeal?

MR CASTAN:  I am talking about the test that has to be

applied, given that we are left with the position

as it was in Fisher and Swiss Aluminium, given that

it is then necessary for the Court to decide in any
given case whether the particular case stated and

the way in which it was answered is of the

character that amounts to a section 73

determination under the Constitution such as to

found jurisdiction.

Now, the test of whether or not the particular

case stated falls on one side or the other of the line was itself the subject of what appears to be

significant disagreement among the members of the

Court. His Honour Mr Justice Brennan, in

particular, seemed to lay down a test that took, as

the criterion, whether or not the tribunal

determining the case stated was in the same
hierarchy as the tribunal which had referred the

question. Others of Your Honours appear to have

adopted a different kind of test examining more

closely whether the particular question left other issues still to be determined by the tribunal that referred the case stated. In other words, what I

was really putting - - -

MASON CJ: But how does all this help you in the present

case?

MR CASTAN:  I merely felt obligated to mention to

Your Honours that that question affects Hepples and

Your Honours - - -

MASON CJ: Are you appearing for the respondent in Hepples?

MR CASTAN:  No, Your Honour. I point it out because in so

far as Your Honour mentioned to me that that matter

has already been taken up, that case, on one view

of it, may not be the appropriate vehicle.

MASON CJ:  But even if we were to accept that, what would be

the point of granting special leave to you with a view to hearing the capital gains tax question if

you were bound to fail on the section 25 point?

Cooling 11 16/11/90

MR CASTAN:  If we were bound to fail, there would be none,

in our respectful submission but, Your Honour - we would have to concede that if we are bound to fail. We would respectfully submit that - - -

MASON CJ:  I realize that but I am putting it to you

hypothetically.

MR CASTAN:  Yes. Well, I would have to concede that if the

Court was of the view that we were bound to fail on

section 25 then those questions do not arise but,

in our respectful submission, the section 25 issues

are very much alive.	What has occurred here is a
view - - -

MASON CJ:  I follow that but then the case rests on the

strength of the argument on the section 25 point,

not on the difficulties that confront the appellant

in Hepples' case.

MR CASTAN:  I was not sure if Your Honour was asking me

whether there were not issues about the importance
test as well as the question of whether the court

below had fallen into error.

MASON CJ:  No, I was only concerned with isolating the

section 25 point from the capital ·gains tax point.

MR CASTAN:  Yes. If, what Your Honour is asking me to

address is solely the question of what we might
call the merits of the decision below or pointing
out of the error in it, as Your Honour put it to my

learned friend in the last matter, as we would

respectfully submit, the matters which we have

submitted are those that we rely on and we would

point out that the issue of premium which I

adverted to in response to Your Honour significant error that we would point to in the

judgment below. That matter was argued, was dealt

with and, we would respectfully submit,

unsatisfactorily dealt with in the sense that it

was dismissed as having no substance without any

analysis of why it would not be that if a premium

received by a landlord is capital, why an amount

for granting a lease is capital, why an amount

received by a tenant for taking a leasehold

interest in real estate is not capital. The matter

was simply not analysed other than to assert that

it was so and, in our respectful submission, it is

manifestly not so.

The old cases on premiums, in our aspectful

submission, are correct and would appl~ equally

well to a case such as this. Your Honours, on the

limited questions that Your Hon()~rs have asked me

Cooling 12 16/11/90

to address at this stage, those are the

submissions.

MASON CJ:  Thank you, Mr Castan. The Court need not trouble

you, Mr Shaw.

MR SHAW: If the Court pleases.

MASON CJ:	The Court is not persuaded that the decision of the Full Court of the Federal Court, so far as it
was based on section 25 of the Income Tax
Assessment Act, is attended with sufficient doubt
to justify the grant of special leave to appeal. The application is therefore refused.
MR SHAW:	We ask for an order for costs?

MASON CJ: Yes. You do not oppose that, Mr Castan? The

application is refused with costs.

AT 10.13 AM THE MATTER WAS ADJOURNED SINE DIE

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